Thank you. Good evening, everybody, thank you for joining the Salvatore Ferragamo first half 2021 financial results conference call. I'm here with our Executive Vice Chairman, Michele Norsa, our CEO, Micaela le Divelec Lemmi, and our CFO, Alessandro Corsi. During the call, we will go through the group's financial results and then open to a Q and A session. I will now read the usual legal disclaimer, which says that this presentation contains forward-looking statements regarding future events and results of the company that are based on the current expectations, projections, and assumptions of the management of the company. The actual results may differ materially from those expressed in any forward-looking statements, the company does not assume any liability with respect thereto.
This document has been prepared solely for this presentation and does not constitute any offer or invitation to sell or any solicitation to purchase any share in the company. The manager in charge of preparing the company financial records hereby certifies that the accounting disclosure of this document are consistent with the accounting document, ledgers, and entries. I now hand over to our Executive Vice Chairman, Michele Norsa.
Good evening to everybody. Today we are reporting a very encouraging set of results. I would like to point out that, as you well know, the company, Salvatore Ferragamo, is going through an articulated evolution process which will be completed with the beginning of next year. Today I have to announce that the Group CEO, Micaela le Divelec Lemmi, is leaving, and I would like to thank her, not only on behalf of the company, but very strongly with my personal appreciation. I think we have been working for the past 14, 15 months together, and I have appreciated her continual support, commitment, and professionalism. The first semester results are showing a significant profitability turnaround. If we look at the past year result at June 30th, we see a quite important loss of EUR 87 million, and we move now to a profit of EUR 33 million.
At the same time, is to appreciate the strong cash generation you will see in the numbers in a while. Of course, the results were driven by the revenue recovery you have already been looking at with July revenues presentation, which was related to market reopening and improvement of consumption in the major markets. At the same time, I would like to point out the very strong effort of the Management, which was focused, as we have previously announced, on the margin improvement, the organization streamlining, and a continuous cost monitoring. In term of revenues and gross margin improvements, we could benefit from different factors, of course, an improved sales mix, full price versus discount. Some increase in specific product categories or prices in geographies and in regions which were important to us.
Of course, if we look at the full picture, we see the influence of high-margin regions like North America, China, and Korea as the major contributors to our results. In terms of organization, we mentioned previously that we have been trying to simplify our organization with double-hatting policy, and we have seen a very important and very positive response from our teams, not only at the headquarters, but also in all the regions. We can also announce that we have a new management joining the company. Already in July, we had the nomination of a Chief Operating Officer, Mr. Gobbetti .
We expect in the next months to have new heads, new CEOs for the regions of EMEA and North America joining the company. In terms of monitoring cost, the excellent result is seen through the reducing of OpEx incidence, which has not reached the 2019 percentage, but is moving into a much more comfortable area compared to the previous year. We are now expecting for the second part of the year, an increase in investment in CapEx and communication in order to support the significant business development. In terms of markets, we see North America continuing with a very, very strong and positive performance.
We are benefiting from quite wide distribution in the U.S. with almost 50 point of sales, not only the coverage of large capitals or cities, but also through shopping malls in the most important regions, of course from Northeast, but in Florida, where we recently opened a new store in Aventura Mall and in California and Texas. We are confident in both Korea and China markets, even if some recent COVID measures have been impacting some of the stores' operation during the month of August. We look at China as the strong driver of the Ferragamo growth, not only in the past, but also for the near future. On the more negative side, we have in Europe and Southeast Asia, a different situation greatly impacted by the lack of tourists and the delayed business traffic.
We look at a recovery, but it may take some time before going back to business as it used to be. I would like now to give the word to Micaela le Divelec .
Thank you, Mr. Norsa. Thanks to you all. I'm pleased to be here today and to have the chance of this last conference call to say goodbye to all of you, and also before that, to mark a first half 2021 back on positive territory in terms of financials, achieving excellent results and making the group ready for new challenges. I've been responsibly on board until the last day of my mandate, and I leave now with a track record after the COVID storm of driver of the boat back to its harbor. Let me give now you a few highlights on the first half 2021 remarkable performance, which is a result of a combination of various strategic initiatives to give a real customer focus to the company, translated in 2021 first semester in concrete action.
There are some good indicators, particularly considering that not many exceptional items are affecting the results compared to the first semester 2020. EBIT is turning from a loss of EUR 72 million in the first semester 2020 to a positive EBIT of EUR 66 million in the first semester 2021. There are some elements, in particular we recorded high retail KPIs in the first semester, despite the still decreasing traffic. Conversion rate in particular is record high with double-digit increase and is currently up to more than 10% in primary store, with almost all the regions recording in primary store a conversion rate in double-digit. As well, average ticket and UPT are growing compared to 2020 as much as 2019 in almost all the regions.
A very healthy gross profit as a second element, which is in the first semester up to 68.9%. Which can be read in 71.7% on the second quarter. Which is driven by a good channel mix, a favorable product mix, and a more healthy full price business vis-à-vis off price business. Thanks to the strategy implemented in the past three years of upgrading the quality of the sales of full price stores.
China, which is the fastest growing market, in the first semester 2021 in particular, is gaining significant traction in primary store on full price business vis-à-vis even 2019, and is currently gaining 7.5 basis points in the weight of the full price sales versus the pre-COVID time, with a growth of full price sales of more than 30%. USA is following as well with 3.5 basis points growth versus 2019 in the weight of full prices just in primary stores. The third element is the responsible approach which has been implemented on investment and operating expenses aimed at reinforcing the culture of return of investment for all the investment opportunities, working and measuring the return of the investment and deciding where to put money based on where the return could have been more fast.
Last but not least, a very clean inventory, not inflated by orders cancellation of pre-COVID period and the positive working capital is contributing to a cash generation of more than EUR 200 million over the six months. The retail sales of the third quarter 2021 are, as we speak, almost at par with the pre-COVID time and the remarkable profitability achieved in this semester could, if things will be equal, continue to exploit its potential in the months ahead. Digital has gained relevance in the last 24 months and is accounting now in the first semester for more than 8% all inclusive of the total revenues with omni-channel initiative contributing over the same period for 2.5% of the total retail sales. I've been full in my position until today.
I leave now a company clean and healthy, ready for new development, which in light of the new governance in place can be developed and managed by the management. I thank you very much for your attention as well as for the question and the challenges of these past years. I hand over to Alessandro in order to deep dive into the first semester results.
Okay, thank you. Good evening, everybody. Welcome back to our first half 2021 conference call. Before commenting the numbers, I would like to thank Micaela for her strong support and the work together in these years. Let's now move to page four and start commenting revenues. As a technical premise, I would like to remind you that all the performance measures of revenues and income statement are reported in accordance with the accounting principle IFRS 5, excluding the Fragrance business both from 2021 and 2020 data following the signature of the transaction agreement with Interparfums that we announced in the press release on July 7th. You can refer to slide number 10 for the quarterly restated figures.
Say that at the end of June 2021, company reported EUR 524 million of net revenues, up by 44% versus last year at current FX and up by 46% at constant FX, with a hedging impact of EUR 6 million+ in the current year versus EUR 3 million- of last year. As you know, in first H 2021, the situation of the stores closures due to the lockdown has been progressively worsening in Europe, where at the end of March, the majority of the network was closed. Latin America, lockdown brought to numerous stores closures in Mexico and in other parts of the region. At the end of the second quarter, only 53% of the global network was operating on regular opening hours.
Looking at the channel mix, first half 2021, retail was up by 49% versus last year at constant FX, and second quarter was up 83% at constant, and four areas, which are Greater China, North America, Latin America, and Korea, exceeded the pre-COVID revenues level. Wholesale was up 40.5% at constant FX versus last year and up 122% in second quarter standalone, despite the still challenging situation of the travel retail channel due to the international travel restriction as a consequence of the pandemic. Finally, rental income. Rental income line has normalized, is now aligned with our forecast of a full year 2021 numbers stable versus 2020. Let's now move to revenues by region, which is page five. Talking at constant FX, Asia Pacific up 34% in the first half, and as you can see from the slide, it solidly represents the first region of our group.
More in depth, retail channel in China saw an increase of 47% versus first H of last year. Korea also posted a solid growth trend of +22%. Japan was up 18% at constant FX with a 67% up in second quarter. Say that, the entire Asian continent now represent over 50% of total revenues for the group. Talking about EMEA. EMEA was up 20.5% at constant in first H and was still strongly penalized by lockdowns and by lack of tourist flows in the period due to restrictions and the bans imposed by the national government. North America, on the other side, recorded sales up 122% at constant versus first half of last year, with a very positive performance both for retail and wholesale sub-channels. Finally, looking at Latin America, it shows sales up 74% at constant with a positive trend in all markets of the region.
Let's now move to revenues by product, page six. Our core Leather categories today represent over 80% of total turnover, with both leather goods, handbags, and shoes showing a solid increase versus last year. Let's now move to the P&L after the comments on revenues. Once again, please remind that all data reporting excluding the Fragrance business, while its net effect is indicated in the line just above net income as a net loss from discontinued operations. Let's focus the gross margin. It was already mentioned by both Mr. Norsa and Micaela. This is certainly one of the best news of this first half reporting. It reached 68.9% of revenues, which is up 7.9 points versus last year.
It was mainly driven by three factors: a higher full price ratio, a more favorable mix in terms of geographies, channel, and product mix, and lower provisions for obsolescence compared to last year, where you can recall we had to prudentially accrue for extraordinary obsolescence, for all the products already on shelves and kind of stuck due to the COVID. Total OpEx were stable or up by 4% at constant FX, with an increase of 30% versus last year in second quarter standalone due to higher variable costs, back to normal expenses versus last year, higher expenditures in communication, and also lower costs released compared to 2020 from extraordinary contribution like we had in government subsidies to labor or reduction in rents from lenders and other extraordinary measures.
Please also note that in the other income line, you have included a one-off insurance refund that we had in the U.S., and it accounts for over EUR 5 million. As a consequence, EBIT showed a very strong recovery versus last year, going from -EUR 72 million in first half of 2020, or -EUR 62 million excluding the effect of the impairment test, to +EUR 66 million in first half of this year. Below EBIT line, as usual, we have segregated the financial lines between what is pure financial income and expenses and the financial portion related to the IFRS 16 right of usage. The pure financial line cost is EUR 7 million below last year due to lower hedging costs and to a one-off effect, a realized evaluation of some currencies that we had recorded in first half of 2020.
For full year 2021, in terms of pure financial cost, you can expect a number very close to the one in 2019. As already mentioned, you also see EUR 3 million- net loss from fragrances discontinued operation to land at a net result, which is EUR 33 million+ versus a net loss of over EUR 86 million in the first half of last year. Let's move now to page number eight, which is balance sheet. Again, another good news, which is inventory progressively down, almost at 20% at current FX and -22% at constant. If we exclude the fragrances from 2020, the inventory at the end of June is down by -15%. This was achieved thanks to a higher operational efficiency and as a result of the management actions carried on to optimize inventory. CapEx was EUR 13 million in first H versus EUR 11 million of last year.
Two main drivers of investments are retail network and digital. For the full year, at the moment, we can expect a number around EUR 50 million. Net financial position, net of IFRS 16 impact, another very strong and positive news of this quarter reporting, is reaching EUR 205 million versus EUR 58 million reported at the end of June 2020. Including the IFRS 16 effect, net financial position is negative for EUR 357 million. Last slide, usual, on the store network. We count a total of 639 point of sale at the end of June, which is -5 versus the same period of 2020. Most of closures come from third-party operated stores, and in particular, they come from the travel retail channel. This is all on my side. I think that we can now open to the Q and A session.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question please press star one on your telephone keypad. Our first question is from the line of Guido Lucarelli from Exane BNP Paribas. Please go ahead. Your line is open.
Yes, good evening. Thanks for taking my questions. The first one is on the price differential between Europe and China. I was wondering if you could update us on this, and whether you are happy with the current level or what would be your target. Second one is on the cost structure. I was wondering what can we expect in the second half as OpEx growth compared to the second half of last year, especially in terms of sales and distribution cost. I think it was quite impressive that they were almost flat versus last year. What is the structure fixed versus variable there? Final one, if you could disclose the like-for-like in the first half of the year. Thank you.
Sure. Okay. We can start from the question on cost structure. I would say that in second half of the year, we can expect in term of OpEx, an increase versus the one that we have in the first part of the year. Of course, we can account or we can estimate for the second part of the year, higher investments in communication, so an acceleration of that type of expenditures. We will have more variable costs related to the recovery path that we are observing in retail business. We will also have less positive contribution from one-off costs. You can expect that the reliefs from the landlords or the government contributions to labor, of course, are decreasing in second part of the year.
All in all, the second part of the year will have a higher acceleration in costs versus last year, compared to the one that we had in first part of the year. Going to the question you made about structure of fixed and variable, I would say that Ferragamo is not different from the other groups. To me, it's always a kind of tricky question because some costs in our business, of course, are really variable, like in some department stores or like in some regions, but other costs are maybe discretionary and not variable. It's not so easy to give a perfect ratio of what's fixed against variable. If you look at the historical numbers, I guess that you can immediately see what is the leverage in the group. What else?
Price differential.
Price differential. In terms of price differential, Europe versus China, of course, we still have almost 25% in terms of differential between the two regions. In terms of like-for-like, the final answer we can give is that contribution from perimeter this year, like we had it last year, is very limited. Basically, there is no contribution from perimeter.
Thank you very much.
Thank you for your question. We have the next question from the line of Susy Tibaldi from UBS. Please go ahead. Your line is open.
Hello, good evening. Thank you. I wanted to ask about the level of retail sales that you are seeing currently in Q3. My understanding from your sales release was that July was back in line with 2019, and now you mentioned July and August is close to 2019. Does it mean that August was a little bit slower, and maybe that was because of some of these lockdowns and COVID restrictions in China? If you can confirm that, it would be very helpful. Secondly, on the profitability, clearly very impressive in this first half. Do you have an outlook of what you expect for 2021? You were already quite close to the profitability seen in H1 2019, even though your top line is still not there, especially on wholesale. If you can help us to understand how to think about profitability, it would be great.
Last question, I wanted to ask about the appointment of Mr. Gobbetti, and just wanted to understand what was the thought process behind it, and why you think that he is the right person to drive the business going forward. Thank you very much.
Okay. I can start again talking about profitability. Of course, you're right, the profitability picture that we have presented in the first half is really very strong. I say that if we focus our attention on direct gross profit, you're right, it's even higher than the one that we recorded in 2019. Of course, there are several factors that you have to take into account when looking at these numbers. Of course, between 2021 and 2019, in terms of channel mix, there's a big difference in terms of relative weight between the channels. The weight of retail and wholesale in the two years that you are comparing has substantially changed. Of course, the higher weight of retail is giving a strong contribution. As Micaela highlighted, and I also already reported, we had a very strong performance in terms of full price sales over off-price sales.
Finally, when you look at profitability in terms of gross margin versus 2019, please also recall that now we are not reporting fragrances in our reporting at direct gross profit level that we used to report in 2019. That is also accounting for some basis points of difference between the two years. This is an apple to apple comparison. If we look or if we think of profitability for 2021, of course, the consensus that we see today for the full year, which is around EUR 60 million, is of course obsolete. Let's call it like that. We are happy to say that is a number that we of course think obsolete. The consensus we see on the sales is around EUR 1,100. I think that is reasonable.
In terms of OpEx, we already answered to the previous question where we see an acceleration of expenses in the second part of the year. All in all, I can expect, or we can expect an EBIT level, an EBIT percentage or EBIT margin at the end of this year, somehow close to 10%. Now on the first question, you understand, I cannot say too much. What I can say is that of course, the shareholders, the committee, the board, have been working very hard on the selection of a candidate for such an important role. I think it would be nice to have a person who can really develop the company for a long time in the future.
From my point of view, I can say that Mr. Gobbetti has an important seniority, is an expert of a fashion business, is running a public company and the search has been done by the best team of professionals. I really hope and believe he is going to be the person for the future development of Ferragamo. Okay, maybe there was another statement, a quote on the current period, right?
In that regard, I do confirm that at the end of July, the trend was almost in recovery at the same speed with an acceleration on China and the U.S. and some sign of recovery for Europe as well as for Japan and APAC was still in a very hard situation due to the lockdown. August has been a month in which in China, as much as it has been visible also on the press, we saw some sign of rebalancing of the purchases. Considering that last year in the same period, we were benefiting of the so-called revenge spending which has been strongly push the level of sales. August has been a bit softer, which is making us in a situation which is close to the level of, slightly below the level of 2019. I would say that the impact is not particularly material.
Maybe just to integrate my first answer about profitability and now we expect the 2021, I say that if I had to model the numbers, what we can expect for the second half is probably a slight deterioration, maybe at gross margin level since you all see that it's kind of record at the moment. It's a record gross margin for the group and higher expenses, as you already said, to land in the range that I already indicated.
Thank you. Very clear.
Thank you.
Thank you for your question. I will now the question from Thomas Chauvet from Citi. Please go ahead.
Yes. Good evening, everyone. I have three questions, please. The first one, coming back to the gross margin, Alessandro. On the appendix of page 10, you've got a very useful P&L for Q1 and Q2, but unfortunately it's 2020, so it's not particularly helpful. What was the gross margin and the EBIT margin in H1 2019 or Q1, Q2 2019? It'd be great if you can provide that maybe on your website in the next few days, to have a very simple pro forma P&L ex fragrances, because I'm trying to understand the impact of that on this record H1 gross margin beyond obviously the full price sales and the channel mix. It'd be really useful if you have that at hand to share with the investors and the analysts.
Secondly, you talked about the change in channel mix. When we look at your distribution network evolution, you continue to close some TPOS, some franchise stores. I think it's been down probably by about 10% since the end of 2019. That's quite a lot of stores. Can you remind us what the target is here in terms of how many more TPOS stores you want to close? How much of that is also conversions to retail? Is there a material impact of these closures on the bottom line? Thirdly, coming back to the question on the management changes, you talked about upcoming announcement for Head of Europe, Head of North America. With regards to Mr. Gobbetti, when do you expect him to start at Ferragamo?
Obviously, he's got duties at his current employer, but would be interested to know when you think he will realistically start, and whether you think this will be an opportunity for Ferragamo to reinstate maybe a model where you have a CEO and a creative designer like you had with Paul Andrew. Thank you.
Okay.
Gross margin, yes.
Okay. In terms of gross margin, of course, we represented the numbers of 2021 and 2020, excluding the fragrances business. You are correctly asking for 2019 as well. I have to say that there is a kind of technical problem since we also have to be certified by our auditors. That's why we didn't present also 2019, because it's a recast, it's a restatement. Of course, we will make our best to make your work easier and give you some indications to help you out in understanding what the 2019 is or would be without fragrances. That's the explanation why we didn't disclose it at the moment. Another question related to the retail perimeter. I think it is quite clear that some retail operations in the airports will be modified.
The present situation, there are terminals which will be modified, airports which will be redesigned according to the new traffic and customer needs. I would expect to have some more closing of third-party operated stores in the airports. In the meantime, these stores are substituted by directly operated stores in the most important regions. As we open two stores in the U.S., we have plans for opening in China. In terms of a total number of directly operated stores, I think there will be no major changes. Some of the investments are related also to renovation and relocation. The CapEx for retail was quite limited in the first part of the year, but it will be much more consistent, much more relevant in the second part of the year. The last question is difficult for me to answer.
What I can say is that Burberry announced that the CEO will leave at the end of the year. I suppose, as I mentioned at the beginning, that with the beginning of new year 2022, Ferragamo will have a new organization. Of course, there is nothing I can disclose now, and I think it's too early to talk about the future plans of a company.
Thank you.
Thank you for your question. We take the last question coming from the line of Oriana Cardani from Intesa Sanpaolo. Please go ahead.
Thank you. Good evening, everybody, and thank you for taking my questions. The first one is on your feeling about the Chinese market. You said that you are very confident and the situation is quite good. Have you already seen any early sign of change taking place? For example, different client mood or a change in communication. What could be the main risk for you in the medium term? Can you remind us the weight of mainland China on your total revenues? The second question is on the business side of Shoes. It remain under pressure as it recorded a drop of around 25% compared to 2019. What is the main issue in your view, and is it something you miss in the latest collection, or does it require more of a strong action in changing distribution or market, or targeted market geographical area?
Thank you very much.
I am very glad you asked a question about the China market because I've been spending quite a while talking to people in different organizations in China. As you may know, I'm still sitting at the International Advisory Board of China Europe International Business School in Shanghai, and I had the opportunity to discuss with professors and high-level personalities. There was probably a misunderstanding in the interpretation from some of the Western media of Mr. Xi Jinping new economic course. I think that what is important is that prosperity is still the main focus of the current leadership. On one side, the speech and the policy is directed to the excessive increase of richness. In fact, the possibility to create inside China and outside China, very large fortunes in a very short period of time.
The redistribution to a larger middle and upper class of more income could even result in an even bigger demand for premium quality brand products. What might be a concern is probably products which have an excessive luxury image. I'm thinking about very expensive watches or products which really can be considered even as elements of potential corruption. I think this is one of the risks. In term of the change we have seen, it was, as Mrs. le Divelec commented in August, was related also to different factors, and I would not expect it to become a consistent trend. In term of the risk we see in China, I have personally a concern on possible restrictions related to the COVID Chinese policy, going towards the Olympic Games in Beijing.
As we have seen in Japan, there might be preliminary restrictions in order to keep a very healthy situation in the area. Again, this might happen at the year end of this year or may not happen.
Yeah. In terms of weight, this was another question. Mainland China today represent 25% of the business.
Okay. Thank you.
Thank you for your question. I will now hand back the conference over to the speaker.
Yes. Thank you everybody for your interest. Our next conference call will be on November 9 for the 9-month results. Have a good evening, everybody. Thank you.