De Longhi Spa

Good afternoon. This is the Coral School Conference operator. Welcome and thank you for joining the De'Longhi First Half 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, Chief Executive Officer of De'Longhi. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group's second quarter 2023 results conference call. Today, together with me are Nicola Serafin, Group General Manager, Marco Cianci, Chief Strategy and Control Officer, Stefano Biela, CFO, Fabrizio Micheli, Director of M&A and IR, and Samuele Chiodetto, Investor Relator. We're very pleased with Q2 results, which showed a significant recovery of their profitability compared to last year, and a stabilization of the growth trends that have been steadily improving month after month since the beginning of the year. In terms of top line, As already mentioned in the recent months, a few exceptional and temporary factors had a significant impact on the first phase of the year. However, if we exclude the discontinuity of air conditioning on the American market, the second quarter achieved a positive expansion, with the coffee segment in positive territory and the Nutribullet business strongly performing. To complete the positive picture, The first six months of the year have displayed a nearly stable EBITDA margin, clearly improving the profitability profile in respect to last year. Specifically, this result was obtained despite the volume decline thanks to careful pricing strategy and strict control on the investments, as well as a recovery of some of the production costs that turned into a tailwind in the quarter. Now let me focus on the quarterly results. Consolidated revenues for Q2 were down by 2.9%, reaching €689 million, with a negative impact of 2% from the currency component. The impact of the discontinuity of mobile air conditioning in North America was €33 million in the three months. net of which the turnover in the quarter showed a positive trend of plus 1.8%. As already highlighted, over the last one month, the European region has been heavily affected, more than other areas, by both the defects of the Russian-Ukrainian conflict and the weakening of consumer purchasing power. However, Over the last few months, the region has shown signs of improvement compared to previous dynamics, returning to positive territory. In more details, southwest Europe showed a turnover almost unchanged compared to last year, thanks to a strong recovery in France and Austria, while Italy and Germany still remained in negative territory. Northeast Europe recorded a double-digit growth, benefiting from an almost homogeneous recovery of the countries of the area. The MIR region saw its turnover fall mainly due to the micro-economics context and the weakness of food preparation. In the American area, sales performance was affected by the discontinuity relating to the exit from mobile air conditioning business. which impacted the turnover by 33 million euros in the quarter. As a result, the area grew 5.5%, thanks to the expansion of the coffee makers and Nutribullet nutrition segments. Finally, the Asia-Pacific region delivered a drop of minus 2% at constant exchange rates, as an effect of the negative performance of Australia and New Zealand. slowing down compared to a particularly strong 2022, but with a strong growth in the other major markets of Greater China, South Korea, and Japan. As regards the evolution of the product segments, the second quarter delivered a return to growth of coffee machines for households after the temporary decline in the first quarter. thanks to a brilliant performance of the fully auto coffee maker segments. Regarding for Eversys, professional coffee machine sector, we highlight the outstanding growth in the quarter at around plus 60%, pushing the weight of this segment on Group's total half-year revenues to 5.2%. Food preparation, although still suffering, shows some product families food processors, personal blenders, spin juices and fryers back to positive territory, while the comfort segment was heavily penalized by the aforementioned discontinuity of the U.S. market. It is worth noting that total coffee area, together with notable exposition, now counting almost 65% of the total group turnover, are destined to represent the main engine of growth and profitability of the group in the medium term. Looking now at the evolution of operating margins in the quarter. The net industrial margin improved to 48.8% of revenues from 45.2% in 2022. This performance was the result of the positive contributions of price mix, €20 million in the quarter. the strict control investments and the recovery of some of the production costs, which turned into a tailwind in the recent months. Specifically, the transportation costs delivered significant savings, along with a partial recovery of the extraordinary costs related to handling the high level of inventory of last year, while the raw material costs leveled off in the quarter. adjusted the BDA amounted to 85.8 million euros, or 12.5% of revenues, delivering a marked improvement compared to 6.9% in the second quarter of 2022, and in line with the margin achieved in the first quarter. The advertising costs remained sustained, even though The weight on sales was slightly lower compared to last year. As to the balance sheet, net financial position as at 30 June 2023 stood at 311.7 million euros, increasing by 256 million euros in the 12 months rolling. In particular, the free cash flow before dividends and acquisitions was 66.5 million euros in the quarter and 85 million in the six months and 308 million euros in the 12 months. In the quarter, the group was able to generate 120 million euros of cash flow from current operations and working capital movements. compared to the second quarter of 2022, in which there had been an absorption of 62 million euros, thanks to the efficient management of the trade receivables and payables aggregate, only partially counterbalanced by the negative change in inventories, increasing from the start of the year because of the normal seasonality. A skill to 181 million euros lower than at the same date of last year. It should also be noted that capital expenditures in the quarter were aligned to last year, while recording a marked decrease in the six months versus last year. Now, as a conclusion of our result overview, I may point out that we are very satisfied with a significant improvement of the margins and the cash generation in the first part of the year. along with the stabilization of the sales in the quarter. This set of results confirm our expectations of a progressive normalization of growth and profitability trends, even though the geopolitical and economical context remains difficult to read, especially as regards to dynamics of consumption. Nevertheless, the Group is confident about the viability of our guidance for the year, supported by the prospect of a recovery of organic growth together with an improvement in margin. In this context, therefore, we confirmed the guidance for the full year of revenues, slightly declining, and adjusted the BDA in the range of €370-390 million. Now we can open the floor to Q&A. Thanks.

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. We kindly ask you use handsets when asking questions. Anyone who has a question may press star and 1 at this time. The first question is from Francesco Brilli of Intermonte. Please go ahead.

Good evening. Thanks for taking my question. Congratulations for the results. The first one, I have a couple of questions regarding coffee segment. The first one is on the B2C. So the second quarter was back to positive, while first half growth remains positive. since mid-single digit negative. I was wondering what are your expectations for the end of the year for this segment? And then the second one is on B2B. It seems that the market is booming. Also other peers are achieving very remarkable growth in this segment and made acquisition to widen the exposure to this business. And on your side, overseas is continuing to grow at fast pace and probably will continue to increase its importance, also based on the indications you provided in the press release. And in the past, you commented you were targeting to expand further in this business, also with external opportunities. And is it still the case? And if so... How urgent do you think it is in order not to lose this opportunity? And then you have a very valuable asset in this space, let's say close to the company, which is Lamarzocco, which would be highly synergistic with Aversiso. So are you planning to exploit this opportunity? So any comment on this would be very helpful. Thank you.

Thank you. Thank you for the compliments. Thank you for the questions. So question one about B2C performance. I would say that the market is recovering, but it's still slightly negative in the first six months of the year. We think the total coffee market is is maybe minus one, minus two percent at global level. However, it's still about 50 percent above the levels of 19 before pandemic. So I think that this is a really very encouraging market trend, considering really the strong growth that we experienced in the past years. In this context, the first quarter this year compares to a phenomenal first quarter in 2022, which cannot be a relevant comparison base, honestly. But also, Similarly, the performance in quarter two, for instance, in Fuli Auto, which has been very strong, probably has by far outperformed the market. So we're still positive about the opportunity offered by household coffee makers in the long term and also in the short term, but I think both quarters don't give the right indication. So, all in all, I would like to highlight that probably the year will be more or less flat versus last year, and maybe progressively improving quarter by quarter. But we want to know that we achieved record market shares on the markets where we can monitor on a constant basis. And so in progressively improving from quarter 1 to 23, and achieving really record high in June 23. So this is also very encouraging. Going to B2B, you had very specific questions. No clue that the De'Longhi success story, if we can say so, has a lot to do with the success of the coffee maker market and ability to be a leader in the segment. Avis is performing very well and we can say it's been a very creative acquisition for us. Certainly we want to grow with M&A. I think that The company has performed M&A on a regular basis, maybe every two or three years in the past, adding new brands and new products. And probably the next priority, the next, hopefully we'll be in coffee, and hopefully, yeah, which is a segment that is very attractive. It is... On La Marzocco, I cannot comment on this. I cannot comment on this. But... I think that for sure if we can perform acquisition in the professional space, if it's a leader and if it's a very profitable, sizable, successful company, it will certainly be active on that.

Thank you. Thank you. Thank you very much for your question. If I may, a very quick one. follow-up on AMP on second quarter and costs slowed down significantly. I was wondering if it's just a matter of phasing of expenses or we can project a lower level for the full year. Thank you.

Yeah, no, as a percentage of sales, we are flat versus last year. I would like to remind now, now we are, as I said, we are very happy with our performance in the quarter from, in particular, a profitability standpoint. But obviously, when we entered quarter three, we had to be somehow cautious after, let's say, the week start to the year. I think we've been more courageous than most of our competition. And we have kept investing behind our coffee makers in particular. So we have a minor reduction in absolute value spent in the quarter and in the half. but we have significantly achieved growth in our advertising spending in the quarter and in the first half. To give you an idea, according to our data, our share of spending in fully automatic coffee maker has increased from 36% share of spending in the advertising market, in the markets we monitor, to approximately 57, where our key competitor reduces spend as a total investment from 31 to 24. So, let's say, I think we are continually rolling out our strategy. We think that advertising will play an important role also in the remainder of the year. We are happy also that we have renewed the contract with our brand ambassador, Brad Pitt, and we will continue with new campaigns in the near future.

Very helpful. Thank you very much.

The next question is from Alessandro Cecchini of Equitas. Please go ahead.

Hello everybody and thank you for taking my questions. The first one is about if you could elaborate a little bit more your performance with the new machine in the U.S. We saw that the U.S. market was positive in the second quarter, plus 5% roughly speaking, excluding air portable conditioning. If you have more feedback from your new coffee machine in the US and if you are planning to launch new products both in food preparation and coffee in the second half. I mean not just updates, but if you are planning to launch something special, something new in the second half. This was my first question. My second question was about Nutribullet. From what we know, probably your strategy to expand the business in Europe was not successful. is expected, so with some delays and so on, so I would like to know when do you expect actually to have a real entrance in the countries and when you expect to do that. And my final question, it's about your performance in margins. First off, you had 12.4% BDA margins for the year. The implicit guidance is more or less to have the same margin. We know that four quarters is much better in terms of seasonality. Just to know it's a question of prudence given the four quarters. Just to have your feeling on this because likely I expect we'll see similar margins in the third quarter, giving similar sales in the third quarter. So just if you could give us your perception on this. Thank you.

So, okay, so the first question is about North America. So North America continues to be a growing market for espresso and coffee in general. We are reinforcing our investments. We continue investing behind our capsule machines. I remind you that we have a very strong venture with Nestlé and Nespresso in Otamaria, which is very successful. We are also pushing our bean-to-cup machines. and the market is growing, is expanding. We have just launched Truebrew with the support of a specific advertising campaign with Brad Pitt. I have to say the first learnings, the first feedback and let's say takeaways from retailers is Pretty good success. I mean, it's been a strong, let's say, start to the project, so we're happy with that. We will continue supporting the product in the second half. We have a major launch with Nespresso. We're launching the first virtual capsule machine incorporating an automatic frothing device. exclusive to De'Longhi and we're really looking forward to the launch which will take place in half to 2023. So we are pretty on track with our development plan in North America. Then with regards to MPD, obviously we have a quite a strong pipeline in different segments. I hand the word to Nicola, to our general manager, Nicola Cerfi. Maybe, Nicola, you can take on the question about the new launches and then the Nutribullet expansion plan that maybe I said it was a bit slow due to the COVID time, but now we are rolling out, and then comment on the margins.

About... Good evening, good afternoon to everybody. About the new product launches, we have indeed quite a dense pipeline of new launches that are coming starting from September up to first quarter 2024. We have quite a few products in the pipeline of fully automatic coffee machine from a new innovative solution that we have we have presented recently to to our customers with being exchanging containers and we have other solutions of in the mid mid to mid range segments that are coming plus and entry-level milk solution for cappuccino. So we have a very wide range of products that is coming soon and including innovative solution in cold brew coffee integrated in our both full automatic and pump espresso machines. About the Nutribullet launch, as Fabio has mentioned, it was a bit slow down looking to the macroeconomic and food preparation context trends, but we are now ready to go. We think that this is the category, the blending category, and personal blending in particular, is the category that within the food preparation range is in this moment giving signal of recovery, is in a positive in the positive space and this is now time to boost and accelerate the expansion of Nutribullet. About margins, as you have seen we have kept quite a constant margin across the first half. We have now some tailwinds that are expected from one side that are Coming from the cooling down of the logistics and supply chain costs, even raw materials are giving some signals of recovery. Despite we have still, in terms of labor costs, we are in the inflection space, so there is pressure from a labor cost point of view. And there is still a bit of uncertainty in the market in terms of trade terms and pricing. We are keeping the carryover on pricing that we have. So in terms of margin, we are expecting something that could stay with the plus and minus of tailwinds and some headwinds more or less in the space where we are.

Okay, thank you. On the NutriBullet, I mean, when do you expect to push on Europe? Is this a question for this winter or next year?

Yeah, we have a phase plan, but in some core European markets, we are already starting to shelving the products now and more come in Italy, France, in Germany, and Poland and Spain. There are activities that are running at this moment, so we should start to harvest some results already from the next quarters.

Okay, thank you.

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Thank you so much for attending the long first half 2023 conference call. Bye-bye.

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