De Longhi Spa

Good afternoon. This is a course call conference operator. Welcome and thank you for joining the DeLonghi third 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, Chief Executive Officer of De'Longhi. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group's third 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 M&A and IR, and Samuele Chiodetto, Investor Relator. We're extremely satisfied with the third quarter results, which confirmed and strengthened the signs of a normalization phase we have been observing across different aspects of our business performance since the beginning of the year. In terms of the top line, the third quarter delivered high single-digit organic growth. And despite some macroeconomic uncertainties, the group was able to achieve growth across the majority of the geographies in both coffee and cooking and food preparation in the last three months. With respect to margins, the profitability trend has shown a steady improvement in recent quarters compared to the previous year, thanks to the strict control of investments and a careful pricing strategy, as well as a recovery of logistic costs and an easing of pressure on remaining operating costs. The NINAMIS allows us to be optimistic about medium-term developments, also thanks to the renewed commitment to invest in communication with the new Perfecto and Nutribullet It's That Simple campaigns, which have been launched in the recent weeks. This confidence is also backed up by the continuous introduction of the new products and solutions designed to improve the customer experience and enable them to make responsible choices. Let me also mention sustainability among the critical enablers for De'Longhi, an aspect that is increasingly influencing our managerial decision and will be incorporated in the group's systemic approach. With the goal of further enhancing internal awareness on this topic, the group has initiated a learning journey for its employees, which kicked off yesterday with a lecture on sustainability held by Nobel Prize Professor Stiglitz. On the innovation topic, allow me to highlight the slides from four through six, where you can see the main product launched in 2023. for key categories. This is the result of a strong focus on investments in research and development, constantly working to enhance quality, design, and usability. Among the others, let me just mention Rivelia, the first fully automatic coffee machine included a bean switch system, allowing consumers to easily switch and explore different bean varieties. And La Specialista Arte Evo, with cold extraction technology, another step to enlarge our target audience addressing the cold brewed drinkers. Now, let me focus on the quarterly results. Consolidated revenues for Q3 were up by 3%, reaching €707 million, with a significant negative impact of minus 4.8% from the currency components. In Q3, all macro regions experienced a notable organic evolution, except Meia. In particular, the European region exhibited growth at high single-digit at constant exchange rates. This is a significant improvement, especially in light of the challenges which the region faced in 2022 due to the geopolitical crisis and decreased purchasing power of consumers. In more details, Southwest Europe showed an expansion in turnover of plus 7%, thanks to the increase in both core categories, which contributed to achieving double-digit performance in Germany, Austria, and the Iberia region. Northeast Europe accelerated versus the previous quarter, benefiting from significant growth in the UK. in the area of the Czech Republic, Slovakia and Hungary, supported both by recovery in the food preparation business and by continuation of coffee expansion in the area. The major region was still in negative territory, mainly due to the micro context and the currency impact. In the Americas, turnover, which in the first six months had been affected by the discontinuity, in mobile air conditioning achieved an acceleration in the quarter, plus 13.8% organic, thanks to the contribution of coffee and a NutriBullet nutrition segment. Finally, the Asia-Pacific region showed an expansion in turnover of plus 2.5% at constant exchange rates, but with a significant negative currency impact in the main countries in the area, both in the quarter and in the nine months. As regards the evolution of the product segments, the course categories show the progressive improvement over the course of the year, delivering a strong organic growth in the quarter. The coffee machines for household sector confirmed a positive expansion already seen in the second quarter, especially thanks to the constant enlargement of the fully automatic coffee market. As regards the overseas professional coffee machine sector, we highlight another outstanding quarterly performance keeping the weight of this segment on the group's total revenue to 5%. Food preparation is back to positive territory, achieving growth at a mid-teens rate at constant effects in the quarter, thanks to the strong expansion of the nutrition segment under the Nutribullet brand. In addition, the recovery of many of the product families, such as food processors, thin juicers, and fryers. Finally, the comfort segment remained in negative territory due to the postponement of the winter season in some relevant markets, while the home care achieved a double-digit growth thanks to a significant acceleration in the ironing category branded brown. Looking now at the evolution of operating margins in the quarter, the net industrial margin improved by 49% of revenues, from 46.7% in 2022, benefiting from the recovery of some production costs. We highlight that in the first nine months, the price mix effect was positive by €30 million. Adjusted EBITDA amounted to €105 million or 14.9% of revenues, delivering a marked improvement compared to 9.2% in the third quarter of 2022. and in continuity with the market improvement achieved in the first six months. The improvement in profitability was also partially supported by postponement of some investments in media and communication in the quarter due to the launch of the new campaigns in recent weeks. As to the balance sheet, net financial position as of 30 September 2023 stood at 326 million euro. and it had been significantly increased from €29 million reached last year. In particular, the free cash flow before dividends and acquisitions amounted to €14 million in the quarter, €99 million in the 9 months and €369 million in the 12 months rolling. In particular, we would like to point out that in the 9 months the Group was able to generate €188 million of cash from current operations and working capital movements compared to a completely opposite picture of last year, minus €159 million of absorption in the nine months of 2022, representing another significant step towards gradual normalization. Now, as a conclusion to my results overview, Let me remark that the group's excellent performance in the last few months supports and strengthens its prospects for post-pandemic normalization, with all key financial metrics, including growth, profitability, and cash flow, continually heading up in the right direction. Although the current economic and geopolitical backdrop remains characterized by uncertainty and variability, We are confident in the group's ability to overcome these challenges and capitalize on the growth potential offered by the coffee and Nutribullet nutrition segments. Having said that, in light to the dynamics of progressive recovery and profitability, we look at the targets for the year with optimism. In particular, we are confirming the estimate of slightly decreasing revenues. We raised the guidance on adjusting the BDA for the year. which we estimate now in the range of 420, 440 million euros. Now we can open the floor to Q&A. Thank you.

This is the course call 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 touchtone telephone. To remove yourself from the question queue, please press star and 2. We kindly ask you to use handsets when asking questions.

Thank you for taking my question and congratulations on results. I'm focusing on slide 13 and 14 where you showed the ABDA bridge and in particular on slide 13 with nearly 46 million in other costs saved. Can you please split the benefit you had from AMP and that you had from logistic cost. And looking at the nine months, you have had the 79 million improvement from lower cost. How should we think of this amount going forward? In Q4, you already talked about some postponement of AMP. Expenses, should we expect this being balanced by further savings on logistics? And how should we think about 2024? Have you already reached a sort of stabilization in cost, or should we expect further savings flowing through the P&L? Thank you.

With regard to the breach on the 9 months and trying to extrapolate what might happen in Q4, we expect to have... This is the 12th month, right?

just a while sorry in the next three months

So for the next three months, we expect to have a flat contribution from volumes, more or less. We continue to be positive on some mixed contribution. We expect to continue to have positive improvements in the industrial costs and as well on freight and logistic costs. At the same time, we might give back something in pricing because we've got cost advantages and the profitability will be under control. But we believe to maintain or improve potentially our market share, we might give back something, especially in critical promotional times. We're facing very important proportional weeks. With the support of our advertising, reinforced advertising campaigns, we will try to also maximize the opportunity by offering strong financial opportunities to our customers. In terms of compared to last year, in the fourth quarter, advertising will be in line or slightly below in absolute value versus last year. Prospects for next year I think is a bit too early but I might anticipate that on the cost side probably we have achieved in a year more than we might have expected originally and for next year we expect to have stabilization on the cost advantages that we are benefiting now.

Okay, thank you. Maybe a brief follow-up. You highlight a negative price mix in Q3. If you can comment on that, if it is fine, if it is mixed or what it is. Thank you.

Yeah, no, I would say that I'm not sure about negative... product mix, but I think we might have positive product mix, but we probably have negative price mix on the back of the promotional initiatives.

Thank you. And maybe if you can quantify the Euro million you spent on EMP year-to-date, if you have the number at hand. Thank you.

Okay, EMP, total EMP in the nine months were around 240 million euros.

One for 140. 240, 240. Ah, 240, okay.

With advertising and promotional together.

Brilliant, thank you.

Comparing to 271 last year.

The next question is from Francesco Brilli of Intermonte.

Good evening. Thanks for taking my question. Congratulations for the solid results. The first one is again on advertising and promotion costs. If you can expand a little bit on this. Is this due to an overall reduction of investment or a phasing effect between quarters or just other initiatives that I would just understand if it's confirmed the previous indication of the incidence of A&B on sales flat in full year 23 versus last year. The second is on Forex. In light of the impacts on the nine-month, we can consider at this level a reasonable impact also for the full year. And the last one is on cash position you have. You have a very strong position, positive net financial position, which is increasing quarter after quarter. Just in terms of capital allocation, what do you think could be the most likely option going forward, thinking of M&A or potential share buyback or higher dividends? Thank you.

Okay, no, thank you for the nice comments on the results. Thank you. On questions, EMP, I would say, yeah, we're going to have a lower level in the fourth quarter, as said. We will maintain a high share of voice. Actually, potentially, I think an increased share of voice as we see competitors are investing less in our core categories, while either we are spending a little bit less, we are more efficient, and we are gaining market share in the advertising space. Having said this, we think that in reality the reduction is some cutback in certain categories categories in particular with regard to food preparation. We cut back a bit. We're going to invest more behind Nutribullet for the quarter. We're going to invest more behind our fully automatic coffee maker. But the savings will come from efficiency and some reduction, as said, in some weaker categories as food preparation. I don't know, Nicola, if you had some comments around it.

A couple of comments on this. Definitely there is also a bit of effect of phasing, because as you have seen, we have launched a new campaign renewing our cooperation with the global ambassador, and the new campaign has went live in France by last week of September and in all the other European countries it was beginning of October. So this means that there is a bit of a translated effect between the two quarters. So we are expecting the fourth quarter slightly below, in line slightly below last year. So the effect that you see in this quarter, in the third quarter, is much significant than the one that we will have in the fourth quarter in terms of growth. of impact. And I would reiterate what Fabio has told, that it's not just an effect of expenses reduction, but it's also an optimization in allocation, as our current share of spending in the product segment is increasing across all the geographies.

Thank you, Nicola. With regards to FX, I think it's fair to consider a very similar effect of FX in the next quarter. And with regards to the question to the cash net, cash position, we're very pleased with the cash generated by the business. I take the opportunity really to to say that we have generated approximately 500 million euros in 12 months before investments and dividends. So, very strong cash position. The company is back on track in that perspective. And the priority would be M&A. M&A, of course, if we continue with this cash generation, and I don't see any reason why we should decelerate, Usually the fourth quarter can generate between 150 and 200 million in cash. So I suspect that we can have a year-end cash position net close to 500 million euro positive. And again, as I said, this will put a lot of pressure on us to own M&A. But again, I don't want to add anything more than that. The company is working on that actively and is our top priority. So buyback is not our priority as dividend, but is an acquisition.

Thank you very much, Riccio.

The next question is from Isacco Brambilla of Mediobanca.

Hi, good afternoon everybody. Three questions from my side. First one is on upgrade of EBDA guidance this year. Could you comment a bit on the main building blocks of the 50 million euros upgrade in guidance or what's driving this? Second question is on current trading in the key for quarter, especially for food preparation, just to better understand if the sharp acceleration in the third quarter was somehow structural or related to transitional factors. Last question is on inventory. I see it touch above the usual increase in the third quarter, which is a bit strange considering the strong top-line trends you are seeing. envisaging, you are experiencing. Is it related to some specific actions from your side to have enough products ahead of an important quarter? Which kind of expectations do you have for the full year?

Sorry, I'm not sure. The line was a bit disturbed on your last question. If you can rephrase it, please. Thank you.

Yeah, what are you expecting from inventory, which was up quarter on quarter, even despite strong top-line trends, so strong sell-out from your side. So just wondering whether this was related to some specific actions on your side to have enough products ahead of an important quarter.

Yeah, I think that... Thank you, Isaac. Okay, the trade on guidance, I think, is frankly because the third quarter has already delivered most of the gap versus the previous guideline, guidance for the year-end results. I think we have the strong, much stronger third quarter. we also have some positive signs in current trading october was a good month it was a good month so we we we think that it's just a extrapolation of what we've been delivering the previous months and what we are seeing in the month of october um second question about the uh organic the growth was at 8.8 percent i i think is a probably in the higher part of our mid-term, mid- to long-term guidance. We think that this group can grow between 5% and 10%, so it is in the range. It is in the higher end of the range, but we say that the long-term ambition is to grow above 5% to give a guidance for not necessarily for next year, but for the future. With regard to inventory, I think that last year was very critical at mid-year. I think the team has done a phenomenal job already in the second half. This year, the inventory dynamics have been more in line with our I'd say historical trends. I leave the word to Nicola, maybe Nicola if you want to comment on this.

To the question if we have enough inventory ahead of a very important quarter, we are in this moment in a much more normalized level of output also from our supply chain. We have, as you know, we have part of the supply chain coming from Asia that is already on water or on hand. But we have definitely full blast in this moment at the supply chain from Europe to support the coffee market in particular. So we do not see any risks in terms of inventory availability. And we see we are in the trajectory to have a good end-year level market. more or less in the space of last year. So we are confident to have the right level of supply in this moment and to end up with a healthy inventory by year-end.

Okay, thanks both for your answers.

The next question comes from Alessandro Cecchini of Equita.

Hello everybody and thank you for taking my questions. The first one actually is on the performance on food preparation that was above my expectations, probably also above your expectations in the third quarter with this kind of performance. I would like to understand if this ramp-up was how much was driven by I would say Nutribullet launch in Europe so probably you can comment about specific numbers but I would like you to understand if it was a small, medium or important support for the third quarter and what you are seeing in the market in the fourth quarter. My second question is about the premiumization that you are highlighting it's something that is you consider more structured than I mean temporary and you are seeing the market in last quarter to see a market that is still prioritizing premium products or I mean so if you can clarify a little bit on these And finally, my last quarter was we had positive financial income in the third quarter. You are close to $1 billion of liquidity. I would like to understand where you are investing this kind of cash, what is the return, and if you see that with this kind of balance, of course, excluding the sizable M&A, you could, I mean, deliver more positive financial income than negative financial income last quarter for next year. Thank you.

Okay, food preparation.

Well, it's I think it's, of course, a hot topic. I think coffee machines have been a strong element in our equity story, while food preparation was a strong contributor to our growth. And then a few, let's say, a couple at least of a gap year since, you know, the the normalization or the post-pandemic. I think that we feel positive about food preparation in the mid-term, although we have experienced some negative sales in the short term, in the past years. We think that partially it's also due to the reshaping of our product portfolio. I think with Nutribullet now we are more exposed to nutrients the younger generations a new way of making a cooking or preparing food at home and very pleased about the NutriBullet results on the back of the positive numbers we have reinforced our commitment to the brand we have a new campaign has kicked off in the month of October in the United States will eventually roll out in other geographies soon. I think that we should continue to deliver growth. The growth was not just coming from the new markets, Europe, but also with solid, we deliver solid results for Nutribullet in North America. So we feel strong about, let's say, the portfolio. As a matter of fact, we're trying really to, also in our communication, to describe in a different way our portfolio in food preparation. I think I'd like to continue using the word nutrition. Nutrition is a strong word that will become more meaningful in the future in the way we behave, in the way we cook, in the way we eat and how families behave. So, again, it's not just about Nutribullet. I think it's also about a recovery with our core products, notably kitchen machines. I think the gap versus last year or two years ago that was still very strong in the first month now is closing. So I'm more positive and I think that we should continue to deliver better results for the year and hopefully on the back of the success of nutrition next year to go back to growth again. Premiumization of products. Indeed, this trend is very visible for our coffee makers. I think that if consumers, they see a clear preposition, they see a clear benefit in products, they can pay more. in a nutshell our philosophy around our coffee makers is around the bean to cup systems I think that having the chance of buying the beans you want the best beans or your preferred coffee using a bean to cup machine which is simple fast and clean is certainly a product which can easily convince consumers to trade up. And then you see premiumization. Probably now is a bit more difficult for food preparation, the traditional food preparation. where consumers at the moment are a little bit reluctant to buy. But this is what we are also witnessing with Nutribullet. Although Nutribullet is an average price compared to the market, in reality it's positioned at a far higher price than most of the products, and we're seeing a strong trade-up. And Nutribullet is winning new customers both in North America and Europe. So I think that some categories are witnessing trade up and premiumization, while I expect some other categories to continue to be a bit more competitive. In terms of cash, I can reiterate what I already commented on the cash generation. As I said, acquisition is a priority. We're going to sit on a pile of cash by year-end, but acquisition is a priority. As an alternative, We certainly, we have dividends. We have already a policy for buybacks. It's very regulated, in particular in Europe. And therefore, it makes very slow the buyback initiatives. However, as I said, priority continues to be the acquisition. I want to reiterate this. Acquisition is our priority.

Okay, thank you. I was just asking about the return of your cash. I mean, in terms of yield, in terms of one billion of cash, you probably have more financial income than financial expenses, if this is correct to assume for the four quarter for the next year. And last question from my side about overseas, if you see reasonable to see this company to continue to grow also next year at 20-30% growth rates also thanks to new contracts it's public that they want a contract with Starbucks.

Sorry, of course we can have some positive financial income but again we are very conservative in our investment. During COVID times, we have, say, we borrow money because we didn't know what to expect. I mean, we were potentially facing a major crisis. And what we were doing is we were investing in a very cautious way. We were not interested in making a high yield. Therefore, they say the incomes would be very limited. At the same time, sometimes the financial incomes can also, which would be positive from, let's say, the cash management, can also have negative signs in particular with the currency hygiene, which in some cases delivers some negatives. But in general, we don't comment on our financial incomes.

The next question, gentlemen, is from Andrea Bonfa of Banca Acros.

Hello, good afternoon to everybody.

I hope you can hear me. Most of my questions have been answered, but I would like to have, let's say, some inputs on 2024, if that's possible. In particular, how do you see the pipeline and new products next year regarding investing? Is there more automatic cash machines, professional cash machines, or any input that might help us? And the second one is related to the current situation of the Chinese yuan, which is devaluating materially. And in particular in China, there seems to be deflation right now going on. And if that might help in the next year, gross margin since most of your production is based in China. Also, in general, maybe a comment on raw material. Let's say definition of what's going on on that front. Because, for sure, there is some deflation in raw material, but we know that this trend is a little bit sticky before having an impact in industrial companies. So, if you can elaborate also on this point as far as next year cross-products are concerned.

Thank you very much. Okay, thank you.

Thank you Andrea for your question. So the first question is about the new products. I think that we have a strong pipeline of innovation. We have recently held in Treviso an international meeting to introduce the new products which will be available to the sales team for 2024. There is a lot of excitement around the innovation. Maybe, Nicola, you want to comment on what are the key products, also including the launch of legacy of Eversys?

We have definitely on coffee, and it's not just on fully autos, but also in Pampa pipeline of products. that will be in the launch phase now in some selected countries, but it will be rolled out in all the countries next year. Rivelia, that is the machine that has been launched in France and Italy for the time being, will be available all over Europe, all over the world from beginning of 2024. On the other side, there is Magnifica, Plus, EvoPlus, that is available in Germany for the time being, that will be rolled out all over the world. So we have quite a significant range of novelties. We have Stark Milk. So that is, and again, in the logical premiumization that we were looking before, all these machines are going on the space of milk solution and beverage solution. That is definitely important. That is definitely a range that is representing a trade up in our product mix. The cold brew version of the machine also in the pump machine will be one of the key drivers of new products for next year. And going in the space, this is for the domestic, the household space. On the professional space, ever since we have the launch of Legacy, that is the third platform of machine in the professional space. Beyond coffee, we have a lot of products ready in the space of food preparation. We will reinforce the offering Nutribullet with cordless products, full-size kitchen system blending and also in the space of end blenders for brown and food processors and a new kitchen machine also for brown. for Kenwood. So, let's say that it's quite a robust pipeline. If I can comment also on the currency, it's true that in this moment the Chinese, the RMB is It's a bit of a tailwind. On the other side, I would comment that we do not have the major of our costs from China, but we are now a significant part of the costs that are Europe-based because a large part of the supply is coming from Europe. So if this is favorable, the renminbi, we have plenty of unfavorable currencies from a market point of view, starting from Australian dollar, Japanese yen in particular, that is quite significant, and US dollars as well. About cost inflation, I can comment also on this. Cost inflation, the trend, we see the trend in terms of transportation and freight probably going to a plateau because it's back to normalization. Material trend has a reduction, but is definitely, I would define this as a slight reduction trend. On the other side, we have still pressure in terms of labor cost. So, my best estimate for 2024 is that these two effects could offset in 2024 and give a flat compensated effect.

Thank you very much.

The next question is from Luca Baccoccoli of Intesa San Paolo.

Yes. Hello. How do I continue? No?

Yes, we can. Yes, we can. Yes.

Okay, okay, good. So my first question is on the advertising and promotion. third quarter. So if you can quantify the facing effect that you were mentioning. The second question regards NutriBullet. At the time of the acquisition, NutriBullet was approximately generating 200 million euros plus. So I was wondering what should we expect at the end of this year from Nutribullet and what was the precise top line growth reported during the nine months. And for next year, basically, if I understood correctly, we expect the food preparation back to normal level, the coffee machine basically having growing also thanks to the strong pipeline that you just depicted. So it seems that the organic growth next year should at least be in the lower end of the 5% to 10% range that you mentioned. So my question is, is this assumption is fair, and the final one is on OPEX evolution. If I'm correct, basically, the OPEX next year will expand in line with the top line. Is that a fair assumption?

Thank you. Lucas, sorry. First of all, if you could rephrase the second question, which was a long question, and partially we we couldn't hear very well the second part. It was about Nutribullet, about the growth rate of Nutribullet, and also the expectation, the comparison with one year ago, and then we lost a little bit the line and the connection.

Yeah, I hope that you can hear me better in this way. So on Nutribullet, my question is... top line that you expect this brand is going to reach by the end of this year at the time of the acquisition it was around 200 million euros so what should we expect for this year and what was the what we delivered in the first nine months I know that you are pretty shy on giving details for each brand but I think it's going to be And is there some other question that should I rephrase?

No, that's it. So the first question is about the EMP and the pre-postponement. Nicola, you answered it first time, so if you want to... I can complete.

Definitely, what would have been planned in September, having the full campaign, it would be something in the range of six, seven million. that we put a bit on hold and bringing this to bring a boost to the campaign by October, November. So this is something that is... fair estimation of a different phase in between the third and the fourth quarter. I grab also the last question about the OPEX evolution that we can expect in 2024. Definitely, this was a year of attention in terms of OPEX because of the uncertainty and the volatility that we experienced from the very beginning of the year. We think that everything that is valuable, given the situation that we have now, we have now can be considered in line and can be linear with the top line. Definitely one of the areas of attention that we have is definitely labor cost, because we sense all over the world, in all geographies, to be under pressure in terms of cost of labor.

About Nutribullet, we expect a growth rate for the year around 10%. Yes, definitely the brand is growing fast. We're very pleased with the development. We have new launches which will take place next year. We hope we can continue delivering growth with the newly acquired brand. Now, in the last question, about the OPEX, yeah, Nicola has already answered, right?

Yes, that's one missing on the next year top-line growth. It's fair to assume at least a 5% growth, organically.

For Nutribullet?

No, no, for the overall group I'm referring to.

The expectation for next year or for this year?

For next year.

Well, it's too early, it's too early. I would like to really reiterate that the ambition for the group with normalization should be to grow above 5%. We feel strong about the coffee opportunity. We have some, let's say, events which are, let's say, would be potentially affecting the growth rates in certain regions, like Maya, for sure. But again, we think the potential for the group is to grow above 5%. And I think we will be working on the budget and finalizing the budget in the next couple and we will give you some guidance as soon as possible. But for the moment, I would stay more with our long-term perspective to grow above 5% without a clear guidance for 2024.

Okay. Thank you.

Delonghi, there are no more questions at this time, sir.

So thank you all for attending the Delonghi