Amplifon SpA

MIL:AMP

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Amplifon Q1 2019 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relator. Please go ahead, madam.

[Francesca Rambaudi, executive]

Good afternoon and welcome to Amplifon's conference call on Q1 2019 results. Before we start, a few logistic comments. This morning we issued a press release related to our Q1 2019 results and this presentation is posted on our website in the Investors section. The call can be accessed also via webcast and dial-in details are on Amplifon's website as well as on our press release. Now let's move to the disclaimer on Slide 1 as some of the statements made during this call may be considered forward-looking statements. Lastly, please note that from January 2019 we adopted the accounting principle IFRS 16 Leases. The comparative data for 2018 have not been restated while the key data for 2019 is also presented without the application of IFRS 16. Therefore, the comparative analysis in this presentation and the commentary on Q1 2019 results refer unless otherwise specified to 2019 key data without the application of IFRS 16.

With that, I'm now pleased to turn the call over to our Amplifon CEO, Enrico Vita.

[Enrico Vita, executive]

Thank you, Francesca. Good afternoon, everyone, and welcome to our Q1 2019 conference call also from me. I would like to start by saying that we are certainly very satisfied about our financial results for the first quarter, but also by saying that even more importantly, we are extremely satisfied about how we are progressing on the execution of our key strategic initiatives for 2020. And in fact on this regard, I certainly need to start by highlighting how things are going in Spain. Here our plans to integrate our 2 operations, GAES and Amplifon, are progressing very rapidly and extremely well. As of today, we have appointed the new leadership team and we have already implemented some of the key initiatives to achieve the synergies according to our plans. From a financial perspective, our performance in Spain in the first quarter was absolutely excellent and even above our expectations both in GAES and in Amplifon both in terms of revenue growth and in terms of profitability.

With regard to revenues, we grew view double-digit with very similar growth rates in inter-business. This is really a remarkable result especially for GAES whose revenues have been flattish for the last 4 years. I have to say that that we could not expect a better start of the year in Spain. And now let's comment together the financial performance of the group in the first quarter and for this I would like you to go to the next chart, Chart Number 3. As you can see, revenues were up by more than 25% at constant ForEx and by around 27% at current ForEx. The organic growth above market was about 4% despite a significant negative phasing effect in France, one of our major businesses of course, due to the new regulation in place effective from January 1st. As you know, we see this new regulation in France as positive for the industry, but this new regulation amongst other positive things also introduces the minimum 30-day trial period, which delayed sales especially from January and February to the following month.

Because of this, we posted negative organic growth in Q1 in France. I have to say that this phasing effect has already lessened and actually already reverted in March and then I can also anticipate to you that April was extremely strong with double-digit organic growth. With regards to the overall profitability, we increased our EBITDA recurring margin by 40 bps from 14% to 14.4% and this was possible also thanks to the already mentioned better than expected performance in Spain and even after an increase -- a significant increase in our marketing investments. The net profit recurring was up by nearly 37% at EUR 20 million. And finally, I would like to highlight our very strong operating cash flow generation, which allowed us to reduce our debt versus December '18 despite the very well-known Q1 seasonality.

And now I hand over to Gabriele to give you more details about our financial performance in numbers.

[Gabriele Galli, executive]

Thanks, Enrico, and good afternoon to everybody. Moving to Slide Number 4. We have a look at EMEA financial performance, which posted in the quarter an outstanding topline growth and a continued profitability improvement also boosted by the excellent performance of GAES. EMEA show in fact in the period an outstanding revenue growth of over 31% in local currency. The revenue growth was driven by a solid 4% organic growth excluding GAES, which was entirely accounted in M&A growth, and by an exceptional M&A contribution of 27.5% for the combined effect of GAES consolidation since beginning of the year, the double-digit organic growth of GAES versus last year, and the continuous bolt-on M&A program primarily in our core German and French countries. Italy posted a continued sustained performance also fostered by the ongoing successful roll-out of Amplifon Product Experience.

Spain showed an excellent and above expectation organic performance growing double digit versus last year for both GAES, which was reported in M&A growth, and Amplifon businesses. France posted a flattish performance due to the anticipated phasing for the introduction of the new regulatory framework with a mandatory minimum 30-days trial. As Enrico already mentioned, although we see this new regulation as positive for the industry, sales from January and February were delayed to the following months. Germany posted a solid performance fostered by both acquisition and strong organic growth. In terms of profitability, the significant topline growth coupled with increased operational efficiency and scale reach for countries allowed an EBITDA increase of 41%, around EUR 12.5 million with a very strong 100 basis point margin improvement from 14.1% to 15.1% supported by better than expected GAES performance even after very strong increase of marketing investment around plus 35% also reflecting group perimeter change.

Moving to Slide Number 5, let's have a look at Spain where GAES integration is fully on track and is already successfully delivering initial synergies as demonstrated by the excellent performance fostered in the quarter both at topline and EBITDA level. Key initiatives implemented include the appointment at the very beginning of January of the new leadership team, improved advertising performance leveraging on the group's best practice focus in fostering customers call-to-action and leading traffic generation, focus on CRM actions, first alignment of commercial practices across the 2 networks, and first quick wins in both direct and indirect procurement. The other key initiatives to be delivered in the following couple of quarters include the rebranding of the whole network and the shop visual identity alignment, the harmonization of the offering, and the continued focus on direct and indirect procurement savings.

Moving to Slide Number 6, we have a look at Americas performance which posted in Q1 a strong revenue growth in local currency amounting to around 14%. The growth was driven by a 3% organic growth in the U.S., performance above the 1.5% U.S. private market growth, which as you may remember was hugely impacted by the very severe weather conditions especially in February. In addition, the quarter also had 1 trading day less than previous year. The organic growth was coupled with a strong contribution from M&A primarily reflecting the GAES LATAM business consolidation as of beginning of '19 further boosted by an excellent organic revenue growth in the period. Currency tail -- tailwind for US dollar appreciation versus euro moving from $1.14 in the quarter versus $1.23 last year gave a farther 8% contribution to revenue growth increasing to EUR 63.1 million from EUR 51.8 million last year.

The U.S. revenue growth was primarily driven in the quarter by Miracle Ear while the growth in Canada was primarily fostered by bolt-on acquisitions. The robust sales growth in LATAM reported entirely in M&A was driven by double-digit organic growth. Moving to profitability. EBITDA recurring increased by more than 30% versus last year from EUR 9 million to EUR 11.7 million with a significant 120 basis point EBITDA margin improvement following the strong operational efficiency, which more than compensated dilutive effect of GAES LATAM consolidation.

Moving to Slide Number 7. We have a look at the APAC performance. As we anticipated in the full-year '18 results call, we had a very good performance in APAC with revenues increasing by a strong 8.6% in local currency, significantly above the reference market. The revenue growth was mostly driven by a robust 5% organic growth coupled with a 3.6% contribution from M&A entirely driven by our recent strategic acquisition in China.

Currency headwind although significantly reducing had a significant negative contribution of around 1% leading total revenue growth to 7.6% from EUR 41 million to EUR 44.4 million. The strong revenue growth in Asia Pacific was driven by very good performance in Australia, which posted sustained organic growth steadily accelerating from the beginning of the year. Revenues in New Zealand were flattish due to the still low returning customers for the anniversary of the regulatory change. China showed an excellent topline growth reported entirely in M&A driven by a double-digit organic growth. EBITDA was at EUR 11.4 million with EBITDA margin posting, even after consolidation of a lower margin Chinese joint venture, a significant improvement versus Q4 '18 as a first step of the profitability improvement expected for the forthcoming quarters.

Moving to Slide Number 8, we can appreciate the profit and loss evolution. Total revenues increased by 26.7% to EUR 392 million. Solid operating leverage led recurring EBITDA margin to 14.4% with an increase of 40 basis point versus Q1 '18. Total recurring EBITDA increased by 30.3% around EUR 13 million to EUR 56.3 million. Reported figures include EUR 1.4 million cost related to GAES integration. Following the strong investment increase during the past quarters and the consolidation of GAES business with related depreciation and PPA related amortization, D&A increased by around EUR 7 million leading EBIT to EUR 32.9 million with a growth of 24% versus prior year. Net financial expenses accounting for EUR 3.7 million, EUR 1 million lower than in '18 despite the strong increase of net debt to finance the GAES acquisition led profit before taxes to EUR 29.2 million from EUR 21.8 million last year with a 33.5% or EUR 7.4 million improvement versus prior year.

Tax rate posted a 190 basis point reduction versus Q1 '18 from 33.3% to 31.4% with seasonality playing as usually negatively on quarterly performance and full year expectation confirmed in line with the 3-year plan target at lower than 30% tax rate. Net profit increased by 36.9% to EUR 20 million with a 40 basis point margin increase. Earning per share adjusted for one-off item and PPA-related amortization posted an outstanding increase of 41.7% from EUR 0.083 to EUR 0.118 a share. Just few words on application of IFRS 16, which as you know has only an accounting impact leaving cash flow unchanged. The capitalization of the right of use led to a strong EUR 22.6 million EBITDA increase due to the different accounting of the rental cost with the resulting IFRS 16 recurring EBITDA of EUR 78.9 million with a ratio to sales of 20.1%. Amortization of capitalized right of use equal to EUR 21.2 million and related interest component equal to EUR 2.9 million resulted in a slightly dilutive profit before tax with non-IFRS 16 accounting.

The dilutive effect mainly coming from the first adoption of the principal, which assumes every contract starts on January 1st '19, is expected to smooth over the duration of the life of the contracts. Moving to Slide Number 9, we can appreciate the cash flow evolution. Following IFRS 16 application, we slightly modified the cash flow representation introducing the operating cash flow before repayment of lease liability and the repayment of lease liability, which were respectively equal in the period, to EUR 54.5 million and minus EUR 19.6 million. Operating cash flow was equal to around EUR 35 million versus EUR 19 million in Q1 '18 with a strong EUR 16 million improvement versus last year following the outstanding conversion of EBITDA improvement. Net CapEx increased by around EUR 8 million to EUR 18.6 million driven by the strong investment plan in IT technology and shop refurbishment.

Free cash flow posted an outstanding growth of around EUR 8 million ending up at EUR 16 million around double versus '18. The M&A activity fostered a cash absorption lower by around EUR 10.5 million versus a very M&A intensive Q1 '18 while cash provided by financing improved by around EUR 7 million essentially because of reduced buyback activity. Net cash flow generated in the period was EUR 3 million versus the strong seasonal cash absorption of EUR 22.5 million in Q1 '18 with an improvement above EUR 25 million resulting in the net financial position at EUR 838 million from the EUR 841 million at the beginning of the year. Moving to Slide 10, we have a look at the debt profile trend and the key financial ratios. As mentioned in the previous chart, the net financial debt closed at EUR 838 million with liquidity accounting for positive EUR 92 million, short-term debt accounting for around EUR 116 million, and medium long-term debt accounting for around EUR 813 million.

The application of IFRS 16 led to accounting of lease liabilities, which amounted to EUR 436 million leading to total of financial debt plus lease liabilities to EUR 1.27 billion. Equity was at EUR 628 million. In order to reflect the recent introduction of IFRS 16 and harmonize the definition among different facilities while preserving the same level of headroom for Amplifon and protection to lenders, we recently redefined the financial covenants with banks and investors. The redefinition of the covenants takes into consideration the following key financial metrics. EBITDA as per financial statements including improvement coming from IFRS 16 and excluding non-monetary cost related to stock grants, net debt as per financial statements without taking into account lease liabilities, equity as per financial statements including IFRS 16, net interest expenses as per financial without taking into account the financial expenses for lease liabilities.

The new threshold for financial covenant have been set as follows. Instead of former 3.5x, the new covenant ratio net debt over EBITDA has been set at 2.85x. Instead of the former 1.5x, the new covenant ratio net debt over equity has been set at 1.65x. Instead of the former 4.0x, the new covenant ratio EBITDA over net interest has been set at 4.9x. Following the new definition of covenants, the ratio net debt over EBITDA at the end of the quarter was 2.36x, which in the old definition would have been lower than 3x proving that the group is rapidly deleveraging after the GAES acquisition.

I would now hand over to Enrico for 2019 outlook.

[Enrico Vita, executive]

Thank you, Gabriel. So we are again at the end of our presentation. In summary, we are extremely satisfied about our start of the year. As you know, Q1 is always very significant to set the base for the year and we can say now that our outlook for the entire year is certainly very positive. The integration of GAES is fully on track and we expect Spain to continue to perform well -- I would say very well, also in the coming months. Finally, we expect our performance in the rest of the year to be supported by the launch of the new Amplifon Product Experience in the Netherlands and Germany in Q2 and in France, Australia, and Miracle Ear in the US in Q3. Also on this regard, themes and plans are going perfectly in line with our expectations.

With that, I thank you for your attention and now I hand over to Francesca again.

[Francesca Rambaudi, executive]

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

[Operator]

Thank you, Madam. [Operator Instructions] The first question is from Romain Zana of Exane.

[Romain Zana, analyst]

Congrats for the nice start to the year. I have 3 question, please. The first question is regarding Spain, which came well above your initial expectation of mid single-digit growth maybe a bit cautious and I was wondering to what extent these can be extrapolable -- extrapolated for the full year. If you can give us let's say an updated guidance for Spain as a standalone. Second question is on the EBITDA profitability. The margin was already up 40 bps in Q1, which is also better than your ambition for the full year. What is driving this better performance and where do you see, let's say, better profitability than initially expected? And last question, which is more a clarification about the France headwind in the first -- in the first quarter. Is that fair to assume that the overall growth for the group of Amplifon excluding this French impact could have been 0.5 percentage points to 1 percentage point higher?

[Enrico Vita, executive]

Thank you, Romain, for your questions. So, I would -- I would like to start with the last one, our estimation if excluding the impact of France. In France because of this regulatory change, actually we posted very negative organic growth in Q1 which was close to 10% not entirely due to this let's say phasing effect. And so excluding the impact of France, our estimation for our organic growth for the group -- total group would have been above 5%. Between 5% and 6% would have been our organic growth in Q1 excluding this French let's say effect. Then with regard to the other 2 questions. With regards to Spain, I think that our assumption in the plan was a fair assumption. I have to say that Spain is doing even better than our expectations. Spain posted double-digit growth in this first quarter and we expect also Spain to continue to perform very well also in the coming months actually. So, I have to say that the Spain is doing very well. In fact it's -- this is the result of a very good work done by the team. It's too early now to say that we can expect at the same time growth in Spain for the remainder part of the year. But we are positioned well, very well I would say. With the regards to the profitability and therefore the improvement in profitability that we have posted in Q1, I would say that also in this regard what has let's say boosted our performance in terms of profitability was the performance of Spain. Also in terms of profitability, Spain posted a profitability higher than what we were expecting in our plans. So, this improvement was mainly driven by Spain.

[Operator]

The next question is from Veronika Dubajova of Goldman Sachs.

[Veronika Dubajova, analyst]

I have 2 as well, please. One, can I just clarify the comments on France? Because I think in the press release, you said performance was largely unchanged, but Enrico, you just said that growth was minus 10%. So if you can just confirm that organic growth was indeed minus 10% for Q1? And I guess if we add that back assuming it was minus 10%, it still looks like European organic revenue growth decelerated a little bit versus where you were tracking last year. I appreciate there's some volatility here quarter-to-quarter, but are you seeing any changes whatsoever either to market demand or your relative growth in any of the other European markets that would explain that? That's my first question. And then my second question is looking at the guidance for the year, this is for Gabrielle, you're doing already very well in Q1 and this is I presume before you realize most of the benefits of owning GAES from a synergy perspective. So curious as you look to the balance of the year and we think about the margin guidance of at least flat margins, is there -- I presume the risk to this is due to the upside. Is that a fair assumption at this point in time? Thank you.

[Enrico Vita, executive]

Okay. So with regard -- thank you, Veronika, first of all for the questions. With regards to the first question, yes, we said that the overall performance in France has been more or less flattish and in fact M&A -- our bolt-on acquisition strategy that we are pursuing in France actually basically offset completely our negative organic growth. So, the comment on flattish performance was related to the total -- to the total growth which was negative in terms of organic growth, but also very positive in terms of M&A. With regards to the second question and in particular to the organic growth performance of EMEA. No, we do not see any significant or material deceleration at all actually. And as I said, the result which was below our let's say recent growth rate in terms of organic growth was primarily driven by the performance in France. As I said, in France I'm very positive that now I mean the phasing is over, March was already positive in terms of organic growth. In April we posted double-digit organic growth in France. So, I think that let's say the one-off effect is already in the back of our performance. With regards to the last point and in particular to the guidance on margin. I would say that it's a bit early to change the guidance, but certainly we are for now more confident and -- more confident and I would say that we would be to -- in the position to give you more let's say colors about the guidance for the full year at least at the end of Q2. Certainly also April, I can say that was quite positive. So, we are in a good position.

[Veronika Dubajova, analyst]

Very clear. And can I just ask a follow-up in terms of where the surprise versus your expectations on the margin has come from? Has there been a better realization of the GAES synergies or has it really been an underlying performance in the business as you look at it?

[Enrico Vita, executive]

Sorry, I didn't get the -- the first part of the question. Can you please say again?

[Veronika Dubajova, analyst]

In terms of the outperformance on margins here today, is it coming from synergies? Or is it coming from underlying performance of Amplifon as a whole?

[Enrico Vita, executive]

I will say that the topline was very strong. Topline -- as I say, the double-digit top line was very strong. That was certainly a big part of the let's say upside in the performance. In terms of synergies, we are proceeding in line with our plans.

[Operator]

The next question is from Catherine Tennyson of Bank of America Merrill Lynch.

[Catherine Tennyson, analyst]

It's Catherine. I have 2 on the U.S. My first one would be on the organic growth. Is it fair to assume that the impact of the trading day was between 50 and 100 bps and if so, that still looks like a fairly soft organic growth number. So if you could just give me some color on what caused that in the quarter? Then my second would be excluding the GAES LATAM contribution to M&A, can you give us any color on additional stores acquired in Canada or North America in the quarter?

[Enrico Vita, executive]

Yes. So with regards to the first question, I would start from the fact that we have seen in general in the US market a growth which was below the -- , let's say the recent market growth. We have said in our chart that our estimation for the growth of the market in Q1 in the US was about 1.5% and this in our opinion is the result of very bad weather that we had in February and in fact the numbers for the market growth in February were very -- let's say were not very strong actually. So, I would say that this lower market growth was mainly related to the very bad weather conditions in particular in February that I'm sure you will -- you will remember. With regards to trading days, yes, more or less the impact of 1 trading day less is about 1 -- 1 percentage point. But I would say that the main reason for our performance was the fact that February was very weak because of the weather. So, we do not see any -- any structural reason for this. With regards to the second question and in particular -- yes, please.

[Gabriele Galli, executive]

Looking at the M&A growth in the region, actually we talked about 10.8% in the whole Americas. Around 10% was linked to the consolidation of GAES LATAM together with the growth of GAES LATAM versus prior year. While the M&A growth in Canada was around 1% and this is due to acquisition done last year. If you want to have any information about other acquisition in the period, we had around 35 stores in France and in Germany so in the EMEA region.

[Operator]

Your next question is from Domenico Ghilotti of Equita SIM.

[Domenico Ghilotti, analyst]

First question, just maybe as a clarification, if you can give us the contribution of GAES in sales and EBITDA in the first quarter clearly. Then second question, is it fair to say that you are -- you should -- we should expect some acceleration in organic growth so if we assume the 5% to 6% that is implied for Q1 is a reasonable assumption also for the full year. And third question is on the margin in North America so despite some limited organic growth, you had a good margin expansion so if you can elaborate on that. Last, you started with very low integration cost in GAES despite the good result -- good contribution. Is it just phasing on integration costs or we can assume that also on the integration cost your guidance was quite prudent?

[Enrico Vita, executive]

Okay. Well, I will start with Spain and then particular -- we thank you for the questions first a lot. And in terms of integration cost for Spain, no, we confirm the guidance that we have given. Actually we knew that the majority of our cost were going to be in particular in the second half. So, we confirm in full our guidance for the one-off cost. With regards to the performance of Spain, you know that we do not give let's say numbers for individual market. What I can confirm you is that in terms of growth and it was all organic growth of course, Spain performed very well with double-digit organic growth. And while in terms of profitability, what I can tell you is that Spain was not dilutive to the company result so was already performing quite well in terms of profitability. With regards to the question on the organic growth, what I can say is that certainly we aim to continue to perform well. And as we said many times, we aim always to overperform the market growth from a pure organic viewpoint by 1 percentage point or 2 percentage points and this is also the confirm -- we confirm this guidance also for the remainder part of the year. And the last question regarding to the margin in the US, that was mainly driven by our efficiencies in the operations in all the different profit and loss items starting from also efficiencies in terms of cost, in terms of procurement, and so on and so forth.

[Gabriele Galli, executive]

They're very -- as we said, we have a -- we had a very good performance of Miracle Ear, which is a quite profitable business. So I could add that also in terms of mix of businesses, there was a positive contribution there.

[Domenico Ghilotti, analyst]

Just sorry, a follow-up, and I was wondering if you can provide -- so it was more related to the GAES as a whole as a contribution not just specific on Spain or maybe just to say how much GAES contributed to the European M&A topline growth so the topline growth coming from an M&A in Europe. You gave an indication on Americas, if you can provide the same amount in Europe.

[Enrico Vita, executive]

Gabriele, do you have the numbers?

[Gabriele Galli, executive]

Yes, just a second. Out of the 21.5%...

[Enrico Vita, executive]

Maybe we can -- we can come back to you at the end of it. At the end of the call, we come back to you with numbers.

[Operator]

The next question is from Kit Lee of Jefferies.

[Nyeok Lee, analyst]

I have 3 questions, please. And firstly, just on the JV in China, can you just quantify what was the impact on margin in APAC for the first quarter? And then secondly on the GAES performance, I think double-digit growth is quite a sharp acceleration from low single-digit where you previously guided to. I'm just wondering if you have taken any initiatives or plans after you acquired the business that drove this performance. Just any color you can give on that acceleration would be helpful. And then thirdly, just on your private label platform, can you just remind us what's the timeline for that full roll-out into other countries?

[Enrico Vita, executive]

Absolutely. Thank you for your questions. So with the regards through the roll-out of the -- the Amplifon Product Experience in other countries. So, in Q2 June will be the turn of Netherlands and Germany whilst in Q3 it will be the case for France, Australia, and Miracle Ear in the US. With regards to the question on GAES and the growth of GAES, I have to say that this growth is a result of very -- let me say plan that we have defined already before entering actually in the company. We have started to work on our plans for GAES already starting from September, October. So that from January 1st, we were able actually to implement some of the key initiatives which drove growth mainly related to marketing. And I'm referring to -- in particular to digital marketing, I'm referring in particular to CRM activities. GAES has a very large customer -- customer database. Also we have changed a few things in terms of TV advertising. Starting now from April, we are also live with our new film on TV. So, it is the result of different initiatives from a marketing viewpoint I would say mainly. And then with regards to the last question regarding China, we are very happy about this is the first quarter of our Chinese JV. The JV grew double-digit as we said. And also in terms of profitability, China posted a good profitability even above our initial expectations. You can say -- I can say it's around mid-teens in terms of EBITDA margin.

[Gabriele Galli, executive]

Maybe just to give the answer to the previous question. So splitting the 21.5% acquisition growth in EMEA, the other acquisition than GAES so namely the bolt-on acquisition in France and Germany gave a contribution between 3.5% and 4% and the remaining part was due to the GAES inclusion in the perimeter. Including both say the acquisition growth and also the organic growth. I remember you that we included both of the 2 in the M&A growth.

[Operator]

[Operator Instructions] Ms. Rambaudi, at this time, there are no questions registered, Madam.

[Francesca Rambaudi, executive]

So thanks to all, and I think we can close the conference call. Thank you.

[Enrico Vita, executive]

Thank you, everyone. Thank you.

[Operator]

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