De Longhi Spa

Good afternoon. This is the Coral Corps Conference Operator. Welcome and thank you for joining the De'Longhi Third Quarter 2020 Consolidated Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Massimo Garavaglia, Chief Executive Officer of De'Longhi. Please go ahead, sir.

Thank you, and good afternoon, ladies and gentlemen. Welcome to the De'Longhi Group's 9-month and Q3 2020 results conference call. With me today in Treviso for the call, I have Marco Cenci, Chief Strategy and Control Officer, Stefano Biella, CFO, Fabrizio Micheli, Director of M&A and Investor Relations, and Samuele Chiodetto, Investor Relations Manager. Before going into the presentation, in light of the still ongoing pandemic, Let me highlight that our group so far has never loosened the strict protection measures against the spread of the outbreak put in place in last spring. In particular, we are still using flexible working models in the office and in the factory in order to safeguard the health of our employees while guaranteeing the necessary workflow and production capacity utilization in face of the strong increase of demand of our product that we have experienced in the past months. Currently, all our plants around the world are working at full capacity. Let me start the presentation with a few slides as an introduction to share an overview of the consumer engagement activities of the main total launches of the last month. As we already highlighted in the past presentation, our group has decided to increase the AP level with the aim to consolidate our leadership in the main categories and to improve the customer experience both in the traditional digital platform. Not only we expanded the activities on the online space with the virtual events and live demonstration, but also we made supplementary effort to renew the focus on the physical store as part of our purpose store strategy across all geographies. All these activities have helped and sustained a strong vote both for the online and offline channels with healthy and lively dynamics across these quarters of this current year. From slide 9 to slide 11 of the presentation, you can see the main product launch in 2020 for each core categories of our group. These are the results of the investment in research and development and innovation, with a continuous improvement on quality, design, and usability, among others. Prima Donna Soul, that contains an innovative technology called Bean Adapt Technology, which is adapting the machine setting, the brewing, the grinding, according to the coffee bean you choose to use. For Kenwood, the Cooking Chef XL, connected with the Kenwood app and easy to use with the Cook Assist touchscreen. These are really very significant innovation I would like to stress it again, and I've been hitting the market in the past months. Now, let's take an overview to the quarter three results before opening the floor for the QA session. As usual, a reminder, I remind you that all figures presented for 2020 and 2019 are including the application of the IFRS 16 accounting standards. However, in order to provide a group's figures on a like-for-like basis with last year, we may now present also normalized values, which exclude the effect of some changes in the accounting treatment of financial contribution and discounts, which have been applied since quarter four of last year. Overall, the group has proven to be flexible and resilient to the challenges and difficult phases during these first months of the year. The results achieved allow us to be optimistic about the full year targets, even if the situation, the outside situation, remains complex and challenging on several fronts. Looking at the first nine months, our revenues were up by 30.9% at normalized level, boosted by this quarter that was up 26.8% following a strong first semester. All the major target categories were in positive territory in the nine months. Coffee achieved a strong growth in sales in the high teens, sustained by a double-digit expansion of the, not only of the fully automatic machine and manual machine, but also of the single-serve systems. The food category grew at high single-digit rate. Remarkable progress of the main products were achieved in the third quarter. The comfort segment maintained a double-digit trend while the home care products recorded a strong expansion in the past three months, driving the sales year-to-date into a positive territory. If we have a look at the geography development in the past nine months, there was an acceleration in all regions. Southeast Europe increased the pace of growth in the quarter, plus 35%, bringing the nine months to an increase of 20.3%, thus confirming A positive trend since the beginning of the year, sustained by the strong expansion of France and Germany, but all the main markets witnessed a positive trend in the last quarter. Notice Europe was up by 15% on an organic value, with the quarter that was up 31.6%. supported by most of the countries growing at a double-digit pace, except Czech Republic and Hungary. The upper region grew by weight in the low teens, sustained by a strong trend in the main countries such as the United States and Canada, China, Japan, Australia, and New Zealand. And May was the only region in a negative territory in the first nine months, but with positive signs of stabilization over the past months in several countries, and a quarter that closed with an increase of 7.7%. If we have a look at the margin on a normalized basis, In the nine months, the net industrial margin improved from 47.2% to 49.4%, so an increase of 2.2%. The adjusted BDA grew by 39.3% to $220 million, equal to 14.8% of the revenues. In the quarter, it was 17.4% of the revenues, up 430 basis points. Such expansion was boosted by a positive effect of volume, a positive price mix, in addition to controlled industrial costs. While on the contrary, the margins were partially impacted by higher duties due to the full impact of the US tariff increase and by higher AP spending. as I mentioned before, aim to support the brands in the main market and to support the future voters and consolidate our leadership. Finally, net income stood at $104 million, increasing by 44.7% with an adjusted income that was equal to $110.4 million up 46.3% and equalling up 7.4% of the total net revenues. Looking at the balance sheet, the net financial position of September 30 stood at 451 million euro, a marked improvement over the past nine months. The group realized a strong cash generation equal to 350 million euros in the past 12 months and 173.7 million euros in the first nine months of this year. After investment, industrial investment of 58.7 million euros. With regard to the net working capital, the value decreased by $165.7 million in the 12 months, mainly due to a lower level of inventory and efficient, very efficient management of the receivables and the strong acceleration of the purchases in the last quarter. Now, closing my introduction. Let me congratulate the group's employees on the tremendous job done in the first part of the year during this complex period for everybody who have shown resilience and adaptability to the changes, obtaining outstanding results. I would like to thank you all our trade partners for the support in running, in supporting us in this period. and all the consumers who have been favoring our product in these difficult times. Having said this, with these positive results behind us, we are confident that we will be able to close 2020 with an organic growth of revenues at a high single-digit rate and an adjusted EBITDA increase in both absolute value and other percentage of the revenues. Now, I would like to open the floor to Q&A. Thank you very much. Thank you for listening.

Excuse me. This is the Coral School Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one under touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press and one at this time. The first question is from Nicolo Storer with Kepler. Please go ahead.

Yes, good afternoon everyone and congratulations on the results. I have two questions for you. The first one relates to your new guidance. If my calculations are right, The high single-digit growth for the full year implies a four-quarter flattish or only very slightly positive. So considering that we are already 50% into Q4, are you witnessing a sharp deceleration in sales or what? is driving you towards such a cautious outlook. The second one is on your gross margin improvement. Before you mentioned lower industrial costs, should we assume that such lower industrial are just related to temporary raw material price decreases, or are you working on something which is more structural, or also is this improvement driven for large part by a better mix?

Thank you.

Thank you very much for the question. Now, on our guidance, as you probably remember, we have been providing a guidance that was showing mid to high growth. We have now performed better than we expected in this quarter. We took our usual approach to review the guidance. But if you allow me, we want to remain always prudent in the way in which we are operating considering the environment. As you know, we have seen news coming in about also recently that I'll be changing the old environment, but it remains very difficult with the lockdowns that are at the moment extended all over the world, all over Europe. Therefore, I think our organization has to continue to be very careful on the way in which we are progressing. I have to say that we could eventually project to close even higher than the guidance that we have been given but also we want to be cautious in the way in which we are approaching because we want to maintain a very high level of discipline in the way of doing business and maintaining our very strong financial discipline. That's why we provided the guidance on the year that is improving but always maintaining on remaining very cautious in the way in which we are operating. So this is a business sense of that. We are working always on having a medium-term view of our business, and I think this is a bit reflecting our approach. For what is concerning the gross margin, Of course, we are monitoring very carefully the evolution of the cost related to the raw material. We have a lot of activities there to make sure that we have a good control of that. We are also working very hard in our organization to find efficiencies to, of course, our volume and mixes. And therefore, you know, I can anticipate that these, I don't want to think about, you know, changes in the trend of industrial costs, but what I want to say is that we are putting in place a lot of measures to make sure that we are containing any pressure on the cost coming from the raw material or coming from the industrial side, especially for the next quarter and for the next year.

Thank you, very clear. Thank you. Thank you very much.

The next question is from Francesco Brilli with Intermonte. Please go ahead.

Hello, good evening, everyone, and thanks for taking my questions. And again, congratulations for the strong results you achieved. I have a few questions. The first one is on the very strong performance of third quarter. It seems higher than every other player in the market, and I was wondering which are the key drivers of this performance. I mean, indications from retailers and peers pointed to a positive market environment, but I was curious on what drove your overperformance, your really, really strong performance compared to the others. The second one is... a follow-up on the previous questions on the guidance. It seems the implied fourth quarter is implying a soft growth ahead, but just I was wondering if you can briefly comment on current trends and what you are seeing from the very first weeks after the announcement of new lockdowns and and this second wave of COVID impacts. In the past you proved to be very resilient in the first part of the year so I was curious if you are seeing similar trends also in this week. The third question is on the kitchen segment. It is performing really nicely compared to the past and Which are your expectations going forward also for next year? Do you think this is contingent to this specific period characterized by pandemic and lockdowns or it is fair to assume that it is a trend set to last for the next year, for the next couple of years? And the very last question is on your production level, if you are still at 100% of your

uh capacity thank you thank you very much for the question uh yeah maybe starting with the fire we're just taking note that's why there's no delay Starting with the first one, what are the key factors for our strong acceleration? Besides the fact overall that we could notice in this period very difficult, a very strong collaboration with our trade partners. I have to say that I think our trade partners, they are very comfortable to work with our range. I think I've shown that there is, you know, a very high rotation of our products in the store, both offline and offline, so we got a lot of support. And also in terms of online, we have seen the pure online supporting us a lot and favoring our portfolio. So overall, I would say, From the front of the customer, we continue to have a strong response. At the same time, I believe that our product mix played a role, and we trust that it will continue to play a role. We are investing heavily on products. I would like to remind that also during this difficult period of pandemic, Our team, our technical team, has continued to develop products in line with our plans. So the launch has been happening regularly and absolutely in line with our foreseen initial plans. So the mix of products definitely played a very important role, and we believe we'll continue to do so. a range of product that is meeting the expectation of the consumer and is covering all the segments where we are playing in our core categories, being the coffee, being the food, the food preparation, being the comfort. For the Q4, yeah, I also, as I mentioned answering the question before, We look at meeting our targets and we have been updating you all guys, increasing our guidance for the year and we set a target for the end of the year that we would like to meet possibly possibly to beat. Obviously, there are some different patterns of growth during the different quarters. We know that the last quarter is the strongest quarter. We want to beat it. We remain optimistic on the evolution. But the way in which we are thinking our business is a bit longer term, is a bit medium term, and I would like to refer to the important role that we have here as a target for our group in judging the evolution of the business. We remain positive on the trend for the next month. We remain positive because we have a new product launch coming. We remain positive because we have a strong set of promotional activities. We remain positive because we have important ATL and marketing activities hitting the ground. we remain positive because we have industrial investors to support our footprint. So all these things are making us confident that we want to sustain our growth. Obviously, as I mentioned, we will be in a position sooner in the next few months to have a conversation about our plan for the next three years and giving you guys already an update. Of course, we will have a bit better visibility for what is happening in the next months and update also for what we expect for 2021 and forward. Talking about the kitchen, the kitchen is doing, indeed, is doing very well. It's doing very well, of course. It's supported in a certain way, we can say, about the evolution and the impact of the consumer behavior coming from the COVID. But I would like to stress that we have been hitting the ground with a lot of new products. I mentioned just a few innovations that we have introduced with Cambru that are doing extremely, extremely well. And more has to come. And so I have to say that if we look at the global scenario, we are extremely active in the market with new product launches. We are listening a lot to our consumers. adjusting some of our products and spending money behind to support them. We will come back a bit more for the future evolution. I think we will be in a position in the next few months to get a better update. For what is concerning the production, here what I can say is that, as I mentioned before, our plants here have to be really Honest and proud, they've been doing really fantastic. All the workers in our plant have been doing a tremendous job in this difficult time to make sure that we have used all our capacity and we maintain our supply chain running despite all the difficulties. To support our growth, we have invested, again, this year, as I mentioned, already 58 million euros, but there are more investments that are coming in to expand our network both in China and in Romania. Yeah, I hope I answered to all your four questions.

Yes, thank you.

The next question is from Alessandro Cecchini with Equita. Please go ahead.

Hello everybody and thank you for taking my questions. The first one is about your clients, in particular online players. So just to understand, do you see that for this very important Christmas period are maybe putting more effort in leaving you and your competitors more spaces in the market? for kitchen products, coffee machines. So just to understand if this kind of very strong demand that you had in this period also is supporting clients to give you more space in online channels and so on for the very important Christmas present. This is my first question. My second question is about M&A, I know that you don't comment on M&A, but do you see more opportunities or less opportunities in the market? Also consider that you are increasing your capacity in terms of financing through a new bond. My third question is about E&P. If you could provide us the Delta EMP in the third quarter only in terms of the bridge. And finally, my last question is, okay, are you targeting, I mean, probably potentially to stay flat or slightly positive in the fourth quarter? Is your target to maintain the margins of last year in the fourth quarter of this year in the fourth quarter only.

Thank you. Thank you for the question.

I can comment now for the second question. I did, yeah, if you can pass me, guys, the information on that. On the four questions, the online players, especially in this period of Christmas and the different promotion days, we see a lot of support from them. We have established a dedicated team that are working on the major online account. We have a global team following the global online accounts. And I've seen a lot of collaboration and new activities that we are doing together with the online trader and a lot of support and trust in giving us space in the channel. At the same time, obviously, we are looking at all opportunities to expand our presence online. including our own e-commerce, because also we want to keep a dialogue with the end consumer through the Delonghi, Brown, and Campbell e-commerce website that are very well recognized because the brands are very well recognized and there is high awareness in this sector. Therefore, yeah, my expectation is that this support will continue also in this period and in the Christmas time. For what is concerning our financial position, indeed, and I mentioned it in several occasions in the past, in a moment of uncertainties and times that are very difficult, I think it's very good that the company, and in this case we are very disciplined on that, is managing well and retaining a lot of flexibility for the future. Future can be shorter, future can be medium term, but any opportunity that we present, we see the long way ready. And we want also to maintain a very strong, as we are having today, financial position to navigate and to sail through any difficult situation that will be in front of us, or to grab opportunities if they will be available tomorrow. It will make sense and will fit with our view of the business and will contribute, I said this several times, to create value on the medium-long term for the group. That's all. To me, the point here is a lot about keeping flexibility giving us the flexibility that a large group like us that has the ambition to maintain a strong position internationally needs. For what is concerning the IPE, yeah, indeed, in Q3 we have increased from 10.8% on revenues to 11.6% of revenues, so we believe it important. uh increase is a sign that we want to continue to invest and our brands are responding very well so we have seen that uh and we will continue to do so we want to build and consolidate our leadership on the medium long term and we want to continue to invest uh behind our our branch and all the brands the longer grown campbell they are responding with a high level of elasticity to our AP investment. And to answer also to your question on the margin, we will remain very disciplined. As I said before, we are very disciplined in managing our margin. But at the same time, I can already predict you that we want to invest significantly above. Think about something like $10 or $11 million AP above what we did in the last quarter, last year, to support well our brands, to support well and to prepare our brands for the challenges in 2021. So these AP investment, we consider it to be an investment that is paying off on the medium-long run, and we want to be very resilient on that, and we want to be very consistent in maintaining this level of investment, improving, if I may, And I hope that we will continue to do so also in the future, improving the quality of the investment that we are doing, always with better campaign, more dedicated campaign, more focused campaign on consumer groups that are interested in our products.

Okay, so maybe if I understood correctly, so you expect that you would like to maybe a better mix, better pricing to the last quarter maybe, and some tailwind from raw material to offset this kind of higher investments in EMPs, sort of your target that you have.

It's correct. Okay.

We will continue to work on the efficiency. What I want to say is We will remain very disciplined. We have a commercial policy also in terms of pricing setting that is very disciplined and we want to keep that. And obviously we are working with a strategy that is better mix of our products, product mix in our sales. And we will work obviously on the efficiency in the different area. But obviously, you know, we want to maintain versus last year, if I look at the last quarter, a growth in our volume. But at the same time, we want to invest in AP for the long run. So, you know, obviously, again, it will be an exercise that we require to manage well volume, top line, and margin, and we will continue to do so. We will continue to work on the efficiency. But we will want to remain very consistent in investing on AP. So on that side, I will not favor to obtain a slightly higher margin in a quarter, decreasing our AP investment. So that's something that we would like not to do. And I will insist on that also when we present our three years plan, because we believe that doing so and having brands that are responding to the AP will create a competitive advantage and will consolidate the leadership in our core category in the medium term. And that's what we are looking at as an important target, equally important than delivering the short-term quarterly targets.

Okay. Many, many thanks.

Thank you. Thank you for the question.

The next question is from Isacco Brandilla with Mediobanca. Please go ahead.

Hi, good evening, everybody. Thanks for taking my questions. I have three. The first one is a follow-up on this last question on margins for the final quarter of the year. You are now running with 200-bit EBITDA margin improvement in the nine months. On top of these additional AMP efforts in the fourth quarter, is there any other driver we should be aware of that can prevent you from continuing delivering these margin improvements? Second question is on networking capital. You are definitely setting new record levels, I would say, for the long-distance. Can you help us understanding whether these incidents of net working capital on space in the region of 10% should be seen as sustainable or whether we should expect the longer reverting to the average of the group in the region of 13% to 14% of sales? And the final question is more a strategic one. When we look at 2021, This year you have been recording exceptional growth, even improving quarter after quarter. Now, which are the levers you can try to activate to manage to deliver growth in 2021, even on such an exceptional year?

Yeah, maybe I'll start with the last one, then I need to add a small clarification on the first one. But for 2021, if you allow me, and I will take time with all of you guys, as I mentioned the other time, to present our view on the next three years with our MTP plan. What I can tell you, obviously, we want to continue to grow. And yeah, we are not yet expressing any guidance for the future, because I would like to elaborate around that. Obviously, our company is set to go, and if you allow me, the investment that I was mentioning before, they have exactly this intention. So there are certain things that can be considered exceptional here and there. The negative and the positive ultimately because I will never forget that we had really a big hit on the negative side in a certain period of this year. But we also see that the consumer and certain habits are changing. We believe that there will be certain things related to the home experience that will continue, will remain. We have seen that our products have been interesting for the consumer also before this exceptional time or however we want to call it has been happening. The company has been growing in the first quarter, had an important growth already till the first quarter, till the COVID came in. And then, okay, the things have been a bit, yeah, changing in term of pattern of growth. I make an evaluation on that saying we want to stick to looking at our growth and we want to make sure that we will continue to support it. We are in the right categories of this business. We have a leadership position in important categories where we are playing. We have a footprint now that is really international. We want to expand it. All these will be topics that I will illustrate when we are meeting next week. at the beginning of next year. I was happy to hear from you in the previous comment that you made that you have seen our company performing in this scenario very well. Again, I want to believe that there were several drivers that were really coming from our model and our strategy that had been contributed to that and that we would like to make sure that they will continue also in the future. For what is concerning the net working capital, the net working capital, yeah, now obviously we are optimizing it as we should always do. We come for information for last year in September where the working capital was around 18, more than 18% on net sales. So we drop now below the 10%. We have a long-term ratio for our working capital in the area of the 13%. We believe that this is healthy for our business. We are driving a business with a certain level of complexity. We are driving a business where we retain a lot of manufacturing because we believe we can make the difference in terms of quality, in terms of innovation, in terms of differentiation of the products. So I'm very careful, obviously, on managing the networking capital. I don't want to dramatize certain deviations if they are justified. We have a clear target on the long run that is in the area, as I mentioned, of the 13% if we look at a bit on a longer period of time. For what are concerning the drivers of the quarter four, I think the drivers for the quarter four, we trust will remain the same drivers that have been bringing us to growth in the first nine months. The quarter four is the most challenging for us, but we enter in the quarter very committed to deliver good results. We enter with a very disciplined approach both on delivering the bottom line results for the year end as of the financial target that we have in mind. So we will continue to maintain this discipline. We will continue to maintain discipline in term of pricing. We want to support our launches and make sure that they deliver for the quarter and hopefully we can capitalize also the beginning of next year and the course of next year. So I have to say that again, I want to maintain A prudent approach as we always did because we see a lot of uncertainty that are coming from the outside world because obviously, you know, there are lockdowns, there are different type of things happening. But overall, if I see the position that we have been reaching at the moment with the trade offline but also with the online in the last year, I remain confident that we are able to translate the drivers of the first nine months also in the last quarter of this year.

Okay, thank you, very clear, and again, congratulations for this set of results. Thank you very much. Thanks a lot.

The next question is from Andrea Bonfavit, Banca Acros. Please go ahead.

Hello, good afternoon to everybody. I do apologize because I joined the conference call quite late, so maybe these questions have already been made. Very quickly, in the light of this massive increase in sales in the third quarter, what do you think is already sold out or is it essentially selling and this is basically an anticipation of stocks for the Christmas season from your clients? Your thoughts about this.

Thank you very much.

No, thank you very much for the question, very valid question. Obviously, you know, we look into it, making also some, having our own opinion. You know, the way in which we run the business, we prepare for the big campaign, making sure that we are supplying our trade in the best possible way. And as I mentioned also before, I was very happy to see that our supply chain and operation responded very well to these critical moments, and we were able to provide to our customers the needs and the requirements that they had across all geographies. Now, I will not exclude that there was also some anticipation of certain orders to be well equipped. to the main season. It could have happened probably in September, so anticipate in certain order. The way in which I see it is looking a bit on the period. If I look at the longer period of time, I'm very happy with the development of the sales and for the data that we have that we are receiving from the trade, from our partners. We are very happy with the sell-out that we are seeing in our product. We are very happy with the evolution of our market share. So if I look at it in this way, I say, okay, there could have been also some anticipation. I would not exclude it, but I remain optimistic on the evolution of the quarter. It's obviously at a different absolute value, so we can discuss in a different way. It's a different absolute value, but on the long run, I can conclude that we will deliver Well, the guidance that we gave, we hope I mentioned before, I don't know if you were already in, that hopefully also we will beat it a bit. But, okay, I want to use a bit of prudence. But at the same time, I'm also very happy to see that the sellout is trending in the right direction for our products. Also, thank to the support that we are giving and the support that we are receiving from the main trade partners around the world.

That's very clear. Thank you very much.

Thanks to you for the question.

As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Luca Bacco, Collegiate Intel of Sao Paulo. Please go ahead.

Hi, good afternoon, everyone. Can you hear me? Yes. Okay, good. Two questions from my side. The first one, is on the financial policy you basically are asking market approximately 150 million euros through a new bond loan but on the other hand you are basically allocating more than 50 percent of this amount to the market, giving back to the market through dividend payment in the next coming weeks. And on the other hand, your liquidity at the end of September is more than 900 million euros. So I understand to be flexible given the high uncertainty period. But I was wondering what is basically the rationale of the new bond issuance? and the the second question is a follow-up on the on the training if you can provide us with an update on the first part of the um last quarter of this year just to better understand how the quarter is evolving thank you

Yeah, thank you for the question.

Yeah, I mean, I would like, you know, to position our choice to place private placement, something that the company has been done also in the past, to enforce even further our financial position in two forms. On one side, taking an opportunity, a very, very competitive condition. On the second side, I believe very important is a matter of prolongation and diversification of our sources to make sure that we retain in a longer period of time all the flexibility that we need. So we have extended the maturity And at the same time, with a very, very competitive solution. So this is, in essence, the reason why it's not something that we have been doing also in the past. In this case, we went even longer because the conditions were very favorable. But I believe that, again, always having this prudent approach on managing our business and diversification of the sources and a prolongation of our maturity is the right way to approach and to maintain a very high level of flexibility at a very, very low cost. For what is concerning the trading, maybe in a highlight, because we started, I mentioned, repeating a bit what I mentioned before, we entered in this quarter with an ambition to grow. Obviously, it's a challenging quarter because of the absolute number and the size of the quarter, but we want to continue to grow versus last year. But the main objective that we have is to deliver against the target that we had in mind, that I communicated, and that eventually we would like to beat. So talking about the year-end target that we had in mind. and we would like to do it being very disciplined both on the driving our results and driving our financial targets okay thank you thank you gentlemen there are no more questions ready started this time Thank you very much. Thank you all. And, yeah, we will talk at the next call. Thank you very much. Have a good evening.