Fluidra S A : Resultados preliminares 3T y actualización previsiones 2022 - Transcripción Audio

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EDITED TRANSCRIPT

FLUI.MC - Preliminary Q3 2022 Fluidra SA Earnings Call

EVENT DATE/TIME: OCTOBER 19, 2022 / NTS GMT

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OCTOBER 19, 2022 / NTS, FLUI.MC - Preliminary Q3 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

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

Clara Valera Fluidra, S.A. - IR & Business Development Director

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

Xavier Tintore Segura Fluidra, S.A. - Chief Financial & Transformation Officer

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

Alvaro Lenze Julia Alantra Equities Sociedad de Valores, S.A., Research Division - Research 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

Clara Valera - Fluidra, S.A. - IR & Business Development Director

Good morning and welcome to our Q3 Update Call following our announcement yesterday evening ahead of our scheduled Q3 results release on the 28th of October. I am Clara Valera, and I recently joined Fluidra as Investor Relations and Business Development Director. I am here with our Executive Chairman, Eloy Planes; our CEO, Bruce Brooks; and Xavier Tintore, our CFTO.

Bruce and Eloy will walk you through a few slides on our Q3 update, and then they will all be available to take your questions. You can follow this presentation in its original English version or in Spanish. (Operator Instructions) Please feel free to dial in during the presentation so that the operator can include you in the Q&A roster. The presentation is accessible via our website, fluidra.com, and has also been uploaded to the Stock Exchange Commission. A replay of today's presentation will be made available on our website later today.

With that, I hand over to our Executive Chairman, Eloy Planes.

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

Good morning to you all, and thank you for your interest in Fluidra and for taking the time to join us this morning. You will, of course, have noticed that we have taken the unusual step to preannounce our quarterly resource. Why have we done this? Like many businesses around the world, we are experiencing an important change in some elements of our trading conditions. And it is always our approach and indeed, in our DNA to be transparent with our investors and all our shareholders.

Therefore, our objective today is to share with you what we're seeing and the best of our ability in the current environment and updated picture of our expectations. Above all, despite the current change in the climate, my leadership team, my Board and myself, we are very confident that all our work to strengthen and position the group for long-term success are in excellent shape. That team (inaudible) and all our ongoing efforts will be to optimize our performance for customers, for employees and for shareholders. We look forward to discussing with you this morning and then in more detail at our (inaudible) Q3 results next week.

With that, I hand first to Bruce.

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OCTOBER 19, 2022 / NTS, FLUI.MC - Preliminary Q3 2022 Fluidra SA Earnings Call

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

Good morning, and thanks, Eloy, and thank you all for participating today in this conference call. We started the year strongly with Q1 volume growth year-on-year, continuing the trends of 2021 and an overall good first half. Our distribution partners, pool professionals and end customers continue to generate strong demand.

However, trading conditions have weakened during the third quarter, affected in the short term by a higher-than-expected channel inventory correction in a more uncertain economic environment. The market conditions we are now seeing leads us to revise our guidance for the year. We will share with you today our preliminary third quarter results, our revised 2022 guidance and the actions we are taking.

We are seeing a strong destocking effect, in particular, in North America. Supply chain disruptions coupled with accelerated demand in 2020, 2020-'21 and continued into the first half of 2022, generated high stock levels along the supply chain in order to protect their business.

Inflation further accelerated the inventory buildup, in particular, in North America. Distribution bought additional stock to beat price increases. We are now seeing a normalization of inventory levels along the supply chain. We continue to increase our prices, passing on raw material cost increases despite some mix impacts in the third quarter and during Q3. Price read-through in North America has accelerated.

Some raw material prices and transportation are showing signs of decline, which is positive for our margins. Nevertheless, the macroeconomic environment remains uncertain, in particular in Northern Europe, leading to softer demand and inventory correction, driven by low consumer confidence on the back of higher energy costs, other inflationary pressures and higher interest rates with a backdrop of geopolitical instability.

Southern Europe remains more resilient in particular, thanks to the tourist season and commercial pool demand. On the positive side, in North America, we still see good sell-through of around mid-single-digit growth year-on-year. Now we are in the middle of the Early Buy campaign, which is going well and returns us to a more normalized purchase cycle.

In APAC, where we did not grow as strongly last year, we are seeing a more stable demand and limited destocking. Australia, our main country in the, region continues to evolve positively. The summer campaign in the Southern Hemisphere will begin shortly. The slowdown in volumes is also influencing our inventory levels and cash flow generation. That positions our ratio of net debt to last 12-month EBITDA at the end of the quarter at around 2.4x. As a consequence of these factors, we are expecting Q3 sales of around EUR 520 million, down 7% year-on-year, FX adjusted. Q3 EBITDA is expected to be around EUR 95 million.

Moving on to Slide #4. We wanted to explain our 2022 guidance in context. Fluidra is a stronger business today than in 2019 despite the correction. We expect the destocking to peak in Q4 and therefore, estimate sales in the financial year 2022 to be around EUR 2.4 billion.

On the left-hand side of the slide, you can see a sales bridge from 2019 to our revised 2022 guidance. I'll remind you, 2019 was the first full year following the merger with Zodiac and the last full year prior to the pandemic. That year sales amounted to EUR 1.4 billion. You can see the meaningful contribution from acquisitions and price over the last 3 years.

You can also see the cumulative volume effect and the inventory correction. The contribution from volume from 2019 to 2021 was around EUR 600 million. We estimate that around EUR 200 million of that volume growth was inventory buildup in the channel, which started correcting during Q3. And as I said earlier, we expect it will peak in Q4 and continue in Q1 next year.

Additionally, around EUR 100 million was pull-forward demand, mainly Texas freeze, heat and above-ground pools. We expect that to normalize over a longer period of time, mainly 4 years, including 2022. If you zoom in on 2022, there's roughly an additional EUR 100 million of inventory built in the first half of the year that is also correcting inside of the year.

We see positive dynamics with price. We've implemented increases over 25% during the period, and as inflation eases and raw materials and transport costs decline, we should see a favorable impact on margins, returning to a more historic level.

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OCTOBER 19, 2022 / NTS, FLUI.MC - Preliminary Q3 2022 Fluidra SA Earnings Call

Our strong cash generation allowed us to complete accretive acquisitions over the period. And for the financial year 2022, we are now expecting an EBITDA at least EUR 500 million, driven mainly by the volume effects I've been pointing out and some dilution in the mix. This is still significantly above 2019 levels, driven by volume, positive price read-through, a higher average ticket and the contribution from acquisitions.

Moving to Slide #5. Looking to the midterm, we remain very confident on the fundamentals of the industry. On Residential Pools, as you know, about 2/3 of our demand is aftermarket. And a large installed base gives an even greater exposure. Over the last 3 years, we estimate more than 1 million pools have been added to the total park.

Based on our experience, aftermarket demand is resilient. About 1/3 is New Build, which is more cyclical, and we anticipate it will be impacted in the short term by the current economic downturn. It's a bit too early to guide for 2023, but in the spirit of transparency, we wanted to provide some color on the moving parts to help you think about next year.

On the left-hand side, you can see a historical look of new residential in-ground pools built in the top 5 countries. This can give you an idea of where demand may end up volume-wise, depending on your view of the future. In 2023, we see demand in New Build decline when compared to 2022 levels with weaker performance in Europe than North America.

Central Europe will continue to be the most impacted by the environment with risk of contagion into Southern Europe. In the States, permit volumes and dealer surveys indicate a decline of 10% to 15% with a larger impact on the entry-level pool, while builders are carrying into 2023 a backlog in premium pools. The Sunbelt, Fluidra strength, will continue to outperform the more seasonal markets. We see the Aftermarket more robust after the inventory and pull-forward correction, offset by price.

Commercial Pool, which represents about 10% of sales, remains sound, supported by pent-up demand and the tourism recovery. As you know, the pool industry retains price increases other than in commodity products. We are seeing a mid- to low single-digit price impact on 2023. We see our industry transitioning towards the normalized ordering pattern we had historically with mid-single-digit top line growth, driven by an installed base growth of 2%, coupled with a higher average ticket due to price and technological improvements in the renewal of pools.

If we move to Slide #6, we want to walk you through the actions we are taking and why we are confident, we remain well positioned for the future and in shape to deliver on our medium-term objectives for all our stakeholders. We talked to you about our simplification program and our Q2 results presentation. Initially, this was a EUR 60 million plan. We have launched and revised upward this plan to deliver EUR 100 million of cost benefits with a target of delivering 1/3 in each of the next 3 years.

The program is focused on redesigning our product offering to achieve savings, streamlining our operations to be more efficient and simplifying our organization. The team demonstrated the ability to pivot in the changing environment during the pandemic to support our customers. The same team demonstrated the capacity to deliver cost and synergy targets after the merger. I'm confident this team will again manage this transition.

At this point, I'll pass the floor to Eloy for some final remarks.

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

Thank you, Bruce. As Bruce has said, the industry is destocking, which we continue to have an effect in the short term and the macro remains uncertain. As these challenges are (inaudible), we will focus on the things we can control that make us a better company like our simplification program. We've had a temporary impact on our balance sheet. However, our inventory doesn't age and we'll expect it to correct in the coming quarters.

Our balance sheet is solid. We [refinanced] it at the beginning of this year, and we have long-dated maturities. Once we digest the inventory in these next quarters, our cash generation is strong. Our capital allocation framework is consistent and will retain optionality to continue to build our leading platform.

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OCTOBER 19, 2022 / NTS, FLUI.MC - Preliminary Q3 2022 Fluidra SA Earnings Call

Fluidra is well positioned to continue to lead the pool and wellness market with our customer-centric approach, with our high quality and service, with our broad product portfolio and enlarged geographic footprint. We have been investing in the business to develop the pool of the future in terms of connectivity as well as a complete sustainable products offering, which are 2 areas where we are clear leaders.

We look forward to sharing with you more a detailed breakdown of Q3 performance at our (inaudible) results release next week. Thank you all for your participation. Now we open the Q&A term, Bruce, Xavier and I are ready to take your questions.

Q U E S T I O N S A N D A N S W E R S

Clara Valera - Fluidra, S.A. - IR & Business Development Director

Many thanks, Eloy, and Bruce for your presentation. We now begin the Q&A session. (Operator Instructions) Alex, please go ahead with the first question.

Operator

(Operator Instructions) Our first question comes from George Featherstone from Bank of America.

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

I'll go one at a time. First thing is on the channel inventory normalization. I guess, the key here is trying to understand what gives you confidence that the peak of this normalization will be in the fourth quarter. And then the comments that you made on the duration of the normalization, how can we get comfortable with that -- bearing in mind the visibility seems to have changed quite dramatically from the first half to this third quarter.

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

George, I mean clearly, we missed on this one. So we've got to own that. When we look back on it, it seems fairly obvious. At the end of Q2, I mean, we saw the inventory correction within the year, but we didn't really see the inventory correction from 2021. And I think the reason was because we had that material backlog. But the reality is 2021 was overserved because sell-in was ahead of demand.

And it was hard to see, I think, just because the customers were banging on the door saying, "we need more product, we need more products. " And so that kind of exaggerated the demand signals that were out there. And if you think about it, it kind of again makes sense in hindsight because as we are slow to serve, they're going to try to figure every way to protect their business by building inventory so that they can complete their jobs.

In addition, it certainly benefited them because they could beat the price. They knew the inflation was coming at them. And so it was -- I think it was smart for them. Supply chain recovered much quicker than we expected in the third quarter, so the soft landing kind of disappeared. We went to -- from famine to feast on the inventory.

If you think about it in our peak, we were over 90 days to serve. And now we're back to our traditional less than 10 days to serve. So I mean, I think naturally, what does the supply chain do. They reduce their forward coverage ratios, and they go back towards a more normal type of base.

In addition, George, we saw inventory out there that we've never really seen before. We kind of had it anecdotally before, which was that once you get past distribution, particularly in North America, that you would see Pool Pros and people like that buy inventory they never had it before. And since then, we've kind of gone out and done some surveys and got a sense of how material that is. And so we feel like the numbers that we have today are frankly more accurate than they were before.

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