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 Third Quarter and 9 Months 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Francesca Rambaudi, Investor Relations and Sustainability Senior Director of Amplifon. Please go ahead, ma'am.

Thank you. Good afternoon, and welcome to Amplifon's Conference Call on Third Quarter and First 9 months. Before we start, a few logistic comments. Earlier today, we issued a press release related to our results, and this presentation is posted on our website in the Investors section. Second, the call can be accessed also via webcast and dial-in details are on Amplifon's website as well as on the press release. I have to bring your attention to the disclaimer on Slide 2 as some of the statements made during this call may be considered forward-looking statements. With that, I'm now pleased to turn the call over to Amplifon's CEO, Enrico Vita.

Thank you, Francesca, and good afternoon, everyone, and thank you for joining us today for our Q3 results conference call. As always, let's begin commenting on the quarter's results, starting with the topline. We posted excellent revenue growth of more than 11% at constant exchange rates and close to 6% at current exchange rates, fueled by a very good organic growth at 9%, one of the highest organic growth ever. This performance is particularly remarkable considering we operated in a context of global market demand that is clearly moving at a different speed. In fact, we saw a strong market growth in the U.S. at circa plus 10%, while we estimate that Europe, our core market, was still slightly negative circa minus 1%, minus 2%. And clearly, this development in Europe was unexpected for us, also considering the easier comparison based to the previous year. Australia and New Zealand combined are in the middle of the 2 regions with a slightly positive combined growth of around plus 1%, plus 2%. About Europe, we estimated that the key markets like France and Germany were in negative territory, in particular, France, the largest market in Europe, suffered a market decrease versus previous year, close to 10%. With specific reference to France, we believe that this very negative performance was mainly because of the effect of the RAC zero reform back in 2021, early 2022, that distorted the baseline for this year and also, although to a lesser extent, to the fact of the shift from both GFPs and ENT is being able to prescribe hearing aid to new customers in 2022, basically only ENTs in 2023. However, we are positive that for both France and Germany, the market demand will normalize and return to positive growth rates during 2024. In such market scenario, we grew very strongly, gaining a significant market share, also thanks to a clear decision that we made, the decision to accelerate investments to gain market share and strengthen our global leadership further. In fact, we are convinced that playing offense is the right choice at such time. And I'm pleased to see that this choice is paying off in terms of sales growth. As you can see from our very strong organic growth, one of the highest ever, as I said earlier on. In such a context, I cannot avoid highlighting once again, our performance in Americas in all geographies and in particular, in the U.S., where our growth led by Miracle-Ear direct network and Amplifon Hearing Health Care was again excellent. In the region, we reported growth of almost 25% at constant ForEx. At this time, I would like also to highlight the performance in the APAC region, where we grew more than 16% at constant exchange rate, outperforming also here the market in all key countries. And today, I'm pleased also to share the achievement of an important milestone of our journey in China. In the beginning of October, we have passed the mark of 300 stores. And today, I can also tell you that we are confident that we can reach about 400 stores by the end of the year by January at the latest. Let me say that I'm very happy about the work and the execution capabilities of our team in building a very solid and future-proof platform in a country which will represent one of our sources of growth in the medium and long term. Even in EMEA, we grew faster than the market, although it was our lowest growth region, but this only because of the weaker-than-expected market demand I mentioned earlier. Finally, revenues from M&A continued to develop strongly and according to our plan. In fact, the contribution from acquisition was above 2 percentage points. Commenting about profitability, as said, we have taken a precise decision to invest in 2 key areas of our business. First of all, and mainly in our field organization to better serve our customers. You may recall that we discussed about a tight audiologist market in some key countries, in particular, in France and Australia. Here, we have conducted a comprehensive recruiting plan in a few of this market -- of our market to ensure that audiologists are not longer limitation to our current and future growth. Second, we have continued to invest in Europe, both in marketing and in our brand, which is the most appropriate choice at time of lower consumer confidence. Clearly, the already mentioned lower growth in EMEA is also affecting our group profitability from a pure geographical viewpoint, being EMEA, our most profitable region. With that, I now hand over to Gabriele to give you more details about our regional performance in more detail.

Thanks, Enrico, and good afternoon to everybody. Moving to Slide #4. We have a look at the group financial performance in Q3, which, as already commented by Enrico, posted an excellent revenue growth at 11.4% at constant ForEx, with a record organic growth at 9% despite a softer-than-expected European market and 1 trading day less. Our organic performance was clearly driven by significant share gains and positive pricing development. M&A contribution from bolt-on acquisition in France, Germany, U.S., Canada and China was at remarkable 2.4%. FX had a significant negative impact accounting for minus 5.7% due to the depreciation of U.S. dollar, Australian dollar and Argentine peso. EBITDA recurring came in at EUR 110 million, with margin at 20.7% versus the extremely challenging comparison base in Q3 2022, which posted, as you may remember, a record profitability with an EBITDA margin of 21.8%. The profitability reduction versus '22 is due to lower operating leverage in EMEA due to softer-than-expected market primarily related to France and Germany, strong investments in audiologists capacity and marketing, as pointed out by Enrico, a less favorable geographic mix and finally, a negative ForEx impact. Moving to Chart #5, we have a look at our financial performance in the first 9 months. Revenues were up around 10% at constant ForEx, with a very strong and above market organic growth at 7.6% and M&A contribution at over 2% and the negative FX impact at around 3%. EBITDA recurring amounted to EUR 386 million, up 4.4% versus 9 month '22, with margin at 23.5%, down 50 basis points versus '22 in light of the previously mentioned results. Moving to Slide 6. We have a look at EMEA performance. Revenue growth at constant ForEx was around 6% versus '22 with a well above market organic growth up 5%, driven by share gains and positive pricing development in a still slightly negative market demand and with a negative impact of 1 trading day less. M&A contribution in France and Germany was close to 1%. EBITDA amounted to EUR 83 million, up around 1% versus '22 with margin at 25%, down 110 basis points versus a challenging comparison base last year, which posted an EBITDA margin October 26%, plus 60 basis points versus '21. The result was driven by the reduced operating leverage in a softer-than-expected market while strongly investing in audiologists capacity, especially in France, and the marketing to unlock constraints and take advantage versus other players. In the 9 months, revenue growth was circa 5% with a solid and above market organic growth at 4% and around 1% contribution coming from M&A. EBITDA amounted to over EUR 300 million, up 3% versus '22 with margin of 28.1%. Moving to Slide 7. We have a look at another outstanding performance of Americas, despite a very challenging '22 comparison base, which posted a revenue growth of 27% versus Q3 '21. Revenue growth was around 25% at constant FX with an excellent organic growth at over 17%, driven by an outstanding performance in the U.S. of both Miracle-Ear direct retail and Amplifon Hearing Health Care. M&A contribution primarily related to U.S. and Canada was over 7%. FX effects had a significant negative impact of 16.6% driven by the strong euro appreciation versus the U.S. dollar and the very strong devaluation of the Argentine peso. EBITDA amounted to EUR 26.8 million with margin at 24.6%, in line versus 2022, also after the strong acceleration of Miracle-Ear retail business. In the 9 months, revenues were up 22.7% at constant ForEx driven by an excellent organic growth of around 16% despite the '22 very strong comparison base. EBITDA amounted to EUR 84 million, up 14.3% versus '22 with margin up 10 basis points at 26.1%. Moving to Slide 8. We have a look at Asia Pac, where we posted an excellent performance. Revenues were up over 16% at constant ForEx, mainly driven by an outstanding organic growth at 14% with all markets of the region performing double digits. M&A contribution was 2.5% related to China expansion plan. FX headwind was strong at minus 12.2%. EBITDA was at EUR 23.8 million, with margin at 26.5% up 10 basis points versus '22, even after the very strong China growth. In the 9 months, revenue were up over 15% at constant ForEx and 7.4% at current ForEx, driven by an excellent organic growth of around 14%. EBITDA amounted to EUR 66.5 million, up 6% versus '22 with margin at 26%, with a contraction of 30 basis points due to the onetime cost for the change of leadership in the region in Q2. Moving to Slide #9. Finally, let me spend a few words on China since we have surpassed the 300-plus stores, a key milestone in our journey. We have, in fact, entered the fast-growing Chinese market only in 2018. And in just a few years, we have become one of the most important players with over 300 points of sales covering 13 provinces and special municipalities, over 700 employees, of which 600 are Hearing Care professionals. China represents a very important opportunity for the Amplifon's medium and long-term growth given the market size and the exceptional growth potential. As a result of our recent and successful acquisition strategy, Amplifon's global network has now reached 9,500 points of sales globally. Moving to the next chart. We appreciated the Q3 profit and loss. As previously mentioned in the quarter, total revenues at constant FX increased by 11.4% with a record 9% organic and a 2.4% acquisition growth, with the revenues of current FX growing by 5.7% at over EUR 530 million. EBITDA recurring came in at EUR 110 million, with a margin at 20.7% versus 21.8% in 2022 record level. When we implemented some cost containment measures, related to the non-strategic investments. As previously mentioned, the profitability reflects the lower operating leverage in EMEA and the less favorable geographic mix due to the softer-than-expected demand -- market demand in Europe, coupled with very strong investments in the business. EBITDA reported was around EUR 108 million after EUR 2 million one-off costs. D&A, including PPA increased by EUR 4 million versus last year in light of the increased investment in network, IT infrastructure and innovation, leading the recurring EBITDA to EUR 45.4 million versus EUR 49 million in Q3 '22. Net financial expenses amounted to EUR 13.2 million versus EUR 8.3 million in Q3 '22 due to the increase in interest rate and short-term debt and on the limited portion of long-term facilities at variable rate since, as you know, most of our long-term debt is at fixed rate. The nonmonetary negative impact of inflation accounting on the Argentinian subsidiary. And finally, the higher figurative interest expenses on network leases following the application of IFRS 16. Tax rate posted a 10 bps reduction versus '22, leading recurring net profit at around EUR 23.5 million versus EUR 29.7 million in Q3 '22. Moving to Slide 11. We see the 9-month profit and loss evolution. Total revenues increased by 9.7% at constant ForEx with an outstanding 7.6% organic component and a 2.1% M&A contribution, and by 6.8% at current ForEx to EUR 1.645 billion. Recurring EBITDA increased by 4.4% to EUR 386 million, with margin at 23.5%, down 50 basis points versus 9 months '22 record level for the previously mentioned reasons. D&A, including PPA increased by around EUR 14 million, leading the recurring EBIT to EUR 193 million, with a growth of around a couple of million versus 9 months '22. Net financial expenses accounted for EUR 36.9 million in light of the previously mentioned factors in addition to some FX differences related to swings in North and South America, leading profit before tax to around EUR 156 million from EUR 165.7 million in the 9 months '22. Tax rate ended at 27.7% leading recurring net profit to EUR 113 million versus EUR 120 million last year. Moving to Slide #12. We appreciate the cash flow evolution. Operating cash flow after lease liabilities was in the period equal to EUR 169 million versus EUR 218 million exceptional level achieved in 2022, when the group implemented several actions delivering a considerable improvement of the working capital. Net CapEx increased significantly by almost EUR 25 million to circa EUR 100 million. As mentioned by Enrico, we are, in fact, strongly investing not only in people and marketing, but also in our network, IT infrastructure and innovation. After CapEx, free cash flow amounted to EUR 69 million. Net cash out for M&A posted a significant increase as well to EUR 83 million versus EUR 52 million last year, following the strong acceleration of bolt-on M&A with 220 shops acquired in the first 9 months of 2023. NFP ended at EUR 918 million after a remarkable investment for around EUR 250 million in CapEx, M&A and dividend. Moving to Slide 13. We have a look at the debt profile trend and key financial ratios. As mentioned, the net financial debt closed at EUR 918 million, with liquidity accounting for EUR 200 million, short-term debt accounting for EUR 450 million and the medium long-term debt accounting for EUR 666 million. Following the IFRS 16 application, lease liabilities amounted to EUR 488 million, leading the sum of the net financial debt and lease liability to EUR 1.4 billion. Equity ended up at around EUR 1.07 billion. Looking at financial ratios. Net debt over EBITDA ended at 1.63, slightly increasing versus 1.52 of December last year after the strong investments in CapEx, M&A and dividends. Net debt over equity ended at 0.86x. I would now hand over to Enrico for the outlook and the closing remarks.

Thank you, Gabriele, and let's go to the final chart of our presentation. First, let me remark that even if some key European markets, like France and Germany, currently present some temporary challenges, please remember that, for example, France accounts for about 25% of the total European market. Our revenue growth in Q3 was very strong, significantly above market and in line with our plans. Looking to Q4, we expect still a healthy market in the U.S., while we expect the European market still to be somewhat subdued until the end of the year, again, mainly due to Germany and above all, France. However, as said, we believe that there are some contingent and specific reasons for that performance, in particular in the French market. And therefore, we expect the market demand in both markets to normalize and return to positive growth rates during 2024. In light of this context, as we approach the year-end, today, we can give you the following more detailed outlook for 2023. We expect our revenues to develop in line with our plan and the outlook we gave you in early May. Net, of course, the negative currency impact versus the previous currency assumptions, impact that now we can estimate of about EUR 30 million on sales. Numbers, this means that we expect revenues in the region of EUR 2.29 billion for the year. So corresponding to EUR 2.32 billion at previous currency assumptions. This forecast implies for the full year. Revenue growth at constant exchange rate of circa 11%, of which almost 9% is organic. And let me tell you that I'm very satisfied with this growth especially considering the weaker-than-expected market in our core geography, which is Europe. Regarding profitability, because of our accelerated investments, mainly in audiologist capacity in particular in EMEA in order to unlock some bottlenecks and support future growth. We now see an EBITDA recurring at circa EUR 550 million after the negative impact versus the previous assumptions of about EUR 10 million. Hence, corresponding to EUR 560 million at the outlook of ForEx. We are very convinced, in fact, we must play offense as we see a concrete opportunity to gain market share and further strengthen our leadership position and also prepare ourselves for a more normalized market development next year. With this, I will turn the floor to Francesca for the Q&A session. Francesca?

Thanks, Enrico. I kindly ask operator to open today's Q&A session. Please kindly limit your questions to maximum 2 initially in order to give everybody the opportunity to ask question. Now I turn the call over to Judith to open for the Q&A. Thanks.

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Niccolò Storer with Kepler.

The first one is on current trading. And so what are you seeing October so far in particular on Europe? And if you can remind us how was Q4 last year, meaning whether the minus 2.5% organic performance was split evenly in first month or maybe whether we had particularly weak October and the strong December last year or whatever. The second question is on profitability. You basically are driving down expectation for 2023. What should we expect for 2024? Is 2023 level, the sort of new base for your standard 40 bps year-on-year improvement? Or should we expect further cost carryover from your current initiatives, which could keep also 2024 EBITDA margin under pressure?

Thank you, Niccolò, for the 2 questions. So with regards to the first one, current trading, October, I mean, it's going well. Sales revenues are growing pretty strong. I would give you an indication about sales revenues growing between 10% and 50%, which is, of course, good. I don't think that there is a big effect in relation to the comparison base of last year between months. So this is a true performance, which is definitely in line with our plans. And in terms of shape of this kind of revenue growth, I would take as a reference Q3. What I mean is that definitely Americas growing faster than the others at constant ForEx. Also I would definitely see Asia Pacific to continue to perform strongly in Q4. And while EMEA is growing, I guess, above market, but still being the lowest in terms of revenue growth. With regards to profitability for 2024, of course, I'm not going to give you a precise outlook for next year. But let me say that this year, the kind of market growth in Europe was in a way unexpected to us. In particular, the performance in France of the last month was completely unexpected. As I said, during the first part of the presentation, the market in France in Q3 from a selling point of view should be in the region of minus 10% from sellout, we don't have precise numbers, but it should be more or less in line with that figure. And to be honest with you, this was not expected. Why the French market is so negative? To be honest with you, I think that it's a combination of different things. I don't think that there is an underlying issue in France, perhaps the reform back in 2021, 2022, in a way has distorted the baseline and therefore, now we see a certain kind of readjustment of the market that led to this kind of a very negative performance, which, again, let me state this, was completely unexpected for us. All this to say that looking at 2024, we expect the market normal -- in Europe normalizing, which means to go back to positive, healthy growth. We expect, definitely, therefore, to have a much better operating leverage in Europe because of the market going back to the NFP positive growth. So without giving you a guideline for next year, what I can tell you is that I'm positive on profitability improvement for next year, first of all, because of I expect a better operating leverage in EU, in Europe, because of this, let's say, for the market, as a consequence of the market normalizing also because we have already sustained the investments that we made, in particular in the field operations. And therefore, we do not need actually to add more capacity for next year. But I'm also positive because if the market will not develop in line with our expectations, we have already identified efficiency measures on cost. And therefore, I'm also positive on that. In addition to that, if it will be necessary, we are also thinking about selective price increases which also should help profitability improving next year. So all in all, a long speech to say, this second half in a way was affected by a lower-than-expected growth in particular in EMEA. And in fact, as you can see, actually, profitability in Q3 was down only in this region. Going forward, I'm positive counting on a more positive market development in a market which is going to normalize, but also I'm more positive also because I think that we know what we have to do if this will not be the case.

The next question is from Hassan Al-Wakeel with Barclays.

I have two, please. Firstly, on EMEA growth in Q3 which is a positive surprise given a tougher market backdrop. Should we expect further recovery into Q4 driven by easing comps? And do you think this market has trust already? And should we expect a more normal 2024? And at a group level, is it plausible to see group growth at or above the market expectation of 6% in 2024 to your mind? And then secondly, following up on profitability, could you talk about the investment that you're making to drive sales, which is clearly working? Is this combined with a sluggish Europe while Q4 implied margins are down 140 basis points year-over-year after margin contraction in Q3 or is there anything else? And how should we think about this level of investment in 2024? And what about other key cost buckets, such as salaries and whether pricing could offset salary increases again next year?

Thank you for the question. Long questions. So if I forget to answer some part of it, please tell me. But let me say that, yes, we are very -- well, we are, let's say, relatively happy with the growth of the EMEA region in Q3 because definitely, we have grown above the market, which was, as we said, somewhat subdued in particular with -- because of the effect of France, which accounts for about 25% of the total European market and also Germany, we estimated that was a bit slightly negative and Germany accounts for about 20% of the total European market. So almost 50% of the total European market was negative. And this, of course, led to an estimation of the total European market to be slightly negative overall. And as I said, that is in a way -- I mean, it was a surprise for us because also the easier comparison base with last year. With regards to our performance in EMEA in Q4, what we expect? We expect to continue to grow healthily. Although, of course, we were even, let's say, forecasting for higher growth, in particular, for example, in France. And for this, let's say, forecast about the growth in France, we have taken a decision also at the beginning of the year actually to increase the capacity of audiologists. I think that in the past, we mentioned many times that audiologist capacity in France, but also in Australia, but in particular in France, after the reform, which, of course, increased the market significantly was a mission. And therefore, we have taken the decision actually to increase our capacity in terms of field personnel, in terms of investment in our organization in order to better serve our customers and in order to release some constraints that we had. So we expect that this kind of investments actually will give us some benefit going forward, in particular in 2024 when we expect the market actually to grow back to positive growth. What will be the estimation, the forecast for the total market growth in 2024? Very difficult to say, but I expect that some of these distorting aspects would not be longer there. And therefore, we expect the market to go back to the usual growth rate. And as you know, our goal in respective of what will be the growth of the market is always to grow above the market, the market grows. I hope that I have touched on all the points.

And then on profitability for Q4?

Yes. Please remind me the question.

Yes. So the question was just around Q4 margins that are implied being down 140 basis points after another -- after contraction in Q3 and if that's driven mainly by investments in EMEA, and whether there's anything else? And how we should think about this level of investment going into 2024? And other key cost buckets such as salaries and whether pricing will be an offset.

Yes, absolutely. I mean, in terms of development for Q3, I think that given also the kind of outlook -- that precise outlook that we gave you, you can make all the math. But yes, let's say that in Q4, we will have a similar trend than in Q3. As I said before, looking at the profitability for next year, I'm positive, I'm positive in EMEA as well. I'm positive because we expect the market normalizing and therefore, we expect a better operating leverage in consideration of the fact that we don't need any more to increase capacity for next year because we are already in place, and we have already, let's say, made this investment this year. But as I said also earlier on, I'm positive about the profitability because in case this expected growth will not normalize, as usual we have proactively identified some cost efficiency measures and also, we are also ready to implement selective price increases in order to have a positive impact on profitability.

Very helpful. If I can just follow up. You talked quite a bit about reform in France impacting the numbers. How are you thinking about potential risks from the Italian Competition Authority probe, be it positive or negative?

Well, very, very, very difficult to say also because we are at a very, very early stage. So don't ask me what is the outcome that I envisage because to be honest, I don't know. What I can tell you is that this kind of investigation can have a very different outcome. The outcome of the investigation from the French authority back in 2016 at the end of the day, found that the market was actually functioning pretty well. Competition was there. And actually, that kind of investigation also led to the RAC zero reform, which, as you know, actually increased significantly the size of the market. So it can be also a positive outcome. But really, I don't have any kind of concrete element to guess what can be -- what it can be at this stage.

Next question is from Veronika Dubajova with Citi.

I have two, please, and then a clarification if that's okay. But I just want to understand, Enrico and Gabriele that these investments that you're making, I mean, they seem to be depressing the fourth quarter margin in particular, much more than they have depressed the other 3 quarters of the year. Should we look at the fourth quarter margin as the starting point for 2024? Or is there something unusual about the phasing here? I'm just trying to understand your message here. If you're hiring people and that's what's depressing the Q4 margin, presumably, we should build from the fourth quarter margin when we think about 2024. So if you can kind of talk to that, that would be very helpful. My second question is just on -- I think just to push you a little bit more, I think Hassan touched upon this, but your expectations for wage growth in 2024. Obviously, 2023 is slightly unusual in terms of wage inflation. If you could kind of comment on what you're thinking for 2024 at this point in time, that would be great. And then apologies, I'm going to sneak in a third one, which is just a clarification. I think, Enrico to your -- you commented, said October is growing, is it going well? And you talked about a 10% to 15% revenue growth. I want to just confirm that, that's a global number and that it's in local currencies? Or was that with regards to a specific region?

Yes, absolutely. So I will start with the last one, which is more quick to answer. And no, I was referring, as usual, about group growth at constant ForEx. That was the kind of indication that I gave you. With regards in terms of to the first quarter -- the first question and in particular about the investments that we are making. As I said, I think that I was quite clear on saying that the kind of impact on profitability that we have seen in Q3 and Q4 actually was in a way unexpected because actually, we were expecting a much better market growth. I think that we discussed also in the past about the fact that in Q3, Q4 second half, we were expecting an easier comparison base, which did not materialize from a market growth in particular in Europe, but in particular, on a couple of key markets like France and Germany and France being double digit down, to be honest with you, was totally unexpected. And this, of course, had some effect on the operating leverage of the region, in particular, of those 2 markets. And therefore, on the profitability of the region and therefore, on the profitability of the growth. Going to the -- about what should we take as a base for next year profitability outlook. I would say that, of course, now we have seen that the market actually is not growing as expected. And although we expect actually the European market to normalize in 2024. As I said, it is very strange. I mean, having the French market being down double digits. In my opinion, the only -- the main reason for that is just about the market normalizing after a huge growth in 2021 and 2022. So in theory, we should see in 2024, actually that we should see the market -- you should see the market to normalize, to go back to positive growth. And also, this will also bring better operating leverage in Europe in consideration also of the fact that we have made these investments, which are also taking GAES in a position where we are ready actually to sustain further growth without any additional investment. But in general terms, as I said before, I'm positive about the profitability of 2024 because in case, we are also working in order to be prepared in advance in case this growth will not normalize. With regard to the second question and therefore, wage growth for 2024, I do not expect the same kind of growth that we had this year. You may recall that in -- on, let's say, historically, we had a wage growth in the region of 2%, 3%. This year, we have actually implemented a wage growth, which was double than that, so 5%, 6%. Our forecast for next year is not of that magnitude like this year. So it's much less than that. So this should not be a concern for next year.