Earnings Call: H1 2021

Sep 7, 2021

Thank you. Good evening, everybody, and thank you for joining the Salvatore Ferragamo First Half twenty twenty one Financial Results Conference Call. I'm here with our Executive Vice Chairman, Michele Neurza our CEO, Michele Adrigo de Clemni and our CFO, Alessandro Porcie. 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 We said that this presentation contains forward looking statements regarding future events and results of the company that are based on the current expectation, projection and assumption of the management of the company. The actual results may differ materially from those expressed in any forward looking statements and the company does not assume any liability with respect thereto. This document has Cement 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 these documents are consistent with the accounting documents, letters and entries. I now hand over to our Executive Vice Chairman, Mr. De Novica. Good evening to everybody. Today, we are reporting a very encouraging set of results. And I would like to point out that as you well know The company, Salvator Ferragamo is going through an articulated evolution process which will be completed with the beginning of next year. So today, I have to announce that the Group CEO, Michaela Levi Lebby 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 our continued support, commitment and Professionalism. The first The results are showing a significant profitability turnaround. If we look at past year results at June 30, we see a quite important loss of €87,000,000 And we move now to a profit of €33,000,000 At the same time, it's appropriate the strong cash generation you will see in the numbers in 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 Which was focused as we have previously announced on the margin improvement, the organization stream timing and a continuous cost monitoring. In terms 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. And 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 hedging policy. And we have seen a very Important and very positive response from our teams not only at the headquarter, but also in all the regions. Now we can also announce that we have new management joining the Already in July, we had the nomination of a Chief Operating Officer, Mr. Badzaggi. And 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 result the excellent result is seen to the reducing of OpEx incidents, which It's not 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 2nd part of the year an increase in investments 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 positive performance. We are benefiting from quite wide distribution in the U. S. With almost The 50 points of sales and not only the coverage of the 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 Stronger driver of the fedagam growth not only in the past, but also for the near future. And 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, so 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 Mikaela Ledivenenkka. Thank you, Mr. Norta, And 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 twenty twenty one Back on positive territory, in terms of financials, achieving excellent 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 the 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 twenty twenty one remarkable performance, which is a result The combination of various strategic initiatives to give a real customer focus to the company Translated in 2021 1st semester in concrete action, there are some good indicators, particularly considering that not many exceptional items are affecting the results compared to the 1st semester 2020. EBITDA is turning from a loss of €72,000,000 in the 1st semester 2020 to a positive EBIT of €66,000,000 in the 1st semester 2021. There are some elements. In particularly, we recorded high retail KPIs in the 1st semester Despite the still decreasing traffic, conversion rate in particularly 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 for a conversion rate in double digit. As well, average ticket and UPT are growing compared to 20 Profit as a second element, which is in the 1st semester up to 68.9% and which can be read in 71.7% on the 2nd quarter, and which is driven by a good channel mix, a favorable product mix and a more healthy Full price business visavisoffpricebusiness. Thanks to the strategy implemented in the past 3 years of upgrading in the quality of the sales of full price stores. China, which is the fastest growing market In the 1st semester 2021, in particularly, it's gaining significant traction in primary store On full price business, vis a 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 then following as well with 3.5 basis point growth versus 2019 in the weight of full prices just in primary stores. The 3rd element is a responsible approach which has been implemented on investment and operating expenses aimed 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 faster. Last but not least, a very clean inventory not inflated by order cancellation of pre COVID period And the positive working capital is contributing to a cash generation of more than €200,000,000 over the 6 months. The retail sales of the Q3 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, of 24 months and is accounting now in the 1st semester for more than 8% all inclusive of The total revenues with omni channel initiative contributing over the same period for 2.5 and of the total retail sales. I've been fully in my position until today. I leave now a company clean and healthy, ready for new development, which in light of the new governance space 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. And I hand over to Alessandro in order to deep dive into the 1st semester results. Okay. Thank you. Good evening, everybody. Welcome back to our first half twenty twenty one conference call. Before commenting the numbers, I would like to thank Michaela for her strong support and the work together in these years. Let's now move to page 4 and start commenting revenues. As a technical premise, I would like to remind you that all the performance measures of revenues and income statements 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 Inter Parfums that we announced as released on July 7. Then you can refer to Slide number 10 for the quarterly restated figures. Say that, at the end of June 2021, company reported €524,000,000 of net revenues, up by 44% versus last year at current FX and up by 46% at constant FX with an hedging impact of €6,000,000 positive in the current year versus €3,000,000 negative over last year. As you know, in 1st age 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. Also, Latin America, lockdown brought to numerous stores closures in Mexico and in other parts of the region. And 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, circa 2021, retail was up by 49% versus last year at constant FX And second quarter was up 83% at constant and 4 areas which are Greater China, North America, Latin America and Korea exceeded the pre COVID revenues level. Wholesale was up 40.5% at constant effect versus last year and up 122 percent in 2nd 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 number stable versus 2020. Let's now move to revenues by region, which is Page 5. Talking at constant effect, 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 1st stage of last year and Korea also posted a solid growth trend of +22%. Japan was up 18% at constant effects with a 67% up in 2nd 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 age 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 percent at constant versus first half of last year, we had 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 6. Our core leather categories today represent over 80% of total turnover with both leather goods handbags and shows showing a solid increase versus last year. Let's now move to the P and L after the comments 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 on gross margin. It was already mentioned by both Mr. Nors and Michaela. 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. And it was mainly driven by 3 factors: A higher full of price ratio, 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 Ordinary 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 effects with an increase of 30% versus last year in 2nd quarter standalone due to higher variable cost, back to normal expenses versus last year, Higher expenditures in communication and also lower costs release 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 €5,000,000 As a consequence, EBIT showed a very strong recovery versus last year, going from minus €72,000,000 in first half of twenty twenty or minus €62,000,000 excluding the effect of the impairment test to plus €66,000,000 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 €7,000,000 below last year due to lower hedging cost and to a one off effects realized devaluation on some currencies that we had recorded in first half of twenty twenty. 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 3,000,000 negative net loss from Fragrance's discontinued operation to land at a net result, which is €33,000,000 positive versus a net loss of over €86,000,000 in the first half of last year. Let's move now to page number 8, which is balance sheet. Again, another good news, which is inventory progressively down, Almost 20% at current FX and minus 22% at constant. If we exclude the Fragrances from 2020, the inventory at the end of June is down by minus 15%. And this was achieved thanks to a higher operational efficiency and as a result of the management actions carried on to optimize inventory. CapEx was €13,000,000 in first age versus €11,000,000 of last year. 2 main drivers of investments are retail network and Digital. For the full year, at the moment, we can expect a number around €50,000,000 Net financial position, net of IFRS 16 impact, another very strong and positive news of this quarter reporting and is reaching €205,000,000 versus €58,000,000 reported at the end of June 2020. Including the IFRS 16 effect, net financial position is negative for EUR357,000,000 Last slide, usual, on the store network. We count a total of 639 Point of sale at the end of June, which is minus 5% versus the same period of 2020, most of closures come from 3rd 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. 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. Think it was quite impressive that they were almost flat versus last year. So what is the Structure fixed versus variable there. And final one, if you could disclose the like for like in the first half of the year. Thank you. Okay. We can start from the question on cost structure. I'd say for the second half, I'd say that in second half of the year, we can expect in terms of OpEx an increase versus the one that we have in the 1st part of the year. Of course, we can account or we can estimate for the 2nd part of 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. So you can expect that the Reliefs from the landlords or the government contributions to labor, of course, are decreasing in 2nd part of the year. So all in all, the second part of the year will have a higher acceleration in cost versus what we versus last year compared to the one that we had in 1st part of the year. Then going to the question you made about structure of fixed and variable, I would say that Ferragamo is not different from the other groups. And to me, it's always kind of tricky questions because some cost in our business of course are really variable, but some like in some department stores or like in some regions, But other costs are maybe discretionary and not variable. So it's not so easy to give a perfect ratio of what's fixed against a variable. But if you look at the historical numbers, I guess that you can immediately see what is the leverage in the group. And then what else about price differential maybe you would Okay. In terms of price differential, Europe versus China, of course, we still have on the 30 It's almost 30% well, 25% in terms of differential between the two regions. And in terms of like for like, the financial you can give is that contribution from perimeter This year, like we added last year, is very limited. So basically, there is no contribution from perimeter basically. Thank you very much. Thank you for your question. We have the next question from I know Susie Tibaldi from UBS. Please go ahead. Your line is open. Hello. Good evening. Thank you. So I wanted to ask about your 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 August is close to 2019. That you mean that August was a little bit slower and maybe that was because of Secondly, on the profitability team, clearly very impressive in this first half. Can you Give us do you have an outlook of what you expect for 2021? Because you were already quite close to The profitability seen in H1 'nineteen even though your top line is still not there, especially on wholesale. So If you can help us to understand how to think about profitability, it will be great. And then last question, I wanted to ask about the appointment of Mr. Gobetti. 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. [SPEAKER JOSE RAFAEL FERNANDEZ:] Okay. I can start again talking about profitability. Of course, you're right. The profitability picture that we presented in the first half is really very, very strong. I see that if we focus our attention on direct gross profit, you're right, it's even year than in 2020 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 2019 in terms of Channel mix, there's a big difference in terms of relative weight between the channels. So the weight of retail and wholesale In the 2 years that you are comparing has substantially changed. And of course, the higher weight of retail is giving strong contribution. As Mikaela highlighted and I also already reported, We had a very strong performance in term of full price sales over off price sales. And 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 and that is also accounting for some basis points of difference between the 2 years. So This is an apple to apple comparison. Then if we look or if we think of profitability for 2021, of course, the consensus we see today for the full year, which is around €60,000,000 is, of course, obsolete. Let's call it like that. We are happy to say that it's a number that we, of course, think obsolete. And the consensus we see on the sales is around $1100,000,000 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 2nd 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 I've been working very hard on the selection of candidates 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. And from my point of view, I can say that Mr. Gobetti The important thing is that the expert of the fashion business is running a public company And the search has been done by the best team of professionals. And I really hope and believe he is going to be the person for the future development of Tetragon. Okay. And maybe there was another set on the Q3 on the current Fed, Irene? So 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 and as well as for PAN 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 had been visible also on the press, we saw Some sign of rebalancing of the purchases also considering that last year in the same period that we were benefiting of the so called revanche spending, which has been strongly pushed the level of sales. So 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, but I would say that the impact is not particularly material. Yes. And maybe just to integrate my first answer about profitability and now we expect the 2021, I would 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 is 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. Welcome. Thank you for your question. I will now take a question from Thomas Chauvet from Citi. Please go ahead. Yes. Good evening. 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 and 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 form a P and 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. And 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 The PBOS stores you want to close, how much of that is also conversions to retail? And is there a actual impact of disclosures on the bottom line. And thirdly, coming back To the question on the management changes, so you talked about upcoming announcement for Head of Europe, Head of North America. With regards to Mr. Gobetti, when do you expect him to start at Ceragamo? I mean, 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 Fragamo to reinstate maybe a model where you have A CEO and an accretive designer that you had with Paul Andrews. Thank you. Okay. Maybe gross margin. Gross margin. Okay. So 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. So that's why we didn't present 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, but that's the explanation why we didn't Disclosed it at the moment. Then another question related to the Retail perimeter, I think it is quite clear that some retail operations In the airports will be modified at present situation, there are terminals which will be modified airport which will be redesigned according to the new traffic and then customer needs. So I would expect to have some more closing of 3rd party operated stores in the airports. In the meantime, these stores Subsiduted by directly operated stores in the most important region. So as we opened a couple of stores in the United States, we have Plans for opening in China and in terms of the total number of directly operated stores at Ginkgo will be no major changes. Some of the investments have related So to the innovation and relocation, the CapEx for retail was Quite limited in the 1st 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 Berberi announced that The CEO will leave at the end of the year. So I suppose, as I mentioned at the beginning, that with the beginning of new In the year 2022, Ferragamo will have a new organization, but of course, there is nothing I can disclose now. And I think it's too early to talk about the future plans of the company. Thank you. Thank you for your question. Now we're taking the last question coming from the line of Orianna Cardini 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. But have you already seen any early Sign of change taking place, for example, different client mode or a change in communication. And what could be the main risk for you in the medium term? And can you remind us The weight of Mainland China on your total revenues. The second question It's on the business slide of shoes. It remained under pressure as it recorded a drop of around 25% compared to 2019. So what is the main issue in your view? And is it something you miss In the latest collection, would that require more of a strong action in changing distribution or market or targeted market geographical area? Thank you very much. So I'm 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 and as you may know I'm still sitting at International Advisory Board of Chinese European Business School in Shanghai and they 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 it's still prosperity is still the main focus of the current leadership. And on one side, The speech and the policy is directed to the excessive increase of richness. So in fact, the possibility to create inside China and outside China very large fortunes in a very, 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 and products. What might be a concern is probably For products which have an excessive luxury image thinking about very expensive Watches or products which really can be considered even as elements of potential production. I think this is one of the risks. In terms of the change we have seen it was to become a consistent trend. In terms 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. So as we have seen in Japan, There might be preliminary restrictions in order to keep a very healthy situation in the area. But Again, this might happen at the end of this year or may not happen. Yes. In terms So, wait, this was another question. Mainland China today represent 25% of the EBITDA. Okay. Thank you. Thank you for your question. I will now hand back the conference over to the speaker. Yes. So thank you everybody for your interest. Our next conference call will We are on November 9 for the 9 months results. Have a good evening, everybody. Thank you.