Good morning. This is the conference call conference operator. Welcome, and thank you for joining the Carel nine months 2018 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 Industries. Please go ahead, sir.
Good morning. Thank you for joining our call for the presentation of the first nine months of 2018 r esults. I'm going straight to page two with an overview of the results. I start by saying that they are basically in line with the first half of the year and with our expectations, both in terms of the top line and in terms of profitability. Sales grew in the first nine months by 8.4% or 10.7% net of the Forex. EBITDA margin, adjusted for the non-recurring IPO cost, is 20.9% of sales, up compared to the same period of last year, leading to a 9.4% growth. Net profit adjusted accelerates compared to the first half of the year and has a growth of 15.6% in the nine months. All the geographic areas reported a growth in the first nine months of the year.
I would like to mention especially Southeast Asia, that with the same Forex was negative in the first six months of the year, whereas now has moved into positive territory net of the Forex. Finally, our footprint expansion roadmap is completely on track, both in terms of CapEx. There are slightly more than the double of the same period last year, which is exactly what we expect, and are also in line in terms of the execution and implementation of the plan. Going to page three with some more details on the economic results. Looking at revenues, the growth of 8.4% or 10.7% net of Forex sees a very slight decrease compared to the first half of the year. It's basically 70 basis points less growth. This is entirely due to two reasons.
One is the decrease of the non-core business that I will mention in a few minutes, which is something that we want and is positive for our profitability. The second reason is the fact that over the summer, we had a peak in the backlog of deliveries due to the shortage of components. Backlog that has already been recovered during Q4. It was just a peak already recovered. EBITDA decreased by 4.1% in the first nine months. That's entirely due to the non-recurring IPO costs. EBITDA adjusted was up by 9.4% to a 20.9% profitability, up from 20.8% in the first nine months of 2017.
This improvement is a very good result because it means we offset a number of negative elements this year, which are the recurring IPO costs, of course, increasing compared to the previous years, the foreign exchange, the footprint expansion, the shortage of raw materials, and the consolidation of the Polish distributor that has a lower marginality. Despite all these negative effects, we managed to increase our profitability, thanks mainly to operating leverage on personal costs, which is what we expect and we are getting, and manufacturing efficiencies. In fact, the cost of goods sold in % is basically in line with the first nine months of 2017. Looking at the EBITDA bridge, we have EUR 39.9 million in the first nine months of 2017. We have EUR 4.1 million of organic growth coming from the top line as well as from the operating efficiencies that I just mentioned.
We have half a million EUR coming from the business combination of the Polish distributor that we acquired in June 2017. Obviously, in the second half of the year, we're not having any additional contribution from this business combination. We lose EUR 900,000 for the foreign exchange, which is good because we lose more than EUR 4 million on the top line. Losing just EUR 900,000 on the bottom line means that we are pretty well hedged. We arrive at an adjusted EBITDA of EUR 43.6 million. We have EUR 5.3 million of non-recurring items, almost all of them related to the IPO, and we arrive at a reported EBITDA of EUR 38.3 million. Net profit is basically in line with the first nine months of last year, notwithstanding the extraordinary items that we have.
If we adjust for the non-recurring IPO cost, net profit grows by 15.6% with an acceleration over the first six months of the year. This is due, again, to the same reasons of the EBITDA improvement, plus an improvement in the tax rate. CapEx, we have in the first nine months, EUR 11.8 million, which is slightly more than the double of the same period last year, which is absolutely in line with our expectations, because I remind you that for this year and next year, we expect to double more or less the level of CapEx that we had on average in the last three years. This is exactly in line. Moving on to page four. Commenting the top line breakdown. Net of the foreign exchange, all the regions globally had a growth in the first nine months.
Western Europe grows by 11.8%. We consolidate our leadership, thanks especially to cross-selling of high-efficiency components and to a very good growth in refrigeration. Eastern Europe and Middle East grows by 20.2%. If we exclude the consolidation effect of the Polish distributor, it grows double digit in any case, this is also a very positive result, again due to cross-selling, growth in refrigeration, but also a better control of the market due to a new leadership we have in the Middle East and to the acquisition of the Polish distributor itself, that, of course, gives us a better direct control on the end market. North America accelerates to 6.1%, up from 3% growth in the first six months. This is especially due to a positive growth, a very good growth in refrigeration. Latin America improves a little bit. We have a 1.4% growth, especially concentrated in Brazil.
South APAC, as I was mentioning, moves into positive territory. We have a 1.6% growth as we start to get the results of the actions that we took in the last few months concerning the improvement of the execution of our sales strategy. North APAC is basically in line with the first six months of the year. We expect an improvement in the coming quarters as we improve our execution, thanks to a new leadership that we have in China since July, and thanks to the expansion of the footprint in China, that will have several positive effects on our growth. Looking at the breakdown by sector, net of effects, HVAC grows by 8.1%. We are consolidating our leadership there, where our market share is very high.
Refrigeration accelerates to a growth of 19.2%. It accelerates compared to the first half of the year, as we increase our market share globally, thanks to our strategy of technological innovation and promotion to end users. Refrigeration has a particularly good growth in Europe, China, and also starting to have good results in the U.S. The core business, HVAC plus refrigeration, grows by 9.7% in the first nine months or 12% net of effects. The no core decreases by almost 30%, basically for the phasing out of some residual contract manufacturing activities, which is what we want, and it's positive because, again, it's good for profitability and it's not strategic. I will now leave the word to Giuseppe Viscovich for a comment on the items below the EBITDA and the cash.
Okay.
On page five.
We are in page five. Below the EBITDA, we have an increase of our D&A, depreciation and amortization. That is due to the project of the footprint expansion, as was mentioned, especially in Croatia, in Italy, and in U.S. Below the EBIT, we have a decrease in the financial income. This is due to the disposal of EUR 35 million life insurance policies that, for this reason, we had a lower income interest. Concerning the Forex effect, we have lower losses on Forex exchange from EUR 700 to EUR 227,000. Concerning the taxes, we closed the period with a lower tax rate at 22% compared with 26% in the previous year. This is mainly due to a reduction in the tax rate in U.S. and in Italy, and also thanks to the absence of dividends paid in the Chinese subsidiary.
I'm going now to page six, where we present the bridge of our net financial position. From EUR 40 million positive of cash at the end of last year, we closed at almost EUR 15 million at the end of the period. During the period, we have generated EUR 32.4 million of cash from the operation. We have absorbed a cash of EUR 15.4 million, mainly due to the working capital, and this is mainly related to the increase in the inventory that during the summer season reached a peak. This is mainly due to the shortages in the electronic components and the extension in the lead time. We have already started to decrease in September, and we also see the possibility to lower the level of the stock by the end of the year.
Concerning the CapEx, we have EUR 11.8 million of CapEx, as was mentioned, related to the footprint expansion project, and EUR 30 million of dividends were distributed during the period. Now I leave back the stage to Francesco for the closing remarks.
Thank you. I'm on page seven to conclude. The results in the first nine months are essentially in line with the first half of the year and with our expectations, both in terms of top line and profitability. We are confirming our leadership position in Europe and our market share expansion overseas. We continue to see a very good growth in the refrigeration sector, which is even accelerating thanks to our strategy of market share growth due to technological innovation and end user promotion. We have a very good profitability that, adjusted for the non-recurring items, increases both in terms of EBITDA and in terms of net profit. This is particularly good considering that this year we have a number of negative elements like the footprint expansion, the recurring IPO cost, the foreign exchange, the shortage of raw materials, and the consolidation of the Polish distributor.
Our footprint expansion roadmap is completely on track, both in terms of the level of CapEx and in terms of execution. To conclude, we basically confirm for the full year the same guidance we provided in our last call for the first half results. We expect sales for the full year to be in line with what we saw in the first six months of the year. Our profitability will be, at the end of the year, more or less in line with the profitability at the end of 2017. I remind you that every year, towards the end of the year, our profitability goes down due to seasonality. Targeting the same level of profitability of last year is, in our opinion, a very good target this year, considering all the negative elements that I just mentioned. Thank you very much for your attention.
We're now more than glad to answer to all of your questions.
Excuse me, this is the c onference call 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 Jack O'Brien with Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. Just want to ask firstly on refrigeration growth and how we should think about longer term growth rates. Clearly, 19% is a fantastic growth figure, but how do you think about this going forward? Really, what are the underlying, or where is that growth particularly coming from? Is it specific products or geographies, or is it quite widespread?
Okay, thank you for the question. Refrigeration, the strategy that we are following to increase our market share, because in refrigeration, we have a bigger potential of market share expansion compared with HVAC, where we are already the leader. The strategy we're following is basically twofold. On the one end, we have technological innovation, introducing new architectures for refrigeration, also mutuated from the HVAC domain, like the variable speed compressor technology, for example, which is providing a number of very big benefits to end users. The first kind of strategy is breakthrough technological innovation, and the second direction is direct promotion to end users like supermarket chains, since they are more concentrated than in HVAC, and they are basically the beneficiaries of the advantages of our technologies. It's very important in this market to do direct promotion to those end users.
This is what we're doing, and this is really delivering results. Like for every very new technology, we typically start from Europe. In Europe is where so far we are seeing the most growth in refrigeration. However, we are also seeing a very good growth in China, and we are starting to see an interesting growth in the U.S. For the future, for the next few years, we expect that also overseas, we will have an acceleration of growth in refrigeration, in line of what is already happening in Europe. Let's say that our expectation for refrigeration, as we continue increasing our market share, will be in the high double digits territory for the medium term.
Thanks. Francesco, a couple more questions, if I may. Firstly, you talked quite a lot at the IPO about increasing environmental regulation and how that's a driver for your business, which obviously, more energy efficient components. Have there been any updates since we spoke in depth at the IPO from a regulatory perspective that we should be aware of? Then secondly, just following on, within HVAC, obviously you've got exposure to commercial, residential, industrial, including things like data centers. Are you seeing big variance in growth by end market?
Okay. Thanks, Jack. Concerning regulation, we didn't see any significant change in the last few months compared to the discussions we had during the IPO. Europe is still going on very strong with the F-gas and the Ecodesign Regulation. In the U.S., it's more, let's say, unclear. Of course, the current administration has tried to reverse some environmental regulation enforced by the previous administration. However, individual states are continuing to enforce the regulation, starting from California. What we see also in the U.S. is that, talking about refrigerants, there will be the transition to the new refrigerants, even if probably in a slower way compared to what is happening in Europe. Please consider that the trend for energy efficiency and also for refrigerants, in our opinion, is now going on more or less regardless of regulation.
Of course, energy efficiency means spending less money on the energy consumption, which is very important for data centers or supermarkets or industrial applications, where the impact of HVAC and refrigeration costs are very high. Also the new refrigerants are more and more important for the sustainability policies and sustainability profiles of all the end users, like technology companies or supermarket chains. This trend, we expect to continue now regardless of regulation. Regulation, of course, is still very strong in Europe and is still being enforced by many states in the United States, regardless of the reversal that the federal administration tried to push. Concerning the final applications in HVAC, we don't see any major differences in growth among them. It changes with the individual geographic areas.
We see the same growth trend for all the final markets in HVAC. No big differences.
Okay, thank you. Perhaps just one final question before I pass over. Obviously, you still have a very healthy balance sheet net cash position. Just interested to hear whether you see some interesting bolt-on opportunities still, and what we should perhaps expect there.
Yes, absolutely. We are working very hard on our M&A pipeline, and we are confident that we can get some interesting results in the future. I remind that the directions we are exploring are complementary components to basically increase the cross-selling. We have potential market, let's say, geography expansion. For example, purchasing some local competitors to accelerate the market share growth, as well as potentially services. These are the three directions. Again, we are working pretty hard on these directions, and we are confident to see some nice opportunities.
Great. Thank you.
As a reminder, if you wish to register for a question, please press Star and one on your telephone. For any further questions, please press Star and one. Gentlemen, there are no more questions registered at this time. Excuse me, there is a follow-up from Jack O'Brien with Goldman Sachs. Please go ahead.
Hi. Sorry to hog all the questions. I just wanted to ask, you talked about at the half year about the shortage of electronic components and how you've been managing that. What are you seeing today? Has that component shortage sort of been resolved? What's the latest?
Okay. Thanks for the question. On the general market, the shortage situation is not resolved. It will probably go on until more or less half of next year. That's what we expect. From our standpoint, basically, over the last 12 months, we increased the stock to cope with the shortage, and the situation from our standpoint is completely under control in this moment. As I was mentioning, we had a peak in the lead times over the summer, especially due to the fact that in any case, regardless of the stock increase, we had to increase the lead times. Lead times peaked during the summer, and that is the main reason why the growth in the first nine months is slightly less than the first six months. This peak in lead times has already been resolved in Q4. It's basically over.
There are still difficulties on the general market. From our standpoint now, the situation is completely under control, thanks to the stock increase. By the way, the stock, we are already working to reduce it, and we expect an improvement in the working capital in the coming quarters.
Thank you very much. That's it for me.
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Okay. Thank you very much for your attention and for joining our call. Hear you next time. Goodbye.
Bye.
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