Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the CAREL Nine Months 2019 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of CAREL. Please go ahead, sir.
Good morning. Thank you for joining our call for the presentation of the nine-month 2019 results. I'm starting from page two with a recap of the main events related to the execution of our strategic guidelines. One of such guidelines is to increase our direct sales footprint to have a better control of the market and of the sales process. Accordingly, in January, we set up CAREL Ukraine, a branch of CAREL Poland, in order to better manage and develop the Eastern European market, which is providing very good results and also a very good potential for the future. Also in January, to have a better execution of the strategy, we appointed a managing director to whom all the main operating processes of the group report.
In July, we did the official inauguration of the new plant in China, three times as large as the previous one. We also deployed our first line of inverters for variable speed compressors in the region, in order to be better prepared and competitive as the sensitivity to energy efficiency and sustainability grows in the region. In September, we did the official inauguration of the enlarged plant in the U.S., which is now two times as big as the previous one. Again, in September, following the previous guideline of having a better coverage of the territory, we acquired Enersol, a distributor in Quebec, Canada, specialized in humidification systems and humidification-related services. I'm now moving to page three, where we can find a recap of the main highlights for the period.
In spite of a further deterioration of the macroeconomic scenario, in particular in Western Europe and China, the revenues growth rates and the profitability for the first nine months stayed close to the first half, proving once again the resiliency of our business model. Overall revenues grew by 18.9% with a positive contribution from HygroMatik and Recuperator, but also with a positive contribution organically from all geographic areas. Organic growth is 6%, down from 7.3% in the first half. The difference is entirely explained by two reasons. The first one is the expected normalization in the growth rate in North America, which is now a solid and very positive double digit, but is, as expected, normalized after an exceptional second quarter where we recover the backlog.
The second reason is the further slowdown of the refrigeration market in Western Europe due to the macroeconomic uncertainty into a de-stocking process going on in the supply chain in the industry. We believe this effect to be temporary because all the underlying trends and tailwinds driving the expected growth in the market, especially related to efficiency and sustainability, do still apply. We have also to remind that refrigeration in Western Europe last year grew close to 24%, so to some extent, a slowdown in the growth was to be expected and physiological. Refrigeration is, in any case, experiencing a very good growth in all the regions outside Western Europe. The overall EBITDA margin is 20%, basically in line with the first half when it was 20.2%.
If we exclude the IFRS contribution of EUR 2.9 million and some minor non-recurring elements, EBITDA margin is 19.1%, again, in line with the 19.3% of the first half. We have a robust cash generation with a free cash flow of EUR 18.8 million, coming from positive operating results, as well as from a further reduction in net working capital. As we will see, the cash absorbed by working capital this year is EUR 2.8 million, down from EUR 5.9 million in the first six months. We are continuing to execute the expected reduction in working capital after the resolution of the raw material shortages. I'm moving to page four with some additional economic and financial details. Revenues grew by 18.9% total or 17.9% net of the foreign exchange. Looking at the bridge, we start from EUR 208.4 million in the first nine months of 2018.
We have EUR 11.8 million of purely like for like organic growth, EUR 2 million of positive effect from the foreign exchange, we lose EUR 1.3 million from the non-core decline. Without this non-core decline, organic growth would have been one percentage point higher approximately. We arrive at EUR 220.9 million of organic sales. To which we add EUR 26.8 million coming from the M&A, we land at EUR 247.7 million of total revenues for the period. EBITDA adjusted grows by 15%, with a 20.3% profitability, which benefits from EUR 5.7 million coming from HygroMatik and Recuperator, EUR 2.9 million from the IFRS 16 adoption. It also discounts approximately EUR 800,000 of recurring costs from the IPO, EUR 400,000 of direct costs related to the U.S.-China duties.
These costs related to the duties have not substantially increased in the quarter, thanks to the execution of the supply chain that we did, moving production for the U.S. outside of China and into the other regions, and this has strongly mitigated the effect of the duty costs. Net profit grew by 13.9%. Net profit adjusted is substantially stable compared to last year in spite of higher financial charges. Finally, CapEx grew by 38.1% to EUR 16.3 million, absolutely in line with the plan, and mainly related to the capacity expansion roadmap. Moving to page five, with the revenue breakdown, we can see that we have positive contribution to growth from all geographic areas. EMEA grew by 21.4% net of the foreign exchange, with a slight deceleration compared to the first half, when growth was 22.1%.
This slight deceleration, again, is entirely due to the temporary slowdown in the refrigeration market. EMEA, of course, benefits from the consolidation of HygroMatik and Recuperator, in any case, we report organic growth in the region. APAC grows by 8.6% net of the foreign exchange, up from 8.3% in the first half. North America grows by 13.2% net of the foreign exchange, which is a very positive result, is normalized after an exceptional second quarter where we recovered the backlog. Now, as expected, it reaches the level that we expect for the growth in the region. Latin America grows by 5.6%, up from 2.8% in the first half, this acceleration is related to a very positive result in Brazil, despite an economic situation in the rest of the region that remains pretty negative.
Looking at the breakdown by sector, HVAC grows by 27.8% net of ForEx, basically in line with the first half. Refrigeration grows by 4.4% net of effects, down from 7.4% in the first six months. Again, this deceleration is entirely concentrated in Western Europe due to the macroeconomic uncertainty and the de-stocking effect. Again, we expect this to be temporary, and we report a very good growth in refrigeration in all the other regions. Keeping also in mind that refrigeration in Western Europe last year grew close to 24%. We then have a 25.7% decrease in the non-core, which is something that we expect. Without this decrease, organic growth would have been approximately one percentage point higher. Organic growth of the core business is, of course, the main KPI for us.
I'm now leaving the word to Giuseppe on page six for commenting the items below the EBITDA.
Thank you, Francesco. Looking at the line below the EBITDA, we can comment the increase in the depreciation with an increase of almost EUR 6 million. The higher depreciation are mainly due to the change in the scope of the consolidation that it accounts for almost EUR 3 million. To higher CapEx due to the expansion of the footprint, and also for the adoption of the IFRS 16 that account for almost EUR 2.9 million. Regarding financial charges, the period shows EUR 990,000 of financial charges compared with EUR 100,000 of financial income last year. This is mainly due to the higher interest expenses due to the loans for the M&A transaction, and also for the absence of deposit contribution coming from the life insurance presence in 2019. Looking at the line of the taxes, we show in the period a tax rate of 22.3%.
That is substantially in line with the first half, where we close with EUR 22.9 million, and is also in line with our guidance for the fiscal year. I'm moving to page seven, where we show the bridge of the net financial position. Last year, we closed with EUR 59.1 million. In the period, we have generated EUR 18.8 million of free cash flow, with absorption of cash due to the CapEx of almost EUR 17.6 million.
We have distributed EUR 10.1 million for dividends, buyback of share of EUR 0.8 million, and we close with an organic net financial position of EUR 50 million with a generation of cash of EUR 9 million. After that, we can notice an investment in the tax step up, which we will give more details in the next slide. Adding the IFRS effect of EUR 14 million, we close the period with EUR 75.4 million.
One comment about the net working capital improvement. We have further improved the absorption of cash, because in the period we have absorbed EUR 2.8 million compared with the EUR 5.9 million of the first half. This is mainly due to the improvement on the inventory and in the decrease of the tax credits. Moving at page eight, further details about the tax step up. It is based on the application of an Italian tax rule, according to which the parent company paid EUR 11.1 million taxes on the excess cost related to the M&A transaction that has been completed last year in 2018, for the acquisition of a HygroMatik and Recuperator. The tax burden has been calculated with a favorable tax rate of 16%.
The advantage for the parent company consists in the possibility to deduct from its taxable income the excess cost in five installment through depreciation, starting from the second year after the tax payment. The tax benefit of the deductible cost has been calculated at 27.9%, according to the actual ordinary income taxes. From an accounting point of view, the amount of EUR 11.1 million represent a tax asset that will be charged to the profit and loss in five years, starting from 2021. The estimated gross tax benefit is estimating EUR 19 million. This should be compared with the initial tax burden of EUR 11.1 million. Switch back now to Francesco.
Thank you, Giuseppe. I'm now on page nine. To summarize, even in presence of a difficult macroeconomic scenario in several geographic areas, especially Europe, China, and Latin America, we managed to maintain a significant growth rate in revenues, also organic, and a stable profitability, proving once again the resilience of our business model and the balancing of our business portfolio. There is a temporary further deceleration in the refrigeration growth rate, mainly linked to the European economic slowdown and to a destocking happening in the industry. This effect, we believe, is temporary because all the underlying trends related to efficiency, sustainability, and new refrigerants are still there and do still apply. Considering that refrigeration in 2018 in Western Europe grew close to 24%.
Somewhat normalization of the growth rate was to be expected, and the market is still growing very well in all the regions outside Western Europe. We continue to execute our plans according to expectations. The integration process of HygroMatik and Recuperator continues very smoothly. They are absolutely in line with the respective business plans, and we have a high single-digit top line growth of the two combined entities. The improvement in inventory is also confirmed. We continue to execute the reduction in net working capital after the resolution of the raw material shortage situation, and the footprint expansion plan launched in 2018 is substantially completed according to plan.
To conclude, taking into consideration a possible further worsening in the European economic landscape and according to the current order intake level, for the full year, we expect the revenues growth rate to reach a mid-single digit level and a slight reduction in profitability due to the lower impact of the operating leverage and also due to a seasonal effect that we experience every fourth quarter due to a slightly higher accrual of especially R&D costs. From a midterm standpoint, we don't see any change in the secular trends underlying our reference markets. Thank you so much for your attention. We are now more than happy to answer to your questions.
Excuse me. This is the Chorus Call Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from William Turner with Goldman Sachs. Please go ahead, sir.
Hi. Morning, everyone. I have a couple of questions. The first one is on this European economic slowdown that you're experiencing in refrigeration. Are you finding it is specific to the refrigeration market? The reason why I'm asking is because HygroMatik and Recuperator are obviously also European-based businesses, and they're growing high single digits top line. Is the drivers for HygroMatik and Recuperator significantly different because they're more HVAC orientated? What is the drivers behind that top line growth outperforming the refrigeration and the HVAC existing business?
Okay. Thank you for the question. Yes, the temporary slowdown we are seeing is mainly concentrated in the refrigeration market. We believe that the uncertainty in the economy, as well as the fact that many players increased their stock at the end of last year, are leading to this temporary slowdown, again, concentrated in refrigeration. In fact, HVAC in Western Europe, even organically, even excluding HygroMatik and Recuperator, is continuing to grow at a pretty steady pace. Thanks to cross-selling, which is helping us very much in Western Europe, where our market share is still very high. Talking about HVAC, we do see some difficulties, especially in those applications related to the automotive sector, in industrial applications related to the automotive sector, but that is compensated by cross-selling. In the end, HVAC organically is still showing a steady growth rate.
Talking about HygroMatik and Recuperator, you're right, they insist on the HVAC market, and so they are continuing to grow very well also because we are getting results by a different management strategy of the two companies, which is providing a very good growth.
Is the data centers market performing particularly well too? I can imagine at the beginning of the year, that could have been an area of weakness, but there seems to have been some improvement in the last couple of months.
Okay. Well, the data center market is pretty steady from our standpoint. We don't see any major differences. Of course, Recuperator, especially, can benefit greatly from the growth in the data center market because the Recuperator heat exchanger can be used in indirect evaporative cooling, in the air technology for cooling data centers. So for sure, the growth in the data center market is benefiting Recuperator, and will benefit even more Recuperator in the future. Overall, we don't see any major changes in the rate of growth of this market.
Okay, great. My final question is, obviously, we're now almost halfway through November. Do you have any kind of early ideas for what your expectations are for 2020 in terms of growth and/or profitability?
Okay. Well, considering the very high volatility on the market, it is still a little bit too early to provide the guidance for 2020. Let's say that all the medium-term drivers and expectations that we have are absolutely confirmed. Talking, for example, about refrigeration in Western Europe, just to mention one, there is still the driver of the natural refrigerants, that, of course, will make the market grow significantly in the coming years. That's one of the reasons why we expect the slowdown to be pretty short-term, also due to the destocking that at some point will end. This slowdown is temporary. All our mid-term expectations and drivers are confirmed. It is a little bit too early to provide the precise guidance for 2020.
Great. Thank you.
The next question is from Alessandro Tortora with Mediobanca. Please go ahead, sir.
Yes. Good morning to everybody. I have, let's say, four question, if I may. The first one is on the U.S. market. As you mentioned before, clearly the trend in, let's say, North America is going to not normalize in the coming quarters. Can you remind me which sort of growth we can expect, okay, in the medium term from this market? I have in mind, let's say, something in the mid-teens area for you in Americas, also considering clearly the starting point, which is, let's say, pretty small. Do I go with the second question, or do you prefer to answer to the first one, Francesco?
It's okay. I can answer to the first one. Thank you for this question, Alessandro. Well, basically, yes, you're right. In the U.S., our expectations for the medium term is to have a double-digit growth. The level of growth that we now have is basically the normal one that we would expect after the recovery of the backlog. This is a growth rate that we can also project in the coming periods. Overall, in the medium term, yes, we do expect a double-digit growth rate in the U.S. Of course, this assumes that the economy in the U.S. more or less stays where it is, because if there is a major slowdown in the U.S. that we don't see at this moment, then this could change. For the time being, from what we see, we can expect to continue growing with more or less this level.
Okay. The second question is on China or let's say, generally speaking, APAC. If I remember well, in the previous call, you mentioned that you are going, let's say, to be much closer to your final customer, and maybe also, let's say, doing some price repositioning, considering the premium price of CAREL versus the other local competitors. Can you, let's say, give us an update on how is going the strategy? Clearly, it will take, let's say, more quarters, not just one. Just to have an idea, how is proceeding this strategy in APAC?
Yes, we are proceeding to execute the strategy with a very strong focus in the region and managerial attention. The very short-term action that you correctly reminded is to analyze where we need to adjust the positioning because there is too high premium price. That is something that we are already doing. In terms of more medium-term action, yes, we are moving to have a higher direct access to the end users also in HVAC. This is something we have been doing in refrigeration, also in China, which has providing very good double-digit growth in the refrigeration in the region. We want to do that also in HVAC, starting from those applications where the end users are more concentrated, so to some extent, more similar to supermarket chains, which is, for example, data centers.
We're having the first very good and interesting feedbacks from this action, having been already specified by at least one very important data center company in China. We're encouraged to continue with this strategy because it's providing results. As you correctly say, this is not a short-term strategy. This is a strategy that will deploy its effect in the coming quarters, but we are very satisfied about how it's beginning to unfold.
Okay. Let's say the third question, then I stop, okay, I promise, is on the service side. Clearly this year, let's say, we are observing the integration of HygroMatik and Recuperator. Let's say, what's next on the service side? For instance, maybe, if you can also give us an update, maybe next year, we may see something on the M&A side, let's say, in this specific business. Thanks.
Okay, thanks. Yes, that's also another very interesting topic. On the service side, starting from the digital services for food retail, we're starting to have the first very positive feedbacks from supermarket chain. We have a very interesting feedback, in particular from an important supermarket chain, with a contract signed, for the provision of digital services, and we expect more to come because they are in our pipeline. We are now ready to start executing a service strategy, especially related to the humidification market, because in humidification, it's easier for us to start deploying services because it's a finished good that we make and not a component. It's technically easier. We already have a strategy designed, and we will start execute it pretty soon.
We hired an individual that is coming on board in the next few weeks, that is a senior, very experienced executive in services in our industry. He will help us execute the strategy, starting from humidification, but not stopping to humidification. That's just the start. We acquired Enersol. It's a small distributor in Canada, but they are very focused on services for humidification. That will also be an additional way to learn after what we learned from HygroMatik, that taught us several very interesting lessons on the humidification business model. Yes, you're right, services is a very important direction of exploration for us in the M&A strategy.
Francesco, just if I may, as a follow-up, considering HygroMatik investment and CAREL positioning on humidification, maybe you can, let's say, start to focus on Europe in the service side, or as you said, the idea is to be immediately global? Just to have an idea how you are going to approach this service expansion.
Okay. The deployment of the humidification service strategy I was mentioning will start from Europe, because that's easier to start from there. With the second priority, we are also looking at the U.S. and also to possible non-organic ways to start developing services in the U.S. As far as the humidification services strategy is concerned, we are starting from Europe.
Okay, thanks. Very clear.
The next question is from Emmanuel de Figueiredo with LBV Asset Management. Please go ahead, sir.
Good morning, and thanks for taking my questions. Just two simple ones. The first one is on Slide five, can you just clarify what is the organic growth in HVAC? The second question is on the share buyback you've done this year of EUR 0.8 million, can you just also help to clarify what is the rationale? Is it capital remuneration, or is it to do with stock options? Thank you.
Okay. Thank you for the question. The organic growth in HVAC would be more or less 7%. The organic growth in the HVAC market in the nine months. Talking about the shares buyback, that's basically related to the long-term incentive plan for executives in the company that was approved by a shareholders meeting last year. We bought the shares basically to provide the performance shares related to this long-term incentive, and that's the only reason why we did the buyback.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is a follow-up from Alessandro Tortora with Mediobanca. Please go ahead.
Yes. Hi, good morning again. Just, if I may, a follow-up on the tax step up you described in the presentation. If I understood well, we will not see this EUR 11.1 million step up on the P&L because it's already accounted like an asset at the net debt level, at balance sheet level. We will start to see the positive impact, the benefit from this deductible cost starting from 2021. Is it right, Giuseppe? Just to understand the mechanism.
Yes, the mechanism you described is exactly this. Because the incentive can be utilized by the company after two years from the payment of the favorable tax rate that we paid this year. It means that for the moment, for the accounting period starting from this year to the 2020 included, this will be considered as a tax asset that will be charged to the P&L starting from the year of the utilization, that is the 2021.
Okay.
In five installments.
Okay.
Once again, if you wish to ask a question, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
Okay. Thank you so much for your attention and for your questions. Talk to you again for the full year 2019 results. Thank you very much. Have a good day, everybody.