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.