Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Fnac Darty Estimated Performance 2020 conference call. My name is Lydia and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you to your host Mr. Enrique Martinez, CEO, to begin.

Thank you very much, and good evening, everyone. First and foremost, I'd like to extend a very warm welcome and wish you a very happy new year, hoping that the year will be quieter than last. I'd like to thank you for attending this phone conference. I'm here with Jean-Brieuc Le Tinier, our CFO, and we wish to present an estimate of our performance over the last year and address your questions. By way of a reminder, this is not a pre-report, this is not the pre-release of our annual statements, which haven't yet been closed or confirmed by the Board. The numbers presented here today and in the press release are neither audited nor final. Given the specific context of this year, we have decided not to wait until the 23rd of February to publish an estimate of our 2020 performance, but we still hope to see you then when we can supplement the information on the date that had initially been sent. The presentation has already been sent. You should also be able to find it on fnacdarty.com. Slide 3 first, and I'd like to look at Q4. As you know, it is a key quarter for our group. Fnac Darty in 2020 managed to secure very good commercial performance in Q4. Sales would be or are expected to be up some 9.6% like-for-like. And this shows how we can overperform during the major events of December, Black Friday and Christmas, namely. There has obviously been the impact of the second lockdown for November. However, the way in which the group is organized has meant that we were able to combine 65% or so accessibility of products in our French stores and Click & Collect across products and categories. Digital performance is the key factor of the last year, it's very visible with a quarter for 70% compared to Q4 2019. And the orders for Click & Collect in Q4 have gone up some 40% compared to the previous year. As concerns product categories, the fourth quarter has confirmed the good dynamics of white goods and technical products such as anything related to working from home, televisions and telephones. Editorial products at the end of the year have shown a good trend, improved on the previous months with the book releases and everything related to gaming and the new consoles such as PlayStations and Xbox. Finally, our diversification has established its real success, driven mainly by urban mobility, which has experienced a growth in sales on Q4. Slide 4. If you look at the full year, you can see that there's a digital overperformance in Q2 and Q4. This shows that we have been able to switch our forces, our strength to e-commerce so that we could manage the lockdown and respond to our clients' and customers' consumer patterns. In this context, with 2 periods of lockdown and some or all of our stores closed, the group, nonetheless, managed to generate some EUR 7.490 billion, up some 0.6% like-for-like compared to 2019. Fnac Darty confirms its position as a leading player in the digital sector, a leading digital player in its sector, with online sales up 10 points, up 20% to 29% and 5 million new clients. We see a real difference between Northern and Europe -- and Southern Europe, in France, Switzerland and Belgium, Luxembourg. We have strong dynamics on sales with -- being up 2% and 1% like-for-like for over the whole year in the Iberian Peninsula minus 11% like-for-like, and this is due to less buoyant macroeconomic environments and the strict restrictions in the main cities where Fnac is present. Now on to Slide #5. We're going to talk about margin. Margin rate reached 29.2% in 2020, down approximately 120 basis points versus 2019. This drop is due to 3 elements: the unfavorable product mix to the tune of minus 80 basis points drop in in-store traffic due to 2 lockdown periods and solid numbers of people allowed in the stores, which had a really impact in editorial items; furthermore, technical sales were up throughout the year, technical products. As we already said to you, ticket sales are substantially down. The impact on gross margin is on the order of minus 65 basis points with an even bigger impact in Q4, which eventually is a time when a lot of live performance ticket sales take place; lastly, integration of Nature & Découvertes offset the drop in merchant sales, which were impacted by drops in in-store traffic. We're expecting current operating income at around EUR 210 million in 2020. I would like to really say the group has performed very well in its time of crisis, has managed to reach an operating margin the second half, which is stable versus the previous year. This was possible, thanks to good management of operating cost as well as readjustment plans entailing government measures, assistance in various countries where the group is present. Now on to Slide 6. Operating free cash flow should reach around EUR 190 million, up versus 2019. This performance is a reflection of excellent management of working capital requirements throughout the crisis. This is further amplified in December with very good sales momentum. We complete 2020 with a lower level of inventory versus last year due to good sales dynamic in Q4 2020. Lastly, the group very quickly established readjustment measures to adjust cost to protect liquidity. Very agile management and carefully controlled purchasing was also very important. The group is showing a strong financial position as of 31 December 2020. Cash -- available cash on the order of EUR 1.5 billion, which includes state guaranteed loans, EUR 500 million, and we can add to this EUR 400 million of revolving credit lines that are undrawn. Lastly, to move on to Slide #7. Before, together with Jean-Brieuc fielding your questions, I'd like to talk to you briefly about our group's outlook for 2021. As you can well imagine, there's still a lot of uncertainties out there. We're expecting the first half of 2021 to still see disturbance due to the health crisis and restricted measures. For instance, in France, the government recently announced there will be a curfew every day starting at 6 p.m. In Switzerland, the government decided to close what are deemed nonessential product aisles in the stores. And Click & Collect being important, therefore, and this will be probably in the second half. We can say, though, that in 2021, towards the end of the year, things should normalize. That's why we continue to be confident and cautious when it comes to 2021 in the second half. You're familiar with the live performance industry. And we're not expecting any return to normal situation in terms of ticket sales until the second half of 2021 at best. Lastly, resumption in economic activity in Iberian peninsula has been more sluggish than in other countries where the group is present. Therefore, in 2021, Fnac Darty is expecting slight growth in sales, the current operating income -- as well as current operating income versus 2020. That's the outlook. And now, we'll be very happy with Jean-Brieuc to field your questions.

[Operator Instructions] I see we already have questions in the queue from Nicolas Langlet first.

Two questions. One, on the outlook for 2021. You're saying that you expect margins to be pretty stable over 2021, at least that's what I understand of what you've said. What are the underlying hypothesis on gross margins and OpEx for this guidance? Second question. Can you tell us -- give us an update on rent renegotiations, what did you secure in 2020? And what can you get in 2021 or hope to get? And lastly, can you tell us more about the marketplace? What was the trend over Q4 and over the whole year?

Thank you, Nicolas. The outlook first. We wanted to give some kind of indications to the market, even despite the context. Over the last few months, we have shown that the group is able to switch some of its business, most of its business on digital, so much so, and that has shown in the operating margin. The top line is up slightly and the operational should be stable. We haven't given any numbers yet. Of course, if you look at the major numbers, the big numbers, we expect to recover margin. And this will have an impact also, of course, on operating income because we've said that the drop was directly linked to the drop in traffic and footfall. But we do know that some of the losses will not be entirely recovered, for instance, on ticketing and live performances, and we have real doubts on that one for 2021. If you look at the P&L, and you'll see that in greater detail on the 23rd. We have enjoyed the benefits of the support plan programs from various governments and the fellow schemes. And that basically means that we expect margins to go slightly up, OpEx also, compared to 2020.

On rents. We've factored in slightly less than EUR 20 million in economies or savings. You'll remember that we mentioned some EUR 3.5 million in Q1. We're talking about rents subsequent to the first lockdown and the first closure. We did manage to get back some EUR 20 million in savings. There are still negotiations or discussions underway. Some of it will go to litigation. And we can expect to see the results later in this year and possibly 2022. But the numbers would be nowhere near the EUR 20 million. 2021. We don't expect the stores to be closed down, and therefore, I don't really expect any savings to be booked. Under the first lockdown, of course, there was a compulsory closure of stores. This time around, we'll have one sort of individual negotiations in the broader context of the yearly negotiations. And it's true that some of our stores have experienced difficult times in 2021. As for the marketplace, we'll see that with the closure later on. What we can say is that the owned business actually grew more than the marketplace. There has been an impact, indeed. But you will see the difference with the owned business during lockdown, but also outside of lockdown.

Just to add to this question about the EUR 20 million on rent. This is something that you don't expect in 2021. It's a one-off for 2020, isn't it?

Well, if the stores are open, there's no reason why we should have any savings on rent.

What about government aid and support? Any idea of what you got for 2020?

Yes, we do. So we will say more when we have the fully audited accounts. It's quite a sensitive issue. It is slightly sensitive, but it sort of is online with what we said at -- with H1. I don't want to make any clear announcements or significant announcements now. The amounts on rent that Jean-Brieuc mentioned are directly related to the COVID situation. Anything on rent in the future will really depend on what the rules are for COVID, and we'll see. But I think that the business for 2021 will set the tone for negotiations later.

[indiscernible] Capital Investment Management.

I've got 2 questions. On new web customers. During your disclosure of the first half results, you talked about several million of web customers over 5 million now. I was wondering, first of all, is this momentum continuing? And has it speeded up during Black Friday and Christmas time? Or is this an overall more uniform uptick we're seeing throughout the half yearly period? Second point. Do you think these are customers that may become loyal customers that may repeat these online sales in the future?

Thanks for the question. Figure was at the beginning of the crisis, during the beginning of lockdown, there was a big uptick. But then throughout the year, the trend continued and speeded up toward the end of the year, during the period when there are a lot of impulse purchases and end of the year purchases. So yes, a good performance. Over 5 million additional active customers, people who've already purchased and done repurchases, similar to the customers who are already accustomed to our online platform. So they weren't just onetime purchases. These were customers who actually came in to the circuit, so to speak, and become regular online customers. So our view is these are customers with whom we will establish a long-term relationship. Many of the new customers took out loyalty cards. The digital loyalty cards were renewed during 2020. Part of this was new customers with the loyalty cards at the end of the year, they made a lot of digital online purchases.

[indiscernible]

Three questions from me. First of all, the government-backed loans, I expect that the payback is not expected for the next few weeks. But if you expect it to be paid back by the end of H1, would that go against the payment with potential dividend? That was my first question. Secondly, where do we stand on the franchisees? And thirdly, your online exposure used to be somewhere around 20. Now it's more like 30 at year's end. What do you make of the online evolution over 2021? Do we expect it to fall back before it goes up again? Or do you -- would you say that with COVID, we've gone through the glass ceiling?

Well, the government-backed loan, we signed it or secured it in April. So we would have to pay it back in April. We'll have to decide then how we do it. We've already booked it, and we're probably not going to pay it back before. The ban on dividends with government-backed loans actually only ran up until the first of January. So whether we keep the government-backed loan or not, we will still be able to pay out a dividend.

We'll see that from Enrique. We'll see that later with the Board anyway. As for franchisees, we do hope to be able to find an agreement soon. The franchise holders have actually been very buoyant to significant growth, somewhere around 10%. So that means that the franchise holders are pleased and relieved. We also have good reason to hope that we can find an agreement on requests. But the franchise network is very dynamic. As for online sales, as you said, the numbers were exceptionally high. And in fact, even when the stores are closed, the business is still good. Now we probably haven't quite understood how things will pan out, so there are still restrictions on mobility, on working from the workplace or from home. So we're not going back to normal yet. And we'll have to wait before we look to the future, but the fact is that we do have more than 5 million new customers that we didn't have at the beginning of the crisis. So that's the new fact. And the normal level will probably not be back at what it was in 2019. It will probably be less than what we had in 2020. Maybe, I don't know, 24%, 26%, we'll see. But we'll have to make sure that we have multichannels. The Click & Collect was very effective, 40% during the period covered. So I think we can expect this to last longer, and we will see.

The next question is from Mr. Florent Thy-Tine, Midcap Bank.

I've got 4 questions. First of all, I'd like to know about deliveries, if there's any change. People are accustomed to being -- to get their deliveries at home or they continue to have to home deliveries even when stores have reopened to the detriment of Click & Collect. Could you also tell us about store performance in terms of footfall versus 2019? Next question on the curfew. It's early days, but still, what do you expect the impact to be on your business? Question 3. November. Some points you made there. And lastly, what are your expectations for cash flow generation in 2021? Are we talking about the same guidance of revenue and margin? Ditto when it comes to revenue guidance, low growth, cautious in H1. I saw the situation, and this is why you're cautious.

Enrique, thank you for those questions. First of all on deliveries, people are often accustomed to Click & Collect and they stay with that. This is well-established from the customers. People are continuing to use Click & Collect quite significantly. You have to factor in restrictions on mobility, transportation, so forth. But people like the speed of deliveries we made very quickly and safely. Question 2, on traffic performance, curfew. We can't say yet. Now if you compare with December when we -- there was the exiting of lockdown, there was also Black Friday and then maximum numbers of people allowed in stores. And these are some of our largest stores where there was a maximum amount of people allowed in. So lots of different pieces to factor into all this. What I can say, though, is we could have accommodated a lot more customers. We think of the various stores, the Fnac stores and so forth. There were long lines waiting outside during the Christmas period. So sales were held back due to these restrictions, and we complied with all these very carefully. Third question on furlough in November was limited, leads to various mechanisms, perhaps purely taking time off, vacation and so forth, a certain percentage. For ticketing and Nature & Découvertes where the stores tended to be closed more, but we're talking about non-significant amounts. And curfew points. Well, that's brand new. The curfew is brand new. Two points here, mustn't forget. There's been a delay in the sales period and discounted sales. There are certain time frames for discounted sales in France, is going to change in the allocation. Now we are opening the stores earlier, 9 a.m., that's for the early morning purchasers. Our customers has spent some of the time at work and sometimes shopping. We know we're going to get further authorizations to open in -- on Sunday in January and February. That will make up for some of it. Plus digital business, we'll see where we end up. But so far, certainly no concern.

To comment on free cash flow 2021, our guidance on 2021 free cash flow. We'll talk about this in greater detail when we report to you our 2020 cash flow, and we'll talk about its composition. And you get a fuller explanation in WCR, CapEx and so forth. So for the time being, we're not giving any guidance on cash flow.

I forgot to mention regard to caution, one of the reasons for caution. We see increases, some ups and some downs, and there is some uncertainty so it makes sense for us to be cautious. We'll be very pleased to increase our guidance once things become clearer. I think it's important though for us to exercise caution.

One further point on cash flow in 2021. So Jean-Brieuc, there should be a change in pace of store openings?

Well, in 2020, we will have opened about 40. Do we have an exact figure? 24 February, 2021. Well, that's mostly franchise holders or small-sized stores that we opened that does have a marginal impact in terms of differences between comparable and like-for-like.

[Operator Instructions] Next question, Mrs. Marie-Line Fort, Societe Generale.

I wondered whether you'd seen any change in sales patterns between the first and the second lockdown. Have consumer behaviors change in France? Secondly, on services at Darty, Darty+, more specifically, how did things go over the course of the year? And secondly, the impact of shipping from China, do you expect additional costs to be derived from that for 2021?

First question. To give you an answer, there's a very great difference between the first and the second lockdown. The stores were closed during first lockdown, so digital was big then. And the impact, therefore, of lockdown was very different. On services, their operations or their results were impacted by the close of -- the closing of stores. We'll get detailed numbers for Darty Max at the annual statements call but we are seeing it go in the right direction in our relationship with customers. And this is key also for the future. On freight, we have seen that recently, we must say that we have only small volumes from China. But the real question is, will the manufacturers be impacted and pass the prices -- pass it through on the prices? So I think we'll have to see how things go. But again, as a concern to us, the impact is not significant.

There are no further questions in the queue, so I'd like to give the floor back to Mr. Martinez to conclude.

All right. Well, thank you very much for listening, for being available for this evening's meeting. We'll meet again for more detailed presentation, and we'll field all your questions then on February 23. It will also be online presentation only, unfortunately. Thank you very much for listening. See you soon. Talk to you soon. Bye-bye.

Thank you for being part of today's session. You can now hang up.