De Longhi Spa

Good afternoon, this is the Coruscall conference operator. Welcome and thank you for joining the DELONGi first quarter 2022 consolidated results. 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, CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group's Q1-22 Resorts Conference Call. Today we may have Marco Cenci, Chief Strategy and Control Officer, Stefano Biella, CFO, Fabrizio Micheli, Director of M&A and Investor Relations, and Samuele Chiodetto, Investor Relator. Over the last two years, we have seen a significant increase in consumption in the small domestic appliance business. thanks to the change in consumer habits and purchasing choices and the consolidation of some medium-term trends already in place in the market. In the first quarter of 2022, despite the difficult comparison with the prior year, we saw revenues growing at almost 60% like for like, where the group was able to continue its expansion path thanks to the driving force of the coffee business. I would take this opportunity to emphasize that the growing cost inflation dynamics and complexity that have affected production and distribution in the last 12 months has required an extraordinary effort from all our teams. The company, with the aim to offset the impact in absolute value of these headwinds, has implemented effective mitigation actions such as price increase strategy already put in place last year and carried over on this here. The current geopolitical scenario and the continuation of the conflict in Ukraine bring some concern about possible developments on a global scale, which we hope will find a quick and peaceful resolution as soon as possible. Before going into more details, let me remind you that the Groups for a Quarter results include a change of perimeter, as the scope of consolidation has included also the Swiss group Eversys whose full control had been acquired in Q2 2021. The consolidated revenues for the first three months of 2022 were up by 8.4% with a solid expansion on a constant perimeter of approximately 5.5%. Looking at the market on a reported basis, we observe south-western Europe grew by 3.9% in the period thanks to the expansion of Germany at the double-digit growth rate and the high single-digit development of the Iberian Peninsula and Austria. The area of north-eastern Europe recorded a negative performance both due to the difficult geopolitical situation that affected consumer sentiment in some countries of the area and due to the particular challenging basis of comparison compared to last year. Just to give an example, the UK market last year was up 93% Q1. The Maya area, Middle East and Africa, ended the period with a double digit performance thanks to the expansion of the main market in the region. The American area has further expanded its size from 15% to 18% in Q1, achieving a significant double-digit growth thanks to the development of the coffee business and the anticipation of sales related to portable air conditioner. Finally, the other Pacific region was up by 28%, driven by a strong growth in China and Hong Kong area, as well as a significant expansion of the main markets in the area of Australia, New Zealand, Japan, and Korea. As for the evolution of the product category, in the first quarter of 2022, the double-digit growth of the coffee sector drove the expansion of the group, together with a significant increase in comfort and a decrease in food preparation. Specifically, the coffee sector confirmed the solid growth trend highlighted in the recent years with a strong boost from the business both in the main countries of the Euro area and in the US and Asia. Core products grew at a double-digit rate despite the high level of turnover achieved in the same period of 2021, supported also by the launches of new products and the success of the global communication campaign that sees Bread Pit as an ambassador of the Delonghi brand. More heterogeneous scenario for the food preparation, which suffer from the very challenging comparison compared to 2021. In this context, some categories such as food processor or deep fryers maintain a positive trend, but kitchen machine and blender show a reduction compared to the level reached last year. In the quarter, The contribution of the comfort category was not worthy thanks to the extraordinary performance of the U.S. market boosted by the advance of the sales of the mobile air conditioner for the summer season. Finally, home care, meaning cleaning and ironing, was partially in the negative territory during the period. Looking now at the evolution of the operating margin in the first quarter, we can observe the following. The net industrial margin equaled to $375.6 million and stood at 51.1% of revenues compared to 52.3% in Q1 2021. In particular, in the quarter, the impacts of cost inflation of raw material and transport costs were only partially upset by the positive effect of the price mix, but at constant exchange rate, the margin would have been slightly up versus last year. The adjusted BDA amounted to €100 million, equal to 13.6% of the revenues compared to 18.9% in 2021. At a constant FX, the margin would be 15.1%. The reduction of the margin was due to higher investment in communication and media which accounted at 12.1% in the new perimeter compared to 10.5% of the previous year, larger OPEX and the negative exchange rate effect equal to around 8.4 million euros. As to the balance sheet, the net financial position at the end of March 2022 stood at 274.6 million, decreasing from year end 2021 due to the investment higher versus last year and an increase in inventory level. Over the last 12 months, the free cash flow before dividends and acquisition was 170 million euro, thanks to a strong cash flow from operating activity. And in more details, the first quarter capex amounted to 56.8 million, an increase of 36.9 million versus last year, and that includes 21 million euro related to the acquisition of the new plant in Romania. Moreover, the ratio of operating working capital and revenue stood at 10.2% compared to 9.6% at the end of March 2021. Now, closing my introduction, let me say that we are rather satisfied by the positive trends in Q1, and we still expect demand of our core category in this year and the near future to remain well above the pre-pandemic levels. Nevertheless, the recent geopolitical developments, together with the challenges arising in the supply chain, are making the microeconomic context more volatile for sure in the coming months. Albeit in a scenario of evolving uncertainty, the first month's results and the feedback received from the markets support us in confirming the guidance forecasting organic revenues of 2022 in line with 2021 with an expected adjusted EBITDA at around €450 million. Now we can open the floor to the QA. Thank you very much.

Excuse me, this is the Coruscant conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions.

The first question is from Isacco Brambilla from Mediobanca.

Please go ahead.

Hi, good afternoon everybody. Three questions on my side. The first one is on Fuliara guidance. It is first to assume that this guidance is basically made up of two components, still positive trends in coffee makers and a slightly declining trend in the other division of the group, namely food preparation and comfort. Second question is on networking capital. Can you give us some more color on the inventory build-up? What is it referring to mainly? I mean finished products, semi-finished or raw materials components. And the last question is on your indication on inflation headwinds. If I recall correctly, in March, you were indicated 100 million euros additional cost from raw materials and transportation costs. How has the situation evolved since then? Is this guidance still a reliable indication now?

Thanks.

Thank you, Zacco, for the question. Indeed, we see a year that is evolving in line with growth in the coffee business in all the different segments of the coffee where we are operating and we still see an opportunity to continue to grow also thanks to the investment that we have been made and we are making with our global campaign that is really providing support and is really very successful in many areas. At the same time we see the opportunity to grow in the area thanks to the new launches of products that are placed in the market in the past few months and that enter now in full distribution both in the fully automatic machine and also the new Specialista machine to complete the Specialista range in the manual coffee maker with a clear differentiation and innovation for the markets. And at the same time, we see the market outside of Europe, where the penetration of espresso has been historically lower, that are starting to react very well to our campaigns and to our initiatives, namely US and Asia. We, as I mentioned in my speech, we see softening on the food preparation side. also in light of a very tough comparison with the first two quarters of the of the prior year and we are following very monitoring very well very closely the evolution on that on that side while at the same time we i have to say that this softness is a bit different in different geographies and therefore would be our work that we would do on our side to make sure that we are activating the right initiative to support it in the course of the year. For what is concerning the North Networking Capital, we have deliberately decided to build a stock very prudently to support our sales in a scenario of the past month, also at the end of the past year, of difficult situation of the supply chain, including on some key components of raw material. So the composition of the stock increase that we have seen in the first quarter is made both on core finished products and at the same time also by additional components and raw materials. For what is concerning the inflation headwinds, correctly you mentioned that we have indicated the 100 million at the beginning of the year and also mentioned that we have been taking the action in term of pricing and in term of mix to offset this increase. Obviously, we are monitoring, we are still, we have been taking consideration, we have been discounted in our forecast this amount, but we are monitoring very close the situation. If there will be on the inflation side additional element that will arise, we are in a position, we have room to cover it again with adjustment on our policy. Now I have to say that if we look forward from now to the end of the year, the magnitude of the impact that eventually will be coming from this inflationary pressure is not for sure much less significant than what it was foreseen in the initial 100 million that we have estimated.

The next question is from Alessandro Cecchini from Equita.

Please go ahead.

Hello, everybody, and thank you for taking my questions. The first one is about the coffee trends in terms of volumes. I would like to better understand what kind of trends you expect for this quarter, for the following one. So if you still see... on a global level positive volumes in the coffee business. And my second question is what is your feeling about the trade, the level of stock at the trade level in this moment in your main markets? And then my third question, it's about cost inflation. So you saw that there are not big differences in terms of 100 million. So I would like to better understand what kind of flexibility you have in EMP if, I would say, inflation is higher than expected or if volumes are higher. lower than expected. So just to better understand on this. And finally, my last question is about capital allocation. I would like to actually to better understand, so you have a very strong balance sheet. Frankly speaking, excluding liquidity, Of the stock, I don't understand why you don't buy back shares in the market, but if you could elaborate a little bit more on this point and if you could underline what are the reasons why you are not activating such a lever that you could have considering your balance sheet. Thank you.

Thank you, Alessandro, for the question. On the coffee trend, I can refer to the fact that, as you know, we have seen a secular, structural, positive trend of the coffee for many, many years, and that has also brought the Longhi to become a leader in the market, in all the markets, and a global leader in coffee, in coffee espresso around the world. We have seen this trend accelerating in the past couple of years and we remain very confident that we see a continuation of this secular trend in this year and in the medium term. Now obviously there will be some regions that could be eventually affected by the whole economic environment. But we see other regions that are growing faster, and namely, as I mentioned before, the regions that are less penetrated, I'm talking about U.S., I'm talking about all Asia, including China, where our campaign is doing very well, despite the current situation in some parts of China, and in all the Middle East. So these are the reasons why, thanks to our position in terms of product portfolio, our position in terms of communication on the brand, we believe that there is a great opportunity for us to continue on the medium term to grow in the coffee area. For what is concerning the stock, we are observing a bit in line with what we see in the categories. A trend in coffee that substantially compared to the prior year remains at the same level, substantially, not significant difference by the retailer here. While we see also due to the softness of the food preparation that there is an higher stock in the retailer for this type of products. For what is concerning the inflation and the headwinds, as I mentioned, we factored in the 100 million that we have indicated previously and also we explained our plan of mix and price increase to cover that and now we are evaluating if there are deviations to these initial numbers that we have forecasted. At the moment we are not in a position to define clearly if there will be an additional number. What I can say is that for sure the magnitude of that will be manageable, will be not of the same size of what we have initially forecasted, so this 100 million initially, and therefore very manageable with the action that we are taking on our side. For the capital allocation, yeah, we have different options open. As you know, indeed, we have a very strong balance sheet. You know that in our MPP, we have a plan that we are confirming year by year to increase our investments. We did it also in this quarter to strengthen our network. At the same time, we have a clear dividend policy with the payout ratio that we have indicated at 40%. And we remain also open observing the market if there are possibility as we did recently with capital brands and with Eversys to conclude eventually interesting acquisition. Today the buyback is not an option that we are considering. But again, it's always an option that is on the table that we will evaluate. It will not be for the very short term.

Okay, thank you. For any further questions, please press star and 1 on your telephone. The next question is from Francesco Brilli from Intermonte. Please go ahead.

Yes, good evening. Thanks for taking my question. Just a couple of quick ones from my side. The first one is if you can provide us with some additional color on the split of the growth in terms of price mix and volumes excluding effects on the top line and what we should expect for the contribution of price mix in the in the following quarters so going forward is going to uh to to increase uh uh since since you are implementing additional price uh price increases in the market and the second one is just just a quick one on the geographical split i still see around the six percent from from russia and ukraine Just to check with you, are you still able to sell products over there and to send products over there, or is it just the volumes from the beginning of the year when the market was before the crisis?

Thank you.

Thank you, Professor, for the question. Our strategy to cover the inflationary pressures for this $100 million is obviously price mix, similarly to what we did last year. Just remind that we have been doing last year where we covered around the same amount, around $100 million, with a price mix effect of $100 million. three percent so we got to 121 million last year for that and the price increase that we had last year that has been carried over from this year it's around 1.5 percent at the moment we have taken measure with the price increase at the beginning of of this year to have the full cover of the 100 million additional cost that we have seen. So the price increase that we have implemented in Q1, actually starting in February, has been of around 20%, obviously modeled in a different way between the different products and category. So with that, plus the mix of our products, especially the coffee cider, We are confident that we are in a position to cover the full amount of inflationary that we have to face. For what is concerning Russia, our focus has been to reduce our exposure and our receivable. And we have been very successful in the first months after the crisis emerged, basically starting from around the $5 billion that we had in receivable when the crisis started. We reduced it now to, at the end of March, $1.8 billion. And I have to say that today, as I speak, this amount has been reduced again to 500 million euro. What is happening is that we have decided, as you know, and we have communicated, we have suspended all the shipments to the Russian market, and we have put on hold, suspended all the investment in communication in the country. Therefore, we are at the moment executing the essential activity to reduce our stock that we still have in Russia. As I speak, we talk about something like 2.8 billion, 2.7 billion rubles. And obviously, we are continuing to sell in the area. For instance, in Kazakhstan and the other area of the CIS country where we had already our business, where we already have our active distribution, where we already have a good presence, we are continuing to sell in this part of the region. Now, for what is concerning Russia and Ukraine, if I may conclude, our first priority is really to take care of the people. And as you know, we have been doing that in Ukraine, where we suspended all the activity offices. We were forced to do it. We suspended... all the sales, but I'm very glad to say that all our people have been accommodated in other part of the group. And therefore, you know, that has been the first focus from our team to make sure that there was not any impact on the people. Ukraine, we are in a wait and see position, obviously, depending on what it will evolve in the course of the next months.

The next question is from Nicola Storer from Kepler.

Please go ahead.

Good afternoon everyone. I want to return for a second on on working capital dynamics because other than seeing an increase in inventories, we've also seen some 250 million increase year on year in payables. So if you can comment on what's behind that and on expectations for the full year. What should we expect as working capital on sales ratio? And related to that, of course, should we expect this extra inventory to remain throughout the year? Thank you.

Yes, thank you, Nicola, for the question. Indeed, the working capital for this first quarter in terms of net variance has been impacted by the increase in the inventory. For what is concerning the payables, but also the receivables, as you know, we have been very active also in the past year. We continue to do that to reduce the payment terms where possible, for sure the DSO from our customer, and also to manage better the DPO from our suppliers. So this has been very strategic. We have initiated already a while ago, and we are in these two parts of the working capital continuing with the same approach, and therefore we expect a revolution in line with this in the next month. So what is on inventory on the other side? We have been deliberately increasing the inventory at the end of last year and this first part of the year really to offset disruption on the supply chain and difficulties and shortages on the critical components. But we believe that seeing a normalization, we started already to see a normalization in the supply of critical raw materials. we believe that we can bring down the inventory to a more normal level. Therefore, on the operating working capital, we target, as I mentioned already last time, to be below the 10% at the end of the year. Our expectation is that there will be, at the end of the year, a working capital, networking capital before the investment that could potentially have an impact altogether of around 100 million, starting from, you know, the end of last year where we landed at a 6% working capital on sales.

Perfect. Thank you.

Once again, if you wish to ask a question, please press star and 1 on your telephone.

The next question is from Luca Bacoccoli from Intesa San Paolo.

Please go ahead.

Hello. Good afternoon, everyone. A clarification from my side and one question. The first one is clarification on the inflationary pressure. If I understood correctly, you said that The OPEX increase should be higher than what you initially had expected, over 100 million Euros, but this increase is manageable. Is that correct?

Thank you for the question. It is better to make a clarification. about the 100 million and eventually, you know, additional that we will manage. We talk about inflation on all costs so that we will include eventually also those, you know, all costs that for instance, so not only the OPEX in that sense.

Okay, what you were targeting in the 100 million euros, that's the P&L lines I was referring to. Okay, and when you say manageable, you mean through further price hikes and even refacing the advertising and promotion budget?

Yeah, for sure, we are evaluating and monitoring very closely. There will be the opportunity to eventually do additional pricing, if needed. That's why we are evaluating very careful on top of what we already implemented in Q1. So we keep it there as an option if needed. On what you mentioned about the A&P, you know we are targeting two different things. On the A&P, you know that we are targeting to have 100 basis points increase this year, moving from 12.6 reconciled for the total group of last year to a 13.6 of this year. But as you know, we are very determined in our medium-term plan to support our growth with ATL investments, specifically on the campaign that we have on our global ambassador. Therefore, we keep the opportunity to eventually remodel the ATL, but it's not something that we want to introduce as an opportunity clear option on the table today. Obviously, we will monitor the evolution of the sales. We know that we have the opportunity to remodel it, but at the moment, the plan is to continue as we foresaw with our investment in communication and ATL.

The question is on the FX headwinds. I was wondering if what we have seen in the first quarter as an impact on the EBITDA should be a good proxy for the other coming quarters.

Thanks. As you know, due to the evolution of the currency and you have seen quite a volatility on that end, what I can tell you is that our hedging policy is covering for that. But at the same time, we have to say the translation effect from currency can be, you know, we cannot exclude it in line with what we have seen so far. But what I can say is that our hedging on the most important currency for us is done in a way to protect that there will be significant impact from now until the end of the year, but we will have obviously to manage quite high volatility on that side.

Okay, thank you.

For any further questions, please press star and 1 on your telephone. The next question is from Fraser Donlon from Berenberg.

Please go ahead.

Hi there, it's Fraser here from Berenberg. Just two questions from my side. Firstly, could you maybe give some color on the trends you're seeing in coffee in the US specifically? So like maybe some category growth numbers or something along those lines. And then the second question was just on kind of the guidance. So obviously Q4 is an important quarter for you and for your competitors. So I just wondered if in Are you counting on consumer sentiment in Europe improving between now and the beginning of Q4 to kind of make the guidance, or does it kind of factor a trend which is in line with what you've been seeing so far, maybe in April and the beginning of May? Thanks very much.

Yeah, thank you for the two questions. On the coffee US, we are seeing definitely a activation of the market since a few years now on our products that is coupling with a very strong vote on the partnership that we are having with Nespresso, specifically on the virtual launch in the U.S. At the same time, we have been, as you know, targeting our MTPs, specifically U.S., and Asia for growth. And we have been very happy to see a double-digit growth in the U.S. in Q1. We believe that we will continue to grow, also supported by our investment and new models specifically dedicated to the U.S. both in the full automatic machine but also in the manual machine with La Specialista in the La Specialista portfolio. Therefore, U.S., we remain very confident that we have the right strategy. We see good growth. We see the category that is expanding. We see the espresso that is penetrating more in the coffee, in the old coffee markets. For what is concerning the guidance, yeah, we are closely monitoring obviously how is evolving now the markets in especially obviously Europe for the things that we have seen. We are closely monitoring the evolution of the consumer dynamics. And here what I can say is that we definitely have seen, as I mentioned before, a softening in the last couple of weeks continuing on the demand in some areas, only in some areas in Europe and especially in the food preparation while the coffee remains more resilient. Our Q2 will have a very high COMP basis versus last year. But for what we have been asking in the back part of the year, especially in Q4, that is very important for us, we believe that we have all the right things in place to continue to grow in the coffee in the most important part of the year. And we count also, besides Europe, we count also in the growth in the market outside of Europe, as I mentioned before, specifically in the U.S., but also in Asia and in China, where we see the market that is reacting very nice to our launches, and we see the collaboration with the big online platform really going in the right direction and supporting us very well in this part of the world.

Thank you very much.

There are no more questions at this time.

Sorry, we have a last-minute registration from Alessandro Cecchini from Equita. Please go ahead.

Yes, thank you. So about these last points, so basically what you are saying that you are still seeing some interesting growth in China and the U.S. in the coffee category. It's right, my understanding, that coffee Also, you are seeing these current dynamics continuing in these two markets. Thank you.

Yeah, indeed. You know, we are very positive in these two parts of the world. We have a full portfolio, and we have seen really online retailers in China and retailers in the U.S. that are really supporting the category of espresso. And we have... our communication plan that has been really giving the right support to the growth, and we are convinced that we will continue to do that. You know that there is a lower penetration of this espresso in this part of the world. And when I say espresso, you know it's a whole hot beverage, coffee and meat beverage. And therefore, we are very confident that will offer us a very good opportunity to grow this year, but also in the years to come.

Thank you.

There are no more questions at this time. Gentlemen, would you like to add any further comments?

Thank you very much. Thank you all for listening. Thank you all.

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