Interpump Group S.p.A. (IP) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Interpump Fourth Quarter 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luca Mirabelli, Head of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. Good morning to those connected from the States. Welcome to this call. As usual, I'm here with Executive Board member, Fabio Marasi; with the precious help of our CFO, Carlo Banci. And today, we are going to comment on the results for the fourth and last quarter of 2020. And what a year it was. The COVID-19 pandemic brought some entirely new challenges to the world, but also provided a good demonstration of Interpump's flexibility and resilience, attaching real-life meaning to these 2 words that we use so frequently in our presentations. We will also remember it as the year we finally made it to the main index of the Italian Stock Exchange, the FTSE Mid Cap. And our market capital passed the EUR 4 billion mark, thanks to the appreciation shown by the markets. And there is no doubt that we are all very proud of these results and very well motivated to face 2021, which is expected to be a year of recovery. Let's take a look at what we have achieved. Considering how quickly the situation changed throughout the year, it makes sense to focus on the quarter first. In the last quarter of the year, we had a confirmation, in some cases, an acceleration of encouraging trends seen in Q3, despite an expected -- somewhat expected strong headwinds from the currency exchange. Sales in the quarter amounted to EUR 340.1 million, minus 0.7% year-on-year. This is the result of organic sales down 1.7%, a negative 3.4% from the currency exchange, so a very strong one and a 4.4% increment due to the perimeter expansion. Sales in Hydraulics amounted to EUR 236.7 million, an increase of 4.2% increase. Let me underline, it's an increase of 4.2%, which was partially hidden by the minus 3.3% from exchange rates and helped by the addition of a healthy 6.2% from companies added in the previous 12 months, mostly Transtecno. As a result, reported sales for Q4 are up 7.1% year-on-year. In Water-Jetting, the top line was organically down 12.4% year-on-year, slightly better than the previous quarter, but still clearly affected by the pandemic-induced slowdown. Many of our customers in this division went on working during the pandemic as they belong to essential industries like food, energy or pharmaceutical. This is what allowed our Water-Jetting companies to remain operational throughout the darkest month, especially I'm referring to mid-March to mid-May, while at the same time, Hydraulics was suffering from almost complete stop. However, while sales related to maintenance, replacement or small expansions went on as normally as the situation allows, other income was hit much harder as some customers completely postponed their largest CapEx projects before because of the more complex nature of the interaction involved. And also because they needed to focus on everyday activity at the time when a new setting presenting -- presented more logistical difficulties than normal times. So the lack of these orders from the first part of the year is the main driver, the main reason for the sales trend in the last quarter. Currency exchange had a negative 3.4% impact and 1 percentage point was added by the recent acquisition of Macfuge, taking us to a reported figure of EUR 103.4 million, down 14.8%. Despite the short-term trend, on a full year scale, the Water-Jetting division proved once again more resilient, limiting its organic drop to 10.8% versus a 13.6% registered in Hydraulics. After factoring in the negative currency exchange and the acquisitions, the final reported sales came to EUR 881.6 million for Hydraulics, minus 2.3% compared to the previous year, and EUR 412.8 million for Water-Jetting, minus 11.5%, which brings us to the total consolidated yearly sales figure of EUR 1.2944 billion, down only 5.4% and compared to 2019, also thanks to acquisitions for a good 8.7% on last year. And look at sales by area in the quarter reveals that Italy and Europe are flat year-on-year. North America is down 11.6%, but this is the performance in Europe, and more than half of it is due to the weakening of the U.S. dollar. Latin America is lagging behind still, minus 25% compared to 1 year before. China is, let's say, catching breath after 2 quarters of strong growth and registered a minus 14% year-on-year, but the yearly performance remains positive. China is poised to reach 7% of our consolidated sales, and it already reached that way on a quarterly basis. South Korea grew 12% in the quarter, which is 2% of our total consolidated sales, and seems overall to be enjoying a very positive momentum. Good news also from India, where a solid 41% increase in the quarter brings the yearly performance in line with the group average, probably even better than the group average in local currency. And hopefully, this is the first signal of the end of a long crisis. Looking at sales by application sector. The best year-on-year performance in the quarter belongs to agriculture, which is up 40% compared to 1 year before. Construction was still strong at plus 24%. Trucks are up 13%. Earth moving and lifting are also up between 6% and 7%. Unsurprisingly, sectors related to Hydraulics are showing the best performance. As already discussed, the recovery in food, cosmetics and pharma seems to be coming late, and this sector still registered a minus 11%, awaiting the return of CapEx. Then we have the cluster that surprised for its resiliency in the course of the year or to say it more precisely, the cluster that showed how little correlation our business may have with industry-wide trends. I'm referring to oil and gas, marine and offshore, which this quarter is down 22%, but remains above average, considering the entire year. The final comment on our top line. As you have seen, sales at the end of the year are very close to pre-crisis level, although with a very diverse mix and strong changes from month-to-month. The road to normality is proving bumpy and full of sudden turns, but we are confident that we have the right vehicle for this kind of growth. And this also shows very well in the profitability we expressed during the year, and especially at the end, Q4 saw a 23.2% EBITDA margin equivalent to EUR 78.8 million, which is an absolute record, both in margin and in absolute value for a fourth quarter, which brings the yearly total to EUR 294.1 million or 22.7% of sales. It's hard to imagine a better demonstration of the resilience of our model. The EBITDA margin for Hydraulics in the last quarter was even nearly 2 percentage points higher than 1 year before, bringing the yearly margin above the one of 2019, 20.8% versus 20.7%. This Q4 improvement was not seen in Water-Jetting, which closed the year with a 26.7% EBITDA margin, 120 bps lower than in the previous year, very similar to the situation at the end of September. The overall contribution to personnel cost from the welfare systems, Cassa Integrazione for Italy and similar schemes in other countries, decreased further as expected in Q4 and amounted to 0.4% on sales, bringing the yearly total almost exactly to 1%. The higher than usual profitability in Q4 brought to a net income of EUR 49.7 million, which drove the yearly total to EUR 152.7 million. The corresponding tax rate for the year was 24.6%, lower than our historical average but mainly for the same reasons explained last year, the fiscal benefits resulting from the installation of Industry 4.0 compliant machinery in Italy. These benefits are going to last for at least 7 years and possibly more if the scheme is renewed. And please note that the net income could get an additional boost, tend to more fiscal benefits granted by the Italian tax authority as a consequence of asset revaluation. At this time, calculations are still going on. So you will have to wait until the final results are announced on March 19 to get a precise idea of the impact. And now we have reached my favorite page of our record for today, the cash flow statement. Cash flow from operations amounted to EUR 229.5 million. As expected, the healthy adjustment of our net working capital went on also in the fourth quarter, a further EUR 25 million for a yearly total of about EUR 55 million. CapEx for the year was EUR 61.4 million, which is towards the high end of our usual range of 3% to 5% of sales. As a result of all this, Interpump achieved an unprecedented free cash flow above EUR 200 million, EUR 203.8 million to be precise. This is very exciting, considering that a low leverage in our balance sheet gives us more firepower for future acquisitions. However, remember that this was not due to a new policy around any out-of-ordinary effort. This is rather the structural characteristic of Interpump model, where cash generation is enhanced in low or negative growth period thanks to the very efficient adjustment of our net working capital, which is quite sizable. Conversely, you should be prepared -- or hopefully, you should be prepared to see less impressive cash generation in 2021 as a result of the return of organic growth. EUR 16.6 million were spent in the quarter to purchase treasury shares, taking the yearly total spending to EUR 48.5 million, and there was no significant disbursements in acquisitions or dividends in the fourth quarter. So in conclusion, our net financial position at the end of the year came to EUR 269.5 million, on top of which we had EUR 62.7 million of commitments related to acquisitions. The increase in the quarter was due to a reassessment following the outstanding performance of Transtecno this year. Net debt now stands at less than 1x EBITDA. Although, as usual, we cannot give you any advanced information about ongoing negotiations, it is fair to point out that for M&A -- an M&A-oriented company like Interpump, this extra firepower comes at the right time as the standstill that was due to the difficulty in assessing the value of companies in the middle of the pandemic appears to be heading to an end. At the same time, we are closely monitoring the complex dynamics of organic recovery, which, as mentioned earlier, occurs in many different shapes and timings. There is no doubt that Hydraulics has started earlier than Water-Jetting due to the stronger compression of the business during lockdowns and also due to easier comparables in the previous year. We are still waiting for Water-Jetting to do the same. And so far, I have to say we have started registering encouraging signals in terms of order intake. But reality is even more articulated than this and there are significant differences within each of the 2 divisions. However, this is a perfectly expected consequence of the diversified nature of our business. We said that from the very beginning that recovery would not have been an orderly phenomenon but quite a chaotic one. And we have some good reasons for optimism, the rollout of vaccines, the rest of the scientific process in diagnosis and cure of COVID-19, the willingness of all monetary authorities to help with the recovery, the change in policy by the new U.S. administration and especially the fact that it is supported by the majority in the Senate. And evenly, hopefully, coming soon, a new government in Italy. There are also some downside risks. A lot of things can go wrong in the implementation of initiatives of unprecedented scale. 2021 doesn't really look like a year for short-term predictions. And this brings me to my next and final topic. Almost exactly 1 year ago, we disclosed our ambitious expectations for a 3-year period ending in 2022. Okay. If we look back at 2020 to say that 2020 did not go according to plans, is a big understatement. So it's about time to update our indications to the market. As you have seen from the press release, after careful consideration, we decided to offer the same indication rolled forward 1 year. So we are envisioning the same growth previously expected for 2020, 2022 for the 3 years 2021 to 2023. In numbers, we believe that the combination of organic growth and M&A can result in a top line growth around 33%. The preservation of EBITDA above 22% despite the possible dilution from acquisitions and a net financial position between 1 and 1.5x the yearly EBITDA. By projecting the same path expected 1 year ago, we are actually making a significant statement. COVID-19 has not forced Interpump to cut, divest, terminate or otherwise sacrifice its potential for growth in any way. And the other underlying message is as strong as last year. Acquisitions should be viewed as a structural part of our model not as something accidental that may or may not happen. They have played and will continue playing a fundamental role in our growth. And I would encourage anyone relatively new to our story to pay close attention to some almost unique aspects in our targeting, assessment and integration processes, which, over the years, have proven very effective at minimizing costs and risks and extracting the highest possible value. At this point, we'd like to hear from you, so let's open the lines to the Q&A session.

[Operator Instructions] The first question is from Matteo Bonizzoni with Kepler.

I have 3 question, if I may. On your M&A ambitions or in any case, these 3 years, 10% revenue CAGR, let's say that historically, if you look at the last 15 years, your 11% revenues CAGR was split in 4% organic and 7% M&A. If you look to 2023, the organic growth should be stronger than the average because of the fact that clearly, 2020 was depressed. So on my estimates, I expect, roughly speaking, 7% organic CAGR. So it means that to get to 10% per year, you are incorporating a sort of 3% M&A. I would like just to understand if it is based on the fact that -- on consideration on your pipeline, so your current pipeline is larger, smaller or close to historical average? Then on -- the second question is on 2021 organic outlook. So you are not providing any yearly guidance, let's say, also last year, you did the same. I just wanted to cross check if an expectation for, let's say, a low double-digit organic growth is reasonable? And also, I would like to understand if after a very good margin defense in 2020, it's -- do you expect flat margin, improving margin or whatever? And final check on the CapEx and tax rate level for 2021, I think that CapEx this year were, in 2020, around EUR 60 million, and tax rate was good because of the reason that you are mentioning. So what about 2021?

Okay. Let's address your questions one by one. The first about our 3 year expectations. Well, as a general note, any kind of forward-looking statements must be -- must come with a good dose of prudence. So there is no doubt that there is an upside risk to what we are indicating. But considering that our previous indication was met by the outbreak of a pandemic. You might understand why we didn't feel like splurging with an extremely, extremely generous indication. Jokes aside, there is a good possibility that the overall growth in 3 years -- organic growth is higher than what we are, let's say, encompassing in these numbers. And so the result could be better than that, but we have 3 years to adjust our aim and hopefully, introduce a positive surprise. We believe that we are still in the middle of the pandemic. Don't forget that the vaccine rollout still have a number of things that could go wrong, especially in terms of mutations of the virus and so on. So although we are overall optimistic, this would not probably the right time to discharge 100% of optimism. And of course, I will give the microphone to Fabio Marasi, who being a Board member might have more of an insider look at these kind of topics. Please, Fabio?

Yes. What I believe is important to underline is, of course, on top of the difficulties in making precise analysis or giving precise targets regarding M&A because better than us, that M&A occurs. And we know also that we have an opportunistic approach, an opportunistic approach, it means that we are able and prepared to analyze and close a small acquisition or also to analyze and approach bigger acquisitions. What is important to underline is related to our strategy and is absolutely clear within the company, within the top management that we are more committed than ever in reconfirming our M&A strategy, in reconfirming our idea of reinvesting in M&A in the growth of our group and in the consolidation of several of the markets in which we are present, almost entirely, the cash flow that we generate every year. As we have seen before, we also have a stronger than ever balance sheet, thanks to the fantastic cash flow generation that we have had in 2020. And for this reason, we are also prepared to look after a slightly bigger acquisitions, slightly bigger targets in comparison with what we have done in the past. We are not looking for professional deals. We are not looking for diversifying our -- or adding another leg. But we are prepared also considering where we are in terms of market capitalization, in terms of size of the company. And in terms of strength in our balance sheet and very low leverage, we are prepared to look at some or something that is even larger in comparison with what we have done in the past. And one last point that I would like to mention is the landscape in M&A. Of course, 2020 has been a difficult year for negotiating and closing M&A transaction because of the whole problem related to COVID logistics, and also some gap between the ideas or the evaluation made by the buyers and expectation of entrepreneurs and the [ sellers ] that were still based on previous year or pre-COVID situations. I believe and we believe we are seeing in the market in these weeks that this situation is easing a little bit, considering that now we have entered in a year that everybody expects to be a little bit more normal. Then if I look to make a final statement, if I have to look at 2021, and looking further, I really want to underline how important will be and how important, we believe, will be M&A for Interpump Group growth.

Thanks, Fabio. Going on with your question regarding the expectation for organic growth in 2021, you are correct in saying that we are not delivering set of numbers as the guidance for the 1 year. You mentioned low double-digit organic increase, which is not reflected in the current consensus. So this question takes me a little bit by surprise. In -- the current consensus has a very high single-digit embedded in it. And I think that it looks doable. In terms of commenting on a significantly higher expectations, I would still be cautious at this time of the year. Again, the year will certainly have 2 different phases, especially the turnaround of the Water-Jetting business which is expected will happen, but the timing is not certain yet. So I wouldn't feel very confident in underwriting double-digit growth at this time of the year. Of course, this fits very well within the reasonable range of expectations. So I would not encourage anyone who have that in mind to change their mind based on any material evidence. It's just a matter of prudence. As you know, in terms of delivering messages for the future, we have always been very prudent in the past. Probably 2020 was one of the few times in history where we had to revise our expectations, and we certainly don't want it to happen again. So that's pretty much everything I could say. Let's stick to the consensus, the one you can find on Bloomberg, or also ask me if you don't have it. We also collect consensus, and I'm going to update it after the set of reports that are going to come out after this call. And I would stick to commenting on that number, not on any particular figure or proposal. Margins and tax rate for 2021 and the years to come. In terms of margins, we have different factors that are suggesting that margins could go up or go down. Therefore, it is let's say -- more reasonable thing is to be looking at a substantial stability of the margins we achieved this year. Although the exit speed of 2020 is promising. So I wouldn't rule out maybe that inching up a little bit of them. But remember that despite the unflattering behavior of the top line, Motor-Jetting into mix factor, the mix factor in Motor-Jetting is quite favorable. This is why, as a percentage, it expressed a very good margin overall. And this might, of course, change as soon as all the companies in Water-Jetting see the recovery. We are also going to meet that 1% help. Hopefully, we're going to meet that 1% help from the lay off funds. And hopefully, we are going to restart paying travel costs and costs related to trade shows. Of course, the exact point in 2021 when this starts happening again is not known. And so these are the reasons for prudence. Of course, the reasons for optimism are in the fact that our operations in 2020 were anything but optimized. Of course, we have to face a number of continuously developing situations and unpredictable events. So we clearly have room for working in a better way, which is -- should be expressed in higher margin. The tax rate, the ones that we have commented now, so the 24.5%, looks like a reasonable indication because of the fiscal benefits for -- related to the hyper amortization of Industry 4.0 compliant machinery in Italy are there. They started last year. They will last for 7 years. So that's a fairly good indication of what to expect. But remember that you may hear more positive news on the tax rate for 2020 when we announce the final results because calculations are still going regarding another fiscal benefit that will probably be a one-off only for 2020. That's -- I think I've answered your question, Matteo?

Yes.

The next question is from Domenico Ghilotti with Equita.

My first question is a follow-up on the guidance. I'm trying to understand, if you see today, a pipeline on the M&A that is different or lower in particular compared to, say, 12 months ago? Because at the end, if I put your 33%, I end 2023 with around EUR 1.7 billion sales compared to EUR 1.8 billion before. So either you see COVID having a structural impact in 2023, so the pricing for the organic recovery? Or you have a lower pipeline for M&A? The second question is some color on what's going on in Water-Jetting and Hydraulics. You were mentioning that Water-Jetting, you see a sign of recovery in the order intake but I think that probably we will wait for a few quarters before seeing this translating into top line. So should we expect Water-Jetting still down in the first part of the year and then recovering while Hydraulics being already the -- continuing the positive trend that we have seen in Q4? And could you give us a sense of -- so you were commenting on the margins. My third question is give a sense on the margin specifically for the 2 divisions. So should we see some upside on Hydraulics more than Water-Jetting?

Okay. Well, first, I would like to make an observation on which is a very superficial one before leaving the answer to Fabio about your comparison. You said that we are aiming at EUR 1.8 billion, and we are aiming at EUR 1.7 billion, and you are asking whether this should imply less ambitious plan for M&A. But as a matter of fact, it's not exactly the same kind of attitude because even the companies that we plan to acquire have had exactly the same or in some cases, even higher decreases than we had. So by acquiring exactly -- if we had a set of companies to acquire by acquiring exactly that set of companies, we would probably achieve the same results in percentage. And this explains why everything being unchanged, the numeric target would go from EUR 1.8 billion to EUR 1.7 billion, but this is, of course, just a very small and superficial observation. And maybe Fabio wants to add something substantial to this?

No. On top of this, I would not like you to -- not to encourage you to take this point, saying that the EUR 1.7 billion instead of EUR 1.8 billion means that we are looking for lower turnover or lower M&A activity. It is exactly the opposite, as I've commented before. We are more committed than ever. We don't have any problem in terms of balance sheet, of course, or [ firepower ], also considering the level of the interest rates. We -- just to add another comment. We will have probably to be prepared to enlarge a little bit our evaluation range for the companies because of the situation of the market. But when I commented this, I have in mind that to add 0-point something or a maximum 1 point to our legal marketplace. But this is not, in some way, affecting our growth capabilities and now we invest to go ahead with our M&A strategy. But I will not encourage you to take this conclusion that we are looking to easier targets for M&A.

So just to clarify, so the pipeline is similar or even stronger than last year? And when you are referring to larger, should I assume, say EUR 100 million to EUR 200 million sales. So this is -- okay.

This is absolutely reasonable, yes. And also another very -- another superficial observation is that when we issued the same indications last year, we already had in our pockets, Reggiana Riduttori and Transtecno. So we had already 8.5% of the external growth which we could already count on. So if you wanted, our target was a little bit simpler to achieve than it appears today. But anyway, what Fabio said about the richness, how the pipeline is, of course, much more important. Now on to your question about the trend expected by both divisions. We are seeing a real explosion of orders in Hydraulics. So I would expect some very strong numbers for the next quarters, especially as we are going to face easier and easier comparison base. So for those of you who like to take a look at year-on-year trends, this would be a funny year to comment on. In Water-Jetting, the easier comparison base will not be there until Q2. Q1 last year was still quite good. And so you're right. You mentioned the second part of the year, I could be a little bit more optimistic and hope that we're going to see the signals -- sorry, not the signals, the effect on the top line as early as the second quarter. But of course, your mileage may vary. Things will have to really -- to actually happen before we can comment on that. But there is no doubt that there is a different timing in a different shape in the recovery. The recovery in Hydraulics appears to be very, very strong proportional to what happened. Remember that on a yearly basis for 2020, Hydraulics still lost more than Water-Jetting. Probably, if we extend this 12 months to an 18 months into the pandemic when Water-Jetting is still making its first steps towards recovery and the Hydraulics is already running, probably Hydraulics might appear to be better than Water-Jetting. But this will be probably an anomaly in history that is not going to last very long. In terms of margins by division, I already hinted at the fact that the margin as a percentage for Water-Jetting is currently in the best range in terms of the mix factor. So I would not expect it to go up. But I could be contradicted very easily as we've seen in the past by the appearing of some very large order that comes with a significantly higher-than-average margin as happened last year. We have seen in the past years that mostly thanks to Hammelmann, the Water-Jetting trends have been characterized by some very large orders. So the granularity has become a little bit too big to be able to comment fruitfully on very short-term trends. However, I would reiterate my comment that the mix factor in the margin for the Water-Jetting starts the year from a very favorable position. In terms of Hydraulics, the increase in margin that has been seen appears to be, let's say, long-lasting or at least had it for long lasting. There is no expectation or no particular reason why it should go down. If you want to look at it another way, if you think of a large part or significant part of Water-Jetting market like India that were -- have been suffering for 2 years. Well, the coming back to life of those markets will undoubtedly have a very positive effect on margins, which is possibly the one that you are seeing in Q4 this year. Q4 in Hydraulics was not only quite high in absolute terms, but the dynamic and the increase seen in Q4 in the last quarter of the year, where usually, there is a negative seasonality is quite telling. I expect that kind of benefits to be stable itself to be reflected in 2021 and ongoing years.

As a follow-up. So you didn't mention raw materials. I know that you have a very good backlog inventory level, so you don't see any typically past price increases in raw materials. So you are still confident that raw materials are not an issue on profitability?

At this point, we do see, of course, all kinds of crazy things happening on some raw material prices. But at this point, there is no indication that this could have a negative impact on margins, unless you want to consider margins on a weekly basis, then in this case, maybe this could happen. But generally speaking, we are absolutely not moving from our policy. All increases in the production factors should be passed on to customers, and we typically have the enough strength both towards customers and towards -- compared to our competitors to pass them on quite nicely. At this point, I will not sound any alarm about that.

And very, very last one. On the Hydraulics strong orders which you are mentioning, is it up also compared to 2019? Because the 2020 comparison is a bit, let's say, useless probably. And so I tend to look at 2021 versus 2019 so on a normalized basis. So basically, you had probably just in March, some impact on the orders. So I'm trying to understand if the market is so strong as it was in Q4 2020 to be up compared to 2019?

Sorry, were you referring to Hydraulics or to Water-Jetting?

Yes. Hydraulics, sorry.

Yes. In Hydraulics, yes, I would confirm that the situation is better than 1 year before, also in terms of other income. But this is not an easy answer, remember that the last the last part of 2019 saw a top line that was decreasing very fast. So actually, the decrease in the order income was seen from as early as the middle of the year. So there is no doubt that the level of order income that we are seeing now is something which probably is comparable, I didn't make any actual comparison, but I have the impression that it could be similar to something that we saw in 2018, which is, of course, a very good indication.

The next question is from Alessandro Tortora with Mediobanca.

Okay. I have 3 questions. The first one is on the CapEx side because -- sorry, I didn't get if you give out an indication on the CapEx -- let's say, organic CapEx for 2021. The second question is on the U.S. or North America. If you can elaborate a bit more what happened in this market, which, for some other, let's say, investor company did quite well. Let's say, it was extremely driven. So just understand is the weakness we experienced there, [ it was related to some updates ], specific attitude from the clients. The third question is on M&A strategy. So you mentioned the product, but just if I understood well that the focus of the company will be on bigger, let's say, sized targets, maybe paying an average multiple, let's say, a bit higher compared to the past. The point on this side is not to change the way you're going to create your target because clearly, Interpump has always had a soft integration approach. So just to understand you can see the bigger size, what's left in this side -- duration side?