Good day, welcome to the Prada Group Full Year 2016 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Alessandra Cozzani, Chief Financial Officer. Please go ahead, ma'am.
Good afternoon to all of you. I'm Alessandra Cozzani, Group CFO, and I'm pleased to welcome you to Prada Group's full year 2016 results presentation. Today, I'm here with Mr. Bertelli, CEO, and Mr. Mazzi, the Chairman. As for today's presentation, we will start with an overview by Mr. Bertelli, after which I will go through the numbers for the period, and Mr. Bertelli will give us some updates on our commercial activities and the outlook for the company. At the end of the presentation, we will be happy to take your questions. I will hand over to Mr. Bertelli.
Good afternoon. Good afternoon, everyone. I'll deliver a short comment on sustainable growth and pathway to sustainable growth. Our actions have been performed, especially in order to create structure dedicated to managing the digital presence of the group and to developing e-commerce and online strategies for the company. The new organization is a very articulated part of our group, and we expect it to start delivering its early fruits in the second half of 2017. We already started to roll out the plan in some geographies, and we'll complete it by the end of the year. We have focused on launching new products, considering price points and strategic products that we enriched our offer with. Something else with it is the rationalization of our structures. We cut costs, and we generated a satisfactory economic performance that's making the company much leaner and more efficient.
We also worked on the reduction of inventory, and we'll elaborate on that later. All the programs together ended up generating a positive net financial position and the capability to self-finance all of our growth and CapEx. We've seen improvements, especially in the second half of the year, and in particular in the fourth quarter, which we'll see through the presentation that Ms. Cozzani is going to deliver. Thank you.
Thank you, Mr. Bertelli. This year, we drew on all the levers available to us in order to improve productivity and efficiency across the group. We have focused on our retail network and commercial strategy, the cost of structure of the business, and our working capital management. The initiatives that we have taken have made the business leaner, more efficient, and more responsive to the evolving marketplace. Despite net revenues being down 9% at constant currency, we maintained a satisfactory level of margins. Gross margin remained pretty stable at around 72%, thanks to the improvements that we made to industrial efficiencies. The excellent progress that we have made on reducing costs had a stabilizing effect on operating margins, particularly in the second half, with an EBIT margin of 13.5% and EBITDA margin of 20.5% for the full year.
Net income for the year is EUR 278 million, representing 9% on net revenue. Turning to the balance sheet and cash flow, the improvements that we have made to our working capital management have delivered excellent results. As a consequence, we have delivered very strong operating cash flow of EUR 632 million for the full year. Thanks to our high level of cash flow generation, we were able to fully self-finance CapEx of EUR 250 million, fully cover the proposed dividend, and reduce the level of debt. As of January 31st, the net financial position turned positive to EUR 23 million from negative EUR 111 million at the beginning of the year. Taking a closer look at the net sales by channel. Overall, sales have shifted from 13% in H1 to minus 6% in H2 at constant exchange rates. Exchange rates had a slight negative impact this year of around one percentage point.
For the retail channel, we have seen sequential improving trends across the year. This improvement was especially visible in the last few months of the year, December and January. This is thanks to the proactive steps we have taken on rebalancing the product portfolio, refreshing the offer with novelties, and restyling the stores. Wholesale increased by 15% to EUR 504 million. This strong result has been largely driven by the excellent performance of our retailer partnership with Net-a-Porter, Mr Porter, and Mytheresa. I would also highlight the strong performance of DFS in Korea in H2. Looking now at the net sales by geography. Most of the key regions saw improving trends in second half of the year, with some particularly strong performance in a number of areas, including Mainland China, U.K., and Latin America. Performance in Asia Pacific was very dynamic in H2.
Mainland China recovered in Q3 and accelerated significantly in Q4 to deliver double-digit growth. We saw improving performance in Hong Kong and a return to positive growth in Q4 in Macau. In Europe, we saw double-digit growth in H2 in the U.K., driven by tourists taking advantage of the weaker sterling and also by local consumption. Russia also outperformed with double-digit growth throughout the year. By contrast, weaker trading condition in Continental Europe was largely due to the continued impact of terrorist incidents on tourist flows. In France, this was most notable in H1. However, there was significant improvement in the final quarter. Net sales in the Americas were impacted by falling tourist flows. However, there was positive performance in Latin America, led by Brazil and Mexico, and improving trends also in Canada in H2. Overall, H2 saw a less steep decline.
After five years of consecutive growth, sales in Japan declined as the stronger yen discouraged Chinese tourists. The steps we have taken to enrich our offer with highly innovative products and to broaden our range of price options are already producing better results. Looking at each product in more detail, we saw improvement in second half of the year in leather goods, where there was particularly high sell-through of the novelties introduced this year. We introduced new families of bag in H2 with some very important launches in Q4, and we are encouraged by strong customer reaction to the launches. Footwear is stable, with outperformance in H2 by Miu Miu. Ready-to-wear saw very good results throughout the entire second half of the year, with particularly strong retail trends in both Europe and Asia Pacific. There were improving trends across whole brands in the second half of the year.
Prada moved from -14% in H1 to -7% in H2 with a significant improvement in the fourth quarter. Miu Miu sales improved significantly in H2 with positive growth in Q4. Church's saw positive growth throughout the year with sales growing 6%. We have made excellent progress on reducing costs across the business, which has enabled us to deliver a stable EBIT margin in the range of about 13%-14%. As you can see on this slide, we made impressive headway on improving our cost structure, leading to the excellent result of reducing total operating expenses by 10% year-on-year. We have applied a rigorous action plan and a disciplined approach in managing costs, resulting in a leaner, more efficient, and flexible organization. We have reviewed the organization and our processes and driven efficiencies across the business, including the retail operations and corporate headquarters.
We have reduced labor costs, mainly freezing turnover. We have brought certain activities in-house, resulting in reduced spending on consultancies and services. We have renegotiated rents in every region and trimmed all discretionary costs in all cost centers. As these slides demonstrate, notwithstanding the sales decrease, our disciplined approach to cost, capital expenditure, and working capital allowed us to achieve strong operating cash flow this year, much higher than last year. In the second half, we produced the highest level of operating cash flow in the last six semesters. The strong reduction in inventory was achieved thanks to the more efficient production planning and stock management, and inventory levels are now at 17% of sales. Capital expenditure has reduced year-on-year as our focus has shifted from store opening to store renovation. In 2016, we have opened 28 stores and closed 26, and renovated around 40 stores.
CapEx is now approximately EUR 250 million, which we consider normalized level. This slide provides an overview of how our net financial position has evolved over the last year. As you can see, the strong contribution of operating cash flow and the reduction in our yearly capital expenditure enable us to cover the dividend payment and improve our financial position by year-end. Net financial position at year-end is a net cash of EUR 23 million, representing a EUR 134 million improvement on our net debt position last year. Thanks to our strong cash flow, and as a sign of confidence in the future growth of the group, this year, we raised the full year 2016 dividend to EUR 307 million. This represents a dividend payout ratio of 111% and a dividend per share of EUR 0.12. The dividend yield represents 3.1%, one of the highest in the sector.
I hand over to Mr. Bertelli for a commercial update.
Well, getting back to the starting point where we began with all our digital activities. We now hired a manager, Ms. Chiara Battistini. Ms. Battistini will develop the retail side for e-commerce, digital, and media. She will bring her expertise. By the end of the year, we will roll out the global e-commerce platform to China, Korea, Australia, New Zealand, and Russia, and the other countries will follow in 2018. The e-commerce plan will be completed to offer all the products that we offer in store. We'll launch women's and men's ready-to-wear and Miu Miu collections. All the products that are offered in our physical stores network will also be offered through our e-commerce network. Another activity we started, and we're actually busy working on it as we speak, is the new release of Prada and Miu Miu, the website.
We are going to improve the experience through the website. It's going to be more appealing. We want to actually improve our CRM system, and we want to provide a more consistent online experience, based on storytelling of Prada DNA. We want to convert our presence in social media into sales by means of increasing and improving our connection to customers and by means of deepening the connection between social media and actual sales channels, like WeChat and so on. Our stores will become a starting platform for all of our digital activities. As far as retail is concerned, we're actually continuing the rationalization of our network with some select openings and some closures. Most of the closures are due to the fact that landlords asked us for illogical rental increases.
We believe that the landlords have actually taken some positions on rentals, which is absolutely going against the trend of the retail and property market, especially considering that most brands are increasing their digital presence. We decided to renovate some Miu Miu and Prada stores with some improvements to presentation, in particular, to simplify it or make it more current. This was actually a limited-cost renovation project. It was about EUR 200,000-EUR 300,000 per renovation. We are embarking in a big pop-up store project. Today, as we speak, we are opening three pop-up stores in Japan that are going to stay open for two weeks. Both Prada and Miu Miu will have a significant number of pop-up stores in the next few months. Prada Men, Prada Women, and Miu Miu will open anywhere between 30 and 40 pop-up stores throughout the rest of the year.
Pop-up stores will be used for the presentation of new products and of new proposals, thus to create excitement and a burst with the consumers, with the shoppers. As far as products are concerned, the issue is not so much the actual price point. What we wanted to do was analyze the product processing and flows and the perception that new clients feel about products, whether they're offered online or whether they're offered through the retail network. We believe that an integrated e-commerce offer, encompassing all social media and so on, will eventually become complementary to the activity we always carry out through our own retail stores. As far as wholesale is concerned, we should point out that wholesale has become a digital activity, too.
In the past, it wasn't rational or logical to serve too many wholesale customers, whereas now it makes a lot of sense because wholesale distributors actually support us in rationalizing our offer and our proposals by acting on different sales channels. We have opened relationships with Net-a-Porter and Mytheresa. We are in the process of evaluating other possible partners, too. We increase our sales through this wholesale channel. The wholesale, as compared to the year before, increased by 15%. I believe that this part of the business will grow even further in the future. Even in this sector, we see a lot of competition emerging between the different e-tailers in terms of their positioning and in terms of their price positioning, too.
We are actually using these portals, these e-tailers, and we're going to run our own sites, so that we may actually make the most of our CRM data to understand exactly what markets we're serving in a very strong and specific manner. We may want to provide specific products for specific markets and different moments in time. Licensing. Licensing is still recording on positive trends in both fragrances and eyewear. We know that licensing is not just performing well but increasing as well. There are no signs of slowdown in our licensing business for both fragrances and eyewear. To conclude, I think we can say we have really focused our attention on a number of activities that are neither different nor complementary to retail, because we see this as a one and only endeavor.
We believe that today, retail must encompass the physical stores and all the activities that support them, which is all the digital activity we engage in. Pop-up stores are a project that may actually be compared to fast fashion in a certain way. It's quick, easy, fun, and exciting, and it integrates our digital strategy beautifully. Actually, coming up with new, fresh, creative ideas in quick turnaround times has always been our specialty. Creating a significant number of pop-up stores in different seasons for our different brands makes us really comfortable in our ability to be very creative and to come up with fresh, new, exciting proposals. Since we are confident, we found a better management balance than we did in the past. In particular, we are more confident about the process management, organization, logistics, and marketing.
We are confident enough in our business today and tomorrow. Eventually, the board of directors has suggested to distribute a dividend of EUR 0.12 per share, i.e., an increase of EUR 0.09 from last year. This is certainly possible through the excellent cash flow generation we recorded. Thanks for your listening. We will now open up the floor to Q&A.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take the first question from Thomas Chauvet from Citi. Please go ahead.
Good afternoon. Thank you for taking my questions. I have three. First one, if we look ahead with your new product initiative in handbags, away from the Galleria line, your new retail store concept, pop-up stores, focus on customer service, et cetera, have you been able to turn retail like-for-like into positive territory, in February and March? Alessandra, you were suggesting the end of last year was better. How does the beginning of 2017 look like in retail? Secondly, on the cost side, you've done an incredible job in both halves. Last year, it feels there's a real cultural change at the company. I think OpEx was down 8% or so in the second half. What are your options, this year, in case like-for-like, we're not turning that quickly into positive territory.
Are you planning to downsize the structure further or we should expect OpEx to grow from here? Thirdly, assuming continued efforts on working capital and cost discipline this year, how should we think about the payout ratio? Could you give us a guidance for the year ahead? Thank you.
The trend we are recording in February and March is positive enough. As far as the like-for-like performance is concerned, please remember that we shouldn't look at the revenue side only, but the cost side as well. You certainly notice that we are heavily engaged in cutting costs. We believe we still have some extra margin to make this even leaner and better. Also, we are engaged in a big CapEx investment activity on pop-up stores. In particular, we want to invest heavily in the digital program. As we continue, we should look at the impact this has in our retail stores, too. We believe that these two things are not separated. They're not different from each other. This is possibly a mistake we made in the past because possibly our structures were not efficient enough or well organized enough.
Both the retail network and the digital network both belong to the same world and to the same source of revenues. As to the dividend payout, this year, we can certainly afford paying out this kind of dividend because we're confident we have all the leeway to do it. I believe that next year, we'll be able to do the same as well. I cannot tell you whether we're going to distribute EUR 0.12, but we're very likely to stay in the same range that we have in the last few years.
Next question, please.
Of course.
Thank you. We will now take the next question from Erwan Rambourg from HSBC. Please go ahead.
Hi. Thank you very much for taking my questions. Sorry to belabor the point about short-term trading, we've heard from others in the sector that they're experiencing a rebound in Europe, notably continental Europe as well as Asia. I'm just wondering if you could comment on what you're seeing, in terms of potential rebound in those two regions, today. Secondly, I understand there's a lot of opportunity to renovate stores. Maybe if you could comment on how many stores you could renovate this year and how we need to think about the store count, i.e., are you still going to close more stores this year than you will open?
Thirdly, more of a long-term question, if you think about the margin profile of the group, given a more demanding consumer, probably a more costly consumer to recruit and retain, what do you think is a sustainable long-term margin goal, at the EBIT level you can have? You went from high twenties to low teens. What can we hope for over the next five or seven years? Thank you.
Thanks for your questions. What you said is certainly true. We do have a lot of positive signs as far as we are concerned. In particular, we see a big rebound in China, including Macau and Hong Kong. As far as Europe is concerned, the lion's share goes to the U.K., of course, and there are some areas where growth is less brilliant. In Korea, for instance, we suffered like everybody else because of the political turmoil. Certain governments are even actually actively discouraging their citizens to travel into South Korea because of the elections and because of the situation with North Korea. Political turmoil has a deep impact on our markets. We live in a period of time where politics and everything that happened after 2008, from Iraq onwards, certainly didn't leave the world in a very easy-to-manage position.
From time to time, we see turmoil, we see turbulences, we see concerns that actually block tourist flows because of fear, because of tension, because of concerns like Paris, for instance, after November last year. That's the kind of unforeseen development we have to be prepared and budget for. Now, retail stores. It's not really a question of opening or closing stores. We only need to open a very limited number of very strategic stores, like we're going to open a Prada store in Brussels, Belgium. The main thing we want to do is give the stores a new identity, which should be designed to cater for the needs of certain new consumers. The consumers are actually changing their identity quite deeply in the last 10 years. It's certainly not the case of consumers not wanting to buy luxury or sophisticated products anymore.
We need a totally different approach. The whole digital activity and the whole digital environment made people able to just look at pretty much everything without ever being seen, which is the big difference vis-à-vis the past. In the past, people had to walk into the stores. They had to ask and talk to the sales associates. Whereas today, anybody can do everything they want, wherever, whenever, and without actually having to physically go around. This means that retail stores also need to have an identity, which is certainly different from what they had 10 years ago. I'm not talking about a global revolution in the retail stores. I'm talking about new incentive systems and new, fresh ideas to encourage people to buy products. They need to look faster, to look even more exciting. You asked about our long-term perspective.
Certainly not worse than now, hopefully better. I feel confident. I have no problem on the future market expectations.
Next question, please. Thank you. Thank you. We will now take the next question from Mariana Kou from CLSA. Please go ahead.
Thank you, management, for taking my questions. I have two questions. First one is on margins by brand. I'm just wondering if you could share some colors with us in terms of the margin difference between Prada and Miu Miu. I know we have seen some volatility in the past few years in terms of the gap between the two. Just thinking longer term, like what sort of scale we should expect Miu Miu to get to and where the operating leverage really come in for Miu Miu in terms of contributing to the group margin. That's my first question. The second question is a small question on management's view on M&A activities. There seems to be a bit more pickup in M&A in the retail space.
I'm just wondering, because I think a few years back when we were kind of talking about doing the IPO process, we're certainly not really actively looking. At this point, given the very strong cash flow position that we are in, would we consider some M&A activities? Thank you.
Hi, Mariana. Talking about margins by brand, of course, everybody can imagine that Prada has higher profitability than Miu Miu. We have many times said that the level of cost for Miu Miu is set for a level of sales bigger than this. Of course, the margins of Miu Miu are improving because we have taken many actions, particularly this year, in terms of commercial activities, but also in terms of rationalization of cost. Miu Miu is expected to increase profitability in the next year. Cash flow generation is not a cause, but it's the effect of the activities we embarked in. It didn't happen by chance.
What we want to do with this big cash flow is mostly self-fund our growth activities and development activities in an industry we're not fully familiar with yet, i.e., digital, but it certainly requires a big investment in human resources and consulting and development. This is the main purpose, the main reason why we want to invest our big cash flow. As far as M&A is concerned, we are certainly not thinking about them now, but we have no bias. We will be happy to review opportunities if they're worth it. We can change our mind vis-à-vis five years ago.
Next, please.
Thank you. We will now take the next question from Melania Grippo from JPMorgan. Please go ahead.
Yes, good afternoon. I actually wanted to come back on the e-commerce that seems to have been a big focus of yours throughout last year. There was a step change in third-party e-commerce for your business. I was wondering whether you expect full year 2017 to be another big growth for wholesale, but led by third-party e-commerce again. That's my first part of the question on e-commerce, and the second part is your own e-commerce seems to be undershooting what you are now doing with third-party e-commerce. Would you also expect a step change here to come good starting 2017? My second question is on current trading. I'm sorry to come back to that, but I'm not sure I got the answer. Are your like-for-likes back to positive territory in February and March, please? My next question is on cost.
You did mention that you expected to still be cutting costs in full year 2017. I was curious to hear a bit more about that, notably, a bit of a boring question within this. You had a change in accounting policy in full year 2016 on DNA. I was wondering, some of this was a catch-up in full year 2016 of several years. I was wondering what you expect that charge to be in full year 2017. Thank you. Sorry, one last, if I dare, the patent box, if you have any update. Thank you.
Hello, Melania. As far as e-commerce is concerned, as you pointed out, we are very much focused on it now, of course, but you know very well that offering all the products we carry in store through e-commerce as well is a very complicated work, and it is very demanding, and it is engaging a lot of people and activity today. Of course, it will take some time, let's say two or three months, to start seeing the actual results of what we are doing today. We are rolling out e-commerce in China and so on and so forth. What happens is that e-commerce will eventually increase our wholesale presence, too, because the more we become visible in digital, the more we will increase our visibility in wholesale, too.
The end result of that activity will be a higher level of visibility on the market through a different channel besides the, let's say, usual retail stores. This is certainly going to drive attention to the wholesale channel, too. As for the rest, Ms. Cozzani will answer you.
Hello, Melania. Coming back to the current trading, I would say that the better condition that we have seen in the last couple of months, I am referring to December and January, are still there. As Mr. Bertelli mentioned before, China turned strongly positive, same as for Macau. Hong Kong has rebounded. Europe is good, driven particularly by U.K. France came back to positive growth. Asia Pacific overall is good, same as Europe. U.S. is better. Let us say still negative, but better. Japan probably remains soft. Talking about the patent box, I read your note this morning. We have applied, and we have been admitted in June, but we are still waiting to discuss with the Italian tax authorities the calculation of method. That is why we have not put yet the benefit in fiscal year 2016.
Probably next year, 2017, we will have the tax benefit for three years, 2015, 2016, and 2017.
Thank you.
Next question, please.
On the cost, sorry, the DNA charge and the cost.
In terms of DNA, of course, we have already said, presenting H1, that we have changed some of the useful life. They are not expecting, of course, to change anymore, we'll probably be in line with 2016. In terms of cost, we still have some room, we will continue to find efficiencies and to rationalize the structure everywhere.
Thank you very much.
Thank you. As a reminder to ask a question at this time, please press star one. We will now take the next question from Rogerio Fujimori from Oddo BHF. Please go ahead.
Hello. Hi, everyone. I have three questions. Gross margins were down 50 basis points in the full year. How should we think about the gross margin outlook for 2017? The second question is about marketing as a percentage of sales, 5.4% in 2016. Should we expect a stable ratio this year? My third question is about the Chinese customer base buying locally and abroad. Could you share how much the growth rate in Q4? Thank you.
The gross margin for this year was, let's say, pretty stable. Correct, we lost about 50 basis points. Consider that it was a great result to me because the channel mix, the product mix, and the regional mix was a negative driver. This result was achieved thanks to the industrial efficiencies that we have reached. In terms of next year, we are not expecting big difference, the gross margin will be stable, probably pretty in line with 2016. As far as communication is concerned, of course, the tendency is of reducing the investment in printed advertisements as against advertising and communication through digital media and websites. For 2017, we are working on a communication budget, which would be dedicated 25%-30% to digital communication in websites. The investment we're now making in the digital world, of course, encompasses and includes this big communication spending, too.
As time goes by, as we define the e-commerce platforms and everything we are going to engage in online, we are going to review our communication spending budget, too. Anyway, we're of course, going to increase our online communication as against our printed communication. You were talking about Chinese customers. Are you talking about Chinese customers globally, wherever they shop? I'm not sure whether I got you right.
That's correct.
Well, globally, they certainly increased, they increased anywhere between 1% and 2%. I think it's about 1.6%-1.8% more. As far as the growth of the Chinese shoppers in China, it grew even more than that. I don't have the exact percentage of the calls, actually they did increase. Actually, I'm advised that in China, the Chinese shoppers increased their shopping by 15%. Thank you. Next question.
We will now take the next question from Paola Carboni from Equita SIM. Please go ahead.
Yes. Hi, good afternoon, everybody. Just a quick question on cash flow, in particular on inventory. Do you believe this 17% percentage is sustainable, or what should we expect for 2017 in this respect? Thank you very much.
Well, for 2017, much depends on how a company wants to manage a stock turnaround vis-à-vis its sales. We believe that a suitable amount to feed our stores suitably would be carrying anywhere between four and five months worth of stock. With good planning and good connection between local subsidiaries and central merchandising, this is the ideal level of stock for retailing. Of course, that has an impact on planning raw materials and procurement, and some other houses may have different percentages in mind. We kept our objective of 17%, and I think we can confirm it for the future, whether it's 17% or 18% is not really significant. The most important thing is how we manage our processes. We may increase our stock by maybe 1%, 2%, but that may vary with long-term strategies.
The fundamental target is get to be less than 20%, of course, if it's one point more or less, it's no big deal. It's a strategic decision. Next, if any.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.