De Longhi Spa

Good afternoon. This is the course call conference operator. Welcome and thank you for joining the DeLonghi first quarter 2023 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 De'Longhi, CEO. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group First Quarter 2023 Results Conference Call. Today, together with me, are Nicola Serafin, Group General Manager, Marco Cenci, Chief Strategy and Control Officer, Stefano Biella, CFO, Fabrizio Micheli, Director of M&A and IR. and Samuele Chiodetto, Investor Relator. Let me start by reminding that in our last conference call, we presented some of the new products launched in 2022 in our core categories, showing how the group has been working to stay ahead of the pack thanks to cutting-edge technology and design. Today, I would like to direct your attention to the launch of Truebrew, an innovative drip coffee machine with grinder emphasizing again the role of the innovation in establishing our leadership in coffee. Truebrew has been launched in March in the American market supported by a fresh campaign starring Brad Pitt as an ambassador. It has a premium position and will have the role to enlarge our product range in the quality coffee experience offering our American customers a new premium solution to brew fresh coffee from whole beans. Now, back to the Q1 results, let me highlight how the group has been able to promptly react to the complexity faced, especially in terms of volumes, growth, and the effects of the cost inflation on consumer sentiment. in particular in this first month of the year the group achieved an operating profitability clearly improving against the first quarters of the pre-pandemic years namely 99 and 20 as well thanks to the combined effects of our efforts in innovation media investments price strategy and last but not least effective measures to control operating costs the first quarter of 2023 was characterized by an unfavorable and complex geopolitical and microeconomic environment, in continuity with the scenario encountered in the second half of 2022. As already anticipated, the start of the year was impacted by some factors affecting the main regions and their sales trend. First of all, in the last two years, we achieved extraordinary growth in the first quarters, respectively 59% in 2021 and plus 5.5% in 2022, on a constant perimeter basis, which represents a very challenging comparison base. Secondly, we have witnessed a partial stocking effect of the trade, due to a more cautious approach of some retailers, which have use their months to decrease the level of inventories. Lastly, let me remind you our strategic decision to exit the portable air conditioning market in the United States, which had an impact of €23.4 million in the quarter and will have a negative effect even in the second quarter. Now, let me focus to the quarterly results. Consolidated revenues for Q1 were down by 18.1%, reaching EUR 602 million with a positive contribution of plus 0.6% from the currency components. As already highlighted in the past months, the European area has been affected more than the other regions, by the effects of the Russian-Ukrainian conflict and the weakening of the consumer purchasing power caused by inflation. In more details, South-East Europe recorded a double-digit decline, with all the main markets down, facing also a challenging comparison to the first quarter of last year, in particular with the one of 2021, which marked a growth of more than 60%, a constant perimeter and constant exchange rates. Northeast Europe showed a decline at a mid-to-high single-digit rate in the context of a macroeconomic and geopolitical scenario experiencing a complex evolution. The MIA region has undergone a double-digit decline compared with a very strong acceleration trend in the last two years. In the American area, cell performance was affected by the discontinuity relating to the exit from mobile air conditioning business, which impacted the turnover by €23.4 million. Net of this effect, we would report a stabilization in the cooking and food preparation business, thanks to the growth of Nutribullet and their products. Finally, the Asia-Pacific region achieved a low single-digit growth at constant exchange rates, with a significant contribution from Greater China, which confirmed its sustained growth. As to product categories, all the above-mentioned effects led to a decline for all the macro-categories of the consumer business, including coffee as well, even if it confirms its relative better resilience. On the contrary, professional coffee, branded Avesis, showed a strong positive trend, which continued its growth trajectory at a high double-digit rate. Looking now at the evolution of the operating margins, the net industrial margin amounted to $304.4 million, equal to 50.5% of revenues, together with a positive contribution of the price mix, circa $6 €20 million and the recovery of transport prices, there was still a residential negative effect from raw materials and production inefficiencies, which will have to find a full recovery in the coming months. Adjusted EBITDA amounted to €64.3 million or 12.3% of revenues, 13.6% in 2022. following investments in advertising and promotions, which, while remaining in line with 2022 as a percentage of revenues at 12.1%, decreased in value by €15.7 million, down to €73.1 million. As to the balance sheet, net financial position as at 31st March 2023, stood at €317.2 million, increasing by €18.5 million from 2022 year-end. In particular, the free cash flow before dividends and acquisitions was €167.1 million in the 12 months. In the quarter, the Group was able to generate €41.4 million in cash from current operations and working capital movements, compared to the first quarter of 2022, in which there was an absorption of €103.8 million. In terms of operating working capital, 8.5% of 12-month rolling revenues at the end of March, the negative change in inventories up to €615 million from the record value of €551 million of the end of 2022 was in line with the expected normal economic financial cycle and was more than counterbalanced by the positive cash generation of trade receivables and payables management. It should also be noted that capital expenditures absorbed €19.2 million in the quarter, a clear decrease compared to last year, which recorded the disbursement for the acquisition of the new production plant in Romania and higher investments in tangible assets. Now, As a conclusion of my results overview, I would like to stress the successful expansion that the group was able to achieve in the last years, emphasizing the adjusted EBITDA doubled compared to Q1 2019, thanks to strong organic growth, effective investments, and focused acquisition, all goals that were able to accomplish while preserving a healthy financial position. Finally, closing my remarks, let me underline that the well-anticipated week start of the year was already included in our guidance. To expect a less challenging comparison in the coming quarters. Also bearing in mind that after the second quarter, the growth will not be impacted by the discontinuity in the mobile air conditioning business in the US. In this context, therefore, We confirmed the guidance for the full year of revenues slightly declining and an adjusted EBITDA in the range of 370, 390 million euros. Now, we can open the floor to Q&A. Thank you.

This is the course conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star, then one on their touchtone phone. To remove yourself from the question queue, please press star, then two. Please pick up the receiver when asking a question.

Anyone who has a question may press star, then one at this time.

Our first question comes from Murad Lamidi from BNP Paribas. Please go ahead.

Murad Lamidi, BNP Paribas Yes, good afternoon, gentlemen. So I have two questions. The first one is on the price mix effect in Q1, so the 20 million that you report. How much is pricing, pure pricing, and how much is mix? And do you expect pure pricing to continue to be a tailwind for the rest of the year, or is it only going to be mix that will be a driver? And my second question is on input cost inflation. Could you give us the raw figure for input cost inflation in Q1? And what kind of development do you expect for the rest of the year on this part of your costs? Thank you.

Yes, so we can divide the 20 million of prime mix into 18 million euro price and 2 million mix. With regard to pricing, we will have an impact of carryover price increases, but we don't foresee any price increase further. Actually, we believe that seeing a decline of input costs Probably the market might be more competitive in the second half, but for the moment, pricing would be positively affected by our measures that will have full effect in the second part of the year. In particular, as I said, the input costs are lower. The word to Nicola Serafine for more details around the input cost effects.

In terms of cost inflation compared with the same quarter of last year, let's say that we have a bit of mixed effect. We have a carryover of some cost inflection due to raw materials. We have cost inflation due to labor costs that the inflationary trend is bringing us. And we have some, let's say, industrial costs due to the fact that in this moment we do not have the same output volumes, volume effect. We are in the range of the low single digit of cost inflection. It is more or less split in these three areas of influence. Where we have benefits in terms of costs that are not directly in the industrial costs, is the benefit on the inbound costs, ship rates, warehousing costs and logistic costs. We are already experiencing beneficial benefits in terms of costs. So we are expecting overall reducing impact cost inflation in components looking forward. But for the time being in the first quarter, we are still, let's say, the carryover from last year.

Okay, thank you very much.

The next question comes from Alessandro Cecchina from Equita. Please go ahead.

Hello everybody and thank you for taking my questions. The first one is about the coffee market. If you could elaborate a little bit more what you are seeing in the market in terms of sell-out in the current month. just to have a better idea of the underlying trend, excluding, of course, the current stocking that you underlined during the first quarter. My second question is about the food preparation strategy. I mean investing in coffee with new products and so on. I remember that you stated about your strategy to expand Nutribullet in Europe, so I was just wondering if you are ready to launch new products in the food preparation, so just to better understand the strategy on these product categories. And finally, on the margin side, we know that first quarter is typically traditionally the quarter with the lowest seasonality. So we needed to take this kind of 12.3% as a floor for the next coming month, also considering the lower inflation. So thank you.

Pardon me. Looks like the speaker line has dropped. Please stand by while we reconnect. We thank you for your patience.

Thank you. Thank you. Pardon me, everyone.

The speaker line has reconnected.

Yeah, sorry for the inconvenience. But we were able to hear Mr. Cecchini's questions. So, Alessandro, the first question is about the market trend in coffee. We are monitoring the key markets and we are seeing a decline in the coffee market at a rate of low single digits around, let's say, between 2 and 4 in the market. The decline is also coming in the first months after a weaker espresso market in the second half of last year. So we have seen also some signs of stabilization in certain markets. So we feel positive in the long term in coffee as a growth driver for De'Longhi and for the industry. although we are unable to predict when the stabilization will be completed and we will be able to see positive markets again. We feel as a market leader also know the responsibility to drive market growth and we are continuing in supporting our products with marketing initiatives as said We launched innovation in the United States supported by the Bread Pit campaign, also with products aiming to American coffee on top of what we are doing in espresso, not just in the United States, but worldwide. The second question is about food press. The market is still weak. We believe that now the weakness that is reported in the numbers is deriving mainly from the stocking effect that hopefully will be completed by April. Still the market is negative, but not at the rates that you've seen are selling. Although we have to also underline some positives in food preparation, which is coming from A very strong growth for Nutribullet, high single digit, which I think is very strong compared to what's happening in the rest of the products. So again, it's not a strong growth for us at 8%, but it's significant. It's, I think, showing that there is a strong interest for personal blending, for quick simple to use, convenient appliances, and Nutribullet is taking advantage of this trend in several markets. I also highlight that Nutribullet launch has not yet been, let's say, completed. Due to COVID, we had a kind of a slowdown in the international rollout of our distribution plan. But again, early good signs from NutriBullet and at least one growing category in food preparation. Now, margins, somehow, yes, is... Well, quarter one, historically, is not the strongest quarter of the year. We think that quarter one EBDA... can give an indication that we have the ability to deliver what we have promised as year-end targets. Maybe we can have some weaker quotas or stronger quotas, but we confirm that given the circumstances, the trend we're seeing in the markets, the trend in the input costs, our cost control initiatives, we think that our margin goals are achievable as of today.

Okay, thank you. So if I understood correctly, you stated that on the COF in April you see a sellout on more or less in general that is a flat-ish versus start of the year that was slightly negative, if I understood correctly.

Yeah, in the current trading, yes. In the current trading, yes. Confirm it.

Okay.

Thank you. Again, if you have a question, please press star, then 1. Our next question comes from Andrea Bonfa from Banca Acros. Please go ahead.

Hi, good afternoon to everybody. Most of my questions have been already answered. But again, this is, let's say, a curiosity on the actual treaty environment because looking At the performance of the first quarter and your guidance, your sales guidance for the year, it entails likely positive top-line growth in the next quarters. And so the question is, are you expecting to turn into positive sales growth in the next few months? And if I may, a detail on the second quarter, The exit from the USAC market was $23 million the first quarter. What's the final count from that exit? I had in mind some $70 million, but I just want to double-check.

Thank you very much. Thank you, Andrea. You're right. We think that our growth rate will turn into positive again in the second half of the year. About second quarter, probably excluding the impact of portable electronic comfort. In the quarter two, we see probably stable to slightly negative market still for small domestic appliances. So we expect to deliver the end results on the back of a return to growth in the second half of the year. With regard to air conditioning, the impact would be around 70 million euro, as you correctly noticed. Probably the effect will stop with quarter two. I think also the opportunity to give some color around the comfort. At the beginning of the year, we have outlined that we would expect a weak air conditioning for the exit from the US market in air conditioning. I have to highlight that due to the weather and also some high inventory levels at retail level, also the European market is kind of softer in air conditioning. As well as we see a lower demand for heaters that were boosted by the worries around the availability of gas after the war in Ukraine started. So all in all it could be that we will face a softer air conditioning season. But again, we are positive about the potential development of our SDA business and coffee particularly for the second half, confirming our guidance. In seasonal, although the decision in the United States is structural, the weakness in Europe is more like due to seasonality. so cannot be extrapolated as a trend for those products in the future it can be that actually after a week here the future will show a quite a return to grow so but again for us is important as we will focus as a group as a strategic decision to focus more on sda where markets are more predictable and not related to seasonal effects and for the moment Fortunately, our exposure in terms of sales and profitability to portable air conditioning and comfort has reduced dramatically in the past.

Great. Thank you very much.

As a final reminder, if you'd like to join the question queue, please press star, then 1. Our next question comes from Luca Dacacoli from Intesa, Sao Paulo. Please go ahead.

Hello, good afternoon, everyone. Can you hear me?

Yes, sure.

Okay, good. So the first question is a follow-up on margin. So I was wondering how do you see the gross margin evolving in the coming quarters, taking into account that from one hand you have some tailwinds on the cost side as you were mentioning but at the same time the strong positive price mix effect that you experienced in last year will fade this year because of the overlaps so how those two elements will play out in the coming quarters and the other question is on the environment if you see any deterioration in the competition and the early signs of price reduction due to the persisting weak demand on certain product category above all on the food preparation. And finally, my last question is on advertising and promotion. If what we have seen in terms of reduction in absolute terms in the first quarter is a good proxy for the full for the.

Thank you.

Hello yes, so thank you Luca. So gross margins. Yes, we see potential for improvement in the gross margin. In the first quarter, the cost saving was in particularly because of the lower logistic costs. While we were still suffering from industrial inefficiencies due to the fact that our production levels are still very, very low. On top of that, the high inventories that are the gross margin is determined by some higher inventory costs that now we are clearing. Going forward, we expect the logistic costs to be on the low side again, so we can continue to benefit from low logistic costs due to the lower inventory levels and the lower rates from asia in particular as well as we start we will start capturing some beneficial effects from the higher efficiencies as the factories are starting to ramp up again in line with the past also not we have not yet fully benefited from the lower input costs that now are also coming in. So there is room for all this, which should translate in better margins. We expect also a potentially slightly more promotional market. I've seen nothing very critical for the moment. And there is some room in our guidance to also have more competitive initiatives to maintain, protect, or eventually grow our market during the second half. So all this, there is enough saving in order to also allow us to be more price competitive. Again, I expect the market to be more competitive. We don't see risk for promotional wars or price wars, nothing like that. just maybe a more promotional market during the year. Probably once the market will go back to normal or to growth again, I think also this initiative will probably ease. So going to the other question, which was about AMP spending for the year, we believe that AMP spending is a very important pillar in our strategy. We think that if De'Longhi has been a winner during COVID times, despite you seeing a decline from our record high in 2021 and 22, we are still winning market share. Our sales are dramatically higher than before COVID. AP played a major role in our success together with our product. So we will continue to invest. But again, we want to be cautious. So we might have a more adaptable strategy, so certainly it would be a pillar, but we will release our investments in line with the developments of the sales. So expecting growth in the final part of the year, we will probably invest again massively, as we've done in the past, but if we see that the numbers for some reason will not come in, but we have room to cut some of the investment and still outspend competition, because I believe that De'Longhi is really the top spender in coffee and food preparation compared to our key competition in Europe and in the key markets.

Ladies and gentlemen, thank you for joining. The conference is now over. You may now disconnect your lines.

Thank you.