Interpump Group SpA

MIL:IP

Earnings Call Analysis

Interpump Reports Strong 2023 Results, Prepares for 2024

Interpump Group announces a robust 2023 with nearly 7% organic growth and a historic high EBITDA margin of 24%, highlighting consistent improvement efforts. A notable free cash flow amounting to almost EUR 150 million reflects the Group's operational strength. Looking ahead to 2024, expectations align with a flat organic sales performance, anticipating a weaker first half followed by improvement. Despite challenges late in 2023, such as December's sales drop hindering cost adjustments, Interpump remains committed to maintaining its EBITDA margin and aims for bolstering cash generation. The Group's EUR 165 million investment in CapEx in 2023 culminates a three-year plan to foster long-term growth through state-of-the-art facilities and enhanced production capabilities.

Interpump Group Delivers Robust Performance in 2023 Amidst Global Challenges

Interpump Group closed its 2023 chapter on a high note, showcasing resilience and growth in a year fraught with global economic challenges. The CEO began the narrative of 2023 by recalling prior projections and then proudly announced an almost 7% organic sales growth, marking it as another outstanding result after significant growths in the previous two years. The company's EBITDA margin reached 24%, the highest in its history, underpinned by diligent improvements across operations, strategy, and customer service. Accompanied by a near record free cash flow of EUR 150 million, Interpump Group's financial story seems both solid and optimistic.

Navigating 2024: Anticipated Trends and Strategic Priorities

Looking ahead to 2024, the Group CEO set a cautiously optimistic tone, confirming a guide for flattish organic sales evolution and a focus on full-year results rather than volatile short-term trends. With an aim to protect the hard-earned EBITDA margin of 2023 and drive further cash generation enhancements, the company indicates a strategic approach that favors strength, flexibility, and balancing in the face of predicted weaker sales performance in the first half of 2024, expected to be followed by a gradual improvement as the year progresses.

Q4 2023 Recap: A Mixture of Expected and Unpredicted Outcomes

The final quarter of 2023 emerged as a complex period with varying impacts on the company's performance. Sales were up by nearly 8%, driven primarily by organic growth. However, a deviation from the norm occurred in December, with the hydraulic sales experiencing an unexpected drop due to an abnormal level of orders postponement and cancellations. The fourth quarter sales decline of 2.5% was attributed to differing trends across divisions, with some areas such as industrial vehicles and generic dealers booming and balancing out weaker segments like agriculture and armoring machine lifting. Crucially, geographical diversification, notably the resilience of the American market, partially offset weaknesses elsewhere, such as Europe and Asia, resulting in a mixed yet resilient sales performance across the board.

Unprecedented Challenges Impacting Fourth Quarter Profitability

Despite sales trends mitigating negative impacts, a convergence of unfavorable factors in the fourth quarter created what the CEO described as a 'perfect storm' for profitability, preventing the year from achieving its full potential. This unexpected turn, marked particularly by weakened December sales, did not allow for timely operational adjustments, resulting in profitability dilution in the Hydraulics division and a mix-driven dilution in the Water-Jetting division. Nonetheless, the company's diverse portfolio and strategic actions provided a cushion against these sudden shifts.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Interpump Group Fourth Quarter 2023 and Preliminary 2024 Financial Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Elisabetta Cugnasca, Head of Investor Relations. Please go ahead, madam.

[Elisabetta Cugnasca, executive]

Thank you. Good afternoon or good morning according to your time zone, and welcome to Interpump Fourth Quarter 2023 and 2023 Preliminary Financial Results Conference Call. As usual, I have to bring your attention to the disclaimer slide started in the next part of the presentation. I hope you were able to download from our website. Afterwards, it's my pleasure to leave the stage to Mr. Marasi, Group CEO.

[Fabio Marasi, executive]

Thanks, Ms. Cugnasca, and thanks to all of you for the attendance. Last November, I concluded that third quarter 2023 presentation underlying group expectations for 2023 and the upcoming 2024. For 2023, a high single-digit organic sales growth rate, the best year ever in terms of EBITDA margin and the material improvement of cash generation. For 2024, our full commitment to prepare ourselves at our best to face a complex year. Today, for 2023, I am pleased to announce an organic growth of almost 7%, an outstanding result after the plus 20% of 2021 and plus 14% of '22. An EBITDA margin of 24%, the best result in our group's history.

As you may imagine, this new month average makes us extremely proud because it reflects the hard work that has been done year after year to constantly improve ourselves from every point of view from operations to strategic approach from new product development to customer service. Third point, a free cash flow of almost EUR 150 million, the second-best result in our group's history after the record free cash flow of EUR 200 million recorded in 2020, the COVID year that was characterized by a double-digit sales decline and a consequent reduction in net working capital.

Moving to 2024. I'm pleased to confirm our November 4, a flattish performance in terms of organic sales evolution. Like in 2023, we will see different trends between the first and the second part of the year. Contrarily to 2023, we will see a weaker sales performance in the first half and then a gradual improvement in the remaining part of the year. I've commented many times in recent years that in such an uncertain and volatile environment, it makes [indiscernible] to concentrate our sales and our actions to match on a monthly or on quarterly results. It is the full year results that matter and they are meaningful, and therefore, I invite you once again to consider 2024 in its entirety. The full commitment to protect 2023 EBITDA margin results in leveraging on the strength, the flexibility and the balancing that drove us to the 24% threshold and finally, a further improvement in cash generation.

To understand 2024 group expectations, it's important to focus on the evolution of the last part of 2023 in terms of sales and moreover, profitability because we are strongly convinced that some of the trends recorded in the fourth quarter should not be transposed or expected for 2024. In terms of sales, up by almost 8% with an outstanding push of almost 7% coming from organic growth. Going back to account 2023 initial organic guidance, 5% a reason which push us to improve in May to high single digit. A stronger performance in the first quarter '23 and not a more positive overview on the remaining part of the year, it is quite evident that we were expecting a decline for the second part of the year, driven by both a market normalization trend and the demand in comparison base in the Hydraulics business.

Please recall, an organic growth of 14% for this division in the last quarter of 2022. Overall trends went accordingly to our expectations with a gradual softening of Hydraulics business since summer and the early exception related to 2023 year-end and precisely December. Fourth quarter and especially December is a soft period first, due to the seasonality correlated to the Christmas break. And on top of this is normal for all industrial companies to check inventory level and decide how much to order before year-end. Then 2022 was a great exception to this, I would say, historical and directional behavior. There wasn't a normal orders level due to the still present fears in terms of supply chain. Exactly the opposite happened in 2023 in December, in particular, during which we saw not only a physiological decrease in terms of order intake, but at an abnormal level of orders postponement and cancellation.

To give you some color, hydraulic organic sales were slightly negative in October, down high single digit in November as we were expecting for both months and almost doubled this drop in December. Water-Jetting division confirmed the expected sales evolution driven organically by a strong push coming from complete solution products and the positive impact of acquisitions. The overall sales decrease of 2.5% in the fourth quarter was, therefore, the result of different trends. Some more, some less expected or better expected but with a different magnitude. Group diversification once again helped to balance different trends. For example, in the fourth quarter, in terms of [indiscernible], industrial vehicles and generic dealers, the 2 most important group market applications totaling more than 30% of our sales, grew respectively by around 10% almost balancing agriculture, armoring machine and lifting.

Together, 25% of sales, which dropped between 15% and 30%. In terms of geography, the resiliency of the American market, our most important one with approximately 25% of the consolidated sales, mitigated Europe weakness with an almost 4% growth while in Asia, India mitigated Chinese decrease. In terms of EBITDA, after having reached 23.7% in 2021 and having confirmed that in 2022, despite the inflationary trend and the dilutive impact of the biggest acquisition in our history, in 2023, we reached a new Mount Everest 24%. As you may imagine, this new threshold makes us extremely proud. It reflects, once again, the artwork that has been done year after year to constantly improve ourselves from every point of view, but to be as usual, completely transparent with you, this result does not fully reflect group capabilities and best practices. As a matter of fact, until middle of November, we were targeting a better and higher number.

December sales evolution may just take some steps back. We are perfectly aware that operations flexibility is one of the strength -- is one of our strengths. But this time, we could not deploy our capability for a combined situation. The sales drop recorded in one single month was really too much compared to our forecast and being December, the last month of the year, we didn't have the time to adjust cost to the new level of sales. If the same situation had happened in October or even in November, we would have had the time and the chance to adapt ourselves and to put in place countermeasures. This is the reason of the material profitability dilution recorded in the fourth quarter in the Hydraulics division. Completely different situation in Water-Jetting.

The dilution recorded was driven by sales mix as in the fourth quarter con products drove sales organic evolution. This phenomenon was exacerbated by the acquisition impact and in particular, by the acquisition and integration of Waikato. You probably remember between the 2 acquisitions performed last spring, Waikato was the biggest in terms of sales with approximately EUR 45 million. And the most dilutive with approximately 14% in terms of EBITDA margin. That compares with the usual range of Water-Jetting between 28% and 29%. The natural dilutive impact was eaten by poor performance recalled by Waikato due to the worsening of mixed market conditions all around the world and especially in Asia.

In a few minutes, I will update you on activities we put immediately in place to help Waikato to overcome this market condition and, therefore, mitigate near future dilution factors. Summarizing in the fourth quarter in terms of sales, different wins coming from different directions allowed the group to mitigate negative trend, while in terms of profitability, same wind coming from different directions created a sort of perfect storm, which jeopardize a perfect year. We all hope that after this long explanation, you will understand why we believe that some of the trends recorded in the fourth quarter should not be translated to 2024. And moreover, while 2023 is, in any case, a year to be proud of.

To conclude on 2023, let's underline the most important points on CapEx, acquisitions and free cash flow. CapEx with EUR 165 million spent in 2023 are the last important step of a 3-year, EUR 450 million effort performed by the group to build the base of the growth part of the next decade. This growth part was developed to achieve 3 fundamental targets; have best-in-class factories, increased production capacity and improved production efficiency. But what do this word mean? Our best-in-class factories means building production facilities which are in line with best practice in terms of energy efficiency, material management, manufacturing process flow and health and safety standards. For example, the best place where our colleagues can work at their best. This was the first and most important step of our plan because owning places where we work assures independence and flexibility to manage everything that is correlated to production with a real long-term industrial approach.

A small but important example, one of the major difficulties to install photovoltaic panel on factory's roof is not the way our infrastructural limitation. But how to split costs and benefits with donors of the real estate, which does not belong to us? These discussions could even take more time than the construction of the plant. This important initial effort, almost EUR 160 million, 1/3 of what we spent is literally the foundation of next decade's group future also because the fundamental requirement to get an increase of production capacity and efficiency. It has no sense to purchase better production lines or machine centers if spaces and flows around them are not consistent.

From a production point of view, it's particularly important to stress the element of production efficiency tool to be able to follow market part in terms of production, is a guarantee for sales evolution, but to be able to deploy this capacity in an efficient way is a guarantee for sales profitability.

Our initial CapEx plan required to be upgraded to factor White Drive acquisition which by itself meant around EUR 40 million of additional efforts. As you probably remember, White was under disposal due to the trust obligation correlated to the deal done for Seaton and this limited CapEx in the years immediately before our acquisition with a negative impact on wide capacity, not only to follow market in '21 and '22, extraordinary evolution but to simply support customers with the level of service that is in line with the excellent quality of White product.

To conclude with this topic after what we did, let's comment what we will do. In 2024, CapEx will start to decrease. We've done the last important project to be realized the new headquarter of Interpump Hydraulics, close to Bologna. After that, we will go back to our usual level of CapEx.

Acquisition. The amount we spent in 2023, approximately EUR 60 million could generate the perception that in 2023, we were less active from this point of view. But in reality, total dimension of acquired companies, close to EUR 80 million in terms of sales. And moreover, the strategic fit shows exactly the opposite because the importance of what we bought goes well beyond what we paid. Mouldtech was a fundamental step to mitigate the supply chain risk correlated to the most important raw material used by the group, Transtecno, while I.Mec and Waikato were the long-awaited new phase of group development in the flow processing segment.

Important steps in our never-ending journey to realize a growth path, which should allow the group to grow in the meantime to reduce industrial risk, thanks to a better diversification by product, geography and final market application. Important steps, but in the meantime, not expensive. This is important to be underlined and this reflects from one side, our discipline and from the other changes occurred in the last few years in our industry in terms of the acquisition landscape. Only a couple of years ago, are also forces of counterparties involved in the competitive arena were quite different. In terms of competition, industrial buyers, had to face private equity and financial sponsors, which could leverage on extremely cheap money, while in terms of targets, the year correlated to the extraordinary market situation pushed the seller's expectation to incredibly high levels.

In the last 2 years, this situation changed dramatically. Structural increase of cost of debt and then higher market volatility coming from trends appeared in the last couple of years, after the case of absence from inflationary trends in terms of cost of goods sold and most recently, of labor to supply chain difficulties made financial sponsors approach more realistic in terms of valuation parameters. More recently, normalization trends and the extraordinary demand peak made seller more realistic too. Therefore, today, we're in a historical phase for all rebalancing among all actors of acquisition processes. And we strongly believe that industrial buyer like Interpump will have far more opportunities and better conditions compared to the past to consolidate, also this is very important in attractive markets.

To conclude my overview on acquisition, and you updating in terms of business evolution, integration process. Mouldtech and I.Mec deserve a few words. Integration activities are progressing well according to Interpump's usual approach and the results in terms of production and therefore supplying enhancement for Transtecno and profitability improvement for I.Mec are already evident. Slightly different is the situation of Waikato. New kind of activities and their market difficulties having appeared since summer, especially for power milk in Asia, forced to a deeper deterioration approach. We started from the basics. We launched the reorganization at that quarter level. And in the meantime, our production and logistics rationalization in U.S.A. and in Europe, respectively.

And we went further on with the construction of a strong collaboration with INOXPA, which is the group company more involved in the dairy world. Today, Waikato sales force can rely on the support of the global INOXPA commercial network. Despite these unexpected difficulties, we are confident that we will be able to support Waikato progression as we did for all the companies, which have joined our group. This is due to both to our integration expertise and the fact that we both a company known in this market for product quality and innovation platform.

Moreover, after a few weeks of joint activities and of effort, we welcomed a management team who fully embraced our managerial values and approach. Finally, and updating you on White Drive, the biggest and above all, the most complicated acquisition in our group history. 2023 was the second and closing year of the integration process, a year dedicated to production enhancement and profitability improvement after 2022, during which our efforts were dedicated to both an alignment to group managerial approach and operations best practice sharing. In 2023, we finally completed the production of the organization and the announcement in the United States, and we implemented the factories rationalization in Europe moving all German activities in our Polish plant.

Unfortunately, the conclusion of our integration effort materialized itself in the moment of normalization of the agriculture market. The most important application fields for White Drive products. After constant and steady improvements quarter after quarter between 2021 and the first half of 2023, last summer, market condition changed temporarily, stop this path. Please note that I deliberately used the objective temporary. After 2 years of hard and deep work, while driving part of Interpump Group, not only from a legal point of view, but moreover, from operational flexibility and best practice point of view. And in 2024, we will leverage on this efficiency implemented in 2023 from production ramp-up to reorganization benefits.

Moving to free cash flow. After more than EUR 200 million dedicated to development activities, the previously mention $165 million and almost $60 million of CapEx and acquisition, respectively. Probably, it would be natural not to associate 2023 to a great year in terms of cash generation. On the contrary, 2023 will be remembered as the year 24% EBITDA margin, a record level and the second most important year for Interpump in terms of free cash flow generation.

After 2020, historical record of a bit more than EUR 200 million. In 2023, we generate close to EUR 150 million. We took in summer '22, a cash commitment improvement and quarter-after-quarter, we deliver it. We underlined with you many times, the reason of '21, '22 cash generation declines. The organic growth being more than 17% in these 2 years.

On average, we consequently drove both a material increase of trade receivable and the group rationale division push production through a massive support from inventory in a period of supply chain issues and scarcity. Without mentioning White Drive consolidation in '21, astonishing '21 and '22 results in terms of double-digit organic growth and profitability achievement required compromise in terms of supply chain risk mitigation and cash flow generation. Starting from summer 2023, this compromises or not necessary anymore. Today, in February '24, we are extremely satisfied to show a record in both EBITDA margin and cash flow generation.

2021 to 2023 cash evolution underline 2 additional important features of Interpump business model, EBITDA excellence and resilience apart. Trade working capital and CapEx, proactive management and flexibility. And this, going back to the previously mentioned EUR 220 million, dedicated to development activities without tempering growth opportunities. Therefore, after '21 to '23, CapEx, close to 7% on net sales and the trade working capital have been picked to close 40% last year.

We can proudly confirm you once again with strong evidence that CapEx and trade working capital in the next few years, we returned to the usual group level, around 4% in terms of CapEx on sales ratio and around 35%, 36% in terms of trade working capital sales ratio. Before the usual updating our most recent market trends and more color on 2024 expectations, please allow me to hand over to Ms. Cugnasca for the ESG update.

[Elisabetta Cugnasca, executive]

Thanks, Mr. Marasi. I will be extremely concise since a few weeks ago, we announced the completion of all 2023 ESG plan action and the duly ongoing delivery of multi-annual action. In fact, between last November updating and December end, following action has been implemented. Launch of the circular economy pilot project, action E.4, conclusion of the pilot project to prepare and implement a vendor rating model, the tablets, environmental and social criteria, action S.5 communication, the achievement of ESG plan objective, action G.6.

We already start to work on 2024 action, product ecodesign, injury rate improvement and supply chain evaluation model extension. And in the meantime, we will work to execute at best, one of the most important 2023 action, the decarbonization strategy and to assure delivery on the most important 2025 action, the increase of no compulsory training. Important step for 2 targets are the signature of a corporate power purchase agreement and of a global training program, respectively.

Obviously, we will go on with the mapping of Scope 1, 2 and 3, which I remind you is an important point to be addressed. Summing up my ESG updating, Interpump is delivering group from all point of view, our amount of concreteness and excellence push us a 360-degree on everything that we were doing, and we are very proud to announce that this committee was recognized just yesterday evening.

In fact, Interpump was awarded as Best Performer in the Year in the seventh edition of Best Performance Award 2022-2024 of SDA Bocconi School of Management, financial solidity and the focus on both innovation and sustainability are award basis.

[Fabio Marasi, executive]

Thanks again, Ms. Cugnasca. Going back to business. What are we seeing now that support our 2024 expectations? In terms of backlog, we are seeing a consistent increase of Water-Jetting order intake month after month. We are seeing a normalization trend of Hydraulics ongoing. And moreover, we are seeing a backlog that today is 3x 2019 level. In terms of custom behavior, December postponement and cancellation trends are over. In January, we came back to a normal physiological trend. In terms of industrial landscape, a more prudent approach from private equity and financial response, a more realistic expectation from sellers should drive to a better environment for M&A.

In terms of Interpump, a totally committed group with everybody focused on 3 essential targets, protect profitability, exploit cash generation, push growth opportunities. 2023 was a year to be proud of in terms of EBITDA and even more in terms of free cash flow. You can be confident that we will do our best to make 2024 another year to be proud of and to match in 2025, our medium-, long-term expectations.

[Elisabetta Cugnasca, executive]

Thank you to everybody. We are now ready to take your question. One request, please. In order to avoid the problem with the line, we kindly asked you to make one question in a row. And, therefore, to allow us to answer to your question step by step. Thank you.

[Operator]

[Operator Instructions] The first question is from Matteo Bonizzoni, Kepler Cheuvreux.

[Matteo Bonizzoni, analyst]

I have 2 simple questions, which are, by the way, related to the usual topics, which we asked in this presentation in the Q&A. One is on the organic growth. My question is the following one. Compared to the minus 6% decline in Hydraulic, which we have seen in Q4, which you clearly said was due to a particularly weak and probably abnormally weak December, for the first half. So my question are for the first half because I don't know what kind of visibility you have for the second half, I think, quite low. So I only ask for the first half.

Do you expect similar kind of decline or better or in any case, different? And similarly to that, for Water-Jetting, which kept a positive trend with 3.7% and I think here, December was not particularly affected by this phenomenon, which you described before, but correct me if I'm wrong. For the first half, you expect pretty similar or it may be better because you have said that you are continuing to observe if I am correct, a strength of the order intake. So maybe it's even justified to assume better than this 3.7%. The second, the last question.

[Elisabetta Cugnasca, executive]

Wait, one question...

[Matteo Bonizzoni, analyst]

Yes. Yes, yes, absolutely, yes.

[Fabio Marasi, executive]

Okay. Thank you, Matteo. In terms of organic growth, I believe that we can expect in the first part of 2024, a similar trend of what we have seen in the fourth quarter 2023 that we have just described, then a weaker Hydraulics and a stronger and more resilient Water-Jetting. And the second part of the year, that will be better, in particular for Hydraulics. This is due, once again, also from the comparison base that is far tougher in the first part of the year. And from our customers' behavior that realized in the second part of the last year that they have exaggerated their purchasing plans and their backlog management and inventory management. And I believe that is almost natural to expect a weaker Hydraulics business in the first quarter and the stronger and more resilient Water-Jetting. But once again, is the year that matter.

[Matteo Bonizzoni, analyst]

Last and quick question is on the margin protection, which is your target for the year. The consensus is, by the way, pretty much in line with that. Maybe it's a little bit down, but I would say, if I'm correct, 10, 20 basis points, but not more than that. Also in this case, for 2 divisions, can you a little bit elaborate more because we are speaking really about a few basis points? But in Hydraulic, given that you will have top line pressure, are you in any case, targeting a full protection of the margin while in Water-Jetting also including the action which you are implementing, particularly at Waikato, should we maybe expect on the contrary a slight expansion of the margin?

[Fabio Marasi, executive]

Matteo, this is a difficult question. We do not have a crystal ball. It is difficult to make such a precise description of the margins that we expect by division or by company by quarter. We have commented margin protection for the full year because we consider many different trends between the quarters, the application fields and the companies, we expect a recovery of Waikato, but it is, of course, a minor company impact, a stronger contribution from the Water-Jetting resiliency and strength from Hammelmann in particular. And as you know, very well, Water-Jetting is characterized by a profitability that is way better than the one of Hydraulics.

And on the contrary, we expect a more challenging Hydraulics market in terms of profitability as well because of the normalization trend that we are experiencing now. Then when we were commenting our expectation or our guidance for the margin for the year, we were considering all these factors together without entering too much in this granularity.

[Operator]

The next question is from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

Hello, can you hear me?

[Fabio Marasi, executive]

Yes. Perfectly.

[Domenico Ghilotti, analyst]

Okay. Now maybe just to follow up on the elements and the granularity that can support the profitability, just not by quarter, but more on qualitative basis. So how do you see the -- or have you seen also in 2023, the inflationary pressure on -- in particular on labor cost, and how have you seen? And do you see the trend on raw materials on the cost of goods sold? So do you see any particular element that you want to flag?

[Fabio Marasi, executive]

Yes. This is a good point. We saw different trends for different cost factors. As we have already commented for sure in November but also in other occasions, we are seeing an increase in terms of labor cost, it is a sort of a late catch-up of the inflationary trends of 2021 and 2022 in many areas in the world. And we are seeing on the opposite, a reduction in the cost or in the prices of many raw materials, aluminum, stainless steel, cast iron in a more reduced way. But altogether, we do not expect any -- if you consider all the cost of goods sold or all the different elements that contribute, we do not expect a price effect either negative or positive for 2024. We expect stable prices and stable volumes.

[Domenico Ghilotti, analyst]

Okay, clear. And maybe a follow-up on the working capital side. So you are mentioning that you are -- have already been able to the client to reduce the working capital and sales ratio at the end of 2023. So should we expect also further improvement in 2024, given the fact that you are planning for flattish organic? So it's merely coming from the operational improvement.

[Fabio Marasi, executive]

Yes. After the peak that we reached in 2022 in order to mitigate the supply chain risk, the inflation that we were seeing and the scarcity and raw material, we reached the unprecedented level of 40% in terms of net working capital on sales. In 2023, we have already reduced this ratio by approximately 150 basis points, and we expect between '24 and '25 to be back to the pre-COVID level that was 35%, 36% of sales, and we are progressing on this market.

[Domenico Ghilotti, analyst]

Okay. My last question. Well, looking at your 2025 commitments, you are well on track on leverage and also on the profitability side. It's quite -- I'm going to say, far away, but it's much more challenging, the top line guidance. So do you think that you can really get to that number? And I presume that will -- this will involve some -- not say large, but sizable M&A also in due course.

[Fabio Marasi, executive]

Yes. Staying on numbers. We confirm 2025 targets because we expect a better organic growth in '25 and because we still have in front of us two full years for M&A and then considering the better environment for acquisitions that I've just described, and considering the very strong balance sheet that we have now, and we will have even stronger going forward quarter after quarter. We believe that we will have the possibility to reach our targets, of course, with an important contribution from M&A.

[Domenico Ghilotti, analyst]

Okay. The very last question is just a clarification because if I understood properly regarding the short-term outlook, you are saying that the exit -- so the entry speed into 2024 is much more similar to the average of the quarter of Q4 and not really to the final so to the end -- so the December month in which you had really some extraordinary negative elements. And so you were at a significant double-digit decline in Hydraulic, correct?

[Fabio Marasi, executive]

Yes. The entry speed is low, but is in particular, far lower than last year entry speed. But the reality is that it was the fourth quarter '22 and in particular, December '22, that was an exception. Considering the unprecedented level of demand that we were facing last year, we had several of our companies that didn't stop even for Christmas track last year. Of course, this year, we are living in a different world and we slow down our manufacturing activities. And I would say that we have answered that in a low, but in a more normal speed in 2024. We have also to consider that in 2023, the speed -- the entry speed was so high that we closed the first quarter last year with plus 19% in terms of organic growth.

[Operator]

The next question is from Alessandro Tortora with Mediobanca.

[Alessandro Tortora, analyst]

I have 2 questions, if I may. So the first one is ability to the -- probably it is related to what basically you mentioned on the free cash flow quotation you see for the current year. So if we basically consider the, let's say, trend, declining trend in working capital on sales, but also much more normalized, let's say, around 4% of sales for CapEx. Is it correct to say that basically 2022 will be your new record year for free cash flow, considering also the target in terms of margin protection you mentioned before? That's the first question.

[Fabio Marasi, executive]

Alessandro, you did the math. We never shared the precise target in terms of free cash flow generation. But if we put together all the elements in terms of expected EBITDA and the normalized CapEx and reduce the trade working capital sales ratio, you did the math. Then it's correct but a good year in terms of free cash flow generation.

[Alessandro Tortora, analyst]

Okay. Okay. And, Fabio, just if I may, is it something as a trend in terms of free cash flow, let's say, pretty regular over the year? Or we need to expect that maybe a better performance of SDA considering also trend in sales, just to understand this is, let's say, pretty regular over the next quarter?

[Elisabetta Cugnasca, executive]

Sorry, sorry, can you please repeat your question because we hear a very metallic voice?

[Alessandro Tortora, analyst]

Yes, but it's my voice, okay, unfortunately. But yes, it is related just to the performance, if this free cash flow generation, let's say, on a quarterly basis, is it pretty regular, okay? Or do we need to think about any seasonality in this performance?

[Fabio Marasi, executive]

No. Our business is very well balanced. And then we do not have particular seasonality in terms of business and in terms of free cash flow generation. if I recollect correctly, the second part of the year is better than the first. But generally speaking, this year, I would say that we will be more regular.

[Alessandro Tortora, analyst]

Okay. Okay. The second question is on Waikato in White Drive. So if I understood well, Waikato now is under, let's say, deep restructuring for new considering what you said, but also a starting point in terms of profitability, the 14%, is there any reasonable target we can remind for Waikato also considering the wide gap versus, let's say, now the profitability of the division?

[Fabio Marasi, executive]

Yes, in terms of Waikato, we never shared precise target, but it's easy to say that we consider that our first goal should be to move Waikato EBITDA margin to 20%. That is our excellence target. It is clear that Waikato was already at a lower level and the market conditions are very tough as per our previous comment. We are -- I wouldn't say that we are strongly restructuring the company.

We are adapting the business model of the company. We are exploiting synergies with INOXPA, in particular, and we are adjusting some peculiarity of Waikato in order to be prepared to a more normal market -- in a more normal market condition to have a far more interesting profitability and far more interesting EBITDA margin. It is too early to say that Waikato reached a profitability in line with INOXPA or with division, but I believe that 20% is reasonable with the midterm perspective.

[Alessandro Tortora, analyst]

Okay. Okay. The third question is on White Drive, clearly, you mentioned before about the current outlook for agriculture, and this is an important lesser market for White Drive. Can you help us, let's say, to understand what's going on there? You can -- you completed, let's say, the restructuring of the U.S. operations. But would you need, let's say, start, let's say, on a better performance from agriculture in order to, let's say, at least see an improvement or at least convergence of the profitability of White Drive, let's say, towards the average of the group -- sorry, the division of the [indiscernible] division.

[Fabio Marasi, executive]

Yes. White Drive is, as we already commented, is a company, is a business that is the most exposed to the agriculture end market that, as you know very well, is one of the weakest in this moment. We have just seen the outlook from CNH or John Deere or other players in this industry. And this market was already suffering a lot in the second part of last year, and it is expected to suffer in the first part of 2024.

I wouldn't say that we need stronger agriculture market in order to have profitability aligned with the one of the group. We need to consolidate because in 2023, we completed an important restructuring plan, both in Germany, I mean, in Europe, which we close the German plant and we integrated everything in our plant in Wroclaw, Poland and in the United States, as you can imagine easily, the inefficiency, the restructuring costs, the consultancy costs were in the millions.

Then combining these restructuring or extraordinary costs with a weaker first market situation is, of course, tough. But -- of course, a stronger agriculture market will be more than welcome. But I believe that the profitability of White Drive have the possibility to be aligned with the one of the Hydraulics business even only with a normal agriculture market and not with a strong industrial market.

[Alessandro Tortora, analyst]

Okay. Okay. And the last question, Fabio, is on the sales mix effect that you mentioned in the Water-Jetting. Is this something that is related to, let's say, some specific application is related to much more money instead of NLB? So just to understand, let's say, some color on this part.

[Fabio Marasi, executive]

I would say that it is too much granular. It depends. We have restricted too much the time horizon that the different sales mix in every single month or in every single quarter, can make the EBITDA different quarter-on-quarter or month-on-month, but I do not have any kind of particular or significant trend to comment in one quarter or in the other, we may have a stronger contribution from larger equipment in comparison with maintenance business, it depends, but I don't have a particular trend to comment.

[Operator]

The next question is a follow-up from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

This is actually, a follow-up on this topic. So from your answer, I understand that looking at 2024, there is no structural reason to expect Water-Jetting to be having a structure different mix. So it's more a matter of some quarter compared to the other, but we should not see a structural trend, which systems are growing quarter after quarter.

[Fabio Marasi, executive]

This is correct.

[Operator]

The next question is a follow-up from Matteo Bonizzoni with Kepler Cheuvreux.

[Matteo Bonizzoni, analyst]

Yes. A quick clarification on the 2024 indications. When you see that, say, that you see a stable 2024, it's organic or its current perimeter? I ask you because there is half year, some months more of Waikato and a little bit of data perimeter. So just to understand, is organic, because if it is organic, it seems to be a little bit aggressive, let's say, but maybe not. If it is a current perimeter, less so, let's say.

[Fabio Marasi, executive]

It is organic. And we will see if it will be aggressive, realistic, prudent, we will see, but it is organic.

[Operator]

The next question is from Bruno Permutti with Intesa Sanpaolo.

[Bruno Permutti, analyst]

A question on the capital allocation. So in terms of return on capital on possible acquisitions, where you see the more rewarding opportunities. And so if you have an idea in terms of segments and/or in terms of geographies, where you believe that you could have the major benefit from acquisition for the rest of the group.

[Fabio Marasi, executive]

Okay. I don't have any crystal ball, unfortunately. Otherwise, I would make another job. But I believe that it is easy to comment that we are not a private equity or we are not a financial institution, we are an industrial group. And thanks God that we don't have any kind of limit in terms of capital allocation or any kind of imposed threshold in terms of return on capital employed. We always look and think about any potential acquisition, thinking about the industrial meaning of this acquisition. Of course, as you know very well, we have always been very prudent, I would say, or rational in the price that we paid or in the offer that we made, but we never made or we never allocated capital or we never approved budget on M&A because M&A is something that you cannot predict is something that happens in general.

Of course, we have a very open approach. We have an opportunistic approach and considering the very strong balance that we have at the end of 2023 and a very strong free cash flow generation that we expect in '24 and '25. The problem is not to consider or to decide where to allocate the money. The problem is to find the right candidate, interesting industrial target and so on.

[Bruno Permutti, analyst]

Okay. And if I may, a second question related to the supply chain. So, in particular, if you can elaborate a little bit on Mouldtech, so if there is -- what are your program for there? And if you are experiencing or expect to experience some increase in transport costs also related to freight costs. So also if you have -- if you are doing something to eventually to manage in a different way, the supply chain considering what is happening around the world.

[Fabio Marasi, executive]

Yes. We are very happy if we think about the Mouldtech acquisition because we secured the most important raw material for the group, in particular for WALVOIL, for the [ Volkswagen ] that is cast iron. And we are very happy about the development of Mouldtech, the integration of the team that we have found with the foundry. And we are progressing in developing new patterns, new models for WALVOIL, for White Drive and for other group companies in order to leverage the manufacturing capacity that we are expanding and installing in Mouldtech to sport group companies with a combination of a very good control of the supply chain and the better cost because the cast iron from India caused significantly less than the cast iron from Europe, even considering the transportation cost.

In terms of transportation cost, if you were referring to the, Red Sea crisis or what we are seeing, it is clear that this is having a short-term impact on transport cost, but it's important to mention that the cost of transporting a container from Asia went down approximately 80% in -- during 2023. And then this increase is something that is having an impact, but it's not so strong or it's not as strong as in the first part of 2022.

[Operator]

The next question is from Gabriel Colominas with Gesiuris AM.

[Gabriel Colominas Bigorra, analyst]

Hello, can you hear me?

[Fabio Marasi, executive]

Yes. Perfectly.

[Gabriel Colominas Bigorra, analyst]

Yes. Just a couple of questions here. First question is on debt cost on interest rates rising and affecting the company looking forward. So I want to understand the perspective on the financing part and which are -- which is the current cost of debt currently on -- of the company. That's my first question.

[Fabio Marasi, executive]

Okay. Considering the level of the [indiscernible]. Today, the average cost of debt is around 4%.

[Gabriel Colominas Bigorra, analyst]

Okay. And second question, you said that this year, it's a very good year in terms of cash generation, which is, of course, in terms of free cash flow. But the way you look at Interpump in terms of cash generation is I take the cash generation previous to working capital effects, which I think could be very circumstantial, depending on the year. And I just eliminate the -- I subtract the interest paid, it realized exchange differences on the taxes paid. And if we look in this concept and we subtract that from the current cash generation of the companies, previous to CapEx and previous to working capital FX, I think this year is not a great year in terms of cash generation. Last year, you had a cash generation to EBITDA about 80% from 2021 to 2022. And this year, this ratio is the lowest in many years, I think, around 70%. I don't know if we have an explanation about that.

[Fabio Marasi, executive]

No, I believe that you can consider free cash flow generation in many different ways. It's your job. Our job is to consider the balance management, the level of debt to EBITDA and the absolute terms in terms of free cash flow generation. Of course, we consider EBITDA, we consider that CapEx, we consider working capital because also CapEx and working capital are important, managerial tools that have to be considered in very good years or in more normal years.

We have commented many times that in '21 and in '22, our free cash flow generation in absolute terms, in absolute number in euros was limited by the very important investment that we had to put in place in terms of CapEx and net working capital. You may include, exclude, I don't know which is your -- but for us, it's very important to consider the absolute number in terms of euro million and this year will be very good, thanks to the very good EBITDA and more normal CapEx and the more normal net working capital.

[Gabriel Colominas Bigorra, analyst]

I'm referring more on operative level of cash generation, which this year has been lower in respect of last year's.

[Fabio Marasi, executive]

It's difficult for me to comment.

[Operator]

[Operator Instructions] Ms. Cugnasca, there are no more questions registered at this time.

[Elisabetta Cugnasca, executive]

Okay. Thank you very much everybody for the attendance, and we wish you a very happy Valentine's Day and we speak you -- we will speak in May. Thank you. Bye.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.