Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd. First Quarter 2023 Results Conference Call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded May 18th, 2023. With us online today are Mr. Sharon Goldenberg, CEO, and Mr. Meni Maymon, CFO. Before I turn the call over to Mr. Sharon Goldenberg, I would like to remind everyone that forward-looking statements for the respective company's business, financial condition and results of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated.
Such forward-looking statements include, but are not limited to, product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the effect of the company's accounting policies, as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities. Mr. Goldenberg, please go ahead.
Good morning, everybody, and thank you for joining us today. I'll start with a short summary of the quarter. Meni will present a review of the financial results, and then, as usual, I will go into more detail regarding the trends in the major territories. Our first quarter results reflect a modest decline in revenues with comparison to industry trends and in line with our expectations. The revenue decline is relative to a very high growth achieved the same quarter last year, where the company grew 36%. In a territory perspective, a 41% in North America, 49% in Europe, 18% in Oceania, and 78% in the rest of the world, all in local currencies.
Altogether, due to the distribution channel's interest in building up large product stocks before the 2022 season, a consequence of the pandemic, whose fallouts were still very much felt at that time. Generally, first quarter sales for equipment suppliers in the pool industry, and especially in the robotic cleaners market, are characterized by pre-season inventory buildup in distribution channel in North America and Europe. As we have said in the past quarters, the nature of the buildup in the distribution channel in the pool industry in general has changed. This is a result of high inventory levels in the channel, a very short pool season last year, a massive change in macroeconomic conditions, and of course, the implications of the geopolitical situation in Europe.
All of this led to an ongoing inventory correction by the distribution channel for the current season. This has affected the company's result in the same way as it has affected all companies in the industry. As it seems, the impact for Maytronics was more moderate. The consolidation of Axi, which we acquired in late July 2022, had a negative effect on our consolidated top line. This is, of course, is essentially of an accounting nature. Meni will talk about this in more detail later. The important point is that Axi's solo financial results in the quarter show encouraging growth in the robotic cleaner sales, a positive indicator that demand by end user is continuing.
The acquisition strengthened our presence in the online channel in North America. We expect a positive contribution in the second and third quarter with a stronger quarter in Axi business. We are also presently working on plans to leverage the platform that Axi offers. We trust that going forward, Axi has substantial growth potential. We're very proud of the result in the commercial pool segment, where we grew 70%, which reflects ongoing improvement in demand in the segment, as well as an upturn in the company's ability to supply the demand. Improvement of margin has significantly improved our gross margin, thanks to four main factors. Factor number one is the successful price increases realization.
On average, the effective price increase was in the upper single-digit range, the result of price increases at the end of the first half last year and the price increase for the 2023 season. The second factor is that we continue to improve and advance projects to optimize the BOM cost, as well as raw material procurement. At every point in time, we have efficiency enhancement projects in the pipeline, and looking ahead, I can mention as an example some of the more recent product lines that were launched. Every launch has a cost structure that demands and enables a subsequent reduction down the road, and we are determined that this will be the case here as well. We're also gradually automating our production lines, and in the past year, we have integrated an advanced automated testing line for motor units.
This project, for example, enabled a significant improvement in our testing processes of motor units that are produced at our Israel production facility and helped in reducing the average testing time by 35% and our ability to manage the production shifts in a more efficient way. Altogether, it resulted in an ROI of about two years. Also, during the quarter, we began to integrate a second automated system into our production lines, which was set up in the Dalton production site. The system automatically manufactures motor units and is expected to increase significantly both output and quality in production of these units, and help us as well in managing the production shifts in a more efficient way. The third factor is that given the characteristics of 2023, the company is focusing on efficiency enhancement and is controlling expenses with the goal of effective profitability management.
We are working according to a formal cost reduction plan, which a dedicated cross-organizational team with targets for identifying efficiency and cost reduction opportunities. Maytronics is a growth company. Realizing the high growth potential in our market requires significant investment in IT, marketing, R&D, and infrastructure. Our head count has grown 60% in the last two years. We're positioning ourselves for a slowdown in production in 2023, given the existing inventory level. At the same time, investment in strategic projects, particularly further building of infrastructure for growth, service and the customer experience will continue. Finally, currency effects were favorable. As opposed to the first first factors, exchange rates are not within our control, but in this quarter, the contribution was positive.
To sum up this session, the first quarter results, the indications we have from the market overall, and especially from Axi, show continuing end user demand in the North American market. In parallel, expectations for further inventory correction by distributors and dealers worldwide altogether to date support the already given outlook for 2023. I will now pass the mic to Meni for a review of the financial results, after which I will talk in more detail about the trends in the major territories. Manny, please go ahead.
Thank you, Sharon. Hi, everyone. First, since I will be talking about the effects of the Axi acquisition, I will try to present a clearer picture. Axi was acquired last year and was first consolidated from the end of July 2022. Axi sold in the past and sells today Maytronics robotic cleaners. Before the acquisition, robotic were simply recognized as revenue, and Maytronics recorded the gross profit on their production. After the acquisition, when Maytronics sends the goods to Axi's warehouse, this is now an intercompany transaction. For as long as the goods are in the inventory, the sale and gross profits are eliminated and are recognized as revenue only when Axi sells the goods to the end user.
In the first quarter, due to seasonality, there are more sales to the distribution chain than what Axi sold out, so there is a small negative contribution to revenues, and this is what happened in the first quarter. In terms of OpEx, in any case, all Axi's operating expenses are consolidated. Now regarding the results. Revenues in the quarter were down 7.9% and amounted to $524 million. Excluding the Axi acquisition, that was consolidated since July 2022, revenues were down by a more moderate 6.6%. Axi's solo revenues in the quarter were almost $21 million, reflecting 11.4% increase.
At the same time, the consolidation and the negative contribution of ILS 7.6 million to quarterly sales because of intercompany consolidation, accounting principles, and strong seasonality in Axi's business, as I mentioned earlier. Axi is an online retailer in the North American market and sells pool equipment to end users. This is reflected in seasonality, meaning the first quarter sales are lower compared to second and the third quarters. Regarding the segments, revenues from robotic cleaners for private pools were down 16.5%. Again, this is due to inventory correction in the distribution channel across all major territories. This effect was partly offset by price increases in the different territories. The public robotic cleaner segment shows the opposite. Quarterly revenues grew 70% thanks to ongoing strong demand, and supported by the return of tourism and significant improvement in the company ability to deliver.
Revenues from sales of safety products and other products were ILS 59 million, up 79% compared to the same quarter last year. Sales growth is mainly the result of Axi's first time consolidation. 40% of their sales consist of related pool products. On the other hand, sales of covers, alarms, and others declined, since sales of these products are affected by the drop in new pool construction. As for the geographic sales mix, North America sales grew 6.4% and amounted to ILS 287 million. Europe sales were down 22.5% and totaled ILS 185 million. The weaker Europe sales reflect inventory correction in the distribution channel and the effects of regional macroeconomic conditions.
Trends in the territory are also more strongly affected by trends in the pool builder segment, as I mentioned before, on covers, alarms, and others. In Oceania, sales remained stable at ILS 37 million. By moving to the gross profit, it amounted ILS 241 million, up 2.1% compared to the last quarter. The gross margin rose to 45.9% compared to 41.4% last year, an increase of 450 basis points. The gross margin was positively affected mainly by the successful realization of price increases, the reduction of BOM costs, and currency effect also contributed about ILS 26 million of gross profit compared to the same quarter last year and about 130 basis points. These effects were partly offset by lower production volumes.
Regarding operating expenses, selling and marketing expenses were ILS 70 million, up 51%. This is mostly the result of Axi consolidation, which contributed ILS 16 million, and currency effects, which contributed to ILS 2.5 million. In addition, labor costs were somewhat higher, and advertising and marketing expenses rose. These were offset by lower shipping costs following the decline in shipping rates. G&A expenses were ILS 36.5 million, up ILS 4.9 million. Most of the increase is due to Axi consolidation, which contributed ILS 3 million additional expenses. Same here, plus the foreign currency effect of ILS 1.1 million. Operating profit was ILS 116.8 million, down 18.2% compared to the same quarter last year.
It's important to emphasize that Axi's consolidation had a negative effect of ILS 18.7 million on operating profit in the quarter. Excluding the effect, operating profit was down by a significantly more moderate of 5.1%. The operating margin, excluding the effect of the Axi consolidation, was up 40 basis points compared to the same quarter last year and rose to 25.5%. It's important to emphasize that the effects of the consolidation are of an accounting nature and are specific to the type of Axi's business and its business volume in the first quarter. We expect that in the second quarter, the consolidation will have a positive contribution to Maytronics' consolidated financial results. Net finance expenses were ILS 18.3 million compared to expenses of ILS 3 million last year.
An increase in the debt level compared to the corresponding quarter, plus significant rise in interest rates, led to interest expenses of ILS 10.7 million in the quarter versus ILS 2.1 million last year. The rise in exchange rates in the current quarter led to higher revaluation of foreign currency transactions, and the net impact of currencies is around ILS 5 million in the quarter. The effective tax rate decreased to 10.2%, mainly the result of a change in the profit mix in the group. Pro forma net income, excluding the Axi consolidation impact, was down by a moderate 7%. Cash flows from operating activities used by the company were ILS 185 million compared to ILS 220 million last year.
Most of the decrease is due to higher trade payables in the period. According to our experience, in the second and the third quarters, collections from customers is expected to increase. The company is also working to reduce inventory volumes by the end of 2023, which will increase the operating cash flow. The increase of ILS 500 million in inventory balance is the result of, first, one is the first time consolidation of Axi, of course, on inventory, on the reporting that totaled ILS 162 million. Second, if we compare the between periods, over the past year, there has been a significant increase of close to 13% in raw material prices and of around 8% in the US dollar exchange rate.
This is of course, a material contribution to the rise in inventory value. Raw material and goods in process increased by moderate of ILS 28 million compared to the first quarter last year, and reflected a modest decline of ILS 29 million compared to the end of 2022. Customers, from the average customer days in the quarter were 66 days compared to 49 days last year. There was no significant change in the payment terms granted to customers, and the increase is mostly the result of sales mix. Average supplier days rose to 85 days compared to 60 days last year. That's it for me now. I will give the floor back to Sharon.
Thank you, Meni. I will now review the major territories. I'll start with North America. Sales in North America declined by 4% in dollar terms and rose 6% in ILS, all in line with our expectations. These results are in comparison to the corresponding quarter where sales grew by 41%. Meaning that although we didn't achieve growth compared to last year, to keep things in perspective, our business volume in the quarter is double than the first quarter of 2020 before the pandemic. These results reflect the trend of inventory corrections in the distribution channel, and to a certain extent, also unfavorable weather in some of the Sun Belt states. Although human business in the Sun Belt is relatively minor, the weather still had an effect on sales in states that suffered more exceptionally bad weather, like California and Arizona.
The numbers are relatively low compared to the overall sales, but as an indication, total sales in the Sun Belt grew by higher than average double-digit rates in spite of the drop in sales in California and Arizona because of the unusually rainy weather. Online sales contributed positive growth, sales of robotic cleaners in the commercial segment experienced triple-digit growth. Together, these segments compensated for the expected decline in the entry model. We realized a low single-digit price increase for the 2023 season, combined with increases in 2022, the quarterly results reflect a high single-digit average price increase. We're making broad and successful use of digital campaigns in general, and especially online. We are encouraged by the growth in the number of dealers who joined our dealer program and expressed an interest to participate in digital campaigns.
We expect that this factor will come into play once the season opens. Disregarding the accounting effects, Axi Solo grew very nicely considering the challenges of the first quarter. Results were influenced by increased robotic cleaner sales and a decline in sales of other products. It's important to point out that sales of other products cover a lot of product categories, where most of them grew. The decline is in certain segments and is the result of commercial rather than substantial factors. Axi's integration is proceeding according to plan, and we are focusing on margin improvements by realizing synergies. We believe that leveraging the Axi platform to broaden the product range overall and by harnessing Maytronics' strong digital marketing capability is the way to drive ongoing significant growth in the region and to capitalize on the high potential in the online channel.
As we said in the 2022 recap, our relations with our partners in North America have not changed since Axi acquisition. Our relationship with this group remains strong, the partnership encompasses several channels in North America and Europe. Looking ahead at the territory in the near future, the weather remained problematic in April, talking about an early start to the season is irrelevant. The weather only began to improve in the past few days, in some areas across North America, it looks more promising in that term than last year. It is still too early to say how this will affect replenish orders by the distribution channel throughout the season and the stock build-up for the season. That's it for North America.
Europe sales were ILS 185 million, down 23%. This result reflects a more complex, challenging situation in the territory and a very high comparative figures in the same quarter last year, following a 49% growth in Europe. The situation in Europe can be divided into two. Northern Europe, where new pool construction and private consumption contracted significantly, leading to a drop in sales of covers and alarms, as well as the other pool equipment sold by the German subsidiary, mainly as a result of the reduction in the number of new pool. At the same time, the demand for robots by the distribution channel also declined following inventory correction and concerns about how the season will evolve. Demand in Southern Europe countries reflects a significantly better situation and is flat, with maybe a modest decline compared to last year.
The trend of softening demand in the distribution channel in Europe already began in the second half of 2022. The fact that it is continued in the first half of 2023 was expected and reflects tight working capital management by our partners. As I said, there is a difference between Northern and Southern Europe. There is also a difference between the countries in a way that is mostly based on the quality of inventory management of distributors. As in North America, we experienced strong demand in the commercial market following the return of tourism, resulting in a high double-digit growth. The weather in parts of Europe has started to warm up recently. We're cautiously optimistic that on the season peaks, we will see ongoing solid end user demand.
To wrap up, sales in Oceania, where the first quarter ends the summer season, amounted to ILS 37 million, down 4% in local currency and flat in shekels. Sales in the territory were affected by bad weather at the end of the season, but our infrastructure there supports stronger growth for next season and will start to build up in the second half of the year. Finally, I will mention the encouraging launch of our LIBERTY line, which enjoy a positive interest by our partners. That is for me, and we'll be happy to take questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star one. If you wish to decline from the polling process, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. I repeat, if you have a question, please press star one. If you wish to decline from the polling process, please press star two. Please stand by while we poll for your questions. The first question is from Igor Rybakov of Prytek. Please go ahead.
Yes, good afternoon. Thanks for taking the question. Hi, Sharon. Hi, Manny. Can you comment on a couple of things? First, from what you're seeing in the channel, both in Europe and North America, is there a rough estimate how many months of, let's say, normal pre-COVID sales do we have in the channel? Also kind of as a follow-up to that question, given the manufacturing capability today, how long might it take to replenish the channel, let's say, from the if somewhere halfway the retailers realize that they need to order more? When do they need to order? At which point within the season do they need to place an order for the products to reach them still within, you know, the current season? That's kind of one question.
The second question on the online channel, given your observations and experience, and it's probably the case so far that the online channel was dominated mainly by the cheaper Asian brands. When you look at your brand, what is the potential for the online channel, and how does online channel work in sync with the traditional retailers in terms of the preservation of the, well, quality of the brand and the ongoing service in terms of perception of the premium offering within the offering partners? Thank you.
Okay. You asked several question within one question, we will try to address, and if we will forget, just remind us. We'll start with the inventory. Generally speaking, there's no like a standard answer for that because it's really varied between distributors, between countries, between channels, between different product lines. It's not that we have a certain amount of inventory which is reflected across all businesses. In some countries, inventory is okay. In some countries is as it should be or a bit higher. The point is that the inventory correction gives the United States distributors not to reorder ahead of time. That is something that is affecting, of course, replenishment orders from Maytronics.
In terms of how quickly we can, we can serve the channel, in our subsidiaries we are well-positioned with inventory. Orders from our distributors and dealers, in North America, in France, in Australia, we can replenish those orders fairly quickly because we have finished good stock. That also free production capacity back in Israel for distributors that are working directly with the Maytronics in Israel. The production capacity that we have is well-suited to meet any demand that we foresee for this for this season. That's with respect to the first question. With respect to the online market, the online market is well developed and is more progressing, of course, in the US.
Actually, one of the things that we see is that the mid to high-end products in the online market generates very good demand. Not just small and cheaper products, like you've mentioned, by the Asian manufacturers. For us, we also see a very strong demand, again, compares to the season, compares to the first quarter of last year. We see a good demand for our cleaners, although they are not on the $250 or $350 product lines. When consumer buys those products, they also expect different level of performance. They also expect different level of service, which of course we provide.
Okay. Just a quick word to follow up. When it comes to the replenishing the channel, when you freed up production capacity in the consideration from the ship at that time to ship the products to local markets. Let's say If you go a ship to Europe and/or United States, how long does it take today, assuming they freed up capacity from the point of order to the point of delivery, not from your local distribution center, but let's say from Israel facility?
It depends on which models, and it depends of course on the shipment time. Production could be done within a few weeks, and shipments to Europe is about a week and a half, 10 days. Shipment to the U.S. is about a month, something like that. Bear in mind that we're also positioned very well with inventory and practically most of what we need, for example, in the North American market, in the French market, we already have enough inventory in order to be able to support the shipping cycle from Israel.
Okay. That makes sense. In terms of... Just one more, follow-up on the online channel.
Sure.
In your own online experience with Axi, did you, is there Like when you look at the product line, is there a certain bifurcation towards the cheaper, more expensive models within your within your model list?
Actually, not. With our model list, actually we have a relatively solid demand on our medium and high-end products rather than just the lower end.
Okay. just to confirm, the online does not impact revenue mix in a negative way. Correct?
It does not affect it on a negative way. True.
Okay. Okay. Thank you so much.
Sure. Absolutely.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. There are no further questions at this time. Oh, excuse me. There is a follow-up from Mr. Igor Rybakov of Prytek. Please go ahead.
Well, I mean, I can as well ask one more, if you don't mind. Can you comment a little bit on the difference in payments from the private pool segment and the public pool segment? Is what you experienced in the quarter, is it typical? Also, I guess, can you provide maybe a little bit more granularity at what else is different when it comes to the cash flow realization in public versus private?
Since we are selling mostly to distributors, then our commercial terms we have with our partners is irrespective of the type of model. A cleaner that is aimed for residential pool or a cleaner that is aimed for a commercial pool, we have the same agreement in terms of payment terms with our distributors, again, in the large scale of things. We don't see a really main major difference between those two segments from a cash flow and payment terms perspective.
The sales have increased and from what I realized from the comments that was partially affected by the change or by the growth in the public pool segment and the decline in the private. Did I understand it correctly?
True. Our revenue is defined by our sales to the distribution channel. When we are selling a residential cleaner to our, to a distribution partner of Maytronics', or if we are selling a commercial cleaner, the payment terms for us are the same between those, two different cleaners. Although the sales cycle of the distributor of those cleaners is different, that has nothing to do with us.
Okay. In this case, maybe can you clarify for me once again, and apologies for that, why did the day sales, those days sales outstanding increase again then in Q1?
Manny, correct me if I'm wrong here. Sales of the first quarter are usually characterized on early buy terms. In early buy terms, we are selling our cleaners, and the payment for those cleaners are part of the early buy terms, which extend the payment terms, compared with standard terms.
Okay. It's a seasonal, it's not a mixed effect, it's a seasonal.
No, it's a seasonal. A lot of the Q1 sales are under the early buy terms, which provide both some incentive in price and also extended payment terms. It is standard in the industry in general.
Okay. Okay. Thank you for educating on that. Appreciate it.
Sure. Sure. Sure.
There are no further questions at this time. Mr. Goldenberg, would you like to make your concluding statement?
Sure. Thank you very much, thank you all for your participation. We're in the middle of a volatile market environment, and we're experiencing macroeconomic conditions we have not experienced in years. The weather was unfavorable for the pool industry in the first quarter. At the same time, we remain cautiously optimistic about how the year will evolve once the pool season in the northern hemisphere moves into high gear. Thank you again for your participation.
Thank you. This concludes the Maytronics Limited first quarter 2023 conference call. Thank you for your participation. You may go ahead and disconnect.