Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardere First Half 2021 Results Conference Call. I now hand over to Mr. Emmanuel Rapin. Sir, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today for the conference call with Arnaud Lagardere, Chairman and Chief Executive Officer of Lagardere, Sophie Stabile Group's CFO; Fabrice Bakhouche, Deputy Chief Executive Officer of Lagardère Publishing, and Dag Rasmussen, Chairman and CEO of Lagardère Travel Retail. This afternoon, we will be presenting the first half year 2021 results. The conference call shall end up with a Q&A session. Arnaud, the floor is yours.

Thank you very much. I will be very brief. You have absolutely no idea how thrilled we all are about this H1, especially on the cash. We've been working hard for the past 1.5 years to achieve those numbers. Sophie will go through them in detail, so I will not. Just to tell you also that it's a little early to -- obviously, to be more precise, but -- that this is not exceptional and that we expect H2 to be also a very good semester so far. I mean there are a lot of things that can happen in this crazy world but we've done everything we could, not mentioning the flow through, for example, from Travel Retail, we think we're protected with what could happen. So expect us to have a very, very strong year, result-wise and, more importantly, cash-wise. Meanwhile, I'll leave the floor to Sophie and get back for the Q&A. Sophie?

Many thanks, Arnaud, and good evening to everyone. In H1 '21, Lagardère has achieved excellent performance in an uncertain context. Lagardère Publishing experienced 90% sales growth and delivered the highest recurring EBIT by far in a decade. Lagardère Travel Retail minimized cash consumption and achieve an outstanding flow-through of 12%, best-in-class performance, thanks to strong cost discipline. Net debt is stable versus December 2020, thanks to all cash protection put in place and liquidity is robust at EUR 2 billion. The Group worked hard to deliver these figures, and we are now, at Lagardère SA, on the path to recovery despite the volatile environment. Let's have a look at the main group figures on Slide 5. Overall, group revenue was stable versus H1 '20, thanks to Publishing strong sales and to the positive impact of U.S. and China favorable domestic traffic on Travel Retail revenue. Let me remind you that Q2 '20 presents a favorable comparison basis due to lockdown in several regions. The massive effort on cost saving and cash preservation started by the group in 2020 are paying off as group recurring EBIT is neutral and group free cash flow is positive in H1 '21. Net debt is much lower than the same time last year as the group deleveraged by more than EUR 300 million in the past 12 months. Moving on to Slide 6. On this slide, you can see that Lagardère Publishing, the orange block, experienced 90% revenue growth during H1 '21, versus H1 '20. This represents a 9% growth versus H1 '19. Lagardère Travel Retail was down 9% versus H1 '20 and 58% versus H1 '19. Scope effect was a negative EUR 55 million, including Lagardère Sports sales for EUR 63 million and Laurence King Publishing acquisition for EUR 9 million. Currency effect was a negative EUR 59 million, mainly due to the dollar. Moving on to Slide 7. Looking at the group overview, you can see that the revenue and recurring EBIT mainly came from Lagardère Publishing in H1 '21. Profitability increased for all divisions versus last year, partly due to massive cost saving measures over the last 12 months. Let's have a look at Lagardère Publishing on Slide 10. Lagardère Publishing achieved an excellent revenue performance of EUR 1.1 billion in H1 '21. This represents a growth of 90% versus H1 in the context of lockdown and progressive reopening of social venues in different geographies over the semester. This strong growth was supported by all distribution channels in physical stores as well as on e-commerce website. Indeed, readers are eager to buy paper books and as well as digital books online. Demand for digital formats remain elevated across the valued geographical areas despite an unfavorable comparison basis due to the lockdown in the first half of 2020. Moving on to Slide 11. In H1 '21, revenues were up 16.4%, as reported, and 18.7% on a like-for-like basis with a EUR 30 million negative currency effect, mainly due to the dollar. The EUR 8 million positive scope effect mainly to include acquisition of Le Livre Scolaire and Laurence King Publishing. The brand performance was mainly driven by illustrated book with best-selling cook books, our gardening books in France. And general literature across region, with topped sales such as, The President’s Daughter, by James Patterson and Bridgerton in the U.S. and Hamnet by Maggie O'Farrell in the U.K. Literature also had a good performance in Spain, while Mexico was affected by the current crisis context. Education had a stable activity in H1 '21 with no curriculum reform in France nor Spain, as expected. Partworks jumped by 19% versus H1 '20, thanks to growth in backlist collection in France and Japan and a denser release is scheduled in the first half of 2021. Moving on to Slide 12. In the first half of 2021, Lagardère Publishing profitability was the highest in a decade with a recurring EBIT at EUR 110 million by -- led by a combination of several results. Strong demand for illustrated and literature books contributed to higher profitability as such the youth and comics books market increased premade in France in the past month on the back of French government incentive for young readers called [indiscernible], hence, boosting sales and distribution activity over the period. The strong profitability was also driven by significant book sales with releases such as Lupin and Bridgerton and favorable channel mix via online sales and sustained reader interest for digital formats. Besides profitability benefit from cost efficiency in the current context with savings on marketing, travel, staff and administration costs as well as overheads. Moving on to Slide 13. Lagardère Publishing, free cash flow was positive at EUR 23 million in H1 '21, thanks to good cash flow generation from operations and working capital activities. Indeed, working capital was contained at minus EUR 37 million in H1 '21, up from EUR 114 million in H1 '20 and from minus EUR 100 million from H1 '19. On the back of control measure and favorable activity. Now let's focus on Travel Retail on Slide 15. In H1 2021, Travel Retail benefit from recovering domestic travel in the U.S., as well as in China, thanks to its relevant footprint. Indeed, its diversified activities enabled the division to appeal to customer with the right goods in various geographies and capturing recovery as it started. Travel Essentials and Foodservice in the U.S., Travel Essentials, in city center in Europe and duty-free items in China. As such, U.S. attracted positive trend, fuel accelerated recovery in Q2 '21 as Lagardère Travel Retail performance moved ahead of global passenger traffic figures as defined by IATA. Moving on to Slide 16. In H1 '21, revenue was at EUR 831 million, down 12.3% as reported and 9.2% on a like-for-like basis versus H1 '20. The negative currency effect is EUR 29 million, mainly due to the drop for EUR 24 million. You can see on the slide that since last year, Lagardère Travel Retail revenue has shifted towards geography and segment with the most rapid flow, namely the U.S. and China on the one hand and Travel Essentials on the other hand. Indeed, North America's share in revenue was from 26% last year to 32% in H1 '21 and experienced a 15% growth versus the first half of 2020. China also showed a 90% revenue growth with other -- while other geographies recorded a decline in sales. Similarly, Travel Essentials revenue was on 47% versus H1 '19, while food services and duty-free activity were on 60% and 65%, respectively. Moving on to Slide 17. In H1 '21, Lagardère Travel Retail, keep working hard on increasing cost flexibility and operating efficiency. The brand proceed to negotiating rent, optimizing store OpEx, adjusting staff costs and reducing SG&A expenses. As such, Lagardère Travel Retail achieved a best-in-class flow through of 12% in H1 '21 in an adverse context of minus 58% revenue decrease versus 2019. What this means is that for every euro of revenue decrease of $0.88 of cost that we invest [indiscernible]. This is massive and we pride ourselves and thank the team for the huge effort we put in and that we keep putting in as we speak. Also through cost reduction measures allowed the division to achieve a total of EUR 1 billion of cost savings in the first half of the year versus 2019, while delivering the best quality of service to customers. Those savings include EUR 320 million of fixed cost decrease for the period. As such, the recurring EBIT is at minus EUR 96 million in H1 '21, this represents an increase in profitability of over EUR 110 million versus last year, while revenue has decreased by the same amount approximately EUR 110 million over the period. The [indiscernible] continue to be main KPI for the group in the current context and all the teams work continually toward operational excellence. Besides all projects and the LEAP plan has been launched in H1 '21 and are on track. Let me remind you that this plan is aimed at delivering EUR 100 million additional cost savings at 2019 revenue level. Moving on to Slide 18. Free cash flow improved significantly in H1 versus H1 '20, while cash flow from operation improved by EUR 93 million. Free cash flow went up by EUR 465 million, as a positive EUR 55 million. This is due to, first, strict CapEx control as capital expenditure decreased by EUR 46 million versus H1, down to EUR 25 million. And second, solid working capital management, which stood at EUR 122 million in H1 '21, thanks to efficiency inventory management and favorable payable position as activity accelerated. Let's move on to other activity on Slide 20. Revenue for other activity amounted to EUR 150 million in H1 '21, up 7.5% as reported and 7.9% on a like-for-like basis. Revenue growth for press and radio stood at 6% and 15%, respectively, and was mainly driven by advertising performance, which was higher than the market. Licensees for half performance was up 8%, and it benefited from the easing of restrictions in various countries. As for event venues, they were closed most of the semester due to government measures. Recurring EBIT stood at minus EUR 11 million in H1 '21, up by EUR 24 million versus H1 '20. We keep working on cost savings and are on track with an additional EUR 50 million cost reduction plan at corporate level for full year 2021. Let's move on to group figures on Slide 22. In H1 '21, group revenue amounted to EUR 2.1 billion, stable versus last year. Profitability has improved tremendously, thanks to efficient cost control as group recurring EBIT is neutral at EUR 3 million, up EUR 221 million since last year. Group EBIT stands at minus EUR 117 million. Group EBIT was affected by EUR 20 million received in care of by Travel Retail [indiscernible] due to the COVID crisis. EUR 46 million in amortization of intangible assets for Lagardère Travel Retail and EUR 20 million in net gain on disposal. Group net income amounts to minus EUR 171 million and is impacted by lower net finance costs than in H1 '20 at EUR 25 million, including increase in debt interest compensated by one-off income recognized on financial assets and by absence of impairment charges as Lagardère Travel Retail versus last year. Interest expense on lease liabilities of minus EUR 32 million decrease versus last year due to the reduction of IFRS sales liabilities. And group net income is also impacted by a EUR 3 million tax expenses due to Lagardère Publishing performance compensating other business downturn. As a reminder, last year, the income tax positive due to tax income generated by Travel Retail division [indiscernible]. Moving on to group cash flow statement on Slide 23. Group free cash flow is positive at EUR 77 million in H1 '21 and reflects the rigorous working capital discipline and CapEx control, the group has been following in the past months accumulated with a positive cash flow from operation over the period. Purchase of investment at EUR 39 million, mainly related to the June acquisition of Hiboutatillus in France by Lagardère Publishing and to a guaranteed deposit at other activities. Disposal of investments represents an inflow of EUR 69 million in H1 '21 and include the remaining EUR 45 million balance of the vendor loan granted in connection with AFC on the disposal of Lagardère Sports. The group's net debt fell by EUR 17 million in the first half of 2021, versus December of 2020 at EUR 1.7 billion at the end of June 2021. Moving on to Slide 24. The group's liquidity position is robust at EUR 2 billion at the end of June 2021, including EUR 868 million in the cash position and EUR 1.1 billion of fully undrawn RCF amount. As such, RCF covenant has been successful based with a large headroom and besides the EUR 150 million bilateral loan has been successfully repaid as planned in June 2021. The state guaranteed loan maturity presented on the chart is for simulation only, no decision on repayment or extension has been announced yet. The group had until the end of the year for such a decision. The group considers that is a sufficient liquidity to cover both its financing and operational requirements in the foreseeable future. Moving on to Slide 25. In 2021, we expect Lagardère Publishing sales to normalize as attendance of social venues is increasing over the year. In H2 '21, we anticipate the new Asterix release to be mitigated by the lack of curriculum reform in France this year. As for profitability, we expect it to benefit from the favorable sales mix in the current context. As such, we anticipate operating margin to be slightly above 10% for full year 2021. Lagardère Travel Retail [indiscernible] revenue is dependent on air traffic trends in an uncertain environment, we will continue to take advantage of recovery in various geographies in an efficient way, thanks to a diversified footprint and segments. We keep working hard on proceedings and adjusting operational capacity to the pace of recovery while delivering outstanding quality service to our customers. As such, we tend to minimize flow-through to a level of 15% to 20% for the year 2021, versus 2019, depending on the pace of recovery. We also continue to our strong cash preservation measure by containing CapEx and managing working capital. Besides, we keep our focus on reducing cost at corporate level, and we are on track with the savings plan of EUR 15 million in 2021 versus 2020. Moreover in the current uncertain environment, we continue to work hard on cost savings and cash preservation while being reading for recoveries. Let me thanks for your attention. We are now available to answer your questions.

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

[indiscernible] Julien Roch, Barclays. First question is, can you give us the July trends in Publishing and Travel Retail? That's the first question. The second question is what margin can you reach in Publishing in a couple of years, if you get to slightly above 10% this year, can we do 12%, we do 15%, some color on that? Then third question is what is the EBIT that others can reach in a normal year, maybe we split between what is left of active and the corporate overhead? And I go for a fourth question, sorry, I'm really, you've said that flow-through for Travel Retail in 2021 versus 2019 would be 15% to 20%. But that seems quite conservative, knowing you've done the 12%, 12.2% in the first half. So Sophie is the EUR 15 million savings, you talked about for 2021, is that on top of the flow-through? So the actual reported flow-through would be below EUR 15 million. These are my 4 questions.

Okay, Julien. Absolutely. Maybe Fabrice, you want to start?

Yes Sure, I can start with the July trend for Lagardère Publishing division. Actually, we are in July in between, I would say, COVID year like 2020 which was an incredible July 2020 and normal July. So we are sort of in between. And more generally, we are seeing sort of a slowdown of our sales mostly in the U.K. and in the U.S. So we anticipate, as Sophie highlighted, a more, I would say, normal H2 in Lagardère Publishing division.

And about the margins?

Regarding the margins, I have to say that the margins we had in 2020 and H1 2021 are really unusual. And they are due to a series of factors, really related to the COVID crisis like a higher turn through, higher digital sales, higher online retail of sales and so on and also a lower cost base due to, of course, almost 0 T&E lower occupation cost. So it's -- I mean, that kind of savings are absolutely related to COVID and we are not going to be able to replicate that in the medium term. But for the rest, there may be lessons to be learned from the COVID crisis. So I'm sure we can improve the flow-through in our various divisions. We can also try to be more reasonable on marketing costs and on occupation costs. So I would say somewhere, again, in between our historic historical margin and the margin you are seeing in H1 '21 and in 2020.

And Julien, both Sophie and myself would answer to you slightly differently, putting a lot of pressure on Fabrice and his team saying that we need still to improve the margins, which obviously Fabrice knows, and we'll continue to do so. We'll continue to do so. There was a question about you, my dear, Dag.

Yes. So hello, Julien, regarding the flow-through having -- well, last year, we already did an excellent flow-through because it was less than 20%. But there were some rent release which were not granted at the time, which impacts favorably the beginning of this year. Plus, I mean, the worst the traffic, the easier quarter-quarter just to renegotiate rents. We've also had some state support, which took some time to come, but which reflects both 2021 -- 2020 and 2021. And the last point is that there might be, but obviously, there might also not be, I'll come back to that, some additional costs for the restart. What I mean is that when you risk -- when you open a store, you don't always have a full traffic. So the cost basis can be higher versus sales. On the other side, if you look at what we're doing in the U.S., which is an excellent performance, we have difficulties in hiring people. So we are understaffed and hence, it gives good flow-through plus that we have been able to open the most profitable stores and not yet opened less profitable or even loss-making because we have global contracts in some airports with some loss leaders. So that's why we consider 15%, 20% as reasonable. And obviously, we put pressure on the team to go towards the lower end of that. But I think between 15% and 20% would already be a very good achievement.

The benefit of this crisis, if any, is that when you're in such a state of urgency you change all the reflexes that you have running a company, and we hope and we will keep some of them for sure. All of them probably not, but some of them definitely. So the improvement that we've made will continue to be present in the years to come with a no-COVID hopefully environment. I think, Sophie, there was a question for you, right?

In terms of other activity and for the trend by the end of the year, we will probably be at the same level as 2020, mainly linked to the fact of the -- mainly linked to the activity of Radio and Press. We have some, I will say, a decrease in terms of revenue probably on the second of the semester with the highest comparison versus H2 2020.

Right.

No, my question was actually more like medium term in a normal environment, what kind of operating profit can we expect for the rest, maybe with the split between what is left of active and the corporate overhead?

We continue to push in terms of development for [indiscernible] of course. And also, as you mentioned, in terms of savings at the corporate level, and as I mentioned during the presentation, we are still to achieve our EUR 45 million in terms of cost at the corporate level. So the famous EUR 50 million, as you mentioned. But in terms of trend for the news more difficult to plan, particularly in terms of radio and press on this complex environment.

Okay. Great. And finally, the July trends are back in Travel Retail?

Yes. So in terms of trends, I mean, if we between April and May, we increased by approximately 7 points, but comparison has always been towards '19, between May and June [ 7.5 ] more or less. And the trends we are seeing now would be between [ 7 ] and [ 10 ] for July. So we really see a pickup, which makes us fairly confident. The point is for the time being, we have no delta variance impacting the figures. We hope you won't see them, but that might come. So I mean psychologically, obviously, everybody is fully prepared for all scenarios. But if the figures continue like that, it's great. But yes, I mean, we might have a slowdown due to a delta variance.

Next question, please.

The next question comes from Mr. Sami Kassab from Exane BNP Paribas.

Thank you, and good evening, everyone. I have 3 questions. The first one is rephasing a little bit Julien's question on the top line performance you expect in Publishing, in H2. I forgot what is -- I forgot what normalized means. Can you give more specific you expect year-on-year revenue to grow or to decline in H2 for Publishing, please? The second question is back on the July trends. Do we see a recovery in Europe. And can you comment from where you stand today, whether you expect August to be similar to July or whether you would expect some further improvement in August versus July at the divisional level for Travel Retail? And lastly, could you please remind me the number of shares the company will have outstanding after the capital increase?

Okay, Sami, it's good to hear you. Fabrice?

I would say that regarding H2 and Publishing, we will be globally, I would say, in line with a normal H2, like H2 2019, for instance, which is a year with Asterix. So it would be pretty comparable with H2 2019.

Not in terms of absolute revenues, right?

Sorry?

But in terms of absolute revenues or in terms of growth?

Yes, In terms of absolute revenues.

Yes. So regarding Travel Retail, we see a pickup in Europe. Duty free, the figures I've seen are more like plus 10%, plus 15% compared to the June frame. So that's very positive. I don't think we see any further improvements in August because of all this noise on delta, which makes that international travel may take a bit longer to resume.

So a little more, why all this...

No. I mean, July in terms of trends, European trends were slightly better than what we expected. So it's a very positive trend so far. I would say that's the main point. What we see is that some platforms are really lagging. Rome is lagging. Prague is lagging. Paris is kind of recovering but with our duty paid and duty free, I would say that's the main thing.

Yes, Sami, about the number of shares we increased them by EUR 10 million. So that today, you have 141,133,286. And if you want mic on, you're free to go. Next question.

We have no other question. [Operator Instructions]

Yes. Let's wait for a few seconds. No more questions?

No more questions.

Okay. Well, thank you so much. And please make some publicity on Lagardère stock. It's really, really cheap now, really cheap. Talk to you soon. Bye-bye.

Thank you. Bye.