SEB SA (SK) Earnings Call Transcript & Summary

Hello, and welcome to the 9 Months 2024 Sales and Financial Data Call. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded [Operator Instructions]. I will now hand over to your host, Stanislas de Gramont, CEO; and Olivier Casanova, CFO, to begin today's call. Thank you.

Thank you very much, [ Casey ]. Good afternoon, everyone. Welcome to this third quarter call. I will take you through the presentation of the results with Olivier Casanova, I'm Stanislas de Gramont. And of course, we'll have a Q&A session afterwards. Starting with maybe the key figures at the end of September 2024. It's a strong quarter, we have delivered this quarter EUR 1.985 billion in sales, which is 4% growth like-for-like. That takes us to the nine months at 5.6% growth like-for-like versus 2023. The offer for the first nine months is at EUR 444 million, up 14% versus 2023 where we are slightly below last year in Q3 at EUR 200 million, minus 4%. If we look at the way our sales has been built between organic and acquisitions and the currencies, over nine months we have, as I said, 3.5% full reporting growth, of which 5.6% organic, 3% negative currency effect and a scope effect of 0.9% acquisitions. Whilst on the third quarter, which is the next slide, we actually post a pretty good level of growth considering a more demanding base on third quarter last year. In fact, our organic growth is plus 4%, we have a slightly lower currency effect of minus 2.1% and scope increases with the integration of Sofilac in our numbers at the end of September, leading to a 3.4% growth in reported sales over the quarter. When we look at the currency effects, we see now in the little box that, year-to-date, it is minus EUR 168 million and we see that, that effect tends to become smaller as the quarters go by EUR 75 million in Q1, EUR 52 million negative Q2 and EUR 41 million negative Q3. As I saw the currencies involved, we see the usual one, I would say, the Turkish lira, the Argentinian peso, the Ruble, the Egyptian pound, the Brazilian real, the Japanese yen, but we also see a negative currency effect on the Chinese yuan. And as you know, we have substantial sales in that currency. When we look at the way we have built our sales between professional and consumer, you'll remember that Professional is 10%, 12% of the business. Consumer is 85%, 90% of the business depending on the quarter. Now when we look at the nine months, we have a professional that is slightly negative versus a year ago, like-for-like, minus 1.6% posting plus 4.1% reported. When consumer is actually growing at 3.4%, 6.6% like-for-like. And the same consumer business is accelerating in the third quarter at 5.8% total growth, 8.1% like-for-like. That's becoming a very interesting number. Whilst we had a difficult quarter in the professional business at minus 12% reported minus [ 20% ], 22% like-for-like. Starting with the Professional business. I think the first reason why we have a lower third quarter is due to an exceptional third quarter last year. We had last year in Q3 an organic growth staggering 43% organic growth driven by large deals in China and the U.S. And as you know, the Professional Coffee Market is driven by large deals, but those, however, big and exciting they are, they also involve a certain volatility quarter-by-quarter. And we can say that the rollout of large deals have been more concentrated on the first half of the year that was initially anticipated, making it a bit bigger than it should have been and thus impacting negatively in the second half of the year. This base effect, in fact, will still be present in the fourth quarter. Now when we look at our professional coffee machines business, our core business, that is the one excluding large deals is growing and is growing above 5% in the third quarter. And that, I think, is reassuring on the health and the potential for growth of this Professional Coffee Market. And last as I mentioned, we have the first consolidation of Sofilac, Charvet and Lacanche [indiscernible] in the group accounts in this quarter. Turning on to the consumer. We see an accelerated growth in the third quarter in markets which are still favorable. Of course, the geopolitic and macroeconomic environment remains uncertain. I mean there's no -- it's in the news every day. But in that context, small domestic equipment markets are well oriented, well oriented driven by innovation, driven by training up by consumers in many markets, in many countries. And in fact, we have seen since the beginning of the year, a pretty robust growth in group sales, 6.6% like-for-like. That turns into an 8% organic growth in Q3. We have a loyalty program in Q3 this year in France that we didn't have last year. But excluding the loyalty program, we still post 7% growth in that quarter, and that has been driven by a strong acceleration in organic growth in Europe and North America. Europe and North America represents 2/3 of consumer sales and themselves, they grow by 13% in the third quarter of this year. And in fact, when we look at the sequence of sales year-on-year growth, quarter-on-quarter growth since Q3 2022, we noted in the second quarter of this year that the 5.9% growth of 2024 was against the 5.2% growth in Q2 '23, thus having no base effect anymore. And this 8.1% growth in Q3 2024 is, again, against a 5.5% organic growth in Q3 2023. So the ambition to recover sustainable growth in the consumer business is confirmed again and what is very healthy is that, that growth is coming from a solid base of innovation. We'll see that in a second. If we go to the evolution of sales by geographic areas, those graphs by region showed the first half performance year-on-year and the third quarter performance year-on-year. And in fact, we see happening what we are planning. But more importantly, I'll detail the performance by regions. It's interesting to see that we can have very pretty different or big variations of performance quarter-on-quarter or semester on third quarter, but the balanced presence of the group allows the group to keep delivering a strong number even if some geographies are not performing as well as they used to. And now if we look in the details of performance region by region, starting with EMEA, we see a strong acceleration in Western Europe. I think that's the big fact of the quarter. Western Europe grows by 13% in Q3. All major countries are growing, including, of course, France and Germany, notable performance in Southern Europe, in Spain, in Portugal and Italy. That growth is driven by impressive rollout of innovations in oil-less fryers, in versatile vacuum cleaners, in full auto coffee machines, in cookware that is posting a very strong performance. And we also have a positive effect with a good start of the big loyalty program. Outside of loyalty program, just to give you a reference, this 12.6% growth in Western Europe becomes 9%. So it's still a very, very solid number. In the other EMEA countries, the momentum is still very positive. Now you could argue that 30% growth S1 15% or 16% growth in Q3 is disappointing. Well, if you look at it on a reported basis, I think the numbers are 13-point-something down to 11%. So it's very consistent and in fact, it's more the phasing of the currency devaluation of the Turkish lira and the Egyptian pound last year that impacts positively or a bit artificially the organic growth in S1. Now so good growth in this area. It's been several years that this area goes from strength to strength. We really post double-digit growth in this part of the world. That growth is driven by strong management of key categories, innovation as in Western Europe, and that is, I think, a very, very solid pattern for the group. Moving on the Americas. On the Americas, we have a pretty good performance in North America, posting 13% growth in North America, driven by the U.S. with no listings with some restocking in some customers in the preparation of the high season, driven by all brands, yet in a market that is lackluster, to say the least. At the same time, we see a continued expansion of our presence in Mexico. And despite the recent peso depreciation, we see Mexico posting regularly some strong growth patterns. Bit different picture in South America. We've been talking the last fourth quarter that South America sales were helped substantially by the France sales, helped by the El Nino Phenomenon. Well, that is kind of coming to an end, we are comping now with very high numbers in Q3 last year. And I think that weighs on that number. Yet in Colombia, we see continuous gains in market share across all categories, whilst Brazil is facing a more difficult environment, one would say as usual and the Brazilian real had a difficult summer. So that leads to some price increases to offset currency valuations in that region. Moving on to Asia. So Asia post flat like-for-like sales, minus 0.3%, split between minus 1.9% like-for-like in China and plus 3.5% in other Asian countries. On China, the story is a bit of the same as it was in the first semester. We have a small domestic equipment market that is muted. We continue to gain share across key categories, both online and off-line. We have a steady pace of product launches in woks, in thermal mugs, in rice cookers, in kettles, and whilst we were expecting some kind of slight recovery in the second half of the year, well, [indiscernible], we haven't seen it. We are not [indiscernible] it and we expect now broadly stable organic sales over the year. Now the interesting thing is that despite China being [indiscernible] we managed to have over 5% sales growth year-to-date at group level. Some good news in other Asian countries where we see a sequential improvement in sales. Yes, we have a favorable base effect in Japan with a rather weak Q3 last year. But we see growth in Cookware in South Korea, that is not totally offsetting the decline in SDA, but still is bringing positive contribution and we have very solid performance in Australia and Vietnam. Next one in product offerings, new categories and our retail network in Vietnam. When we move into the evolution of the performance by categories, I think it's pretty notable that most of our categories grow between 6% and 12%. That is very, very strong. With a special mention, of course, of Home [indiscernible] care, which is leading the pack, but also Home Comfort, but also beverages, driven by all categories. The food preparation is back to close to 10% performance, Linen care that we often describe as a category with no growth or, in fact, is a very healthy 8% growth. So we see that all our categories are improving driven by a strong flow of new innovative products that are feeding that growth. One comment on electrical cooking. Electrical cooking is made of two parts, a positive part in, call it, the Western world and the negative part in China, where it weighs a lot in the super portfolio. So that number looks contained, but in fact, it hides a stronger performance in the developed or in the historical markets and the lower performance in China. For reference, in Cookware, we've put the Cookware performance, excluding the loyalty program, which still is very, very strong. Right. I think that's it for the sales. I will, of course, take your questions, but Olivier can take us through the financial -- in terms of -- [indiscernible] of those good sales numbers.

Okay. Thank you, Stanislas. So moving on to the results. So in Q3, as you can see, we delivered EUR 200 million of ORfA which is marginally below last year. This is mostly reflecting the fact that we had a very strong profit contribution from Professional last year, reflecting an exceptional level of activity in Professional. As Stan explained, we had, in fact, two large contracts, which contributed to the exceptional sales level in Q3 last year. When you look at consumer, the margins, in fact, are holding up very well. They are marginally above last year. They reflect, of course, the favorable volume effect. We saw the acceleration of the growth in consumer, especially in Europe. It's still reflecting the reduction in cost of sales compared to last year. Of course, it's a carryover from 2023. It's also reflecting a strong absorption of fixed cost effect resulting from the strong let's say volume growth this year. And then we have also a dynamic sales activation. We are investing, of course, to support the sales growth and reinvesting part of the cost reduction, which is a natural phenomenon in the industry. To summarize on nine months, we are delivering EUR 444 million of ORfA, which is up 14.2% on last year. And the margin, as you can see, is a healthy 80 basis point above last year. Moving on to conclude our net financial debt. It stands at EUR 2.480 billion this quarter, which is comparing to, in fact, EUR 2.4 billion in June. As you know, June and September are high points in terms of net debt, reflecting in large part the seasonal activity of the business and therefore, the buildup in inventory ahead of the strong Q4. It's also reflecting the continuation of the effect from the Red Sea crisis which is leading, as I mentioned, at the end of June to an increase in the stock in transit. We had an increase of two to three weeks of the shipping time from Asia, and this is reflecting in a slightly higher inventory. We're obviously hoping for a faster resolution of the crisis, but it looks like this effect, unfortunately, will continue probably beyond the year-end. The net debt level, of course, reflects also the cash flow generation partly used, of course, in share buybacks, as we mentioned, and in the two acquisitions done earlier this year, the Sofilac acquisition in Professional and an important partnership in Saudi Arabia. We're, of course, expecting as usual, a strong cash flow generation in Q4, which will help to reduce debt level to the desired level. To conclude on the outlook for 2024, no surprise. We are maintaining outlook for the year, which means we are still expecting an organic sales growth of around 5% and an operating margin up on last year and close to 10%.

Thank you very much, Olivier. Now I think we are ready to take your questions on this short presentation.

[Operator Instructions] Our first question comes from the line of [indiscernible] from BNP Paribas.

Three questions from my side, please. First of all, regarding China. I mean, if you can comment on what did you see in the last few weeks maybe about the Golden Week? And have you started to see some positive impact from the stimulus plan on the consumer behaviors? That's my first question. The second question is on Professional. So well, the quarter was weak, 22% down like-for-like. I guess you mentioned the comps will start to be easier by Q1 next year. So that means still [ tough ] in Q4. So how do we need to think about your underlying growth for Professional in 2025? And the last question is regarding the budget reform in France. Do you expect any impact in terms of tax rate for you, please?

I will take the #1 question, Olivier will take the #2 and #3 and then we'll comment and I will answer a fourth question, which is having 13% growth in 2/3 of our consumer sales is pretty remarkable. And I think it's probably something that you should think of and look at. But anyway, that was my [ Joker ] question. Now on China, we see that the market is muted. We've heard and we've seen that [ agitation ] on the stimulus plans and we haven't, unfortunately, seen any sign of recovery or improvement in the third quarter or in the last month or in the Golden Week. I think the situation is pretty stable on the low side, on the muted side. And we don't see and haven't seen any impact at this stage of any measures. Olivier, Professional?

So Professional, as you said, we have obviously an impact from those two large contracts, which will continue in Q4 and in the early part of next year. What is important is that the underlying business, which is reflecting, in fact, the healthy potential of the Professional Coffee Market remains there. Hence, our growth of [ above 5% ] on, let's say, the recurring business beyond those large contracts. So I think it's too early to comment on what will be the full year or next year for Professional. But I think you can expect, of course, this effect of a high comps base to remain at least in the early part of next year. But we remain very bullish about the prospects for the coffee market as a whole. We know there are strong fundamentals in China, of course, in large part, but also in the U.S. is driven, as you know, by increasing volumes, increasing consumption and adoption of coffee around the world, but it's also driven by the switch that we see to a full auto coffee machine. And this is where, of course, the strong position and the strong leading market share of Charvet and WMF is playing to the full extent. So we remain very positive about the long-term and midterm prospects of this business. Regarding the budget in France, as you've seen our, let's say, tax rate, at the group level, is hovering between 21% and 24%. We expect some impact but moderate at group level from the tax reform, which is being discussed at the moment. And this will lead to a tax rate probably towards the high end of the historic range.

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

The first one is actually on very good performance in Western Europe and in the U.S., very, very good. So I would like to -- what is your feedback by business environment, current business environment of course, ahead of the Christmas period? So your current feeling about these two geographies after a very, very solid third quarter. This is my first question. My second question is instead about logistic costs. Of course, you are having some headwinds at the moment. If you could quantify it, probably it could be very interesting, but apart from this, how do you see the group for entering, I would say, 2025? So just to understand how are you dealing with this issue and how you would like I mean to manage the cost for the next year? And finally, about the net working capital on sales. If I are not wrong. So last year, you had 14.6% sales about commercial working capital. So probably this year will be higher. So if you could elaborate a little bit more on this could be helpful.

Thanks, Alessandro. I will take the first one, and Olivier will take the other two. I think for Western Europe and U.S., we have an environment that is -- the global consumption environment is not extremely bouyant or moving. I mean we see that Germany is in or around recession. We see that in France, the growth, lackluster. We have a pretty solid U.S. economy. And we see that our markets are performing better than the economy, and we see that we are performing better -- substantially better than the market. So I think it's -- there are two elements to that comment. The first one, the market react to innovation and to trading up. And I think this is what's happening. The categories I'm quoting in a fryers, in versatiles, in full auto, in cookware, our big categories, they're categories where consumers have a strong appetite for innovation and trading up. And I think we are playing a strong role in developing our sales or even this category. That's the first comment. The second comment is that we've been telling you and sharing with you in the two or three years, the fact that we have a strong and continuous innovation pipeline. And I think these results are a reflection of the fact that past those inflation, hyperinflation years and big [ categorization ] of 2022 and the first half of 2023. We are back on the historical path and trend of the group, which is to be able to grow even in mature markets through strong and great category management and innovation, our base business. Now U.S. is more skewed towards cookware, but in cookware in the U.S., all our brands are growing Orkla, Imusa, [indiscernible] were growing in all sales channels. And again, it is also through innovations and trading up that this growth is happening. You may have in the U.S. some elements of couple of growth points of inventory management by customers buying forward to anticipate logistics issues or challenges, the harvesting, the sea freight thing. So I think it's a good transition. But the North America number at plus 13% is very solid, and the bulk of it is seller-driven. Olivier?

Okay. So on logistics costs, as we discussed on calls, we've been impacted by the tensions that we've seen in the last few months on shipping costs. That impact, however, has been, let's say, minimized. Certainly, it's a fraction of what it was maybe at the height of the COVID crisis. And the reason why it's been limited is we have been able to use our, let's say, yearly contract to minimize the impact of spot rates on our average rates. It has impacted us, however, a little bit in Q3. It will continue for, let's say, a few more months. It's difficult to tell right now what will be the shipping cost in 2025. It depends in part 2 on whether there will be a resolution of the Red Sea crisis or not. So your guess is as good as mine. And on top of that, the timing of negotiation of this contract is more, let's say, early 2025 than today. So I think it's a little bit early to predict. But let's say, if I were to make a guess, I would say that I do not expect a very large decrease in the shipping cost next year. This was not going to be a very strong, let's say, tailwind. In terms of net working capital on sales, I think as we said consistently, we think our normalized level is somewhere between 15% and 17%. So last year at 14.6%, end of December, we were slightly below, let's say, the normalized level. Of course, as I said, we expect to continue to suffer from the Red Sea crisis and therefore, to have higher stock in transit even at the end of the year. This will be even, let's say, more so because Chinese New Year is earlier than last year than this year in 2025. And so we expect overall to be in the upper part of the 15% to 17% range that we have mentioned consistently.

So just a point on logistics, basically, if you don't see a decrease, of course, this base case we could imagine next year to have some headwinds because, of course, your contracts that you took at the beginning of this year, of course, there will be ended or you have a very longer period of contracts to cover the vast majority already of 2025. So just if you can elaborated this [indiscernible].

You're getting into a level of precision, which I would love to be able to give you at this stage. But no, what I'm saying is that, yes, shipping costs have been higher for a few months now than last year and certainly, than our expectations. However, as you know, they have been coming down. Now they're not coming down very fast, but they have been coming down. So net-net, as I'm saying, I do not expect a very strong either increase or decrease in the average shipping cost for the year. That's my guess at this point of the year. But again, it's a bit of a blind let's say a guess because we haven't really started the negotiation with the [indiscernible] and the shipping lines at this stage. So more to come probably when we announce our full year results, and we'll probably be able to be a little bit more specific. But the point is, don't expect a massive, let's say, tailwind from shipping costs decrease next year, but don't expect also a massive headwind.

Last point. So basically -- so if you see any Professional that is, I mean, so still facing tough comparison in LatAm probably, I mean, the El Nino situation still there, I presume that your guidance, you are still very -- I mean, positive on Western Europe and North America to be still ranging of growth for the fourth quarter. Is that right, this [ qualitative ] comment?

Yes, very much so. And I would say if you refer back to our Capital Market Day a year ago in December, we said we have three engines. We have our core business in Europe and the Americas which is 2/3 of our consumer sales. We have China, which is a quarter of the total group and 1/3 of the consumer sales, and we have Professional, which is 10%, 12%. And we said we expect the group to grow over 5% organically using those three growth engines. And in fact, if you refer back to the last 4 or 5 quarters, that's what we do. And we do it every quarter with pretty different levers. We know that -- and it's not that we choose to slow down the Professional or China. But the fact to have a balanced portfolio of activities and geographies allows us to focus our investments, to focus our efforts where we think there is good opportunities and to absorb the negative impact where we see that we have some base effects or some cycle effect, which is the case in the Professional business. So we were not surprised by this third quarter performance than one could argue that this is a bit more than expected. This is a bit less than expected, but since the beginning of the year, we knew that it would be more balanced between Professional and consumer than it was in the first half of the year. We knew that it would be more balanced between emerging markets and mature markets on the consumer side. So on our side, we are not really surprised of that evolution. Yes, the numbers themselves sometimes are a bit more buoyant than we would have expected or a bit less positive than we would have expected or a bit more negative, put it the way you want. But I think keeping the guidance at 5% plus organic is the essence of what we've been telling you in the Capital Market Day last year, and I think we are on track to do that.