Maytronics Ltd. (MTRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd. First Quarter 2023 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, May 18, 2023. With us online today are Mr. Sharon Goldenberg, CEO; and Mr. Meni Maymon, CFO. Before I turn the call over to Mr. Sharon Goldenberg, I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policies as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. Mr. Goldenberg, please go ahead.

Good morning, everybody, and thank you for joining us today. I'll start with a short summary of the quarter. Meni will present a review of the financial results. And then as usual, I will go into more detail regarding the trends in the major territories. Our first quarter results reflects the most decline in revenues with comparison to industry trends and in line with our expectations. The revenue decline is relative to a very high growth achieved in the same quarter of last year, where the company grew 36%. And in a territory perspective, at 41% in North America, 49% in Europe, 18% in Oceania and 78% in the rest of the world, all in local currencies. Altogether, due to the distribution channel interest in building up large product stocks before the 2022 season, a consequence of the pandemic was full-ups, but it's still very much felt at that time. Generally, first quarter sales for equipment suppliers in the pool industry and especially in the robotic cleaners market, are characterized by preseason inventory buildup in the distribution channels in North America and Europe. As we have said in the past quarters, the nature of the buildup in the distribution channel, in the pool industry in general, has changed. This is a result of high inventory levels in the channel, a very short pool season last year, a massive change in macroeconomic conditions. And of course, the implications of the geopolitical situation in Europe. All of this led to an ongoing inventory correction by the distribution channel for the current season, and this has affected the company's result in the same way, as it has affected all companies in the industry, although as it seems the impact from Maytronics was more moderate. The consolidation of ECCXI, which we acquired in late July 2022, had a negative effect on our consolidated top line, but this is, of course, is essentially of an accounting nature. Meni will talk about this in more detail later. The important point is that ECCXI's solid financial results in the quarter show an encouraging growth in the robotic cleaner sales, a positive indicator that demand by end user is continuing. The acquisition strengthened our presence in the online channel in North America, and we expect a positive contribution in the second and third quarter that are stronger quarter in ECCXI's business. We are also presently working on plans to leverage the platform that ECCXI offers, and we trust that going forward, ECCXI has substantial growth potential. We are very proud of the results in the Commercial Pool segment, where we grew 70%, which reflects ongoing improvement in demand in the segment as well as an upturn in the company's ability to supply the demand. In terms of margin, we significantly improved our gross margin, thank to 4 main factors. Factor number one, is a successful price increases realization. On average, the effective price increase was in the upper single-digit range. The result of price increases at the end of the first half last year, and the price increase for the 2023 sale. The second factor is that we continue to improve and advance projects to optimize BOM costs as well as raw material procurement. At every point in time, we have efficiency enhancement projects in the pipeline and looking ahead, I can mention, as an example, some of the more recent product lines that were launched. Every launch has a cost structure that demands and enables a subsequent reduction down the road, and we have determined that this will be the case here as well. We're also gradually automating our production lines. And in the past year, we have integrated an advanced automated testing line for motor units. This project, for example, enabled a significant improvement in our testing processes of motor units that are produced at our Israel production facility and helped in reducing the average testing time by 35% and our ability to manage the production shifts in a more efficient way. Altogether, it resulted in an ROI of about 2 years. Also, during the quarter, we began to integrate a second automated system into our production lines, which was set up in the Dalton production site. The system automatically manufactures motor unit and is expected to increase significantly both output and quality in production of these units, and it helped us as well in managing the production shifts in a more efficient way. The third factor is that given the characteristics of 2023, the company is focusing on efficiency enhancement and is controlling our expenses with the goal of effective profitability management. We are working according to a formal cost reduction plan, which with dedicated cross organization team with targets for identifying efficiency and cost reduction opportunities. Maytronics is a growth company, realizing the high-growth potential in our market, requires significant investment in IT, marketing, R&D and infrastructure. Our head count has grown 50% in the last 2 years. We are positioning ourselves for a slowdown in production in 2023 given the existing inventory level, but at the same time, investment in strategic projects, particularly further building of infrastructure for growth, service and the customer experience will continue. And finally, currency effects were favorable. As opposed to the first 3 factors, exchange rates are not within our control. But in this quarter, their contribution was positive. To sum up this session. The first quarter results, the indications we have from the end market overall and especially from ECCXI for continuing end user demand in the North American market. And in parallel, expectations for further inventory correction by distributors and dealers worldwide altogether to date, support the already given outlook for 2023. I will now pass the mic to Meni for a review of the financial results, after which I will talk in more detail about the trends in the major territories. Meni, please go ahead.

Thank you, Sharon. Hi, everyone. First, since I will be talking about the effects of the ECCXI acquisition, I would try to present a clearer picture. ECCXI was acquired last year and was first consolidated from the end of July 2022. ECCXI sold in the past and sell to date Maytronics' robotic cleaners. Before the acquisition, robot sales were simply recognized as revenue, and Maytronics recorded the gross profit under production. After the acquisition, when Maytronics send the goods to ECCXI's warehouse, this is now an intercompany transaction. For as long as the goods are in the inventory, the sales and gross profit are eliminated and are recognized as revenue only when ECCXI sells the goods to the end user. In the first quarter, due to seasonality, there are more sales to the distribution chain than what ECCXI sold out. So there is a small negative contribution to revenues. And this is what happened in the first quarter. In terms of OpEx, in any case, all ECCXI's operating expenses are consolidated. And now regarding the results. Revenues in the quarter were down 7.9% and amounted to ILS 524 million. Excluding the ECCXI acquisition that was consolidated since July 22, revenues were down by a more moderate 6.6%. ECCXI's solo revenues in the quarter were almost $21 million, reflecting 11.4% increase. At the same time, the consolidation had a negative contribution of ILS 7.6 million to quarterly sales because of intercompany consolidation accounting principles and strong seasonality in ECCXI's business, as I mentioned earlier. ECCXI is an online retailer in the North American market and sales pool equipment to end users. This is reflected in seasonality, meaning the first quarter sales are lower compared to second and the third quarters. Regarding the segments, revenues from robotic cleaners for private pools were down 16.5%. Again, this is due to inventory correction in the distribution channel across all major territories. This effect was partly offset by price increases in the different territories. The public robotic cleaner segment shows the opposite. Quarterly revenues grew 70%. Thanks to ongoing strong demand and supported by the return of tourism and significant improvement in the company ability to deliver. Revenues from sales of safety products and other products were ILS 59 million, up 79% compared to the same quarter last year. Sales growth is mainly the result of ECCXI's first-time consolidation. Since 40% of their sales consist of related pool products. On the other hand, sales of covers, alarms and others declined, since sales of these products are affected by the drop in new pool construction. As for the geographic sales mix, North America sales grew 6.4% and amounted to ILS 287 million. Europe sales were down 22.5% and totaled ILS 185 million. The weaker Europe sales reflect inventory correction in the distribution channel, and the effects of regional macroeconomic conditions. Trends in the territory are also more strongly affected by trends in the pool builder segment as I mentioned before, on covers, alarms and others. In Oceania, sales remained stable at ILS 37 million. I'm moving to the gross profit that was amounted ILS 241 million, up 2.1% compared to the last quarter. The gross margin rose to 45.9% compared to 41.4% last year, an increase of 450 basis points. The gross margin was positively affected mainly by the successful realization of price increases, the reduction of BOM costs and currency effect also contributed about ILS 26 million to gross profit compared to the same quarter last year and about 130 basis points. These effects were partly offset by lower production volumes. Regarding operating expenses, selling and marketing expenses were ILS 70 million, up 51%. This is mostly the result of ECCXI consolidation, which contributed ILS 16 million and currency effects which contributed to a ILS 2.5 million. In addition, labor costs were somewhat higher and advertising and marketing expenses rose. These were offset by lower shipping costs following the decline in shipping rates. G&A expenses were ILS 36.5 million, up ILS 4.9 million. Most of the increase is due to ECCXI consolidation, which contributed ILS 3 million additional expenses. And same here, plus foreign currency effects of ILS 1.1 million. Operating profit was ILS 116.8 million, down 18.2% compared to the same quarter last year. It's important to emphasize that ECCXI's consolidation had a negative effect of ILS 18.7 million on operating profit in the quarter. And excluding the effect, operating profit was down by a significantly more moderate of 5.1%. The operating margin, excluding the effects of the ECCXI consolidation, was up 40 basis points compared to the same quarter last year and rose to 25.5%. It's important to emphasize that the effect of the consolidation are of an accounting nature and are specific to the type of ECCXI's business and its business volume in the first quarter. We expect that in the second quarter, the consolidation will have a positive contribution to Maytronics consolidated financial results. Net finance expenses were ILS 18.3 million compared to expenses of ILS 3 million last year, an increase in the debt level compared to the corresponding quarter, plus a significant rise in interest rates led to interest expenses of ILS 10.7 million in the quarter versus ILS 2.1 million last year. Furthermore, the rise in exchange rates in the current quarter led to higher revaluation of foreign currency transactions. And the net impact of currencies is around ILS 5 million in the quarter. The effective tax rate decreased to 10.2%, mainly the result of a change in the profit mix in the group. Pro forma net income, excluding the ECCXI consolidation impact, was down by a moderate 7%. Cash flows from operating activities used by the company were ILS 185 million compared to ILS 220 million last year. Most of the decrease is due to higher trade payables in the period. According to our experience in the second and the third quarters, collections from customers is expected to increase. And the company is also working to reduce inventory volumes by the end of 2023, which will increase the operating cash flow. The increase of ILS 500 million in inventory balance is the result of first one is the -- the first time consolidation of ECCXI, of course, whose inventory on the reporting data totaled ILS 162 million. Second, if we compare between the periods, over the past year, there has been a significant increase of close to 13% in raw material prices and of around 8% in the U.S. dollar exchange rate. And this is, of course, a material contribution to the rise in inventory value. Raw material and goods in process increased by a moderate of ILS 28 million compared to the first quarter last year, and reflected a modest decline of ILS 29 million compared to the end of 2022. Customers -- so the average customer days in the quarter were 66 days compared to 49 days last year. There was no significant change in the payment terms granted to customers. And the increase is mostly the result of sales mix. Average supplier days rose to 85 days compared to 60 days last year. That's it for me. Now I will give the floor back to Sharon.

Thank you, Meni. I will now review the major territories. I'll start with North America. Sales in North America declined by 4% in dollar terms and rose 6% in Shekels, all in line with our expectations. These results are in comparison to the corresponding quarter, where sales grew by 41%, meaning that although we didn't achieve growth compared to last year -- to get things in perspective, our business volume in the quarter is double than the first quarter of 2020 before the pandemic. These results reflect the trend of inventory correction in the distribution channel and to a certain extent, also unfavorable weather in some of the Sun Belt states. Although Q1 business in the Sun Belt is relatively minor, the weather still had a certain effect on sales in states that suffered more exceptionally bad weather like California and Arizona. Again, the numbers are relatively low compared to the overall sales. But as an indication, total sales in Sun Belt grew by higher-than-average double-digit rates in spite of the drop in sales in California and Arizona because of the unusually rainy weather. Online sales contributed positive growth in sales of robotic cleaners in the commercial segment experienced triple-digit growth. Together, these segments compensated for the expected decline in the brick and mortar. We realized a low single-digit price increase for the 2023 season -- and combined with the increases in 2022, the quarterly results reflect a high single-digit average price increase. We are making broad and successful views of digital campaigns in general and especially online. We are encouraged by the growth in the number of dealers, who joined our [ LD ] dealer program and express an interest to participate in digital campaigns. We expect that this factor will come into play once the season opens. Disregarding the accounting effects, ECCXI solo grew very nicely, considering the challenges of the first quarter. Results were influenced by increased robotic cleaner sales and a decline in sales of other products. It's important to point out that sales of other products cover a lot of product categories, where most of them grew and the decline is in certain segments and is the result of commercial rather than substantial factors. ECCXI's integration is proceeding according to plan, and we are focusing on margin improvement by realizing synergies. We believe that leveraging the ECCXI platform to broaden the product range overall and by harnessing Maytronics' strong digital marketing capability is the way to drive ongoing significant growth in the region and to capitalize on the high potential in the online channel. As we said in the 2022 recap, our relations with our partners in North America have not changed since the ECCXI acquisition. Our relationship with Bünger remains strong and the partnership encompasses several channels in North America and Europe. Looking ahead of the territory in the near future, the weather remained problematic in April. So taking about an early start -- so talking about an early start of the season, is irrelevant. The weather only began to improve in the past few days and in some areas across North America, it looks more promising in that term than last year. But it is still too early to say how this will affect replenish orders by the distribution channel throughout the season and the stock buildup for the 2024 season. That is for North America. Europe sales were ILS 185 million, down 23%. This result reflects a more complex, challenging situation in the territory and a very high comparative figures in the same quarter last year, following a 49% growth in Europe. The situation in Europe can be divided into 2: Northern Europe, where new pool construction and private consumption contracted significantly leading to a drop in sales of covers and alarms as well as the other pool equipment sold by the German subsidiary, mainly as a result of the reduction in the number of new pool build. At the same time, the demand for robots by the distribution channel also declined following inventory correction and concerns about how the season will evolve. Demand in Southern Europe countries reflect a significantly better situation and is flat with maybe a modest decline compared to last year. The trend of softening demand in the distribution channel in Europe already began in the second half of 2022. And the fact that it is continued in the first half of '23 was expected and reflects tight working capital management by our partners. As I said, there is a difference between Northern and Southern Europe, but there is also a difference between the countries. In a way that is mostly based on the quality of inventory management by distributors. As in North America, we experienced strong demand in the commercial market following the return of tourism resulting in a high double-digit growth. The weather in parts of Europe has started to warm up recently, and we are cautiously optimistic that when the season peaks, we will see ongoing solid end user demand. To wrap up, sales in Oceania, where the first quarter ends the summer season, amounted to ILS 37 million, down 4% in local currency and flat in Shekels. Sales in the territory were affected by bad weather at the end of the season, but our infrastructure there supports further growth for next season and will start to build up in the second half of the year. Finally, I will mention the encouraging launch of our Liberty line, which enjoy a positive interest by our partners. That's it for me. And we'll be happy to take questions.

[Operator Instructions] The first question is from Egor Rybakov of Penserra.

Can you comment on a couple of things. So first, from what you're seeing in the channel, both in Europe and North America, is there a rough estimate how many months of, let's say, normal pre-COVID sales do we have in the channel? And also kind of as a follow-up to that question, given the manufacturing capability today, how long does it might take to replenish the channel, let's say, from the -- if somewhere halfway the retailers realize that they need to order more, when do they need to order -- at which point of this -- or within the season do they need to place an order for the products to reach them still within kind of the current season? So that's kind of one question. And the second question on the online channel -- kind of given your observations and experience and it is our understanding so far that the online channel was dominated mainly by the cheaper Asian brands. But when you look at your brand, what is the potential for the online channel? And how does online channel work in sync with the traditional retailers in terms of the preservation of the quality of the brands and the ongoing service and kind of the perception of the premium offering with the Maytronics -- with the [ Dolphin equipments ]?

Okay. You asked several questions in one question. So we will try to address and if we will forget just remind us. I will start with the inventory. Generally speaking, there's no like a standard answer for that because it's really, really varied between distributors between countries, between channels, between different product lines. So it's not that we have a certain amount of inventory, which is reflected across all businesses. In some countries, inventory is okay. In some countries, as it should be or a bit higher. The point is that the inventory correction gives the incentive today to the distributors not to reorder ahead of time, and that is something that is affecting, of course, replenishment orders from Maytronics. In terms of how quickly we can serve the channel in our subsidiaries, we are well positioned with inventory. So orders from our distributors and dealers in North America, in France, in Australia, we can replenish those orders fairly quickly because we have finished good stock. That also free production capacity back in Israel for distributors that are working directly with the Maytronics in Israel. So the production capacity that we have is well suited to meet any demands that we foresee for this season. So that's with respect to the first question. With respect to the online market, the online market is well developed and is more progressing, of course, in the U.S. And actually, one of the things that we see is that the mid- to high-end products in the online market, generate very good demand -- not just small and cheaper products, like you've mentioned by the Asian manufacturers. For us, we also see a very strong demand, again, compared to the season, compared to the first quarter of last year. We see a good demand for our cleaners, although they are not on the 250 or 350 product lines. And when a consumer buys those products, they also expect different level of performance. They also expect a different level of service, which, of course, we provide.

Okay. And just if I were to follow-up. So when it comes to the replenishing the channel with the freed up production capacity in the consideration for the -- at that time to shift the products to local markets. So let's say, if you -- if you were to shift to Europe and/or United States, how long does it take today assuming the freed-up capacity from the point of order to the point of delivery, not from your local distribution center, but let's say, from Israel facility?

So it depends on which models and it depends, of course, on the shipment time. But production could be done within really a few weeks and shipments to Europe is about a week, 1.5 weeks, 10 days shipment to the U.S. is about a month, something like that. But bear in mind that we are also positioned very well with inventory. And practically, most of what we need, for example, in the North American market, in the French market, we already have enough inventory in order to be able to support the shipping cycle from Israel.

Okay. That makes sense. And in terms of -- just one more follow-up on the online channel. I think your own online experience with ECCXI, did you -- is there sort of like when you look in the product line, is there a certain bifurcation towards the cheaper, more expensive models with within your model list?

Actually not, with our model list. Actually, we have a relatively solid demand on our medium and high-end products rather than just the lower end.

Okay. So just to confirm, the online does not affect revenue mix in a negative way, correct?

It does not affect it on a negative way. True.