Societe BIC SA

PAR:BB

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the First Quarter 2018 Results BIC's Conference Call.I now hand over to Mrs. Sophie Palliez. Please go ahead.

[Sophie Palliez-Capian]

Thank you. Good afternoon, and good morning for those in the U.S., and welcome to our Q1 results presentation. As usual, the call will be hosted by Bruno Bich, Chairman and Chief Executive Officer; Jim DiPietro, Chief Financial Officer; and Gonzalve Bich, Chief Operating Officer. We will start by a short presentation of our results, including the main highlights, and then we will go through the usual Q&A session.Let me give the floor to Bruno.

[Bruno F. Bich, Chairman & CEO]

Thank you, Sophie. Welcome to everybody. Thank you for joining in. Let me start with the first quarter key figures. So sales reached EUR 415.4 million, a 1.5% decrease on a year-to-year comparative basis. Europe decreased by 0.4%; North America's slight decline is due mainly to Shavers; developing market decreased 3.8%, with a soft performance in Brazil. We will go into more detail in the next slides.Normalized IFO was EUR 69.6 million compared to EUR 81.1 million last year due to increase in raw material costs as well as continued investments in human resources and brand support. Normalized IFO was 16.7% compared to 17.1% last year.Our EPS was EUR 1.06, flat with last year. Our net cash position at the end of March was EUR 184.6 million compared to EUR 204.9 million at the end of December 2017. Jim will go into more detail regarding the evolution of our net cash position.Let me now give the floor to Gonzalve, who will comment in more detail on our performance by category.

[Gonzalve Bich, COO & Executive VP]

Thank you, Bruno. Good morning, and good afternoon. We'll start with a brief overview of the stationery markets. If we look at overall stationery market performance, we continue to win and outperform the market as we hone activity during key promotional events, build distribution, optimize product mix and capture incremental e-commerce opportunity.In Europe, for example, the total stationery market declined by 1.5% in value year-to-date Feb. We remain the market leader with 17.9% value market share, gaining 0.4 points. The strongest increase was in the U.K. where we gained 1.7 points, reaching 17.6% value share, particularly thanks to good performance in e-commerce and additional distribution. In France, we gained 0.6 points, reaching 37% value market share. In the U.S., total market was down 2.4% in value year-to-date March, in which BIC outperformed, growing 4% in value.Our Stationery net sales were up in the first quarter by 2% on a comparative basis. If we first look at North America, net sales increased low single digits with a healthy back-to-office promotional period at the beginning of the year, which included a strong performance in our core segments. As it's a high-interest area, we will also mention the very solid growth momentum is continuing within e-commerce as we take steps to drive increased brand presence, availability and convenience online. Our e-commerce sales in general continue to be strong, up nearly 40% year-to-date.In Europe, net sales in the quarter were flat, coming off a strong close in 2017, particularly in France and the U.K., with expected softness in the quarter. Growth in Eastern Europe is consistent, with Poland and Turkey driving distribution and sales with consumer promotional activity.Looking now at Latin America. We see low single-digit increases despite some sales growth challenges in Brazil, for example, with retailer inventory adjustments. The anticipated softness -- softening of the Brazilian market, however, was offset by a strong performance in Mexico ahead of the back-to-school season.In India, domestic net sales at Cello were flat versus prior year. With a more efficient and streamlined portfolio now in place to even encourage consumer trade-up, focus was been placed on gaining awareness with impactful brand support. A digital video campaign released this March, for example, based on consumer insight into the relationship between students and their parents, entitled Surprise Test, received 13 million views in its first month alone.Q1 2018 Stationery Normalized IFO margin was 6.3% compared to 3.6% in Q1 2017, with manufacturing efficiency improvements offsetting the unfavorable effects of raw materials.Let me now move to Lighters, where net sales were slightly down by 0.5% on a comparative basis. In Europe, net sales increased mid-single digit, driven by distribution gains and increased visibility in traditional channels in France and Russia. This was partly offset by declines in Southern Europe in countries such as Italy, Turkey and in Germany.In North America, net sales increased low single digit, with improved visibility and a favorable mix effect in the modern mass market as well as distribution gains in traditional channels and continued e-commerce expansion. Our performance was also driven by pre-buys from major customers ahead of a mid-single-digit price increase implemented in the second quarter.Overall performance in Latin America was impacted by Brazil due to ongoing retailer inventory adjustments. However, in Mexico, we performed well, thanks to distribution gains.Q1 2018 Normalized IFO margin for Lighters was 35.7%. This resulted from the increase in raw materials and in brand support as well as unfavorable fixed cost absorption from category. This was only partially offset by the improvement of manufacturing efficiency.Turning to Shavers. The disruption of the North American market continues, with aggressive competitive pressure from direct-to-consumers players and rapid shift in consumer trends that involve the convenience of online purchase. At the end of March 2018, the total U.S. wet shave market decreased by 4.1% in value and the one-piece segment declined by 2.8%. While the environment remains challenging, our strong support plans for the brand are starting to play out with performance driven by the following: firstly, the continued growth of the men's business with the successful launch of BIC's Flex 5 Hybrid in 2017 and also distribution gains on large packs of BIC Comfort 3 Hybrid and BIC Flex 3; secondly, the performance of our female business continues thanks to the launch of BIC Soleil Balance and Bella Click.Sales growth has been challenging. Shaver net sales were down 6.0% on a comparative basis in the first quarter versus prior year. Overall, the category was negatively impacted by high promotional pressure and trade inventory management changes. BIC Shavers, however, outperformed the market in a number of key geographies outside the U.S. thanks to successful new product launches, which have all been well received.If we now look by region. In Europe, net sales decreased low single digit, reflecting the soft market environment in France and in Southern Europe, particularly in Greece and Portugal. However, Eastern Europe performed well, with sales in Russia growing 4x faster than the market, thanks to BIC's Flex 3 Hybrid and new listings and promotional activity in the Ukraine.In North America, net sales declined high single digit, affected by ongoing market disruption and retailer changes in planograms and inventory management. On a positive note, our new products have been well received by the trade and consumers.Finally, in the Middle East and Africa, net sales decreased double digits due to decrease in promotional activity as we anniversaried promotional activity linked to the African football championships in the first quarter of last year.IFO margin was 7.9% in Q1 versus 12.3% last year as a result of net sales decline, notably in the United States, raw material increases as well as unfavorable fixed cost absorption.I'll now hand it back to Jim for the consolidated results.

[James DiPietro, CFO & Executive VP]

Thank you, Gonzalve. As we review the key elements of the summarized P&L, we see in the first quarter of 2018 net sales were down 12.2%, as reported, and decreased 1.5% on a comparative basis. Gross profit decreased 10.6% while Normalized IFO was down 14.2%.Slide 10 shows the evolution of net sales between the first quarter of this year and first quarter 2017. The perimeter impact was a negative 1.5%. This is related to certain BIC Graphic operations in developing markets that were stopped as well as the closure of Norwood Europe operations in 2017. In addition, the foreign currency translation impact was unfavorable 9.2%. This is mainly due to the U.S. dollar compared to the euro as well as the Brazilian currency impact.I will now review the change in first quarter Normalized IFO margin compared to last year's first quarter. Cost of production was favorable 1.6 points versus a year ago. While we did realize an increase in raw material costs, it was more than offset by positive impacts of favorable manufacturing variances versus a year ago. As planned, total brand support investments increased by 0.2 points, which includes consumer and business development support, advertising and consumer and trade support. Operating expenses and other expenses were higher by 1.8 points in the first quarter of '18 compared to a year ago.Slide 12 explains the elements of IFO to net income. We see net finance revenue was negative EUR 2 million compared to a positive EUR 700,000 a year ago. First quarter 2018 had an unfavorable fair value adjustment to financial assets in U.S. dollars.Income before tax decreased EUR 67.6 million, while the effective tax rate decreased to 28.1%, mainly due to the favorable changes in the U.S. corporate tax reform.Net income group share declined 1.9% to EUR 48.6 million. And finally, EPS group share was EUR 1.06 and stable compared to first quarter in 2017.Slide 13, we see the main elements of working capital. Inventories increased to reach EUR 476.7 million; trade and other receivables decreased to EUR 441.6 million; trade and other payables were EUR 121.7 million.On Slide 14, we see the summary of the evolution of our net cash position between December of 2017 and March of 2018. Net cash from operating activities was plus EUR 37 million, with EUR 75.2 million in operating cash flow. We had a negative EUR 38.2 million of an impact from working capital, which is mainly driven by inventory increase versus December of 2017. Net cash was also impacted by the investments in CapEx as we invested EUR 27.4 million in the first quarter. Share buyback accounted for an investment of EUR 21.2 million.This ends the review of our first quarter 2018 consolidated results, and I'll give the floor back to Bruno.

[Bruno F. Bich, Chairman & CEO]

Thank you, Jim. In conclusion, our net sales during the first quarter were negatively impacted by the weakness of the U.S. shaver market, which continues to be disrupted, and the soft performance in Brazil, mostly due to inventory adjustment by retailers.On the positive side, Stationery showed encouraging result. We had a solid back-to-school season in South Africa, we saw further market share gain, and in North America, it was a good start of the year in the modern mass market and strong growth in e-commerce. Distribution gain and increase in store visibility supported the Lighter category.For the full year 2018, we remain committed to achieving our objective as announced in February: group net sales to increase between 1% and 3% on a comparative basis with all categories contributing to growth; normalized income from operations to be between 17% and 18%.We are now ready to answer your questions.

[Operator]

[Operator Instructions] And we have our first question from Nicolas Langlet from Exane.

[Nicolas Langlet, Research Analyst]

I've got 4 questions, please. The first one, you mentioned the impact of several manufacturing variances in Q1. Is that something you expect to reverse in the next quarter? Second question on Lighters, you mentioned the mid-single-digit price increase in the U.S. Is that for the entire distribution network? Or is it only for specific channels? And then, so do you plan to increase prices outside U.S. in 2018? Third question on the raw material, I think at the beginning of the year, you were looking at 50 basis points negative impact for the full year. Is that still the case? And lastly on the Writing Instruments, your key competitor in the U.S. had a trade dispute in the past month with a key retailer. Do you think part of the market share gain is explained by that? Or not at all?

[James DiPietro, CFO & Executive VP]

So Nicolas, let me start. I'll answer the variance question and the material question, and then I'll hand it over to Gonzalve for the other 2. Manufacturing variances, what we've seen in the first quarter was really the change of the year-to-year impact. So first quarter of 2017 was less favorable. We had some favorability rolling into the first quarter of this year based on production and timing of sales that rolled over from the end of last year. So we were favorable in the first quarter of '18 compared to first quarter of '17. You can see the biggest impact of that coming in Stationery. For the balance of the year, we don't anticipate the same. We see that really as a first quarter dynamic. And I think that really leads then into your next question on raw material. Our review for the full year remains consistent to what we had said in February. We see the impact of IFO for this year being raw materials increasing, depreciation at a higher rate than it was a year ago as well as absorption. And absorption will obviously be impacted by the sales results of the year in addition to OpEx expenses for the full year. Raw materials, as you mentioned, we were looking at roughly 50 basis points coming into the year. We would see that to be maybe 50 to slightly higher, but maybe depreciation being a little bit lower than what we had anticipated in the year. So in total, cost of production impacts that we would envision and estimate for this year is very consistent to what we discussed back in February of this year.

[Nicolas Langlet, Research Analyst]

Okay. So you expect a big reduction of the cost of production in the next 3 quarters?

[James DiPietro, CFO & Executive VP]

Yes. What we had seen in the first quarter was the impact of raw materials. We did have an unfavorable impact in the first quarter. That was offset by the variances and the change of variances versus a year ago. What was lower in the first quarter but we still forecast it to happen in the balance of the year is the higher depreciation cost, which was less than the full year estimate in the first quarter as well as the impact of absorption.

[Nicolas Langlet, Research Analyst]

Okay. So the raw material impact in Q1 was at around 50 basis points?

[James DiPietro, CFO & Executive VP]

It was probably -- it was close to the full year estimate. Yes.

[Gonzalve Bich, COO & Executive VP]

Good afternoon, Nicolas. Gonzalve. So for your question on Lighter, this year in the U.S., we took, as we said, a mid-single-digit price increase across the market. That's an average across the distribution channels. Outside of the U.S., we base our year-to-year price increases based on market dynamics, consumer buying power, and of course, our desire to continue to drive distribution. I don't have any specific numbers pointing to different markets, but we are taking price where possible. With regard to your question about one of our large competitors and their dispute with a large retailer here -- or customer here in the U.S., I don't think that we've seen an impact of that in our results or the market quite yet, and we remain vigilant on the year to go.

[Nicolas Langlet, Research Analyst]

Okay, okay. But is this customer one of your customer already, and a big one?

[Gonzalve Bich, COO & Executive VP]

Yes. As you know, we want all customers to be our customers, and we want BIC seen, BIC sold everywhere in the U.S.

[Nicolas Langlet, Research Analyst]

Okay. Okay, if I can just add one quick question. On the adoption of IFRS 16 in your account, was there any impact on your EBIT in Q1? And do you expect -- what's the impact you expect for the full year?

[James DiPietro, CFO & Executive VP]

You said 16 or 15?

[Nicolas Langlet, Research Analyst]

16. 1-6.

[James DiPietro, CFO & Executive VP]

Yes. 16 is, for the full year, a very small impact for the full year and was extremely small then, but quarter-by-quarter. The bigger change, as you've seen and what we've released earlier, is the impact of IFRS 15 with the reclass of investments -- brand investments that were above net sales now below, and year-to-year, that's 20 basis point impact of margin. No absolute change, just 20 basis points. IFRS 16 is an extremely low impact on a full year basis.

[Operator]

So we have another question from Gala Lutaaya from Bank of America Merrill Lynch.

[Gala Lutaaya, Analyst]

I have a few questions, please. So the first one is on Shaving. What is your view on the Shaving category? We know that Harry's is now available at Walmart and your largest competitor in shaving said last week that they are not happy about where they are with their grooming business, and they have plans in place to go back on track. How are you planning on reacting to the continued increase in the level of competition? And on the other hand, in Europe. European Nielsen data show a progressive decline in the Shaving category. What are the drivers of the softness in the European market? And do you expect a contagion effect from the U.S. to Europe given the entrance of the shave clubs in the European market? And then my second question is on the guidance. You reiterated your guidance of 1% to 3% organic growth. And considering that Q1 was the easiest quarter in terms of comparables, and you also saw some selling in Lighters -- sorry, some trade loading in Lighters, this implies that you expect an acceleration over the next quarters. And then, what will be the drivers of such an acceleration?

[Gonzalve Bich, COO & Executive VP]

Thank you for your question, Gala. So I'll start with Shaving. As we've said before, the U.S. shaving market is disrupted. And as you mentioned, one of our key competitors put that forward very eloquently last year. And I don't think that, that's decreasing. You still have the main drivers of that disruption: direct-to-consumer impact; pricing action by that said -- same said competitor; increased promotional pressure from the market itself; and consumer dynamic changes. We are battling hard through the launch of new products, but also building on our core and driving share and loyalty from consumers. The grooming industry is undoubtedly undergoing a transformation. It has for a couple of years, and the visibility that the industry has on the outlook is limited. We remain focused on delivering on our strategy, and when you ask about reaction, it's new products, innovation, promotional activity that are relevant and meaningful for consumers, and working with our customer partners to maintain and grow distribution. Europe, on the other hand, has probably been impacted for a longer time frame. So the amount of disruption or the downward pressure is not as great as we've seen in the last 2 years in the U.S. That having been said, it's also disrupted. There are new players entering the market. With Harry's launching in the U.S., I think that's going to continue. Shaving globally is a complicated industry right now. But BIC, through relevant and innovative products, both new and existing, continues to be chosen by hundreds of millions of consumers around the world. We've told you about our market share achievements here in the U.S. many times over, and I think that we're very focused on continuing that for the balance of the year. From a guidance perspective, yes, we continue to be committed to achieving our sales outlook for the year between 1% and 3%. In the balance of the year, we have back-to-school coming up in key regions, Europe, the U.S. and some other geographies in the world. And plan is in place to win there as well as promotional plans on our 3 categories. As I said during my comments, distribution gains continue to be an important part of our strategy, either in existing markets or as we grow into new markets. You heard me talk about the growth in Eastern Europe for many quarters, many years at this point, and those are where we continue to see forward progression.

[Operator]

So we have another question from Peter Testa from One Investments.

[Peter Testa]

I guess a question on the gross margin part, just to [indiscernible] questions from earlier on. You were suggesting that the depreciation and absorption timing might be sort of more stressed into later in the year. And I was wondering whether if you felt that overall, these sort of other operating efficiencies would be enough to offset this on depreciation absorption and the 0.5 point and so on raw material like they did in Q1? Or whether this will give us some view how that might moderate. That's my first question.

[James DiPietro, CFO & Executive VP]

Okay. So back to that -- again, I reemphasize the comment on the first quarter, that was a -- more of a onetime impact as far as the variance is rolling into this year based on the sale of the inventory produced at the end of 2017. So the favorability of what we have seen is really a 1-quarter dynamic, if you will, especially compared to first quarter of 2017 where the variances were less favorable. For the balance of the year and for the full year, our view, as I mentioned a little earlier, is really the same as we had coming into the year. We see that, again, in the guidance, the range of 17% to 18% Normalized IFO being impacted by cost of production. And the 3 elements of cost of production, again, being raw materials probably being slightly greater than that of absorption and depreciation. We've seen the increase of raw materials in the first quarter and we'll continue to see that for the balance of the year. Absorption, a little less so in the first quarter, more so starting in second quarter. And depreciation similar to absorption starting in the next quarter. And again, the phasing of that will run through the balance of the year. So currently, especially as we plan the sales growth of 1% to 3%, we don't see a significant change in the viewpoint of cost of production at this point. So we don't see the same impact of the first quarter of efficiencies that we've realized versus a year ago materializing for the balance of the year. But again, this is consistent to what we have seen coming into the year and what we explained back in February.

[Peter Testa]

Right. Okay. And then on the Lighter business, the Brazilian destocking situation has now gone on for some quarters. And I was wondering if you could give a view or some understanding of how you think that plays through or what visibility you've managed to gain on that inventory to understand how this should work its way through as we go into 2018.

[Gonzalve Bich, COO & Executive VP]

The inventory management by wholesalers and retailers is really their strategy, and it's something that we partner with them on to ensure, as I've mentioned before, that they always have adequate inventory of our products to meet demand. The last, you're right, 6, 9 months have had a lot of volatility in Brazil. I think Brazil, in general, is highly volatile over the last year, and leading up into the elections of November, it's still going to be a challenging situation. The teams are on the ground and working with each of those partners to ensure that they have the right level of inventory. If I think about the U.S. and the prebuy, if we take the situation excluding that prebuy, our results in the U.S. would have been low to mid-single-digit decline. So inventory management is something that's going on around the world. And for those of us who follow retail, we read a lot about it. What's important from our perspective on an operational level is to ensure adequate levels of inventory, both in the warehouse but almost more importantly, at the peg or next to the cash registers of the world so that consumers can find those BIC products and those BIC Lighters every day.

[Peter Testa]

Okay. And do you have a sense of what the growth is in Brazil, excluding the inventory move that's been going on, i.e. is that -- is there some context of up, down or where?

[Gonzalve Bich, COO & Executive VP]

Brazil Lighters is not one where we have syndicated data that I could share with you. I wish I could. But we remain focused on managing that and ensuring that retailers have adequate levels of inventory to never be out of stock so that consumers can find their BIC Lighters everywhere, anytime they need it.

[Peter Testa]

Okay. And then lastly on the Stationery side, you mentioned that you didn't feel that you had much of a positive benefit from your larger competitor's issues in North America, but however, you've done quite well on market share. Do you have any sense of how your shelf space development progression might go going forward based upon the resolution of these issues, i.e. are you, as a result, winning shelf space? Or is it too difficult to tell at this moment? And if not, maybe you could give some other thoughts as to why such a good market share performance in Q1.

[Gonzalve Bich, COO & Executive VP]

I think, first, it's too early to say anything. This is a relatively new event. I'm going to, of course, point my answer towards the outstanding job of our sales and commercial teams around the country, ensuring that we are winning pegs. New products, absolutely, is an important part of our -- has been an important part of our strategy. You've heard me talk in the past about Champion Brands and massification of products in the hearts and minds of consumers and so we continue to build share. And then finally, there's e-commerce. And I gave some color during my commentary about the -- it's not low double-digit growth in e-commerce. It's quite important. And that's an important part of our strategy, to ensure that a BIC seen is a BIC sold and that's about ubiquity of distribution off-line but also online, and we have dedicated teams working with online partners to ensure that consumers can find all BIC products when they need them online.

[Operator]

So we have another question from Steve Levy from Natixis.

[Steve Levy, Analyst]

The first question is on the Shavers division, and just to get more color of the question about are you seeing more pressure in Europe. Just wanted to know whether or not you are seeing P&G is having the same price policy in the EMEA and at the same time in the U.S.? The second question is on Lighters. I know that a big sport event is a good moment to sell lighters. Do you have -- have you planned any specific promotion for this quarter for the World Cup? And should we weight some pressure on margin based on that specific event? And the third question is on the CapEx. You spent EUR 27 million this quarter. Does that mean that we can extrapolate for the rest of the year this amount of CapEx? Or it should increase also by the end of the year? That's all.

[James DiPietro, CFO & Executive VP]

Steve, this is Jim. Let me start with the last question on CapEx and then I'll turn it back to Gonzalve. The full year estimate of CapEx is still EUR 150 million that we communicated back in February. Based on our current plans, that is still the full year estimate that we see across all the 3 categories. So there's no change to the communication guidance we gave back in February for this year's investments at EUR 150 million.

[Gonzalve Bich, COO & Executive VP]

In Shaver, Procter & Gamble's pricing policy, to which we have no visibility from an ASP out to the customer perspective, does lead potentially, because retailers are the ones who set prices, not us, to fluctuations in price in Europe. Europe not being a monolithic market, we'd have to go market by market, and that could be rather long and tedious. But we are seeing continued pricing action, and probably more importantly, promotional pressure from that large competitor in Europe. To your question about Lighters, of course, the team in Russia has worked on some important and fun promotional activities for that market. Russia is a relatively small part of the global Lighter business, so I don't see any impact at a global level.

[Steve Levy, Analyst]

Maybe just one last question, if I may, on e-commerce. Is Amazon on your top 10 distributor?

[Gonzalve Bich, COO & Executive VP]

We don't give ranking to our customers. They're all important to achieving our mission in selling products to customers. But of course, Amazon is an important and very valued customer that we partner with to continue to offer our products, not only in the U.S., but around the world.

[Operator]

So at this time we have no further questions. [Operator Instructions]

[Sophie Palliez-Capian]

Okay. So if we have no more questions, we may end our call. And just a short reminder for a few dates for 2018. So our next AGM, the financial AGM will be on May 16 at our headquarters in Clichy. And the second quarter and first half results will be released on the 1st of August. Thank you very much, and we remain at your disposal for any follow-up questions. Thank you.

[Bruno F. Bich, Chairman & CEO]

Thank you.

[James DiPietro, CFO & Executive VP]

Thank you.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.