Lagardere SA (MMB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining this evening to the Lagardère's full year 2023 results. I'm Emmanuel Rapin, Head of Financial Communication, and I will be guiding you through the presentation. The conference is led today by Arnaud Lagardere, Chairman and Chief Executive Officer of Lagardère SA and Hachette Livre; Sophie Stabile, Group CFO; Dag Rasmussen, Chairman and CEO of Lagardère Travel Retail; Stéphanie Ferran, Deputy Chief Executive Officer of Hachette Livre. After the presentation, we will have a Q&A session. [Operator Instructions] Now I leave the floor to Arnaud Lagardere. Arnaud, the floor is yours.

Thank you so much. Let me just say a few words before leaving the floor to Sophie. Just to express that we are obviously extremely happy, we have another exceptional year, setting new records for the company. But the most important, I think, is that our numbers are the exact consequence of our strategy, meaning, one, that we've been taking advantage of the growth of Travel Retail, investing in that business unit, as you know, in 2023, with significant numbers. We want to push them as hard as we can to take advantage of this growth that is unbelievable and the results of Travel Retail are extremely impressive. But at the same time, boosting also the organic growth Publishing. We've dealt with a number of increased costs, not to mention paper and so on. And we've been able, for the past year, as for the year before, to maintain the step that we've achieved as per the COVID and keeping this very nice margin of 10% plus, and the objective, of course, for the years to come is to keep in the double-digit operating margin and grow it if we can. I wouldn't be surprised, as I said to the press release that within the next 2 to 3 years, probably 3 years, that the Travel Retail result exceeds the Publishing result. And this is not because -- although I would admit that, why not, there is business unit that is better managed than the other one. It's just that, as I've always said, for the past 10 years, we have an engine of growth and we have an engine of power. And we don't want to miss this extraordinary growth that we see in Travel Retail. So congrats to Dag that is here in this conference. I will deal with other issues that we've mentioned in the press release, but before, I leave the floor to you, Sophie, to get into the numbers in more details.

Thank you, Arnaud, and good evening to everyone. We are pleased to share with you Lagardère Group excellent results for 2023. The activity was driven by the performance of our 2 main businesses, Lagardère Publishing maintained historical long level of activity against a very high basis 2022 comparison. And Lagardère Travel Retail attained a new record performance, a peak in profitability and was very dynamic in M&A activity. Let's now have a look to the main group figures. Overall, as you can see on this slide, group revenue is very strong at EUR 8 billion, up by 14% on a like-for-like basis. In 2023, the group's recurring EBIT jumped to EUR 522 million (sic) [ EUR 520 million ], the best performance in the last 15 years. This remarkable achievement exceeded our record-breaking performance in 2022. The operating margin reached 6.4%, slightly above 2022 and substantially higher than the 5.2% in 2019. The group free cash flow, excluding changes in working capital, stands at EUR 272 million. The Board of Directors has decided to submit dividend payout resolution of EUR 0.65 per share for consideration to the next AGM on 25th of April, given the group's active investment policy and in order to reduce net debt. Let's deep dive into the division revenues. Group revenue growth is driven by Lagardère Travel Retail's tremendous growth in 2023. Overall, revenue up 16.6% as reported and up 14% like-for-like. The difference is due to EUR 83 million negative currency effect mainly due to the U.S. dollar and EUR 242 million favorable scope effect, which includes the acquisition of Costa Coffee in Poland, Marché International in Germany and Tastes on the Fly in the U.S. at Lagardère Travel Retail. Moving on to Lagardère Publishing on Slide 9. After reaching a historical level, Lagardère Publishing's revenue up 2.2% as reported and 1.9% like-for-like at EUR 2.8 billion. This level of activity reflects the division's ability to build on the diversity of the portfolio, secure best seller in France as the latest Asterix & Obelix album and Son odeur après la pluie by Cédric Sapin-Defour, but also in the U.K. with the Empyrean saga by Rebecca Yarros. And we continue to capture social media trends, especially in the Dark Romance segment in France. Moving on to the next slide. In '23, we observed different trends by geography, particularly an acceleration in France up 6.1%, mainly driven by the dynamic release schedule in illustrated books. The activity remained at a high level thanks to the solid performance of Young Adult Bestseller and General Literature. In addition, Le Livre de Poche, we celebrated 70th anniversary last year, achieved a record year, thanks to strong sales of backlist title like Virginie Grimaldi, Mélissa da Costa and Pierre Lemaitre. In the U.K., growth reached 6.1%, fueled by Trade Adult Bestseller such as the latest Rebecca Yarros and The Housemaid Series by Freida McFadden. Additionally, a dynamic increase in backlist sales also drove the activity. In Spain and Mexico, we grew by 17.9%, thanks to a strong momentum in the Education segment, driven by the educational reforms. In Mexico, sales continue to be supported by dictionaries. Finally, the U.S. and Canada represent 29% of revenue versus 32% in 2022. This decrease was mainly due to the market tightening and the absence of best sellers. Let's have a look on at profitability on the next slide. Lagardère Publishing's recurring EBIT reached EUR 301 million. The important point is that recurring EBIT has maintained a historic high, thanks to ongoing operational initiatives and despite higher costs, including the impact of the Polaris transformation project in 2023. Additionally, the margin level at 10.7% represents a significant improvement compared to the pre-COVID levels, which stood at 9.2%. Let's turn our attention to Lagardère Publishing's free cash flow. Overall, free cash flow before changes in working capital is up slightly at EUR 159 million, which confirmed the strong cash conversion of Lagardère Publishing. Moving on to Lagardère Travel Retail. In a nutshell, 2023 marked a milestone year for Lagardère Travel Retail. Revenue surged over EUR 5 billion, up 27.8% as reported and up 23.4% like-for-like. Beyond its ongoing recovery in 2023, the Travel Retail division outperformed the '19 level. We witnessed growth across all geographies with sharp performance in EMEA, up 26.6%, driven by traffic from international tourists and outstanding results in Italy and Poland. The Americas up 16.3% on an already high basis, especially in the United States. And the recovery in Asia up 52.1% from a very low base in 2022. Let's deep dive into the division's revenues. Lagardère Travel Retail saw a significant boost from the acquisition in Food services segment which accounted for 27% of our overall activity compared to 23% in 2022. The acquisition of Marché International in Germany, Costa Coffee in Poland play a pivotal role in this historic level of activity. Moving on to Slide 16. The recurring EBIT stands at a positive EUR 245 million with an operating margin at -- of 4.9%. Lagardère Travel Retail reached its record high recurring EBIT, mainly due to improved activity across all regions and the gains from the LEaP program that delivered an additional EUR 95 million of recurring EBIT. Let's turn our attention to Lagardère Travel Retail free cash flow. Free cash flow before changes in working capital amount of -- amounts to EUR 161 million compared to EUR 138 million in 2022, primarily driven by robust cash flow from operation. It's important to highlight that we intensify our CapEx to continually adapt to future improvements in airport and foster growth through strategic acquisitions. Let's discuss other activities. Revenue for the year totaled EUR 254 million, down 3.3% on a like-for-like basis. A few points to be highlighted. First, the decline in radio activity is due to reduced audience levels in a challenging environment. Second, the press activity was down by 9.4%, primarily due to lower circulation. Finally, international license for Elle remained relatively stable compared to 2022, while Lagardère Live Entertainment saw a growth of plus 8% following a favorable base effect in the first half of 2023. Now let's proceed to discuss the group figure. The most important element to look at this profit, group share, which stands at EUR 144 million. The slight decrease versus last year is mainly due to elements below the total EBIT with higher financing costs and higher income tax in 2023 due to stronger business level in the U.S. and Europe. Moving on to group cash flow statement. On this slide, we have 3 key items that illustrates the primary dynamics of our division. First, the cash flow from operations before changes in working capital increased from EUR 524 million to EUR 611 million. This growth can be attributed not only to the recovery of our activity, but to an overall strong operational performance. Second, our CapEx increase underscores our commitment to the future development of the business. And third, the purchase of investment, driven by our M&A strategy with the example of Marché International and Tastes on the Fly in Lagardère Travel Retail. Moving on to available liquidities. At the end of 2023, the group's liquidity position was at a very high level with EUR 3.1 billion. In December 2023, Lagardère signed a facility agreement with Vivendi in order to face the reimbursements on bond and Schuldschein linked to the activation of the change of control close. On the next slide, we see a simulation for the situation as of 12 January 2024. At this date, the group has drawn an additional EUR 1.2 billion on the facility agreement to repay bonds and interest, reducing then its liquidity accordingly. Now the net debt. Net debt increased to EUR 2.1 billion at the end of December, up from EUR 1.7 billion at the end of 2022. This can be attributed notably to the significant M&A activity amounting to EUR 383 million. However, the leverage ratio remains below 3x at the end of December. Now looking at the shareholder structure. The main point is the closing of the transaction with Vivendi announced on November 21, 2023. Vivendi Group now has at 59.8% stake in the company and the majority of voting rights. Another point to keep in mind, the extension of the rights to sell the Lagardère shares granted in 2022 until June 15, 2025. A few words now on the group ESG strategy. The group is proud of its ESG performance, which is a matter of great importance with many successful initiatives in our different divisions. As an example, you see Lagardère Travel Retail ended plastic bags in all its in-house brands as part of its strategy to suppress plastic. On the other hand, Lagardère Publishing was prized for its annual EcoDesign program. Next slide. We are strongly committed in our 4 main drivers that you can see on this slide. First, limiting our environmental impact; second, the importance of people of our group; three, ethical and governance responsibilities; and last, social and cultural diversity. I will just share a few examples of our action in 2023. We reached 46% of women top executive, up from 45% in 2022. 13 projects were supported by the Fondation Hachette for reading. Now to conclude a few words on 2024 trends. Despite the uncertain economic and geopolitical environment, the Lagardère Group remains confident its ability to maintain high level of result, thanks to the dynamics of responsiveness of its teams and the diversified geographical presence of its 2 core businesses. Despite the soft market trends and costs extensions, Lagardère Publishing should maintain similar performance to 2023. And with robust momentum in global air traffic amid uncertainty regarding the revival in international Chinese tourists, Lagardère Travel Retail has potential for revenue and profitability growth, thanks to operational excellence. Thanks for your attention. We are now available to answer your questions.

Yes. The first question, I will read is from Adrien de Saint Hilaire from Bank of America. The question is just to clarify the outlook on Publishing. What do we mean by similar performance to 2023 in terms of revenue and results?

Thank you for the question. What we mean by that is that we will be flat in revenue and flat in EBIT, which is in itself a challenge and a very ambitious target because we just ended 2 exceptional years in terms of results. And we plan to achieve this through 2 main levers. The first is the top line because we have a great catalog in '24, especially in France with the release of the [ Misu ], soon to come, and also because we are going to work more closely and more efficiently on performance, especially on pricing, on purchasing and also on the volume of book we are going to produce.

Thank you. I will take now some questions about -- from Societe Generale, Christophe Cherblanc, and I will try to put them by activities. The first one, and I will continue with the book publishing. The question was about the dynamic of price increase, obviously, in France and in the U.K. How could you describe the different momentum? And what was the case for other countries? And how do you see price increase in 2024?

Regarding price increase, in the last 2 years, we've made significant efforts to increase our prices, whether it is in the U.K., in the U.S., but also in France. To give you just a quick number for France, we increased price by 6% last year, which enabled us to offset a significant part of the inflation in cost and especially in paper and in freights. So pricing is on top of our agenda to randomize growth. Regarding this year, we will continue to increase price, but probably more selectively and with a more data-driven approach that we will roll out in all countries.

So I will continue again with Christophe Cherblanc's questions and still about book publishing. The question is about the distribution project. It seems to be postponed. What is your plan on distribution? And if I continue a little bit, there is a question about French education reforms in '24, '25. Would you see some elements about that?

Okay. Regarding the distribution in France, as you know, we decided to stop the Polaris program in its current form. It was a program that we started to design in 2021. And after 2 to 3 years of design and maturing the project, we realized that it was probably too big and too expensive for what we needed. So we decided to stop it, which doesn't mean that we will stop our thinking on Distribution. Now we are in the process of terminating all the contracts we have regarding the Polaris program, and we are setting up a small team to think again about the future of Distribution in France. And we hope that we will have a calendar for this at the end of H2. So that's for the Distribution. And I think there was a question about education reform. So what we expect regarding education reform is limited. No impact for '24, because in '24, it's just about leveling books for the primary education. We expect more in '25, '26 as it will tackle the secondary school. And we expect the impact to be of several million euros on our results in '25, '26.

Thank you. I will continue with Christophe Cherblanc's questions more on Travel Retail this time. The first question is most probably about the description of government aids in Travel Retail and what happened in '23? And what can you say about the next steps?

Yes. Hello, everybody. So total one-offs this year were about EUR 30 million positive, including EUR 29 million in rent, mostly in North America. This will be reduced significantly in '24 because we're going towards the end of these programs.

Now on the acquisition of Tastes on the Fly, there is a question about would there includes some minority shareholders that are known to be DBs and has the depth of this operation will be financed -- sorry?

That I think is another question.

Okay.

So CDB minorities and Tastes on the Fly is, give or take, 10%.

Okay. And...

And there's another question on Travel Retail in Asia. You know that China is not recovering. China is not in a good macro economic position. And unfortunately, we have not returned to breakeven in Asia.

So if I follow up again the question of Christophe Cherblanc, Societe Generale. The question was about what are the amount of cost -- financial cost included in the other division at the EBITDA level? If I may take this question. It's about the financing costs on commercial activity linked to the book publishing that is recorded under this other businesses. The debt has been refinanced. You saw the slide about the refinancing of the bonds to the agreement with Vivendi. And could you say something about the impact of financial costs in 2024, Sophie?

Or the financial cost in 2024, the level of interest increase from 2% to 5%. So roughly, we expect an increase of EUR 50 million in the financial cost in 2024.

Okay. I think the question of Eric Ravary about book publishing and Polaris has been covered. Now Thomas Singlehurst from Citi raised the question about most probably Travel Retail. How much of a positive impact do you think the Olympics in Paris will give?

Well, historically, when we observe other countries which had housed the Olympics, the impact was minimal, marginal because you have, obviously, lots of newcomers visit the country, but also less traditional tourists coming because the city is crowded. So we don't expect any significant impact.

I don't see other question right now, maybe we'll leave a few seconds.

Yes, I see a couple of other questions. One from Christophe Cherblanc about the radio business as it hit bottom in audiences and revenues. And well, it depends. We have 3 radios. I think RFM is doing extremely well and will continue to perform well. As far as Europe 2 is concerned, it's a different issue. We have some problems in the morning show, which, as you know, is probably the main driver of audiences that we have to fix. Have we reached bottom for Europe 2? I don't know, to be honest with you. I hope so, but I'm not so sure. About Europe #1. I think we've reached a bottom. We have kind of successful audiences recently. And I think we'll take a benefit of all the efforts that we've done in terms of cost. It's in terms of realigning all the shows that we have. So I think that will have a great impact, you never know. But hopefully, we've reached the bottom a couple of months ago, but we'll see what happens. I see another question also concerning Travel Retail and Publishing. I mentioned in my introduction, and I think I mentioned it also in the press release that within the next 3 years, Travel Retail might exceed, in terms of result, Publishing. The idea is just that it refers to the fact that the result growth speed in Travel Retail is higher than the one in Publishing. And it doesn't mean that the Publishing result will be flat for the next years. As Stéphanie said before, we expect some similar sales and result. Hopefully, we'll have some growth, very small because that's the tendency of the market. But hopefully, we'll have some growth. And if we have some growth in terms of sales, hopefully, they will reserve also, and I'm talking about 2024 in a better result. But again, we don't -- as you know, we don't communicate on the budget numbers, but we're still quite optimistic. And that's pretty much the questions I see. I see another question from [ Celisse Recabari ] also, why selling Paris Match? What revenues and EBIT figures in 2023? Well, we don't communicate on the EBIT figures of any of those properties, including Paris Match. We know that at a time when we say that we will sell Paris Match. But since we've received an offer that is quite significant, nice to say, from LVMH. It's our duty and especially my duty reporting to the Board to work on that offer and nothing more than this. So it might take some time and probably talking to the unions of Paris Match and maybe Lagardère News at the same time. Another question, sorry, because I see that from Christophe Cherblanc, who seems to like Lagardère. He's asking a lot of questions. Thank you so much, Christophe. You said Vivendi have spoken about a strategic plan for Lagardère, can you provide details? Well, the strategic plan they are referring to is the Lagardère strategic plan, actually, that they support that we've presented to them. It's the plan for the next 5 years, and it implies, one, reduction of the debt, that is important to us; and second, provide some fuels, some gas to Lagardère Travel Retail, again, as I said before, taking advantage of the growth in the marketplace and helping also the Publishing side, and that's the reason why I took over the Chairmanship and being a CEO at the same time. We strongly believe in Publishing for the years to come. The same reason we believed in it when we invested in this market when nobody believed in it at that time 10 to 15 years ago. And we have some ideas of organic growth. We have some ideas of acquisitions also, and we're entering a quite -- very offensive strategy in terms of cost-cutting. There is some place still to cut costs and probably review also all the published books that we do. Maybe we publish too many books. Maybe there is something to do and that refers to what Stéphanie said before. Before getting into a so ambitious project as Polaris was, we need probably to think about where we want to be in the next 3 to 5 years. Maybe we don't need to have such a big, big place for us and maybe we don't need to spend that much amount of money also. So it hasn't been postponed. The site of Germanville is a no way for us, definitely. But I think that from [indiscernible], where we are, we can build something and we can still continue to grow on a different way, on a better way for the shareholders, I would say. And that's pretty much what I would say on my side unless you have more questions, but I don't see any other. So if I don't see any other questions, I would probably -- yes, absolutely, I would probably thank all of you, thank Dag, Stéphanie, Sophie and Pauline and all of you present in this call. Thank you so much. And again, we'll talk to you as soon as we can as soon as we have information and definitely for the first semester and quarter. Thank you so much.

Thank you. Thank you, Arnaud.