Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardère 2021 Third 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, Sophie Stabile, Group CFO; Fabrice Bakhouche, Deputy CEO of Lagardère Publishing Division; and Dag Rasmussen, CEO of the Lagardère Travel Retail Division. This morning, we will be presenting the quarter 3 revenue of 2021, and the conference call will end up with a Q&A session. Please, Sophie, the floor is yours.

Thank you, Emmanuel. Good morning, everyone. Lagardère Group accelerate on its growth trajectory in third quarter of 2021, thanks to Lagardère Publishing resilient performance and to Lagardère Travel Retail ongoing recovery. The group experienced growth of 26% versus third quarter 2020. This also represents a growth of 13% as of 30 September 2021 versus first 9 months of 2020. The group also pursued development opportunity for its 2 main divisions. Lagardère Publishing acquired Workman Publishing to consolidate its leadership position in the U.S. market. And Lagardère Travel Retail entered into a financial and business partnership with JD.com to further develop its business in all Asia, especially China. On the liquidity side, the liquidity position is solid at EUR 1.9 million as of 30 September 2021, thanks to good cash generation from activities. The revolving credit activity was still fully enrolled at EUR 1.1 billion. Additionally, this past quarter, we have proactively managed the group's liquidity profile with a successful EUR 500 million bond issued due 2027 and a partial tender offer of 2023 notes. As communicated, we intend to use the remaining EUR 350 million proceed of the new bond together with available cash to fully repay our EUR 465 million state-based loan by the end of 2021. Moving on to Slide 4. On this slide, you can see that in third quarter 2021, group revenue increased by EUR 275 million versus last year to EUR 1.5 billion. This is only EUR 300 million more than the previous quarter and is a revenue level that has not been reached since Q4 2019. Scope effect was negative EUR 28 million and currency effect was a positive EUR 3 million. Moving to Lagardère Publishing on Slide 5. In the first 9 months of 2021, Lagardère Publishing experienced an outstanding growth of 10% versus last year. This represents a growth of 7% versus 2019. In the fourth quarter of 2021, Lagardère Publishing revenue decreased by 3% on a comparable basis versus last year, which is a great performance given the unfavorable comparison basis. Indeed, third quarter 2020 performance was exceptionally high due to the strong sales rebound after the lockdown in all geographies. Additionally, the absence of a curriculum reform in France this year mostly impacts the third quarter versus last year. As such, Q3 2021 strong revenue performance translates into a 4% growth versus Q3 2019. This performance was driven by Illustrated book and General Literature on the back of ongoing high reader interest for books. Digital e-book and audiobook represent 12% of Q3 2021 publishing revenue. Moving on to Slide 6. In Q3 2021, book sales performance was driven by ongoing demand for Illustrated books, especially practical, lifestyle guide and new books such as comic and manga. This demand positively impacted distribution sales. Several franchise bestsellers also drove General Literature good performance geographies. By author such as Stephen King in the U.K., Nicholas Sparks in the U.S. and Guillaume Musso in France. Partworks experienced favorable dynamics with 9% growth, thanks to strong backlist collection and new launches over the first half of the year. Now let's focus on Lagardère Travel Retail on Slide 7. In Q3 2021, Lagardère Travel Retail revenue keep improving on the back of air traffic recovery at EUR 710 million, a level not seen since first quarter 2020 before COVID. In fact, year-to-date revenue increased versus last year for the first time since the COVID crisis at 17% growth versus 9 months 2020. This represents 82% growth versus last year and minus 39% like-for-like performance versus Q3 2019. Passenger traffic dynamics were mainly driven by domestic and regional travel with the U.S. domestic air traffic-driven revenue growth. As such, Travel Essential segment benefit from domestic U.S. and regional European travel growth. Moving on to Slide 8. In Q3 2021, Lagardère Travel Retail accelerated recovery, thanks to its relevant and diversified footprint further widening the gap with IATA global traffic figures as seen on this chart. As such, Q3 2021 revenue represented nearly 50% of 2021 year-to-date revenue versus 1/3 on average in recent years. Revenue keep improving in North America at 172% growth versus last year. France revenue increased by 78% versus Q3 2020, thanks to traffic increase due to less restrictive travel measure. EMEA revenue also increased by 53% on the back of regional traffic restart this summer. And Pacific region remained virtually closed, while Greater China performance increased by 65%, thanks to network expansion and growing customer demand despite lockdown in some Chinese region in August and September. Moving on to Other Activity (sic) [ Other Activities ] on Slide 9. Other Activity revenue increased by 5% on a comparable basis for 9 months 2021 versus 2020. In Q3 2021, revenue was flat versus 2020 at [ EUR 57 million ]. Lagardère sales -- Lagardère new sales were mainly stable at minus 1%. Radio performance declined by 16% on the back of a slower value advertising market environment and lower audience figures. The Press segment was broadly flat with a 1% revenue growth driven by good advertising momentum at Paris Match and Le Journal du Dimanche despite slower [indiscernible] activity. ELLE license activity experienced strong growth of 23% while benefiting from the easing of restriction in various countries. And the Entertainment business had low activity as events venue were mostly closed. Moving on to Slide 10. Lagardère Publishing sales are driven by consumer demand for books across various segments and formats with the positive impact of the new Asterix released in October expected to partly mitigate the essence of curriculum reform in France this year. In the current context, profitability continued to benefit from strong sales and favorable mix. As such, the group revised its outlook as the operating margin is expected to reach close to 12% this year in this exceptional context. Lagardère Travel Retail revenues are still dependent on air traffic. In an improving but uncertain context, our diversified footprint and segment enabled us to take advantage of domestic and regional travel recovery and be ready for reopening of Europe-U.S. routes in an efficient way. We keep addressing operational capacity to the pace of recovery and striving towards operational excellence. Thanks to our strong work on cost optimization, we upgraded the outlook of Lagardère. Travel Retail is expected to further minimize its flow-through in 2021 to a range of 12% to 15% versus a range of 15% to 20% previously. Lagardère Travel Retail also continued effort to preserve cash, especially regarding working capital and CapEx. We keep our continued effort on corporate cost reduction and expect to reach a EUR 15 million corporate cost savings in 2021 versus 2020 according to our plan. Many thanks for your attention. We are now available to answer your questions.

[Operator Instructions] The first question comes from Christophe Cherblanc from Societe Generale.

Just wanted to start with book. Sophie, you mentioned the context was exceptional. So should we see the 12% as the benefiting margin? Or do you think that's a sustainable level in the future? Second question on book. What is your exposure to paper cost? How do you manage the spot price increase? Is it impacting 2020? And last on Workman. You flagged the guidance the margin guidance is without Workman. I would assume the Q4 timing consolidation will be positive to margin. Is that the case? And can you confirm Workman's margin mid-teen, high-teen? Any more color on that would be super useful.

Thank you, Christophe. I leave the floor to Fabrice for all the questions.

On paper cost, we do have, particularly in Q4 and also potentially in 2022, an increase in our paper cost, maybe, let's say, around 5% to 6% overall. So it's an increase in our cost base, which we will try to offset with lower manufacturing cost on the rest of our manufacturing cost. And we may also have to increase some of our prices. So we will have an impact on the -- of the paper cost increase. On your first question regarding the margin, as I said in July, we will do our best to keep what we have achieved in 2021 mainly regarding the higher sell-through and also the contained marketing cost that we managed to have and to reduce in 2021. So this is what we will try in '22 and the years after. I'm not sure we will be able to have a 12% margin in the years to come. And my best guess is that it will be in between the pre-COVID margin and this outstanding 12% that we are hoping to have in 2021. Regarding Workman, which was your last question, we will have a positive impact of the Workman consolidation in Q4 on our margin and our profitability. But this is mainly due to the title shift and the fact that the Workman's bestsellers will be on Q4. Regarding '22 and the years after, we will implement the synergies over time. We will have very substantial synergy story, but they will mainly materialize in '23 and, above all, '24 and '25.

And on the level of margin, is it a 15% margin business based on the price you paid for it?

It's a -- it's more than a 15% margin business after the implementation of the synergy. In the meantime, it will grow up from the existing margin to 15% over time because it will take us 2 or 3 years to implement all synergies we have with this business.

The next question comes from Julien Roch with Barclays.

Yes. My first question is would it be possible to have a monthly trend in Travel Retail going back for Q3? And then can we have some indication of trends in Travel Retail and Publishing for Q4? So that's 3 questions. And then the other question is I suppose for Sophie as Arnaud is not around. Vivendi has bought on their stake. And to be able to keep that stake, they need approval from the regulator. The issue will be the market share of Editis and Hachette in France. Would Lagardère be willing to sell part of Hachette to make the merged entity better? Or would Lagardère not sell anything, and therefore, given the -- if they want the deal to happen, has to sell quite a lot of Editis, I think?

Thank you, Julien. So I will answer to the last question concerning [ Vivendi ], Editis and Hachette. As we already mentioned, it's too early to discuss on this part of this transaction today. And we are working at this day for the authority in term of competition. And we will come back to you when we will have more information on that side. Concerning the monthly trend, Q3 for Lagardère Travel Retail and Q4, I will leave the floor to Dag.

Yes. So during the summer, there has been a kind of a plateau around minus 40% with some changes month after month. But we were seeing some kind of stability. Actually, until mid- of October, where the 2 last weeks, somewhere around minus 35%. So we -- it's been plateaued which the good thing is that it's maintained. The bad thing is obviously that it didn't improve. But we're fairly optimistic for continuing improvement for the rest of the year. And once again, the 2 last weeks are around minus 35% versus 2019.

And on books, anything on Q4?

Yes. On books, we have the Asterix and the J.K. Rowling new book in the U.K. So we anticipated Q4 2021 in line with Q4 2020, which was an excellent Q4, as you may remember. So we are pretty confident with the end of the year regarding publishing.

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

I have 2 questions probably for Dag. Can you please remind us of your 2019 Travel Retail revenues that were derived from corporate travel as opposed to leisure travel? And Dag, what is your outlook for corporate travel? Do you expect that it will revert to prepandemic levels or that it will be structurally below with what we've all experienced with COVID?

Thank you, Sami. So corporate travel varies a lot from geography to geography. So it's a bit difficult to say. My guess would be that to be between 20%, 30%. But I mean you know that the evolution has been very changing with Asian improving quite a lot for a while and then low cost. And obviously, these would be mostly nonbusiness or corporate travel. So the evolution of corporate travel, I do think that corporate travel by itself would not get back to its historical level at least anytime soon, although we see positively that conferences start -- restart. I mean, again, right now, there's a travel retail conference, and there has been new conferences. So that's good for corporate travel. But I mean there will be the fact that many companies want to save on travel, that we see that Zoom, Teams and so on is very efficient at least for internal communication. So I expect a decrease of the part of corporate travel. This being said, for the total Travel Retail, I'm still very confident and optimistic. And that's the mood we can see here.

[Operator Instructions] The next question comes from Thomas Singlehurst from Citi.

Yes. It's Tom here from Citi. You mentioned in response to an earlier question the potential for price increases within books. I mean the performance of consumer publishing just generally across the last 18 months has been absolutely fantastic, much better than I think anyone might have thought. And that obviously vindicates consumer books as a medium. I'm just wondering what your attitudes are towards pricing. One, are you pushing pricing harder? And is that something that you could -- a lever you could pull running into the next couple of years in a more inflationary environment?

Fabrice?

It's an excellent question. And we've looked at the book prices over the last 20, 25 years. And they grew lower than the rest of the prices than inflation rate. So it's a good question. And it's probably a question we'll have to ask to ourselves and also to the rest of the market. We have a pretty dynamic pricing policy in the U.S. We have a dedicated pricing officer with -- in charge of optimizing the prices. And we'll try to do the same sort of things in France. And there is, in my view, a potential for price increase in books on the French market as well.

Very clear. And one final maybe follow-up. I mean the implication of your comments is that excluding education, the consumer part of the portfolio was growing in the third quarter. I'm just wondering what changes third quarter to fourth quarter given the information that you expected a more flat performance. Is that just life going back to normal and less people curled up at home with books?

Well, not really. Actually, Q4 2021 -- 2020, sorry, was really outstanding and extraordinary, mostly in the U.S. and in the U.K. It was really an exceptional quarter. So we will be -- in line with Q4 2020, being helped with Asterix and J.K. Rowling, which means that if we take out those 2 outstanding bestsellers, we'll be slightly below Q4 2020 and more in line with Q4 2019, for instance. But still, there is still this dynamic on our market. And we have still this sort of new habits of people reading more books. It is slowing down a little bit, but we still have this in our sales figures. And we'll probably have this impact in Q4 2021.

That's great. Congrats on the quarter.

[Operator Instructions] We have no more questions.

Thank you to everyone. And we will see you in February for the end results. Thanks.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may disconnect.