SEB SA (SK) Earnings Call Transcript & Summary

Hello, and welcome to the SEB 2022 Third Quarter Sales and Financial Data. Please note, this conference is being recorded. [Operator Instructions] I will hand over to your host, Stanislas de Gramont, CEO; and Nathalie Lomon, CFO, to begin today's conference. Thank you.

Good afternoon, everyone. Stanislas de Gramont speaking. Thank you for joining us for this call. I will be taking you through our 9-month sales and financial results together with Nathalie Lomon, our Chief Financial Officer. And without further ado, Nathalie, maybe you want to get a start in.

Yes. Thank you very much, Stanislas, good night, and everybody. So we're starting with the group sales review. Moving to the next slide, please. Thank you. In the first 9 months of 2022, the group has reported a total sales of EUR 5.560 billion. This is reported when compared to 2021, minus 0.2% and minus 4.3% like-for-like. It's a trend of continuous growth with the exception of the 9 months of 2020 that is reported on the right-hand side of the slide. In the third quarter, the group has reported sales for EUR 1.894 billion. It's minus 3.4% compared to last year's same quarter and minus 8% when compared to last year like-for-like. It is an increase of 6.6% when compared to 2019. Moving to the next slide and looking at the breakdown of our sales between consumer and professional, first focusing on the Consumer business, the group has reported over the 9 first months, EUR 5.056 billion. So it's minus 1.2% when compared to last year and EUR 1.720 billion in the third quarter, minus 4.2%, minus 8.8% like-for-like. On the Professional segment, the business has reported EUR 504 million of sales in the first 9 months, that's close to 11% more than what this business has delivered in 2021, 6% like-for-like. And in the third quarter, EUR 174 million that's close to plus 6% and stable like-for-like basis. If we move to the sales bridge and understand how they've just been developing over this first 9 months, you will see that the total sales reported is very close, as was said previously, to what we delivered in 2021. It's a slight decrease of 0.2% of sales but with a strong contrast between organic growth of minus 4.3% and currency effects, 229%, most of this coming from the USD, CNY and RUB appreciation when compared to the EUR in which we are reporting. Over to you, Stanislas for the breakdown of...

Yes, I'll take it from there. And maybe with a pretty unusual way to look at the business. As you see, we have a minus 0.2% reported growth, which is essentially flat. And what's really interesting in this year is the contrast between the performance of the various parts of the business. I'll start maybe with the right-hand side with the other countries, which weigh for 0.5% -- minus 0.5% negative contribution to the overall group's performance. To say that generally, our business is very resilient. Our markets are resilient. Our activity is pretty stable despite a difficult context. I mean I won't elaborate too much on the economic context in the world nowadays. But what's more interesting is to see that we have in this business in the first 9 months, China weighing positive 3.9% growth to the total group. Professional business weighing 0.9% positive. Russia/Ukraine, of course, was negatively minus 1 point of growth and specifically France/Germany, weighing negatively 3.4 points of growth. So what's really interesting in this first 9 months is that the performance of the group is very uneven, very contrasted and I will walk you in the next 5, 10 minutes through these various geographies and activities just to share with you the way business is developing. Starting on the next slide with France and Germany. France and Germany account for over 20% of total Group sales. And over the first 9 months, we have sales down 17%. That comes after a record growth of 21% year-to-date in 2021. If you remember last year, we were really satisfied with the performance in these 2 major countries for us. And I think the first effect is that we are up against a very high historical level in France and Germany. And in particular, there's already been a more substantial rebalancing of consumer spending out of our activities in those 2 markets than in our markets. And in fact, the market share to date in France and Germany is down 7% year-on-year, while the overall total market, if we average out of the geographies of the world is fairly stable. The second specific point on this business is that we have in 2021, very large loyalty programs in those 2 markets. That's why EUR 61 million are less in 2022 than in 2021. And that accounts for itself for 5 points of growth in these 2 geographies. As probably, by the way, a side effect of those LPs being very high last year, impacting some overconsumption at our specific -- a qualitative comment. The third element is a category mix effect. We -- you know that small domestic equipment is made of cooking categories and non-cooking categories. Well, in fact, cooking categories were the ones that benefited most from the pandemic and the lockdowns. Why? Because people stayed at home and they overconsumed cooking categories. And in fact, when the total market is down 7% year-on-year, the cooking market is down 10% year-on-year in France and Germany. And as a matter of fact, our exposure to the Cooking segment is 25 points above the market exposure, Cooking 75% of our business in France and Germany, it's only 50% of the market. So as a result of that, we see our sales in Cooking categories, down 19% year-to-date. But last year, the growth was 27%. So a difficult market, difficult category mix with another way of Groupe SEB in France and Germany on those categories that performed best during the COVID days. Non-repeated loyalty program and last, a very specific situation in France with a strong destocking in the retail trade, which increases the exposure of trade brands to consumers and, therefore, the short-term market share of trade brands. That's a pretty specific French phenomenon that we observed in our categories. We'll come back to that if you need. Moving on to the next slide, and I won't spend too much time on it. That's the major sales decline we observed in Russia/Ukraine. Those 2 markets were EUR 384 million in the full year last year, around 5% of Group sales. And our year-to-date sales are down 23% in reporting or 33% in like-for-like, when last year they were growing by 31%. So not only we are losing a substantial chunk of the business around 1 point negative impact on the Group's growth, but those 2 countries were substantial sources of revenue growth and profit growth in 2021. And later on, when we see the -- off the bridge, we will share with you the fact that France/Germany and Russia/Ukraine are positive contributors in terms of mix, the profit realization of the Group, and, therefore, that weighs on the profit realization. That was the negative part. We have some very positive news starting with China. China is the Group's #1 market, and we keep showing positive momentum in China. We have year-to-date sales up 5.5% organic or 60% reporting, but that's because of the strength of the CNY to the EUR. And when we look at that, with the first comment is that those sales are a 5% -- 5.5% and that's in a fairly changing macroeconomic environment. The news are full of negative ideas with China or the lockdowns or the economic performance. We see our sales extremely resilient. They're extremely resilient because we have a strong push on e-commerce that we've had for many years. E-commerce is now 67% of total Supor sales. And more importantly, we have strong and stronger position in our main strongholds, Kitchen Electrics and Cookware. But at the same time, we see some developments in Large Kitchen Appliances, Home and Linen Care. So a strong performance in a volatile macroeconomic environment, and that is also due to the fact that Supor significantly outperformed the market. That is coming from a continuous policy of innovation and product offering extension and also the online sales development, in particular with strengthened presence on fast-going platforms, in Volker or TikTok. I move on to the next slide. It was actually market positions. I'm sticking to -- here, okay? Talking about market position. As you know, our 2 biggest categories in China are in Kitchen Electrics where Supor is #1 online, widening the gap with the #2. And we are stronger and stronger off-line and the gap with the #1 is now -- we are [ reducing the gap ]. Equally on Cookware. On Cookware, we are the undisputed leader of the market, both online and offline and was being at least twice the size of our contender. We are still strengthening our leadership year-to-date, controlling almost half of the offline market. So China goes from strength-to-strength. China is delivering what we expect from it, which is growth from 5% to 10%, and that is despite a global macroeconomic environment in China, that some people describe as not so positive industry. Moving on to the Professional Business. The Professional Business post 10% -- sorry, 6% growth like-for-like -- 10% growth like-for-like in year-to-date, I think. Let me check my numbers. I think I'm being confused. And that is a very satisfactory performance, 6% like-for-like, sorry. Why is it very satisfactory? Well, we have, first, you know that this business is made of 3 activities. We have major contracts, we have, I would say, Core machine business, and then we have Service and maintenance. Core contracts come and go, and we have a very, very high base in 2021, in particular in the U.S. and the U.K. If we take that aside, the like-for-like growth in Core business is up 6% in Q3 and 15.4% year-to-date. That comes from something we described back a year ago in the midst of the COVID crisis. We said we wanted to expand our customer base. We now have a much larger and steadier customer base. We said we wanted to grow Service and Service revenue is up double digit year-on-year. And last, we said, the acquisition of Curtis would allow us to grow the business with different segments in the United States. And we see Curtis achieving double-digit growth in the U.S., gaining some market positions. Looking on deals, we have a good ramp-up of the Luckin Coffee in China. We know that Luckin went through highs and lows in the last 2 years and Luckin is back to business, and we are installing new machines in Luckin Coffee in China. And we see a strong order book for Q3. We see Professional Business on a good track which is double-digit growth performance year-on-year this year. Beyond Professional Coffee, we have a continued development in Hotel equipment in Q3. Still a small business, but a business that is now delivering positive growth year-on-year. And last but not least, on Professional, if we move on to the next slide. You've seen late in July that we've acquired Zummo. Zummo is a leading company in the design, manufacture and distribution of automatic juicing machines, recognized expertise, 130 employees, 15% on R&D, 1 factory based in Valencia in Spain. Revenues around EUR 25 million in 2021, strong growth. That allows us to penetrate a new segment in the professional sector that is complementary with coffee machine. You see here a picture of a fast-food restaurant side-by-side with Zummo juice machine together with the WMF coffee machine. It is not made up. This is a true restaurant with a true business scenario. So that's what we see in this acquisition. We see complementarity of the customer base, both the ability to develop synergies, but also the ability to access to new consumers with these acquisitions. A lot of potential and a lot of prospects on this business. So this is the way our sales have developed in the last -- in the first 9 months of 2022, as you see, a very contrasted development with some parts in some places, going very well and some other parts are more difficult. I hand it back to you, Nathalie, to take us through the financial performance in the first 9 months.

Thank you, Stanislas. So if we look to the next slide. Sales we have documented a charge. Operating Result from Activity stands at EUR 319 million compared to EUR 528 million in 2021. I will walk you through the bridge between those 2 numbers in a second. In the third quarter, the group has delivered EUR 120 million of operating results. And at the end of the third quarter, the net financial debt stands at EUR 2.581 billion, and I will give you further explanation on the trends on the financial debt as well. So if we move to Slide 17 with the ORFA bridge and the explanations between what we have delivered last year in the first 9 months and what we have delivered this year. I will start with the -- on the left-hand side of the chart. Obviously, with a negative impact coming from lower volumes sold this year when compared to last year. For you to know, France and Germany would account for roughly 50% of this negative impact. So it's a significant weight on the profitability of the company. Moving to price mix. It is a very positive impact. It is coming from the price increases that we have been facing to the distribution to offset the increase of cost of goods sold that I would comment in a few seconds. And it is also coming with a positive mix impact. Actually, mix impact was stronger at the end of the first half, and it's not that strong in the third quarter. And once again, it is coming from the fact that our business in France, in Germany and also in Russia, who are 3 very profitable countries for the group, is lower than what we had delivered in the third quarter last year. So this has a negative impact on the overall price mix for the company. Then you see the increase of cost of goods sold over 9 months. So a significant increase. But again, we are compensating to a price and mix. Most of it is coming from a raw mats component that we're sourcing. We're also impacted negatively by the sea freight and compared to last year, [ under auction, ] we have made the decision to slow down production in our sites to help reducing the level of inventory. And we have a limited but given impact of energy costs that is actually quite small, it's EUR 15 million, but it's worth noting it. Growth drivers and selling and administrative expenses, they're very much in line with what we had delivered at the end of the first half, meaning that the third quarter expenses are really under control, very close to what they were in the third quarter last year, so very much in line with the ambition that we have to keep them both growth drivers and SG&A at the level of H2 in 2022. And last but not least, currencies, it's minus EUR 40 million on the operating profit. It's a combination of positive impact on sales as we have seen at the beginning of the presentation, plus a negative impact coming from the short position that we have as most overall purchases are denominated either in USD or in CNY. Moving to the net debt. Net financial debt stands at EUR 2.581 billion. In the third quarter, we have delivered a slightly positive free cash flow, which is good news when compared to cash flow consumption that we have witnessed for the first half of the year. We still have a fairly high level of debt. It's coming from the level of inventory that are linked in to the stock buildup that we have done in 2021. Remember that at that time, we were building inventories to make sure that we would have enough goods to supply to our customers because of the low quality of supply chain and some risk in supply of companies. And this is a decision that we had made at the late of 2020, was still valid in 2021, still valid at the beginning of the year. And as we have witnessed in the second quarter, a slowdown in demand, we have decided to reduce our purchasing, reduce our production. And this year has obviously an impact on the inventory, if you take, a few months or a few quarters to see this number going down. The other items that have impacted the net debt in this quarter are the acquisition of Zummo, as Stanislas just mentioned. And you may recall that we have also done a bit of share buybacks in the second quarter of this year. Still the financing structure of the Group remains very healthy, while balanced. I remind you that we do not have any covenants on our financial debt and that's a very, very significant part of the financing for the Group is made on a fixed rate. So that was it for the financial presentation. I'm moving to the next section, which is about the consolidation of the Group's business in the DACH region. So this is a plan we've been working on for more than 1 year. And the purpose of this plan is to make sure that we have the right organization and the right set-up to foster growth and to deliver more synergies in the DACH region. So DACH is the first European market for the Group, and it's actually the second largest market for the Group after China with the combination of Groupe SEB DACH and WMF. So we are implementing consolidation of the activities in this region with an organization that will constitute a unique market company for the Consumer business in DACH that will sell at the same time the SEB brand and the WMF brands. We will have also 1 strategic marketing entity also to deliver and to grow WMF product range and brand on a worldwide basis. So having in mind that WMF is the premium brand for Groupe SEB with both DACH. We will have also, in Germany, a single center for all support functions with the exception of accounting activities that will be transferred into our Shared Service Center in Warsaw. And last but not least, of course, the PCM business stays at headquarters in Germany. So Geislingen, which is the place where we are currently doing this call tonight, will become the headquarters of Groupe SEB in the DACH region. The plan is to implement the first measures of this consolidation in January 2024, and assigned to have all the discussions with the workers' council. The cost of implementation is assumed to be around EUR 35 million, including EUR 25 million that will be booked in 2022, not in the operating profit, but in the net result of the company.

Thank you, Nathalie. I will now share with you in a couple of slides the outlook for 2022. Maybe starting with understanding what went on in the summer, again, strong, continued performance in Professional Coffee in China, Russia/Ukraine, as expected. The other market is soft, but in line with the market performance despite a context that is described to be worse, and we have some bad news in the France and Germany. And this is what leads us to revise our guidance. Slightly on the first front, we were talking of a stable versus full year 2021, around EUR 8.059 billion. Now we see sales landing around EUR 7.9 billion. We mentioned an operating margin from activity between 8% and 8.5%. And the impact on the volume and on the geographical mix of France and Germany, in particular, leads us to revise down our estimate to 7% to 7.5% operating profit for the full year. That assumes Q4 sales trend, which is a mix, which would be in line with what we've lived through in the third quarter. We will step up the decrease in Group's operating expenses that were initiated in the third quarter and we see headwinds on raw materials, freight and foreign exchange of circa EUR 300 million, changing in content but unchanging the total sum versus what we saw at the end of July. Maybe as a word of conclusion, I would like to share with you, if you go to the next slide, a few considerations. The first one is 2022 is a perfect storm. We are up against huge 2021 comps. We grew sales last year by 16%, EUR 1 million ahead of our peers. Profit was EUR 830 million, first ever above EUR 800 million. We have ongoing headwinds, EUR 300 million this year and we had also already EUR 300 million last year. So we've absorbed, in the 2 years, close to EUR 600 million of headwind and a consequence or a side effect of those 2 first policy that we are facing a difficult situation in some key markets, which affect the balance of the Group's performance. That said, we also look at the promising nature of our market. In consumer, we see that our markets are very resilient globally despite very high levels last year. And that tells us that our markets are not so impacted or affected by economic crisis, inflation than other markets or other discretionary group market. That is great news on the consumer. On the professional market, we knew that when our customers re-open their doors, we would restart our activity of selling and servicing machines, and that is being confirmed quarter after quarter, and we see order books sooner than ever. And finally, I think we are very confident of the Group's business model strength. We know that we are -- we have a business that is balanced between Consumer and Professional, between mature markets and between emerging markets. We have a span of categories that sometimes affect us as we see in cooking in France and Germany and globally allow us to grow sustainably at or above market levels. So we are -- despite a difficult situation in 2022, we are very confident in the fact that different business of the Group is where it should be and that the strategy delivers long-term and midterm results. Thank you very much for your attention. I've taken 30 minutes. We have now time and room for your questions.

[Operator Instructions] The first question comes from the line of Charles-Louis Scotti of Kepler Cheuvreux.

Yes. Good evening, everyone. I'd ask 3 questions, if I may. The first one. I understand the cut in the guidance is mainly explained by lower revenues. Do you have a good visibility at this stage on your cost base for this year for the balance of the year? And what explains the range in terms of the profitability target for the full year? Second question. On headwind on profit. It seems that raw materials and head costs have peaked in 2022. I won't ask you for a margin guidance for next year. But could we reasonably expect those headwinds to become tailwinds to your profit going into 2023? And my third question on destocking. It seems to accelerate your top line drop this year. Do you have an idea on how far we are in the destocking process of your clients? And should we expect this thing to ease at some point in 2023?

Thank you very much. Nathalie will cover your first 2 questions, and I will take the third one. Nathalie?

Yes. Thank you for the question. So if you look at the cost base, and I will start with cost-driven administrative and commercial expenses. We have the very strong ambition not to grow those expenses in the second half when compared to 2021. But we still have the opportunity to adjust some of them, especially the growth target. That would depend clearly on the level of sales that we think we can deliver by the end of the year. As far as cost of goods sold are concerned, we have a good understanding of the cost base. So if you were to answer your question, what would explain the range in the guidance, that's mostly related to sales. We have made an adjustment of the guidance, saying that we plan to deliver a bit more than EUR 7.9 billion.

Around EUR 7.9 billion.

Around EUR 7.9 billion. But then the -- sorry, the range in the guidance depends on the -- where we will be around this EUR 7.9 billion. Then talking about the headwinds, tailwinds. You're right, we see some of the items that are impacting negatively the P&L that could ease a bit in 2023. That could be the case for the freight and for some of the raw materials. But you should also have in mind that we have a short position or exposure on USD and CNY and despite the fact that we hedged in the long term, we may have a negative impact from that as the -- as rate that we expect for '23 should not be as favorable as the one that we had in 2022. Just to make a long story short, we are just starting the budget process. We need a bit of time to work the numbers and see how things will go on in 2023. And we'll be able to give you a bit more details regarding 2023 once we have completed the budget process.

Thanks, Nathalie. I'll take the third question. The destocking has impacted us from this year. And we see we are getting closer to nominal inventory targets in our retailers. So I'll talk about [ front ] in a second. So I would expect that effect of destocking, retail destocking to be probably closer to the end than to the start. Obviously, this will depend -- this depends on the dynamics of the market. I mean it's clear that destocking is a factor of how much you buy in and how much you sell out. So when the markets are less dynamic, it takes a bit longer. But I would say that we are probably closer to the end than to the start. With maybe France that is slightly delayed, not because of a particular behavior but because of the fact that the market is dynamic than somewhere else. But I don't expect us, come Q1 next year to still talk about destocking as a major effect or an impactful effect on our business.

The next question comes to the line of Alessandro Cecchini of Equita.

The first one actually is on your performance in other countries, Europe of course, excluding Russia, Ukraine, it seems positive in the third quarter. So I would like to better understand this kind of trend and the drivers. And specifically also talking about this area, other countries, including, of course, Russia, Ukraine, if I am not wrong, there is a new regulation for bidding large and small appliances to be shipped to Russia starting from January 2023. So I would like to better understand your point on this, if it's correct. And secondly, my third question, sorry, it's about you're hedging in terms of raw material and components. I would like to better understand your current policy that you have for this.

Thank you, Alessandro. I will take the first 2 questions, and Nathalie will cover the third one. Well, starting with the second one. I'm very surprised by this ban of imports of this small equipment to Russia from January 1, we haven't talked about it. So I will further investigate and -- but I would be very surprised of that type of -- we are unaware of. On your first question on the other countries, it is very contrasted. And we have some countries, which performed well, some others that don't perform well. U.K. is going through a very nice year; Italy, Spain are good. We see Poland very good in the first 4, 5 months of the year, not good in the last 2 months. I think it's very contrasted and it's very, very performance. And this is why I didn't elaborate on any specific trend. What we see, maybe just to help you, is the bulk of the counter performance in Western Europe is driven by France and Germany. If I was picky, I would say Belgium as well, but usually, we see the same trend in Belgium as we see in France. In Central and Eastern European countries, we see, as usual, a stronger dynamic than in Western Europe, with inflation that hits a bit -- that is a bit higher than it is in Western Europe. But overall, I think -- I mean, when you look at it from some distance, you see that the other countries are probably going through a curve of maybe the dynamic than they are used to be doing. But at the same time, the cost are very high. I think Eastern Europe, submarkets, we were at 40% growth year-on-year last year in 2021. So it's difficult to draw the negative conclusions. But as you say, they are resilient. They are positive for several of them, and that just tells us that our industry is resilient at anything towards economic -- to negative economic situation, not the prices. Nathalie, you want to cover the point on hedging?

Yes. So we have a long-term strategy regarding hedging and that is valid for currencies and also for some of the raw materials that we supply for the group being aluminum, nickel and polypropylene. So those hedges are placed over time. And obviously, it is done -- a way to help our business and our markets have enough time to adjust their pricing and not see the P&L being immediately impacted by changes in recurring prices. So this policy applies to what I mentioned previously to the exposure we have on the USD, on the CNY, but also on our raw material purchases.

Okay. About the Russia, sorry, I know the news from large appliances. So that is -- I mean, it seems to be real. I was just guessing that if it's done for larger appliances, it's the same for small appliances. But this was just my guess, and I try to ask you on this point. And finally, if I may, on the energy cost, could you quantify how much of the headwind for energy costs, I mean your EUR 300 million of guidance?

Yes. So we have not included energy costs in our headwinds. And headwinds we would include the negative impact of ForEx. We're including the increase of sea freight and the increase of road maps and components. But for you to know, at the end of this first 9 months, it's a negative impact of EUR 15 million, 1-5 when compared to last year. So it's not nothing, but it's not the bulk of the cost increase that we're facing.

We are not energy-intensive activity. So it impacts us as everyone, but it's not a major part of our cost structure. Thank you, Alessandro, for your question on Russia. We just take -- and what is at stake is double-usage goods and others. We haven't heard of any specific. That said, I mean, we are now at the edge -- pack of functions. So we are extremely aware and careful of any decision that is made by the authority. So we will triple check and make sure that we do business in compliance with the regulators.

The next question comes from Mourad Lahmidi of BNP Paribas.

Yes. I have a couple of ones. So the first one is on the pricing and the environment that your industry is running quite a fairly high level of inventory. So I was wondering how is the pricing environment? I think that you were into a price hike campaign during Q3, how this campaign went? I mean do you plan to further increase prices down the road? This is my first question. The second question is on the ForEx impact. So if I'm not mistaken, the ForEx impact in Q3 was almost neutral at the EBIT level. So I'm just wondering how much of the delay we will see in your P&L in terms of capturing the move in the dollar and the Yuan since the beginning of the year?

I'll take the first one. Nathalie will take the second one. So if I can rephrase your question on the first, you have 2 questions, in fact. What is the relationship between the willingness to reduce inventory levels and the ability to maintain or put pricing through. And the third question is what would be your prospect in terms of further pricing. On the first one, I think it's -- you have a very valid question. We have passed through a price increase in September, in March, and we have the third one that is coming in [ next ] September. There is, of course, a balance to be found between pricing and activity management, volumes, market share, et cetera. We have passed through, and you see that in our bridge, most -- all the pricing we wanted to go through in the first 2 waves. We are now maybe a bit more prudence in including pricing through, to find a good balance between understanding and leasing to consumers' occupation, but at the same time, protecting our margins, which is essentially what we've been doing in the course of the 9 -- 12 months. Again, let's remember that we had EUR 300 million of headwinds last year. We take another EUR 300 million of headwinds this year. The pressure on that is so very substantial and pricing has been a substantial contributor to messaging that impact on our bottom line. Down the road, we see the balance between pricing and mix to move much more towards product mix in terms of adding value. We see pricing. We are probably close to the end of our pricing initiatives. I'm talking about pricing initiatives in mature markets. I mean we keep raising prices in a volatile currency markets. I mean Russia, Brazil, Turkey, those are very sensitive. They are very sensitive to currency evolution, and we have to follow that. So we expect major or more inroads on mix and pricing coming from mix in the following few months. Nathalie, why is foreign exchange impact the...

Hi, Mourad. So the impact is -- you're right, it's almost neutral in the third quarter. It's a combination of negative impact coming from USD and CNY so the same short exposure I have commented previously, and a positive impact coming from the RUB. We are benefiting from the appreciation of this currency and we have a long exposure in RUB, with the state -- in this country. And it is a mix of the 2 that makes it almost neutral in the third quarter.