Earnings Call: Q1 2019

May 15, 2019

Good morning. This is the Call conference operator. Welcome and thank you for joining the Chorus Call First Quarter 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. Please go ahead, sir. Thank you very much. Good morning, everybody. Welcome to the presentation of our Q1 results. As usual, I will start with some highlights. So I'm on page two. During this quarter, we continued consistently with the execution of our strategic growth guidelines according to plan. And this led to a top line growth of 19.5% with an organic component of 3,700,000, where all geographic areas reported a growth both in current exchange rates and fixed exchange rates, as well as a component coming from the consolidation of Agromatic and Recuperator, the two companies that we acquired at the end of last year that contributed for 8,700,000.0. Q1 results for the two companies were fully in line with the respective business plans. We already saw an acceleration of their top line growth compared to the historical track record and the post merger integration roadmap is proceeding according to our expectations. So we're very satisfied so far about the integration. EBITDA margin at 19.6% was in line with the full year 2018 and we continue to benefit from a positive tax rate of approximately 19% down from approximately 24% in Q1 twenty eighteen. Net financial position grew by 18,400,000.0, mainly due to the adoption of the IFRS 16, accounting for 14 700,000 and also to an increase in net working capital, which is not related to inventory where we confirm the stabilization that already happened in Q4, but it's due to some seasonal effect on receivables and payables that we will comment in a few minutes. The production footprint expansion plan is proceeding on track with our expectations. Both the Chinese and The US plants will become operational within for staff as expected. We continued also our sales footprint expansion strategy with the opening in January of a subsidiary in Ukraine managed as a branch of Karel Poland, which is the distributor we acquired in 2017 to increase our control over the Eastern European territory. By the way, Karel Poland is reporting a very healthy growth, confirming the validity of our strategy. In terms of services, we are continuing according to expectations, the implementation of the go to market phase for digital services aimed especially at food retail. I'm now moving to page three with some more details. So revenues grew by 19.5% or 18.4% net of foreign exchange. The organic growth net of the agrammatic and recuperator consolidation was 6.4%. This was slightly limited by a number of contingent factors that happened in Q1. Over such a short timeframe in a business model like ours, some contingent elements can become evident. So for example, in Q1, we reached the saturation of the North American plant accumulating some order backlog. The situation is being resolved as we speak with the opening of the plant expansion that will happen within this month. In general, we are seeing a growing order intake portfolio. So we are confident that top line growth will accelerate in the coming quarters. If we look at the revenues bridge on the top right, we can see that we started from $67,000,000 in Q1 twenty eighteen. Then we have $3,700,000 of organic growth, 8,700,000.0 is coming from the consolidation of the M and A and 700,000 of positive effect from the foreign exchange arriving at 80,100,000.0 of revenues in Q1 'nineteen. EBITDA grew by 18.9% with a profitability of 19.6% in line with the profitability of the same period of last year, which was 19.7%. This includes 1,800,000 coming from hygromatic and recuperator, as well as 1,100,000.0 coming from the adoption of the IFRS 16. But it also discounts €500,000 of additional recurring costs related to the IPO that were not present in Q1. Net profit grew by 8.4%, discounting higher interest expenses for the increased net financial position, but also benefiting from a significant improvement in tax rate, as I mentioned. CapEx in the period were $4,900,000 so the manufacturing footprint expansion project is proceeding according to expectations. There is a significant improvement over the same period in Q1 when CapEx were 1,700,000.0. And this is when, of course, the manufacturing footprint expansion project has not started yet. Moving to page four, with the revenue breakdowns, on the left, we can see the geographical breakdown. Here we simplified slightly the geographical breakdown to make it more consistent with our logistic platforms, which are EMEA, APAC, North America, and South America. We saw in the period a growth in all geographic areas, both in current exchange rates and fixed exchange rates. EMEA grew by 22.3 or 22.6 net of effects. This was this benefited significantly from the acquisition of agrogrammatic and recuperators that mainly insist on this region. Organically the region grew approximately 5%. APAC grew by 15.8% or 13.7% net of effect. North America grew by 12.6% or 4.2 net of effects. As I was mentioning, this was limited by the saturation of The US plant because we had an older backlog at the end of the period. But again, the situation is resolved in this moment. Latin America, we saw a growth of 1.9% or 4.7% net of effects, which represents an acceleration compared to 2018 despite an economic situation in the region that remains pretty challenging. To the right, we can see the breakdown by sector. HVAC grew by 26.8% or 25.3% net of effects, again benefiting from the consolidation that exists on this market. Refrigeration grew by 9.6% or 9.1% net of effects. Refrigeration, taking out the consolidation effect, remains the fastest growing market. And then we have a 25% decrease in the NOCOR, which is continuing its expected decline. I'm now moving to page five where leave Mr. Dzusek Paviskovic for the comment on the items below the EBITDA. Thank you, Francesco. So some comments on the lines between the EBITDA and the net profit. Regarding the depreciation and amortization, we have an increase from 1,900,000.0 to €4,000,000 This is due to the change in the scope of the consolidation. So RECOPLAET and AGOMATIC contributed to increase the the figure. And also, it's due to the adoption of the IFRS 16 of almost €900,000 of additional depreciation. Below the EBITDA, the financial charges and income, we moved from 97 financial income to 266 k of financial charges. This is mainly due to the increase of the debt. We moved our debt at €117,000,000 compared with 70,000,000 at the end of last year. That's this is the reason why we increased the financial charges. Concerning the taxes, we decreased the absolute value of the taxes from 2.6 over last quarter over last year to 2.1 of million of this year with an average tax rate of approximately 19% compared with 24% over last year. And this is mainly due to the introduction of the Patent Box that we couldn't account for in Q1 twenty eighteen, because as you will remember, we obtained the ruling at the end of the year of 2018. Moving to page six now, where we show the bridge of our net financial position. We closed the year at 77,500,000.0 Euro compared with 59.1 of 2018. There is an increase of 14.7 again from the adoption of the IFRS 16. We introduced the retrospective method in the IFRS 16. Despite this, the organic net financial position is 62.7. And in the period, we have generated free cash flow of almost €13,300,000 that was absorbed by mainly by the CapEx, almost €4,900,000, and also by the increase in the net working capital of €11,100,000. Some comments on this regarding the detail of the net working capital, we incurred in an increase in the receivable, and this is a seasonal effect. In fact, the last quarter of the year is always lower in term of sales compared with the first quarter of the year. Instead, concerning the payables, the trade payables, we had an increase, and this is due to a nonrecurring situation of last quarter or last year where we had a significant level of OpEx with a very short term payment terms. In addition to that, in the 2019, we decreased the level of purchases in electronic components in line with the reduction of our inventory level. In fact, concerning the inventory, the level of inventory remained quite flat. I'll give back the the stage to Francisco. Thank you. Thank you, Giuseppe. So, yes, an additional comment on the working capital. So on the receivables is an effect that we see every first quarter of the year, and the effect is absolutely in line with what happened in first quarter 'eighteen. Concerning the payables, this additional OpEx were related to consulting also for the M and As that we performed that typically have a shorter payment terms. So on page seven, for the final results, final remarks, we are happy to report that the implementation of all our strategic growth guidelines is proceeding according to plan. And this is providing a solid growth in all geographic areas, despite the microeconomic scenario that remains pretty uncertain under several dimensions. The agrammatic and recuperator integration process is proceeding very well. The results of the two companies at the end of the quarter were in line with the respective business plans. We are already seeing an acceleration in the top line growth compared to the historical track record of the two companies and the post merger integration roadmap is proceeding according to expectation. The development CapEx plan for the footprint expansion is proceeding in line. We will add the two Chinese and US plants operational within first half as expected. And we confirm the stabilization of the inventory that was already happening during Q4. So after we overcome the seasonal effect in receivables and payables, we expect an improvement in working capital in the coming quarters. So to conclude, the cost and the best deployment of these strategic guidelines together with a growing order intake portfolio that we are already seeing, make us confident for a further improvement in performance in the coming quarters. Thank you very much for your attention. We are we are now more than happy to answer to your questions. Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. To remove yourself from the question queue, please press star and 2. The first question is from William Turner of Goldman Sachs. Please go ahead. Good morning. I just have one question at the moment, and it's on the organic underlying business. So in the first quarter, you've grown around 5%, and that is obviously still fast growth, but down quite a bit from the almost 11% or 10% that you had in 2018. I was wondering if you could just, give a little bit more color on the kind of, like, underlying Corral business on what's changed between or what's decelerated the most between now and then. Okay. Thank you for the question. So, yes, it's net of foreign exchange growth was slightly more than five percent or 6.4% with current exchange rates organically. We saw a number of contingent elements limiting the growth during the first quarter. For example, as I was mentioning, the situation of The US plant that limited the growth, even compared to the older portfolio that we already had during the first quarter. So that was basically an effect related to the situation of the capacity, not to the order intake. In Europe, we saw a deceleration basically related to the fact that we had a few exceptional quarters of growth in the region last year, which was, as I commented several times above what we expect for the medium term. So we consider pretty normal a quarter or two of consolidation after such strong growth during after several quarters of strong growth in the region. In China, we had another contingent effect. That was the fact that the VAT was rate was lowered by the government on April 1. So some customers moved orders from March to April to benefit from the VAT reduction since safe there include the VAT. So basically these were, there were a number of contingent elements, but as I was mentioning, our order intake portfolio is already improving compared to the first quarter results. In general, one individual quarter is a pretty short timeframe for our kind of business model. So some, even some contingent elements like this can become visible. Great. Thank you. The next question is from Alessandro Tortora of Mediobanca. Please go ahead. Yes. Good evening to everybody. I have, let's say, three question, if I may. The first one is you can come back on the trend that you, let's say, discussed before on the order intake. I know that your order intake, your, let's say, backlog is, let's say, really short term, covering some months of business. But if you can, let's say, give others some ideas of how is evolving this item for you? The second question is on the margin trend and profitability trend. Excluding clearly the IFRS 16 impact and considering also the all the investments you are doing on hardening capacity, is, let's say, still reasonable to assume a profitability for you in terms of EBITDA margin similar to the level achieved last year, so let's say, to 20%, of around 20%? And the last question is on the last acquisition you made. I'm referring to Recuperator. We saw high single digit growth. Can you, let's say, share with us also any plan to realign the margin of this company to your, let's say, to your level? Thanks. Excuse me. Is it the operator? I don't know if your line is on mute. Yes, yes. Thank you. Sorry, yes. Sorry, I was muted. Okay, thanks for the questions. So first point, order intake. Yes, our order intake gives us the visibility of a few weeks. However, from the order intake, we can't in any case spot several trends. We also saw already the results of April. So we can confidently say that the top line is accelerating compared to Q1. This is a trend that we can easily identify even if the order intake portfolio tends to be pretty short. Also because of the fact that some elements limiting the growth in Q1, as I was mentioning, were pretty contingent. Concerning the second question on margin and profitability. So the organic the purely organic EBITDA margin, excluding agrammatic and recuperator and excluding the IFRS 16 was around 18.5%. There were, again, a number of factors that on such a short timeframe can become visible. The first one is the €500,000 more for recurring IPO costs that were not present in Q1. This is compounded with the fact that since growth for the reasons I described was lower than expected during Q1 did not provide us the operating leverage that we expect on SGNA. But as the top line improves, we expect to recover the operating leverage effect. Other two factors limiting the profitability in Q1 were a contingent effect on the product mix that again was visible over a short timeframe. In particular, we had a significant, a very strong growth in CO2 compressors that was driven by the CO2 market, especially refrigeration. Since compressors are not items that we make, but are bought and sold, they have a lower marginality. And so this created a visible effect during Q1 that was a purely mix effect and that was visible in this timeframe. Finally, the price concerning the contribution margin, the price effect is totally aligned with our historical trend. So we didn't have any price decreases above what is our historical trend. However, the material costs did not go down. They did not increase either, but they did not go down because we saw in this quarter, basically the effect, the retrospective effect of the shortages that happened during 'eighteen that created some tensions on the cost. The cost did not increase, we managed to contain them. However, not having the decreasing cost but having the decreasing price, which is typical for us, also negatively contributed to the margin reduction during Q1. Again, these effects are mainly contingent. So on all these dimensions, we expect an improvement in the coming quarters. Concerning the third question, so to realign the margin of recuperator, we are taking a number of actions. Okay, first of all, there is a positive effect coming from the aluminums. The price of aluminum is as compared to the very high levels it had reached recently. But we also have, of course, operating leverage coming from the fact that we are accelerating the top line growth using especially, let's say, a stronger focus on growth compared to the previous management, but also leveraging very much on the cross selling using our safe network. This is and will provide operating leverage. And on top of that, we are also having saving on the SGNA compared to the previous management of the company. There are other actions, slightly more medium term, like for example, interventions on the design of the product to reduce the cost and on the manufacturing lines to reduce the cost. So there are really many dimensions for this. So in particular, we are investing in manufacturing to reduce the cost of making the production more efficient. So again, along a number of dimensions, are increasing the profitability of the company. Okay. Okay. So let's say, to sum up, considering all the factors that you mentioned before, you still consider, let's say, feasible to have, let's say, a sequential acceleration in the coming quarters, looking at, let's say, all the factors you mentioned. And therefore, we may, let's say, still consider achievable, let's say, organic sales growth as also you did in the past years, close to the high single digit area? Yes. Let's say it's still a little bit early to provide the precise guidance on the full year. However, yes, we surely expect an acceleration of the top line and we expect to come to high single digit for the top line and we foresee an improvement over all the performance indicators of the group. Okay. Okay. Thanks. Very clear. As a reminder, if you wish to register for a question, please press The next question is from Emmanuel Defigreiro of LBV Asset Management. Please go ahead. Good morning and thanks for taking my questions. I have three, please. The first one is, can you just clarify a little bit these IPO costs? Because your IPO was in the summer. So are these additional IPO costs for Q1 twenty nineteen? Or is it something from 2018? If you just give some color on what's happening there. The second thing is on the EBITDA margin and given the previous question on the margins. When we're talking about close to 20% EBITDA margin, I presume this is pre IFRS 16? And then and if you can confirm that. And then thirdly, on the acquisition front, do you think it's reasonable to believe that this is more a year of consolidation of the past two? Or is it likely we will see more M and A activity this year? Thank you. Okay. Thank you for the questions. So concerning the 500 if you're mentioning the 500,000 recurring IPO costs, these are basically additional SG and A related to a higher auditing costs, higher Board of Director costs. So basically, and higher compliance costs, which are fairly structural for the fact that we are listed and these costs were not present in 2018 because we went public in June. Concerning the second question, the 19.6% EBITDA margin that we reported is including the 1,100,000 from the IFRS 16 effect. Again, for the coming quarters, we expect an improvement in the profitability. On point three, talking the M and As, we are, yes, focused on consolidating the two agrammatic and recuperator. And by the way, we are very satisfied about how the consolidation is going. However, our pipeline is still active. It's, as you know, very difficult to say when we will have new deals, but we are continuing to scout for new possible deals. Thanks. Very clear. Gentlemen, there are no more questions registered this time. I'll turn the floor back to you for your closing remarks. Okay. Thank you very much for your attention and for staying with us during this presentation of Q1 results. We'll hear you again on our next call for the presentation of first half results. Thank you very much. Have a good day.