Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Carel full year 2018 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of Carel. Please go ahead, sir.
Thank you very much. Good afternoon. Thank you for joining our call. We are very proud to present our first full year results since our IPO. I can anticipate that the results that we will see shortly are very positive and fully in line with our expectations along all the main strategic directions that we have been describing over the last few quarters. Namely, organic growth, M&As, services, as well as other elements like the footprint expansion or the working capital, which has started to improve as we expected, and the tax rate. I'm moving to page two, where we can see some of the main achievements of the year related to the execution of such strategic directions. In June, as you know, we had our IPO. It was very successful despite pretty challenging market conditions.
It was the first IPO on the main segment of Borsa Italiana in 2018 and one of very few. It was a key milestone for the group and the foundation for the next level of development and growth for the long term. We acquired the residual 51% stake in our sales subsidiary in Japan, according to our strategy of expanding the direct sales footprint all over the world. Finally, in June, we deployed the first full line of programmable controllers in the U.S. according to our strategy of manufacturing footprint expansion all over the world. Over the summer, we continued growing the sales network with the opening of direct branches in Singapore and North Africa, Morocco. We started the construction of the new plant in China, three times as large as the current one.
That will be operating starting from spring this year. That will be the foundation for the next level of development and growth in the region. At the end of November, we completed two very important transactions, HygroMatik and Recuperator, in line with our bolt-on M&A strategy and fully consistent with the strategic guidelines that we have been describing for our M&A strategy, as we will see in a few minutes. Finally, in December, we started the expansion project for the new plant in the U.S. that will lead us to have double the current capacity, again, according to our capacity expansion roadmap. Moving to page three, we can start to see some actual results. Revenues in 2018 grew by 9.7%. EBITDA margin, adjusted for the non-recurring items, was 19.7%. Net profit, adjusted for the non-recurring items, grew by 18.9%.
This is thanks to the consistent implementation of our strategic guidelines. In terms of organic growth, if we exclude HygroMatik and Recuperator, growth has been 8.9%, fully in line with the previous quarters. This is thanks to the strategy of cross-selling as well as market share growth, especially in food retail, where we are increasing our direct promotion efforts to end users, supermarket chains, and proceeding with very strong breakthrough technological innovation related to energy efficiency and the new refrigerants. Moving to M&A, we completed two very important deals. We acquired, towards the end of the year, the 100% share capital of HygroMatik and Recuperator. HygroMatik is one of the leaders in humidification in German-speaking countries with a very premium and well-known brand.
Since in that region, our market share in humidification was pretty small, this move allows us to achieve a significant position in the region with very promising synergies in terms of sales as well as operating. Recuperator, on the other end, is one of the leaders in Europe for a specific kind of heat exchanger used for energy saving and heat recovery in air handling units for data centers, industrial, and commercial applications. It works very well with evaporative cooling, which is a system that we also make, so there is a very strong technological fit with our portfolio, as well as very promising commercial synergies as we expand the system and the value that we can provide to our customers in the air handling unit niche, which is one of the niches where we expect the most significant growth in the years to come in air conditioning.
Finally, the third pillar for growth is services. Last year, we launched a number of pilot projects combining our thermodynamic expertise together with our know-how in controls, connectivity, algorithms, and data. We identified two priorities, which are OEMs and food retail. Along these two priorities, during 2019, we will execute the go-to-market phase where we are extremely focused. Moving to page four, we can see some more details on the results. In the chart on the top left, we can see that revenues grew by 9.7%, despite the negative impact of the exchange rate, without which growth would have been 11.4%. EBITDA was down by 6.7%, entirely due to non-recurring items. Adjusting for those, it grew by 8.5% to a profitability of 19.7%, which is basically in line with the 19.9% of the end of 2017.
This was our target since we managed to offset a number of negative elements of 2018. That is the recurring IPO cost, the foreign exchange, the footprint expansion, and the shortage of raw materials. In fact, the cost of goods sold was absolutely in line with 2017, despite the tensions on the raw material market. In terms of net profit, it was basically in line with the end of 2017. However, adjusting for the non-recurring items, it grew by 18.9%. A particularly good result, which is due to an additional reduction of the tax rate, which is related in part to an extraordinary item, which is the Patent Box ruling mechanism in Italy, as we will see, but also we have a structural improvement in the group tax rate, as we will see.
CapEx grew by 80%, which is in line with our plan, because I remind you that our plan is to more or less double the CapEx level, combining 2018 and 2019, this is what we confirm. Also the execution of the plan is going according to what we had expected in terms of the manufacturing plant in China, in the United States, as well as Croatia. On the top right, we can see the EBITDA bridge. We start from EUR 50.3 million of reported EBITDA at the end of 2017, with EUR 5.3 million of organic growth, EUR 700,000 coming from the business combinations. We lost EUR 1.1 million due to the foreign exchange, we arrive to an adjusted EBITDA of EUR 55.2 million.
We have EUR 5.9 million of non-recurring items related to our IPO and EUR 2.3 million of other non-recurring items related mainly to the M&As and other minor elements. Finally, we arrive at the reported EBITDA for the year of EUR 47 million. As we can see on the bottom part of the page, we propose to shareholders a dividend of EUR 0.1 per share, which is approximately 32% of net profit and is fully in line with our dividend policy. Going to page five, we can see some more flavor on the top line. All the geographic areas grew in the year, net of the foreign exchange effect. We can see that Europe had a very good performance, both Western Europe and Eastern Europe and Middle East, that grew by 14% and 15.6% respectively, net of the foreign exchange.
Even if in Eastern Europe and Middle East, in the second part of the year, we no longer had the consolidation effect of the Polish distributor, Alfaco, acquired in June 2017. All the overseas regions improved their growth compared to the third quarter of 2018. North America grew by 7.2%, it's continuing to improve its performance. Latin America has a slight improvement over the third quarter and grew by 1.8%, despite pretty challenging economic conditions in Brazil and Argentina that affected deeply the market during 2018. South Asia Pacific grew by 5.2%, net of the foreign exchange, which is an additional improvement. I remind you that the region had a negative growth in first half.
We are here improving very much the performance of growth as we execute better our sales development roadmap, taking a number of actions like opening the branch in Singapore and changing some leadership roles in the sales organization. In North Asia Pacific, we also have a slight improvement over the third quarter. It grew by 5.8%, here we are also very focused on improving the execution in terms of sales as well as in terms of innovation. The new plant will also allow us to start manufacturing the high-efficiency components and prepare to introduce them aggressively in the market as the sensitivity for high efficiency continues to develop in the Asian region.
If we look at the right, the breakdown by sector, first of all, I would like to highlight that if we excluded the non-core business, which is decreasing, and we wanted it to decrease, growth would have been 10.9% or 12.7% net of Forex. Air conditioning and refrigeration had a very good performance in 2018, both of them. Air conditioning grew by 9.9% net of Forex, refrigeration grew by 17.6%. Refrigeration is the engine of growth and will continue to be as we do direct promotion to end users, do technological innovation, and introduce digital services. The non-core business decreased by 25%-26%, and this is according to expectation and to plan, since we do not consider these residual businesses as strategic. Going to page six, I leave it to Mr. Viscovich to comment the items below the EBITDA and the cash bridge.
Thank you, Francesco. In page six, we can see some details about the lines below the EBITDA. Starting from the depreciation and amortization, we had an increase in depreciation from EUR 8 million to EUR 9.1 million. This is due to the project of the footprint expansion, especially in Italy and China. Regarding the financials, we can see that the financial income decreased from EUR 451 of last year to EUR -136. This is mainly due to disinvestment of our life insurance policy of EUR 46 million last year, where we gain interest at around 2%. It is also due to the increase of our loan to finance the new acquisition that has been done at the end of the year. Regarding the gain exchange, we had an improvement from a loss of last year of EUR 800, we moved to EUR 350K.
This result with an earning before taxes of EUR 37.4 million, compared with EUR 41.8 million of last year. Regarding taxes, as already anticipated, we have significantly reduced the taxes from EUR 10.7 million of last year to EUR 6.6 million of this year. This is mainly due to the positive impact of the Patent Box. That is almost EUR 2.1 million. And despite the accrual that we have done on the transfer price issues, where we have definitely settled the open litigation with the tax authority, refer to the year that were open and claim last year. As you can see, the tax rate is moved from 25.6% of last year to almost 18% of this year.
Moving now at page seven, we give a representation of the net financial position bridge from 2017, where we had a positive net financial position of EUR 40.2 million to the end of last year, where we closed with a negative financial position of EUR 59.1 million. That was mainly due to the acquisition of the two entities due to the merger and acquisition event of about EUR 78 million. Without which, we would have closed our net financial position in a positive situation of EUR 19.1 million, with a total variation compared with the previous year of about EUR 20 million. EUR 20 million that are represented by dividend distribution during the year of EUR 30 million, and also by a generation of cash of EUR 9.6 million from the free cash flow.
Regarding the free cash flow, we have absorbed cash from the CapEx of about EUR 18.1 million, and from the net working capital of EUR 13.8 million. Regarding the net working capital, useful to say that we have had an increase of the inventory level in order to manage the shortages in the electronic components during the year. At the end of last quarter, the net working capital decreased compared with the third quarter of 2018, of about EUR 2 million. I give back now the stage to Francesco.
Thank you, Giuseppe. Final comment on this. As expected, working capital in the fourth quarter has already started to improve, as Giuseppe said, by a couple of EUR million. We expect, of course, further improvement along 2019. Moving to page eight, before the closing remarks and the questions, I would like to highlight the main driver behind all our strategic decisions, which is sustainability. As you know, air conditioning and refrigeration account for significantly more than 10% of the total energy consumption globally, and there is a growing sensitivity of people and governments to this topic. Also in developing countries, where the consumption is increasing and will continue to increase. That's why we invested an average of 6% of revenues into R&D over the last three years, which is significantly more than comparable companies in similar sectors, devoted to helping customers to increase the efficiency of their units.
Efficiency can improve very much using the proper control solutions. Helping them to transition to refrigerants that have a lower global warming potential, and extract value from the data coming from the field. I thought it was important to highlight this key strategic pillar, because it will be the pillar that will continue to drive all our decision also for this year and the coming years, also in terms of the development of digital services. Moving to page nine, for the closing remarks, I would like to underline how 2018 confirms the very good resiliency of our business model and business portfolio, since we achieved very consistently our expectations along all dimensions, and we consistently executed our strategy along all these dimensions.
The CapEx plan is also proceeding in line with the roadmap in terms of expenditure, as well as in terms of implementation for the Chinese plant, for the U.S. plant that will start operating in spring this year, as well as for the increasing capacity in the Croatian plant. We propose a dividend of EUR 0.1 per share, which is in line with our dividend policy. Finally, we will continue with our strategy, as I just mentioned, of providing more and more innovation for sustainability to our customers in the years to come. As a very closing remark, I would like to underline that as of today, we don't see any signs of a change in the trend in our niches compared to what we have experienced in the last few quarters and the last few years.
I thank you very much for your attention, and 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 touch-tone telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and One at this time. The first question is from William Turner with Goldman Sachs. Please go ahead, sir.
Hi, gentlemen. I've got a couple of questions. The first one is on your underlying margins in the fourth quarter. At your 3Q results, you had an underlying EBITDA margin of 20.8%, and for the full year, it came in at 19.7%. That kind of implies quite a stark decline in profitability in the fourth quarter, despite probably accelerating growth. Could you please go into a bit more detail what happened there?
Okay. Thanks for the question. Basically, the decline in profitability in the fourth quarter is a seasonal phenomenon that happens every year, and we had anticipated that. That's why our target was to stay more or less in line with 2018. That's due to the fact that the fourth quarter is normally slightly lower in terms of sales, and we also accrue a number of SG&A costs in the fourth quarter. That's a phenomenon that tends to happen every year.
Great. Thank you. My second question is, the tax cut that you got this year to 18%, that's quite a significant change. What could we expect going forward into 2019?
Okay. The result of 2018 is mainly driven by the extraordinary, let's say, accrual for the Patent Box, the ruling that we had with the tax authority, and this is referred to previous year, let's say, tax benefit, that won't be at the same level for the next year. For this reason, in 2019, we forecast an increase, let's say, of the tax rate compared with 2018, we approximately estimated that the tax rate will be in the range of 22%-23%, also because we have a pending, let's say, the renewal of the tax incentive in China, for which we are working for. For this reason, we think that a reasonable tax rate for next year will be in the range of 23%-22%.
Maybe we can also underline the fact that the underlying tax rate, excluding the Patent Box in 2018, was 23%, was in any case a strong improvement compared to the 26% of 2017. It's slightly more than third quarter when it was 22% because of two reasons. One is the dividend distribution from China that has a withholding tax of 10% that we had anticipated, and also the fact that we settled all the pending issues with the tax authorities, and all these settlements are incorporated in this tax rate. 23%, which is what we had basically expected for the end of the year, includes all these elements, and then if you include also the Patent Box, we arrive at 18%.
Great. Thank you. I have some questions on the capital spend that you've had over the last year, because you've obviously spent a lot of capital. The HygroMatik acquisition, could you go into a little bit more detail about what synergies you expect from the business, and other than it just being a bolt-on of a new product, how it fits in to your overall group, and where you think its profitability could go in the long term?
Okay. There are really a number of synergies that we expect from the HygroMatik acquisition with different time frames, of course. First of all, the market positioning of HygroMatik is typically significantly higher than our market positioning, which means that we have commercial synergies in terms of cross-selling, leveraging our sales network and HygroMatik sales network that are also pretty complementary in the different parts of the world. There are cross-selling possibilities related to the different positioning of the brands of Carel and HygroMatik. In addition, we have cross-selling related to the fact that Carel has some additional products that currently HygroMatik doesn't make. We have also operating synergies possibly coming from, for example, purchasing, because being it's the same kind of product, there are for sure purchasing synergies that we can achieve.
We also believe that in the medium term, there are also manufacturing efficiencies that we can achieve. We started integration very focused with a number of work streams of joint teams between us and HygroMatik. The teams are working intensely on the integration, which is going absolutely according to plan and according to the business plan that we had made before the acquisition for the business case. Everything is absolutely confirmed as of this moment for our expectations.
Okay, great. I have a couple of more questions, operator, if you want to see if anyone else has any questions, they could go, and then I can return into the queue.
The next question is from Alessandro Tortora with Mediobanca. Please go ahead, sir.
Yes, thanks for taking, let's say, my time and your time. I have three questions, if I may. The first one, sorry, is related to the working capital performance and management. If you can, let's say, give us an idea of the normalization that you expect in terms of working capital on sales in 2019. The second question is on the margin side. If you can, let's say, considering also the investments you have made in new capacity, if it is reasonable to assume for the next, sorry, for the current year 2019, an EBITDA margin overall, let's say, in line or not so far from the level we registered in 2018. The third question is on the top-line side. Clearly, let's say, you share with us an outlook telling us that you expect 2019 consistent with the past years in terms of growth.
What I would like to understand is if you see significant differences by region. For instance, you mentioned before an acceleration in the U.S., so if we can expect maybe U.S., sorry, North America outperforming maybe the European subsidiary and also some other, let's say, outlook you can share with us for the emerging markets. Thanks.
Okay, thank you. Coming to the first question. Working capital, basically at the end of the year, adjusting for the integrations, the business combinations, and the deferred tax liabilities, working capital was 21% compared to a 22% in the third quarter. We already in the fourth quarter started to see, as we expected, an improvement. Let's say the operating working capital, adjusting for all the non-operating elements-
Okay
improved by a couple of EUR million from 22% to 21%. For 2019, we will continue to improve, and we expect to go below 20%.
Okay.
In terms of the second question, EBITDA margin in 2019. Of course, it's very early in the year. However, we do not have any reason to expect major changes compared to 2018. Of course, as we continue to invest in the footprint expansion.
Okay.
Concerning the different regions, again, it's very early in the year. Let's say that, again, what we can say is that we don't have at this moment any reason to change what we have been seeing and discussing in the last three quarters.
Okay. Just sorry, if I may, a quick follow-up. On the CapEx side, after the around EUR 18 million okay investments you made in last year, what is, let's say, reasonably the amount that you can spend in 2019?
We confirm our plan of having, let's say, EUR 40 million overall between 2018 and 2019. Let's say then in 2019, we will have probably something around EUR 22 million. Of course, it's an approximate figure, we confirm that.
Okay, thanks.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is a follow-up from William Turner with Goldman Sachs. Please go ahead.
Hi. Thank you. Would it be fair in assuming now that your leverage is at one times that further bolt-ons is not going to be a strategic priority for the next coming year or two? Secondly, what, if any, exceptional items can we expect in 2019 given now that obviously the IPO and those deals have been completed?
Okay, thanks for the questions. For the first question, yes, of course, we continue to have an active pipeline of M&A targets. Of course, needless to say, it's pretty difficult to foresee the timing of any such deals, but we didn't stop the research for possible targets. The bolt-on M&A strategy is still going on as before. For the second question, in terms of extraordinary items, non-recurring items for 2019, as of now, we do not have any. Especially related to the IPO, no, there is nothing left for 2019.
Great. Thank you. My final question is, on your guidance, you're expecting continuation of trends seen in 2018. Is that specific to organic sales growth, or are you talking about revenue growth as a whole? Because obviously you're going to now be consolidating two businesses. Are you expecting the organic business to continue with the same trends as 2018?
Yes, of course, it's the organic where we don't see any reason to change our view. It's the organic part.
Great. Thank you.
The next question is from Giuseppe Grimaldi with Mediobanca. Please go ahead, sir.
Good afternoon, everybody, and thank you for taking my question. Just very quick one. Have you already assessed the impact of IFRS 16 for this year, if any? Can you give us some granularity on that?
Yes. Okay. Yes, we have already estimated the impact of the IFRS 16 for 2019. The net financial position will be effective of about EUR 16.2 million. In term of, let's say, EBIT, we expect almost EUR 3.5 million of less OpEx, and EUR 3.5 million of additional amortization, depreciation, and amortization that won't impact on the EBITDA.
Basically, it's EBIT neutral?
EBIT neutral. Yeah, sure.
Okay. Fair point.
Once again, if you wish to ask a question, please press star and one on your telephone. The next question is a follow-up from William Turner of Goldman Sachs. Please go ahead.
Hi. Good afternoon. It is actually Jack O'Brien from Goldman's. Just jumped onto Will's line. I just wanted to understand if you have seen any changes to the competitive backdrop since your business was listed. Obviously, very solid results, but just wanted to understand if there are any sort of changing dynamics that we should be aware of. The same question also goes with regards to regulation, which is obviously quite an important driver for your business.
Okay, thanks for the questions. Actually, no, we haven't seen any significant change in the competitive scenario. Of course, the competitive scenario has been evolving all the time. However, we did not see anything specific relevant in the last few months. Considering regulation, again, there has not been any significant change in the regulation outlook. That means that the regulation outlook remains very positive for us because it is continuing to push for the transition to high efficiency and new refrigerants, in Europe, but also in other parts of the world. In the United States, there has been a very strong focus in most recent month towards refrigerant leaks from the refrigeration circuit. In some states, they are fining heavily the plants that have refrigerant leaks.
This is very good for us also because our innovative systems for refrigeration, which is the so-called water loop system that has a compressor on board the cabinet is particularly tight in terms of refrigerant leakage. This is probably the most interesting change that we have seen in regulation recently, which is even more positive for us.
Great. Thank you. Perhaps just one final question from my side. During 2018, yourselves and a number of other engineering companies were affected by shortages of electronic components, and obviously you're mostly a sort of assembly business rather than manufacturer. Is that still an issue? I suppose aside from that, are there any other sort of risks you see? What would you define as your biggest risks to your 2019 plans?
Okay, thanks. Concerning the shortage, yes, the situation is still going on in the market. For us, it's now basically over, I would say. We're very happy that we managed to absorb any possible cost increases because the cost of goods sold in 2018 has been in line with 2017. We didn't have any impact on our P&L from the shortage. We had, as you know, an impact on working capital, but we are recovering that, and it's improving. We don't see any additional significant effect for us from the shortage in the future, besides the fact that we will improve the working capital. Concerning any major risks that we see for 2019, let's say that, of course, in general, as you know very well, the macroeconomic scenario globally has some elements of uncertainty.
However, we are very confident because we confirm the resiliency of our business model, of our applications, that are very specific and often very pretty de-correlated from the general economy. As I was mentioning before, as of now, we don't see any change in trend in our niches compared to what we have seen in the last few quarters. Yes, the risk, of course, is there on the general scenario, but we do not have any specific reason to worry for that as of now.
Perfect. Thank you very much.
For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
Okay. Thank you very much for your attention and for your interesting questions. Looking forward to meet possibly some of you during the roadshows or for the presentation of first quarter results. Thank you very much.