Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us today to the Lagardère's first semester 2023 results. I'm Emmanuel Rapin, Head of Financial Communication, and I will be guiding you through this presentation. The conference is led today by 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. After the presentation, we will have a Q&A session. [Operator Instructions] Now I leave the floor to Arnaud Lagardere.

Thank you so much. Good afternoon, good evening to all of you. I will leave the floor right away to Sophie Stabile since there's not much to say about those numbers other than that they are extremely good, especially on Lagardere Travel Retail. I guess you read it, and I think we have good information to give you about this first semester, and we're still very optimistic about the second. Sophie, go ahead.

Thank you, Arnaud, and good evening to everyone. Today, we are pleased to share with you a solid H1 '23, which saw a steep increase in both revenue and recurring EBIT. The activity was driven by the robust performances of our 2 main businesses. Lagardère Publishing maintained a high level of revenue with a 1.6% growth on a like-for-like basis and despite a less dynamic market. Lagardère Travel Retail strongly increased its revenue by 32.4% also on a like-for-like basis. The branch recurring EBIT is at a historic level of EUR 92 million, performance will be further detailed in this presentation. Finally, the Group remains in line with its operational efficiency objectives and continues to focus on business development opportunities with significant M&A activity. Let's now have a look at the main Group figures. Key Group's indicators are all above H1 2019 for the first time since the COVID crisis. Overall, Group revenue is strong at EUR 3.7 billion. The operating margin is up to 3.8% versus 2.7% in 2019 and 3.5% in 2022. The Group's free cash flow excluding changes in working capital is at EUR 76 million. I will comment on this later in this presentation. Moving on to group revenues. Group revenue is up 19% like-for-like versus last year. As you can see on the slide, this is essentially thanks to Lagardère Travel Retail, the red block on the bridge is an outstanding revenue growth. Scope effect was a positive EUR 87 million, which includes the integration of the following acquisition. First, [indiscernible] in April 2022. Marché International in Germany in February 2023. Costa Coffee Polska in March 2023, Welbeck Publishing in December of 2022. Moving on to the detail of Lagardère Publishing activities. Lagardère Publishing achieved a high level of sales at EUR 1.2 billion in H1 2023. This represents 1.6% like-for-like increase. This performance is mostly driven by, first, the strong activity of the illustrated segment with good momentum in the [indiscernible] segment, as well as the Young Adult books. Second, the performance is also linked to the growth in general literature with best seller like Le Suppléant by Prince Harry, Florent by Florent Pagny and Le Silence et la Colère by Pierre Lemaitre in France. Too Late by Colleen Hoover was also a success in the U.S. and in the U.K. The [indiscernible] of sales was also booked by social media trends and the exposure of [indiscernible] on social networks such as TikTok. So for example, the novel, Fourth Wing by Rebecca Yarros benefits from store online engagement. Moving on to Slide 10. In H1 2023, the activity varies from our one geography to another. The activity was robust in France, up by 7%, mainly due to the performance of illustrated book and general literature. In the U.K., we observed a strong like-for-like growth of plus 7.3%, driven by the Young Adult segment and the dynamic release schedule. The U.S. was down by 8.6% like-for-like after our excellent H1 '22 due to a softer release calendar and the lack of [indiscernible] referring this semester. Finally, Spain and Latin America benefited from the rise of the Education segment in the cycle of school refunds in Spain for primary education. Let's have a look at profitability on the next slide. Lagardère Publishing profitability reached EUR 65 million. The margin level at 5.2% improved significantly versus pre-COVID figures. Profitability remained at a very high level despite being impacted by some inflation and specific transformation expenses. The slowdown of the activity was partially compensated by a specific focus on operational costs. Moving on to Lagardère Publishing free cash flow. On this slide, it is relevant to note that Lagardère Publishing free cash flow before changes in working capital remained stable compared to H1 2022 level at EUR 3 million. Indeed, despite a lower cash flow from operations before changes in working capital, the income taxes paid was lighter as well as the level of investment in H1 2022 versus last year. Moving on Lagardere Travel Retail. H1 2023 was a remarkable semester for Lagardère Travel Retail at EUR 2.3 billion of revenue. This represents a tremendous 32.4% increase on a like-for-like basis compared to last year. During the semester, we kept performing well, thanks to our favorable geographic footprint and foothold in the EMEA region, North America and Asia. Overall, geography has shown revenue equal or above 2019 levels. Beside the resumption of air traffic recovery, I would like to highlight the hard work of the team, the commercial initiative and operational efficiency efforts were also again outstanding. Let's deep-dive in the division revenue. The activity was driven by a rebound in duty free and food services, thanks to a sharp activity in Northern America and the EMEA region. [indiscernible] also increased its share in the mix due to the latest M&A integration. Also, the strong growth in international traffic had a positive effect on our Duty Free & Fashion, [indiscernible] revenue gradually increased from 37% in H1 '22 to 39%. If we look at China, we know that the domestic market has gradually returned to 2019 levels. However, international flights in China are prohibitive and in recovery. We will keep following this trend. Let's now focus on profitability. In H1 2022, recurring EBIT stand at EUR 92 million, having more than tripled compared to last year. Profitability, high points of 4% was achieved due to combination of several factors. First, improve activity across all geographies. Second, improve efficiencies to the deep performance program in line with targets and temporary favorable price elasticity in the context of inflation; and last, remaining one-off subsidies in the U.S. due to the COVID crises. Moving on to Lagardère Travel Retail free cash flow. Free cash flow before changes in working capital reached EUR 86 million versus positive EUR 43 million in H1 2022, meaning it's double. This is a remarkable improvement mainly due to the travel recovery in airports. With CapEx of EUR 71 million this semester, we significantly increased our investments to meet airport expectations and our commitment towards them. These investments are also material through the EUR 147 million we spent in key M&A projects this semester, including Extime duty-free Paris and Marché International in Germany. Let's move on to other activities. Revenue for the last 6 months amounted to EUR 125 million, up 2.5% on a like-for-like basis. A few points to be highlighted. First, positive performance of Lagardère Live Entertainment with the new borrowing after the health crisis and the listing of sanitary restrictions. Second, the press activity is down by 5.1% and the radio revenue is down by 8.5% due to softer audiences saturation and the decrease of advertising revenue. The performance of international licensing is up by 4.6%. Let's move on to Group's detailed figures. Adjusted profit Group share, which is a positive EUR 24 million is stable compared to last year. This is mainly driven by the EUR 141 million recurring EBIT increase. The big change in the Group share, now positive at EUR 45 million is mainly generated by a one-off IFRS 16 concession adjustment. We switched from fixed lease to a variable lease. Moving on to Group cash flow statement. On this document, we can see 3 key items: first, the cash flow from operations before changes in working capital growing from EUR 144 million to EUR 207 million, thanks to the strong recovery in Lagardère Travel Retail activity. Second, our CapEx increase showing our comment to the future of the business through investments. Third, as a [indiscernible] of this investment dynamic, our M&A acquisitions level. Finally, the seasonal variation of working capital and the dividend paid in May 2023 explains the change in the net debt level. The Group's liquidity position is solid at EUR 1 billion. The amount is in line with our active and present financial strategy. In June 2023, the SAS was extended until April 2025 for a total of EUR 982 million. Moving on to the net debt. Net debt is up to EUR 2.2 billion compared to EUR 1.7 billion at the end of 2022 due notably to the significant M&A activity and the dividend payout. However, it should be noted that the leverage ratio remained below the first semester of 2022. It's also below the 3.5 multiple highlighting Lagardère financial discipline. Moving on to the shareholder structure. A few words on the group ownership. On the June 9, 2023, the European Commission adopted the decision authorizing Vivendi to acquire control of Lagardère SA. This authorization is subject to the fulfillment of 2 conditions proposed by Vivendi. Firstly, the sale of 100% of the capital of ADP and secondly, the sale of Gala magazine. On the sales are approved by the European Commission. Vivendi will have the voting rights attached to the shares [indiscernible]. For the full year 2023, despite the uncertain economic environment, we remain confident in our ability to maintain a high level of results, thanks to the dynamics and responsiveness of the team. Despite pressures on cost, Lagardère Publishing should maintain relatively similar performance to last year. In a normalized environment, as global traffic continue to recover, Lagardere Travel Retail has potential for revenue and profitability growth, meeting lease initiatives. Many thanks for your attention. We are available to answer your questions.

So I have a few questions. I received the first one from Julien Roch, Barclays. First question is about Travel Retail. What are the Q3 trends in terms of revenue versus 2019? And could you please also comment about the activity in the Q2 versus 2019? For Publishing, what are the summer trends, plus any significant release in [indiscernible]? The third question is more about the strike on the GDD, [indiscernible] said that's costing EUR 0.5 million a week. Is that true? Why do we have such a strike? And how is it changing.

So should I start?

Yes, Dag, please.

So the trend in Travel Retail, Q1 was like plus 13% versus '19; April was 18%; May was 18% and June was 25%, which gives an average of 20% for Q2 and 17% for H1. Given the initial trends for Q3, we would expect something between 18% and 20-ish percent versus '19.

Then I think it's [indiscernible].

Julien, regarding publishing, a couple of notes for this summer and the autumn. So we have -- for the summer, we have a strong [indiscernible] reform in Spain. We are doing reasonably well, and we will probably gain market shares, which is good news. Regarding the autumn, we have a relatively strong publishing schedule in France with the new Asterix in October as you probably know, plus [indiscernible] which will be published by Lagardère, and the new book by Robert Galbraith in the U.K. and in the U.S. versus last year in the U.K. and the U.S., we won't have obviously the fantastic books we received from [indiscernible] in the second half of 2022. So it has to be, of course, balance versus the [indiscernible] smaller revenues in the U.K. But I am really confident regarding Page 2 obviously of the book business.

And about the [indiscernible] with Arnaud Lagardere?

Yes, yes. Yes, absolutely. Why is there a strike? And how much does it cost? Why is there a strike is because the journalist of the newspaper did not accept the fact that the shareholder name, Geoffroy Lejeune as the new head of the JDD for reasons that I think that -- lot of people think that are totally untrue. So that's the main reason. They also want to have a, what we call, a [indiscernible], which means the ability for the journalists to be part of a vote naming the head of the chef -- the head of the journal, which we think is not in respect of the law. So we also rejected that. We opened, what we call in France, [indiscernible], which means the ability of the journalists that do not agree with those decisions to leave the company with a package that is way above what the French law would permit them to have. And as far as the cost is concerned, you mentioned a number from [Laetitia Colombani], it's difficult to give exactly a right number per week since there are weeks once a month that -- where we publish JDD magazine, which has a cost attached to that. So it's really difficult to say. We are calculating the impact that we would have worst case for the JDD, for Lagardère News and the whole company. I would say that as of today, it will not change the budget that we have and that we presented last year in December -- earlier in December, by the way, and that it will not change the course. Financially speaking, maybe a slight impact in terms of cash if the journalist accept to leave the company at a certain cost. I would like to remind you also that once Vivendi will have control of Lagardere, which we think would be around October, November, I don't know exactly when, but around those dates, then at that time, they will be -- they will have all the journalists of the Group. So whether it's from JDD or Marché, will have the ability to leave the company with a certain package. So whether they do it now or little later would not change the whole picture. And again, it will not change the budget and the forecast that we have and the guidance that we give to you. This is pretty much what we can say about JDD. Another question?

Thank you, Arnaud. I think the question is, Adrien de Saint Hilaire from Bank of America. Quite recouping with Julien Roch, but have some questions from Christophe Cherblanc, Societe Generale. So I will start maybe the one from Group publishing. And how do you see your ability to raise price and what is possible to do in regions?