Lalique Group SA (LLQ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lalique Group Annual Results 2019 Conference Call. I am Shea, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Roger von der Weid, CEO. Please go ahead.

Thank you. Good morning, ladies and gentlemen. I would like to welcome you to our conference call in connection with the 2019 financial results of Lalique Group, which we published earlier this morning. My name is Roger von der Weid, CEO of Lalique Group, and I'm here on the phone together with our CFO, Alexis Rubinstein. It's our pleasure to have you all in our call. Thank you for taking the time for this conference in these challenging times marked by the coronavirus pandemic, and we all hope you are all in good health. First of all, I would like to apologize that we had to postpone the publication of our results by just over a week. This was due to last minute's efforts in calculating and representing IFRS 16 effects and valuation of deferred tax assets in connection with the Swiss corporate tax reform. At least, we had preannounced some of our results earlier as we felt we would like to go out as soon as possible due to the COVID-19 market turbulence. So you had already an indication. And as you have seen, our final results published today are in line with this pre-announcement. In the next minutes, we would like to walk you through our 2019 results slide presentation. And as you have seen, the presentation is available at the Lalique Group website, and we will go slide by slide. I will start with a brief summary of our 2019 performance, then Alexis will provide more detailed overview of our 2019 financials. And I will then turn on to our priorities and outlook, in particular, how we assess the current COVID-19 situation and what we are doing about it. After the presentation, of course, we will be happy to take your questions. So to start, let's go directly to Page #4 of the slide deck where I would like to give you a quick overview of our financial performance in the past year. The first point to mention is that we achieved further growth in line with our financial guidance, while we significantly invested to further strengthen the base of our diversified business model. Sales up were -- are up by a moderate 5%. And in terms of growth, we were very pleased to see that our Ultrasun segment, again, delivered a very strong performance, and also almost all of our perfume brands as well as the Lalique crystal business, which had a positive development. On the other hand, our sales performance was impacted by a significant low results at Lalique Parfums in the Middle East, including, of course, the Iran embargo. In terms of profitability, let me point here to the EBIT of EUR 1.4 million for the year. This is in line with our revised guidance from October 2019, and it reflects plan expenses for our business expansion in Asia, mainly China and Japan. And it also includes costs for the restructuring we did in the U.S. as well as one-off acquisition costs of the Scottish whiskey distillery, The Glenturret, in an amount of EUR 1.2 million. Looking back, let me also recap that we completed a rights issue in July 2019, which generated gross profits of CHF 48 million that were used in part to refinance The Glenturret whiskey distillery acquisition. And this brings me to the last point on this slide, and let me underscore this also in the current difficult economic environment. Despite our investments in 2019, our balance sheet remains strong with an equity ratio of 50% at the end of the year 2019, and we also have a solid liquidity position. Let's turn to Page 5 now, where we summarize some highlights from the business in the past year. As I said, the first point to mention here is the acquisition of 50% of The Glenturret whiskey distillery, alongside Mr. Hansjorg Wyss, who acquired the other 50%. Glenturret being Scotland's oldest working distillery. And the transaction was completed just 1 year ago. With this step, we further expanded our portfolio and now address an even broader clientele in the international luxury goods market. Second, we are very pleased that we signed an exclusive perfume licensing agreement with a renowned luxury brand, Brioni, and we are very much looking forward to launch the first Brioni scent, later this year, when the brand will celebrate its 75th anniversary. The third point to highlight is the expansion of our market presence in Asia where we progressed as planned and where we opened a new boutique in Beijing and 4 new shop-in-shops in Japan. As already mentioned before, we also further strengthened our positioning in the sun protection market with the continued strong growth of Ultrasun as a leading brand in terms of product innovation. To conclude this overview, let me also point out the strategic investments by the India-based DS Group in Lalique Group as well as our partnership with our long-standing shareholder, Hansjorg Wyss on The Glenturret distillery, whereby Mr. Wyss also increased his stake in Lalique Group in the course of last year's rights issue. And with this recap, let me now hand over to Alexis, who will give you a more detailed overview of our 2019 financial results.

Thank you, Roger. And also from my side, I would like to welcome you all to this conference call. In order to look at our 2019 financials in more detail, let's go to the Slide 7. Here, you can see an overview of key figures from our performance during the year, and I will just highlight a few items. The operating revenue has increased from EUR 136.4 to EUR 143.5 million in 2019, plus 5.1%. This growth has been driven by the positive development of Lalique crystal and also the continued strong expansion of Ultrasun as well as good performance of other operation businesses, partially offset by the decrease in Lalique Parfums sales due to, as said by Roger, Iran embargo and the Middle East difficult market conditions. The personnel cost has been increased due to the further expansion of the business, in particular, in the new operation that we set up in Japan as well as the newly acquired Glenturret distillery. Operating cost has been significantly affected by the EUR 1.2 million of acquisition costs related to the Glenturret transaction as well as new boutiques openings in Asia. We had also this year some extraordinary costs in the U.S. in the context of the restructuring of our operations started by -- from end of 2018 and ending after half-year 2019. This increase in OpEx has been however compensated by IFRS 16 first application, as of 1st January, 2019, with the capitalization of the right-of-use of leased premises, which led to a shift between OpEx and amortization of, respectively, EUR 7.7 million and EUR 6.9 million. The consolidated EBIT, LLQ EBIT amounts to this year, 2019, EUR 1 million to EUR 1.4 million versus EUR 6.1 million, affected by Glenturret transaction as well as expansion in Japan and restructuring costs in the U.S. But for a better understanding of this key result, let's go to the Slide 8. Slide 8, on which you will see how would have been our EBIT and net profit at the comparable scope versus last year without the effect of -- at EBIT level, The Glenturret acquisition cost of EUR 1.2 million, affecting our EBIT and net profit, and in the meantime, partially offset by the IFRS 16 positive effect of, respectively, EUR 0.8 million at EBIT level and EUR 0.3 million at net profit. Consequently, our EBIT would have been at EUR 1.8 million this year. What is not mentioned in this bridge is also, on the top of it, the extraordinary income related to a legal proceeding in 2018 that had positively affected our 2018 EBIT by EUR 2.4 million. At net profit level, we had a net positive impact this year related to the corporate income tax reform in Switzerland. In 2020, privileged tax regime at continent level has been abolished, generating an increase in deferred tax liabilities and expense this year of EUR 2.1 million in our financials. However, we assessed the different method proposed by the Swiss Tax Administration on how to transition from the mix tax company status to the ordinary taxation. And we decided to apply a combination model of 5 years to rate DCF model and 5 years depreciation of a step-up. In this regard, this method will allow us to offset throughput profit with hidden reasons related by the DCF valuation for an amount of EUR 5 million. So net impact on our financial this year is positive for EUR 2.9 million, taking into consideration that as a comparison, 2018 financials have been as well positively impacted by the corporate tax reform in France for EUR 1 million. Let's now turn to Page 9 with an overview of the result breakdown by our business segments, which are Lalique, Ultrasun, Jaguar, Grès as well as other brand segments. We will go through each segment in the slide that will follow. So let me just point out there that in our largest segment, Lalique, which represent 56% of the total group income, had the stable sales level this year if we exclude the 2018 extraordinary income, despite the decrease -- the strong decrease, material decrease in perfume sales due to difficult market conditions and issues in the Middle East. Also, we see here that growth in our largest -- second largest segment, Ultrasun, was again very strong with an increase in sales of 25.1% and an EBIT increase to EUR 4.1 million. What is also interesting to see on this slide is the composition of the other brands segment with Bentley, Samouraï perfume brands, but also Lalique Beauty Service, and now the whiskey distillery business, Glenturret. As the revenue share this year is still low at Glenturret, no specific segment has been created so far. But as this revenue will significantly grow over the next years, we will then create a new segment or division for this business. Let's move now to Slide 10 to take a closer look at the Lalique segment and the drivers of the 2019 performance. So Lalique had solid sales trends in 2019, in most of the pillar, I must say, all the pillar except perfume. So I've said, excluding 2018 extraordinary income, sales are stable, especially interior design and jewelry pillars had 2 single-digit growth this year, thanks to strong performance in areas like China Mainland or Russia, in particular. Our performance was good as well, thanks to successful launchings for Art Lalique, but as well as the Chinese artist collaboration, Han Meilin. Hospitality business is still developing well in our 2 hotels, especially at Villa Rene Lalique and Chateau Hochberg, with the Villa Rene Lalique's very high satisfactory occupancy rate and continued provider of constant source of positive media coverage. As said, perfume sales has materially decreased by 18% this year to the Iran embargo and market challenges in the distribution in the Middle East. This effect, combined with the set of losses in Japan and restructuring costs in the U.S., affected negatively our EBIT for this brand this year. With this, we can go to Slide 11 with Ultrasun segment, which delivered a strong and broad-based growth supported by the minerals, sports and fluid productions already launched in 2018 that allowed us to enter new channels like health store in all the markets. The strong increase in sales of 25% was driven by expansion in top 3 markets, well established like U.K., China and Switzerland as well as newer and smaller markets like Netherlands, Taiwan and Korea. Despite a slight increase in personnel costs and OpEx this year, EBIT has increased to EUR 4.1 million in 2019 at a real high level of EBIT margin of 19% this year. On these basis, we continue to see ongoing 2 single-digit growth for Ultrasun on a mid-term basis. Turning now to Slide 12 and the Jaguar segment. So despite the market challenges in the Middle East already explained, the sales went up by 5%, reflecting growth in all markets, especially in Europe and North America. Also, the EBIT margin raised to 16%, thanks to the improved gross margin due to the optimization process or filling process in Ury in our perfume filling factory in France. Same for Grès segment on Slide 13, sorry, which we can see that we reported a pleasing rise of sales of 20%. This positive development with growth of EUR 0.9 million was driven by a strong performance in Spain and Latin America, especially. The relaunch of Cabochard and the launch of Cabochard chérie in May were the main drivers of this increase. So EBIT remained very satisfactory at 16% evidently as Jaguar. Now turning to the Slide 14 to the Other brands segment, on Slide 14, which I said includes: brands -- perfume brand, Bentley; Samouraï; our perfume filling and logistic operation, Lalique Beauty Service in France; and the newly acquired distillery, Glenturret. Bentley performed very well this year despite distribution issues in the Middle East. And on Samouraï and as Grès new launches was satisfactory this year. Regarding Lalique Beauty Service, maybe one word regarding the fact that we have increased its -- this logistic capacity in 2017 and then the production capacity in 2018 and '19. And as a consequence, the factory is now ready to produce up to 12 million perfume bottles, including the new license, Brioni, and the new launch plan in 2020. Glenturret has been acquired as of end of March 2019 and shows EBIT loss of EUR 1.8 million, including the EUR 1.2 million of transaction cost. The new Glenturret, including the refurbishment of the facility, new bottle design and new packaging and new product range, will be relaunched by the end of 2020. The EBIT decline of this segment is entirely due to the Glenturret transaction cost and set-up losses, that has offset good performance of other perfume brand businesses. Now to conclude this part, the financial part, let's go to the Slide 15 and our balance sheet analysis. There were, in 2019, 3 major effects that has materially affected our balance sheet. The first one was The Glenturret transaction, as of 28th March, 2019, which led to an increase in assets of EUR 28 million, especially in inventories, whiskey inventories and intangible for brand and goodwill. The transaction -- this transaction has been prefinanced by a bridge loan of CHF 24.5 million from Silvio Denz, repaid after the share capital increase for CHF 15 million in July. The second event was the share capital increase as of July 10, 2020, with gross proceed of CHF 48 million. This capital increase allowed LLQ to refinance the Glenturret transaction as well as increasing its net cash position and improving balance sheet equity ratio from 39.2% before the share capital increase as of half year to 50.1% as of year-end 2019. Also, it's important to mention that it allows us also to improve our net debt-EBITDA ratio from 3 last year to 2 as of end of 2019. The last event, or if it's an event, that impacted our balance sheet is obviously IFRS 16. Application of this new standard led to an increase in fixed assets and financial liability, respectively, by EUR 21 million for the assets and EUR 23 million for liabilities in our balance sheet as of year-end 2019. With this, I hand back to Roger for the third and last part of the presentation related to business priorities and outlook.

All right. Thank you, Alexis. And to start this part and before we actually come to the outlook section, which is, of course, heavily marked by the current COVID-19 situation, let's have a brief look at our product portfolio, of which you can see an overview on Slide 17. We have shown you these graphics before as they reflect our proven diversification strategy. So the graphic on the right side of the slide shows the 3 sectors or divisions of our business model. Lalique with its 6 brand pillars, with EUR 81 million in sales. Then Beauty with Ultrasun and all other perfume brands, whether proprietary or under license, with EUR 60 million sales. And the third being spirits, high-end spirits with The Glenturret's Scottish single malt brand with EUR 2 million in sales for the year under review. Within the Lalique segment, growth in the interior design pillar was 25% and 13% in jewelry, while the fragrance pillar declined by 18%. The other pillars, decorative items, art and hospitality were flat. Within the Beauty division, Ultrasun reported an impressive growth of 25% and the perfume brands also showed a positive development in mid- to high single-digit figures. And last, Glenturret sales of EUR 2 million for the period for April to December 2019 were in line with expectations, considering that 2019 and the first half of 2020 are deemed a transition period with low-level A&P activities until the launch of the rebranded distillery and the new whiskey range, which, unfortunately, due to the situation, had to be delayed from June this year to probably later in the year, Q3 or Q4. The date is not yet fixed. The graphic on the left side of the slide shows the revenue split by region. And as you can see, Europe remains the main market with 56% or more than half of global sales. Europe, in this case, includes Russia. That has shown a very solid growth over the past year, in particular for the Lalique segment. Asia continues to increase its share of global sales, while the Middle East declined due to the market conditions we encountered there, whereas the U.S. market has been stable. Of course, we remain convinced that diversification, both in terms of the broadness of our activities as well as the different positioning of our brands, is a key strength of Lalique Group and particularly so in the current difficult economic situation. This now brings me to the next page, Slide 18. On the left side, you can see how we currently assess the impacts of the COVID-19 situation for our business. While on the right side, we summarize what measures we initiated to date with the aim to mitigate negative effects as far as possible. As far as our assessment is concerned, I need to stress out the unpredictability of the current crisis, which will, of course, depend on when the coronavirus pandemic will be under control. Lalique business has been severely hit from mid-March 2020 on when lockdowns were decreed basically all over the world. And even after the end of the lockdown, we anticipate that markets will time to recover, although the pace will, of course, vary from industry to industry and also from region to region. On the measures we have undertaken to address the situation. Of course, on the human side, we implemented health and safety measures at our sites to protect our employees. And on the financial side, we took comprehensive action to protect our profitability and preserve our liquidity, in particular, through internal cost reductions combined with state support programs. With this in mind, let's turn to the next page which summarizes our outlook, given the current COVID-19 situation. Now bearing in mind the unpredictability due to the lack of control over the pandemic, we are not in a position to provide an outlook for 2020 and our ability to forecast 2021 is impaired by the uncertainty regarding the pace of the economic recovery. Our financial guidance -- mid-term financial guidance remains valid. However, we anticipate its achievement will be delayed by the time lost due to the crisis and its aftermath. As we continue to pursue our goals to enhance revenues and margin, our strategy remains unchanged. And on Slide 20, which we have shown you before, you see our main initiatives and objects in the mid and longer term. Of course, the timing has become uncertain now due to the negative effects of the pandemic on economies worldwide, but the main objectives for each of our 3 divisions are still valid. And let me summarize them as follows. First, it's improving profitability of the Lalique segment, while pursuing organic growth there. The second is to leverage our investments at the Group's perfume production sites by increasing sales, with the biggest driver being new licenses. And thirdly is to develop The Glenturret brand to drive the whiskey sales according to the business plan. So to sum it up, we finish with Page 21. 2019 was a year of heavy investments in the breadth of our business with the performance line -- with the performance in line with revised guidance, marked by moderate growth on the one hand and expansion costs on the other hand. 2020 severely impacted by COVID-19 crisis, with question marks behind the pace of economic recovery in 2021. And as said, Lalique Group will pursue the implementation of its strategy. However, the achievement of the financial targets will be delayed. With this, I would like to thank you for your attention. And Alexis and I are now happy to take any questions. So operator, please, who has the first question?

[Operator Instructions] The first question comes from the line of [ Daniel Burke, SKB ]

My first question would be, which products on which distribution channels are -- can you still sell at the moment? Could you imagine maybe Ultrasun or some perfumes? And the second one, in a full lockdown months like April, what kind of sales development do you see? I can imagine it's down double digit. If you could still give us some impression how bad this decline is at the moment.

[ Mr. Burke ] on your first question, we are selling all of our products to make it short, given that the markets in Asia, in particular China and Japan, are not under a governmental lockdown. Certain department stores have temporarily shut down in Japan, for instance, but there's no official lockdown. So we keep selling goods in those markets, whether on the Lalique side, crystal, et cetera, perfumes as well as Ultrasun. That's for the first part. Other than that, of course, all our retail shops, other than in Asia, are being closed, we also see a significant decline in wholesale sales worldwide. Of course, our wholesalers' retail clients having also had to shut down their operations. Our wholesalers have no possible sellout these days. But nonetheless, there is some activities. And this is the reason why we didn't entirely shut down our factories, Lalique crystal and the perfume production, mainly to ensure that operations are ongoing in the logistics department. So we are able to ship goods to the extent possible. We, of course, also encountered some issues with forwarders and in the supply chain. I hope this answers your question. As to our sales levels, of course, the drop is significant. It's -- yes, of course, it's double digit. The thing is that, of course, we -- all the forecast we had before became meaningless since a lot of them were either canceled for the time being and some others were simply delayed. And on the other hand, we see that some orders come in very, very rapidly. And then, of course, it is our goal and our task to be able to fulfill those orders as quickly as possible.

[Operator Instructions] The next question comes from the line of Rene Weber, Vontobel.

Also a question on the current situation, perhaps going into more details. So in total, you have 32 stores. How much of them are still closed? I guess, most of the Asians are already open again. Can you give us a little bit of a feeling how, for example, the reopening of the China store has worked up until now? And then the second one, also going back on the production. You mentioned that it's not fully shut down, how much people are still working there? And is it possible to do some work on these factories in France?

Yes. Rene, we have currently 7 shops, operating in China, Hong Kong and Mainland China. And to be more precise, actually, they never closed. Even in China during the high noon period of the pandemic, there were no lockdowns, at least not in Shanghai and Beijing where our shops are located. So -- and those shops, I have to say, did surprisingly well even during the crisis. I assume that this is, of course, partly due to our local team that did well and also to the fact that our Lalique clientele is some kind of insensitive to economic conjuncture. So -- and of course, we -- until recently, all our shops in Japan were still operating. But last week, some department stores like Isetan and -- Meitetsu decided nonetheless to close. So as we speak today, we have 10 shops that are still open for business.

Okay. And regarding the production site in France?