De' Longhi SpA

MIL:DLG

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the De'Longhi first quarter 2022 consolidated results.

[Operator Instructions] At this time, I would like to turn the conference over to Mr. Massimo Garavaglia, CEO. Please go ahead, sir.

[Massimo Garavaglia, executive]

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group's Q1 '22 Results Conference Call.

Today, we may have Marco Cenci, Chief Strategy and Control Officer; Stefano Biella, CFO; Fabrizio Micheli, Director of M&A and Investor Relations; and Samuele Chiodetto, Investor Relations.

Over the last 2 years, we have seen a significant increase in consumption in the small domestic appliance business, thanks to the change in consumer habits and purchasing [ charges ] and the consolidation of some medium-term trends already in place in the market.

In the first quarter of 2022, despite a difficult comparison with prior year, we saw revenues growing at almost 60% like-for-like, where the group was able to continue its expansion part, thanks to the driving force of the coffee business.

I would take this opportunity to emphasize that the growing cost inflation dynamics and complexity that have affected production and distribution in the last 12 months has required an extraordinary effort from all our teams.

The company, with the aim to offset the impact in absolute value of these headwinds, have implemented effective mitigation actions, such as price increase strategy already put in place last year and carried over on this year.

The current geopolitical scenario and the continuation of the conflict in Ukraine brings some concern about possible developments on a global scale, which we hope we find a quick and peaceful resolution as soon as possible.

Before going into more details, let me remind you that the group's first quarter results include a change of perimeter as the scope of consolidation has included also the Swiss group, Eversys, whose full control have been acquired in Q2 2021.

The consolidation -- consolidated revenues for the first 3 months of 2022 were up by 8.4%, with a solid expansion on a constant perimeter of approximately 5.5%. Looking at the market on a reported basis, we observed South Western Europe grew by 3.9% in the period, thanks to the expansion of Germany at a double-digit growth rate and the high single-digit development of the Iberian Peninsula and Austria.

The area of Northeastern Europe recorded a negative performance, both due to the difficult geopolitical situation that affected consumer sentiment in some countries of the area, and due to the particular challenging basis of comparison compared to last year. Just to give you an example, the U.K. market last year was up 93% in Q1.

The MEIA areas, Middle East, India, Africa, ended the period with a double-digit performance, thanks to the expansion of the main market in the region.

The America area has further expanded its size from 15% to 18% in Q1, achieving a significant double-digit growth, thanks to the development of the coffee business and the anticipation of sales related to portable air conditioner.

Finally, the Asia Pacific region was up by 28%, driven by strong growth in China and Hong Kong area as well as a significant expansion of the main markets in the area, Australia, New Zealand, Japan and Korea.

As for the evolution of the product category, in the first quarter of 2022, the double-digit growth of the coffee sector drove the expansion of the group, together with a significant increase in comfort and the decrease in food preparation.

Specifically, the coffee sector confirmed the solid growth trend highlighted in the recent years, with a strong boost from the business, both in the main countries of the Euro area and in the U.S. and Asia.

Core product grew at a double-digit rate, despite the high level of turnover achieved in the same period of 2021, supported also by the launches of new products and the success of the global communication campaign that sees Brad Pitt as an ambassador of the De'Longhi brand.

More to our general scenario for the food preparation, which suffered from the very challenging comparison compared to 2021. In this context, some categories, such as food processor or deep-fryers, maintained a positive trend, while kitchen machines and blender showed a reduction compared to the level reached last year.

In the quarter, the contribution of the comfort category was noteworthy, thanks to the extraordinary performance of the U.S. market, boosted by the advance of the sales of the mobile air conditioner for the summer season. Finally, home care, which means cleaning and ironing, was partially in a negative territory during the period.

Looking now at the evolution of the operating margin in the first quarter, we can observe the following: the net industrial margin equaled to EUR 375.6 million and stood at 51.1% of revenues compared to 52.3% in Q1 '21.

In particular, in the quarter, the impacts of cost inflation on raw material and transport costs were only partially offset by the positive effect of the price mix. But at constant exchange rate, the margin would have been slightly up versus last year.

The adjusted EBITDA amounted to EUR 100 million, equal to 13.6% of the revenues compared to 18.9% in 2021. At a constant FX, the margin would be 15.1%. The reduction of the margin was due to higher investment in communication and media, which accounted at 12.1% in the new perimeter compared to 10.5% of the previous year. Larger OpEx and the negative exchange rate effect equaled to around EUR 8.4 million.

As to the balance sheet, the net financial position at the end of March 2022 stood at EUR 274.6 million, decreasing from year-end 2021 due to the investment higher versus last year and an increased inventory level. Over the last 12 months, the free cash flow before dividends and acquisition was EUR 170 million, thanks to a strong cash flow from operating activity.

And in more details, the first quarter CapEx amounted to EUR 56.8 million, an increase of EUR 36.9 million versus last year, and that includes EUR 21 million related to the acquisition of the new plant in Romania.

Moreover, the ratio of operating working capital on revenue stood at 10.2% compared to 9.6% in at the end of March 2021.

Now closing my introduction, let me say that we are rather satisfied by the positive trend in sales seen in Q1, and we still expect demand of our core category in this year and the near future to remain well above the pre-pandemic levels.

Nevertheless, the recent geopolitical developments, together with the challenges arising in the supply chain, are making the macroeconomic context more volatile for sure in the coming months.

Therefore, albeit in a scenario of evolving uncertainty, the first month's results and the feedback we received from the markets support as confirming the guidance, forecasting organic revenues of 2022 in line with 2021 with an expected adjusted EBITDA at around EUR 450 million.

Now we can open the floor to the QA. Thank you very much.

[Operator]

[Operator Instructions] The first question is from [indiscernible] from Mediobanca.

[Unknown Analyst]

Three questions on my side. The first one is on full-year guidance. Is it fair to assume that this guidance is basically made up of 2 components, still positive trends in coffee makers and a slightly declining trend in the other division of the group, namely food preparation and on comfort?

Second question is on net working capital. Can you give us some more color on the [ network income ], the inventory build-up? What is it referring to, mainly, I mean, finished products, semi-finished or raw materials components?

And the last question is on your indication on inflation headwinds. If I recall correctly, March, you were indicated EUR 100 million additional costs from raw materials and transportation costs. How has the situation evolved since then? Is this guidance still a reliable indication now?

[Massimo Garavaglia, executive]

Thank you [indiscernible] for the question. Yes, indeed, we see a year that is evolving in line with the growth in the coffee business, in all the different segments of the coffee where we are operating.

And we still see an opportunity to continue to grow, also thanks to the investment that we have made and we are making with our global campaign that has clearly provided support and is very, very successful in many areas.

At the same time, we see the opportunity to grow in the area, thanks to the new launches of products that are placed in the market in the past few months. And -- that enter now in full distribution, both in the fully-automatic machine and also the new specialist machine to complete the specialist range in the manual coffee maker, with a clear differentiation and innovation for the market.

And at the same time, we see the market outside of Europe, where the penetration of [ espresso ] has been historically lower, that are starting to react very well to our campaigns and to our initiatives, namely U.S. and Asia.

We -- as I mentioned in my speech, we see softening on the food preparation side. Also, in light of a very tough comparison with the first 2 quarters of the prior year, and we are following -- monitoring very well, very closely the evolution on that side.

While at the same time, I have to say that this softness is a bit different in different geographies and therefore, would be our work that we will do on our side to make sure that we have activated the right initiative to support it in the course of the year.

For what is concerning the net working capital, we have deliberately decided to build a stock very prudently to support our sales in a scenario of the past months, also at the end of the past year, of difficult situation of the supply chain, including shortages on some key components of the period.

So the composition of the stock increase that we have seen in the first quarter is made both on core finished products and at the same time, also by additional components and raw materials.

For what is concerning the inflation headwinds correctly, you mentioned that we have indicated that the EUR 100 million at the beginning of the year and also mentioned that we have been taking the action in terms of pricing and in terms of mix to offset this increase.

Obviously, we are monitoring -- we are still -- we have been taking a special. We've been discounted in our forecast of this amount, but we are monitoring very close the situation.

And if there will be, of the inflation side, additional element that will arise, we are in a position, we have room to cover it again with the adjustment on our policy.

Now, I have to say that if we look forward from now to the end of the year, the magnitude of the impact that eventually will be coming from this inflationary pressure is not, for sure, much less significant than what it was foreseen in the initial EUR 100 million that we had estimated.

[Operator]

The next question is from Alessandro Cecchini from Equita.

[Alessandro Cecchini, analyst]

The first one is about the coffee trends in terms of volumes. I would like to better understand what kind of trends you expect for this quarter for the following one? So if you still see, on a global level, positive volumes in the coffee business?

And my second question is, what is your feeling about the trade, the level of stock to the trade level in this moment in the main -- in your main markets? And then my third question, it's about cost inflation. So you saw that there are not big differences in terms of EUR 100 million.

So I would like to better understand what kind of flexibility you have any in , if I would say inflation is higher than expected or if volumes are lower than expected? So just to better understand on this.

And finally, my last question is about capital allocation. I would like to -- actually to better understand. So you have a very strong balance sheet. Frankly speaking, excluding liquidity of the stock, I don't understand why you don't buy back shares in the market, but if you could elaborate a little bit more on this point?

And if you could underline what are the reason why you are not activating such a level that you could have considered in your balance sheet?

[Massimo Garavaglia, executive]

Yes. Thank you, Alessandro, for the question. Yes, on the coffee trend, yes, I can refer to the fact that, as you know, we have seen a secular structural positive trend of the coffee for many, many years. And that has also brought on to become leader in the market, in all the markets and the global leader in the coffee -- in coffee espresso around the world.

We have seen this trend accelerating in the past couple of years. And we are -- we remain very confident that we see a continuation of this secular trend in this year and then in the medium term.

Now obviously, there will be some region that could be eventually affected by the whole economic environment. We see other regions that are growing faster. And mainly, as I mentioned before, the region that are less penetrated, I'm talking about U.S., I'm talking about all Asia, including China, where our campaign is doing very well despite current situation in some part of China, and in all the Middle East.

So these are the reasons why, thanks to our position in terms of product portfolio, our position in terms of communication on the brand, we believe that there is a great opportunity for us to continue in the medium term to grow in the coffee area.

For what is concerning the stock, we are observing a bit in line with what we see in the categories, a trend in coffee that substantially, compared to the prior year, remains at the same level, substantially, are not significant difference by the retailer here. While we see, also due to the softness of the food preparation, that there is a higher stock in the retailer for this type of products.

For what is concerning the inflation and the headwinds, as I mentioned, we are -- we factored the EUR 100 million that we have indicated previously. And also, we explained our plan of mix and price increase to cover that. And now we are evaluating if there are deviations to this initial number that we have forecasted.

At the moment, we are not in a position to define clearly if there will be an additional number. What I can say is that, for sure, the magnitude of that will be manageable, will be not of the same size of what we have initially forecasted. So this EUR 100 million initially and therefore, very manageable with the action that we are taking on our side.

For the capital allocation, yes, we have different options open. As you know, indeed, we have a very strong balance sheet. You know that in our MTP, we have a plan that we are confirming year-by-year to invest -- to increase our investments, and we did it also in this quarter to strengthen our network.

At the same time, we have a clear dividend policy with the payout ratio that we have indicated up 40%. And we remain also open observing the market if there are possibility as we did recently with Capital Brands and with Eversys to conclude eventually interesting acquisition.

Today, the buyback is not an option that we are considering. But again, it's always an option that is on the table, that we will evaluate, will not be for the very short term.

[Operator]

[Operator Instructions] The next question is from Francesco Brilli from Intermonte.

[Francesco Brilli, analyst]

Just a couple of quick ones from my side. The first one is on the -- if you can provide us with some additional color on the split of the growth in terms of price mix and volumes, excluding FX on the top line? And what we should expect for the contribution of price mix in the following quarters?

So going forward, is it going to increase since you are implementing additional price increases in the market?

And the second one, just a quick one on the geographical split. I still [ see ] around the 6% from Russia and Ukraine. Just to check with you, are you still able to sell products over there and to send products over there? Or is it just the volumes from the beginning of the year when the market was -- I mean, what's -- before the crisis?

[Massimo Garavaglia, executive]

Yes, on our strategy, to cover the inflationary pressure for this EUR 100 million, there's obviously price mix, similarly to what we did last year. Just to remind that we have been doing last year, where we covered around the same amount, around EUR 100 million, with the price mix effect of 20%. So we got EUR 121 million last year for that.

And the price increase that we had last year, that has been carried over for this year, it's around 1.5%. At the moment, we have taken measure with the price increase at the beginning of this year to have the full cover of the EUR 100 million additional costs that we have seen.

So the price increase that we have implemented in Q1 actually, starting in February, has been of around [ 12% ]. Obviously, modeled in a different way between the different products and categories.

So with that, plus the mix of our products, especially on the coffee side, we are confident that we are in a position to cover the full amount of inflationary -- that we have to face.

For what is concerning Russia, our focus has been to reduce our exposure and our receivable. And we have been very successful in the first months -- in these months after the crisis emerged.

Basically starting from around EUR 5 billion that we had in receivable when the crisis started, we reduced it now to, at the end of March, EUR 1.8 billion. And I have to say that today, as I speak, this amount has been reduced again to EUR 500 million.

What is happening is that we have decided, as you know, and we have communicated, we have suspended all the shipments to the Russian market, and we have put on hold, suspended all the investment in communication in the country. Therefore, we are, at the moment, executing the essential activity to reduce our stock that we still have in Russia.

As I speak, we talk about something like EUR 2.8 billion, EUR 2.7 billion move-on. And obviously, we are continuing to sell in the area. For instance, in Kazakhstan, in the other area of the CIS country, where we had already our business, where we already have our active distribution, where we already have a good presence, we have been -- we are continuing to sell in this part of the region.

Now for what is concerning Russia and Ukraine, if I may conclude, our first priority is really to take care of the people. And as you know, we have been doing that in Ukraine, where we suspended all the activity offices. We are forced to do it. We suspended all the sales, but I'm very glad to say that all our people have been accommodated in other parts of the group.

And therefore, that has been the first focus from our team to make sure that there was not any impact on the people. Ukraine, we are in a wait-and-see position, obviously, depending on what it will evolve around in the course of the next month.

[Operator]

The next question is from Niccolo Storer from Kepler.

[Niccolò Guido Storer, analyst]

I want to return for a second on working capital dynamics because other than seeing an increase in inventories, we've also seen some EUR 250 million increase year-on-year in payables. So if you can comment on what's behind that?

And on expectations for the full year, what should we expect as a working capital sales ratio? And related to that, of course, should we expect this extra inventory to remain throughout the year?

[Massimo Garavaglia, executive]

Yes. Thank you, Niccolo, for the question. Yes, indeed, the working capital for this first quarter, in terms of net value, has been impacted by the increase in the inventory.

For what is concerning the payables, but also the receivables, as you know, we have been very active also in the past year. We continue to do that to reduce the payment terms where possible or for sure, the DSO for our customer and also to manage better the DPO from our suppliers. So this has been very strategic. We have initiated already a while ago.

And we are, in these two parts of the working capital, continuing with the same approach. And therefore, we expect an evolution in line with this in the next month.

So what is on inventory on the other side, we have been deliberately increasing the inventory in this at the end of last year and this first part of the year, really to offset disruption on the supply chain and difficulties and shortages of the critical components.

But we believe that seeing a normalization -- we started waiting to see a normalization in the supply of critical raw materials, we believe that we can bring down the inventory to a more normal level. Therefore, on the operating working capital, we target, as I mentioned already last time, to be below the 10% at the end of the year.

Our expectation is that there will be at the, end of the working capital -- net working capital before the investment, that could potentially have an impact altogether of around EUR 100 million, starting from this end of last year where we landed at a 6% working capital on sales.

[Operator]

[Operator Instructions] The next question is from Luca Bacoccoli from Intesa Sanpaolo.

[Luca Bacoccoli, analyst]

A clarification from my side, then one question. The first one is a clarification on the inflationary pressure. If I understood correctly, you said that the OpEx increase should be higher than what you initially had expected of EUR 100 million, but this increase is manageable. Is that correct?

[Massimo Garavaglia, executive]

See, Luca, thank you for the question. You're right that it's better to make a clarification. When we talk about the EUR 100 million and eventually addition that we will manage, we talk about inflation on all costs so that we will include eventually also all costs that freights, for instance. So not only the OpEx in that sense.

[Luca Bacoccoli, analyst]

Okay. What you were targeting in the EUR 100 million, that's on the P&L line I was referring to.

Okay. And when you say manageable, you mean through price -- further price hikes and even [ replacing ] the advertising and promotion budget?

[Massimo Garavaglia, executive]

Yes. On the -- no, for sure, we are evaluating and monitoring it very closely. There will be the opportunity to eventually do additional price increase, if needed. That's why we are evaluating very careful on top of what we already implemented in Q1. So we keep it as an option, if needed.

On what you mentioned about the A&P that we are targeting -- two different things. And on the A&P, you know that we are targeting to have 100 basis point increase this year, moving from 12.6% reconciled for the total group of last year to a 13.6% of this year.

But as you know, we are very determined in our medium-term plan to support our growth with ATL Investments, specifically on the campaign that we have on our global ambassador. Therefore, we keep there an opportunity to eventually remodel the ATL, but it's not something that we want to introduce as a clear option on the table today.

Obviously, we will monitor the evolution of the sales. We know that we have the opportunity to remodel it. But at the moment, the plan is to continue as we foresaw with our investment in communication and ATL.

[Luca Bacoccoli, analyst]

Okay. Great. It's very clear. And the question is on the FX headwinds. I was wondering if what we have seen in the first quarter has an impact on the EBITDA should be a good proxy for the other coming quarters?

[Massimo Garavaglia, executive]

There, as you know, due to the evolution of the currency, and you have seen, yes, quite the volatility on that end. What I can tell you that is our hedging policy is covering from that. But at the same time, we have to say the translation effect of foreign currency can be some -- we cannot exclude it in line with what we have seen so far.

But what I can say is that our hedging on the most important currency for us is done in a way to protect that there will be significant impact from now until the end of the year. But we will have obviously to manage quite high volatility on that -- for that side.

[Operator]

The next question is from Fraser Donlon from Berenberg.

[Fraser Donlon, analyst]

It's Fraser here from Berenberg. Just two questions from my side. Firstly, could you maybe give some color on the trends you're seeing in coffee in the U.S. specifically, so like maybe some category growth numbers or something along those lines?

And then the second question was just on kind of the guidance. So obviously, Q4 is an important quarter for you and for your competitors side. Just wondered if the guide -- are you counting on consumer sentiment in Europe improving between now and the beginning of Q4 to kind of make the guidance? Or does it kind of factor a trend, which is in line with what you've been seeing so far, maybe in April and the beginning of May?

[Massimo Garavaglia, executive]

Yes, thank you for the two questions. On the coffee U.S., we are seeing definitely activation of the market since few years now on our products that is coupling with a very strong growth on the partnership that we are having with an espresso, specifically on the [ VAF ] launch in the U.S.

At the same time, we have been, as you know, targeting our MTP, specifically U.S. and Asia, for growth. And we have been very happy to see a double-digit growth in U.S. in Q1.

We believe that we will continue to grow, also supported by our investment and new models specifically dedicated to U.S, also both the fully-automatic machine, but also in the manual machine with La Specialista in specialist portfolio.

Therefore, U.S., we remain very confident that we have the right strategy. We see a good growth. We see the category that is expanding. We see the espresso that is penetrated more in the coffee -- in the old coffee markets.

For what is concerning the guidance, yes, we are closely monitoring, obviously, what is always evolving. Now the markets in -- especially, obviously, in Europe for the things that we have seen, we are closely monitoring the evolution of the consumer dynamics.

And here, what I can say is that we definitely have seen, as I mentioned before, a softening in the last couple of weeks, continuing on the demand in some areas, only in some areas in Europe and especially in the food preparation, while the coffee remains more resilient.

Our Q2 will have a very high comp basis versus last year. But for what we have been asking in the back part of the year, especially in Q4, that is very important for us. We believe that we have all the right things in place to continue to grow in the coffee in that -- in the path, in the important part of the year.

And we count also -- besides Europe, we count also in the growth in the market outside of Europe, as I mentioned before, specifically in U.S., but also in Asia and in China, where we see the market that is reacting very nice to our launches, and we see the collaboration with a big online platform really going in the right direction and supporting us very well in this part of the world.

[Operator]

There are no more questions at this time.

Sorry, we have a last-minute registration from Alessandro Cecchini from Equita.

[Alessandro Cecchini, analyst]

So about this last point, so basically, what you are saying that you are still seeing some interesting growth in China and the U.S. in the coffee category. Is it right to my understanding that, also, you are seeing these current dynamics continuing in these two markets?

[Massimo Garavaglia, executive]

Yes, indeed, we are very positive in these two parts of the world. We have a [ food ] portfolio, and we have seen really online retailers in China and retailers in the U.S. that are really supporting the category of espresso.

And we have our communication plan that has been really giving the right support for the quarter. We are convinced that we will continue to do that. You know that there is a lower penetration of espresso in this part of the world.

And when I say espresso, it's a whole hot beverage, coffee and [ neat ] beverage. And therefore, we are very confident that it will offer us a very good opportunity to go this year, but also in the years to come.

[Operator]

There are no more questions at this time. Gentlemen, would you like to add any further comments?

[Massimo Garavaglia, executive]

Thank you very much. Thank you all for listening. Thank you, all.

[Operator]

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