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. 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 the vice president, Mr. Fabio De'Longhi. Please go ahead, sir.
Good afternoon, ladies and gentlemen, and welcome to the De'Longhi Group quarter two 2022 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 Relations. 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 two 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 time 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 growth. I finally take the opportunity to sincerely thank all of you, all the analysts and investors I've been dealing with in the past few years. 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. Now we start commenting the H1 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 half of the semester. Specifically, the weakness in the second quarter is attributable to various elements. Firstly, a challenging comparison versus 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.
The scenario has deteriorated the demand for goods in the European region. While in the main extra-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 six to nine months should lower significantly the negative impact of these extraordinary effects. Secondly, the cost inflation was not fully offset by price increases. We stick to our strategy to maintain a pricing discipline even more rigorously, even though we're 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 espresso markets, taking advantage of the strong momentum in the Coffee segment. Consolidated revenues for the first six months of 2022 were up by 0.9% with a positive contribution of +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.
Southwestern Europe recorded a -14% in sales in quarter two, bringing the half one trend in negative territory. In particular, we point out a marked weakness in some of the core markets such as Germany, France, Austria, and Switzerland, which in the recent years benefited from the favorable context of own consumption, while the Iberian 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 exception of Poland, which grew double-digit in the quarter. The region resulted overall in negative territory in quarter two, only partially mitigated by the appreciation of the US dollar. The America area delivered a sustained growth in half one, maintaining a positive trend in quarter two, thanks to an expansion in the coffee and comfort categories.
Finally, APAC maintained a strong pace in growth, as highlighted in the first part of the year, led by almost all the main countries in the region, Australia, New Zealand, Greater 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 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 kitchen machines and Braun's hand blenders, while some minor categories such as deep fryers, spin juicers, and toasters remain 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 the 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 two. 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 communication and media, which increased from 10.5% to 12.8% of the previous year.
The fact of the increases in product cost, raw materials, freight, transformation cost, not fully offset by the price mix component. Larger costs, among them production inefficiencies 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 due to higher investment versus last year and the significant increase of the inventory level. In the first half, the free cash flow before dividend and M&A stood at -EUR 245 million, mainly due to the higher level of inventories reached, plus EUR 172.3 million in the six months.
Larger CapEx, the figure in the first half amounted to EUR 94.1 million, +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 rising costs, the supply chain, the distribution channels, the consumer demands. We never felt the effects 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 and 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 2022, we expect the persistent weakness of the markets 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 an adjusted EBITDA in the range of EUR 320 million-EUR 340 million. Now, we can open the floor to Q&A. Thank you.
Excuse me, this is the operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove yourself from the question queue, you may please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question comes from the line of Niccol``o Storer from Kepler. Please go ahead.
Yes. Good afternoon. Can you hear me? Hello?
Yes.
I have two questions. One is related to revenues and the other one to costs. On revenues, your guidance basically implies a continuation in Q3 and Q4 of the trends in Q2. Don't you expect a worsening of the picture also in areas that so far have held better than Europe? This is the first question. The second question is related to costs. In particular, I wanted to understand how much of the impact from higher A&P, cost inflation, and warehousing costs is coming from warehousing costs, and what should we expect in the second part of the year, specifically on warehousing costs?
Related to that, also, if you confirm your commitment on keeping the A&P on sales one percentage point higher compared to previous years. If the guidance includes this assumption. Thank you.
Your comments on revenues, I would agree. We expect the remainder of the year to be fairly in line with what we are witnessing here in quarter two that we are just reading. It's not impossible that we have some surprises here and there. At the same time, I think that we are facing also an easier comparison in the second half versus last year. We're getting good signs in coffee, which is the majority, the vast majority of our sales. I still believe that the weakness we're facing as we speak in quarter two I think is not just due to the lack of consumer confidence. I think it's in the summer.
People are now enjoying holidays. We believe that this post-COVID effect, once that people will get back home after summer, will potentially have some upside. 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. That's definitely a positive that we are also counting on in our guidance. With regards to the cost, I probably can hand over the answer to Marco Cenci, but just to introduce the cost. I mean, we have very high warehousing costs. We have already suffered, yeah, about 50% of the impact to expect for the full year in the first six months. We expect total extraordinary costs related to warehousing around EUR 25 million on top of last year.
Yeah. 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 EUR 20 million-EUR 25 million full year, and partially 50% of that is already in the first half. 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 phase, we are phasing part of the not absorbed fixed cost for this year. That kind of cost could amount around EUR 30 million-EUR 35 million full year. That partially included in the first half.
The combined effect of the extra warehousing costs and factory inefficiencies for the year will be around EUR 60 million?
Yeah, we can say that as soon as the stock will come back at the normal level, this kind of cost will disappear right away.
With regards to A&P, we believe that the decisions taken in the past years to accelerate our growth through extra investments in advertising has been very successful. We've been able to increase our market shares and also had a positive impact in our product mix. We continue with our plan, rolling out the plan. 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 monies 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 consumer are very reluctant to buy these products.
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 two years. We're 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, thank you. Just a brief follow-up, considering that you mentioned it. Is the idea to compensate inflation on cost with price mix of EUR 100 million still valid?
Yes. Yes, this is our ambition. Although we have to say that, honestly, we see some potential risks. 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 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.
Instead of passing on the 100, maybe it would be around 80 due to the current situation. We have reassessed, you know, keeping this in mind.
Perfect. Thank you.
The next question comes from the line of Isacco Brambilla from Mediobanca. Please go ahead.
Hi. Good afternoon, everybody. Thanks for taking my questions. I have a couple. The first one is on the consumer's environment. We are reading about many concerns on erosion of purchasing power for families, especially in Europe. From your understanding of the industry, is this 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-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, on consumer, it's not easy. It's not easy to really assess the consumer attitude that we will see in September. What I can say is small domestic appliances is often a very resilient business in a you know tough economic cycles. These our products are useful for the family, are good gifts for Christmas, are small investment which may be helping having little treats 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. At the same time, we are still experiencing a post-COVID effect.
I think that the weakness of the softening of the De'Longhi 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. We see positives in long-term trends for us. Coffee is super strong despite the momentary weakness in certain months and in certain geographies. 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.
Thanks also to advertising campaign, we are improving our mix. There is still a strong ongoing premiumization of the market. This is on the positive. On the negative, food prep 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 you make very traditional food at home, into fast, healthy food which you can combine with also supplements.
You transform, you know, instead of having a heavy meal, you get a healthy, quicker, homemade meal, very easily and very easy to clean. This is what we expect from the market. I said, I believe that our industry, our company has been very resilient in the difficult economic cycle. In terms of guidance, it is a base. It is definitely the base. De'Longhi will restart from EUR 320 million-EUR 240 million. We believe that we are suffering from extraordinary costs related to the supply chain disruptions. This will fade away progressively. We think that there are. I'm throwing a number which is an early say analysis, but I think there are at least EUR 50 million that we can take away, we can recover due to these inefficiencies and extraordinary logistics and warehousing costs. 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 inefficient. 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, if margins are the same, instead of EUR 320 million, EUR 240 million, it could be EUR 370 million-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 investment for the future. We can progressively, if sales go up, to have a lower incidence of the A&P costs. 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.
Many thanks. This was extremely helpful.
The next question comes from the line of Francesco Brilli from Intermonte. Please go ahead.
Good evening. Thanks for taking my question. I have a couple of questions from my side. The first one is on production levels. Can you share with us the level of production utilization of plants you have as of today? Is it still close to full utilization, 100%, or is slowing down? If you can share with us the plan you have in mind to slow down the production going forward in the next quarter, in the next quarters. The second one is on investments. I see that you are accelerating investment, and they are concentrated on production plants. I just wanted to ask to what these investments are devoted for production plants, so renovation or other actions. The third one, if I may, is which level of Forex tailwinds are you including in your guidance, in your new guidance for this year?
Sorry, I missed this, the latter part of the last question. If you could, repeat it. Thank you.
Yes. The Forex tailwind that you are embedding in your new guidance for this year.
On production, I don't want to go too much in detail. It's very painful because we have taken extreme actions to address quickly the inventory issues. We've taken extraordinary measures, which are translating in these inefficiencies that you see in the P&L. But we think that this was the right decision to take at this point of time. We feel confident that our action will bring rather quickly. Inventory corrections takes time, and so you don't have to expect no results really in short term.
We will have a first 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. Then to go back to normal 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. We'll try to reach lower inventory levels during 2023 to end up with a level of inventory more aligned to what we were at the end of 2020 and in the previous years.
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, two different directions, if I can really summarize. I mean, there are many more because we have investment also in innovation, in products. With regards 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.
Will allow us to ramp up quicker and in an environment that we feel comfortable with and competitive costs. The other important area of investment is automation. We've done and we continue to take out costs from our products through investment, which are in, as said, in automating 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 we are correct, we don't expect any significant impact in the short term.
Although we are covered on exchange rate with the dollar, for instance, 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. Summarize, short term, little to no impact. For next year on the dollar, we have to make an assessment.
Thank you very much.
The next question comes from the line of Luca Bacoccoli from Intesa Sanpaolo. Please go ahead.
Hi. Good afternoon, everyone. Can you hear me? Hello?
Yeah, yeah, Luca.
Okay, great. 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? 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, traditional food appliances vis-a-vis, let's say, appliances supporting healthy behaviors. The last question is on the CEO. I was wondering if you have set any internal deadline for the appointment of the new CEO that you can share with us. Thank you.
Okay. Thank you, Luca. Yes, on A&P, yes, I confirm, probably more than 1%, as I mentioned before, De'Longhi will be above 1%, our 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 our, w e have 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 that 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 has been in the past 15 years. This with regard to A&P, I don't know if I answered the question. If I move to NutriBullet. NutriBullet is less affected in term of growth rate, a negative growth rate, than our traditional cooking. We think it's because it's a younger and proposition. We think that for the moment, we are focusing on certain geographies. Unfortunately, with COVID, our international rollout has been quite slow.
Now we are starting really rolling out in Europe and in selected markets. We think that we will probably start seeing the effect of this rollout in the second half in a tougher environment, which maybe will make more difficult our launch, at the same time less visible the results. We think that the change in habits 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 ethnic 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 require new development, so 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 terms 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 to take advantage of this and I've been appointed the CEO again. 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 does not mean that we want to have a long period of transition. As it's gonna be a very important decision and we don't want to go through another change.
We want to make a good assessment, taking advantage of the fact that the company doesn't need a change in 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 is in continuity with what the company has done before. 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 a. Probably an internal solution could be quicker. If we will do an assessment, maybe in between three months and six months, I think we should be able to come to some solution. Yeah.
Okay. Thank you for your transparency.
As a reminder, if you wish to register for a question, please press star then one. The next question comes from the line of Alessandro Cecchini from Equita. Please go ahead.
Hello, everybody, and thank you for taking my questions. The 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 in which geographies in particular or if it's something widespread. Just to understand this point. 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 investment. I would like to better understand in the first half in your bridge, how much were this kind of investments? If you could split between how much is advertising and how much it's, I would say promotion, but very rough. Thank you very much.
Okay. The first question was about where the environment is worse for sales and pricing. It's definitely Europe. The second question is about A&P. On a yearly basis?
Six months. First half.
The first half, yes, the increase has been about EUR 34 million. Media was around?
About 20.
EUR 20 million. Around EUR 20 million. For the year-end?
Six months.
Yeah, exactly. This is the first six months?
First six months.
In the second half, we expect to have investment, media investment, more or less in line with last year.
We have to consider that the first half of this year, the comparison is in a first half of 2021, where we do not invest in the coffee campaign. As Fabio said, you have to record that we start with Brad Pitt campaign in September 2021.
Mm-hmm. No, no, clear. Actually, in terms of competition, I mean, everybody we had the chance to have a call with SEB, that's your competitor a few days ago. In this environment, competition, it's changing a little bit or still the same competitors in your view, the. Your main, I mean, obstacles or your main competitors? Just to better understand your competitive environment in this market versus last year, I will say.
Yeah, I would say the same. I mean, you're right. We expect competition in coffee from, you're right, in the high end, Philips, Saeco, more so in the entry low end. We don't see any major, like Sage, Breville for the traditional coffee machines. Then of course KitchenAid in food preparation or Moulinex in certain other products. So more or less it is the same as usual. From what we are hearing, everyone is taking initiatives to protect their margins. Therefore, we think that more or less all industry is trying to pass on the same price increase to the market.
Mm-hmm. Okay. Thank you to everybody.
Once again, for questions, star then one. We now have a follow-up question from Niccol`o Storer from Kepler. Please go ahead.
Yes, thank you. Actually, two very quick follow-up. Did I understand well, if I say that? Can you hear me?
Yeah. There is some noise. Background noise.
One sec. Okay.
Much better. Much better now.
Perfect. 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.
Below previous year's level. If I'm not wrong, we were in the EUR 770 million region.
Yeah, exactly. Yeah.
Okay. The second clarification is on your revenues guidance. Is the minus mid-single digit at constant or current Forex?
Reported.
Reported. Okay. Is it fair to assume that you might have some 3% FX effects boost?
It's possible. It's like? Okay. Thank you.
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 two 2022 results conference call.