Letter to the saver

Carel's strategy: more business in the USA and focus on innovation

Hi tech. The group wants to restore investment in research to 5-6% of revenues and use acquisitions to accelerate growth. The risk of economic slowdown

by Vittorio Carlini

8 April 2024

5' min read

Key points

L’America
Technological innovation
The World of M&A

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5' min read

On the one hand, the continued commitment to Research and Development. On the other hand, the objective of pushing sales especially in the United States. All this with an eye on integrating the latest acquisitions, primarily the Norwegian Kiona. They are among the priorities of Carel Industries to support the business.

Yes, the business. The Italian pocket-sized multinational, which completed a 200 million capital increase in 2023 and of which 'Lettera al Risparatore' heard from the top management, produces hi-tech solutions and components to improve energy efficiency and control air conditioning, air conditioning or refrigeration systems - and machinery. Regarding the first front ('Air conditioning'), the group is active - essentially - in the industrial, commercial and residential sectors. With regard, on the other hand, to 'Refrigeration' the focus is on supermarkets and 'food service' (refrigerators for the distribution of drinks and snacks).

L’America

Well: one priority - along with expansion in India, Asia and consolidation in Europe - is to push business in the United States. Carel is present in that region with two production plants (Pennsylvania and Oregon) and several sales subsidiaries. In 2023, the turnover in these markets was 97.1 million. Now the goal is to accelerate turnover. In this sense - it should be emphasised - the company has a good positioning in air conditioners for industry and data centres. On the other hand, penetration in both commercial 'Conditioning' and refrigeration is lower. In fact, there is still no presence in heat pumps. It is evident that there is a desire to push activity in the segments indicated. In order to do this, on the one hand Carel is aiming to further articulate the sales network; and on the other hand - although this hypothesis could materialise in 2025 - the road of increasing the production base is not excluded. A step, the latter, which will be achieved through M& A or organic growth ? The group replies that, to date, the question has not been addressed. That said, the company - pointing out that with respect to acquisitions as a whole it does not have a greater focus on Conditioning or Refrigeration - indicates that America is a market where shopping has a higher probability.

ESERCIZI A CONFRONTO

Technological Innovation

So far the US. Another priority, however, is technological innovation. In general, Carel, which in 2023 - between Opex, Capex and specialised personnel costs - invested around 4% of its turnover in R&D, aims in the medium to long term to return to the 5-6% mark. These outlays have, among other things, contributed to the launch of Stone. That is, the fifth generation of the software development environment, which is then incorporated into the final product. The system enables the engineers of client companies to carry out, among other things, automatic real-time testing of code functionality. Not only that: on the one hand, it allows remote maintenance of the algorithm; and on the other, it supports the use of artificial intelligence. More. It facilitates the creation of digital twins to validate the hi-tech solution without having to build physical prototypes. In short: the company is pushing innovation and, in this case, development environments for edge software, which, moreover, is a powerful facilitator of hardware sales. That said, is there room for the same software in the cloud? Evidently yes. These are an important source of revenue. In the world of refrigeration, and supermarkets, one may for example recall the technological solutions that - via 'Software as a service' - offer the possibility of collecting data on the operation of refrigerated counters and, thus, of carrying out predictive maintenance.

RICAVI PER AREE DI BUSINESS

But it is not just a question of software. Innovation also rhymes with reduced consumption (and costs). An example? In the area of data centres and 'Conditioning', reducing the use of water is crucial. To this end, the group has developed a coating - for the surface of heat exchangers - which requires less H2O to lower the temperature.

The need to reduce consumption also concerns energy. In refrigeration, especially driven by EU regulations (F-Gas Regulation), there has long been an increasing use of non-polluting refrigerant gases. In particular, there is the exploitation of carbon dioxide. However, mechanisms that use CO2 have poor energy efficiency. Hence, there is a push for the production of electronic components for solutions (such as variable speed compressors also using CO2) that limit the consumption of Mega Watts.

All as easy as drinking a glass of water, then? The reality is more complicated. In 2023, a financial year in which Carel reported revenues (+19.3%) and net profitability (+14.2%) up on the previous year, the heat pump business - worth around 13% of turnover - has beaten the headlines. It is a trend that - saver's concern - risks dampening the company's consolidated growth.

RICAVI E GEOGRAFIE

Carel, although aware of the situation, does not share the fear. Certainly - is the indication - on the one hand, the slowdown in demand for 'heat pumps' in 2023 was significant; and on the other hand, the long wave of the phenomenon - due to regulatory uncertainties, among other things - is being felt at the start of 2024. That said, however, Carel emphasises that the phenomenon is contingent in nature. The rise in interest rates, which helped to dampen investment, is now behind us. In addition, Carel points out, the disposal of excess inventory by customers is underway. Finally: the energy transition, of which heat pumps are an expression, is a structural trend. Therefore, the group concludes, the expectation is for a resumption of business in the second half of 2024. Yes, business recovery. More generally, the saver expresses a further doubt: that linked to the concrete slowdown in several economies (especially in Europe). It is a trend that, by delaying customers' investments, may limit Carel's growth. The group, inviting a more detailed analysis, again does not share the concern. First of all, as already indicated for 'heat pumps', the factors that induced problems at various junctures - such as the rise in the cost of money - are behind us. Moreover, Carel points out, several indicators - such as consumer and business confidence - are improving. Not only that. The pocket-sized multinational emphasises the geographical diversification of its business: a feature that limits macroeconomic risk. Against this, the company - pointing out that qualitative signs of recovery are also being felt in the supermarket sector - says it is confident about the gradual general improvement of the business.

RENDICONTO FINANZIARIO

The World of M&A

So far, some suggestions on innovation, geographical expansion and the economy. Carel, however, is also focused on the integration of the acquired companies. There were two extraordinary transactions in 2023: the one on New Zealand-based Eurotec and the shopping spree at Kiona. The latter, in particular, has no small significance. The M&A should allow for several synergies. Among others: the enhancement of innovation, combining Carel's presence in Hvac-R units - and knowledge in thermodynamics - with Kiona's digital offering. Also: the integration of the two companies' platforms for the supermarket sector. More: the acceleration of the Norwegian group's geographical expansion, thanks to Carel's sales structure. Beyond that, however, it should be noted that Kiona's Ebitda margin in 2023 was less than 20 per cent. That is to say, the level is lower than that of Carel (21.1%). A context that leads to the assumption of the risk of the dilutive impact of the transaction. Carel rejects this consideration. The company, by indicating that Kiona's Ebitda margin will be increased to over 20%, affirms the incremental nature on the group's medium-term margins of the acquisition. Against this background, what then is the outlook for 2024? The company offers no guidance regarding the financial year. With regard to Capex, however, it indicates that capitalised investments will be around 5% of revenues. Of this around half is directed towards so-called 'operations'. That is, for example, the digitisation of production processes.

PURPOSE

Stock performance.

The technical analysis of the stock

Vittorio CarliniRedattore
Luogo: Milano
Lingue parlate: Italiano, Inglese
Argomenti: Finanza, Tecnologia, Analisi fondamentale
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