Hello and welcome to the SMCP H1 results call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any time, please press star zero, and you will be connected to an operator, and I will now hand you over to your host, Celia Desverlanges, to begin today's conference. Thank you.
Thank you. Good morning, everyone. This is Celia Desverlanges, head of IR of SMCP. Thanks for being with us today for SMCP H1 results. I'm here with CEO Daniel Lalonde and CFO Philippe Gautier. As usual, we will go through the presentation, and then we will have the Q&A session. Before I hand it over to Daniel, I invite you to go through the usual disclaimer on page two. Please note that unless otherwise stated, all results reported in this document, so for H1 2019 and H1 2020, are under IFRS 16, and I think, Daniel, that we can start now. The floor is yours.
Thank you. Thank you, Celia. Good morning, everyone. Thanks for being with us today for our H1 results. I'll begin with a quick overview of the H1 results, and Philippe will detail these before we conclude. So as you've seen from the press release this morning, H1 results were meaningfully impacted by the COVID-19 pandemic. However, the operational performance was above our expectations, thanks to better-than-expected sales performance and a stronger impact from our cost-savings plan. Back in July, you saw our sales numbers. As a reminder, we talked about a minus 33.1% of reported growth and a minus 33.5% in organic growth. Once again, organic growth is excluding De Fursac and at constant currency. This performance includes a gradual improvement throughout the second quarter on the back of store reopenings from 20% of stores open at the end of April to 97% at the end of June.
Also, from the continued recovery in mainland China, which returned to positive growth in June, and last, a strong acceleration in e-commerce in Q2 with a 32% growth in sales. In terms of profitability, the adjusted EBITDA stood at EUR 55.1 million, i.e., a 14.8 margin, while adjusted EBIT came in at minus EUR 29.7 million, which is the result of a drop in sales combined with a reduction of gross margin. This was particularly offset by strong cost-saving measures, which generated more than EUR 60 million in savings versus LY, and enabled us to rapidly variabilize more than 50% of operating costs on a comp basis. Net income stood at minus EUR 88.5 million in H1 versus EUR 17.2 million in H1 2019.
This result includes EUR 42.6 million of goodwill impairment on other brands, the division which includes Claudie Pierlot and our recent acquisition, De Fursac, impacted by the pandemic.
Pre-tax operating cash flow came in at -EUR 49.4 million, including a reduction in CapEx versus last year and a relatively limited increase of our operational working capital. And finally, net financial debt stood at EUR 445.1 million, representing a leverage ratio of 5.5, excluding IFRS 16. Importantly, we secured our liquidity position with EUR 219 million of cash at the end of June, following the negotiation of EUR 140 million state-guaranteed loan and a reset of our covenants for 2020 and 2021. Moving on to page five, slide five, I just wanted to quickly remind you of our H1 numbers by region. In France and Europe, sales were down respectively -33.8% and -33.5% on an organic basis, in line with the group average. The performance reflects a gradual improvement throughout the second quarter, in line with stores reopening, even if tourism flows remain largely absent.
In the Americas, sales were down 45.5% on an organic basis, showing a greater impact from the crisis as most stores remain closed in that region until the end of June. Finally, in APAC, sales were down minus 26.6% on an organic basis, showing a sequential improvement throughout the second quarter. This performance reflected a good resilience, strong resilience in mainland China, which returned to positive growth since June, and this trend continues. Some contrasted trends in the rest of Asia. Now, let me turn over to Philippe, who can take you through the numbers in more detail.
Thank you, Daniel, and good morning, everyone. So moving to slide seven, let's focus on our operational performance. Adjusted EBITDA decreased from EUR 141 million in H1 2019 to EUR 55.1 million in H1 2020, a performance above our expectations. On the one hand, we saw a drop in sales combined with a reduction of 4.8 points of the gross margin to 71.5% due to an increasingly promotional market and, to a lesser extent, to some inventory depreciation. On the other hand, we managed to partially offset these impacts through strong cost-savings measures, which generated more than EUR 60 million of OpEx savings on a comparable basis, i.e., the non-core being De Fursac. Here, we are talking about our operating costs, excluding the effect of the IFRS 16 restatement.
This means that with a -33.5% organic sales decline and a reduction of 19% of our operational cost, meaning store costs and SG&A, we have been able to rapidly variabilize more than 50% of our expenses. As Daniel mentioned, this is better than what we were expecting in terms of adjustments of our store goods, in particular during the lockdown period. It has been achieved through the renegotiation of commercial leases and minimum commissions with department stores in all regions, the use of temporary unemployment measures, the strict optimization of working hours in our network, and SG&A optimization, be that on other net costs or discretionary spending. Now, if we move to the net income on page eight, you have another view of the main components of the P&L for H1 2020, starting with the adjusted EBIT, which stood at -EUR 29.7 million versus EUR 66.5 million last year.
Second, non-recurring expenses, they reached EUR 46 million, and it's primarily due to a goodwill impairment of EUR 42.6 million on the other brands division, resulting from the current COVID-19 crisis. The depreciation concerned primarily our recent acquisition, De Fursac, and it has been caused by the timing. The COVID-19 pandemic erupted just a few months after the acquisition, and then a more prudent approach adopted by the group for its investment and its international operating plans over the coming years. Financial charges were down from -EUR 28 million in H1 2019 to -EUR 14 million in H1 2020. If you remember last year, financial charges included -EUR 12.6 million of one-off repayment charges.
Excluding as well IFRS 16, our cost of debt was down from EUR 9.1 million in H1 2019 to EUR 6.5 million in H1 2020, showing a continued optimization of interest costs from 4.1% last year to 1.8% this year.
Finally, income tax to that is EUR 6.3 million, taking into account the non-deductibility of the goodwill impairment charges and part of the LTIP charges. Consequently, our net income is to that minus EUR 88.5 million in H1 2020 compared to plus EUR 17.2 million in H1 2019. If we talk about cash, and this is on page nine, in H1 2020, our pre-tax operating free cash flow stood at minus EUR 49.4 million. This result is better than our expectations and comes from three drivers. One, an Adjusted EBITDA of EUR 55.1 million versus lease payment of EUR 61.3 million, i.e., a net minus EUR 6.2 million. Then, CapEx stood at minus EUR 29.1 million in H1 2020.
As you know, as part of our COVID-19 action plan, we have decided to reduce significantly our CapEx, so they were reduced from minus EUR 33.9 million last year to protect our cash position.
Now, H1 is still a bit impacted by timing effects, so the CapEx reduction will become increasingly visible in H2 2020. Finally, change in working capital was relatively limited at EUR -9.3 million. This is based on an increase of our operational working capital from 16.8% of sales in H1 to 22.3% of sales in H1 2020. Thanks to the strong effort to manage inventories, we recorded a moderate increase of 12.3% versus H1 2019 of our inventories and plus 6% versus December 2019, if we consider the sales deterioration during the half year. Again, all the actions we have taken setting up to control our stock in H1 2020 should be increasingly visible in H2 with a large reduction of our merchandise purchase for the winter 2020 season. Moving to slide 10, a few comments on our debt.
You can see that our leverage ratio increased clearly from 2.2 times in H1 2019 to 5.5 times at the end of June 2020. Net financial debt stood at EUR 445 million versus EUR 387.4 million at the end of December 2019, impacted by the operating free cash flow of minus EUR 49.4 million. As you know, in H1, we strengthened our cash position and increased our financial flexibility with the negotiation with all our bank partners of the state-guaranteed loan of EUR 140 million, the suspension of financial covenants for fiscal year 2020, and the waiver of covenants, and the easing of financial covenants for fiscal year 2021 as well.
With this financial structure in place, we have today a very comfortable cash level at EUR 219 million at the end of June to face the current context. On slide 11, we will have highlighted the main impacts of IFRS 16.
As of June 2020, we record on our balance sheet an impact of EUR 492.4 million of lease commitments and our P&L reintegration of up to EUR 61.3 million of lease charges in our EBITDA.
So in conclusion, I am strongly convinced that we are today well equipped to face this challenging period. We benefit from a well-diversified business geographically, with strong brands showing a solid traction with the Chinese consumer. We are well positioned to leverage e-commerce, a key area for us, one that we've been investing in since 2015. We quickly put in place an action plan to mitigate the effects of COVID-19, as the benefits showed in H1. We can rely on a solid financial flexibility to continue to weather the storm. And finally, we are an agile organization, leveraging what makes my team unique, a truly entrepreneurial spirit.
In parallel, we continue to pursue our journey, focusing on key priorities and shaping SMCP in a changing world, which includes enhancing the desirability of our four brands, accelerating sustainable fashion, creating one unified channel by right-sizing our brick-and-mortar network while boosting digital and omnichannel services, and last, strengthening our unique business model. So thanks for your attention, and we are happy to take questions.
Thank you, Daniel.
Thank you.
Yeah.
Of course. So as a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. Please ensure your line isn't muted locally, and you will be advised when to ask your question. So star one on your telephone keypad. Our first question comes in from the line of Chiara Battistini, calling from J.P. Morgan. Please go ahead.
Good morning. Thank you for taking my questions. The first one is if you could actually make any comment on current trading, on the trading of the last couple of months, so Q3 so far. And the second question is on the cost savings that you achieved in H1. How much would you say we can expect to be repeated in the second half of the year, and how much is more structural? Or say it in another way, are there any measures you took that just translate into a linear cost structure going forward? Thank you.
Okay. Thanks, Chiara. Listen, I'll take your first question and Philippe, your second. What I can say about current trading, I think it's the question today. I'll just say a few words. Let me say about four or five quick points. So first of all, I can say we have a sequential improvement in sales since April, which means that July is better than June, and August is better than July. Secondly, mainland China has been positive since June, every week, and this trend is also improving. I'd like to say also that we've had positive like-for-like in mainland China since June. France has been more resilient, much better than the trend in Q2, so that's good news. There has been a calendar change, as you know, on the soldes, which were pushed two weeks this year versus LY. We started in mid-July versus end of June last year.
Europe is more contrasted. We see some Germany is resilient on a better trend and continues to outperform markets like Spain, the U.K., and Italy. And last, North America is still a very tough market, given the current climate, particularly in the U.S. versus Canada. So that's what I can share with you. And Philippe, I'll let you answer the second question.
Yeah, sure. Hello, Chiara. So in terms of cost savings, as you saw, we have reduced our cost, our OpEx, by 19% on a comparable basis. So that's both on our store cost and on our SG&A. So I would say there are probably three main components in there. You have about one-third or a bit more, which is like rent relief negotiation or reduction in commission, including negotiation of removing any minimum guarantee on the commissions with department store. So that's a bit over one-third. Then you have everything related to temporary unemployment and adjustment of hours in our network. So that's another third. And then the rest is all the other measures, structural measures in terms of reduction of SG&A, be that on overhead compensation, hiring freeze, or discretionary spending.
So what I would say, it's a very large reduction in H1, also considering there are some variable costs, which are reducing with the very large reduction of the sales. If we project to H2, we probably will have as much savings in terms of store costs on some of the variable elements, and particularly on the temporary unemployment, which will be much, much less significant. But then we will continue to see savings more on the SG&A part. So we will continue to see savings, but not obviously at the level we saw in H1 as the top line improves.
Thank you. Do we have another question?
The next question comes in from the line of David Da Maia, calling from CIC. David, please go ahead.
Yes, hello. Thank you. So my two questions are already been asked by Chiara, so I have no further questions. Thank you.
Okay. Thank you, David.
It wasn't.
Okay, Richard, do we have another question?
The next question comes in from the line of Kathryn Parker, calling from Jefferies. Kathryn, please go ahead.
Good morning. Thank you for taking my questions. So my first question is on the department store commissions. And I wondered if the decline in the commissions paid is in line with the decline in sales, or if you managed to maybe renegotiate for a lower proportional commission, and whether the department store concessions performed in line with the freestanding stores. And then my second question is on the inventory write-down versus the impact of greater discounting, and whether you could just give a bit more clarity on how much of the write-down occurred and which collections it applied to. Thank you.
All right. Thank you, Kathryn. Like the first question, like Chiara's question, I'll take the first part, and I'll let you answer the second. So regarding department stores, as you know, we're all in variable commissions with department stores. It's an important channel for us worldwide, and we typically are in the accessible luxury segment of department stores, the big traffic drivers and the leaders in practically all the department stores in the world in our segment. So it's an important channel. The question was, do we have new rates, essentially? I'd say it's something that we do on a regular basis. So we've been negotiating. We continue to negotiate with department stores even before COVID, with some good results, actually. So we've set with some of our key department stores new commission structures that were already in place prior to COVID.
I don't think that we accelerated that in COVID because we were already on this prior to COVID. As Philippe mentioned earlier, we have very, very few guaranteed margins with department stores. It's mostly a variable business for us. In terms of performance versus freestanding stores, I'd say we had slightly lower performance overall in department stores, mainly because a lot of the business from our department store channel comes from big department stores in key cities, which were more meaningfully impacted by the lack of tourism. So I'd say slightly less than freestanding stores, mainly due to tourism. Philippe.
Hi, Kathryn. So your question on the gross margin, as you saw, we had a reduction in the gross margin of 4.8 points versus last year, which was a bit better than our expectations, actually. Two components in there. The most important one is clearly the discounting.
We had higher discount rates, around 35%, a bit over 35% in H1. Clearly, the market is much more promotional, and we did also more digital, which is a more promotional channel. So that's quite logical, and it's really unprecedented times. And then in terms of inventory depreciation, roughly one point of margin on inventory depreciation, the impact on this year. So what I would stress, we're on track in terms of inventory. Our stock is pretty sound. As you know, we have taken some strong measures, so the impact is, yeah, it's significant, but it's not that huge in terms of inventory depreciation.
Thank you, Richard. Okay, Richard, do we have another question?
The next question comes in from the line of Geoffrey Micallef, calling from Oddo BHF. Geoffrey, please go ahead.
Hello, this is Geoffrey Micallef. Thank you for taking my questions. I have two. The first one relates to the impairments on Claudie Pierlot and De Fursac. I was wondering why this impairment is mostly to Claudie Pierlot and De Fursac and not to the other brands, since in H1, at least, the growth trend was quite similar on all the brands. So is it an expectation of a slowdown in those two brands? And the second question is on the promotion rate that you expect in H2, because I've seen on many websites that the promotions are quite aggressive. I don't know if you could comment a bit on that. Thank you. And for the gross margin. Thank you.
Sure. Maybe on your first question, I would say, yeah, the impairment relates mostly to De Fursac. The key difference with the other brands from an accounting point of view is that the other SMCP brands, they are valued based on the acquisition price at the time by 2016, whereas De Fursac is valued in our books based on the acquisition in September 2019. Therefore, at a higher value. So we did not have time yet to develop De Fursac before the COVID-19 pandemic started, which is different from Sandro and Maje, where we had several years of growth in the meantime. So that's the major difference.
Promotional rate.
In terms of promotional rates, yeah, I think this year is really peculiar with the very changing context in general. So you can expect that all the players in the market, they tend to have higher inventories that were compared to what they would wish. So that leads to clearly a more promotional market, and I think the customer, they are responding to it. Also, this combined with higher activity on e-commerce, which is more promotional. So yeah, you could expect this promotional activity to continue. Now, maybe it was a bit high, particularly in H1, but yeah, that will continue certainly in H2.
Maybe just to add a point, Geoffroy, to this, our strategy is very, very clearly to sell more at full retail. That's the path we were on prior to COVID. That's the path we're going to get back on as soon as we can. In terms of calendar as well, I can share with you a few things. In terms of the promotional calendar on a regional basis, it's not different than last year. Maybe the deepness of some of the promotions or the discounts are a little higher, but in terms of promotional cadence and calendar in terms of days, it's identical to LY. And again, I repeat, our goal continues to be, with all my CEOs in the company, all the brands, is to sell more at full retail. That's our company goal.
Thank you, Operator.
The next question. Of course, the next question comes in from the line of Muriel André, calling from HSBC. Please go ahead.
Thank you. Good morning, everyone. Most of my questions were asked, but maybe one more on working capital. Could you give us a bit of color on the impact of the payment delays in terms of social charges in France and what we can expect on that side for H2?
Right. Yeah, that's a very granular question. Maybe what I can do, I can answer to you in terms of the trade payables in total. We have seen trade payables reduce significantly, therefore a negative impact on our working capital. This relates to the very big adjustment we do on our merchandise purchase for H2 and for the winter 2020 merchandise. So it has a negative impact on our working capital, clearly. And then I would say you have different impact on the other assets and liabilities, non-operational working capital, which is fairly stable versus last year. So if I look at the various components in terms of working capital, so I talked about inventories, which is at 12% versus June last year and 6% versus December. And here we made some progress, particularly in Asia, for example, where the inventory is less than last year.
So we are quite happy about that. This is despite unfavorable timing impact in France because you have the shift of the sales period, which only occurred in July. And we still have actions on that. Other items, trade payables, we are being quite successful in there, reducing our, sorry, our trade receivables. Sorry, we have been successful in reducing our trade receivable, even in a tough context. And then, as I mentioned, negative impact on trade payables due to the reduction in purchases.
Operator? Do we have another question?
The next question comes in from the line of Alexander Casas, calling from Casas & Associates. Alexander, please go ahead.
[Foreign language]
[Foreign language]
[Foreign langlanguage]
The first question is related to the split of the goodwill impairment between Claudie Guichot, Pierre Lalonde, and De Fursac. Do you want to answer?
Sure. Sure. So one can add that we are reporting on the other brand divisions, so that's our segment reporting, and that is composed of De Fursac and Claudie Pierlot, so that the choice that we have taken in terms of reporting to the market, and we can actually change that. But to answer your question, let's say you have about three-quarters of the effects which relate to De Fursac, and the rest is Claudie Pierlot. Yeah, in terms of, yeah, clearly you have a timing effect. We couldn't anticipate the COVID-19 pandemic when we did the acquisition of De Fursac.
And I would say the situation is we are taking a more prudent approach in terms of international rollout and in terms of investment. That's what we do in general in the group, given the pandemic, but it impacts more De Fursac because that's where we have the most significant expansion plan.
So we continue to have the expansion plan, but things that they are a bit delayed in timing, and that's where there's an impact on the DCF calculation and the goodwill.
[Foreign langlanguage]
Unfortunately, we cannot communicate that because it's not in the press release. What we communicate is other brands. What we can say on De Fursac is that the performance for H1 was below SMCP performance due to the strong exposure to the male category, which has been a bit more effective than the women category, and to a lesser exposure to e-commerce. So the only thing that we can give you is a qualitative comment: the decline is more important for De Fursac than the rest of the group.
Maybe on the last. This is the last question, if I heard it correctly, about the network. A few words on the network. Where we're at today is, as I mentioned earlier, our plan going forward will be largely based and focused on investing to develop like-for-like growth. We will continue space growth, but at a lesser pace than in the past. If I look at it by region, I'd say in France, we're still working on, in fact, day-to-day on the optimization of our network. We've had some net closures this year. We'll continue to have some net closures. We've done a bottom-up approach for France, as if we had started today, what would be the ideal distribution, and we're working towards that. It will be optimized, which means less stores in France.
On the international front, so we're pursuing a selective opening program in Europe, in the U.S., and with a big focus on continuing to develop our network in Mainland China, where we see a lot of potential and opportunity.
Okay. Thank you, Daniel. I think we have some questions. Operator? Two last questions.
The next question comes in from the line of Marie-Line Fort, calling from SG. Please go ahead.
Good morning. Just a quick question on CapEx. Could you guide us for the CapEx budget for the years, please?
Sure, so in general, what we expect is to have a reduction of CapEx around 70% for the full year. We have a little bit of timing because the decision we took, they are impacting more H2, so that's where you don't have too much of the benefit yet on H1, then you will have the biggest part of the benefit on H2, and just to mention, this is a reduction in CapEx, which touches a bit all our CapEx. So obviously, a reduction in our expansion and number of new stores in the year, as well as a reduction in terms of different projects, even if we continue to prioritize the very important ones, mostly related to digital.
Thank you, Philippe. Operator ?
The final question comes in from the line of Chiara Battistini, calling from J.P. Morgan. Please go ahead.
Hi. Sorry, just a very quick follow-up question on your comment on promotional activity in the second half of the year. Did I get it correct that you're expecting promotional activity to stay elevated but not as much as H1, or should it be similar to H1? Thank you.
No. I think the environment is going to be similar to H1, and so this is our only one attempt to guide exactly on what's going to happen. So that's how we say, in general, we will continue to be quite promotional. But then you have another technical aspect, which is the shift of the sales period in France from H1 into H2.
Yeah. So again, it'll depend a little bit by region. As I announced the trends on your first question on current trading, we're seeing some positive like-for-like in China, since June, which is very encouraging. Listen, we won't have a more promotional calendar than LY in terms of dates, etc., etc. In some markets, I think we'll have slightly deeper discounts. But really, so I think this is what you can expect, a little bit the same in H1, with maybe the caveat that in China, a little bit less. And quickly, we're zooming back to one of our overall strategic points is to sell more at full retail, which is really, really important for us. I think that's it, Celia, from a questions point of view. So we have no more questions. So we'd like to listen. We'd like to thank everyone for all your questions today.
Listen, we wish you a very nice day, a very nice weekend.
Thank you. Bye-bye.
Thank you for joining today's call. You may now disconnect. Your handset.