Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardère First Half 2020 Results Conference Call. I now hand over to Mr. Emmanuel Rapin. Sir, please go ahead.

Yes. Good afternoon, everyone. Thank you for joining our conference call. Today, we have with us Arnaud Lagardere, General and Managing Partner of the Group; Gerard Adsuar, Group CFO; Arnaud Nourry, CEO of Lagardère Publishing division; Dag Rasmussen, CEO of Lagardère Travel Retail division. This afternoon, we will be presenting to you the H1 2020 results, and the conference will end up with a Q&A session. Please, Arnaud, the floor is yours.

Thank you, Emmanuel, and good afternoon to all of you. Hope you're safe and sound yourself, your family and so on. It seems that we're not definitely down with this virus so be very, very careful for yourself and your family. The performance of our activities, as you saw in the press release, and Gerard will get back to it in more detail, of course, have been impacted by the lockdowns and travel restrictions everywhere in the globe and we had to see a significant loss of revenue. But you will see also in the details that there is some resilience, especially, and we're very happy about this, in the book publishing group. I will just focus on a couple of items, 3 or 4 items, to just show you that we are working not only to be as resilient as we can, but also to prepare the next world, I would say, the second semester and next year and the years to come to be much stronger. But one, first, we have, I think, successfully prioritized the safety of people, whether it's employees, customers or partners, and we're quite proud of this. This was our priority and continue to be our priority. Second, we have reacted very quickly and very early. I think we've talked about this before and strongly to this disruption of all the activities that we are in. We've made a lot of strong and selective effort, a lot of imagination and activity in different aspects of our businesses, how can we work more efficiently remotely, how can we stay in touch with our customers, how can we adjust our product offerings and distribution channels to continue to be relevant, how we can operate in a leaner and more agile ways in promotion of costs and so forth. This relates to what I've told you before, preparing the second semester and probably much more in the years to come. Three, despite the challenging environment, we continued to move forward and achieve the serious steps in our strategy with focusing on the group. In April, we closed the sale of Lagardère Sports, which was not, by the way, easy. And I would like to congratulate Gerard and his team. It was in April in the middle of the crisis, but we've been able to close it in a nice way, I would say. Then in June, we announced the sale of Lagardère Studios. To be very clear, the deal we've made at that time with Lagardère Studios was exactly the same, if not a better, deal than we would have done before the pandemic, which also is -- was a challenge to us, and well done to Gerard and his team. So now we're more and more focused, which is what we've told you and what you pushed us to do, focus on Lagardère Publishing and Travel Retail, which is good, by the way, because we need all the attention and all the power and the means of the group to do so. Last, but not least, on the financial side, we have taken the right steps to preserve cash and consolidate our liquidity. In addition to operational corrective actions implemented early in the crisis, in the beginning of this year, we took the initiative at the Supervisory Board to withdraw our dividend proposal for 2019, first of all. Then we also secured our EUR 1.25 billion credit facility with our relationship banks and would like to thank them for the trust they have in us, being able, again, Gerard and his team, to negotiate a covenant waiver for June 2020 and December 2020. So as of June 2020, we have nearly EUR 1.5 billion of liquidity, and we're confident this provides us with a cushion in a scenario of prolonged crisis, which is unfortunately what we are seeing in some countries and in some places. Obviously, I will get back to all these questions with Dag, with Arnaud and with Gerard. And now I'll leave the floor to you, Gerard, to give us more details on the first semester 2020. Go ahead, Gerard.

Thank you, Arnaud. So highlights on Page 4. Our results for the half year have been impacted by the COVID pandemic and associated lockdown and travel restrictions. This explains the significant variation of the key figures, which are summarized on this page. Revenues were down 38% to EUR 2.088 billion. Group recurring EBIT turned negative to minus EUR 218 million, reflecting both the usual seasonality of Lagardère Publishing and the impact of COVID across all activities. Likewise, adjusted profit was minus EUR 278 million. And free cash flow before working capital, which is our main cash flow measure, was minus EUR 242 million. Net debt stood at EUR 2.048 billion at the semester end. This semester was truly exceptional with the consequences of this unprecedented pandemic. And before proceeding to the semester results, I would like to give you some additional color on how our activities were impacted, how we swiftly responded to and our liquidity position. So on Page 5, you can see how revenues were impacted month-by-month by activity. For Lagardère Publishing, you can see very clearly the impact of the lockdown from mid-March to mid-May. April was the only month fully impacted by stay-at-home orders, and our sales were down 39%. The positive aspect is that the business recovered quickly as lockdowns were lifted, with sales up 21% in June. For Lagardère Travel Retail, the activity started to deteriorate at the end of January, raising a very positive start to the year. And the impact increased as the pandemic spread from China to Asia Pacific, to Europe and eventually to the U.S. and the rest of the world. The business bottomed out at 91 -- minus 91% in April and recovered modestly after that. So moving to the corrective actions on Page 6. We -- yes, we reacted quickly and strongly to the pandemic in -- first in our Travel Retail activity and then across the group. First and foremost, all the business have prioritized the safety of our employees, clients and partners with adequate sanitary measures, and we have created a solidarity fund to help those of our employees most in need. We optimized sales and pricing -- and prices where possible. We maintained adequate distribution solutions and link with our customer. We implemented cost reduction across activities, in particular staff costs, external spending and lease rental negotiations. We optimized CapEx and working capital in order to preserve cash. And as Arnaud said, we also withdrew the '19 dividend proposal. Last, but not least, on Page 7, we're current on our liquidity position. So during the semester, we secured the EUR 1.25 billion group credit facilities with our banks and agreed to a covenant waiver for June this year and December of this year. As of 30th of June 2020, we have a liquidity of close to EUR 1.5 billion, including EUR 450 million undrawn on our group credit facility. Our liquidity is strong for the next 12 months even in a prudent scenario. I would come back to that at the end of the presentation. So moving now on to Lagardère Publishing results. On Page 9. Lagardère Publishing recorded revenues of EUR 971 million for the first semester, down 8% like-for-like. The decrease in revenues was directly linked to lockdown measures that resulted in a substantial closure of our point-of-sale networks and the decision to postpone new releases in this context. Lagardère Publishing benefited from its geographic diversification as the lockdown impact was significantly less in the U.K. and in the U.S. compared to France. Moreover, the decrease in revenue was limited by the strong recovery observed as the lockdowns were lifted and also with successful new releases. We also saw an acceleration in digital formats, e-books and audiobooks, during the lockdown. This demonstrates that we are well positioned to capture this growing market segment going forward. On Page 10, I will comment on the profitability for Lagardère Publishing. Recurring EBIT was down EUR 9 million to EUR 27 million, which is a margin of 2.8%. This recurring EBIT impact or variance represents a flow-through from sales of 29% after restating the Partworks business, which postponed most of its launches to the second half. This is significantly better than the range of 35% to 40% we're guiding on when we release our Q1 sales, thanks to a favorable sales mix. In particular, blacklists, e-books and audiobooks and swift implementation of corrective actions. Now in terms of cash flow generation for Lagardère Publishing on Page 11. Free cash flow before change in working capital was almost flat, minus EUR 3 million, flat with last year. Change in working capital of minus EUR 114 million is mainly due, so like everywhere, to the seasonality of the activity as we typically built up inventory of schoolbooks ahead of the start of the school year in September. The slight deterioration compared to last year came from an increase in advance to authors. Now I move on to Page 12 to comment on the activity of Lagardère Travel Retail. Our Travel Retail activity recorded revenue of EUR 947 million for the first semester, down 55% like-for-like. France was down by 60%, with the combined impact of the strikes at the beginning of the year and of course, the lockdown measures starting in March, leading to the rapid shutdown of virtually the entire transportation network. Similarly, Europe and Middle East was down minus 53%, impacted by the travel restrictions and border closures starting in March. North America was down by 53% with lockdown measures introduced in many states. Asia Pacific was down 52%. The region felt the impact of the COVID pandemic there earlier, as you remember. However, the decline was slightly limited by the greater resilience from Mainland China, where revenue are almost stable year-on-year in the second quarter thanks to new openings, online media sales and a gradual resumption of domestic travel. In terms of profitability for Lagardère Travel Retail on Page 13. We recorded a recurring EBIT of minus EUR 209 million in the first semester. This represents a flow-through of 24%, in line with the 20%, 25% range on which we guided at Q1 sales release. In the chart on the right side of the page, you can see the fruits of the corrective actions undertaken and the magnitude, which is quite impressive with also -- in line with the drop in sales. Including -- so actions undertaken, including rent renegotiation, reduction in the number of point of sales opened, adjustments of opening times, payroll cost reduction and reduction basically in all nonessential spending. We felt EUR 219 million in fixed cost compared to last year, bearing in mind that this does not fully capture the impact of corrective actions, which also have an impact on revenue, like variable costs, working capital and CapEx. I'm now on Page 14 to discuss the cash flow generation of Lagardère Travel Retail. Free cash flow before working capital decelerated by EUR 230 million to minus EUR 208 million, or EUR 209 million on the graph, mainly as a result of the deterioration in operating cash flow. CapEx were broadly flat at minus EUR 70 million, bearing in mind that the work we have done on CapEx as part of the corrective measures will be seen later on in the year as most of the CapEx for the first semester were committed and could not be reversed. Working capital was minus EUR 200 million, in line with what I said at Q1. Bearing in mind which is -- sorry, which is a mechanical consequence of the decrease in activity as we did not consume our inventories and had to pay our supplier eventually even though we optimized payment terms. In terms of outlook, we expect to have a reversal in H2 that is a function of the extent of the revenue recovery. Other activity. A brief note on other activity on Page 15. With reported revenues of EUR 107 million for the first semester, which is down minus 26% like-for-like. Similarly to Lagardère Publishing, other activities were impacted by the lockdown measures in France, which effectively prevented us from operating and also impacted the advertising revenues in the news activities. The recovery has been slower than Lagardère Publishing as notably some of the activities are impacted by -- and continue to be impacted by the restrictions, such as events, for example. So as a result, recurring EBIT was minus EUR 35 million. Moving on to the group results on Page 17 to comment on the change in revenue. Revenues of EUR 2.088 billion, down 38% like-for-like, in line with our previous comments. The bulk of the decline came from Lagardère Travel Retail. We had a negative EUR 20 million scope impact and a positive EUR 3 million FX impact. I'm now on Page 18, where we can see the recurring EBIT of minus EUR 218 million at group level. And we can see that this translated into EBIT of minus EUR 476 million. So a few bridge elements that are worth noting: a loss from equity-accounted of EUR 25 million as a result of COVID-19 impact on our Travel Retail joint ventures; impairment losses of EUR 63 million, also mostly in Travel Retail; and finally, the application of IFRS 16 on concession agreements at -- in Lagardère Travel Retail led to an impact of minus EUR 94 million, which is the last element of the bridge. So according to IFRS, the savings on fixed rents that was -- were negotiated in the first half, we are talking about EUR 130 million in total and included in our recurring EBIT, have to be booked on balance sheet and taken in profit over the period of the concession. This is why we have a negative impact here. But IFRS should be amended on this point by year-end. And consequently, we will see a reversal of this negative impact in the second semester of the year. I continue on Page 19 with the bridge from EBIT to net profit. Group share, which was minus EUR 481 million for the first semester. Again, highlighting a few bridge elements. Net finance cost increased to EUR 41 million, notably due to the increase of the debt. We benefited from an income tax benefit of EUR 65 million, primarily reflecting the deferred tax income arising on tax losses for the period and depreciation charge against concession agreement. On Page 20, we have a similar bridge from group recurring EBIT to the adjusted profit - group share. I will directly move on to Page 21 as I commented on most aspects already. So on Page 21, a few observations about group cash flows. Free cash flow before working capital deteriorated by EUR 288 million to minus EUR 242 million, mainly as a result of the deterioration of the operating cash flow in the COVID-19 context. Change in working capital was minus EUR 261 million (sic) [ EUR 269 million ]. As a summary of what we said before, this includes the usual seasonality effect for Lagardère Publishing and the mechanical impact of the slowdown of Lagardère Travel Retail. As such, we expect that June should be the low point for the year. Now moving to Page 22, where you can see the evolution of the consolidated balance sheet over the first semester. As a consequence of the cash flow that I just commented, net debt increased to EUR 2 billion during the semester. Equity was reduced to EUR 1.1 billion, mostly as a result of the EUR 500 million loss booked in the semester. Right-of-use assets and lease liabilities decreased by, respectively, EUR 700 million and EUR 560 million due to the renegotiation of rents for Lagardère Travel Retail. I will now comment the outlook and liquidity. So on Page 23. So yes, our business environment remains uncertain into the second semester of the year as the COVID-19 pandemic continues to spread. As such, we have not resumed the guidance as we used to do in the previous years. Lagardère Publishing had a strong recovery in June, which confirms the resilience of the business model. We'll nevertheless continue to face an uncertain environment in terms of consumer trends. In addition, we will have a negative base effect given the absence of new Asterix release and a single school reform in France instead of 2 last year. In terms of flow-through, we have improved our estimates with an anticipation of 25% to 30%. As a reminder, we initially expected 35% to 40%. The better performance in terms of recurring EBIT is mainly due to a more favorable sales mix than initially anticipated, as I commented. For Lagardère Travel Retail, we continue to see a modest gradual recovery of the activity. July revenue was down by approximately minus 65% year-on-year versus minus 82% in June. As of end of July, most airports and railway stations in which Lagardère Travel Retail operates were opened. We carry on our strategy in terms of point of sales reopening, which is agile, and is function of traffic recovery and operational as well as contractual constraints. As per this strategy, we aim to be breakeven in point of sales that are opened. In this context, we anticipate the modest gradual recovery to continue into the second semester, which, however, remains subjected to the risk of localized lockdown and continued uncertainty in the U.S. platform. We continue to implement major corrective actions with significant impact, in particular in terms of rents and payroll costs. These initiatives, combined with the transformation plan, LEAP, allow to continue to anticipate a flow-through in the range of 20% to 25%. Last, but not least, I will comment on our liquidity position on Page 24. So as I said, our liquidity position at the end of June is close to EUR 1.5 billion, of which EUR 1 billion of cash and EUR 400 million of undrawn credit facility. We consolidated our liquidity with a covenant waiver agreed with our relationship bank for this year. We view this liquidity position as strong and sufficient for the next 12 months even in a cautious scenario, which is based on the following assumptions: so for Lagardère Travel Retail, a continuation of the trend observed in July over the next 12 months; a gradual return to an activity in line with 2019 at the end of 2020 for Lagardère Publishing and at the end of 2021 for other activities; and finally, the repayment of all debt due in the next 12 months without assuming a refinancing. This debt would represent EUR 570 million. So that closes my presentation, and I think we can move to the Q&A. Thank you.

[Operator Instructions] We have your first question from Julien Roch from Barclays.

My first question is on -- well, first of all, thank you very much for giving a monthly progression that's super useful and then the drop-through. Very good disclosure. Travel Retail, minus 65% in July. Can we have some indication of publishing and other activities? TF1 and M6, their advertising was flat in July and August. I'm talking about new advertising. So that's first question. The second is disposals. There was lots of press article saying you were selling all the radios and then you stopped and the press articles were wondering who stopped you, and they were talking about either EUR 200 million or EUR 250 million, which is an amazing price. So can you tell us anything about what might have happened? And then thirdly, Vivendi said they would ask for Board seats. Have they done so already? And even if they haven't done so already, when they do, will you agree to give them a seat? These are my 3 questions.

Okay, Julien. Good to hear from you. Maybe I'll turn over to Dag first on July and August numbers and Arnaud, and then I'll answer the questions about disposals and Vivendi. Go ahead.

Yes. I don't think the question was for me actually because we disclosed retail. It was more or less minus 65% for July. Obviously, August, we don't have. What we see is that, globally, we have an improvement in France. For instance, in the U.S. for a while, we had 2% improvement per week. But obviously, with the pandemic growing in the U.S., this has halted completely. So it's -- I mean, we've discussed that before. That between the uncertainty of the evolution of the sanitary situation, how the states will regulate according to that with physical distancing and so on, the macro economy, the micro economy sentiment of consumers. The supply of flights and tourism offer, we don't make any prediction globally in it -- or by month.

Okay. Arnaud?

Okay. Yes. We are very reluctant about commenting the month of July in our business because as I think you all know, July, August and to some extent, September are months very much dedicated to back-to-school sales of textbooks. And the curve really depends year after year on when wholesalers and schools and regions buy. So they can really vary quite dramatically from one season to the next, which makes the overall figures of July tough to analyze. So the indication I can give you is, one, to repeat that the educational season will be weaker this year than a year ago because in France, we have only 1 grade that has updated curriculum versus 2 last year. On the other hand, knowing more or less what happened in July, the trade business is looking good. It's a robust month of July in trade. This is the indication I can give.

Okay. Thank you, Arnaud. As far as the other questions you mentioned, Julien, concerning disposals, I read the press like you. Sometimes I'm a little bit disappointed in seeing things that are not really real. So if we start commenting or denying what you can see here and there, it's an endless process. So I don't want to comment any rumors. As far as disposals are concerned, we've closed -- or we will close, by the way, sorry, the Lagardère Studios definitely. And then we'll see exactly what we do in -- around September or October, November about radios, at one point. And you know the Bataclan, Folies Bergère and so on, what we call the entertainment part of Lagardère, Lagardère Entertainment, and see if we have some buyers. We haven't seen any so far because it's a quite very difficult business to be in today. So I don't think you should expect any significant disposal in the months to come. And maybe not, but you never know by the end of the year. As far as Vivendi and the Board seat is concerned, the only thing I can tell you is that this -- it's not a question you should ask me. As you know, on the limited partnership, the Board, the conseil de surveillance has to make a decision, and we are not part of it. And ultimately, this is a general assembly that will definitely draft or not draft the position proposed by the conseil de surveillance. So I cannot tell anything else other than we haven't received any precise request from Vivendi as far as the Board seat is concerned. Let me also remind you that, to make a long story short, we've been competing and struggling from time to time with Compagnie Generale des Eaux at that time and now Vivendi for the 10, 20, 30 years that have passed. They have been competitors. We had some fights and so on. Fortunately, we have the main owner, I would say -- not control, but the main owner of the company is a friend of us. He's a friend of mine, Vincent Bollore. So we don't expect anything else on this. And again, don't wait for me to make any further comments. I don't want to continue to spread rumors and so on. You've read -- you read too much of these. And if there's something that is significant and important for Lagardère that is coming in, you will know from us and maybe from them, but definitely from us. So that's all I can say about disposals and Vivendi. Maybe I should ask something. I hear your voice. I would let you ask the question. But maybe I should also say something. Not only about Arnaud, but also about -- Arnaud Nourry, but also about his team. You've seen that the numbers they have been able to achieve are absolutely unbelievable. And it goes really not to say that it's an achievement that has been reached with a lot, a lot of efforts. The -- we are very, very happy to have this division within our group because it saves our year, in a way, which doesn't mean that we are not supporting the efforts -- or the efforts of Dag, obviously, because this is something also that is quite difficult. And really, the thing that Dag is thinking about is not only to lose less money than he should -- or than he would. Really to structure his group for the years to come with different scenario, whether it's a totally different world that we will see, which I don't believe, or quite the same world with some changes. But anyway, we have to adapt to that. And both Arnaud and Dag are doing an extremely good job in adapting their group in this present year and for the years that we will have ahead of us. Julien, you wanted to interrupt me. Go ahead.

Not interrupt. I wanted to ask another question on the deal announced the 25th of May with Bernard Arnault. Have you closed the deal? And can you tell us anything about the deal? Because again, I'm not going to believe everything that's in the press, but it is supposed to be some restructuring with LC&M and he's supposed to get into the [indiscernible] and so I don't know. If you could tell us whether the deal has closed and give us some color on what happened, that would be great.

Yes. No. I mean there's not much I can say more than what has been said before, is that it's a minority stake and it's to help Lagardère to keep the integrity of its businesses, both Publishing and Travel Retail, and to help us to really not suffer too much during this period of time. Technically, the deal is not closed, and it will be beginning of September, I think. But there are some technical issues that takes a little time, administrative, to tell you the French word. But absolutely not significant. And for me, the deal is done. But it will be officially and legally done and presented at the very beginning of September, and there's not much else I can tell you.

We have one more question from one, from Sami Kassab from Exane.

I have a few topics of interest to discuss, please, Arnaud. The first one is, can you comment on the spend per tax trends that you're seeing in Travel Retail, especially in the current recovery phase? And also, ideally, could you break down the rate of decline at Travel Retail between traffic, spend per pax, network expansion that you have seen in H1? Then turning to Publishing. Can you quantify the impact of the base effect from Asterix and the French group reform in H2? Are we talking around EUR 50 million of basic effect? And still with Publishing, any update on the Simon & Schuster acquisition? Interest, your size, time line and the like? And lastly, Arnaud, for the command structure, you hold the control rights to the group. These control right are certainly worth a lot. Have you considered monetizing these control rights by transforming the legal structure, like more [ elle.com ]? Or is that something that you are not likely to contemplate in the near future?