Maytronics Ltd. (MTRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd. Fourth Quarter 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded March 26, 2025. 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. I will now pass the call over to Amiram Bracha, Director of Investor Relations and Business Development. Amiram, please go ahead.

Thank you, Joni. Good afternoon, everyone, and thank you for joining, and welcome to the conference call to review the results of 2024. Joining us -- joining me on the call today are the company's CEO, Sharon Goldenberg; Eyal Yona, acting CFO; and Elad Weinstein, VP of Strategy and Business Development. A recording of today's call will be available at our website later today or by tomorrow. I'm handing over the floor to Sharon to give an overview of the year, summary of the trends in the pool industry, and Eyal will continue with the financial review. We will then open for questions. Sharon, please go ahead.

Thank you, Amiram. Good morning, everyone, and thank you for joining us. The year 2024 was very difficult for the company. Although we have given detailed and extensive attention to the main trends that led to this in all previous calls, nevertheless, to summarize, a perfect storm of the macro environment and its effects on demand characteristics, both of the distribution channel and of the end consumer, increased competition, the effects of the war and the weather altogether led to a decrease in revenue and significant erosion in profitability. During the year, we gave forecast that did not materialize. As a result, we examined the range of possibilities in terms of our outlook management practice and formulated a framework more suited to the structure and characteristics of the company's activities. And I will, of course, address this later. During the year, around midyear, we began to realize that there is a growing gap between the plans and the trends we are encountering in the market. In the first stage, we examined the long-term growth scenarios in all territories and from there, back to the production program and to the examination of all infrastructure and the level of expenses at the headquarters and in the subsidiaries. The growth in all the company's infrastructure over the years and especially during the COVID period was based on the need to support continuous growth. And the reality against the updated scenarios required a realization process. We formulated an operational efficiency plan that is looking deep inside in order to try to adapt the company's expense structure to the updated scenarios we saw before us. These moves yielded in a reduction of NIS 12.7 million in 2024. And their impact in the full year, combined with additional efficiency measures, is expected to have an impact of NIS 40 million reduction in the company's operating expenses in 2025. The combination of these processes and the completion of the work plans for 2025 also included a reassessment of paradigms that influence decisions in the field of procurement, inventory and infrastructure investments. In the robot sector, we examined aspects of the mix among the other things between generation of products and between cordless and corded models. In addition, we made decisions to reduce and focus on certain contents related to the past developments in non-robotic product areas. These processes led to the reduction of assets in the amount of NIS 47 million. From the difficult coping in 2024, we believe that the decision to take responsibility and carry out realization is important and necessary. Of course, all these actions are required and supported by accounting, and Eyal will elaborate on this. But essentially, what stands behind most of them is the understanding that certain assets that were built or acquired a few years ago are not adapted to the updated forecast and plans. For example, during the COVID period, the availability of electronics components was very challenging and long-term procurement decisions were made to ensure continuity in production at the volumes predicted at that time. The procurement volume carried out at the time are not adapted to the updated forecast as of today, both in terms of quantity and especially in terms of the future robot mix. And therefore, we recorded a reduction of NIS [ 16.9 ] million related to raw material inventory. The accounting implication resulting from the need to make reduction in -- paint a very unpleasant picture, where we summarized the year with a net loss of approximately NIS 30 million, but we are working to ensure that 2025 will be a year where the turnaround begin, and I will expand on this later. Alongside the many challenges, 2024 also saw achievements. First, even in 2024, despite a year with challenging demand characteristics, we managed to reduce the inventory of robots, both raw materials and finished products, by approximately NIS 150 million. And this is unrelated to the required inventory write-offs with the amount of NIS 26.6 million. The inventory reduction has a decisive contribution to the positive cash flow, which helped the company in its day-to-day operations and among other things, to act to acquire Focus in Australia and to complete the acquisition of full ownership of ECCXI, both of which are important strategic moves. The company's plans and goals for 2025 are to continue reducing inventory and in combination with the plan to improve margins and profit, the cash flow from operating activities in 2025 will focus on reducing debt. At the beginning of 2024, we announced a multiyear plan to reduce the direct cost of robots and successfully implemented reductions of approximately 7% during the year. We continue to implement the strategic move, and I will talk about the goals in this area later. We have made significant progress in the road map in developing and extending value propositions in the field of robots. We launched the LIBERTY 600, in our view, the highest quality robot currently in the premium category. We are in advanced stages of developing a significant and groundbreaking generation of robots under the Dolphin brand. This generation will allow the consolidation of older product lines, strengthening the technological leadership of robots under the Dolphin brand, which expect to bring significant improvements in the value proposition against market demand and improvement in profitability. We launched the Niya brand and are working to gradually expand the value proposition under the brand. We launched Skimmi, the floating skimmers category, which are robots that clean the water surface is a category with significant growth. In our estimation, the Skimmi is the best one in the category. And towards the end of 2025, we're expected to launch the next generation that will bring an even better value proposition. Skimmi, like Niya, as we explained throughout 2024, didn't meet the target dates of the original work plans, partially due to the effects of the war. But we are optimistic about the more positive contribution in 2025 and beyond. We extended the non-robotic value proposition with the acquisition of Focus in Australia, and this opens up the possibility for us to examine leveraging Focus core activities to other markets. The direct-to-consumer move is a significant component of Maytronics' strategy. We completed the acquisition of full ownership of EXI and make significant progress in leveraging ECCXI platform in two significant areas. First, in Europe, a market with great potential in our understanding in the online channel that ECCXI Europe will allow us to realize. And secondly, in the growth in the pool market outside of the robotic category, a category where we achieved double-digit growth in 2024 in the others product segment, the ECCXI. In our estimation, there is very significant potential in aftermarket sales in the online channel. And therefore, we have built and refined the capabilities, and we expect continued growth and improvement in profitability in this area in North America. We have made great progress in building sales capabilities on our online platforms, both through the app and through the company's website, with increasing leverage of the high-quality infrastructure built in these areas for online sales. Regarding trends in the pool market, in our estimation and according to industry estimates, during 2024, the trend of slowing down the construction of new pool continued. This trend is significantly influenced by the macroeconomic environment. And the number of new pools built decreased by an estimated rate of approximately 25% compared to last year. This trend affects the sentiment in the industry, but meets the company mainly in the field of covers in France and in the distribution activity in our subsidiary in Germany. In terms of the robot market, 2024 was characterized in our estimation by similar quantitative sales to last year and a single-digit decrease in monetary terms. The main factors that influenced the market in 2024 are: first, the superiority of the robotic solution over other cleaning solution continues to be reflected in the increase in the conversion of pool owners from alternative cleaning solutions. The macroeconomic environment, combined with a very short pool season in North America and Europe, continued to create headwinds that were reflected in the postponement of purchases and core trade down by pool owners. Within this macroeconomic environment, online and mass market channels are flourishing. Demand for entry level is rising, and this is why we estimate that the market is experiencing the entry of additional players, mainly Chinese, offering cost-conscious robots. In general, 2024 was characterized by an increase in the competitive landscape, and the number of players operating in the market increased. Although most of the newcomers have minimal market share and operate mainly online, they create noise, and this affect the effectiveness of marketing in terms on conversion costs. We estimate that the situation in the market will converge to a more steady state, which will be characterized, among other things, by the exit of some small players from the market. Signs of maturity can already be seen from the larger Chinese players, who are striving to north to higher prices. In terms of Maytronics, revenues from the sale of robots from private pools amounted to approximately NIS 1 billion, a decrease of approximately 24%. Revenues from the sale of spare parts in the segment increased by approximately 18%, an increase reflecting the trend of postponing purchases and performing to repair as well as increase in the installed base of robots that have completed the warranty period. Overall, segment revenues decreased by approximately 21%. The main factors for the company's underperformance in the market this year are: first one is given a portfolio of robots that is more suitable for medium to high price levels, the trading down trend created headwinds. As mentioned, the work plans for 2024 were to launch the Niya product, a strategic move that was intended to address this and improve our value proposition. But as we have mentioned several times during the year, the timing of the product arrival to the market didn't match the company's plans, mainly due to the effects of the war. The company's sales in the professional channel, distributors and dealers are significant. The demand of this channel continued to be affected by inventory correction, and this had a significant impact on the results this year. As we mentioned in the previous quarter in our estimation, the inventory correction is largely behind us. Intense competitive landscape online in general and on Amazon, in particular, was reflected in a flood of new launches in the entry-level segment of $300 to $600, an increase in marketing expenses and decrease in their effectiveness in terms of converting consumers to online purchases. In summary, in 2024, we achieved less good results compared to the robot market as a whole. And therefore, it is clear that we lost market share. However, in our estimation, Maytronics is the leading company and has the largest market share to date. We believe that our value proposition is better than the one of the competitors. There is a float of product in the market, but we believe that it is right for us to continue to have the product with the best value proposition and performance over time for pool owners. In past years, this quality sold itself. And today, we're dealing, among other things, with a multitude of products that are marketed aggressively, and we will make the necessary adjustment in marketing to deal better. I will now pass to Eyal to give financial overview, and then I will summarize and address the company's outlook. Eyal, please go ahead.

Thank you, Sharon. Hello, and good morning or good afternoon to everyone. I will go over the main points of the P&L report and the balance sheet and the highlights related to them. I will start with the results of the fourth quarter. Total sales in the quarter amounted to NIS 242 million, a decrease of about 20%. Traditionally, fourth quarter sales reflect the delivery of orders preseason in the U.S. and Europe and season sales in the Southern Hemisphere, mainly in Australia. Generally, the company faced a very conservative stocking approach, both in Europe and North America. And season sales in Australia were lower than last year, mainly due to high comparison numbers as a result of an early start and a strong season last year. We are summarizing a generally good quarter in this territory. And in combination with the acquisition of Focus, which was consolidated for the first time, we expect a positive season in the first quarter and overall, a continued strong positioning of the Australian subsidiary. We are summarizing 2024 with sales of NIS 1.62 billion, a decrease of 13.9%. Sales from the private pool robot segment amounted to NIS 1.16 billion in '24, a decrease of about 21%. The volume and consumption trends of pool owners and the stocking trends of the traditional distribution chain in the current macro environment creates a headwind to the demand levels the company is experiencing. This significant trend, combined with the intensity of the online competition, a very short pool season in Europe and in the U.S. and the effects of the Iron Swords War created for us in '24 a perfect storm that resulted in a significant decrease in revenues. The level of sales and mainly the gross margin were affected this year by the sales mix of production versus inventory sales, but this is a managed move aimed at improving the balance sheet structure and mainly reducing inventories. Revenues from the sales of robots for public pool amounted to NIS 102 million, a decrease of 7.5%, mainly reflected very high comparison numbers in the first half of 2023 when segment sales grew by 60% due to the effects of the post-COVID at that time. Revenues from safety products and related products for pool grew by approximately 17% and reflect an increase in sales of related products through ECCXI in the U.S. and the effects of the consolidation of Focus starting from November 1, which contributed about NIS 60 million to the segment's revenues. Gross profit in 2024 amounted to NIS 586 million, representing 36% of revenues, a decline of 580 basis points. First, I will refer to the inventory provision, which contributed to a decrease of 210 basis points in annual gross profitability. As we mentioned during the conversation, 2024 is largely a year of realization. The ongoing practice is that every item of raw material and every robot or other finished products is examined against sales forecast and consumption. The work plans for 2025 and the completion of the go-to-market processes for 2026 and beyond led to the fact that the updated forecast changed in such a way that required the recording of several inventory provisions. These provisions amount to about NIS 27 million, of which NIS 16 million are attributed to the reduction of raw material inventory and NIS 11 million to the reduction of return finished product inventory. The remaining main factors that affected the gross margin, which were communicated throughout the year and the last 3 quarters, first of all, a decrease in production quantities, resulting in a relative increase in the overhead per product, decrease in ASP, average selling price due to both price adjustments and the impact of the robot mix, sales mix between robots and the safety segment and other products. These negative effects were partially set off by exchange rate effects and improvements in the in the bill of [ material ]. At the level of operating expenses in '24, R&D expenses amounted to about NIS 47 million, a decrease of 13.9% compared to last year. The decrease in R&D expenses is mainly attributed to a reduction in the scope of headcount in the development activities in the field of water technologies due to focus in this field. This amounted to about NIS 6.8 million compared to about NIS 13.6 million in the corresponding period last year. During the year, we conducted an examination process of the development activity in the field of water technologies. As part of this, a decision was made not to proceed with a specific component development as part of the solution. And therefore, we recorded an impairment of intangible assets in the amount of about NIS [ 15.7 ] million, which was recorded in the other expenses in the P&L. The remaining intangible assets in the company's balance sheet attributed to Water Technologies is about NIS 39 million. Sales and marketing expenses amounted to NIS 330 million without a significant change compared to last year. We recorded a decrease in wages by about 4% as a result of efficiency measures and a decrease of 6.5% in shipping expenses. On the other hand, we recorded an increase in expenses for campaigns and promotions, mainly for ECCXI activity. G&A expenses amounted to about NIS 150 million this year, an increase of 3.9%. Wages decreased by about 9%, which is NIS 6.3 million as a result of efficiency measures implemented during the second half of the year. Apart from that, the expenses were affected by several items that are not routine in its nature. First, we recorded a salary expense due to a contingent commitment to purchase minority shares in ECCXI in the amount of NIS 2.2 million and expenses for transactions to purchase the remaining minority shares in ECCXI and the acquisition of Focus in the amount of NIS 1.1 million. In addition, last year, we recorded a onetime income in the subsidiary in the U.S. in the amount of about NIS 5.5 million from a salary grant following the COVID crisis. As mentioned, this year, we recorded other expenses in the amount of NIS 20.7 million, NIS 15.7 million of them, as I mentioned earlier, related to the impairment of a component from the intangible asset in the field of water technology. In addition, we recorded an impairment of about NIS 5 million due to a decision to stop selling the Poolside Connect product, which is not adapted to the change in consumer preferences in the pool field, reflected in higher demand for cordless robots. Operating profit in 2024 amounted to about NIS 37 million compared to NIS 258 million last year. Net financing expenses amounted to about NIS 51 million compared to NIS 66 million last year. The decrease in net financing expenses is mainly due to the impact of exchange rate changes on foreign currency balances and the revaluation of hedging transactions and on the other hand, an increase in interest expenses. We're Summarizing '24 with a net loss of about NIS 29.5 million. Cash from operating activities amounted to about NIS 129 million compared to NIS 164 million last year. The improvement is mainly due to the decrease in inventory balance by NIS 110 million. A few highlights for the company's balance sheet and mainly about inventory. The company's efforts to reduce inventory balances in the cleaners field led to a decrease of about NIS 177 million, which is about 21%, of which NIS 26.6 million are attributed to the impairment provisions, as I mentioned before. During the fourth quarter, we recorded an impairment provision for raw material inventory, mainly electronic items and several power supply models, in the amount of about NIS 15.9 million as a result of updating the production forecast of the relevant robot models for these raw materials. As Sharon mentioned, as part of updating the growth forecast for cleaners in terms of the mix of Dolphin families that the company produces and those that are in advanced development stages as well as decisions to reduce the number of families of cleaners produced by the company in general and in the number of models in each family in particular as part of marketing focus and efficiency processes. In addition, we recorded an impairment provision for returned finished product inventory in the amount of NIS 10.7 million. Updating the sales forecast for the remaining return robot inventory led to the decision to convert part of this inventory into spare parts, and part of it was scrapped. These decisions were made out of cost benefit consideration and as part of efficiency efforts and optimal utilization of inventories in the company and its subsidiaries. The remaining inventory of related products of pool increased by about NIS 43 million, of which about NIS 10 million are attributed to the first-time consolidation of Focus and the remainder is mainly attributed to the growth of this segment's activity in ECCXI. We continue to work to reduce inventory levels and estimate that we will be able to reduce inventory balances during '25 by a total of NIS 80 million to NIS 100 million. That's all for me. I return the conversation to Sharon. Sharon, please.

Thank you, Eyal. Throughout most of its years, Maytronics operated in a market characterized by four significant factors that operated over time, a relatively small niche market, a limited competitive environment, a distribution channel and pool owner with conservative consumption characteristics and a consumer journey that focused mainly on the dealer level and the professional segment. The market was decisively based on the professional channel, distributors and dealers. Maytronics led the market with a product and distribution strategy that included many types of models, many SKUs, and this strategy yielded a leading position and a very significant market share. The robot market is, in our understanding, in a transition period. Two significant parameters, the macro environment and the competitive landscape, are significantly different from the past. In relation to the macro environment, even the longer and the higher for longer will end, and it can be hoped for a relief in interest rates that will lead to a change in demand characteristics. In our understanding, the Chinese competition, as it does in other industries, enter the market through cost-conscious products through significant marketing and a model of losses in order to buy market share and build a brand. As I mentioned, it can be expected that the small companies will exit. And according to the signs already seen today, the leading companies will move to a more significant focus in the medium to high price range. In terms of the company, we're in the process of adapting our range of value propositions in the market. And as I mentioned earlier, we are in advanced stages of development process with the next generation of doing robots. This is a very significant development, which will allow SKU reduction, expansion of the cordless offer, improvement in profitability and most importantly, in the value proposition to the consumer, improvement in the user experience of the pool owner. Establishing omnichannel capabilities with an emphasis on successful implementation of platforms for direct sales to the end consumer is critical for optimal coping. And Maytronics online activity in the future will be based on several channels, unlike the current reliance mainly on Amazon. We are currently in a challenging transition period, but it is important for me to try to clarify where this market is going in our understanding. Looking ahead, in our understanding, the robot market will have different characteristics. The market -- the number of electronic cleaners sold each year is expected to increase and potentially even significantly in our estimation. The convergence of robotic technology, battery technology and other technologies that we will bring in the future and probably also the competition will lead to the fact that we believe that an increasing part of the installed base will move to robots. In a significantly larger robot market than before, we see Maytronics continuing to lead the market in innovation and consumer experience. However, the likelihood that the company will be able to hold such a high market share as in the past is less likely. In our understanding, the realistic scenario is erosion in the quantitative market share. However, decisive and successful implementation of the strategy in terms of go-to-market and development aspects will allow the company to continue leading and growing on the market growth. And I will try to address the implications of these trends on long-term goals later. Regarding the company's forecast in general, for many years, Maytronics was exceptional among Israeli companies and chose to give an annual growth forecast for its revenues. In light of the changes in the robotic cleaning market in general and the company's revenue mix, in particular, the company sees fit to change the forecast horizon and move to providing a quarterly revenue forecast. The company's forecast for the first quarter of 2025 is for revenue in the range of NIS 320 million to NIS 335 million, reflecting a decrease of approximately 26% to 30% compared to the corresponding quarter last year. The decrease in the first quarter sales is largely based on our work plans and mainly stems for the up -- from updating the sales model in several territories, an update that is part of the implementation of the strategic component of including more direct sales to the end consumers. This move will be reflected in 2025 in a change in the mix and timing of revenue recognition between the quarters over the year compared to previous years. Therefore, first quarter revenues, which mainly reflect preseason sales to distributors, are expected to be lower than we are used to, both due to this impact and due to continued conservativeness in stocking policy. I will note that the implementation of direct sales to the end consumer within the season may contribute to increased profitability in the second and third quarters. Also, the quarterly forecast reflects specific operational challenges at ECCXI that we overcome at the end of the quarter and the impacts of challenges characteristics of the pool industry as a whole in the French market, which, of course, also affected us. Regarding 2025 as a whole, one of the most important points for us is the continued realization of inventory reduction. We expect a decrease of NIS 80 million to NIS 100 million compared to the inventory balance at the end of 2024. Such a decrease will help the company reduce the debt level and return to better alignment between production rates and sales rates towards the [ 2024 ] season and during 2026. We expect a further improvement of 5% to 6% in the direct robot cost, a result of continued implementation of efficiency measures in production, design and engineering. If you recall, in 2024, a reduction of 7% was achieved, and we set a target of reducing the cost of a robot by 10% to 15% by the end of 2026. This issue is under significant managerial attention, and we are working to achieve real efficiency in this area even beyond the long-term target given. And as soon as we can, we will update on that as well. As I mentioned earlier, at the end of the first half of 2024, we entered a process in which adjustments were made in the structure of operating costs. Continued decisive implementation of cross-organizational efficiency plans in Israel and in the subsidiaries as part of the construction of work for 2025 will allow us to reduce operating expenses by approximately NIS 40 million. This amount includes the full year impact of the measures implemented during 2024 and additional efficiency measures that we implemented as part of the construction of work plans for 2025. We expect a decrease in investment in fixed assets in the amount of approximately NIS 12 million to NIS 15 million compared to the level in 2024 as a result of measures to adjust the scope of investments. The company's free cash flow is expected to be at least 100% of net profit in 2025. Last year, we set a revenue target for 2028 to reflect the company's long-term goals. When we review the target update, considering aspects such as market growth rate volatility, the dynamic competitive landscape and channel mix; altogether created short-term uncertainty that led us to conclude that it is appropriate to move from setting a long-term revenue target for a specific year to characterizing potential annual revenue growth in the medium term. Firstly, I mentioned in the robotics market, we expect continued acceleration in the adoption of robotic technology at the expense of all other cleaning solutions. This acceleration over the years will generate a significantly larger robot market in quantitative terms, both to the adoption by pool owners and the creation of a larger replacement market due to the growth in the installed base. We estimate that the convergence of stabilization of the main characteristics, which are currently in the dynamic states, will lead the market to quantitative growth characterization at an average medium to high single-digit rate. Regarding Maytronics, the likely scenario is a certain erosion in market share, which means that quantitatively, the growth may be lower than market growth. But we expect to compensate for this erosion through determined implementation of go-to-market moves, which will allow the company to achieve growth similar to market growth in monetary terms, so much for the robots. As for the other products, in this area, things are somewhat simpler. In our estimation, we have not begun to scratch the potential in the aftermarket online market. This is a trend that is in its infancy at the market level. We estimate it will be intensified, and ECCXI's online platform is an excellent infrastructure to realize this potential. We expect to grow at rates higher than the growth of the aftermarket. Summing up all these parameters bring us to estimate that Maytronics average annual growth in the medium term should be in the range of a medium to high single-digit rate on average. Last but definitely not least, we would like to highlight that the company's Board of Directors recommended to the general assembly on the appointment of Mr. Dov Ofer as the new Chairman of the Board. We, of course, welcome the recommendation and look forward to a fruitful collaboration with Mr. Ofer. That's all from our side, and we are open to receive your questions.

[Operator Instructions] There are no questions at this time. Mr. Goldenberg, would you like to make your concluding statement?

Yes. Thank you. Just thank you all for joining us today, and have a good rest of the day. Thank you very much.

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