Earnings Call: H1 2017

Aug 29, 2017

Good evening. Carusco operator speaking. Welcome to the presentation of the First Half twenty seventeen 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 an opportunity to ask questions by the financial markets. Speakers will be Brunello Cucinelli, President and CEO Moreno Charapica, CFO and Pietro Arnabaldi, Investor Relations. I I would now like to give the floor to Mr. Cocinelli. The floor is yours. Good evening, ladies and gentlemen, and very warm thanks from myself as usual. And I'd like to also thank you on behalf of all the people working in our company. And thank you investors, analysts and the press for the esteemed that you have displaying being displaying to us for a long time. I hope you are all well rested both in your body and soul because at the end of the day, I think that we all need to rest in order to feel better. As you know, I'm always very, very happy to release these calls because it is a way to communicate, to speak to you, to convey to you our vision of the world and the business. Of course, in this call, we will just communicate economic data. So I would like to devote maybe a few more minutes in order to talk about products, visual merchandising and also the fact that we need very special salespeople in our stores. And I'd also like to dwell on the web. But as it is a habit, I would like to give you the general highlights, then the CFO, Moreno Charapica, will drill down a bit more. Then I will get the floor again in order to provide you with visibility on 2017, great visibility on the summer 2018 collections because they're drawing to a close. And then I'd like to talk about product market and then tackle the great topic of online. So as for the results, net revenues EUR 243,300,000 plus 10.7 percent at current exchange rates visavis 30th June 2016. EBITDA EUR 41,600,000 plus 13.1 percent net profit EUR 19,900,000 plus 10.6%. It is very important to report increases on international markets, 11.7% plus and also the Italian markets, plus 6%. And we are always, as usual, very, very pleased with Splendid Italy. North America, plus 9.3 percent Europe, plus 9.9 percent Greater China, plus 34.6%. We keep repeating that this is just a small market in absolute terms and rest of the world 11.4%. Then increase in revenues in all distribution channels, retail plus 21.7 percent, wholesale monobrands adjusted plus 2.6 percent, wholesale multi brand plus 6.7 percent. Net financial position EUR 59,400,000 against EUR 79,700,000 last year. CapEx investment plan EUR 22,200,000 including the large multiyear investment plan, EUR 17,000,000 to support the prestige exclusivity of the brand, both in the physical channel and in the online virtual channel, always keeping our eye on achieving sustainable growth. So this is my comment on the 1st year results. We are very pleased with the performance of our business the first half of the year. Both revenues and profit show strong growth. Sales of the winter collections are going very well, very, very well. All this considered, we expect 2017 to display double digit growth in both revenues and profits. I'm about to read a very important piece now. Order intake for summer 2018, which is now about to end, is truly positive. The feedback on our collections is particularly positive as well as the allure surrounded our brand, it seems to us. As a result of a careful analysis of the above mentioned elements, we can express a very positive view on 2018 and keep envisaging more double digit growth for the near future. We have recently celebrated our 5th anniversary since our listing on the Italian Stock Exchange. Going public has been an important choice and we are immensely glad with it, I have to say, because we have confirmed all that we had planned back then with our co workers, new analysts and investors in terms of constant double digit gracious growth, the growth that we call gracious. I'd now like to give the floor to the CFO, Moreno, who will provide you with more detail. Good evening, ladies and gentlemen, and thank you, Brunello. I'd like to immediately start commenting the financial economic data starting from Slide 11 of our presentation where we compare results of the first half twenty seventeen with the adjustment figure of the first half of last year. I'd like to point out that adjusted results of the first half twenty sixteen factor in the exclusion of non recurring personnel costs amounting to EUR 1,500,000 and also the sterilization of the theoretical tax effect of such non recurring costs. The comparison with the reported income statement is shown on Slide 19, where you will find some more detail. Now back on to Slide 11, the comparison between the first half twenty seventeen and the first half twenty sixteen adjusted shows the following: an increase of revenues by 10.7% at current exchange rates and 9.7% at constant exchange rates, with a subsequent impact of foreign currency of about EUR 2,000,000. The increase of the first margin by 40 basis points from 64.5% to 64.9%, An increased impact of SG and A on sales from 47.8% to 47.9%, I. E. Plus 10 basis points. The increase by 30 basis points of the EBITDA margins, which moved from 16.7% up to 17.0%. It is important to point out that the hedging operations on revenues net of cost in foreign currencies are made in order to neutralize the impact of exchange rate fluctuations on the absolute value of the group EBITDA. Also considering that the very same incurred costs incurred abroad are subject to the same ForEx performance. As to our expectation for the full year as far as the absolute value of EBITDA is concerned, do not change following ForEx fluctuation. In the second half of the year, if the ForEx developments confirm the current exchange rates, the impact of ForEx on revenues could be potentially negative. However, it will not at all impact on the esteemed estimated absolute value of EBITDA. As to depreciation, it increased by €1,000,000 from €9,600,000 to €10,600,000 with the unchanged impact at 4.3%. We expect a slight increase of this impact towards the end of the year because of higher depreciation and amortization being accounted for in the second half. As to the net financial expense, it moved up from EUR 1,800,000 to EUR 3,000,000, The increase given the reduction of the average net financial position and the subsequent drop in financial expense has to do with ForEx fluctuation. This increase is mainly linked to the accounting of exchange rates hedging and in particular to the accounting of unrealized foreign exchange losses relating to the intercompany financing in foreign exchange, which are temporary by nature as they depend on the exchange rate at the end of the period concerned. Tax rates amounted to 29.1% compared to the 29.8% adjusted last year. And then net income, EUR 19,900,000 with an increase of plus 10.6%. Now moving on to Slide 12, we provide some detail on the first margin change operating costs and EBITDA. Always still comparing it with the adjusted figures of last year. The increase of the first margin is driven by the business performance, by the excellent sales results and like for like results and also by the channel mix, with the impact of retail revenues amounting to 49.8% against 45.3% last year. The increase of operating costs, the details of which are reported on Slide 13 is in line with the business performance. In particular, the increase of rents has to do with the retail network evolution. The number of direct boutique went from 86 as of 30 June 2016 to 91 as of 30 June 2017 considering also the full conversions in Russia from the mono brand wholesale channel to the retail channel. And then there were some relocations and footprint increase. Personnel costs increased by 10.6%. This was mainly to do with the development of the retail direct network and also the direct management of 5 shop in shops at the Canadian luxury department store, Holt Renfrew, which before were managed and handled with a wholesale formula. As to the other operating costs, EUR 44,900,000 impact 18.4 percent against EUR 39,600,000 impact 18.0 percent, including the structural costs relating to the network development and the direct management of our footprint of our presence in the digital world. Within these costs, investments in communication devoted to supporting and protecting the image of the brand increased by EUR 1,300,000 from EUR 11,200,000 to EUR 12,500,000 and impact still stable flat at 5.1%. Let's now move on to net working capital, Slide 14, showing a reduction of the strictly commercial net working capital, whose incidence on the rolling revenues moved from 35.8% last year down to 31.5%. Inventory increased slightly of the impact on sales, 33.1% as of 30th June 2017, thanks to the very positive sellout figures and with a value that is in line with the impact as of 31 December 2016, because it amounted to 33.9%. Trade receivables decreased, thanks to a positive management of inflows and also the conversion from 3rd party management to direct management. Also thanks to online boutique, the 4 stores in Moscow and the 5 Canadian shopping shops. Trade payables, stable and flat. Slide 15 shows the performance of CapEx amounted to EUR 22,200,000 which is part of the new investment plan of the 3 year period 2017, 2019, whose aim is to safeguard exclusivity, prestige and protection of the brand, both in the brick and mortar channel and in the online one. Considering the positive cash generation favored by the performance of the net working capital and following the investment for EUR 22,200,000, the net financial position that you can find in Slide 16 is dropping significantly, amounted to EUR 59,400,000. We would like to point out that our net financial position, Slide 17, reaches its usual peak between June September due to seasonality and then it moves down in the last half of the year. The reduction trend in the first half will also continue in the second half of the year with an expected full year net financial position that it will be lower than the 31 December 2016 figure. This is the end of my presentation. I give the flow back to Brunello. Yes. Thank you, Moreno. So what about the current year? Well, we can say that actually things are going very, very well. We are very pleased with the mood surrounding the brand itself. So we have enjoyed a great springsummer season. The collections that are now displayed in the stores seem to be particularly appealing. So we have somehow well, besides beautiful collections, also the visual merchandising is we're particularly pleased with. So we can say that this is a good start of the winter. Another important year is the culture that we have tried to circulate and spread with workforce because I think this is high time for the sales assistants to show their kindness, their professionalism, their politeness. But I would like to go back to this because I deem it very important topic. So as to visibility on 2017, of course, only 4 months to the end of the year, we can confirm that we expect a strong double digit growth in terms of both revenues and EBITDA and profit, so EBITDA more than proportional. So we can say that we envisage 2017 as a beautiful year, so to speak. So as we have just completed the men's sales campaign and we have reached 60% of the women's sales campaign for the springsummer 2018 collection, we can say that the feedback on our collection has been particularly positive. And maybe and this is what our customers say, these are the 2 best collections that we designed. But you see, we keep repeating this, but this is actually the way things are. So these collections are particularly pleasing. And seriously speaking, you know how important it is that you receive a good feedback from the multi brand stores. So the order intake has been particularly good. And therefore, we forecast that 2018 will also display double digit growth in terms of both profit and revenues. As for the 2018 2020 business plan, well, I wouldn't dwell on this because you are familiar with it. I would only like to stress that the next 3 years should maybe be the 3 years when cash will be consolidated And we feel pretty comfortable now because debt is so low that this is definitely not an issue. The real issue is to keep innovating product wise. And I would like to devote 3, 4 minutes to spend 3, 4 minutes on this important topic, product, visual merchandising and also the fact that you need to have very special salespeople in the shops and communication is important. I know that I might sometime run the risk of repeating myself, but I have always been hammering that product is always key in any company. You need a well made product displaying great identity. In this case, for us, it must really be the true expression of the Italian culture, Italian heritage, modern and contemporary. And it is also important that this product is ageless and very easy to wear because this is also another issue for many multi brands worldwide who keep complaining that maybe some products are not very easy to wear. So visual merchandising, as you all know, is essential. It's key for us. It is fundamental for women, but it is definitely essential indispensable for men because especially for menswear, how can we possibly attract a male customer unless your shop window is very special? You see just tiny details make the difference how you combine things, the slightly wider trousers, for example, may be matched to a more to another contemporary piece. So I really believe that in order to have a contemporary menswear, well, it is more difficult for men's than for women's. Well, the women's style team always tells me that it's easier to design menswear. But in my opinion, it is more difficult to be strongly innovative in menswear, also maintaining the taste of the brand. And then the sales assistant, this is a very important topic in my view, because when you actually step into a store, in a shop, you don't want your store assistance to hassle you, to push you. You don't want to receive 20, 30 emails per day showing and displaying outfits because at the end of the day, the impression I have is that we are all fed up with it. And this is true for many different industries. So with all sales assistants, we are focusing on making them very elegant and younger. Young is important for 64 years of age and I can't possibly inspired by a sales assistant who's my very same age. I'd like to be approached by maybe a 35 year old sales assistant dressed in a special manner who appeals to me and because my aim is that of being looking maybe 5 years younger. So all these sales assistants must be very chic, elegant and polite. Somehow they need to epitomize to represent kind advisors because when you come across them, they come to you, they approach you and help you find your the suitable outfit for you. And they need to establish a friendly relationship with customers because we definitely need to have a gratifying relationship with our customers. And then distribution is always an important topic. I have the feeling that you see it's full everywhere, full of products. We are flooded with products. So it's very important to maintain exclusivity for your products and brands. I think that we all human beings are in the lookout for something exclusive, somehow almost tailor made. Jean Jacques Rousseau fascinated me with his statement. I can barely imagine a human being that is similar to me. So every single one of us would like to look a bit different. And of course, the online world definitely makes everything a bit more massified. And this is definitely where we have to focus on in the future. And this is true for all industries. The other day, I was talking politics with a very important scholar. And I said to him that political leaders, in my opinion, are massifying their image. This is a very, very utterly contemporary topic. For example, personally speaking, I'm set up of seeing the very same face everywhere, 10 times a day with the very same face talking about saying about the very same things. So maybe it is high time for politics to think about this too. The political leader maybe should be less exposed, less visible, more exclusive. And as to the online world, we also tend to bear in mind whatever political leaders are right. So I have one dating back to a few days ago, when just 2 Twitters were published, were posted, which means that you don't you should not overdo things. And then another important thought I'd like to share with you concerns the Internet world, the online world. I think that the Internet is very fascinating, but also very complicated to interpret. So we have to safeguard our brand from massification. So as you know, as of January 1, 2017, we started this grand project, which is not does not consist of financial investments, but which involves all of us in protecting the brand worldwide through our multi brand presence, through our boutiques and also within our company itself. Because I know that I might be boring, but this great posting of pictures, of documents, of everything really deprives everything of fascination. So we enjoy a great business relationship with MyTeresa, they also have a very high end physical store in the German market. They're also very, very good. So beautiful multi brand stores, but I'm deeply convinced and I was talking to Ricardo and Luca, my co CEOs this morning, I think we are actually experiencing and seeing the growth of very important excellent multi brands worldwide because this is the future for every company. So since January 1, we are now operating directly the we where we live, where we work, how we behave, how we work and the relationship we have with the creation with our mother earth and with the people because this is a very interesting thing. On the other hand, we have the best worldwide boutique that we opened in January and also the most important one. Sorry, I'm just having a sip of water. We had a great ham today, but it was very savory and salted. It's part of our culture. Anyway, so we have this great boutique. And honestly speaking, we'd like to say that it is performing very, very well. It is displaying strong growth. We do not know at what speed this online boutique will move and perform, But you should know that we have a very important growth protection, which means that if in 3, 4 years' time, it was to multiply 5 fold to 4 fold, it will just mean hiring some more human beings, some people to help with the packaging and the shipments. Everything needs to be shipped from Solomeo and we try to always focus on the craftsmanship, the manual works, so packaging, visual merchandising, special relationship with customers, especially from the human point of view. Well, obviously, if we have a special relationship with you, you might be saying some olive oil, some books, some flower. This year, we harvested 8 hectares of wheat. So if you like wheat flour, you should know that we have produced very high quality flour through our wheat. We also have a very interesting project with all our customers, which is maybe mending and donning their old cash via pullovers because you know, we always have moths in our wardrobes. So our customers basically sent in their old pullovers and we done and bend it and to bring it back to become as new. So it is some source of 1 to 1 friendly relationship with our online customers with handwritten notes accompanying the packaging. So we want to set up a very loving, a very human, highly human relationship. And we are also working on something very special. The great value of anticipation. And we actually noticed that when we say that a specific product will come out of production tomorrow and then we will stage the personalized tailor made label, while customers appreciate the value of anticipation. So I do not think that service will be 1 hour delivery. We don't want that fast delivery is not for us. And now to wrap up, we would like to thank you all for all that you do for us. And honestly speaking, we keep working with serenity, very focused, but with a lot of pleasure and passion. But we always try to strike a perfect balance between life and work because when you are well rested, the quality of your labor definitely improves. So human beings need rest. I have always thought that unless there is rest, there is no creativity because only creativity can only be spawned by rest. So thank you very much for all that you do. And best wishes to may the creation enlighten our path. Thank you very much. We are now open for questions. We will meet you in November in New York, then in America, then in Milan, in England. But I'd like to say that we are experiencing a great time of serene work. Thank you. Chorus Call operator speaking. We will now open the floor for questions. The first question is from the Italian conference call, Andrea Bonfa, Bancaretti. Good evening, ladies and gentlemen. Brunello, if I may, I have quite a general question on the situation of American multi brands and retail. Are you maybe concerned by the recent performance in that industry? And I refer in particular to Neiman Marcus just to mention one name. And the second question has to do, if I may, with the multiplier between franchising and retail. If you can say that if we assume 1.5, this multiple is correct. And the last sorry, we didn't really get the second question. I'm sorry, but there is some disturbance on the line. So the second question, whether we are correct in assuming a multiplier of 1.5 between wholesale and retail price or how what kind of multiplier it should be? And the third question is whether the minus 20, minus 21 of the franchisee that you reported in the first half can be replicated for the rest of the year, too. So as far as the minus EUR 21,000,000 is concerned well, Moreno, minus 21 does not factor in the constant perimeter. So we can say that considering constant perimeter, we have a so called like for like that is positive for the first half and we are confident we will keep it in the second half. As to the absolute value, obviously, having excluded the stores that have now become part of the retail network, the absolute number is negative that is basically the same as the first half? Say that things are going very, very well in America with the U. S. Department stores and also with Neiman's. Well, the truth is that they are in the lookout for very exclusive special products because when they turn up at our doorstep in our showroom, they want to buy exclusive products, they want to know who you sold your products to. Well, it is very important that visual merchandising is performed properly in these department stores. Sales assistants must know the product and the company down well. So I am not concerned at all. On the contrary, I believe that they need exclusive special products that are easy to sell with a high taste. It's always a very disabled story. But I do not think that generally speaking there is any difficulty. As far as the second question is concerned about the multiplier between wholesale and retail. Well, it changes as a function of the fact that we have full price sales or maybe discount rebate sales and this of course gives way to changes. If we were to you an average, it is above 2. But there is no homogeneity there because in direct retail, we have both full price and reduced price sales. And res wholesale, we have one single backup applied. Yes, thank you very much. Thank you. Next question from the Italian conference call, Andrea Randoni, Intermonte. The floor is yours. Thank you and good evening. So my first question has to do with a very hot topic nowadays, which is the exchange rate. You explained that you have hedging on the full year EBITDA. Just to make things clear, I'd like to ask you whether the indication for revenues, double digit growth for 2017, 2018 is at constant exchange rates. I'd like you to specify this. And then, if possible, a comment on 2018 at current exchange rates and in case what you want to do in terms of price rises in order to counterbalance the ForEx effect? The second question, if I may, has to do with your opening strategy. In the previous conference calls, you mentioned, you spoke about this. And if you can provide us with an update on your current expectations for new store openings over the coming years? Thank you. As far as the ForEx hedging is concerned, as we have always maintained, we have tried to be as transparent as possible always since when we started our conference calls. We always hedge, but we never speculate. We always hedge for our revenues, net of cost our revenues in foreign currencies. So this way, we can be confident that the effect on margins in absolute values is never a positive or negative surprise. There is never a loss or a gain. Vice versa, as far as the current exchange rates revenues are concerned, the impact of Forex can give way to fluctuations. At this moment in time, the constant exchange rate, well, there is 1 percentage point less than results at current exchange rate. Of course, the performance of foreign the last against June 30, thus it is likely the exchange rate will be higher than current exchange rate. As far as expectation is concerned, we are still confident that at current exchange rate, the double digit growth is guaranteed. But obviously, if foreign exchange rates were to lose 30% against the dollar, this cannot be the case. Then about 2018, well, at current exchange rate, we expect growth above 10%. But with this kind of ForEx situation, as I said before. But as far as 2018 is concerned, since the spring summer 2018 sales were very good and the orders were very interesting as of today. For 2018, we account double digit growth in terms of both revenues, EBITDA. As far as store openings are concerned, our plan usually is for 3 openings a year worldwide, maybe 1 year, it could be 2 or maybe 3. And then on top of the 3 openings, there can be a maybe an expansion of a store like it happened in Milan. Generally speaking, this is the strategy we pursue. We therefore envisage a very comfortable 3 year period with CapEx amounting to 5%, 6% of our revenues and a 3 year period where the quality of sales and income statement all goes very well. So we are very confident. The main topic is the one I mentioned before. However, we must at all cost, safeguard our brand, even if this means giving up revenues because online, you see there's a flood of product, massification of products and this can wreak havoc for the image of the brand and the value of the brand. Thank you for your answers. Thank you. Next question from Paola Carboni, Equitasim. Yes, good evening, good evening, Brunello. I have a few questions. First of all, for the rentals, the performance of rentals, because in there has been some operating leverage in this first half that had not been there before. So I'd like to know to what extent this has to do with the fact that you in sourced the online business, internalized it without any costs or whether there are any other elements like rent renegotiation on other markets? Also whether this improvement is sustainable for the full year too? And then another question has to do with conversions, recent conversion from franchising to the U. S. Or from multi brand to the U. S. We saw this in Canada and in Russia. Are there any further opportunities in the future in other markets? And then I have another question on the other revenues component, which went up in the first half of this year compared to last year. If I can have some more detail, some more colors of this. And I'd like to understand what the effect of this was on margins. And then if you can give us any your expectation for the full year debt? Well, I can answer nearly all questions. As far as the other revenues, where you see we're talking about EUR 1,000,000 a year. Yes, Moreno speaking. So there are some insurance related refunds, so not very material items. This is ordinary business for us. And in the second half, we think that the performance will be very similar to the first half. Well, as far as rents are concerned, Brunello speaking, we think that in the prime locations worldwide, you see this is the level of rents. And as far as we are concerned, for the next 3 years, we think that the incidence of rents will stay flat. As far as conversions are concerned, there is nothing specific to report. This time, maybe that's what there will something will come up in a couple of years time, but for the time being nothing in view. As far as the full year debt is concerned, you see the machine you see actually the line is not very good for us today. We can't really hear properly. But generally speaking, we are very happy with how things are going debt wise. I think that between €30,000,000 €35 million debt out of EUR 500,000,000,000 in revenues. So we think that it is a pretty interesting figure. So as I keep saying to my coworkers, we should not worry about debt or net financial position. The true issue, daily issue is to design contemporary products and have our customers feel a special mood when they enter our stores because you see many sales assistants, they work on provision basis. So the more they sell, the more they earn. Therefore, they push and hassle customers. My answer is, well, just let me take a look around first and then I'll ask you, I'll call you if I need something. So we need to get rid of this attitude, especially in our stores, because this is the reason why many customers decide to shop online instead of physical brick and mortar stores. Thank you, Paola. So as there are no further questions, we'd like to thank you immensely. If you need anything, please give us a call. Best wishes and best wishes for the new start of the year. Thank you. Bye bye.