The Board of Directors of CAREL Industries S.p.A. approved the consolidated results as of 31 March 2024.
Francesco Nalini, CEO of the Group, commented: “As already expected and anticipated, the first quarter of this year was characterised by a particularly challenging economic scenario, especially in some geographical areas, which was reflected in several sectors of both air conditioning and refrigeration. Starting with the former, the segment that suffered the most was the heat pump segment, which in recent quarters, has experienced a sharp and significant slowdown in Europe as a result of some regulatory uncertainties, which have been partly resolved, the dynamics of interest rates and the trend in energy commodity prices. Turning to refrigeration, the strong recovery observed in North America was offset by a still stagnant European demand, although some qualitative signs of improvement were also seen in that geography. The true magnitude of these trends was partly accentuated by a comparative period, the first quarter of 2023, which had been extremely positive and robust, thanks in part to the extraordinary contribution related to the easing of the electronics shortage, which had allowed the Group to dispose of some of the previously outstanding orders.
However, the above is temporary in nature: heat pumps play an essential role in the European decarbonisation strategy, while energy efficiency and the transition to more sustainable refrigerant gases remain two key elements in the development of refrigeration in the coming decades. In the short term, we expect a gradual improvement, concentrated in the second half of this year. Turning instead to the medium and long term, CAREL aims to further strengthen its global positioning based on customer focus, anticipation of market needs and undisputed technological leadership. From this last point of view, an important result was already achieved in the first quarter of this year: the percentage amount of revenue spent on research and development was brought back close to its historical average, i.e. above 5%.”
Consolidated revenues
Consolidated revenues came to € 146.4 million, compared to € 161.0 million as at 31 March 2023, a decrease of 9.0%. Net of the change in the scope of consolidation of Kiona and Eurotec (€ 7.3 million) and the marginal negative exchange rate effect, the decrease would have been 13.3%.
This decrease is primarily attributable to a contingent and non-recurring element related to the significant contribution to revenues, in the first part of 2023, of the disposal of the backlog accumulated in previous quarters. During this period, the shortage of electronic material had eased considerably, allowing the Group to increase the volumes produced and delivered. Added to this is a real contraction in demand that has affected some sectors, particularly in Europe. Starting with air conditioning, which accounts for 71% of consolidated revenues and recorded a drop of -10.1% (at constant exchange rates) in the quarter, the decline in sales in the residential sector (heat pumps) intensified further. This is due to a number of transitional elements including: a certain regulatory opacity at European level (so-called F-gas regulation; EPBD; Heat Pump Action Plan) and at local level (particularly in Germany, although it now appears to be substantially resolved); an unfavourable dynamic in the relationship between gas and electricity prices; high interest rates; high inventory levels throughout the supply-chain due also to tumultuous market growth between 2021, 2022 and the first part of 2023. With regard to the other verticals in which the Group operates, while the industrial sector was particularly buoyant, especially in the US, led by excellent growth in Data Centres, the commercial sector closed in the negative area mainly due to the very high comparative context in Q1 2023.
Regarding refrigeration, which accounts for 29% of consolidated revenues and reported a decrease of -3.8% (at constant exchange rates) in the quarter, opposite trends were recorded in North America and Europe. In the former, there has been a strong upturn in investment in both food retail and food service, linked to a decidedly positive macroeconomic scenario and considerable interest in more sustainable and efficient solutions, while in EMEA there is a substantial stagnation in demand, although there are some timid signs of a possible trend reversal expected in the coming quarters.
Analysing the individual geographic areas, the region with the greatest weight for the Group, EMEA (Europe, Middle East, Africa), from which 67% of revenues derive, closed the first quarter of 2024 with a decrease at constant exchange rates of -16.3% (on a like-for-like basis, the decrease would have been equal to approximately 22%): a general negative performance in the verticals in which the Group operates contributed to this result, with a marked decrease in heat pumps. As already mentioned, there is a significant penalty due to the comparison with Q1 2023, the second highest quarter ever recorded by CAREL, which had reported robust growth in the residential sector. The general weakness of demand in Europe is due to a number of mainly macroeconomic (GDP growth essentially flat, 0.3%, and interest rates at highs) and regulatory elements (the latter partly resolved or in the process of being resolved), compounded in some segments by high inventory levels along the supply and distribution chain.
APAC (Asia-Pacific), which accounts for approximately 15% of the Group's revenues, reports growth at constant exchange rates of 8.3% compared to as recorded in the same period of 2023. In addition to the contribution of Eurotec, these results benefited from an excellent performance of the industrial air-conditioning sector (including some opportunities related to electrification) and data centres, while the commercial sector was not very tonic due to the weak economic scenario in China.
Revenues from North America, which account for about 16% of the total, grew by 14.8% at constant exchange rates and benefited from excellent performance both in the HVAC sector, particularly in applications related to computer centre cooling and other innovative industrial applications, and in the refrigeration sector, where the growing interest in solutions increasingly oriented towards the use of refrigerants with a low polluting impact, mainly natural refrigerants, is particularly positive, also following some regulatory confirmations in recent quarters. Also important, from a strategic point of view, was the success of the products for air handling units developed by Enginia, a company acquired in 2021, which led the Group to implement part of the production process for these references in its plant in Pennsylvania. Finally, South America (which represents approximately 2% of the Group's total turnover) reports significantly growing results compared to the first quarter of 2023: the good performances recorded in Brazil were also confirmed in other South American countries, thanks mainly to an improvement in refrigeration results.
Business outlook
The first quarter of 2024 was also characterised by a framework of strong geopolitical instability mainly due to the conflict between Russia and Ukraine and the outbreak of the Israeli-Palestinian one. In macroeconomic terms, the scenario is not homogeneous in the geographical areas where the Group's presence is greatest: Europe, China and the United States. In Europe, while the inflation trajectory has stabilised at just above 2%, interest rates still remain at highs (above 4%) and GDP growth is essentially flat. The signals coming out of China are mixed: while industrial production is growing significantly, in fact, there are fears of deflation. Finally, as far as the US is concerned, despite high interest rates the economy is still robust.
The Group's first-quarter results partly reflect these scenarios with double-digit percentage growth in North America, positive but less brilliant performance in APAC and a sharp decline in EMEA. The latter was also impacted by contingent and temporary phenomena such as the aforementioned sharp deceleration in sales of heat pumps and the recovery of refrigeration that is struggling to materialise.
As far as the continuation of the year is concerned, expectations are for a gradual growth in performance, in particular in EMEA in the second part of 2024, linked to a series of phenomena, including the recovery of the investment cycle in the refrigeration sector (the first slight signs of which are already present), the disposal of accumulated inventories in the heat pump supply chain, and the improvement of the European macroeconomic scenario (interest rates). The basis of comparison with 2023 will also normalize in the second half of the year For the second quarter of 2024 the scenario should not undergo significant changes, therefore the Group expects consolidated revenues close to those of the first quarter of this year.
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