Amplifon S.p.A. (AMP) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Amplifon Full Year 2020 Results Conference call organized by UniCredit. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations Director of Amplifon. Please go ahead, madam.

Thank you. Good afternoon, and welcome to Amplifon's conference call for credit investors on Q4 and full year 2020 results. Before we start, a few logistic comments. We will make reference in this call to the presentation, which is posted on our website. And before turning to our CFO, I have to bring your attention to the disclaimer on Slide 2 of the presentation. Some of the statements made during this call may be considered forward-looking statements. With that, I am now pleased to turn the call over to Gabriele Galli, Amplifon's CFO.

Thank you, Francesca. Good afternoon, everyone, and thank you for attending our conference call. Without doubt, 2020 has been a very challenging year for all of us, both in terms of personal view and in terms of professional kind of view. However, if today, we look back at how we reacted to the emergency and if we look back at our achievement over the last year, we can certainly say that we are very proud about how the Amplifon team worked all together to turn these challenges into opportunities. As you know, since the beginning of COVID-19 outbreak, our first priority has been to protect all our people, while continuing to serve safely our customer that still needed our services. Our second priority was to protect our profitability, cash flow and balance sheet. Hence, we reviewed completely our way of operating the business, looking for efficiencies. Also, we immediately focused on the most important projects, while postponing all those nonessential. In fact, we confirmed our commitment to the pillar of our strategy, keeping investing on our people and organization, on our brand, on our Amplifon product experience and on our M&A strategy. Actually, in terms of M&A, we have been very active finalizing, on top of the usual bolt-on acquisition, the acquisition of Attune in Australia at the beginning of the year and the acquisition of PJC Hearing Care at the year-end. All in all, a huge amount of work has been done by the Amplifon team that allows us to certainly say that Amplifon of today is much stronger than the Amplifon 1 year ago. Moving to the following chart, we have a view on highlights. With regards to our financial results, we believe today that we are reporting very strong achievements. Despite the 9% decline at constant Forex in terms of sales, with the fourth quarter reporting a strong finish of the year, despite the new lockdown measures implemented in many of our core markets, we improved our profitability by around 110 basis points, even after the significant investments I mentioned early on. We also reported the best ever cash flow generation with the operating cash flow above EUR 300 million. Consequently, we reported an excellent net financial position at around EUR 634 million. Also, these results tell us that Amplifon is strong and that our business model is flexible, agile, and most important, reactive. Moving to Slide 5, we have a look at the financial performance in the full year 2020. Revenue at constant Forex were down 9% with organic performance at minus 11% due to COVID-19 outbreak, m&A contribution at 1.7% and Forex impact at minus 0.9%. EBITDA amounted to EUR 371 million with margin at 23.8%, up 110 basis points versus full year '19, despite the heavy COVID impact on revenues in Q2, thanks to the timely and effective cost containment measures. Cash flow indicators also came in very strong in this unprecedented period, thanks to the actions implemented to maximize cash conversion and protect our net financial position. Free cash flow was up 71% versus previous year and NFP as of end of December was around EUR 634 million, improving by over EUR 150 million versus December '19, with financial leverage at 1.63x. The strong result achieved this year in profitability and cash flow and the strength of our balance sheet allow us to propose at the next shareholder meeting a dividend of around EUR 0.22, with a payout at 49%, also as a recognition to all of our shareholders for the strong support demonstrated throughout 2020, canceling the dividend it was supposed to be paid. Moving to the following chart, we have a look at the group financial performance in Q4, which posted a strong result with a record EBITDA, both in terms of absolute value and margin. Revenues at constant Forex increased around 3% despite the lockdown measures implemented across different markets, especially in Europe, and moreover, despite a very challenging comparison basis with the revenues in Q4 '19 growing at constant Forex by over 26%, and organic growth by over 8% versus Q4 '18. Organic growth was plus 1.7%, and the contribution of acquisition was 1.2%. Forex was negative for minus 1.7% as a result of the strengthening of the euro against the U.S. and Australian dollar and the Latin America currencies. In the quarter, we posted record EBITDA and EBITDA margin. EBITDA came in at EUR 143 million with a margin at 27.8%, up 210 basis points versus previous year, thanks to the structural efficiencies derived by the decisive measures implemented in Q2, and with no social tool contribution nor significant income related to rent concessions. In addition, this strong EBITDA increase was achieved even after sizable reinvestment in the business. Moving to Slide #7, we have a look at EMEA financial performance, which was affected by COVID outbreak since March, but recovered strongly from end of June, and posted a strong performance in H2, also despite new lockdown measures implemented at year-end across major countries. In the full year, revenues were down around 10.5% in local currency, with organic performance at minus 11.6%, well above our reference market, and M&A contribution at plus 1.1%. EBITDA in the full year amounted to EUR 305 million with margin at 27.2%, up 150 basis points versus previous year. In Q4, revenue growth was around 2% in local currency with an organic growth of 1.5%, well above market, and despite a very challenging comparison basis since Q4 '19 organic growth, even excluding GAES, was plus 7.4% versus previous year. Strong organic growth in the quarter was reported in Spain, France, Germany, BeLux despite all the lockdown implemented. EBITDA in Q4 amounted to the record level of EUR 126 million, up around 8% versus previous year with margin at around 33%, up 180 basis points versus previous year, thanks to the improved efficiency and productivity. Moving to Slide #8, we have a look at Americas performance. In the full year, the revenues were down 8.6% in local currency, above market, and with organic performance at minus 9%. Forex was negative for 3.9%. EBITDA in the full year amounted to EUR 57 million with margin at 23.1%, up 40 basis points versus previous year. In Q4, revenue growth was 1.1% in local currency with organic at 1%, thanks to a robust and well-above market performance in the U.S., driven by a strong performance of Miracle-Ear, despite the rise in infection and the Presidential elections; strong improvement of LATAM performance in Q4, but severely impacted by Forex. Total FX in Q4 was negative for over 9%. EBITDA in Q4 amounted to EUR 19 million with margin at 25%, up 80 basis points versus previous year, thanks to greater efficiency and productivity. Moving to Slide #9, let me spend a few words on the acquisition of PJC's Hearing business, which we announced and closed in December 2020. PJC Hearing is the second largest Miracle-Ear franchisee with 110 points of sales in Texas, Florida and New Mexico, highly attractive states due to the highest density of senior citizens in the U.S., and with 2020 revenues of over $50 million. The transaction will allow us to combine PJC's 110 points of sales with the 59 corporate stores owned by Amplifon Dax, strengthening the Miracle-Ear corporate network, thanks to greater scale and sharing of reciprocal strengths, and creating a tremendous new opportunity to drive growth and value by developing, implementing and sharing best practices and processes, which will then be deployed to the whole Miracle-Ear franchise network. Moving to Slide #10, we have a look at APAC performance, which led the recovery in 2020 and showed an outstanding operating leverage. In the full year, revenues were basically flat in local currency, despite the COVID impact, with organic performance at around 8%, offset by M&A related to Attune acquisition closed in February 2020. Currency had a negative contribution by around minus 3%. EBITDA in the full year amounted to EUR 62.8 million with margin at 34.4%, up 5.1 percentage points versus previous year. This impressive expansion in profitability was due to higher structural efficiencies following the stronger measures implemented in Q2 as well as to the positive contribution from social tools, primarily introduced in Australia to offset the COVID impact during Q2 and Q3. In Q4, revenues were up 17.7% in local currency, driven by a strong organic growth of around 8%, despite an extremely challenging comparable basis, since organic growth in Q4 versus previous year was 11%. In the quarter, organic growth in China, in New Zealand was double-digit, and Australia reported a solid performance as well. M&A in Q4 related to Attune accounted for around 10%. Forex was negative for 1.8%. EBITDA in Q4 was EUR 17.7 million with margin at 32.1%, posting an improvement of 4.1 percentage points versus previous year. This strong improvement in profitability was due to higher structural efficiencies with no contribution coming from social tools. Moving to Slide 11, we appreciate the Q4 profit and loss evolution. Revenues showed a growth of 3% at constant Forex, despite new lockdown measures implemented across different markets. Following a negative currency contribution of minus 1.7%, revenues landed at EUR 513 million, plus 1.2% versus previous year. The structural efficiencies and productivity enhancement coming from the strong measure we implemented during Q2 and Q3 led to an excellent growth of profitability, up 210 basis points, from 25.7% to 27.8%, the all-time high level. The absolute EBITDA increased by around 10% from EUR 130 million to EUR 143 million this year. EBIT increased by 16%. Net financial expenses and tax rate, in line with the previous year, led an increase in net result of 17%, from EUR 51 million to EUR 60 million in the quarter. Moving to Slide 12, we have a look at profit and loss evolution in the full year. Following the negative impact of COVID-19 during Q2, total revenues decreased by 9.3% in local currency to EUR 1.56 billion versus EUR 1.73 billion in '19. Despite the heavy COVID outbreak in Q2, timely and effective action cost led EBITDA margin at 23.8%, up by 110 basis points versus 22.7% last year. Absolute EBITDA was at EUR 371 million versus EUR 393 million last year. D&A increased by around EUR 11 million, leading EBIT to EUR 169 million, following a slight increase in financial expenses, driven by the important activity of debt refinancing implemented during 2020. And following a substantially flat tax rate, net profit ended at EUR 101 million. Moving to Slide #13, we can appreciate the cash flow evolution. Operating cash flow, after lease liabilities, was in the period equal to EUR 314 million versus EUR 239 million in '19, posting an outstanding improvement of EUR 75 million, around 32% despite the negative impact of COVID in Q2. Net CapEx decreased by around EUR 32 million to EUR 57 million, leading free cash flow at EUR 257 million versus EUR 150 million last year, posting an outstanding growth of EUR 107 million, plus 71% versus '19. M&A absorbed around EUR 89 million, mostly driven by the acquisition of Attune and PJC, versus EUR 66 million in '19. Net cash flow was positive for EUR 160 million versus EUR 55 million in '19, leading the NFP up EUR 634 million versus EUR 787 million at the beginning of the year, with an outstanding improvement of EUR 153 million in the period. Moving to Slide 14, 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 a record level of EUR 634 million with a sequential improvement over the last 4 quarters. Liquidity accounted for positive EUR 545 million, short-term debt for around EUR 75 million and medium/long-term debt for around EUR 1.1 billion, proving the very strong financial profile of the group after the completion of the refinancing program, which resulted in the extension of the maturities by around EUR 270 million as well as in the increase of the amount of committed line by around EUR 380 million, thus allowing us a financial headroom of around EUR 800 million, including cash on balance sheet and undrawn committed revolving facilities. Following the IFRS 16 application, lease liabilities amounted to EUR 423 million, leading the sum of net financial debt and lease liability to EUR 1.05 billion versus EUR 1.21 billion last year. Equity ended up at EUR 800 million with an increase of EUR 105 million versus December last year. Looking at the financial ratios, net debt and EBITDA ended at 1.63x, the best result achieved after the completion of the successful GAES acquisition, and net debt over equity ended at 0.80x, posting a significant reduction versus 1.13x at the end of 2019. Moving to Slide #15, we can have a look at the committed credit line after the refinancing activity in terms of amount and maturity. As you remember, last year in February, we had the successful placement of the EUR 350 million 7-year bond. And then, we completed the refinancing through a strong activity, ensuring EUR 650 million of additional finance. There, you can see the detail. Today, we have a private placement for around EUR 85 million. We have a GAES Term Loan Tranche A by -- for around EUR 200 million. We have the bank loss for around EUR 0.5 billion, and revolving credit facility for EUR 250 million, for a total committed line amounting to around EUR 1.4 billion. The average maturity, as you can see, is in the order of 4 years. And as I was commenting before, the total financial headroom is around EUR 800 million. Moving to the last chart, we can have a look at the outlook. Looking ahead, the outlook for the next months remain uncertain and difficult to predict, since we are still experiencing important lockdown in several key markets, such as Germany, Italy, et cetera, and the vaccines rollout varies as well as across the different countries. The good news is that in the first 2 months of the year, our revenue at constant Forex were in line with the previous year, which we see as a remarkable achievement in consideration of the ongoing restrictive measure across different markets and of the extremely challenging comparable basis since January and February of 2020 were up strongly versus the same period of 2019. We are certainly continuing to gain market share. Then, with regards to 2021, we expect our market to gradually normalize during the year as COVID-19 vaccines are released. How fast is today, almost impossible to say because we know that the performance of our reference market varies according to the implementation of restrictive measures, especially those one which severally -- severely limited mobility. What we can say today is that we aim to continue to perform above our reference market. We can also say that in terms of profitability, we expect to continue to reap the benefits of our action implemented since Q2, aiming to achieve a significant margin improvement compared to 2019. Looking further ahead, we remain very positive on our prospects of growth as we stand firm on our strategy and on our investments, thus on what is crucial for the medium and long-term development of our company. Thanks a lot. And now, let me hand over to Francesca, again. Thank you.

Thank you, and I will -- I turn the call over to Sabrina, the operator, in order to open for the Q&A session. Thanks.

[Operator Instructions] The first question is from Luke Cummins of Lume Sales.

I have a couple of questions. So first of all, what can we expect in terms of M&A the coming years? And also how that ties into your leverage and potentially your rating targets? Then secondly, on the 2021 outlook, it seems a bit cautious to me, given underperformance in Q4 and also the first 2 months of the year. I do understand the uncertainty, but at the same time, the performance has been decent in recent months. So why so conservative? And do you expect some, let's call it, pent-up demand being visible in 2021? Because I would expect that the trends in people needing hearing aids has not changed by COVID. And then thirdly, if I may, also on the cost efficiencies. I think it's quite impressive posting margin improvement in a year like 2020. So can you be a bit more concrete on the measures you took throughout the year?

Thanks a lot for your question, really. So in terms of M&A, we expect to proceed with our piecemeal strategy. During Q2 2020, when COVID, I mean, entered the different markets, we stopped the dividend, we stopped the M&A, we stopped also the CapEx. But as we saw that, I mean, COVID was not affecting any more as it was in the first period because today, for example, we have a lot of countries in lockdown, but we see revenues still -- have been growing, we restarted with our business strategy. So moving forward, we expect to have a similar attitude. On average, we have EUR 80 million, EUR 90 million per year. The countries of focus are Germany, France, something in the U.S. and China. Leverage. Leverage, I think, we have been able to reduce significantly. And in the calculation, you can appreciate that we still have Q2 inside -- I mean, the last 12 months EBITDA, Q2 2020. So I really expect that, I mean, if situation goes like it is going, at the end of Q2 2021, when Q2 '21 will substitute Q2 '20, we will have a significant improvement in the leverage, which may result in the order of 1.30x, 1.40x. So this is the number by playing the simple math. In terms of rating, we will have a discussion in the next days with Standard & Poor's. 12 months ago, after COVID started, we had a negative outlook. But I believe that we have been able to show that we transformed this difficulty into an opportunity, not in terms of profitability, in terms of cash flow, in terms of ability to raise additional credit lines. So I hope that they would be convinced or, I mean, give us original rating. In terms of outlook, I think, I mean, we have been pretty positive in the message we gave to the financial community. Actually, I mean, the first 2 months were in line with 2020, where there was no COVID at all. In 2020, first 2 months grew by around 10% versus '19. So what we said is that we grew by 10% versus '19, in the first 2 months. And we expect that moving on the COVID will affect less on average in the next 10 months than what it was during the first 2 months, so it was a very positive message in terms of growth. But, I mean, we have, I mean, fast reliability as our key value. So we prefer not to give a certain number also because at this stage, you cannot give a certain number, of course. Then -- so we prefer not to really give a new outlook. I have to admit that we are positive in the medium term, of course, very positive in the long-term because, as you were mentioning, I mean the trends are basically the same and maybe the usage of the mask made even more evident the need of a hearing aid for people with some hearing impairment. Going to your third question, we made a lot of activity on cost. So we achieved significant cost efficiency. Of course, what we did during Q2 was something was exceptional because there was some social tools, some rent waiver. But of course, I mean, with 40% revenue reduction, achieving a plus 200 basis points in EBITDA margin is not quite common. While moving to Q3 and Q4, we believe this is the, I mean, range of improvement we can obtain with a normal level of volume. So what we believe for 2021 is EBITDA margin in the range of 200 basis points higher than the EBITDA margin we had in 2019. So in the past, we used to grow by 50 bps per year. Now, I think we are going to show a jump up in profitability by 200 basis points between '21 and '19. And then, from '22 on, we expect to grow, thanks to scale, reach, thanks to some further efficiency, other pace, which is very much in line with what we were doing before. So jump up and then we expect to grow by another 50 basis points per year for the medium-term at least.

The next question is from Irina Idrissova of BlackRock.

Just one on kind of the consumer trends and perhaps, competition. Throughout the pandemic, given we've seen a lot of shift towards digital, have you seen kind of an acceleration of adopting teams to remote settings in your customer base? And what have you seen kind of competitors doing on that end? And also, what are your initiatives?

Yes. So not at all. Unfortunately, not at all, in the sense that during the worst month of pandemic, everybody was thinking about, I mean, opportunities coming from digital and talking about not digital marketing, which is a key asset for us as well. And talking about, I mean, remote setting. And this could have been good because we could have been able to serve our customer from distance. Actually, it was not the case, nor for Amplifon or for all the other competitors. And if you look at the pure digital adoption today, is exactly in line with what it was before the COVID, with the total penetration lower than 1%. Our customer base, at the end, is 85 -- 80, 85 years old. Making a full setting online is quite impossible. So we really didn't see any major change in the basic trends. What it is true, on the other side, is that, I mean, digital marketing is very important in the sense that, I mean, parents, I mean, sons both are really important in the purchasing process of our customer. So while our customer, most of the time, are 80 years old, the sons and the daughters and the relatives may be much younger. So Internet is today a way where people can have information, at least for the first level, and is a very important mean of, I mean, communication and advertising. And, I believe, we are leveraging very much on that because, of course, by being one of the biggest player of the industry, you can leverage on scale economies, so you can invest more than the other. And this is something on which we are, I mean, investing a lot and we are taking advantage of it.

[Operator Instructions] Mr. Galli, there are no more questions registered at this time. I'm sorry, one question just registered from Mary Beth of Generali.

Can you hear me?

Yes.

Okay, great. Sorry. So I just have a general question on sales and EBITDA contribution from the various channels. I'm thinking about the directed operating stores versus the franchisees. And I would like to understand, if there is any difference in terms of performance between these different type of distribution channels?

Absolutely, absolutely. So first of all, let me tell you that we have the franchisee model just in U.S. and just for Miracle-Ear. So in total, sales in Miracle-Ear accounts for around 40% to 45% of our U.S. business. The franchisee model is applicable to, say, something in the range of EUR 100 million. Of course, I mean, the price is very different. So just to give you broad numbers, in U.S., the retail market is around $2,400, while, I mean, the price we have when we send to our franchisee, is much more limited, something in the order of 25% of this amount. So the total revenue is lower. But in terms of percentage, of course, it is higher. So if I look at the EBITDA margin of Miracle-Ear, is significantly higher than the average of U.S., which is in the range of 24%, 25%. But, of course, I mean, in absolute value, you start, I mean, from a price, which is lower. Maybe it's worth mention that in Miracle-Ear this year, we made an important move to a vertical integration while acquiring PJC Hearing business, which I was commenting during the presentation, for a total value of around EUR 50 million rated revenues. So basically, we will transform a part of franchisee revenues, say, something in the range of EUR 15 million into EUR 50 million retail revenues. So with a good profitability, a little bit lower than the one at the franchisee, but of course, with a higher absolute value, thanks to the retail price effect.

And in terms of performance, how did they perform versus the rest?

Performance versus previous year?

The rest of the portfolio versus you -- basically the operating -- directly approaching due to differences?

We -- so in -- sorry, in absolute term, in a percentage term, the directly operated stores have a lower EBITDA margin than the franchisee. But again, they can sell at a nicer price. In terms of performance versus the previous year, the performance was very much similar. So basically, we gained market share in Miracle-Ear, both in our directly operated stores and in our franchisee, which sold that to the franchisee network we have.

Maybe, if I can ask -- on the difference between the direct and franchisee, obviously, you have pros and cons on the 2 models. On the franchised model, the advantage is, for sure, that it applies very well for the U.S. market, which is definitely very, very huge. And especially in the U.S., people prefer generally to be entrepreneurs rather than employees. But on the pause of the direct, you have, as Gabriele was saying, the fact that you can capture the whole value chain, so the famous retail price versus the wholesale price. And moreover, obviously, you have also the control -- direct control on the consumer. Obviously, with Miracle-Ear, we shared the data of the customers through our franchisee, but obviously, it's different in having a direct access. So obviously, these are the main differences.

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

Thanks. Thank you. Thank you to everybody for taking part in the call, and I will kindly ask Sabrina to disconnect. Thanks.

Thank you. Bye-bye.

Bye.

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