Lagardère SCA (OTCPK:LGDDF) Q3 2019 Earnings Conference Call November 7, 2019 4:00 AM ET

Company Participants

Florence Lonis – IR

Arnaud Lagardere – General and Managing Partner

Gerard Adsuar – Group CFO

Arnaud Nourry – CEO, Lagardere Publishing Division

Dag Rasmussen – CEO, Lagardere Travel Retail Division

Ugo Valensi – CEO Lagardere Sports and Entertainment Division

Conference Call Participants

Sami Kassab – Exane BNP Paribhas

Julien Roch – Barclays

Florence Lonis

Thank you. Good morning, everyone. Thanks for joining our conference call today. We have with us Arnaud Lagardere, General and Managing Partner; Gerard Adsuar, Group CFO; Arnaud Nourry, CEO of the Lagardere Publishing division; Dag Rasmussen, the CEO of the Lagardere Travel Retail division; and Ugo Valensi, the CEO of the Lagardere Sports and Entertainment division.

This morning, you will be presented the Q3 2019 revenue. And as usual, the conference will end up with a Q&A session. Please, Arnaud, the floor is yours.

Arnaud Lagardere

Thank you, Florence and good morning to all of you. I would like to make as usual, some comments, maybe a little longer on the business itself. And then obviously a dealer quickly about the disposals and obviously, at the end, some words on the CAF since, it’s a big news for us today. Concerning the divisions, as you read on the PR, Lagardere Publishing should post an operating profit above last year. Thanks to higher revenues in France and Spain. Thanks to so improve margins in the U.S. and in the UK.

As you know and I hope all of you read this wonderful book on the release of Asterix in October has been a huge success, number one in the best seller list with more than 600,000 copies sold the first week with a very warm reception by the press and the reader which is even more important so far. So our division deliver solid performance to date also, thanks to the curriculum changes in France. Thanks to nice growing the trade division, and thanks to the mobile gaming studio, which is something that it’s quite new and quite interesting for us. And I was always the Partworks division.

So, we, very, very happy with what is happening in this division, the strategy remain, as you know, our change, we want to continue to grow. We’re going to through acquisitions and through organic growth mainly, but not exclusively, in English-speaking countries. We want to diversify the revenues with adjusted markets of games, for example, as we did with Gigamic this year. We want also to ensure the business integrity and we want to continue to innovate and to participate to the next technological revolution which we are part of.

As you see, if you’re really interested in this business and it’s a very still very resilient and very solid in every place in the world. So, it’s a great satisfaction for us. As far as the Travel Retail is concerned, we maintained solid revenue growth as you see on Q3, we reach 6.3 growth on a like-for-like basis. In most of the geographies, if not all especially more specifically in Europe, and also in China, so we benefit from strong tailwinds.

And even if you can see here and there are growth that slowdown a little bit, the global passenger market remained very strong and this is also a satisfaction to us. Very short also in North America where the traffic is still there. And in Europe, we have a very nice growth in Italy, where we are more than 9%, 9.1% year-to-date. We’ve made a lot of innovations, so we had to invest in CapEx that goes with it in Venice and anyone but we see the results clearly here. And France also is posting resilient results with 9.7% year-to-date.

In Asia, last but not least, and especially in China, so this is also something that is very interesting for us since both Publishing and Travel Retail are our two core businesses that represent the bulk of the existing and future value of the group. So all in all we confirm the guidance for its return year between 4% and 6% constant excellence rate and that includes the excluding the impact of the acquisition of HBF and IDF, International Duty.

Some very quick comments on disposal because due to confidential reasons we don’t want to give too much, too many details on who is interested in acquiring the remaining businesses that are for sale. And especially on the price list, but I can assure you that we will focus on making the remaining disposal happen at the right time and hopefully at the right price.

When you look for example, at Lagardere Studios, the takeover, well the possible, sorry, takeover of Endemol Shine by Banijay have kind of a little bit close the whole industry for well. And now that this transaction has been officialized, not done, officialized, that should and luck, the transaction market and for those the consolidation is for smaller players like us like Red Arrow to happen. So we feel excited for the coming weeks and in the coming months in this arena.

Concerning Lagardere Sports, we, obviously, the recent development in the business and especially the CAF have an impact on the business prospect, but we will deal for it and we’ll talk about it later. But however, we remain extremely committed to finalize this process and preserving the value of course for our shareholders.

Now if you allow me to make a real quick comment on profitability and the corporate, as you know improving the profitability is a top priority for dag and for ongoing in their businesses, but to enhance the profitability of the whole company, as you know, we started a process within Lagardere Corporate. As far as the Lagardere Active, corporate structure is represented on the cost that represented around €12 million in 2018 last year will be extinguished by 2020.

But more importantly, secondly, as I announced before, Pierre Leroy is leading on the corporate group to redesign it to cut costs, obviously. And this is happening. The target on the full year basis is to reduce within the range of €10 million to €16 millionand the cost so that would include a redundancy cost that is in place now. So we’ve had a lot of extended discussions with the union and peers that it’s doing well.And the current state of the project are the idea is to reduce their headquarter staff by 30% three zero 30%.

Now, let me finish with the last news that happened yesterday. As we communicated yesterday about the contract as Lagardere Sports has with CAF, the African Football. We have here a very very strong case. And we’ll do whatever it takes either to maintain the contract or deal with more changes or get a significant amount of cash. When you look at the stock yesterday, we lost around €160 million €170 million of value just as a as a consequence for potential acquisition and this is obviously unacceptable.

We are respected company we sort of the capturing all these years with efficiency with loyalty with dedication. So this is really unfair. And even if I know that no one should be to candid or native in this business in general, I think we don’t deserve such a treatment, and we’ll make our voice sound loud and clear, to protect the interests of our company’s shareholder. Whatever it takes, we hope that we will need to do it needed will do it.

And, Mike, is there going to be another questions we don’t have much to say more to say about this. But you know, if you have any questions, obviously, you may simply be ready to answer them.

So that concludes my introduction here and I will now leave the floor Gerard. Go ahead Gerard.

Gerard Adsuar

Thank you, Arnaud. Let’s go to Slide 3. So I will comment the Q3 issues which totaled €2 billion this quarter representing for 20% like-for-like growth, driven by growth of more than 6% both Lagardere Publishing and Lagardere Travel retail. Therefore, as Arnaud said, demonstrating that’s group strategy with around travel and retail and publishing is operationally effective. And for the nine months ending end of September reviews amounts to €5.6 billion up 5.7% on the like-for-like and 6.7% on the constant currency basis.

If we go to the next Slide on Page 4, we detail the impact of scope and currency between the like-for-like and reported. We have a very small negative scope effect which is the balance between the disposals and Lagardère offset by the acquisition that we have made mostly at Travel Retail, the acquisition of HBF granted food Hojeij Branded Foods in the United States. For more clarifications, you have all the scope effect, which is detailed at the end of the press release, you shouldn’t make confusion. The currency effect is positive

plus €76 million and relates mainly to the appreciation of the US dollar. Therefore, the overall performance is a plus €288 million in term of revenue positive which represents plus 5.7% growth.

Next slide. You can see a breakdown of the revenues on the first nine moms by geographic areas. You can see that the USA and Canada share is increasing from 20% to 24% and obviously this leading to the acquisition of HBF as I’ve mentioned previously. Now let’s go to the division. So conditioning first Q3 growth was 6.6% with steady performance in France of course, on the back of the school curriculum reform in Spain as well with the primary school curriculum reform and also in part works and in mobile games as Arnaud mentioned, reviews in the UK was slight very safely done because of quieter.

i would say release SKUs and slower setting, slower sales in education compared to last year. The United States were stable in the quarter, Spain and Latin America delivered other strong growth as I said stood by the curriculum reform in Spain and Mexico, Hartford delivered rose of plus 6% with number of success of connections in particular in France and then also in Japan and in Germany eBooks.

So, I would say digital share of our revenues including the textbooks, that’s now we said also sharing digital with — within this new curriculum reform accounted for 7.8% of the overall revenue of publishing in the third quarter with the digital audio books represented now 2.9%, which is a trend which is increasing. So, at the end of September, the overall growth is plus 3.3% like-for-like.

Now, let’s go to Travel Retail. Q3 reduce €1,150,000,000 are up 6.3% like-for-like with good performance across all geographies. France continued to post a very robust growth plus 8%, almost 8%, with good performance from the Duty Free segments especially in the regional platforms. Growth in the Foodservice and the Travel Essential networks as well. Solid growth of 7.4% also in the European in the Middle East region, so excluding France, with very dynamic sales in Italy and good network growth in Central Europe in Spain as well.

Growth in the Middle East with, in particular, the opening of the Dubai food Courts. In Africa, with the opening of the new concession in Gabon and Senegal, the business was stable, up 1% in North America on the quarter, with very bullish growth in Foodservice, a number of new sales outlets in particular in Dallas and Denver. But this partially offset by the negative impact of the hurricanes and the closure of some point of sales.

And also, to some extent, the traffic in the international airports were affected by the China and the U.S. as well. But overall remain with positive trend reviews in Asia-Pacific are up plus 8% driven by very good organic expansion in China, of course Hong Kong operations were affected by the protests. But this was partly countered by network growth at the Hong Kong Airport.

The business was down to 2.2% in the Pacific region, because of the economic slowdown in that region in particular. So at the end of September only know in the revenues amongst to €3,150,000,000 and 6.4% on like-for-like basis

Lagardere Sports. The Q3 revenues are at €52 million. They are down compared to last year. This is due to the calendar effect. So, at the end of the September, we are still up 30% and that this is mainly due to the AFC, Asian Football Confederation, contract and they CAN for which candor is very high this year. Lagardere Active, we have revenue of €100 million. So, it’s down 16% from the like-for-like basis mainly due to the drop in Argentina for growth plan the decline in the circulation revenues in the press title and then unfavorable comparison basis for Lagardere Studios. At the end of September, revenues amounts to €356 million so down 8% on like-for-like basis.

Now let’s go to the guidance. So, another solid performance for the third quarter. So I’m please to confirm again the guidance for the full year of recurring EBIT on the target scope, which is, as you know mostly Publishing and Travel Retail, expected to be between plus 4% and 6% versus last year. The constant exchange rate and excluding the impact of the acquisition of HBF and IDF, International Duty.

Regarding the non retain business scope, the contribution, so, we have adjusting now with the disposal of the key channels, so the contribution to returning EBIT in 2019 is now expected to be between 64 million and 74 million, taking into account as the impact of the TV channel disposal to MCs. Indeed as a reminder, the 2018 net EBIT for the TV channel was €23 million with only €3 million on H1 last year which shows that there is a very strong and positive seasonality on the second half of the year.

For 2019 we had expected with seasonality to be around €16 million for the last six months of the year for the TV channels, hence we have €16 million impact through the €18 million to €19 million bracket that was given in the former guidance. As regards to HBF and IDF, we expect an additional contribution to the scope, which will be somewhere between €26 million and €28 million.

Finally with regards to the impact of the flags, the sensitivities are the same as previously mentioned, that is plus or minus 10% on the dollar equals plus or minus €16 million and plus or minus 10% sterling equals plus or minus €5 million. As of today is the last stage at the same level as it is at the end of October which is corresponding to 5% lesser.

The impact should be around plus €7 million to €8 million, forthcoming if it says at the same level as it is at the end of October they should be looking back because it’s almost zero. So adding up all the elements that I just mentioned, total group recurring EBIT is expected to be between €420 million and €438 million.

This concludes my presentation so we can start the Q&A.

Florence Lonis

So we can start the Q&A. So, may we can say the first question?

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Sami Kassab from Exane BNP Paribas. Please go ahead.

Sami Kassab

Sami from Exane here. Can you confirm whether you will receive payments in cash for the 2019 edition of the CAN? Or is the contract cancellation announced by the CAF yesterday putting is a cash receipts of the 2000 edition ex-date. Secondly, do you expect publishing to show positive organic revenue growth in Q4 or to be in decline? And Arnaud I do not fully understand what you said in your opening remarks with regards to the publishing EBIT in 2019. Did you talk about margin expansion just in the U.S. and in the UK for margin expansion for the whole division? And lastly, for now, can you maintain this 5% plus organic revenue growth targets in travel retail for 2020 for next year, or do you expect it to be more challenging to get to the 5% plus.

Arnaud Lagardere

Okay, Sami. Gerard, how about the receipt the cash on CAF this year?

Gerard Adsuar

Talking another controller, if you go of course the cash, the majority vast majority of the renewed and profit that the cash has been booked in the first half. So we do not expect as a result of these new events and cash. We do not expect major deterioration of our cash estimates or compared to ourm, I would internal forecast.

Sami Kassab

So revenues have been booked. The cash has not yet been received, but you expect to receive this full cash payment that you’re due?

Gerard Adsuar

Yes in line with our forecasts.

Sami Kassab

Thank you all. And looking at…

Arnaud Nourry

Yes good morning. This is Arnaud Nourry. On Q4, it’s a big quarter for us, as I’m sure you’ll realize, because in October and November, we shift all the books for the Christmas season and it’s never very easy to forecast that color will be. What I can tell you is that we have Asterix in France and we have no authority last year, so that’s for us in October which we’ve seen very clearly in the turnover of October. On the other side, in 2018 in the UK, we had published by J. K. Rowling, we had the second Hawking book both were really successful and in the US we had the Nick Sparks book in November. So my guess is you should not expect any significant growth in Q4 for at least.

Sami Kassab

The decline in revenues or no growth?

Arnaud Nourry

Kind of flattish.

Sami Kassab

Okay.

Arnaud Nourry

As far as, our model is concerned, we launched a program in the US for improving the margins, which is very improved in ’19 and I’m quite happy with the achievements to a much lesser extent we’ve done the same in the UK. So the regular marginal asset leave overall should be much better in ’19 than it was in ’18.

Sami Kassab

Thank you, Arnaud.

Arnaud Nourry

That was my comment. Thank you, Arnaud and Gerry value about the 5% in 2020, if you can make any comments by the way?

Dag Rasmussen

Exactly. So, Good Morning, Dag speaking. For Q4 I can confirm it will be above 5%. For 2020, we haven’t disclosed a group here so it’s too early to tell anything but I wouldn’t be surprised if…

Sami Kassab

You wouldn’t be surprise is what that?

Dag Rasmussen

You would not be surprised if we reach 5%.

Sami Kassab

Thank you. And last year, Arnaud you said that you’re targeting to reduce corporate costs by 10 to 15 million. I thought last year you had to reported 13 million of Lagardère corporate cost so the 10 to 15 solid benchmark that to the 30 million reported last year or does that include the 12 million of active corporate costs in the 10 to 15 you guided or does that include other costs somewhere else?

Arnaud Lagardere

Gerard, you can help on this, but it doesn’t include 12. Go ahead.

Gerard Adsuar

No, it’s in addition. We have to emphasize so one which is that which has gone at Lagardère which is to reduce the corporate process of Lagardère IT so this is something which is happening later in the course days — cost of the Lagardère IT or cooperate in 2018 was around 12 million. So, this is something which will be a curse which should be reached over 19 and 20.

In addition, we have launched an exercise of cost saving as the top five level central corporate level, which is, therefore, in addition with an estimate between 10 million and 15 million, which will be achieved by 2022. So it will keep taking, let’s say 2 years, because we’re launching the project now. So that’s, it confirmed that it’s in addition.

Sami Kassab

This is very helpful. And just before I leave the floor, can you confirm whether you’re discussing with any buyers for Studios and Sports? Or whether for now there are no discussions ongoing? Or perhaps you can’t say on that?

Arnaud Lagardere

We cannot say much more other than we are in a discussion, yes, absolutely, with buyers, absolutely. The reason why I want to be very quiet is that we’ve seen in the past, and in the past months there have been a lot of comments, obviously from you, because this is what you do every day. And from shoulders that we were under pressure to sell. We are under pressure to do the new strategies for sure. And we will achieve that and we will do it as soon as we can. But we are not in under pressure to sell at the best price. So we’re kind of fighting against this. This is a reason why I want to be more quiet than I’ve been before. But we have buyers, absolutely and we have ongoing discussions on both assets, absolutely.

Operator

[Operator Instructions] The next question is from Julien Roch from Barclays.

Julien Roch

First question is coming back on, well, I have kind of 25 questions for the price of one. So, you said Active 12 million of cost at the corporate level in 2018. And that you said that. But you actually are keeping toward a lot of assets in Active in a few event, all of them individually, you get up to 8 assets, RFM, Virgin, Le Journal du Dimanche, Paris Match, et cetera, et cetera. So how can you say 100% of the corporate costs if you keep eight assets or you still save 12 if you keep those assets because they are moving to the corporate center? Or are you contemplating to sell more of Active? It’s my first question.

Arnaud Lagardere

Okay, sorry. So question-by-question, sorry Julien. So, good morning by the way. Gerard, go ahead.

Gerard Adsuar

No, I mean, the corporate effective that I was talking was the layer, they 12 layer, it was the layer, which was previously managing all the activities of the big, I would say, Lagardere Active business. So you had today existing business of Lagardere News, but also the Lagardere Studios, the press, the digital business, all the businesses that we have all in the meantime. So the Lagardere News is a structure with its management and the staff on a standalone kind of basis. For your second question, I will leave it to Arnaud.

Arnaud Lagardere

Sorry, what was the question again, sorry.

Julien Roch

The question is does this 12 go to zero despite keeping 8 assets Active? And are using keep those eight assets Active? So the answer, yes. But then the second question they will link together is, are you going to keep all those 8 assets in Active?

Arnaud Lagardere

I’m sorry, sorry. There are some assets that we’re not willing to sell. And that so far, either because we think they are important for the Company, or we think it’s not the right moment to sell it anyway because they’re not performing well. So outside JDD, Match and Europe seems to have a very nice momentum so far. I mean, we’re not recovering everything robust in terms of volumes but what we received from urgency so far that I’m not seems okay. So we’re very happy about this. And the price campaign and the outdoor campaign that we’ve done since to kick off nicely, very nicely.

So other than those three assets, as I said, if we receive offers and kind of received a couple of offers here and there, we might contemplate a selling but, this is something that I’ve talked to the unions before, to be short to do it, and the decision has not been made, that let’s say for example, that we don’t reach the prices that we will reach on the on production and on sports.

So, we might sell more assets to get into our goals and get enough cash to make the acquisition on a date, especially in publishing and in incredible retail. So, over on kind of answering your question, yes, some other assets might be fulfill, but the decision has not been taken so far today but it could be possible. Yes.

Julien Roch

The second question, if you were to lose the CAF contract, and I know you’ll fight in court and you might actually win. But if we look at the worst case scenario, if you were to lose the CAF contract, what would be the kind of recurring level of sports going forward and it’s about 10 million EBIT, 15 million EBIT, 20 million EBIT?

Arnaud Lagardere

Okay, that’s a question I don’t think we would answer precisely, Gerard. What I can tell you is that for the years to come until 2028 our current contract that we have and that is still in place by the way. The average EBIT is around 10 million, but when I refer to the damages that would occur if such a reservations is happening, I’m talking about, all the market cap that we’ve lost yesterday and I was prescribed around this announcement. So I’m talking about something around €160 million or €170 million. This is what I’m talking about, but, again, yes, Gerard, under your control because I’m not in Paris. Gerard, I think you know the average [indiscernible] right number as the EBIT, right?

Gerard Adsuar

Yes. Okay.

Julien Roch

Okay, yes. Now and as you unveil very helpfully so, the 12 million active plus the 10 to 15 in targeting to reduce cost. Could you actually do more if you’re emerging like capital and management into Lagardere ACA. There is €1 million a pretax profit there, but there’s also about €5 million, €6 million every year that Lagardere Capital Management is spending, which could be spent more efficiently if it was integrated into corporate overhead. It would also remove some of the comments that it were to the executive committee paid by another company. So what you thinking on that?

Arnaud Lagardere

Yes I your comments on your very, detailed note that you’ve done a couple of weeks ago. This is something that I don’t want to discuss openly and publicly. Since as you know we are talking to to our French Tribunal about the NCL revenue and count, we will do whatever it takes to reduce the cost on an efficient manner. Should we touch the structure of the Company FCA obviously not never ever not over my dead body, I would say, and you know but the FCA, I haven’t talked about [indiscernible] about this precisely, but I will look at it, if it makes sense or not, but I will and especially the only consequences, which means…

Julien Roch

Okay, and then the last question is on guidance. So you’re reaching out into 46. But clearly Q3 has been better that expected. And the trend you’ve given on Q4 seems to be fine. So is there a possibility you could beat guidance?

Arnaud Lagardere

Gerard.

Gerard Adsuar

We have — we reconfirmed the guidance and I cannot comment more than that. If we would possibly need to be it, we would have changed the guidance. So you have to take the guidance as it is.

Julien Roch

You mean the 4% to 6%.

Gerard Adsuar

Yes,

Julien Roch

Okay. Thank you. Very clear, thank you very much.

Unidentified Company Representative

Thank you, Julien. Any other questions please?

Operator

Thank you, ladies and gentlemen. [Operator Instructions] We don’t have any more questions.

Arnaud Lagardere

Okay. Well thank you everybody for this conference. And obviously you can keep in touch with Florence and Gerard directly. Thank you so much. Talk to you soon. Bye bye.

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2019-11-08