Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

So good evening, ladies and gentlemen. Welcome to this conference. Welcome. Now Mr. Enrique Martinez has this floor.

[Interpreted] Thank you. Good evening. I'd like to thank you for your availability and for attending this conference call. In order to be transparent, I have decided to comment our performances estimate in light of the exceptional context that we've been working in from past few weeks. For the second consecutive year, the distribution sector has been impacted by social movements in the month of December, which is the most critical time for our industry. As you know, the end of the year, time is key for our group, both in terms of turnover and in terms of profits. Fnac is a corporate brand store for Christmas gift with a strong presence in city centers, in particular in Paris Intra-Muros. While we were all expecting growing Christmas sales this year in line of the year 2019 and also because of a favorable base effect and a favorable calendar effect, we are seeing quite the opposite. We're seeing a significant drop of the activity over the Christmas period of time in France. We estimate the loss of the turnover due to social movements and that loss is about EUR 70 million. The transport issues have made it extremely complex for steering some of the operations to start with the extreme difficulty for some of our teams to move around. I'd like to contribute to the huge efforts made by some of our fellow employees, who've managed to serve our customers with determination, and I would say, some kind of courage. In spite of a good cost control and the positive contribution of the acquired companies for an amount estimated to be a little more than EUR 20 million, the exceptional impact of social movements on our activity will have a negative impact on the current operational result for the activities pursued in 2019, and they should be around EUR 293 million. Our current operation margin should reach 4%. Before giving the floor to Jean-Brieuc, so he can give you more specific comments about the performance estimate, I'd like to tell you that I have decided to have a strategic review of our Dutch subsidiary, BCC, which, as many of you know, is a subsidiary of Kesa Electricals, which it -- was then -- put inside the Darty scope. The activity turned out to be structurally [indiscernible]. We've, therefore, taken some actions to reduce the losses and we addressed the activity, notably through the partnership made in 2018 with Wehkamp. These actions have been fruitful, but not in the sufficient manner. And so in order to reach a critical size and seize the best market opportunities, consequently, we have decided to launch an active process in order to research the partner that could provide a future for BCC. No timeline has been communicated at this stage, and we will communicate about the progress of that process in due time. Now the floor is to Jean-Brieuc.

[Interpreted] Thank you, Enrique. I'm going to talk about the estimate for the performance of the activity [indiscernible] in the year 2019. We're not talking about pre-publishing our yearly accounts that have not been closed and have not been validated by our Board of Directors. We are sharing here the performance estimates for 2019, which is including or taking into account the losses of the turnover in December because of the strikes in France. The figures that are given in that press release and that are being communicated during the conference call have not been audited and are not final. In those estimates, the activity in the Netherlands will be accounted for in non-pursued activities in accordance with the application of standard IFRS 5. In order to help you to understand the implementation of the application of that standard, you will find the press release on Page 3, the profit and loss account for 2018, as it was published last year and an estimate of its pro forma equivalent that was reprocessed with deconsolidation of BCC to make it comparable. As you can see, in 2018, the turnover for BCC was about EUR 343 million, with only 2 months in Wehkamp, and the current operational revenue was negative by EUR 8 million. The turnover of the activities of the group in 2019 to the exception of the Netherlands, would be about EUR 7,340 million and would display a growth of about 0.7% in comparable data. The turnover of the acquired companies, including Nature & Découvertes, WeFix and BilletReduc would be about EUR 115 million in 2019. We have communicated in October a scope-related effect of about EUR 200 million that would include Wehkamp. The Netherlands are not being consolidated anymore. The additional turnover that would be connected to that scope would be about EUR 150 million in 2019 in pursued activities. Let's come back to the month of December. The loss of the turnover is estimated to be about EUR 70 million because of the strikes in France. In order to assess that figure, we have reprocessed each shop, each store with the unusual job of visitors, the shoppers -- the store shoppers have been strongly affected mainly in Paris and particularly for the Fnac brand store. As an example, the number of visitors in the group Parisian stores have declined by 16% versus 2018 to be compared with an average normalcy drop of minus 2%, minus 3%. So not only the loss of the turnover because of the yellow vest in 2018 has not been compensated, but on top of it, the sales have declined by about EUR 35 million during the Christmas period of 2019. At the end of the day, the turnover of the fourth quarter in France should be about stable in like-for-like. Notably, thanks to a good performance of the Black Friday, and the stores are showing a clear decline of the sales because of the base effect and the favorable calendar effect. Now as far as the gross margin rate is concerned for pursued activities, we consider that it should be 30.4% of the turnover and is decreasing by about 20 base points versus 2018. The slight erosion coming from 3 main factors: the loss of volume of sales at Christmas due to the strikes, as well as the negative impact of the mix related to editorial products, which is estimated to be about minus 15 base points on the yearly gross margin rate. The technical dilutive effect of the development of some franchises that have been estimated to be minus 15 base points. The product mix effects and services is slightly positive, in line with the first 9 months of 2019. The margin rate of the small appliances is declining, but there's been a slowdown in the fourth quarter. The negative effect of the implementation of new telephone insurance offers remains up to expectations. Those negative mix effects would be compensated by a positive impact of Nature & Découvertes, which is estimated to be about 50 base points on the yearly gross margin rate. So as far as our costs are concerned, there's been good cost control and good execution of the performance plan. The group could keep its operational cost stable, which is in line with our objectives. The operational margin should reach 4%. As far as the free cash flow is concerned, good execution of the group and the contribution of the acquisition should help us to generate a free cash flow of about EUR 170 million, which is on the increase compared to 2018 in spite of losses of unpredictable and significant losses of the turnover. Now, the floor is back to Enrique to talk about the future.

[Interpreted] I'd like to conclude briefly by telling you that these performances estimate are translating the impact of the exceptional social movements, and they are for me the evidence of the fact that the strong resilience from our group. It is a very agile, and there's a big commitment -- strong commitment from our teams. If we look at the year 2020, which is ahead of us, we should pursue the implementation of our plan -- strategic plan, Confiance + and continue to grow our market shares on all our segments. And notably, starting on the anniversary date of our new partnership with our telephone insurance offers, the contribution of acquisition would be slightly less significant in 2020 on our current operational result, due to the technical effects of seasonality. At the end of the year 2020, the group should have little growth of its turnover and of its current operational results. On the medium term, there should be a strengthening of our commercial leadership, our innovation capability and the excellence of our brand stores and of our brand should help us to confirm the growth objectives, which should be higher than the market and the current operational margin and should be 4.5% to 5%. Thank you for your attention. Jean-Brieuc and myself are ready to take your questions now.

[Interpreted] [Operator Instructions] So we do have a first question from Steve Levy.

[Interpreted] First question is about the working capital requirement. What would be the impact of deconsolidation of the Netherlands on the working capital requirement? And the second question is about the objectives for 2020. The slight growth of the turnover and of the current operational results, does that imply that there will be an increase of the free cash flow for 2020? And could you please tell us -- give us an idea of the growth in Belgium. So we would have an idea of what would be the deconsolidated turnover for 2019?

[Interpreted] Thank you, Steve. As far as the free cash flow is concerned, EUR 170 million, it does not include the impact of the BCC free cash flow. We will give you the exact impact of the BCC free cash flow when we'll publish the accounts. But when you look at the impact of the deconsolidation of BCC on last year's free cash flow, we see that is quite marginal, a little bit less than EUR 10 million. And for BCC, in 2019, we will give you the exact figure when we publish the accounts. Now, at the moment, BCC is not included. We don't gain on the free cash flow in 2020. We should have a slight increase of the current operational income, but it's too early to state whether we should have an increase. Somebody say that there should be an increase, but -- I assume your question was about the Netherlands and not about Belgium, one or the other, the idea is to recover the organic underlying growth in the Benelux in 2019. We'll give you all the exact figures when we publish the accounts. We are closing the accounts at this stage. We've not given you the turnover per quarter in a detailed manner. Everything will be available when we publish the accounts the -- when the accounts are audited. So at the end of February, we will give all the details. But you have the BCC impact for last year, so it's not that complicated to make a good calculation.

[Interpreted] If I may, one last question. Could you please quantify the impact of [indiscernible] Max on the gross margin in the fourth quarter?

[Interpreted] I think it has contributed to a good performance of the service. It's too early to tell you about the impact and the performance of Darty Max, but it's not significant for the results. To come back to BCC, Steve, overall, the turnover was about EUR 400 million for BCC. I will give you the exact figures at the end of February, about EUR 400 million.

[Interpreted] Next question from Geoffroy Michalet from BHF.

[Interpreted] My question is related to free cash flow of EUR 170 million, which is quite higher than the estimate in spite of the adversarial side effects -- the negative side effects of the side. Could you tell us why you are confident about the fact that the free cash flow is so positive in spite of the context?

[Interpreted] Well, there are a few elements, but I'd like to repeat, it's an estimate. We haven't closed all the accounts yet, audited, but we have suffered from declining sales in December. So we've had a loss of EUR 70 million of turnover. The free cash flow also is due to the acquisitions. With the inclusion of Nature & Découvertes, this is bringing some additional cash flow. So the free cash flow should be slightly higher. You heard about the current operational revenues. And a lot of work has been done on the stocks and on -- mostly on the [ rear ] margin cashing, which has been done very well. So we should have a very good quality free cash flow given the economic context.

[Interpreted] No more questions at this stage. [Operator Instructions] The new question is coming from [indiscernible] from Kepler Associates.

[Interpreted] I'm from [indiscernible] Kepler. I have 2 questions. One about Nature & Découvertes. Unless I'm mistaken, there are many information that are missing the acquisition price, the yearly performances, the long-term performances. So we are at the beginning of the integration. So it's difficult to assess it. Could you please give us this information now? Or are you going to come back to this exact acquisition terms for Nature & Découvertes' past results and their first results during the first months? That's the first question? Second question about the Netherlands and BCC. When we look at this sector, we see that there are 49 stores that are making about EUR 1.5 billion, about 5x what BCC is doing. My question is, have you approached Ceconomy, first? Number two, do you intend to do it or not, because you consider that BCC format and the other format are not the same. And therefore, you're looking for another partner? That's the second question. And the third question is about the loss of the turnover. I know that you never also come back to [indiscernible] format. But about the loss of the estimated revenue, the rationale would be that it would affect the Fnac more than Darty. Could you please tell us an assessment would it be 40%, 60% -- 40% for Darty, 60% for Fnac? Or could you please tell us an idea about the breakdown of that loss of turnover or loss of revenue? Now since we don't have the revenues per country, it's difficult to assess the situation. I have other questions about Spain.

[Interpreted] Thank you. So we're going to try to answer the 3 questions. So the first question, we don't have the information at this stage about the acquisition of Nature & Découvertes. If we thought there were more immediate things to share with you, we'll give you the information when we publish the results, but Nature & Découvertes was also affected by the movements in the same way as Fnac and Darty because they have a strong presence in city centers. So consequently, we've said that the loss was greater for Fnac than for Darty. It's about 2/3, 1/3. And the main reason for that is because Fnac has a much stronger presence in city centers than Darty, especially in Paris, the main provision stores have been strongly affected. And also because Fnac is, by definition, in France, a very popular brand store for Christmas gifts and that's where the impact of the strikes is the greatest. The third question about BCC. As you said, once we have decided to look for a continuation of the activity, we're looking at possible partners. We have opened -- we have started a very transparent and open process. Ceconomy, I believe, was also contacted and informed and it's too early to give some information at this stage. I think it would be logical to say that there could be a possible candidate to be interested.

[Interpreted] Next question from Steve Levy from MainFirst.

[Interpreted] Once again, there are not that many questions, so I'd like to ask another question. About the dividend policy. Is it going to change in 2020? Would it be on the longer-term basis? And I have a question about the organic growth. Except for the franchises, is it going to be positive till Q3?

[Interpreted] For the dividend, first of all, we have to close the account and we need to have a discussion with the Board of Directors in the next weeks. At the moment, we are just making that preliminary statement of result. In 2019, in view of the positive and negative elements of our acquisitions, a door could be opened. Before we make any announcement, we need to talk to the Board about the resource allocation and in order to anticipate any dividend policy. As far as -- so we're not going to give that indication today, Steve.

Too bad for you, Steve.

[Interpreted] A new question from [indiscernible]

[Interpreted] I had 2 questions. About the number of visitors in December, you said it was impacted minus -- by minus -- it was about minus 16%. Was it compensated by the Internet sales? Doesn't seem to be the case according to the figures that were shared. Could you please give us some information? What about the guidance in 2020 about the slight growth? Is it an organic growth or...

[Interpreted] For the first question, the impact was very strong on store visitors mostly in Paris. The Internet activity has resisted, but did not benefit from that loss of sales in the shops. The performance of the e-com overall was quite disappointing for all players. We don't have the data with market consolidation and all the different activities, but the first indicators seem to highlight that the e-com has resisted, but did not have -- not benefited from the loss of sales in physical stores.

[Interpreted] [Operator Instructions] One question in English. Next question is in English from Adam Crocker from Logbook Investments.

I just wanted to -- just confirm the numbers for revenue. What is included and what is not, that EUR 7,340 million excludes BCC? And I think you said, but I might have missed it, how much BCC was? I just wanted to get the revenue numbers with and without the discontinued operations?

Okay. I'm not sure -- we didn't hear you well. If I understood, [indiscernible] these figures are excluded -- as far as [indiscernible] the sales number EUR 7.3 billion that excludes the sales of BCC and all the figures which we published today in the press release or during the con call excludes the figures from BCC. And BCC would have represented something like EUR 400 million of sales, if we were to consolidate it, but we will not.

[Operator Instructions] Okay. So no more questions. [Operator Instructions] Okay, so you have the floor for the conclusion. Thank you very much.

[Interpreted] And we'll meet again on -- in February for a complete report of our results in 2019. Thank you. Thank you very much.

The conference is over. Thank you for your participation. Thank you. You can log off now. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]