De Longhi Spa

Good afternoon. This is the Curriculum Conference Operator. Welcome and thank you for joining the De'Longhi Third Quarter 2022 Consolidated Results presentation. 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. Fabio Telunghi, CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the Telunghi Group's 9 Months 2022 Results Conference Call. Today, together with me, are Marco Cenci, Chief Strategy and Control Officer, Stefano Biella, CFO, Fabrizio Micheli, Director of M&A and IR, and Samuele Chiodetto, investor-relator. The group ended the first nine months of the year with revenues substantially in line with the record levels reached in 2021, although in the last two quarters the results were affected by many headwinds, of which some are temporary and others are originated from exogenous events. In particular, the group's performance was impacted by three main effects. Rising trends in cost inflation, extraordinary costs of handling the excess inventory, and softening demand in some markets. First of all, in the last 12 months, the upward trend of many product costs like energy, freight, and raw materials has put some pressure on the industry's margins. On our side, by leveraging our brand's awareness among consumers, we were able to implement selective price increases in order to offset, to a certain degree, the impact of cost inflation. Secondly, the substantial increase of inventory level has required the implementation of extraordinary measures to reduce the stock. During the last months, we have prioritized the reduction of the stock. in order to favor a normalization of inventory level in the short term, consistently with the standard seasonality. The logistic and warehousing cost of the excess stock combined with the production inefficiencies have affected the results to an extent that we should be able to ease next year. Lastly, the group sales have been leveling off even though many complexities affected the consumer demand have emerged in the last months. However, the group has carried on its long-term strategy on media and communication, maintaining the planned investments and spreading the coffee global campaign across the world as a milestone for the future expansion. In addition to the above, let me also stress that even in a complex microeconomic environment, we're still benefiting from positive long-term trends, in particular, on one hand, the secular trend in coffee. Today, 54% of total sales, which is confirming its expansion year after year, with a potential upside still largely unexpressed in many regions. On the other hand, a well-established presence in the world of cooking and nutrition, which is rapidly evolving according to new consumption trends the new generations. Now let me focus on results. Related revenues for the first nine months of 2022 were down by 1% with a positive contribution of plus 4.4% from the currency component. In the third quarter revenues fell by 4.7%, with a positive contribution from the currency equal to 5.6%. In the nine months, the group has been able to mitigate the weak performance in the European area, thanks to the growth achieved in the extra-European geographies. Here's some more color on the third quarter. Southwest Europe showed dynamics similar to the previous quarter. with a moderate weakness of continental markets and a main exception of Italy and the Iberian region that showed some growth. In Northeast Europe, the negative trend continued in the quarter, albeit improving, with severe negative impacts of the Russian-Ukrainian conflict. The MIA region experienced a positive quarter, driven, above all, by a positive currency contribution. that of which, however, sales were still in positive territory. The American area decreased in the quarter compared to last year due to an early sales of portable air conditioners in the previous quarters, while, on the contrary, the region recorded a double-digit growth in the coffee, supported by a strong acceleration of fully automatic coffee machines. Finally, in the Asia-Pacific region, the double-digit growth showed in the first half continued, sustained in particular by the significant expansion of Greater China. After the evolution of the product categories, the segment of coffee machines for households continued its growth trend in the quarter, expanding at a mid-single-digit pace, supported by fully automatic and manual machines. The food preparation segment confirmed the tough comparison with the extraordinary growth rates obtained by last year, as well as the impact of the weakening consumption. The contribution of the comfort category, portable air conditioning and heating, remained positive, although in the third quarter air conditioning products slowed down. Home care, floor care in irony, was in positive territory, both in the quarter and in the nine months. in particular thanks to the double-digit growth of irony in the third quarter. Finally, the contribution of the professional coffee machines of Ephesus was largely positive, showing a high double-digit growth trend. Looking now at the evolution of the operating margins in the quarter, the net industrial margins stood at 46.7% of revenues, compared to 49.9% last year, due to equally to rising production inefficiencies related to the stock reduction measures, and to the increase in product costs, raw materials, logistics, transformation costs, not fully offset by the price increases, equal to 15.6 million in the quarter and 48 million in the nine months. Adjusting the BDA amounted to 63 million euros. equal to 9.2 of revenues compared to 14.7 in 2021, witnessing a margin erosion due to the aforementioned cost inflation, lower volumes, and extraordinary warehousing costs. On the contrary, in the third quarter, expenses for media and communication were slightly below last year in value and did not add pressure on the margins. As to the balance sheet, net financial position as at 30 September 2022 stood at €29 million, decreasing from 2021 year-end due to higher investments and exceptional working capital absorption. The free cash flow before dividends and acquisitions was negative by €272 million in the nine months mainly due to higher level of investments, capex of €126 million, approximately €33 million higher than last year, and negative working capital dynamics, minus €366 million, originated by the higher inventories and a sharp decline in trade payables, not fully compensated by the decline in trade responsibles. Now, as a conclusion of my results overview, let me say that despite the deteriorated geopolitical scenario and the softening consumer demand, we still believe that the secular trend in coffee and our strong presence in the nutrition and cooking segment will sustain a business expansion in the medium term, as witnessed by some markets and product categories, even in these difficult times. Moreover, we strongly believe sticking to our strategy on price management and media spending together with them with the measures implemented to reduce the stock levels will ensure a recovery of the group's profitability in the near future as to this 2022 we confirm our current guidance forecasting for the revenues down mid single digit and an adjusted bda in the range of 320 240 million euros now we can open the floor to Q&A. Thank you.

Excuse me, this is the Coruscall Conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone 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 star and 1 at this time. The first question is from Isacco Brambilla with Mediobanca. Please go ahead.