Earnings Call: H1 2021

Jul 29, 2021

sir. Welcome, everybody. Thank you for being with us. In a scenario still impacted by the pandemic, the result of the first half shows significant improvement compared to last year. Revenues are substantially growing double digits, marginality of stores in the strong progress, costs continue to decrease, cash and domain equity and financial indicators are under control. These are the first fruits of the initiatives undertaken since the beginning of 2020. These are strong signs that encourage us to look with more confidence to the future and to continue with more determination the work started in these months, months in which we carried out a deep reorganization of our business model to make it more efficient, digital and in line with market trends. We are therefore exiting from non profitable and non strategic activities in order to free more resources to invest in high value assets. In the first half of these markets and channels on which we are most focusing our attention continue to grow in a significant way. Russia reported revenues up by 64% and is already above the prepayment levels of 2019. The digital channels, which now represent a third of the group's revenues, showed a plus 50% growth. In the Q2, revenues practically doubled in all main countries. Sverica, supported by a major television advertising campaign, has today a through at 85%. The start of the Q3 is showing further consolidation of our performance. In July, with all our stores open again, sales are up 23% and are close to the pre pandemic levels. Also, an even more important aspect, that's underline. Sales are increasing with a significant reduction in markdown. This shows that our revenues for customers and our level of service are improving. The scenario remains complex, but we are convinced more than ever that our work is leading us in the right direction. Wishing for a gradual return to normality, we are persuaded that in the next quarter the results of our efforts will be even more tangible. Thank you, everybody. I leave the stage to our CEO, Nivior Di Paraiso. Thank you. Good morning and good afternoon. Thank you for joining us today to discuss H1 'twenty one financial results. Let's start with Slide number 2 with the highlights. So sales at EUR264 million, up 8.4 percent or 10% at constant ForEx, driven by a strong second quarter that is up 90%. Gross margin at 47.9%, delivering 6.90 basis points of improvement in comparison with H1 last year. EBIT at minus €29,000,000 with no special item incurred this year versus an EBIT adjusted of minus €70,000,000 in H1 2020. This improvement has been supported by the gross margin expansion and further cost reduction, minus 8.5%. Net working capital is under control at €169,000,000 well below H120 that was at EUR223,000,000 Net financial debt adjusted before IFRS 16 lease liabilities is EUR108,000,000 in line with March after the peak of April. So May June generated EUR 12,000,000 of cash, thanks to the re openings. In December, you remember it was EUR 100,000,000 of debt. Current trading today, the full network is open. Comparable store sales year to date with 29 are up 17%, thanks to a good like for like also in July. That is up 23% versus 2020 and minus 6% on July 2019. Please go to Page 3 for a quick overview on the restructuring plan. I would say mission accomplished in H1. Finally, the unpleasant job is finished. And now we can we should focus on the strategic revamping of the brand. During the last 24 months, we closed 177 stores or 18% of the network with a strong acceleration in the last 12 months. The optimization will be almost completed within year end with additional 50 store net store closure. In Canada, we closed 10 stores and the remaining 20 are now at variable or discounted rents in 2021. In the U. S, we exited from brick and mortar retail, focusing the business on web and wholesale key account. In Europe, we implemented a general network optimization, including the closure of the frame branches of the Italian retail company. And then we moved the optimized network into each country subsidiary for a fully omni channel approach and material administrative savings. A special focus has been dedicated to UK and Germany with 2 successful out of quarter restructuring. We closed 3 stores out of 6 in UK and 11 out of 27 in Germany. The remaining stores are now with reduced rent in 2021. In Japan, we are going to liquidate the subsidiary, closing the 7 DOS and moving the business to a new distributor that is taking over the best locations. And we add additional wholesale business starting from spring summer 2022. Finally, today, the group announces the shutdown of the Serbian plant following the decrease in demand of dressy leather shoes. As I said, the group did not incur any material restructuring costs for the staff and faster reorganization. H1 has been positively impacted by the reduction in expenses. H2 will increase the savings that will be at full speed in 2022. Please go to chart number 4. Here, there is a summary of the ongoing portfolio network optimization. The number of monobrand stores at the end of June is 810 compared with 936 in June last year. So we did EUR 126,000,000 net closure in the last 12 months with an impact in this half of EUR 9,500,000 in terms of sales versus June 2020. As said, there are additional 15 net closures planned within the year end, 16 franchising, 26 DOS and 8 under license agreement. The final number of Monogram stores will be at the year end in the region of 7 60. Please go to chart number 5. There are some interesting details for your review. You can see that H1 percentage of closure by country and the reopening calendar. 100 percent of the store network is open from July 1. However, the trend has been really different country by country. In some countries, in Europe, lockdowns have been really tough, and so you may appreciate some really positive like for like. To give some example, Italy has been closed on average 28% of the time versus 41 last year. So like for like is plus 20%. France has been closed 52% of the time versus 38%. And notwithstanding this fact, the like for like at plus 12% can be considered really strong. Like for like in Russia is up 109% and China 26%, confirming the strong momentum of the trend in these countries less impacted by lockdown this year. Please go to chart number 6 to see the DOS operating status and like for like by month. The blue boxes contain the average percentage of closure by month. In this half, the network has been closed on average 28% versus 35% in H1 2020. On the other side, you can see that starting from mid March this year, the comparison base in term of closure percentage is really easy and consequently GX experienced a progressive improvement in like for like. 2nd quarter like for like is up 56%. It is important to underline also strong year to date reduction in markdowns with year to date reduction in markdowns with 700 basis points on 2020 and 400 basis points on 2019 year to date. Please go to Page 7 to comment H1 top line by channel. As said, the top line grew 8.4%, driven by a strong performance in wholesale that is up 16.8%. The company has been able to reduce cancellation compared to the previous season and delivered really good decision management with an increase of €9,000,000 on reorders and €7,000,000 in the sale of old stock, old season stock. On top of that, customers asked for EUR 5,000,000 of fallwinter 2021 early deliveries. Franchising is flat, driven by the positive like for like and by a favorable timing effect on the different season deliveries. DOS is flat and missed a little bit the expectation due to the longer lockdowns and restrictions experienced in Germany, Austria, France, U. K. And Canada. However, the strategy is working because the positive like for like and the growth for the online compensated the negative perimeter effect. On Page 8, there is a very quick view to net sales by region. Italy and Europe had a very similar high single digit growth supported by wholesale, up in the region of 20%. And by like for like, up 20% in Italy and 5% in Europe, a little bit depressed by Germany, Austria and the Netherlands. However, both Italy and Europe delivered a class 100% in the Q2, and this is quite remarkable considering that these are our core markets, but also the more impacted by the pandemic. North America is down 11% after the heavy reorganization implemented with the closure of TEMD U. S. And Canada and the exit from the Bricard Mortar in the U. S. Rest of the world is positive double digit as a combination of 2 performances different by geography. Asia Pacific is down 9% with 2 exceptional events. I mean the liquidation of the Japanese subsidiary moving the business to a new distributor and the closure of the contract with the wholesale Mainland China distributor. However, like for like in China is positive, 26% in our network and the new strategy to have different distributors by provinces is gaining traction under the drive of the new general manager. On the other side, Eastern Europe continues really to outperform. It is up 28%, with Russia up 64% on 2020 and up 9% on 2019. Like for like in Russia is impressive. It has been plus 100% on 2020 and plus 25% on 2019. The brand momentum in Russia is really, really strong. On Page 9, net sales by product. Just to say that ready to wear is more impacted by the pandemic with the ready to wear specialists really prudent in buying new products. On the other side, performance of footwear has been fostered by spherical performances. Please go to Chart 10 to comment direct online evolution of top line. There are a couple of important messages. Online sales are up 30% on H1 2020 80% on H1 2019. However, as you can see, Q2 2021 has been minus 7%. In order to better understand these results, let's analyze the performance by gender and by channel online and brick and mortar. You can see that Q2 20, kid was up 153% as a consequence of the full lockdown of the brick and mortar network. In Q2 this year, kid like for like online was minus 36%, but like for like kid brick and mortar was plus 60%. So there is in place a normalization of customer behaviors after the reopening coming back to the physical stores. Men and women did not suffer from the abnormal comparison base and are positive double digit. In addition, this chart shows really an important information on brick and mortar and also on web. Our stricter full price approach in all channels in the Q2 with an average 900 bps decrease in discounts and markdown in all the channels. Please go to Chart 11 to comment working capital and net financial position evolution. Net operating working capital landed at €169,000,000 the lowest in recent years, mainly thanks to a good performance in credit management, minus €28,000,000 in receivable and also the good performance of our vendor payment agreements that allowed the payables to grow €33,000,000 Also inventories are under control, thanks to the action taken on a carpool buying for full winter 2020 and springsummer 2021 with a reduction of BRL 100,000,000 in new purchases compared with the previous correspondent seasons. In addition, the progressive reopening of DOS and outlet delivered in May June a positive cash generation so that the debt decreased from the seasonal peak in April at EUR 125,000,000 to EUR 108,000,000 at the end of June. On Page 12, there is the income statement. Sales at EUR264 1,000,000 as already commented. Gross margin is EUR127 1,000,000 or 47.9 percent on sales, with an increase of 6.90 basis points. This is the combination of plus 8.60 basis points due to material reduction in markdowns and no needs of additional inventory write down and the minus 170 basis points totally due to the different channel mix with a lower weight of DOS revenues and also in this case, the impact has been mitigated by the lower average markdown. The total operating costs are BRL156 1,000,000 down and with an additional 8.5 percent reduction or BRL 15,000,000. In particular, G and A at BRL 125 1,000,000 are down 9% or EUR 13,000,000 in H1 'twenty one and includes EUR 7,100,000 of furlough contribution, €5,700,000 of government support on rents and the structural costs, €4,300,000 of rent reduction and a 20% increase in advertising and promotion. At the end, EBIT is at minus €29,000,000 with no special item recorded this year. In H1 2020, EBIT adjusted was negative minus €70,000,000 Again, the company decided to maintain a prudent approach, not recording EUR 11,500,000 of deferred tax assets. To give the precise information, there are in the region of EUR 40,000,000 of deferred tax assets on losses not recorded in our financial statements. Consequently, in the next years, once we will be profitable, we can recover this amount of tax assets. Please go to Chart 13 for the balance sheet. It remains quite safe. The invested capital is decreasing in line with the strict control over CapEx, over working capital and the depreciation of the right of use regarding stores. Please go now to Page 14 for the cash flow statement. I would like to comment that it stated before IFRS 16 because this is the real net financial position versus banks. The operating cash flow in the look at the right part in the before the last column, the operating cash flow is negative €29,000,000 due to the loss. However, there is a mitigation because the decrease in working capital generated €13,000,000 of cash. CapEx are still under strict control, and we invested EUR 7,300,000 versus EUR 9,100,000 in the same period last year. And considering also EUR 4,400,000 of positive hedging valuation, the net financial debit is EUR 108,000,000 before IFRS 16 liabilities. Please now go now to Page 15 for the outlook. It remains unchanged. So consider that we are experiencing a positive start in Q3 for the U. S, the like for like of July is plus 23%, and the total year to date is plus 17%. Considering that we have been able to collect a mid single digit positive for winter 2021 initial order collection in wholesale, we assume that in case no more market lockdowns will happen in second half, we may deliver a low double digit growth in top line. Considering the fact that we will keep maintaining a really strong focus to cost management and also in markdown reduction, we believe that in terms of EBIT, we will be able to reduce the loss also in comparison with the first half. So let's say that the transformation journey is well on track. On this respect, please go to Page 16. Just an update on our transformation journey. It won't be the same company. In green, the update. So let's say that as far as the team is concerned, now it is completely done. A new brand officer is joining the company and a new merchandising officer on footwear just joined the company and he will add his seniority in footwear and accessories. He spent 25 years of his career in luxury brand in this industry. We don't want to increase prices. Our dream is to increase the perception of the products in front of the final customers, more style, Italian touch and so on in order to be more relevant for the final customer joint with our, let's say, revamping and relaunch of the brand that we plan in 2022. The rationalization process has been completed. And as I said, we tomorrow today announced the closure of the Serbian plant. We are now open to we are now ready to open the Q and A section and take your questions. Thank you, sir. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question comes from Francisco Brivi of Ace of Monte. Please go ahead. Yes, good evening. Thanks for taking my question. Congratulations for the results and for the achievement and the progression of your plan. I have a quick question on based on the results achieved mainly on the cash generation for the 2nd part of the year. Can you provide some additional indication on net financial position at the end of the year? And probably, is it fair to consider a number a better number compared to what indicated in the last conference call? Let's say that there is a high degree of uncertainty also regarding this new delta variance. But I think that we should stay in the region of 100, 110, like in June. In case reopenings will be, let's say, at the full speed, maybe we can also improve the situation. You know that in my opinion, the fact that we decided to cut for winter 2020 buying of EUR 40,000,000 and then springsummer 2021 of EUR 60,000,000 was really the most important decision we took last year because today we are in the position to protect our inventories. We are not forced to sell off inventory. So we can protect the product, we can protect the brand and we are delivering, let's say, a sort of a positive like for like with real and material decrease in discount. And starting from June, fortunately, also our really strong outlet network is fully reopened. Unfortunately, there are still important limitation to the traffic to the are still important limitation to the traffic to the tourism. And consequently, tourists are really important for fashion district outlet and McArthur Glenn and all the other champions in Europe. And consequently, maybe we can do better, but it is early to say. Yes. Thank you. If I may, a quick follow-up question. On the Serbian plant, probably I just missed it, but can you provide us with some indication on the impact that you will have? And the second one is on the online China. So this something some normalization in the trends between online and brick and mortar. Just can you share with us what are your expectation going forward for this year and most of next year? Okay. So starting from the easy one that is online. We did in Q2 this year really an experiment. I mean, 100 percent alignment of discount policy regarding both brick and mortar and online. And consequently, notwithstanding the fact that kids was a little bit weak compared to the exceptional performance of Q2 last year with a + 153%, we decided not to push on promotion because as a matter of fact, our target is to reduce markdown. And the expectation for so now we are absolutely in line in any case with our expectation that is in the reason of plus 30% on 2020, considering the full year. As far as the Serbian plant is concerned, it's a pity because we let's say that when we built the premises and the factory, the project was really to increase the quality and the volumes of dressy leather shoes. Unfortunately, in the last 5 years, customers' demand and the customers' behavior went in a different direction. And so it is not sustainable any longer to move production from Asia to Serbia in order to support the full production capacity of this big, big plant. So we have been forced, let's say, also considering COVID that drove to really a reduction in the volumes and also in this kind of formal back to work dress issues. It was necessary to take this absolutely unpleasant decision. As another factor, the factory in any case is quite lean. So as of today, to give an example, the raw material of just EUR 1,200,000 and a small depreciation has been fully recorded at June because we will be able to absorb these raw materials in the other selling them at the to the other suppliers. And as far as the net book value of the CapEx, it is in the region of EUR 9,500,000. We assume to be able to sell the premises with no material losses according to the fair market value that we received from 1 Serbian Real Estate Advisory Firm and 1 International real estate advisory firm. So for the time being, we do not see material restructuring costs. The liquidation process in Serbia according to Serbia, although is quite, let's say, light in terms of restructuring charges. In any case, we are in strict contact with the Serbian government in order to support at our best the transition to new investors that will locate their investment and production in our premises, so that with our support and the focus of the government, we will be able to mitigate the impact of this coal closure in Serbian society. Very clear. Thank you. The next question is from Orellana Cardani of Enteo Sao Paulo. Please go ahead. Yes, thank you. Good evening, everybody, and thank you for taking my questions. The first one is about current trading condition. July started well, very well. Is it true for both retail and wholesale? And do you think that the good start could continue on the same path in Q3? The second question is on gross margin in the 2nd part of the year. Do you believe that any temporary closure of factories by your suppliers due to COVID in emerging markets may damage gross margin in the 2nd part of the year? And finally, for the last question is on full winter collection. For summer, spring summer, you focused on 2 main products. Will you have the same approach also in Fort Winter? Thank you very much. Okay. Thank you for your question. So current trading, in some countries, we are doing really well. Fortunately, this year, the sales period has been placed exactly as in the normal years because last year was really a problem because the postponement of sales period induced the companies, in any case, to do promotion because people was waiting for promotion and for the sales period. So to do promotion also before the sales period and consequently we experienced like let's say the industry really a longer period of markdowns. This year, fortunately, July is just the sales period for Europe and starting from mid June for Northern Europe. So let's say, I think that this performance is quite good compared to last year, also due to the fact that we are in the full in July, in the full of the sales period and maybe last year, some countries were not in the sales period. However, it seems that people, once they can enter the stores, are really willing to buy because this positive result we are experiencing has been obtained, notwithstanding in brick and mortar, really a material fall in traffic in any case. So it means that retail KPIs in terms of conversion of units per ticket and also fortunately in terms of average price due to the reduction in markdown are really working in this season. So we hope that once movement restriction will ease a little bit in the second half, we should be able to improve the performance. So today, we have, let's say, positive expectation for Q3 in retail. And for wholesale, it's more or less the same. And the demonstration of this is the fact that we have been able to place €9,000,000 of reorders more than in Q2 last year. So let's cross finger and let's see what about lockdowns or not. Production problems in the supply chain, let's say that the industry is suffering a couple of problems. The first one is that there are still some lockdown, short term lockdowns in Vietnam, in Indonesia and in other countries, there is a sort of stop and go. They close 1 week, reopen 2 or 3 weeks, close 1 week. So let's say that maybe some delays may happen. We are really closely monitoring the situation in order to take all the necessary action to mitigate eventually the impact. And one of the action may be high freight. So as you said, the real problem of our industry in the near future is the increase in costs of transportation. Fortunately, we are one of the most important importer of shoes and apparel in Europe. Consequently, we have long term contracts with the companies. And consequently, 2021 is not materially impacted by this increase in the cost of transportation. For sure, it will be a little bit, but not materially. We hope that in the second half, the pressure will decrease and consequently, we hope to be able to, let's say, have a better situation in 2022. However, the price list of 2022 are reflecting a sort of slight increase in prices because it is necessary to recover the margin and consequently, in some cases, the pass part of this impact on the price of the product. For winter 2021 approach in terms of advertising, yes, we will continue in this approach. But in a little bit different approach, but with the same tone of voice and also the new language that we are using like Spherica TV campaign. The TV campaign, we will add a couple of TV campaign. The first one really important in 12 countries regarding back to school, also in order promote the important collaboration we have with Disney and also with Nintendo for the Super Mario, let's say, Super Mario products. So we will have a really strong collaboration, Disney, more for girls and Nintendo Super Mario more for kids. And then in October November, there will be a TV campaign regarding AmphibioX. So not just one product like Svelica, but the family of waterproof product that are really important for us in full winter and also in spring summer at the beginning of the spring summer. And it will be with the same, let's say, a story like Spherica with really important creative ideas behind with the same agency that has been chosen for Asperica campaign. As another advertising will be part of the brand revamping and brand reactivation that we are planning also for 2022. And this will mean also an increase in marketing spending. And this is the reason why we are being so, let's say, tough in following all the necessary reorganization action in order also to free up resources for the investment we are doing the digital transformation, but also to increase a little bit of the marketing spending. Madam, has your question been answered? The next question is a follow-up from Francisco Brilier de Ferrantes. Yes. Just a quick one on prices. You mentioned that you will implement, from the Surpal, a price increase starting with the beginning of 2022 for the full category. Is that right? Something like you are envisaging for the next year? I would like to be a little bit clearer. Let's say that we are not going to increase prices, let's say, on all the products. The increase in prices will be, on average, in the range of 2% to 3%, so really a slight increase on average. The recovery of the profit of the margin should derive from our approach to reduce markdown. Once and when our, let's say, brand will be back in terms of consideration from the final customers and also in terms of appeal and participate in the perception for the final customers, then in case the brand will have more pricing power, we may consider to create capsule or projects with a higher price, but really, really very prudent in this market situation. So let's say that increasing prices or rationalization of the collection in order to increase the to reduce the number of SKUs and to increase the quantities by SKU will be the main action to protect the margin. And I would like to take this question also to give a little bit of a flavor regarding gross margin in second half because you have seen that we have been able to deliver a really important improvement in gross margin in first half, also due to the fact that first half last year was heavily impacted by huge inventory write down. And the second half last year was normal, I would say. We will have the same situation this year. So big improvement in the first half and then more or less the same margin in second half. Provided that in any case, we'll try to improve the gross margin, reducing markdown and discounts. But this is something that we can build week by week during the second half. So for the time being, I would recommend to assume the same gross margin in H in the second half of twenty twenty one compared with the second half of 2020. So at year end, 3.50 basis points of improvement on the full year compared to last year. Super clear. Thank you. Mr. Luis Drolessa, there are no questions registered, sir, at this time. As usual, thank you very much for your time. Feel free to contact Simon or myself for any information or doubt you may have. We are here and we will be happy to answer to your question. Thank you very much. Keep in touch on November and we will inform you about eventually the new Investor Day that I think in case of no lockdown, consequential normalization of the volatility, we will held in November. Thank you very much. Ladies and gentlemen, thank you for joining. The conference is now open and you may disconnect your telephones.