Fluidra, S.A. (FDR) Earnings Call Transcript & Summary

Good morning, everyone. This is Alex Short from UBS Global Industries Group. We're very lucky to have Fluidra, and Chief Executive Officer, Bruce Brooks, again this year, along with the Luis, Head of IR at our industrial conference today. For those who are not really familiar with Fluidra, Fluidra is a -- with the global headquarters in Barcelona, Spain, provides a right range of pool equipment and a wellness solution. 2017 full year announced a transformed merger with Zodiac Pool solutions and really established itself as a global leader in the Pool Equipment and Solutions sector. And we're looking forward to hearing from Bruce about the journey Fluidra is currently on today. And before I pass the mic to Bruce, I want to kindly remind everyone that please feel free to submit any questions for Bruce via the webcast portal. Thank you. Bruce?

Okay. Thank you, Alex, and thanks, everybody, for joining us today, at least in this virtual format. Hopefully, you got the presentation in front of you, and I will try to go through it fairly quickly over the next, let's say, 25, 30 minutes or so, and then we'll open it up for any questions. As Alex said, I'm Bruce Brooks, I am the CEO of the new Fluidra. I spent the last 9 years, I guess, or almost 10 years now in the pool industry as I was the CEO of the legacy Zodiac Company, so part of the merge. And then about 25 years with Black & Decker DeWalt running various consumer and industrial businesses around the globe for the group. If you go to Page 3, you get a quick look at Fluidra in a glance. As Alex said, the merge has made us the leader in the pool of equipment and wellness space. We don't build pools. We make all the stuff that make them work. This tends to be very highly engineered products for most of our goods, which certainly impacts the competitive base. We are listed on the exchange with a bit more than a EUR 2 billion market cap. Global HQ is in Barcelona. And our American HQ is in California. We have a great group of brands and I guess the number there, about EUR 1.4 billion in sales and EUR 269 billion was the previous guidance that we had provided. If you go to Page 4, you really see our story in my mind on 1 slide and perhaps a little bit of the agenda for our chat this morning. This is a very attractive marketplace. It tends to grow at about 2x GDP. I suppose we're going to get tested now in the -- in this COVID world, but it is a rational space that has a couple of different components that feed into it that we'll talk about. The merge has really created a platform from which we have the ability to grow. And with this merger, we have so many levers to pull as far as driving value creation. Our mission is to create the perfect pool and wellness experience. We really try to focus our team on putting themselves in the end user's mindset and thinking about that overall experience as opposed to just about a pump or a valve or something like that. And culture and sustainability is very important to us. So we're a values-driven company because we want to be able to repeat that performance over and over as we go. As you go to Slide #5, I'll talk just a little bit more about the industry. This is an industry that I think a lot of people that aren't familiar with Fluidra or the pool space, think of as a new construction market. There is a component that is new construction, and it's important to us. It makes up about 25% of the market, a little more than 25%. But really, the key is to think about the overall life cycle of a pool. That first year that the pool is constructed, our piece of that pool is about 10% to 20% of the cost of the installed pool. And then that pool goes into a consumable range where mainly they'll add a cleaner or something like that. But they're going through chemicals, maybe a little bit of maintenance. As you get in that 8- to 12-year cycle, you start to replace your core equipment over that pad, and that's really in the core space for us. And then in about the 15- to 20-year mark, much like a kitchen in your home starts to look a little dated and people tend to remodel, and they'll look at both the equipment as well as the shell of the pool for change. So as you think about that, the new construction year is important. As I said, it makes up a little bit more than 1/4 of the market. You see on the upper right, kind of the history of the pools, and we're still not back to the 2007 peak. Most of the markets are with the exception of the U.S. and Spain. U.S., I think, it's more been delayed by capacity. Spain, I think, was so speculative. I don't know that we'll ever see that kind of rate that was there before. As you think about this market, though, more than 70% of it is aftermarket. So that new construction just feeds an ever going base of existing in-ground residential pools that is very resilient. So in fact, if you look back at the '07, '09 range, that market continued to grow because every year, you're getting new pools that are feeding into that, that are in a different stage of meeting maintenance and/or remodel. And so therefore, it gives a nice base for the market. So as you see on the lower right, is this concept the resilient, 73% aftermarket, 20% new build. And that new build number, we just picked at the trough in 2009. So we don't see the market really going below that again. So it says about 93% of the market is resilient, and then 7% is tied to new construction growth. As you go to 7 -- excuse me, 6, you see the market historically growing at about 2x GDP or 5%. The last CAGR we had was 2014 to 2017. But if you looked at it for the last 50 years, it would be the same. It would be about that 5%. The mix has changed over time, less new construction, more aftermarket. And then on the right, you see the industry growing at that kind of 4% to 6%, driven by that new build that feeds in every year. The installed base growing and then average ticket growing, which is growing because of features, growing certainly because of connectivity and growing because of energy efficiency. So it's a good space. It is a seasonal space, so it can be impacted by weather. We like to think kind of plus/minus 1%. If you go to 7. This slide just talks a little bit about the joining of the 2 companies and the platform that we now have. I'll just go through it quick and then elaborate on a few of these things. We have the broadest and best geographic footprint of any of the players in the marketplace. With the merger of Fluidra, we have the largest range of products, which I'll talk a little bit about more. We have arguably 6 of the top 10 brands in the globe that are associated with the space, so recognized there. We have a core competency in innovation, which I'll talk about a touch. We've got 3x as many patents as far as our nearest competitor, helping protect our margin. We're very strong commercially from a sales and marketing perspective. And we also have a couple of best practices in operations that are driving margin. And as I mentioned before, culture and the team is quite important to us. And I'm sure you hear that from everybody. But happy to talk about that more, but I'll keep the driving for now. So if you go to Slide 8, you see a little bit of a sense of the geographic footprint. We are #1 in over 40% of the market space and in the top 3 in the next 53. So I mean, we're -- we've got a global leadership position. As you look at the chart on the right, you see that we are under-indexed to the American markets. So the American market makes up almost half of the global market. And this is 1 of the exciting things about the merger. It puts us in a much better position to attack the American market, a little bit over-indexed into Europe, which is the legacy strength of Fluidra. But for sure, we are the most geographically diverse, which certainly helps from a risk standpoint. As you -- and as you go to Slide 9, you start to see just a hint of the range of products that we have for the pool. So we have over 75,000 items but the nice thing about this merge is that we are well positioned for revenue synergies. And Fluidra's strength was really in the entry to mid-price but having all products for everybody. So kind of a one-stop shop. Jandy, Zodiac, Polaris or the legacy Zodiac that joins in was much better at the mid- to high price point. And so now we have the opportunity to branch into aboveground equipment, ladders and rails, white goods, which are things like drains and skimmers. So a much more expanded opportunity for product. And from a Fluidra perspective, we can take that broader geographic footprint and put the Zodiac product through that distribution network, opening up a lot more of customer bases. So revenue synergies are something that we started to report on at the -- really the end of last year. We see that as exciting upside to our plan or at least a hedge in this new COVID environment. From a product development standpoint on Slide 10. I spoke about innovation before. We've got over 200 engineers, close to 1,200 patents and a very robust product road map and product delivery or new product delivery process. We tend to focus on a few key areas, certainly improving the quality, which is paramount in this industry, user experience. But energy and sustainability has become important industry -- or we are the industry leader in connectivity. We've got over 0.25 million of pools connected at this point in time. So we continue to rise rapidly there. And then we'll continue to work on our overall range expansion. As you start to go really now into how we're going to go drive this business. We are organized really by geography first and then by segment second. So North America is a place where we really feel like we can accelerate growth. It's a place where the legacy Z team was in good shape before, growing at about 1 point a year in market share or almost 1 point a year in market share. And now we have the opportunity to expand the product category. We've made a significant push in the aftermarket since about 2015, that's paying dividends at this point in time. And then the connected pools are strongest in the U.S., which opens a lot of doors for us. From a European and Southern Hemisphere perspective, it's really about profitable growth. We're going to continue our pro center expansion. That's our distribution arm that allows us to be really close to the pool pros. And then it's about share of wallet and channel management as we leverage the brands and that breadth of product that we have. And this is the space where we get the most cost synergies that read through for us. From a commercial pool standpoint, you can almost think of that as developing markets today. That's where we've focused our commercial initiatives. But as we get stronger in those, we're starting to push those more in the developed markets. We just launched commercial pools in the Americas, in the fourth quarter. So this is a -- the developing markets tend not to have much in ground residential. And so we focused on commercial to get started. And then last, but not least, we have a large opportunity to improve margin with the merge. Both companies had a -- one was good at lean, the other was good at a value improvement process. A lot of synergies that I'll talk more about, focus on quality and service level. You put that combination together, and this is kind of our pre-COVID strap plan, but we're looking at sales growth in the 5% to 8% range. EBITDA margin, which is going to grow 400 basis points. Obviously, nice leverage on the net income. And this is a business that generates cash. And as of the end of last year, we brought down the debt ratio by about a turn. So really in a pretty good position coming through the, I guess, I'd say, the primary merge year of last year. All of these things were well on track. Q1 was a little bit rough last year. Q2 was very strong. I mean Q2 was good. Q3 was strong. Q4 was really strong, and then we were really positioned coming through the first 2 months of 2020, with a very good quarter. So feeling like the bulk of the merge process has really gone pretty well for us. So now as you look at Slide 12 and start to think about the modeling of the business and where we can go drive value. We see a sales growth, again, in a pre-COVID world of kind of 5% to 8%. We think that will be a little bit more challenged with COVID, and we'll come back and talk about that. But we still continue to see the installed base growing. We think average ticket will continue to push. The question will be really on new builds on the longer term, how that holds up. It's holding up well so far. I do think commercial will get a bit more challenged and then continue to gain market share. So we'll now test this resiliency theory, I think, in the marketplace, but we'll see how that plays out. As I mentioned before, revenue synergies are something that we didn't put in that 5% to 8%. I think that it probably works as a bit of a hedge now. And then I would also say we see -- we do see M&A opportunity in the space. You would have seen a small move that we made in Australia in the first quarter. So we do see getting back into that space. M&A used to drive about 1%, 0.5% to 1% inorganic growth, and we see that still being a play in the future. But again, was not in that that 5% to 8%. From a margin perspective, there's 2 areas that we're really focused on. I mentioned before, first is value improvement and lean. We had guided to EUR 25 million over the course of the strap plan. We have since upped that to EUR 30 million. This is a process that has been ongoing for our company and has been -- team has done a great job with -- did not show up as much as we would have hoped in the first year just because we had the additional challenge of tariffs. But continuing to work on our supply chain to bring down the overall impact of tariff because the value improvement main savings have been there. The team also did a very good job on synergies. We talked about EUR 35 million of synergies being the opportunity in the merge, let's say, there's commercial or the kind of the people duplication cost was ahead of schedule and actually overachieved by 5. The operations side was a little further behind because of the delay in the closing of the deal. But those cost synergies are there. So we revised our target up to EUR 40 million, with a little bit more cost to achieve. So I think this next slide on 14 is quite interesting. As you see on the upper left, you see the 400 basis points of improvement. Only 60 of it was really driven by leverage and now with taking up the cost guidance and the value improvement, we're putting more and more of this in our own hands. From a debt perspective, this chart on the right has confused the number of folks with the dots. So basically, what it says is that if we're under the dot level, which is our intention, then the company can turn back on the dividend. We achieved that in '19. And it came down at 2.6, so almost 1 from the close of the deal at 2017 to almost 1 turn. And we did -- we held our dividend or paused it for now based on the environment just to make sure that we had plenty of liquidity, which we're in very good shape on. And we're going to continue to march down the debt under 2.5, and I think long-term run rate around 2. It is a capital structure that's very robust. We had repriced our term loan B just in the -- in January. So we don't have anything significant due until 2025. We did draw of some of the revolver and expanded our bilateral. So we're in very good shape even if there is a second wave of lockdown in the fall. So from a priority standpoint, we wanted to make sure that we've got ourselves below those debt targets. At that point, we could turn back on the dividend and start to look at bolt-on acquisitions, which, as I've talked, we've done and we feel in a very good position to continue to. So from EBIT to margin, we are in good shape. I think from the merge perspective, we're in good shape. And so then the next question kind of goes to [ 15 ]. What happens to us in a COVID world. We did report a few weeks ago our first quarter. First quarter was good, not great. So we're still positive on top line and EBITDA even with a very challenging last couple of weeks of March, specifically in Southern Europe. So as I mentioned earlier, I think we could be tested a little bit more on how this double engine works. With the post-COVID environment, the early signs are quite encouraging. I think the commercial pool will face some challenge, certainly as the hospitality and travel industry is impacted. That represents about 8% of our sales. But the bulk of our sales are really in this residential aftermarket. And what we're seeing is that we've been impacted strongly by lockdown in the areas where -- specifically places like Southern Europe, where demand was just cut off. But as the market opens back up, we've seen strong demand, which leads us towards kind of a compressed, but strong season. I gave the example on the call of Germany, France, Spain and Italy in the month of April. Germany stayed open, stayed double-digit up. France opened for 3 weeks, almost got to flat. Spain was, let's say, mostly locked down or locked down for at least half of the month. We're in an about 50% down and Italy was totally locked down. And was almost 100% down for the month. So as these things have opened back up, we're very encouraged by what we saw in early May, was not surprised by the POOLCORP announcement. Because there's clearly a cocooning effect that happens quicker than we could have imagined, with it being very difficult to get a full [Audio Gap] and lead generation has been quite strong. So we'll see how that plays out on a longer term. In the meantime, we are continuing to deliver on our synergies and lean. Cash continues to be in good position. And we'll continue to look for some M&A opportunities. So just in closing before questions, and I turn it back to you, I guess, Alex. This is a very attractive industry. We think it will prove itself out again in these times, tends to grow at 2x GDP. Who knows what GDP is right now because you see all kinds of noise out there. But we expect the aftermarket to stay strong. And we'll see how the cocooning effect is impacted versus a potential recessionary environment. The merge has put us in an excellent position from geography to product proposition to brands to some key processes that all gives us, I think, a very compelling story for value creation. Okay. Alex, I guess I turn back over to you. Tell me how you want to attack the question side.

No, this is great. Thank you for the thorough presentation, Bruce. We have some few questions in the queue. So I'll kind of read through the questions and might go over back to you, Bruce. And we can kind of do the back and forth.

Back and forth. Sounds good.

All right. So the first question, there's a lot of news about the tremendous demand for above ground pools. Can you walk us through how you benefit from it? And to the extent you can, Bruce, can you quantify it?

Okay. As I mentioned a little bit in the results. There I'm going to go outside of our industry for a second, Alex. I was talking to a friend from Home Depot, who said I could chart the day where people got their stimulus check because every day turned into Saturday. There's a -- I mean, if you're stuck at home, you need something to do with the kids. If you have a pool, you wanted to open them earlier. So we saw a strong pull forward of opening of pools that put a lot of demand for heat products. I think COVID in nature drives demand for things like saltwater chlorinators, anything that helps you make sure that, that pool is clean and safe. And I mean, you've probably seen a bunch of the press. I mean it's literally, it's hard on Amazon to get a floater pool for your backyard, not that we make them. But kind of EUR 30, EUR 40 a buck for your kids or your pet. And so people are looking for things to do, and it has certainly driven a surge in in-ground pools. We are in -- or excuse me, in the above ground pool space. We're in the above ground pool space strongly in EMEA. So our European base, and I would tell you that, that benefits us in Germany, benefits us in Italy, as it opens back up, really benefits us across Europe. And so that demand has remained very strong. And I think one of the encouraging things, I can't talk specific numbers yet. Let's stay true to our call is that lead generation for our builders has been very strong. So everybody is learning how to sell over Zoom, but lead generation has been strong. So again, we expect a compressed but robust season. I think the biggest question for us now is really what happens in Q4. Q4 tends to be the early buy period. And there's really more of a signal on '21. So I think that's the next thing to really watch, Alex. Now April and March are big months for us. So the decline that we saw in March, the decline that we saw in April was material for us. We were down 20% in April, but we thought we were going to be down worse. And we really see April as the bottom for the industry.

Got it. And another question here. So you talked about your aftermarket strategy working out, and you guys may have to strengthen your market position there. Can you just talk about kind of what you guys are doing really differently versus kind of when you took out this journey in 2015? And what more from your perspective that Fluidra can do to -- do even better in the aftermarket space versus your competitors?

Yes. I think the aftermarket is driven -- or the aftermarket play is driven by 3 things: One, is the share in new construction. So you plant the seeds; two, is product development, making them easier to install, easier to service, things like connectivity, which have been both long going plans for us. What we did differently in 2015, and as the guy that had the smallest share in the aftermarket, was we put a dedicated sales force together for that space, a dedicated incentive program, like an extended warranty, special access to technical service for that aftermarket folks and a loyalty program. And those things have had tremendous impact, I think, in helping to accelerate the space. I think the tricky thing with our industry, Alex, and it's a blessing and a curse is, it is not like you get a listing at Walmart and all of a sudden, your volume blows up. It's thousands of customers in this space. And so it's a bit like hand-to-hand combat. So we're seeing a very steady increase in our aftermarket penetration with the program that we have. We're a leader in new construction, so that keeps planting seeds. We're a leader in product development, so that keeps bringing products that make somebody a little bit more willing to maybe change a product that's on the pad from the existing unit. And then this really the commercial approach that we've taken layers on. But we would expect for it to have continued steady climb. The one downside right now, I'd say, from COVID is, it is tough to go out and convert new customers. Customers are busy, they're not making a lot of change right now without being able to see somebody face-to-face. So it's going to be a long, steady climb as opposed to hitting on the light switch.

Right, right. Got it. Okay. Is just kind of a follow-up question to the first question. Just can you clarify to the best you can, what percent of sales today for Fluidra is related to above-ground pools?

I don't have that number off the top of my head, I would have to ask, Luis, if he could get back to you. But I would say, it's certainly less than 10%.

Got it. Okay. It was -- you talked about...

[indiscernible]

Got it. Okay. Thank you, Luiz. And Bruce, you talked about new products briefly. If you don't mind, can you just talk about some of the exciting products that you guys are expecting to introduce to the market? And kind of what key kind of product features are you guys focusing on developing and introducing just based on, let's say, COVID-19 impact? Or just based on kind of what you guys have been seeing in the market?

Yes. So if I go -- I'll take that on two levels. I mean we've continued to focus on energy efficiency and connectivity. So from a connectivity standpoint, we launched a new cleaner this year that allows you to directly connect from your phone to the cleaner, you can turn it off, turn it on, manage your cleaner remotely. So I don't know if you have a second home, you want to get the product rolling before you get there for the weekend, you're set. So we're comfortable [Audio Gap] manage directly from your phone. We've done the same for a heat pump in Europe. And you can imagine we'll continue to work through the line. So again, turn on your heat pump before you get there, so that it's -- the pool water is comfortable and set to roll. We've done it now for a pump as well. So again, you can manage -- you start to manage your pool more remotely without having a full automation system on it. So that's one area. We continue to work on installability and serviceability in the new products that we come with. Energy efficiency, we've got more coming in the variable speed place. And so those are, I guess, kind of core and continuing to roll. The second piece I talked about is expanding our catalog in Q4 with a very small range. And we're going to continue to work to fill in that range over time. And you can think that we're going to be doing the same type of thing in white goods, ladders and rails, above ground pool equipment for the states, so continuing to expand the catalog. I will say that area slowed down a little bit just because the certification has been a challenge in the COVID world. Now from a COVID perspective, we were very quick to respond from a marketing campaign with Pool is a Safe Place, and we've seen a lot of positive take-up of that type of PR. We came with a few products to help outside of the pool to help in the disinfection and cleaning. But the key focus that I really see in the -- since COVID is focused on sensing and dispensing chemicals, things like saltwater chlorinators that give a more steady flow of maintaining somebody's water is safe and clean and clear. So I think those types of products are going to have a pretty good run or a pretty good acceleration right now. We have a leadership position on those products in the -- in Europe. We have a strong position in the states, but we see opportunity to continue to bring things in that particular area. One of the ones that were -- is kind of maybe crosses boundaries right now in the connectivity and the -- in that space as a product called Blue Connect or -- comes from an acquisition a couple of years ago, Blueriiot. And it's literally a floater in your pool that will tell you what the chemical status is of your water and what you need to put in or change in the water to make sure everything is perfect and safe and comfortable for when the kids jump in. So there's some neat stuff going on.

Yes, and this early. That's great. We may have one or two more questions, Bruce. Another question here. Can you give an update on the trends you're seeing in Europe for late May? And kind of first few days in June? And just given that lockdowns are kind of ending, kind of globally -- in major regions in Europe. I mean do you see kind of pent-up demand driving your performance kind of second half of this year?

Yes. I think I'm probably a little bit limited on what I can say here so Luis can't kick me under the table, like usual. But I'll go back to some of the statements that I made before and maybe refer you to some information. That trend I gave of April and how it was impacted by lockdown is staggering to me. So no lockdown, Germany stays double-digit-plus growth, and I mean strong double digit. France almost gets back to flat with 3 weeks of performance in April. And so it really has been lock down-driven as opposed to demand related in the Northern Hemisphere. So as it becomes a normalized environment, it's been good. And I would say it's been good in the Northern Hemisphere. And I think you guys probably all saw, if you didn't go look at POOLCORP's most recent announcement that kind of said, they expect it to be down, I think, 5% to 10% for the quarter and had the -- they were one of the few that guided and then had to come back out and say, hey, it looks a little more robust than that. So certainly, were to down materially in April, 20% is big. It's the smallest month of the quarter, but it's still important. So that was a hit. But as things turn back on, it's been quite robust and leads to that saying of a compressed but strong season.

Got it. That's very helpful. Just one more -- one question and just quickly, Bruce. What are your key focus areas for the rest of the year?

That's a good question. I mean it's -- certainly, there was no playbook when COVID came. I mean it's, first, make sure the employees were safe as could possibly be, try to provide continuity for the -- for our customer base. And then you kind of switch to make sure that -- and it's not all Indian fall like this. But making sure that the balance sheet is in great shape. Do everything you can to protect the P&L from various cost measures. I think we did that, and then you kind of move into strengthening mode, how are you going to be stronger when you come out of this? And from my perspective, right now, it's really turning all the team back on quickly to maximize the compressed, but robust season. And then I think the piece that starts to come on, maybe more for the leadership team to be thinking about longer term, is if we're going to be in a demand-challenged environment, maybe we aren't. But maybe I think you have to kind of plan for the worst and hope for the best. What are the additional levers that we can pull as a company? What are some of the things that we would have considered outside of the strategic plan base that I was sharing with you guys today? And for us, I think it is simplifying the company. I mean we're -- we have a large footprint and I think the footprint itself makes sense, but are there areas that we can get more leverage and simplify. We've got a number of ERP systems and how do we continue to work to consolidate that. We've got 75,000-plus SKUs. I think that's a ripe environment for a company of our size to start to work on. We've got over 30 manufacturing facilities. So those are not low-hanging fruit. The low-hanging fruit is in the VI program and in the natural synergy of bringing the merger together. But in this environment, it tells us that we need to accelerate on some of those things.

Great. We're up on time here, Bruce and Luis. Thank you for joining us again this year, and we look forward to having you again next year. And again, thank you for sharing the story and look forward to staying in touch. Thank you very much, Bruce, Luis.

Okay. Appreciate it, Alex. Thank you. Thanks, everybody.

Take care, bye.