De' Longhi SpA

MIL:DLG

Earnings Call Analysis

De'Longhi Reports Resilient H1 2023 Results

De'Longhi demonstrated considerable recovery in profitability and stabilized growth in the second quarter (Q2) of 2023, with positive developments particularly in their coffee segment and the Nutribullet business. Despite a 2.9% decrease in consolidated revenues at EUR 689 million, impacted by currency fluctuations and discontinuation of air conditioning in North America, the underlying sales trend showed a 1.8% growth. Adjusted EBITDA increased significantly to EUR 85.8 million, resulting in a healthy margin of 12.5% of revenues, markedly up from 6.9% in the previous year's quarter. The company maintains its full-year guidance, expecting a slight decline in revenues and an adjusted EBITDA in the range of EUR 370 to EUR 390 million.

De'Longhi's Second Quarter Demonstrates Growth Amidst Challenges

De'Longhi has navigated a complex landscape in the first half of 2023 to deliver results that exhibit both resilience and potential for growth. The company experienced a significant recovery in profitability in comparison to the previous year, a notable feat considering various disruptive factors such as the discontinuation of their air conditioning line in North America. This event alone affected their top-line revenue by EUR 33 million. However, when excluding this impact, De'Longhi's second quarter showed a commendable upward trend with a revenue increase of 1.8%.

Regional Performance and Product Segments Enhancing Growth

Regionally, the European market faced challenges due to the Russia-Ukraine conflict and reduced consumer purchasing power but has shown signs of revival indicating a positive growth trajectory. While Southwest Europe's turnover held steady, Northeast Europe demonstrated remarkable double-digit growth. The American market felt a 5.5% growth, adjusted for the air conditioning discontinuity, bolstered by coffee and Nutribullet segments. Conversely, the Asia Pacific region saw a slight decline due to a slowdown in Australia and New Zealand, yet this was offset by impressive growth in key markets like Greater China, South Korea, and Japan. Product-wise, the standout performers were household coffee machines with fully automatic segments, and Eversys' professional coffee machines which soared by about 60% in revenue contribution to 5.2% for the half-year.

Core Businesses Spearheading Success

De'Longhi's strategic focus on their coffee range, along with the Nutribullet brand, now represents around 65% of the group’s overall turnover. This consolidation positions these segments as the central drivers for the company’s medium-term growth and profitability. Other product families, such as food processors, personal blenders, and fryers, also saw a return to positive growth, despite the comfort segment taking a hit in the U.S. market.

Improved Margins and Cash Flow Reflect Efficient Management

Financially, De'Longhi displayed a strong improvement in net industrial margin, jumping to 48.8% of revenues compared to 45.2% in 2022, owing to successful price-mix strategies, controlled investments, and beneficial production cost reversals. The adjusted EBITDA posted a significant increment to EUR 85.8 million, reflecting a margin of 12.5% of revenues, which aligns with the first quarter's margin and marks a substantial improvement from 6.9% in the same quarter last year. The company also reported a healthy cash flow with their net financial position increasing to EUR 311.7 million and generating an impressive EUR 120 million from current operations and working capital movements—a stark contrast to the previous year's EUR 62 million outflow.

De'Longhi's Vision for Future Amidst Global Uncertainties

Despite geopolitical and macroeconomic uncertainties, De'Longhi's management remains positive in their outlook, emphasizing a return to organic growth backed by enhancing margins. Reinforcing this sentiment, the company confirms its guidance for the year, projecting a slight decline in revenues with an adjusted EBITDA range of EUR 370 million to EUR 390 million.

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the De'Longhi First Half 2023 Consolidated Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio de' Longhi, Chief Executive Officer of De'Longhi. Please go ahead, sir.

[Fabio De’Longhi, executive]

Thank you. Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group's Second 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 Samuele Chiodetto Investor Relator.

We're very pleased with the quarter 2 results. We showed a significant recovery of the profitability compared to last year, and a stabilization of the growth trends that has been steadily improving month after month since the beginning of the year. In terms of top line, as already mentioned in the recent months, a few exceptional and temporary factors had a significant impact on the first phase of the year. However, if we exclude the discontinuity of air conditioning on the American market, the second quarter achieved a positive expansion with the coffee segment in positive territory and the Nutribullet business strongly performing.

To complete the positive picture, the first 6 months of the year have displayed a nearly stable EBITDA margin, clearly improving the profitability profile in respect to last year. Specifically, this result was obtained despite the volume decline, thanks to careful pricing strategy and strict control on the investments as well as a recovery of some of the production costs that turn into a tailwind in the quarter.

Now let me focus on the quarterly results. Consolidated revenues for Q2 were down by 2.9%, reaching EUR 689 million with a negative impact of 2% from the currency component. The impact of the discontinuity of mobile air conditioning in North America, was EUR 33 million in the 3 months, net of which the turnover in the quarter showed a positive trend of plus 1.8%. As already highlighted, over the last 12 months, the European region has been heavily affected, more than other areas by both the effects of the Russia-Ukraine conflict and the weakening of consumer purchasing power. However, over the last few months, the region has shown signs of improvement compared to previous dynamics, returning to positive territory.

In more details, Southwest Europe showed a turnover almost unchanged compared to last year, thanks to a strong recovery in France and Austria, while Italy and Germany still remain in negative territory. Northeast Europe recorded a double-digit growth, benefiting from an almost homogeneous recovery of the countries of the area.

The MEIA region saw its turnover for mainly due to the economic context and the weakness of food preparation. 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 33 million in the quarter. Net of this effect, the area grew 5.5%, thanks to the expansion of the coffee makers and the Nutribullet & Nutrition segments.

Finally, the Asia Pacific region delivered a drop of minus 2% at constant exchange rates as an effect of the negative performance of Australia and New Zealand, slowing down compared to a particularly strong 2022, but with a strong growth in the other major markets of Greater China, South Korea and Japan.

As regards the evolution of the product segments, the second quarter delivered a return to growth of coffee machines or households after the temporary decline in the first quarter, thanks to a brilliant performance of the fully auto coffee maker segments.

Regarding for Eversys, professional coffee machine sector, we highlight the outstanding growth in the quarter at around plus 60%, pushing the weight of this segment on group's total half year revenues to 5.2%. Food preparation of those this offering so some product families to processors, personal blenders, spin juicers and fryers back to positive territory, while the comfort segment was heavily penalized by the aforementioned discontinuity of the U.S. market.

It is worth noting that total coffee area, together with Nutribullet position, now counting almost 65% of the total group turnover are destined to represent the main engine of growth and profitability of the group in the medium term.

Looking now at the evolution of operating margins in the quarter. The net industrial margin improved to 48.8% of revenues from 45.2% in 2022. This performance was a result of the positive contributions of price-mix, EUR 20 million in the quarter. The street control investments and the recovery of some of the production costs which turned into a tailwind in the recent months. Specifically, the transportation costs delivered significant savings, along with a partial recovery of the extraordinary costs related to handling the high level of inventory of last year, while the raw material cost leveled off in the quarter.

Adjusted EBITDA amounted to EUR 85.8 million or 12.5% of revenues, delivering a marked improvement compared to 6.9% in the second quarter of 2022, and in line with the margin achieved in the first quarter. Advertising costs remained sustained, even though the weight on sales was slightly lower compared to last year.

As to the balance sheet, net financial position as at June 30, 2023 stood at EUR 311.7 million, increasing by EUR 256 million in the 12 months rolling, in particular, the free cash flow before dividends and acquisitions was EUR 66.5 million in the quarter and EUR 85 million in the 6 months and EUR 328 million in the 12 months.

In the quarter, the group was able to generate [ EUR 120 million ] of cash flow from current operations and working capital movements, compared to the second quarter of 2022, in which there had been an absorption of [ EUR 62 million ]. Thanks to the efficient management of the trade receivables and payables aggregate, only partially counterbalanced by the negative change in inventories, increasing from the start of the year because of the normal seasonality. Still EUR 281 million lower than at the same date of last year.

It should also be noted that capital expenditures in the quarter were aligned to last year while recording a marked decrease in the 6 months versus last year. Now as a conclusion of our result overview, let me point out that we are very satisfied with a significant improvement of the margins and the cash generation in the first part of the year, along with the stabilization of the sales in the quarter. This set of results confirm our expectations of a progressive normalization of growth and profitability trends.

Even though the geopolitical and macroeconomical context remains difficult to read, especially as regards to dynamics of consumption. Nevertheless, the group is confident about the viability of our guidance for the year, supported by the prospect of a recovery of organic growth together with an improvement in margin.

In this context before, we confirm the guidance for the full year of revenues, slightly declining and adjusted EBITDA in the range of EUR 370 million, EUR 390 million.

Now we can open the floor to Q&A. Thanks.

[Operator]

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

[Francesco Brilli, analyst]

Congratulations to the results. The first one, I have a couple of questions regarding coffee segment. The first one is on the B2C. So the second quarter will back to positive. Well, first half growth remains since mid-single-digit negative. I was wondering what are your expectations for the end of the year for this segment?

And then the second 1 is on B2B, it seems that the market is booming, also other peers are achieving very remarkable growth in this segment and made acquisition to widen the exposure to this business? And on your side, Eversys is continuing to grow at a fast pace and probably will continue to increase its importance also based on the indications you provided in the press release.

And in the past, you commented you were targeting to expand further in this business also with the external opportunities? And is it still the case? And if so, how urgent you think it is in order not to lose this opportunity? And then you have a very valuable asset in this space, let's say, close to the company, which is [ Lattissima ] which would be highly synergistic with Eversys. So are you planning to exploit this opportunity? So any comment on this would be very helpful.

[Fabio De’Longhi, executive]

Thank you. Thank you for the compliments. Thank you for questions. So question one about B2C performance, I would say that the market is recovering, but it's still slightly negative in the first 6 months of the year. We think the total coffee market is maybe minus 1%, minus 2% at global level. However, it's still about 50% above the levels of '19 before pandemic. So I think that this is really very encouraging market trend, considering the really the strong growth that we experienced in the past years.

In this context, the first quarter this year compares to a phenomenal first quarter in 2022, which cannot be a relevant comparison base, honestly. And -- but also -- similarly, the performance in quarter 2, for instance, in fully auto, which has been very strong, properties, we are by far outperformed the market. So we're still positive about the opportunity offered by household coffeemakers in the long term and obviously in the short term. But I think both, let's say, both quarters, don't give the right indication.

So all in all, I would like to highlight that probably the year will be more or less flat versus last year, maybe progressively improving quarter-by-quarter. But we want to know that we achieved record market shares on the markets where we can monitor on a constant base. So in progressively improving from quarter 1 '23 and achieving a really record high in June '23. So this is also very encouraging.

Going to B2B, you had very specific questions. No clue that De'Longhi success story, if we can say so, has a lot to do with the success of the coffee maker market and our ability to be a leader in the segment. Eversys is performing very well and we can say, has been a very accretive acquisition for us.

Certainly, we want to grow in -- with M&A. I think that -- the company has performed M&A on a regular basis, maybe every 2 or 3 years in the past, adding new brands and new products. And probably the next priority, the next -- hopefully, would be in coffee and hopefully, yes, which is a segment that is very attractive. It is -- on , I cannot comment on this. I cannot comment on this. But I think that for sure, if we can perform acquisition in the finance space, if it's a leader and this is a very profitable, sizable, successful company, it will certainly be active on that.

[Francesco Brilli, analyst]

If I may, a very quick 1 follow-up on A&P second quarter and costs slowed down significantly. I was wondering if it's just a matter of phasing of expenses or we can project a lower level for the full year?

[Fabio De’Longhi, executive]

Yes. As a percentage of sales, we are flat versus last year. I would like to remind now we -- I said, we are very happy with our performance in the quarter from -- in particular, a profitability standpoint. But obviously, when we enter quarter 3, we had to be somehow cautious after, let's say, the weak start to the year.

I think we've been more courageous than most of our competition, and we have kept investing behind our coffee makers in particular. So we have a minor reduction in absolute value spend in the quarter and in the half, but we have significantly achieved growth in our advertising spending in the quarter and in the first half.

To give you an idea, according to our data, our share of spending in fully automatic coffee maker has increased from 36% share of spending in the advertising market in the markets we monitor to approximately 57% where our key competitor reduced spend as I say, total investment from 21% to 24%.

So let's say, I think we are continuing to roll out our strategy. We think that advertising will play an important role also in the remainder of the year. And we're happy also that we have signed -- renewed the contract with our brand ambassador Brad Pitt, and we will continue with new campaigns in the near future.

[Operator]

The next question is from Alessandro Cecchini of Equita.

[Alessandro Cecchini, analyst]

The first one, it's about if you could elaborate a little bit more your performance with the new machinery in the U.S.. So we saw that the U.S. market was positive in the second quarter, plus 5%, roughly speaking, excluding the higher portable conditioning. So just your -- I mean, if you have more feedback from your new coffee machine in the U.S.. And if you are planning to launch new products, both in food preparation and coffee in the second half I mean not just updates, but if you are planning to launch something special, something new in the second half? This was my first question.

My second question was about Nutribullet from what we know probably your strategy to expand the business in Europe was -- I mean, not as expected with some delays and so on. So I would like to know when do you expect actually to have a real entrance in the countries and when you expect to do that.

And my question is about your performance in margins. First half, you had 12.4% EBITDA margins for the year, then except your guidance is more or less to have the same margin that we know that fourth quarter is much better in terms of seasonality. Just to know it's a question of prudence given the fourth quarter just to have your feeling on this because likely, I expect I will say, similar margins in the third quarter, given similar sales in the third quarter. So just if you could give us your perception on this.

[Fabio De’Longhi, executive]

So -- okay. So the first question is about North America. So North America continues to be a growing market for espresso and coffee in general. We are reinforcing our investments. We continue investing behind our capsule machines. I remind you that we have a very strong venture with Nestle and Nespresso in North America, which is very successful.

We are also pushing our bean-to-cup machines. And the market is growing, is expanding. We have just launched TrueBrew with the support of a specific advertising campaign with Brad Pitt. I have to say the first, let's say, the first learnings, the first feedback and, let's say, takeaways from retailers is a pretty good success. I mean there's been a stronger let's say, start to the project. So we're happy with that, and we will continue supporting the products in the second half.

We have a major launch with Nespresso. We're launching the first VertuoPlus capsule machine incorporating automatic frosting device and exclusive to De'Longhi, and we are really looking forward to the launch, which will take place in half to 2023. So we are pretty on track with our development plan in North America.

Then with regards to NPD, obviously, we have quite a strong pipeline in different segments. I hand the word to Nicola to -- our General Manager, Nicola maybe, Nicola, you can take on the question about the new launches and then -- the Nutribullet expansion plan that maybe I said it was a bit slow due to the COVID time, but now we are rolling out and then comment on the margins.

[Nicola Serafin, executive]

About -- good evening, good afternoon to everybody. About the new product launches, we have indeed quite a dense pipeline of new launches that are coming, starting from September up to first quarter 2024. We have quite a few products in the pipeline of fully automatic coffee machine from a new innovative solution that we have presented recently to our customers with being exchanging containers. And we have other solutions of -- in the mid to mid-high range segment that are coming, plus entry-level milk solution for Cappuccino. So we have a very wide range of products that is coming soon and including innovative solution in cold brew coffee integrated in our -- both full automatic and pump espresso machines.

About the Nutribullet launch, as Fabio mentioned, it was a bit a slowdown looking to the macroeconomic and food preparation context trends, but we are now ready to go. We think that this is the category, the blending category and personal blending, in particular, is the category that within the food preparation range is, in this moment, giving signal of recoveries in the positive space, and this is now time to boost and accelerate the expansion of Nutribullet.

About margins, as you have seen, we have kept quite a constant margin across the first half. We have now some tailwinds expecting from one side that are coming from the cooling down of the logistics and supply chain costs, even raw materials are giving some signals of recovery. Despite we have still in terms of labor cost, we are in the inflection space. So there is a pressure from a labor cost point of view. And there is still a bit of uncertainty in the market in terms of trade terms and pricing. We are keeping the carryover of pricing that we have in terms of margin, we are expecting something that could stay with the plus and minus of tailwinds and some headwinds more in the space where we are.

[Alessandro Cecchini, analyst]

Okay. On the Nutribullet, I mean, when do you expect to push on Europe? Is there a question for this winter or next year?

[Nicola Serafin, executive]

Yes. We have plan -- we have a phased plan, but in some core European markets are -- we are already starting to sell in now and imports come in Italy, France, in Germany and Poland and Spain, there are activities that are running in this moment. So you should start to harvest some results already from the next quarters.

[Operator]

[Operator Instructions] Mr. De' Longhi, there are no more questions registered at this time.

[Fabio De’Longhi, executive]

So thank you so much for attending De'Longhi first half 2023 conference call. Bye-bye. .

[Operator]

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