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 Full Year 2023 Consolidated Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio De'Longhi, CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group Fourth Quarter and Full Year 2023 Results Conference Call. Today, together with me are: Nicola Serafin, Group General Manager; Marco Cenci, Chief Planning and Control Officer; Stefano Biella, CFO; and Samuele Chiodetto, Investor Relations and External Communications Director and M&A Manager. We are extremely satisfied with the full year results, which once again demonstrate the group's ability to seize growth opportunities, to overcome market challenges. In particular, during the year, the group significantly improved the key financial metrics, such as underlying trends, profitability and cash generation in the context of a gradual post-pandemic normalization that we observed in previous quarters. After a slow start of the year due to some transitory and extraordinary factors, the group has shown a significant progression, both in coffee and nutrition and food preparation sectors, achieving organic growth at high single-digit rate both in quarter 4 and second half of 2023. All through the year, the group maintained a level of profitability that has steadily improved in comparison to 2022, thanks to strict investment controls and a partial relief of inflationary pressures on certain industrial costs. These effects, combined with effective price management and continuous product mix improvement, has contributed to rapidly bringing the group's profitability back close to the historical average. These achievements enabled the group to generate a significant amount of cash flow, more than EUR 430 million before dividends, which was strategically used in the establishment of the professional coffee hub with La Marzocco and Eversys for further strengthening its leadership in the market and for creating value for shareholders. Now let me focus on the results. Consolidated revenues for quarter 4 were up by 4.7%, reaching EUR 1,078 million with a significant negative impact of 3.3% from the currency component. Over the course of the year, the geographical evolution was influenced by the weak start of the year. However, we report that all macro regions experienced widespread organic growth in the second half of the year. Specifically, the group's organic growth accelerated in the main geographies in the fourth quarter with exception of the America region, which experienced some transitory elements. Southwestern Europe experienced organic growth at high single-digit rate in the second half of the year with a 10% acceleration in the fourth quarter, where the main markets experienced a considerable uptick with Germany and France showing high-teens turnover progression. Northeast Europe recorded a significant positive trend in 2023 with a progressive acceleration of developments over the second half of the year due to a significant expansion of the core product categories in the main markets. MEIA region achieved organic growth in the fourth quarter in the low-teens, but the area remains in negative territory over the past year due to a challenging macroeconomic environment. The exit from the mobile air-conditioning business had significant impact on the America region's result in 2023. However, the coffeemakers and nutrition, food and preparation business are in positive territory in organic terms for the year. Finally, the Asia Pacific region's turnover increased in organic terms over the span of the year, thanks to an acceleration in the second half, which resulted in a mid-single-digit organic growth in quarter 4. Regarding the product segments evolution, the core categories performance improved gradually throughout the year with organic growth trends picking up in the second half. The domestic coffee machine sector highlighted a turnover in line with the previous year with growth reaching a mid-single-digit rate in the fourth quarter. This was supported specifically by an acceleration at the low-teens pace of the fully automatic machine category, thanks to the success of the new product recently launched in the market. The nutrition and food preparation segment highlighted positive dynamics in both quarters of the second half of the year despite finishing the year in negative territory. The growth recover was primarily driven by the development of both the Nutribullet and Braun brands. With regard to the remaining segments, we highlight a significant expansion of ironing products in the quarter, which brings the home care category, floor care and ironing, into positive territory in the 12 months. The trend in comfort, portable heating and air-conditioning, in 2023 was strongly influenced by the group's choice to exit the American portable air-conditioning market. Finally, we highlight the significant growth of Eversys professional coffee machines, which maintained a consistent expansion trend throughout the year, resulting in a turnover growth of more than 30% in 2023. Looking now at the evolution of operating margins. In the full year, the net industrial margin improved to 48.9% of revenues from 47.3%, thanks to a favorable price/mix and easing inflationary pressures on product costs. A comparable improvement was made by the group in the fourth quarter from 46.4% of revenues last year to 48.1%. The 2023 adjusted EBITDA reached EUR 444 million, or 14.4% of revenues, a significant increase from 11.5% in 2022. Over the year, the profitability improved mainly thanks to lower inflationary pressures on industrial and logistic costs as well as an improvement in the price/mix. The uptick in margins was also favored by partial savings from investments in media and communication, which were realized through the improved spending effectiveness and more targeted use of assets and channels. Despite the negative currency impact, the group achieved a margin of 16.6% of revenue in the fourth quarter, which was approximately 200 basis points higher than the previous year. As for balance sheet, net financial position as of 31 December '23 stood at EUR 663 million, an increase of EUR 364 million over the previous year, thanks to significant cash generation in quarter 4. In particular, the free cash flow before dividends and acquisition amounted to EUR 436 million in the 12 months let me emphasize that the group was able to generate positive cash flow before dividends and acquisitions in every quarter of the year, which is a noticeable and significant improvement over the discontinuity observed in 2022. Now as a conclusion to my results overview, I would like to point out that while the current economic and geopolitical scenario remains uncertain and variable, the group's prospects are strengthened and supported by the trends of improved organic growth and financial metrics that have been highlighted in previous quarters. We firmly believe that the group's medium-term potential is still favorable, given the ongoing growth of special coffee market and the path back to growth of the nutrition and food preparation sector. Furthermore, the creation of the hub between La Marzocco and Eversys has enabled the group to strategically strengthen its presence in the professional coffee machine sector, leveraging knowledge and expertise in that area and diversifying the group's market exposure. The most recent positive development in the group growth and profitability dynamics have led us to estimate a 9% to 11% increase in sales for 2024, including an enlargement of perimeter with the business combination with La Marzocco and Eversys. At the level of profitability, we forecast an improvement in the year leading to an adjusted EBITDA of roughly EUR 500 million to EUR 530 million for the group. Now we can open the floor to Q&A.

[Operator Instructions] The first question is from Niccolò Storer with Kepler.

I have a couple of questions. The first one is on your working capital performance, which has been particularly strong. And if I have to look at the items, I was surprised by the low level of receivables, which were kept at the previous year's very low level. Has something extraordinary happened which drove to this performance? Or should we expect this to remain as it is over the coming years? The second question is on your guidance. First, I wanted to basically understand if your revenues guidance still implies the same guidance you gave us a few weeks ago on company at previous perimeter or if something has changed in the underlying trend of the company, let's say, without La Marzocco. And still related to guidance, on EBITDA, what is basically -- which are the assumption behind the EUR 500 million, EUR 530 million? Clearly, if we take out the downward spread in revenues, 9%, 11%, what could lead you to the low end or to the high end? Which are the assumptions behind that? And which are the assumption you are incorporating in your guidance for advertising and promotion cost?

Thank you, Niccolò. Yes, indeed, in working capital, the group's performance has been extremely strong. On the receivables side, nothing major, I think pretty in line with what happened in the year before. I think more maybe comments on inventory management, we think that we have reached probably very low levels. So I can potentially expect next year, the inventory to go a bit higher as we really have been very strict in managing those, particularly after a difficult trend in the previous year. We are coming from a difficult year in 2022 with very high inventories in June. So this year, the policies have been extremely strict. Now I think that I would say that you can expect probably a similar performance for next year for receivables while on inventory, I would expect maybe a higher level on top also of the consolidation of La Marzocco, of course. But more details will be disclosed from IR from some way in the next days. With regards to the guidance, well, I think we're coming from a strong quarter. We see positive quarter in quarter 1 '24. So there is no reason for the moment to expect a slowdown. Probably, we're going to have a year where we -- I think we're going to have a pretty easier comparison in the first half, probably more difficult compare in the second half but again nothing major. On the top line, of course, we have a benefit from the consolidation of La Marzocco. But we still expect -- and now I go to the -- also to the impact on potentially on EBITDA. We expect growth for, let's say, the household business in the mid-single-digit -- mid- to high -- mid-single-digit. And we think this is also potentially helping the EBITDA development. We see against EBITDA potentially some higher logistic costs due to the Middle East situation and the Gulf and, I would say, the Suez situation. But for the moment, we have positives on the cost side, which are more than offsetting. So we still believe that also then, say, first quarter, we should be able to show improvements both in top line and margin. And there is no reason to expect a slowdown at the moment for the year. So we're confirming now actually the guidance, we have given a new guidance for EUR 500 million to EUR 530 million all in all.

The next question is from Isacco Brambilla, Mediobanca.

I have three. First one is on the EBITDA bridge. If you can break down the price/mix component between prices and mix for the fourth quarter or for the full year, whichever is better for you. Second question is on the professional coffee business. Now that we have seen closing of the transaction, could you give a bit more color on the rough prospects you expect from this business? Is it low double-digit pace? You mentioned for La Marzocco over the past 5 years as something sustainable going forward. Last question is more on strategy. You closed 2023 with an impressive free cash flow generation. Liquidity should be above EUR 1.2 billion. Which are the priorities for cash redeployment going forward?

Okay. So thank you for the questions. So well, if you don't mind, I skip to the second question and the third and then I hand over the word to Nicola Serafin for the bridge, for the EBITDA bridge explanation. With regards to professional, okay, just acquired La Marzocco, so taken control of La Marzocco. We're very, very excited about the prospects of the professional business. We believe that La Marzocco, we have a budget slightly above last year. I mean, we had a very strong year both at La Marzocco and Eversys and in particular Eversys. So we think that this year, we're going to be slow growth also for the, say, the La Marzocco businesses that we will consolidate in the next months, say, from March on. With regards to strategy and cash allocation, obviously, we see it again on a lot of cash, which is, I think, great news, in particular for the effectiveness of our business model. I think it's one of the strength of De'Longhi is the cash generation, which is putting a lot of pressure from M&A and cash allocation. However, I don't think that in the short term, we should focus on M&A, not because we don't have cash or we have the means. I think we have a meaningful position with La Marzocco. It can be a very transformational acquisition for the prospects we have, not just in the professional business but also in the super high-end household business, which is growing rapidly in many geographies. So we want to focus on this, on the integration, which is not really an integration but is just the support -- the right support to make La Marzocco and Eversys even stronger in the next years. But we are in the market looking into opportunities. But for the moment, we want to digest the acquisition and scouting for great -- if there would be a meaningful opportunity, we have the means, the ability to, of course, capture. But for the moment, I'm very pleased with the, let's say, the acquisition that we have just completed. Then Nicola, if you can comment on the bridge.

Thank you, Fabio. About the EBITDA bridge, we have more or less EUR 80 million of 2023 versus 2022, where we have unfavorable effects of volumes by more or less EUR 35 million and EUR 28 million of exchange rate unfavorable while we have a favorable EUR 25 million on price and mix. And we have EUR 20 million of A&P, advertising and promo, where we have created also, let's say, significant savings through some efficiencies in investment. And we have a significant part of around EUR 100 million of lower industrial costs and logistic and transportation costs, where the logistic and the warehousing costs are the significant part of this EUR 100 million. We have kept definitely a significant steady price policy with a carryover -- a positive carryover fact over the 2023 that we are also projecting for 2024, keeping stable. We are working with some promotional actions by -- in particular by the year-end to keep competitive our position.

The next question is from Francesco Brilli, Intermonte.

A few of them have already been answered. Just a couple of quick ones. On A&P, I mean, you managed to save some costs on A&P by efficiently managing the expenditure. Is this level sustainable also for the next year? Or are you projecting some additional investments on this line? And the second one is on warehousing costs or industrial costs. In general, you had a positive effect of -- from these costs on EBITDA. Probably some part of them are coming from the tight management of production and lower production at the beginning of the year. Is it sustainable, this level of cost also for 2024? Or we have to project something more for next year?

Thank you. On A&P, well, just some background, if you recall, at the beginning of 2023, we were off at a quite slow start. So we have decided to try to, let's say, to maintain or eventually slightly reduce our A&P investment and to try to capture as much as possible efficiencies, say, to -- so to -- for the second half of the year. Then we progressively improved our performance with a positive quarter 2 and 3. And so we have increased our spend in the final of the year, still maintaining very efficient results. So in the end, I think we have spent very well our monies. Our intention is to maintain a high level of spend. I think that the reason of the market results and the growth that we have delivered in the final part of the year is also thanks to our -- the effectiveness of our investment behind our core products. So we want to continue to invest behind advertising, be more efficient. We think that for 2024, would be sufficient to have investment fairly in line with the investments that we had in the full year '23. Then with regard to, let's say, the improved costs and the potential risks on the cost in 2024, actually, we were seeing it the other way around. We see as -- we still see opportunities in savings on the cost side, on the materials and on the components. And on top of that, we have a positive volume effect. Because if you recall, we were still in -- in the first part of the year last year, our factories were not yet running at full capacity. Actually, we're still at low capacity because we were in the low phase of the year. And then also, we were suffering from the overstocking or some, let's say, still some -- suffering from some continuation of the negative impacts of the overstocking that we suffered in the previous months. So on the OpEx side, we are positive. We are positive on efficiencies. Unfortunately, it would be slightly offset by the logistic costs. Warehousing is under control, logistic costs due to the war that will impact and then some inflation that we have on labor. Labor, of course, the inflation that we have suffered, and we are increasing -- the cost of labor would be slightly higher. But all in all, we still expect some benefits from all the operations in terms of costs.

The next question is from Alessandro Cecchini, Equita.

The first one is about Nutribullet. During the last call, you were very positive, very bullish about the prospects of this business. I just wanted to better understand your strategy for 2024, if you could elaborate a little bit more on company-specific initiatives in order to enlarge geo or product mix. So just some actions that you have in mind in order to improve to normal regardless, I mean, the economic environment. And linked to this point, in the coffee business, if you expect 2024 to be a normal year in terms of product launches or a better-than-normal year. This is my first question. My second question is about your guidance. So just to make the math, correct me if I am wrong, so organic growth is low mid-single digit. All the perimeter, I would say, your previous guidance was confirmed, if I am not wrong. Making the math, I presume that La Marzocco can heed, I mean, high single-digit organic growth in your mind, so not double-digit like previous year but still high single digits. So it's correct, my interpretation for this? And finally, I saw financial expenses of EUR 2 million negative. Next year, you could have, I mean, cash-out -- so this year, a cash-out for La Marzocco but very, very buoyant free cash flow generation. So just to say if you expect a similar amount of financial charges for 2024.

Thank you, Alessandro. First question, Nutribullet, no, last year was a strong year for Nutribullet again. I mean, with positive growth across all the geographies, both United States, Nutribullet helped to support our sales in North America as well as supported our performance in nutrition and food preparation in the remainder of the world. We are still at an early stage of, let's say, deployment of Nutribullet across markets. So we will continue the international expansion, which doesn't mean necessarily to enter a new market now. I mean, we have entered already the market and now it's to getting stronger in the market. So the product range will support that. The focus will maintain -- will be maintained on blending as a priority, particularly in the new geographies. I would say I would underline the introduction of portable. Portable blending is becoming more important in North America. And we think that has also some potential in Europe as well as we are extending our leadership now, not just, say, in the single-serve blending but as well as on more traditional-power blending, where we are enlarging our broader range. I highlighted, it might appear as not a major, let's say, widening of the range. In reality, in traditional food preparation, blending represent approximately 40% of the market. And with these two initiatives, we will enormously increase the scope, the potential of Nutribullet in very adjacent categories, where there are -- I would say, the brand has reason to win in the United States, in the U.K., in Australia and in many other markets in Europe, Eastern Europe and Middle East. So we continue to have same growth prospects for Nutribullet also in 2024. In terms of guidance, yes, you are right. We have, say, given the new guidance. But you should expect probably, let's say, we have good momentum in the household. We're going to have a strong, we think, first half, maybe a more difficult comparison in the second half. And with regard to La Marzocco, we expect for the first year probably a low single-digit growth, not a high one, because of the strong growth that the company has experienced in the past 2 years, not dissimilarly to what happened to Eversys. And then with regard to financial expenses, again despite the payment of La Marzocco, the cash-out, which is approximately EUR 350 million, we still have about EUR 350 million net financial position at the beginning of the year, which is fairly in line with what we had last year. So I don't expect major swings in term of cost of financing as well as on the yield on our investments. So I expect the financial cost would be fairly in line with the ones that we had in 2023.

Okay. And so maybe on the product launches in the coffee business, so just if you can comment a little bit.

Nicola, if you want to maybe say something about the products.

Yes. Definitely, we have, let's say, a significant roadmap. We have some products that you have just seen in the market, where we are planning the -- quite significant at what we are planning a rollout globally. And Rivelia is one of these product. Then we have a couple of new significant launches also in the range of the -- our cappuccino machines. There is Magnifica Plus and Magnifica [ Next ] that are two products, where in the medium range, we are expecting significant traction and significant benefit also for our market share to strengthen our position in the midrange of the product.

Okay. So basically, the continuation in term of product launches versus last year, so you don't expect Rivelia or something similar to be issued in...

Rivelia has been launched, you are quite familiar in Italy because that's been launched in Italy. But just to share, Rivelia is being -- is in launch in Germany in this moment. So it's definitely a launch 2024. And moving to pumps, we have a significant launch with a digital version of our La Specialista that is coming and a couple of pump machines in the low, midrange in -- by year-end, in particular in the U.S. market.

The next question is from Andrea Bonfa, Banca Akros.

Actually,-- most of my question have already been answered. So if you don't mind, I would like to ask you a detail on the ForEx impact on EBITDA, the EUR 28 million, if it's possible to have a kind of breakdown of what were the currency which impacted the most.

Thank you, Andrea, for your question. Maybe, Nicola, you want to answer all this.

Yes, in particular, U.S., Australian dollar, Japanese yen, Canadian dollar, yes.

Okay. And if I may, the Chinese renminbi, was it -- had any impact on both ways or no? Or was it neutral?

No, no, it's favorable in -- Chinese renminbi at the EBITDA level, it was favorable. Negative was Canadian dollar, Japanese yen, Australian dollar, U.S. dollar and the pound, a bit.

What is the impact of Chinese yen?