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 Third Quarter 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.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group 9 Months 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 and M&A Manager; and Sara Mazzocato, IR Specialist. In the first quarter, the group revenue climbed by 14% following La Marzocco consolidation and expansion of the household business, which recorded another strong quarterly performance, accelerating from the first half across the key regions such as the U.S. and Eastern Europe. I would like to emphasize that over the last 18 months, the group has consistently delivered outstanding results in terms of business growth and profitability, investing in product innovation and communication initiatives and capitalizing on the espresso market structural upward trend as well as several arising opportunities in the nutrition sector. Our growth strategy remains focused on leveraging our strong brand awareness in core categories. Each brand in our portfolio is a clear category captain and plays the role of expanding category penetration in the market. Since the start of the year, we've been able to significantly increase the group operating results at double rate of sales growth at the top of our range of our strategic goal. This improvement is attributable in part to the perimeter expansion but also to the stabilization of the industrial costs and positive mix effect, indicating the continued growth of our consumer interest in the premium segments of our product portfolio. It should be emphasized that the improvement in profitability in 2024 was accomplished in the context of higher spending on media and communication A&P, with a significant pickup in the quarter due to both different phasing in the year and additional activity supporting product launches. Let me quickly review the major product launches in the recent quarters, as shown in the presentation. Starting from De'Longhi brand. We've been working on the global rollout of Rivelia, winner of 3 iF Design award and the Red Dot Design Award; an introduction of Magnifica EVO Next for the mid-end consumers launched on the manual space; La Specialista Maestro and La Specialista Opera with advanced technology, including the cold extraction. Cold, after last year tremendous success of the Multi Go Pro (sic) [ Multi Pro Go ], has just completed the launch of the Go collection, including also the compact stand mixer and hand mixer with excellent performance and luxury design all in a compact size. Nutribullet has enlarged its blender family with Smartsense, featuring a smart auto cycle and nutritional Flip, which keep ingredients cold up to 24 hours and can make smoothies on the go. Last but not least, Braun has expanded its presence in the ironing market with innovative products in addition to strengthening its portfolio in the hand blender and cooking categories. All these product releases were backed by specific media investments, which reached millions of potential users. To name a few recent brand activation, I would pick the event for the launch new Nutribullet Flip portable blender; the Kenwood's campaign for the introduction of the new Go collection and a worldwide coffee campaign with Brad Pitt as an ambassador. Most of these initiatives are underpinned by an evolution of the marketing mix towards a large-scale social media impact and e-commerce performance marketing plans. Furthermore, let me point out that with a strong spirit of innovation, La Marzocco and Porsche collaborated to develop a dedicated product range, which have been globally released at several events across the world: Shanghai Coffee Festival; London's Soho House; and the Los Angeles Porsche. This is yet another example of how La Marzocco continues to lead the industry by blending tradition and cutting-edge technology together with iconic design and precise engineering. Now let me focus on the quarterly results. In the third quarter, the group revenues reached EUR 806 million, plus 14% with respect to the previous year. The group was able to increase its business in all main geographies, with America posting a solid organic growth, accelerating in comparison to most of the recent quarters. In more details, South-Western Europe area recorded an increase of 7.4% in turnover corresponding to a low single-digit organic growth, favored by the performance of certain categories such as Switzerland, Austria and Iberia, in line with the trends experienced in the last 18 months. North-Eastern Europe advanced further in the quarter 3, achieving the fourth quarter in a row of double-digit organic growth, with Poland outperforming the area followed by U.K. and Czech Republic and Slovakia, both delivering mid- to high single-digit growth. Regarding MEIA, quarter 3 was up double digits thanks to the perimeter expansion and low single-digit organic growth despite the geopolitical context. Americas region accelerated in the quarter resulting from the consolidation of La Marzocco and strong like-for-like growth thanks to a mid-teens growth rate in the home coffee in the quarter. Finally, Asia Pacific was up by 10% thanks to consolidation of La Marzocco, which helped offsetting the decline in the region's performance on a like-for-like basis, further affected by negative currency fluctuations. In terms of product sectors, the key categories' positive growth dynamics persisted throughout the year with the solid developments in the last quarter for both the home coffee sector and in nutrition and food preparation segment. The favorable performance of the business, together with the contribution of the integration of La Marzocco led the coffee area to represent over 60% of the group revenue in both periods. Specifically in this quarter, home coffee machines recorded an increase in turnover at the low teens rate thanks to the significant expansion of fully automatic machines and acceleration of the capsule systems. The nutrition and food preparation segment confirms the trend of the first half of the year, increasing turnover at a low mid-digit rate in the quarter. Let me highlight, in particular, the return to growth of Kenwood's kitchen machines, increasing at a mid-teens rate in the period and the continuous expansion of the blenders sector thanks to Nutribullet's personal blenders and Braun's hand blenders. Comfort sector was a negative in the quarter under review, but had no substantial impact on the group's overall performance. Home care recorded an increase in turnover at a mid-single-digit rate after 4 quarters in a row of double-digit growth, driven by the ironing branded Braun, which continues to rise even in the period of reference. Looking now at the evolution of operating margins in the quarter. The net industrial margin stood at EUR 416 million, equal to 51.6% of revenues compared to 49% in 2023, benefiting from volume increases, the easing of inflationary pressures on product costs and a positive product mix. EBITDA adjusted was EUR 131 million or 16.3% of revenues compared to 14.9% the previous year. Aside from La Marzocco consolidation, profitability has been enhanced by significant volume effect, cost stabilization and a favorable pricing mix contribution. The quarterly improvement in profitability was achieved in the context of greater investment in media A&P, with a percentage of like-for-like turnover of 12.9%, an increase of about 190 basis points versus quarter 3 '23, supporting the planned product launches in the period. As to the balance sheet, the group ended the quarter with a positive net financial position of EUR 266 million, following the distribution of EUR 105 million dividends to shareholders and EUR 327 million of net absorption in relation to the closing of the business combination between La Marzocco and Eversys. Therefore, free cash flow, before dividends and acquisition, amounted to EUR 372 million in the 12 months and EUR 36 million in the last 9 months. The expected positive contribution from current operations, together with the improvement of working capital in the last quarter, give us confidence in substantial cash flow generation for the full year. In conclusion, we ended the third quarter with yet another outstanding set of results, keeping us confident about the company growth, profitability improvement and the generation of significant free cash flow. Despite the volatility that characterizes the current geopolitical backdrop, we feel that the general outlook for our key sectors and markets is still supportive. The coffee market has been experiencing robust growth driven by espresso market expansion and consumer premiumization across multiple countries. The nutrition and food preparation have maintained their upwards trend in recent quarters, thanks in part due to the recent introduction of new products that are increasingly geared towards a consumer attitude to healthy eating. Furthermore, recent advertising initiatives have been effective in strengthening brand awareness and market share, assisting retailers and enhancing consumer engagement. In this context, we have revised our full year guidance supports raising expected top line growth to 11% to 12%, previously 9% to 11%, corresponding to an adjusted EBITDA level of around EUR 440 million, EUR 550 million with respect to EUR 500 million, EUR 530 million previously projected. Now we can open the floor to Q&A. Thank you.

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

Two questions. The first one is on the expected margin evolution for Q4 and its main building block, in particular, A&P and gross margin evolution. So linked to that, I was wondering if your guidance for advertising promotion expenses for the year is confirmed. And so we should expect for fourth quarter a reduction in the weight of A&P expenses on sales? And maybe if you can help us understanding how much of the gross margin expansion that we have seen year-to-date is linked to La Marzocco consolidation and how much can be considered at the same perimeter and if you expect this trend to continue into year-end? The second question is on Eversys. If you can give some flavor on the performance of Eversys in the 9 months or in the quarter? And maybe giving us an update on the project with Starbucks and if it has survived the latest CEO transition at Starbucks. Congratulations on results, which were really remarkable.

Thank you, Niccolò. Thank you a lot for your kind words. With regard to margin, we expect the margins to continue to be strong in quarter 4. As you noticed, we are benefiting from some cost reductions. We're giving back some of the margin to the trade as well as we are improving mix. So as a consequence of all this, we continue to expect to have strong margins in the quarter 4, pretty much in line with what the quarter 3 was. This will happen on the back of let's say, increased A&P investments. We -- so we -- as you noticed probably that we have increased our A&P in quarter 3. It's been a stronger increase versus year before. Despite that, we have posted a strong EBITDA performance. We expect to continue investing more in comparison to last year in quarter 4, probably at a lower rate compared to the incremental investment versus the year before in quarter 3, but still higher than the last year. We expect that on the back of growth expectations and positive margin developments, we expect to continue to expand our EBITDA. La Marzocco is certainly contributing very positively as La Marzocco has a higher EBITDA, higher than average. But no, the improvement in quarter 3 is due to the strong performance of household. I have to say that, unfortunately, Eversys has been weak, and we expect a continued decline at Eversys by double digit. But again, on the back of a record year in 2023, where we had exceptional performance due to some one-offs, particularly in China, which now is certainly a very difficult market for the moment for professional equipment. But all in all, we keep our focus and we think that we are still optimistic about the next development of Eversys, and we expect also to start rolling out the first Starbucks deliveries for next year. The expectation next year is to start with approximately 500 units which will be delivered as soon as possible. I mean, we now see that the rollout should happen in the second half.

Is it fair to say that this 500 units is higher than the probably 100 you were mentioning at the time of the...

Honestly, still -- to me, it's still nothing. I mean the business potential is huge. We are now getting closer to delivery. It could be 300. It could be 400, could be 500. It won't change. I think now the indication is approximately 500 units, which is great. Now we will really test on the field the product and the opportunity, and the stake is potentially very high. As you know, Starbucks has about 20,000 stores just in the United States. 10,000 are directly operated and 10,000 franchising, plus then, they have international network. So I think there's -- we're getting closer to the moment of truth and we're looking forward to it. It's a great innovation, and we are very excited. But again, it's still a process that will involve further efforts and investment and focus on our side. But it's great too to see that also despite the recent management change at Starbucks that you have mentioned, I mean, the new CEO has confirmed the plans.

Okay. But why all these delays? I mean, first, it was expected for end of this year, then beginning of next year. Now it's second part of next year. Is this something depending on you or on Starbucks?

It's partly dependent on us. We've been requested to make changes. It's a dialogue. The product has been, let's say, modified based on the test. I mean we're talking about not just a new product. I mean it's not like a new coffee maker on a very consolidated technology that is substituting an existing coffee maker with a similar technology. We're talking about very innovative product that implies also in-store -- major in-store investment and redesigning a supply chain model for the stores on cold brew, so which is obviously an incredible opportunity on one side. On the other side, it's also, for sure, a more complex deal rather than selling a similar or evolutionary technology.

The next question is from Alessandro Cecchini, Equita.

The first one actually is on the U.S. market. So performance over the last quarters has been not, I mean, as expected, while in this quarter, you executed very well with plus 9%. So more on a strategic point of view, I would like to understand what is changing from your side in terms of marketing, in terms of product. So just to understand if this is, I mean, the start of a new -- I don't want to say a new era for De'Longhi in U.S., but I would like to better understand your strategy, new products in the coffee business. So the market, the coffee business in the U.S. is -- I mean, I don't want to say greenfield, but not so far from this from an espresso point of view. So I would like to better understand your point in this very important geography. My second question is about coffee. What are, I mean, your expectations for fourth quarter, in particular in Europe? So if you still see room for gaining market shares in the field, thanks to new products. So this is my second question. My third question still on coffee is on Nespresso. I would like to understand if there is room for you to win new agreements worldwide. Or you are -- I mean, okay, your -- the current framework is like this? And my last question on kitchen machines returning to grow. I would like to understand if you have a feeling if this is due to the new range, the new products? Or is, I mean, a category that is a little bit rebounding from -- after several quarters of negative performance?

So the first question was about U.S.A. I would say just a good quarter. I think the past quarters have been impacted by some -- let's say, a consequence due to the exit of portable conditioners, some also temporary weaknesses due to some overstocking in Nespresso, in particular in the first half of the year. I think that -- yes, I think it'd be a -- it's a good quarter. Certainly a good quarter, very happy with the performance. I think that we now are a very focused agile company in 2 segments, which can deliver secular growth, and one is obviously nutrition where Nutribullet is performing very well, is winning market share. Despite the Ninja initiatives, we have substantially won market share in our core segments as well as we see espresso and cappuccino as potentially growing market. Nespresso has stressed again, their will to win in North America, and they continue investing alongside with us. We have new launches, Vertuo. We have Pop and also Lattissima Vertuo, which are rolling out. So we feel strong also about our ability to win shares in the market. Fully auto, also we have now launched new products. We have completed the range for North America. We are winning share, and the market is the fastest-growing segment in the U.S. now. So I think positive news on the U.S. With regard to coffee in Europe, we're confident about market growth. We think that the growth will be in the market, which will enable us to post the growth again. And also, we have strong market shares. We're performing well in all the key markets. So the market shares are higher than last year at this point of time. So we will ideally continue to take advantage of our market position and expand our market share also in the last quarter, in which we will invest with the new launches with a renewed media campaign. We will invest more than last year and also capture the opportunities in the premiumization of the market. The last question was about -- sorry, this is one question about Nespresso. Highly confident to announce soon 4 new markets with Nespresso. So that's -- I cannot say more, but highly, highly confident on that, which will strengthen us in coffee and also in very important European markets. With regard to kitchen machine, Nicola, do you want to maybe...

Yes. We had a good quarter on kitchen machine as we are -- it's an area where we are looking back to gain market share, and we have a strong activity also with the retailers to get back on market share on the top of a launch of the new product, the new Kenwood Go collection that is on the top of the food processor launched last year that was very successful. And this is giving new adds to the category, let's say, on the back of this quarter, better momentum back on the category.

About Nespresso, just if I understood correctly, you spoke about 4 new markets in Europe.

Yes, highly confident about that.

The next question is from Isacco Brambilla, Mediobanca.

I have three. The first one is on Capital Brands. In the presentation, you mentioned several activities to push the brand in Europe. Could you remind us, even roughly speaking, the split between sales in the U.S. for Capital Brands, Nutribullet versus Europe? Second question is on A&P. No later than 6 months ago at the, say, Capital Markets Day, we were talking about a capital decrease in A&P expenses as a percentage of sales. Now it looks like you are accelerating on that, so which are the drivers of this change? Do you see higher opportunities in the market right now? Last question is on building blocks of the margin outlook for next year. If you can give a sense of which forces you see as positive and negative looking ahead to 2025? I know it's early, you will provide the guidance later on, but just if you can help us on a qualitative basis.

Okay. Let me start from the A&P part. As you have seen, we had first half of the year where we are in line with last year investments, and we had an acceleration in this quarter, where we grew the incidence on sales by more or less a couple of points to 1.9% because we are looking to capture very surgical opportunities, and this is something that we are looking forward to get also in this quarter, probably at a bit slower pace because we have tried to create momentum in the past quarter, but we will keep pushing also on this one. Obviously, this is -- the incidence is increasing a bit compared if we look at, let's say, constant perimeter without the effect of the combination of La Marzocco. We have very detailed activities by all brands. So with the launch of the Flip campaign in the U.S., we have a broad social media campaign to create awareness. We are working across Europe, in France, in Spain, in several countries. We have a big launch with Kenwood, make it big with the new collection, the Go collection, that now is complete with 3 products. And obviously, we are keeping momentum on the coffee with the ambassador campaign that will go across all the full season.

So the third question was about the full year '25 outlook. It's a bit too early. I also -- it's a bit too early. I think that the quarter is indicating the potential of the company. I think that our products are very useful products that also in tougher economies or economic downtrends can be very useful and it can be gift, can be small purchases that can help families also to face higher costs as well as very gratifying when maybe families are spending less money for outdoor, for traveling, for entertaining. So too early to say, but it has been a really good quarter. We think that the company will continue to focus on delivering organic growth as well as continue to keep their eyes open and capture also M&A opportunities. I know that we're sitting on a lot of cash, and we will hopefully generate further cash in the next months as usual. We have added 2 nice businesses to the group in the last 4 years with Nutribullet, which is helping us in North America to get stronger in North America as well as offering international opportunities and with Marzocco now and the combination with Eversys. So we had 2 nice acquisitions. And hopefully, we will also enhance the growth opportunity with new acquisitions in the near term. And in particular, we want to continue to deliver an accelerating EBITDA organic growth. Our company has a strong leverage, and we want to continue to maintain our strong business model in a way that if we can continue also to accelerate the growth opportunity with new acquisition, we can deliver ideally a double growth rate at EBIT level that happening. Obviously, this is a best case scenario. It's in the top of our range, but we want to continue to deliver growth and accelerated profits despite the increased investments to support our products and the launches.

Going on the question about Capital Brands. The Americas is more or less 75%, 3/4 of the total Capital Brands business and 1/4 is outside of the U.S. Both are growing significantly double digit. This is obviously a signal of the opportunities that the international expansions still have.

The next question is from Hela Zarrouk of ODDO BHF.

Yes, do you hear me?

Yes, we do.

Yes, okay. Congratulations for the good set of Q3 results. So my first question is on the professional coffee segment. So if you could give us more color about business development in Q3. You already talked about Eversys, but what about La Marzocco and your expectations going forward? And what about the weakness seen in the professional coffee segment in China market in H1? My second question is on full year organic growth. Should we expect the same trend seen in Q3 to continue in Q4? And could you please remind us the guidance for organic growth for the full year? And my last question is on the comfort segment. So what was the performance of the comfort segment in Q3? And should we expect it to accelerate in the coming quarters?

Okay. First question is about the professional division's development. Then I will hand the word to Nicola to comment on the other question.

The organic growth.

The organic growth and comfort. On professional, as said, Eversys is showing a double-digit decline. As I said, it's coming from a record year in 2023, where we got, let's say, one-off deals, in particular in the Chinese market. So we expect the weakness of Eversys continue in the last quarter of the year, probably at a double-digit rate still. We think that next year, we will expect to normalize and go back to growth progressively during the year. With regard to La Marzocco, Marzocco has outperformed again the market and has posted a, let's say, mid- to high single-digit growth in the quarter 3. And on the back of a positive U.S. market, positive European market and a solid expansion in the consumer range, in particular, Linea Micra and Mini still delivering growth in the consumer space. I highlight also the success of the venture with RIMOWA and the new Porsche design products, which have been incredibly successful in terms of commercial success as well as an incredible visibility in the marketplace. So we expect La Marzocco to continue its trend also for the end of the year.

About the expected organic growth in Q4, say that we are seeing a robust start of the quarter. So we expect to be in line with the Q3. And this is what is also pushing our guidance to the highest boundaries of the expected guidance. This is -- we are preparing big events like Black Friday, Christmas sales and, let's say, we are optimistic at the moment. This is despite just to comment on the comfort category because comfort has been -- and seasonal products has been not a great year this year, and still also the winter is mild. So we do not have a positive outlook on the comfort for the quarter. So -- but the incidence on the total revenue of the group is very limited. So the negative -- the current double-digit negative trend is not very impactful. So we expect a robust growth on the quarter despite a negative performance on the heaters.

The next question is from Natasha Brilliant, UBS.

Three from me, please. So firstly, can you just remind us how much of your U.S. revenues are produced in China? And whether you've had any early thoughts about potential tariffs and what you might do to mitigate that? If the tariffs were to come in, would you start building inventory ahead of time? Or how are you thinking about that? Second question, you mentioned lots of cash and M&A is still very much on the agenda. Has the pipeline changed? Have you identified any targets? Just any more color there? And without any M&A, where do you think cash will end for 2024? And then finally, just to come back on your midterm targets in terms of the margin. Obviously, with the higher guidance and strong momentum, you'll probably end this year at the lower end of the targets you gave us at the CMD. So how should we think about that going forward? Does it give you a bit more comfort that we could reach the upper end of that midterm guidance?

Sorry. So Nicola, can you handle the first question? Good initiatives we have...

So about U.S., let's say that of our revenues in U.S., we have a good balance across the 2 geographies because we have more or less 50% of the revenues coming from Europe or production from Europe and 50% from China that this impacting something like 7%, 8% of our revenues in terms of COGS, obviously. And obviously, we have already -- we have activated on the view of what can come with the tariffs. We have plans for exiting from China. Some are already activated and some are ready to come in the next months eventually across also different geographies. It can be Asia to Asia or even Asia to Europe.

In absolute value, you want maybe to...