De'Longhi S.p.A. (DLG) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the De'Longhi's first half of 2021 consolidated results presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Massimo Garavaglia, CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group Quarter 2 2021 Results Call. I hope you hear me well. Today, here in the room, we have a Macro Cenci, Chief Strategy and Control Officer, Stefano Biella, CFO; Fabrizio Micheli, Director of M&A and Investor Relations; and Samuele Chiodetto, Investor Relations. I'm pleased to release this outstanding set of numbers that highlight the strength and the flexibility of the group in coping with many complexity horizon over the last latest months. First of all, let me recognize the extraordinary effort made by all our people over the last quarters that allow the company to serve customer and achieve great results in a still very complex and uncertain environment. The exceptional flexibility that the people and the organization have shown in the last period is an important signal that to consolidate the group's ability to adapt promptly to the market changes and conditions. I move now to Slide 4. And yes, I would like just to start with the presentation that you see in the slide of some of the activities in the communication area. It is to emphasize the commitment of the group in the last years in expanding the budget of communication, in marketing activity to support our brands and our business. So you see here in the slide, some activities that will be done to support the De'Longhi's brand celebrating the 100 years of Braun and a campaign, a very successful campaign to support our Kenwood range. Now moving to the Slide 8. During the first half of the year, as you see in the slide, the group was able to consolidate and strengthen its position in the small domestic appliance market. The strong growth achieved both in Q1 and in Q2 was supported by continued investment over the years in innovation, communication, digital marketing and production excellence. These efforts have enabled the company to seize the opportunities offered by the acceleration of the consumption in the domestic environment and to successfully address the complexes that have emerged in the last few quarters overall in the supply chain. In this regard, it should be noted that despite several problems that have arisen in recent quarter, the production platform have worked at full speed. There have been no disruption effect in the manufacturing activities. Furthermore, thanks to the numerous measures implemented, like increased efficiency and a very careful pricing strategy, the group, we think, will be able to mitigate that well very large extent, the effect of the cost increases. This strategy will allow us to achieve an adjustment EBITDA margin for 2021, improving versus last year, and I will come back on this point when I talk about our guidance. Now let's take an overview of the half year results before opening the floor to the questions -- session to the questions. Let me -- I would like to make you notice that the group scope of consolidation in the first half of 2021 has included for the entire half the America Group headed by Capital Brands Holdings and starting from April 1, the Swiss Group Eversys. But as you know, is active in the segment of professional coffee machine and the -- whose entire share capital was applied by De'Longhi on May 3 of this year. On Slide 9, you see the consolidated revenue of the first quarter -- of the first half, sorry, that amounted to EUR 1.4 billion, a bit more than EUR 1.4 billion, growing by 60%. Expansion of the group on a like-for-like basis would have been 46% with a turnover of slightly above EUR 1.3 billion and up to -- up 51% constant exchange rate versus last year. Now going to Slide 10 and on the geographies. Looking at the geographies on a like-for-like basis, I would like to highlight the areas that have achieved a double -- strong double-digit growth, both in the first and the second quarter of the year. Southern Europe -- South and Western Europe showed a strong trend, growing by 52% cost of exchange rate since the beginning of the year. In particular, we witnessed a remarkable expansion of the coffee business in Germany and France in both periods. Northwestern Europe grew by 53% at the constant exchange rate with the all-ever expanding revenues at a double-digit rate in H1. Americas achieved a significant growth, plus 38% despite a negative currency effect of around 12% and the maintained a positive trend already achieved in quarter 1. Then I would like to highlight also the strong recovery achieved in the Middle East region that closed H1 with an increase of 142% of constant exchange rate versus prior year. Finally, Asia Pacific maintained a double-digit growth in the first part of the year increased the sales by 40% over a constant exchange rate. Going to the categories and therefore to Slide 12. Coffee was boosted by a remarkable expansion of all product families at a growth pace above the group's average in both quarters, driven in particular by the expansion of the full automatic coffee machines. Cooking and food preparation segment has closed the half year with a significant double-digit growth with a substantial contingency between the first and second quarter. In particular, the increased attention of consumer for product related to the home experience have supported the expansion of the business basically in all geographies. As of the rest of the business, the cleaning and ironing segment confirmed a solid double-digit expansion in the period, while the comfort segment recorded a high single-digit growth, also considering a delayed seasonal start of a possible air conditioning, especially here in Europe. Going now to Slide 15, talking about the margin. The net industrial margin equal in the first half to EUR 721.4 million and improved in terms of percentage of the revenues from 48.7% to 50.4%, thanks all to the higher volumes and the positive contribution of the price mix that we calculated at around EUR 32 million for the first half. The adjusted EBITDA amounted to EUR 251.4 million, representing 17.6% of the value on a like-for-like basis. It stood at EUR 230 million with a sharp improvement in the margin on the revenues from 12.5% to 17.5%. Such expansion was boosted by strong volume effect and the positive price mix, which more than offset the increased investment in A&P and slightly higher -- that has been slightly higher versus last year and the negative impact of higher cost of transportation and raw materials. Net profit amounted to EUR 180.8 million, equal to 12.6% of the revenues, and a like-for-like basis would have been EUR 140.4 million, equal to 10.7% of the revenues. Looking now at the balance sheet on Slide 17. Our net financial position at the end of June stood at EUR 218 million, slightly declining from the beginning of the year due to a cash out for dividend, but around EUR 80 million and the acquisition of Eversys for EUR 129 million. However, the cash flow before dividends and acquisition was EUR 196 million in the 6 months and EUR 450 million in the 12 months rolling. The net working capital improved significantly compared to last year. The increase on inventories was widely offset in the 12 months back in the 6 months by careful credit and trade payable management, bringing the ratio of net working capital to revenue to 2.2%, a marked reduction to last year figure of 10.6%, but were more consistent with the values that we have been seeing at the end of 2020. Therefore, I would like to make a short conclusion, and If we see the extraordinary set of results achieved in the first and second quarter of '21, this is confirming the healthy and strong medium-term trends underway and allow us to look with the positivity of the evolution of the business in the near future. Despite the numerous complexity and challenges that the industry is facing, such as the increase in costs related to transport and raw materials, the group has demonstrated the resilience and flexibility that have allowed to maintain the production capacity to full speed, confirming our results and our targets and the margin at an EBITDA level in the current year. We are experiencing a phase of strong business growth, and we believe that in order to maintain a medium-term -- in order to be in line with our medium-term plan, it is necessary to continue to strengthen our investment in innovation, expansion of the production capacity and in communication to support our brands and products. This regard, the second half of the year, we see the group's focus on launching an important global communication campaign with the aim of further consolidating its positioning and boosting the business growth in the coming years in line with our medium-term plan. For the first part of 2021, we now see -- sorry, for the rest of 2021, we now sees group revenues, including Capital Brands, lower the constant exchange rate in the upper end of the range previously communicated, a range was 28% and 33%, and then adjusted EBITDA improving versus last year, both in value and as a percentage of revenues. Furthermore, the consolidation of Eversys will bring just about 2 percentage points of additional revenue growth and an EBITDA adjusted as a percentage of revenues in line with the rest of the group. I open now the floor to questions.

[Operator Instructions] The first question is from Mr. Francesco Brilli with Intermonte. Please go ahead, Mr. Brilli.

Many congratulations for the results achieved. I have a few questions from my side. And the first one is on the profitability of the acquisitions. It seems like -- I make some calculation. It seems that dropped significantly from 21% in Q1 were in only Capital Brands were included to slightly higher to 15% in Q2 when Eversys was added. It seems something related to material increase in labor cost, and I was wondering it is due to some exceptional items or seasonality or it's other things? And if you can provide some additional color on this. And in your guidance, you mentioned that Eversys, we have an adjusted EBITDA margin in line with the group average. Should we expect the same for Capital Brands for full year? And then I have an additional one in -- on the pipeline of the new product introduction in the second half of the year, which percentage have you already achieved in the first half of the year, and what are you expecting for the rest of the year? And the last one is on price mix. If you are planning to implement additional price increases going forward, in Q3 and Q4 also to offset inflation of transportation costs and raw materials and to which extent if you can provide some indication on this.

Thank you very much for the questions. Yes, maybe I will take one by one. On the new acquisition, we have integrated -- we started to integrate Capital Brands in the first month of this year. We see a nice evolution of the business. And yes, there are some elements that have to be managed by the new acquired company including, obviously, the valuation of the dollar that had to be managing in terms of pricing and something that they are currently doing. And also with the team in Capital Brands, we have agreed to start an investment plan in A&P that will be rolled out in the next year, and that was started already in the first half of this year. We started also to reinforce the organization with the objective to create the basis for future growth in the future and to start also to prepare also further expansion that will happen in the last quarter, but then more in the second -- in next year outside of U.S. Having said all that, obviously, this is -- the objective remains to deliver an EBITDA on percentage of the revenue that is in line with the group that was our objective. And obviously, to continue with the management to explore opportunity to leverage the plant that is ready very strong in the U.S. to expand further with new products that will be prepared for '22 and '23. So there are a lot of activities happening at the moment with Capital Brand, but we are very happy with the evolution of the business. And we see in our simulation, also considering the higher cost and considering the devaluation of the dollar, we see a contribution on the EBITDA basis, the new company that is in line with the rest of the group. For Eversys, we just started to have it fully the perimeter. The environment of the professional coffee business is improving, and we see already the order book. So that is the order book that is growing. And therefore, also there, we believe that the contribution on EBITDA basis to the group results will be in line with the rest of the group in percentage of the revenue, and we should see that coming in, in the next quarter. For the new products and new products in production, it was a nice rollout of the products that were introduced in the last quarter of 2020, a nice rollout in the different geographies in the first semester of '21 with a very good reception from all our biggest customer, both online and in traditional customer. We have a very strong set of new launches foreseen in the second half of the year, namely in the last quarter of this year, that, as I mentioned in my short speech, will be strong this quarter by an important campaign -- global campaign that we will launch as of September. Finally, the important points about the pricing. We have been working on pricing strategy since the beginning of the year. And I was very happy with that, and I was very happy with what the team has done -- has been done in a very structured way, not in a reactive way, but in a proactive way. And therefore, today, we are in a condition to say that we see obviously, as everyone in the industry, the cost increasing due to the transport, mainly the ocean freights and also obviously on some components and commodities. But our pricing strategy, together with the increased efficiency in our plant, we believe, as I said before, will be able to offset a large majority of this increase in the cost of the -- thanks also to the strategic result adjustment that we made in the course of the -- throughout our portfolio. So I believe that is a big achievement for our group.

The next question comes from Mr. Mourad Lahmidi with BNP Paribas.

Congratulations for this very strong quarter. Actually, I have a couple of questions on the cost headwind that you saw in H1 2021. Can you give us a broad idea of how much came from the increase in A&P? And how much came from the increase in input costs, like transport and raw material? And is it fair to say that you will probably see most of the input cost headwind in the second half?

Lahmidi, thank you for the question. Here, I would like to give you some figures that will -- so that's a bit how we see it that will cover the full year because then the way in which certain costs are coming in and the different period that we are monitoring, but we are very committed that because this is a basic way in which we see also the development of our medium-term plan of what is happening in the full year. We see in the full year an impact on the cost from -- mainly coming from logistics, commodities or components and so on. In the -- around 2.5% of the revenues in -- 2.5%, 2.6% of the revenues in the course of 2021. And that's where we say, thanks to our initiative on the pricing strategy and the efficiencies, we are able -- we believe, we are able -- as we did in the first half, we are able in a large majority to cover this impact that we have seen -- that we see in the course of 2021. For the NPE, here, I would like to go back to what we already announced when we presented also our medium-term plan. On overall, we are committed to increase our spend on A&P by 100 basis points of revenues in the full year. And we already have seen the first half moving in terms of percentage on the revenues from 10.9% to 11.2%. So we talk about around EUR 50 million increase on A&P in the first half of this year. And yes, as I said, our commitment also to support this campaign that we have is to increase compared to the prior year our A&P on revenues from 12.4% to around 13.5%. So this 100 basis points that will be split. And I think we have been showing that also during the MTP presentation will be a lot on the [ ACL ] size or media and communication with also an important part of that going on digital communication.

The next question is from Alessandro Cecchini of Equita.

The first one is about the trend that you saw in the second quarter, so very, very strong. So plus 4% -- 40%, sorry, organic growth. I would like to better understand if you could split -- if you can elaborate a little bit more on product categories, so between coffee and food preparation for this specific quarter. And instead, I would like to come back a little bit on the headwinds on the cost side. So if I am not wrong, your calculation is roughly EUR 80 million of headwinds for this year. So it's more for you in terms of transportation costs or more in terms of commodity components and so on? So just to better understand for you, it's more, I mean, important this element or the other one?

Thank you very much, Alessandro, for the question. Talking about the categories, I mentioned, we are seeing other all the categories growing very strongly. Obviously, the coffee has been performing even strong as accelerated, even stronger for us. And -- but also all the food preparation with Kenwood and Braun, they've been growing significantly in the second quarter. So I have to say that we have seen an important growth coming from all our portfolio. The only exception has been the possible air condition in second half remains part of our business, especially in this season. But again, it's really linked to the season, especially in Europe. But if we exclude that, that has limited impact on all the rest. We have seen a good performance on all the different -- all the other categories, including the food preparation. And we believe that all the new products, new launches and the campaign that we have been doing to sustain Kenwood and also Braun with a 100 years celebration in all different countries has been behind this growth and has helped us also to consolidate our share in the market. For what is concerning the cost, yes, the increase that we have seen that I think obviously is coming from all the industry is somehow split between the transportation, mainly, as I mentioned, ocean freight and the cost of the commodities. I always would like to highlight the fact that our manufacturing footprint is very well balanced because we have a very strong industrial platform here in Europe. So they've been not impacted by or limitedly impacted by the ocean freight, roughly 50 -- a bit more than 50% of our production is today based in Europe. For what is -- and therefore, on that side, I think we have been quite balanced. We were well positioned, in my opinion, to absorb this additional cost. And also the longest and very strong sourcing operation in the different countries. And I think we were able to leverage that to manage well in the best possible way, I would say, the impact coming from the cost of the commodities and the components. Obviously, there is an increase. I quantified it translated in an absolute value quantified in roughly 2.6% in the course of this year. But again, I would like to stress that the large majority of this cost has been covered by a very well-executed pricing strategy, proactive pricing strategy that has been initiated early in 2020, 2021.

The next question is from Mr. Lorenzo Margiotta of Bank of America.

Congrats on another very good quarter. Two questions for me, please. Firstly, on components, do you expect that you'll have any issues with actually sourcing components? Or do you think that will be fine. I think it's well understood that pricing is increasing, but to actually source them some of your competitors are talking about potential issues there. And then just secondly, I think some sort of back of the envelope math suggests that your revenue this year might not be very far away from your sort of midterm guidance for 2023. Is that something -- I guess, how should we think about that midterm guidance today as we approach it already sort of 2 years in advance?

Lorenzo, thank you very much for the question. Yes, for sure, on -- obviously, on the components, is something spread in the industry, not in our industry that there have been challenges in the past months. I have to tell you that we have been managing to in a way that is not -- we don't expect -- we didn't have, and we don't expect to have a disruption in our chain. What we did was, again, they are early in the year to put together a task force that has been working relentlessly to make sure that any shortage -- possible shortage that would have come on some components, strategic component, we were able to address it taking the right measure in order to prepare for that. And that has been a very hard job that has to continue, by the way, because obviously, this situation is still there and it still has to be managed. But I have to say that from what I could see in the first semester, what we see now in the second half of this year, the results of all these proactive activity that has been including people from supply chain, from operation, from R&D, from procurement has really helped us and put us in a position to say that we are ready to deploy our plans in terms of our commercial plans and our launches without having a disruption compared to what we originally planned. So I think this is a big achievement in my opinion of the group. And that's why I mentioned before, we see the devaluation of evolution of the near -- of the future. For what is concerning the -- our guidance for 3 years, we are aware. We are happy with that, I had to say. At the same time, as I mentioned, I think in the last call, we want to take the right time after the summer -- in the month after the summer to have a good assessment for the future. And in light with all the plans that we have already prepared for -- in our MTP that we have been disclosing also during our Analyst Day. So in terms of qualitative -- quality of the plan, we believe that we need to stick to what we have been prepared. What we have to review, obviously, are the numbers -- are the figures because we had an acceleration in the course of the past last year and also, obviously, this year. But we believe a lot that our business model and the quality of the work that we have been preparing will be very affecting for the years to come. And of course, we started -- for example, we started to work on some very important pillars for our future growth that talking, for example, about U.S. And about China, we are still working on that. We have been working even faster in the U.S., but we want to do the same in Asia. They have to represent important growth pillars for the future. And I was very happy to see the evolution that we had in this first -- at the end of 2020 in the first 6 months of this year. So overall, I can already announce that our strategy will not change. So in the way in which we presented our strategy, if you recall our temple, where you see the pillars, so where you see the enablers, where you see the project will not change. What we will have to review and obviously, in due course, we will communicate will be obviously the financials and all the rest of the numbers, and we will do it after the work that the team will do in the months after the summer.