Earnings Call: H1 2019

Sep 9, 2019

Good afternoon. This is the KARSCO conference operator. Welcome and thank you for joining the Karel Industries First Half twenty nineteen 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 Carrel Industries. Please go ahead, sir. Thank you. Good afternoon and thank you for joining our call for the presentation of our first half twenty nineteen results. As usual, I will start from Page two with some highlights. Results in this first half confirmed the continuation of our positive track record of growth, thanks to the consistent execution of our strategic guidelines. In the second quarter in particular, we saw as expected a significant acceleration in sales growth, profitability as well as net working capital compared to Q1 and that's despite an increasingly challenging market scenario, especially in Europe and Asia. Top line growth improved by approximately one percentage point compared to the first quarter and that's both total and organic fixed exchange rate and current exchange rate. Total revenues grew in this first half by 20.3, up from 19.5% in the first quarter and we have a growth in all geographic regions also organically where organic growth is 7.3%, up from 6.4% in the first quarter. We then have €18,100,000 of positive contribution from the consolidation of Agromatic and Recuperator that were not present in the perimeter in the 2018. The performance of the two entities is very positive. The integration plan is going on very smoothly and they are absolutely in line with the respective business plans. They report a combined top line growth in the high single digit range, which is a significant acceleration compared to their past performance as standalone entities demonstrating that we are creating value with these two transactions already. EBITDA adjusted for the nonrecurring items, which were mainly IPO related in 2018 and mainly M and A related in 2019 is 20.5% of sales, up from 20% in the first quarter of this year. EBITDA reported is 20.2%. The net financial position increases by €16,900,000 and that's almost entirely due to the adoption of the IFRS 16 principle without which the financial position would have been basically stable. We have a significant improvement in net working capital. The cash absorbed by net working capital is half what it was during Q1 and that's also thanks to the execution of the stock reduction plan that we have in place after the resolution of the raw material shortages that we experienced last year. The production footprint expansion roadmap that started last year is almost over. The new Chinese plant has been fully relocated and is now fully operating as well as The U. S. Plant expansion, which helped us overcome the logistic bottlenecks that we experienced during Q1 in North America. Also the geographic expansion of our sales footprint remains a strategic priority to have a better direct control of the market and consistently in January we opened a sales branch in Ukraine to better cover the Eastern European territory managed by the Polish our Polish subsidiary. And finally, the go to market phase for the digital services for food retail is proceeding in line with expectations. Moving to Page three with some economic figures, we can see on the top left, as I said, revenues grew by 20.3% or 19.3% net of the foreign exchange, up from 18.4% in quarter. The Looking at the revenue bridge, we can see that we have $9,700,000 of positive contribution to sales coming from the core business organic, Then we had $1,400,000 coming from the foreign exchange and we lose $1,000,000 for the expected decrease of the non core, which is continuing. So core business so organic growth is 7.3%. The organic growth of the core business would have been almost one percentage point higher at 8.2% without the decline in the non core. We then have 18,100,000.0 coming from the consolidation of Agromatic and Recuperator arriving at $166,900,000 revenues in this first half. EBITDA is up 39.4% to $33,700,000 Adjusting for the non recurring items, as I was mentioning before, EBITDA is up by 17.1% to €34,200,000 We have here €3,900,000 coming from the consolidation of the two entities as well as €2,000,000 coming from the IFRS 16 adoption. EBITDA adjusted on revenues is 20.5% on sales, which is lower than the first half of last year, but higher of the with respect to the 19.6% we had in the Q1. If we adjust for the IFRS 16 principle, EBITDA adjusted on sales would be 19.3% of sales, which is basically in line with the 19.7% we reported at the end of last year. We have to say that on EBITDA, we also discount €800,000 of recurring costs from the IPO, which were not present in the first half of last year and also €400,000 of additional costs related to The U. S. China duties. Of course, we have actions in place to mitigate the duties. We are moving our production for The U. S. Out of China into other regions, including The U. S. Themselves, thanks to the plant expansion to mitigate this effect. Therefore, we expect it to be lower in the future. Net profit is up by 21.7% to 19,000,000 Adjusting for the non recurring cost, it will be basically in line with last year and that's despite higher financial charges and a higher tax rate, which is at approximately 23% in line with our expectations and that we will comment in a few minutes. CapEx are up by 54.9% at $11,200,000 basically related to the footprint expansion, which is now almost over that went and is almost finished according to our plans. Moving to Page four, we have the revenue breakdown. On the left, have the breakdown by region. We can see that all geographic areas report the growth net of the foreign exchange, which is in our opinion a very good result considering the increasingly challenging and uncertain conditions of the market in several parts of the world. EMEA grows by 22.1% net of Forex, which is basically in line with the first quarter even taking out the contribution of agrammatic and recuperator that mainly insist on this region. APAC is up by 8.3% net of Forex, which is a deceleration compared to the first quarter, but in our opinion is a good result considering the market situation there, which is increasingly difficult, especially in China. We have a number of strategic actions in place to improve our growth rate in the region for the medium term. North America has a strong acceleration in sales growth to 20.3% net of FX and that's also thanks to the overcoming of the logistic bottlenecks we experienced during the first quarter, thanks to the plant expansion. Latin America grows by 2.8% net of FX, a slight deceleration compared to the first quarter. Here we had a very good growth in Brazil double digit. However, we had strong negative effect of the economic situation in the rest of the region, especially Argentina. To the right, we can see the breakdown by sector. HVAC grows 28.1 net of FX with an acceleration compared to the first quarter also considering the contribution of agrammatic and recuperator and that's thanks to our strategy of cross selling and geographical expansion. Refrigeration rose 7.4% net of Forex. And then we have the loss of $1,000,000 due to the expected decline of the non core as we said before. I now leave the word to Giuseppe on Page five to comment the items below the EBITDA. Thank you, Francesco. At Page five, we can go through the lines below the EBITDA, starting with depreciation and amortization, showing an increase from 4.1% to 8.1%. The increase is mainly due to the enlargement of the consolidation perimeter that account for about €1,300,000 the adoption of the IFRS 16 that account for about €2,000,000 and the remaining for higher CapEx incurred during the period. With reference to the financial charges and income, they are affected by the higher interest expenses linked to the new loans, mainly activated for financing the M and A of last year. And also by the absence of the financial income of the last year life insurance policies that has been sold. At the end, the line of the taxes that show an increase of our tax rate as anticipated from 20.5% to 22.9% mainly for three reasons. The first one is that we have anticipated the distribution of dividends from China in the first half where instead last year it was in the second half. We also have a higher tax rate in the Italian parent company that starting from first January twenty nineteen is considered an holding company and so is affected by an higher regional income tax. And third, a prudential accrual that we have done in the Chinese subsidiary, where we are pending for the renewal of the ruling that is expired at the end of last year. Here, we are we expect to get the approval by year end in case of positive answer, we will account a benefit retroactively. Now we can go to Page six, where we show the bridge of the net financial position, where we closed the end of the period at €76,100,000 that has been affected by 14,700,000 by the adoption of the IFRS 16, without which the net financial position would have been at 61.4%, almost in line with the financial position at the end of last year. And during the period, we have distributed dividend for €10,100,000 We have purchased back shares for more than €1,000,000 And also we have generated cash free cash flow cash of €9,000,000 that includes capital expenditure for €11,200,000 and the increase of net working capital for €5,900,000 As already anticipated, regarding the net working capital, we have significantly increased the performance reducing the absorption of cash that was in the first quarter more than €11,000,000 This is thanks to the improvement in the inventory and also to the decrease in tax credits. Stage back to Francesco for the final remarks. Thank you. So moving to page seven to summarize, we saw in the second quarter a significant improvement in top line growth, profitability as well as net working capital compared to the first quarter even in presence of an increasingly challenging market scenario, especially in Asia and Europe and the enduring of very difficult conditions in Latin America. This is a demonstration of the resilience of our business model as well as of the validity of the strategic guidelines that we consistently execute. The integration process of Hybromatic and Recuperator is proceeding very smoothly. The results are fully in line with the respective business plans and the performance is way better what it was in the period they as standalone units, meaning that we're already creating value with these transactions. The footprint expansion plan launched last year is substantially over. The new Chinese plant is fully operating as well as The U. S. Plant expansion. And we are just now adding the final assembly lines to China and to Croatia. Finally, we confirmed the improvement in the inventory trend that we are executing after resolution of the raw material shortages situation. As closing remarks, we can observe that there is an increasing volatility in the market, especially in Europe and China and a difficult political situation in Latin America. And this suggests us a prudential stance in elaborating medium term forecast. Without a significant further deterioration in the global macroeconomic scenario, we can expect for the full year to keep a top line growth as well as profitability close to what we have achieved in this first half. Thank you very much for your attention. Now we are more than happy to answer to all of your questions. Excuse me. This is the KARSCO conference operator. We will now begin the question and answer session. You. The first question is from Alessandro Tortora of Mediobanca. Please go ahead. Yes. Hi. Good evening to everybody. I have two questions, if I may. The first one relates to the outlook, okay, short term and also medium term outlook that you pictured before. Can you, let's say, give us some details focusing, first of all, on the short term in for the, let's say, the outlook for the second part of the year because we saw in the first half and about all in the second quarter, a strong acceleration in North America, while if we take out the contribution of the two acquisition in Europe, Western Europe should have grown, let's say, by 3%, four So if you can, let's say, better explain why, let's say, what are the reasons behind this slowdown in Europe? Also, if you consider sustainable the acceleration we observed in The U. S. In this first half? Thanks. Thank you for the question. So in the short term, we are observing in the market in general higher uncertainty and volatility. We observed this in Europe, while in general industrial investment is as everybody knows is more uncertain. We are and this leads the market to be more cautious with investments. We're observing that also in Asia, especially in China because there is the trade war, which is of course an effect and is leading to again more volatility and more cautiousness on the market. Just a comment on the trade war then I come to your questions. The trade war is basically in China could affect us in basically three ways. The first one is the direct cost of the duties. And here we are putting in place since month we're putting in place the adjustment of the supply chain. So we are mitigating the effect even more than we have done so far. The effect has been relatively small in fact. The second effect is a movement on the Chinese market more towards the internal market out from the export concerning Chinese manufacturers. We are adjusting to this by strengthening our innovation capabilities in China to develop products more effectively tailored at the local market and we are executing that now. And the third effect is a general again uncertainty and possible slowdown in the Chinese market that of course we will counter attack with an increase in the market share which is still pretty low there. Having said this, so this is basically the situation in Asia. The situation in Asia is such that the actions we are taking make us confident for the medium term, even if for the short term there is uncertainty on the performance. Concerning North America, the outlook remains very positive. The performance in the second quarter was particularly positive due to the resolution of the bottlenecks and the backlog we had in Q1. So we expect for the coming quarters a good performance in North America. So we stay positive on the market, probably not at the same level that we had in the second quarter. Concerning Europe, even taking out agrammatic and recuperator, the growth in the region has been basically stable compared to the first quarter. Here, we particular in Europe refrigeration is more affected. Refrigeration is going very well outside Europe with a very good growth. It has accelerated a bit in Europe and that's due to a particularly good year last year. And since refrigeration is less OEM based and more project based, there could be fluctuations in the individual periods in the market. In any case, all the underlying trends that fuel our growth in refrigeration, which is the F Gas regulation for refrigerant, the pursuit for higher efficiency and so on, they still are there. So we are very confident for the medium term. The situation for the very short term in Europe is again uncertain. So overall, the stance that we take is overall that we foresee to maintain the same level of growth or a level of growth which is close to the one we achieved in the first half and the same for profitability. Okay. And the second question was on, let's say, the statement related to the medium term. Clearly, when you mentioned, let's say, prudential stance is that you consider, let's say, these around the 7% organic growth you're going to get according to your target this year as a sort of, let's say, sustainable level or as you stated that you see some risk that could put at risk also let's say this 7% level? Well, let's say for the medium term since all our underlying assumptions in terms of market growth and our outperformance of the market are untouched, we confirm a high single digit for organic growth in the medium term. So we have no reason to change our view for the medium term. We have only of course more uncertainty like regarding this moment for the short term. Okay. Thanks. The next question is from William Turner of Goldman Sachs. Please go ahead. Hi, there. My first question is on the CapEx outlook for the remainder of the year and for next year. Given that you've almost completed the footprint expansion in China and The U. S, can we expect to start coming down in the second half? And then what's the expectations for 2020? Okay. Thank you. So yes, the footprint expansion is almost over. However, there are still several expenses we need to accrue in the second half. And so more or less, we confirm our forecast for this year as well as we confirm the expectation for next year at approximately more or less in the €15,000,000 CapEx. Okay, great. And then my second question is a follow-up on one of the previous ones that you had. And that was your mentioning in China that you could shift towards focusing more on the internal market rather than probably the exporters which are based in China. And when you look at your sales currently to the country, how much of it is going towards companies which export from China versus those that sell internally? And then how does the competitive dynamics differ between those export orientated Chinese customers and the import and the internal ones? Okay. We don't a precise figure for sales for the export market as well as for the internal market. Let's say that a very general difference between export market and the internal market is that the internal market as least at this stage as probably on average less sophisticated figures, but higher volumes. But in any case, also the internal market is moving up in terms of feature and is increasingly attentive to efficiency and sustainability. So we expect the internal market to be more and more sensitive to let's say the competitive advantage that we have with our offering. And at the same time, we are improving our production capability and competitiveness, thanks also to footprint expansion, but also our innovation capabilities to adjust the offering to the internal market. Additional strategies that we are pursuing right now in China is to have a more direct access to end users like we are doing successfully in Europe especially in refrigeration. We are now targeting more end users in order to basically promote the advantages of our technology also to end users in the internal market. And that's the basic strategy together with product innovation that we will follow to cover better the internal market, which has the advantage of having much bigger volumes than the export market in our niches. Great. Thank you. The next question is a follow-up from Alessandro Tortora of Mediobanca. Please go ahead. Yes, hi. Two very, let's say, quick follow-up. The first one is given that we are discussing about all the major in order to recover and to release growth in, let's say, China, I saw that you collapsed, okay, the difference between South APAC, North APAC. Can you tell us, sorry, the performance just an indication of China organically speaking in this first half in terms of sales? And the second question is on the net working capital on sales. We saw a good, let's say, release in terms of net working capital in this second quarter. If I remember well in the last conference call, were targeting net working capital on sales level below 19%. Is it confirmed for the full year? Thanks. Okay. So let's say, South Asia Pacific is having in this moment a better performance than North Asia Pacific. We have a double digit growth in South Asia Pacific and we have slightly more than 5% in North Asia Pacific. We're talking fixed exchange rate because with current exchange rates growth would be higher. So fixed exchange rate, we have double digit in the South and slightly more than 5% in the North. Concerning the working capital, yes, confirm the target of being below 20% this year sorry 19% this year. Okay. Okay. Thanks. Gentlemen, there are no more questions registered at this time. Okay. Thank you so much for your attention and for your questions and speak to you again for the third quarter twenty nineteen results. Thanks. Bye.