Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardère 2020 Third Quarter Revenue Conference Call. I now hand over to Mr. Emmanuel Rapin. Sir, please go ahead.

Yes. Good morning, everyone. Thank you for joining our conference call. We have with us today Arnaud Lagardere, General and Managing Partner; Sophie Stabile, our Group CFO; Arnaud Nourry, CEO of Lagardère Publishing Division; Dag Rasmussen, CEO of Lagardère Travel Retail Division. And this morning, you will be presented the quarter 3 2020 revenue, and the conference will end up with a Q&A session. Please, Arnaud, the floor is yours.

Thank you very much, Emmanuel. I hope you're safe. I know that some of you got hit by the virus. So I hope that, especially them, you are doing well, you and your family. And please continue to be safe. Before leaving the floor to Sophie, I'd like to make a couple of comments, 3 issues I would love to cover. The first one is about Sophie, herself, that is joining us. I thought that since we are in the middle of some difficulties regarding the virus, regarding some shareholders, I thought that it was the right time to strengthen our financial policy, the way we express ourselves towards the financial community, whether it's you guys, analysts, whether it's the banks, whether it's the investors and shareholders. Even though she is young, she has a lot of experience. So probably some of you know her already. And she's, as you know, also very talented. And just a simple fact that she joined us in the middle of so many difficulties is a proof that she is not afraid of battles, and we're going to have some battles. I'm talking especially about, obviously, the business itself. So we welcome Sophie and wish her all the best. Second issue I would like to cover is about everything that you hear, everything that you read, everything that you listen to about so many rumors here and there. As a principle, we do not comment them because if we start doing this, we get into an endless process, which doesn't mean that those rumors are true, by the way. The only thing I can tell you is that there are no negotiations on any disposal of the group, no negotiations on any change in the limited partnership, currently. And obviously, we're having some discussion with all the shareholders because this is the good governance that we want to keep on doing. And if there is something that is significant, that is important to the group, you'll know. We won't hide it. You will know, all of you. So I do not expect any questions around this since we will not answer to those questions. Last but not least, last time, or maybe the time before last time, we left you a couple of weeks before quite an important Investor Day. It was focused on the cost-cutting plan that we had in mind, and we still have in mind. Please give us some time now, give Sophie some time to review all the plans to improve them since we have to improve them. We have some benchmark. Dufry is one of them that we have to study, follow and maybe do as well as they do, maybe even better as they do. But give us a little time, and we'll get back to you and discuss those issues. And now I leave the floor before the Q&A session to Sophie about the Q3 numbers and any kind of questions that you have. Sophie?

Many thanks, Arnaud, and good morning to everyone on the call. So I move on Slide 3. This quarter, we have seen different dynamics in our business that has led to a Q3 2020 group revenues at EUR 1.19 billion, a minus 38% trend versus Q3 2019. This trend is in line with H1 2020 performance announced on the 30th July as well as with the year-to-date trend for the last 9 months. As mentioned, the underlying dynamics are [indiscernible] depending on the business. Lagardère Publishing achieved a plus 6% revenue growth in Q3 2020, thanks to the quality of its book production. This enables the business to take advantage of the General Literature market's rebound despite lower Education and Partworks performance in various regions. Lagardère Travel Retail performance in Q3 2020 at minus 66% was affected by the resurgence of COVID-19 second wave across regions. The business was impacted in Europe and in the U.S. by heightened travel restriction measures starting August 2020, not to mention the Pacific region that has been virtually closed since the onset of the pandemic. Other Activities were impacted by COVID-19 effects at minus 9.6% in Q3 2020. This performance was driven by Radio's positive trend over the quarter. Moving on to Slide 4, Q3 2020 revenue evolution. Given the minimal scope and currency impact, the like-for-like performance represents a minus 38.3% decrease versus Q3 2019. You can see on the chart that this performance was mainly driven by the drop in Lagardère Travel Retail revenues, which is the red square, while Lagardère publishing, the yellow square, has seen an increase in earnings. Contribution from Other Activities and the nonretained scope remain relatively small. As a reminder, Lagardère Studios are still in the nonretained scope as of 30th September 2020. Indeed, as announced on the 2nd November, Lagardère Studios sales to Mediawan was completed on the 30th October 2020 on previously communicated items. Moving on to Slide 5. Lagardère Publishing achieved a plus 6% like-for-like growth in Q3 2020 at EUR 704 million versus EUR 663 million in Q3 2019. Scope impact is mainly due to the acquisition of Blackrock Games in December 2019 and Le Livre Scolaire in January 2020. The 9 months like-for-like performance is at negative 2.8% due to the strong lockdown that took place in spring this year. Measures relative to the COVID-19 pandemic somewhat impacted Lagardère Publishing as a business in Q3 2020, for instance, in the Education sector. Nevertheless, revenue grew by plus 6% on the back of positive market dynamic in the Literature field. In short, we just keep reading and buying books in Europe and the U.S. The quality of our production was demonstrated by several best sellers in the General Literature and Illustrated segments. This has enabled us to take advantage of the general market rebound across regions this quarter. As you can see, some of the top-selling books are shown on this slide. Some more detail on the next page, Slide 6. After the strong rebound in June this year, the positive trend continued into Q3 2020, with a plus 4% revenue performance in July, August 2020 and the present performance in September 2020 versus last year. As such, the business benefits from a diversified format mix and distribution mix that's happening to more readers. Indeed, e-book sales, as opposed to paper book sales, strongly increased in both the U.S. and Europe. E-book revenue share grew to 9.9% of Lagardère Publishing quarterly revenue versus 7.8% in Q3 2019. Audiobook format was preferred by more and more readers in the U.S. over the quarter, and audiobook revenue share grew to 3.7% of Lagardère Publishing revenue in Q3 2020 versus 2.9% in Q3 2019. As for distribution channels, Lagardère Publishing benefit from the increase in online sales in Q3 2020, adding to the reopening of physical bookshop after the lockdown in France. In terms of book releases, General Literature and Illustrated Books best sellers grew sales in France, in the U.K. and in the U.S. Midnight Sun, the 5th book of the Twilight Saga by Stephanie Meyer was launched in August. Since then, it has been the undisputed best-selling books this quarter, with over 2 million units sold in French and English languages. Troubled Blood by Robert Galbraith and Where The Crawdads Sing by Delia Owens also attracted reader in the U.K. As far as reader, they favor The Return by Nicholas Sparks and nonfiction release around the Black Lives Matter movement, such as So You Want To Talk About Race by Ijeoma Oluo. On the other hand, the Education segment is soft from COVID-19 impact on school campaigns in Spain and Mexico at minus 20.8%. Additionally, there was only one level of high school reform in France this year versus 2 in Q3 2019. Finally, on the Partworks segment, as part of the strategic cost reduction at the onset of the pandemic in Spain, less Partworks launches were performed in H1 2020. And given Partworks are sold over a continued period of time, less launches in H1 2020 led to less revenue in Q3 2020 at minus 7.6%. Moving on to Lagardère Travel Retail business on Slide 7. Lagardère Travel Retail revenue represents a EUR 393 million in Q3 2020, a minus 66% like-for-like performance. The like-for-like performance is minus 59% for the 9 months period, slightly higher than Q3 2020 due to the better performance at the beginning of the year. At that time, the pandemic was mainly limited to Asia. The Travel Retail business evolution is currently correlated to COVID-19 evolution. After some recovery post lockdown with regional borders reopening in July, the virus' second wave impacted business starting August, with differences among regions. In Europe, after some recovery in July and early August, the region has been impacted by heightened travel restriction measures starting mid-August 2020. This led to a decrease in regional leisure travel, especially in September and some leisure travel usually seen in late summer season. As such, revenues for France and the rest of Europe decreased by minus 71% and minus 61%, respectively, versus Q3 2019. In the U.S., revenue decreased by minus 70%. Air traffic was mainly domestic. International air travel and business travel were very much impacted by the pandemic. As for Asia Pacific, revenue decreased by 67% in Q3 2020. This trend was driven by various dynamics. Australia and New Zealand have been virtually closed since the onset of the pandemic, which drove revenue down minus 93% for the Pacific region. On the other hand, Mainland China remains an exception. Domestic travel recovery and booming luxury domestic spend have driven revenues up by plus 63% in that country in Q3 2020. The positive impact on Travel Retail remains small as China revenues are not significant overall. Nevertheless, this revenue growth and the positive evidence showing that our stores concept and items sold are still relevant and appealing to our customers. This trend also translates the business capacity to rebound in a somewhat normalized passenger traffic environment. Moving on to Slide 8. Travel Retail trends in line with modest passenger mobility. The bar chart on this page shows that Travel Retail revenue remains generally in line with passenger mobility trends. International air traffic decreased the most, with regional travel depending on government-coordinated measure in Europe and domestic traffic mostly driven trends in the U.S. and China. Beyond air traffic, nonairport distribution channels have been less impacted by government-restricted travel measures. For instance, in France, nonairport business has decreased in Q3 2020 by minus 54% versus minus 71% total front activity. Point-of-sale located in railways, malls, hospitals and so on mainly sold travel essential items. Moving on to other activity on Page 9. Q3 2020 like-for-like revenue performance for Other Activities was somewhat better than 9 months performance at minus 10% versus 21% for the 9 months period. This is mainly driven in Q3 2020 by the good performance of Radio, all revenue increased by plus 8%. Indeed, announcers give press advertising budgets towards Radio as a reactive media during the summer period. On the other hand, the Press segment at minus 14% has been impacted by announcements from luxury goods and travel industry cutting their advertising budget. Moreover, international license at minus 28% had been impacted by COVID-19's second wave in Asia. Similarly, Lagardère Live Entertainment has suffered from closure of entertainment venues due to the pandemic at minus 59% versus Q3 2019. Moving on to Page 10 now. As of 30th September of 2020, the group's liquidity represents EUR 1.3 billion, of which EUR 837 million cash position and EUR 550 million of undrawn revolving credit facilities. We remind you that the RCF covenant for 31st December has been waived. In terms of outlook, in the current uncertain context, the group confirms that it cancels the recurring EBIT guidance originally released on 27th February that was then suspended on 25th March 2020. As for the year-end, Lagardère Publishing revenue rebound is expected to soften in the current context of lockdown in France and in the United Kingdom. Also, there is no Astérix album release in Q4 of this year as those albums are only published in every 2 years. Additionally, the flow-through of Lagardère Publishing revenue to recurring EBIT is expected to be in 20% to 30% range, thanks to cost savings engaged and favorable revenue mix. On the Lagardère Travel Retail activities in October 2020 was similar to Q3 2020 level, driven by travel restriction in the wake of the pandemic's second wave. However, the year-end activity will depend unto the extent of lockdown in various countries. Lagardère Travel Retail kept focused on cost reductions in the current uncertain environment. In light of the cost reduction, Lagardère Travel Retail flow-through on revenue to recurring EBIT is expected to 20% to 25% range. Many thanks for all your attention. Now we are happy to answer to your questions.

[Operator Instructions] The first question from Julien Roch from Barclays.

I'm sorry, I joined late because of previous call, so I don't know whether Arnaud is on the call. But if we could have any comments on the recent press speculation about a negotiation between Bernard Arnault, Vincent Bolloré and Arnaud Lagardere. That's my first question. The second one is for Dag. So you gave us October growth organic for Travel Retail, which is very useful. But I guess, October could be better than November, December, or at least November because there's new restriction in November. So how do you feel about the last 2 months of the year actually worse than October or not? And then the last one for Arnaud Nourry on publishing, very good Q3, but new restriction in November, which, if you look at Q2, added impacts. So do you think it's going to be the same? Or are French people finally embracing online for books? So some comments on the potential impact of lockdown for books. Those are my 3 questions.

Julien, this is Arnaud. Yes, I was on the call. And I wouldn't have missed your questions, Julien. You know that. No -- and actually, I answer your questions by saying that. No, but I think that I would not answer the question.

Fair enough.

And -- yes. No, the answer was very clear. I can repeat it for you, Julien, if -- is that when you start denying things that you can read or listen, it's an endless process. And we don't want to get into this, first of all. And last but not least, I said that there were no -- currently, there were no negotiations regarding any disposal or any change in the limited partnership structure. And again, if there's anything significant, obviously, because we have that obligation. We would release it and talk about it publicly to all the shareholders. So you didn't miss anything, Julien. Dag, can you answer your question?

Yes, I can. So it's true that the lockdown in France but also in Europe has an impact on sales. So we predict more or less minus 65% for October. I would say that if the result of the lockdown is the same as it was in April and May, we would probably lose 10 points compared to that for November and December, if it's the same, which would more or less make minus 70% for Q4.

That's it?

I think that was the question.

Yes, yes. Okay.

Yes, yes. No, that's okay.

Okay. Arnaud?

The -- well, let's keep in mind that France is about 1/3 of our business. So what will happen in France will have an impact on a significant portion of our business, but only, if I may say, that only 1/3. There is a lockdown in the U.K., but in that market, the weight of the Internet channel before physical or digital books is much, much higher than in France, and that is unlikely to be impacted. It could be as high as 50% of the turnover in the U.K. So I'm less concerned about the lockdown in the U.K. than I am by lockdown in France. What I can share is that, despite the like-for-like with Astérix in October last year, October has been a good month for us so far. November is going to be dreadful in France because bookstores have insisted to have the government deciding to close all book outlets, supermarkets, everything but Amazon. And I do not anticipate customers in France to switch from buying in bookstores to buying from fnac.com and Amazon. So we're going to have a dreadful month of November. I have hoped that book stores will reopen early in December. And I'm accustomed to saying that Christmas is on the 25th of December every year, and French people buy lots of books before Christmas. So November is going to be dreadful. I hope there will be a rebound in December. We're going to lose sales, but I'm just unable to tell you exactly what will be the magnitude of that in France. But given the fact that October was a good month, I'm not massively concerned about November. Let's put it this way.

So you see, Julien, from what Arnaud is saying, Dag is saying and from what Sophie said before, precisely on the Q3, we have pretty much the same trend that we had in Q2. You have 2 divisions, one that is really resilient and still resilient, and the other one that is suffering. But with all the efforts of cost cutting, we can achieve a flow-through, that is, if you compare it to the other competitor, that is a good one and probably one of the best. So we do as much as we can and hope that this crisis will end. It will end, we know, but as soon as possible. And if it doesn't end, we will continue to crush the cost and help the book publishing to be as resilient as it is. Any more comments, Julien?

No, that's very good.

[Operator Instructions] Next question from Charles-Louis Scotti from Kepler Cheuvreux.

Hello? Do you hear me?

Yes, we do.

Okay. Great. I have a couple of questions, actually. The first one on the free cash flow generation. Should we expect the free cash flow burn over the full year to be lower or higher than what it was at the end of June? My second question on Travel Retail in China. I'm quite impressed by the 30% increase year-on-year growth. Can you tell us how much is driven by passenger growth? And what is more company-specific like store openings? My third question on the advertising business market. Some companies are [ stepping up ] their advertising budget for the end of the year. Should we expect to, again, a stronger Q4 performance for advertising sales, especially at Radio? Then another question on the Simon & Schuster sales process. Is it still on track? And are you still interested in buying this nice asset? And finally, last question on Travel Retail. Can you give us an idea of the breakeven in terms of when -- basically, how much sales do you need to be breakeven in the Travel Retail business?

Okay. I will answer the Simon & Schuster question, then Dag and then Sophie on the free cash flow. As far as Simon & Schuster is concerned, it's very simple. There's nothing we can tell you. We're not allowed to tell you anything that is happening right now. So that was a short answer to a short question, and sorry about that. Dag, about China and the rest, please?

Yes. So about China, the plus 36%. Traffic is the minus 10%, 15%, probably on the domestic market. So the rest is either performance or openings. And in the performance and openings, you have a new activity, which is using CRM on WeChat and video stream sales. We have organized very professionally this sale, and it works very well. During the crisis, it represented 30% of last year's sales. It's probably a bit less now, but it's still very successful. And as you've seen, we continue our growth in China. We opened several stores in Hongqiao and in Shenzhen, starting some duty, duty paid, obviously, with Chanel, Dior and other brands and most fashion brands. Plus, we have important project, which should come very soon. Regarding the breakeven, I take that question now. I think the best is to consider our flow-through, which is between 20%, 25%. That's what would give you the best idea of where our breakeven point would be.