CIR S.p.A. - Compagnie Industriali Riunite (CIR) Earnings Call Transcript

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the CIR First Half 2026 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Rodolfo De Benedetti, Chairman, and Michele Cavigioli, CFO of CIR. Please go ahead.

Good afternoon, everybody. Welcome to this call. As usual, we'll go through the key numbers that were approved by today's Board meeting with the half year results and then open it up to your questions. So in terms of volumes, sales were slightly up 1.5% -- 1.7% in H1. The growth came really from KOS, 4.3% growth on last year. Sogefi was basically flat. Net results for CIR year came in at EUR 18.6 million up from EUR 14.5 million same period last year. The improvement was mainly at KOS, and this is also due to the increased ownership that we have, of course, to 100% as opposed to 60% for the same period last year. So this brings the contribution of KOS from EUR 4.7 million to EUR 8.7 million this year. Sogefi, about flat at EUR 10.5 million, and the holding company structure is slightly better, but almost in line with last year. Net financial position was impacted significantly by the KOS transaction. So it's minus EUR 24 million consolidated against a positive EUR 220 million of same date last year. And the main driver here was the EUR 227 million investment in KOS, EUR 25 million in the buyback of CIR shares as well as EUR 13 million of minorities dividend, and this basically explains the difference. In terms of outlook, we pretty much see a confirmation of what we budgeted for at KOS. We have increase occupancy, both in Italy and in Germany. I would say that this is the sum of regions where we are at capacity close to 95%, which is really the maximum occupancy, which you can reach. But there are still some regions both in Italy and in Germany, where we can do better than that, where we are not there. And so we see that as an upside that we are working on to realize. There has been a tariff adjustment. I'll come to that later in -- we have Italy as well as Germany, which will continue throughout the year in the case of Germany. And so we expect as we, I think, indicated in a prior call that this year should be kind of a consolidation year for KOS. We had a significant increase of profitability last year. And we plan to basically confirm -- is slightly higher results this year, but not obviously the same progression as we had last year. Sogefi, we -- the latest guidance is that we expect low single-digit decline in revenues for the whole year. This was confirmed in the first half of the year, probably the first half of the year so a slightly better market than what we predicted, particularly in Europe where the market has been relatively good. Weak China, as we'll see and pretty much in line at U.S., we indicated that we foresee for the year basically to confirm the EBIT margin of '25. If you go to Page 5, we just reminded the major events for H1. You already know about the buyout of the KOS minorities. This happened at the beginning of the year. It has been a significant investment for CIR. It was financed through our cash reserves, plus or minus a dividend from KOS that was paid to shareholders. Today, we own 100% of KOS, as you know. We also proceeded with further buybacks of our own shares as we have done for the last few years. We made a tender offer for 50 million shares, which was partly successful. And together with open market purchases, we invested about EUR 25 million in the first half of the year to buy back our shares. And as we indicated from next week, because we had to respect the close period, we will resume the ordinary buybacks through open market purchases as we have done in the last few years. If I go to Page 7, and basically comment the consolidated P&L. And maybe go on the right side because the consolidated numbers are relatively meaningless. But as you can see, in terms of revenues, we had good growth in Germany. This is mainly because of the increase in tariffs. We had good growth in Italy in nursing homes and flat revenues in rehab. And Sogefi including exchange rates, which had a negative effect of a lot of point -- percentage point, we are slightly negative. The financial result, as you can see, is slightly better than last year, mainly because of the better return on CIR's parent company financial assets. And so the total is EUR 14.5 million negative against EUR 18.3 million last year. And then on the lower right side, you have the breakdown of the contribution. So as you see, as I mentioned earlier, KOS contribution grows substantially, mainly because of the 100% of the results that we have this year compared to 60% we had last year. So this is flat and shareholding company is pretty much in line with last year. And so this brings our net result of 18.6 -- EUR 18.6 million this year. Page 8, you have a breakdown of the consolidated debt. KOS has higher net debt at the end of the period. This is mainly because of the dividend that was paid in the early part of the year that I mentioned earlier that was part of the F2i transaction. Sogefi had a positive free cash flow in the first half. And so you have the total for the subsidiaries and the shareholding was impacted, as I said earlier, by the cash-out for the F2i buyout. You have on the left lower-hand part of the chart, the net financial position, including long-term leases. Those are mainly, as you know, the KOS facilities that are not owned and that we finance with long-term leases. You have the bridge of the net financial position. I think I commented already those numbers. So unless you have questions later, I won't spend any time on it. You have on the lower part of the page, the operating cash flow on -- for the 6 months and the breakdown between CapEx and working capital and funds from operations. And as you can see, both KOS and Sogefi operated with positive operating cash flows in the 6 months. Passing on to Page 10, where you have a detail of our balance sheet. On the left side, you have the increase of the KOS investment going from 60% to 100%. The Sogefi one is simply the addition of the 6-month results. And then not much else to comment, no major changes for the rest of the chart, with the exception of the net cash because of the KOS investment. And then you have total shareholders' equity and divided by number of shares. And this is -- the difference is mainly related to the buyback of shares. On the right side, you have the private equity in and out, so new investments and distributions, not much to report here. Last year, as you might remember, we had a negative currency effect on the private equity investments because most of them are dollar-denominated, and we had a significant dollar devaluation, which wasn't the case this year. And then you have a bridge on the lower part of the page for the net cash at the holding company, which goes from EUR 362 million to EUR 162 million. And the main impact here, as I mentioned earlier, KOS acquisition and share buybacks. On Page 11, you have a simplified P&L of the holding company. Income from financial asset was better than last year, even though financial assets were lower because of the KOS investments. The holding company recurring costs were in line with last year. Nonrecurring costs were -- this is mainly related to the KOS acquisition, notably something called Tobin tax, which is a tax on share transactions that we had to pay on the acquisition of the 40% of KOS. And this brings the net result at a slightly negative EUR 1.3 million for the 6 months. On Page 13, figure of KOS, you have basically, the number of beds on the right-hand side, no major changes here. On Page 14, you have the P&L. As you can see, slightly higher profitability. Growth came mainly from nursing homes because of a 3.5% tariff increase. Germany grew by 6.8% with a slight increase in occupancy and an average tariff increase of about 5.4%. In rehab and psychiatric and acute care were quite flat in terms of both top line and margin. So the increased contribution to the bottom line comes from Italy's nursing homes mainly and Germany. Net debt showed an increase of EUR 56 million. This is mainly due to the -- about the same number, EUR 56 million of dividend payments that happened at the beginning of the -- at the beginning of the year, plus the cash out from the stock option exercise, which was related to the F2i transaction, where we bought back some shares from management and some development CapEx as well as some net working capital absorption. I skipped the outlook because I already commented on it before. On the lower left side, you have the real estate situation, not much to report and no major changes since the end of last year. Page 15, you have a breakdown of Italy and 3 businesses we operate in Italy as well as Germany with both the number of beds, the average end-of-period occupancy rate. I think they're all pretty self-explanatory. As I said, Italy nursing homes, this is the sum of all regions. There are regions where we are at regime in terms of occupancy. There are a few regions where we still need to get there. I think the important thing here for the rehab business in H1 was that the Italian government passed a law that established an increase in tariffs starting from July 1. This increase is significant, depending on the type of service, but this was long overdue. It hasn't been -- we haven't had increases for years, and it's a significant increase, which will then have to be implemented by every region because as you know, the health care system is administered by regions, and so they will have to basically transform it into their own administrative decisions. Every region have their own timing and their own interpretation. So we expect this will take a few weeks, if not months. And so we will have the full year effect starting from the beginning of next year and maybe some elements of it in the rest of the year. Together with that, we will also have a renegotiation of some labor agreements in the rehab activity and so that will bring an increase in -- on the cost side. We think all in all, the plus and the minuses should result in probably mid- to low single millions of euros better contribution on a full year basis compared to the present situation. Germany has increased occupancy. Here, too, we have a number of regions, which are at capacity. And we have a particular situation of a single region where we are far from saturated. There are issues related to margins and particularly real estate contracts. We are focusing our attention on a very limited number of structures which are responsible for a significant negative contribution. And so the problem is not broad. It's very concentrated. And also taking into account the new management that is in place, we have established this to be one of our most pressing priorities to attack and resolve this situation, which is responsible for a few million euros on a limited number of structures of negative contribution, which really pollutes a bit the German numbers. On Page 16, you have the P&L by segment. So both Italy and Germany, and you have a comparison between the first half of this year and the first half of '25, as you can see, we have, over the last few years, we have going back in Italy to the margins that we used to generate or are very close to the margins we used to generate before COVID. And I remind that this H1 2019 was the best year before COVID. And so it was kind of the top performance that we experienced in this business. And we think that we probably won't get to exact -- the exact same percentage margins also because the perimeter has changed and has grown, but that we have fully recuperated the shortfall that COVID created. Germany has been longer to catch up, but we are pretty convinced that we will be able to get there, particularly attacking those few structures that I mentioned earlier that are responsible for, if not all, but most of the shortfall against the plan that we had when we made the acquisition. Going to Sogefi on Page 17. As I said, revenue is pretty flat. Despite that, increasing margins. This is, frankly, remarkable performance. I think management has done a great job here with declining revenues and a pretty volatile market and raw material tensions to be able to basically have a slightly better EBIT margin in H1 compared to last year. So we're very happy about H1 performance. We highlighted the fact that there is a relatively poor visibility going forward, but this is not new. This has been the case for quite some time. This is related to duties. It's related to higher oil prices and the impact that this can have on the end customer decision to change his car, to raw material prices increases. But frankly, we've used to this. We've been operating in this business for a long time. And I think we have a management team that is capable and experience and that knows how to pass on those macro negative variances to clients. And so I'd say that there's not much to report here other than a pretty good performance in the first half. On Page 18, you have it broken down into 2 divisions, both divisions increased their performance compared to last year. So they both contributed to a better performance. Air and Cooling has higher margins. It used to have higher margins historically. So this is a business that operates at 9% EBIT margin, which in this business is a very good performance. Suspension, as you recall, comes from far because we had a couple of years where we had almost 0 contribution, and there's been a very successful turnaround in this division. So margin has grown to about 6% of EBIT margin, which is not bad, which is probably still we can do better but it's substantially better than it was just a couple of years ago. This is it for the presentation. I have taken about 25 minutes. And so I'd like to leave the rest of the call to your questions.

[Operator Instructions] The first question is from Martino De Ambroggi of Equita.

A few questions on costs because I clearly understand that the net effect between up -- revised upward tariffs and higher cost of labor has a low mid-single-digit improvement, let's say, on a full year basis. This has to be considered in absolute value, I suppose. But focusing on the increase in tariff. You mentioned a few weeks or months. So for sure, this in January next year will be fully implemented or there is a risk of delay. And could you quantify overall what is a normalized -- all other things being equal, the normalized positive impact for the tariffs?

Yes. Maybe I'll start, and then I leave it to Michele to complete. So yes, you are correct, the mid- to low single-digit was intended to be millions of euros of increased contributions on a full year basis compared to today. In terms of timing, it's always difficult to forecast how public administration take decisions and particularly their timing. Every reason is different. Every region has their own approach in interpretation, budget constraints. And so some of them have already started to communicate measures. I would suspect that this will happen certainly before the end of the year. I -- in the government decision, it is said that the tariff increase is valid from January -- from July 1. Then obviously, every region has some leeway and some autonomy, but they have to basically respect the national decisions. And so this is why we believe that this should be effective on a full year basis from January 1 next year. Do you have anything else to add?

No. Just maybe to give you a bit more flavor what this was about. This is the increase in the hospital rehabilitation tariff, which has been frozen for -- since 2012. So very long time. And for this very long time, we had no tariff increase in rehabilitation. And at the same time, the labor contract were kept almost frozen as well. So usually, when you have an increase in the tariff, then there has to be also a labor contract renegotiation, and this is what will happen in the second part of this year. The rehabilitation tariff, depending on which kind of service is concerned, will increase from a minimum of plus 3% to a maximum plus 18%. So very, very differentiated across different specialties of the rehabilitation care. And we think that it's not going to be the same in all the regions because we have seen it before, every region tends to interpret it in a different way, cap, no-cap maximum. So they will have differences here there and also regarding to the retroactivity, that will be different. So for the time being, we cannot make any real forecast for this year. We assume that it's going to be over by year-end. So the impact for 2027 is what Rodolfo was saying before.

And on the German side, I remember in the last call, you mentioned there are 3, 4 nursing homes, creating problems and you were renegotiating -- you were in the renegotiation process. I don't know where we are if there is any update on this? And for the full occupancy, if I remember correctly, Italy is expected this year Germany, hopefully, next year for the full occupancy?

In terms of occupancy, as you have seen, on Slide 15, we were 95 something in Italy in '19, which was probably full occupancy because we never get to 100. Now we are a couple of points less. Most regions are 95 and above. We have a few regions and a few homes here and there which take the average down. So we can certainly have an upside here if we work specifically in those special situations to get back to 95, not probably this year, but there has been some [indiscernible] for '27 to get there. In Germany, was still lower. 95-plus is also achievable in Germany. Some regions like Bayern are already there, which demonstrates that we can get there. And the national average is brought down substantially by the special situation that we were talking about. It's 3, 4 homes with real issues that are related to real estate quality, real estate nonperformance, nonavailability of staff in certain other cases. So we are seriously evaluating an exit from those structures, not easy to implement because of the length of the rental contract. But we are considering to -- if the turnaround is not successful shortly, we are considering to exit to just avoid a few homes making the national average in terms of both occupancy and EBITDA suffer.

Okay. And the last on KOS. I know it's difficult to predict M&A, but how is the market? Is plenty of opportunities or there is a few opportunities to grow? Because I believe that now that you have full control of KOS, you are probably more incentivized without any problem in accelerating the M&A acquisitions and so on.