Amplifon SpA

MIL:AMP

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Amplifon First Quarter 2018 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations Director of Amplifon. Please go ahead, madam.

[Francesca Rambaudi, executive]

Thank you, Judith. Good afternoon, and welcome to Amplifon's Conference Call on First Quarter 2018 Results. During the next hour, Enrico Vita, Amplifon's CEO; and Gabriele Galli, Amplifon's CFO, will provide comments on the results for the first quarter of 2018. After the presentation, we will be happy to take your questions.

First, a few logistical comments. Earlier this morning, we issued a press release containing our results and the presentation, which management will refer to now is posted on our website. Second, you can access this call also via audio webcast and the link is indicated on our press release. Third, please refer to the disclaimer on Page 2 for any forward-looking statements. Lastly, please note that from January 2018, we adopted the accounting principles IFRS 15 and IFRS 9, which have led to changes in accounting policies and in some cases to adjustments in the amounts recognized in the financial statements. The comparative data for 2017 have not been restated while the data for Q1 2018 are also presented without the application of IFRS 15. Therefore, the comparative analysis in this presentation refers, unless otherwise specified, to 2018 data without the application of IFRS 15 being the impact of IFRS 9 negligible. With that, I am now pleased to turn the call over to Amplifon's CEO, Enrico Vita.

[Enrico Vita, executive]

Thank you, Francesca, and good afternoon, everyone, and welcome to our Q1 '18 conference call also from me. I would like to start saying that once again, we are very satisfied about our results of the last quarter. We are very satisfied about our performance in absolute terms, but we are even more satisfied if we take into consideration that the comparable base was extremely challenging as Q1 '17 was by far the strongest quarter of last year. You may recall in fact that in Q1 '17, we posted a record revenue growth of plus 16.3%. We are also very satisfied in consideration that we have achieved this result with one trading less on average this quarter versus the same period of last year.

So let's move to the Chart #4 to see the main numbers for the quarter in more detail. As you can see, the revenues were up nearly double-digit in local currency and I would like to highlight once again that the composition of the growth was very healthy. In fact, the organic growth was above market reference at a very healthy 5.4%. The contribution from our piecemeal acquisitions added another 4.3% to the total growth, which however was affected by a very adverse currency effect. We expect that this currency effect, of course, to be progressively lowering in the next quarters of the year. At the same time, we have been able to increase our EBITDA margin by 40 basis points from 13.8% to 14.2% after an increase in our marketing investments of about 15% in the period and again, notwithstanding an adverse translative ForEx effect. The net profit was also up by nearly 20% and we achieved EUR 15.2 million net profit in the quarter.

So let's move now to the following chart, Chart #5 and here you can find our revenue roadmap. At region level, our growth was very strong in EMEA and in Asia Pacific while the performance in the U.S. was affected by a soft January due to exceptionally adverse weather conditions that I'm sure you will recall.

However, with regards to the U.S., I also wanted to mention that the trends quickly reversed in February and March with a very good acceleration in the top line. With this, I leave the floor to Gabriele to give you more details about our performance in numbers.

[Gabriele Galli, executive]

Thanks, Enrico, and good afternoon to everybody. Moving to Slide #6, we have a look at EMEA financial performance, which has been also in Q1 '18 higher than the reference market. EMEA posted in fact during the period an outstanding 11% revenue growth despite 0.9% currency headwinds coming primarily from the British pound. The strong organic growth accounting for 5.7% has been further boosted by a significant 6.2% growth from acquisitions. The resulting 11.9% revenue growth in local currency is even more significant, being the comparable base is extremely challenging with a growth of Q1 '17 over '16 amounting to 14.9%.

Italy posted a double-digit growth over a particularly strong '17 driven by the successful marketing strategy with a strong focus on CRM and digital. Germany had a very strong performance improvement fostered by both acquisitions and healthy organic growth. France also had a positive performance primarily thanks to the strong M&A activity. Iberia achieved an outstanding double-digit organic growth coupled with a strong M&A contribution. In terms of profitability, the significant top line growth coupled with the increased operational efficiency and the scale-reach in core countries allowed an EBITDA increase of 20.9%, around EUR 5.4 million with a strong 120 bps EBITDA margin improvement from 13.2% to 14.4%.

Moving to Slide #7, we have a look at Americas performance, which posted in Q1 '18 a revenue increase in local currency amounting to 3.6% driven by a 2.5% organic growth, coupled with a 1.1% growth from acquisitions. We see this result as solid considering the exceptional adverse weather condition in January and a very challenging comparable basis with Q1 '17 growing at 15.5% versus Q1 '16. The solid growth of the region has been driven by the strong performance of Miracle-Ear. The significant currency headwinds with average euro-dollar ForEx rate at 1.23 in Q1 '18 versus 1.06 in previous year had a negative contribution amounting to 13.6% leaving revenues at EUR 15.9 million (sic) [ EUR 51.9 million ] versus EUR 57.7 million last year. Moving to profitability, EBITDA margin increased by around 20 basis point from 17.0% to 17.2% as a result of strong operational efficiency. After the close of Q1, we disposed our 51% stake in Amplifon Brasil acquired in 2014. The stake was sold to the former JV partner being the business model, not the right one to lead expansion in South America. The transaction is not material.

Moving to Slide #8, we have a look at APAC performance. The revenues increased by 7.6% in local currency entirely driven by an excellent organic growth. The result is even more remarkable considering the extremely challenging comparable basis, plus 24.4% in Q1 '17 versus Q1 '16. Substantial currency headwinds with the Euro-Australian dollar at 1.56 in Q1 '18 versus 1.41 in Q1 '17 resulted in a negative ForEX contribution amounting to minus 11.3% leaving revenues to EUR 11.6 million from EUR 12 million in '17. The positive performance in local currency was driven by robust momentum in Australia posting a healthy organic growth and by the continued outstanding performance in New Zealand driven by high single-digit organic growth. The EBITDA margin at company highest levels, increased by 20 basis points to 28.2% with a slight reduction in absolute value driven by the ForEX effect from EUR 12 million to EUR 11.6 million.

Moving to Slide #9, we can appreciate the profit and loss evolution. Total revenues increased by 4.8% to EUR 310 million after inorganic growth accounting for 5.4%, a growth from acquisition for 4.3%, and the currency headwinds impacting negatively by 4.9%. Solid operating leverage led EBITDA margin to 14.2%, with an increase of 40 bps versus Q1 '17. The performance is particularly strong considering the adverse translative ForEX impact on the mix of the regions with Americas and APAC contribution penalized by the appreciation of the euro. Total EBITDA increased by 7.7%, around EUR 3.1 million from EUR 40.9 million to EUR 44 million. Following the strong investment increase during the past quarters, D&A increased by around EUR 1.8 million to EUR 16.7 million leading EBIT to EUR 27.3 million with a growth of 5.1% versus previous year.

Net financial expenses of EUR 4.7 million, in line with '17, led profit before tax to EUR 22.6 million from EUR 21.3 million last year with a 6.1% growth versus '17. Tax rate posted a significant 7 percentage point reduction versus '17 from 39.9% to 32.8% with seasonality playing negatively on quarter performance and full year forecast confirmed in line with the 3-year plan target at lower than 30% tax rate. Net profit increased by 19.3% to EUR 15.2 million from EUR 12.8 million in '17 with a 60 basis point margin increase to 4.9% from 4.3% last year. EPS grew to EUR 0.07 per share from EUR 0.058 in '17.

Moving to the following slide, you can appreciate the cash flow evolution. The operating cash flow reached EUR 19 million versus EUR 14.9 million in '17, achieving a strong EUR 4.1 million improvement versus last year with an outstanding conversion of the increasing profitability. Net CapEx decreased by EUR 2.2 million to EUR 10.6 million driven by lower [ past ] M&A refurbishment activity. Free cash flow posted an outstanding growth of EUR 6.3 million ending up at EUR 8.4 million versus EUR 2.1 million in '17. The strong M&A activity although lower compared to the exceptional Q1 '17, which included AudioNova, France absorbed EUR 25 million for the acquisition of 55 shops primarily in France, Germany and Canada. Financing activity, namely share buyback absorbed EUR 6 million versus EUR 6.8 million last year. Net cash flow absorbed in the period EUR 22.6 million posting a significant decrease, around EUR 32 million, versus the absorption of EUR 55 million in '17. Net financial position ended up EUR 320 million from EUR 296 million at the beginning of the year versus the EUR 279 million in Q1 last year.

Moving to the Slide 11, we have a look at the debt profile trend and the key financial ratios. As mentioned in the previous chart, the net financial position closed at EUR 320 million with liquidity accounting for positive EUR 101 million, short-term debt accounting for around EUR 300 million and medium-long term debt accounting for around EUR 120 million. We remind you that the EUR 275 million Eurobond has been refinanced through bilateral and revolving bank facilities allowing a significant reduction of the financial expenses, starting from July '18, an extension of the residual debt maturity and the decrease of the excess liquidity. In terms of financial ratios, the group is standing on a very safe spot with net debt over EBITDA at 1.43x and net debt over total equity at 0.55x and 0.60x at '17 and '18 IFRS respectively. The very solid capital structure would allow the group to pursue the future growth opportunity presented during the last Capital Markets Day. I would now hand over to Enrico for 2018 outlook.

[Enrico Vita, executive]

Thanks, Gabriele. So we are almost at the end of today's presentation. I think that Q1 was a strong start towards our year targets and also towards our mid-term ambitions. The first quarter of the year, it is always very important to set the base for the year. Therefore, I believe that we have now set the base for another successful year for our group. Finally, I would like to mention that we are progressing fast in the implementation of the all key initiatives of our strategic plan and on this regard, I would like to give you a quick update on the rollout of our new Amplifon product line in Italy in the next chart. In fact, on April 15 in Valencia, Spain we have unveiled a new Amplifon product line and ecosystem to more than 1,600 people from our Italian stores and what I can tell you is that our people were super excited about what they have been presented. So we are now very ready for the rollout, which is confirmed will start from mid of May and also I can assure you that everyone is also very determined to make it a great success. So with this, I'll leave back the floor to Francesca.

[Francesca Rambaudi, executive]

Thank you. I would now turn the call over to Judith in order to open the Q&A session. Thank you.

[Operator]

Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Romain Zana with Exane.

[Romain Zana, analyst]

I have 2. The first one regarding the profitability, you delivered an improvement quite close to the run rate of the 40 bps, 50 bps for the group and this despite the currency headwind and I guess some front-end loaded marketing investments. So I was wondering if you see now a greater potential for the full year than the 40 bps, 50 bps. Would that be a credible scenario? And the second question is regarding the implementation of the new digital strategy and private label, could you please remind me what is the agenda following the rollout in Italy in Q2, what will be the following regions or country?

[Enrico Vita, executive]

Romain, thanks for the questions. We said we are very, very satisfied about our results for the Q1. We believe that Q1 represent a very solid base in order to deliver another strong result in 2018, but you're right, of course, the result is also very positive in terms of profitability taking into consideration, of course, the headwind from currency, but I think that it's too early to say that we can deliver even a higher profitability of the usual 40 bps, 50 bps for the year. So it's too early, let's see what is going to happen in the next quarter or so and then, if there will be the opportunity, you can be assured that we will do everything in order even to improve this result if possible. With regards to the second question and for the launch of the new Amplifon product line and the Amplifon ecosystem, as I mentioned just at the end of the presentation, everything is set for the launch in Italy starting from mid of May and we invested quite a significant amount of money in order to gather together all the personnel from the shop in one location in Valencia in Spain in order to present the new Amplifon product line and all the features of the ecosystem. As I said, the reaction from our people from the stores was super enthusiastic and was super excited. So we think that they will be very, very keen, very determined in order really to make it a great success. With regard to the next year and to the next countries and the next markets, for this year, we will focus on Italy, but we are planning to expand the roll out to all the EMEA region and also the Americas and also the other countries by 2019, early 2020. So we are perfectly, let me say, in line with the plans of rollout that we have announced also during our Capital Markets Day.

[Romain Zana, analyst]

And maybe if I can just follow up on my first question, maybe a question for Gabriele. Can you just please quantify the ForEX headwind that you have faced in Q2 -- in Q1 at the EBITDA margin level, please?

[Gabriele Galli, executive]

Yes, I mean, as we were -- I mean, describing – so there was an appreciation of the euro versus the dollar from 1.06 last year to 1.23 and there was an appreciation of the Australian dollar -- or the euro versus the Australian dollar leading to a revenue decrease amounting to around 4.9%. If you want to have an idea, I mean in terms of mix of the different region, during Q1, profitability of EMEA is a little bit lower compared to Americas and lower compared to APAC. So the euro appreciation gave basically lower contribution in the region leading around 25 basis point to 30 basis point EBITDA margin decrease.

[Operator]

The next question comes from Lisa Clive with Bernstein.

[Lisa Clive, analyst]

I have 3 questions. First of all, on Germany, that market has been going through a lot of consolidation in the past few years. Could you just comment on how far that trend has progressed and whether there is still quite a lot of independents left in the market who are likely to be consolidated in the next few years? Second question, could you give us some insights into how your Amplifon Hearing Health Care works in the U.S. market. We've noticed an emerging trend of Medicare Advantage Plans starting to add hearing care to their offerings. So I'm just wondering how that's translating into changing dynamics in the hearing aid retail market in the U.S.? And then lastly, you pointed to strong organic growth in Australia in the period. This is really quite at odds with commentary from one of your vertically integrated competitors about the market dynamics. So could you help shed some light on what's going on in that market. I understand there was some negative publicity around aggressive sales practices, very high ASPs but clearly, any blowback from that has not seemed to affect your business in any way.

[Enrico Vita, executive]

Yes, so I will start with the first one and about Germany. Yes, well, you know that, strangely enough, Germany is one of the markets in the world with, let me say, the most fragmented market. What I mean is that our estimation is that today, the independent channel in Germany still represents about 60% of the total market. And in fact, you know very well that the leaders in this market are Geers and [ Kint ] followed by us, but the leaders that I mentioned before have about 10%, 11% market share. So it is a very, very unconsolidated market and therefore, certainly, there is still room for us to grow through our piecemeal acquisitions. You know very well that also last year we have significantly increased our network there and the fact that we have increased our network in Germany was also one of the main contributor to our growth and therefore also to our profitability expansion. So the answer – the straight answer to your question is that we believe that there is still a very, very big room for consolidation in Germany.

With regard to the second question, which was about Amplifon Hearing Health Care, you know that Amplifon Hearing Health Care has been one of the drivers of our growth in the U.S. You know that basically, we work on together with the insurance company through this business unit. We partner with insurance companies and we provide on their behalf, of course, hearing aids to their customers. With regards to the possible evolution of the market in consideration of the fact that Medicare is increasing, of course, as a platform. Yes, with Amplifon Hearing Health Care, we have launched the new health plans and therefore, we can certainly bid on additional requests for programs, which will allow the health plan to offer their membership hearing health care benefit. With regards to the third question about Australia. Well, in reality, you are referring to something, which has already happened now several months ago and which was about I think we mentioned in one of the calls last year about the fact that there was some bad publicity in the market, but this was something which happened more than 1 year ago. In reality, what I can tell you is that we have had quite a strong performance in Australia last year despite that and also what I can tell you is that we have seen that also in the start of this year in terms of market growth, Australia reported quite a healthy growth in the region of 4%, 5%. So we do not see really any kind of negative effect on the market performance and also in our performance in the recent months. Maybe you're referring to something that happened several months ago.

[Operator]

The next question comes from Veronika Dubajova with Goldman Sachs.

[Unknown Analyst]

I'm [ Francesca ], couple for me, please. The first one is on the Americas growth rate in the first quarter. Quite a meaningful deceleration there, I know the comp was pretty hard -- pretty difficult in the first quarter, but I'm just wondering what drove that given the relatively strong HIA data we've seen [ from ] the manufacturers if you can comment on that, that would be very helpful. And I noticed that in your press release, you just mentioned Miracle-Ear as driving growth, so maybe talk to what's happened with the Amplifon hearing health business and with Elite as well? And then my second question is on the margin progression in EMEA, clearly, a very strong first quarter. Is the improvement that you saw in Q1 representative of the underlying potential you see in the business for the rest of the year or there is something unusual that happened in the first quarter in the European business from a profitability perspective?

[Enrico Vita, executive]

Thank you, Veronika, for your questions. With regard to the first one and the Americas, as I mentioned during the presentation, the performance in Americas was affected by quite a soft January, in particular, as far as I remember in the first couple of weeks of January where we had exceptionally adverse weather conditions. And in fact, we had several stores -- several hundred stores actually closed for few days in the Americas in the first month of the year. Also, you are right saying that we have also to consider that the comparable base was very challenging for the Americas, but in order to give also some comfort, what I can tell you is that the performance in February and March had as we were expecting a good acceleration in the top line. Yes, we mentioned Miracle-Ear because Miracle-Ear, of course, is our franchising network that is in terms of length of a chain of control is shorter and in fact, Miracle-Ear drove a very solid performance, of course, Elite and Amplifon Hearing Health Care actually were below the performance of Miracle-Ear. With regard to the EMEA region profitability expansion, you know that from this region, we expect the biggest contribution in terms of profitability improvement and this thanks to the fact that we are increasing the size in some key markets like Germany and France and you know very well that scale and size of the network is extremely important in order to improve the profitability in the region. As you know, we do not provide guidance of profitability in a regional level. So the last comment that I would make about your reference about HIA data. I think that we must always keep in mind that this data are [ sell-in ] data which can be also heavily affect -- be affected by stock in programs from some manufacturers. As far as we understand, also there was some activities on this regard from some manufacturers in particular on some larger accounts in the U.S. So we need to see more, I mean a longer period of time in order to really understand the growth of the Americas -- of the U.S. market. Our estimation is that the Americas did not grow above --significantly above the record level.

[Unknown Analyst]

That's very helpful, Enrico. What do you need to do to get the Elite growth rate higher? It's been a drag on the Americas growth rate now for a while and I just wonder, is your expectation this is just going to be a lower growth business and that's what it is or is there something that you believe you can do to try to accelerate the growth rate in Elite?

[Enrico Vita, executive]

Absolutely. Actually, we are working also very, very hard on Elite. First of all, I'm also happy to share with you that since mid of last year, we have also there a new leadership team, which has also critically reviewed the value proposition of Elite and we are significantly -- I mean we are working very hard in order to add always more value to the proposition of Elite and then pretty confident that also Elite will contribute in a material way to the growth of the U.S. going forward. So yes, there are several things that are in the pipeline at this moment in order to really accelerate the growth of Elite.

[Unknown Analyst]

Okay, and final question if I may, Enrico, and I promise to be done after that, but M&A, do you see any larger assets becoming available for sale this year?

[Enrico Vita, executive]

You know that I think we mentioned that in general terms around the world that there are not [ plans ] of the potential large targets for us. There are, let me say, 4, 5 potential targets. You have seen I guess that in the last months, there were some speculation and some rumors also with some articles on newspapers about the potential sale of [ guys ] in Spain for a minority, I don't know, but we cannot really comment on speculation or rumors, but you know very well also that our balance sheet is quite -- actually is very strong, very healthy, and therefore, if there will be any opportunity coming up, for sure, we will look at that.

[Operator]

The next question comes from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

I have 4 questions. The first is related to the APAC region. I would come back to some color on the performance there considering the very, very, very good results, so if you can give us the sense of what is driving the organic performance and also there is a significant contribution from the new store openings? Second, moving to Europe. I'm trying to understand -- so I see the double-digit growth in Italy, so I'm trying to understand if there is say, overwhelming contribution of Italy to the organic performance of the region because you were commenting here of a more I would say, positive but less impressive contribution from other counties organically? And third, on the Americas, just to understand basically from your comments I would argue that you see some acceleration in the organic performance given that Q1 was most affected by the very soft January. And last is on the topic of the new product launches. How should we look at the short-term impact of this new product launch because you clearly addressed the medium-term impact and the strategic relevance, but should we expect some pick-up in marketing cost for example or any kind of dilution due to this launch in the short term? And did you have any negative feedback from the Valencia conference?

[Enrico Vita, executive]

Okay, thank you. Thank you for the very comprehensive questions actually. So I will start with the regions and I will start from the last one, the Americas. Yes, we expect already in this quarter a better organic growth from the Americas. As I said, actually after a soft January when we had really some very bad weather conditions that I'm sure that you will recall, we have already seen in February and in March quite a significant acceleration in the top line. So I expect these also to continue in the second quarter. And therefore, I expect also in the second quarter to have certainly a better organic growth in the Americas. In the Asia Pacific, actually, it is a continuation of the very strong performance that we had throughout all last year. We -- the market was positive, the market overall was positive. As I said, we have seen the market in Australia growing at about 5% and even something more in New Zealand, so certainly, the market growth is supporting our growth, but overall, we have outperformed the market and I think that this is the result of a very strong management team that we have there delivering really outstanding results. With regards to the third region that you mentioned, the EMEA region, Italy did very well, we are very happy, but we did not perform very well in terms of organic growth only in Italy. We had also very good organic growth in Spain as Gabriele was said, in Germany. So it's -- I would say that is the overall result sees a contribution from many markets, of course, not all of them, but in general terms, I think that the overall region performed very, very well and with regards to the last question about the launch of the new Amplifon product line and the ecosystem, I can immediately tell you that we did not really get any negative feedback from our sales force. Actually, as I said before, the reaction from our people was really super enthusiastic, which gives also to us even more comfort about the success of the initiative. For sure, we will have some marketing cost in Italy in the Q2 for the launch, but overall, we are also planning to -- of course, to have a good growth in terms of revenues overall in the region and for what we have expect is not a significant impact of from that in the EMEA region overall. That's basically it.

[Domenico Ghilotti, analyst]

So there is, for example, no one complaining or concerned about the lower flexibility toward the client for example?

[Enrico Vita, executive]

What I can tell you is that we introduced the new hearing aids flying with the drone into the stage and there was a standing ovation for the product. So no, no, not really. Everyone was really super enthusiastic.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

[Enrico Vita, executive]

Thank you.

[Gabriele Galli, executive]

Thank you very much, Judith. I think thanks to everybody, and I think we can close the conference call.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.