Interpump Group SpA
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Interpump Group SpA
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Ladies and gentlemen, thank you for standing by, and welcome to today's Interpump Q3 and 9 Months Results Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 7th of November, 2018.
I would now like to hand the call over to your speaker today, Paolo Marinsek. Please go ahead.
Thank you. Good afternoon to everybody. Thank you for calling, and welcome to this presentation. I know the [ eccentricities ] is becoming a cliche, but again I'm only going to give you good news because the result we are commenting today confirm once again that Interpump is in excellent shape. If I had to describe this situation in just one word, I think that the best one would be disconnection. Disconnection because in the past 4 quarters so basically from Q4 '17 to Q3 '18, we posted accelerating double-digit organic growth, respectively, 11.4% then 12.4% then 13.3% and the 13.8% that we are announcing today. So you see that our growth was stronger than the tough comparison base of 1 year ago because you remember that 2017 has been a very strong year. Our growth was stronger than the trade wars, the industrial cycle and so on and so on. And the beauty is that in the same quarter, our EBITDA margin following the same path, growing from 21.2% to 22.3% then 23.3% and finally 23.5% today. This constant increase is important to mention that already incorporates the [indiscernible] brought about by a sizeable acquisition like GS-Hydro and on top of this, the nice increase of some raw material [ large ] inflation here and there, the issue that you mentioned many times. And then you know when it rains, it pours, so as expected also the headwind from the currency exchange is almost over, so really good news. So saying that let's focus on the quarterly growth.
So I told you 13.8% organic growth. The currency exchange limited its negative effect to 60 basis points; this is mostly due to the Indian, the Brazilian and the Australian currency as well as the U.S. dollar finally stopped penalizing us. The perimeter expansion represented by GS-Hydro brought our total quarterly sales to EUR 310 million, representing a reported year-over-year growth of 19.3%. If we have a look at the 2 division I'm pleased to inform you that Water-Jetting accelerated sharply and shows an organic growth of 13.1%, basically unaffected by currency, reaching 13.3% because of the recent acquisition of Ricci Engineering. Please note that Ricci is now absorbed completely into Interpump. So this is the last time we will mention it as a separate entity.
Hydraulics grew organically by 14.1%. There was a negative currency effect of 90 basis points and total reported growth came to 22.8% due to the increase in perimeter represented by GS-Hydro. Please remember that the comparison base last year included a growth of 16.5%. This means that our largest division, Hydraulics, in 2 years grew organically by nearly 33%.
Now moving onto consolidated year-to-date results. Total sales reached EUR 953.6 million with an organic growth of 13.1%, a negative currency impact of 3.5% and a 6.9% increase resulting from 1 month of INOXPA, 5 months of Mariotti & Pecini and 9 months of GS-Hydro. Summing up altogether, our reported year-to-date growth amounted to 16.5%. Many times we have been asked a lot of questions and lately particularly about the trends of our sales by country and sectors. Really, I am more than happy to disclose this information, but I would like that you remind 2 important facts. The first one, because of our strong [indiscernible] towards diversification, you know that this is our main target, in each different market and in any application, we are small enough to detach ourselves from the trends seen or expected in a particular market. So company-specific event such as launching a new product or acquiring a new customer are much more relevant than general news about the market. This is the first reason why you shouldn't model your expectation for the future of Interpump based mostly on market, the point was. The second reason why you shouldn't do it is that even we do not do it. Really, we do not dare to forecast which application or which country will bring the best surprises. We are ready to service without any need to change our shape. When we say we are flexible, we really mean it. The same product can be used across many different application. If you take a gear pump, a gear pump can be used in agriculture as well as in a small [indiscernible] the same [indiscernible] and of course, even more for hauls and feeding. Even if you consider different products, different products share the same manufacturing process based on standard machine tools. We have no need for dedicated production line as it is typical, for example, in the car industry.
So we move so fast, if you want, from a sector to another that by the time you get the complete picture, it could probably be already obsolete. With this in mind, anyway, let's see the growth by area for the quarter.
So the geographical distribution of our 13.8% organic growth, or to be more exact, 13.1% since the comparison I'm going to make included the currency exchange. Europe is up 10% and now Italy is not the main contributor to this growth. Why it is? The first reason is the comparison base. In the quarter, we are comparing to, Italy showed last year a spike in growth at 22%. Last year the second quarter was plus 6% from plus 22% and the fourth one, plus 6% again.
So basically, this is the main reason. But if you say fair to say that the growth missing in Italy for the [ transport ] homogenized for the tomato industry is more than compensated for by the rest of the company. And the weight of Italy on our total sales remain in line with what we have seen in the past.
North America. North America is up 17% even compensating for the currency effect, which went from very strongly negative in the first quarter to slightly positive in this quarter, so during the year we had this change. The growth is accelerating from Q2, is accelerating from 12% to -- plus 12% to plus 15%.
Latin America shows a plus 6% which just like in the past quarter is actually a strong double-digit growth in local currency.
China is flattish in the quarter. China is flattish and it's probably the country that suffered the most from the comparison base.
As a reminder, last year Q3 was particularly strong with a growth of 54%. And Q4 was particularly weak; by the way it was particularly weak also for us because during that time where we had relocation of WALVOIL and Interpump Hose in China. Anyway, China year-to-date trend is still very satisfactory at plus 24%, and we expect it to improve again next quarter because we really have no sign of weakness in the fourth quarter.
And then India. Just when we thought it couldn't get any better, even our superstar India accelerated from last quarter. Year-on-year growth in Q3 was plus 87% [indiscernible] 87% [ that become ] 69% in Europe.
Now let's take a look also at the trend in our main application sector for the first 9 months of the year. So at this point, earth-moving is up at 17%, agriculture came very close at 16%, truck is 14%, of which truck manufacturer is plus 29%, construction plus 11%, industry plus 9%, lifting plus 8%, contractors plus 7%, food, cosmetics and pharma plus 6%, cleaning plus 2%. Once again, as I told you before, those numbers represent our sales in those application sectors. Do not assume them to be strongly correlated to industry trend because of the size and flexibility consideration we made before.
And now it's time to talk about Marine. You may remember that in the previous quarter, both Water-Jetting and Hydraulics net of GS-Hydro had hit an all-time record, respectively at 28% and 22.2%. Now with the help of the strong organic growth in Q3 EBITDA margin for Water-Jetting rose even faster, reaching 29%. In Hydraulics, the 22.2% was substantially confirmed at 22%, which became 20.5% when factoring in GS-Hydro. The resulting EBITDA margin for the whole group is 23.5%. So it is exactly the same of 1 year figure. And this is really a remarkable achievement because it means that the improvement in every other part of the business has already compensated the dilution brought about by the acquisition. In absolute term, we generated EUR 73 million in the quarter, bringing the total year-to-date at a very satisfactory EUR 219.8 million, so almost EUR 220 million. Net income for the quarter came to almost exactly EUR 43 million, bringing the total year-to-date to EUR 137.3 million. As a reminder, this incorporates a non-monetized fiscally neutral one-off that is in the recognition of negative goodwill from the acquisition of GS-Hydro companies amounting to EUR 11.9 million.
Adjusting for this one-off, we get to a normalized bottom line of EUR 125.4 million, 26% higher than last year, and with a corresponding tax rate of EUR 29.2 million. Free cash flow in the quarter amounted to EUR 30.3 million compared to the EUR 37.3 million registered in the same period last year. Breaking down to the major components, we had a EUR 13 million improvement in cash flow from operations, EUR 62 million versus EUR 48 million. But on the other hand, we had EUR 9.5 million more in working capital absorption. And this is of course related to our growth, but partially is also the sign of what I consider a positive trend in the economy because compared to 1 year ago, we have compensated for higher lead time from our supplier, increased minimum order size and the [indiscernible]. And of course, we are expecting a seasonal improvement that is very usual for the end of the year. But we also think that this situation to continuing well into 2019.
And then the other point, we have EUR 8 million more in CapEx, EUR 19 million versus EUR 11 million, reflecting an acceleration compared to the first half of the year that will bring our year-end total to around 5% of our sales. This is the usual upper end of our historic range, and I believe that this is a proper figure for a year with one of the highest organic growth ever seen. We did buyback of shares, this worth EUR 8.9 million, and we spent EUR 1.7 million in acquisition and this brought our final net financial position to EUR 277 million. On top of this, you know we have commitments for the purchase of subsidiaries that stand at EUR 43 million.
So at this point of the year, I'm happy to confirm that the outlook for the business is still very positive. What I especially like is that the Interpump broke a new barrier by growing double digit over a quarter which already incorporated a double-digit growth. In other words, this is really continuous growth, not a [ doubt as a factor ]. And let me say as you can understand that in this very moment first I know also the number of October. And I can tell you that October is one of the best months that I ever seen in Interpump.
So I think that today, it is almost mathematically evident that we are going to exceed significantly guidance that we gave in the beginning of the year for both sales and EBITDA.
So at this point, I imagine you are going to ask me what's next. As you know, the future looks exciting from here. The signals we are getting pointed to positive organic growth in the year to come. How much, of course, you know, we usually give our guidance in February. But we have much more benefiting that there will be enough sign looks in our numbers. We are seeing that during this year, financial market has shown the tendency to exaggerate bad news and disregard the good ones. I know this will sound, if you want, pretty normal to you, but industrial people, we always find this very surprising.
Let me give you an example. When the news on tariffs and trade wars started to spread, we kept telling everyone that our local production would minimize the negative impact. That only a very small slice of our sales would be involve and that our flexibility would allow us to relocate our production as needed. Well, we didn't needed to relocate anything. The impact of tariff was significantly reduced by the devaluation of the won versus the U.S. dollar and the rest of the cost was taken by the booming U.S. economy in the form of price increases. In the end, the profitability of our American companies did not suffer. Moreover, we took also the benefit of the corporate tax reduction. And be careful that even if you want to relocate from China to U.S., would not represent an issue for us, but we didn't have the need to do that. Another example I could make it is the great concern on raw material prices, labor inflation, and so on. At this point you have seen our [ mapping ], so you already know the end of the story, which if you want was very easy to predict given the history of Interpump, because this is something that we have always managed pretty well. We keep meeting lots of investors and they now seem to be worried by an upcoming slowdown in industrial cycle.
First of all, the idea of a general synchronized slowdown of industrial production [indiscernible] that I couldn't imagine taking any action based on it. And there is more, there is more. It could be plain wrong as the comments from key players in the industry we serve are not supporting these [indiscernible]. Also many foreign investors are also worried about the behavior and the statement of the Italian government. But let me remind you that we are a fully international company, that none of the actual and proposed action by the government puts any of our Italian operation at risk. And generally speaking, in Italy, the link between politics and the real economy is very weak, to say the least. We also keep getting question about M&A. And this is much more understandable given the lack of announcement, unfortunately. Someone has suggested that raising the organic growth takes up all our agencies. This could probably be a good excuse, but it is absolutely not true. I can confirm you, assure you that we are really busy, as always, putting external growth in many different directions. As always, the timing and the outcome of every single deal, unfortunately, is not under our control. But be confident that new acquisitions will arrive as usual. So I think I have told you everything, what is important. But of course, I encourage you for any questions. So please, operator, open the lines.
[Operator Instructions] Your first question comes from the line of Matteo Bonizzoni.
The first question is on the margin trend by division. I was trying to extrapolate from your release the profitability of GS-Hydro in Q3 and tell me if I'm right, the revenues could have been EUR 15 million, EUR 16 million with an EBITDA margin in the region of 4%. So if it is correct or not. And if you stick still to double-digit margin guidance for GS-Hydro as you exit this year. And also I was calculating that for clearly with the strong acceleration in Water-Jetting that I would like to know where it comes from and how sustainable you see? The margin was strongly up in percentage term in Water-Jetting, 290 basis points year-on-year. Why? In hydraulic even if we exclude GS-Hydro, the margin was from flat to slightly up compared to 21.9% last year. So just if you want elaborate these different trends despite the fact that the organic growth by division was broadly similar in the quarter. And the last question is on the CapEx. Well, the CapEx in the 9 months was, I think, EUR 43 million compared to EUR 29 million in the 9 months of last year. So significant increase. Can you elaborate on that, and what would be the CapEx level for this year?
Yes. Let's start with GS-Hydro. In GS-Hydro, we are doing a big job, a lot of action, a lot of activities. So the first point I wanted to underline is that we are really happy about the development of our plan, and basically we are getting the result we expected. If you asked us to give you exactly the EBITDA margin of GS-Hydro, it is becoming a little bit more difficult because more we are going on and more we learn about GS-Hydro and how to develop the company in the best way. So basically among the actions, we did something that split our activities in different areas to give you an example to where a good industrial organization will already have a planned manufacturing reassigned to I.M.M. in Italy. So this is, let me say, an activity that in this moment, we find in the I.M.M. balance sheet. And another point is for example that the 2 branches, Finland and Norway, were not acquired but transformed into exclusive distribution agreement, and this approach allow us to maximize sales and cross-selling opportunity because the size and the local visibility of the distributor is larger than the one of smaller GS-Hydro branch. Other idea we have in mind, for example, is to have better synergies among our companies to put together reassigning, for example, some branch of GS-Hydro. One is an idea that we have in China, for example. So saying that there are a lot of elements that we will not find directly in the situation of GS-Hydro. But is a sort of, if you want, adjusted EBITDA margin. The number that you mentioned, 4% is not far from the present situation. But I want you consider that many actions we took -- we put in place, so for example, reduction of people, we remove some responsible of some branches with important [indiscernible] they will have a full effect during 2019. So basically in this moment, we started the cost and we will get the full benefit next year. So I think that, putting together those things, I think that it is very reasonable to confirm you that we will get, let me say, putting together of different results in the different company. We will get EBITDA -- a double digit EBITDA margin starting from the very beginning of 2019. So the action are already put in place and the result is something that we will get directly in the beginning of the year. We are -- what I want to confirm you that we are really confirming the validity of this acquisition, the importance of the brand and, let me say, and the result we'll get. Another point that I would like you consider that the process in which the company is involved, usually they have -- they last a pretty long period, I would say. The average could be something between 6 months and 1 year, something like that. So of course, in this moment, we are still working on previous order and not on the new order. But everything okay, everything in line, I confirm you the result for the beginning of the year. Regarding CapEx, I think that the CapEx is maybe a little bit higher than we expected at the beginning of the year. But I think that also the level of sales is higher than we'd expected at the beginning of the year. And so I think that the amount of our investment is absolutely in line with our hedges. So we will stay in the 5% that we consider basically the high part of our investment. So I would say that is very consistent with the current situation. There is another point regarding the current profitability in Hydraulics, how sustainable. There is not a particular event, I gave you the situation of the market, and you'll see that basically all the major market are growing, all the major business are growing. So there is a positive situation, but we are not in front of a particular jump of something exceptional. And no initiative that we have taken is one-off initiative that will expire tomorrow morning. So I would say that, yes, is a strong market, is a good market, but the situation is sustainable.
Okay, Luca Mirabelli speaking. I would just like to add, Matteo, that let's say a softening of the EBITDA margin from Q2 to Q3 with the notable exception of last year, because last year we also had a sharp peak in -- sharp acceleration in growth that masked this. But typically an EBITDA margin tend to go down between Q2 and Q3. So this is seasonal. I wouldn't see those 20 basis points of trimming in Hydraulics as a sign of anything. I would really discourage you from reading that in that direction.
Your next question comes from the line of Alessandro Tortora.
Let's say 3 questions from my side. The first one is a follow-up. I understood that CapEx will be, let's say, higher than expected this year. What I would like to understand is where you are investing your money in, let's say adding machine or capacity in [indiscernible] again? The second question is on the profitability of the Water-Jetting. I understood that you had the record margin, what I would like to understand if you are benefiting from, let's say, some price increase supplied, or for instance, you had let's say some division like Hammelmann recording, let's say, higher profitability compared to already high level due to some specific projects, as you mentioned at the beginning of the call. And the third question is, again, profitability. I'm referring to, let's say, cost inflation risk [ borrowing ] in the U.S. I would like to understand what is, let's say, the profitability for instance that you are, let's say, having in subsidiary like Muncie or NLB, just to have an idea of, let's say, the successful posture you mentioned before?
Yes. Of course, the main reason for this higher CapEx, higher but very normal, be careful, is because of production capacity. If you consider the situation in India, for example, where we are growing in this crazy way and this is constant growth, which is growth that is growing again and again, always more, you understand that we have to continuously adapt our production capacity. And this is not only in machine tools, that is obvious, but also in plants. In India, really we built up 3 brand-new plants and also in this moment, we are increasing our production capacity. Then we have I.M.M. I.M.M. is growing always and [indiscernible] is something that we need to expand significantly. So you know that we increase our production capacity both in Romania and in Italy. And let me say even there, we build up 2 new plants, 2 brand-new plants. When [ borrowing ] is booming you'll see the result of [ indiscernible ] and again close to Bologna on the motorway, we are building up a very important, a very efficient new plant. So putting together all those company, not forgetting Muncie, Muncie that is booming, and by the way, speaking about profitability, I will tell you that Muncie is running around 24% profitability. So any concern related to cost inflation, this -- the last question you put to me, I think that the answer is there. We are more than managing any cost inflation, and so it means that also the price increase is something that we are using as usual. So I consider very normal the CapEx that we have. If I would mention the company where we had the most, I would say Muncie, I.M.M., WALVOIL, no doubt. The country I mention to you is India, but Italy is very important. And I think that to stay in India, it's over 5% of our sales is a very reasonable number. Profitability was a blessing, what is a very good jump and we are very happy for that is NLB. NLB is growing its sales and is growing very high in profitability. And this is, let me say, the global result of the American company or the American company are doing very well. But for many, many years, we had NLB running below 20% EBITDA that was not -- sorry?
Exactly. Exactly. And yes, please...
And now NLB, let me say, found this road and is regularly running over 20% margin. So basically let me say, everything good, there is no particular one-off event that is creating this very strong situation. But this is a stable, strong growth of the company.
Okay, okay. And sorry, just if I may on -- again, on the Water-Jetting, I understood let's say NLB, let's say, higher profitability. On the Hammelmann side, I remember that the division for you, let's say, extremely profitable with a margin even higher than 30%, okay. Correct me if I'm wrong. What I would like...
Correct.
Yes, what I would like to understand is, I remember in the past, you talked about the specific application on the vessel cleaning or the hull cleaning in China, for instance. What I would like to understand is, let's say how is performing Hammelmann also in light of these, let's say new application in China?
Yes, you know that Hammelmann is a lot of application, a lot of different application. The EBITDA margin of Hammelmann in this moment is 32%, 32%. So is absolutely in line with a growth, they had a growth that is around 7%, so performing very well. The application that you are mentioning is a nice application where we see an interesting future because it is, let me say, especially that we have very few company or something like. But it's not the only application where Hammelmann has a chance to grow. I would like that if you really understand that Hammelmann is so a huge portfolio of diversified product that really is in the condition to get any opportunity arising everywhere. And I think that the moment we are living is very positive and particularly very positive for a very innovative company like Hammelmann.
[Operator Instructions] Our next question comes from the line of Domenico Ghilotti.
Just one question related to your CapEx guidance. Should we assume that the current trend also for next year, the range of 5% of sales, say is a reasonable assumption? Are you planning for that?
Ghilotti, it's always in our standard, it would depend, of course, of the size of the market and every time I mention that within 3% and 5% is the limit where we feel comfortable to be in line with the request of the market and to be innovative, because the beauty is that every time that we increase production, we also introduce more efficient machinery and this is something that help our growth in profitability because we are running more efficiently. So but...
Okay. But just say, what is the flexibility that you have. So how much in advance you can say, okay, I started with a plan to invest 5%, but then I can adjust the investment to 3%, to 4% if I see that the market is not responding?
Many times, we mentioned this factor. We are very lucky in this situation because we are working with very high quality but standard machine tools. When we need to buy a new machinery, we have not to wait 18 months. We have to wait 6 months. So really -- and the machinery usually is a general part of machinery. So in this sense, we do not need a very long time. And this is the reason why I wanted to mention also in my presentation, the beauty of the flexibility and in this moment, in the moment you reach the market is growing in this way, you capture the result of the flexibility. Because really for us to know that it's growing as moving extent of agriculture is not doing any difference because we supply the product using the same production line. In this sense, those are the best moment to, let me say, to take advantage of the flexibility we have.
And last question, in terms of gross margin, so industrial margin in the third quarter and another chance to say, to check also at the constant perimeter what have been the trend you've been able to really support...
Gross margin is growing. So you see that we are seeing during this year, and every year, every quarter, we perform better.
Next question comes from the line of Michele Baldelli.
Just a quick question, and I know that you don't like too much about speaking on the orders of the backlog. But if you can give a flavor on these metrics, whatever you can, please.
Two items, incoming order is not changing, incoming order is strong as it was in the beginning of the year. And the backlog, the backlog is, let me say, very high, much higher than 1 year ago. Consider that during the year, we increased our production capacity. So the increased production capacity allows us not only to face the request of the market, but also let me say to improve our delivery time. But basically, the backlog is much higher than 1 year ago and at the high level of the last quarter.
[Operator Instructions] No further questions at this time. Please continue.
So I thank you, all of you for participate in this conference call, next one will be for February.
14 February.
14 February for the last quarter result and the full year result. And as usual, as I assure you, you will be happy. Thank you very much for calling. Bye-bye. Take care.
That does concludes the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.