Earnings Call: Q3 2020

Nov 6, 2020

Thank you. Good afternoon. Thanks for joining our call for the presentation of the nine month 2020 results. I'm starting from page two with the main highlights. We're pleased to report that the positive trends that we observed at the end of the first half accelerated in this last period, leading to a significant improvement in top line growth, in profitability, as well as cash generation. Revenues year to date in the nine months grew by 0.1% or 1.2% net of the foreign exchange, so we come back to growth. We had a particularly positive performance in the third quarter with a growth of 7.7% compared to the same period of 2019 and even more in local currency. We saw an improvement in all geographic areas as well as in both markets, HVAC and Refrigeration, and that's a confirmation of the capability of the group to seize every opportunity in this fast changing and unprecedented environment, as well as the confirmation of the resiliency of our model vis a vis the temporary shutdown of more than 60% of our production capacity that we had in the first part of the year. EBITDA was 19.6% of sales in this first in this nine months, with a 40 basis points improvement over the first half and 30 basis points improvement over the 2019. This is thanks to the return of operating leverage in the third quarter, as well as the effective implementation of a number of initiatives to reduce operating expenses and improve the efficiency, so offsetting the impact of higher logistic expenses related to the COVID supply chain disruptions that in the nine months amount to approximately €1,800,000 We had a very robust cash generation with a free cash flow to equity of approximately €25,000,000 leading to a 20% reduction in the net financial position over the year end or approximately €13,000,000 Going to page three, we can see the revenue bridge on the top right. So, we start from €247,700,000 in the first September 2019. We add 300,000.0 and will end at $248,000,000 of reported revenues, but then we have to consider 2,700,000 of negative foreign exchange effect and $500,000 of expected reduction in the non core business, so the like for like purely organic growth was 1.4% in the period. EBITDA had a slight reduction of 2.2% to 48,500,000 or 19.6% of sales, again slightly lower than the 20% of the first nine months of twenty nineteen, but with an improvement over the first half and over the 2019 year end. The slight reduction is due to the lack of operating leverage in the nine months as well as the higher logistic costs, but was offset by the higher efficiency. It's also confirmation of our strong position in terms of currency natural hedging since the almost €3,000,000 we had in terms of lost revenues due to the foreign exchange didn't have any significant impact on our bottom line. Net profit was down 7.2% to €26,200,000 due to the operating results and higher G and A because of the investments we made in the last two years, and CapEx at €7,800,000 are in line with our expectations with a strong reduction from the €16,300,000 of last year due to the fact that we completed our capacity expansion roadmap in 2019. Going to page four, we have the revenue breakdown to the left of the breakdown by region. All regions improved. EMEA goes back to positive territory with 3.6% growth net of the foreign exchange. We continue to have a very good performance in Eastern Europe and Northern Europe, offsetting a softer result in Southern Europe and The UK. In Asia Pacific, sales declined by 2.1% net of the foreign exchange, with an improvement from the minus 7% of the first half due to a very strong recovery in China, while the rest of the region remains in a pretty challenging situation. In any case, we expect that the rest of Asia will improve in the coming months. In North America, we have a decline of sales of 8.9% net of the foreign exchange, again an improvement from the 13% minus 13% of the first half. In North America, consolidation was somewhat to be expected after the plus 20% of 2019, but then we have been experiencing a very challenging scenario since March. In Latin America, we go back to growth. We grew by 4% net of the foreign exchange, thanks to an excellent result in Brazil, offsetting a softer result in the rest of the region, which in any case is improving. To the right, we can see the breakdown by sector. Again, both sectors improved. HVAC grows again by 0.5% net of the foreign exchange. We continue to have a very good performance in high efficiency heat pumps, in data centers, as well as in projects related to indoor air quality for hospitals, mainly in China and Eastern Europe. In Refrigeration, in HVAC, this is partly offset by a softer result in the most cyclical applications like HVAC Industrial, which is still challenging. In refrigeration, we grew by 3.4% net of the foreign exchange. We continue with our strong market share gain in food retail in almost all regions, and this is offset by a softer and negative result in foodservice, even if the result in foodservice at a negative single digit is much better than the market as a whole, and we're starting to see the first signs of recovery, especially in China. So, the like for like growth is 1.4%. The non core then declines by 13.9% net of the foreign exchange. I'll now leave it to Nicola to comment the items below the EBITDA on page five. Thank you, Francesco. The slide number five, it takes the group results from the EBITDA to net profit. The first nine months result was impacted by higher G and A costs, mainly related to the minimum CapEx level of 2019. In the period under review, the financial management effect in profit and loss was pretty in line with the 2019 figures. In detail, financial charters were higher compared to last year due to the increased amount of loans available for the group. Such growth was more than compensated by better result on ForEx and of the company consolidated with the equity method. The tax rate of the period was 23%, slightly above 2019 level. Such increase is mainly related to a different country mix and to the fact that it is expired the tax subsidy in Croatia. The group net profit as of September 2020 was equal to $26,200,000 compared to 28,200,000.0 of the same period of 2019. Slide number six shows the net financial position evolution over the first nine months of 2020. The net financial position strongly improves compared to December 2018 level. At the September 2020, the net financial position was equal to €49,600,000 compared to €62,100,000 at the December 2018. Such amount include around €14,000,000 of IFRS 16 liabilities. The funds from operation was equal to €40,000,000 The increase in net working capital was mainly driven by seasonal effect. It should be noted that the DSO at the end of the period slightly improved compared to June 2020 level. In June, the group paid dividend of around €12,000,000 At the September 2020, the group has an amount of cash, cash equivalent and available credit line of more than €100,000,000 I leave the floor to Francesco to go on with the presentation. Thank you, Nicola. So I'm on page seven with the final remarks. To summarize on the operations side, the backlog accumulated during the lockdown in February and April was completely absorbed in June and July. Currently, we see no major issue in terms of our operating capacity. On the contrary, we worked very hard in the last few months to increase even more by adding capacity to Croatia and China and by working with our supply base. I take the opportunity to summarize the current situation in Italy. Italy is now divided in to three areas according to the level of severity of the health conditions and of the containment measures. The area we are in, which the region we are in, which is Veneto, is currently in the lowest severity area. But in any case, even in the most severe areas, there is no lockdown of production activities, so we don't foresee any disruption of the supply chain. And the same applies basically to all of Europe in this moment. On the demand side, we saw an acceleration of the positive trends experienced at the end of the first half, especially with a very good performance in high efficiency heat pumps, data centers, indoor air quality for hospitals, as well as food retail. We have a softer result in the most cyclical HVAC applications like industrial and a negative single digit result in foodservice, again much better than the market as a whole. We implemented a number of initiatives to reduce discretionary operating expenses, us to improve our profitability over the first half and over the twenty nineteen year end. So to conclude, the current order intake is giving positive indications for the end of the year. As of now, we don't see any disruption in demand and I'm referring in particular to the second wave of the COVID in Europe. Net of a possible sharp deterioration of the scenario, in particular in Europe, so we expect to achieve 2020 revenues close to the level of 2019. And we maintain all our expectations for growth and strategy execution in the medium term. Thank you very much for your attention. We are now at your disposal for any questions you might have. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The The first question is from William Turner with Goldman Sachs. Please go ahead, sir. Hi, everyone. Thanks for taking my question. I don't have too many this quarter. It seems like another solid quarter from you guys. I just have one more in terms of the medium term strategy for the group. And it's more on your performance in North America and Asia Pacific. How do you see your market position in these markets developing? Given the fact that obviously Europe you have a very strong market position and it's the majority of sales, how do you view the competitive dynamics in North America and Asia Pacific? And are you and is your growth developing how you expect it? Okay. Thanks, William. So basically, we maintain our usual guidelines for growth in the medium term. So speaking about Asia, probably you recall that in China, we underwent through a strategic analysis to find out how we should move forward in the next few years. We are now executing that strategy that involves, for example, end user promotion, both in food retail as well as in data centers for the technology companies. This strategy is already providing pretty good results, have to say, because both in food retail and in data centers, are growing very well in China and we expect to continue to do so, and the end user promotion is particularly important on this respect. This end user promotion aimed at establishing our position as a technology leader also in China is also, we believe, the key for maintaining this very strong competitive position also for the medium term, because then we will establish our reputation with end users in terms of the leading brand in technology, and so avoid pure competition based on price or let's say, or cost. At the same time, we are developing our production footprint in China, so to be also more cost competitive. We are at the same time increasing our capability in R and D in China to develop more and more technologies which are suited to that market. So, are the main strategic directions we have been executing since last year and they are definitely starting to deliver results. For the rest of Asia, basically we will take advantage of these very same strategies. We will also increase our coverage of the territory. We expect that as the rest of Asia will exit from the very sharp lockdowns they have been facing and the economy improves, we expect that also our market results will improve as well. In terms of North America, we will continue with our strategy of developing, for example, food retail, so by promoting our technologies to food retail and especially the newer technologies that we have been introducing first in Europe. We are going to continue increasing our market share in HVAC, where we still have a huge space available left for growth and where our technologies are definitely leading and cutting edge. So, we expect to continue with our market share growth. In America, we just very recently announced internally that we are going to have a change of leadership in North America. Basically, the current CEO of Latin America will become CEO of both regions, so Latin America and North America, again to better we believe that this will strengthen our organization to better continue pursuing these opportunities. Great. Thanks. That was very comprehensive. That's a great question I have for the time being. Thanks. The next question is from Alessandro Turcura with Mediobanca. Please go ahead. Yes. Hi. Good afternoon to everybody. Sorry for my voice. Okay. I will be very short in the question, okay? Maybe you can be longer on the answer in case. So the first one is on the cost savings you mentioned during the presentation. Considering the trend at the top line level and also your guidance, but also, let's say, the usual trend you have in the last quarter, can we assume reasonably that the profitability won't be so different from the level you achieved in the nine months? This is, let's say, the first question on the profitability. The second question, again, on this topic is assuming next year will be, let's say, a bit normal compared to 2020, do you consider feasible, thanks to a positive effect from operating leverage, at least to be, let's say, close to 20%? This is the first question, Francesco. Thanks. Sorry, Alessandro, I missed in your second question when you're referring to the 20%, the period. Yes, yes, it was not clearly not this year, okay, Francesco. It was on 20%. Okay. Thanks. Okay. So in terms of the cost savings, basically in the nine months, we are in excess of €4,500,000 of operating expenses savings. We are trying to make as much as possible of that structural. We are analyzing we are in a phase where we are deeply analyzing our organization to see how we can simplify, streamline and definitely make structural as much of that as possible. Of course, not everything can be made structural because at some point we will start again traveling. But I mean, our objective is to really consolidate as much as possible of those savings. Concerning the year end 2020, let's say, we believe that the trend that we saw will continue in terms of profitability, even if please consider that every fourth quarter of the year, that happens every year, the fourth quarter tends to have a slightly lower profitability because we have the accrual, especially some seasonality in costs and the accrual of some costs that happens at the end of the year. So, let's say, trend will continue, the profitability of the fourth quarter could be slightly lower because that is what happens every year. In terms of our expectations for 2021 and the medium term, let's say, if our organic growth rate resumes its target level, which is what we expect, then let's say, we expect to have a profitability that again can stay in the range 19 to 20%. It's difficult to be more precise at this point because of course it depends on a number of factors, but let's say our target is between 1920%. Okay. Okay. Thanks, Francesco. The other question are, first of all, CapEx for this year, considering the low level of you spent, but also the indication for the next year. Second question is on working capital, a very limited absorption of working capital. So are you confident to keep this very limited level of working capital also for year end? The last question is on M and A. The last question is on M and A. Considering, let's say, COVID situation, but also, let's say, an application deeply outperforming compared to others, do you see concrete opportunity for you in the short term? Or maybe it's a bit more difficult, let's say, to finalize some M and A for you in this context? Thanks. So, Alessandro, this is Nicolas. With reference to the CapEx, we are foreseeing a level for the 2020 around €13,000,000 €14,000,000 Then it depends on when some projects will start because it is possible that there could be some movement between December, January, etcetera, but this is the level that we are foreseeing. Okay. In the medium term, we are seeing a level of CapEx that should be between 4.5% to 5% of the net sales as a guidance for the middle period. With reference to the working capital, in the middle term, we are seeing a working capital between the 15% and the 16% on the net sales. On the shorter term, we are seeing that DSO and DPO will be pretty in line with the level at the September. With reference to the inventory, it is possible that it will increase for safety reasons even related to COVID, like increase. Okay. Thanks. Okay. In terms of M and A, yes, for sure, the current situation doesn't help, especially for overseas deals. We are going on to explore and we are in talks also with some prospect targets even overseas, but of course the current situation doesn't speed up things. On the contrary, maybe it's slowing them a little bit. But we are also considering opportunities in Europe and there, of course, it's much easier in this respect. So, I would say that there is some slowdown in terms of activities overseas, meaning especially America, while in Europe we are going on without any significant delays. Okay. Gentlemen, there are no more questions registered at this time. Okay. Thanks everybody for joining the call and for the questions. I'm looking forward to talk to you again for the presentation of the full year 2020 results. Thank you very much. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone. Thank