Earnings Call: Q2 2020

Sep 1, 2020

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercom Second Quarter and First Half twenty twenty Results Conference Call. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Luca Mirabelli, Head of Investor Relations of Inca Pump. Please go ahead, sir. Thank you. Welcome, everybody. Good afternoon, Europe. Good morning to those from America, and thank you for calling in. I'm here to comment our H1 and Q2 results and answer your questions together with the Board member, Fabio Marazzi, who is also CEO of GF Hydro and with the precious help of our CFO, Carlo Banshi. I do need to remind you that this is the second presentation since the beginning of the COVID-nineteen pandemic, and we are very proud of the numbers disclosed today as they are the successful result of a strong, conservative effort to protect our business. First of all, our subsidiaries grasped every chance to stay open, at the same time accepting no compromise on the health and safety of our colleagues. We made the most of our exposure to many different industries and our trademark operational flexibility so we could keep our attention and our production efforts focused on those customers whose business was up and running. Some core characteristics of our models, such as vertical integration and sizable stocks of raw materials allowed us to minimize disruption related to the supply chain. And finally, I am pleased to notice that even the performance of those companies that were taken on board only recently was neatly in line with the rest of the group. Let's see the results of this effort in the half year numbers. Total consolidated group sales in the first six months were down a single digit, minus 9.1% at almost $640,000,000. This is an encouraging result with the worst of the COVID-nineteen related disruption hopefully behind us. As unchanged to perimeter and currency exchange, the organic decrease in sales was minus 18.7 in the period. Perimeter expansion gave a positive 9.7% contribution, while FX was negligible. Going by division, Hydraulics registered a minus 9.4% in sales, of which minus 23.6% organic. Water jetting registered a much better, minus 8.3, almost entirely organic. Due to the extension and duration of the lockdowns, particularly in the month of April, it's no surprise that the second quarter held the strongest impact of the pandemic on sales. Let's see the numbers for the second quarter. Total sales amounted to EUR 295,600,000.0, down 17.8% year on year and 25.9% organically. However, the monthly trend was somewhat encouraging with both absolute sales and year on year comparison improving month after month in May and June. Going by division, Waterjet improved more resilient with a decrease limited to minus 14.6%, almost unaffected by changes in perimeter, whereas Hydraulics registered an organic drop of minus 31.6%, which became minus 19.4%, thanks to the contribution of recent acquisitions Reggiano Regulatory and Trans Techno. Looking as usual at organic sales by geography. As a note, the minus 25.9% we mentioned for the quarter becomes minus 26.5% due to a slightly negative effect of the currency exchange. In terms of geographical area, the differences in timing, severity and government approach to the pandemic are reflected in the local sales trends. Europe was down 29% in the quarter, of which Italy did minus 35%. North America was down minus 26%, a bit better without the currency effect. Asia Pacific was down minus 6%, of which, and this is going to be interesting, Australia, plus 3% and China, plus 8%. The rest of the world registered a minus 28%. Latin America, more or less, followed the same pattern as North America, a bit better, with a minus 19%. As to India, as you could expect, it has the worst performance of all areas. What perhaps you may not expect is the magnitude of this drop, 75% compared to Q2 last year. In terms of sales by application sector, COVID-nineteen has the strongest impact on large OEMs, which are typically customers of our Hydraulics division. These companies have no choice but suspend their operations, in some cases for the entire quarter, because of the level of complexity in their operations and in their supply chains. In some cases, they have facilities in India, where the lockdown, in fact, as we noticed, was the strongest. This explains the minus 43% in earthmoving, minus 38% in lifting, minus 36% in construction, minus 33% in agriculture, minus 30% in trucks. As usual, there are two different patterns here with sales to truck manufacturers down 50% and other categories like price collection vehicles, sewer cleaning and other utility vehicles, which are closer to minus 10%. Other sectors which feature smaller or more dynamic customers, possibly with a closer ties to those essential activities that were not suspended anywhere under the lockdown, show a decrease in the teens. Industry, minus 19% Contractors, minus 18% Food, Cosmetics and Pharma, minus 16% Cleaning was substantially flat at minus 2%. But the award for the best trending application sector goes once again to the quarter oil and gas, marine and offshore applications, which showed altogether a healthy plus 7% in the quarter, particularly thanks to sales by Amelmann and GS Hydro. This is more or less all we can say about sales. However, I believe that in order to evaluate the resilience of the inter pump model in an extreme situation like the one we have been through, it is much more significant to take a look at margins. We have suggested a number of times in the past that a negative trend in sales actually allows us to reduce the most expensive part of our production capacity, which we heavily rely on in times of strong organic growth. I'm referring to outsourcing, extra shifts, over time, temporary staff for second choice suppliers. This has true even in the third consecutive quarter of negative top line growth. So we closed the quarter with an EBITDA margin of 22% on sales, also helped by the fact that our most profitable division, Water Jetting, was impacted more likely. This corresponds to EBITDA of €64,900,000 for the quarter, bringing the year to date figure to over €139,000,000 or 21.8% of sales, just 130 bps behind the very good 2019. Going by division, EBITDA margin in the quarter was 20.5% for Hydraulics and 24.5% in Water Jetting. For the half year, this translates to 20% in Hydraulics and 25.2% in water jetting. Finally, nothing suggests the resilience of our margins better than a comparison between Q1 and Q2 Despite an organic decrease going from minus 11% to minus 26% year on year, the EBITDA margin improved slightly. Net income for the quarter came to €30,200,000 bringing the year to date total to €63,500,000 with a tax rate of 27.1% so far. Let's look at the most important items in the cash flow statement. Cash flow from operations was EUR 50,800,000.0, down EUR 21,000,000 compared to the 2019. CapEx in the quarter amounted to €13,000,000 a few million euros less than you might have expected, but this small difference should not be regarded as a sign that any project has been canceled or discontinued or sacrificed, but rather as a simple delay in spending brought about by COVID related physical constraints. As a consequence of negative organic growth, but also, I have to say, as a result of our containment efforts, I'm very pleased to highlight that sales net working capital freed up 18,000,000. As a comparison, last year, it absorbed EUR 17,000,000 instead. And that was already a nice result for the second quarter. So yes, Interpolper set yet another record for quarterly free cash flow generation at EUR 59,300,000.0, bringing the total at the half year point to nearly EUR 100,000,000, 98,300,000.0 to be precise. No one likes a year of strong negative growth, of course, but at least the effect of cash generation through the reduction of net working capital is once again confirmed for Interbank. There were even more circumstances benefiting our final net financial position. The expense for acquisitions in the quarter was negligible with CHF1.4 million. The share buyback was moderate, and its cost of CHF4.3 million in the quarter was more than offset by the income resulting from the other side of stock options, 13,200,000,000.0. So despite the dividend payments, 27,900,000.0, net debt went down by more than EUR 40,000,000 during the quarter, settling at EUR 344,200,000.0 at June 30. At the same time, the additional commitments for purchase of subsidiaries were worth $62,400,000 I trust that you shared our satisfaction about how Enterbark navigated the first half of a very challenging year. In my opening remarks, I listed the reasons why we are happy from an operational point of view, but the financial results were even more noteworthy. Margins were up about 20% and even increased from the first quarter to the second despite the trend in the top line and an unprecedented level of cash generated while safeguarding the dividend payments. This completes the picture of the first half of the year. For the second half, clearly, expectations about Interpol's performance cannot be completely independent from what happens with the pandemic. However, we do not expect our production capacity to be constrained in the same way it happened in spring. Experience has demonstrated that it is possible to turn workplaces and factories into low risk environments, and health care systems are much better prepared, especially in terms of testing and tracing. Similar considerations also apply to our customers who are increasingly returning to placing orders and buying from us. After the upward trend registered during the second quarter, in July, both sales and order intake were higher than June. Not dramatically higher, mind you, but it was the fourth consecutive month of increase. As to August, as you know, August is not an average month, but according to preliminary data, I would say that sales for the month appear encouraging and order intake is reassuring. On the other hand, we also have to know, this is something you already know, the very strong negative impact of currency exchange. So we should keep an eye on the situation because if the situation with currencies persists until the end of the year, it will clearly have an effect on our H2 performances. Back to the COVID impact, large parts of the economy were put in pause, so to say that they were not destroyed. The availability of credit, if anything, has increased. Some of our customers might still be there wondering about whether this is the right time to resume activity or not, but they haven't disappeared. And even their reference markets have not disappeared. In other words, this is not the year 02/2009. So not only Interpol, but I would say the entire or most of the manufacturing industry has the potential and the resources to sustain a full recovery at some point in the not so remote future. And the example of China shows that the recovery doesn't need to wait for the availability of a vaccine that hopefully will put an end to this entire story. On top of this encouraging perspective, there's m and a where scouting negotiations and perspectives might have been disrupted in the very short term by the travel limitations, but whose strategic value is certainly not affected by the pandemic. As we already commented in the past, it's even possible that uncertainty works in our favor in terms of willingness to sell. With this, I think we have reached the end of my presentation, and I would like to thank you for listening so far. The line can now go to the operator for the beginning of the Q and A session. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Matteo Bonizzoni with Kepler. Please go ahead. Yes, good afternoon. We have three questions. The first one is on the margin trend, particularly in hydraulic. In the second quarter, we have seen a better margin versus the first one, so 20.5% versus 19.6%, so 90 basis points better despite the fact that, as you highlighted, in your presentation, the organic decline in July was more than double compared to Q1, so minus 32% versus 19%. So can you a little bit more elaborate on these remarkable performance in relation to mix cost control? And do you believe that overall EBITDA margin in hydraulic in the region of 20% could be sustainable also for the second half of this year? This is the first question. Related to the first question, and this is the second one. Can you quantify the savings from the cash in Tegrezzioni in the second quarter in million euro? And how much could it be for the third quarter, I guess, much lower? And the final question, I was looking at the consensus estimates on Bloomberg just now. For the full year is 1,310,000,000.00 revenues with 272,000,000 of EBITDA. I guess that even also the for solution revenues could be, I would not say challenging, but probably more challenging than the EBITDA, that $272,000,000 given the performance on the margin there, which we had in the first half looks achievable. So can you a little bit comment about your expectation compared to consensus? Thanks. Okay. Thank you. I think we can answer the first two questions together. Savings from Passenger Pillar Filipino, the second quarter had Casa Integra Ciones in Italy and any comparable, let's say, wage held to in other jurisdictions amounted to 2.3 percent in the second quarter, which means that our 22% would have been close to 20% even without that help. As to the third quarter, I'm not aware of the final requirements to have more access to have still to to maintain the right to access the extraordinary extended customer integration. Last time I checked, it was a threshold based on the decrease in sales during the first half of the year. And I would say that a good part of our Italian subsidiaries still would qualify for that, mainly all those in Hydraulics basically without a big exception of one company in the cylinder business. Of course, the point is that we hope that there will be less and less necessity of cost containment. So one thing is the possibility, the other thing is the necessity. I'm afraid certainly not me, but I'm afraid no one still here has a number to answer your question about expectations for Q3 because it will heavily depend on the business. But I think it's fair to say that we would still have access to enter place in good part for our Italian Italian business. Of the evolution of the margins from Q1 to Q2, there's a point that we we have always discussed how our cost structure is not cast in stone. So it's it's subject to change evolution and flexibility along the time. Now the the first answer that comes to my mind is that the difference between q one and q two is that in q two, we have three more months to act. And, so what you are seeing is actually the results of the actions that we took, while whereas in the first quarter, we were clearly caught by surprise. There was nothing we could do to prepare to for what was about to come. So yes, in terms of the absence of any one offs or any strange any strange event, we have already cleared the the consideration about customer figure of Peony. I don't think there is any other element that would suggest otherwise. And then, of course, anyone at this table is free to interrupt me if if they have anything to to add. But apart from that, I think that the 20% would be sustainable. Specifically, your question was about hydraulics. And as I mentioned, most companies in hydraulics would still qualify for custom integrated cooling Ethan. The third question, the the top one, I I would say I agree with all the considerations that you made about consensus, about the availability of that, about the fact that perhaps the consensus on sales looks more looks more challenging than consensus on EBITDA. I'm also afraid that that we share the same visibility on that, though, because it will clearly depend not the not even on the pandemic, but on the psychological effect of the pandemic and on the economic effect of the pandemic. Now I still think that it is fair to say that it's also compliant with what the the minister of of finance said in interviews yesterday, the the work is behind us. And, so I'm not overly pessimistic. Of course, we must keep an eye on on currency exchange because it can take away a few points or even more than a few points of performance. So clearly that that would be beyond any any control by any company. But I would, yes, I would confirm what you just what you just said. I don't I feel I don't have anything to add. Thank you. Thank you. The next question is from Domenico Dulotov with Equita. Please go ahead. Good afternoon. First, first question, I would like to come back to your guidance. So I'm not sure I I fully understand the trend that that you are seeing in terms of orders. Because from the press release, I understood that you are still running below last year level, so not yet normalized in terms of sales, but you are still that you are starting to see some trending order intake that is suggesting that the starting normalization is underway. So could you give us some more color and maybe also comment on if the recovery is broad based or is linked to some geographies, to some end markets and some divisions more than others? So this is the first question. Okay. Two things are not incompatible because clearly, a pickup in order intake would be preliminary to normalization of of things in the in the following month. When I say normalization, of course, I'm talking about the new normal. So a normalization, a normality that could make us draw a line and assess what the impact of COVID-nineteen was and start from there. As of today, we are still below the last year's number. We are very, very close, substantially at the same level of last year, but considering the addition of the of the acquired companies. So clearly, this is not an analyst idea of back to normal. In terms of normality, we probably expect a strong plus sign. But of course, also, reconnecting to the previous question, we don't need a plus sign, an organic plus sign in order to make it to the guidance. Otherwise, I wouldn't feel entitled to to consider that a possibility. So in in terms of the the development, the order intake had its its minimum in in April, of course, and it went increasing month after month. Be honest, August is not a normal month. So it's order intake in August was not stronger than than July. That would be awkward. But the book to bill ratio did go up even in August. So we are not worried about erosion of portfolios, let's say, let's put it this way. In terms of distribution, there is clearly a very strong prevalence of the water jetting sector, and this is not surprising considering what we have said about the structure of customers in the typical structure of customers in both sectors. And geographically speaking, of course, the best performance still comes from the Far East to the Pacific area. The good result of China seem to to be going on. So anyone that was worried that the pickup after COVID in China could be a flash We'd have to think twice because it appears to be a structural recovery trend. I'm afraid there's not a lot more than I can add about about this, but, again, order intake is the the first telltale sign of good things to come. So so you you have compared to The US, no big differences. I saw the sales number were not so different. Are you seeing any difference in the recall in Europe compared to The US? No. Not really. Not really. My impression, remembering what happened four years ago is that, The US might be in for a bit of stop and go connected to the elections. This has nothing to do with who's going to win the elections. This is quite neutral in this case. But, you know, some decisions or investment decisions might be postponed, just waiting for for clarity. And so this is something that we have typically seen in every election year in the state. On the other hand, it is also possible that the contraction of the market has seen so far would overshadow any election stop and go. But so far, we don't see any major difference in trend between the Europe and North America. Okay. Second question is on the profitability. I'm trying to understand you were mentioning clearly the labor schemes for the social schemes support on profitability. Can you comment on any other significant, say, temporary savings that was, say, supporting Q2 and will be over during the second half? Well, I can't think of anything with a timer on it that would be automatically over in the second half because every action that we take, every step that we take is will last as long as necessary until we see the signs of a recovery. So clearly, there are the usually almost automatic ones. Term contracts are not renewed after expiration. And as we mentioned in the remarks, the outsourcing over time and extra shifts are reduced. They're not down to zero, by the way. So there's still, I hope we don't need to to leverage on that, but there would still be some some meat on the bone. And that can stay at this level as long as necessary. It's not something that we are forced to to give up at some some point. Again, the social support is the only thing that doesn't really depend on us, but I don't see any sign of governments willing to leave to that before the economy That means that we're showing the signs of a of a pickup. So I wouldn't be overly worried by that. But there's really nothing I I can think of now. Maybe probably a goal managers, actual companies, unlike me, have something to add. No. The main issue is I agree totally with Luca. What is also important to say on this respect is that there is nothing exceptional or nothing extraordinary in these results because the improvement from Q1 and Q2, in particular in the hydraulics, is widespread all around the companies. And one particular aspect that I would like to mention is the very, very good performance of the newly acquired companies in the gearbox sector, then the regulatory and the transtechnology. Then, of course, in this period of significant uncertainties may not be the main focus or the main attention, but it's important for you to understand and to note that we are continuously improving the companies and in particular the companies that we have just recently acquired. And this is absolutely true for Transtech, no energy regulatory that, of course, didn't need significant restructuring, but just, some improvement or some strategic decision that has already been taken in terms of international organization or some subsidiary abroad. And the first results are really, really encouraging in this respect. And this is the only factor that I would like to note in this particular environment. Yes. Thank you. Thank you, Fabio. Actually, I have to confirm that the contribution from the previous extension is actually above average, which is not very obvious if you think of the numbers that were announced in the press releases when the companies were acquired, but they are already above our the rest of our companies in in terms of EBITDA margin. So you are referring initially, you are referring in to the top line that was also performing at least in line with the group in terms of organic performance. My initial remarks have to do with the top line, which is, let's say, in line or better than the group. And possibly, as a consequence of this, but mostly as a consequence of the simple adjustments that Fabio was mentioning, the EBITDA margin of those companies is already visibly above the one they had upon acquisition. Oh, the operation something this year in order to improve the margin. Okay, thank I don't take any credit for that, but I will definitely pass that on. The next question is from Alessandro Tostrev with Mediobanca. Please go ahead. Yes. Good afternoon, everybody. I have three questions for me. The first one, if you can come back to, let's say, the situation you explained before on the performance by by area. And if you can focus on media, I understood clearly the the the full impact of the pandemic here. Can you give us an idea if you have in place any contingency plans here if the company has been experiencing any, let's say, disruption in terms of operation? So if basically there is a plan B moving some production capacity given the situation. The second question is on the CapEx. Mentioned before that for sure on the spending side, the CapEx has been a bit delayed. So if you can give us an idea that the CapEx spend in the first half would be, for instance, doubled in the second part of the year. And the last point is on the free cash flow side. I understood that we are currently now in September considering, let's say, the performance on the working capital and CapEx side. Can you give us any idea of how is sustainable this, let's say, record free cash flow you got in the second quarter and of course giving any idea or guidance on the, let's say, on the indication, okay, on the net debt side for the full year? Thanks. Okay. I will start addressing all your questions, and then anyone is welcome to pick up on me. The performance by area and specifically India, there is it's no secret that India had one of the most severe outbreak of COVID-nineteen and one of the most, I would say, inefficient measures to contain that. Lockdown measures were either not very well respected or, not achievable because of the specific situation of the way, of of the way in the meeting, is organized and so on. The good point here is that, as of today, our, let's say, constraint for production in India are not there anymore. So as of today, of course, I cannot promise that it will go on forever. But as of today, we do not have any practical limitation, any closed plans or any, let's say, fully suspended activity. Clearly, it will take a while before this has a visible impact on the demand side. But as far as we are concerned, we are not the constraining factor anymore. Our production capacity is not a constraining factor. So for now, we don't see the need for any contingency plan. We did have some very minor aspects. For example, we manufacture in India the some components for Enochsta products that are assembled in Spain. And of course, we made plans for manufacturing those components elsewhere. As far as I know, we didn't have to implement that because the situation improved in time to keep things as they are. Another example would be Balboil. Balboil shifted some supplies for Korea from India to Italy. So they were sourced in Italy instead of being sourced in India temporarily. But once again, this is not should not be regarded as an exceptional measure because that supply has already gone back and forth between Italy and India based on workload balancing of our production site. So I I don't think that, we ever needed, or that we are ever gonna need any major contingency plan for India. Remember that India serves Indian customers. So if, if India shuts down, I would we don't need production there, really, you know. The production that we need there is very, very limited, basically, to the two two things that I I mentioned. Sandeep, can you say anything about CapEx? CapEx, the first half, we have total CapEx of about €28,500,000 Then we think about the full year, I believe that something around €60,000,000 or slightly below €60,000,000 is something that can be reasonable. And the third question was about the free cash flow and, in particular, the sustainability of this very high level of the free cash flow. I would say, Alessandro, two things. The first step is that, of course, this very positive and very high number is strongly related to the exceptional circumstances, and nobody is expecting or betting that this situation will last forever, and then we cannot think about this level of free cash flow conversion if we think about a normalized situation or a five year period. What is also important to say, I believe, is that the positive effect of the negative performance in terms of organic growth and then the reduction in working capital that we have seen in the first half of the year is not ended because in spirit of what concern the inventories level, it will take time to adapt, normalize the level of the inventories in the new situation. And then on a on a material point of view, I expect that we will have a positive contribution from reduction of working capital that are in particular related to the reduction of inventories in the next few months. But of course, it is very expected that sooner or later, will have a rebound of this very tough situation, and then the working capital contribution may not be expected to be lower anymore. Okay. The next question is from Michele Baden with Exane BNP Paribas. Please go ahead. Hi, good afternoon to everybody. Just a question for more accurately about the M and A strategy and what you see on the market in terms of within the next by the sellers and also pricing and also timetables. If, let's say, you think it's an argument more that probably before early twenty twenty one or, let's say, we could expect something already in 2020? Thank you. Yes. The main the main subject of group has not changed for this situation, and this is, I believe, the most important statement or the most important point that I can underline. We have seen that we have closed two very small acquisition in the month of July despite all the difficulties, also technical and logistics logistical difficulties. It's very important to underline that we always have a lot of ROCE on our table, and we are continuously negotiating, scouting, and moving forward in approaching companies that may fit well in our group and in our M and A strategy. Then on our side, the strategy has not changed. The commitment is total. And also considering the very high and very strong cash flow generation, we are more than willing to deploy this cash flow generation in M and A in a consistent way with what we have done in the past. Regarding the market, regarding the willingness of the seller or the shareholders to sell, I believe that we may say that what happened is encouraging more entrepreneurs to decide to close a transaction or to, in particular, to enter in a bigger group. If someone wanted to sell 100% and maximize the proceeds, of course, this is not the best year because of the results of 2020 that are affected by the pandemic and by the COVID situation. If you are looking for an industrial partnership and you are looking on a long term partnership in which probably we sell the majority on day one, and you stay at the end of your company in maintaining the minority shareholders in the company as well, Probably probably, this is the right time to decide to finalize a transaction. And then the possibility for us, considering also the kind of transaction and the kind of acquisition that we are usually looking for, probably this situation will end up with an increased number of opportunities on a midterm perspective. What is difficult now is apart the logistical issue, what is difficult now is to define the right price for companies that are being significantly affected by the pandemic and that in 2020, we'll have results that are lower than the one in 02/2019. And then, finding a compromise and finding an agreement on the numbers, also considering some adjustment that may can be made adding or discussing our situation or our now solution based on 2021 may take longer time. And then what I would say is that I would not exclude any other transaction, any other acquisition during the year, in the year 2020, considering the high number of dossier or discussion that we have opened and we are actively pursuing. But on general terms, I would say that finalizing a transaction will require more time because of the discussion on prices. Regarding the willingness, I would say that the willingness is, in general, increased in the market. And in particular, we've increased in entrepreneur or in companies that are looking for industrial partnership and not financial partnership. This is what we are seeing today. Thank you very much. The next question is from Rafael Muro with Ameren. Please go ahead. Yes. Hi. Sorry, my question was escalated. Thank you. Okay. Thank you. And there are no more questions registered at this time. Okay. So thanks, everybody, for attending. Our next appointment will be November 10 for the Q3 results. I hope to see you all on the line. And of course, we are available until then for Investor Relations activity. Hopefully, we'll also resume roadshows at some point. So I hope to see some of you in person as soon as possible. Thanks on behalf of everyone here. Thanks for attending, and I wish you a nice rest of the day.