Ladies and gentlemen, thank you for standing by. Welcome to the Maytronics Ltd. second quarter 2022 results conference call. All participants are 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 August 17, 2022. 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.
Thank you very much. Good morning, good afternoon, and thanks for joining us. With me are Meni Maymon, CFO, and Amiram Bracha, our investor relations manager. I'll start with a summary of the second quarter and first six months of 2022, and Manny will continue with a review of the financial results. After that, I'll go into more detail regarding the regions. Maytronics has delivered a half year and quarter of double-digit sales growth across all regions, which reflects ongoing strong demand in challenging market conditions. However, our results fell short of our expectations and budget targets, which had an effect on our margins. We will elaborate on what led to that during the call. I'll start with a general review of the pool market.
The market experienced two years of very fast growth during the pandemic, and as we reported in the past, 2022 is emerging as a year of transition and return to pre-COVID demand patterns. Accordingly, there are indications that demand for the construction of new pools has softened. This refers mainly to demand for above-ground pools and there are categories in the swimming pool market that are experiencing a significant drop in demand. These trends, together with the inventory in the supply chain, macro trends and the weather, are causing fluctuations and, in a way, anxiety in the supply chain. At the same time, we believe that the robots category is more resilient compared to other categories and in general.
Heat pumps and above-ground pools are among the categories that have experienced a significant drop in demand after two years of exceptional sales and because of inventory in the distribution chain. On the other hand, robot sales are clearly continuing to grow, and I want to stress that growth in sales of Maytronics robots, unlike the general trend in the industry, is not based mainly on price increases or mergers and acquisitions, but essentially reflects organic growth based on volumes and robot mix. After two years of demand that was hardly affected by the weather, 2022 has returned to normal in this respect, and the weather is once again a factor of influence in the scale of demand and distribution chain behavior, which was always the case in the pool market.
Cold and rainy weather that delayed the start of the pool season in Europe and the Northeastern U.S., combined with a macro environment of high inflation, rising interest rates, the war in Europe, and the implication on energy and food prices, have led to high volatility, with big difference in demand from one month to the next. For example, after a weak month in April, rising temperature led to an okay demand in May and a strong demand in June. The install base of more than 20 million pools without robotic cleaners is the foundation of the resilience of the robotic cleaners market. Maytronics, as a market leader, believes that it is succeeding in converting consumers to the robotic technology. We believe that this was always the case this year, and we expect the trend to continue.
Rising energy prices and labor costs only serve to strengthen the value proposition of robots compared to other cleaning methods. In the first half of 2022, Maytronics grew 28% excluding Forex effects. There were more than a few exogenous factors that affected our quarterly results, such as currencies, the weather, shipping costs and schedules, and raw material prices. Nonetheless, we grew solidly, but as I mentioned, the results fell short of our expectations and budget targets, which had an effect on our margins, and Manny will talk about this later on.
For example, sales of several tens of millions of ILS that were planned and expected to be recognized in the second quarter will only be recognized in July due to logistics problem in supply. We report in shekels, but the exclusion of currency effects reflects our true performance up or down, and that's why it is important for us. The first half includes a significant part of the pool season in the US and Europe, and in this respect, our performance was exceptional. Our organic growth is based on a 6% price increase and reflects more than 20% volume growth in robot revenue. The resilience expressing Maytronics sales of residential pool robots is supported by the strength of our brand, the digital marketing capabilities we have built, and our global presence online in the and in the professional channel.
Thanks to all of this, the company is able to keep growing even in a highly challenging market conditions we are working in, based on the penetration of robotic cleaning technology, which is replacing other methods. A trend that supports our estimates of achievement of the revenue growth forecast for 2022 and our estimate that we will continue to grow at the traditional pre-COVID rates from 2023 onwards. By the end of July, we completed the acquisition of Backyard, the leading company in the U.S. pool market, especially in marketplace sales. This is an important strategic step in Maytronics' digital transformation and its ability to reach end consumers.
We believe that this acquisition will enable us to leverage these capabilities to expand our offering of targeted products and services that deliver added value to the end user, which will contribute to realizing the high growth potential in the U.S. market. Before and during the 2022 season, we raised prices with an aim of mitigating the expected negative effects on the cost structure, while keeping the balance with growth potential. A sharp drop in exchange rates eroded the increase in price. We also experienced an extreme rise in the cost of shipping to consumers and a significant rise in raw material prices, which led to downward pressure on our margins. The trend of rising shipping prices became even more extreme in the past year. These costs, that were not a major component of our cost structure, have become a real burden.
The cost of a container from Israel to the US has risen from $2,600 to more than $10,000, and we are shipping significantly more containers. For example, around 65% of the additional cost in the selling and marketing expenses item compared to the corresponding quarter are due to the difference in shipping costs. For the half year period, the number rises to around 68%. As a result, we are looking at making further adjustments to our sales process in the different regions, which, combined with the trend of modernization of logistical challenges in the supply chain, should help to improve margins. After 2 years of focusing on meeting elevated demand, the company will be able to devote more resources to projects that will deliver better operational efficiency through increased automation.
We ended the second quarter with a strong order backlog of ILS 400 million for the rest of the year, which is an increase of about 32% compared to last year. Manny will now review the financial results, after which I will talk about the regions and future expectations. Manny, please go ahead.
Thank you, Sharon. Hello, everyone. I will review the main items in the financial statement and talk about the relevant items. Revenues in the first half, which reflects the most of the company's business in the pool season in Europe and in the US, was ILS 1.14 billion, an increase of 24%, and excluding the Forex effect, about 28%. Revenue in the second quarter was ILS 566 million, an increase of almost 14%, and excluding the Forex effect, around 16%. Revenue from sales of private pool robots grew in the second quarter by 15%, and in the first half, the segment grew by 26.5%. These results are in comparison with very strong, comparative figures in 2021, when we grew by 32% and reflect ongoing high demand in challenging market conditions.
We raised prices by 4%-5% before the 2022 season. During the season, in mid-May, we raised prices again by around 4%, meaning that effectively, in the quarter, there is an impact of a price increase of about 5.7% out of total growth. Revenue from sales of public pool robots increased in the quarter by 20%. The segment experienced growth in this demand following the recovery of the tourism and hotel industry, but we are still experiencing difficulties in the availability of specific electronic components, which led to us being unable to meet all the demands. Revenues from sales of safety products and related pool products in this quarter amounted to ILS 49 million, a decrease of 2% and an increase of 6% in local currency terms.
Most of the company's sales in this segment are in Europe and in euro, which weakened by an average of 8.5% compared to the corresponding period. The average rate was 3.56 compared to 3.93 in the comparison period. The relative drop in growth is attributed to the related pool product segment and the construction of new pools. On the other hand, sales of water treatment products increased mainly in Australia. In terms of the regional sales mix in the quarter, in Europe, we grew 8% and 19% in euro. In the first half, we grew 19% and in euro about 32%. In North America, sales grew by 18% and 15% in dollar.
Oceania sales in the quarter grew by 35% and 42% in the local currency. Sales in the rest of the world grew in the quarter by 24% and by 48% in the six-month period. It reflects mainly the increase in Argentina and East Asia. I will talk now about the gross profit. The gross profit in the second quarter was ILS 228.5 million, up 5% compared to the corresponding quarter last year. The gross margin declined by 345 basis points. Our earlier expectations were for a lower negative impact than reported, and I will try to explain.
First point, Forex effects, mainly the erosion of the euro by an average of 8.5% and the Australian dollar by an average of 3.8% against the shekel, reduced gross profit by ILS 13.5 million, 150 basis points. Second point is the raw material. In the quarter we recorded slightly higher increase than expected in raw material prices, mainly electronic components and plastic. We see around 14% increase in cost of raw material on average compared with June 2021. Another point is the rising of the shipping costs. The COGS is affected by shipping costs for import compared to shipping costs for export, which are classified as selling and marketing expenses. I will talk about these expenses later on. This is a significant increase in shipping rates.
These impacts are partly offset by raising sales prices to the company's customers by effective rate of 5.7% in local currency. Two rounds of price increase were intended to offset the impact of BOM costs, but the currency effect was strong, and it strongly eroded the price increases. Also, as Sharon said, the sales targets were higher by tens of millions of ILS than those that were achieved. Regarding operating expenses, the R&D expenses growth in the quarter was modest at 5.8%. R&D expenses in second quarter related to the monitoring and control system amounted to ILS 4 million compared to ILS 2.3 million last year. Selling and marketing expenses increased by 25% in the quarter and 32% in the first half.
The main items that contributed to the increase in shipping, a sharp rise in ocean freight rate and an increase in inland transportation costs in the U.S. and Australia. It led to an increase of 105% and 126% in shipping costs in the quarter and in the first half. The total increase of the shipping cost is about 66% of the total increase in selling and marketing expenses. The rest of the increase is due to the workforce addition in most territories and higher advertising and promotional costs. The OpEx to sales ratio in the quarter is 17.5% compared to 16.2% in the corresponding quarter last year. I want to point out that these are not the company's normal operational efficiency levels.
The planning budget was based on a higher level of sales in the quarter, which as mentioned, was several tens of shekels lower because of delays and logistics problems. Operating profit in the first half was ILS 272.5 million, up 9%, and excluding Forex effects, operating profit rose by 20%. Operating profit in the quarter was ILS 129.7 million, a drop of 5.7% compared to last year. The drop in operating profit is largely due to the weakening of the major currencies against the shekel, as mentioned, which lowered the operating profit by ILS 12.3 million. The impact of the sharp rise in the shipping cost, as I mentioned, which accounts for most of the increase in the selling and marketing expenses.
The third point, income of several tens of million ILS that was not recognized in the quarter due to the logistics problems. Those are the main effects on the operating profit. The effective tax rate in the second quarter is 16.1% compared to 18.7% in the corresponding period, following the recognition of Yizre'el Industrial Park as Development Zone A. Cash flows from operating activities were ILS 139 million generated in the second quarter compared to ILS 238 million in the corresponding period last year. The difference is mainly the result of an increase in inventory balance due to business growth and increase of 50% in production.
An increase in raw material inventory as part of a decision by the company to make earlier and larger purchases, of raw materials, and to ensure a response to the demand for its products and maintain manufacturing continuity. An increase of 15% in the cost of the raw material and the increase of finished goods and inventory in transit. This overall picture comes down to an increase in average days inventory, which were 148 days, compared to 108 days in the corresponding period last year. In view of the expected trend, improvement in the supply chain and in the availability of some, of, raw materials, and the return of demand in the pool market to typical pre-COVID levels.
In the coming quarters, the company will work on adjusting the scope of raw material inventory. We also recorded an increase of ILS 166 million in the balance of trade receivables, mostly due to sales growth and mix of dates on which they were created. In the second quarter, the sales mix was much more in June compared to the corresponding quarter last year. Average customer days in a quarterly calculation rose to 63 days compared to 54 days in the corresponding period. On the other hand, we recorded an increase of ILS 84.5 million in the balance of trade payables due to business growth and increased inventory in the period. Average supplier days rose to 61 days compared to 51 days in the corresponding period.
Cash flow used in investing activities amounted to ILS 52 million compared to ILS 43 million last year. In the first six months of 2022, the company invested more in the acquisition of fixed assets as a result of the investment in its sites in Dalton and Kibbutz Yizre'el. I will end with the board resolution yesterday regarding a dividend distribution of ILS 65 million to be paid in September. That's it for me. I will hand the mic back to Sharon.
Thank you, Manny. Before I'll talk about the key regions, I want to talk specifically about the new pool construction market, which is relevant to all regions. Demand for new pools, especially above ground, has softened. This is clearly evident in the low price categories. First, a drop in demand for above ground pools, which are the least expensive. Second, a drop in demand for lower end in-ground pools. One of the main reasons is the rising cost of building a pool in the past two years, particularly the price of lower end pools, which has risen by 30%-50%. In the current macroeconomic environment, which has placed downward pressure on consumer purchasing power, the effect on the segment of pool owners who buy above-ground pools or lower-end in-ground pools is more significant, and as a result, demand drops.
As we have said in the past, in terms of the demand for robots, Maytronics is less affected by the new pool construction segment, because a decisive part of robot sales is for existing pools. The company's sales for new pools are mainly for the medium to high-end, more expensive new pool segment, and indications show that demand for new pools in this segment is mostly stable. This is reflected in the company's results in 2022. Robot sales are growing in volume and value, while the related pool product segment, especially in Europe, in countries where we specialize in working with pool builders, is struggling to grow at the same pace and has even dropped in some products because this segment is more affected by the demand of new pools. As I said, these account for only a minor percentage of the company's revenue.
Now regarding the territories. North America, on the macro level, the major trends supporting continuing growth on the overall pool market are persisting, including moving to the Sun Belt states and to warmer states in general, moving to the suburbs and continuing investment in the home space, although this factor is not as strong as experienced by the pool market in the past two years. On the other hand, other trends like automation, product connectivity, sustainability, and green energy efficiency trends continue to support the robot market. Cold wet weather until the end of May, especially in the markets of the northeastern U.S. and the West Coast, affected demand by pool owners.
Very strong early buy sales in the first quarter and the natural desire of the distribution chain to stock up as early as possible after the lessons learned in 2021, led to high inventory levels in the first half of the second quarter, which were not utilized because of the weather. In June, as soon as the weather warmed up, we experienced strong demand by end users in professional stores and online. Demand, which soared in June, and the robot mix we were required to supply, suppressed our ability to deliver towards the end of the quarter, mainly because of supply chain challenges that mostly centered on shipping schedules, especially to the U.S. market. As I mentioned, shipping rates rose significantly, and in addition, shipping times were also longer.
It formerly took 4-5 weeks to ship a container from Israel to the US, this year it took 6-8 weeks. Because of this, as I mentioned earlier, sales of several tens of millions ILS that were planned and expected to be recognized in the second quarter will only be recognized in July due to logistical delivery problems. In spite of all the challenges, sales in the first half of 2022 grew 27%, both in shekels and dollar terms, and second quarter sales grew 18% in shekels and 15% in dollars. Looking ahead, there is a trend of reduction in inventories by dealers and distributors in all products.
This is related to the adjustment of inventory level to the new demand levels, which are lower for some categories in the industry, and the desire to convert inventory to cash due to rising inflation and macroeconomic challenges. This trend has a ripple effect on the robot category as well. Although the inventory level in the distribution chain is reasonable for this time of the season, and in the end, demand by the end consumers will lead to a need by the distributors to stock up. In summary, the company continues to believe that the U.S. market remains a meaningful growth driver for us. It is a very big market with about 12 million pools and the penetration rate of robots is low at around 15%. We see a relevant market of 10 million pools where we want to introduce the robotic solution.
We are very strongly positioned in this market with a subsidiary, business partners, presence in all distribution channels, and strong digital capabilities. At the end of July, we completed the acquisition of Backyard, which creates for us and for our partners another growth opportunity online, and combined with the excellent infrastructure in professional stores in the Snow Belt and the Sun Belt, we expect continued double-digit growth. Regarding Europe. In Europe, 2022 is evolving as a more complex year with cold, wet weather that led to a late start to the season. Growing uncertainty due to the war in Ukraine and an economic slowdown accompanied by soaring energy and food prices. Europe was marked by a variance of demand between countries, particularly between Northern Europe, where demand was more moderate, and Southern Europe, where demand was higher, also due to the return of tourism.
Despite very challenging market conditions, we achieved 19% growth in the quarter and 32% in the half year in local currency terms, which reflects our business in the market and our ability to meet demand much better than we did in 2021. We believe that these are exceptional results in the industry, which mostly recorded practically negative growth in the region. In Oceania, we achieved solid growth of 26% in the first half and 42% in the second quarter in local currency terms. In the rest of the world, growth was also high at 48% and 24% in the half and the quarter respectively, supported by a recovery in Argentina and a very high double-digit growth in Southeast Asia, mainly based on the public market. In terms of products.
Private pool robots such as high runners in the S Line continue to meet with high demand and experience meaningful growth with premium products, including the M700 and the S400, which we launched last year, growing at even higher rates. The numbers are also encouraging looking ahead. The public pool segment recovered in terms of demand, and after the US, which took the lead with the H-mark market, the public market in Europe also opened. As you recall, in the first quarter, we weren't able to supply the entire demand, mainly because of availability constraints in segment-specific electronic components, leading to a drop in the segment's revenue. In the second quarter, we improved in terms of our ability to meet demand and achieved pleasing growth of 20%. To be honest, we still didn't supply the entire demand.
In other products, covers continued to grow nicely in the first half, but as mentioned, other Bünger & Frese products are experiencing softer demand following the drop in the construction of new pools. In Australia, along with strong growth in robots, we are benefiting from good growth in our water purification products. In terms of the competition, it has remained significant mainly on the part of Fluidra, which is working hard against us, mostly in Europe, but also in the U.S. As for the Chinese competition, we are handling the situation much better in the online arena, also because of our supply capabilities, which have improved significantly in relation to demand. In the second quarter, we improved our positioning versus the Chinese competition compared to the corresponding period last year. In November this year, after four years, the Piscine Global Europe exhibition will be taking place.
The biggest and most significant event in the pool market in general and in Europe in particular. As usual, we plan to be there with an interesting story that represents the product categories in which Maytronics is active. To sum up, we believe that besides our excellent product lines, which have always dealt successfully with the competition, the step change that we have made in our production capacity in the past year and that we will continue to make in the future, is crucial to our competitiveness. Also, as we have emphasized in the past two years, we have built meaningful digital capabilities, and now that our production capacity has been improved and we own Backyard, which specializes in online sales and particularly in marketplace sales, we will be able to use our demand-stimulating digital tools as necessary. Finally, a few words looking ahead.
2022 is evolving as a year of transition between the COVID era and the new normal. On the one hand, looking ahead at the rest of the year, we see a trend in which distributors are adjusting their inventory levels, and on the other, in the robot market, we see ongoing strong demand by end users. We're comfortable with the demand and the ability to keep on growing in the U.S. market in view of the low penetration rate of robots, digital tools, and building the infrastructure for their operation, our presence and capabilities in the online channel in general, and especially after the Backyard acquisitions. All of which support our ability to continue to convert pool owners who use other cleaning solutions to robotic cleaners. In Oceania as well, where the season is now approaching, generally, the feeling is good, and we expect further growth.
By contrast, Europe is likely to be more moderate compared to the high growth we delivered in recent years and in the past year. The reasons are mainly macroeconomic, and when taken together with certain countries where robot penetration rates are higher, this could lead to growth that is more moderate. Overall, on the plus side, backlog for the rest of the year is relatively high at ILS 400 million, 32% higher than the corresponding period last year. In the same breath, exchange rates, especially the euro and the Australian dollar, continue to work against us. When we factor in all these elements with our half-yearly results, we believe that the sales growth forecast for 2022 can be maintained at 18%-22% in shekels. That's it for me. We'll be happy, of course, to take any 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. The first question is from Zach Miller of Yost Capital Management. Please go ahead.
Hey, guys. Thank you for taking the questions, and congratulations on the quarter. First one here is on the Backyard acquisition. Can you talk about what you expect this to contribute to revenue and operating profit this year? Then as a follow on there, is the contribution factored into the 18%-22% guidance?
Hi. Thank you for your question. We believe that we will have a contribution of a few tens of millions ILS to the top line when at the end of the year we will consolidate the other products that Backyard are selling with the existing products of Maytronics that they are already selling, which is part of what we recognize as revenue also today. That's from a revenue perspective. From a margin perspective, we're still in the process of evaluating how it will impact our margins. That's one thing. Our estimates of 18%-22% is excluding the add-on revenue that we will have from the Backyard acquisition.
Awesome. Thank you. That's helpful. Then last one from me, and as we're looking at the second half here, how do we think about the price volume contribution? I guess, is that same 6% roughly price increase that you guys saw this quarter, is that what we should be thinking about for second half or does the dynamic change at all?
The dynamic will change a little bit because some of the price increases that we did in the second quarter didn't went into effect at the beginning of the quarter, but more towards the middle or the end of the quarter. The overall 6% is not including full effect of the price increases that we did during the second quarter. If we look on the second half of the year, we believe that the actual impact of the price increases that we did already stepping into the season and during the season will be more closer to around 10%.
Got it. Perfect. Thank you, guys. That's all I had. Appreciate the help.
Thank you.
Thank you. 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 poll for more questions. There are no further questions at this time. Mr. Goldenberg, would you like to make your concluding statement?
Yes. Just to say thank you all for joining us today. We, as usual, will continue to work as the management of Maytronics, and we hope to see you next time on our earnings call. Thank you very much.
Thank you. This concludes the Maytronics Ltd. second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.