Ceconomy AG (CEC) Earnings Call Transcript & Summary

Good morning, honorable shareholders of CECONOMY AG. Dear guests, ladies and gentlemen, on behalf of the Management Board, I would like to extend a cordial welcome to you on the occasion of CECONOMY AG's Annual General Meeting. Exactly 1 year ago, I stood here also in a function as interim Board member of CECONOMY. Since then, a lot has happened in the operating business and with the further development of the company, which is also true with respect to the top management team. I was delegated yet again from the Supervisory Board to join the Management Board this time as CEO, where I'm working together closely with the Supervisory Board and with the CEO and with Karin Sonnenmoser and Ferran Reverter and his team in Ingolstadt, to steer the company back on the tracks of success. Let's talk about the contents. First, I would like to look at the business of the past financial year, then look at transformation of the company and take a look ahead to the forecast of the business year 2019 and '20 and the development of the first quarter. Ladies and gentlemen, after the difficult year 2017 and '18, we were able to stop the negative trend as announced last year and stabilized the business, which was not an easy process for all of us because we had to dismiss many employees. But we progressed operationally. Let me explain. In the fiscal year 2017/'18, our profitability had clearly deteriorated. On top of that, there was the high write-down for the interest in METRO. Our cost structures were not competitive, neither did we tackle transformation. This changed fundamentally during the past 12 months. We found solutions for portfolio companies and shareholdings, redefined responsibilities, optimized processes and created the prerequisites and the basis for competitive cost structures. The heading for all these measures is cost and efficiency program. Also with our other initiatives, we made headway. For example, we were able to stop the negative trend with profitability. Our successes in stabilizing and developing the company further were also reflected in the share price, which reached its rock bottom end of 2018 with less than 2 -- EUR 3. 2019, we had a share price of EUR 5.50. And at the moment, the share price is at EUR 5.10. Our ambition, however, is different. This recovery can only be a first step. We are working to enter into a new phase after stabilization. We want to be back on the track for the success and stay there. First and foremost, we need to develop a strategic framework to carry the company into the future. But let us first take a look at our financial performance and the most important performance indicators for the past fiscal year. One year ago, I had told you that the fiscal year 2018 and '19 was a year of transition and reorientation -- or was to be a year of transition and reorientation. Today, I can tell you, we tackled the reorientation and rigorously implemented the first steps and, thus, reached our financial targets. The development in the currency and portfolio-adjusted sales was slightly positive, as expected. With the plus of 0.8%, we reached EUR 21.5 billion. Thus, we were spot on with our forecast. With the earnings before interest and tax, we originally had thought that there would be a slightly declining result. The clean EBIT without Fnac Darty was EUR 4 million above the level of the previous year with EUR 402 million. That's without Fnac Darty. So our operating profitability has stabilized. When we take a close look at the financial development, we can see that Online business remains our growth driver. Online sales has grown to EUR 2.9 billion, by more than 13%. And this, our improvements of the webshop and the apps played an important role. But this is not all of it. With the further dovetailing of classic retail and online, we are reaching more competitive advantage. Even now, more and more customers pick up their products and their purchases in the stores. The so-called pickup rate reached about 50% of online orders in the fourth quarter. In the services business, however, we did not grow dynamically enough with 1% of sales plus. One of the several reasons is that the mobile telephony contracts were slightly declining as compared to the previous year. We used the year to further develop products and solutions and create new services, and we harmonized our services. For example, the services of our SmartBars were harmonized across the company. Customers can have their devices installed or minor repairs made or battery changes and display changes can be affected then. In the fourth quarter, we were able to generate clear growth. In the first quarter of this year, our services business increased by 10%. The groundwork is bearing fruit, the groundwork of last year. But let's look at our earnings. As we said, the EBIT of EUR 402 million was slightly above that of the previous year. This was actually the EBIT where we have deducted the cost and efficiency program and the share of Fnac Darty. Positive effects were, for example, the declining in personnel costs and higher cost efficiency in the stores in Germany. Also, the better planning of our campaign days around Black Friday 2018 and higher earnings and revenues in Services & Solutions supported our earnings. In Germany, Austria and Switzerland, it was especially Switzerland that made a contribution because of reduced costs. Germany profited of staff savings and more focusing and marketing activities and reduced non-personnel costs. Major reason for earnings in Western and Southern Europe were the positive developments in Italy. In Spain, the clean earnings have also increased. But there was a decline in the Netherlands due to the sales decline attributable to the intensive competition, and we also had difficulties in the supply chain after changing both the IT system and the logistics service provider. And the declining earnings in Eastern Europe are also attributable to increasing staff costs with a very intensive competition. What is quite clear is that given the development in the Netherlands and Poland, we cannot be happy, and we took steps to improve the situation. Let's look at the earnings per share now. This chart shows you the reported financials, including the restructuring expenses. The reported EBIT also contains the contribution of Fnac Darty amounting to EUR 21 million. Although reported EBIT based on restructuring was lower than in the previous year, the periodic -- the earnings for period and the earnings per share increased because of the improved financial result. One year ago, financial results was influenced because of the impairment losses of our METRO shareholdings. In the fiscal year 2018 and '19, this did not come to bear. And also, the sales of our 5.4% of METRO shareholdings and the dividends of METRO had a positive effect. And in the past fiscal year, we also had a reduced tax rate which resulted from internal restructuring measures. Ladies and gentlemen, for the fiscal year 2018/'19, we do not intend to pay out dividend. We want to use the earnings to strengthen our equity. This is the second year in a row where we shall not pay dividend. But may I assure you that this is only a passing phase. In the framework of our ongoing strategy process, we keep reviewing our dividend policy, we do not intend to continue along this line. And in the future, we want to pay out a dividend. We want to render our company fit for the future and for the intensive competition and the changes in the market and challenges. Let me tell you, we have already achieved a lot in the framework of this transformation. You remember this slide from last year, we focused on 4 pillars: digital growth, Services & Solutions, category management and supply chain and organization and cost structure. 2018 and '19, we pushed numerous projects within the strategic initiatives. In doing so, of course, we broke at different speeds in the different pillars. I pointed this out last year already. Let's start with the last pillar, organization and costs because this is the pillar that supports other initiatives. In the past, the group had lost sight of competitive cost structures, which is changed with the cost and efficiency program. We streamlined administrative structures, established new leadership teams and recruited new talents with key skills for success. We analyzed our portfolio to find sound solutions for our Greek business and for smaller activities such JUKE, the Retail Media Group and iBOOD. This means that our cost and efficiency program is on track. The effects thereof have also made a EUR 20 million contribution for our earnings in 2018 and '19. Total savings will add up to EUR 110 million to EUR 130 million per annum and can more than compensate for inflation-based cost increases, and we will realize everything fully by 2021. Expenses will reach EUR 190 million. But independently of the program, we must say that strict cost discipline will be part of our everyday life. And thus, we can make leeway for investing in other initiatives. Let us move on to digital growth. That, of course, is an issue that we are working on all the time because we believe in our omnichannel approach, and we think it's an enormous opportunity for CECONOMY. We want to offer product services and consultancy services wherever customers expected, irrespective of whether it's in the store, while they travel or at home. In this way, we can link online with off-line. Now in concrete terms, this means that in the past few months, we have converted 6 different webshop platforms to 1 single IT platform in order to improve the entire online appearance. A year ago, the download time of our webshops amounted to 3.6 seconds. Now we have been able to cut the system down to less than 1 second. That's our webshop in the downloading times and also the search functions is amongst the top group of comparable platforms. And an increasingly important contact point is also our app, where we have optimized the user interface. These differences are quite tangible to our customers. So this means that the conversion rate, that is the step from simply visiting a website to actually making a purchase, has gone up. The same is true for our mobile phone sales. The new webshop went live in November here in Germany and will then be gradually brought out in other countries. Our Online business is to be even better linked to our brick-and-mortar business. And for this purpose, our staff in Germany will be equipped with smartphones with a dedicated app. Thus, our advisers will receive all the required products and comparative information that they need in order to better serve our customers in a more individual fashion. This is being tested in some pilot stores at the moment. In this current fiscal year, we would like to roll out this system step by step in all our stores in Germany and Spain, and then the other countries will follow. 2019, 2020 will also be a year where we wanted to start our store of marketplace concept with a pilot in Germany. The customer experience in the omnichannel provider is not only restricted to the purchase experience on the Internet. On the contrary, our services in the stores is also important -- are also important. A year ago, every country had their own service strategy. That is no longer the case. We have harmonized this. And in the summer, we have introduced new offers for extended warranties in Germany. The demand for our core services at the SmartBars has gone up very much in the first quarter of this new fiscal year, and that is also a guarantee for further success. In the current fiscal year, we will continue to invest in Services & Solutions. We want to roll out this new model for warranties throughout the group, and we'll keep introducing new services. So you can have the service packages, ready-to-use antivirus and cloud storage, and you can buy them. And on top of that, you cannot only buy a laptop in our stores, but you can also, at the same time, buy the memory space in the cloud and the antimalware protection at the same time and have it set up on your device. Let's move on to logistics and category management. Activities in this area, of course, naturally take more time because these are mainly large-scale projects, which will have to be ramped up successively and then also rolled out in all the various countries. This is why we have consistently tackled this issue. Now in Germany, we have introduced a centralized pricing strategy, and we offer to our customers a reliable price promise across all channels. In Spain, a new assortment and shop floor management system was tested. We have reduced the number of products on offer, thus, creating new space for new product groups and more services. And in our supply chain, we also are driving forward with centralization. At the beginning of last year, our centrally negotiated purchasing volume in Germany amounted to a single-digit figure. In November, it already reached just below 70%. That is a big step in the right direction. Spain, Italy, Poland and in the Netherlands, the level of centralization in procurement has already reached a similar level. In other countries, we do need to do a bit of catching up, and that is something that we are going to do to obtain the optimization of our assortment. Our approach is quite clear, the leaner our assortment, the less or the easier it is for customers and the less we do have to deal with outdated and high inventories. This is why we have launched corresponding content for the other countries -- for other countries in order to reduce the assortment and, thus, facilitate customer choice. Every country has defined their top 300 products, and they account for about 1/4 of the sales. Now our objective is to increase the share of the business generated by the top 300 products continuously. Our pilot product in Spain shows very good results already. In the first half of 2020, we will, therefore, also roll out this concept in Germany, Italy, the Netherlands and Poland. In parallel to that, we are also working on logistics concept in order to pull the delivery to our stores based on centralized warehouse. That's a very important element because it's the only way in which we can have an overall package in this field. As you can see, we are busy working on transformation, and at the same time, working on our strategy in order to further advance the business model of our company successfully and sustainably. Currently, we are comparing all the various activities. We assess them financially, and we also determine milestones for this transformation. We will have a discussion with that with our Supervisory Board and present this to you at the end of March. But I can tell you already that the focus of our considerations is the aspiration to have a better, more comprehensive service for our customers and better advice with products and the relevant services. We're also thinking about how we can better live up to our societal responsibility by way of sustainable concepts. Sustainability in all these aspects will live up to your interest -- best live up to your interest as shareholders of CECONOMY. Now let us now come to the outlook for the current fiscal year. In sales for this year, we expect that Online and also Services & Solutions will be the most important levers for future growth. The corresponding initiatives and activities will be continuously rolled out and driven forward. In gross margin, we expect -- due to the competition in prices, we expect a certain level of pressure, but the trend is going to improve, we think. And this will be offset by the introduction of new products and in particular, the expansion of our services. At the same time, we also assume that we will be able to continue to cut our costs in line with our targets. Savings will come mainly from our cost and efficiency program. And on this basis, we will have the following outlook. For the current fiscal year, we expect a slight growth of currency adjusted sales. We expect an EBIT to increase of EUR 445 million to EUR 475 million. Possibly, this will also include a positive effect to the tune of EUR 5 million to EUR 15 million, which will result from the changes in the accounting directive. Now the cost and efficiency program, we expect this year to contribute a special earnings of EUR 10 million net, which will recognize as such and which will not be part of our forecast. Now our earnings contributions from the interest in Fnac Darty and in the joint venture in Greece are not contained in our forecast either. The forecast has been adjusted for changes in the portfolio. All in all, the outlook shows that after a year of transition, where we stabilize the earnings, we will be able to return to sound growth in earnings. This then brings me to the first quarter this year. Ladies and gentlemen, in the current fiscal year, we would like to continue our progress made in '18/'19. And therefore, we continue to focus on full implementation. In the first quarter, this meant in particular that we wanted to successfully implement the Black Friday period and the holiday period. On Black Friday, we did not only increase our online sales, but we also were able to serve more clients in our stores. Our omnichannel business model is working. We can see this reflected in the 2-digit sales growth in the 5-day Black Friday period. We are also very happy in the first quarter about the development in our online and services fields. In both fields, we have seen sound growth. At the same time, we are working on further centralizing and standardizing our business as basis for more growth going forward. But there are also some areas where we need to be stronger and better in implementation. We are not yet happy with our performance in Poland. We have taken action in order to counteract the negative development. In some countries in the Western and Southern European region, the first quarter showed a declining market growth, and the competition was fierce. Our objective for the coming months is to make sure that we can also deliver in this market environment in order to achieve our goals. The development in the company and the market environment is also reflected in our KPIs in the first quarter. Adjusted by currency effects and portfolio changes, our sales figure has gone down by 0.5%. If we then also exclude the iBOOD business, which has been divested but which cannot be treated as a portfolio of activity because of its size, then this would mean that we'd have a sales level which is almost on par with that of the previous year. Adjusted EBIT has grown by EUR 20 million to EUR 289 million. So what you can see here primarily is a strict cost management. Operational expenses have clearly gone down, in particular, due to savings in HR and material costs. On top of that, of course, we have made progress in our strategic initiatives, in particular, in the field of services. Including the effects on the implementation of the cost and the efficiency program and the earnings contribution from our affiliated companies, our reported earnings have gone up by EUR 84 million to EUR 319 million. In the first quarter, we have thus laid the foundation for a sound overall here. Ladies and gentlemen, let me summarize at the end of my presentation. In the current fiscal year, primarily, we will have to focus on 2 things: focusing and implementation. We will focus fully with all we can on our customers and the systematic implementation of the initiatives in our 4 pillars. The first step in order to lay the foundation for our business and to get it in order again was the cost and efficiency program. We have streamlined our organizational structure, and we have adjusted it for structures and units that were only diversion. At the same time, we established this program for the whole of the company, and this has given awareness to cost. The second driver in order to improve profitability, of course, is growth. And the prerequisite for this, of course, is consistency in our strategic redirection. In the coming few months, we will begin to actually turn our operational business on the basis of customer focus. This transformation will first take place in pilot projects, of which I've already mentioned a few. Should we then draw the conclusion that if a project is economically viable, we will then implement it across all countries and markets. The objective of our transformation is determined. We want to be the first choice for our customers. We have to be better for that. We have to become better. We need to be better than our competitors. We need to even be much better than we are today. It's a tough job for all those involved, but I'm firmly convinced that we are well equipped to face up to the challenges lying ahead. This applies to our strategic direction in our operational projects, but it also applies to the entire team of CECONOMY and media market to turn. Our staff, I would like to thank them very much for their commitment at this point. My gratitude goes in particular to the management in Ingolstadt. Mr. Reverter and his team in October 2018 courageously intervened and quickly took the required steps in order to stop the negative trend. Together, we will be able to continue along these lines. The past 2 years certainly were not very easy for all of our staff, but I have nonetheless seen a lot of commitment in many places and the firm resolve to do better. That, I think, deserves great respect, the respect of all of us. Ladies and gentlemen, at this point, I do not only want to thank our staff, I would also like to thank you for your trust in CECONOMY. We will tackle the jobs ahead with resolve, and we would be happy to see if you were to accompany us also going forward with your trust. Thank you very much. And now I would like to hand back to Mr. Fitschen. [Statements in English on this transcript were spoken by an interpreter present on the live call.]