Lalique Group SA (LLQ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Lalique Group H1 2023 Results Conference Call and live webcast. I am Alice, the Chorus Call operator. I would like to remind you that our participants will be listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [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. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen. I would like to welcome you to our conference call in connection with the half year 2023 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 in our call. Thank you for taking the time for this conference. In the next couple of minutes, we would like to walk you through our half year results slide presentation. As you have seen, the presentation is available on the Lalique Group website, and we will go slide by slide. I will start with a brief summary of the first semester then Alexis will provide a more detailed overview of our financial results, and I will then turn on to our business priorities for the second half of the year as well as our financial outlook. And after the presentation, of course, we will be happy to take your questions. So let's go directly to Page #4 of the slide deck, which summarizes key takeaways for our business performance in the first half of the year. First, we achieved profitable growth despite a challenging market environment even though profitability declined compared to the previous period. Our operating revenue increased to EUR 87.7 million, which represents a growth of 5% or 8%, if one excludes the exceptional income we recorded in the previous year. Our growth was again supported by the breadth of our business and was particularly driven by the perfumes business, the Ultrasun sunscreen products and the Glenturret whisky and visitor center revenues. Second, our performance was impacted by higher costs. This reflects significantly higher energy costs, in particular, but persistent international inflation trends as well, which resulted in higher production and salary costs. And we also faced some supply chain constraints in procuring product components in the first half of the year. This led to a lower profitability and resulted in an EBIT of EUR 2.5 million at an EBIT margin of 2.8%. Our net profit amounted to EUR 0.6 million in the first semester. In this respect, I ought to mention that we saw an improved business momentum in the second quarter, also thanks to price increases which we initiated to mitigate rising costs, which momentum has continued in the second semester of the year. With regard to our balance sheet, Lalique Group continues to have a strong equity ratio of 47.8% at the end of June 2023. To conclude these slides and reflecting the performance in the first semester, let me point you to our revised guidance for the full year 2023. We now expect sales growth in the upper single-digit percentage and profitability at EBIT level is expected to be higher than in the first half of 2023, but well below the full year 2022 level. With this, let's turn to the next page with some recent business highlights. I will start with the Lalique segment, where our 2 main pillars perfumes and crystal achieved solid sales. We also continued to expand our international presence with the opening of 2 new shops in China. In Switzerland, we completed the move to our new Lalique flagship store in the center of Zurich, which showcases our new retail store concept. Turning to our overall perfumes business. We saw higher sales and our growth was again supported by new launches, a fourth Brioni fragrance and the new Bentley collection perfume, which both had a promising start. With regard to the Ultrasun segment, we're pleased to see that the business with sunscreen products is back on growth track after pandemic. Profitability strongly improved in the first semester, and the performance was also supported by new formulas based on ultralight fluids, which we launched for far eastern markets in particular. Turning to our Scottish whisky distillery, The Glenturret. We saw a strong increase in whisky sales in the first semester and our on-site hospitality offer has developed positively with a higher number of visitors. In this regard, we were pleased to see that the Glenturret Lalique Restaurant was awarded as Best Restaurant in Scotland. And last but not least, let me mention another award, which underscores the excellence of our gastronomy establishment, Chef Jérôme Schilling at our Hotel & Restaurant Lalique at Château Lafaurie-Peyraguey was recognized as Meilleur ouvrier de France or in English best craftsmen of France. And with this, let me now hand over to Alexis Rubinstein who will give you a more detailed overview of our financial results in the first semester.

Thank you, Roger. And also from my side, I would like to welcome you all to this conference call. To look at our half year financials more into details, let's go to the Page 7, where you can see an overview of our half year P&L. The increase in revenues by 8% if we exclude the 2022 extraordinary income, has been driven by perfumes sales increase, 7.5%, the Ultrasun recovery was at plus 17%, and the Glenturret continued growth at 34%, while Lalique sales remained stable during the first semester. Gross profit margin decreased from 57.7% to 53.5%, reflecting the significant increase in energy costs in our production facilities, especially in France for EUR 2.3 million as well as the decreased productivity due to production and supply issues during Q1. After a very difficult Q1, the group started to recover in Q2, supported by sales price increase and an improved profitability to end up at an EBITDA of EUR 10.3 million and EBIT of EUR 2.5 million. Net profit was at EUR 0.6 million impacted as well by the increase in interest rates. Let's look at it in more detail on the next slide, the Slide 8. In this slide, we see the explanation of the EBIT decrease from EUR 8 million in half year 2022 or EUR 6.3 million, if we exclude the one-off effect in half year 2022, EUR 2.5 million EBIT in the first semester 2023. The EUR 4.4 million of revenue increase is EUR 6.1 million, if we exclude this one-off effect in 2022. It did not compensate the decrease in gross profit margin due to inflation and especially in energy costs in the French production facilities as well as production issues at the Lalique Crystal Production, but I will come back later on this in the slide that will follow. Meanwhile, personnel and operating costs increased by EUR 3.9 million, reflecting as well inflation and additional headcounts in our production facilities. Let's now turn to Page 9 with an overview of the results breakdown in our business segments. Here, we see that we do not have any change in our segment organization consisting of the segments, Lalique, Ultrasun, Jaguar fragrances, the Glenturret as well as the other brands segment composed by Samouraï, Bentley, Grès, Brioni, Lalique Beauty Services, our perfume filling factory and Lalique Beauty Distribution companies in France and in the Middle East. We can highlight here that Lalique still represents 52% of the total sales. And that the main EBIT contributors were Jaguar, Ultrasun and the other perfume brands for the first semester 2023. Let's now move to the next slide, the Slide 10 to take a closer look at the Lalique segment. Total operating revenues decreased from EUR 46.5 million to EUR 45.2 million in the half year 2023 and stable if we exclude the extraordinary net income of EUR 1.7 million in the first semester 2022. Perfume sales were down by 3%, while the crystal sales were stable during the first semester. Hospitality grew by 7%, mainly driven by growth - the growth of the Château Lafaurie-Peyraguey Hôtel & Restaurant in Sauternes close to Bordeaux. While orders and demand for crystal have been still very high during the first semester and is partially in Q1, sales volume and gross profit margin have been significantly impacted in Q1 by issues with the setup of the -- our electric furnace started end of 2022 until March 2023. Q1 was consequently strongly impacted by a combination of events. The inflation of energy costs, not compulsory related by sales price increase as well as volume and productivity reduced by these furnace issues. After having solved these issues with the furnace, the profitability was back to expected level in Q2, thanks also to the price increase effective in April 2023. Personnel costs increased by EUR 1.1 million, reflecting the 5% increase due to inflation as well as the increased production staff in the crystal factory. Operating costs increased mainly due to the 2 new boutiques in China and the relocation of the Lalique headquarter in Paris in May, June 2023. EBITDA was at EUR 4 million as of half year 2023 versus EUR 9.2 million last year. And despite the recovery in Q2, EBIT ended up at minus EUR 1.7 million versus EUR 3.8 million during half year 2022. With this, let's go to the Page 11 with the Ultrasun segment. Total operating revenues increased to EUR 13.2 million in half year 2023, plus 17%, especially thanks to the U.K. market. Gross profit margin rate slightly decreased in the half year 2023 from 45.4% to 43.4%, which reflects higher production costs and total costs have decreased by 17% versus half year 2022. Consequently, EBIT reached EUR 2.4 million in half year 2023 versus EUR 1.1 million in half year 2022. Now turning to Slide 12 now with the Jaguar segment. Operating revenues increased by 17%, mainly thanks to positive development in the U.S., India, but also Benelux. The decrease in gross margin from 33% to 30% was due to inflation. And it will be improved during the second semester, thanks to price increase. And consequently, the EBIT was at EUR 1.4 million for the first semester 2023. Now let's go to the Slide 13 and the segment dedicated to the whisky distillery, the Glenturret in which we observe strong sales during the first semester with a plus 34% increase. Every department contributed to this performance. However, private client sales of whisky in Lalique decanters was the main drivers of the growth explaining as well the increase in gross profit margin up to 71.1% during the first semester 2023. Personnel costs increased by 6.9% due to inflation and increased staff in the production area, while OpEx increase reflects inflation in growing business. EBIT was at minus EUR 0.9 million versus minus EUR 1.5 million in last year 2022. And thanks to strong seasonality in whisky business during the second semester, the target is still to be at breakeven at the year-end that will highly depend on the Q4 wholsale distribution of whisky. Let's now turn to Slide 14 and the other brands segment. We will see that apart from Bentley fragrances, for which sales, we're down by 16% due to component supply issues that are mentioned by Roger, all other brands continued the growth. Grès by 5%, Samouraï by 17% back to pre-pandemic level and Lalique Beauty Services, our perfume filling factory 16%, reflecting increase in production from 4.6 million of perfume bottles the half year '22 to 5.5 million perfume bottle in half year 2023. EBIT ended up at EUR 1.8 million versus EUR 3.2 million in half year 2022. Now to conclude this part. Let's go to the Slide 15 to take a closer look at our balance sheet. And we see here that apart from the lower profitability during the first semester and seasonality effects, the significant decrease in cash was mainly due to the necessary increase in perfume stock for 10 million to face supply issues, which were sweat for our perfume business growth. The increase in fixed assets reflects mainly investment in facilities in order to increase production capacities in the perfume segment with a new semi-automatic line, and the cold glass workshop in our crystal factory. We also renovated our new head office at Rue Caumartin in May, June, in which we moved in June in Paris. Equity ratio remained strong at 48%, while net debt/EBITDA ratio increased temporarily up to 4.4% due to working capital increase in relation to the necessary increase in stock as well as the reclassification of liabilities related to license segments into financial liabilities for EUR 12 million as of end of June 2023. We now consider our stock at the right level in order to support perfume growth. Hence, we intend to gradually improve this ratio in the second semester and onwards, especially in 2024. With this, let me hand back to Roger for the third and last part of the presentation.

Thank you, Alexis. Let's go to Slide 17 with our business priorities for the second half of the year. As we said before, Lalique Group will continue to pursue its diversification strategy as the breadth of the business has proven to be a strength both in positive as well as in economically challenging market conditions. Looking at the cost side. Energy costs will remain high in the second semester 2023, but we expect a significant decrease in energy costs from next year on due to forward contracts that we concluded for the period 2024 and 2025. As a result of general inflation, however, personnel and other operating expenses are expected to remain at elevated levels in the second half of 2023 and beyond. That said, we will move ahead with selected product launches and projects, which include in the fragrance business, the rollout of new launches for Lalique and Jaguar, while also continuing to leverage our new distribution setups in the Middle East, in Asia and in Latin America. On Ultrasun, we will focus on the redevelopment of the Chinese market with our new distribution partner, and we're also preparing the U.S. market entry after having successfully secured the Ultrasun rights following a year-long trademark dispute with the local company. The Lalique segment will see the global launch of the Magritte and Lalique Art collection, and of course the “Rose Nebula crystal collection that we just presented at the [indiscernible] show last week. Most importantly, we will pursue our efforts to increase production capacity at the crystal manufacturing. At the Glenturret, we will continue the rollout of the 2023 whisky release, which started in August and we look forward to the launch of our first gin, a London Dry Gin under the name Aberturret. Last but not least, we will continue to work on key projects planned for 2024 and 2025, in particular, the launch of the first Superdry fragrance, the relaunch of the Fabric Frontline silk label and later on the opening of the Villa Florhof in Zurich. This brings me to the final page, Slide 18 with our financial outlook. As mentioned at the beginning of this conference, we revised our previous guidance for the full year 2023. We now expect sales growth in the upper single-digit percentage range and profitability at EBIT level is expected to be higher than in the first half of 2023, but well below full year 2022. Looking further ahead, we're holding on to our midterm targets. With regards to the profitability, the ambition is to gradually increase EBIT margin to 9% to 11% range if maintains, but due to inflation trends, the achievement of this target range is expected to be delayed until 2026. And of course, as always, these outlooks are subject to unforeseeable events. With this, I thank you for your attention. And Alexis and I are now happy to take your questions. Operator, please.

[Operator Instructions] Our first question comes from the line of Patrik Schwendimann with Zürcher Kantonalbank.

I have a question regarding your guidance, EBIT margin is guided well below last year, but higher than in H1. As the best guess, would you say an EBIT margin of 4% to 5% achievable for the current year, 4% to 5%? That's my first question. Then second question in terms of price increases, what have you done so far on average? And what are your plans here in terms of price increase for the next couple of months? Then third question, the Lalique brands are just stable in H1. What is your best guess here for the second half of the year for the Lalique brand in terms of sales growth? And why are you here, probably more optimistic for the second half of the year? And finally, if I may, you just have mentioned Ultrasun in China and the launch in the U.S., what's your best guess here in terms of sales? What additional sales do we expect here in China and then in the U.S. for the second half of the year and then for the next year?

Mr. Schwendimann. As far as the guidance is concerned, we -- of course, the first semester we saw an EBIT margin of 2.8% compared to 7.6% for the full year '22, of course, excluding extraordinary items. So our best guess is somewhere in between. We can't give you any more precise percentage at this stage. But I think that our guidance is pretty clear with the terminology we used. As far as price increases are concerned, we increased prices several times over the past 18, 24 months. So of course, we will continue to monitor the situation very closely. And while we need to protect our margins, of course, at the same time, we need to be careful not to price ourselves outside the market. So as said, we haven't taken any decisions yet, but we will observe the situation at least until year-end. On your question on the sales development of the Lalique brand or segment in the second semester. Obviously, the second semester is always stronger, not only, but also due to the holiday season sales. So we expect the second semester to deliver stronger sales than the first semester. And then on your last question on Ultrasun, well, of course, we expect some Chinese developments and new listings and therefore, new sales until year-end. But I may anticipate that the big impact will be seen in 2024. As far as the U.S. is concerned, we hope to be able to penetrate the market in the second half of '24. So obviously, no impact in the remaining months of '23 and in the first half of '24.

But do you think for Ultrasun, it's possible to go back next year to historical sales level?

Well, one has to see that our pre-COVID sales level included, in particular, in 2019, significant sales revenues from the Chinese market, which we're in the process of restructuring. So obviously, we expect to go back at those levels, but it might take 1 or 2 years. What needs to be -- and if I may add, of course, Ultrasun has always been profitable, at least until COVID and those issues with the Chinese market, and we can see in the first half that Ultrasun delivered a strong EBIT and we anticipate that to continue like this in the next years.

And just coming back to your remark regarding the guidance, it's between 2.8% and last year, the adjusted 6.7%. That's why I have mentioned 4% to 5%. So that's then you think that's could be in this range?

Yes, it could be in this range, but we can't be more precise in our guidance.

[Operator Instructions] Our next question comes from the line of Manuel Lang with Vontobel.

It's Manuel from Vontobel. And I have 2 questions right now. The first one is on inventories. So why were inventories in the second half so high? Is this because you did the markets expect to perform better? And what do you see for the second half there? Do you expect the normalization? And the second question would be then on personnel costs. Do you have anything in mind to bring personnel costs down in the second half of the year and also next year?

Mr. Lang. Yes, on inventories, we felt the need to significantly increase our stocks of product components knowing that the delivery lead times have significantly or literally exploded over the past 12 or 15 months. And also the volumes that we can order at a time since certain suppliers restrict us in terms of volumes. And as a result of that, in order to be sure to be able to supply our customers we were forced to increase those stocks. And as Alexis pointed out, they are at the level now that we deem sufficient to cover the business needs. And we don't expect to have to further increase them. And we will see, especially as supply chains developments, when -- whether we can reduce them or whether we need to keep them at the current levels. I would say that for the next 6 to 9 months, at least until end of first semester '24, I anticipate that we'd rather stay at the current levels. As far as personnel expenses are concerned, of course, we always tightly monitor expenses and personnel expenses in particular. But as you're aware, our business is growing. It's also continuing to expand with new businesses. So at the current stage, we don't plan to implement any specific cost reduction program. But as said, tight monitoring of the situation and of its evolution. Does that answer the question?

Yes.

[Operator Instructions] We have a question comes from the line of Jean-Philippe Bertschy with Vontobel.

I have rather question on the market in recent news flow on the St. Laurent's market, and I would be very much interested in having your view. Kering acquiring Creed and [indiscernible] creating a perfume beauty segment recently. And you have seen what was the impact on [indiscernible]. So what is your view? And whats could be an impact positive or negative for Lalique, please?

Well, obviously, we're aware of -- and obviously, we've observed the market and in particular, M&A trends. We've seen the Creed acquisition as well. But for us, it doesn't -- I mean, it doesn't change our strategy, at least not fundamentally. We've always said that we try to acquire new brands or new license provided that they fit with our portfolio and our strategy. So whatever happens in the market is not directly relevant to us. But as said, we're consistently prospecting for new licenses and if we have, of course, a chance to acquire a brand outright. Of course, we would look at it, provided that the brand is within our means and our financial capacity. I don't know whether that quite answers the question.

It's very helpful. And as well as of interest -- with interest, why the growth has been so strong in the past semesters or years. What is the reason behind this strong growth in the fragrances in your view?

Well, I guess that we've seen many more brands diversifying and launching their own perfume lines. This has become quite standard now, especially in the fashion industry, but not only. And I think for many brands, they have their core business, whatever it is, and fragrance provided, it is done right, whether internally or through a licensed partner is always a big upside in terms of brand visibility, in particular, also for luxury brands with, I would say, high pricing in the core business and perfume of course, is an access or entry-level product. So for brand visibility and diversification purposes, that's always very interesting. But of course, it needs to be done right. We see -- as you said, we see a lot of new access, new brands entering the market, but one which we see equally -- almost equally many brands disappearing from that market since as said, it needs to be done. And of course, that the market becomes more and more competitive.

Great insights.