Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the OVS Nine-Month 2022 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.
Good afternoon to everybody, thank you for being with us for this conference call. I'll try to be faster, saying that the quarter has been pretty good in my opinion in terms of sales, because it has been severely impacted by an unusually hot weather in October that penalized all the market. Being sensitive to kid, we suffer even more than the general market because kid is the most sensitive part of the market to weather. In spite of this, we have been able to generate a good level of sales, even keeping into account the very challenging comparison with the third quarter of last year. Excellent results in terms of sales, we achieved in November once the weather condition normalized, a good performance in terms of sales still is undergoing.
In term of margin, we decided consistently with our policy in the last 24 months, basically, not to follow customers if customer doesn't want to come in the store with markdown and discount policies. We have been very disciplined even in this quarter, and that's why in term of gross margin we are generating good results. We have been able to manage the negative sales of October in term of cost with some reduction of labor cost. Labor is not really rigid in term of cost because we have several agreement like part-time which we can and also holiday period, we can work on the manager, the, the cost of labor in a way that we make it partially variable.
We have been able to reduce during the month of October the labor cost in the store according to the lower traffic. It has been a period characterized by an heavier investment in marketing. Maybe some of you might have seen the PIOMBO van campaign, which we made on La7 with a very important effort in term of visibility. We are benefiting from this because we are realizing that traffic and sales of PIOMBO started reacting immediately after the first days of TV ad in a very positive way. PIOMBO, in general, is performing extremely well. We are super happy of about how PIOMBO is performing, men and women.
We recently opened a PIOMBO store in one of the most important shopping area in the holiday resort in Italy, in Cortina d'Ampezzo, in Corso Italia. It has been an incredible success. It is only one store, but the quality of customers that we have been able to attract, tells us a lot with the potential of PIOMBO even in the next coming quarters and years. This is a bit generic, so I prefer to leave the word to Francesco, to give you a more quantitative view of our quarter. Thank you.
Thank you, Stefano. I would start on page three, the focus on the results of the third quarter that see sales substantially flat versus last year, despite, as said, the hot October that prevented us to reach, let me say, the full potential of the quarter. Sales that, as said, were almost completely recovered in the month of November with the change of temperatures. The gross margin remains basically stable versus last year. Due to the, on one side, the high cost and the increased perimeter, but on the other side, as pointed out by Stefano, by all the actions that we implemented on cost saving, the impact on EBITDA is close to marginal. It's just a couple of million EUR lower than last year.
An element to be remarked is that the interest, the financial charges, reduced a lot, so much that we say that the profit before tax, even despite the lower EBITDA, is increasing versus last year. Moving to the view of the nine months on page four, the performance of OVS confirms to be very strong, with sales growing double digits, and with EBITDA growing about EUR 20 million in absolute terms versus last year, so landing at EUR 124 million.
Similarly, the profit before tax increased even more thanks to the effect of the lower financial expenses that the company is having in this year, thanks to the improved financial structure implemented in the course of 2021 with the capital increase and the refinancings. I move to page five to give some color in the view by channel and in the view by brand, with let me say overall also, every sign is positive. The growth encompass both the franchising and the DOS. Over the nine months, of course, in the DOS, the driver was the growth of the like-for-like performance, while on franchising, we are also benefiting of the expansion.
We are able to, we are continuously able to attract new partners that some are entering completely new into this venture of being a franchisee. Some other arrived from other players that do not deliver performance as OVS. Globally, we are increasing by EUR 60 million over the nine months on the franchising. The EBITDA, as said, is increasing also percentage-wise. While in the view by by brand, we see, of course, the different status of maturity, let me say, of the two brands. OVS is growing 5.5% being already with a relevant established network and growing thanks to the like-for-like performance.
Upim has on the sales an increase of 20%, which is the combination of a positive like-for-like and the perimeter growth. In terms of EBITDA, both signs grows double digits. OVS leveraging the operating leverage over the fixed cost of the stores, and Upim more similarly to the sales, thanks to the high weight of the franchising channel in this business. I move to the financial part on page number six, that show a trade working capital improving, so freeing up resources of EUR 26 million compared to 12 months ago, with trade receivables that are growing by 12%.
As said also in the previous meetings, this is nice to have growth, because it's less than half the one that we have on the sales. We are in a scenario of declining the DSO. I have to spend some more words on inventory and trade payables, which are strongly linked to each other. In inventory, we see a robust growth, but this is on one side temporary because end of October, as said, was a moment in which we had already in the store the goods for the wintery season that started only in November. The peak of October was something that in the...
at the end of the month of November was already partial absorbed in a significant portion. The other element, which we discovered also, Zara declared to have done in the same way, is to anticipate the Spring/Summer 2023 arrivals in order to completely avoid issues on the supply chain, issues that we suffered on Spring/Summer 2022 and somehow even penalized the results to date. This is supposed to be an element that in the course of 2023, of course, will be no more a critical point.
The peak of stock that we have today, which is, let me say, all connected to the new season, we do not see it as a problem. Moreover, all these additional stock is still to be paid, and that is the main reason of the growth in trade payables that also benefit of the general normalization of the business after that in 2021, we were just exiting the pandemic peak. Let's move to page number seven to provide some view on the capital expenditure, which is in line with the overall spending of 2021, after EUR 57 million with a different mix between the new openings and refurbishment.
This year, we prefer to focus on refurbishing the stores, in particular the OVS stores, in order to provide consistency between the collection that is improving every season, with let me say a layout of a store with more wood, more quality of the materials, that is a combination to attract the new customers that are allowing us to achieve these results. In parallel, we are going on ahead with the investments in IT and digital transformation. On the logistic, we see an increase because we are investing in automation now in the Pontenure distribution center. This is the reason of the increase in that item.
I move to page number eight to provide a full view on the consolidated cash flow statements. We added also the column of 2019 because the comparison with 2021 is a little bit misleading. Last year, we were destocking after the cash absorption we suffered in 2020, both in terms of trade working capital and in other working capital. The comparison is not viable. While it is viable with 2019, and we see an increase in the operating cash flow and in the net cash flow of about EUR 20 million, despite a significant increase in CapEx. 2019 was a year with lower than average investments.
Despite that, the ability to keep the working capital under control and to generate the EBITDA allowed us to close the nine months basically with a zero balance. In terms of net financial position, of course, we have to account that we invested about more than EUR 30 million in giving back to the shareholders some cash, either as dividend or as payback of the shares.
I move to page number nine to comment the continuous decline on the leverage ratio that was last year 1.9, 1.86 at the point of 31st of October , and in the view of the last 12 months was 2.8, and that now is 1.33. Given the, let me say, ability of the company to generate cash over the last quarter, we expect to reach a leverage ratio around 1, just below 1, by the end by the end of the year. That would be, let me say, an achievement.
I just remember that in 2020, we completed the year with a 5.5 leverage ratio, now we are, we start with a zero in two months. I leave to Stefano to comment the outlook. I just take the opportunity to remember that the pictures below are the ninth store of Cortina, that Stefano mentioned in the opening.
Thank you, Francesco. I have not that much to add. We are already at mid of December. We are almost at the end of the normal sales season. The quality of our stock is pretty good in term of mix, because we have the same level of stock of current season and former season. It's in absolute term. Within this, amount, the share of new goods, is much higher than, last year. In term of quality, we approach the sales season, but even before the sales season, the Christmas season, with a better quality of stock.
We expect that, unless, we discover unexpected change in the consumer attitude in the next coming weeks, given also that weather is less important in this part of the year because we are not in the middle of the change of the season, but we are clearly in full, winter. We don't expect to suffer from season variability. Basically, quality of stock is good, and we expect that, also, we will be a little bit pushy on the sales because, what has been lost in October, can also be recovered during the month of January in term of cash. Basically, in my opinion, we have a good expectation for the remaining 45 days. Thank you, and up to your...
Up to you with your question. Thank you.
Thank you. This is the Chorus Call Conference Operator. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Andrea Bonfà with Banca Akros. Please go ahead.
Hello. Good afternoon to everybody. I hope you can hear me. My main question is related to your attitude on cost of labor next year. I would define this year the year of inflation driven by energy prices and commodities in general, logistics and so on so forth. Next year, I think maybe the main item is cost of labor. I would like to know what's your attitude toward that, and how can you manage that. In as far as your attitude on, let's say, restocking after the Autumn/Winter 2022, is this an attitude that to have a lower amount of stock or to be as normal as ever or what's your view on that?
My, my view is that, I mean, the conversion is increasing and maybe you need a structurally lower stock, but, I mean, it's my view. Thank you very much.
Bonfà, I have not understood the last part of your question. Your perception is that?
Well, my perception is that you got less traffic and higher conversions, or I think that you don't need to fill up your shops. Or let's say with, I think your shops should need a lower amount of stock compared with what we were accustomed before. At least in my personal view. I don't know if you share this view.
Okay. Well, labor, yes, you are right. Labor will be the cost component that for sure will be subject to increase in term of trying to recover at least partially the inflation that has been suffered in term of impact on the bargaining power also. Basically, cost increase is something that we need to expect and that we need to have in a country which is suffering for a high inflation rate. Based on what we know, a couple of days ago, agreement has been achieved among the main association of employers and the main group active in the retail industry in Italy. The increase of labor in term of inflation recovery will be even too small.
Basically, there will be an impact in our accounts, but much lower compare to the one that we should have suffered if the index of inflation should be applied to the salaries. So we expect to have a 2%-3% of cost increase in terms of salary that will be managed also with a lower number of hours that will be worked, given that compared to 2019, the traffic in the store is still lower. So what we will try is to compensate the rate increase with a number of hours that will be lower compared to the pre-COVID situation.
In terms of energy, we expect to be still impacted by the higher cost of energy, even if we are adopting some solution that will provide a reduction to this impact in terms of self-production of electricity through solar fields.
Photovoltaics.
Photovoltaic, yes. On logistic, and commodities, we are starting to experiencing a lowering of the cost. Logistic particularly is getting very similar to the pre-COVID situation, and it's gonna benefit the account for next year. Commodities are going down. Dollar was a bit tough for our orders, but now dollar is a bit weaker again. Overall, there will be a modest impact, negative impact of currency, but nothing that we cannot manage. On the stock aspects, I think that I don't see this issue, the issue that you are looking at. Our level of stock is fine, in my opinion. Some stock is also owned by brand, which are introducing their goods in our store under concession.
You might see this stock, but we don't own this stock in some case. All in all, I think that we are not suffering about overstock, or we are not missing the right stock. We feel that we are okay with the stock.
Let me say that the additional stock, if maybe was not enough clear, is on the full Spring/Summer 2023 season. The full winter 2022 has basically the same level of last year. Somehow, given the price increase has also some lower pieces in the end in the store. It's okay that we need less stock in pieces. In fact, we are like that. The new stock is pure Spring/Summer 2023.
Thank you very much. If I may, just to try to understand, you disclosed to us that the first 45 days of the Q3, Q4 are performing very well with a +10%. I'm wondering if you can share with us your thoughts or at least, let's say, the kind of operational leverage that we should expect, if these numbers are confirmed. My opinion is that if you are able to confirm these kind of numbers by year-end, in the last quarter, your operational leverage should be very strong and potentially much higher than what you are or I am pricing in my numbers. Thank you.
I don't think this is the venue where we can enter so much in details. I think you can continue your discussion with our IR, and he will try to give you all the information that we can provide to you. All in all, I think that we are still in front of a challenging situation from a market perspective, so I wouldn't be too optimistic. I think that already what we told tells that we feel really comfortable in achieving a good increase compared to the result of last year. I don't think this is a venue if, to say if it will be 159, as some of you expected, or 65 or 67 or, let's see what happens. We have still another 45 days.
The good things is that, the situation is, in my opinion, extremely, solid, and, the visibility on the near future is pretty good.
The next question is from Domenico Ghilotti with Equita. Please go ahead. excuse me, Mr. Ghilotti's line dropped. The next question is from Luca Bacoccoli with Intesa Sanpaolo. Please go ahead.
Hi, good afternoon, everyone. I hope, you can hear me. Is that right?
Yes.
Okay, good. First question is on advertising, because in the last, let's say, six months, it happens more and more that your brand is visible on traditional media, I'm referring to TV broadcasting, but also on newspapers. I was wondering how much are you spending on advertising in the first nine months? What is your approach for next year? If you are expecting willing to increase the advertising expenses also to favor, let's say, the shift towards PIOMBO. The other question regards the fourth quarter. I understood that you are not so keen to share with us what could happen, it seems that the volatility now should be much lower.
I was wondering if the cash flow generation in the last quarter could be similar to what we have seen in the fourth quarter 2021. My last question is on next year. Most of the, let's say, moving parts, which are going to shape up next quarter were mentioned during your comments. I was just curious to understand how we have to see to the prices, if you intend to increase further prices, as you have done this year to offset the headwinds that you mentioned on US dollar and on the energy side. Thank you.
Okay, thank you for the question. On advertising, I don't have an exact number to share with you about the quarter. I tell you that part of the advertising which will be spent also in the fourth quarter, like the TV that you are looking at in this period. I would say that in general, in the full year 2022, there is an increase of advertising cost of about 30% compared to year 2021. This is mostly generated by the TV campaign and effort of increasing also the presence on the social network advertising. These are the two element that increased the most.
In term of cash generation on the fourth quarter, I would be prudent because on one side, it's true, we are experiencing, as of now, a very solid sales dynamic, which means cash-in. On the other side, we as explained by Francesco, we decided consciously to avoid the risk of in further supply chain disruptions, which penalized our Spring/Summer 2022, mostly in kids, and we decided to anticipate some deliveries.
That's why the level of stock is higher compared to last year, not because of the current season, I repeat, but because we decided to anticipate deliveries related to the Spring/Summer, part of which has now retraction on net financial position because we've been compensated by increased amount of liabilities versus suppliers, but part of which will be paid. Basically, I think that there will be a compensation between the higher cash-in generated from the sales and some higher payment for this increase of anticipated deliveries. In terms of price evolution, it's very delicate, if I can say, very sensitive and very difficult.
This year we increased the prices materially, and I think that this is one of the reason why we have been able to generate, I think, very good results, as a combination of a certain amount of customer that we have lost in the entry level, maybe, but another important amount of new customer that we attracted, thanks to PIOMBO and thanks to the brand strategy. We don't want to lose other customers in the low-end part of the price pyramid. Next year we'll be very careful in managing prices. There is still room to increase prices in the mid or high level items. The proof of it is that this year, the sell through of items which were priced in the higher range has been higher compared the sell through of items that have been priced lower.
This means that the brand is achieving the attitude of being able to stretch the prices up in the, in the product which are more qualitative or more fashion like PIOMBO. Also we needed to remain prudent in continuing giving to our base of kids customers also the proper level of entry level. It will be a combination of maintaining prices in the kids and increasing prices in the adult. By the way, adult is performing better than kids for the first time in maybe 15 years, to my memory, which is good news in my opinion. We believe that based on our assumption, the balance of these actions will allow us to maintain a more than decent margin.
Okay. Thank you very much. Very clear.
The next question is from Domenico Ghilotti with Equita. Please go ahead.
Hi. I hope you can hear me. I have a few questions. The first is related to Q3 performance. In terms of same-store sales, I'm trying to understand the Upim same-store sales, because I presume that OVS is more or less in line with the total total results for the division. If you can help us in understanding what, how was the price mix contribution, the volume contribution. Also to explain the different performance in terms of profitability. You were mentioning the gross margin is stable at consolidated level. I wonder if this is the case also for the two division or if Upim was more difficult for Upim to raise price, to have a price mix positive contribution. That's the first question on Q3.
I have a question on PIOMBO. I'm trying to understand where are you in the penetration of PIOMBO in the stores, if you have still room to increase the floor dedicated to PIOMBO. If you see a risk of more fashion risk for PIOMBO, so some risk of obsolescence compared to the core proposition that proved very resilient and not affected by this risk.
Okay, clear. On the Q3, if I understand, you want to have some color on the breakdown between the performance of OVS and the Upim ones. Let me say that the two brand has been, first of all, has been able to increase prices. Both of them increased prices. OVS increased prices more than Upim, but both of them increased their prices. The reason why OVS, I decided, we decided to increase prices more is related to the fact that we have introduced more element of innovations in OVS than in Upim. New customers has been attracted thanks to higher quality of the items, namely PIOMBO or Hybrid or Gap, et cetera. Upim has been more stable in term of offer proposition with a good exception, which is perfumery.
Upim increased the perfumery and because perfumery market generated a good plus this year, the performance of Upim in term of sales in the third quarter has been higher compared to OVS because of this. The presence of perfumery, which is higher in Upim than in OVS. The second reason why the performance of Upim in term of net sales has been higher compared to OVS is that Upim markdown has been higher. OVS basically didn't increase markdown compared to last year, while Upim that was approaching the second half with a higher level of stock has entered in a bit higher markdown mood, which as expected, generated more traffic and more sales. On PIOMBO, today, PIOMBO represents something more than 15% of the penetration in men and women.
I don't think we will increase this amount and the square meter dedicated to PIOMBO because we don't want it to hyper characterize the company as a more fashion one. Even if I need to point out that the PIOMBO style is an endless style. PIOMBO is not something that you wear and then later after you stop wearing. The risk of obsolescence, as you said, is not that high comparatively to other fashion brand which are highly risky in term of obsolescence. Basically, PIOMBO is an evergreen.
On, in term of impact of PIOMBO anyway, there will be some novelty next year because we are introducing PIOMBO also in the kids. In order to satisfy the desire, the preferences of customers, which are a bit more, I'm not saying fashion conscious, but I say demanding in term of quality, we will introduce also PIOMBO Kids. That will start from spring. I don't think that in the beginning, the presence will amount to something close to 15%. Maybe in the first year, we will have a 3%, 4%, 5% of kids represented by PIOMBO.
Okay. Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. The next question is from Federico Belluati with Kepler Cheuvreux. Please go ahead.
Good evening. Thank you for reaching my question. I'm just asking, how's the Stefanel channel going, if you are satisfied with it? What are your expectation for this year and for the coming months? Thank you.
I'm really sorry, but the quality of your microphone is different from the others, so-
Oh, sorry. Sorry about that. Do you hear me better now?
No, no. There is a.
Mr. Belluati could you please use the receiver, please, instead of the...
Do you hear me better now?
No. Try now.
You hear me?
No, we cannot.
We cannot hear you now.
What about Stefanel?
Mr. Belluati, can you please just try your microphone because we cannot hear you anymore.
No, mine is on now.
Okay. Can you please repeat your question?
Do you hear me better now?
A little bit.
Excuse me, Mr. Belluati's line dropped.
No. Maybe the only word I understood was Stefanel. I hope that Mr. Belluati is still with us. On Stefanel, we are really in a startup situation. We are happy with the response from the customer that we are receiving. We are opening some new franchising store in Italy, and we are opening in some other country. We are still prudent because what I want to do now before pushing the accelerator of opening, and in principle we might open plenty of franchising store because the demand for Stefanel is pretty high in the market also out of Italy. We want to be sure that we have a great collection. The impression is that we have still to work.
We have good signals, but also some adjustment to be made in the collection. I hope that also with the improvement in the organization with the team, which is now more focused on the evolution, the planning of the Stefanel collection, we can have a great Spring/Summer. This is really something we are waiting in order to start pushing the accelerator and opening more and more stores. Very well, Stefanel in the e-commerce. This means that the higher price and the reputation of the brand is still attractive. Because the number of store is much smaller compared to OVS, we are noticing that the penetration of Stefanel e-commerce in the total sales of Stefanel is much higher compared to OVS.
Okay, thank you. Sorry about the technical issues.
Now I hear you.
I'm sorry. Sorry about that. Sorry. Thank you so much. Thanks a lot.
No problem. I think that-
Yeah.
Unless you have further questions from you, from, you guys.
No, I'm fine.
Okay. Thank you for attending this call and. No, please go ahead.
Excuse me. We still have two questions.
Okay. Sorry.
The next question is from Luca Orsini with One Investments. Please go ahead.
Hello, everyone. Hello, Stefano. Can you hear us?
Ciao, Luca.
Ciao. Perfetto.
I know that you met Massimo in London, I know.
Yes, I know. We talked about you.
Okay.
Such a nice guy. I just have three questions. The first one is on Coin. Just if you can tell us if something is going to happen, and how do you think you can finance that? The second question is on the SKU. Are you happy on where you are on SKU or there is still some optimization work to be done, either increasing them or decreasing them or increasing them, which I don't believe. The third thing is, do you have a comment on the average ticket, whether it has moved significantly? The last thing is, are you carry on with your buyback, and what is your plan, and whether you're gonna cancel stock?
Okay. On Coin, the answer will be very, very fast. We have no news on Coin. So we have also no comment on the way we are gonna finance in case we should have news. One thing is clear, we will not penalize our balance sheet with consolidating Coin in any case. In one way or the other, we go ahead or we don't. We wouldn't go with an acquisition for another %. In any case, the balance sheet and the net financial position of OVS will not be impacted by Coin.
After 15 years of high leverage, I don't want to have, in this moment in the market with rising cost of money, I don't want to have a bigger burden of debt on our shoulder. In term of SKU, no. Maybe I can say that we are starting to move our first steps in the outerwear, sport leisure wear. There will be some incursion in segment of product, like tennis, like Nordic walking, like biking, which is more related to urban mobility than really to sport in term of performance. There will be something new there. Obviously, it will be new SKUs, obviously.
Average ticket is increasing, Francesco gave me some number because I didn't have this number, so thank you, Francesco. In 2019, average ticket was EUR 26, in 2021 it was EUR 32, in 2022 is EUR 33 . The last question was about.
The buyback. About the buyback.
The buyback is gonna continue, but not at the same pace than before. We gave to our broker instruction to be less bullish, even because in this moment, we are in a moment where with the exclusion of yesterday, the share price is basically well oriented. The nature of the buyback was also to act in a way to balance excess of volatility. We are happy with what we did, and we are ready to do more in case it will be necessary.
Okay. Will you cancel the shares?
We are not talking about it now.
Okay. Well, thank you.
We-
Keep up.
Thank you.
The next question is from Francesco Brilli with Intermonte. Please go ahead.
Oh, good evening. Thanks for taking my question. The question I had was almost already answered. It was on Coin. I just wanted to say that if there which are the main focus area that you are assessing and you are focusing there or your due diligence, you already answered, I think.
We are focused on generating liquidity.
Okay. Thank you.
Okay. Thank you to all of you and Merry Christmas, given the timing of this call. Bye-bye.
Ladies, and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephone.