Earnings Call: H1 2012

Aug 23, 2012

Good morning, ladies and gentlemen. Welcome to Li-Ning Company 2012 interim results announcement. Let me introduce today's management. Executive Chairman and Executive Director, Mr. Li Ning. Mr. Jin Peng Kim, Executive Vice Chairman and Executive Director. Mr. Nicholas Chong, Chief Financial Officer and Executive Director. Firstly, Mr. Chong will first walk through the financial highlights of this year. After that, Mr. Li and Mr. Kim will present the business review, operational review, future outlook and strategies. After that, we will have Q&A session. Now we would like to invite Mr. Chong to start the presentation. Good morning, ladies and gentlemen. 女士们、先生们，早上好。 [Foreign language] In 2012, the company revenue decreased by 9.5% to RMB 3.8 billion. Mainly as a result of the overall economic condition and industry landscape. The sporting goods industry in China experienced a further slowdown as well as increasing pressure from inventories in retail channels. In addition, the group scaled down its sales to its distributors to mitigate the pressure from inventories in retail channels. On the other hand, the group continued to also buy back a portion of outdated stock from distributors during the period to accelerate the clearance of inventory in retail channels. Gross profit decreased by 15.5% to RMB 1.72 billion. The decline was mainly due to the increase in overall discount rate in the retail end, to meet the intensified market competitions, and also higher percentage of sell-through factory outlets and discount stores. Lower ASP for apparel and also the clearance of obsolete inventory. Operating profit dropped by 58.5% to RMB 184 million. Besides the declined gross profit I mentioned earlier, the decrease was mainly due to the full amount of impairment provision of RMB 120 million for the Lotto brand license as adjusted under a supplemental agreement that we have announced in June. At the same time, affected by increased inventory balance and higher balance of long aging trade receivables, the provision for impairment of assets increased as a result. Other one-off expenses, such as costs related to the organizational restructuring, contributed to an increase in administrative expenses in the first half, affecting operating profit. Nevertheless, the group strives to improve operation efficiency through effective management by reducing distribution costs, as well as achieving overall expenditure stability. In view of the above factors, profit attributable to equity holders reduced to RMB 44.3 million. Earning per share dropped to 4.21 cents. Under the current business condition, the board of directors believe it is important to maintain cash on hand for the Group's future development. As a result, the board decided not to declare payment of interim dividends in the first half of 2012. We hope that investors can understand and support. Moving on to the next slide. 下面。 Under profit margin, due to higher overall discount rates in the retail end, the clearance of obsolete inventory, as well as higher rate of other brands which have lower gross profit margin than Li-Ning brands, the group gross profit margin dropped by 3.1 percentage points to 44.2%. Operating profit margin was 4.7%. Net profit margin is 1.1%, RMD is 2.4 percentage point. A&P was 13% in the first half, lower by 2.9 percentage points versus the first half of last year, mainly because the Group streamlined its costs and expenses to enhance operational efficiency. However, given the marketing activities for London Olympics and also the sponsorship for CBA and increase in the group PSP expenses is expected over year 2012. For the staff cost, absolute dollar has declined, but even then, the revenue drop is so that percentage of staff cost has gone up by 0.9 percentage points. Moving on to the next slide. 下一页。 Account receivable days increased by 45 days, mainly because the Group extended further support to its distributors. Inventory days increased by 33 days, primarily due to repurchase of inventory, and also lower trade fair order execution rate, and also higher self-managed retail Business proportion. Accounts payable days increased by 21 days. As a result, the overall cash conversion cycle increased by 47 days, causing a substantial impairment to group operating cash flow. The group is actively looking at initiatives to improve the cash position. The Group focused on expediting the clearance of stock and optimizing the inventory structure in the retail end, while strengthening sales through factory outlets and discount stores. We seek to accelerate the turnover of retail stocks and to resume the inventory in retail channels to a healthy level within the next 6 to 12 months. Due to increase in sales volume of gross profit and increase in expense ratio, the return on equity was 1.2% and the return on assets was 0.6%. As for Capex, first half is RMB 325 million and expect a decrease of 17% versus a year ago. Total Capex for the year is expected to be about CNY 300 million as the group pays. Besides the normal Capex expenses, we also need to think of the balance of the construction cost of the Jingmen Logistic Hub. Moving on to the next slide. The Group pursue a prudent treasury policy, treasury management policy. Cash and cash equivalents are amount to RMB 1.3 billion, up 19% versus a year ago. Bank borrowings has increased from RMB 830 million to RMB 1.2 billion. Liabilities of convertible bonds amounted to 653.6 million, which represent the present value of the CB principals and interest. The net cash dropped to negatively 351 million. Current liabilities of the group decreased by 8.1%. Current ratio went down slightly from 1.56 times to 1.52 times. Liabilities to assets ratio decreased slightly by 0.6 percentage points. Moving on to the next slide. For the first half of 2012, the proportion of revenue contributed from apparel products declined slightly from 49.3% to 47%, whereas footwear we have managed to increase it from 44.6% to 46.7%. The Li Ning brand remains the main contributor to the group's revenue, while the proportion of other brands increased to 11.5%. Moving on to the next slide. Right now, we have four sales region versus the three sales region in the past. We have added the western region. The northern and eastern region remains the major revenue contributor, close to 70% of the revenue came from the north and east region. 40% of the revenue came from the newly added western region. The south region continue to grow, has shown a growth of 1.9% year to revenue versus last year. Now I would like to hand over to Mr. Li Ning to talk about the group's brand advertising and marketing, as well as the marketing achievements of the London 2012 Olympics. 大家好。现在我跟大家回顾一下我们的业务。 The short run, the sportswear industry in China will face a very competitive landscape. Challenges such as overexpansion, excessive channel inventory, rising costs are made tougher by the wholesale model common amongst most leading Chinese apparel businesses. Nevertheless, we expect to see growth in the low to mid teens in percentage for China's sporting goods industry. Looking at the long-term prospect, growth of Chinese sportswear sector will be driven by mainly four factors. Firstly, China's rapid urbanization continues to move 1%-2% of the rural population into urban areas annually. Secondly, Chinese consumers purchase more and more as disposable income, sports participation, and the level of consumer sophistication rise. Thirdly, industry players with quality brands and products will benefit from consumers trading up across brands to premium brands and within brands for better design and technologies and functions. Lastly, inflation will continue to drive up prices. 那么在这个2012年上半年。 Adhering to the strategy of focusing on its core business, during the first half of 2012, the group formulated its integrated marketing plan with major sports events and unique brand positioning. In addition, the group also sustained its consistent communication with consumers on the brand positioning to strengthen brand equity. The group sees the enormous market capacity for basketball. The market has maintained a faster pace of growth and is essential among teenage consumer group. 国内最受欢迎的主流运动之一，对青少年消费群体影响很大。 The group therefore seized the opportunity to sponsor two major basketball leagues, Chinese Basketball Association and National Basketball League. At the same time, the group also launched exclusive signature shoes, Turningpoint 001, for NBA star Evan Turner, and 2 Year of the Dragon special editions, effectively boosting the Li-Ning brand's exposure and product sales. We also highlighted the group's professionalism in track and field and running by sponsoring high-level events such as the IAAF Diamond League, Shanghai Diamond League, Beijing International Running Festival, and Li-Ning China 10K Road Racing League. Through various grassroots running, advertising, and promotion events, such as Mini Fun Run and Li-Ning iRun Club, the group developed running culture in China and a professional image. During the period, the group even held the integrated advertising and marketing campaign for the Run Off Pressure and Take a Breath 9th Generation Ultralight Running Shoes launch, helping to further shape Li-Ning's professional brand image in running. Our marketing for badminton adopts multi-brand, multi-channels, and multi-platforms through integrated promotion, and have helped maintain its number one association with the Chinese National Badminton Team and China's badminton sector. The group's sponsorship to top-notched athletes such as Lin Dan, who will come to Hong Kong very soon, and other contractor athletes to the Thomas Cup and Uber Cup, and the 2012 Singapore Open allowed the group to accumulate a wealth of experience for its Olympic Games marketing. I was very honored to be invited to participate in the Greek leg of the torch relay for the London 2012 Olympic Games as a representative of the Beijing Olympics. The Olympic flame witnesses change events achieved great results as the first key activity in the group's Olympics marketing promotion campaign. In June 2012, the group held a press conference in Beijing with the theme, Witness the Change, the Dragon Dazzles London. The group once again used the dragon theme in 2012, the Year of the Dragon, to launch the Scarlet Scales sportswear series and provide professional competition gear for the Chinese national gymnastics team, Chinese national shooting team, Chinese national diving team, Chinese national table tennis team, and Chinese National Badminton Team for the London 2012 Olympic Games. This has enhanced Li-Ning brand exposure and the brand professional image while supporting the national teams for the Olympics. The group sponsored five Chinese national gold medal teams and top-notched overseas athletes to shine in London 2012 Olympic Games. I think many of you have watched the performances on TV, of which our five national gold medal teams garnered 22 gold medals, contributing to close to 60% of China Olympic Delegation Team's total gold medals. Here, you can see some pictures. In particular, the badminton team and table tennis team swept all of the Olympic gold medals for the respective categories for the first time. Other athletes also demonstrated excellent performance, such as Lin Dan's consecutive championship in men's badminton singles, Christian Taylor, triple jump athlete from the U.S.A., winning a gold medal. Spanish National Basketball team, winning silver medal. Yelena Isinbayeva, world's number one in pole vault, winning a bronze medal. Their performance has led to a bigger or a higher influence of our brand. We have been doing a lot in product design and innovation. Through continuous enhancement in product functionality and quality, we strive to create product offerings which are able to meet the needs of both general consumers and professional athletes. In addition to being the long-term sponsor of High-Tech Sport Gear for China's five national gold medal teams, we also sponsor other domestic and international sports resources with top-notch gear to support these athletes in achieving outstanding performances. These athletes include Lin Dan, Christian Taylor, Yelena Isinbayeva, Sauva Paul. At the London Olympics, one of these athletes was injured, and so he withdrew from the competition. But still, we are able to highlight brand features in our products. In addition to developing products for professional athletes, Li Ning brand also offers a wide range of footwear products for general sports enthusiasts. We have always been devoted to footwear research and innovation, have developed a series of new technologies applicable to footwear. During the period, we expanded the Li Ning footwear product family by launching the ninth generation Ultralight running shoes, ARC shock absorbent running shoes, UnitBall Phoenix basketball shoes, and more under the Li Ning brand. 服装产品研发团队持续运用创新的产品科技，将试验成果应用于最终产品上。对于服装产品科技，AT DRY的科技品牌集团持续节约资源，规范。集团持续倡导绿色环保服装理念，将可持续环保面料应用于李宁品牌2012春季男子运动系列。同时，我们也致力于研究开发超轻薄运动面料。作为集团核心运动项目之一，我们的李宁研发、生产中心也具备了业内高级别的人员和领先行业的新型研发设备。研发突破性地羽毛球球拍科技是我们的一个方向。所以我们在立体功能和风动导流，这是我们两个科技的产品研发的一个名词，一个方向。这些产品受到了顶尖运动员、分销渠道和消费者的高度好评，强化了李宁品牌羽毛球拍产品在市场上的专业地位。除了李宁品牌之外，其他的品牌，像红双喜。Double Happiness提供了独特的地板设备，用于伦敦2012奥运会both table tennis和badminton事件。The table tennis athletes representing China mainly used equipment provided by the Double Happiness brand. Double Happiness continually reinforced its competitive edge in the table tennis market by signing top-notch table tennis athletes as their spokespersons and collaborating with various professional competitions from at home and abroad through sponsorships. We further improved our product research and development and successfully rolled out over 100 new products in the first half of 2012, expanding our professional table tennis, apparel, football, footwear product lines. At the same time, Double Happiness continued to expand the research and development of table tennis, badminton, football, basketball, volleyball, and small-sized fitness equipment. AIGLE's business remained steady, and its existing stores maintained double-digit same-store sales growth. New stores also are developing satisfactorily, stimulating improvements in overall retail performance. AIGLE will continue to build up its brand recognition and loyalty through its casual and trendy styles, increased investment in advertising placements in outdoor and travel media, and establishing brand image stores. Kason brand's sales in apparel, footwear, rackets, and equipment accessories grew rapidly as the result of the comprehensive upgrade of its brand positioning, product mix, research and development, and sales channels. Through brand differentiation and positioning, we will continue to make full use of the advantages from the sports marketing resources of the Li Ning brand and Kason brand to increase its market share in the badminton category. Since the pace of development for the overall business of the Lotto brand has fallen short of expectations, we entered into active discussion with the licensor. Ultimately, both parties decided to sign a supplemental agreement, which amended the termination date of the license of the Lotto brand to 31st December 2018. By doing so, we reduced our financial expenses. Lotto brand will focus on the retail end and clearing inventory through factory outlets and discount stores. Now, I would like to invite Mr. Kim to present our operational review, as well as our outlook and future strategies. Mr. Kim, please. Thank you. Good morning. 早上好。 I'd like to take the opportunity today to update you on the broad and deep transformation program that we have announced in July, and to focus on what we have really been concentrating on in the last month and even further. 对未来前景的看法，以及集团战略。 These are pretty tough times for the industry, but we feel very confident that the transformation program that we have put together, which we shared with you in July. 请转到下一页。 Along with the partnership between Chairman Li Ning and myself, are bringing a lot of changes to the company. The last month of transformation. 在转型当中，也将会是公司新的一个开始。那我要跟你们分享一些早期我们在这一方面的成功。困难的时间需要很清楚的愿景、方向和非常决断的决定。我们相信我们已经做了提升一些动作，而且也准备好要做更决断的决定，希望可以导致我们的愿景是在中国第一位的运动品牌。如果看这个议程方面，就是我们已经定下，我不会详细讲，因为在7月已经解释了。但是我们今天的焦点，如果你看看那个渠道的效率，对我们来讲很重要，就是非常决断地去处理在过去两到三年积累的渠道的存货。我们采取了决定，就是我们有时候甚至取消或者不发出一些订单的量，因为这个可能不是最有效率、最有生产力的。对于渠道来讲，我们要改善我们销售产品或者做销售的一个方法。今天会跟你们分享一下我们怎样去改变这个供应链的模型。所有这些都根据我们零售和经营的经验，就是我们从一些专家再过来是李宁的一些战略师。另外就是很决断地去处理运营方面的能力，我们对于开支方面的严谨，我们要更节俭一些。就是说我们在零售方面，我们聚焦在零售的运营和效率，也看我们的机构的资源怎么去利用，希望更好推动产品和零售的销售。那么我们的产品就是有长期的一个焦点。今天开场说到我们有两个很强的顶级的人才，是在运动服方面的两个先锋，他们在全球都领导这方面的设计。未来一到两年他们会加入我们，会带来更好的产品，可以改善我们公司的发展。我们的业务模型也需要很深入去看的。我们的批发模型，我们不需要太担心零售店的网络，还有零售的运营，这个我们相信以后可能不会这么管用，所以我们会做一些战略的行动，看看怎么样去组织，怎么样更接近市场，而且更聚焦在零售方面。下一页。这也是一个三阶段的蓝图，已经跟你们分享过，我们已经进入了这个过程一两个月，李总跟我的合作加速了这个步伐，我们可以直接控制整个项目。管理层也是很投入，现有的管理层加上一些今天说的新的加入的人才，还有一些顾问和我们带过来的专家，也是推动了这些改变。在未来12个月，我们的焦点就是要清除渠道的存货量，我们要更决断去采取行动。在整个零售、渠道的行业里面，因为现在有过大的供应，所以我们应该要更决断，希望可以明年就开始做得更好。同时我们努力去改善过程组合的效率，我们也需要去看看我们自己的执行能力，希望有一个更聚焦的品牌组合，也希望看看怎样可以加速。自己渠道的存货，另外成本运营方面也要做得更好。这些的效果都会在下半年看到，可以让我们重新去分配我们的资源，比如说不同的市场推广、CBA等等的计划。那么非常重要的是要做得很精益。在我们的运营方面，我们在今年下面的时间会继续这样做。另外很聚焦在我们的核心的产品，就是李宁品牌。我们也会看怎样会转移资源到中国市场核心的顾客。那么你会看到Li Ning Company将会更聚焦在针对顾客方面。在未来两年，我们会看怎样改变业务模型，在供应链和整个市场的商品方面，我们要用非常兴奋的产品去领导，是很超越和独特的产品，是跟我们以前的产品不同的。这里也是革命的一部分，因为我们刚才说有一些产品方面的先锋会加入我们，那么讲我们会有更有效、更有效率那个业务的模型。Next page please. 就是通过下面两张页的两页，下一页我要更深入地去讲。现在我们只是过了两个月，但是有很多很有趣的东西正在发生。2012年12半年，就是我们在清除渠道的存货方面做得更快。另外，我们在渠道方面也有变化，我们要针对另外一组的顾客，以前没有这么多的零售的利润很重要，那我们采取了一些步骤增加折扣率。如果你不让他们有盈利的话，就很难增加营业额和效率。还有就是推出市场的产品。这个分销商的政策是我们的焦点，在明年也会推出。同时这个在明年的第四季度可以开始实行。下半年你们会做更多，但是力度更大，而且更是要改善店铺的效率。任何的店铺，如果我们发现它不够盈利，或者没有效率，那年初我们就已经采取了一些决定，下半年关店的数量应该会大大地减少。那么其他的店会变得更聚焦，相信可以带来更强的盈利和生产力。在今年我们的渠道，这第六代店增加了四家，给我们非常好的提升。在生产力方面，另外这个盈利的改善和清除存货方面的工作，会帮助他们变得更具生产力，因为我们需要改善产品的结构。下一页。供应链变成一个更重要的部分。我们之前就是一批发的业务，只交货给经销商之后，就是由他们来做。那这后面有很多的问题，而且效率比较低。我们在实验一个，不光是我们自营的店，还有经销商的店，我相信这个计划今年会推出。已经开始了，在我们自己的渠道，你可以想象到总体的力量，减少存货、增加产品周期。要做到这个，我们需要一个更先进的结构，还有就是仓库物流方面的中心。在荆门我们做的投资是非常重要的。在未来一年，我们将会更灵活，而且可以有一个更好的物流的系统，人手系统去做到我们的零售模型方面的一些改变，就是直接交付或者送货到店。一些很受欢迎的项目，我们已经开始了这个计划，在未来的时间，特别明年会加速。同时有很多的机会，比如说一些跟高尔夫球相关的商品，我们非常积极地去探索生产搬到海外，特别是服装方面有很多机会，我们也已经联络过一些潜在的供应商，我们觉得这方面的减少的机会将会是很大。你会看到一些早期的进展，还有明年也会看到更多的进展。下一页。很开心可以宣布有一个更强大的团队。虽然之前经过很困难的时间，李宁可以吸引到这个行业里面最好的人才。Sam Soo，Young Global的副总裁就加入我们了。现在我们有最好的管事。在行业里面11个，当中有4个是独立的非执行董事。那我们招聘了4个高级人员，代表是最好的能力，不光是在这个行业，还有就是他们功能。首席供应链官是来自一家领先的高科技公司，是全球最好的供应链的公司。他负责中国的采购和供应链，是推动那个转型。怎样把我们的业务模型变得更零售为本。首席的销售官他有非常丰富的行业的经验，是来自于意甲联赛的体育品跨国公司，他管理过他们大部分的在中国的业务。他现在就是零售业务，他是首席的销售官，会建立我们零售方面的能力。同时，很开心我们有这个首席产品官的加入。他可以说是其中一个领先的产品的领导。他负责四个设计中心当中两个，在头三家的行业的领导的公司，他很快会加入。他会重新设计我们的产品的设计和生产方面的能力。除此之外，我们也聘请了一个就是很经验丰富的人才，负责制作产品设计跟planning。他会加入我们，也是一个世界级这方面的人才，可以把李宁的产品变得更加年轻，提供一个一致的视觉上的体验，不只是产品，是所有的东西，就包括所有顾客接触到的东西，包括零售店。下一页。过去两个月呢，李董跟我都是花费大部分时间在李宁方面。我大部分的时间都是花在这个公司里面，去推动这个转型。管理层是非常投入在这个转型的过程当中。过去两个月，供应链有所改变。在未来几个月呢，会有更多新的资料可以让我们享有就是比竞争对手更多的优势。我们在这个方面的模型也会改变，要更接近市场。同时我们订购的产品不是所有就是六个月提前认定，就是说很多都是更接近这个市场。而且我们有一个混合的模型，就是批发和零售之间的混合。现在呢，跟零售商来讨论应该怎么样来做。这个会把运营的资本资金变得更有效率。那么另外就是我们市场推广方面，营销活动，我们要在现有的平台上做一些重要的投资，比如说CBA，我们花的营销的投资是非常重要。你们可能有过我们有一个奥运会当中的一个非常聪明的计划，就是提升李宁品牌的地位和曝光率。我们也会继续希望被视为在这个板块里面领先的品牌。渠道改革会继续。我们会探索不同的方法去改善零售的效率，而且会非常紧密地跟经销商合作，去改善库存的情况，希望零售的体验可以改善，还有生产力也可以改善。这一个改革也希望可以更敏捷地去做产品的竞争力。我们招聘了这个产品方面的主管，还有改善库存的功能，同时更深入地去看我们的能力，就看看确保好的产品不会很快地缺货。所有都是希望改善我们产品的竞争力，就是我们应该有正确的方向。在过去两个月已经有好的改善。下一页。我要给你看这一页，就是公司非常的投入的这一页。现在就是把时间就是推到问答上面。大家早上好，我要跟大家分享几个信息，才开始这个回答的部分。首先呢，我们为应付目前行业严酷的环境，减缓零售端产生新的存货压力，主动与经销商沟通，控制订单的安排。根据2012年全年订货会的结果和目前的经营环境来看，管理层预期2012全年收入同比将录得负增长。另外，虽然我们积极、果敢应对现实的经营环境，为长期和可持续发展而做的一些系列的短期营运和财务资源的调整，但也避不开对短期的盈利能力造成一定的压力。因此，管理层预计2012年全年可能会录得权益持有人应占的亏损。可是我们有信心，目前所进行的管理变革和策略调整将会帮助我们度过现在充满挑战的行业环境，提升未来的核心竞争优势，为集团在国内体育行业的可持续发展提供长远的稳健基础。去年上半年，李宁品牌同店销售较去年同期录得中单位数的下降。然后呢，上半年零售端平均折扣率是68折左右，其中普通店铺约75折，清货渠道约49折。我们将重点解决存货和应收账款的问题。集团已对经销商和供应商发布了2013年经销商批发折扣额度和返利的政策。批发折扣率虽然降低，但在这方面进一步加强管理，适当缩减，因此整体综合折扣率变化少于一个百分点，在对集团的毛利以及订货会结果的影响都不明显。集团正在进一步改善供应链管理、产品上市和规划的方式。从2013年第一季度订货会开始，我们将以更加灵活的方式来管理产品上市进度。因此，订货会结果将不能完全对未来的实际经营及销售状况起到预示的作用。基于对信息披露负责任的考虑，集团决定以后不再公布每一次订货会的数字。不过我们仍然十分重视公司与投资者和媒体保持紧密的沟通，让其他最新营运的信息能够准确、及时、公平地对外披露。希望各位