Logista Integral, S.A. (LOG) Earnings Call Transcript & Summary

Good afternoon, and welcome to all of you attending this audio webcast of Logista first half results of fiscal year 2020. My name is Manuel Suárez, CFO of the company. And with me is Gloria Martin, Investor Relations Director. To follow the results, I will go through the presentation you see on your screens. And in the meanwhile, we will continue receiving your questions that together with those received during the morning will be answered at the end. I invite you to read the disclaimer included in the second slide of the presentation, regarding forecasts, estimates and forward-looking statements. There are 3 main topics I would like to highlight in our results. First, there is a recurring activity performing in line with what was expected. Second, a negative impact of the tobacco taxes and retail sales prices that brought a negative result this year to be compared with a positive one in the first semester of 2019. And third, the impact in the month of March of the coronavirus crisis. All these together caused that in the period revenues have grown in all regions, while economic sales in Italy and Spain offsetting the negative ones in France. Altogether, adjusted EBIT decreased by 11%, percentage that practically goes to the net income as a consequence of lower restructuring expenses and a higher tax rate. Let me give you now a brief overview of the performance by Europe then that I will detail later. Revenue evolution in the period is marked by a pretty good trend in our convenience and pharma business, while transport has kept growing in parcel and courier, being more stable in the part of the business, more related to tobacco. COVID-19 crisis is impacting the most to both distribution and transport, while tobacco taxes and prices have not played any role in none of both periods. In France, tobacco volumes continued showing a steady decrease in trend, in line with what we saw in previous periods, consequence of retail sales prices increases offsetting tax ones. Most of the tax increase this year has been already passed to prices as the last movements that are still pending, causing at the end of the period a negative impact in results. There is a clear weaker activity in the convenience distribution to other channels with the anti-COVID measures. In Italy, the impact of these measures has been of lower importance. Convenience business has kept its rhythm of double-digit growth and tobacco volumes have been stable. All this masked (sic) by the delay of tobacco manufacturers passing tax increases to the retail sales prices of their products, causing an added impact. Going into a deeper analysis by country now. In Iberia, tobacco and related has shown a 5.7% growth, consequence of the positive tobacco volumes evolution in Spain, growing market share in Portugal, very good trend in convenience and a stable tobacco prices and tax scenarios in both periods. COVID-19 affected in March maybe in a decrease in consumption, and a switch of vending channels in Portugal from vending machines to petrol stations. In transport, economic sales grew 3%, being stable in long haul and showing growth in the other 2, which is a different pattern of what has been observed after the lockdown begun when both parcel and courier have started to show a slower activity. In the other businesses where we report the activity of pharma and editorial distribution, economic sales have decreased by EUR 2 million, consequence of the continued growth of pharma activity double-digit in revenues, masked (sic) [ marked ] by the ceasing of a service to a customer relevant in sales terms but not in results, and the difficult evolution of the publication sector. Here, the impact of the lockdown measures is important in the case of the editorial sector and less in the case of pharma. Also, there is still some track and trace agreements pending to be finalized, while the services are being fully provided, allowing room for improvement in the second semester. In total, impact of lockdown measures can be estimated in EUR 3 million in Iberia, while there were no one-offs due to tobacco retail sales prices changes. EBIT in France has been reduced in 1/3, consequence of a continuous decrease in tobacco volumes derived from the steady tax increases that has required this year a retail sales price increase of EUR 1 to offset it, EUR 0.50 in November and EUR 0.50 in March. This year, there has been also the transformation of the health tax, contribution sociale, into excise taxes, which would require an additional increase of EUR 0.20. At the end of the period, manufacturers had to pass all these tax increases to selling prices. And this compares to previous year when tobacco manufactures increased the retail sales prices of their products more than the tax increases in the period, having in H1 2019 a positive impact from this issue. In contrast, both e-transaction and convenience sales in this channel had a positive evolution. In the other businesses where the underlying trend was already weak, the lockdown measures have impacted in an estimated 35% in the period, consequence mainly of the closing of points of sale. Cost had, in general, a normal trend affected by inflationary pressure in transport and insurance, while providing room for improvement in certain trace timing differences. COVID-19 measures have had a negative impact estimated in EUR 1.5 million in our businesses in France. Italy had in the period an adjusted EBIT increase of 1.4%, having this year an important negative trend of tobacco tax/price movements, consequence of tobacco manufacturers not translating into prices all tax movements. And moreover, this compares to the previous year when the effect of this phenomenon was clearly positive. Tobacco volumes were rather stable, and the trend in services rendered to manufacturers and in convenience products has been clearly a growing one. Costs have behaved in line with economic sales evolution out of the extra costs due to COVID-19 impact, whose whole effect can be estimated in this country in EUR 1 million. The P&L of the period reflects what we have commented at the beginning, a slow growth in recurring operations masked (sic) [ marked ] by the lockdown and tobacco tax/price movements. Revenues grew in all geographies, while the economic sales growth in Spain and Italy has been offset by the decrease in France. Let me remark here that without the EUR 11 million negative difference because of inventory valuation and not making any estimation of lockdown term measures, the economic sales would have grown by 2%. Total cost comparison is still influenced by track and trace implementation, transport costs in France, insurance and the ones associated to COVID-19 crisis. The lower amount of restructuring costs partially offset by the absence of capital gains makes profit from operation to be EUR 85 million, EUR 9 million less than in 2019. Cash position has stood around EUR 230 million higher than last year average of the period, causing the increase in financial revenues; while the increase in financial expenses is totally due to the implementation this year of IFRS 16. Being this one, the total difference caused by it in the increase in EBITDA is fully offset by the increase in depreciation. Corporate income tax increases in 2.52 percentage points is due mainly to extinguishing of some deductions related to direct taxation. Net income finally decreases because of the impact of measures to fight COVID-19 and the impact of tobacco retail sales space, movements that more than offset the increase in recurring operations. As advised before, the investments figure is returning to levels more in line with the normal needs of Logista. You know that Logista normally dedicates between 1/3 and 50% of its investments every year to IT with the aim to keep its infrastructure and technology updated, to be able to keep on developing services to its customers and to improve its operations. Last 2 years, our investments were higher than the average to support the effort needed to implement track and trace services and to target some renewal of general IT infrastructures. Now that it is fundamentally done, the figure shown is in the range of what we normally be seeing in the coming future. There is nothing special to remark in terms of normalized cash flow. The EBITDA is moving in the same line and the EBIT, once it is adjusted by the rentals payments that had a different treatment in both periods as a consequence of the adoption of IFRS 16 in 2020. Normalized taxes respond to the evolution of results and effective tax rates, while the CapEx figure improvement is driven by what was commented in the previous slide, adjusted by the normal timing differences. Working capital is normally lower this part of the year, being this year especially affected because of COVID-19 measures in past. And last, the CapEx effect in the payment of taxes is the opposite direction in each of the 2 periods, just reflecting timing differences that tend to stabilize over time. To briefly summarize which are the financial conclusions of this period, the resilience of Logista's business model is again proved in this situation when the vast majority of the points of sale we distribute products to remained open among a lockdown general status, although there is no doubt the general situation of consumption is also affecting us in our results. The actual results of this semester are also marked by the impact of the one-offs due to tobacco prices movements. Last part to remark is the solid cash flow profile of the company compared to operating results or to net income. But even considering all this, and in view of the current circumstances in which our business has been executed in the last month of the semester and the circumstances in which it is being executed now, the guidance communicated to the market for the closing of this fiscal year cannot be kept. There are on top of that, uncertainties about how this situation is going to evolve in the coming future and how the present lockdown is going to be progressively abandoned. This makes impossible to provide a new guidance at the moment. However, what we can say is that the fact that most of our operations are working normally in terms of providing services and distributing products to points of sales that remain open, and the resilience of our business model, make us expect that the reduction of profit versus previous fiscal year will not be too relevant. And that's all on my side so far. I pass now the over to Gloria Martin to the Q&A session. Gloria?

Thank you, Manuel. I will read now the questions received until now. But I remind you that you can continue sending questions until the end of the webcast or contacting Investor Relations later through the usual channels you know, sending an e-mail or just giving a call. First question is Pedro Alves from CaixaBank, outlook for second half 2020. "Could you provide us a first range of underlying EBIT growth in second half '20, excluding COVID-19 effect? Could you make sense to extrap --" "Would it make", sorry, "sense to extrapolate the circa 2% achieved in first half '20? Or should we expect an acceleration from the billing of traceability tariffs to manufacturers?" Second question, underlying EBIT in Iberia. "Excluding the impacts of COVID-19, the EBIT in Iberia is only slightly positive in the first half, below our usual mid-single-digit performance. Can you please explain the reasons?" Third question, inflationary pressures in France. "Could you give more details on what is happening with your transport and insurance costs in France? And if this inflationary pressure is expected to continue in the next quarters?"

Okay. Thank you, Pedro. In terms of the outlook for the second half of the year '20 out of this COVID-19, i.e., I would say it's too conservative to think on the circa 2% increase achieved in the first half. Since you are absolutely right, the traceability tariff should take -- should have taken this increase. Better to say too, it wasn't given as the guidance of the company as of the end of the first quarter. The second part, the underlying EBIT in Iberia is exactly the same question once you make the adjustment, just taking into account that generally speaking, the track and trace agreements are more or less close or practically close in Italy and are lagging still a bit in France and in Spain. So yes, if you take the figure for Iberia, you will see a more normal path of growth in this area. And in terms of what is happening in France where there has been some insurance, insurance of safety issues there for transport is in the south of France was having a high level of incidences. So the insurance costs have increased reflecting that fact. And in terms of the pressure on the transport costs that we already mentioned in the first quarter, I mean, the actions are already taken to the rising transport there. And I think for the second half of the year, you should take a, I mean, a lower impact, a much lower impact of this pressure.

Okay, second participant is Joao Safara, Banco Santander. I will read now only the questions that have not been repeated or answered so far, okay? So first question, "Can you give us some color on trends and impacts in your business during the month of April as part -- or part of April, or the combined trends with March and April? Just any figures that could help us determine the impact, at least during the lockdown period? Second question, what was the incremental impact of costs linked to the COVID-19 in March '20? Can you quantify? Is that the number that you should be extrapolated for the rest of the months of the lockdown or even also for Q4 '20?"

Okay. So first, Joao, in terms of the trends for the month of April, I would say in the month of March, it was characterized first of all for first reactions, or in some respects, can be stable and some not. I would say in terms of tobacco for this characteristic mainly is the cancellation of all movements of tourism and cross-border sales. So you should assume that decreases close to 10% could be normal in volume consumption in Spain and Italy and much lower in France. Keep in mind too is that 1 out of 4 tobacco parts in France were estimated before this that were not paying taxes there, and this is canceled now. That's why basically consumption there tends to be flat. In terms of transport, transport activity which is correlated to GDP, so I mean, you should assume an increasing volumes in what is in line with what is happening in the economy. In the terms of in courier, should be a modifier or a model by the fact that there is a movement towards growing in e-commerce. It stood at lower margins, and that's it. And in terms of editorial business, what happening is suffering in the month of April also. In Italy, the situation as you mentioned is just the tobacco part. I also mentioned that both in Italy and in Spain, convenience in tobacco is behaving very well. I mean when the rest of the point of sales, or vast majority of them, are closed, what happens basically that tobacco benefit from this lack of convenience of another networks. And in the part of wholesale to another networks in France, is suffering because of the closing of point of sales basically. That's it. Then in the incremental costs in the month of March due to COVID-19, we talked remember, a total impact of EUR 5.5 million. This could assume something like 40%, EUR 2 million could come from the costs part, and the remaining from the sales part.

Okay. Next question from Carlos Gutierrez, Dunas Capital. "Could you give us further details on how can convenience business decrease in France, while keep on growing in Italy where lockdown have been much stronger and durable at the moment?"

Okay. Well, it's clearly what we commented before with Joao's question is that, I mean, now the tobacco mix, the tobacco mix is a very strong point of sale given the absence of another points. While in the convenience business in France, a high component of it is -- are precisely the rest of the networks. That's why it's weaker there.

Okay. Next question from Pablo Cuadrado, Kepler Cheuvreux. "Could you share if you expect some recovery in losses in tobacco inventories during Q3 from recent prices movement from tobacco producers? Shall we expect a recovery of some of the almost 6 million losses accounted during first half?"

Okay. So Pablo then, in talking about the recovery of prices, there has already been positive movements, both in Italy and in France during the month of April. And there is still one part, I mean, this is at the will of tobacco manufacturers. The case in Spain, prices have not moved in the last 2 years. So at some point, they must increase, isn't it? Obviously, they will at one point, and that is there on top of that.

"And COVID-19 cost, you have stated almost 5.5 cost for March. Can we assume this has been a one-off cost? Or would you expect that the negative effect could be enhanced during April and May during the state of emergency measures in the key countries?"

Well, the EUR 5.5 million, sorry for some confusion, is the total impact of COVID-19. I clarified in the previous question that we could assume something like 2 were due to costs. And now then there will be impacts also in April, obviously minimized by the fact that we now have -- we have -- some corrective measures are put in place. But the impact will continue as far as measures will continue.

Sorry, I'm trying to discriminate which question has been already answered, so just give me a minute. "Is there any change in the dividend profile for 2020 at the moment? Or do you reiterate your minimum 90% payout this year?"

As far as things are and the policy of the company is to pay at least 90% of its net income as dividend every year, this has not changed. Obviously, we are in a very, I mean, uncertain environment. We have to see. But the policy as such is that, and that's where we are.

Next question from Oriana Bastianelli, Kairos. "Can you kindly comment on the evolution of M&A activities? Second, I know it is early time. But ideally despite an expected drop on net income in 2020, would you expect to be in a position to at least confirm" -- what we have answered -- "absolute dividend in light of the impact of goodwill amortization and availability of reserves?"

Well, in terms of M&A activities, I commented, Oriana, that there is a good chance of doing some operations because of track and trace mainly in both in Portugal and in Poland, where there were good possibilities; plus in the other countries where the manufacturers reside. I mean, we could be interested for us to be there. There is nothing more to comment at the moment. There is nothing precise on the table in these days. And second, the policy on dividends is what I said here before. It stays at 90% of net income. And the strength of our balance sheet is clear. And this is one thing that the Board will have to decide once the things are being clear, once this sort of uncertainties are resolved and with a clear nature.

Okay. Next question from Miguel Medina, [ KC ] Capital. "Has Logista met the new CEO at Imperial? I am not sure what his starting date is. If you have any change in existing commitment to retain a 50% stake in Logista?"

Well, first question is no. The CEO has not -- the CEO of CEO has not joined Imperia. And it's a matter that he should comment with Imperia. But there is no commitment for them to stay, to have any certain percentage in Logista. [ It's just their will ] to do that.

Okay. Next question from Patrick Folan, Redburn. "With the stricter measures with the lockdowns, have you seen a reduction in illicit trade, particularly in France?"

Yes, that's the case. And that's the case particularly in France where I commented before, it's -- it was very high because of the price differential and the geographical situation of the country. In particular, we have seen a high increase in sales in particular areas where normally the illicit trade should have been higher.

Next question from Carlos Gutierrez, Dunas Capital. "Have you got any estimation of normalized percentage of economic sales in Spain coming from tourism, tobacco consumption-related?"

Well, yes, it's normally estimated the impact of smuggling or illegal trade in tobacco in Spain between 10% and 15%. Obviously, it's a difficult figure to obtain, but that's the normal estimation [ of smuggling ] assumed in the market.

Next question from Carlos Gutierrez as well. "Do you expect any impact from the Imperial Brands' sale of Altadis' cigar business?"

No. We run our -- our distribution contract is with [ Tabacalera ]. We are distributing their products, and it's a matter of changing of the [indiscernible]. But all our contracts are done at market prices and market arrangements, so there is no change on that.

Next question from Pedro Alves, CaixaBank. "In France given that wholesale convenience outside tobacco channel has been weak for a couple of years, could you share if this business is loss-making, and if you are eventually planning to divest from this business?"

We will not -- we do not disclose the result by business in any country. But what I can tell you is that we are very closely following the performance and the possibilities with the business, with the business of wholesale to other networks and tobacco in France.

Okay. I'm just looking if we have any question that has not been answered. Let me take -- I think we have one. You see it was Pablo Cuadrado from Kepler. "Tax rate has increased to about 27% during the first half. Shall we expect a similar reference for second half?"

Yes, that's the point. That's the point, Pablo. In fact, that's the way of looking the corporate income tax is through a global year approach. It is make the approval every semester.

Okay, let me check. Joao Safara, Banco Santander. "Can this EUR 15 million CapEx in first half '20 be extrapolated for the second half?" "The 20" -- well, it's already answered, the tax rate, okay. So is the investment?

Well, in that range, yes. Maybe the same figure, maybe a bit higher, but that's the range of figure you could assume.

Well, I think we have already answered all the questions but those that were repeated. But in any case as I explained to you before, if you want to question or contact as for any other reason, please use the usual channels. So send me an e-mail or just give me a call.

Thanks to all of you for the attendance to this audio webcast presentation.