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Good afternoon. This is the Chorus Call Conference operator. Welcome, and thank you for joining the De'Longhi First Half 2022 consolidated results presented by the Vice President, Fabio De'Longhi; and the CEO, Massimo Garavaglia [Operator Instructions]
At this time, I would like to turn the conference over to the Vice President, Mr. Fabio De'Longhi. Please go ahead, sir.
Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group Quarter 2020 Full Year Results Conference Call. Today with me are also Massimo Garavaglia our CEO; Marco Cenci, Chief Strategy and Control Officer; Stefano Biella, CFO; Fabrizio Micheli, Director of M&A and Investor Relations; and Samuele Chiodetto Investor Relator.
First of all, I would like to hand the floor over to Massimo for a farewell message.
Thank you, Fabio. Thank you very much. It was an honor for me to work for this great group in the last 2 years. I take the opportunity to thank the De'Longhi family, the Board and the entire management team for the support and trust shown from the very start.
Moreover, let me express my sincere gratitude to all the employees of the group around the world whose professionalism and dedication in such difficult times were a great motivation for me.
I leave this group with the belief that the strong focus on the strategic pillars and its unique competitive strengths are the main guarantee of a sustainable long-term goal.
I finally take the opportunity to sincerely thank all of you, all the analysts and investors have been dealing with in the past few years. And now I give back the word to Fabio.
Massimo, thanks. Thank you for your hard work, dedication and leadership over the past years, and I wish you all the best. And now we start commenting the half 1 results.
The first half of 2022 ended with revenues substantially in line with the record levels reached last year, despite the signs of softening demand in Europe that emerged in the second phase of the semester.
Specifically, the weakness witnessed in the second quarter is attributable to various elements. Firstly, a challenging comparison to last year that recorded an extraordinary expansion in turnover of 46% in the first half and 36% in the quarter on a like-for-like basis.
Secondly, a complex and dramatic geopolitical situation, which inevitably has been worsening the consumer confidence. Lastly, the adverse inflationary pressures, which have been eroding the disposable income of consumers and affecting the purchase choices.
This scenario has deteriorated the demand for good in the European region, while the main actual European areas, the group has been able to maintain a positive trend, thanks to expansion of the markets and the development of the Coffee business.
As to profitability, the quarter's margins were eroded by some specific and, in our opinion, transitory effects.
First of all, the significant increase of inventory levels required a slowdown in production activity and higher logistics and warehousing costs, influencing the profile of margins in the quarter.
The reduction of stock already planned for the next 6 to 9 months should lower significantly the negative impact of these extraordinary effects.
Secondly, the cost inflation not fully offset by price increases. We stick to our strategy to maintain a pricing discipline even more rigorously even though we are facing a tough environment in the distribution channels.
Lastly, the spending on A&P have been increased to the continuation of the global campaign launched in autumn last year, starring, Brad Pitt as an ambassador that has been having a phenomenal impact with aim to strengthen the group's leadership and authority in the special markets, taking advantage of the strong momentum in the coffee segment.
Consolidated revenues for the first 6 months of 2022 were up by 0.9%, with a positive contribution of plus 3.8% from the currency component. In the second quarter, the revenues fell 5.8% with a positive contribution from the currency equal to 4.9%.
The broad geographical diversification of the group was able to mitigate a weak performance in the European area, thanks to the growth achieved on the extra European geographies. South Western Europe recorded a minus 14% in sales in quarter 2, bringing the half 1 trend in negative territory.
In particular, we print out a marked weakness in some of the core markets, such as Germany, France, Austria and Switzerland, which in recent years benefited from the favorable context of on consumption, while the Iberia region continued to grow.
The negative trend continued Northern Eastern Europe due mainly to the direct and indirect effects of the Russian Ukrainian conflict with the exception of Poland, which grew double digit in the quarter.
EMEA region resulted overall in negative territory in quarter 2, only partially mitigated by the appreciation of the U.S. dollar. The America area delivered a sustained growth in half 1, maintaining a positive trend in quarter 2, thanks to an expansion in the coffee and comfort categories.
Finally, APA maintained a strong pace in growth as delighted in the first part of the year, led by almost all the main countries in the region, Australia, New Zealand, Great China and South Korea and a significant contribution of currencies.
As the evolution of product categories, the first half highlighted a significant weakness in the food preparation sector, offset by the coffee business resilience. Specifically, the sector of coffee machines for households that grew in the half year slowed down in the quarter, attenuated by a strong trend of expansion of manual machines supported by recent launches relating to the expansion of the La Specialista range.
The food preparation sector confirmed the difficulty in comparing with the extraordinary growth rates obtained in the first half of last year. This weakness is more pronounced in the core categories of Kenwood's kitchen machines and Braun's hand blenders, while some minor categories such as deep fryers, spin juicers and toasters remained in positive territory in the quarter.
The contribution of the comfort category, portable air conditioning and heating, remained positive in the half. Although the second quarter was disadvantaged by an early air conditioner sales season, which took place in the first months of the half year.
Home care, house cleaning and ironing, was in the positive territory in both periods under analysis, thanks to the recovery of ironing in the last months of the semester.
Finally, the contribution of the professional coffee machine sector, represented by the newly acquired Eversys -- which showed a very strong growth trend -- was largely positive.
Looking now at the evolution of the operating margin in the second quarter. The net industrial margin stood at 48.2% of revenues compared to 50.4 last year, due to increase of the cost inflation, not totally offset by the price-mix component and the lack of production efficiencies because of lower production levels in quarter 2.
Adjusted EBITDA amounted to EUR 149.1 million, equal to 10.3% of revenues compared to 17.6% in 2021 and 12.5% in 2020. The reduction of margin was mainly attributable to higher investments in communications and media, which increased from 12.8% to 10.5% of the previous year.
The factor of the increases in product cost, raw materials, freight, transformation cost not fully offset by the price/mix component. Larger costs, among them, production initiatives and warehousing and logistic costs due to the high level of stock.
As to the balance sheet, net financial position at the end of June stood at EUR 55.4 million, decreasing from 2021 and to do higher investment versus last year and the significant increase of the inventory level.
In half 1, the free cash flow before dividend M&A stood at minus EUR 245 million, mainly due to the higher level of inventories reached plus EUR 172.3 million in the 6 months.
And larger CapEx, the figure in H1 amounted to EUR 94.1 million, plus EUR 33.5 million versus last year including the EUR 21 million acquisition of a new plant in Romania.
Conclusion and guidance. We are living in a time of increasing complexities coming from many fronts, such as raising costs, the supply chain, the distribution channels, the consumer demand will narrow the effect that in most cases might prove to be temporary.
In this period, the group has been showing to have competencies and assets to overcome difficulties, and this is a strong competitive edge. In the meantime, the group strategy has to maintain a strong focus on a sustainable development of the business in the long run, leveraging the communication investment and international expansion outside Europe in working on the production cost control.
This medium-term strategic lines will enable us to support our leadership positions, especially in the coffee. Strengthening the presence of our brands in the markets and aiming and fostering our global expansion.
As to this 2022, we expect the persistent weakness of the market and demand in the second half of the year, and we therefore expect to be able to close this year with revenues down mid-single digit and adjusted EBITDA in the range of EUR 320 million, EUR 340 million.
Now we can open the floor to Q&A. Thank you.
[Operator Instructions] The first question comes from the line of Nicolas Storer from Kepler.
Yes. Can you hear me?
Yes. Okay.
Okay. I have 2 questions. So one is related to revenues and the other ones to cost. So on revenues, your guidance basically implies a continuation in Q3 and Q4 of the trends seen in Q2.
Don't you expect a worsening of the picture also in areas that so far have held better than Europe. So this is the first question.
The second question is related to cost in particular. I wanted to understand how much of the impact from higher A&P cost inflation and warehousing cost is coming from warehousing costs?
And what should we expect in the second part of the year specifically on warehousing costs. And related to that, also if you confirm your commitment on keeping the A&P on sales 1 percentage point higher compared to previous years. So if this -- if the guidance includes this assumption?
Yes. Your comments on revenues, yes, I would agree. We expect the remainder of the year to be fairly in line with what we are witnessing here in quarter 2 that we are just reading. And it's not impossible that we have some surprises here and there.
But at the same time, I think that we are facing also an easier comparable in the second half versus last year. We're getting good signs in coffee, which is the majority -- the vast majority of our sales. And I still believe that the weakness we are facing as we speak in quarter 2, I think is not just due to the lack of consumer confidence.
I think is in the summer, people are now enjoying holidays. We believe that this, I'd say, post COVID effect once that people will get back home after summer, will potentially have also some upside.
But in the end, we think that we can confirm the trends that we are seeing today. We think that China is still showing good signs and the market of coffee machines is growing very rapidly for us.
So that's definitely a positive that we are also counting on in our guidance. With regards to the costs, I probably can hand over the answer to Marco Cenci, but just to introduce the call. I mean we have very high warehousing costs. We have already suffered about 50% of the impact that we expect for the full year in the first 6 months, we expect total extraordinary costs related to around EUR 25 million on top of last year.
We confirm, as in the past, we said, the same as EUR 100 million versus last year of raw material and other costs. On that, we have to add due to the high level of stock, some inefficiency in warehousing due to the fact that we have to rent space and to have some other costs that, as Fabio said, probably we will take around the EUR 20 million, EUR 25 million full year.
Partially 50% of that is already in the first half. And also due to the fact that we are reducing the production we are, let me say, stopping the production in our factory. There, we will face -- we are phasing part of the not assorted fixed cost for this year.
That kind of costs could amount around EUR 30 million, EUR 35 million full year. Also that partially included in the first half. So the combined effect of the extra warehousing costs and factory and efficiencies for the year will be around EUR 60 million.
We can say that as soon as the stock will come back at the normal level, this kind of cost will disappear by the way.
With regards to A&P, we've done -- we believe that the decisions taken in the past years to accelerate our growth through extra investments in advertising has been very successful.
We have been able to increase our market shares and also the positive impact in our product mix. So we continue with our plan rolling out the plan. And we will probably increase this year, A&P of probably 1% as was already announced.
But this is resulting from some shuffles in where our money are allocated and we are now reducing our investment behind our food preparation and kitchen products because we believe in this space, there is a little upside if we increase advertising.
For the moment, the consumers are very reluctant to buy these products. And on the contrary, we are confirming our investments behind coffee, where we are getting good results, and we maintain a positive stand despite the difficulty and despite the incredible volume jump that we have witnessed in the past 2 years.
So we are confirming the plans. And also, we are leaving some room for some promotional initiatives at key times of the fall to support our sales, not only with the advertising campaign, but also with effective promotional initiatives behind our core items.
Okay. Just a brief follow-up, considering that you mentioned it. Is the idea to compensate inflation cost with price mix of the EUR 100 million still valid?
Yes, this is our ambition, although we have to say that honestly, we see some potential risks and the risks are also coming from the fact that we want to accelerate our inventory reduction.
Therefore, it's not impossible that -- saying that we have about EUR 100 million of headwinds in extraordinary costs that were already announced to the market. We were thinking to totally offset them now we are now a bit more cautious.
We will be very disciplined in the price increase, but we might have some initiatives that are more aimed to the slow-moving stock reduction, which can result on a worsening of our price increase strategies or around EUR 20 million.
So instead of passing on the EUR 100 million maybe it would be around EUR 80 million due to the current situation. So we have reassessed keeping this in mind.
The next question comes from the line of Isacco Brambilla from Mediobanca.
I have a couple. The first one is on the consumer environment. We are reading about many concerns on erosion of purchasing power for families, especially in Europe from your understanding of the industry.
Is the situation expected to peak in terms of headwinds in the second half of 2022? Or in your opinion, this will remain a theme also for next year?
Second question is on your EBITDA guidance for this year. Should we see this EUR 320 million to EUR 340 million new guidance as a new basis from which we should expect De'Longhi to restart its growth path starting from 2023?
Well, the consumer is not easy. It's not easy to really assess the consumer attitude that we will see in September. But what I can say is small domestic appliances is often a very resilient business in tough economical cycles.
Our products are useful for the family, are good gift for Christmas or small investment, which may be helping having little tricks at home and saving major costs in the restaurants or around the world, which I expect to have some positive for us in the second half.
But at the same time, we are still experiencing a post-COVID effect. I think that the weakness of the softening of the longest sales is more related to the fact that after a couple of years of lockdown, people are now enjoying their summer and traveling and therefore, our sales have been a bit softer.
But we see positives in long-term trends for us. Coffee is super strong despite the momentary weakness in certain months in certain geographies. But all in all, we see a tremendous growth potential.
We see opportunities for increased penetration and China is a great example. Thanks also to advertising campaign, but also the appreciation of consumers for better coffee. The more they are exposed to better coffees, the more they want to have better coffee [ at home]. And thanks also to advertising campaign, we are improving our mix.
There is still a strong ongoing premiumization of the market. So this is on the quality. On the negative footprint will be weak, and our numbers are really considering a continued weakness of this segment that on the contrary last year has been a phenomenal growth engine for the group.
At the same time, we are working on new habits and the acquisition of Nutribullet will allow the group also to move from the more traditional food preparation segment where you make cakes or you make bread or make a very traditional food at home into food, fast, healthy, which you can combine with also supplements.
So you transform instead of having a heavy meal, you get a healthy quicker homemade meal very, very easily and very easy to clean. So this is what we expect from the market and as said, I believe that our industry, our has company been very resilient in the difficult economic cycle.
In terms of guidance, it is a base. It is definitely the base. The longer we restart from EUR 320 million to EUR 340 million. But we believe that we are suffering from extraordinary costs related to the supply chain disruptions.
This will fade away -- will fade away very progressively. We think that there are throwing a number which is an early, say, analysis. But I think there are at least EUR 50 million that we can takeaway, we can recover due to these inefficiencies and extraordinary logistics and warehousing costs.
As I said before, the question from Mr. Storer, we said that we have EUR 25 million of extraordinary warehousing costs and EUR 35 million of it. We think that once that inventory levels will be restored and our production will go back to normal, this eventually will disappear.
Saying so, it could be that the real base, say, if sales stay still, margins are the same. Instead of EUR 320 million, EUR 340 million, it could be EUR 370 million and EUR 390 million EBITDA adjusted or normalized.
Obviously, this will be achievable with a time lag, hard work and some short-term difficulties but we think that this is in our potential. Of course, we think that at the same time, the A&P will stabilize.
We don't foresee increase in absolute value of our advertising investments for the future. So we can progressively if sales go up to have a lower incidence of the A&P cost.
And also, our assumption is for this is true if there is still a cost inflation stabilized. If we see further inflation, that would be handled through price increases and mix improvements.
This was extremely helpful.
The next question comes from the line of Francesco Brilli from Intermonte.
I have a couple of questions from my side. The first one is on production levels. Can you share with us with the level of production of utilization of plants you have as of today?
I mean it's still close to full utilization, 100% or is lowering down is slowing down. And if you can share with us the plan you have in mind to slow down the production going forward in the next quarters?
And the second one is on investments. I see that you are accelerating investment and they are concentrated on production plans, just wanted to ask to what these investments are devoted for production plants?
So renovation or other actions. And the third one, if I may, is which level of ForEx tailwinds that you're including in your guidance into your new guidance for this year?
Sorry, I missed the latter part of the last question, if you could repeat it?
Yes, the ForEx tailwind that you are embedding in your new guidance for this year?
Yes. Okay. Okay. So on production, well, I don't want to go too much in detail, it's very painful, but it's very painful because we have taken extreme actions to address quickly the inventory issues.
We've taken actual measures, which are translating in these efficiencies that you will see in the P&L. But we think that this was the right decision to take at this point of time. And we feel confident that our action will bring rather quickly.
And inventory correction takes time. And so you don't have to expect no results really in short term. We will have a first say, delivery of our plan by the year-end. Where we want to end the inventory level around EUR 700 million, thanks to this extraordinary reduction in the production capacity.
And then to go back to norm by the end of 2023. And we will try to control as much as possible the usual seasonal peak that we have in the month of July and August. So we try to reach lower inventory levels during 2023 to end up with a level of inventory more aligned to what were at the end of 2020 and in the previous year.
The investment for CapEx for the year will be around EUR 150 million and this also including the new factory in Romania. The investments are towards, say, 2 different directions. If I can really summarize many more because we have investment also innovation, new products.
But with regard to the industrial investments, we have built a new plant because we think we will need production capacity to support our long-term growth in fully automatic coffee machines and coffee makers in the future.
The investment is such that will allow us to have a longer period to absorb the extra capacity that we bought in a country that we know very well, so will allow us to ramp up quicker and in a barrel that we feel comfortable with and competitive costs.
The other important area of investment is automatization. We have done and we continue to take out costs from our products throughout investment, which are in -- as I said, in automated machine, reducing the impact of cost of labor, the incidence of cost of labor in our products, in particular, in our Italian plant, but as well in the Romanian plant.
Last but not least, you asked about ForEx. For the year, we expect much lower purchases at year-end. And if our new assessment on purchases and are correct. We don't expect any significant impact in the short term.
Although we are covered on exchange rate with the dollar price. For this year, we are well positioned in the future for next year, we need to take into account what can be an impact of the worsening of the exchange rate between euro dollar.
So summarize, short-term little to no impact for next year on the dollar, we have to make an assessment.
The next question comes from the line of Luca Bacoccoli from Intesa Sanpaolo.
Good afternoon, everyone. Can you hear me?
Yeah. Yeah. Okay.
Great. So some follow-up questions from my side. The first one regards the advertising and promotion budget. You left unchanged the guidance of a 1% increase as a percentage of sales. But this means, I think, in absolute terms, a lower amount given the decreasing top line. Is that correct? And the second follow-up is on the Nutribullet, I'm just curious to understand if you already see a divergent trend between consumer attitude towards, let's say, a traditional food appliances vis-a-vis let's say, appliances supporting healthy behaviors.
And the last question is on the CEO. So I was wondering if you have set any internal deadline for the appointment of the new CEO that you can share with us.
Okay. Thank you, Luca. So yes, on A&P, yes, I confirm probably more than 1%, as I mentioned before, [indiscernible] (00:38:07) will be above 1% or increase in A&P due to the, again, the continuation of our global campaign, which, for the first time, will be on a 12-month basis because if you recall last year, we started investment in September.
And this year, we have started -- we continued our advertising campaign in January and throughout the year. We think that there is still a strong momentum in coffee. I mean, despite I said the weakness in certain geographies or in certain months.
But all in all, we think that coffee will continue to be an incredible engine for our growth story in the future as I've been in the past 15 years. So this with regard to AP, I don't know if I answered the question.
If I move to Nutribullet, Nutribullet is less affected in terms of growth rate, a negative growth rate than our traditional cooking. We think is because it's a younger and proposition and we think that for the moment, we are focusing on certain geographies, unfortunately, with COVID our international rollout has been quite slow.
And now we are starting really rolling out in Europe in selected markets. So we think that we will probably start seeing the effect of this rollout in the second half. In a more -- in a tougher environment, which maybe will make more difficult our launch and at the same time, less visible the results.
But we think that the change in [ abet ] is opening also the door to other launches that we might have in the future in both healthy cooking, like grain cookers, or also some ethnical cooking that are now growing quickly in North America or in the U.K., just to name a few Ninja has been very successful with their grain cookers or another player called Instant Pot with some rice cooker and healthy food preparation, which the new generation are very keen on buying.
Again, this product requires new developments, so will not be they will deliver results in the short term, but this is products that we think are part of a strategy behind the Nutribullet acquisition.
In term of CEO, well, I cannot say much, but I can say something. I mean, we have decided today during our Board of Directors that taking advantage of my experience with the company and to say, to take advantage of this. And I've been appointed the CEO again.
I will -- although our intention is to have a new CEO outside of the family as soon as possible, we can work in finding the new talent, both internally or externally, taking the right time.
This doesn't mean that we want to have a long period of transition, but as is going to be a very important decision, and we don't want to go through another change. We are -- we want to make a good assessment, taking advantage of the fact that the company doesn't need changing the strategy can work towards, say, implementing -- continue to implement the let's say the strategic plan that was set out by Massimo Garavaglia, which has been continuity with what the company has done before.
And therefore, we will try to be ready with a new CEO as soon as possible, using myself as an interim with giving continuity to the company. Reinforcing the initiatives in the short term. And hopefully, we will come up to a good decision as quickly as possible.
Frankly, I don't expect to have probably an internal solution can be quicker. So if we will do an assessment, maybe in between 3 months and say 6 months, I think we should be able to come to some solution yes.
[Operator Instructions] The next question comes from the line of Alessandro Cecchini from Equita...
Hello, everybody, first one, actually, it's -- you stated about the environment in terms of pricing, you stated tough environment in distribution. I would like to better understand which geographies in particular or if something widespread.
So just to understand this point, and frankly, I mean, it's the reason why in the second quarter, probably you had a price mix effect on EBITDA bridge only flat? My second question, it's about still A&P investments.
I would like to better understand in the first half in your bridge, how much were these kind of investments? And if you could split between how much is advertising, how much it's, I would say, a promotion, but very, very, very rough.
Okay. The first question was about where the environment is worse for sales and pricing is definitely Europe, definitely Europe. The second question is about A&P. On a yearly basis, in the first half, yes, the increase has been about EUR 34 million.
And media was around about -- around EUR 20 million. So for the year-end. Yes, exactly. So this is the first 6 months -- in the second half, we expect to have investment, media investment more in line with last year.
We have to consider that part of this year, the comparison is in a first half of '21 where we do not invest in the coffee campaign. As Fabio said, you have to recall that we start with Brexit campaign in September '21.
Clear. And actually, in terms of competition. So I mean everybody we added a chance to have the call with SEB that is your competitor a few days ago.
In this environment, competition, it's changing a little bit or still the same competitors in your view, your main obstacles your main competitors just to better understand your competitive environment in these markets versus last year, I will say.
Yes. I would say the same. I would say the same. I mean we expect competition in coffee from [indiscernible], we don't see any major Sage Breville for the traditional coffee machines and then, of course, KitchenAid in food preparation or Moulinex in certain other -- so more or less, it is the same as usual.
And from what we are hearing, everyone is taking initiatives to protect their margins. And therefore, we think that more or less all industries is trying to pass on the same price increase to the market.
[Operator Instructions] We now have a follow-up question from Nicolas Storer from Kepler.
Actually, 2 very quick follow-up. Did I understand well if I say that can you hear me?
Yes. There is some noise, background noise.
Let me one second Okay. Okay. Okay.
Much better.
Perfect. So I was wondering, did I understand well, you said you aim at bringing inventories at EUR 700 million at year-end. Is this right?
Yes, yes.
So below previous year's level, if I'm not wrong, if we're in the EUR 770 million region?
Yes, exactly, yes.
And the second clarification is on your revenue guidance. Is the minus mid-single digit at constant or current ForEx?
Reported. Reported.
Reported Okay. And is it fair to assume that you might have some 3% FX boost?
It's possible. It's like...
Gentlemen, there are no more questions registered at this time.
As there are no more questions, I thank you all for attending the De'Longhi Quarter 2 2022 results conference call.