Earnings Call: H1 2020

Sep 11, 2020

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the Karel First Half twenty twenty 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 Caren. Please go ahead, sir. Thank you. Good morning. Thanks for joining this call for the presentation of the first half twenty twenty results. I'm on page two with the main highlights and we are proud to report that in spite of the unprecedented situation that took place in the first half of this year with the temporary lockdown in China in February, as well as the extended lockdown of the Italian plant in March and April with of course a sharp economic downturn globally, we were able to achieve operating results not far from what we had reported in the first half twenty nineteen. Thanks to the resilience of our business model and thanks to the resilience of our operating model that allowed us to promptly react to this fast changing adverse scenario. Revenues were down 3.6 compared to the 2019 or 3.1% net of the foreign exchange. So in the high end of the expectation range that we had at the end of Q1. This performance is particularly positive if we take into account that we face the shutdown of more than 60% of our production capacity. And that's thanks to our strategy of technological mirroring in production and the resiliency of our supply chain that we increased over the last few years with the footprint expansion program and that we are also investing to increase even more as we speak. This has always been a key pillar of our strategy and has been particularly important during this period. EBITDA at 19.2% in terms profitability is substantially in line with the full year 2019 and is one percentage point higher than the Q1 result. And that's thanks to the quick and effective implementation of a number of initiatives to contain operating expenses, offsetting the absence of operating leverage as well as higher logistic expenses that we face to effectively continue serving our customers as we will see. We had a strong cash generation with a free cash flow to equity of approximately €10,000,000 and a net financial position which is in line with the first quarter and with the end of last year even after the dividend payout. I'm now moving to page three with some more economic details. So revenues at €161,000,000 were 3.6% lower than last year or 3.1% net of the foreign exchange. This is in the high end of the guidance that we provided and we were able to recover most of the backlog that we had during June with a residual sale in July, thanks again to the resiliency of our production footprint. EBITDA was down 8.4% to €30,900,000 with a profitability of 19.2%, down one percentage point from the 2019, but in line with the full year 2019 when it was nineteen point three percent and one percentage point more than the first quarter. If you look at the bridge, we start from €33,700,000 in the 2019. We lose €5,100,000 due to the operating deleverage basically. Then we have €1,200,000 of additional logistic costs that we faced voluntarily because we gave priority to the service level to our customers and the defense of our market position in this period. And that's related to more usage of airfreight to compensate higher lead times and disruptions from our supply base, as well as more expensive air freight because of the shortage of available flights and also a greater inbound volume due to the fact that we also increased the inventory. Of course, we forecast an improvement in this cost item in the second half of the year. We then had €3,400,000 of discretionary OpEx reduction that offset this mainly in terms of travel, consulting and marketing expenses. And so we land at an EBITDA of 30,900,000 Net profit was down 14% to €16,300,000 due to the operating results and higher D and A related to the footprint expansion. And CapEx were $5,000,000 with a strong reduction from the $11,200,000 of the first half twenty nineteen, mainly due to the end of the footprint expansion program while we maintained our long term investments in R and D and we also invested in making our supply chain even more resilient by deploying additional production lines in Croatia, The United States, and China to make our supply chain more resilient and that was not foreseen before this pandemic situation. I'm now moving to page four with the revenue breakdowns. To the left, we can see the breakdown by region. EMEA was down 0.5% net of foreign exchange, so essentially in line with last year. Here we have a very good performance from Eastern Europe, thanks to the investments we made over the last few years to increase our presence in the region and a good performance in some applications like heat pumps in Northern Europe. That's thanks to market share increase because these are projects, new projects related to market share increase that we achieved in the last period, as well as helped by government incentives related to the sustainability programs, for example, in Germany. This offset some weaker applications like wellness or automotive. In Asia Pacific, sales net of foreign exchange were down 6.8%, which is a strong improvement over the minus 17% of the first quarter. This is thanks to a good recovery in China. China accounts for approximately 50% of sales in the region. In China, we had a good performance from data centers, from food retail and also from new opportunities related to investment in indoor air quality like hospitals and luxury condominiums. On the other hand, the rest of Asia was weak because of extended lockdowns and the corresponding economic downturns. North America had sales of minus 12.7% net of foreign exchange, more or less in line with the first quarter. Latin America had minus 6.2% net of foreign exchange. Here we had a strong impact of the foreign exchange. We had a positive result in Brazil in local currency. However, a pretty soft result in the rest of Latin America. In general, the American regions were the latest to be hit by the pandemic and so they still represent the most uncertain area. To the right, we can see the breakdown by sector. HVAC was down 4.9% net of foreign exchange. Again, we had a positive result in data centers, in heat pumps, in some indoor air quality applications, offsetting poor results in automotive as well as the wellness application. Refrigeration was up 1.1% net of foreign exchange with a good performance in food retail in China and Europe, offsetting a slowdown in the HORECA and foodservice application. Here concerning food retail, I would like to mention that the market in general was not so positive because retailers have been pretty cautious with investments. We believe that we started to invest again when the situation improves, but so far they have been pretty cautious. However, these positive results is mainly due to market share increase because of our strategy of market share increase in food retail and it provided positive results, especially in Europe and China during this first half. The non core was down 14.7% net of foreign exchange. I would like to highlight that the core business net of foreign exchange was down 2.9%. I now leave the word to Nicola Biondo for commenting the items below the EBITDA on Page five. Thank you, Francesco. The Slide number five details the group results from the EBITDA to the net profit. The 2020 was impacted by higher D and A costs mainly related to the vigilant CapEx level of 2019. In the period under review, the financial charges were higher compared to last year due to an increased amount of loans available for the group. It should be noted that such growth was more than compensated by the better result of Forex and of the company consolidated with the equity method. The tax rate of the period was 23.1%, pretty in line with the 2019. The increase compared to the 2020 is mainly related to a different country mix and to the fact that it is expired tax subsidy in Croatia. The group net profit of the first half twenty twenty was equal to €16,300,000 compared to euro €19,900,000 of the same period of 2019. Slide number six shows the net financial position evolution of the first half twenty twenty. The net financial position was pretty stable compared to December 2019 level. The fund from operation was equal to €25,500,000 and around €10,000,000 higher than the CapEx and increase of net working capital of the period. 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 improved compared with the period with the same period of last year. In June, the group paid dividend of around €12,000,000 At the June 2020, the group has an amount of cash, cash equivalents and available credit lines of about 100,000,000 The financing activity performed during the period made even stronger the good financial situation of the group. I leave the floor to Francesco to go on with the presentation. Thanks, Nicola. So I'm on Page seven with the closing remarks. So to summarize, we managed to mitigate the impact of the lockdown of more than 60% of our capacity, thanks to the resiliency of our production footprint that has always been a key pillar of our strategy. And that was increased over the last two years with the expansion program. In the last few months, we launched a number of initiatives to increase this resiliency even more in terms of additional production lines, as well as extensive work on our supply base to increase the redundancy, also in terms of geographies. The backlog accumulated during the lockdown was absorbed mainly in June with a residual sale in July. On the demand side, also the resiliency of our business model mitigated the economic slowdown, thanks to the diversity of applications and geographies. In HVAC, we had a good performance in high efficiency heat pumps, as well as data centers and a poor performance in automotive and wellness. In refrigeration, we had a positive performance in food retail and a negative one in Hureka and food service. We launched a number of initiatives to reduce discretionary OpEx that took full effect in the 2020, enabling us to maintain the EBITDA margin in line with the full year 2019 and improve it compared to the first quarter. So to conclude, we saw a positive sales results in July. Also the preliminary figures for August are positive. So we expect the 2020 in terms of sales at least in line with the same period of 2019. And we have a favorable view on the full year, even if it's still too early to provide the precise guidance for the fourth quarter considering the uncertainty that remains pretty high and the short visibility that we have in terms of portfolio. For 2021 at the medium term, we maintain all our strategic drivers of growth because they are still there and there could be the rebounds of the applications that were softer this year, as well as the geographies that were weaker in 2020, plus additional opportunities like indoor air quality, as well as those coming from investments on the green deal by the European Union. Thank you so 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. Session. Anyone who has a question may press star and one at this time. The first question is from Alessandro Turtura with Mediobanca. Please go ahead, sir. Yes. Hi. Good morning to everybody. Good morning, Francesco. I have, let's say, four questions, if I may. The first one is on the description you made by by region. I would like to understand if you can share with us some, let's say, more details on the performance in The U. S, which let's say was negative. And on the other side, if you can, let's say, give us, probably I didn't catch, sorry, during the presentation, the performance, okay, of China in this, first half. The second question is on the heat pump. I understood that this is an application that is gaining traction. Can you give us an idea, if this is an application so far probably concentrated in Nordics, not in Europe? And, overall, what is, let's say, all the components and software, the the, let's say, the the weight of these application for you as of today, compared to your total sales? The third question is on, the backlog. I understood that you still have a tail end of the, let's say, backlog of pre COVID situation. Looking at, let's say, your backlog today is, let's say, how can I say, stable year on year? It's a half compared to the last year. Just have an idea, considering, let's say, your your your guidance, okay, for the second part. And the last question was on the tax rate. I understood that there was this expiry in Croatia subsidy. I thought that you were trying to get to some renewable, okay, of this from from pressure in terms of, let's say, lower tax rate? Or, is it something, let's say, structure and the full tax rate will be, I don't know, 23% going forward? Thanks. Okay. Thanks, Alessandro, for the questions. So starting from the regions, in The US, the performance has been okay, first of all, let's start from reminding that we had a very good performance last year because we had approximately 20% growth in North America last year. In general, the market in North America has been deteriorating very fast when the pandemic evolution started to deteriorate in the 2020. The the performance is is not bad in HVAC. So HVAC has has a a performance which is which is not so not so bad. Whereas on the other hand, the performance is poorer in refrigeration, especially in the food service application because in The U. In refrigeration, we are growing in food retail, but we are still pretty exposed to food service application and that has been performing very poorly in North America for obvious reasons. In terms of food retail, as I was mentioning in general, in the market, investments are very cautious. And so in Europe and China, we managed to get a significant market share in this period. In North America, we are getting market share over the medium term, but over this six months, the cautiousness of the retailers in terms of investment prevailed. On the other hand, HVAC had a positive performance. We expect probably a slight improvement in North America in the future. In terms of China, so China had a positive performance in this first half. So China grew with a good recovery after the slump in the first quarter. Here we're having a good performance pretty across the board, would say. But in general, we had a good performance in data centers, in as well as in some applications related to indoor air quality, like hospitals, as well as luxury condominiums, where we're seeing a number projects. All of these projects for indoor air quality, but also data centers, they involve also humidification, the humidification business, because humidification is very important for indoor air quality and also increasingly important for data centers. We also had a good positive performance in food retail in China because we are growing with some big retail chains that are having a good performance in China because they're opening stores, whereas in general on the food retail market in China, again, the market is cautious. But we are following some big retail chains that are opening stores. In terms of data centers, we are now since probably you remember that we started an activity of direct promotion to end users in data centers in China, we're now specified by two of the three biggest technology companies in China for their data centers. Going to the second question, for the heat pumps, let's say that overall heat pumps for us weigh approximately 10% of the total turnover, approximately. The growth in this moment is, yes, is mainly in Northern Europe because that's the region or the part of the world that historically has been more advanced in terms of the heat pump technology. So we have several new projects there that are the result of the work done in the last few quarters with our customers. And these customers are probably benefiting from also the favorable regulatory environment for heat pumps that is present all over Europe, but especially in Northern Europe. We also had to mention that heat pumps tends to be kind of seasonal because in the first half typically of the year, it's when they create the stock for the distribution base. So in general, we're very positive about the heat pump application, but it could have some seasonal fluctuations, but that has always been the case. Talking about the backlog. So the backlog was recovered almost entirely in June. In July, we recovered the last tail and now the backlog related to the pandemic is over. So there's no more additional backlog related since the July. There's no additional backlog. And our order portfolio is at the normal structural levels that we have. The performance that we have seen in terms sales in July and August was positive regardless of the fact that the backlog was fully recovered. Okay. Concerning the tax rate, I leave it to Nicolas. Okay. Thank you, Francisco. And the tax holiday in Croatia was linked to to the amount of investment that was done in the past in that in that factory. And due to the fact that for the pandemic, used more than expected the capacity of this facility there, we used all the benefits that we had from the government in the past. At the moment, we are not foreseeing so big investment to have a tax holiday for the future in Croatia. In a way, to the country mix that we are expecting for the future, we foresee that the tax rate for the future will be around 21, 22%. Okay. Thanks. The next question is from Will Turner with Goldman Sachs. Please go ahead, sir. Good morning, everyone. I don't have too many questions, but just some kind of rather technical ones. So the first being, the lower discretionary spend that you had relating to, travel expenses and marketing, do you expect that those lower costs to stick going into 2021? Or do you consider them temporary reductions? The second question is on the higher working capital consumption. You've outlined on why that is the case, to give some more resilience in these kind of unprecedented times. But if we, if we assume that we've people are adapting a little bit better since coronavirus supply chains are coming a bit better online, Can we expect that working capital, outflow to reverse, in the second half or at some point in 2021? And then my final question is that, given that you intend in the future to do further bolt on M and A, could you give us an update on how the performance of Hygromatic and Recuperator were in the second quarter? I think in the first quarter, you said that they both grew or at least one of them grew 10% organically. Did they manage to maintain growth in the second quarter? And I know you're still happy with their performances. Okay. Thanks, William. Okay. Starting from your first question on the OpEx. So we expect to that the saving will stick for the most part also in the 2020. Concerning 2021, we will, let's say, try to maintain as much as possible. Probably some saving will not be there because we will start again to do some travel. We maybe will start again to do some exhibitions. But of course, we will try to consolidate as much as possible the savings that we achieved. They will be present for the most part for sure also in the second half of this year. But let's say this energy action we took on the OpEx made us realize that there is definitely the possibility to be more efficient on that side also structurally. Going through the net working capital, so first of all, let's say the net working capital is still pretty low on historical levels because it's 16.3% of sales. So it's definitely in our range of targets and expectations. We do expect an improvement in the second half of this year, especially in the inventory, because now unless there is, of course, again, a disruption related to the pandemic, I hope not. So if the situation remains like is now, we expect a reduction in inventory in the second half because the situation has been normalized and we are already working to reduce the inventory. Let's say, not a huge reduction because the inventory did not increase at massive level, was a slight increase mainly in Croatia because we leverage a lot on the Croatian plant. So we will have a slight reduction in the second half already. Concerning agrammatic and recuperators, so the performance of agrammatic and recuperator in this first half was negative, so they decreased their sales, both. In the case of recuperator, was due on one on the first of all, they, of course, are company which are more specialized than the group is. So while we have a resiliency related to the variety of applications, are more specialized, so they are more subject to individual fluctuations in demand. In the case of recuperator, they had the lockdown, of course, in Italy and they that affected their growth and also because they have only one plant at the moment. And also they had reduction in demand related to the fact that they are so far they are also still exposed to Italy and Spain that were heavily affected by the pandemic in terms of demand. The prospects for recuperator are very positive though because we are making a number of investments. We also deployed a new production line there and so we have very good expectations for the company. Also because all the guidelines for indoor air quality suggest that to use humidification, but also to use the heat exchanger for basically exchange heat without having the flows of air to mix, which is what a recuperator does. So we expect that recuperator would also benefit from the indoor air quality trend as well as the, let's say, trends driven by the European Union. IGROMATIC also had a negative result in the first half and that's mainly related to the wellness application because IGRAMATIC has a significant business in terms of spare parts with wellness application and of course, all the spas were closed, So they they they had a reduction. But this is a short term effect because now we expect that to to to recover pretty soon. Great. Thanks. There is a follow-up from Will Turner with Goldman Sachs. Please go ahead. Hi. I guess I I do actually have one follow-up question. And we've spoke about this a little bit before, but, obviously, you know, with, coronavirus, we've seen a lot more people working from home. Some people are a bit concerned about commercial office real estate. Do you think is this going to have an impact on your business? Have you seen any early sign of, for example, lower refurbishment rates or lower construction of office buildings? And how do you think that this could impact Corral if it was to materialize? Okay. So, yes, there there could be and there likely will be a slowdown in new construction for commercial commercial real estate. That's for sure. This is an effect that we will in any case see at a later stage of the cycle because we are, let's say, we're not directly exposed to the final market. However, the trend we are seeing in this moment is that, first of all, there will be compensatory effects. The first one will be the likely incentives coming from the Green Deal because the energy consumption of buildings in the European Union is 40%, four-zero percent of the total energy consumption. So the European Union will most likely incentivize the refurbishment of real estate to increase the energy efficiency. And that would be for sure a positive effect. The second effect is the refurbishment for indoor air quality. Because in many offices where people are coming back, there is a great big, big concern on the recirculation of air, for example, because if there is not a proper recirculation of air, then the environment is not healthy. And that's according to all the guidelines that are being released by the World Health Organization, as well as many other authorities globally. So these authorities, basically they recommend strongly to increase the usage of fresh air. They recommend strongly to have a humidity level between 4060%, and they recommended not to mix the flows of air going in and out of the room of the environment. And all of this is basically to reduce the presence of droplets and of viruses in the air because if you use outside air, of course, the concentration of droplets falls as well as if you had a humidity above 40%, then the droplets fall down to the ground. And of course, need when you get the fresh air from the outside, it must not mix with the air from the inside. And this is basically these three trends in particular are in line with our product platforms because for the unit to work on the air handling units, you need to use the heat recovery system not to mix the flows of air, which is what recuperator does. Of course, we do humidification and also the air handling units to manage all of these, they would probably need also an upgrade on the control system. So also this trend for indoor air quality, we expect and this is what we are seeing so far, we expect it will compensate on our standpoint, it will compensate the effect of a very likely slowdown in commercial real estate new construction. That's interesting. Thanks. The next question is a follow-up from Alessandro Porto with Mediobanca. Please go ahead. Yes. Hi. Thanks. Two quick follow-up from my side. The first one, if you can, let's say, remember us what is the sorry. What is the the exposure in terms of sales or application on the residential side? If if Manuel should be chief to Europe, exposed to residential, but honestly, don't remember exactly. The last follow-up is on, let's say, the M and A strategy side. I would like just to have an update from you if you see, let's say, opportunities in in the short term and okay. An update also on this on this side. Thanks. Okay. Thanks, Alessandro. So sales in residential, again, you know, for us, it's not easy to just to provide precise figures for this because we don't have visibility on the final application. But we estimate the residential to account from 10% to 15% of our revenues. We have here mainly the heat pumps, but we are also seeing some, in this moment, some penetration in China. For example, what I was mentioning, we're doing several projects on luxury condominiums in China because they're very concerned about indoor air quality. They were before because of pollution, but they are even more now. So we are participating in these projects with humidification as well as controls. But in general, overall, the safe but apart from this, let's say, for us, residential is mainly high efficiency heat pumps, so high end heat pumps. And that total residential will be from 10% to 15%. In terms of M and A, we are looking at several tens of companies, I would say, basically in Europe and The US, and we are in open discussions with some of them. So the pipeline is very active and in several directions, I have to say. So that's definitely a very important strategy for us. Okay. Yes, Francesca. Gentlemen, there are no more questions registered at this time. Thank you everybody for your attention, and thanks for your question. Looking forward to speaking with you again for the presentation of the third quarter results. Thanks. Have a good day.