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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the De'Longhi First Quarter 2023 Consolidated Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio De'Longhi, CEO. Please go ahead, sir.
Thank you. Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group First Quarter 2023 Results Conference Call. Today, together with me are Nicola Serafin, Group General Manager; Marco Cenci, Chief Strategy and Control Officer; Stefano Biella, CFO; Fabrizio Micheli, Director of M&A and IR and some regulator investor relator. Let me start by reminding that in our last conference call, we presented some of the new product launched in 2022 in our core categories, showing how the group has been working to stay ahead of the pack, thanks to cutting-edge technology and design.
Today, I would like to direct your attention to the launch of TrueBrew an innovative with coffee machine with grinder, emphasizing again the role of the innovation in establishing our leadership in coffee. TrueBrew has been launched in March in the American market, supported by a fresh campaign starring Bred Pit as an ambassador. It has a premium position and we have the role to enlarge our product range in the quality coffee experience, offering our American customers and new premium solutions TrueBrew fresh coffee from all beans.
Now back to the quarter 1 results. Let me highlight how the group has been able to probably react to the complexity phase, especially in terms of volumes, growth and the effects of the cost inflation. On consumer sentiment. In particular, in these first months of the year, the group achieved an operating profitability, clearly improving against the first quarter of the pre-pandemic years, namely '99 and 2012 as well. Thanks to the combined effects of our efforts in innovation, media investments, price strategy and last but not least, effective measures to control operating costs. The first quarter of 2023 was characterized by an unfavorable and complex geopolitical and macroeconomic environment in continuity with the scenario encountered in the second half of 2022. As you already anticipated, the start of the year was impacted by some factors affecting the main regions and their sales strength. First of all, in the last 2 years, we achieved extraordinary growth in the first quarter, respectively, 59% plus 59% in 2021 and plus 5.5% in 2022 on a constant perimeter basis. which represent a very challenging comparison base. Secondly, we witnessed a partial destocking effect of the trade due to a more cautious approach of some retailers, which have use their months to decrease the level of inventories. Lastly, let me remind you our strategic decision to exit the portable recognition in market in the United States, which had an impact of EUR 23.4 million in the quarter and will have a negative effect even in the second quarter. Now let me focus to the quarterly results. Consolidated revenues for quarter 1 were down by 18.1%, reaching EUR 602 million with a positive contribution of plus 0.6% from the currency component. As already highlighted in the past months, the European area has been effective more than the other regions by the fact of the Russian Ukrainian conflict and the weakening of the consumer purchasing power caused by inflation.
In more details, South West Europe recorded a double-digit decline with all the main markets down, facing also a challenging comparison to the first quarter of last year. In particular, with 1 of 2021, which marked the growth of more than 60% at constant perimeter and constant exchange rates. Northeast Europe showed a decline at a mid- to high single-digit rate in the context of an macroeconomic and geopolitical scenario, experiencing a complex evolution. The EMEA region has undergone a double-digit decline compared with a very strong acceleration trend in the last 2 years. In the American area, sales performance was affected by the discontinuity relating to the exit from mobile air conditioning business, which impacted the turnover by EUR 23.4 million. Net of this effect, we would report a stabilization in the cooking and food preparation business, thanks to the growth of Nutribullet and their products.
Finally, the Asia Pacific region achieved a low single-digit growth at constant exchange rates with a significant contribution from Greater China, which confirmed it's a sustained growth. As to product categories or the above-mentioned effects led to a decline for all the macro categories of the consumer business, including coffee as well. Even if it confirms its relative better resilience. On the contrary, professional coffee, branded Eversys showed a strong positive trend, which continued to show its growth trajectory at a high double-digit rate. Looking now at the evolution of the operating margins.
The net industrial margin amounted to EUR 304.4 million equal to 50.5% of revenues, together with a positive contribution of the price/mix, circa EUR 20 million and the recovery of transport prices there was still a residential negative effect from raw materials and production inefficiencies, which we led to find a full recovery in the coming months.
Adjusted EBITDA amounted to EUR 64.3 million or 12.3% of revenues, 13.6% in 2022. Following investments in advertising and promotions, which while remaining in line with 2022 as a percentage of revenues at 12.1% decrease in value by EUR 15.7 million, down to EUR 73.1 million. As to the balance sheet, net financial position, as at 31st March 2023 stood at EUR 317.2 million, increasing by EUR 18.5 million from 2022 year-end. In particular, the free cash flow before dividends and acquisition was EUR 167.1 million in the 12 months. In the quarter, the group was able to generate EUR 41.4 million in cash from current operations and working capital movements compared to the first quarter of 2022, in which there was an absorption of EUR 103.8 million. In terms of operating working capital, 8.5% of 12-month rolling revenues at the end of March.
The negative change in inventories up to EUR 615 million from the record value of EUR 551 million of the end of '22, was in line with expected normal economic financial cycle and was more than counterbalanced by the positive cash generation of trade receivables and payables management, which will also be noted that capital expenditures absorbed EUR 19.2 million in the quarter, a clear decrease compared to last year, which recorded the disbursement for the acquisition of the new production plant in Romania and higher investments in tangible assets. Now as a conclusion of my results overview, I would like to stress the successful expansion that the group was able to achieve in the last years, emphasizing adjusted EBITDA doubled compared to quarter 1 '19, thanks to strong organic growth, effective investments and focused acquisition, all goals that we're able to accomplish, while preserving a healthier financial position. Finally, closing my remarks, let me underlying that the well-anticipated weak start of the year was already included in our guidance to expect a less challenging comparison in the coming quarters. Also bearing in mind that after the second quarter, the growth will not be impacted by the discontinuity in the mobile air conditioning business in the U.S. In this context, before we confirm the guidance for the full year of revenues, slightly declining and an adjusted EBITDA in the range of EUR 370 million, EUR 390 million.
Now we can open the floor to Q&A. Thank you.
[Operator Instructions] Our first question comes from Mourad Lahmidi from BNP Paribas.
So I have 2 questions. The first 1 is on the price/mix effect in Q1. So the EUR 20 million that you report, how much is pricing, pure pricing and how much is mix? And do you expect pure pricing to continue to be a tailwind for the rest of the year? Or is it only going to be linked that will be a driver? And my second question is on input cost inflation. Could you give us the low figure for input cost inflation in in Q1? And what kind of development do you expect for the rest of the year on this part of your costs.
Yes. So yes, we can divide the EUR 20 million of prime mix into EUR 18 million price and EUR 2 million mix. With regard to pricing, we will have an impact of carryover price increases, but we don't foresee any price increase further. Actually, we believe that seeing a decline of input costs, probably the market might be more competitive in the second half. But for the moment, pricing is -- would be positively affected by our measures that will have full effect in the second part of the year.
In particular, as I said, the input costs are lower. I mean I hand over the word to Nicola Serafin for more details around the input cost effects.
In terms of cost inflation compare with, let's say, the same quarter of last year, let's say, that we have a bit of mix effect. We have a carryover of some cost inflection due to raw materials. We have cost inflation due to labor cost that the inflectionary trend is bringing us, and we have some, let's say, industrial cost due to the fact that in this moment, we do not have the same output volumes, volume effect. We are in the range of the low single digit of cost inflation.
It is more or less -- it's more or less split in in 3 areas of -- in this area of influence, where we have benefits in terms of costs that are not directly in the industrial cost is the benefit on the inbound cost of sea freight warehousing cost and logistic costs there we are already experiences a beneficial benefit in terms of costs. So we are expecting overall reducing impact cost inflation in components looking forward but for the time being, in the first quarter, we are still, let's say, the carryover from last year.
The next question comes from Alessandro Cecchini from Equita.
The first 1 is about the coffee coffee market, if you could elaborate a little bit more what you are seeing, I mean in terms of sellout in, I mean, current month just to have a better idea of the underlying trend, excluding, of course, the current destocking that you underlined during the first quarter. My second question is about I mean the food preparation strategy. So you are, I mean, investing in coffee with new products and so on. I remember that you stated about your strategy to expand the Nutribullet in Europe. So I was just wondering if you are ready to launch new products in the food preparation. So just to better understand the strategy on this product category?
And finally, on the margin side, we know that first quarter is typically traditionally the quarter with the lowest seasonality. So we needed to take this kind of 12.3% as a floor for the next coming months, also considering the lower inflation.
Pardon me. It looks like the speaker line has dropped please standby while we reconnect. We thank you for your patience. Pardon me everyone the speaker line has reconnected.
Yes. Sorry for being convenient. But we were able to hear Mr. Cecchini's questions. So Alessandro, no, the first question is about the market trending in coffee. We are monitoring the key markets, and we are seeing a decline in the coffee market at the rate low single digit around, let's say, between 2 and 4 in the market. The decline is also coming in the first months after a weaker espresso market in the second half of last year. So we have seen also some signs of stabilization in certain markets. So we feel positive in the long term in coffee as growth driver for De'Longhi and for the industry.
Although we are unable to predict when stabilization will be completed, and we will be able to see positive markets again. We feel as a market leader, also the responsibility to drive market growth, and we are continuing supporting our products with marketing initiatives. As I said, we launched innovation in the United States, supported by the [indiscernible] feed campaign also with the products aiming to American Coffee on top of what we are doing in espresso. So not just in the United States, but worldwide.
The second question is about food price. Market is still weak. We believe that now the weakness that is reported in the numbers is deriving mainly from the destocking effect that hopefully will be completed by April. Still, the market is negative, but not at the rates that you see are selling. Although we have to also to underline some positives in food preparation, which is coming from a very strong growth for Nutribullet, high single digit, which I think is very strong compared to what's happening in the rest of the products. So again, it's not a strong growth for us at 8%.
But it's significant is, I think, showing that there is a strong interest for personal blending for quick, simple to use convenient appliances and Nutribullet is taking advantage of this trend in several markets. I also highlight that Nutribullet launch has not yet been, let's say, completed. Due to COVID, we had kind of a slowdown in the international rollout of our distribution plan but again, early good signs from Nutribullet and at least 1 growing category in food preparation.
Now margins somehow, yes, is well, quarter 1 historically is not the strongest quarter of the year. We think that quarter 1 EBITDA can give an indication that we have the ability to deliver what we have promised as year-end targets. We'll not -- maybe we can have some weaker quarters or stronger quarters, but we confirm that given the circumstances, the trend we are seeing in the market, the trend in the input costs, our cost control initiatives, we think that our margin goals are achievable as of today.
Okay. So if I understood correctly, you stated that -- on the coffee in April, you see our sell-out more or less, in general, that is flattish versus start of the year that was slightly negative, if I understood correctly?
Yes, in the current trading, yes, in the current trading, yes, confirm it.
Our next question comes from Andrea Bonfa from Banca Akros.
Most of my questions have been already answered. But again, it's, let's say, a curiosity on the [indiscernible] environment because looking at the performance of the first quarter and your guidance, your sales guidance for the year, it contains a likely positive top line growth in the next quarters. And so the question is, are you expecting to turn into positive sales growth in the next few months? And if I may, a detail on the second quarter, the exit from the U.S. AC market was EUR 23 million in the first quarter. What's the final count from that exit? Have in mind that some EUR 70 million, but I just want to double check.
Yes. Thank you, Andrea. So you're right. We think that our growth rate will turn into positive again in the second half of the year. About second quarter probably excluding the impact of portable on comfort, let's say, comfort in the quarter 2, we see probably stable to slightly negative market still for small domestic appliances. So we expect to deliver the year-end results on the back of a return to growth in the second half of the year.
With regard to air conditioning, the impact would be around EUR 70 million, as you correctly noticed, will probably the effect will stop with quarter two, I underline also the opportunity to give some color around the comfort. At the beginning of the year, we have outlined that we would expect a weaker conditioning for the exit of -- from the U.S. market in [indiscernible]. I have to highlight that due to the weather and also some high inventory levels at retail level all show the European market is kind of softer in air conditioning as well as we see a lower demand for heaters that were boosted by the worries around the availability of gas after the war in Ukraine started. So all in all, it could be that we will face a softer air conditioning season. And -- but again, we are positive about the potential development our SDA business and coffee, particularly for the second half, confirming our guidance.
In seasonal, although the decision in the United States will -- is structural. The weakness in Europe is more like due to seasonality. So it cannot be extrapolated as a trend for products in the future. It can be that actually after a weak year, the future will show a quite a return to growth. So -- but again, for us is important and we are focused as a group as a strategic decision to focus more on FDA where markets are more predictable and not related to seasonal effects. And for the moment, fortunately, our exposure in terms of sales and profitability to portable air conditioning comfort has reduced dramatically in the past.
[Operator Instructions] Our next question comes from Luca Bacoccoli from Intesa Sanpaulo.
Everyone can you hear me?
Yes, yes, sure.
Okay. Good. So the first question is a follow-up on margin. So I was wondering how do you see the gross margin evolve in the coming quarters, taking into account that from 1 hand, you have some tailwinds on the cost side, as you were mentioning, but at the same time, the strong positive price/mix effect that you experienced in last year we said this year because of the overlaps.
So those 2 elements will play out in the coming quarters? And the other question is on the environment. And if you see any deterioration in the competition and the early signs of price reduction due to the persisting weak demand on certain product category above all on the food preparation. And finally, my last question is on advertising and promotion. If what we have seen in terms of a reduction in absolute terms in the first quarter is a good proxy for full year?
Yes. So thank you, Luca. So gross margins. Yes, we see potential for improvement in the gross margin. In the first quarter, the cost savings was in particularly because of the lower logistic costs, while we are still suffering from industrial inefficiencies due to the fact that our production levels are still very, very low. On top of that, the high inventories that are -- the gross margin is determined by some higher in inventory costs that now we are clearing. Going forward, we expect the logistic cost to be on the low side again.
So we can continue to benefit from low logistic cost due to the lower inventory levels and lower rates from Asia in particular. As well as we will start capturing some beneficial effects from the higher efficiencies as the factories are starting to ramp up again in line with the the past. Also not -- we have not yet fully benefited from the lower input costs that now are also coming in. So there is room for all this, which should translate in better margins. We expect also a potentially slightly more promotional market. I've seen nothing very critical for the moment. And there is some room in our say, in our guidance to also have more competitive initiatives to maintain, protect or eventually grow our market share in the second half.
So all this, there is enough savings in order to also allow us to be more price competitive. Again, I expect the market to be more competitive. We don't see risk for promotional wars or price wars, nothing like that, just maybe a more promotional market in during the year. Probably, once that the market will go back to normal or to grow again, I think both of these initially will probably ease. So going to the other question, which was about [A&P] spending for the year. We believe that [A&P] spending is a very important pillar in our strategy. We think that if the loan year has has been a winner during overtime, despite you're seeing a decline from our record high in 2021 and '22, we are still winning market share our sales are dramatically higher than before COVID.
AP played a major role in our success together with our products. So we will continue to invest but again, we want to be cautious. So we might have a more adaptable strategy. So certainly, it would be a pillar, but we will release our investments in line with the developments of the sales. So expecting growth in the final part of the year, we will probably invest again massively as we have done in the past. But if we see that numbers for some reason, will not come in, but we will have room to cut some of the rate and still outspend competition because I believe that De'Longhi is really the top spender in coffee and food preparation compared to our key competition In Europe and in the key markets.
[Operator Instructions] Ladies and gentlemen, thank you for joining. The conference is now over. You may now disconnect your lines.
Thank you.