Lagardere SA (MMB) Earnings Call Transcript & Summary

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

Thank you. Good afternoon, everyone. Thank you for joining us. This is a conference call with Arnaud Lagardere, General and Managing Partner of Lagardere; Sophie Stabile, the Group CFO; Arnaud Nourry, the CEO of Lagardère Publishing Division; and Dag Rasmussen, CEO of Lagardère Travel Retail. This afternoon, we will be presenting the full year 2020 results and the conference call will end up with a Q&A session. Please, Arnaud, the floor is yours.

Thank you, Emmanuel. Good afternoon to all of you. Hope you're safe. I will make a few comments before leaving the floor to Sophie. First of all, to tell you that, obviously, we had better years than the 2020. Obviously, there has been some external events driving this. But we're not going to shy away from the pleasure of doing better than most of our competitors in both our divisions, Lagardère Publishing and Lagardère Travel Retail. To start very quickly with the book publishing, the year was good for the industry, of course, but it was very good for us. And especially very good for us because we had some exceptional best sellers, and you know that Arnaud Nourry says that every year, and exceptional becomes not exceptional. But this year, we had some winners that really drove the numbers as you will see them. And this is not an excuse to tell you that it's going to be hard to beat those numbers this year, but it will be difficult to beat them for sure. So we're very happy, and congratulations to the team of Lagardère Publishing, wherever they are, in France, in U.K. or in the U.S. It was a very tough business to drive. But as you see in the press release, the numbers speaks for themselves. As far as the Travel Retail is concerned, it has been an even worse year, and I have to admit that, and it's a comment that is coming from most of the analysts that, for example, the number of flow through shows that we are really top of the class. There are a lot of reasons for that. Obviously, the talent of the team. But also, we have to acknowledge that the reason why we've been so quick to respond to the crisis is due to the fact that we are a decentralized unit. So the people in place locally were able to move quicker and to negotiate quicker with the landlords on the conditions. Obviously, it carries some cost to it, but we saw the benefit this year about this. All in all, within those 2 divisions, we've been able also to make a lot of cost cutting. And this explains why we've been able to compensate most, not all, unfortunately, but most of the crisis. About the unit that is under the corporate, what we call Lagardère News, we've been hurt by the cut in advertising expenses, and that also you can see in the numbers that it could have been worse. And overall, we are very, very happy about this. It shows that the strategy we've pushed for the past years is the right one, having a pillar -- 2 pillars actually, but 1 focus on growth. That will come back. We're convinced that it will come back one day and sooner than later. And on the other side, an engine of power, very resilient. And you see the benefit of having those 2 legs, and that is the reason why we were setting those recent years to invest in both units which is something that we will continue to do. I will leave the floor to Sophie, and we will -- all of us return your questions. Sophie, go ahead.

Many thanks, Arnaud, and good evening to everyone. As you all know, 2020 was shared by the unprecedented COVID-19 pandemic. And as a group, we took a strong hit in the first half of 2020. Despite the adversity, the group still adapted itself to deliver a much stronger second half of the year. We saw a significant increase in the group's profitability and cash flow generation, which were both positive in H2 2020. Thanks to strong savings plan across branches and at corporate level as well as significant work on cash with control of working capital and CapEx. As we remained focused on our 2 core businesses, these activities were affected by the crisis in a different way. Lagardère Publishing revenue was stable versus 2019 with an outstanding recurring EBIT performance at plus 12% growth above guidance, driven by the specific 2020 context. On Lagardère Travel retail, we outperformed our profitability guidance with a best-in-class flow through at 19.9%. This performance reflects the hard work that was done on the cost saving side despite the minus 60% revenue decrease, which is in line with global passenger air traffic trends. Indeed, after a flow through of 24% in H1 2020, our strong action plan on cost savings led to a much lower flow through of 17% in H2 2020. On the liquidity side, we ended the year with a strong availability liquidity of EUR 1.6 billion and net debt down by EUR 315 million versus end of June 2020 at EUR 1.7 billion at the end of the year. We also secured liquidity going forward as we successfully extended the group's revolving credit facility to March 2023. We also implemented the state-guaranteed loan with 9 banks for EUR 465 million. In 2020, we finalized the successful disposal of Lagardère Sports and Lagardère Studios activities. Now, let's have a quick look on the main group figures on Slide 5. In light of the crisis, the group worked out over the year on reducing costs, particularly in the second half of the year, by implementing a flexible cost structure across branches and rationalizing cost at the corporate level. As such, group recurring EBIT was positive at EUR 63 million in H2 2020 after a first half at minus EUR 218 million. For the full year, group recurring EBIT is at minus EUR 155 million. The group also focused its effort on cash with strong desire to contain working capital requirement. Those efforts, combined with the strong profitability of the publishing business in H2 2020, enabled the group to achieve a highly positive free cash flow generation of plus EUR 255 million in the second half of 2020 after a first semester at minus EUR 511 million. Moving on to Slide 6. Looking at the group revenue, you can see that the revenues mainly came from the publishing business in 2020 due to the publishing activity resilience and to the strong impact of the COVID pressures on the Travel Retail business. Lagardère Publishing also accounts for the major part of recurring EBIT with a very strong profitability in H2 2020 that goes beyond the usual seasonality effect. You can also see that on this slide, that whole division benefit from cost-cutting action plan in H2 2020 after a difficult H1 2020. On Slide 7, we wanted to highlight our main ESG achievement in 2020 as we keep developing initiatives in our 4 ESG pillars across regions. On the environment side, our focus is to reduce our footprint via a pragmatic approach and on the 3 main fronts; climate change, responsibility resource management and responsibility approach to the food chain. As such, we have managed to increase our purchase and supply of certified and recycled paper by 1.98% in 2020. We also achieved 0% of nonrecyclable disposal plastic supply for Lagardère Foodservice brand in Europe at the end of 2020, which is a major commitment for us. Another core focus for the group is our responsibility to our employees. One of our key milestones this year was to increase the woman executive by 2 points to 51% versus 219, meaning more than 300 women out of 600 executives. Additionally, the group has implemented several initiatives on the social and ethics pillars, among which the rollout of Ethics Line as well as the COVID solidarity fund for our most affected employees. Let's run into 2020 performance for various activities. Moving on to Slide 10. Lagardère Publishing activity had an exceptional performance with a strong improvement in the second half of 2020 despite an uneven trend. The first semester was strongly impacted by lockdown, whereas revenue grew by plus 5% in the second half of 2020. After the first lockdown in Q2 2020, there was a catch-up effect with significant demand for book this year. Lagardère Publishing was able to take advantage of this trend, thanks to the strong quality book offer, including several best sellers such as the Twilight series, Midnight Sun in the U.S. and the U.K. and also in France, The Ickabog in the U.K. and A Promised Land by Barack Obama in France. Lagardère Publishing also adapted itself to reach readers through different book formats and distribution channels. This mitigated the impact of the second wave of lockdown in France in November 2020. And overall, revenues were stable versus 219% at EUR 2.4 billion in 2020. There were differences among geographies and segments, as we can see on the next slide. In 2020, revenues were down 0.4% on a consolidated basis and 0.8% on a like-for-like basis, with a EUR 24 million negative currency effect, mainly due to the U.S. dollar and the British pound. The EUR 34 million positive scope effect, mainly included acquisition of Le Livre Scolaire, Laurence King and Blackrock Games. The branch performance was mainly driven by sales in general literature on the back of strong reader demand across regions. The education segment was led by only 1 school reform in France, as expected. However, sales in Spain and Mexico were affected by school budget control due to the COVID crisis. Additionally, Partworks sales were affected for the full year by the decrease in the launches due to the health crisis. Demand of -- demand for tourism guides was lower due to the travel restrictions globally. Moving on to Slide 12. In view of the dynamics mentioned previously, Lagardère Publishing recurring EBIT was up by EUR 26 million in 2020 at EUR 246 million. Recurring EBIT was up by 19% to EUR 219 million in the second half of 2020 versus a decline of minus 25% in the 6 months to June 30, 2020. The strong profitability performance was driven by significant backlist sales with, for instance, The Witcher with more than 4.5 million books sold, and a favorable sales channel mix and format. Indeed, the volume of return is generally lower through online sales. Besides 2020 saw a significant growth in e-book and audiobook sales in the context of health crisis, as e-book sales were up 20%, 22%, and audiobook sales were up 25% versus 2019. Additionally, profitability benefit from cost savings in the current context with, for instance, less marketing spend for launches and less business travels related to book sales. Moving on to Slide 13. Free cash flow generated by Lagardère Publishing was higher in 2020 than in 2019, thanks to operational performance and significantly forced to contain working capital requirements. Indeed, H1 performance was affected by an unexpected lockdown measure. H2 performance was much stronger than H1. And actions implemented in H1 led to EUR 182 million favorable working capital in H2 2020. As such, free cash flow generation was at EUR 262 million in 2020 versus EUR 221 million in 2019. Cash conversion remains high at 63% of recurring EBIT in 2020. Now we will focus on Travel Retail on Slide 15. Lagardère Travel Retail business was strongly affected by the COVID crisis in 2020 as travel restrictions were enforced globally for the most part of the year. After the strong lockdown in Q2 2020, Travel Retail sales mostly benefited from domestic and regional travel. Revenues stayed in the minus 65% area in the second half of the year, leading to a like-for-like performance of minus 60% in 2020 versus 2019. This performance is slightly stronger than air passenger traffic, many thanks to other distribution channels such as [ worldwide ] that were less affected by border closures. Moving on to Slide 16. In 2020, revenue were at EUR 1.72 billion, down by 59.7% on a consolidated basis and by 60.4% on a like-for-like basis. The positive scope effect is EUR 51 million and come mainly from the acquisition of International Duty Free in Belgium in September 2019. The negative currency effect is EUR 20 million and mainly due to the U.S. dollar. All regions and segments were affected by travel restriction in 2020, with the exception of Mainland China, where revenue grew by 22%, thanks to a strong domestic traffic and online sales. Additionally, Lagardère Travel Retail launched its strategic supply and service agreement in Hainan in December 2020 through its partnership with a local player, bringing more than 250 brands to new shops in this area. In terms of segments, Duty Free was strongly affected by travel restrictions at minus 65%. Foodservices were down minus 61%, while Travel Essentials segment was at minus 53%, thanks to a less depressed traffic [ worldwide ]. Moving on Slide 17. Lagardère Travel Retail ended the year at the better end of flow through guidance at 19.9%, thanks to remarkable efforts on cost savings implemented in H1 2020 that led to a best-in-class 27% flow through in H2 2020. Just to remind, you have -- you that the decreasing revenue environment, the lower the first row figure, the better. In 2020, Lagardère Travel Retail flow through reported a cost saving of more than EUR 2 billion, while not compromising delivery, the best quality of service to our customer. As part of cost reduction at EUR 1.4 billion majorly came from the decrease in revenues. This includes decrease in cost of goods sold and variable costs related to a decline in sale and rent, for example. Besides the massive efforts were done on limiting the impact of revenue decline and profitability, as the action plan implemented at the onset of the crisis generated EUR 605 million on the fixed cost savings. Those fixed costs include decrease in rent through strong negotiation over the year, savings in SG&A expenses, staff costs, partially through stoppage of store opening. Lagardère Travel Retail achieved significant cost reductions through renegotiation on a case by case basis, adapting opening hours and reducing necessary expenses. This is a major focus on this work and still being down further today as we speak. As such, recurring EBIT stood at minus EUR 353 million in 2020 and represent a EUR 505 million decrease versus 2019, whereas revenue decreased by EUR 2.5 billion in the same period. Moving on to Slide 18. On the CapEx side, we focused on rationalizing expenditure with a strict focus on significant projects. As such, CapEx related to Mainland China were prioritized in order to develop sales efficiently in the country. Similar CapEx related to the implementation of IT projects were carried on in order to avoid further costs that would arise in the stop & go process. When adjusting for those specific items, CapEx related to point-of-sale and warehouse were down 40% in 2020 versus 2019, as the division priorities expenditure in a view of progressive recovery, especially in the second half of the year. Moving on to Slide 19. Despite ongoing low air traffic levels, free cash flow management was significantly improved in H2 2020 after the initial impact of -- in H1 2020 as an activity adapted to a COVID context. Beyond drastic cost-saving measure and strong CapEx control, working capital was also closely managed in H2 2020. As such, working capital requirements were favorable by 93% -- EUR 93 million in H2 2020, versus a negative EUR 201 million in H1 2020, as more efficient inventory management counter the sharp drop in trade payables. As a consequence, free cash flow stood at minus EUR 42 million in H2 2020, a strong improvement from minus EUR 410 million in H1 2020. Now moving on to other activity on Slide 21. Revenue from other activities amounted to EUR 229 million in 2020, down 20.5% on a consolidated basis and down 20.7% on a like-for-like basis. In 2020, Radio and Press were affected by the decrease in advertising revenue due to successive lockdown despite some slight recovery over summer and in near high end for the holiday season. Licenses for ELLE brand at minus 27% revenue versus 2019 were also impacted by COVID crisis. As for event venues, they were closed for the whole year due to government measures. Recurring EBIT stood at minus EUR 47 million in 2020. It was less affected in H2 2020 than in H1 2020. Thanks to ongoing work on cost savings at News and corporate level. More generally, recurring EBIT for other activity was mainly impacted by the decrease in advertising revenue for Press and Radio. Now move on to Slide 23 on the group result. In 2020, group revenues amounted to EUR 4.4 billion, mainly impacted by the strong sales decrease on the Travel Retail business. Group recurring EBIT stand at minus EUR 155 million in 2020, which is a tremendous improvement from H1 to H2 2020. Indeed, group recurring EBIT was positive at EUR 63 million in H2 2020 after the first half at negative -- minus EUR 218 million. Group EBIT stands at minus EUR 549 million. Group EBIT was affected by EUR 59 million losses incurred by travel Retail JV due to the COVID crisis. Those losses mainly came from JV impacted by the strong decrease in airport traffic such as [indiscernible]. Group EBIT was also strongly affected by nonrecurring items, including EUR 106 million impairment losses for Lagardère Travel Retail relating mainly to price down -- of its concessions in Rome and Belgium, and to a lesser extent, to closure of point-of-sales. Group net income amounted minus EUR 660 million, and it's impacted by EUR 23 million increase of financing costs, mainly related to EUR 17 million in write-down of financial assets at Lagardère Travel Retail and EUR 7 million of increase in financing costs related to the increase of indebtedness and borrowing costs. It is mitigated by the positive income tax figure of EUR 31 million, an improvement of EUR 86 million compared to 2019. This figure reflects tax income generated by the Travel Retail division losses as well as a lower income tax charge linked to the downturn in business. Moving on to group cash flow statement on Slide 24. After the COVID effect, the group limited the downturn through much stronger performance in H2 2020 versus H1 2020. As such, working capital requirements were favorable at EUR 252 million in H2 '20 versus negative EUR 269 million in H1. The significant work of working capital led to a stable level of minus EUR 17 million as a full year 2020. CapEx was also significantly reduced by minus EUR 25 million in H2 2020, while they were initially up by EUR 12 million in H1. Ultimately, CapEx were down EUR 40 million over the year at EUR 169 million in 2020. The group generated positive free cash flow of EUR 255 million in the second half of 2020 driven by the various initiatives rolled out at the travel -- Lagardère Travel Retail and a good performance from Lagardère Publishing. Significant work was done on CapEx, working capital and cost savings. And I would like to thank all the team for this tough work. The group's net debt fell by EUR 315 million in the second half of 2020, down to EUR 1.7 billion at the end of December '20 versus EUR 2 billion at the end of June. Moving on to Slide 25. The group's liquidity position is robust at EUR 1.6 billion at the end of December, including EUR 687 million in cash position, coming mainly from the Publishing business, and EUR 950 million of undrawn RCF amount. In order to consolidate its financial position, the group set up, in early January 2021, a state guarantee loan called PGE for EUR 465 million and also enabled -- and extended RCF to March 2023. The initial maturity of the state loan is one year with a possible extension for up to 5 additional years at the decision of Lagardère. As to the RCF, covenants were redefined to take account of the impact of the health crisis on whole of the Lagardère Group businesses. The group considers that it has sufficient liquidity to cover both its financing and operational requirements in the foreseeable future. Moving on to Slide 26. Despite the effect of the COVID crisis, the group ended the year in a much better shape than after the first half. In 2021, we expect Lagardère Publishing revenue to normalize after an exceptional 2020 year. As such, we anticipate book sales to be impacted by progressive reopening of leisure and event venues after an exceptional 2020 year, which benefited from boosted demand in the lockdown context and several outperforming best sellers. We also expect the new Asterix release to be mitigated by the lack of curricular reform in 2021. In addition, we expect reduced demand for digital format to slightly impact profitability. As for Lagardère Travel Retail, revenue recovery will be strongly correlated to air traffic trends. We will be adjusting operational capacity to the recovery pace. As an indication, IATA forecast as of 3 February this year was for 2021 passenger traffic to increase in the range of 13% to plus 50% versus 2020 and this would represent a decrease of minus 39% to minus 54% of revenues versus 2019 according to this indicated forecast. In this uncertain context, we keep negotiating rents, optimizing staff costs and working on cost savings more generally. This work enabled us to deliver best-in-class flow through at 19 point -- 19% in 2020. For this year, Lagardère Travel Retail remains focused on minimizing flow through versus 2019 depending on the pace of recovery and on preserving cash. We've been working on the LEAP plan to reduce the level of cost for recovery. The plan has an expected run rate of around EUR 100 million cost saving per year. And we continue streamlining the cost structure of other activities in the current context and reducing cost at corporate level with another savings plan of EUR 50 million in 2021. As such, in 2021, in the COVID environment, we will continue to work hard to reduce costs where possible and preserve cash via strict working capital and CapEx management while being ready for recovery. Many thanks for your attention. Let me remind you the next date for the financial calendar. We will hold an Investor Day, and we will publish our Q1 '21 revenue on Tuesday, April 27. We are now available to answer your questions.

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

My first question is on the current shareholding because the last time someone published on the AMF was in October. So I'd like to make sure that the current shareholding is more or less current. So about 7.3% for Lagardère, 7.8% for Financière Agache, 28.3% for Vivendi, 20% for Amber, 13% for Qatar, 6.7% for DNCA, and so a free foot of 17%. So if you could update us on shareholding? That's my first question. The second one is on Travel Retail, you were quite helpful in giving a wide range but still a range in terms of revenues, 13%, 1-3, to 50%. And then you say you would minimize flow through, but could we have a range on the flow through based on, I suppose, the revenue? And then the last question is for Arnaud. Anything you can tell us about the current situation? Apparently, according to Le Monde, you're selling your radio station to Évasion and your Press to [indiscernible] and you get EUR 200 million for the commodity. So anything you can tell us on current development around structure and shareholders would be great.

Okay, Julien. Let me answer to your first question. I think it's pretty much the numbers. I wouldn't say they are exactly what they are because you have some shareholders selling and buying sometimes. As far as I'm concerned, I did not. [indiscernible] neither. But roughly, if you get an overall picture, those are the current numbers, I would say. I have to turn on to probably Pierre Leroy to say exactly what we are entitled to publish or not. But roughly, you got the right numbers. As far as the last question is concerned, and then I'll turn the floor to Dag. You know Julien, it's always the same thing, and that's the reason why we've stopped for a long, long time answering to the rumors, the expectations, are they going to do this, they're going to do that. As far as I'm concerned, and I'm in charge, absolutely no decision made so far. Absolutely not any decision made so far about selling this and this, about changing the status of the company, although I said to you, and I said it publicly, too, that a change of the common deeds, as always, is always an option. The condition I would put is to have a nice and tasteful environment among the shareholders. Maybe we're getting to there. And at that time, we might ask ourselves the question. But in your projections, do not anticipate anything like this, whether it's selling assets or a change in the structure of the group, please, because it could be misleading. As far as the -- well, Dag, you have to answer the question on Travel Retail. So go ahead, Dag.

So the flow through we expect for 2021 will be between 20% and 25%, knowing that the better the sales, the worse the flow through because if traffic comes back, obviously, you have to reopen stores, you have to restart to pay rent and so on. So there's inversion between the level of flow through and the level of sales that you can keep the same range as last year between 20% and 25%.

Next question from Sami Kassab from Exane.

On Travel Retail, is it possible to perhaps tell us if you expect to be positive or negative on EBIT -- on recurring EBIT in '21, or at least what's your gut feeling or crystal ball or whatever you have, would suggest just positive or negative on EBIT for Travel Retail '21 at this stage? Secondly, why would the demand for the digital book format decline in '21? Anything particular at play here? And lastly, can you repeat the 2021 corporate cost-cutting plan? Is it 5-0 or 1-5 -- is it EUR 50 million or EUR 15 million? I didn't understand properly.

Dag, please.

Yes. So on Travel Retail, good try, but we don't give any guidance per division. So I'm not sure we could answer that. But moreover, it's really very dependent on traffic. You know that there's new forecasts or hypothesis come out. I mean IATA came with a new forecast this morning, which is worse than the previous one. So -- I mean it's very -- as you said, we have no crystal ball. Difficult to say, but in any case, I don't think it's our policy to give any guidance by division.

He knows, Sami knows us very well. Sami, any other comment?

On book format, on digital book, and perhaps [indiscernible] you said a slight decline in profitability, EUR 246 million is a record number in terms of EBIT. I know you don't guide, but any color to try and calibrate the efforts you have in mind?

If we can, Arnaud?

Yes. We have 2 different digital formats. The first one is the e-book format. That one was in decline in the last 5 years, but it did rebound in 2020 because probably consumers could not access to the bookstores and bought more in digital. We particularly had a peak when the shops were closed everywhere. I'm unsure that format is going to be growing in '21. I would think it's going to decline. The other format is the audiobook format and this one started growing 3 years ago. It accelerated its growth in 2020. And I think it's going to keep growing in '21 and further because it's a promising format. All in all, I would think that the digital portion of our business is going to remain more or less stable in '21.

Is that clear, Sami?

Yes. And on the corporate cost-cutting plan?

Yes. Sure. Sophie, go ahead.

Sami, it's 1-5 and not 5-0. So it's 1-5 internal savings. Good try, Sami.

Thank you, Sophie. Thank you, everyone. Good night.

But we can do better, Sophie, right, on the corporates, and we will do better. But that's another issue that we'll discuss later on.

For the moment, we don't have anymore questions. [Operator Instructions]