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.

Hi. Good afternoon, everybody. Three questions from my side. The first one is on the extraordinary costs you are recording today. This year, at the end of July, you indicated €60 million in secondary costs. Is there any update you can share with us on how this cost evolved in the third quarter? Second question is on coffee makers. If I made correct calculation, the division accelerated in the third quarter, growing at least a mid-single digit. Is this sort of sustainable growth pace, even looking at the coming quarters? Last question is on networking capital. Is the 700 million euros stock target by 2022 year end still valid? And if not, is there any number in terms of net working capital on sales you are confident to achieve by the end of the year?

Thanks. So, no, we confirm that

Extraordinary costs, which we previously announced around 60 million euro due to inefficiencies and extraordinary logistic costs. We are fairly in line with what we have previously said. With regard to coffee makers, you're right. We're still showing a positive trend. This is in value. In volume, we see some weaknesses in certain product categories, but all in all, we feel strong about, as I said, the long-term growth trend in the segment, and we think that Probably this is, considering the market circumstances, is a strong performance for our coffee maker segment. Some color around it. There is increased penetration in new geographies. We see better mix and premiumization in the high end. And we expect this to continue in the future. With regards to the stock level, as I said, yes, we're super strict in our stocking policy. The ambition is to go to €700 million, and obviously this is just the first step of our normalization plan. We think that the company can have an ambition to have a rotation around 2.5 times. So this is, let's say, at constant revenues, we think that we can bring down further in 2023 are inventories, ideally in the 600 million area. Obviously, you have to account for seasonality. As you know, our business is cyclical, and we need to produce in advance to level off our production levels during the year. Obviously, we will not have an effect similar to what we did in the past, but we can expect maybe in the short term the $700 million to go up again, probably in the area of $800 million or around. It would be... defined according to the market needs and the seasonalities and then hopefully to see the usual reduction and hoping to have our optimal level at the end of the year.

Sorry, on working capital, sales

The very aggressive plan to reduce inventory is also affecting purchases and so we have to fully assess the impact of the reduced purchasing in the short term. However, we should have working capital lower than 10% on sales.

Next year, next year, as an ambition.

The next question is from Luca Baccoccoli with Intesa San Paolo. Please go ahead.

Hello, good afternoon, everyone. A few questions, again, from my side. The first one is a follow-up on the inventory level. I was wondering if the expected reduction will drive to a similar cash flow generation or, as you were mentioning before, the other elements of the networking capital could become a major headwind, so limiting the and positive impact from the networking capital shrinking the second question is again on the inventory level but at your distribution partners so if at the retailer level you know how the inventory are moving if upwards or downwards or otherwise stable vis-a-vis the last, the previous quarter. And the other question is on the FX impact, looking at the nine months at the EBITDA level, basically the FX has an actual effect. So I was wondering how should we model the 2023, taking into account that the euro's keeps evaluating against the U.S. dollar. And finally, if you can share with us any update on the current trading, this would be very helpful from October onwards if you have seen any relevant, let's say, deviation from the sales trend seen up to the nine months.

Thank you.

All right, thank you Luca for the question. So our vision is to have at year end approximately 200 million in cash. So looking at the current levels, we should expect a cash generation for quarter three around 150, 180 million euro. We feel pretty confident about this. I said that there is something that probably will depend also on our purchasing strategy that can also probably affect a little bit our cash performance, but that will potentially only postpone by a month or two the cash generation. So we feel strongly about the impact of the cash flow that we will generate with the inventory reduction in the next months just keeping in account that our strict policies might have a short term impact that we didn't have in the past. Second point on distribution and also is related sort of also to your final question on current trading. Some protolines are normalizing the stock levels. Some protolines are still behind the plan and where they should be. Just a reminder, we felt that the stock levels were around 20, five weeks at the beginning of the year in kitchen machines, where usually the normal level should be around 12 weeks. And now I think they are going down, but kitchen machines are still high. Coffee, I would say, rather stable with maybe some positives in certain product lines probably fully auto is better off and maybe slightly higher in other segments all in all we feel that is normalizing also good signal in current trading for kitchen machines where we had a pretty positive October well less negative less negative October in kitchen machines which is probably showing that also the inventory levels, the trade levels are going in the right direction. We have also to be cautious because we are getting closer to Black Friday and probably now some restocking took place and we have to monitor the next months. All in all, and I jump also to the final question, we saw a pretty positive October. I mean, in line is not better, which is suggesting that our year-end forecast is definitely achievable. But we are still very prudent as we are now still in a stocking situation at trade level and the markets are a bit softer than what they used to be. last year. Overall, we are confident about reaching the guidance. Probably in the short term, we're going faster in the top line, but also you saw that our margins were slightly below expectations for the reasons that we have already discussed. Therefore, broadly, we confirm the year-end guidance. where maybe so far we are a bit ahead of the plan on time of top line, but maybe margins, we are in line with what they say the guidance was. You also had a question on the nine months FX effect on ABDA. Let me... It is fairly... close to neutral.

Right. And so I was wondering what should we expect for next year?

For next year, I think our currency portfolio, our currency exposure is getting better. And for... I mean, we will get back to you on this probably later on with a more precise outlook for next year. What I can say in the short term, we're more balanced in the past, we're more balanced in the past, so we can have maybe a slightly negative impact, but not as significant as one might think looking at the change the new exchange rate is the euro dollar, so we are less affected by that.

Okay, great, very clear. Okay, 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 actually It's on your point on the current trend. So if I understood correctly, so starting from the minus 10% of organic growth that you had in the third quarter, probably you are expecting less negative fourth quarter in terms of year-on-year growth. If you could clarify a little bit better on this point. And in your assumption for the year, what kind of Forex impact are you planning for this year? And finally, if you could confirm your previous guidance of around 110 million of headwinds coming from logistic, coming from raw material, etc. Thank you.

So the first question is about the guidance and to meet the guidance probably we have to meet the guidance and we include on the top line we could achieve guidance with a slowdown in sales, apparently. We are more positive on our potential top-line performance, but still we see the pressure on the margins, and therefore we think that potentially better top-line performance that is in line with what you are seeing in quarter three can be potentially offset by the continued pressure on the margins, which is also partially due to our aggressive stocking plan and the headwinds generated by the lower efficiencies. So we didn't change guidance as we think that the BDA targets are fairly in line with our expectation. But indeed, it's not impossible that we perform a bit better on the top line. But again, we will not have any meaningful impact on overall guidance for the next quarter, which I hate to comment on the short-term results. Second question is about Forex in the full year, the impact is not a significant impact. Currency exposure has been mitigated due to the new currency balance. and we expect not to have a significant impact at the IPDA level. For what refers to the logistics and the cost inflation, we confirm between $100 and $110 million of extra cost, including the extraordinary cost related to the logistics, let me say, impacted due to excess of inventory and inefficiencies at the factory level.

Okay. Thank you. Thank you very much.

Mr. Delonghi, gentlemen, there are no more questions registered at this time.

So, ladies and gentlemen, If there are no more questions, thanks for attending the DeLonghi conference call. Bye-bye.