Fluidra S A : FLUI.MC - Q2 2022 Fluidra SA Earnings Call

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

FLUI.MC - Q2 2022 Fluidra SA Earnings Call

EVENT DATE/TIME: JULY 29, 2022 / 9:00AM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JULY 29, 2022 / 9:00AM, FLUI.MC - Q2 2022 Fluidra SA Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Albert Collado Armengol Fluidra, S.A. - Secretary

Bruce Walker Brooks Fluidra, S.A. - Co-CEO & Executive Director

Cristina del Castillo García Fluidra, S.A. - Director of Investor & Shareholders Relations

Eloy Planes Corts Fluidra, S.A. - Executive Chairman, Executive President, MD & CEO

Javier Tintore Segura Fluidra, S.A. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Andre Kukhnin Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

Christoph Greulich Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

Erik Salz JPMorgan Chase & Co, Research Division - Analyst

Francisco Ruiz BNP Paribas Exane, Research Division - Research Analyst

George Featherstone BofA Securities, Research Division - Research Analyst & Associate

Manuel Lorente Mirabaud Securities Limited, Research Division - Analyst

P R E S E N T A T I O N

Cristina del Castillo García - Fluidra, S.A. - Director of Investor & Shareholders Relations

Good morning, and welcome to Fluidra's First Half 2022 Results Presentation. I am Cristina del Castillo, Investor Relations and Shareholders Director of Fluidra.

Today's presenters will be Mr. Eloy Planes, our Executive Chairman; Mr. Bruce Brooks, our CEO; and Mr. Javier Tintore, our CFTO.

You can follow this presentation in its original English version or in Spanish. You can select your preferred option in the drop-down menu at the bottom right of your screen.

Today's presentation will include live Q&A. (Operator Instructions) Presentation materials are accessible through our website, fluidra.com, and they have also been uploaded premarket open to the Stock Exchange Commission. The replay of today's presentation will be made available on our website shortly after we finish.

Let us start the presentation by opening the floor to our Executive Chairman, Mr. Eloy Planes.

Eloy Planes Corts - Fluidra, S.A. - Executive Chairman, Executive President, MD & CEO

Thank you, Cristina. Good morning to everyone on the call, and thank you for joining us for this first half results presentation. As Executive Chairman, first of all, I want to thank our team, clients and suppliers for their continued trust in Fluidra.

No doubt, we are facing a volatile and changing environment. Increased inflation, Ukraine war and inventory correction as supply chains tends to normalize. These challenges are impacting many industries and countries worldwide. I believe you will hear today the strength and resilience of our global platform and the capacity of Fluidra to navigate the environment well.

2

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JULY 29, 2022 / 9:00AM, FLUI.MC - Q2 2022 Fluidra SA Earnings Call

Later, Bruce and Javier will dive into the Fluidra's numbers, but let me make some comments before to do it. Despite of the noise of this volatile environment, we continue to see solid end-user demand for the industry on top of a couple of years of extraordinary growth, which confirms the step change of the pool industry.

We posted excellent Q2 sales figures driven by price and inorganic activity over a very strong comparable that includes the Texas freeze. On the other hand, margin has suffered in this first half, and there has been a time lag between a higher inflation dynamics than expected and pricing implementation.

We have seen 2 different trends in Europe where read-through has been practically offsetting inflation and North America where we decided to not reprice the backlog to protect our customers impacting us about EUR 30 million of read-through in this first half.

We are seeing an accelerating read-through in the latter part of the quarter, what give us confidence for improving our H2 margins year-over-year. We are then reformulating our estimates for the full year based on the first half figures. We see growth in H2 driven by price, M&A and FX despite the correction of the inventory levels in the channel as the industry move -- as the industry moved towards to more normalized practices.

On the margin front, as I said, we see year-over-year recovery in the second half as a result of all the initiatives that has been implemented. Our company is prepared to continue capturing growth, delivering strong cash numbers. And as Bruce will explain to you later, we have additional margin levers that we have not been able to pull during the last few years of growth, and now we are activating.

And finally, I want to highlight that despite investments in inventory in this first half that will be corrected in the second half of the year, we have a strong and healthy balance sheet that we have recently recognized. We are convinced that the creative M&A is a strong value contributor to our strategy, and Bruce will walk you through a couple of acquisitions that we have done recently. At the same time, we believe in the fundamentals of our business. So I'm pleased to announce that we are launching a stock repurchase program of 3.5 million shares in the next 5 months.

All in all, we continue to be committed to our financial policy of running our company at around to net debt EBITDA by year-end. At this point, I give the floor to Bruce, our CEO, who, along with our Chief Financial and Transformation Officer, Javier, will provide a deeper look at the Q2 '22 numbers.

Bruce Walker Brooks - Fluidra, S.A. - Co-CEO & Executive Director

Thanks, Eloy. Let me start with comments on our overall performance and highlights for the first half of 2022 and then turn it over to Javier to provide more details on the financial results. I will then return to provide some color on our outlook.

The numbers you see on Slide 5 are the 2021 and 2022 financial highlights for January through June. In the first half of 2022, sales grew 22% and 8% when adjusted for currency and perimeter compared to the same period of 2021 to EUR 1,445,000,000. This record top line was driven by price and perimeter expansion. EBITDA and EBITA grew 9% and 8% to EUR 361 million and EUR 321 million, respectively. Adjusted for currency and perimeter, they declined 3% and 7%.

Both measures were impacted by significantly higher-than-anticipated inflationary pressure as we were delivering the backlog at 2021 pricing. This decision to support our builders who generally lock in new construction prices will benefit us in the midterm but has had an estimated impact of more than EUR 30 million. Based on the materiality and the continued complexity of the supply environment, we changed our policy in May, as we communicated on the last call.

Cash earnings per share grew 1% to EUR 1.12 per share, impacted by the one-off tax benefit from the merger taken in Q2 2021. The operating net working capital ratio to sales increased 12 points versus last year to 29% due to supply chain recovery, inventory rebalancing in the channel, inflation, M&A and FX. I'd like to remind everyone that our products are nonperishable. It will take a couple of quarters to normalize levels as the industry adjusts to the new situation.

3

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JULY 29, 2022 / 9:00AM, FLUI.MC - Q2 2022 Fluidra SA Earnings Call

Our net debt stands at EUR 1,245,000,000. Our leverage ratio increased to 2.1x with the deals executed in H2 2021 and the higher investment in inventory.

Moving to Page 6. Let me shed light on the current environment and give an update on our business. No doubt, the world is in a volatile moment. We are encouraged to share that sell-through levels are at mid-single digit on a global basis and even at low double digits in North America, if adjusted for the Texas freeze, demonstrating again the resiliency of our space. On the other hand, volumes are being impacted by some level of correction of inventory in the channel as service level improves on most of our products and the industry returns to demand-based buying patterns.

Northern Europe, who have led the organization and growth percentage for the last 4-plus years, is facing a more challenging environment. In this geography, we not only see inventory correction but also the impact of people again traveling to Southern Europe where we're actually seeing the benefit and energy inflation and the war. As mentioned on the previous slide, in North America, we took the commercial decision not to reprice backlog orders, honoring the conditions that we extended to our customers.

At the end of Q2, after our May price action, we are already seeing acceleration of price read-through. Our mix of growth drivers has changed versus our original guidance with price reading through as a greater contributor, reaching almost 10% year-to-date. On the inflation front, we see an easier comparison as we look forward. Labor and some components continue to add pressure while we're beginning to see some relief in metals and container costs.

Turning now to our business mix. We saw a duality in performance when we talk about our 2 engines. Let me first take a quick step back. We've been able to grow 4% in the quarter on top of a tough Q2 2021 comp of 43% growth with both metrics adjusted for currency and perimeter. New construction activity recorded a solid evolution. So I will share with you later the continued adoption of more energy-efficient and connectivity features, driving an increase in the average ticket. The combination of increased features and higher prices will make 2022 a strong sales value year in new construction.

As we have been forecasting, the aftermarket saw weaker relative performance in the quarter due to specific impacts, including, first, Texas freeze's tough one-off 2021 comparable; secondly, correction of pull forward of heat and above-ground pools; and thirdly, remodel backlog based on pool pro capacity challenges.

Moving to Page 7. Let me share some highlights of the quarter. We're continuing to work to make ESG part of our core culture for the entire organization. On the social front, we are thrilled by the continued high level of employee engagement according to our 2022 survey where engagement reached an outstanding 90%. Our customer-centric culture, our people are a competitive advantage. We are happy to share that we have finalized the first couple of life cycle assessments for some of our pumps and robots, which will help us improve their sustainability and circularity.

Finally, on the environment front, we have a project in South Africa whereby we are converting our facilities to solar. We expect to save more than 500 tons of CO2 per year.

Let's move to IoT and the connected pool. Let me share some numbers in this field where we see continued momentum. First, we committed to reach 1 million connected users by 2025, and we are ahead of the curve at some 700,000 users. We recorded an outstanding greater than 40% growth year-to-date in new users connection rate.

If we focus on North America, it's worth highlighting that the higher-priced connected product sales is growing about 3x more versus nonconnected product in this still capacity-constrained space. We continue to learn and grow in the SaaS or Software-as-a-Service space. Although still small, we are pleased to share that we saw a strong growth of greater than 27% of service revenue in North America on a last 12-month basis.

In addition, our experience shows the penetration of connected new pools in North America has increased to around 80% versus the 65% that we shared back in our April 2021 Capital Markets Day. Finally, as for M&A, we have just acquired Swim & Fun, a market-leading distributor based in Denmark that serves the Nordic market, a market with growth potential and high margins. It supplies a wide range of maintenance and upgrade products, water treatment and above-ground pools and spas, mainly for the mass market.

4

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

JULY 29, 2022 / 9:00AM, FLUI.MC - Q2 2022 Fluidra SA Earnings Call

The company reported approximately EUR 30 million of sales in 2021 and adjusted EBITDA margin close to 20%, with an upfront payment of less than 5x EBITDA multiple and potential future earn-out payable in 2026 based on '23 to 2025 EBITDA. This deal is expected to be EPS accretive in 2023.

Lastly, let me remind you that we reached in June an agreement to merge our Hungarian operations with Kerex, a leading pool equipment distributor that will allow Fluidra to offer a more comprehensive product portfolio to an expanded customer base.

Kerex reported sales of approximately EUR 10 million in 2021 and the EBITDA multiple paid is less than 5x. We expect to start consolidating it as of late Q3. Both deals reinforce our leading distribution position in Europe.

Turning now to Page 8. You see the sales evolution by geography. During Q2, global sales grew 15%, benefiting from our accretive M&A activity in 2021. We grew 4% on a constant FX and perimeter basis. In the 6-month period, sales grew 22% and 8% when adjusted for currency and perimeter.

Southern Europe's good performance continued with currency and perimeter adjusted growth of 10% in Q2, mainly driven by Spain's strong sales evolution in the quarter and very good performance of commercial pool, both helped by the return of tourists. For the 6-month period, this region saw growth of 16%. The rest of Europe was impacted by the difficult environment previously mentioned in Northern Europe and had a tough comparable in Q2 2021.

North America sales were up 34% or 41% for the quarter and the first half, respectively, driven by last year's strong M&A activity. They grew 3% and 6% on an adjusted organic basis against a monster comparable in Q2 2021 where this region saw an outstanding growth of 70% organic, which benefited from the Texas freeze event. We see accelerating sell-through levels post this one-off event.

In mid and late May, we began to see replacement orders slow as customers began to adjust their coverage ratios for product as the supply chain recovers. This trend should peak in Q3 and we believe will be mostly complete by the end of the year, returning the industry to a normal pattern for 2023.

Rest of the World recorded strong sales growth of 26% for the quarter and 23% for the 6-month period on a currency and perimeter adjusted basis. This area saw strong growth in Australia. Perimeter contributed about 5% of Q2 growth and about 6% in the 6-month period.

Next, on Page 9, we see the evolution by business unit. Residential Pool is our largest segment and accounted for 75% of our sales. The business grew 12% driven by M&A and was flat for the quarter and had a 4% growth for the 6-month period on an adjusted FX and perimeter basis.

Q2 performance is mainly explained by the inventory, supply imbalance and the current situation in Northern Europe. Strong evolution in new construction that offset the aftermarket against an outstanding comp in 2021 of more than 50% growth. Top performing product categories were pumps, filters and cleaners.

Commercial Pool grew strongly, supported by the recovery of tourism, which we expect to continue, our strategic investments and accelerated by inorganic activity. The business increased 20% once adjusted for FX and perimeter in Q2 and 23% in the first half, positioning us well for further growth.

Pool Water Treatment grew 26% for the quarter once adjusted for FX and perimeter and 27% in the first 6 months of the year. This business unit saw a strong performance of both Water Care Equipment segment, along with Chemicals, positively impacted by price and negatively affecting the overall mix.

The Fluid Handling business recorded a 3% growth in the quarter and 10% in the first half, adjusted for FX and perimeter, aligned with our residential activity.

No doubt, our global platform is truly demonstrating its resiliency and balance during these volatile times. Lastly, I want to thank our talented team of more than 7,000 employees and business partners for their agility, positivity and sacrifices.

5

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.