Maytronics Ltd. (MTRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd. Third Quarter 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, November 28, 2024. With us on the line today are Mr. Sharon Goldenberg, CEO; Mr. Eyal Yona, Interim CFO; and Mr. Elad Weinstein, VP of Strategy and Business Development; and Mr. Amiram Bracha, Head of Investor Relations. Before I turn over the call to Mr. Sharon Goldenberg, I would like to remind everyone that forward-looking statements for the respected 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.

Thank you very much, and good morning to everyone. Before anything else, I want to express our deep sorrow over the loss of Shmuel Harari, an exceptional member of the Maytronics family, who fell in combat in South Lebanon about a month ago. Shmuel was a brilliant professional whose role included leadership of ESG at Maytronics. He was also a true Zionist who made Aliyah from the U.S. alone and build a wonderful family, and his death is a great loss to his family, his friends and everyone who knew him. The current security reality has had a huge impact on us. Our organizational efficiency is harmed by the continuing absence of dozens of employees who are called up on and off for reserve duty. This is strongly felt throughout our company from the operational challenges, mainly at the Dalton site, through to the fact that most of our employees live and work under the constant threat from the north. We hope and pray for the continuation of the permanent cease fire and an end to the war, first and all for the safety and the well-being of all residents of Israel and for us so that we can go back to the normal course of business. Moving on to a review of our business. As we shared with you after the second quarter, the challenging combination of the macro environment and the short pool season in the past 2 years had a negative effect on the demand characteristics. Along with growing competition and the effects of the war in Israel over the past year, all created a perfect storm that took a toll on our financial results in 2024. The interest rate environment, which has remained high throughout the year, was strongly affected the volume and nature of demand by both the distribution channel and end users, namely the pool owners. Regarding our business partners in the distribution channel, distributors and dealers, their inventory buildup patterns changed significantly as interest rates climbed quickly in the second half of 2022, along with the need to destock surplus inventories that accumulated as the world emerged from the pandemic. This trend continued throughout 2023 and 2024, resulting in relatively low inventory levels, leading to the estimate that the process of inventory correction is mostly behind us. The buildup patterns reflected in the continuous destock we saw in 2024 are a combination of a short pool season for the second year in a row and the growing strength of the online channel. The growth of the online relies on a broader offering that are aligned with cost pressure on consumers as interest rates and inflation limit discretionary spending. This offering is the outcome of the entry of a large number of Chinese players with value propositions covering the entire price spectrum who make significant investment in digital marketing on the online platform and social media. This trend drives a faster pace of conversion to the robotic solution and supports the transformation of the robot market into a market with volume that is significantly larger, but this meaningful potential is accompanied by competition that is becoming more and more intense and is reflected in pressure on prices and a decline in the ASP. As we presented in the last quarter, the strategic process undertaken by the company in 2023 identifying those trends and our work plan defines ways to tackle the changing market conditions in 3 main arenas: by expanding our value propositions, by tailoring the go-to-market strategy and by addressing the cost structure. From the aspect of expanding our value propositions, this year, we launched a new product line for the mid- to low-price range that will be sold under a separate brand, Niya. This initiative expands the company's value proposition and its ability to compete in the mid- to low-price segment that was characterized by high growth rates also in 2024. As we said in the past, also because of the war, the launch of the new models was delayed and in practice, their effect on sales in 2024 season was minor. However, we are moving towards 2025 season with a significantly larger arsenal with the introduction of Niya models to both the B2B and e-comm channels. We believe that the professional channel has been and will continue to be a meaningful channel in the pool industry. The 5 Niya Tracker models will bring to the -- that we will bring to the professional channel in 2025 create the potential for significant change in the stores' value propositions, enabling them to compete with the broad value propositions offered online in this price range. This initiative received great interest in the professional channel, mainly due to the fact that it is offered under the Maytronics comprehensive business umbrella. While we are disappointed with the impact of the Niya launch on our 2024 results, which was also due to the delay caused by the war, there are a number of things that boost our confidence in the effectiveness of the initiative moving forward. In 2024, we run a successful pilot in a major retail pool chain in North America, and the feedback was positive. We are in the advanced phases of initiatives involving several major pool chains for 2025. Their success will enable us to achieve growth based on market share gains in a year in which, at the moment, initial estimates do not indicate a significant change in demand, and I will talk about that a bit later. A week ago, we got back from Piscine Global 2024, the world swimming pool trade show held at Lyon, France. We met with our business partners, major distributors that operate mainly in Europe. First of all, we feel that the strength of our relationship with these partners is as strong as always been. They express cautious optimism with respect to 2024 and provided encouraging indications regarding demand for the company's products in general and the Niya Tracker line in particular. In 2024, the company launched a new robotic cleaner Skimmi, that delivers a unique robotic solution for cleaning the water surface. This is a relatively new segment in the pool market that provides a solution to a significant need among pool owners and is demonstrating increasing demand and nice growth. Skimmi offered a solution with clear technological advantages at a competitive price. In this segment, too, as we said in the prior quarter, the challenges of the war caused a significant delay in the launch of -- in the launch date, which had a negative effect on the company's plans to gain market share in the segment and as a result, on revenues in the period. Nevertheless, in this segment as well, the indications we did succeed in realizing in 2020 -- the initiatives we did succeed in realizing in 2024 and the indications at the Lyon Trade Show, where we presented Skimmi, demonstrated positive feedback from the market, and we expect to gain market share in the category and to be a factor in driving its growth in 2024 and going forward. In 2023, we began marketing the Liberty Line, a cordless robot family for residential pools. For the 2025 season, we are expanding our Liberty value proposition with the launch of Liberty 600, a cordless robot for the premium segment. With novel technology, this innovative robot offers brushing, filtration, extended battery operation time and ease-of-use capabilities sets a new standard in the market. It also introduces innovative cleaning capabilities for stairs and sun ledges, a high-quality solution to a practically unmet significant pool owner need. With substantial differentiation in cleaning capabilities, a competitive price tag and much interest in the market, we believe that the Liberty 600 will be a strong contender in the premium segment and expect the fruits of this launch in 2025 and going forward. Maytronics is currently working to enhance its marketing focus, targeting both end users and professional channels. In this context, at the Lyon Trade Show, Maytronics launched the Dolphin Difference theme, which is aimed at emphasizing the differentiation of robots under the Dolphin brand. The concept will provide key tools to all parties selling Dolphin robots to contend with the growing competition and marketing information to pool owners that amplifies the brand's proven superior performance, quality, service, lifespan and its focus on sustainability values. One of the interesting directions in the expansion of the company's value proposition is in the pool water treatment segment. The second version of the Mineral Swim system, which treats pool water was launched in the second half of 2024. At present, it is sold mainly in Australia and enjoys solid demand. In 2025, a soft launch of the third version designed for the global market is planned. Version # 3 will present substantial improvement and will include AI-based capabilities that allow for optimization, monitoring and purification of the pool water, delivering a high-quality solution that is competitively priced compared to the offering now on the market. Sales of the system will begin in the second half of 2025 in Australia, and beginning in 2026, it will be sold worldwide. In October, we completed the acquisition of Focus Products, a leading provider of chemicals and software solutions for managing pools and spa retail operation in Australia. While the acquisition is immaterial to the comprehensive set of Maytronics businesses, it possesses an opportunity for Maytronics Australia extending and diversifying its product offering, particularly in the chemical category and strengthening its value proposition in the water treatment segment. I will talk more about Focus later on. Since the second half of 2023, we have been actively pursuing market share gains in e-comm through ECCXI in the related pool products segment. As part of this effort, we work to expand ECCXI's agreements with leading manufacturers in the pool industry to include the sale of a broader product portfolio with ECCXI's capabilities. The move was successfully accomplished and led to a growth in the segment, most of it based on market share gains. However, this growth was not well reflected in this year's margin, among other things, due to investment in operational infrastructure needed to support the growth of the business in addition to certain operational challenges during the year. We will continue our focus on leveraging ECCXI's infrastructure together with the margin expansion initiatives. That's it regarding the product. Two strategic initiatives are aimed at improving the company's competitive position and profitability. The first one is related to the adjustment and change of go-to-market strategy. During the year, we established a subsidiary to expand ECCXI's business into the European market and to build online capabilities that will allow for marketplace sales in this territory. The online channel in Europe is different to the online channel in North America. Its market share in most of the markets in Europe is considerably lower compared to the professional channel. Still, it is characterized by growth, and its development is critical to optimally address the trends related to competition and pool owners demand characteristics. Building the infrastructure beyond the logistics aspect, which mostly involved the receipt of regulatory approvals and sales approvals from a large number of parties in numerous countries has taken longer than expected. This harmed our ability to make online sales in the territory in 2024 in line with our initial plans, especially considering the way demand in the territory evolved this year. Today, the company has received most of the approvals and is working to complete the business infrastructure as the 2025 season approaches. Another change in our go-to-market strategy relates to channel mix. To cope with demand trends and the competition and their impact on ASP and margins, we are working to establish capabilities and agreements with our business partner so that our sales mix of different products will include sales on expanded channels. These initiatives will enable the company to continue to support its traditional business partners, especially our distributors and also improve the competitive positioning and margins. The second strategic initiative focused on improving competitive positioning and profitability relates to our cost structure. And in 2024, we've made a nice progress. Last quarter, we mentioned that we had made good progress in executing initiatives to meet the 3-year goal of achieving 10% to 15% reduction in direct robot production costs. We can reaffirm achieving a 7% reduction in direct robot production costs looking at the end of 2024. In our 2025 work plans, we will consider the expansion of those projects through which we can continue...

[Technical Difficulty] We'll try to connect Sharon back because we can't hear him.

Sorry.

Sharon, you got cut off there for a moment. Please continue.

Okay. I'll go back. Along with these initiatives, which focus on the gross margin in the second quarter, the company executed a cross-organizational process to tailor the structure and scale of OpEx and investments. In the third quarter, this process was broadened. And as a result, we are revising upwards the impact of the adjustment related to personnel and rent, which resulted in ILS 2.7 million of cash savings in the third quarter and expected cash savings of ILS 5.7 million in the fourth quarter and ILS 21.8 million in terms of full year impact. Margin expansion is a core focus for 2025, and we will keep updating regarding the progress. I will now let Eyal take over for review of the financial results. Eyal, please go ahead.

Thank you, Sharon, and good morning, everyone. I would like to take the opportunity to say a few words since it's my first conference call at Maytronics. I've been with the company for the last 11 years, during which I served in every position in the finance -- in the financial arena. For the past 4 years, I served as VP Finance and managed the accounting and economics teams and most of the company's substantial project from the financial aspects. After a formal handover period with many, the team and I are beginning to work on the 2025 budget. The finance department will prioritize developing and driving processes to further improve efficiency, which will ultimately support improved margins. As Sharon said, this is a key focus and priority for 2025. I will now review the main items in the financial statements. Q3 sales, which mostly represents sales in the tail end of the pool season in North America and Europe and early buy sales ahead of the pool season in Australia and the Southern Hemisphere were ILS 321 million, down 3%. Foreign currency effects on quarterly revenues were immaterial. Revenues in the Residential Robotic Pool Cleaner segment were ILS 214 million, representing a decline of 6%. The segment's contribution to the company's total revenue declined from 68.7% to 66.8%. Revenues in the commercial, public robotic cleaner segments were ILS 22.6 million, an increase of 13% that mostly reflects growth in sales of spare parts. Revenues in the safety products and related pool products segment amounted to ILS 83.7 million, unchanged compared to the corresponding quarter. The segment's revenue in the quarter reflects continuing double-digit growth in ECCXI sales in the other product category, accompanied by a decline in pool cover sales in France, which is the result of an additional drop of 30% in new pool constructions. In the 9-month period, total revenues were ILS 1.384 billion, a decline of 12.7%. Foreign currency effects on sales compared to the corresponding period amounted to an increase of ILS 22.6 million, which is around 1.4%. Revenues in the residential pool robot segment were ILS 1 billion, a decline of 18.9%. The segment's contribution to the company's total revenues decreased from 87% to approximately 72.5%. Revenues in the public pool robot segment were ILS 81 million, a decline of 10% that reflects strong buildup by the distribution channel last year due to the positive trend in the segment as the world emerged from the COVID. From a longer perspective, the volume of sales in the segment is good, and this is definitely true considering the macroeconomic situation, which is also taking a toll on demand in the segment. The company's positioning in the public pool robot segment is very strong in all territories. Maytronics has the broadest product range, and we expect to continue to grow at a pace that is aligned with the market developments. Revenues in the safety products and related pool products segment were ILS 300 million, an increase of 16% that is mainly attributed to double-digit growth in sales of other pool products by ECCXI. The segment's contribution to the company's total revenues rose to 21.7% compared to 16.3% in the same period last year. Gross profit in the third quarter was ILS 122 million. The gross margin was 38%, down 230 basis points compared to the same quarter last year. Looking at the gross margin by segment, the margin in the private pool segment declined by 130 basis points, reflecting the negative effect of the lower ASP and high indirect costs due to the decline in production volumes. These effects were partially offset. Thanks to the continued realization of BOM reductions. We anticipate that the focus on further measures to reduce the direct cost on robot production and the go-to-market initiatives Sharon talked about will lead to the enhancement of our margins. The gross margin in the safety products and related pool products segment declined by significant 480 basis points. The combination of growth in the segment's share of total revenues and the fact that the segment is reflected by low margins impacted the consolidated gross margin. Most of the decline in the segment's gross margin is attributed to excess margin on sales of other pool products. This is a business that, as we said, has grown, but its margins were impacted by investments in operational infrastructure, which was expanded to support the business growth and also by the mix of the products sold. The trend is similar when we look at the 9-month period, during which the gross margin declined by 350 basis points. Most of the decline was in the first quarter compared to the first quarter of 2023 when the gross margin was relatively high. Regarding operating expenses. Net R&D expenses were ILS 12 million, a 3.7% decline driven by downsizing in the water technologies segment. On the other hand, development expenses and the capitalization of development costs in the robot segment rose. The increase in robot development expenses aligns with the company's strategic focus and our advanced development efforts for cutting-edge robots that are set to launch in the coming years. Selling and marketing expenses amounted to ILS 79 million, a decline of 1.5% compared to the same quarter last year. Efficiency enhancement initiatives and adjustments of expenses were expressed in the quarter in a 10% decline in the cost of wages, mainly as a result of downsizing. These effects were partially offset due to the growth in ECCXI's advertising and sales promotion expenses. G&A expenses amounted to ILS 34.9 million, an increase of ILS 6.3 million, mostly the result of a grant related to the pandemic that was received in the corresponding period last year by the North American subsidiary. and the contingent consideration associated with the completion of the acquisition of the minority interest in ECCXI. Disregarding these effects, the cost of wages declined by 8%. In the 9 months, all in all, the trends are similar. We recorded a decrease of 15% in the R&D expenses due to downsizing in the water development technology and an increase in expenses and the capitalization of robot development costs, as I said before. The third quarter closed with an operating loss of ILS 4.2 million compared to an operating profit of ILS 12.7 million last year, mainly as a result of the decline in sales and the gross margin. The results of efforts to optimize operating expenses as reflected in the third quarter amounted to ILS 2.7 million and are the results of measures we started implementing during the second quarter. As we said, these efforts were expanded in the third quarter and will be more significantly reflected in the fourth quarter and moving forward. Operating profit in the 9 months were ILS 129 million, down 49.9%. The decline is the result of the decrease in sales volumes and in the gross margin and also the effects of the changes in the sales channel mix. Net financial expenses in Q3 were ILS 17.8 million compared to ILS 14.7 million in the corresponding period. The increase in the net financial expenses is largely due to the effect of changes in exchange rates on foreign currency balances and the valuation of hedging transactions and an increase in the interest expenses. In the 9 months, net financial expenses amounted to ILS 46.8 million, a decline of 7%, mainly because in the period, the effect of changes in exchange rates of foreign currency balances yielded ILS 0.7 million in net income as opposed to a net expense of ILS 8.2 million last year. The group's effective tax rate in the 9 months rose to 21.5% compared to 11.5% last year mainly due to high sales volume of inventory items held by the subsidiary in North America, which affected the profit mix in the group. The third quarter closed with a net loss of ILS 18.2 million compared to a profit of ILS 2.7 million in the corresponding quarter. In the 9 months, net profit was ILS 64.7 million, down 64.8% compared to the same period last year. Cash flows from operating activities in the period amounted to ILS 161 million compared to ILS 211 million last year, a decline of ILS 49.7 million, resulting from a decline of ILS 122 million in operating profit, which was offset following continued destocking and tight working capital management. The company's inventory declined by ILS 55 million. Robot inventory that includes finished goods inventory and raw material inventory for robots were lowered by ILS 126.4 million, reflection -- reflecting a reduction of approximately 15% in these inventory segments. This trend was partially offset with an increase of ILS 70.8 million in the balance of inventory of related pool products, which is mostly attributed to growth in ECCXI's business in this segment. Cash flow from investing activities consumed by the company in the 9 months were ILS 81.5 million compared to ILS 106 million in the corresponding period last year. Most of the decrease in the 9 months is attributed to acquisitions of fixed assets on a smaller scale as well as payment of a deferred contingent liability for the acquisition of a subsidiary between periods. That's it for me. Sharon will now take over.

Thank you very much, Eyal. I'll go into more detail about the trends in the territories. I'll start with North America. Third quarter sales were ILS 176 million, down 7% compared to last year. In terms of buildup in the distribution channel, as we communicated in the last quarter, in light of the late start to the season and macroeconomic effects, we expected the conservative approach to inventory buildup to continue in the third quarter. Inventory buildup for the 2025 season will be cautious and will rely on a combination of the early buy program with just-in-time purchases before the 2025 season opens and a reduction of winter orders. The third quarter results reflect that pattern as we experienced further destocking by distributors and dealers and an absence of significant replenishment orders. We estimate that the inventory levels in the distribution channel as of the end of the third quarter declined by double digit compared to the beginning of the year, reflecting a very low inventory levels, relatively speaking. Given these inventory levels in the channel, we are cautiously optimistic regarding the orders we will get during 2025. Obviously, a stronger season, a decline in the interest rate and an incremental boost from orders for the Tracker and Skimmi lines represents potential, but it is still too early to provide a forecast with a high level of degree of certainty. In the online channel, the season was positive for the robotic cleaners, but it ended in the third quarter with a negative trend in demand for robots. If we look at the Amazon data in terms of search volumes, there was a 20% decline compared to the corresponding period. We estimate that the short season impacted demand as pool owners prefer to postpone purchases. This business environment affected all players in the channel, led to increased marketing efforts and promotions by the Chinese players, which demanded us adjustments that affected our margins in the quarter. The Chinese are our main competition in the e-comm channel, and they continue to invest heavily in digital advertising which poses a challenge and impact our margins. We expect that these trends will continue to characterize the business in the channel and expect that our cost and go-to-market initiatives will enable us to have a better competitive position and improve margins. To sum up the season, in the online channel, the automatic cleaner market experienced strong volume growth, mainly as a result of an accelerated conversion to robotic solutions from other solutions like suction, pressure and manual cleaning. Naturally, this trend is very encouraging. But as we said several times at our last conf call as well, unfortunately, our ability to cash in on this trend in 2024 was limited due to the delays of the launch of the Niya models. However, we believe that the trend of conversion to the robotic solution will continue, and we will be ready and in a far better position to make market share gains that are more substantial. Looking ahead, we believe that most of the inventory correction in the robot segment is behind us, but we expect a cautious approach to early buy orders. Overall, initial estimates for 2025 do not assume a sharp increase in demand. Discretionary spending will continue to be tight. So we are very focused on achieving growth through market share gains. Regarding Europe. Quarterly sales were ILS 75 million, a decline of 3%. The European market continues to be more complex and challenging than other territories. The macroeconomic conditions that have contributed to a sharper decline in new pool construction and a downturn in discretionary spending combined with bad weather led to a decline in sales. We're experiencing stronger competition by both traditional and new competition from China. Launches of new competitive products are increasing with more aggressive pricing and diverse go-to-market strategies. Similar to North America, we believe that in Europe as well, most of the inventory correction is behind us. And here again, we expect a cautious, conservative approach regarding early orders for the 2025 season. The expansion of value propositions, our enhanced competitive capabilities with ECCXI Europe are expected to contribute to growth based on market share gains. And finally, Oceania, a bright spot among the territories. The third quarter is the quarter when early sales are made for the summer and the pool season, which starts in the fourth quarter. Sales in the quarter rose by 20% and amounted to ILS 50 million as a result of the strong season which ended in the prior quarter. Overall, inventory level in the channel are reasonable. While the Chinese players are proceeding in their efforts to penetrate the Australian market, we have not felt yet any substantial impact; thanks to our solid foothold in the market, strong loyalty to Maytronics among dealers and the fact that the online channel in the territory is not dominant. We are continuing to develop the pool water management segment in Oceania and have launched the second version of Mineral Swim, a product that delivers an innovative enhanced water sanitation experience to the consumer. The market response was excellent, and the product will be part of our value proposition in the territory in the 2024-2025 season. I want to go into a little more detail about the Focus acquisition. Focus is a well-known and respected brand in Australia. It provides a full product line of chemicals for swimming pools and spas and to the best of our knowledge commands the biggest market share in the segment. The company buys most of the products in China and sells them mostly through independent stores and chains that specialize in the swimming pool and spa in Australia and New Zealand. In addition to its chemical business, Focus offers its customers, the swimming pool stores, a proprietary software solution named Liqua. The Liqua software developed in-house enables efficient customer base management, provides a marketing and customer relationship management system, supports in-store water testing with treatment recommendation and offers a comprehensive tool for managing the work of pool technicians who performs repairs and regular maintenance. The acquisition is well aligned with the global product infrastructure expansion strategy and with building and continuous deeper connection with the value chain and pool owners. Furthermore, the expansion and diversification of our business with stores, thanks to the Focus acquisition, strengthens the Maytronics Australia market positioning overall while the top quality software solution creates a meaningful anchor for relationship orders, replenishment orders and stability in our business relations with the stores. We expect to leverage the business of the 2 companies in the 2024-2025 season. In summary, Maytronics remains a very significant global market player and a megatrend -- and the megatrend of pool owner conversion to robotic technology, which accelerated this year, clearly supports long-term growth. We believe that the series of initiatives executed prior to the 2025 season plus others we are implementing position the company well, and we will reach the market in 2025 optimally placed to capitalize on the significant market potential. We believe that together with the cost initiatives being implemented that will be expressed in margin improvement which is our core priority for 2025. That's it from us. We'll be happy to take any questions if you have.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] There are no questions at this time. Mr. Goldenberg, would you like to make your concluding statement?

Thank you very much. Just to thank you all for joining us today, and we wish you a happy holiday and a good weekend. Thank you very much.

Thank you. This concludes the Maytronics Ltd. Third Quarter 2024 Conference Call. Thank you for your participation. You may go ahead and disconnect.