Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardère 2021 First Quarter Revenue Conference Call. I now hand over to Mr. Emmanuel Rapin. Sir, please go ahead.

Yes. Good morning, ladies and gentlemen. Thank you for joining our conference call. We have with us today Arnaud Lagardere, General and Managing Partner of Lagardère; Sophie Stabile, Group CFO; Pierre Leroy, Co-Managing Partner and Chairman and CEO of Lagardère Publishing Division; Fabrice Bakhouche, Deputy CEO of Lagardère Publishing Division; Dag Rasmussen, CEO of Lagardère Travel Retail Division. This morning, you will be presented the quarter 1 revenue 2021, and the conference call will end up with a Q&A session. Please, Arnaud, the floor is yours.

Thank you, Emmanuel, and good morning to all of you. I would like, first of all, to make a few comments, obviously, about the rumors you've read last weekend, yesterday and this morning, again and again and again. These rumors reveal the possible change of corporate form and some discussions with the main shareholder. And what I have to say is that it is true that there is a project and discussions that are indeed ongoing. With a view to the next general meeting, I am discussing separately with the main investors to see whether reasonable terms meeting certain criteria can be found. And among those criteria, there is managerial continuity, preservation of the perimeter, which is something important, as you know, for me, and for the company and for its employees and also, of course, a fair compensation for the general partner. So my goal is to make changes to the governance to restore a good dialogue with the main shareholders. We've been struggling with this for years. And I would love to propose a project that is in the interest of the group, and again, of the employees and all its stakeholders. Yesterday, we published a press release that you've all read, I guess, saying that these discussions are still ongoing. And as of today, to be very cautious, I have to say that there can be no certainty as to their outcome. I have no specific timing to give you, but I have to say also that I remain optimistic. You will understand that I don't want to make any additional comments or -- and not answer to any questions about the subject. It is very sensitive for the market, and we will communicate, of course, in due course, in accordance with the stock market rules. We have to be very cautious, and we've been very cautious so far. This is a very important subject for the company. And a very sensitive matter also as we saw yesterday for the stock market. So that will end my introduction about this subject, and now let's move to our Q1 results. And before turning the floor to Sophie, I would like to make some very short preliminary comments. Well, first of all, as you all know, Q1 is probably the worst quarter this year for any comparison to last year since the COVID appeared around mid-March 2020. So we had, last year, 2.5 months that were still normal, I would say. And you probably saw the numbers also that Q1 is the -- kind of the continuation of Q4 2020. And in term of trends, it looks like the whole 2020 year, meaning -- won a very strong publishing revenues and a nice like-for-like growth of almost 14%. A still struggling Travel Retail with a 56% decrease. But with some, I would say, sunshine and good hope in China and in the U.S., thanks to domestic troubles recovery. We also have a better-than-expected other activities, what we call other activities due to significant efforts in cost cutting. And last but not least, both cash and liquidity are also better than we expected, and I have to recognize all the efforts of divisions and corporate management regarding cost-cutting, CapEx, working capital and free cash flow focus. So all in all, obviously, this is not a good quarter, but we know what -- we know why it is not a good quarter. And again, I would like to recognize all the effort, specifically of Travel, Retail and Dag and his team. It's not easy for them. It's really, really tough, whether you're in France or outside France. They're struggling every day against things that they have nothing to do with. And they're fighting with a lot of determination, and I think that we've done the proper work to be ready for the recovery. There will be a recovery, a day or another, hopefully, very soon, thanks to the vaccine. And I can tell you that the team is ready to start again to grow maybe a different one, maybe more focused on cash than growth, but still fast-growing activity than it was before. Now Sophie, I leave the floor to you for more details. Go ahead.

Thank you, Arnaud. Good morning, everyone. And as mentioned by Arnaud, in Q1 2021, the group's revenue was still driven by lockdown dynamics across branches with different effects on each business. Lagardère Publishing had a strong sales growth, thanks to its effective book offer and renewed interest in books in a lockdown context. And for Lagardère Travel Retail was still driven by passenger and traffic with a sound wave of lockdown in France, in Europe, and accelerating growth in China and starting recovery in the U.S. So for the other activity, we are mainly impacted by Q1 lockdown. Value stream led to a total revenue of EUR 905 million in Q1 2021, which is a minus 29.8% performance versus 2020 and minus 77.8% performance versus 2019. Moving on Page 4. On this slide, you can see that Lagardère Publishing the orange block experienced revenue growth during Q1 2021 versus Q1 2020. And Lagardère Travel Retail performance largely explains the total revenue decrease. Scoped effect was negative EUR 34 million, and currency effect was a negative EUR 29 million, and it is mainly linked to U.S. currencies. Moving on Slide 5. Lagardère Publishing experienced strong revenue growth in Q1 2021, representing plus 13.9% growth versus Q1 2020. And this increase was driven by the good performance of General Literature and Illustrated books segments. Digital book and audio book represents 13.6% of Q1 2021 Publishing revenue. Moving on to Slide 6. In Q1 2021, our book sales growth was led by successful editorial choice and backlist and several bestsellers were released in the General Literature and Illustrated book segments such as backlist goods, including Bridgerton, Lupin and Attack on Titan as well as new releases such as book by James Patterson and Harlan Coben. Lifestyle books and Partworks also experienced favorable dynamics with Partworks revenue increased by plus 5% versus Q1 2020. The Education segment was, however, impacted by a decrease in Mexico due to the pandemic, somewhat offset by a positive performance in Spain. Asset revenue decreased by 12% in Spain and Latin America. With positive dynamics in various segments drove growth in several geographies and revenue was up by 22% versus Q1 2020 in France. By 9% in the U.S. and by plus 20% in the U.K. So now let's focus on Lagardère Travel Retail on Slide 7. In Q1 2021, Lagardère Travel Retail revenue was down minus 56% versus Q1 2020, which represents a minus 63.1% like-for-like performance versus Q1 2019. And traffic dynamics were different in various geography. So in Europe, Q1 2021 was affected by a third wave of lockdown, and revenue was down minus 60% in France and minus 54% in the rest of Europe. The U.S. experienced slight start to recovery in March, driven by domestic traffic, thanks to vaccination campaigns. Asset revenue was down minus 52% in the U.S. versus Q1 2020. Asia Pacific revenue was down minus 32%, thanks to the strong performance of plus 37% in China, driven by 2 elements, favorable traffic trends and also customer demand in Mainland China. Moving on to Slide 8. Lagardère Travel Retail revenue breakdown by geography has changed in 1 year of COVID, North American share has gained 1 point up to 28%, and our presence in the Travel Essentials segment enabled us to take advantage of the nation's domestic air traffic recovery in March in the U.S. Greater China, mainly Mainland China and also Hong Kong gained [indiscernible], thanks to favorable dynamics on the Chinese market, and this represents 73% revenue growth, thanks to our network expansion, our presence in Hainan and also booming customer demand for products offered by our Duty Free segment in Mainland China. The [indiscernible] region, Greater China and the U.S. now represent more than 40% of total travel retail revenue. And the diversity of our segments and geography enable us to take advantage of recovery opportunity that arise amidst the health crisis still impacted air traffic in most countries. Moving on to Slide 9. Overall, Travel Retail revenue is still dependent on air traffic, and as such, represent a minus 63% decrease versus Q1 2019. And when we compare this to the minus 73% decrease in global air passenger traffic, as per IATA. Travel Essential experienced better performance than other segments due to a stronger domestic traffic versus international traffic. As such, when travel restrictions ease, air traffic recovery has a positive impact on revenues. Lagardère Travel Retail keeps working on cost efficiency and closely monitor strength to pick part for recovery in the wake of vaccination campaign globally. Moving on to the activity on Page 10. So in Q1 2021, our activity revenue decreased by 10% versus Q1 2020 by 16% versus Q1 2019. Lagardère News revenue was down minus 3.5%, driven by the decrease in press securities revenue due to the closure of point of sale in a lockdown context. For the Radio performance was slightly up at plus 1.5%, thanks to good advertising activity in March 2021. License were impacted by the health crisis at minus 40% versus Q1 2020. And of course, I do probably expected the Entertainment business had virtually no activity due to the closure of event revenues. Moving on to Page 11 for the liquidity and outlook. So liquidity was solid as of 31st March 2021 at EUR 2 billion, thanks to our strong work on cash generation from activity. The revolving credit facility was fully on growth at EUR 1.1 billion, And in terms of outlook for the year, Lagardère Publishing sales were boosted in the lockdown context and are expected to normalize with the gradual reopening of leisure venues over 2021. And Lagardère Travel Retail revenue are still dependent on air traffic, with different level of travel restrictions still largely in place in Europe, admissions and air traffic recovery over the year in the U.S., mainly driven by domestic travel. We keep adjusting operational capacity to the pace of recovery, while pursuing negotiating on rent and optimizing costs to minimize '21 flow-through versus 2019. We continue to work on preserving cash by continuing CapEx and managing working capital. Cost structure for other activity is being reviewed and streamlining as we focus on operational excellence. We also keep our continued effort on corporate costs reduction and according to our plan that we present to you on February 2020. Many thanks for your attention, and we are now available to answer your questions.

[Operator Instructions] We have a first question from Sami Kassab from Exane BNP Paribas.

A few questions from my side, please. First, can you elaborate a bit more on what you refer to as a normalization in Publishing sales momentum? Do you expect H2 '21 to show organic revenue decline? Or growth given the tough comps we have versus last year? Secondly, Can you comment on the latest trends in Travel Retail in April? Have you seen the improvement in North America continue? And can you discuss the performance in April, up double digits in North America, and how is it shaping in other countries? And lastly, I understand that cash preservation is key and critical in that COVID environment. But let me look ahead and let me assume that the world normalizes. In that scenario, would you be interested in acquiring assets in school publishing in Europe and Africa, for instance?

Thank you, Sami. [Foreign Language], Sami. Let's start with maybe Fabrice on the sales momentum in publishing.

Thanks, Arnaud. Yes, actually, there are already signs of back to normal in most of our geographies. So Q2 should be in line with the normal Q2 like 2019, for instance. So there should be growth at the end of June. We should preserve the advance we already have in Q1 and be, I would say, more or less in line with our normal Q2 like 2019, for instance.

Okay, Fabrice. The last question was also both for Sophie and for you, about the cash preservation in what Sami called a normalizing world, having some possibilities to make acquisitions, which we are monitoring very carefully with Sophie. But let's say, we would have some investment to make, and let's say, there will be some opportunities around education. What would be your feeling, Fabrice?

We are open to such opportunities if they arise, of course. As you know, we are not willing to look at acquisition project in education in the U.S., but for the rest, regarding education, we are open to any projects mainly in Europe, U.K., France and Spain, but can be also in other geographies.

Okay. Very good. Dag, about the trend in April, if you have some numbers there?

Yes. So regarding the trend in April. It's a mixed situation with the lockdown in Europe, which is getting worse. And North America, which does confirm its improvement. If North America is contrasted, because you have the U.S. on the one hand, which is really improving and which is now running at something like minus 30%, 35% versus 2019; and Canada, which is experiencing yet another shutdown getting worse. And they are trending like minus 92%. So it's a mixed situation. But globally, yes, it's improving, and we're very optimistic on the North American performance.

Okay. Thank you for that. Sami, any other questions?

Yes. Just Canada is down 92% on what, on '19, right?

Yes.

Next question from Julien Roch from Barclays.

My first question is echoing Sami's question who asked about April trend for Travel Retail and Dag's answer, it's mix and North America is improving. But if you put everything together versus what's happened so far because you were very kind enough to continue to give us the monthly data. So March was down 61%, so you've been around 60% for that 7 months now. So is April still at that level? Or we've gone to minus 40% or minus 50%. So that's my first question. And then the second question on the price speculation. I know you put out a press release, and you're not going to comment much more than that. But on the non-Travel Retail non-Publishing businesses, i.e., The Media business, the press seems to indicate you are going to keep that. But if you could give us more color on what you feel is core, noncore any other assets, because there's been no mention whatsoever of the entertainment venue. So is that still for sale when things will improve? Do you really intend to keep the Radio, the press for the next 5 years? Or are you open-minded on that? So any colors on that specific part of the company.

Okay, Julien. Thank you. Dag, can you start?

Yes. So I mean we're in the same order of magnitude. March was like minus 63%. April will be more minus 60%, so there's a slight improvement, thanks to the weight of North America and the very good dynamic we have in China. So it's slightly improving, but it's the same orders of magnitude.

Okay, Dag. As far as your next question, Julien, there's not much else I can tell you. The things I wanted to make clear, because there have been so many rumors and so many distraction, for all the employees of the company, whether they're in Publishing, Travel Retail or Media, was to really be focused on what we have today and cut a deal on what we have today. I've heard so many rumors telling that one shareholder could take that piece, another one could take this piece and so on, and that was absolutely awful for the company. So I wanted to make sure that we start with a deal where all the activities and assets stay in the company. Is it for the end of times? I don't know. Maybe not. I don't know. But I don't want to elaborate still, since still the deal, sorry, is not done yet on the future of those businesses. But for sure, we start the new company, if it happens, again. If it happens. We would start the new company with everything that you have today in line. And if you have any projection to make for this year, for next year, you have to include all these activities. And then we'll see. I mean it's an open company, they would have a new Board, we would have discussions. And we would see, obviously, we're not focused 100% of what we have today. But as a start, this is what we wanted, and this is something that I will not change on this team. It's easier for us to start with this. And sorry, again, Julien, not to be more specific about this, but I'm sure you would understand that.

Sure. And last question on margin. I apologize I missed the presentation. I was on the Mediaset call, which is -- doesn't have transcript on Bloomberg, where you have a transcript. So I thought that take note -- sorry if I missed the presentation. But anything you can tell us on margins for both division? Have you given -- have you reiterated your drop-through guidance for Travel Retail versus 2019? Or has things changed? Any indication on margin on Publishing in the short term for 2021? And then if you look more at the medium term, once you get back to 2019 revenue, where do you think margin will be for Travel Retail? And then Publishing, it's not a matter of being back to 2019 because you're already going to be above that probably this year, but what potential of margin improvement do you see at Publishing, which historically has at the margin below peers?

Okay. So yes, yes, I understand the question. Sophie?

Okay. Yes, Julien, because we are at the revenue, we don't reiterate level of margin. But just to remind what we say at the end of February. For the Travel Retail, we keep a level of flow-through between 20% and 25%. We continue exactly what we have done since the last year on -- in terms of operational excellence. And particularly in terms of flow-through, in term of priority, in term of preserving cash, and also to optimize our cost. So we continue in that same trend, and with a very positive impact on the first quarter of the year. And for the Publishing, we continue also in the same trend with the effect that because everything is closed, we continue our savings plan in the Publishing, and there is no big event and no big organizational events in beginning of 2021. So we continued the same trend as 2020, as already we mentioned in February.

Next question from Thomas Singlehurst from Citi.

I had a qualitative question actually -- or 2 qualitative questions both on behavior of your customers as we go into recovery. So starting with Travel Retail. I was just wondering, in the U.S. and China where you're seeing the sort of early signs of domestic recovery, are you seeing any major change in behavior or consumption habits for travelers? Is spend per passenger sort of roughly where you'd expect it to be? And then second question is sort of the same, but it's on the Publishing side. I mean obviously, hopefully, we will meet other people, again, in bars and cafes and all that sort of stuff. So I recognize we can't all stay home reading books forever. But is there a particular change in profile that you expect as a result of moving back to normal? Will we see particularly acute pressure on e-books and audio books? Or will it be sort of broad based sort of downdraft as things return to normal?

Okay, Thomas. So same question for both divisions, behavior of customers. Let's start with Dag and then Fabrice. Go ahead, Dag.

Yes. So for Travel Retail, obviously, it's early days of recovery. So we experienced some revenge shopping and revenge travel, people who haven't been able to buy for a while, have the opportunity. We also see that it's the most affluent people who start to travel. So spend per pax is better than what we could expect. It's -- so good surprises around that. But that's obviously just the start. What we see in the U.S., we have stronger sales during weekends and holidays. So less business travel, more leisure plus pleasure, so I would say that's the main trend. If we look in China, where we're much more on fashion luxury, we have this new Hainan stuff, where we're very successful and where we are, by far, the most successful among our competitors. This is not totally travel. It's downtown, dedicated for Chinese travelers. It's an island sort of China. That's part of something, which will change in a structural way, which is that the Chinese government has a strategy of bringing back Chinese luxury consumption to China. It used to be like 25%, and I think they want to reach 50%, which is very good for our operations in China, both in Hainan and our domestic network. It will impact, obviously, the international network. But I think that it will impact it in relative and not absolute, because the Chinese middle class is growing so fast that I'm optimistic that the Chinese travel will come back and compensate that. More generally, I think that the use of digital is getting more and more important especially so in China, I would say, where we have a significant part of our sales on streamline of live stream video and WeChat sales and so on using our CRM, big database we have of around close to 2 million customers. So we use that, and it's something, which developed during COVID and which is continuing, and this will continue long term with very, very different approaches among regions. You don't have at all the same digital strategy in China, in Europe, in North America. Other trends which we start not to feel and real experience, is towards more sustainable consumption, more local consumption. And obviously, that's a strategy we have had for a while and which we are accelerating.

Fabrice?

Regarding Publishing, as I already mentioned, and from what we can observe already in the U.K. after the lockdown, there has been some sort of back to normal. Regarding the number of books we sold in April in the U.K. and also regarding the split between print books and digital books. So I would say, and it's more or less the same in the U.S. in April. So I would say that our readers will be back to normal pretty soon regarding the habits as far as digital formats are concerned, as far as the number of books read and book -- and bought are concerned. The only question mark we have is our ability as an industry to retain the new readers we had during the COVID crisis. So that will be the challenge for the second half and the years to come, to try to capture and to continue to interest the readers we had during the COVID crisis. Any other question, Thomas?

Next question from Charles-Louis Scotti from Kepler Cheuvreux.

Yes. I have 2 questions. The first one on the Publishing business. You recorded a very nice organic sales growth in Q1, but still well below Editis, which was up 40% year-on-year. Are there any company-specific reasons that explain this gap between you and Editis? And my second question, I'm not sure you will answer it, but I'll try anyway. Do you think it would be an issue of having 1 of your major competitor at your supervisory board, especially in the Publishing business? Or do you actually believe that you might create some synergies with Editis, without bringing the 2 business together? For example, on the advance on royalty rights, like fees of printing for example?

That's a good question, but I will not answer to it, obviously. But it's a nice try, obviously. Fabrice, on our numbers compared to Editis?

Yes. Actually, if we have a look at Q1 JFK figures, so the number of books actually sold, our commercial performance is very close to Editis actually slightly higher than Editis. But as I mentioned in the press release, they also had a very strong performance of their third publishers revenues. And also additional party publishers, and it's probably what explains the difference between our figures and their figures in Q1 in France.

We love, Charles-Louis, to have competition. It's good for us. It makes us better.

Thank you. We don't have any more questions for the moment. [Operator Instructions]

Yes, we'll wait a few seconds. And if not, I guess we've covered pretty much everything we want to cover this morning. So thank you very much for attending this call, and we'll talk to you, I hope, very soon. And anyway, we have our H1 call in a few months to come. Thank you so much to all of you. Have a great day. Thank you so much. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.