Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lagardère 2021 Full Year Results Conference Call. I now hand over to Mr. Emmanuel Rapin. Sir, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today for the conference call with today: Arnaud Lagardere, Chairman and Chief Executive Officer of Lagardère SA; Sophie Stabile, Group CFO; Fabrice Bakhouche, Deputy Chief Executive Officer of Hachette Livre; Dag Rasmussen, Chairman and CEO of Lagardère Travel Retail; Pauline Hauwel, Group Secretary General. And this morning, we will be presenting the full year 2021 results. The conference call will end up with a Q&A session. Arnaud, the floor is yours.

Thank you, Emmanuel, and good morning to everybody. I will be very quick to leave the floor to Sophie on the numbers. You've seen them. I've seen some comments from the press, not from analysts yet because it takes a little time to work on the figures. But it's not difficult to see that we had an exceptional year in all divisions. Publishing obviously, certainly, we benefited from a booming market. The COVID helped us for sure, helped the whole industry. But the good thing is that we captured, we think, new readers and part of them will continue to read. So overall, we expect 2020 to not to be at the same level, but we've reached a higher EBIT recurring level than 2019. As I said, the COVID helped us, but also we've been able to develop new segments, like the board games and many others. And we've been also able to cut costs. So congratulations to Pierre Leroy, to Fabrice Bakhouche, to the whole team and, as always, to the pressure that Sophie and her team were able to put on the division. Travel Retail, despite the numbers, is in a very good shape actually. I mean, if the travels rebound, we'll be ready to rebound, too. If it takes more time, we'll stick to our low flow-through level. And I think I don't know any other company that has such a low level as we have. So again, it has been really a great job for Dag and all his team. I don't think people imagine the level of stress and difficulty that our team have been into. It has been unbelievable. Meeting with Dag and his team many times, I have been able to see how stressful this period was and still is, by the way. So great job, and we're very happy. Lagardère News, also a lot of efforts in the cost reduction. JDD and Match and ELLE licenses are doing well, especially ELLE licenses. Europe 1 is still a different story, it's still losing money. It's not significant at the level of the group, but still it's a lot of money for us. So we'll keep our efforts until we reach breakeven, which will not be tomorrow as you can imagine. We expect the whole division to do a little more negative EBIT than 2021 because we expect the ratings of Europe 1 to be best case at the same level and work is still going down a little bit. But we'll keep the efforts, it will take time, and we have time. So we still are very optimistic. We think that we've reached a level of stability in terms of employees, in terms of cost-cutting. So at least we've done that, and it's behind us. And last but not least, the corporate delivered the cost-cutting level we ambitioned. We still have some efforts to do for the year to come, this year and next year. And also I have to say that Sophie and her team did a tremendous job putting pressure on people. It's not always easy when you have such a difficult environment to put another level of stress. But coming from EUR 70 million impact, cost impact, and reaching EUR 40 million and, we hope, EUR 35 million -- EUR 45 million, sorry, and hopefully EUR 35 million and why not lower than that in the years to come is not an easy job, and it's never an easy job. So let me turn the floor to Sophie and wait for your questions. Sophie, go ahead.

Many thanks, Arnaud, and good morning to everyone. So in 2021, Lagardère delivered a very robust performance in mixed market conditions for its different activities since the pandemic impacted very differently the two main divisions. 2021 was a record year for Lagardère Publishing with gross profitability and free cash flow at historical levels. In a still adverse environment impacted by air traffic market slowdown, Lagardère Travel Retail managed to adapt its cost structure and to outperform the flow-through guidance at 11.8%, thanks to strong cost discipline, operational excellence and agility. Similarly, as Arnaud mentioned, on the corporate side, we reduced cost by EUR 50 million, in line with what we had announced. Our cash protection measures implemented in the past year, combined with good cash flow from operations, enabled the group to achieve a EUR 200 million reduction of the net debt over 2021. Considering the sharp improvement in our operation and cash generation, the Board of Directors has decided to submit a dividend payout resolution of EUR 0.50 per share at the next AGM taking place on the 22 April. The group remains in line with its operational efficiency objective and cash allocation measures and continue to focus on core business development opportunities. Let's have a look at the main group figure on Slide 5. Overall, group revenue is strong at EUR 5.1 billion but still remains 26.5% lower than in 2019. The level of operating margin at 4.9% is very close to the 2019 level. This is mainly due to the excellent performance of Lagardère Publishing in 2021 and the outstanding flow-through of the Travel Retail activities. Additionally, free cash flow is much higher than in 2019, partly thanks to the significant improvement in the level of working capital. This allows us to restore our level of leverage while refunding our state guarantee loan. Moving on to Slide 6. The strong group revenue growth at 18.6% is due to, on the one hand, Lagardère Publishing, the orange block, which experienced an exceptional 8.1% revenue growth in 2021. On the other hand, Lagardère Travel Retail was up 34.3%, thanks to progressive traffic recoveries. Scope effect was a negative of EUR 78 million, which includes EUR 150 million of the sale of Lagardère Studios and the positive impact of EUR 38 million in Q4 2021 from Workman Publishing acquisition. Currency effect was negative by EUR 29 million mainly due, of course, to the dollar. Moving on to Slide 7. On this bridge, you can see the profitability increase for all divisions versus last year. Lagardère Publishing is benefiting from the favorable book market and Lagardère Travel Retail profit has been massively reduced at minus EUR 81 million versus minus EUR 353 million in 2020. Lastly, Other Activities improved its recurring EBIT by EUR 26 million. Moving on to Slide 8. On the ESG side, the group keeps committing to the four main focus points. As a testimony to our strong CSR commitment, we are happy to be a member of two top-rated ESG entities. We will discuss the environment topics in more detail on the next slide with the carbon footprint. I will just give two examples of our commitment to give a brief overview. In 2021, we have laid strong projects to our inclusion of minorities with, for instance, the diversity committee onboarding minorities at Lagardère Travel Retail in the U.S. market. Additionally, the group increased its focus on diversity with Lagardère Publishing donating 65,000 books to organizations that support diversity, out of nearly 300,000 books donation to 50 charities in the U.S. Moving on to Slide 9. In 2021, the group has delivered its first carbon footprint assessment based on 2019 data for the sake of relevance. We have worked very thoroughly according to recognized methods, such as Greenhouse Gas Protocol with the help of the advisory firm, Carbone 4. Each of Lagardère's divisions was involved in the process on the relevant scope, covering approximately at least 70% of total group revenue. As such, a group steering committee has been created to work in 2022 on defining a road map and main KPIs for reduction of emission of all 3 scopes. Moving on to Lagardère Publishing on Page 12. Lagardère Publishing achieved an exceptional revenue at EUR 2.6 billion in 2021. This represents an 8.1% like-for-like growth, which is unprecedented, mainly fueled by favorable tailwinds linked to the pandemic. As a reminder, our performance usually stands in the 0.5% area, in line with the market. In 2021, all geographies experienced a growth in revenue. Growth was stronger in France at 14%, especially thanks to the boom of the comics and manga market. As such, last year, the manga market in France doubled versus 2020 and increased by 2.5x versus 2019. Sales in the U.K. and U.S. increased by 3% and 4% versus 2020 on a basis that was already very strong in '20. This overall performance was supported by all distribution channels in physical stores as well as online. Demand for digital format remains strong across the value geography and accounts for 11.5% on the 2021 revenue. Moving on to Slide 13. The branch performance was mainly driven by Illustrated Books with best-selling cooking and well-being books and strong growth of comics and manga. The latter was supported by the release of the new Asterix album and Attack of the Titans in France. This effect explains that the share of Illustrated Book jumped from 14% to 17% of the total publishing revenue in '21. General Literature remains a main source of revenue, although its relative share declined to 42%. Best-seller in this category includes The Christmas Pig by J.K. Rowling and the President's Daughter by James Patterson and Bill Clinton. Also, as expected, lower activity in the Education segment resulted from the lack of curriculum reform in France. Overall, the strong demand for group and also a positive impact on our distribution activity of third-party publishers, especially in France and in the U.S. Let's now take a few minutes to look at the Workman acquisition on Slide 14. In '21, we were excited to announce that we acquired Workman Publishing, further strengthening our position in the U.S. in the context of market consolidation. This acquisition complements our portfolio in children's books and adult nonfiction. With this acquisition, Lagardère Publishing will ramp up in the U.S. publishing market. Moving on to Slide 15. Lagardère Publishing profitability reached a historical level at EUR 351 million, led by a combination of several drivers. First, reader interest was very strong in '21 across all the geographies and all ages. Additionally, Lagardère Publishing also benefited from a favorable segment and format mix. Strong demand for Illustrated Books contributed to higher profitability. The used and comic books market saw a drastic increase in France over the past months on the back of the French government incentive for young readers. Profitability was also helped by significant backlist sales with releases such as The Return and Bridgerton, driven by Netflix program. Additionally, it was supported by a favorable channel mix via online sales with a lower level of return. As a reminder, Workman Publishing was integrated in Q4 2021. Additionally, profitability benefited from savings on marketing, travel and administrative costs as well as overhead and limited effect of paper increase in 2021. Moving on to Slide 16. Lagardère Publishing free cash flow before change in working capital reached a record level at EUR 254 million in 2021. This represents a cash conversion ratio of 72%, driven by the high conversion rate of additional revenue into cash. Moving on to Lagardère Travel Retail on Slide 18. In a nutshell for Lagardère Travel Retail, 2021 was a year of progressive recovery, still way below 2019 at minus 46%. Besides the resumption of air traffic recovery, the efforts of the team and the operational efficiency achievements were indeed remarkable. Moving on Slide 19. Travel Retail benefited from improving domestic travel trend in the U.S. and in China, where the group has strong presence. U.S. rebound started in Q2 and accelerated towards the year. Network expansion continued in China despite some closures due to variants and regional traffic resumed in Europe during summer but plateaued later in the year due to COVID variant. As for segment, Travel Essentials was resilient with EUR 245 million growth versus 2020, thanks to recovery in domestic and regional traffic, mainly in the U.S. and Central Europe. Moving on to Slide 20 with a focus on Lagardère Travel Retail's expansion in North Asia. In 2021, Lagardère Travel Retail continued to expand its activity in North Asia region, which includes Greater China and Japan. Our activity was strong, despite local restriction in H2 due to COVID variant. Mainland China revenue doubled versus 2019. Lagardère Travel Retail was the first travel retail leader entering Hainan market in 2021, supplying a huge 40,000-square meter duty-free complex in China. Overall, we are now accelerating our development in North Asia with our strategic partnership with JD.com and Chinese investors. This enables us to take advantage of the great opportunity of domestic tourists and increasing demand for luxury products in China. Moving on to Page 21. In 2021, Lagardère Travel Retail keep working hard on increasing cost flexibility and operating efficiency. We achieved a best-in-class flow-through at 11.8% in 2021 versus 2019 in an adverse context of 46% revenue decrease in the same period. What this means is that for every euro of revenue decreased, EUR 0.89 of cost has been variabilized. We focus on the renegotiation of the concession contracts, to the adaptation of sales opening to traffic trends, the adjustment of personnel costs and a reduction in overheads and the efforts on stock cuts, royalties, insurance, credit counts, IT and activities. Cost reduction measure allows the division to achieve a total of EUR 1.7 billion of cost savings in 2021 versus '19, including approximately EUR 560 million of fixed cost savings. As such, the recurring EBIT stands at minus EUR 81 million in 2021. This represents an increase in profitability of EUR 272 million versus '20. Given revenue increase is EUR 570 million, this means that nearly 50% of additional revenue goes down into recurring EBIT. Besides, all projects on LEAP plan are on track. Let me remind you that this plan is aimed to deliver EUR 100 million of additional recurring EBIT versus 2019 at same revenue level. Moving on to Slide 22. Free cash flow improved significantly in 2021, up by EUR 482 million at positive EUR 30 million. This is due to strict CapEx controls as capital expenditure was EUR 32 million lower versus '20 and solid working capital, which stood at EUR 78 million in 2021, thanks to efficient inventory management and favorable trade payable position as activity accelerates. Let's move on to Other Activities on Slide 24. Revenue for Other Activities amounted to EUR 242 million, up 6.9% on a like-for-like basis. Revenue growth for Press reached 2.9% and was mainly driven by advertising performance, which was higher than the market for both Paris Match and Le Journal du Dimanche. Radio revenues slightly decreased due to lower audience number, including because of the development of remote working. ELLE license performance was up 8% as it benefited from the easing of restrictions in various countries, international advertising operation and revenue diversification. Recurring EBIT stood at minus EUR 21 million in 2021, up by EUR 26 million versus 2020 as we keep working on cost savings. Corporate costs have been significantly reduced as announced. They amount to EUR 45 million in 2021, which represents a decrease of EUR 25 million compared to 2019. Let's move on to group figures on Slide 26. Group EBIT stands at EUR 66 million, affected by EUR 59 million increase versus '20 to reach EUR 1 million net gain from Travel Retail and Publishing JVs and EUR 134 million of impairment loss reduction due to a significant write-down in Travel Retail concessions in 2020. Group net income amounted to minus EUR 101 million. And it's impacted by lower net finance costs than in 2020. Income tax of minus [ EUR 22 million ] as opposed to a tax benefit of EUR 31 million in '20 and again from discontinued operation of EUR 2 million versus a loss of EUR 20 million in '20. Moving on to group cash flow statement on Slide 27. Group free cash flow is positive at EUR 456 million in 2021 and reflects the favorable working capital and CapEx control that the group has been following in the past months, cumulative with positive cash flow from operations [indiscernible]. Purchases of investment at minus EUR 279 million mainly related to the acquisition of Workman Publishing and the capital increase of the JV at Lagardère Travel Retail. Disposals of investment represents an inflow of EUR 89 million in 2021 and include mainly the balance of the AFC loan related to the disposal of Lagardère Sports at Other Activities and the disposal of the stake in J'ai Lu and Glénat by Lagardère Publishing. Moving to Slide 28. The group's liquidity position is solid at EUR 2 billion at the end of 2021, including EUR 937 million in cash position and the EUR 1.1 million of fully undrawn RCF amount. Additionally, in line with its activities and present financial strategy in 2021, the group drew a new EUR 500 million bond through 2027, refinanced EUR 150 million of 2023 bonds and fully repaid the EUR 466 million government-backed loan ahead of maturities. Moving on to Slide 29. The remarkable level of cash flow in 2021 allow us to restore our financial flexibility. Net debt is down to EUR 1.5 billion at the end of 2021 compared to EUR 1.7 billion the previous year. This represents a leverage ratio of 3.6x. This allows us to submit a dividend payout of EUR 0.50 per share. Moving on to Slide 30. As communicated by the group, Vivendi will not exercise the voting rights attached to the shares acquired from Amber Capital or in the tender offer until the clearance of the takeover by the European competition authorities. It will therefore have 22.3% of the theoretical voting rights of the company in the meantime. Moving on to Slide 31. In 2022, we expect Lagardère Publishing sales to be affected by a less favorable book market. Additionally, there will be no new Asterix nor curriculum reform in France this year. As such, and taking into account the integration of Workman Publishing, consolidated revenues are expected to remain stable in 2022 versus 2021. As for profitability, we expect it to be impacted by market slowdown and cost inflation. As such, we anticipate operating margin to be slightly above 11% for full year 2022. As for Lagardère Travel Retail, revenue remains dependent on air traffic trends. In an uncertain environment for business travel and Asia international traffic, we will continue to take advantage of the progressive recovery in an efficient way, thanks to our diversified footprint and segments. We keep working out on cost savings and adjusting operational capacity to the pace of recovery. As such, and depending on the pace of recovery, we endeavor to minimize flow-through to a level of 15% to 20% for the year 2022 versus 2019. Besides, we will keep focused on reducing costs at corporate level with an additional reduction target of EUR 10 million to reach a level of EUR 35 million in 2022. Based on our solid cost control efforts at the business and corporate level and a good cash generation from operations, the Board of Directors will submit a resolution to distribute an ordinary dividend for fiscal year 2021 of EUR 0.50 per share to the Annual General Meeting of Shareholders on 22 April. To conclude, I would like to stress that in this current uncertain environment, we continue to work out on cost saving and cash preservation while being on the road to recovery. Many thanks for your attention. We are now available to answer your questions.

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

[Foreign Language] Three questions or three and a half questions. First one is Q1 trends in Publishing and Travel Retail. And on Travel Retail, where are your level of revenues versus 2019 in Jan and Feb? And the question and a half is when do you expect to be back to 2019 level in Travel Retail, '23 or '24? That's the first question. Second one is Vivendi will get at least 45% of shares per tender, and at most, 89%, assuming, Arnaud, you don't sell. So they are at least your largest shareholders but could control the company, even if they can't exercise their voting rights. So regarding the Editis and Hachette merger, it will only be allowed with disposals. So are you willing to sell part of Hachette to get the merger through? Or will the disposals only come from Editis? That's my second question. And then third question for Sophie, the working capital was amazing in '22. I know it's always hard at the beginning of the year, but some guidance on working capital for -- sorry, working capital was amazing in '21. Some working capital guidance for '22.

Well, thanks, Julien. Thank you for your Claude Lelouch reference. I mean, you're still away from France, but very, very French as we all are. Okay, so I will leave the floor later to Sophie and to Dag and Fabrice, but I will answer your question about the takeover on Vivendi. They do have 45%. We hope the takeover will be a success, meaning that we hope that it will reach as quickly as possible 50%-plus. It is not only -- it's not an issue for us, but it's something that we were waiting. And I am personally waiting for it because we'll be protected by a strong, huge and powerful French company that have cash. And we need that support to continue to grow, whether it's in Publishing, whether it's in Travel Retail and maybe other areas, but definitely in those two segments where we have huge ambition, as you know. We're still in the podium, but we would like to be closer to the #1. And maybe, you never know, maybe #1 one day, although Bertelsmann and Dufry are far, far ahead. But you never know what could happen. As far as Editis and Hachette is concerned, to tell you the truth, I cannot tell you anything. It's in Vivendi's hands, and they will go through the European courts in Brussels and to the commissaire and deal with them. We have some experience, as you know, back 2003 and '04. We know how it happens. We know that there are remedies. We are aware of this. They are aware of it. But be a little bit patient. I'm sure the goal of Vivendi as it is ours is that, at the end, Lagardère gets a very powerful entity that could continue to grow. Will there be revenues from Hachette or from Editis? I have no idea. I don't know. I mean, so far, I really don't know, so I don't want to tell you anything. But it will be for the benefit of Vivendi and Lagardère, which in the end, it's pretty much the same. Fabrice?

Yes. On Publishing, it confirms the outlook that Sophie has just alluded to. We are slightly below Q1 2021, but we are higher than Q1 2019, which means that margins are gradually slowing down, but still they remain higher than the pre-COVID years. We had a good beginning of the year in literature in France with two bestsellers, [indiscernible], and the new book by Pierre Lemaitre, [indiscernible]. So a very good start of the year in literature in France and still dynamic markets in the U.S. and in the U.K. Also again slightly below 2021. So a good start of the year but not an exceptional start in 2021.

Dag?

Travel Retail, as you know, Omicron has been around. So the good trends we had in October, November slowed down in December. And in January, we lost, give or take, 5 points at constant perimeter. So we're around minus 36% constant perimeter, minus 34% globally. February, the last week seems to have improved. We see the pressure linked with Omicron easing, so I tend to be on the optimistic side. But I mean, there's lots of signs saying that life might get back to more normality. And we already see it in some figures. So it looks like we're getting closer to our forecast.

Okay. Sophie?

And for the working capital, our objective is, of course, to continue to minimize the effect of working capital for 2022. The objective is to reach a natural position of working capital.

Okay. No, just on going back, Dag, when do you expect to be back to 2019 level in Travel Retail, by, I guess, '23 or '24?

In total figures, '23. That would be total figures with ups and downs, depending on countries and business lines. But if we take into account, I mean, global figures, we plan to be at 2019 figures next year.

Thank you, Julien. To go back to your questions before because I just have here a press release about all the issues of concentration, I see that TF1 and RTL could reach 70%, 7-0, market share in advertising, in TV advertising. So talking about Hachette and Editis, it gives us some margin, if you know what I mean. So we'll see about the potential remedies. If there are some remedies, we'll see that, but we feel confident.

Next question from Christophe Cherblanc from Societe Generale.

First one was on book. Can you give us some clarity on book pricing? I know it seems to be more art than science. But in the current context, how do you think about raising prices or trying to experiment with pricing in book? The second question was still on book on paper cost. I think in the release, you mentioned inflation. So what is the effective exposure? And I assume you have some kind of hedging. So how long will it take to recoup to the P&L? And last one is on Travel Retail. Just as a follow-up to what Julien was asking about, if revenues go back to 2019 level in '23 next year and taking into account the EUR 100 million of permanent savings from LEAP, is it fair to assume EBITDA will be up to EUR 260 million, EUR 270 million next year for Travel Retail?

A brief a little bit that. So I'll give the floor to Fabrice.

Thanks. On book pricing, I think I already had the opportunity to discuss that in the previous conference calls, so it's -- you're absolutely right, it's more announced than system, but we are putting a lot of pressure on our publishers to increase the prices. As you know, we'll have headwinds in 2022 due to wage inflation and paper costs and freight costs and so on. So we are putting a lot of pressure on everyone in all our geographies. Of course, some of our books and our publications are more sensitive to price increase. So we need to be careful for some of them. But let's say that overall, over the last 25, 30 years, book price have increased less than the global inflation. So there is probably room for price increases in '22 and '23. Regarding paper costs, we have managed, as of now, to avoid paper costs because we bought a lot of paper in advance. But I'm afraid in 2022, we face significant paper cost increase, let's say, probably around 20%. So we are doing our best to offset this impact on our P&L by buying different types of paper, by trying to do smart purchase, by trying to reduce manufacturing costs on the rest of our supplies. So we are doing our best to offset this increase. But still, it will be significant in 2020.

Okay. Dag?

Yes. So obviously, once again, we get above, depending on the traffic conditions and so on, but that's our hypothesis today. If we reach these levels, we don't plan to add EUR 100 million on '19 figures as soon as '23 because you have some adverse effects, like rent renegotiations and so on. So it's really about improving the operational performance in order both to be able to reinvest in rents; and two, to increase operational results. So the figures you mentioned are more of the figures we would have in mind for '24 than for '23. But today, definitely '23 is expected to be above '19 and reasonably above 2019.

Okay. And just the absolute level of paper costs in million, roughly?

A little bit about EUR 100 million for the whole group.

For the moment, we have no more questions. [Operator Instructions] Next question from Jerome Bodin from ODDO BHF.

First question for Arnaud. So press mentioned you could acquire some shares. Any comments on your willingness to invest would be useful. And the second question for Sophie on CapEx. So for Publishing and Travel Retail, what should we expect for next year, especially for Travel Retail in the context of the progressive reopening?

Thank you, Jérôme. Yes, it's true. Well, first of all, I will not sell any shares in the takeover. So I'll keep those 11 and something -- 11%. And as I said and I confirm, I would like ideally, if it's possible because it depends on the market, be able to acquire something like 3 or 4 more percent and reach 15% in the near future. Absolutely, I confirm that. Sophie?

And for CapEx for Travel Retail for 2022, it will depend on the pace of the recovery of the traffic. But if we have the high level of recovery, we will go back in the range of 2019 in terms of CapEx level.

There is no more question. Back to you for the conclusion.

Okay. Well, the conclusion is see you next time. We have a lot of things going on. We'll have our general assembly sooner than last year's. And we just can't wait to have this COVID out because I think we'll reach levels of EBIT that the group hasn't reached for a long time, if not ever. So we are very, very optimistic. And again, it's a lot of work. So congratulations to all our team. And thank you for listening to all of you guys. Thank you so much. Bye-bye.

Thank you very much. Bye.

Bye-bye.

Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.