Fnac Darty SA (FNAC) Earnings Call Transcript & Summary

Hello. Welcome to the conference for the presentation of the half year results of Fnac Darty. Enrique Martinez, Director General; and Jean-Brieuc Le Tinier, CFO, will be speaking during this call. Gentlemen, the floor is yours.

Hello. Thank you, everyone. Thank you for being with us for the presentation of our half year results. I know that the week was tough, so I'll skip through the essential. I want to first express my support to the stores that had to face riots and the consequences. And most of our stores have reopened. Only 1 is still closed. And we have 3 reasons for satisfaction. We've been resilient in our sales in spite of the [indiscernible]. We've improved our gross margin thanks to our multichannel strategy and [ based ] on value creation and service. Can I have a second slide? Activities during this semester and then Jean-Brieuc will tell us about the financial aspect, and then we'll have time for questions after conclusion. As you know, the household confidence has dropped after the energy crisis, and we've had a drop of consumer activity. Thanks to operational resilience, we've managed to overcome this difficulty, and we've got reinforced service area. And during the first semester we've also resized our partnership in Switzerland and bought MediaMarkt in Portugal and this will complete our offer on that market. We have a plan, which worked out successfully for 2023. As regards retail in France, it's a sector that is under a lot of pressure, the first trimester, we had a drop, and the drop increased in the second semester. Our [ service levels ] have reached minus 2.5%. Thanks to our resilience and our multichannel approach where we've been able to make up for this [indiscernible] incomes with a sluggish consumption and negative calendar effect. We observe this at the European level and the EUR 3.344 million revenue is cause there's a calendar effect for the drop in the second semester, which represents about 1.5%. And this is because May was [indiscernible] bank holiday, and the sales week was preponed to July. Even without this, the second term was [indiscernible] by a drop. And we were able, however, to have 1 good news that the gross margin stayed at a level of 31%. And if you reverse the impact of franchises, it really means an improvement of 35% and that confirms the model we went for, for sustainable quality and good quality service. Number 7, we've presented the key indicators to follow the financial [ implications ] and evolution of the strategic plan. [ Multichannel was 79% ] of in-store revenue. Our objective, as you know, is to reach 30% of mail orders or Internet orders. And this corresponds to multichannel model, with 49% of people using click and collect, so they buy online and they come and pick up their goods, which is the opportunity for some window shopping, and a complete in-store experience. Then we have a wide range of products and services and shows the diversity of our offer in domestic appliance, technical products, editorial products, and services. This is important for us because it includes diversification, and it represents 15% of our activity. And now let's concentrate on the energy aspect. We are very committed to going green and reducing gas emissions. It's part of our 2020 objectives, the Science Based Targets. And we have a vast remodeling program for our stores. We're installing LEDs everywhere. And in the first semester, we will be investing [indiscernible] of the EUR 20 million which is planned for the coming years for changing the lighting system and the electricals. We have a partnership with Valeco to increase the share of our green energy. And this has been working since April 2023. Number 9, before I conclude on this first part, I think it's important to share with you some of our ideas, which have really marked our development. I want to be in keeping with our approach -- digital approach, logically, we have included our customer base, but also all our new customers trying to create a favorable environment for communication. And it's a 360-degree approach which connects the digital approach and the in-store approach with 2-figure growth, which is 1 of the best retail results in France. We started this campaign since 2021 and [indiscernible] 2024, we think that this is going to go on improving, and we're really in a good place for the development of the choice offerings that our group can bring. So this is what I wanted to say as an introduction. Now I want to talk about some of the operational results by geographical zone. Let's see to start with the revenue and the gross margin. As was said, the group had a first term in '23 with over EUR 3 billion, a slight drop, but the drop is comparable with other years, and it's based on the loss of purchasing power and people postponing their decision to buy things which are not essential, and there's also the bad context of June -- May and June being full of bank holidays, and the sales not at a good date. So this is -- this explains a drop of 1.5%. As our team already said, we are multichannel, and that's 1 of our strong points. And that keeps us at a high level with 49% of Click and Collect sales, and it shows our resilience in the long term. Now by category, we have quite a drop in the second [ trimester ] compared to the first 1. The gaming, which is doing very well, a record activity, and we were able to stock up on some of the games, which were missing for a long time. In many regions, we are still developing Darty Max, and ticket sales compared to the '22 equivalent semester, we're doing much better. And the sale of hardware has dropped because it had a favorable context last year with people equipping themselves for home officing. The area of small appliances has not progressed either.

And let's see the operational performances by geographic zones. France and Switzerland dropped by 2.5%. And in France, when you look at the [indiscernible] published last year, that Darty is still above average in the global market. However, we had to close 10 shops in Alemannic Switzerland in '23 and some shops in France in '22. And now in the Iberian Peninsula, a drop of 4.3% and with Portugal being in growth and Spain dropping because of the pressure on consumer behavior of a very competitive environment. Let me remind you that, pending the last [indiscernible] authorization, we bought MediaMarkt in Portugal. Closing should happen in September '23. Then in Luxembourg and Belgium is the only region where sales have gone up compared -- plus 1.7%. And this is thanks to the salary increases, which have improved the purchasing power of people. And a new shop has opened in '22 and services have increased. Repairs and Darty Max and other services have gone up. Now for the gross margin, Darty has maintained its gross margin, thanks to its positioning in premium goods, which means that it's easier to get the customers to pay the difference. And the progression has been plus 35 basis points and 25 for the mix, thanks to in-store sales, which have been very good, particularly for editorial goods and plus 10% in ticket sales, thanks to good programming. Comparing is difficult because the first trimester of last year was still affected by COVID restrictions. Now operational cost, inflation has been offset mainly by our efficiency program because we managed to save with this program, and with an investment of EUR 4 million compared to what we had before, if you don't count energy, the operational costs have increased only by EUR 13 million, thanks to a highly performance plan setup by management. And so as a percentage of the turnover, it's gone up by only 1.4%. The results year-by-year appear here. You note the effects of the rise in energy costs are not entirely offset by the performance plans. The provision for ADLC, net income from continuing operations. And that's how we get at minus EUR 134 million. With a rise EUR 26 million, thanks to the nonrecurrent financial expenses, and selling Daphni Purple. The group invested EUR 1.6 million in this investment fund, and until '22, the participation was reassessed at its real value. And after the first [ trimester ], we decided to sell this off because of the market output, and the investments we have made gave us sales benefit of several million euros. So we end up at minus EUR 163 million. For the end of June, this is what we got. The free cash flow, which we have adopted above those of the similar date last year. And apart from the EUR 68 million of last year, we have a cash flow requirement, which is in keeping with the normalization of the group, which we have started at the beginning of '23. And the operational investment for EUR 63 million and EUR 8 million for improvement of energy management. So the financial structure of the group is healthy with nearly [ EUR 1.4 billion ] in shareholders' equity. The net financial debt traditionally is higher at the end of the exercise due to the seasonality of activities. So on the 30th of June 2023, net debt outside IFRS 16 is EUR 674 million. We also have EUR 470 million (sic) [ EUR 427 million ] available at the end of June to which to be added EUR 500 million, which can be called upon. So in March 2027-2028, the option was subscribed at 98.5% of our bank commitments. Therefore, we have a line of EUR 500 million up until March 2027 and then EUR 492 million up until March 2028. And [indiscernible] for the third consecutive year the group has proposed paying out dividends of EUR 1.40 per share in our General Assembly last May. It is paid on the 6th of July, represents a distribution rate of 38% of net results per share for the activities. For the first time, our shareholders had the option of receiving the dividends paid in shares [indiscernible] to 44%, showing that there's a lot of trust. The 535 million (sic) [ 535,616 ] new shares were created as of the 6th of July. At the end of June, the [ net ratio ] over 12 months shows that the leverage is at 2%, which is in keeping with our strategic plan. As you can see on Slide 17, the next reimbursement will happen in 2024. And as we commented in the results presentation 2022, we wish to secure the next debt line of EUR 300 million, which will achieve maturity in 2024. So we have set up an additional credit line, which has not been drawn upon yet in a delayed drawn loan of EUR 300 million, which could be drawn upon only once, but only to reinforce the bond debt of 2024. So maturity of 3 years in case of a drawdown, which can be extended by 2 years. And after that the group can continue its credit line to maturity benefiting through the low rate of 1.75% and secure our level of financial security. And then in S&P, we received the grade of BB plus, Scope and Moody's, BBB and Ba2, both being stable, and this shows that they believe that our omnichannel approach is sound as well as our financial discipline. And now I'll give the floor back to Enrique to conclude our presentation.

Thank you very much. So on Slide 19, the second half contracted strongly as compared to the first half. But actions were undertaken and they bore fruit. We won market share, we've improved our gross margins, we've also maintained strict control over our costs and operational activities. We're aware of what's ahead of us, but we know our strength as well. There are encouraging signs, even though there's a lot of uncertainty. The level of inflation is stabilizing. There's increased household purchasing power. And lastly, the second half is usually more dynamic because there's a back-to-school, there's also Black Friday, Christmas, and the Rugby World Cup will be happening this year in France. So we know very well that when there's an event of this type, it brings people together, and we hope that this will have a positive impact on the sales of technical products, and especially on televisions. To conclude, we confirm our 2023 objective to reach current operating income of about EUR 200 million. For up until 2024, we are aiming for about EUR 500 million in cumulative free cash-flow from operations and then 2025 at least EUR 240 million in free cash flow. So this will entail a very strict management of our inventory. We have to maximize around EUR 520 million per year. And as Jean-Brieuc already said, we will be finalizing our acquisitions in Portugal, and there may be other opportunities for development. I have finished with my presentation. Thank you very much for your attention, and we are now here to answer any questions you may have.

[Operator Instructions] We have the first question, [indiscernible].

I have a question in reaction to the last comment on your M&A. Could you tell us what your viewpoint is of [indiscernible] at a discount because there have been rumors, people have said that some of their activities could tie in very nicely with yours and this could allow you to gain a lot of market share.

People may have imagined that the acquisition has already taken place given what was said in the press. So I don't want to comment too much in detail. As you saw, and we're looking for opportunities in Portugal where our model is relevant. So it all depends on the quality of the asset and also our capacity to generate synergies. Currently, on the market, as we'd anticipated, there are more opportunities than over the past 2 years because, well, business is difficult for everybody. I will not comment on what we're looking at currently, but so far, the situation is very stable. And currently, we're already a major player, and I think on the digital market, we have developed our market share very strongly and also [indiscernible], for example, they have very important presence. And today, we wanted to show that we are a major player. And currently, our capacity -- we have capacity to develop organically. But if there are acquisitions, which we find attractive, then we will study them on a case-by-case basis.

The question now from Emmanuelle Vigneron of HSBC.

I would like to have more information on retail media, especially in terms of its contribution to turnover. And then what are your expectations for [ BFR ] for the year? And then lastly, for your gross margins, can 1 expect a similar increase for the second half?

So for [ BFR ], as announced, it's being normalized. It's stabilizing. We've made a lot of efforts. We'll come back to a normal level. Despite results in June, which was a difficult month, for the year, as you all know, everything depends on sales in December, but things have returned to normal. But I'm not going to be commenting that performance today, but things are back to normal. So for gross margin, generally, in absolute terms, the second half is usually lower than the first half given the weight of Black Friday, for example, we sell a lot more technical equipment than in the first half. Generally speaking, we have a particular focus on maintaining our margins. We will continue the efforts that we started in the first half, we will continue that in the second half, but I can't quantify that today for you. And now on [ BFR ], I don't think it's we said, but it's similar case everywhere. The quality of our inventory is highly satisfactory. Our teams have made a lot of efforts to adjust our offer to demand and to make sure that the products are available despite an inflationary context. We have a satisfactory level of inventory right now, and we hope that this will lead to satisfactory cash generation by the end of the year. Right now, we've decided to show our hands. And we see that we have to be a little bit more explicit in our communication, especially the yearly results and perhaps a fuller report. But we can say that, well, there are more opportunities in technology, we've developed an entire network of communicators, and then also events in our stores. If you go to [indiscernible], for example, you'd see what we're talking about. And this is quite unique because the store can connect to a network, which is 1 of the highest levels of digital traffic. Currently in the rankings, we are 1 of the sites to generate the most traffic in France. As compared to the Americans, I'm sure we're actually not far from #2.