Maisons du Monde S.A. (ZMM.F) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Maisons du Monde S.A. Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Julie Walbaum, CEO. Please go ahead.

Thank you. Good morning to all of you, and thank you for joining this call on such short notice. You have no doubts in the press release we issued yesterday evening. As you are all very much aware, this year proves more challenging than expected. You might remember that the guidance we confirmed at the beginning of May was conditioned to the stabilization or improvement of the macroeconomic and supply chain conditions. However, those conditions have materially worsened over the last few weeks, and we now expect our second quarter to be high single-digit negative. And more broadly, our previous assumptions need to be updated. Inflation in Europe is now exceeding 5%, an unseen level for decades. And while some analysts considered until recently that inflation would go down after summer, it is now widely believed that due to the continuing war in Ukraine and related macroeconomic disruptions, inflation will stay high until the end of the year. In relation to this, the consumer confidence index stands at a record low, further deteriorating versus the end of March, which was already at a level comparable to the first 2020 lockdown. The high inflation and the low consumer confidence levels are driving overall demand for discretionary goods down, and we expect our furniture and decoration categories to be more impacted than others after 2 years of material spending in household equipment. And this can already be observed in April as illustrated by the Banque de France Furniture Index, which was down 8% versus March; and 15% down versus April 2019. Also, Ipsos, the Market Research Institute, released a piece a few days ago showing that furniture and decoration are indeed the kind of arbitrage French consumers are likely to make [indiscernible] constraint. Consequently, while we anticipated that demand would stabilize and then start to progress again in the second half on the back of a more favorable comparable base, we now think that store traffic could be staying in the low range currently observed. That is materially down year-on-year. And after a significant decline in H1 due to high comps, we expect online traffic to start growing again in H2, but more moderately than initially planned due to the soft demand for the category. Supply-wise, we do continue to actively rebuild our inventories. Now while the port of Shanghai did come back to reasonable operating conditions, which is good news, the evolution of the pandemic in other parts of China keeps generating serious bottlenecks in secondary harbor, which still represent about 25% of our shipments, which creates extra cost as we need to redirect some of our loading. These disruptions may also slow down our stocking plant in the upcoming weeks. We still expect to reach the inventory levels we previously mentioned by the end of this year, but the sequence may be a bit more back-ended than anticipated. On the cost side, most cost components of the gross margin that is freight, raw materials, energy, have all risen sharply in the recent months, creating important disruption in the assessment of our cost base. Let's take some examples on raw materials. Wood is currently trading at prices 25% higher than last year, and that is up to 50% on wood type such as oak. Textile is on average 30% more expensive. Considering that for those products, raw materials make up to 30% to 60% of purchasing costs, the impact of that on COGS is sizable. And obviously, there is freight, which, as you know, has increased fourfold on average over the last 18 months, cost of which is not going the same from one product family to the next. We have been negotiating hard with our carriers and with our suppliers to minimize the cost uplift with a big push from our purchasing team over the last few weeks as we are closing end of May, that is now, the first round of our annual negotiations. This is an unprecedented context of high inflation across the board and of high volatility. Based on the careful analysis of actual numbers year-to-date and the revised assessment of our forecast for the year to go in the context of these negotiations, we now reckon; our projected costs for the full year have been underestimated, temporarily impacting the projected gross margin model. As I said, negotiations are still ongoing to minimize cost uplift for future collections. Also, as planned, we will be implementing over the summer an additional wave of price uplift to complete our 2022 pricing program. It goes without saying that we, as an executive team, are committed to pull every lever to support sales first and also to minimize our cost base in order to protect our profitability. We have a series of short-term and midterm action plans in place to boost demand in the upcoming quarters. On the cost front, we are implementing additional efficiency programs in purchasing, logistics and transportation as well as the containment of all central costs. Recruitments have been put on hold and other SG&A, including brand investments, have been cut or postponed. We are also monitoring our cash very closely. That said, we think it is important not to [ de-urbanize ] future sales growth. And in that period, we want to set forth our key strategic initiatives, such as the launch of our second warehouse in the North France and the further deployment of online marketplace outside France. We also want to keep actively replenishing our inventories to support self-acceleration in 2023 while managing sourcing and freight constraints. In this context, we have decided to update our guidance for 2022. We now anticipate our top line growth to be mid-single-digit negative and our EBIT margin to be at 5% or above. As regards free cash flow, we expect a level between EUR 10 million and EUR 30 million. Our targets regarding carbon neutrality and dividend payout remain unchanged. This updated guidance may sound cautious, but given the high uncertainty in which we and, frankly, the whole market are operating, we consider it is a reasonable approach at the time we speak. On the longer-term perspective, we stay absolutely confident in the intrinsic quality of our model. And although the 2025 target we disclosed at our CMT last November may be extended, the group strategy remains fully valid. In conclusion, it is fair to say that the company is facing an unprecedented combination of excellent headwinds that challenge its short-term performance. But the context is also confirming the relevance of our choices in the recent years and recent months. Whether it is the further differentiation of our collections and the buildup of a strong lifestyle brand, the reduction of store openings and the deployment of our marketplace, our recently (sic) [recent] decision to relocate part of our sourcing to Europe or to launch a secondhand offering. Finally, to build the relevant organization for Maisons du Monde. All these gets, in my view, further soundness in the current context. I fully trust the agility and commitment of our teams to hold the help efficiently in these rough seas and leverage every challenge we faced to keep strengthening the company again and again. Thank you all for your attention, and we are now ready to questions, Regis and I.

[Operator Instructions] Your first question comes from Stephen Benhamou from BNP Paribas.

I've got 2 questions, please. The first one is on the timing. Can you be -- can you please be more explicit in terms of schedule? I'm struggling to understand what happens between the beginning of May and then now. Why you were so confident to maintain your full-year guidance at the beginning of the month and why you're not so that confident now? And second question is about the implication in terms of gross margin. Can you please detail what you could expect in terms of gross margin? You were previously expecting 100 to 150 bps gross margin in [ Rouen ] in 2022. Can you please break down what you are expecting in terms of the impact from freight cost, pricing and product mix?

Sure. Thank you. I'll take your first question, and Regis will answer your second one. While you're mentioning our guidance that we issued -- that we confirmed, sorry, 3 weeks ago. And that's right. We did come from the guidance. However, we did qualify it back in the time. We said that this was provided macroeconomic and supply chain conditions do not deteriorate, that is stabilized or improved. And what happened over the last few weeks is that those conditions were materially worsen. And if I'm just focusing on the top line, I suggest we have a look at the current trading that is May, which has been well below our expectations, to be fair. And traffic has been materially down year-on-year and in strong deterioration versus April. If I were to expose, traffic was down 35% to 40% year-on-year, whereas it was sort of only down 20% in April. That is the data we had last time we spoke. And when it comes to online traffic, in May it was down 25%. While in April, it was sort of only down 15%. And April was already down versus March. So I guess what I'm saying is that the dynamics has not been good over the last month, and the weekly dynamics is also negative. So basically, this is influencing the view that we're having now in the next quarters and we no longer expect the improvement that we initially planned for in underlying demand. So basically, that's what's been happening on demand. And also, the COVID pandemic is still hurting. We said that we were anticipating a improvement of the supply chain conditions. And now as we said, we have to redirect our loadings, our secondary ports are still being disrupted. So it is true that given this low demand, our inventories in our warehouse gets replenished faster than planned as we keep inbounding catalyst, which is good news. But that said, we're having new collections, both in Furniture and Decoration to ship for H2. So those delays in onboarding impact Q3 sales and also margins as new collections come with the new pricing. So this is also has been happening over the last few weeks. And the third and last bit is the supplier negotiation. As I said, we are ending the first round of our big annual supplier negotiation end of May. So basically, the returns we had from the suppliers took over the course of the month of May. So we had new elements coming in over the course of this month. And that's what brought us to really update all of our estimates in our forecast and overall, the cost base assessment. So these are all of the new elements that make us speak to you today was basically the updated estimates. And to be fair, I think that it's sort of a unique situation for the market, for the category and for us as a company, right? This is basically an equation with 25 variables moving around at the same time. So we are providing the best transparency we have at the time we speak.

Thanks, Julie. And Stephen, to complement on your question vis-a-vis gross margin. Indeed, now we are contemplating a decrease of gross margin, which is circa 300 to 350 basis points. It's really twofold, cost and pricing. On a cost perspective, Julie just mentioned some of the elements on freight because it was part of your question. We have figured prices on a certain set of volume. Most of these programs are not going as planned due to COVID. So to secure minimum shipping volume, we had to renegotiate a portion of those costs. Secondly, on costs, still different components, energy, rate, but more importantly, it's really about raw materials. And as just mentioned by Julie, now we have a much more crystal view vis-a-vis those negotiations with each of the supplier. And we mentioned it, some of those raw materials are really raising to the roof. Cotton, we did not mention it, but double price. Oak is plus 50%. So despite really negotiating hard with all of our suppliers not to accept all those cost increases, the cost evolution is really higher than expected, higher than previously assessed. On a pricing perspective, we have implemented the first series of price uplift to compensate those extra costs. They are not materializing to the extent we were anticipating due to supply chain challenges, new collection getting implemented at a slower pace than planned. So when we look really, all of our analysis at the end of April, really getting in all those details vis-a-vis all those moving elements at such family level regarding cost, as I said, pricing effect, volume dynamics and so on and so forth. It's many components that have moved. So we just recall that our projected costs were underestimated. And now we assess gross margin to be, in this context, much more closer to the 62.5, 63 percentage versus the 66 of [indiscernible].

Last question is about the pricing. So you mentioned at the beginning that you could do some other price increase in H2. To what extent the pricing -- I mean, what are you expecting in terms of price increase in H2? And are you afraid about squeezing the effect in terms of demand if you're increasing the pricing, given the current interest rate environment?

Thank you. So well, in terms of pricing, what we can observe is that competition has increased their prices by at least as much as us and actually even more, which gives us room for some more pricing to pass on, to answer your second question. We've been assessing a lot of our products, hundreds of our products relative to competition and what we've been observing based on this analysis is that the price increases observed with the other players was higher than the one we've been implementing. So again, that gives us confidence in our ability to pass on this extra pricing. As we said earlier, we are basically implementing a price uplift in waves of 5% to 10%. So this is again the sort of range we're envisaging for this summer, 5% to 10%. So all in all, on a cumulative basis, that would be in a low-teens price increase, which again puts us in line with competition.