Interpump Group SpA
MIL:IP
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Interpump Group SpA
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Interpump First Quarter 2019 Results Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Paolo Marinsek, Deputy Chairman of the Board. Please go ahead, sir.
Thank you. Thank you, and good afternoon, everybody, and thank you for calling. So it's time to speak about Q1 2019. The first thing that I would like to tell you is that as anticipated, we had one more quarter of growing sales. Organic growth shifted gears to a single-digit after 6 consecutive quarters of double-digit, but organic growth is definitely still there. This is, you can imagine, the trend we expected in our guidance, and this is the trend we expected to see in the rest of the year.
So organic growth was positive once again at 6.5% on top of a very challenging comparison as you remember. But we had further help from the currency exchange and from the perimeter expansion of the past 12 months that brought our reported increase in sales to a nice round 10%. So the final reported sales figure for the quarter was EUR 343.6 million.
We have seen 2 different trends in our sectors. Organic sales in Water-Jetting were almost at the same high level of last year with only minus 0.3%. Then in that sector, we had a 2.6% help from the currency exchange and the fact that 2.5% from the addition of Ricci and FLUINOX in Spain. So altogether, this brings the quarter's figure to EUR 110.7 million that represents a growth of 4.8%.
Sales in Hydraulics are stronger. In Hydraulics, they posted an organic growth of 9.9%. So here, we are really very, very close to double-digit. Then we have currency exchange hitting just 1.7% and 1 month of [indiscernible] in 1.1%. So reported sales in Hydraulics were EUR 233 million, that represents a growth of 12.7%. So globally, I would say our sales are really very satisfactory.
But let's look at them in more details. Without considering acquisitions, sales are up 9.5% in Italy and 9.2% in the rest of Europe. In the U.S., sales are catching breath after the strong double-digit organic growth of last year. They are up nearly 9% in Europe, but this corresponds almost exactly to the appreciation of the U.S. dollar compared to 1 year ago. But let me say, there's another point that I consider important in the U.S. market. This breath that the market took is because there is really shortage of manpower in the U.S. The American economy is strong, it's performing very well, unemployment is very low. And so in this moment, the positive that's a softer, shorter [indiscernible] and this is because there is a shortage of manpower. So generally speaking, if you want, there is, for me, a good indication for a strong market.
Latin America. Latin America is flattish in this quarter with just 3%. And particularly Brazil, as you know, is always up and down, in this moment, is on a negative swing at minus 11%.
China. China, we believe that sales in China during the quarter, which were also then overall flattish, do not give a fair picture of the status of our business there. We had there a stronger slowdown in Water-Jetting, [ 18% ] but this, because of a change in order timing by large Pratissoli customers. So Pratissoli customers, you understand, is in a niche market, sewer pumps.
But on the other hand, we have a very reassuring plus 10.8% in Hydraulic, which, there is no doubt, is a much better representation of the country trend because hydraulic really is something that is a global market and not a niche market.
Without being surprised, India is performing very well. The strongest growth once again has been registered in India, plus 25.6% for the quarter, and we are reinforcing our leadership on that market. So those are the geographical distribution of sales, and while sales by country are showing a diversity of trend as you have seen, when we look at sales in our major application sectors, they are all with a positive sign. Construction is up [ 30%; ] industry, the same, [ up 30% ]. Agriculture [indiscernible] is moving [ 6% ], lifting [ 15%, ] tractor [ plus 12% ], of which tractor manufacturer OEM [ plus 7% ]. So this is what I think I can tell you regarding our sales.
If we move on to profitability, let's look first at the official numbers, which include the effect of the IFRS 16 accounting principle. And so that with this principle, EBITDA amounted to EUR 78.6 million or 22.9% on sales. Margins to amount to be 25.8% for Water-Jetting and 21.4% for Hydraulics. Of course, to help comparison, let's consider IFRS 16 was not there. Water-Jetting, in this situation, could have generated EUR 27.6 million of EBITDA with a margin on sales of 24.8%. The decrease from the 26% registered 1 year ago really does not reflect any structural change but is simply a consequence of the sales trend and product mix during the quarter, along with the unavoidable cost of adjusting production capacity that there is something that, as you know, we are doing also in this moment.
In Hydraulics, we would have registered EUR 47.4 million EBITDA with a margin of -- on sales of 20.3%, unchanged compared to 1 year ago despite a number of ongoing activities related to the implementation of the CapEx plan. And consider that it would have been even 10 basis points higher without the acquisition of Hydra Dyne Tech but, of course, we are very -- we are extremely happy about this acquisition. So very welcome. But anyway, the margin is the same or could be considered a little better. These altogether corresponds to a consolidated EBITDA of EUR 75 million or 21.8% of sales.
For onetime, I would like to comment also on EBIT margin. EBIT margin feels not only the short-term compression from the ongoing action but in a trend of solid growth like the current one, this is compensated for by the lower weight of amortization and depreciation on sales. So perhaps, it is a better indicator of our profitability. And so please note that our EBIT margin for this quarter was almost unchanged since last year at 18.2%.
Net income. Net income for the quarter came to EUR 45.3 million, and this net income does not include any one-off. This represents an increase of 16.5% compared to a normalized figure for last year. So you'll remember normalized means net of the negative goodwill over GS-Hydro. And in this situation, our tax rate for the quarter was 27.9%.
Let's also take a look at the evolution of our net financial position. Before discussing the changes in the quarter, note that it was adjusted by adding EUR 68.4 million at the beginning of the year. And this is to account for future leasing payments according to IFRS 16.
So during the quarter, we had a good increase in cash flow from operations at EUR 72.3 million versus EUR 64.7 million last year. But on the other hand, let me say that the lion's share was absorbed, or I prefer to say it was invested, in the net working capital, which absorbed the EUR 52.1 million on top of the seasonal decrease in debt to suppliers typical of this period of the year. There are several actions behind this growth of the net working capital. I didn't say there are several reasons, but the actions we took. The first one is that considering the significant amount of investment planned for the year, you remember that we expect some EUR 80 million in CapEx, and this includes the relocation, redesign of inter plant and so really important, very important activities. As a basic measure of prudence, we decided to front load our inventories to preferred efficiency.
Then there is a second point, and this is related to other number of [indiscernible] became an accessory in our working capital. And this is required to serve some high potential [ margin ] success shipyards where the value of products and the time-to-market are especially [ realigned ]. And last year, this was affected by some bottlenecks related to the supply of secondary components. And just to give you an example, if you were to consider that in this moment in the inventory, [indiscernible] something a 6 million order for an offshore oilfield and also our really interesting business for the future that we will have.
Third point is some opportunities, some occasions that we decided to catch. So we decided to buy raw materials at low prices, so significantly lower than today's market price. Just to give you an example, brass -- market brass -- market price of brass today is EUR 5.1, EUR 5.2 per kilo. In our stock, we have brass that's covered for the year at EUR 4.3 per kilo. So altogether, those are, let me say, the action that brings this number. But the increase of the working capital is a temporary phenomenon. It will be back to our normal level by the end of the year. And really, it really is -- already give us a positive sign in this direction.
Nothing new to tell you regarding CapEx. CapEx grew EUR 1 million comparison with last year from EUR 12.2 million to EUR 13.2 million. And this is why, putting all together, all those numbers together, our free cash flow for the quarter was reduced to EUR 2.7 million. But really, I hope it's clear to everyone, that is not a reason for you to worry about cash generation for 2019. I said for you because I am absolutely serene.
Then we have the acquisition of Hydra Dyne Tech. And a minor purchase of treasury shares, that bring our net financial position to EUR 381.6 million as of the end of March. And additionally, we had commitments for purchase of subsidiaries worth EUR 49.8 million. So these are the numbers and this, I think, is everything I have to tell you regarding the quarter. But of course, I want also to give you my feeling regarding the rest of the year.
I am very confident that our expectation, the ones we expressed in the guidance, will prove very realistic. Despite the very tough comparison, it is true that the growth we anticipated is definitely there. Our business in Italy and Europe is growing at rates that have no comparison with the macroeconomic plan. And we are optimistic also about the U.S. market as I told you before. As a reminder, we didn't suffer any impact from the introduction of tariffs. So it is fair to expect that our situation is not going to change if new ones are introduced.
Be careful that we are already targeted on some product on -- for example, we are currently targeted on pump assemblies, but not on other component. But also in this situation, we are not experiencing any pushback from customer impacts. Because you have to consider that we are anyway an American company so our competition is there in the U.S. So all of our competition is experiencing the same issues. So there is -- our customers have, let me say, no one else to go and to get the supplies. So the situation is for this reason, we increased our prices in U.S. and so there is no reason for concern for this point.
But on the other hand, the prospective of a larger and comprehensive infrastructure renewal plan is becoming more and more realistic as in this moment, both the Trump administration and the opposition have recognized it as a priority. And you know the plan would have a very positive effect on both our divisions because high-pressure pumps are used for the renewal of the reinforced concrete and the other components play really a major role in construction machinery.
It is true that we are seeing a slight decrease in the pace of order intake here and there, similarly to what other major companies in our industry have stressed, but this is absolutely not worrying us. You have to know that our portfolio is still higher than last year. And let me say, to be honest, to put things in context, last year, they were really too high compared to our production capacity. So in this moment, we are adjusting our capacity. So we are serving our customers probably this year, we will be able even to serve our customers better.
As I told you before, we are very happy about our latest acquisition, and I have to tell you that I expect more to come during the year. So what I have in this moment is a positive feeling for the rest of the year.
I do not think to have other points to tell you, so I'm ready, if there is any question, to answer to your questions. Please, operator?
[Operator Instructions] First question is from Matteo Bonizzoni from Kepler Cheuvreux.
I have 2 questions. The first one is on the organic growth on the top line. In Q1, we have seen the 6.5% organic growth thus far with the Hydraulics still solid, 9.9%, while Water-Jetting went into slightly negative territory, minus 0.3% because there has been a slowdown, it's true to say, against a difficult comparison. So what is happening here? And what do you expect for the next quarter in the 2 divisions? Particularly Water-Jetting, can we consider this minus 0.3% sort of anomaly? Or there are reason to believe that also in the next quarter it's going to be close to 0?
And the second question is on the margin. We have seen excluding this EUR 3.6 million impact, positive impact from IFRS 16, we have seen EUR 75 million of EBITDA with a 50 basis point dilution from 22.3 to 21.8. Also in this case, in Hydraulics, the margin was in any case down 10 basis points despite a very solid organic growth, and the Water-Jetting was down 130 basis points. Just a little bit of color on this dilution and going forward.
Regarding organic growth, as you said, very strong in Hydraulics and let me say flat in Water-Jetting. If I have to find the main reason, I think that the main reason in this moment is a big job, a big order, also the one I mentioned to you just to give an example, the offshore oilfield in [indiscernible] and this has been particularly in the U.S. But I have no concern regarding the trend. The trend will move positive, there is no doubt about that and will absolutely recover in the rest of the year at a very, very small, let me say, change in the trend.
Another point that I wanted to underline. You know always we have different product also in Water-Jetting. For example, there is no doubt that Pratissoli pump, they have, let me say, a better margin that -- and Interpump, so the small pump, the big bump has better margin. So if, for example, Pratissoli has a different timing in order in China, this is affecting a little bit but there is no doubt that the situation will be recovered.
Something that is similar, I would say, in margin. I would say in margin. First of all, you have to consider that I always said that 0.5 point more, 0.5 point less with the mix, the very big diversification we have in our product is not creating any concern because this is just a matter of different mix.
But another point is that we are doing a lot of activities to increase our production capacity. And there is no doubt that also this, let me say, represent the cost. So let me say this is even one reason why I told you something also about the EBIT. I put your expectation also on EBIT because you know it is a common idea that growth should have an immediate positive effect on EBITDA margin. And let me say this is true, but this is true for moderate regular growth because it allows for a more efficient allocation of indirect cost. But in different scenario, where you have strong -- even if you want sometimes, even unexpected growth in sale, this will always bring some temporary inefficiency, more outsourcing, extra shifts, higher shipping to compensate for production delays, many things. And of course, there is the cost and the disruption resulting from the adjustment of production capacity, what we call the relocation cost. So in the very beginning, this efficiency can be even more significant than the [ basket ]. But they are [indiscernible] temporary and they disappear when we have the chance to adjust to the new volume of business. That is precisely what we are doing now.
But what happens to EBIT in a situation like this? The effect on EBIT is compensated for by the decreased weight of amortization and depreciation on sales. So in other words, the difference between EBIT and EBITDA margin is reduced. And this is why you have seen that our EBIT margin is basically unchanged where, on the other hand, we have a change in our EBITDA. So I should say, so to sum up everything, there is no doubt that some unavoidable costs in this moment for relocation and all the actions we have been putting in and we are doing. And let me say some different mix here and there. So no concern.
The next question is from Domenico Ghilotti with Equita.
Two questions. The first is on GS-Hydro in particular. So I was expecting to see some support and contribution in Hydraulic margin coming from the fact that you have integrated this company that last year was dilutive. So if you can elaborate what has been offsetting this, and if you're running, say, with the same profitability or higher profitability than the last quarter.
And the second question is on the adjusted production. So you are talking about adjusting production. So just to be sure that I understand properly, are you referring to the need to increase the -- your capacity? Or are you adjusting the sales that you have seen the slowdown and so you are -- let's say, you're lowering the utilization rate of your current capacity?
No, Mr. Ghilotti, I answer immediately to the second question because no slowdown, adjusting production is adjusting capacity. It's adjusting capacity. You know we have not finished even the job that we started particularly last year, but even the year before -- we have the year before. We are doing important investment to increase our capacity. That includes, as you know, also new plants. And so a new plant means also to move into this new plant, so to stop the production here and to start the production there. So to do these things, you need to increase your inventory to be able to have material for the timing that you need to move the machinery. So it's a really important disruption, and I would say that I consider an industrial record, our ability in moving plants and increasing production capacity with, I would say, an insignificant effect on our margin. This I consider the most difficult part of our business, and I consider that we are doing that very successfully. But what we are doing in this moment, and you know that our sales in a couple of years grew dramatically, is to increase production accordingly. Let me say even our backlog is, as I tell you before, even too much if you want, right? We are in a very safe position because we have a long backlog, but we have also to pay attention not to penalize our customers and to serve them in the best way.
So we are not reconsidering anything because of slowdown because we are in the middle of an organic growth. But of course, we are in the middle of the model to increase our production capacity also with new plants.
And next, I move on GS-Hydro. GS-Hydro is giving us satisfaction. It's giving us satisfaction in many points. Let's start with the most simple one. We are, let me say, in a mid-single digit EBITDA. So we move from nothing, from 0, to a mid-single digit. So this is positive. Without including into this number the positive effect that we have in other industry, in growth of sales in other business like [ hose and ] fittings, in pushing the new business like the case of Hammelmann in China that took the responsibility of GS-Hydro.
So GS-Hydro is moving positive. Of course, GS-Hydro is not at the level of profitability we are used to seeing in Interpump, but the trend is a very positive one.
So just to sum up your previous answer, you're saying that 2019 is a year in which our margin development is less than optimal, so it's a bit affected as well as the working capital by this increase in the step-up in capacity?
Yes. But as I told you, even in the working capital, this is absolutely temporary in the sense that this, first of all, represents an upfront and opportunity. So 2 things, an upfront and an opportunity. You know that -- and the opportunity is something that we said we will start with our [ end ]. We did a good job buying a little bit more of raw materials. By the way, be careful that our biggest increase is in raw materials so it's not something that becomes obsolete. It's something that is like cash, of course, and we bought pretty well.
And your concern regarding the margin, even if we are speaking about small numbers, but there is no doubt that the biggest factor is in all the action we put in place to adjust our capacity to the new level of market where we are.
Next question is from Michele Baldelli with Exane.
I have a few questions. The first one is about the U.S. decline in the Water-Jetting division. In particular, I was calculating that probably in this quarter, the decline in U.S. was around double-digit. And my question relates more to, is it because of the oil and gas sector? Or what was the reason of this weakness in the Water-Jetting, the region U.S. or North America?
The second questions relate to the growth of the suppliers. Suppliers from the balance sheet grew by roughly 2%, 3%, while you grow much more. And given that the backlog is higher, your expectations are higher, I was wondering why it's not growing by a bit more. It could be because of a lower raw materials cost, but just to have some colors on it will be good.
And the third question, third one and last one, is looking to the details from the interim report. It seems that in the Water-Jetting division, despite an increase of the gross margin, there has been an investment in the commercial expenses and also SG&A. Is it something that we should look just temporarily? Or is it an investment because you see stronger growth in this Water-Jetting division?
I answered the first 2 question. The slowdown in the U.S. market in Water-Jetting, basically, I said that what you said is the answer to what is the reason why there is not a growth in Water-Jetting, the reason is in the U.S. And yes, there is something also related to offshore, but let me say it's something that I consider more a delay than a reduce. There is some bigger orders and so there is a longer timing, and so I consider that the issue will be timing in delivering. So we see there is no slowdown in some specific market. Shipyard and offshore is becoming a very interesting part of the business of Hammelmann. So the reason is more a delay than a reduced market.
Suppliers. Yes, it's true. If we see in days, probably we have something around 5, 6 days more in suppliers in payable. But this is almost typical of the respective seasonal; something that we -- more expensive than giving up a negative. So let's say this is pretty seasonal. And so that I think that also this will be recovered in -- during the quarter.
I have not understood the third question and not even my friend here. So I kindly ask you to respectfully repeat the third question, sorry, Mr. Baldelli.
Too many questions, I know. No, the last one was about -- I saw that the gross margin in the -- specifically in the Water-Jetting division improved. But EBITDA margin or EBIT margin declined. And this was due to the investments in costs basically on commercial expenses and SG&A because they grew stronger than the top line, reducing margins. So I was wondering, and this is just for Water-Jetting division, it is an investments like commercial expenses because you wanted to invest in new projects, new clients and so on? So it's something that will fuel an improvement of the order for sales in the future or it's just temporary? What is the view on these items?
I do not find anything that specific, anything particularly different with other quarter. I don't know. I really hope you can wait that we make an analysis, a more detailed analysis together with Banci, and we will let you know, we will give you the answer.
If I look altogether and I have the evolution of our expenses, but this is not answering your question because your question is specific on the Water-Jetting business. But altogether, altogether, I see that in the evolution in comparison with our growth in sales, we have a much lower growth in commercial cost. So I would say it should be a positive effect.
But specifically speaking about Water-Jetting, I don't want to give you a number. I am better to give you a precise answer. Then we will call you and will analyze with you the situation. Sorry for that. Thank you.
The next question is a follow-up from Domenico Ghilotti with Equita.
Just a question on the -- usual question on cost inflation. You were mentioning that there is a shortage of manpower for your clients in the pump business. I wonder -- and you mentioned the low unemployment rate. And so I wonder if you are seeing the same issue, the same shortage.
And then just -- also, if I understood properly, just to check if I understood properly, you are saying that you are expecting a recovery in organic growth in Water-Jetting and probably some slowdown in the Hydraulics started very, very strong. So more as a convergence into the 2 performances more or less.
No. No. We are not suffering the same situation. I spoke yesterday with all our American guys, so to check the situation in each company, and we are not suffering this shortage of manpower. Probably something that the big company are suffering more than what we are.
So basically, the problem is, let me say, more in the OEM than in our business. We are able to find people, so we are not particularly concerned to growth -- to grow in our sales.
Regarding then my expectation. My expectation is no doubt for the recovery in Water-Jetting. And I do not see any reason why we should consider this organic growth special in this moment, also because the backlog in Hydraulic is really strong, is really good. So I think that we can expect a similar number for the rest of the year.
[Operator Instructions] The next question is a follow-up from Michele Baldelli with Exane.
My last question is just about an update on your feelings on the M&A strategy, M&A opportunities that you can see in this year, if there are others just to get some color.
Yes. Mr. Baldelli, the color is always the same. We will never change our strategy on this point and our policy. We have -- I know that I become tedious because I tell you basically always the same, but it's absolutely true, Mr. Baldelli. It is absolutely true. We have a very nice dossier on the table and we are in different stages of negotiation. So it's not just something that we are imagining, but it is something we are, how to say, dealing. So there is no doubt that you have to expect additional acquisition during the year.
If you ask me ask the timing, you put me in difficulties because in this activity, the timing is very, very difficult to define. It's not something that is only in our hands, but unfortunately, is also in the hands of the person on the other side of the table. But there is no doubt that there is no change and that you will see other acquisition during the year.
[Operator Instructions] Mr. Marinsek, there are no more questions registered at this time.
Thank you very much. I thank you all, the persons participating to this call. Next one is not earlier, will be for the second quarter, August 5, that's it. Thank you very much, and bye-bye to everybody.
Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.