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 First Half 2024 Consolidated results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fabio de' Longhi, Chief Executive Officer of De'Longhi. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group First Half 2024 Results Conference Call. Today, together with me are Nicola Serafin, Group General Manager; Marco Cenci, Chief Planning and Control Officer; Stefano Biella, CFO; Samuele Chiodetto, Investor Relations Director, M&A Manager; and [ Saya Mazzucato ], IR Specialist. The group maintained its upward momentum in the second quarter, demonstrating yet again its ability to realize consistent growth in the core business segment and at the same time, noticeably improving profit margins. Turnover went up by more than 10% in the last 3 months, thanks to the consolidation of La Marzocco and a 6.9% increase in the household segment, excluding comfort. In detail, this category suffered during its peak seasonality because of an unfavorable climate in Europe and the aftermath of the discontinuation of the American Mobile Air Conditioning business in H1 2023. However, the impact will be diluted during the year. Organic growth in the core categories remained strong, following the trends experienced over the previous 12 months. Home coffee continued to grow structurally expanding at the high single-digit rate, in line with the first quarter, thanks to the De'Longhi brand gain in market share in a special area and a sound market development supported by solid megatrends. Food Penetration & Nutrition segment grew as well, extending its upward trend in the quarter, largely driven by the blenders' category, including blenders, hand blenders and personal blenders. In addition, ironing products achieved double-digit growth for the fourth consecutive quarter, boosting market share. Organic turnover expansion, coupled with an upgrading product mix and a further softening of inflationary pressure on certain industrial costs enabled us to achieve a significant improvement in the profitability at constant perimeter, enhanced by the consolidation of La Marzocco. These favorable dynamics allowed us to jump back to the historical profitability range, reaffirming the fourth margin guidance for the year. The group confirms its robust cash generation ability with approximately EUR 425 million of free cash flow before dividend and M&A generated in the last 12 months. Employed to finalize the strategic acquisition in the professional coffee business and to remunerate shareholders, distributing more than EUR 100 million dividends. Now let me focus on the quarterly results. In the second quarter, the group revenues reached EUR 765 million, recording an 11% increase compared to the previous year. The group was able to expand its business in all key geographies with the European areas still leading and growing at high single-digit rates. More details, South-Western Europe grew at a pace of 6.5% in the second quarter, translating into low single-digit organic growth. The business in the area was impacted by weakness of the comfort segment, due to unfavorable climate conditions. Within the context, certain markets like Austria, Iberian Peninsula, Switzerland experienced a robust growth aligned to the strong trend experienced in the last 12 months. Northeast Europe continues running, registering growth of almost 14% in the quarter, corresponding to an organic rate of around 9%. The second quarter is the fifth consecutive one of organic growth for the area, driven by the performance of the coffee and ironing businesses. The MEIA region went back to growth expanding at a high-teen rate, 10% organic after tough first quarter, highly impacted by geopolitical uncertainty. The growth was pushed by a positive performance of the coffee area and in certain categories within Nutrition and food preparation segment. Americas grew by 10%, thanks to the consolidation of La Marzocco. The organic perimeter experienced a slowdown due to the aftermath of the discontinuation of the mobile air conditioning business and the weakness of the overall comfort segment. The core categories were up, thanks to a solid expansion of Nutribullet products and positive developments on the fully auto coffee makers and Nespresso capsule systems. Finally, Asia Pacific grew at a mid-teens rate, thanks to the consolidation of La Marzocco that offset the slight organic decrease in the area, specifically Eversys, as expected, suffered a tough comparison with the weak demand in certain countries, while the home coffee achieved a positive expansion in the period. Regarding product segment, it's worth highlighting that there has been positive tendency across all macro categories without the exception of the comfort business, allowing the group to maintain the positive momentum achieved in the last 12 months. Specifically, the coffee machine sector, both for domestic and professional use, which currently accounts for approximately 62% of total revenues expanded significantly in the quarter, driven by the contribution of La Marzocco consolidation and a double-digit growth in household fully automatic machines and Nespresso capsule systems. The growth of nutrition and food preparation category in the quarter was driven by personal blenders and hand blenders. Lastly, it is worth mentioning the significant growth of Braun branded ironing products, which recorded a 35% growth rate in the second quarter. Looking now at the evolution of the operating margins in the quarter. The net industrial margin stood at EUR 391.5 million equal to 51.2% of revenues compared to 48.8% in 2023, benefiting from a positive effect of La Marzocco consolidation, the mix and the easing of inflationary pressures on product costs. EBITDA adjusted was EUR 110.9 million or 14.5% of revenues compared to 12.5% in the previous year. Expansion of volumes, a further easing of inflationary pressures on some industrial costs and an investment in media and communications substantially in line with respect to 2023 translating into an improvement in margins despite the increase in labor and logistic costs. As to the balance sheet, the group ended the quarter with a positive financial position of EUR 305.3 million, following the distribution of EUR 104.8 million dividend to shareholders and EUR 326.8 million of net absorption in relation to the closing of the business combination between La Marzocco and Eversys. The fourth, free cash flow before dividends and acquisitions amounted to EUR 425.2 million in the 12 months and EUR 74.3 million in the quarter, thanks to significant contribution from current operations. To sum up, over the last few quarters, we've been able to successfully capitalize on structural coffee market growth in both household and professional segments as well as to meet consumers' new needs in nutrition and food preparation segment, focusing on healthy food and cooking and fast and user-friendly kitchen appliances. This allowed the group to go back to a medium-term growth path consistent with its potential. We believe the general outlook for our core products and market remains positive, notwithstanding than certainly characterize the current macroeconomic scenario. The consolidation of La Marzocco, the continuation of the upward trend home coffee and the stabilization of the nutrition business, along with outstanding margin recovery and robust cash flow generation give us confidence in reiterating the guidance for the full year. Therefore, we confirm the forecast of 9% to 11% increase sales for 2024, including the enlargement of the perimeter through the business combination of La Marzocco and Eversys. In terms of margin, the quarterly results reinforce expectation of reaching the upper end of the guidance. which foresees an adjusted EBITDA in the range of EUR 500 million to EUR 530 million for the new perimeter. Now we can open the floor to Q&A. Thank you.

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

I have 2 questions. if I may. The first one is a clarification on food preparation trend in Q2. If I make the math based on your presentation, I calculate that actually the preparation was negative by 1% in Q2. And this contrast basically with what you are saying about further growth. So if you can clarify this. Second one is on margin expectation for the second part of the year if we take your guidance and also the fact that you're expecting to reach the upper end in terms of EBITDA, basically implied margins for the second part of the year are flattish versus the second part of previous year. So I was wondering which kind of dynamics are you seeing on revenues and cost justifying flattish margins? And the last one is on price mix. I saw that price mix was still positive in Q2. Can you please give us more granularity on how much has been priced, how much mixed?

Yes. Sorry, first question, no. Food preparation was positive in quarter 2 with a plus 2.4% -- sorry, 1.4% growth in quarter 2.

Okay. It is the same ForEx because maybe it's a ForEx issue, I do not know maybe...

No, no. So second question is about the margins, margin expectation. Yes, I think that we're very encouraged by profits and margins in quarter 2. As said, we are enjoying higher gross margin, thanks also to the cost saving -- natural cost savings. We are also supporting our commercial initiatives. So we are giving back up partially some of the savings. But we are able to still to maintain a better profitability. I think that we expect the margins to continue to be good also in the second part of the year. It is true that we were just slightly, let's say, added some color around our guidance. We haven't changed our guidance. But we think that the results are coming in and in line or even slightly better than expectations. I think that we have to account that the second part of the year accounts for approximately 70% of the profits. So, therefore, it's a bit too early to improve eventually guidance. I would be a bit prudent on that. Although I think that we feel comfortable that we will continue to maintain positive gross margin in the second half, it is still continue to give something back to the market to boost our shares and our market conditions. The last one is on price/mix and this has been positive again for quarter 2. So the -- can I have this -- yes, sorry, positive price/mix was poised for approximately EUR 3 million in the quarter.

And price was positive or negative, if I may.

Price was slightly negative. I said we got savings and it was a plan to give back some of the savings that we were getting and still improving the overall margins for the group, but supporting our market position and sales.

The next question is from Isacco Brambilla with Mediobanca.

On my side, the first one is on coffee makers division. I was wondering if you can give us a bit more color on the performance of Eversys and if there is any specific difference with the performance of B2C coffee in the quarter or in the semester, as you wish. Second question is on Americas. The segment was negative in the quarter if we exclude La Marzocco. Can you give us a bit more color on performance of coffee makers and food preparation in the region. Last question is on A&P. You mentioned in the speech, A&P expenses substantially in line. Could you give us the figure in absolute terms or as an incidence on sales for the first half would be really helpful for our modeling.

Okay, so yes, the performance of Eversys has been negative. It was expected and somehow anticipated is -- let's say, is particularly due to a slowdown in Asia. In last year, we had -- first of all, the first part of the year was still very high comps generally, and particularly in Asia, and we have experienced a negative market, particularly in China. On the contrary, La Marzocco which probably had less buoyant growth during 2023 is holding on and is fairly in line with the 2023 performance, actually has shown even an acceleration in the last quarter. So we confirm that probably is going to be a stabilization year for the professional business in coffee. While we continue to grow with our household coffee division on the back of the success of the fully automatic coffee makers which are the main portion of our business and also the return to growth of Nespresso, which is the second most important product line within the coffee category. With regards to the U.S.A., in particular...

Yes. The question was about our Nutrition coffee and comfort...

Comfort was exited, let's say, totally, we had closed out last year of some inventories, which didn't happen this year. So we still have a negative effect in -- maybe...

I can give a bit of color on this because U.S. -- let's say, North America and U.S. in particular, you are correct that is offsetting the contribution of La Marzocco is negative in the period in the first half but neutralized by the effect of the comfort discontinuation is positive, is 7%, it could be something like 7% positive in the growth that is supported by the growth of both coffee and nutrition. So these factor -- we completely exited. It was the tale of the discontinuation that it was several times mentioned last year...

Excluding quarter growth of 7% between Nutrition and coffee.

Nutrition and coffee, but is sustained by both categories is steadily growing both Nutribullet in particular, with personal blender and didn't happen this year. So we still have a negative in coffee and didn't happen this year. So we still have a negative, and is ramping up didn't happen this year. So we still have a negative that was a bit weak in the first quarter, it has increased in the second quarter.

With regard to your question on A&P, has been in line in absolute value.

It's 11.6%.

11.6%. In line with an absolute...

Yes.

The next question is from Francesco Brilli with Intermonte.

A could of questions from my side. The first one is on current trends in the market. If you can share with us what you are seeing the latest weeks for in July by region, if I may ask. And if you can also share with us the level of competition on specific product segments. And the second one is on working capital. If you can shed a little bit of color on that, if it's something the trend of the first half of 2024 is something specific for the second quarter or -- and can be sustainable also for the rest of the year? And third one, if I may, if you can just give us a little bit more color on the accretion from La Marzocco on the -- on gross margin. If you can just add some detail on that.

Yes. So this question, we expect a positive July -- what we -- July is coming in, in line with the expectation and would be a positive month. So far, market is continuing at a similar quarter.

Despite still comfort negative...

We see negative contribution of air conditioning. Competition is fierce, of course, provided the market is a tough year overall, but we don't see any change in aggressivity of competition. So we see competition is more or less the same. With regard to working capital, we have a working capital development, which is in line with our, let's say, objectives. We're going to have a higher inventory level during the year compared to last year. Yes, we said we're going to be slightly higher. But again, we said also that we will probably make sure that we'll be -- product available to sustain the market growth potential and opportunity we have. So this will happen, but the inventory that will be in line with our usual seasonality and usual trends. With regard to La Marzocco. La Marzocco is not -- in terms of gross margin, is not higher. And it is for sure is delivering a higher EBITDA, that's for sure. But in terms of gross margin it's fairly in line with the group average.

Next question is from Zarrouk Hela with ODDO BHF.

I have 2 follow-up questions, please. So the first one is on the comfort segment. Could you please remind us the part of this comfort segment alone in your consolidated sales and your expectation on this segment, how to develop over the second half of the year? And my second question is on the project that you have with Starbucks regarding the development of the coffee machine for cold brew. So could you please make an update on the development of this project? During the Q1 call, you mentioned that the test phase should be launched in Q4 and then roll out fully in 2025. Is this still relevant?

The first question, Comfort, we expect to continue, let's say, having a negative impact on comfort also in the second part of the year. If in the first half has been around...

The business is 4% to 5% of our business...

No, I want to say, we are in a negative 25% now. We think that in the second part of the year, we can have an additional maybe EUR 5 million to EUR 10 million of decline in the segment but will be diluted on sales of approximately EUR 1.6 million, EUR 1.8 million for the second half. So it's going to be very minimal in the -- despite we expected negative impact that would be very minimal now. We expect maybe for the EUR 5 million to EUR 10 million decline in the second half. The weight of comforter...

In our business is being 4% to 5%...

It's 4% to 5% on total business now. With regard to Starbucks, yes, we make that we are in modifying, let's say, the products according to the latest request. The goal was to get started in the quarter 3 -- sorry, quarter 4 of 2024 with 400 units. Probably would be a slight delay. It is possible that won't happen in quarter 4, maybe in the first quarter '25, but this is a minimum -- a minor change in the plan is due to this new modifications that were required. But -- the said project is still on track, and we expect now to kick in with a delivery in quarter 1 '25.