Maytronics Ltd. (MTRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd First Quarter 2025 Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded May 21, 2025. With us online today are Sharon Goldenberg, CEO; Eyal Yona, Interim CFO; Elad Weinstein, Chief Strategy and Business Development Officer; and Amiram Bracha, Director of Investor Relations and Business Development. 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.

Thank you, and good morning, everyone. The sales of the first quarter are primarily characterized by the stock buildup of the distribution channel in North America and Europe ahead of the season and in-season sales in Oceania. Revenue for the first quarter amounted to a total of ILS 346 million, reflecting a 24% decrease compared to the first quarter of last year, but suppressing the upper end of the guidance of ILS 335 million we provided in March. This is an important point in our dialogue with you. The revenue for the quarter was affected by several factors. First is our transition to direct sales. Our gradual transition to direct-to-consumer requires a lower level of stock buildup by the distributors for this purpose. It's important to note that the distribution channel remains and will continue to be a very significant pillar of the company's go-to-market strategy. But in order for us to compete effectively online, this transition is essential. These go-to-market impacts are reflected in all markets in the Northern Hemisphere, but due to the share of the online channel in North America, the impact in this territory is more evident. It's important to say that this impact was known and accounted for in our plans for 2025 and in the guidance for the first quarter. Next is that following a challenging pool season in 2024 and while macro and geopolitical uncertainty remains high and the added uncertainty around tariffs in the North American, all realized in a conservative inventory buildup by dealers ahead of the season. Additionally, on our side, we exercised caution regarding credit to certain customers. All this impacted on the scope of our sales to distributors and major dealers during the quarter. Third point is regarding the competitive landscape. In this aspect, despite the reasonable expectations that tariffs would lead to price increase and ease competitive pressure in the U.S., this scenario didn't materialize during the quarter. We continue to experience an elevated digital marketing spend by the competitors as well as continuous penetration attempts to the professional channel in Europe and Australia. In this regard, I would point out that the direct impact of the change in U.S. tariff policy, even in its softened updated version, create uncertainty and commercial conditions that makes it challenging to realize some of our 2025 plans in the U.S. Nevertheless, we firmly believe in diversifying and expanding our value proposition overall and through EMEA in particular, and we are working to create improved condition for realizing this strategic initiative. A few final points. Q1 revenue was also influenced by several operational challenges in Israel and ECCXI, which caused delays in production and shipping, impacting online sales. That's it with respect to the top line. As mentioned, the company is very focused this year on managing profit and profitability, and we are encouraged by the progress in this area. We have teams working on a wide range of cost structure initiatives. We've quantified targets for 2 main categories: OpEx and direct COGS, and I will highlight some of the efforts and achievements with respect to them. Although our overall gross profitability declined in the quarter, this is mainly due to the sales and production volume. In our assessment, on an annual basis, this impact will be more moderate. The crucial point for us is that processes and projects focused on reducing production costs are progressing, yielding reductions and over time, they're reflected in our P&L. As our mix of sales from new production is improving, the cost reduction efforts and more -- will be more reflected in our P&L. In this respect, cost reduction implemented in 2024 are reflected in a positive contribution of 180 basis points to the gross profit. I'll remind you that in 2024, we achieved a reduction of 7% in direct cost of cleaners and set a target for further reduction of 5% to 6% in 2025. During the first quarter, we achieved a reduction of about 2% out of the annual target, which is an excellent achievement, and we continue to push hard in this area. Another point regarding gross profitability is that we show a significant improvement of over 400 basis points in the gross profitability of the safety products and related products segment. The improvement results from 2 main factors: First, excellent work by the team in ECCXI in improving the gross profitability of other products. The improvement is based on more thoughtful catalog management and refining overall direct costs. Second, the contribution of the Focus acquisition in Australia. This is the peak season quarter in Australia and the chemical sales mix contributed above-average gross profitability in the segment and exceeded our early expectations. Regarding operational, the adjustment of expenses at the headquarter and subsidiaries in all expenses categories, which began in the second half of 2024, yielded a decrease in expenses of about ILS 13 million in the first quarter this year compared to the same quarter last year. This efficiency is better than early assessments and is part of the company's plan for a total decrease of about ILS 40 million in operational expenses in the year. We ended the first quarter with an operating profit of ILS 33.5 million, constituting 9.7% of sales. This result is very encouraging for us as it is better than the work plans. The entirety of cost and efficiency processes is beginning to create a cost structure that allows us to present improved profitability even at relatively low revenue levels. I'll now hand over to Eyal to review the financial results, after which I will summarize and address the 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 financials with a few additions to Sharon's review. The total sales for the quarter amounted to ILS 346.6 million, a decrease of 24%. In terms of business segments, compared to the corresponding quarter, sales of private pool cleaners decreased by 32% to ILS 248.8 million. Most of the decrease is attributed to North America, and I will elaborate on this later on. Sales of public pool cleaners totaled to ILS 26.2 million, an increase of 3%. And sales of safety products and related pool products amounted to ILS 71.5 million, an increase of 9.5% compared to the corresponding quarter. The increase is mainly due to the acquisition of Focus and an increase in sales of related pool products in the subsidiary in Australia, which was partially set off by a decrease in pool cover sales in France and sales of other products in ECCXI. In terms of geographical segments, sales in North America amounted to ILS 142.4 million, a decrease of 41%. The decrease in sales in the territory reflects, first, the impact of the change in go-to-market, as Sharon mentioned, the conservative preseason stocking of the dealers in the territory and on our part, more conservative credit risk management with some of the company's customers in North America. The first quarter is essentially an off-season quarter in terms of sales to the end consumer. However, the general trend in the online channel reflected in the decrease in the search volume on Amazon, along with several operational challenges in ECCXI led to a decline in sales of robots and other products through ECCXI compared to last year. The decrease in the scope of business activity in the territory during the first quarter is in line with the company's expectations and does not reflect the future trend. In terms of inventory and profitability, we are satisfied with the trends in the territory. Focused activity by the subsidiary led to reduce inventories more than anticipated. In addition, as Sharon noted, we achieved a significant improvement in profitability of the commercial activities at ECCXI, and I will address it later on. Sales in Europe amounted to ILS 140.5 million, a decrease of 11% in ILS and 8% in euro terms. There is some variation between the different markets in the territory. We achieved growth in the Southern European countries with the exception of France. The French pool market is experiencing challenging factors. Constructions of new pools and consumer demand for aftermarket products continue to decline. This trend continues in the French market after 2 years of decline. Additionally, we are experiencing an increase in the intensity of the competition. Sales in Australia and New Zealand increased by 28% to ILS 51.8 million, reflecting the contribution of the consolidation of Focus. The integration of Focus that was acquired during the previous quarter is proceeding according to the plans. It is an acquisition that contributes greatly to our relationship with the dealers. The contribution exceeded our expectations in terms of gross profitability that was achieved in the first quarter. It should be noted that the contribution in the quarter is the result of seasonal sales in Australia. We can expect a less significant contribution in the second and third quarters, which are quarters of off-season in Australia. The impact of changes in currency exchange rates compared to the last year resulted in a decrease of ILS 7.4 million in revenues, mainly as a result of the devaluation of the euro by an average of 2.9% and the Australian dollar by 5%. Gross profit amounted to ILS 128 million, a decrease of 27.5% compared to the corresponding quarter last year. The gross profit rate decreased to 37.1% compared to 38.9% last year, a decrease of 180 basis points. I would like to point out that the gross profitability of the company is in alignment with the company's work plan. The gross profitability was influenced by several elements. Initially, I would like to address the negative. Although multiple actions resulted in a decrease in fixed assets in Israel and its subsidiaries, at the sales level of the quarter, cost allocations continue to weigh on gross profitability in the quarter. However, we were able to mitigate the effect of this change by implementing a number of efficiency measures. The first one is a BOM reduction of 8% in robot production, positive contribution of 180 basis points to gross profitability. The quarter sales are still mainly from the existing inventory. We can understand the potential of improvement as we increase the sales mix from new production that includes procurement and more efficient processes. The decrease we achieved in the quarter is mainly due to 7% reduction achieved in 2024. Since the beginning of 2025, reduction of 1.2% of the annual reduction target in the range of 5% to 6% have been achieved. These actions will be reflected in the company's future gross profitability. A second point that contributed significantly was the improvement in the gross profitability of ECCXI's commercial operations. As mentioned, the improvement of the agreements with manufacturers and service providers in the field of transportation led to a substantial increase in the gross margin of this activity. The last point I mentioned in the geographic review is that the consolidation of Focus has contributed to an increase in the gross profitability of the other product segments since Focus' gross profitability exceeds the average in this segment. Other elements that have affected gross profitability include an average selling price, ASP, involving a mix of products and tactical price adjustments, the impact of changes in currency rates and the sales mix between robots and other products. The currency exchange rate had a relatively minor negative contribution of ILS 4 million to the gross profit compared to the corresponding quarter, which is approximately 40 basis points. Regarding the operating expenses in the quarter. R&D expenses amounted to ILS 10.2 million, a decrease of 18% compared to the corresponding quarter last year. The decrease in R&D expenses is mainly attributed to a reduction in the scope of headcount and other expenses in the development activity in the water technology sector, which amounted to ILS 1 million compared to ILS 2.5 million in the corresponding quarter last year. R&D expenses in the fields of robot remained at a similar level as part of the company's strategy to continue to lead in this segment and in the preparation of launch of new generation of robots in the coming years. It should be noted that the gross R&D expenses, including the capitalization of expenses to the balance sheet declined by 19%. In this case, as well, the entire decline is attributed to the water technology sector. Sales and marketing expenses amounted to ILS 51.8 million, a decrease of 25%. The decrease is mainly due to the reduction in wages expenses of ILS 2.5 million, reflecting a decrease of approximately 11% as a result of saving measures carried out by the company, a decrease in shipping expenses and a decrease in the commissions for sales on online marketplaces and expenses for campaigns and promotions, mainly for ECCXI's activities. On the other hand, there was an increase of ILS 1.7 million from the consolidation of Focus operation. G&A expenses totaled ILS 33.2 million this year, a decrease of 6%. The decrease is mainly due to the reduction in wages expenses of ILS 2.1 million, reflecting a decrease of 13% and a decrease in consulting expenses. On the other hand, there was an increase of ILS 0.9 million from the recording of wages expenses due to the contingent liability to purchase the minority shares in ECCXI, an increase of ILS 1.3 million from the consolidation of Focus operations and an increase of ILS 0.8 million in depreciation expenses. Total operating expenses reflect a decrease of 18.8% compared to the corresponding quarter, which exceeded our work plans. Operating profit amounted to ILS 33.5 million, 9.7% out of sales, which again exceeded the company's work plans. EBITDA in the first quarter amounted to ILS 59.7 million, which is 17.2% out of sales compared to 18.3% out of sales in the corresponding quarter. Finance expenses amounted to ILS 16.2 million compared to ILS 10.3 million last year. The increase is due to an increase in interest expenses due to higher volume of credits as well as net income from foreign exchange valuation and foreign exchange transactions, which amounted to ILS 2.2 million compared to ILS 4.6 million last year. The net debt balance amounted to ILS 818 million, an increase of ILS 26.4 million compared to last year. The second and third quarters are usually by higher level of sales and end consumers and collections from customers, which are expected to contribute to a decrease in the debt level. In this regard, it should be noted that collections in April and May so far enabled the reduction of the net debt by ILS 45 million. Taxes on income amounted to ILS 3 million compared to ILS 10.2 million last year. The effective tax rate decreased to 17.6% compared to 20.5% last year as a result of a change in the group's profit mix. Net profit amounted to ILS 14.2 million, a decrease of 64.1%, but again, exceeded the work plans for the quarter. Cash used to operating activities amounted to ILS 33.5 million, an improvement of ILS 35.9 million compared to the cash used in the corresponding quarter. The decrease is due to an improvement in operating working capital, which is based on better collection from customers and a decrease in inventory volumes. There is a decrease of ILS 144 million, which is 15% in the inventory balance, which is mainly due to a decrease of ILS 134 million in the inventory of finished goods and raw materials in the fields of robots. And a decrease of ILS 22 million in the inventory of safety products and related pool products, which is mainly attributed to the reduction in the inventory of other products in ECCXI and in the French subsidiary, which is covers and alarms. On the other hand, there was an increase of ILS 12 million, which involves the consolidation of Focus for the first time. The accounts receivables shows a decrease of ILS 136 million in light of the decrease in revenues in the quarter and improvement in the average customers days during the quarter. The accounts payables decreased by ILS 154 million, mainly due to the reduction in the total purchase volume and the timing of purchases during the quarters. That's it from my side. I would like to turn the stage over to Sharon. Sharon, please.

Thank you, Eyal. In summary, the weights on returning to growth still exists in the markets we operate in, both in terms of the competitive landscape and the macro environment, which still impact the private consumption overall and the demand for discretionary products in particular. Nevertheless, we act decisively in expanding and updating our value propositions. We are in advanced stages of refining and expanding our robotic cleaners offering, which is expected to significantly elevate our value proposition in line with market needs and improve profitability. Maytronics has been and will continue to be a leader in the robotic pool cleaners category. We will expand our value propositions, evolve and improve the go-to-market. The cost initiatives are creating a cost structure that allows us to present improved profitability even at relatively low revenue levels. We expect that the combination of macroeconomic relief and significant product launches will lead us back to growth. In this scenario, we believe the cost actions we are implementing this year creates potential for a meaningful operational leverage. Regarding Q2 forecast, Q2 sales reflect part of the pool season sales in Europe and the U.S., and we expect the continued impact of macroeconomic conditions and the competitive environment. As of these days, weather is showing some positive signs in some markets. Considering all of these parameters, we estimate that Q2 revenue will range from ILS 530 million to ILS 600 million. Before we open for questions, I want to say a few words on a personal level to Eyal, who is soon concluding a long and successful journey at Maytronics. Eyal grew within Maytronics' Finance division for more than a decade and has a significant part in the company's overall success and in the uncompromising professionalism and dedication of the finance team. I wish you, Eyal, all the best in the next stage of your journey, and I have no doubt you will shine wherever you choose to be. Starting on 1st July, Amit Magen will take on the role of CFO. Amit brings over 2 decades of financial leadership in public and private companies. Amit has a proven record of successful leadership of cost efficiency processes, complex M&A transactions and has a good understanding of the capital markets. We're very pleased with Amit joining Maytronics and are confident that combining his experience and skills with his alignment to Maytronics' culture is an asset that will assist Maytronics in the coming years. That's it for me, and we will be happy, of course, to take your questions.

[Operator Instructions]. The first question is from [indiscernible].

First, congratulations on the improved results. I have 3 questions for today. The first one is about the forecast for the second quarter. We are standing today at the end of May, and the question is if you feel comfortable with the forecast that you delivered in the report, this is the first question. The second one is about the market share. You were leading the market with 45% to 48% market share. And the question is this is the situation today or you lost some market share? And what is your expectations in terms of market share at the end of the year? The third question is about the acquisition of the Chinese company Aiper by the Spanish company. The question is, I think that this transaction is giving you a very positive valuation on one side. But on the other side, it may affect your position in the market. So if you can elaborate more on this transaction.

Thank you for your questions. I will address or we will address them one by one. So with respect to the forecast, yes, we are like a bit over the mid of May. And like in every season, these days is like only the beginning of the pool season. And we are in a seasonal business. So we are highly dependent on how the season will evolve, how weather will evolve and the fact that we are closer to consumer and sell more direct-to-consumer impact our sales depends on when the season starts. So are we confident with the guidance that we gave? We feel that this guidance is achievable. Otherwise, we wouldn't give that guidance. And that's the best I can say at this point in time. So that's with respect to the forecast. With respect to the market share, like we said in March, we didn't specify any specific percentage of market share because of a lot of changes that happened in the market and some of the challenges with us estimating the actual market share because of the changes and the dynamics in the competitive landscape. So we didn't specify any significant -- any particular, sorry, market share. But what we've said is that since the opening price point up to the middle price point cleaners started to be more relevant in the market, and we didn't play so much in that arena. Then from a quantity perspective, yes, Maytronics lost market share, and we shared that in March. We're doing a lot of efforts that on the categories that we operate that we will maintain our market share as much as possible. But what practically is very important for us is also to have profitable sales. And that's where we focus. I will say also that we -- to the best of our estimation, we were and we're still a leading robotic pool cleaner provider in the market. So that's with respect to the second question. And last was the Aiper and Fluidra deal, Fluidra acquiring 27% of Aiper. So naturally, that move by Fluidra creates both risks, but also opportunities. That's what we believe that it also creates opportunities for Maytronics. Of course, that internally, we are evaluating that, and we are building what we need to build in order to leverage and the opportunities that we have. And I must admit, we will not share with Fluidra what we're going to do.

Just one point, if you can hear me, is about the valuation because I think that the valuation of that transaction is giving you a very positive valuation, which is not given by the market today. So if you can elaborate more about that.

I would say as follows. Potentially, you are right. And we believe that in time, it will be translated also to the valuation of Maytronics.

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

Yes, sure. So first, thank you very much for participating. And of course, thank you for the questions. We'll meet again in the conference call for Q2 on August 20. And until then, of course, we are at your service as needed. So have a great rest of the day. Thank you.

Thank you. This concludes the Maytronics Ltd First Quarter 2025 Conference Call. Thank you for your participation. You may go ahead and disconnect.