Good morning and good afternoon. Welcome to the conference call for Stella International Holdings Limited 2023 Interim Results Conference Call. I now pass the call to our MC today, Mr. Matthew Goetz. Matthew Goetz, go ahead.
Thank you. Good evening, everyone. Thank you for joining us for the presentation of Stella International Holdings Limited 2023 interim results. On the call with us today is Mr. Stephen Chi, CEO and Executive Director; Mr. Andy Tam, Group Chief Financial Officer; and Miss Macy Leung, Head of Investor Relations. Andy will first present a summary of the group's financial performance for the six months ending June 30, 2023, after which Stephen will present a business review of the group's manufacturing business as well as the outlook. Please note that all lines will remain muted for the duration of the presentation. There will be an opportunity to ask questions following the completion of the presentation. I will now hand it over to Andy to discuss the group's financial performance. Thank you.
Thank you, Matt. Good evening, everyone, and thank you for joining our interim results presentation today. Let's start with the group overview, the highlights. This is 2023. It is the first year of our three-year plan ending 2025. We talked a lot about the three-year plan in the last annual results. So for anyone who is not as familiar, please refer to that presentation as well. For the first half of 2023, our revenue and shipment volumes declined year-on-year, pretty much in line with our expectations as some of the volume is back-end loaded in the second half. Our ASP is up 6.5%. Volume is down 18.6%, leading to our group revenue is down 13.4%. But we have improvement in our operating margin and also gross margin perspective. Operating profit is $65 million, down 5.5%. Operating margin percentage is now 9%, up 70 basis points.
Our adjusted net profit is $60 million. It's flat year-on-year compared to the first half last year, which is a very strong first half for us in 2022. The adjusted net profit margin is 8.4%, we're up 110 basis points. We have the net cash of $163 million on the balance sheet. A lot of the cash is reserved for our expansion project and as a part of the diversification initiative. All of this remain on track, despite we have some delay in Indonesia. We also like to share that the board has declared an interim dividend of $0.42. That maintains our normal payout ratio of 70% of our adjusted net profit of $60.3 million, which excludes a $5.9 million fair value loss related to our investment in Lanvin Group. If we return to the next page to the income statement.
The ASP of footwear increased 6.5% to $29.60. That partially offset by operating offsetting the 18.6% decrease in shipment volumes to 23.6 million pairs. The decline in volume is due to a lot of things, but obviously it is partly to the lower utilization in our sports factory. Also, we talked many times before that as we move our customer mix to more complicated products, more premium style products, it takes a lot more cycle time. So we no longer compare historical pairs on an apple to apple business. So volume going forward might not be as a good indicator when we discuss the results. The increase in ASPs was mostly driven by the declining share of our lower ASP styles in the casual category.
And of course, a more pronounced contribution from our sports, luxury, and high-end fashion categories, which we are introducing actually new athleisure line, and more often that product is actually much more premium than before. Our consolidated revenue for six months decreased by 13% to $760 million and is in line with our expectations. Our gross profit increased by 1.2% to $166 million. The gross margin increased by 340 basis points to 23%, due to a very good production efficiency that we had in the first half and also, again, more premium product styles that our customers are ordering. Our operating profit declined by 5.5% to $65 million. With a positive impact to our customer mix, intense production efficiency, and cost control. And this was offset by a $16 million net provision related to Rockport's Chapter 11 that we announced earlier.
Our reported operating margin is at 9%, which is 70 basis points better. We had talked about earlier about there is a $5.1 million of fair value loss with the Lanvin investment, which is a mark-to-market equity instrument in the whole. So that instrument goes up and down. It is not related to the underlying operating performance. So if we adjust for that, the adjusted net profit is $60 million as opposed to $55 million. So on an adjusted basis, our net profit is basically flat on a year-on-year basis, but the net margin actually improved to 8.4%, which is about 110 basis point improvement. Going to CapEx and cash flow. Our net cash flow from operations was $28 million, with pretty better working capital management.
Our CapEx was $23 million, lower than our initial planning as we delayed some planned expansion projects to better match the timing with future demand. And at the beginning of the year, we guided to be about $110 million CapEx. It is going to look like we are going to be more close to $60 million-$65 million CapEx for the entire year. Going to this page on the balance sheet. As you see, we have $163 million net cash on the balance sheet. So our net gearing ratio is very healthy. But of course, a lot of the cash is maintained for the Indonesian expansion project and some of the CapEx that we have earmarked before, but it is just been delayed in terms of timing. Going to the next page on valuation and dividend yield. We historically pay as a payout policy, 70% payout ratio.
There are years that we pay more, some years we pay less. In 2020, we broke even, we didn't make a profit. But in the first half, we want to stay consistent. $0.42 is 70% payout ratio. If you look at basically the last 12 months of dividends we pay, including the interim of $0.42 and a final dividend from last results, we're basically about 11% dividend yield on a last 12-month basis. On the cost structure slide, the purple part is the gross margin. You can see the expansion about 300 basis points from 19.8%- 23%. Material costs still make up the bulk of the cost for Stella International. It's 56.7% for the first half of this year.
Overall, because of better efficiency management, you see some of the subcontracting costs, which is 11.6% last year, now is 10.2% in the first half this year as we better manage our people and capacity, and also timing of the working hours. Next is a long-term trend that we show for volume and ASP, is a long data history. But on volume, of course, like I was saying, as we do this mix shift to more luxury and fashion or more complicated product in general across category, the pairs is a little bit more difficult to compare on a like-to-like basis. So our first half volume seems to be down from $ 29 million-$ 23.6 million. Our ASP is trending up now from $27.8- $29.6. Going to the next page, this is a long-term chart on our operating profit and margin.
We end 2022 with 8% operating margin and our three-year plan target is to hit 10% operating margin. In the first half this year, at 9%, we're pretty close to that target. We'll continue to march towards that in this three-year plan. A lot of that will be really part from our three-year plan strategy that we're executing right now, which is more about enhancing our category mix to better align with our unique design, product development capability, and really expanding and diversifying our manufacturing capacity. We talked about Indonesia, we talked about Bangladesh. We are making more profits in Bangladesh as of now. We also have been really optimizing our management effectiveness and efficiency, really change our internal organization and how our team is structured in an industrial organization perspective.
Lastly, we are focused on strengthening our cost efficiency and really focus on our working capital basically to free up cash so we can reinvest in parts of the business. So under this plan, by the end of 2025, we're still targeting that 10% operating margin, and we target a low teen annualized growth on our profit after tax. During this three years, nothing's going to be exactly linear. This year is the crux part for the three-year plan. But it won't be exactly mid-teens every single year, but there'll be some fluctuations through the three-year period. Now I'm going to turn to Stephen for our business review.
Thank you, Andy, and good evening everyone. Slide 13 gives an overview of customer portfolio we are working with. As you know, we separate our portfolio into four different categories. Sports. Sport footwear ranges we develop for well-known sportswear brands. It includes limited editions, collectible product, and cross-brand collab. Luxury, which are mostly high-end footwear ranges that we develop specifically for luxury high-end fashion brands. As for fashion, it is the best-in-class footwear, including boots and heels and sandals, provided to many of the world's leading fashion brands. For casual, it is mostly casual styles for many of our long-term customers. Going to the next page. It contains a breakdown of our manufacturing revenue by product category. Going through each category. Our sports category accounts for 43.9% of revenue, and several of the sports customers were de-stocking during this period under review and managed inventory.
But an improvement in ASP partially offset the impact of volume drop. Revenue attributed to our luxury and fashion category accounted for 8.8% and 25.7% of our total manufacturing revenue, respectively. In our fashion category, we saw a strong recovery among existing customers on a year-on-year basis while adding and growing with new high-end fashion customers as well. With one customer actually rebalancing his portfolio product and adjusting his product launch strategies. As for our casual category, it accounted for 22.6% of revenue as we reallocate capacity to grow our other category in line with our own strategy as well. We also suspended work with one of the customers following a Chapter 11 filing. Slide 15 contains a breakdown of revenue by region. North America and Europe remains our two largest markets, accounting for 43.9% and 27.4% of our total revenue.
This was followed by GRC, which accounted for 16%. Rounding this out, rest of Asia accounts for 9.2% of total revenue, while other geographic regions accounted for 3.6%. Slide 16 shows where we are currently in terms of capacity expansion and diversification strategy. Our newest manufacturing facility in Solo, Indonesia, is ramping up in line with demand. But in alignment with ongoing weak macroeconomic conditions, we have delayed some planned capacity expansion projects to better match with the timing and future demand. As of June 30 this year, China accounted for only 25% of our manufacturing capacity, while Vietnam accounted for 51% of our capacity. Collectively, our factories in other parts of Asia, Indonesia, Bangladesh and Philippines, accounted for 24% of capacity. Going on to slide 18, which is our outlook for rest of 2023.
We expect ASP for the full year to follow the same trend as the first half. Namely, a modest increase as a result of stronger sell-through to sports, luxury, and high-end fashion brands, which are requesting more premium products with higher product production complexity. We expect to maintain our strong gross profit margin and operating margin level as we continue to implement our three-year plan. With orders from our newly added luxury high-end fashion customers continuing to grow from a small base and supporting the further enhancement of product and customer mix, we will also continue to improve our production efficiency. We expect our non-sports manufacturing facility will continue to operate at close to full utilization in the second half, as we pursue a greater operation efficiency and cost control. We are committed to moving forward on our long-term capacity expansion project.
The ramp-up of our new facility in Solo, Indonesia, remains on track and is performing well operationally, while we continue to build additional facility capacity in Bangladesh. However, we are slowing down the progress of building a new manufacturing facility in Indonesia for our major sports customer, reducing our planned CapEx for the year. We will continue to develop our own new handbag and accessory manufacturing business into another pillar of growth by continuing to enhance the product quality and production efficiency while introducing it to more of our high-end customer base. This is the end of our presentation. We look forward to answering any questions that you might have. Thank you all.
Thank you, Stephen. We are now ready to move on to the Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. If you wish to ask a question, please press star one on your telephone touchpad. Once again, if you wish to ask a question, please press star one on your telephone keypad. Our first question is come from Tadan with Daiwa. Tadan, please go ahead.
Hi, guys. Just a quick question. Regarding the Rockport bankruptcy, I think it was acquired by Authentic Brands a couple of weeks ago. What is the implication of that? Are we going to write back or are we going to be able to get back some of the receivables?
Okay. Got it. On the Rockport Chapter 11, it is unclear. They just closed the transaction. But under the Chapter 11, their account receivable was stuck on a Chapter 11 bankruptcy round. Based on the deal and the valuation that did the deal, there would not be any recovery of that AR from an unsecured claim perspective. We have right now a $16 million net provision, which includes an $8 million insurance against it.
We look at Rockport, this transaction, as while it is good to give that brand a second life under a new ownership with more, I would say, capable balance sheet and financial health, larger platform. But at the same time, for unsecured creditors during that process had to go to Chapter 11. Your AR is stuck in that bankruptcy court. And unlikely that we will recover that or write back the full $16 million at this point.
Okay. But there is still a chance that we can get some of that $16 million back through the bankruptcy courts, right?
Not necessarily from the bankruptcy court, but more from other secured claims. There are other, I would say, aside from the main Chapter 11 bankruptcy process, you can still process a claim through other avenues that we are strategizing with our bankruptcy lawyers as a part of the whole unsecured creditor committee. Not just us, but along with other secured creditors as well. There are potentially other avenues, but it is too early to speak about that because it is more of a lawsuit that you have to file that we are kind of processing.
Got it. Okay. My second question regarding your sports customer. In, I think the announcement you guys said that there are some signs of improvement towards the end of this year. Their commentary during their results seems to be quite positive and just overall, I think from the gist of things, it seems like things are turning around and there is starting to be stock. What is the situation there and how are we looking at 2024?
2024, okay. Better doesn't mean it's going to be, let's say, double-digit growth. We do see slow recovery, low single digits, and I would be basically looking at the same thing for next year. Business are stabilizing, and we do see a very small growth next year on the sports side. Carlton, does that answer your question?
Yep, got it. All right. Thanks, guys.
Yeah.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone keypad. This reminder again, if you wish to ask a question, please press star one on your telephone keypad. Our next question is come from Darren with Chartwell Capital. Darren, please go ahead.
Hi, Stephen. Hi, Andy. So excited to see kind of first glimpse of how our three-year plan is coming together. Obviously, this year, the contribution from our fashion category is up year-on-year. I think in the past, we've touched on the difference in cycle times for casual versus luxury, but what about against the fashion category? How much longer does it actually take to produce a fashion shoe versus compared to a casual shoe?
All right. Let me answer that. I think that's actually a very difficult question to answer. Depending on the style and depending on Let's say boots. It seems probably easier in certain regards, but then there's a lot of processes that's involved, whether it's crimping, it's the leather, it's the treatment. Fashion customers, in general, are a bit more complicated because it tends to follow the trends and different type of leather or mixing of leather and fabric. That is a really hard question to answer, yeah, in regards to actual time cycle. But generally speaking, with fashion brands and luxury brands, what they're asking is a lot more complicated, so the cycle time is definitely much longer.
All right. I thought you mentioned Sorry, sorry. Keep going. Yeah.
As a result of that, it's probably one of the reason why we have higher ASP.
Okay. Yeah, I meant to touch on ASP. We mentioned that on the sports side, we did see some ASP increase within the category, and then wanted to just follow up and ask because our ASP is up year-on-year on a blended basis. I was wondering for some of the other categories, for example, for the fashion category or for the luxury category, which we're trying to get more exposure to, did we see pronounced ASP growth in other categories as well?
Yeah. So in general, across all the categories, ASP is actually up. Okay? Even within the casual category is up. Okay? Every single category is different. Sports is up because we have some new customer coming in with more premium products that we are making for them. On a casual side, even casual is up because as we, I would say, decrease the production of, I would say, particularly the low ASP product, it kind of lifts the ASP of that category by itself. Okay? The mix shift, a customer mix shift within that category has contributed to that. In fashion and luxury, of course, they are asking for more premium product, and that is what we have noticed. There is a trend almost across category. Every single brand and customer is looking for, I would say, a premiumization of their product line, the product stack.
Now, you can try to charge higher ASP to the consumer, but the consumer are basically not stupid in a way. So they demand a higher quality, much more complicated product that differentiates even more in the marketplace. Especially now, a lot more brands trying to launch a product in this category, in the kind of fashion sneaker category, is to make it more stand out and differentiated, you do have to incur more cost and production complexity for that. So we have seen that kind of premiumization across every single category in terms of product stack. So that is why at the beginning of the year, we were looking at ASP be flat year-on-year, but it seems to be actually, it really is going to be up for the entire year, around 6%-6.5% ASP increase.
Okay. As far as the contribution goes to revenue for fashion plus luxury, I am sure a lot of people have asked, is there a target contribution that we are looking to get to maybe by the end of the three-year plan or maybe even on a longer time horizon?
I mean, I can answer that a little bit. As you know, Stella works with so many different brands, and one of the reasons why we broke this down into four different categories because the business is changing almost daily. For example, the Rockport filing on Chapter 11, that is unexpected. But brand comes in and out, changing CEO all the time, different strategy, different, let us say, direction, moving up to premium or moving down to more mass. So we do not really have a target, to be honest with you, in terms of each category. But each category has its own strategy and its own growth plan.
Yeah. To build on Stephen's comment, I think we talked about when we look at our customers, we rank them on a scorecard perspective on a return basis, risk reward, margin versus how much working capital use and what oftentimes is qualitatively long-term, can we do a larger, bigger business with them? Does this strategy match with our design, product development-driven capability? A lot come into play even when we evaluate even a casual category customer and how much we can work with them on ongoing business. As we look forward in this three-year plan, right now, sports is about 43%. By the end of this three-year plan, it is probably similar to that range. Casual category is the one that has been declining since 2022. Now it is 22.6% in the first half of this year.
We might be closer to the 20% range by the end of our three-year plan in 2025. Even when we look at beyond that, we might see even casual customers, even looking at them, they are looking at premiumization of their product line as well. A lot of things can change in the dynamics in terms of each of this category and might be a good customer in the casual side that we might look forward to doing in the future, actually.
All right. On cost of sales, you mentioned that you realized better efficiency basically from, well, just better management overall, whether it is with the labor force or with the working hours. Could you maybe give some examples of what kind of measures you implemented that led to us realizing this better efficiency, just so we can get a better sense of what is actually going on at the plants?
One major thing is when we talk about capacity, there is the physical real estate capacity of the plant built, but the other capacity and that first capacity is hard to manage because once you build a plant, the plant is there. The second capacity, and we look at, is the people capacity. That changes all the time. We want to make sure all workers are utilized in a 95% utilization if we can. Okay? We do not go beyond that. We want to make sure that people have opportunity to rest and things like that, but we make sure that we have high utilization of the labor capacity. With the labor force, you know that they are naturally in manufacturing, there is a high attrition rate. Okay? There is a lot of natural attrition that goes on during a year.
To maintain it at 95% utilization, we always have to keep rehiring. That is a normal process. In a time where one of our large foot customer told us and also a lot of vendors that we are not looking at as high of a utilization from a labor capacity perspective, we really took it heart and really tried to preempt that and really try to manage our labor force in a more accurate way. This is a day-to-day planning. During this time period, we never had really any big layoffs or severance. You have heard the news in Southern Vietnam, other manufacturers had large layoffs during that first half of the year. We never had any of that during this time period. We were at very high people utilization across the board.
Also, we were able to reduce overtime because we are able to manage our people to demand and production cycle a little better. That is really just going into the weeds and detail on how we manage people and what kind of demand and we need for the production cycle.
Okay, great. My last question is when it comes to Solo, we mentioned that the ramp-up is on track. Just wondering where we are at now in terms of the tariffs.
This is only the first half. On a full year basis, we will see a slight increase on a year-on-year. That is probably what we would say for now. If it is on a full year basis, when we have the full year, we can talk more about the utilization of the Solo factory. It is one place where we are actually, the quality is getting better faster than we expected. Originally, it was more for casual, but now we are even introducing sports, so it is a little bit ahead of our expectations. That is progressing well, actually.
Okay, good. Thanks, guys.
Thank you. Our next questions come from Allison with DBS. Allison, please go ahead.
Hi, Stephen. Hi, Andy. Thank you for the presentation. Can we also comment on the other categories you just commented on sports in terms of the order book? That is the first question. The second question is, has there been any new customers in discussion? I remember, I think a couple quarters ago, there was mention of newer customers such as KARL LAGERFELD, for example.
Let me talk about maybe just order book and visibility for the full year. Right now, we are in mid-August. So our shipment from production volume is pretty clear for the entire year. We talked about it is similar to our guidance at the beginning of the year. We are going to be down 13%-14% in terms of volume. Our ASP is going to be up similar to first half, which means revenue is probably going to be down around 10% on a full year basis. We are going to maintain pretty much our gross margin, and typically second half is actually a higher gross margin period than the first half. As we do more luxury and fashion, which is more second half loaded, more of that shipment comes in second half. So there is a little bit of seasonality within our mix as well.
Looking at our operating profit margin target of 10%, we think we might be able to actually get there on a full-year basis this year. Looking at first half, second half, we probably have more of a 40/60 split in terms of profitability. A lot in for the full-year basis. Stephen, you want to talk about some new customers or anything like that?
I think some new customers that I probably cannot disclose the name. Some is actually on a luxury side, some is on high fashion side. Maybe during the end of the year call, I am sure I can disclose that. We are currently making samples and prototypes for that.
Got it. Very clear. Thank you. My question is, does RMB depreciation have any impact on the P&L?
The RMB depreciation on a labor side. A lot of the costing that we do, in general, exchange rate costing. Across some of customer, we have gotten to a point where we try and narrow the duration of our FX fluctuation with our customer. Obviously, the best you can do is you fix the spot rate, you pay the spot rate every year, so there is no fluctuation risk for a supplier, but that is too much. For most of the customer, we do like a 90-day period where we price the first order, that is a season or that is 90-day cycle. Basically, the equivalent to a season for a lot of customers, what the FX rate will be. If there is a major fluctuation, more than 5%, then we have a discussion after that.
But if it's within that range, during the time period, then during the entire duration, okay, not just one day or two day, but during the entire duration. If there's drastic movement, then we talk, and we negotiate, but otherwise, sometimes you win, sometimes you lose. So there hasn't been a really, on post-implementation, there hasn't been really major fluctuation impact in terms of FX to our P&L. And granted, some year we do gain, some year we do lose. In general, this year, USD is a little bit stronger, so it might be gain a little bit, but it's not really that much because the duration of FX exposure we have with the customers is very short.
That's all the questions. Thank you.
Thank you.
Thank you. Our next question is come from Terence with Morgan Stanley. Terence, please go ahead.
Thank you. Thank you, management. I have two questions. The first one is about the, I think the follow-up on the labor cost. You did the calculation in the first half this year versus the first half last year. The labor cost per pair actually is now about 6%. Just wondering, if there's any more specific example on how you managing to do that, because I believe a lot of your peers, not only their first half ASP module was down year-on-year, but they also, I think the labor cost for them, more like 6% and they are seeing a per pair labor cost is rising up. Just wanted to ask you if there's any specific example that, given the longer lead time that you place in the more fashion or luxury category, how you manage to sort of reduce labor cost per pair?
That's the number one question. The number two question is regarding the, I think on the sports category, if you can, I may miss some of the comment, but maybe you can share with me about the overall sort of outlook and the current discussion with your key customers regarding how they see 2024 regarding the, especially the first half. Is there any recovery from the customer sports perspective, or they still think that in the 2024, the first half, they are feeling the overall order momentum and also the consumption momentum will still be weak for them? That's two questions from me. Thank you.
Thank you, Terence. Let me address the first one. On the labor cost. It is really about detailed people day-to-day management. It is really important to, you want sufficient utilization, you got to manage the people right. That's why I go back to a point where first half this year, we didn't lay off anyone, okay? I think some other manufacturer you hear, they've had major massive layoff in Southern Vietnam, pay big severance costs. That basically means they have way too many people, okay? That's just not a sufficient of people management. We didn't have to do any of that. Because we're very focused, we're very lean, even from last year. We have to get in front of this. There'll be low utilization by our large customer, because that's what they told us, and to all the vendors as well.
We need to make sure we manage our operation efficiency, people management capacity utilization very well. Also within that, how do we minimize overtime and other subcontracting costs, which is high. So we manage the people power and planning. That's what actually allows you to lower labor cost per pair, okay? That's the efficiency measure, even our customer measure as well. Maybe Stephen, you can talk about the sports category outlook.
Okay. In terms of sports category outlook, other than our major customers, we do have other sports brands as well. In general, the sports category, I would say they are basically normalizing their inventory issue. I believe it is still there. So it will still take them some time to really clean everything out. So from our perspective, we do not expect the sports brand in general to have a tremendous growth. Low to mid-single digits will be a good year, 2025, and that is basically what we have returned. That is basically what we did in terms of preparation and planning for this year. And that is why, like Andy said earlier, that is how we manage the labor force and labor utilization.
Got it. So I can more so conclude that for the sports category, the major customers, no matter who it is, they are still pretty cautious. Everyone, every sports brand is still a little bit cautious on the outlook, even up to now, right?
Correct.
Okay, got it. Thank you. Thank you. That is all my questions. Thank you.
Okay. Thanks, Harris.
Thank you. Just a reminder again, if you wish to ask a question, please press star one on your telephone keypad. If anyone wishes to ask a question, please press star one on your telephone touch pad. Excuse me, Matt, we do not have a question at this point of time.
Wow. Thank you. Stephen and Andy, did you have any final comments to make?
Yes. I think this is the first half of our three-year plan. Looking at first half of performance so far and also looking at the rest of the year, we feel like we are in a very good track to achieve our three-year plan. In fact, we are probably looking at a little bit ahead than what we originally expected. We are almost midway in terms of if I were to look at the goal line. We kind of outperformed better than we expected from the original plan from our strategy. Everything is great. I think nothing is going to be entirely linear, though, for the entire three-year plan I mentioned earlier. It might seem that we do so well this year that maybe next year, 2024, it will grow, but then it might not be as aggressive as, say, we have this year from a four-year basis.
Either way, we are still on track to get to that mid-teens net profit growth for all three years, and we will probably hit that 10% operating margin target pretty soon. Stephen, anything you want to add?
No.
Okay. Well, thank you very much. I look forward to speaking to you guys and seeing you guys in person. Give us a shout if you guys have any further questions. Thank you, everyone.
Thank you all.
Yeah. Thank you everyone for joining the presentation today. This concludes today's call. Have a great evening.