Lagardere SA (MMB) Earnings Call Transcript & Summary

Good evening. We're about to start. I see that there are a lot of people that are already connected. I'm going to be very quick in my introduction. I'm not going to give you any introduction. I'm going to give the floor to Gerard. I'm sure you've read the press release. So I'll give the floor to Gerard and I might take the floor afterwards. I'd like to give some time for the Q&A. So Gerard, you have the floor.

Good evening, everybody. I'm going to move on directly to the slide about the highlights for 2019, which was a good year, a very good year actually, with revenue of EUR 7.2 billion, a 5% growth. Lagardère Publishing and Lagardère Travel Retail showing their capacity of seizing the opportunities offered by the activities and the geography. The EBIT -- the group recurring EBIT is stable. The impact of the disposal of the media assets being offset by the strong progress of the Lagardère Travel Retail margin as well as Lagardère Publishing margin. The free cash flow is around EUR 294 million, up in comparison with last year, if we reprocess the real estate disposal of last year, thanks to the improvement of the cash generation. The net revenue is stable, EUR 200 million, so the group share adjusted profit reported result is along the same lines as what we had announced in December. The net debt is EUR 1.461 billion. The leverage ratio shows the good financial situation of the group. So we recommend to keep the ordinary dividend per share at EUR 1.3. This is quite a special year because there's been a lot of changes related to the strategic refocusing. The objective of this slide is to clarify the changes in the scope. On the left-hand side, you have the activity as reported before, that is to say, we have 4 segments of activity for 2019. The revenue for the 4 segments and the combined results amounted to EUR 7 billion. We've -- the disposal of the Sports activities and the accounting rule means that we need to classify this activity for 2019 as a given-up activity, which is -- which means that we need to reprocess a line per line in order to present them on one line on the income statement and in the financing table, as the net flows of the [indiscernible] activity. So Table #2 is the reported figures for 2019, which highlights consolidated EBIT of EUR 7.2 -- EUR 211 million (sic) [EUR 7.211 billion] and recurring EBIT of EUR 378 million. Now let's look at the target scope, which is the strategic scope. That is to say, Lagardère Publishing, Lagardère Travel Retail and the other activities, the News segment and the corporate segment. Well, the EBIT for 2019 of the target scope, the pro forma scope amounts to EUR 6.936 billion and the recurring EBIT of EUR 361 million. The target scope activities, which is the one we are interested in, which is -- because it's the future activities, while these activities in 2019 show a growth on a like-for-like basis, reprocessed with the acquisitions and the currency impact of 4.5%, more 4% and 6.1% for the recurring EBIT, which means that we had a very good performance. The following slide now. As for every years, I'm going to give you the reconciliation of the guidance. Whilst quite advanced slide, but you can see the results in relation to the double guidance last year. On the left-hand side, you have the guidance for the target scope. We had announced a range of EBIT growth between 4% and plus 6%, and we achieved plus 5.6% of growth. So this is the top of the range. To this, we have to add a scope effect and the currency effect of plus EUR 34 million, especially with the integration of HBF. The EBIT of the target scope, as I said before, is EUR 361 million. We also gave you a range between EUR 64 million and EUR 74 million for the non-retained assets, mainly Lagardère Sport and Lagardère Studio, and we have actually plus EUR 81 million with EUR 70 million for the media asset mainly Lagardère Studio and EUR 64 million for the Sports. And thus, altogether for the 4 segments, we have plus EUR 442 million, which is above the guidance we had, and we display 306 -- EUR 78 million (sic) [EUR 378 million] in our account in the wake of the deconsolidation of the Sport activities, as I said before. With these clarifications, we're going to look at the activities for our 2 main segments, starting with Lagardère Publishing, which had a remarkable year in 2019. The EBIT is at EUR 2.380 billion, up by 5.9% on a consolidated basis and plus 2.8% on a like-for-like basis. All this is supported by the high school reform, the success of Asterix, the very good performance of general literature and the good dynamics of mobile games. Spain is also supported by the Asterix's success and a good school campaign in Andalusia with good results in Japan, Germany and France. The U.K. and U.S. had a good year, but suffer from the favorable comparison effect. Last year, we had very good best sellers in these countries on these 2 geographies. Now let's look at the recurring EBIT. Strong growth, plus EUR 20 million with an operating margin that is improving with 9.2% with the effect of the school reforms, the Asterix success and good [ performance ] of the U.S. because of the audio book growth and the productivity plan on the operations. Let's move on to the gist of our business, the free cash flow. The fresh cash flow is growing, plus EUR 85 million with the margin improvement and positive WCR. The improvement of the WCR plus EUR 35 million in 2019 compared with plus EUR 14 million last year, a drop of the stock level on the Partworks, which was impacted last year by strong launches at the end of 2017. I think that the performance in terms of cash flow generation has to be proceeded by looking at the free cash flow before the WCR variation. Yes, there is quite a good -- a lot of volatility in the WCR, but in average, it's quite stable over the years. As you can see on the last line of the table, in 2019, the free cash flow before changes in the working capital for the Publishing activity made a progress of 31%, and we've reached EUR 151 million now. The Retail activity -- the Travel Retail activity, a good year in 2019, EUR 4.260 billion plus 16% in consolidated data. Of course, there is the impact of the acquisitions we achieved plus 6.3% on a like-for-like basis with progress in all the geographies. In France, we are at around 7.6% in spite of the slowdown due to the strikes at the end of the year. In the Europe -- in the EMEA region, plus 4%; in North Africa, plus 3%; and the Asian Pacific region, plus 7%, which is rather contrasted because we have a very good growth in China. But on the other hand, a drop on the Pacific region because of the economic slowdown in Australia. Now let's look at the profitability of the Travel Retail activity. The EBIT is at EUR 152 million with plus EUR 31 million and a profitability improvement by 3.3%. This progress can be explained by the impact of the HBF acquisition and the International Duty Free acquisition in Belgium on the -- over the last quarter, and in the good performance of the activity in North America and Italy and France, which led to the absorptions of the Hong Kong events and the economic degradation or deterioration in Australia that I was mentioning before. Now let us look at the cash flow development. The cash flow generated by the operations as well as the CapEx, that is to say the investments, we achieved a strong growth, respectively, plus EUR 48 million plus EUR 29 million with the combined effect of the acquisitions, but also of the very good performance of the activity. The WCR variation is slightly negative, minus EUR 13 million, while I don't know if you remember, last year, it benefited from an optimization program that was quite exceptional, plus EUR 50 million, an optimization of the WCR that -- we cannot repeat this every year, of course. Similarly, for Lagardère Publishing, we look at the variation of the WCR, not the variation of the free cash flow, before the variation of the WCR, which is more representative of the underlying performance. So in 2019, it's the last line, the free cash flow before the changes in the working capital progressed by 20% and reached EUR 87 million. Of course, I can -- I have to make a few comments on the Travel Retail segment by mentioning the COVID-19. At the end of January, our Travel Retail activity has been affected by this epidemic of the coronavirus, mainly in Asia Pacific region and the international hubs, mainly regarding the Chinese travelers expenses in Europe. To date, the impact on the first quarter EBIT result is minus EUR 20 million before the action plan. What I can tell you is that we've reacted very quickly and very strongly by launching action plans immediately that we'll be talking about. Dag and his team have a real know-how in the field because we had to face this type of events over the last years. This impact should be offset for half of it during the year by these saving plans. The development of the epidemics, of course, is impossible to forecast, to date. But however, we are extremely focused in order to implement different types of actions on -- in all our countries, if need be. In order to finish the presentation of these 2 activities, I wanted to zoom on to the development of our free cash flow over the last 3 years, on our 2 core businesses, depolluted by the WCR variation. On the left-hand side, you can see the strong capacity of cash generation of the Lagardère Publishing business with a cash conversion that is really high. You can also see on the right-hand side, the sustained progress of the Travel Retail with the effect of the EBIT progress, organic EBIT and acquisitions included and the cash conversion that is improving -- that has been improving over the last 2 years. So improving the cash generation is an objective of the strategic refocusing, as you know. Now let's talk about the figures for the group. The EBIT, first of all, the target scope generated without the acquisition, EUR 282 million, in addition to what we had last year with a positive change effect with the dollar appreciation, a EUR 90 million. The scope effect is quite light. The impact of the disposal of the Active Media was offset by the acquisition in the Travel Retail segment. Now I'm going to comment the transfer between the EBIT -- the group recurring EBIT. The group recurring EBIT is EUR 378 million. It's the addition of all the branches that I just commented, and the revenue from the other activities, which is stable at EUR 91 million. So the group recurring EBIT with restructuring expenses that are stable. The gain on disposal, EUR 135 million that have been achieved in the wake of the disposal of the media assets, the TV channel. The impairment losses EUR 34 million, down in relation to last year, mainly for the media assets that were not retained and the amortization of the intangible assets, EUR 91 million related mainly to the amortization of the impairment losses for the Travel Retail acquisitions. And the increase from one year to the other can be explained by this scope effect. So the EBIT before taxes and financial cost is EUR 411 million. A few words about the restructuring costs. In the past, the restructuring costs were focused on the decreasing businesses, especially the press activities, which margins were under pressure. The strategic refocusing means that we can reduce the amount significantly, EUR 50 million -- EUR 60 million this year related to the resizing of the corporate within the group announced last year -- at the end of last year, in the wake of the refocusing. And this will enable us to issue, as we announced between EUR 10 million and EUR 15 million of cost savings by 2020. In 2019, the exceptional cost of the Publishing and Travel Retail segments showed for Lagardère Travel Retail integration phases plus acquisition in order to generate synergies and costs linked to a concept notification, and for Publishing costs -- logistical cost. So all these participate to the improvement -- of the operating improvement of all 2 segments. So the interest expenses on the lease liabilities, no comment is the reprocessing linked to the IFRS. The amounts vary depending on the scope. We have the equivalent on the EBIT. The financial cost -- the net financial cost, EUR 53 million, slightly up in relation to previous year -- to the previous year, the income tax expense improved in relation to last year, EUR 55 million included the exceptional tax for the session or for the disposal of the Europe 1 building. The net income, EUR 207 million, it's the result generated by Lagardère Sport. It includes depreciation, resulting from the disposal of EUR 244 million. Given all these items and the minority interest, the profit for -- and the group share is EUR 177 million. We calculate the adjusted profit, the group share with the same method, reprocessing the nonrecurring EBIT and items, the impairment losses and the tax impact with the same methodology for 2019. The group recurring EBIT to adjusted profit is EUR 200 million adjusted profit group share in relation to last year. The consolidated statement of cash flow. The gross margin is up, thanks to the positive impact of the Lagardère Publishing like the Travel Retail impact. The free cash flow, excluding property disposals is EUR 280 million in -- compared with EUR 241 million in 2018. I commented the main variations beforehand. The paid taxes EUR 51 million compared with EUR 30 million in the previous year. The increase can be explained by timing, in fact, regarding the liquidation of the French taxes and the more taxes in the U.S. CapEx represent an amount of slightly less than EUR 200 million, mainly in 2019. In the Travel Retail, EUR 156 million with a significant share of investment related to the opening of new stores. The balance coming from Lagardère Publishing, EUR 35 million, including the investment of logistics projects in the U.K., as I mentioned before. After the disposal of the real estate, free cash flow is at EUR 294 million, but I will be telling you about that in the following slide. The financial investment, EUR 287 million, mainly explained by the disposal of the business in Belgium. The disposal of investment got us EUR 323 million. The dividend paid and the interest are more or less stable. The other items, including the reprocessing of the cash flow from Sports as well as the buyback program for the shares for EUR 30 million. Last few words about the cash flow now. This year, in 2019, we have different items that disturbed the understanding of this cash flow. In this slide, I wanted to explain the performance of the cash generation from our target scope that is our future scope, isolating the impact of the activities that are not retained. The nonrecurring items, such as the real estate disposals or related to the strategic refocusing as the corporate assets. By doing so, we highlight that the free cash flow of the target scope without the WCR variation is at EUR 250 million, up by EUR 41 million which is to say, plus 20%, therefore, a very good performance. Quickly, the main aggregate in the balance sheet, the variation of the intangible assets and the other liabilities is mainly related to the reprocessing of the sport as an asset for sale. So the different items, assets and the liabilities increase the right-of-use assets and the lease liabilities that we take into account, as the IFRS 16 increased by EUR 300 million with the arrival of the new contract. The International Duty Free or acquisition in Belgium, the equity are going down -- equities are going down, EUR 196 million, including the distribution of dividends, minus EUR 200 million. The increase of the net debt was commented during previous slides. I'm not going to dwell on this. Now the -- after implementing in 2019 sustained program of acquisition and disposal, the group has a financial situation that is healthy with a leverage ratio at 2.1x at the end of 2019, and a pro forma exercise 2.4x after the session of the Sport activities. This activity having generated a high level of EBITDA in 2019. Furthermore, the group also has a reserve of liquidity of more than EUR 2 billion. The guidance now. For 2020, the group is planning a progress of the EBIT of the scope target, included between 4% and 6% on a like-for-like basis at the constant exchange rate, excluding the acquisition of IDF and excluding the impact of the coronavirus. Regarding IDF, we had deemed that the revenue for 2020 would be between EUR 190 million and EUR 200 million with the profitability slightly up 9%, which is an impact of plus EUR 14 million over the 9 months that are not comparable. Adding up these different items, the EBIT for the target scope should be around, and in compliance with our guidance, between EUR 390 million and EUR 397 million. To be clear, the target scope is, without Lagardère Studio, for which I'd like to remind you, for which the results in 2019 amounted to EUR 15 million. These amounts are on the constant rate, that is to say, with the average exchange rate for 2019. Variation for the dollar exchange rate would impact -- would mean an impact of [ 4 ] minus or less EUR 14 million on the EBIT, and an impact of plus or minus 10% would imply an impact of EUR 4 million on our EBIT. The EBIT -- sorry, the dividend, as for 2018, the ordinary dividend suggested to the Annual General Meeting will be fixed at EUR 1.30 per share. There will be a suggestion of paying the dividend in shares, allowing the group to strengthen its financial flexibility in supporting the development of these 2 priority areas, while maintaining shareholder return.

So this is it for the presentation. Thank you,Gerard. We are going to give the floor to the questions, either by phone or in the auditorium. Who wants to start? So far, no questions on the phone. This gentleman, over there.

Olivier Moral, HSBC. Regarding the guidance or rather the indication of the coronavirus impact, what assumptions have we taken in Europe? The EUR 20 million, is it only for the Chinese part of your assessment? Or does it include a strong slowdown in Italy over the last week and in the other European airports?

Dag, you have to explain now.

The assumptions that we made is in relation to the known situation before what happened in Europe. At the moment, the situation is changing every day. So it's really impossible to forecast what's going to happen. So the impact for the first quarter is estimated to be -- as we said, given the action plan we designed for all the countries, even the countries that are not really affected. The situation is changing very quickly because in China, the traffic is starting again. There's a strong pressure politically for the production to resume even though people are dressed as cosmonauts. We have factories that are working up to 60%. There's an improvement of the domestic traffic. So there's a transfer of the seriousness of the coronavirus impact. It seems that in Europe, especially in Italy, but potentially elsewhere in Japan, for example, there could be epidemics developing, but we have no visibility on what could happen. I don't think we can see anything more than that in any case.

Can you give more information on your action plan and what you can do?

Yes, go ahead.

In terms of action plans, there are global action plans. I don't think it's me. We work on all topics at operational level and in airports. We negotiate reduction of opening hours or even complete closure of retail points sometimes. We reduce, sometimes rent. Lease decrease for -- like in the Wuhan airport, for instance. So this is something we sometimes do. We also have a system -- go ahead. In terms of staff, we have different leaves. So we can ask them to go home. We pay them for leaves. And they are not paid when they go home. So we use that quite a lot. It's more of an anecdote. But in China, the Chinese head have asked the staff to voluntarily take a pay cut for up to 2 months and 80% of them have accepted to not be paid for 2 months. Some have accepted only for 2 weeks, but this is a significant impact. We also have a lot of imagination as to how to preserve our turnover. I don't know if you know how it works in China, but we do videos in the retail points, trying the different clothing. And then there's a chat that starts from that. And this is paid by WeChat Pay, and then it's delivered in the people's home. That has allowed us to increase the sales. I mean we were starting really low, but we managed to double the sales in a week, thanks to that. Of course, we've stopped all sorts of congresses, trips. We've renegotiated a lot of contracts. And even in Hong Kong, we've managed to renegotiate Internet costs. So we've looked at all costs at all supplier's level or employees' level. And country-by-country and even centrally, we've put in place different cost saving tactics. We look at all the revenues, but also all the costs, and we look at what we can do. We've looked into the merchandising as well because you know the priority of merchandising in China has changed. The pricing can change to optimize the margin, so it's something that we've looked into globally everywhere.

In terms of the leases in the airport, I mean, it must be quite a strong fixed cost. Is that actually a fixed cost or is that a variable cost? And I mean, not just in China, but overall, I mean, we may speak about other countries later on, is that a cost that you can reduce? And see what you can do in airports?

Well, in terms of those leasing systems in airports, we have a lot of different types of contracts that can be from a fixed kind of lease or profit sharing before lease, which is ideal on the [indiscernible] stream. We have variable leases with a minimum, which can be an absolute -- minimum or per passenger, a minimum per passenger that can be global or per product category. And the impact on the business can depend on where -- or depends strongly on where it takes place. Sometimes, we have a very low minimum guaranteed -- granted minimum and in this case, it's very variable. But in other places, it can be -- it can have a much bigger impact. So it's very hard to come out with an average.

It really depends on the type of contracts. And to this, you add other kind of measures that are above the specific measure for coronavirus. It's -- we tried to just freeze all the spending that don't -- we don't consider as currently necessaries and there are a few in the publishing area. And we are just trying to put different things in place to try and protect the results, and more than anything, cash flow, and we are really careful about all that. Knowing that it has its limit, obviously, because we still need to keep the Travel Retail interest in mind even though in China, it's around the 3%. And it's exceptional, but still, we still need to underline it. But we're quite far structurally in the kind of increase we've had in Travel Retail. So when you have an effect on the CapEx, of course, there is -- there will be impact in later on in later years. So we need to be careful then and watch this very carefully.

One more point. When we have our minimum guarantees like that, we try to renegotiate that. So sometimes it's possible within the contract because there are some specific clauses regarding this. But in any case, we're just trying to renegotiate. So this is something that our different heads are trying to do at the moment. Gerard, you want to add something?

Yes. I've been told that I have done a small error when I talked about the economies, the savings we did in the corporate part of the group. It's EUR 10 million to EUR 15 million, but it's by 2022. And I think I said by 2020. So it's not -- so there is no change compared to what we said in December, but just wanted to rectify this.

But in any case, we'll give you more detailed information in March, the 25th of March. So you see sometimes we noticed that Travel Retail is bringing us a lot of increase, and sometimes it's -- we are happy to have a very resilient activity such as the publishing. So that's the good thing about a diverse kind of group. It gives us 2 sides to balance on.

We have a question on the phone. First question from Julien Roch from Barclays.

Yes. My first question is about the coronavirus again. An offset of EUR 10 million for the rest of the year, and Dag has been very clear as to how you've managed to save millions. But if it carries on, and you've got EUR 30 million in the second trimester -- quarter can you still do some savings? Or are you -- have you reached a maximum? That's my first question. Second question, regarding Travel Retail again. Could we have the revenue and the recurring EBIT with the EBIT at 30%? And have you reached your goals because you had some in 2019, regarding both the revenue and the EBIT, and you've not mentioned it at all. And my third question, it's for you, Arnaud, regarding selling of assets, TV and LFM and some showrooms are up for sale. What impact might it have on 2020 and 2021? It was very negative in 2019, but I'd like to know what it will bring in. You could bring in some of -- part of this 158 [ minutes ] that you've lost in 2019?