Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

[Audio Gap] H1 2020 results presentation for Fnac Darty. I'll be hosting today's event. [Operator Instructions] I'd now like to hand over to Mr. Enrique Martinez, CEO, to begin today's call.

Thanks very much. Good evening to you all. Thanks for connecting live to today's conference call. I'm with Jean-Brieuc. We're going to present the H1 results that we revealed somewhat during our 17th of June release. We decided to provide a business update for the months of April and May and to give you a bit more color on the impact of the crisis. So let's begin with Slide 3 of the presentation we sent out to you. We see that we achieved revenue for the first half of EUR 2.849 million, down 10% on a like-for-like basis in an unprecedented crisis with the closure of almost all the stores between the 15th of March and the 10th of May. And we had a loss of over EUR 400 million over that period. I'd like to stress that we had good operational performance and the capacity of the digital platforms. The weight of online increased 31% over the half as compared to the figure of the previous half of 18%. Of course, this figure benefited from the store closure during the period. But also, as you'll see, the -- even with the reopening online was very dynamic. So we see a very encouraging recovery as of the 11th of May, the reopening of our stores, strong sales dynamic that continued into June with very positive activity. But also the online business yielded good results, 60% growth in the first half, with a peak achieved during the lockdown period of 160%. These, of course, very significant numbers in online business that continued to grow as of May 11 with the growth of 85%. The group was able to attract new customers. We recorded over 1 million new customers during the crisis. And these dynamics continued after the reopening of stores. And amongst these new customers for the group, we have 190,000 new Fnac+ members during the first half. Now the dynamics is down 110 basis points, impacted by an important product mix effect. Also, the performance of services that was very disfavored by the mix. But there was a positive impact with the integration of Nature & Découvertes in the scope during the first half. So we landed with a level of margin at 29.6%, but compared to last year, remains a high margin level. Very good cost control, thanks to our rapid readjustment plan to turn -- to temporary unemployment in most of the countries, and that had a positive impact on our costs. We're posting a strong financial position at the end of H1 2020, with a cash level of over EUR 900 million. And of course, Jean-Brieuc will go into more detail in a moment. We're one of the first companies to enjoy access to the state-guaranteed loan, and one of the conditions of the loan was that we were able to withdraw the proposal for the dividend that we were due to pay during the AGM in May of EUR 1.50 and we're banned in 2020 to undertake -- from undertaking share buybacks. Moving to Slide 4. Just to remind you with this -- we have 3 distinct periods during the H1 and succession. At the start of the year, January and February before lockdown, we achieved a very good start to the year with revenues up 2.8% on a reported basis and a like-for-like basis that was similar, and even though the consumer spending context was marked by the transport strikes in France that affected the first days of January and also the beginning of the winter sales period. Against this backdrop, that's when the COVID-19 crisis struck with a phase of stores shutdown and mass lockdown during the period that started on March 16 and continued until reopening May 11. We were able to respond rapidly and we take many measures. The -- we saw that the resilience of our omnichannel model, its strength was once again be able to demonstrate its full relevance and delivered strong performance. The strong brand equity, Fnac Darty, the strong brand awareness in -- really was deployed its full operational execution and then served the customers who needed our products. And there, the quality of our operational execution and the robustness of our IT capability, we're able to ensure high standards of after-sales services and delivery. We achieved 220,000 after-sales interventions, even during the toughest period of the lockdown. I'd like to thank the teams who responded very professional, and they were very courageous during those very difficult times. If we look at the categories of products that were particularly sought after by our customers, I would -- a lot of IT, computers, accessories, gaming, small domestic appliance and white goods. We were able to benefit from this loan of EUR 500 million on the 19th of April. In a very short space of time, we're able to meet the crisis with a lot more confidence, and if need be, have a recourse to additional liquidity. Consequently, we supported the network of stores to reopen, also our network of franchisees to help them overcome the crisis with cash and financing and to meet requests for a state-guaranteed loan. And we helped them and supported them to -- for the recovery period, which -- with very encouraging results. After the 11th of May, we must say that we're very pleased with the way the group was able to execute store reopening. We put in place the highest safety standards to protect both our people and our customers, and that continues today because we've always ensured maximum safety in our stores. 9% growth achieved on a constant basis, with the customers returning to our stores, a sign of trust and confidence recorded by the various quality surveys that we conduct. Looking at June, it's more stable month, 21% increase in-store activity, like-for-like. And across the area, it's 25%. Digital dynamics comes in at plus 85% e-commerce sales dynamics. We were able to achieve renewed dynamics of Click & Collect, representing the key to the omnichannel model ability to rapidly deliver products. And we returned to a level pre-crisis that shows that even with lower level of traffic in shopping centers, Click & Collect is widely solicited by our customers. Moving to Slide 5, which shows some of the main achievements during the half year. We did not stop our diversification business strategy, continuing to invest in new and promising markets, with 13 new store openings mainly under the franchise model, strengthening the group's territorial footprint. We continue to develop our network of franchisees as well as the Darty Cuisine network, with the opening of 8 new corners, of which 4 are exclusively dedicated to the offer. We continued to roll out our WeFix with the opening of 5 new corners, bringing the total of points to 101 new openings at the end of June. And as you've heard, a major acceleration in urban mobility with the launch of the Citroën Ami electrical solution vehicle with a deployment in already 39 Fnac and Darty stores throughout France. And this was a high point and has a lot of media impact that was also good sales performance. The group has demonstrated even in a new category. It was able to showcase all its assets, and it's know-how and expertise for the distribution and new products, the Citroën Ami. Urban mobility won't stop there. It's really a strong symbol that we want to set up a full ecosystem around urban mobility, with electric-assisted bicycles and electric scooters, with the Angell bike, Xiaomi brand that will be coming on stream soon to develop our footprint and also generate considerable sales between now and the end of the year. And lastly, I flag as one of the highlights of the half year, the difficulty in selling of -- services during the lockdown, we saw that there's a restart of services since the reopening of stores with our Darty Max offer, which will enable us to capture new customers on our service offerings, which affirms the move from a transactional to a subscription model to secure greater loyalty. I'll stop there and hand over to Jean-Brieuc, who will detail the financial performance in the first half.

Thank you, Enrique. Let's -- I look in detail at each region before we talk about operational and financial performance of the group as a whole in H1. Let's move on to Page 7, France and Switzerland. Revenue for the area was down 9.7% like-for-like for the half yearly period due to loss in stores, due to the closure of all stores during the health crisis. Strong performance of online sales in the half yearly period plus the good start-up and resumption in store sales after lockdown helped offset the loss. Encouraging signs as the store opened end of May and in June. Big growth in revenue in June, up 25%. Good momentum for IT categories due to more remote working and remote learning, home learning. Also freezers sit well, air conditioners as well as gaming and other types of similar categories that didn't fully offset the down in books, audio and video, which are highly sensitive to impulse buying and were hard hit by store closures. Enrique said that services see a strong drop due to reduction in merchant services since the beginning of lockdown and stop of ticket sales due to governmental measures to stop large gatherings. After -- due to the crisis, we adjusted our operating spending quickly, established various measures to cut costs, and the initial effects were good but didn't fully offset the drop in revenue and the drop in gross margin. Furthermore, ramp -- a gradual ramp-up of insurance after switching partners has continued to have an impact on gross margin in the first 3 months of the year due to new telephone insurance offers. All of this had negative impact in a significant way on current operating income for the region, minus EUR 45.6 million, at least EUR 15 million of which related to Nature & Découvertes integration in the first half. I'll come back to that in greater detail in a moment. On to the next slide, Iberian Peninsula. The area was especially hard hit due to a longer lockdown than in other regions of the group, and a more gradual reopening of stores just completed at the end of the first week of June. Therefore, revenue, down by 20.5% for the first half like-for-like, in spite of good online sales in both countries and good momentum in IT and gaming segments. The macroeconomic environment and consumer purchasing power deteriorated substantially in both Spain and Portugal due to the health crisis. The macroeconomic situation wasn't -- weren't -- that had quite an impact on current operating income in the region, in spite of good work done by the teams and good cost containment, minus EUR 12.7 million, which is down compared to the first half of 2019. Let's look at performance for Belgium and Luxembourg. This is Slide #9. We see strong resistance in revenue, down only 3% like-for-like for the half yearly period. Thanks to good momentum in IT equipment called small computer equipment gaming and small kitchen appliances. We saw good online sales and a good resumption of business in the stores as of May. Growth in revenue up 22% in June, which shows a continuation of good in-store momentum since the ending of lockdown. There's strong competition in the period, but good operational performance within white goods shows current operating income, which is positive, plus EUR 0.7 million, slightly down by EUR 0.7 million versus the first half of 2019. Let's move on now to the income statement. This is Slide #10. For the reasons I've just indicated by region, revenue for the group at EUR 2.849 million, which is down 10% like-for-like. Revenue is, therefore, down by EUR 240 million in a half yearly period compared to the previous year. After positive contribution from Nature & Découvertes of around EUR 60 million, estimated loss of EUR 400 million in revenue due to the 2 months of store closed down, which to some degree offset by very good e-commerce activities, revenue up by around 70% as of end of June and good resumption of activity since the actual reopening of the brick-and-mortar stores. We observed continued good recovery in June, with growth of over 21% for the month, group-wide. Good momentum for online sales continued since the end of lockdown, up by 85% from 11 May to end of June. Gross margin rate. Gross margin, EUR 844 million in the first half, which is down by 110 basis points over the previous period. This reduction is mainly due to products and services mix, which is unfavorable due to store closures, a drop in sales of press product, highly sensitive to the -- and a drop in services sales, which are structurally lower through the Internet. But we've seen a gradual ramp-up in new insurance offerings after the change in partner in April of 2019. That continued to have an impact on gross margin in the first portion of 2020. Positive impact, up 60 basis points for the gross margin due to the scope inclusion of Nature & Découvertes, but it didn't fully offset the other elements. Since the beginning of the crisis, the group immediately set up cost-cutting plans and partial unemployment, saving around EUR 60 million in costs during the half yearly period. But logistics and delivery costs, of course, were impacted by the strong increase in volumes, EUR 11 million in expenses there. Operating cost also include an expense of EUR 55 million due to the inclusion of Nature & Découvertes to the scope. We're continuing to renegotiate. We've just renegotiated with partners financial agreements, amounting a highly significant group-wide as of the end of June around -- a savings of around EUR 3 million. For the half yearly period, negotiations are ongoing every single day in France and internationally. Momentum is good with our leaseholders, with our owners. They know that we can generate large footfall in a fairly down context for most shopping malls. Most of the savings in rental fees will be in the second half of 2020 or the beginning of 2021. As per what we announced in mid-June, current operating income, minus EUR 58 million, down EUR 104 million. In the upper level of the guidance given, I'd recall the following: integration of Nature & Découvertes, but to a technical -- a negative technical impact of minus EUR 15 million due to the brand's seasonality as expected. Excluding that impact, current operating income will be down EUR 80 million -- is down EUR 80 million versus H1 2019. Nonrecurring costs, EUR 25 million versus EUR 22 million last year. These costs include, first of all, technical readjustment due to the depreciation of the Darty brand mainly due to discount rates. These also include cost of EUR 6 million, directly related to the health crisis, setting up the safety equipment to comply with social distancing in stores as well as [ providing ] employees with logistics they needed during the lockdown. Excluding these [ tailwinds ], nonrecurring costs, EUR 5 million. Financial expenses, minus EUR 23 million, strongly down versus the first half of 2019. This includes, among other things, interest expenses, interest relating to the government-guaranteed loan and IFRS impact of EUR 11 million. As a reminder, financial expenses in the first half of 2019 include cost of refinancing of our bond EUR 27 million. After factoring in noncurrent elements, financial expenses and tax proceeds, EUR 26 million, relating to negative operating income. Net income of continuing operations, minus EUR 80 million, down EUR 46 million compared to the previous year. Having to deal with seeking a partner for the Dutch activity, BCC, which we began in the beginning of the year, the group has already booked a cost of EUR 42 million, which is adjustment of the value of the discontinued operation, which has no cash effect. Consolidated net income, group share, minus EUR 118 million for the half yearly period. Let's move on to Slide 11. Let's put in detail at the impact of the IFRS standard -- IFRS 16 standard on our first half results. As a reminder, the main impact here are on EBITDA, our debt position and our financial costs, excluding cash portions. EBITDA, EUR 119 million, which is down EUR 87 million compared to the previous year. IFRS 16 had an impact to the tune of EUR 124 million on EBITDA. So excluding IFRS 16, EBITDA would be minus EUR 5 million, down EUR 100 million, which is in line with the drop in current operating income, which I alluded to previously. Applying IFRS 16 standard, had an impact of EUR 11 million on financial costs booked under the income statement. As of end of June, net debt, EUR 1. 507 billion. IFRS 16 impact relating to this booked for rental income, EUR 549 million. Excluding this portion, net debt adjusted, EUR 549 million, excluding IFRS 16. Let's look at free cash flow generation as of end of June. This is page 12. All in all, free cash flow from operations, excluding IFRS 16, minus EUR 503 million, down compared to last year. This reduction is mainly due to 3 things. First of all, a drop of EUR 100 million in EBITDA compared to last year, which I just mentioned, plus there's another effect that's having to do with payables due to the lockdown and with positive impact in inventory, which we cautiously -- because we cautiously managed inventory during the half yearly period. Operating investments down by EUR 15 million versus last year's EUR 38 million. The group also paid out EUR 13 million under investments made in 2019, [ average of ] those. In the -- for the second half, we'll see this further drop in CapEx, expected amount of minus [ EUR 110 million ] all in all. Cash, effect of tax, was up for this period from minus EUR 15 million, now minus EUR 24 million. The group in 2019 saw the benefit of reduced taxation due to a portion of it was paid at end of 2018. Briefly now, let's talk about our financial structure. This is Slide number -- Page #13. We're in a sound cash position, EUR 1.2 billion in shareholders' equity. Excluding IFRS 16, net financial debt, minus [ EUR 135 million-some ] versus the end of the year. This is an understandable customary change due to the strong seasonal feature in retailing generally and especially at Fnac Darty. This was amplified in the half year period a negative effect that we talked about previously on WCR. As I mentioned with Enrique, during the half year period, liquidity has continued to be a group priority. It's strong end of June, in spite of the crisis that's unparalleled. We've readjusted costs to protect our liquidity. We've done an agile inventory management starting to -- at the beginning of the lockdown period. This strong financial management and good resumption of business and extension of the EUR 500 million state-guaranteed loan meant that we could have EUR 900 million in cash on hand at end of June plus the revolving credit line of EUR 400 million, which has not drawn on. Fnac Darty has around EUR 1.3 billion in cash on hand, which makes us confident we can [ triumph ] any uncertainty, which may remain in upcoming months. At the same time, considering uncertainties due to the health crisis, S&P has downgraded Fnac Darty to BB. But thanks to our good resistance and a very good resumption of activities after lockdown, rating agencies have left unchanged within outlook, which shows their confidence in the Fnac Darty business model. Furthermore, the group obtained a commitment from the lenders to accept suspension of the natural covenants for June to December 2020, but the covenants evolved and complied with as of end of June. We're showing yet again our strong ability to adapt. We're nimble, we're able to protect our cash position during an unprecedented crisis. Thank you very much. I give the floor back to Enrique to talk to us about the outlook.

Thank you very much, Jean-Brieuc. Brief conclusion before we move to Q&A. Obviously, the backdrop means that we remain prudent regarding the health situation and recovery. The group has displayed an exemplary action, which makes us confident in our ability to address new challenges if they arise. As all companies, the second half is critical for delivering our annual results. We've already put in place all the necessary action for -- to boost the uptick and after the summer break and moving into the end of the year period. I'd like to thank the teams and our partners and all the teams in the ecosystem that has allowed the group to face this crisis remarkably with their impact on H1. These are making us confident in our ability to address the challenges as we move to the end of the year. As Jean-Brieuc said, we're entering the end of this first cycle of the crisis probably better prepared to address the challenges ahead, with the cash position that is far more significant, thanks to obtaining this term loan that makes us confident in our ability to address the crisis. And we're now ready to take your questions.

[Operator Instructions] The first, from Mr. Nicolas Langlet from Exane.

I got three questions. The first, could you tell us how sales have trended since beginning of July? Have you seen continued dynamics in June, and we're beginning to see a normalization? Second question on gross margin. How do you view the trend in -- to H2? On the one hand, we have Nature & Découvertes, less positive impact in the service and product mix that could be improved. Taken all in all, the stability of the gross margin. Does that seem to you reasonable? Or is it too optimistic, the drop OpEx of minus EUR 69 million? Excluding Nature & Découvertes, how much is linked to the state loan? Do you anticipate further state loans? And do you have initiatives for cost-cutting over and above what is normally planned?

Thank you, Nicolas. Well, we haven't -- we can't really give you too much detail, but I'd say that trading remains a good trend, similar to what we saw in earlier months, that the sales were key last year. They were less impactful this year. But over and above that, we've said it's in fact with the performance in June, July. A bit less in Southern Europe. Spain is suffering from further lockdown in Catalonia, impacting traffic, and Portugal has a lockdown exit profile, somewhat different to that of France. Gross margin, maybe Jean-Brieuc can -- but for the first half, that was linked strongly to the product mix effect and the service effect. This is something that, in normal operating conditions with activity that is far more normalized, should not happen again. We anticipate the margin in [ a stable ] pretty constant. I mean we don't expect impacts as seen in H1. And you know that the group is very determined to deliver stable margin performance, with the service input at the right level. Now on the OpEx -- well, on the margin technically, Nature & Découvertes was -- slightly impacted the second half as Nature & Découvertes enter the scope in the first of August, so it'll be July, their -- on impact OpEx and margin, for marginal amounts, but there'll be -- it will be seen. And in H2, we won't have the impact of the change in the insurance partner that had hurt the first half of this year. On the OpEx front, the bulk of the savings or on personnel costs, with the term loan and payroll costs not paid because salaries weren't paid, we also saved a bit on the other SG&A. We consumed less electricity and other utilities during the lockdown period, and we didn't book the first half generally rental savings. The strict accounting rule, what is not signed at the date of the closing isn't taken into account. So we booked what has been signed with the landlords of EUR 3 million. There'll probably be more significant impacts in H2 or even into '21, but we're in no hurry. We have good arguments and the strength of the brands on our side on H2 to return to OpEx. Well, it depends. But today, in normal trading conditions, we won't have recourse to state funding. And those term loan plans will take their course as normal in the second half. Potentially, OpEx at normal condition will be -- will remain stable. But we'll see at the end of the -- it will also depend on the channel stock mix, but we're not expecting any big surprises on the OpEx at the end of the year.

Next question from Ms. Aurélie from Kepler.

Actually, two questions. Firstly, on the July comment, you say similar to the previous month, the actual month, June. Can we expect July then to be similar to June, around 25%, which is an exceptional performance? On June specifically, lots of promotional activity. Was there? I don't think so. But could you confirm whether or not there was a lot of promotional activity? Question two, you added EUR 10 million above guidance, midrange. If consensus for the full year will be EUR 10 million above the current level, would you be happy with that? Last question, recall your CapEx guidance for 2020, please, if you don't mind.

Thank you for the questions. We won't be giving figures. We said we were satisfied. This growth -- when I say satisfied, is that business normalized. We've coped with the period, we built a good quarantine month. We won't give you the specifics though. June was a fairly extraordinary one. CapEx, onto that point, we said under EUR 100 million, substantial drop compared to CapEx last year. We have big strategic projects, but things were frozen during the lockdown, and expecting to a -- less CapEx for the remainder of 2020. End of year landing, we don't comment on it. We talked to the year-to-year calculations. We need to remain cautious regarding performance. Things could considerably change the landing. There are risk factors. We're very cautious. We will not give any specific indications to the market as to the full year landing. Question on promotional activities. Answer -- last year, there was a week of sales end of June, beginning of July. Discount sales, positive results. This year, a lot less. There are some commercial events, but not actual promotions as such.

Next question, Mr. Christian De Vim from CM-CIC.

Yes. I have a brief question. Online sales, I was just doing the math, 18% of sales of early '19, and 30%, EUR 530 million last year, EUR 830 million, that's an increase of 35 -- 38%. Could you give us the split online-omnichannel sales? And the follow-up is that you costed the impact of COVID on store closures, EUR 400 million on revenue. Last night, Maisons du Monde tried to [ cost ] the impact on stores at online sales. We lost EUR 400 million in sales linked to the COVID-19 on stores. Do you have an estimate of the impact on the online sale, of this kind of excess activity that it's not set to last?

Yes. Online sales not -- it went from 18% to 31%. That's a significant increase. But on a base that is declining, you need to bear that in mind for the second half or at least Q2. Don't know if you want -- if there was a more specific point on that, Christian. On COVID impact, COVID, it's pretty complicated. We didn't want to risk starting to do the split, online sales, store sales, et cetera. [ And you know that ] we had -- we saw Click & Collect that was down through store closure. And then Click & Collect rate, that came back to normal in June. So that's good news. And overall, the impact of COVID on stores of the group, we're not going to start to try and seek out the causes, the impacts to detail, rather the impacts across the stores. What we saw, a reduction in sales of EUR 300 million in the court, 300 -- well, EUR 300 million, with the recovery into June of some EUR 100 million compared to what we estimate.

What's the portion linked to COVID or to the more sustained business, return of customers to stores?

It's really difficult to see clearly there, but we're not going to risk doing that exercise in detail. Enrique?

Yes. Well, between the period 15 -- March 15, May, we're 20% of our revenue, that was -- multiply those a portion of store sales that was transferred to online sales and new customers because we did create 1 million new accounts when we reopened our stores. June week, stores were positive and online, almost times 2. So there's a portion of transfer of recovery of sales that were not done in March or April and then a proportion of the normal business. I think it kind of disrupts some of the portion. I mean Click & Collect, I mean, it's about 50%. But if your stores are closed, it becomes 0. So what we've seen when the stores were closed, pure online business worked very well. We saw very strong growth rates. And as soon as the stores reopen, we returned to a very strong growth profile. With the use of Click & Collect, that was as important as before the crisis, with very significant volumes. That's very encouraging, which indicates that the group has the right tools, the right system to be -- online growth while putting a system to recover store traffic in those stores. Well, we gave you the EBIT of Nature & Découvertes.

Could you give us the revenue of Nature & Découvertes on H1? I don't have that.

EUR 60 million for Nature & Découvertes.

Next question from Geoffroy Michalet from ODDO.

I got two that have to do with WCR. First of all, an inventory reduction on the order of around EUR 150 million. Approximately -- this is approximately the extra foreign exchange '20 versus '21? Can we take it then?

We didn't hear the end of the question. [Technical Difficulty]

Next question, Marie Fort, Societe Generale.