Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Good evening. Welcome to the presentation of First Quarter Revenue 2023 of Fnac Darty and the planned acquisition of MediaMarkt in Portugal. Mr. Enrique Martinez, CEO of Fnac Darty; and Jean-Brieuc Le Tinier, CFO, will take the call. Over to you.

Thank you very much. Good evening, everyone. Thank you for being with us for this conference call for the presentation of our first quarter 2023 results. Our press releases and the presentation that we are going to be giving during this call are available on our website. I am delighted to be with you for this conference call for 2 reasons. First of all, because the stability of our revenue and gross margin in the first quarter show excellent performance, excellent results, which demonstrate the capacity of our group to adapt to meet the needs of our consumers and to provide value. I guess a backdrop of growing pressure on this purchasing power. Furthermore, we are announcing the acquisition of MediaMarkt in Portugal, 25 years after the opening of our first store in the country. We now have the opportunity to consolidate our position as #2 in the market on this free dynamic high-growth market and to provide to our Portuguese clients a full range of products and services as part of our Fnac Darty project. So before going any further, I'd like to give the floor to our CFO, Jean-Brieuc.

Thank you very much, Enrique. Fnac Darty posted held up very well in terms of revenue in the first quarter. Our figures are stable on a gross published basis. This can be compared to first quarter 2022 results, which we can now qualify as normal after the post pandemic -- after the pandemic period. First of all, these results display strong growth in our in-store sales against the backdrop of a sustained number of visits. Our stores are repealing with the product, the quality, the advice of our sales staff. Our online sales are now at a high level of 22%, 4 points better than the pre-COVID level, confirming the quality of our digital offering. Finally, click and -- afterwards, Click & Collect, which is a key indicator of our performance is now accounts for 49% of online sales, up 2 points on 2022, bearing out our choice of an omnichannel model. With the stability of our sales, we've also been able to maintain the stability of our gross margin in the first quarter. In fact, the gross margin is up 20 basis points after restatement for the franchise effect. These good results are due to the positive contribution of services, and in particular, the point of Darty Max and a pickup in ticketing. Let's look at the commercial performances by region and product category. The France-Switzerland region held up well with sales at minus 0.3% on a like-for-like basis due to the strong performance of in-store sales. In France, in particular, the group continued to outperform the market in the first quarter according to the most recent figures published by the Banque de France to end of March. We should note that the scope effect on the region is almost neutral. In Paris, the scope effect is slightly -- is negative with the closure of the [ Italy Parisian ] store in Switzerland is positive with the partnership with Manor in the second quarter. And in particular, in the second half, we should expect a negative scope effect in Switzerland, given the decision to leave the German-speaking region of Switzerland by end of May, notwithstanding the continued growth in French-speaking Switzerland with 27 in-stores versus 23 at present. On the Iberian Peninsula sales are down 1.6% with contrast between Portugal, which is up slightly and Spain, down given the major pressure on spending power of consumers. Finally, the Belgium and Luxembourg region is on the rise again with an increase of 3.1% on comparable data. Sales are also driven by the new store in Brussels in May 2022. Moving on to performance per category. Editorial products are up strongly driven by the increase in traffic in stores. The shift in spending from a household goods to leisure cultural products, a significant video and audio products, in particular, vinyl, also post strong results as well as gaming, which is up strongly given the strong uptick in PS5 sales. Services continue to rise across all regions with the continued growth of Darty Max and encouraging pickup in ticketing. Technical products posted -- reflected the strong growth in telephony as well as leisure products such as sound and photo. The whole category, however, is down with the decline in hardware sales in particular, computers. Finally, household appliances are down quite strongly in volume, both in large and small items. Given the pressure on purchasing power and after a strong pickup during the COVID period, the pandemic period, consumers are on a wait-and-see basis. And I'll now hand back to Enrique, who will present our acquisition project in Portugal.

Well, we've been in Portugal for the past 25 years. We've achieved a great success there. And the acquisition project for MediaMarkt in Portugal, which we presented is really extremely satisfying. With this transaction, we will be able to increase our revenue by approximately 1/3 and consolidate our position as the #2 player in the country by integrating the 10 media market stores and bringing on board 400 media market employees who will join our current team of 1,700 employees. We'll be able to build an ecosystem of products. And this transaction consists in buying a network of 10 stores and website spread across the region, the density populated regions of Portugal in the North Center and in the Lisbon area. The geographical presence is, therefore, very complementary with that of our 35 Fnac stores. This acquisition will enable us to add to our range of products, in particular, electronic and household appliance products in addition to our very strong offering in editorial products and consumer electronics. We will also strengthen [ our provision in ] services, product repair. The company is slightly profitable in terms of ROC and the country will benefit from operational and commercial synergies. The implementation of the transaction, however, is subject to approval of the local competition authority, but I'm confident we will close between now and the summer. In conclusion, this transaction is fully in line with the core of our Darty Fnac projects. I'm very satisfied that it will be able to establish in the development that we've achieved successfully over the past 25 years. To conclude, well, we are very satisfied with our performance in the first quarter. Admittedly, the first quarter is not the most important of the year. But in a challenging environment where consumers are adjusting their purchasing behavior to the constraints that weigh on the purchasing power is very important to be agile, responsive to adapt our offerings and services. And this is what we have done with some success. So in addition to containing costs, we have been able to focus on the longevity of our operating model. We have developed a major investment plan for our stores to reduce energy consumption. As of the end of March, we had already renovated and converted to full LED, 20% of the stores that we own, which sets us on track to achieve the 15% decrease in electricity consumption that we're aiming for and that we explained in February. And we are planning to renovate 60% of our properties by the end of 2024 and 100% by the middle of the next financial year. We are following the macroeconomic situation very closely and consumer trends in our sector. But our performance over this first quarter enables us to confirm our guidance. That is to say, current operating income around EUR 200 million, cumulative free cash flow from operations at about EUR 500 million and free cash flow from operations of at least EUR 240 million annually starting 2025. To conclude, I'd like to talk about the arrival of new Board members. In recent months, the Board discussed how we might include new members for more diversity. And we are very happy to be putting Olivier Duha up for nomination at the next shareholders general meeting. He is the Founder and Co-President of Webhelp. He created unicorn and a true global success story in a matter of just a few years. I strongly believe that his talent and his skills will be of great value to the work of the Board, which will now have 14 members, of which 11 independent Board members, 6 and 2 staff representatives. I thank you for your attention. And Jean-Brieuc and I would be happy to answer your questions.

[Operator Instructions] First question, Marie Fort of Societe Generale.

I had a few questions on your first quarter revenue. For Belgium, in particular, you talked about tax measures in your press release. So what was the impact of that? Was it significant? And then on sector trends in France, the Banque de France document explains that for consumer electronics, there was a drop in value and in sales volumes. But there may be a mixed effect or a kind of deflation. I wanted to know what -- how you interpreted that? Is it competition? Or is it related to specific product categories? Those are my 2 first questions. I also have questions about Portugal. You talked about synergies without necessarily going into numbers, I know you may not be able to -- could you tell us, in qualitative terms about the synergies, is it in terms of purchases costs, the product offering that you mentioned in brief, what about the sales momentum within MediaMarkt in Portugal in recent years as compared to your own sales. And you mentioned that it was already profitable. How does that play out as compared to the numbers for the Iberian Peninsula?

There are lot of questions. All right. So for Belgium, there were tax measures for consumers to help support consumption, and we have this new store that's doing very well indeed in Brussels.

Could you tell us a little more because these effects may not last. So what do you think the effect might look like in the future, would it account for half of growth or more?

Well, for the moment, it's a positive trend for consumption. Last year in Belgium, wages increased considerably. So that was one aspect. And then energy costs increased considerably in Belgium as well, which affected consumer purchasing power in 2022. And if you look at energy cost today, they are starting to drop and consumer behavior could change in our favor, because they still have a 10% extra in wages. So we'll see how that plays out through the year. I can't really quantify the exact effect of the tax measures. Now, on France, you talked about volume and prices. To answer you directly, the effect isn't as intense as it was last year, but there's transport costs. There's the dollar stabilizing. So it's quite stable, I would say. And then, of course, there's a mixed effect for different categories, different segments within product categories that could explain that. But no, I wouldn't use the term deflation. Now, on Portugal. So we are acquiring MediaMarkt in Portugal, which is already profitable. And we will be leveraging synergies that are organizational with ancillary roles that we will not need to replicate as they already exist. And then we will be working together on electronics. So we were already -- we will already provide consumer electronics and services. And MediaMarkt also provides consumer electronic services and appliances. So we have that in common, but it will also help us diversify with [ make a slack ]. We are reproducing what we did with the Fnac Darty merger in France. So we are expanding our product range. So diversification in the product offering. Without going into figures, I think what's important is that we are growing our model in Portugal with services and the strategy that we're pursuing in other countries, too. So, household appliances were not yet active on that in Portugal, but it could be the case in the future. And that can really supplement the offering today in Portugal.

I have a final question. Now you said that the name would remain MediaMarkt. But once the transaction is complete, would the stores be called Darty or Fnac. It sounds like it's more of a Darty than a Fnac model.

Well, we'll have the answer for you in a few months. We haven't quite decided yet, but it will not be called MediaMarkt in the long run. But we'll make the announcements a bit later. We don't know yet.

Next question is from Clement Genelot from Bryan Garnier.

I have 3 questions. First of all, on the like-for-like performance. Just to see whether this like-for-like performances are not consistent or whether there is this -- is there a sequential improvement month after month. Next on ticketing. In the press release, you talked about the pickup in ticketing as a driver in the improvement in the gross margin in 2023. But unless I'm much mistaken, I thought the pickup in ticketing was achieved in 2022. So I just wanted a clarification on that and to see whether we'll get a boost due to pick up in ticketing 2023 as well. And next to go back I understand that we don't have a valuation. It's just to see whether there's an improvement in the -- with the valuation of [ Mac ] or whether we're closer to the valuation we had previously?

On monthly performance, there's no big change over the past 3 months. They're different in volume terms. February, obviously, was smaller. January is bigger with the sales, but no particular difference compared to last year. Quite frankly, nothing particular to talk about there. On ticketing, the ticketing pickup was gradual after the pandemic. In the first quarter, we did not have a full recovery, don't get there was -- we ran out of stock on some of the tickets that had already been selling from the second quarter. We should be able to have a more -- a better comparison. Ticketing is doing well. And there'll be last year, if you remember, we had the limitation on traffic in January. And January last year, if you remember, was far from what it should have been. So what we -- our performance here is going to be what we expect for the year. And on valuation, we won't give detail on this, but it was more in line with the overall MediaMarkt system, which reflects standard results in the immediate future, no comment, but quite frankly, it's pretty good.

[Operator Instructions] There is an additional question from Marie Fort, Societe Generale.

Yes, sorry, I was on mute. And goes without saying perhaps, but you are making this acquisition in cash, is that right? That's my first question. My second question is, could you say a bit more about the energy costs. So how things have changed since your February presentation. Is there any improvement? Or is it still a similar situation?

On payment, yes, we had to [ pay cash and we paid cash ]. On energy costs, 2 aspects. First of all, reducing consumption with a priority. We told you that during the second half, and that was a success. Temperatures were relatively, I mean, tolerable. So we were able to keep costs down. And then for lighting and all of the other strategies, I think that, that should bear fruit later this year. So we really need to make sure that we implement this energy cost reduction plan. In terms of prices, it's not quite at the same level as last year. So perhaps we'll remain under forecast, but it's a bit early to say. We are also using solar energy now at a cost that is below market levels, which should help soften our lending. But we'll tell you more later this year, there are a number of variables to take into account overall consumption and other factors. But we are happy with the way things are going, and we'll do the math a little later.

Can you tell us what your target is in terms of energy?

EUR 30 million to EUR 50 million less than last year, more than last year.

[Operator Instructions] For the time being, there are no further questions.

Well, thank you all very much for taking part in this conference call, and see you very soon, and thank you so much for being with us. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for attending, and you may now disconnect. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]