Lagardère SA (OTCPK:LGDDF) Q2 2024 Earnings Conference Call July 23, 2024 12:00 PM ET
Company Participants
Emmanuel Rapin - Head, Financial Communication
Arnaud Lagardère - Chairman and Chief Executive Officer
Gregoire Castaing - Deputy Chief Executive Officer
Dag Rasmussen - Chairman and Chief Executive Officer, Lagardère Travel Retail
Stéphanie Ferran - Deputy Chief Executive Officer, Hachette Livre
Emmanuel Rapin
Ladies and gentlemen, thank you for joining us this evening to Lagardère SA First Half 2024 Results. I am Emmanuel Rapin, Head of Financial Communications. And I will be guiding you through this presentation. The conference is led today by Arnaud Lagardère, Chairman and Chief Executive Officer of Lagardère SA and Hachette Livre SA; Gregoire Castaing, Deputy CEO of Lagardère Group in charge of Finance; Dag Rasmussen, Chairman and CEO of Lagardère Travel Retail; and Stéphanie Ferran, Deputy Chief Executive Officer, Hachette Livre. After the presentation, I will be reading the Q&A session from financial analysts only.
And now I will leave the floor to Arnaud Lagardère.
Arnaud Lagardère
Thank you, Emmanuel, and good afternoon to everybody. Before I get to my brief introduction about H1, let me give you two quick updates. The first one is to introduce Gregoire Castaing, who will cover H1 in details. You received the PR, so you know exactly who he is and where he is coming from and his group. He will be fully operational in September and the idea is to reinforce our financial team, while Sophie remains CFO of the group, obviously. Gregoire will report to me, and the current team will report to him. One of the top mission Gregoire will carry is to lower the net debt amount and bring more focus to the overall company on the cash management. And so we will welcome him, and this is going to be very, very helpful.
Second, you’ve heard the Vivendi announcement, which is a great news for the Lagardère company. As you remember, the deal that I personally made with Vincent Bollore and his family was based on very close relationship between both families, and at that time, Vivendi was the vehicle for that deal. So, we will – once the whole deal will be accomplished and once all the agreement will be given by the extraordinary general assembly of Vivendi, we will be closer to the Bollore family, and that’s exactly what I wanted for Lagardère. So, it is a great news.
Now going back to H1, I have to say that the Board and myself are extremely proud of all colleagues from all divisions in the group Lagardère for their achievement and the record numbers. We continue our growth and profitability semester after semester, year-after-year. And hopefully, we have – we are – we will do the budget for this year and we will do better, I hope than last year.
Let me give you the floor to Gregoire about the details on H1 and get back to you about the Q&A. Gregoire, the floor is yours.
Gregoire Castaing
Thank you. Thank you very much, Arnaud and good evening, everyone. First of all, of course, I would like to say that I am very glad and proud to join this beautiful group, Lagardère. And of course, I am also very pleased to share with you our strong results for this first semester of ‘24.
As you can see it on the first slide, Lagardère Group revenue has reached its highest historical level at nearly €4.2 billion, up 13% as reported and more than 10%, 10.1% on a like-for-like basis. The group is also – has also reached a new record in terms of recurring EBIT with €212 million, up by €71 million, compared to the same period last year. And last but not least, the free cash flow has also improved significantly, increasing by €123 million compared to H1 ‘23. I will come back to this later, but as Arnaud mentioned it, this last KPI is definitely one of our key priorities from now forward is we want to deleverage the group and reduce the level of its net debt. These good figures were driven by all the performance of all our business lines.
First of all, Lagardère Publishing revenue grew by 4.5% on a like-for-like basis with a high level of recurring EBIT at €113 million, up by €48 million. Lagardère Travel Retail reached a new peak in terms of revenues, increasing by 13.5% on a like-for-like basis, H1 as reported with the division recurring EBIT hitting a new record at €109 million. Lastly, other activities are stable, while we observed a strong momentum in the radio activities and Lagardère Live Entertainment.
Let’s move now to the group main figures. And on this slide, as you can see, this slide illustrates again the strong activity and revenue growth compared to last year, along with the global improvement in terms of operating margin, this margin has increased to 5.1% from 3.8% in H1 ‘23. The level of net debt has slightly increased since last year mainly due to the group’s investments in H2 ‘23 with Tastes on the Fly, Marche, Costa Coffee M&A. But as I already mentioned, we want to focus on generating cash and reduce our level of net debt by the end of this year. That’s why I also want to point out that the level of net free cash flow generated during this first semester also increased significantly, as you can see it, but nevertheless, we remain vigilant on this matter. And that’s why in April, as you know, the AGM approved the Board’s proposal for a dividend payment of €0.65 per share for ‘23 compared to €1.3 last year.
Let’s come back to revenues and main variation on the Slide 6. Group revenue increased essentially driven by Lagardère Travel Retail with growth of €327 million on a like-for-like basis. But this performance is also with the publishing very positive with €57 million more generated during this first semester compared to H1 ‘23. Besides this good organic growth, the scope effect has also been very positive, as you can see with €107 million, which mainly includes, as already mentioned it, the acquisitions of ‘23 Costa Coffee in Poland, Marche International in Germany and Tastes on the Fly in the U.S.
If we now focus on each main business lines, starting with the split of publishing revenue by segment on Slide 9. As you can see, Lagardère Publishing revenue achieved a new historic level of €1.3 billion during this semester. This performance was mostly driven by, first, the illustrated segment with a good momentum in the young adult market. Second General Literature was best sellers by Guillaume Musso and Laurent Gounelle in France, Rebecca Yarros and Ana Huang in the UK and James Patterson and Michael Crichton in the U.S. It is also worth noting the performance of Partworks benefiting from the success of new collection launched in France and in Japan at the end of the last year.
Moving on Slide 10 to see the split of this revenue by geographic area. As you can see, the U.S. And the Canada is now our first market during this first semester with roughly 32% of the global revenue. This area was up by close to 8% like-for-like basis, supported by a strong release program and as well growth in the audio division, which is a very good thing for the margin, by the way.
France is still a core market with 29% with a modest decline down to close to 1%. This is quite better than the market, even if we also suffered from the low lower level of activity in educational, for instance. In the UK, the growth reached 8% in a slightly down market. This good growth is mainly due to the exceptional Guillaume Musso of front and backlist sales. Finally, Spain and Latin America were globally up by 8%, while business remained stable in Spain. It saw a significant increase in both the education and trade sectors in Mexico.
Let’s have a look to the profitability on the next slide. And as you can see, Lagardère, publishing profitability was up €48 million, as I already mentioned it, compared to the first half ‘24. But it’s important also to point out the margin level at 8.6% represents a significant improvement mainly driven by growth in the UK and the U.S., a favorable sales mix, as I mentioned it in both physical and digital formats mainly in the U.S. and also, of course, cost saving measures. A major part of this performance in terms of profitability is also linked to timing effects and mix of sales, as I said it.
During this past summer, you should not elaborate too much on these figures in order to reassess the target for our full year ‘24 lending. This advance gives us some comfort on our target, but it isn’t a reason for increasing too much our target. And as you know, the second semester is definitely very important for us, very contributive. So that’s why we have to be very cautious until the end of the year.
If we have a look to the cash flow statement on this slide, the key element is that Lagardère Publishing free cash flow before changes in working capital is up €70 million, at €73 million versus last year, a level achieved again, thanks to significantly higher cash from operation.
Let’s move on to Travel Retail and starting with the split of – in terms of revenues. As you can see, the EMEA area, excluding France is still our main market with a very strong dynamic regarding a growth of 22% in H1 driven by increase of traffic from international tourists especially in Italy, Romania and the UK. The France is still a core market with also a positive trend and a growth 18%. The growth in the Americas region is slightly lower than during ‘23, but still very robust with roughly 7% during this semester. And as many players, our activity in North Asia wasn’t very good recently, which is largely attributable to the unfavorable economic climate in China, but important also to underline that despite the situation in Asia affecting many players. Overall, the growth of the branch remains very positive, as you can see. And H1 ‘24 was a good semester for Lagardère Travel Retail with revenue at €2.7 billion.
If we have a look to the division revenue by segment and focusing on the three main segments. The activity was mainly driven by food service growth, which saw a significant boost since our acquisition in this segment. And I think it’s also important to notice that we have now a well-balanced portfolio of activities with three main business lines of roughly equal weight.
Moving on to Slide 16. The recurring EBIT stands at €109 million. As Arnaud already mentioned, the profitability remained high at 4%. This level is stable compared to last year, but significantly higher than the pre-COVID level, which was more between 2% and 3%. So again, it’s a good thing to stay at this high level of margin even with a significant growth in terms of revenue. This is obtained thanks to, of course, improved activity in the EMEA, as I said it, good margin control by the team and, of course, efficiency on the cost and game plans.
Let’s – now let’s turn our attention to Lagardère Travel Retail cash flow on the Slide 17. And the main thing to underline is that we have still a significant level of CapEx with CapEx at €104 million this semester, the group significantly increased its investments compared to last year. I would like to underline this because even if we are focused on the cash generation, we also still invest significantly in this fast-growing and profitable business. However, it’s also good to note that despite this increase of CapEx, free cash flow before change in working capital is almost stable at €83 million, thanks to higher cash from operations.
Let’s move on to our third business line, other activity. Revenue for the last 6 months amount to €136 million, stable on a like-for-like basis. A few points to be highlighted. The first one, the good momentum in Radio activity due to improved audience ratings for Europe 1, particularly. Secondly, the press activity was slightly down due to the decline in advertising revenue in a decreasing and very competitive market. And finally, Lagardère Live Entertainment record robust growth, thanks to the successful programming of our live entertainment to the news. Globally, the recurring EBIT is up by 6%, minus 10% compared to last year, thanks to our efforts on savings and cost efficiency.
Let’s move now to group consolidated figures. This semester was less favorable in terms of IFRS 16 impacts, which are strictly accounting issue without reflecting the operational variation, we had a very significant impact, as you know, on H1 ‘23. We also had significant increase, as you can see it on interest costs, finance costs, linked to the increase – both the increase of interest rates and also the increase of bad debt. And of course this is one of the reason that we want to decrease the level of debt and deleverage to the group, as we mentioned it with Arnaud. And however, despite the benefit from a high impact of IFRS 16 in ‘23 and thanks to the high level of group recurring EBIT in ‘24. We have bottom line, as you can see, an increase in terms of adjusted profit growth per share from €24 million to €36 million.
Moving on to our cash flow statements at group level since our profit is more driven by operational performance rather than accounting or IFRS adjustments, change in net debt is much more positive than last year. As you can see, in H1 2024, this change in net debt is at minus €212 million compared to €341 million last year. This improvement coming from, first, €146 million from net cash from operations, nearly €100 million of lower purchases and investments, and of course, the reduction of the dividend paid, as I already mentioned. This shows our ambition to reduce Lagardère indebtedness and nevertheless, again, even if we are on track, even if the trend is good, we also have to be very cautious. And the second semester is definitely key for us in terms of activity and cash generation.
And on the Slide 20, as you know, one of our key events for this semester is definitely the refinancing process very well managed by the group, thanks to this. The group’s liquidity position is now solid with roughly €1.1 billion, including €365 million in cash and financial investments, €700 million in undrawn amounts for the RCF and €80 million available from the Vivendi loan, but the most important thing is that we – the profile of the maturities have been mainly spread towards ‘27 and ‘29.
Still on the net debt, moving on to the ratio on Slide 24, the leverage ratio net debt on EBITDA remained below 3x at the end of June and is improving a semester-by-semester. After – again, sorry to insist the second semester that will be very key for us in terms of cash generation and leveraging the group. And we are, as I mentioned, focused on this objective and this target.
To conclude on the Slide 26 and on the guidance despite the uncertain economic environment, we remain confident in our ability to maintain high level of results, thanks to the dynamism and responsiveness of the teams. Lagardère Publishing to remain relatively similar performance to last year despite the pressure on costs and Lagardère Travel Retail has potential for value and profitability growth, of course, in an environment which stay normalized and buoyant.
Arnaud Lagardère
Thank you so much, Gregoire. Yes, go ahead. Sorry.
Gregoire Castaing
No, go ahead, Arnuad.
Arnaud Lagardère
I was saying, I am available to answer question, if you want.
Gregoire Castaing
Yes, exactly.
Question-and-Answer Session
A - Emmanuel Rapin
So, I have a set of questions. The first questions come from Jerome Bodin of Oddo. Question for Lagardère Publishing. Could you provide an update on the cost trends for Lagardère Publishing in H2 2024 and 2025, particularly regarding the evolution of paper costs? Second point is still about publishing, has the investment project in the distribution center being abandoned? The third question is about other activities. It’s about the French Partnership Limited commodity that is running the Lagardère Radio activities. Is this format still valid even considering Vivendi split project, maybe Stephanie?
Stéphanie Ferran
Yes. Thank you for the question. Regarding the costs at [indiscernible] also we started the year with a decrease in paper costs, which was following the trend that was initiated last year. And for H2, we expect an increase in paper and cardboard material. However, this should have a limited impact on our overall cost for two reasons. The first one is the amount of paper we already have in stock. That will protect us for the next months. And the second one is the fact that we have engaged into a more systematic and consolidated purchasing approach. So all-in-all, we should have a slight decrease in our paper costs on our P&L in ‘24 versus ‘23. Then I can catch up with the question on distribution. So, as you know, we announced earlier this year that we would abandon original Polaris program, which was both a logistics and an IT program. In the last six months, we made a full inventory of what was done. So, now that this is behind us, we are now ready to embark with a new and fresh thinking that we will start right now. And it might imply an option where we would be renovating our current logistics scheme, and also, we will be progressively and carefully updating our information system rather than the big bang scenario that we had originally. And on all those projects, well, you know that it takes time. We should have, let’s say, a new vision of all of them early next year, probably at the end of Q1. Thank you.
Arnaud Lagardère
Thank you, Stéphanie. For the question regarding the limited partnership of Europe 1, it is still valid and will still be valid until 2027. And after 2027, we will do what we will see what we do. It is an agreement with Arcom. It has been voted by the Board of Lagardère, including the members of Vivendi. So, there are no reasons why we wouldn’t continue this limited partnership. Other questions? Emmanuel, you have written questions?
Emmanuel Rapin
No. I have no more questions neither on the screen nor written.
Arnaud Lagardère
Okay. So, maybe we should wait a little bit to see if there are further questions. No questions?
Emmanuel Rapin
No questions.