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 Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Elisabetta Cugnasca, Group Head of IR. Please go ahead, madam.

Thank you. Good afternoon or good morning, depending on your time zone, and welcome to this Interpump Third Quarter 2025 Financial Results Conference Call. As usual, I must draw your attention to the disclaimer answered in the annex part of the presentation that I hope you were able to download from our website. Now I would like to leave the floor to Mr. Marasi, Group Chief Executive Officer.

Thank you, Ms. Cugnasca, and thanks to all of you for joining our call. We are here to speak about the third quarter '25 results and 2025 expectations. Starting from the results of the third quarter 2025, I would like to underline 2 numbers, plus 3.4% and almost EUR 87 million. Plus 3.4% is the organic growth recorded by the Hydraulics division in the quarter, a long-awaited growth after 7 consecutive quarters of organic decline. EUR 87 million is the free cash flow generation of the quarter, the best achievement in one single quarter in Interpump Group's history. Moving to 2025 expectations. I have to underline that the acceleration in summer of Hydraulics recovery signal is a strong support and allow us to increase both our sales and profitability guidance for the year to the highest part of the range already provided that was minus 5%, plus 1% and 22.5% regarding EBITDA margin. After this first overview of this quarter, let's focus with more details on most important third quarter '25 financial KPIs and in particular, sales, EBITDA and cash flow generation. Regarding sales, in the second quarter of 2025, after 6 consecutive quarters of declining sales, we recorded a revenue growth with a 1% organic increase. In the recently concluded quarter, not only we achieved growth again, but this growth accelerated from plus 1% to plus 2.3%. Same result growth, but different drivers. While in the second quarter, growth was driven by the Water Jetting division, in the third, it was driven by the Hydraulics one. And once again, this is the confirmation of the strength of the group, the diversification. I was very pleased with the 19% growth posted by the Water Jetting division in the second quarter, which led to the plus 1% consolidated, but I cannot deny that I'm even happier with the plus 3.4% of the Hydraulics division that contributed to this quarter plus 2.3% consolidated. The normalization process for this division began exactly 2 years ago, following the first signs of slowdown in sectors applications such as agriculture and lift, which resulted in a 6% organic revenue decline in the last quarter of 2023. Finally, after 7 consecutive quarters of decline, we have recorded growth. We cannot deny once again the benefit of a favorable comparison, considering that in the third quarter of 2024, we had the toughest of the 7 with a revenue drop of nearly 17%, but the data is nonetheless encouraging. In the previous quarter, agri was the only market application growing. Now in a multiphased scenario, other ones within the division are up from generic dealers, more than 4% to lift more than 8% to air moving machine with a 15% growth. By the way, agri is up by almost 18%, a very comforting number. Moreover, in the third quarter, sector applications, representing over 50% of division revenues posted growth. And among the remaining ones, the most significant are showing only a low single-digit decline. Of course, we cannot yet say with certainty that we have reached the end of the normalization process that began 2 years ago, but we can certainly say that early sign of recovery seen in the previous quarters have strengthened and that all the conditions are in place for further improvements. Moving now to the Water Jetting division. I believe I'm not mistaken in assuming that this result in line with last year could be the least appreciated figure of the entire quarter, especially considering the delightful plus 19% achieved in the second quarter. As we often emphasize when commenting on this division performance, this trend is less linear than that of Hydraulics because of the presence or absence of individual high-value contracts that can distort the comparison base. This is exactly what happened this quarter. In 2024, the division recorded organic growth of nearly 9%, thanks in particular to 2 orders invoiced in September '24 for an accumulated value of EUR 10 million, one contract in Turkey related to the marine market application and another in China related to the oil and gas sector. As clearly shown on Slide 8, last year's strongest quarter was the third one. We hope that this volatility in the division results doesn't come as a surprise for those who know us for some time, both because of our frequent explanations, I always underline the group performances and moreover, Water Jetting division once should be judged and evaluated on a yearly and not a quarterly basis. And because of the evidence available in the annex of our financial results presentation for several years now in this presentation, let's see, Slide 23. After discussing the results of the 2 divisions, let's analyze the performance of the main geographical areas in which we operate, naturally at constant exchange rates. The key regions in Europe, Italy and Germany delivered the best results with increases of more than 10% while China has returned to account for almost 5% of organic revenues for group revenues grew by more than 20%. Our most important country, the United States, once again recorded a decline around 5%, but this figure represents a clear improvement compared to the nearly double-digit or higher declines seen in previous quarters. Let's move to EBITDA now. As with revenue, profitability in 2025 has also been marked by continuous improvement. In the first quarter, which was still affected by significant weakness in the Hydraulics division with revenues declined organically by around 14%. Thanks to the measures implemented to protect profitability and improvements in Water Jetting division, the drop in profitability was only slightly greater than the one of the revenue, less 12% compared with minus 8% in sales. Subsequently, in the second quarter, the first sign of recovery in Hydraulics division and the strength of the Water Jetting one led to a 1% increase in revenues accompanied by an almost 7% rise in profitability. In the most recent quarter, a revenue increase of over 2% corresponded to a profitability improvement of more than 5%. Although numerically less striking than the previous quarter, this result is undoubtedly more significant. Indeed, the third quarter was not supported by the leverage effect of the major Water Jetting Chinese contracts. The achieved results reflect, on the one hand, the recovery in revenue of the Hydraulics division, amplified by the group's careful cost adjustment strategy. And on the other, the ongoing improvements in production processes within the Water Jetting division, aimed at overcoming the inefficiencies that unfortunately accompanied the strong revenue growth in 2024. For the first time in several quarters, margin improvement has been driven by progress in both divisions, further supported by the absence of dilution effect from acquisitions. This quarter truly demonstrates the flexibility of our business model and group's ability to continuously adapt its cost structure to evolving demand. Let's move on to the first quarter to the third KPI through which we do evaluate our work, cash generation and these components. From a free cash flow generation perspective, 2025 has also shown an improvement path. Compared to '24, the first quarter recorded a slight delay, more or less EUR 5 million due to the advanced payment mechanism linked to major contracts signed in China last year. In the second quarter, free cash flow amounted to over EUR 46 million, in line with the corresponding period of the previous year. This result was by no means guaranteed, considering that revenue recovery naturally influences working capital and in particular, trade receivables. In the most recent quarter, despite a further strengthening of revenue growth, we achieved an even better performance, generating nearly EUR 87 million. That is our historical record for free cash flow generation in a single quarter. At the beginning of the year, we set ourselves the goal of consolidating the record achieved in '24, and we are well on track on this. Moving to CapEx. On Slide 10 of the presentation, we are pleased to present the actual photo of the New Interpump Hydraulics facility in Sala Bolognese alongside [indiscernible] rendering. The relocation process has been successfully completed and the plant is now fully operational. We consider this a significant achievement, having maintained production throughout the construction and transfer phases. Thereby minimizing the inefficiencies typically associated with such a complex process in an industrial setting. This accomplishment was the result of a joint effort, and we extend our sincere appreciation to both our colleagues and our suppliers for their continued support and collaboration through every stage. Concluding with acquisition, as you know, last August, we presented a series of slides outlining the criteria that make a company attractive to us, the internal process through which we turn that interest into concrete action. And finally, the integration approach should an acquisition be completed. To complement the theoretical framework, we provided a practical example, the acquisition of Padoan. We are now pleased to add 2 further examples, Tutto Hidraulicos and Borghi Assali. Both companies represent a perfect fit. They strengthen 2 of our verticals, cylinder and reduction gears, respectively, expand our product range and offer opportunities for revenue growth and margin improvement. Moreover, Tutto Hidraulicos enable us to continue our geographical diversification process and exemplifies the attractive spirit of those joining our group. Less than 1 year ago, as you know, we acquired Hidrover in Brazil. Our new colleagues have actively identified opportunities that in their view would have reinforced our presence in the country, complemented our product offering and leveraged mutual commercial relationships. Slide 11 provides a brief description of both acquired companies. Before moving to our outlook for 2025, I would like to reiterate the key message I shared with you last August. The ultimate target of group growth and development strategy is diversification. It's diversification by division, by geographies and by market applications and not a dimension that allows to proper manage business risk. Its diversification that allows to reduce volatility through different cycle exposure and this diversification that allow us to effectively react to unexpected swings. Now let's move on to the near and far future. October performance confirms most recent trends with a positive evolution of hydraulics and the confirmation of Water Jetting strength. Regarding the latter division, let me refer to my earlier comments on revenues. For Water Jetting, it is and will remain essential not to be misled by comparisons with 2024 quarters. The robustness of our division is demonstrated by the fact that in recent months, August, September and October, we secured more orders than in the same month of 2024. The combination of the third quarter solid results and October trends allow us to reaffirm our full year guidance, particularly pointing towards the upper end of the range. We believe this is a very reasonable assumption, which also factors in the 2 elements which must be considered to make an accurate forecast, a significant comparison effect of opposite nature between the 2 divisions and the risk of order cancellation or postponements. Regarding the first assets, you will certainly recall that in the fourth quarter '24, the Hydraulics division recorded a 14% decline, while the Water Jetting one posted an increase of more than 7%. As you can imagine, the magnitude of these variations make it challenging to identify the underlying real industrial trend. As for the second one, our customers too need to improve working capital and one of the easiest way to achieve it at the year-end is not to confirm previously placed order and move to the following year. As you may recall, in 2023, this phenomenon caught us by surprise and had an impact on EBITDA margin because we did not have time to adjust costs to a level of demand below our expectations. For cash flow generation, we remain committed to delivering the best possible outcome. As far as the near future is concerned, we understand there are expectations for the slightly more distant future as well, namely 2026. As you know, the budgeting process is taking place in these weeks. And therefore, for now, the only thing we can do is to share some insight, insight based also on what has happened so far in 2025. In terms of revenue, the 2 divisions will face completely opposite situations. For the Hydraulics division, the first part of 2026 will have a more favorable comparison basis than 2025, during which organic revenues declined by almost 11%. We are confident that revenue growth will strengthen further, thanks to the recovery of the market applications that are still soft. Conversely, for the Water Jetting division, the first part of the year will be the most complex, considering that in the first 6 months of 2025, we grew by almost 14%. Nevertheless, we remain confident in continuing to secure new orders, thanks to our technological advantage. Finally, to conclude on revenues, acquisitions completed so far in 2025 according to their consolidation periods are expected to contribute about 1% to total revenues. As for profitability, we will continue to adjust the cost structure in line with demand trends to exploit the positive effect of improving sales. And finally, regarding CapEx, further reduction could be expected following the completion of all projects related to the '21-'23 investment plan, and this would support our cash generation ambition. Naturally, both for the near future and the slightly more distant one, we continue our search for the new perfect fit to integrate into our group. These are ongoing activities that cannot be scheduled, but we assure you our full commitment on this. Before opening the floor to your questions, let me remind you of the figures I started with, plus 3.4% organic growth in the Hydraulics division and nearly EUR 87 million in cash flow generation. These numbers demonstrate once again the strategic levers of our group, diversification and operational flexibility, levers we will use to achieve the goals we have set for 2025 and subsequently to successfully take on 2026.

Are you ready for questions?

Absolutely.

[Operator Instructions] First question is from Matteo Bonizzoni, Kepler Cheuvreux.

Two questions on the 2 divisions, on the 2 segments. As regards Hydraulic, you flagged this more than 10% sequential improvement of the organic growth because in Q2, it was minus 7%, and now it's plus 3.4%, so a significant improvement. It seems to understand from your words, Fabio, that your expectation, correct me if I'm wrong, for Q4 could be to have an organic trend, let's say, not below this 3% year-on-year, but maybe can you add a little bit more flavor on that? And for Water Jetting, simply speaking, there was on the contrary, a sharp slowdown because from an exceptionally strong plus 19%, we flattened basically. Also in this case, I would like to know better your expectation is to recover let's say, a little bit stronger organic growth in the last part of the year. And back on Hydraulic, I was forgetting what's your feeling, let's say, now that you are mid-November on the production rates of your customer in the month of December? Do you have any flavor? You were mentioning before that clearly December is a particularly crucial month because it's end of the year and maybe there could be swing or maybe changes in the production rate of your OEM customer in Hydraulic, particular. Do you have any kind of feeling on their willingness to slow down activity or on the contrary, to keep a decent pace of production rate?

Matteo, thank you for this very strong start in the Q&A session. Now clearly, very interesting questions. And clearly, I will not give you this kind of granularity simply because it's very difficult to say and to comment precisely what should be expected for the quarter now. Clearly, what we said, commenting the post third quarter and in particular, the results of October is what you have to take into account. What we have seen in October and what we are seeing now is a confirmation of this trend. Confirmation of this trend by division means that we see Hydraulics in the short term, I mean in this quarter in a better shape in comparison with what we're projecting, certainly for the easier comparison base. You know very well that last year, Hydraulics was significantly affected by the postponement and cancellation of orders by our customers, in particular in December. This year, I'm not saying that we will not see any kind of this phenomenon, but I'm expecting a far lower impact and also the comparison base is not so challenging considering what we have seen last year. In Water Jetting, as I already disclosed in my speech, and I've already commented so many times, I usually stay away from commenting months or quarters because one single order, in particular for companies working on projects, Hammelmann or Inoxpa that falls in September or October may vary dramatically the results of the quarter. I'm much, much more pleased to see the results and the continuous strength of the Water Jetting division, both in terms of sales and in terms of order intake. And then the strength of the market, the underlying support that we are seeing by the new application and the new markets in which we are operating with our system is what is comforting me the most. I have to remind you and to everybody that Water Jetting is concluding the fifth consecutive quarters of growth. And almost apart minus 0.2% in the quarter, we had 20 consecutive quarters of growth. some of them with a very significant growth such as the one recorded in the second half -- in the second quarter '25. Then to be honest with you, I don't care too much if in the third quarter, we grew only by 0.2% is the scenario that matters. And the scenario remains positive and remains characterized by a long-term development driven by the new application, driven by the demand from our customer and for new potential customers and application fields. This is what matters the most on an industrial and on a commercial point of view.

Next question is from Natasha Brilliant, UBS.

I've got a few. Firstly, if you could just comment on the pricing environment, particularly in Hydraulics, is the growth all volume-led? Or has there been some pricing as well given the recovery that you've seen? Secondly, just on the U.S., do you think that, that could get back to growth in Q4? And then lastly, on White Drive, it sounds like agri is continuing to improve. So is White Drive also starting to see some improvement and tracking alongside those trends? Anything else you can say on that would be very helpful.

Yes. Thank you, Natasha. Regarding pricing, we are not seeing any variation in price, and we haven't seen it through the year. Then the variation that we are seeing, in particular in Hydraulics are driven by volumes entirely. And this is slightly positive because with more or less a 0% price effect, we are getting some benefit from the reduction of cost of raw material, and this gap is important in order to absorb the increase in labor cost. Regarding U.S., as stated in my previous speech, clearly, U.S. is between the large market, the environment that is suffering the most in this period, even with lower impact. Moving to agriculture. We have seen a significant improvement in comparison with the status in which we were living 1 year ago or only a few quarters ago. And clearly, this is benefiting several of our companies and in particular, the ones that suffer the most. White Drive is benefiting from this, in particular in Poland because if we look at the production of the 2 companies or the 2 business that we have, the 2 production facilities that we have in White Drive in Poland and in the U.S., the European facility based in Rosolów, Poland is the one that is the most exposed to agriculture, and it is performing very well, also thanks to this increase in demand and developments in volumes. The Hopkinsville, Kentucky plant instead is more focused on construction application and construction application is not improving, it's not growing at all in any similar part in comparison with agriculture. And considering also what's happening in U.S., the improvement is way lower than the one that we are seeing in Europe. But we have completed the restructuring. The new CEO is well in place, and we are confident that also in U.S., we will be able to achieve the targets that we have set in our mind. What is important is that the consolidated results of White Drive are moving into the right direction. I have to make one further comment on U.S. because I forgot to mention tariffs impact. And clearly, what we have done in these 2 last quarters in which we have seen the effects of tariffs has been to adjust prices accordingly or to invoice the customers separately, the amount of tariffs that we had to face into our operation in U.S. then the net effect on our P&L on our EBIT is 0 because we pass through the increase related to the tariff application.

And just to follow up on the -- so my question was really, are you seeing any signs of improvement into Q4 in the U.S.

It's too early to say. If I had to say now, I wouldn't say so.

Next question is from Michele Baldelli, BNP Paribas.

I have a couple of questions. The first one relates to your statement when you said the execution of orders in Water Jetting in Q3 were higher, it means basically, given your sales trend that the mix was, let's say, more single equipment rather than systems or you wanted to say that you collected more orders in the last 3 months, if you can clarify on this? And the second question relates still to Water Jetting division, if you can provide some color on the trend of the backlog, please?

Yes. No, starting from Water Jetting, I mean that we collected more orders in the last 3 months. in Water Jetting in comparison with the same period of last year. And I believe this is important to demonstrate once again the reliability and the strength of the underlying market. And this order intake comment is made independently on delivery dates of these orders. But we believe that this is a positive evolution. Regarding the evolution of the order backlog and the order intake, this improvement is clearly characterizing also Hydraulics because as you know very well, we started the year in Hydraulics with a strong decline. In the first quarter, we went down by 14% in Hydraulics, in the second, minus 7%; and in the third, plus 3.4%. Considering also the very short -- the short lead time that we have in Hydraulics that generally is around 3 months, Clearly, this dramatic improvement in sales is a consequence of a very strong improvement or a change in the wind in the order intake.

Next question is from Domenico Ghilotti, Equita.

I have 3 or 4 questions, if I may. The first is on the recovery in the Hydraulics division. So I'm trying to understand if you think that this is also mainly driven by restocking or if it is actually more the underlying demand because your clients are not so positive so far, in particular in the U.S., but in general. So the outlook is still a bit controversial. Second, a follow-up on the orders on Water Jetting. So orders are up year-on-year in Water Jetting. Can you say the same for the backlog at the end of September or not? And third, I have a question on your exposure to the data center is, let's say, topic these days. But actually, I've seen some industrial companies like Gates or Dover are not typically a data center suppliers that are presenting products for this application. So just to check if you have any significant exposures. And last, I'm curious if you can share so where are you on the White Drive profitability for the full year in 2025 because probably it's an area of potential upside in margin if there is a clear recovery in Hydraulic.

Okay. Starting from this last question, I will tell you in February because 2025 is not finished yet, but we are on the right track. And I'm pleased to see these developments month after month. Regarding data center exposure, I don't care too much. I understand how sexy is this topic for the market, but we are much more interested in maintaining the diversification in maintaining the exposure to as many application fields as possible. Clearly, we are having some businesses in this world, but I don't believe that it would be serious to comment on one single project, one single order, one product development specifically for this application field. It seems to me excessive, to be honest. Then I will not follow up on this. Regarding the orders in Water Jetting, we improved the order intake, but the order backlog at the end of September is not yet higher than it is lower than the one of last year because we have to consider that in between, we achieved a very important growth. And in particular, we executed and we delivered the giant order in China with Hammelmann in the second quarter. The first question was on the recovery of hydraulics and how this can be explained if this is partially explained by restocking. In reality, I would say that it's not restocking, but it's the end of the destocking that is contributing positively. It seems playing with worth, but it's a different topics because until several months ago, the consumption of our components or the demand for our components was artificially reduced by the consumption of stock by our customers. I agree with you that our customers are not performing spectacularly. I've just seen CNH third quarter results or other companies' results, and they are not in reality growing or improving so much their output, but they have consumed their stock, and this is particularly true for OEMs. And then removing the destocking possibility, they have to buy accordingly with their needs. Until a few months ago, they were buying below their needs because they were consuming their stock. And I would define precisely not as a restocking, but end of destocking.