Good afternoon. This is the call's conference operator. Welcome, and thank you for joining the Interpump Second Quarter and First Half 2020 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 Interpump. Please go ahead, sir.
Thank you. Welcome, everybody. Good afternoon, Europe. Good morning to those from America, thank you for calling in. I'm here to comment our H1 and Q2 results and answer your questions together with a board member, Fabio Marasi, who's also CEO of GS-Hydro, and with the precious help of our CFO, Carlo Banci. I don't need to remind you that this is the second presentation since the beginning of the COVID-19 pandemic, and we are very proud of the numbers disclosed today, as they are the successful result of a strong, concerted effort to protect our business. First of all, our subsidiaries grabbed 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 model, such as vertical integration and the sizable stocks of raw materials, allowed us to minimize disruption related to the supply chain. 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, -9.1% at almost EUR 640 million. This is an encouraging result with the worst of the COVID-19 related disruption hopefully behind us.
At unchanged perimeters and currency exchange, the organic decrease in sales was -18.7% in the period. Perimeter expansion gave a +9.7% contribution, while FX was negligible. Going by division, hydraulics registered a -9.4% in sales, of which -23.6% organic. Water jetting registered a much better -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 felt the strongest impact of the pandemic on sales. Let's see the numbers for the second quarter. Total sales amounted to EUR 295.6 million, down 17.8% year-over-year and 25.9% organically. The monthly trend was somewhat encouraging with both absolute sales and year-over-year comparison improving month-over-month in May and June. Going by division, water jet improved more resilient, with a decrease limited to -14.6%, almost unaffected by changes in perimeters.
Hydraulics registered an organic drop of -31.6%, which became -19.4% thanks to the contribution of recent acquisitions, Reggiana Riduttori and Transtecno. Looking as usual at organic sales by geography, as a note, the -25.9% we mentioned for the quarter becomes a -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 a -35%. North America was down -26%, a bit better without the currency effect. Asia Pacific was down -6%, of which, and this is going to be interesting, Australia, +3% and China, +8%. The rest of the world registered a -28%. Latin America more or less followed the same pattern as North America, a bit better with a -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-19 had 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 -43% in earthmoving, -38% in lifting, -36% in construction, -33% in agriculture, -30% in trucks. As usual, there are two different patterns here, with sales to truck manufacturers down 50%, and other categories like trash collection vehicles, sewer cleaning, and other utility vehicles, which are closer to -10%. Other sectors which feature smaller or more dynamic customers, possibly with closer ties to those essential activities that were not suspended anywhere under the lockdown, show a decrease in the teens. Industry, -19%, contractors, -18%, food, cosmetics, and pharma, -16%. Cleaning was substantially flat at -2%. The award for the best trending application sector goes once again to the cluster oil and gas, marine, and offshore applications, which showed altogether a healthy +7% in the quarter, particularly thanks to sales by Hammelmann 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 Interpump 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, overtime, temporary staff, or second-choice suppliers. This held true even in the third consecutive quarter of negative top-line growth. 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 lightly.
This corresponds to an EBITDA of EUR 64.9 million for the quarter, bringing the year-to-date figure to over EUR 139 million, or 21.8% of sales. Just 130 basis points behind the very good first half of 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 -11% to -26% year-on-year, the EBITDA margin improved slightly. Net income for the quarter came to EUR 30.2 million, bringing the year-to-date total to EUR 63.5 million, 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 50.8 million, down EUR 21 million compared to second quarter of 2019. CapEx in the quarter amounted to EUR 13 million, a few million 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-19 related physical constraints. As a consequence of negative organic growth, but also, I have to say, as a result of our containment efforts, I am very pleased to highlight that sales net working capital freed up EUR 18 million. As a comparison, last year it absorbed EUR 17 million instead, and that was already a nice result for a Q2.
Yes, Interpump set yet another record for quarterly free cash flow generation at EUR 59.3 million, bringing the total at the half year point to nearly EUR 100 million, EUR 98.3 to be precise. No one likes a year of strong negative growth, of course, but at least the effect on cash generation through the reduction of net working capital is once again confirmed for Interpump. There were even more circumstances benefiting our net financial position. The expense for acquisitions in the quarter was negligible with EUR 1.4 million. The share buyback was moderate, and its cost of EUR 4.3 million in the quarter was more than offset by the income resulting from the exercise of stock options, EUR 13.2 million. Despite the dividend payment, EUR 27.9 million, net debt went down by more than EUR 40 million during the quarter, settling at EUR 344.2 million on June 30th.
At the same time, the additional commitments for purchase of subsidiaries were worth EUR 62.4 million. I trust that you share our satisfaction about how Interpump 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 above 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 payment. Well, this completes the picture of the first half of the year. For the second half, clearly, expectations about Interpump's performance cannot be completely independent from what happens with the pandemics. 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 healthcare 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 notice something you already know, the very strong negative impact of currency exchange.
We should keep an eye on the situation, because if this 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 on pause, so to say, but 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. Even their reference markets have not disappeared. In other words, this is not the year 2009. Not only Interpump, 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.
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 is M&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&A session.
Excuse me. The first question is from Matteo Bonizzoni with Kepler Cheuvreux. 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 hydraulic was more than double compared to Q1, so -32% versus -15%. Can you elaborate a little bit more on this remarkable performance in relation to mix cost control? Do you believe that overall, maybe the margin in hydraulic in the region of 20% could be sustainable also for the second half of the year? This is the first question. Related to the first question, this is the second one, can you quantify the savings from the Cassa Integrazione in the second quarter in million EUR?
And how much could it be for the third quarter? I guess much lower. The final question, I was looking at the consensus estimates on Bloomberg just now. For the full year is EUR 1.31 billion revenues with EUR 272 million of EBITDA. I guess that even also the Forex evolution revenues could be, I would not say challenging, but probably more challenging than the EBITDA, that EUR 272 million, given the performance on the margin, which we will have in the first half looks achievable. So can you comment a little bit about your expectation compared to consensus? Thanks.
Okay. Thank you. I think we can answer the first two questions together. Savings from Cassa Integrazione for the second quarter had Cassa Integrazione in Italy and any comparable, let's say, wage help too in other jurisdictions, amounted to 2.3% 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 am not aware of the final requirements to have more access to help still to maintain the right to access the extraordinary extended Cassa Integrazione. Last time I checked, it was a threshold based on the decrease in sales during the first half of the year. I would say that a good part of our Italian subsidiaries still would qualify for that. Mainly all those in hydraulics, basically, with the 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 Cassa Integrazione. One thing is the possibility, the other thing is the necessity. Certainly not me, but I would say no one here has a number to answer your question about expectations for Q3, because it will heavily depend on the business. I think it's fair to say that we would still have access to aid, at least, in good part for our Italian business. Speaking of the evolution of the margins from Q1 to Q2, there's a point. We have always discussed how our cost structure is not cast in stone. It's subject to change, evolution, and flexibility along the time. Now, the first answer that comes to my mind is that the difference between Q1 and Q2 is that in Q2 we have three more months to act.
What you are seeing is actually the results of the actions that we took, whereas in the first quarter, we were clearly caught by surprise. There was nothing we could do to prepare for what was about to come. Yes, in terms of the absence of any one-off or any strange event, we have already cleared the consideration about Cassa Integrazione. I don't think there is any other element that would suggest otherwise. Anyone at this table is free to interrupt me if they have anything to add. I think that the 20% will be sustainable. Specifically, your question was about hydraulics, and as I mentioned, most companies in hydraulics would still qualify for Cassa Integrazione in Italy. The third question, the tough one.
I agree with all the considerations that you made about consensus, about the durability of that, about the fact that perhaps the consensus on sales looks more challenging than consensus on EBITDA. I'm also afraid that we share the same visibility on that, though, because it will clearly depend, 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, and it's also compliant with what the Minister of Finance said in interviews yesterday, the worst is behind us. I'm not overly pessimistic. Of course, we must keep an eye on currency exchange, because it can take away a few points, or even more than a few points of performance. Clearly that would be beyond any control by the company.
Yes, I would confirm what you just said. I feel I don't have anything to add.
Thank you.
Thank you.
The next question is from Domenico Ghilotti with Equita SIM. Please go ahead.
Good afternoon. First question, I would like to come back to your guidance. I am not sure I fully understand the trend that you are seeing in terms of orders, because from the press release, I understood that you are still running below last year level, not yet normalized in terms of sales, but you are starting to see some trending ordering data to suggest that some normalization is underway. 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 markets, and some divisions more than others? This is the first question.
Okay. The two things are not incomparable, because clearly a pickup in order intake would be preliminary to a normalization of sales in the following months. When I say normalization, of course, I'm talking about the new normal. A normality that could make us draw a line and assess what the impact of COVID-19 was and start from there. As of today, we are still below the last year's number. We are very close, substantially at the same level of last year, but considering the addition of the acquired companies. Clearly, this is not an analyst idea of back to normal. In terms of normality, you would probably expect a strong plus sign. Of course, also connecting to the previous question, we don't need an organic plus sign in order to make it to the guidance, otherwise I wouldn't feel entitled to consider that a possibility.
In terms of the development, the order intake had its minimum in April, of course, and it went increasing month after month. To be honest, August is not a normal month, so order intake in August was not stronger than July. That would be awkward. The book-to-bill ratio did go up even in August. We are not worried about erosion of portfolios, 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 typical structure of customers in both sectors. Geographically speaking, of course, the best performance still comes from the Far East, the Pacific area. The good result of China seems to be going on.
Anyone that was worried that the pickup after COVID in China could be a flash would have to think twice, because it appears to be a structural recovery trend. I'm afraid there is not a lot more that I can add about this. Again, order intake is the first telltale sign of good things to come. Clear up here.
For Europe compared to the U.S., no big differences. I saw the sales numbers were not so different. Are you seeing any difference in the recovery in Europe compared to the U.S.?
No, not really. My impression, remembering what happened four years ago, is that the U.S. 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. Some investment decisions might be postponed, waiting for clarity and so on. This is something that we have typically seen in every election year in the States. On the other hand, it is also possible that the contraction of the market seen so far would overshadow any election stop and go. So far, we don't see any major difference in trend between Europe and North America.
Second question is on the profitability. I'm trying to listen. You were mentioning clearly the labor schemes, so the social schemes support on the profitability. Can you comment on any other significant temporal saving that was 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, will last as long as necessary until we see the signs of a recovery. Clearly, there are the usual, the almost automatic ones. Term contracts are not renewed after expiration. As we mentioned in the remarks, the outsourcing overtime and extra shifts are reduced. They're not down to zero, by the way. I hope we don't need to leverage on that, but there would still be some meat on the bone. That can stay at this level as long as necessary. It's not something that we are forced to give up at some point.
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 lift that before the economy is at least showing the signs of a pickup. I wouldn't be overly worried by that. There is really nothing I can think of. Maybe Fabio, who manages actual companies unlike me, can add something to add.
No, Domenico, 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 well spread all around the companies. 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 Reggiana Riduttori and Transtecno. Of course, in this period of significant uncertainties. May not be the main focus or the main attention, but it's important for easy understanding to note that we are continuously improving the companies, and in particular, the companies that we have just recently acquired.
This is absolutely true for Transtecno and Reggiana Riduttori, 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 of some subsidiary abroad. The first results are really, really encouraging in this respect. This is the only factor that I would like to note in this particular environment.
Yeah. Thank you, Fabio. Actually, I have to confirm that the contribution from the perimeter 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 the rest of our companies in terms of EBITDA margin.
Initially, you are referring to the top line that was also performing at least in line with the group in terms of organic performance.
My initial remark had to do with the top line, which is, let's say, in line or better than the group. 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, congratulations. In this year, you are able to improve the margin. Okay, thank you.
You know I don't take any credit for that, but I will definitely pass that on.
The next question is from Alessandro Tortora with Mediobanca. Please go ahead.
Yes. Good afternoon, everybody. I have three questions for me. If you can come back to, let's say, the situation you explained before on the performance by area, and if you can start with India. I understood clearly the full impact of the pandemic here. Can you give us an idea if you have in place any contingency plan 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? Second question is on the CapEx. You mentioned before that, for sure on the spending side, the CapEx has been a bit, let's say, delayed. If you can give us an idea that the CapEx spent in the first half could be, for instance, doubled in the second part of the year.
The last point is on the free cash flow side. I understood that we are clearly 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 therefore giving an idea or guidance on the, let's say, on 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, it's no secret that India had one of the most severe outbreaks of COVID-19 and one of the most, I would say, inefficient measures to contain that. Lockdowns measures were either not very well respected or not achievable because of the specific situation, of the way India living is organized, and so on. The good point here is that as of today, our, let's say, constraints for production in India are not there anymore. As of today, of course, I cannot promise you that it will go on forever, but as of today, we do not have any practical limitation, any closed plants, or any, let's say, fully suspended activity.
Clearly, it will take a while before this has a visible impact on the demand side. As far as we are concerned, we are not the constraining factor anymore. Our production capacity is not a constraining factor. For now, we don't see the need for any contingency plan. We did have some on very minor aspects. For example, we manufacture in India some components for INOXPA products that are assembled in Spain. 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 Walvoil. Walvoil shifted some supplies for Korea from India to Italy. They were sourced in Italy instead of being sourced in India temporarily.
Once again, this should not be regarded as an exceptional measure, because that supply had already gone back and forth between Italy and India based on workload balancing of our production site. I don't think that we ever needed, or that we are ever going to need any major contingency plan for India. Remember that India serves Indian customers, so if India shuts down, we don't need production there really. The production that we need there is very limited. Basically, the two things that I mentioned. Fabio, can you say anything about CapEx?
CapEx? In the first half, we had total CapEx of about EUR 28.5 million. If we think about the full year, I believe that something around EUR 60 million or slightly below EUR 60 million is something that can be comfortable. 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 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. 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 particular for what concern the inventories level, it will take time to adapt, normalize the level of the inventories to the new situation. From a managerial point of view, I expect that we will have further positive contribution from a reduction of working capital that are in particular related to the reduction of inventories in the next few months. Of course, everybody expects that sooner or later, we will have a rebound of this very tough situation, and then the working capital contribution may not be expected at this level anymore.
Okay.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Michele Baldelli with BNP Paribas Exane. Please go ahead.
Hi. Good afternoon to everybody. Just a question for probably more curiosity about the M&A strategy and what you see on the market in terms of willingness by the sellers and also pricing and also timetables. If, let's say, you think it's an argument more that probably is for early 2021, or let's say we could expect something already in 2020? Thank you.
Yes. The M&A strategy of the group has not changed for this situation. This is, I believe, the most important statement or the most important point that I can underline. You have seen that we have closed two very small acquisitions in the month of July, despite all the difficulties, also technical and logistical difficulties. It's very important to underline that we always have a lot of dossiers 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&A strategy. On our side, the strategy has not changed. The commitment is total. Also considering the very high and very strong free cash flow generation, we are more than willing to deploy this cash flow generation in M&A in a consistent way with what we have done in the past.
Regarding the market and 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 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 helm of your company, maintaining a minority shareholding in the company as well, probably, this is the right time to decide to finalize a transaction.
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 will have results that are significantly lower than the one in 2019. Finding a compromise and finding an agreement on the numbers, also considering some adjustment that can be made, adding or discussing earn-out situation or earn out solution based on 2021 may take longer time.
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 dossiers or discussion that we have open and we are actively pursuing. 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 will be 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 Raphaël Moreau with Amiral Gestion. Please go ahead.
Yeah. Hi, sorry, my question has been answered. Thank you.
Okay. Thank you.
Thank you. No other questions registered at this time.
Okay, thanks everybody for attending. Our next appointment will be November the 10th for the Q3 results. I hope to see you all on the line. Of course, we are available until then for investor relations activity. Hopefully, we will also resume roadshows at some point. 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.