Earnings Call: Q3 2018

Nov 6, 2018

Good evening. Call and call operator speaking. Welcome to the presentation of 9 months 2018 results of the Brunello Cucinelli Group. I'd like to remind you that all participants are in listen only mode. Following the presentation, there will be the opportunity to ask questions by the financial markets. The speakers will be Mr. Cuccinelli, CEO and President Moreno Charapica, CFO and Pietro Arnabaldi, Head of Investor Relations. In order to receive help from an operator during the conference call, press star followed by 0. And now I'd like to leave the floor to Mr. Cucinelli, the floor is yours. Good evening, ladies and gentlemen. Although this time, theoretically speaking, I will be the only speaker, although we are all here, the 8 of us in this room. As usual, I would like to thank you all, analysts, investors, journalists, and I hope that you're all fine. So for us, it is always a great pleasure to disclose results. Maybe it's not the same for you because you might be listening to 5 or 10 calls a day. But you see, for us, it is somehow a way to communicate with you, to convey to you our thoughts about our company, the world, the time we're living in. Well, I have to say that this conference call is very important for us because somehow it marks the end of the current year. And we can also give you some visibility about the next couple of years. Therefore, we would like to structure it as follows. So first of all, I will give you the main financial highlights. Then I'd like to say something and spend a few words on 2018 because it is really ending nearly. Then I'd like to spend some more time on 2019 19 2020. A couple of words on the very important press event that we organized last September with 500 journalists. I'd like to really talk to you about the great experience of the Silicon Valley last September and then devote some time to product and markets. I'd now read out the my comment. So net revenues EUR 122,100,000 plus EUR 8.2 at constant exchange rate at current exchange rate, plus EUR 10.9 at constant exchange rate visavis EUR 389,900,000 in September 30, 2017. Then revenues are on the growth on the rise in all markets, Italy plus EUR 5.5 EUR 5.7 EUR 9.7 EUR 9.7 EUR 9.7 EUR 9.7 EUR 9.7 EUR 9.7 EUR 11,000,000 excluding Italy North America, plus EUR 3.3 percent. But of course, at constant exchange rates, there is a high single digit increase. Greater China, EUR 29,200,000,000 and Rest of the World, EUR 9 point 5,000,000. So all the distribution channels marked a rise. Retail, plus EUR 6.8 percent monobrand wholesale EUR 11.4 percent and multi brand wholesale EUR 9.5 percent. So this is my comment to results. 2018 is drawing to a close. And to our immense pleasure, further growth was confirmed in terms of both double digit revenues and profitability, but also and above all, in terms of brand positioning and credibility, and we like this especially. The truly very positive performance of our winter collections and the appreciation displayed for the next summer ones also in terms of order collection lead us to envisage further double digit increase in 2019. I have just come back from several trips around the world, and we are now back with renewed great confidence in our country. Abroad, there is still strong admiration for our culture, our handcrafted products and our ability to find the best and beautiful side in all things. Maintaining the quality of products that the world expects from us will be increasingly important. This will be the future for our company, preserving the harmony of places and people we are renowned for, maintaining the creativity, craftsmanship and exclusivity acknowledged to us by experts and customers, designing fresh, modern and contemporary collections of very, very high standing representing the true essence of luxury. Let's now move to 2018. So 2018, we can call it a nearly ended year. And we can call it a record year, double digit revenues, EBITDA, more than proportional. And the same also goes for the net income. But I would rather like to focus on the contemporary taste of the brand and specifically the menswear collection collections, they need to be fresh and modern all the time. So as to 2019 2020 as a whole, for 2019, considering the sellout of the winter collection still ongoing and the orders collected that are very, very good men's wear and women's wear alike. For next year, we can definitely envisage a healthy fit double digit growth. The feedback from the specialized press during the Milan Fashion Week and also multi brand feedback on collections, while these feedbacks were very, very positive, very so knowing that for the next spring summer, we will be displaying collections that have stirred interest and appreciation in all the different markets. Well, this gives us a lot of confidence. But now we have to think of the fallwinter collections, and we are just now designing them as we speak. But we are already satisfied with them. But of course, if we are satisfied with them, that's not enough. Customers need to appreciate them. But when we have a unanimous positive judgment from the very beginning, then it means that it's all downhill. Then as to the healthy equity situation, half the revenues and the net financial position are such that we can feel very confident about the future. And this gives us the opportunity to keep investing for growth, development of our enterprise. As for the next the 2 coming years, we can envisage CapEx that could be between 7% 8% of revenues. You see, I think that there's no doubt about it Because of the expansion of e commerce, everything tends to commoditize very quickly. So in order to be contemporary in your stores, in your showrooms, while you need to refurbish them as frequently as possible And new technologies must be extremely, extremely modern because you see you enter a showroom, you take a picture at the collection. But while you're taking a picture at the single item, you're also photographing somehow the showroom. And the 2nd season, if the showroom is still the same when you take your photos, I'm not saying that your collection ages, but it is definitely less fresh. So we have to accept that everything happens quickly. And this means that all changes must be quick. Now a couple of words on the 4th September event. Well, I held 129 interviews on the run up to that date and I was very, very exhausted because of that. It's the same as when I took the roadshow, the IPO. 1 of the last people I met, the potential investors, she basically told me, can you tell me about how your company was set up? And I would have shot myself instead of answering because it was the end presentation that I won on 1 that I had. But anyway, this September event was a grant because we invited 500 press from all over the world and we showed them our places, the places where we live and where we work. We showed them the restoration work in the village and also in the periphery because as you know, the outskirts was restructured by the foundation and not by the listed company where you are analysts or investors. And undoubtedly, we are experiencing a time when the when sustainability is important. Everybody talks about it. Honestly speaking, we like to call this human sustainability because the truth is that if human beings are happy at work, at the workplace, their creativity rate goes up. And then the online world. You see, I went to San Francisco in the Silicon Valley and I had a great week there. And I was the first speaker at the Marc Benioff meeting sales force, the Dreamforce meeting. I went to see the Apple Net headquarters, a great, great factory, I have to say. We had lunch there and and there were 6,000 people there. But I was impressed by the fact that all these people, they were not really smiling a lot. They were 27, 28 years of age more or less. I went to meet Mr. Bezos, Jeff Bezos, who wanted to meet me, and it was a great moment to get acquainted. We discussed for a couple of hours in serenity, and I was very pleased with that meeting. And then I also went to see 3 smaller businesses, but very fascinating ones. And why do I say that? Because while I was going back home, this I could say that this unforgettable experience gave us an opportunity to reflect upon the great topics of the e commerce and how mankind is evolving. We are increasingly, all the more convinced that we need to have super sophisticated technologies. This is definitely important, so much so that we do invest a lot in this field. And you see what happens is that these technology tends to become obsolete in 6 months' time, but you can tell the difference between contemporary technology and a technology that dates back to a few months before. As to the digital world, we are pretty satisfied with how things are going for us. And now we have our e commerce. We've had it for 2 years nearly. And we are now investigating the opportunity to enter the Chinese market because we could do that maybe mid next year because as you know, the rules and regulations there are slightly different. And now I'd like to talk about the markets, more or less. An overview. So we spent 2 months traveling around the markets worldwide. And this is what usually happens in this industry in between September October. Then we held a great assembly and we decided to do the following. So China has become a domestic market for us too, although sometimes they do not have really domestic inverted commerce rules. But this makes a difference. I went to China 30 years ago for the first time. I know this country and I like the fact that my staff travels there with a completely different view on these people because you should see, you should consider that there's 4,000,000,000 human beings living there. We don't even have 14%, 15% of revenues there in this market. Therefore, we have a lot of untapped potential for the future. We have the impression that there is a special attraction to some specific products worldwide. And I'm talking about high quality exclusivity and craftsmanship products. And also even more so if they come from Italy because at least for our concept, Italy represents true luxury. Of course, everything must be very fascinating, visual merchandising too. All the sales people must be very young, contemporary, kind and polite and especially for menswear, where if you have sales staff that is fascinating, they can talk you around, they can make you feel young. Well, lately, a lot has been said about China. Well, first of all, we would like to highlight that we have not experienced any slowdown in that market. On the contrary, when you actually come back from these business trips and if you actually see what happens in just a 6 months' time, so many breakthrough changes happen that you are fascinated when you come back. This world for us is just a small market for us, but we believe that it is bound to become the market of the future because of size, because of knowledge of the brand. And I've always been keen on the Chinese people because they are very much online all the time. But at the same time, they really are the ancestors of civilization. When Rome was established 700 years before Christ, China could already boast centuries long of sophisticated refined civilization. So honestly speaking, this could be the century of China like the 20th century was the century of America and the century before the century of Europe. Now it is a very important thing for us. So another thing I wanted to mention today, our revenues is 50% mono brand and 50% multi brand. We would like to keep growing in both channels in the same kind of breakdown. But what matters is that in the mono brands, 47% of this 50% is the brick and mortar stores and 3% is online stores. As for the multi brand, breakdown is similar, 47% and 3%. For example, Net A Pote, Mr. Porter, Maesa, these are really the top names in the multi brand channel. Well, we are convinced that multi brands are on the rise worldwide. I'll give you an example. In China, we went from about 10 accounts 3, 4 years ago to 35 nowadays in just a few years. And I think a staggering growth will be experienced by small multi brand names, small Mr. Porters, Net A Pottes, Online, but it will be definitely growth there. So, mono brand stores can grow both in the physical and the digital world. And as of today, we think that globally, there will be a 10% online market. You see, we have 50% of our market that is multi brand, And we don't really know what the percentage of online business is. But of our revenues, 10% is online. So in the end, we envisage a balanced growth over the years between monobrand and multibrand. And now lastly, I'd like to mention another important topic, menswear. You see, this is an important issue. We believe that this market might experience a staggering evolution. Of course, I do not mean by that the so called fashion menswear that is accounts for 15%, but rather, I mean the 85% of menswear, 85% of the market, so called the contemporary business market because this market can be broken down between suits, so suiting and then sporty chic apparel. Of course, the business side business suit side has a very high share because you spend more or less less when you dress casually rather than formally. In this world, and I don't want to offend anybody with this, I think that we need new fresh brands in the suiting world, fascinating brands. So after 30 years of market ruled or dominated by the same brands, maybe the market becomes bored. You see, when I was young, I was modeling for LS. You might remember this was a top brand for ski and tennis wear. So I was a model there. And are you done well all the presentation of collections, so 1978, 1979, number 1 in the world? And the label that you would wear on the front, it was a tennis ball. And it was really everybody wanted it. After 2 years, nobody wanted to buy LS. And I remember the owner, Mr. Leonardo Servadillo, who said to me, Brelo, come and take a look at this collection. But what's wrong with it? And I said to him, my dear friend Leonardo, do you know what's wrong with it? The logo. If you make it a logo less collection, it will be different. And so it was a great experience for me. Going back to suits, it seems that among these new suiting brands, well, we are named among the new brands too, and we are honored by that. And this also gives us an idea of the large opportunity in menswear suits. So we started with the tailoring here in Solomeo. We call it Sartoria Solomeo, and it's a made to measure tailoring. This started for the top 25 accounts worldwide, and it works this way. There is a young tailor and many young tailors come from directly from the schools that you know about that we set up. So when customers step in, tailors suggest or give recommendations for something made to measure with a contemporary taste. So it is as if you were experiencing something new. Because if you are 50 or 45 and you have a 35 year old tailor, it is easier for you to be recommended as something younger. So we would like to so we manufacture in Italy. So you know what our prices are like. So a customer want to feel young when they wear suits because by nature, suits, they don't make men look younger. Whereas on Saturdays Sundays, when you wear something casual and chic, even if you are a senior man with a sneaker, jeans and a hoodie, you automatically look younger at least by at least 5 years. So to conclude, I just have one minute left. So I would like to hammer once again what we deem fundamental. We strongly believe in absolute luxury. We believe in made in Italy. We believe in high top notch craftsmanship. There are many new artisans that are starting up the trade. And we believe in exclusivity. You see, I don't want to sound like a snob, but I don't want to buy distributed widely distributed products. We also believe in the importance of renewing suits. We also believe that shops and stores must represent some sort of home where you are being welcomed and where you basically breathe the atmosphere of the brand. So we can say that this work conditions and this concentration enables us to work on new collections, in this case, winter 2019, with confidence, but also with the awareness that every day, it is our duty and task to try and be creative and not just for the style and design. In order to be creative, you need to be open minded, but also you need to have the courage to listen because listening becomes tough, especially when you are successful. So thank you very much for your attention. I apologize for having spoken at length, but I really wanted to once again hammer on the fundamentals, quality, multi brand and luxury. I'm here at your disposal for any questions. And you can still always come and visit, give us a call. You're always welcome. Chorus Call operator speaking. We will now start the Q and A session. The first question is from the conference call in English, Mariana Horne, Berenberg. Hi, it's Marya Horne from Berenberg. I had two questions, please. The first one, if you could provide some comments on what you've been seeing in Europe in Q3? And then if you can also comment on what you've been seeing in the month of October? And also the same for China, but maybe also if you can comment on the type of consumer that you've been seeing in China. So maybe the age and if you've been seeing maybe in the past few years a younger consumer? And then the second one, to my second question is on profitability for the full year. If you can confirm your expectations and if you can maybe comment on the impact that you will be seeing from hedging gains for the full year? Thank you. So as far as the as hedging is concerned, as usual, on we always hedge for everything when we make the price list. So we have no profit or gain on the income statement. But we have been doing this from the German Deutsche Bank always. And I remember that a bank director back then they said, why are you hedging for the Deutsche Bank? They're always on the rise. And I said, because we want to have an industrial profit and this is never going to change. You should never expect any profit or loss from this. As far as the age of consumers are concerned, obviously, whatever happens in China, it regards and concerns younger customers because it is younger people that are more interested in fashion, whereas in Europe, it is different because Italy or U. S, a handsome 60 year old or a beautiful 60 year old, they want to try and wear something different. What is interesting to me and you see this is well too. Everybody seems to be in the lookout for unique products, very high quality, high craftsmanship apparel. And of course, this is an advantage for us because that's precisely what we do and this is what the market is looking for. I'm always convinced of the following. Ovidium once said and it is applies to fashion too. Ovidius said he makes a difference between those who were dressed well and the others who were not dressed well. You could tell wealthy people from poor people apart. And this was true 2000 years ago like the same as today. So I keep saying once again, luxury must be something exclusive. And as a whole, we think there's a very good mood for luxury. 2 routes ahead, 2 routes ahead. On the one hand, we have products with a decreasing price with a very wide distribution manufactured worldwide. And on the other hand, the second path is for products that are recognizable, highly priced manufactured in special places like Italy, for example. So October and beginning of November went very well, although I'm less worried about the month rather than the seasonality because what matters for us is what about the fall winter that starts in July and ends in December? What about springsummer from January to June? As a whole, we are very happy with the results. But of course, you need to have a great visual merchandising, beautiful collections, fascinating salespeople. So and this is what matters the most. How can you keep your collections beautiful? Thank you. Thank you. Next question from the conference call in Italian, Alberto D'Aigliano, Sachs. Good evening, Brunello. Good evening. I have a few questions. I would start from the first one. On the Sarteria tailoring project, would you like to expand it from the 25 first stores and make it bigger? Or whether you want exclusivity and therefore, you don't want to expand it any further? The second question is, when casualwear seems to be grabbing market shares from the formalwear. So your proposition is important. Do you see any change in the split of products between casual and formal for menswear? And your confidence in the online, does this have an impact because you sell more casual online, I imagine? And the last question has to do with CapEx, 7%, 8%. Is this a temporary thing in terms of CapEx or OpEx, rents and other costs? How much has the cost of doing business in luxury increased because this is something visible for all players in the sector? I'll start from this very last question. This 7%, 8%, I think it has gone up not just because of rents, because rents as research says, they are very, very high, but they're definitely not on the rise. For us, now it's 10%, 12%. Before, it was 9% incidence. But I think that for true luxury and the web has made everything very, very quick. So your showroom must always be new and then your store needs to be refurbished every couple of years. But this has got nothing to do with rents. Then online business, you see the online is also used in order to showcase your product because maybe you happen to be in Los Angeles, you walk into the boutique and you go and meet your Los Angeles tailor. Then the Sartoria tailoring, of course, we started with 25 boutiques with very, very young tailors. Our idea is to expand and to have this service and the tailor in all stores. But it is important to start because you need to have a young tailor because it is only if you have a young tailor that you can understand how suits must be designed. An important customer turned up 48 years and he said I have 21 suits. What can I buy now? Well, I can just adjust it a little bit, take it in, tighten it a little bit, just tiny details. And he said, my wife said that I have to throw away the 21 suits that I have and to buy your suits. Well, this is good news for us. But it means that if you can dress young on the weekend, it is difficult to dress during the week because then you don't want to wear a classic brand or a classic suit. You want something fresh. So we'd like to expand this business one day. And I firmly believe in specifically this kind of business because it is true, you have the sporty chic casual look, but if you are wealthy, you see you need also good suits. I went to meet Mr. Bezos and he said to me, could you please recommend 3 or 4 outfits? You see that's the kind of customer we're talking about. He was wearing one of our shirts, blazer, trousers. The only thing he didn't have was a tie. But he did not welcome me in his home with a hoodie. Maybe years back, he would have worn a hoodie. Then we had an important dinner with 19 tech guys, 19 billionaires. Yes, they were all billionaires and they were all wearing a blazer. I would have never imagined this. I would have never imagined they would turn up in a jacket, in a blazer. So it means that menswear is changing, but your blazer must be very chic, must be very tapered, it must be handsome. And this can only be recommended by a young tailor, not a 70 year old one, truth be told. I am 65 myself. And if I suggest if I give you a recommendation, it's not the same that if a 40 year old recommends something. Thank you. Thank you, If there are no further questions, I'd like to thank you immensely. Yes, there's one more, Pietro is saying. Francesca Di Pasquantonio. Yes. Hello, Francesca. I will be disappointing you with my trivial question. So I'd like to know how your like for like figure performed in the 3rd quarter in your stores? Well, Francesca, I have to say that it is performing pretty well. But just one difference, be careful with the like for like because there is a like for like of products with no logo and there's a like for like for products with a logo, that's for sure. So this is And this is a breakdown that is well known to the fashion people. We are particularly pleased, Francesca. You see salespeople must be young, polite, chic. You have to maybe be offered a coffee or something for menswear especially. And this is very important. And I don't want to listen to anybody who says that menswear is in difficulty. And it is not true because all the people I know, they want to take pictures of themselves 2, 3 times a day and they want to be dressed at best. The thing is that what they require is a different product so that their wife thinks they look better. And by nature, Francesca, when you wear a suit, unless it is a specific suit, you don't look fresh and young. So I might now want to ask another question. Over the last 2, 3 years, how has the way shopping changed? Because I know that trunk shows are very important for you and direct sales that have everything that happens outside of the shop. So I'd like to know whether this is a trend that is ongoing in a significant way. Well, I would never I wouldn't say that we have a lot of sales outside of the store. What I'm saying is that inside the store in e commerce, you need to have somebody recommending products and items. This is what matters. Well, first of all, our customers are mainly wealthy, rich people, and they need to be recommended. The other evening, I had 10 people from Kazakhstan, very wealthy Kazakhs in my home. And they said, Brunello, first of all, you invited me to my to your place and I'm very, very pleased because it never happened to me. I just went to 7 Stars Hotel. And this bowl shows you how important the human relationship is. So and then they were asking me, can I maybe take this blazer in, in order to look younger? This is what goes to say that they need somebody recommending or suggesting things to them. It is difficult to pick up a fabric for your suit unless you are from the fashion industry. You want to be recommended by a young chic tailor. So they should say to you this is the year of pinstripe. So you should have pinstripe. Last year, it was Prince of Wales. So these must be your advisers, polite advisers. We have many wives of polite of wealthy customers who say, can you help my husband look a bit younger and fresher? Of course, tailors must be inspiring. And especially for menswear, Francesca, because blazers, there's no joke about them. Today, we discussed whether to have blazers 1 centimeter longer or shorter, whereas for women's wear, it's all different. Whereas men's wear suits 2 years ago, they're different. And you can tell that you're not contemporary. That's why I'm saying that menswear, they have a lot of opportunity. You see, we have rich customers, and we can sell them contemporary suits even if they have thousands of them. Thank you, Francesca. I hope I was to the point. Thank you. Next question by Paola Carboni, Equitasim. Good evening, Brunello. My question has to do with the online. I think I you mentioned a 10% percentage, which could be maybe a future objective visavis current 6%. Well, our online business is worth 5%, 6%. But since we are also present in the multi brand market, we think that this is our estimate of the global online market for our multi brand. They have 10%. So when we sell to NEMA Markets to Harrods, we think that their online thanks to their online, our brand has a 10% online percentage. But you see, Paola, we have invested immensely in this. And we have facilities that are ready to cater for larger expansion because nobody knows where it's going to. And we wanted to set up the facilities for the future too. Whatever happens, in the online world, we have space and technology available. My question was I think I had misunderstood then. But I also wanted to understand your online strategy for the multi brand channel. What I mean by that is that in the light of the potential you see, should we think that in the future, the number of multi brand online will increase? Maybe the number of SKUs online, will it increase? Will it become more than or the same as the physical world? I want to know whether you might have a more aggressive approach in the future. Well, we tend not to be aggressive, generally speaking. But you see, for example, today in multi brands, 3% of online is NetSupport, EBITA PORSE and Mysoreza. I think that there are many, many small sized multi brands that buy from multi brands online. That's why I think that there will be growth in online multi brands, the same as the physical multi brand store. So what I believe is that in 5 years' time, in China, there will be 300 great physical multi brand stores and the same and I think that there will be many, many stores similar to Net A Pote and Monte Theresa, although maybe of a smaller size. So there will be this growth, that's for sure. Yes, thank you. Thank you. Next question, Antoine Rieu, Societe Generale. Good evening, Ronel. I had two questions. You mentioned that there was you saw no evidence of a slowdown in China. But when you look at the numbers for the Q3, there is a slight slowdown in Greater China. So I was wondering if you meant maybe Mainland China versus Hong Kong? And the second question is a follow-up on online. In China, I was wondering if you would were considering about working with the likes of Alibaba. Excuse me. Can you please stop one second? I didn't say I said that there was no slowdown in China. This is important. I didn't see any slowdown in China. So what I said was we did not see any kind of slowdown in China, Antoine. This is important. So I don't know if I sorry for interrupting you, but this is what I said before. Okay. Okay. But I can explain something else if you need. The only thing is that I never said that there was a slowdown in China. I said that we saw no slowdown in China. Yes. No, no, exactly that was my question actually because if you look at the numbers in 3Q, it's actually slightly slowing down, no, in Greater China 3Q versus first half. Well, yes, but this is like 29% between 29% 32%. I don't even take this into note. I don't consider this to be a slowdown because it's too tiny. This is just some source of swinging and oscillation. The figures are so tiny and small that you just need to sell 2 items more at the end of the month and more one more delivery wholesale then that's the swinging. But generally speaking, there is no slowdown, neither in terms of taste or in terms of requests. Okay. Verity, I had a second question. Just on your online strategy in China, do you would you consider working with the likes of Alibaba and JD dotcom with Luxury Pavilion and Toplife in the future? Well, at the moment, it's been a month that we are in the lookout. We are seeking a partner in China, an e commerce partner in China because you need to have a partner there for the e commerce. And we are considering, we are investigating who this partner could be. I have always maintained that we need to always go for truly absolute luxury. And that's what I mean, absolute luxury. But now I can't really tell you today whether it will be Alibaba or others. What I can say is that we will be opting for the high end luxury operators. Okay. Thank you. Thank you. So if there are no further questions, thank you very much. I hope I was clear and exclusive. Whatever you need, call me or Pietro, and we'll reply as timely as possible. So we are very happy with the year and we consider it to be finished already. And hopefully, the collections coming out in January will meet your taste. Thank you very much and have a nice evening.