Kering SA (KER) Earnings Call Transcript & Summary

Thank you for joining us on short notice to discuss the acquisition of Creed we announced earlier today. I am Jean-Francois Palus, Group Managing Director, and I will be conducting this presentation and Q&A session together with Raffaella Cornaggia, CEO of Karing Beaute; and Jean-Marc Duplaix, Group's CFO. Let's start on Slide 4 with the main highlights of the acquisition of Creed that we are excited to be able to present to you. First, Creed is an iconic heritage fragrance house with strong positions in high-end luxury, the fastest-growing segment of the fragrance market. Second, Creed is a unique asset. The house is the largest independent global player in this segment. For full year 2023 ended March 31, it had revenue of more than EUR 250 million, and the house consistently delivers a very high EBITDA margins. Third, this acquisition represents a decisive step for Karine Beaute, the entity we recently created, which is headed by Raffaella. Beauty is a natural extension of our houses universe. It is strategic for Kering to develop our expertise and presence in this category just as we have done in Eyewear. The acquisition of Creed will support and accelerate our ambitions in this fundamental area. And lastly, on a more technical note, we are acquiring 100% of Creed from the existing shareholders. The transaction will be all cash and we expect to close the deal in the second half of the year, subject to clearance by the relevant competition authorities. Turning to Slide 5. A few highlights on Creed. The House has built it's unique positioning on an iconic portfolio of luxury fragrances. In particular, Creed is home to the world's renowned Aventus family of scents. Creed has a long-lasting track record of crafting timeless fragrances based on it's know-how of selecting and sourcing the most exquisite natural in regions. Creed is widely recognized for producing artisanal and original essences of unrivaled quality. Synonymous with exclusivity and creativity, Creed enjoys high customer loyalty, together with the ability to attract and retain new clients. The client base is younger, more affluent and [indiscernible] than the segment average. When asked about Creed, customers view it as a prestigious, elegant and bold brand. Let me now hand over to Raffaella for a deeper dive into the market dynamics and further insights on Creed. Raffaella?

Thank you, Jean-Francois, and good evening, everyone. We are very proud to announce the acquisition of the House of Creed, which will become a cornerstone of Kering Beaute, and I'm delighted to share more about this beautiful brand with you. On Slide 6, a brief overview of the fragrance market. It's estimate size on retail sales value and based on 2021 figures, it's EUR 35 billion, combining Prestige and high-end luxury with 2 segments that matter to us. Up EUR 30 billion, Prestige is the biggest segment with 3% to 5% estimate CAGR over the 2022 to 2026 period. At the top of the pyramid, high-end luxury of EUR 5 billion is the fastest-growing segment with an estimated 15% CAGR over the same period. This is the segment in which Creed operates as the largest independent global brand with a 10% market share. Now what is [indiscernible] the growth of the high-end luxury segments? There are several reasons. First, consumers are increasingly upscaling their purchases from Prestige to Luxury, looking for more exclusive, personalized and distinctive options. In addition, wealthy consumers new to the fragrance market, leapfrog Prestige brands directly purchasing high-end luxury fragrances, especially in Asia, driven by high-quality heritage and storytelling. It is also worth noting that compared to other personal luxury goods categories, high-end brands still represent a relatively small portion of the overall fragrance market, leaving plenty of potential for incremental growth. What are the common feature of high end fragrance brand in this case, the high-end luxury segment is set apart from Prestige. Thanks to the higher quality, creativity and exclusivity of it's progresses. Deserving customers with high spending power and superior loyalty bring strong revenue recurrence and long-term resilience to this segment. To note, Creed is delivering a top of range, high double-digit profitability. To capitalize on high-end luxury fragrance brand growth, retailers are pushing their visibility, expanding the attention and space they dedicate to them, further accelerating their growth. And now let's discover together the House of Creed on Slide 7. Creed is a Heritage Fragrance House with century long history. It was established in London in 1760, as a tailoring house by James Henry Creed, serving royal families across Europe. Initially, a complement to tailoring, Fragrance organically transformed into the core activity of the house. Oliver Creed [indiscernible] are perpetuating this addition seven generation later. This brand, originally British, has developed very special relation with France over time. The production site with established in Fontainebleau, near Paris, where it's programs are still made today. Moving to Slide 8, some information about Creed product portfolio. 65% of revenues derived from men's category with Aventus standing as the best-selling signature fragrance. Another 15% of revenues come from women fragrances, where successful recent launches point to the obvious potential to further grow revenue and market share. Another 15% is generated by unisex fragrances and for now, only 5% comes from other categories such as candle and body lotions. Regarding pricing, you will see that Creed is definitely sitting at the higher end of the market with fragrances retailing above EUR 250 million or 75 milliliters to 100 milliliters bottle in the French market, for example. On Slide 9, some additional information on Creed's market presence. The House has a global footprint with stronghold in the U.S. and the U.K., together representing 2/3 of revenues. Creed distribution is selective with 1,400 points of sales, mostly department and specialty stores and 36 branded stores. When it comes to distribution, Creed has gradually moved towards higher integration, managing directly it's distribution in key existing markets and Creed currently employs 700 people. On Slide 10, we outlined the vast and top potential of Creed, and our ambition will be to unlock it, continuing to drive it's success worldwide with its passionate team. First, by geography. Creed's exposure to Mainland China and the broader Asia Pacific regions offer tremendous growth opportunities, keeping in mind that grow in the high-end segment in this country significantly outpaced the overall market. In addition, by channel, Creed is so far under index in Travel Retail and we will work to roll out it's presence more globally while remaining highly selective. The same applies to e-commerce, a channel in which Creed is today underpenetrated. And finally, many levers can be activated from a category standpoint. While we further reinforce Creed position in men and unisex fragrances, we will also focus on growing it's presence across women and other categories. We see a very compelling rationale and mutual strategic benefit in terms of expertise, network and geographical footprint.

Thank you, Raffaella. To wrap up our presentation, on Slide 11, we have a summary of the strategic rationale for this landmark acquisition. It constitutes a significant milestone in the development of Kering Beaute in a category that is strategic for Kevin. As we believe more than ever in the strong potential of all our houses in the luxury beauty segment, Creed represents a perfect fit in our family health houses. This acquisition will enable us to rapidly gain a meaningful scale. Kering Beaute will leverage Creed's outstanding and scalable platform, notably when it comes to distribution. On Slide 12, a quick reminder on the transaction. We are to acquire 100% of Creed. The deal is to be completed in H2 and is subject to clearance by competition authorities. The transaction will be all cash and the current management team will continue to lead the business in this new chapter of the house journey. And now Raffaella, Jean-Marc and I are ready to take your questions. Operator?

[Operator Instructions] The first question is from Piral Dadhania from RBC.

Congratulations. I have 2 questions, please. Could you perhaps be a bit more specific on the financial profile of the transaction, specifically the enterprise value and perhaps the multiple pay and also the EBITDA margin that was achieved in the year to March 2023. And then secondly, I was just wondering whether Creed also manufactures under license arrangement for any third-party brands outside of it's core brand. Does it look on behalf of any third parties?

Jean-Marc Duplaix speaking. As we mentioned, we won't disclose the enterprise value. But what I can tell you that the transaction is based on multiple that checks into account that Creed's scale on top of branch profitability. And obviously, which is very consistent with recent fragrance transactions in terms of EBITDA multiple. I'm referring to area and fragrance businesses. We mentioned that the approximate size of Creed is EUR 250 million of sales with high profitability, which is -- something which is quite common in this business of high profitability and so it means that you can imagine it's a very substantial EBITDA margin. So if you apply multiple generally using the start of transaction, you have acquired to bid a proxy of the price that will be paid and that you will be achieved anyway by the end of the year in the cash flow statement concerning that we expect to close the transaction by the end of the year. To summarize, the multiple wings fully reflects both the quality and the scarcity of such an asset on the market.

Piral, it's Raffaella speaking. So regarding your question of license manufacturing for third party, Creed today has their manufacturing capability in Fontainebleau completely dedicated to the Creed production. So there is no other production for third-party.

The next question is from Charles-Louis Scotti from Kepler Cheuvreux.

My first question is on the channel mix of [indiscernible]

We are sorry, Charles-Louis, we cannot hear you clearly. Can you please repeat your question?

Yes. My question is just channel mix of Creed. If you could help us understand the [ shell ] wholesale and retail and if you have on retail being [indiscernible] for one. And so more generally speaking on Kering Beaute, do you intend [indiscernible] to expect to have a new -- have a brand or ensure what [indiscernible].

So I understand from your question that you want to have a channel mix specificity, the current one.

And also the plan on how you dealt on this acquisition, you will make this mix evolve if you have already [indiscernible].

Okay. So let's first start with your first part of the question about the distribution. So how is the channel mix. So today, the distribution channel are mostly brick-and-mortar. So 75% of the sales today are brick-and-mortar with online and travel retail represents 2 meaningful low levers per suite with 20% and 5% of sales, respectively. In terms of geography, do you want to know as well geography, I think it could be interesting to go in this part. We significantly overperform in North America, U.K. and Europe which is also consistent with the Anglo European heritage of the brand. Today, North America and Europe represents around 3/4 of the sales in total. So this clearly indicates the amazing potential that this brand has, especially in Asia, the adventure of the brand in China is just at the beginning because the brand has opened it's first brick-and-mortar store only in November 2021. So right now, the brand has already 11 boutiques, but China, right now, it's only 2% of the total sales. So this indicates really the potential for the future. And then the second part of the question, it's about how it will evolve. Clearly, we are saying -- so sorry, we were saying before that we will -- our acts of development are clearly the part where the brand is not so strong right now. So Asia which is super clear, the opportunity, especially China, and then Travel Retail, as I mentioned several times and online as well as potential for development. So this is in terms of channel. And do you want to answer the second part, Jean-Francois?

Yes. Regarding licensing, the first step of Kering Beaute refers to taking the license for Bottega Veneta, Balenciaga, Alexander McQueen, Pomellato, and Qeelin. And then potentially, we will take some others like we did with Kering Eyewear but today, we focus on the 4 ones that I mentioned.

The next question is from Oliver Chen from Cowen and Company.

Congrats. I use Creed every day. So it's a great brand. In terms of the EPS accretion dilution, what should we know in terms of as we think about our model? Also, on the branded stores and the [indiscernible] footprint, what do you see happening there over time to 36 stores and 1,400 doors, and then you touched on this earlier, third question. How do you see this acquisition synergizing with other big fragrance opportunities in your brand portfolio? What kind of expertise do you see there? And then lastly, we've done a great job with the Aventus platform and also the [indiscernible]. I'd love your thoughts on the female opportunity because that seems like an underpenetrated opportunity.

Maybe I will start with the first one, and then we will ask you maybe to repeat some of the questions you have because here, again, the sound was not good but I will start with the first one about the impact on the financials. The impact of Creed acquisition is expected to be accretive for Kering soon after the transaction, both in terms of growth and margins [indiscernible] limited given the relative size of Creed compared to the total of Kering. Then maybe there was a question about the branded store network, have you done some expansion?

Yes. And on this part, I can answer, definitely, there is a big potential for the branded store network. So I was telling you, we have still a limited amount of boutique -- Creed Boutique, which is only 36%. So -- and we have -- there is a potential in all the geographies. But again, there is the bigger potential sit in Asia. And on this part, we can clearly leverage the super strong Kering Real Estate capability which will facilitate the opening of new branded stores around the world. So this part -- this is okay for the second part of the question. Is there -- it was not very clear when you were speaking, is that around the part of the question that -- can you repeat it, and we will answer you?

The [indiscernible] stores, I think you answered it. I was curious about the Creed core competency and how that will apply to your other brand opportunities and other fragrances? And if you leverage their innovation and their history to broader Kering portfolio? And then lastly, one on...

Yes. As we said, Creed constitutes definitely a very good platform for speeding up the ramp-up of Kering Beaute in several ways. As we said, Creed has an outstanding know-how in sourcing materials and ingredients and of course, we will benefit from this know-how. Also, we will use the distribution network in order to speed up our penetration of some markets throughout the world. And also, the inclusion of Creed into our group will also enhance our power or negotiation power with all stakeholders of this beauty industry, where you know that size matters and with this transaction, we gained significant size much earlier than if we were just along with Kering Beaute.

And lastly, one on the [indiscernible] series has been a lot of innovation and demand that Creed has a big male presence. Just would love your take on do you see the brand evolving in terms of unisex from women's?

Clearly, we see tremendous potential in women fragrances, especially in the high promises geography where Creed is perceived as a predominantly female brand like China. Creed, what is important to underline is that Creed benefit from a positive sentiment towards its sophisticated scents and unisex versatility which should support it's diversification towards woman fragrance. Women already know the brands and our presence in Creed store. It's interesting, but in the U.S., women are 1/3 of the buyers, 40% in the U.K. and 60% in China. So we have a stronger launch plan on women's fragrances, which will be supported by a focused communication that will further fuel the growth on this category.

[Operator Instructions] The next question is from Erwan Rambourg from HSBC. Please go ahead.

Congratulations, Raffaella, Jean-Francois, Jean-Marc and the teams. First, if I look at brick-and-mortar, I think you said brick-and-mortar with 75% of sales. It's pretty clear that you want to increase the number of owned retail stores from 36. Are you happy with the 1,400 wholesale partners, wholesale doors? Or would you want to increase that as well? Linked to that question, I'm wondering if you could give us the split between wholesale and retail in terms of brick-and-mortar contribution to sales today. And then thirdly, I'm wondering how you think about awareness building, notably in Asia and notably in China, is it word-of-mouth? Are you using brand ambassadors? Are you thinking about specific media campaigns, how do you think about building out the brand in terms of awareness and attractivity in Asia?

Perfect Ervan, thank you for the question. I will start -- can I -- one second, can I start to the first question. It's about contracts. Yes, we are happy with the current -- So congrats, sorry. Can we start with the brick-and-mortar? We are happy with our 1,400 wholesale stores. But for sure, we will continue to develop them, especially in Asia. So both on the brick-and-mortar freestanding store and as well wholesale store. And we will be -- continue to be selective in the choice of our partner and in the progression of our distribution. So that's the strategy that we will continue to pursue. Then on the split retail-wholesale, we -- our ambition is to continue to increase our direct-to-consumer ratio and for that, we were saying we want to progress both in store, our own boutique and as well in online, and we will pursue this objective. And then on your last part of the question about the awareness building, I think that it's worth first of all, doing few precisions because for Creed, it's a very well-known brand, especially as we were saying in the Anglo world, so especially in the U.S. and the U.K., where this brand boost leading top of mind and needed awareness in the luxury segment. It's the #2 in the U.S. and co-leading in the U.K., and it's very significant share of volume. All of these to the updating analysis. And it's the top 3 industry player in the industry in terms of digital mention on social media platform. So you pointed out clearly Asia, that is the region where the brand needs to further develop for sure. So on this part, we have plan and I will pass the word to Jean-Marc.

Yes. Of course, it's a little bit too soon to elaborate on all the initiatives we will launch going forward. As we mentioned, Creed enjoys the top of French double-digit profitability. You know perfectly that the key characteristic of the high-end luxury segment is that it requires more levels of A&P than the Prestige segment. That being said, I mean, as clearly explained by Raffaella and Jean-Francois that many levels of growth in terms of geographies, channels, categories and so on. It would be needed to activate this initiative, these objectives with proper investments. So we would expect going forward in the next year that the margin should normalize a little bit at levels slightly lower than the one -- than the current ones. So of course, Creed will remain high profitability business, accretive to carry margins but at slightly lower level, considering all the investments we have to make. And of course, in the coming months and the coming quarters, we will have the occasion to present the progress we are making at Creed and all the initiatives we are launching to support the development of the brand in various regions, starting with China, as explained by Raffaella.

I just had a short housekeeping question around online. I think you said 20% of the business. Is that all of your own online? Or is that also with partners?

It's also with partners. So it's [indiscernible] ours and others.

The next question is from Antoine Belge from Exane BNP Paribas.

Yes. Antoine Belge at BNP. Just 3 questions, if I may. So if I understood correctly, deal will be accretive on margins. So I look at your EBITDA of last year, 35% and EBIT 27%. So just to confirm that be really accretive on those numbers. And usually for these like that, the sales multiple is usually in excess of 5 or 6. So I don't know if EUR 1.5 billion would be a ballpark number that would not be far from reality. And actually within question number one, what -- when you calculated the question, which interest rates did you use under on the resources. And second question, is it possible to have a bit of an idea of the recently [indiscernible] EUR 250 million, what was the number, I don't know, in 2019 or whatever reference that could help us having a bit the trajectory of the brand? And then third question, which is a consequent of the previous one is -- so how long will it take to the [indiscernible] sales for that type of business? Is it like 3 years, 5 years? Yes, any sort of idea of at which speed that business would be growing?

I will start with your first question, which is very detailed and very confrontative and of course, as you can imagine, I will not answer to all the different aspects of your question. Yes, it's accretive definitely on EBITDA and also, the growth rate is above the average growth of the group. It's accretive in terms of EBIT. We didn't refer to the EPS. When it comes to the multiple of EBITDA, I think that you could refer to some recent transactions that happened in the past few years or even you can refer to the multiples of the industry and the business. So we are talking about a very high multiples, very connected in the case of Creed, very high profitability and the profile of the growth delivered by the brand in the recent years and also considering what the brand is able to deliver going forward and I will not confirm any figure. So regarding the momentum of Creed, the house enjoyed high double-digit growth rates in the past 2 years. And we bank on something, the same pattern from -- for the following years. And this will also respond to your third question.

Maybe just a quick follow-up. Just the U.S. market because I understand the Q1 you said 2/3 with the U.K. and 3/4 with Europe. I don't know, is U.S. like 40% or something like that?

North America, it's very high, and it's around 50%.

The next question is from Carole Madjo from Barclays.

Just a quick question for me as well following up on the trend on top line. I guess it's around what kind of growth rate are you seeing in beauty compared to luxury goods space and do you have the same trend? And mostly on the U.S. market, which we just mentioned. Of course, we are seeing now in the U.S., a phase of slowing down with our enterprise consumer being a bit less. We see similar trends in the fragrance market as well and, of course, for Creed?

So we are -- so Creed is operating on the -- what we are calling the high-end luxury market, which is the one that have the tailwind as we were mentioning. It's growing much faster than the fragrance market in general. So the fragrance market in general, if we take Prestige and [indiscernible] it's projected to grow between 3% and 5%. And instead, the high luxury progress market is projected to grow up to 15%. You see that this segment precising which Creed operates is the segment that is the most favorable, and we will continue to grow in the years to come. So said so, I think that the growth, it's very strong and it's stronger. In terms of geography, the strongest growth is in Asia, where I was explaining that the consumers are really leapfrog from mass to high luxury and in this segment in China -- in Asia, sorry, in APAC, the market is growing. The high-end luxury market is growing at 20%, so higher than in the rest of the world.

Okay. Understood. So you feel like you continue to do more resilience in case of macro slowdown, for instance, considering your pricing point?

Absolutely.

The next question is from Natasha Brilliant from Credit Suisse.

A couple of questions from me. Firstly, just on the deal itself. You say if you were competing against any other players to Creed and why the existing shareholders decided to sell now? And then second question, you talked quite a lot about what Creed brings to Kering. But is it a case of just more firepower from Kering to drive growth going forward? Or what else is Kering brings to Creed to really help with the strategy going forward.

Actually, there is competition around this wonderful asset because as we said, it's a unique asset, a sizable and very highly performance. But indeed, we had -- it was not a beauty contest, and we had an exclusivity with the seller as early as the beginning because we share a lot of values together and the same vision about the future of the company. We also had a very good fit with the management team, and that's why we have this opportunity to consummate this deal without any competition.

So in terms -- for the second part of your question, in terms of the -- how we plan to leverage Creed as a platform. So our ambition is for Creed to become a full-fledged fragrance platform, leveraging leading luxury fragrance position to accelerate, door opening and obtaining better space in general. Creed go-to-market and distribution network, which is spanning local distribution through the 1,400 doors in total, will, in general, accelerate the revenue of future Kering Beaute fragrance franchise. That's very clear. And in terms of what the synergies, I think that the -- in terms of synergy, we have done -- we will not provide you with quantitative estimates at this stage. It's too preliminary. But we have performed an indeed preliminary assessment of potential revenue and cost synergies on both Creed and Kering. This preliminary assessment of synergies underpins our belief that Creed has a significant compelling strategic value for Creed.

As a summary, we can say that this move will save us a couple of years in ramping up Kering Beaute. Thank you all for being on our call and for your questions. As you have understood, we are all delighted that Creed will be joining our family of luxury houses. And by the momentum, it will provide to our growth strategy in the fragrance and beauty segment. We wish you a nice evening, and we will be talking to you again soon. Thank you.