Earnings Call: Q4 2021

May 20, 2021

Earnings release

Ladies and gentlemen, welcome to the Watchers of Switzerland Group's Q4 FY 'twenty one Trading Update. My name is Simona, and I will be coordinating your call today. I will now hand you over to your host, Brian Duffy, CEO of Watchers of Switzerland to begin. Brian, please go ahead. Thank you, Simona, and good morning, everybody. Thanks For joining us, I was going to overview the report that we put out today and to give a bit more Flavor from my standpoint on the performance that we've been reporting. Q4 is difficult to get into perspective in comparison to last year because of obviously the full lockdown that we were in last year and partial Obviously, the full lockdown that we were in last year and partial lockdown we're in this year. But as far as we're concerned, it was a very strong quarter. Throughout the quarter, we had a very strong online business here in the U. K. We had a good Click and collect business prior to the openings on the 12th April and then a very strong response From our markets beyond our expectation, actually, when the stores reopened. And fundamentally, a very, very strong Continued business in the U. S. For all of our stores for open trading and doing a great job. So We think it was a great quarter overall and interesting and if you look at it against fiscal year 2019, as you'll see in the report, up 24.7% and Luxury watch is up 30% if we compare to fiscal year 2019. We then focus on looking at the year Overall and years characterized by what we see as exceptional growth in the U. S. Market, Dollar to dollar plus 38.5 percent. Despite the business are facing some headwinds, we had locked down at the beginning of Over year, stores started to reopen in May and weren't fully reopened through to August. And clearly, dealing with the subdued traffic, Particularly in places like Vegas, where we have a big presence, huge religious traffic there, also New York, where Fewer people coming to work or socialize or shop. We overcame, I think, all of these challenges with great marketing, great use Technology, great client reach out with our CRM and client telling methods. We have great reference from Customers who are having good experience for our customers to come to us. So I think we're very proactive and very confident we On the market overall in the U. S, the market at the end of the day was strong. I think we'd acknowledge that Throughout the year, and if anything, picking up pace as the year went on. Our teams in the U. S, Again, they really have a destiny. They have fantastic jobs throughout the year. The UK were up 3.6%. I think that is equally as exceptional as the U. S. When you take into account the headwinds in the UK, we were Call is for 26 weeks of the year and half of the year. Our shops were unavailable to our consumers. Our international And airport business was a small fraction of what it typically had been historically. But we responded to that by being hugely active on digital. Online business more than doubled. As you see, On digital online business more than doubled. As you've seen in the last quarter, more than tripled. Click and Collect, we were able to do in Lockdowns 23 were very, very helpful to keeping our core business going. And then when our stores were opened between lockdowns, including the most recently opening business has been very, very helpful to keeping our core business going. And then when our stores were opened between lockdowns, The most recently opening business has been very, very strong. So compared to fiscal year 2019, again, we're looking at Plus 18% overall. The team again, UK, full of enthusiasm, professional, really well trained, couldn't wait to get back in store Again, and doing a tremendous job. Some other headlines to take away of domestic business, domestic Sales effectively, 95% of our total. We're really are a domestic business. If you look back at the last fiscal year, Luxury Watch is now 87% of our total, and the top eight brands that we refer to now representing 81%. In addition to sales performance, I think we've outperformed on profits. We clearly haven't finished our audit. Overall, we're confident enough to give the indication that we have there of adjusted EBITDA, dollars 104,000,000 to $107,000,000 represents 33% to 37% improvement on AOI, which we're clearly very pleased to report. And based on that and the good Performance that we're repaying, the furlough money for the year, we've repaid The government financing that we took out as a precaution at the start of the year. And we're also really delighted to be announcing the creation of Ipsland Group Foundation to whom we'll be contributing $3,000,000 1.5 million dollars booked this year, dollars 1.5 million committed for next year, We're very pleased and very appreciative of the Board's support to do that. Then one other number we're very pleased to see to you There's a level of debt that's down at $43,900,000 this time last year, dollars 130,000,000 So we feel good about the year. We're really glad it's behind us. And it's clear that it was a very challenging year for the world. We know it's not over, but I think Perspecta is obviously a lot more positive, and we share that going into fiscal year 2022. Based on that, we've done our plans, we've done our projections, we feel confident on the perspective we're looking at. We're clearly staying with our proven strategies that are working for us well. We have a really good pipeline of projects, 1 or 2 that were delayed, particularly In the U. S. Sort of carrying into fiscal year 2022, I guess, assumption we are making is that we're not going to be affected by any further lockdowns in the next year In the U. K, the U. S. Or Switzerland, we have visibility as we typically do at this point in The supply situation from key brands, we're not included in our guidance any unconfirmed Projects overall, and again, we've been consistent in doing that historically. And it all leads us to say that next year, we think we could increase our sales Between 16% 21%. Overall, that's a $1,500,000 to $1,500,000,000 relative to 1,100,000,000 And adjusted EBITDA, we think we've material leverage potentially a bit so flat to a 0.5 improvement means Point that means plus 16% to plus 26% on profitability on profits. So that's where we are, and we'll start very happily take your questions. I'm preparing to ask your question. Please ensure your phone is unmuted locally. Our first question is from Ann Laura Bismuth of HSBC. Amla, your line is open. Please go ahead. Yes. Hi, good morning. Thank you for taking my question. I have 3 actually. My first question is, is it possible to have an idea of the luxury watch sales growth this year between the split between price and volume? The second question is about the U. S. Market. So any key learnings in the U. S. Market so far in terms of brand preferences in the luxury watches? You did the same in the U. S. And in the U. K. Market? And finally, on the online performance, so online was obviously very Especially in the U. K, but have you observed a change since stores that have reopened in the U. K? And So I'll give the answer hi, it's Anders. I'll give the answer on in the volume mix question. So in terms of luxury watches, year on year volumes for the group were essentially flat. So it's driven by average selling price improvement. And within that, the vast majority of that is mixed towards, obviously, Rolex, Patek and Automa, the higher price point front. Okay. And with regards to the U. S, Obviously, as you know, our whole contention about the U. S. Market is that it was significantly underdeveloped due to a lack of investment in retail. I think we're proving that to be true. And the really strong performance has maybe been overall in the market the last couple of years You're buzz investing. You have other retailers responding as well. And I think there's good support coming from the brands in terms of supply recognizing the Potential in the U. S. So our view is that the U. S. Will outperform the global market and the potential is We have to do it, and it's obviously happening right now. Online in the U. K, I mean, clearly, we've had Great momentum. We are already aware of market leader. We think we've improved that situation further. We invested We're behind driving our online business with digital marketing and some traditional marketing advertising what was available Online during lockdown. So we really got behind the business, and it's performed very well. I mean, in the last quarter, Q4, We were three times last year. And to your question, post the reopening, we've actually continued to show Year on year growth, which we weren't expecting, it's obviously reasonably recent, but expectation was on store opening But we would peg down a bit on the level of online that we were doing, but so far it's not the case. So not that we have Certainly, there's been a permanent improvement in the online business overall for us and An acceleration of a trend that was already there. The U. S, we only just we only got going on online last September, October. It's gone well. We have a great lineup of brands. We're putting marketing behind it. We have Credit provider, good technology. So we're making really good week to week progress, and we are looking to increase our marketing Behind that business because we see it's having good potential. Thank you very much. Thank you, Anlora. Our next question is from Guido Lucarelli of BNP Paribas. Guido, please proceed with your question. Yes, good morning. Thanks for taking my questions. The first one is on the U. K. Sales. I was wondering if you could give us Any color on the performance of the U. K. Market compared to 2019 in the second Part of the quarter when the stores were opened. The second one on the U. S. On the American Dream Store, I've seen the release that it's planned for FY 'twenty two. I was wondering if You had more visibility on which quarter should we expect the stock to open? And the last one on capital allocation, because with net debt decreasing, you seem to be generating More than enough cash for your capital expenditure requirements. So I was wondering what's the plan there, if we can expect The use for more acquisitions for the expansion in the U. S. Or maybe some policy to give cash back to the shareholders? Thank you. Thanks, Grito. We're not sort of tracking by week Against 2019, so specifically how we compare to 2019 for the second half of April, I don't have to hand as a statistic. But overall for the quarter, we are performing very well against 19 and undoubtedly accelerated when the stores reopened in the U. K. But if you don't mind, we'll get back to you with that specific later. The American Dream, we love the projects, American Dream. We think it's going to be a big success. It's largely open in terms of fun park and some retail. There's quite a lot of investment in preparation. It's already been done on the luxury side of things. And our current plan is And our current plan is that we would be open at the earliest for the holiday season this year. So there's been a lot of there's been no changes in the timing of our list, but that's our latest plan that we would hopefully be open for the Holiday season in the U. S. So open by kind of October, November. It's not then, then it would be just after the year end, but it's Part of our fiscal year, and it's a project that we feel very good about. Capital allocation? In terms of capital allocation, obviously, we closed off, As you've seen, with low debt, so it's a great headroom. And obviously, we are growth And we are in the pursuit for acquisition targets as we haven't made any secret of that. So we think that at this point in time, the best way to use the capital is to grow the business at the moment. So we are Obviously, spending capital, as you've seen, we guided up. We didn't achieve our capital objective for this year because there was a slippage of some of the projects, as Brian pointed out. So capital next year is a bit up on this year, obviously, as a result. But for now, we're going to keep the cash, and we're going to see how we can use this For accelerated growth. Great. Thank you very much. Thank you, Guido. Our next question is from Louise Singlehurst of Goldman Sachs. Louise, your line is open. Please go ahead. Hi, morning everyone. Thanks very much. Just a couple of questions from me if I may. Just going back to the cash position, the cash conversion and the better than expected net debt, obviously, lower CapEx this year. Can you Net debt, obviously, lower CapEx this year. Can you talk about the working capital and the inventory dynamics, Anders, and where we are in terms of I presume everything has got fairly light. We would focus on Rolex, but across the rest of the brand portfolio as well and by price points in terms of inventory. And So the real question is how that outlook looks into full year 2022? And then just a follow-up on the U. S, if I may, on the space rollout. Is there any indication you're able to give us in terms of the space component of growth for full year 2022 with the projects that you have talked about? Thank you. Sure. So on the working capital then, so we've always said that the best way to look at this business is to take 11% of sales and use that as your working capital assumption. Actually, that holds true pretty well as we sit here. Inventory closed down a little bit on last year because obviously we had bought for Last year, the Easter and so forth, and then the lockdown came. So inventory was actually, as we pointed out last year, quite high at year end. Inventory in this category, we don't have a problem with it. We look at it as an asset rather than a liability, which is quite unusual for retail, But it tends to appreciate in value. The composition of our stock is really good. I wish I had a bit more of some of the brands Like Rolex and Patek and Autonomous specifically, but obviously, that is somewhat Supply constrained, but inventory is in really good shape actually. So don't think that we need to worry about that area. I'd just add to that that we bought confidently as well in anticipation of Maintaining a good level of business during lockdown and then clearly having a significant step up in our stores open, which I think is clearly to have been A wise move overall. The U. S, we have listed The projects that we are looking at, so you have the American Dream, you have Aventura, which has been delayed. We have other projects of investment in the Meyers network investment and the Grow Up None of them are actual space increases, but they have significant elevations from which As we know, we've obviously had a very positive impact on sales overall. So we are actually, we don't have a number to say space. We will be adding some monobrands as we did successfully last year, 8 monobrands. We'll have a similar program This year, so that's additional. But as you know, typically, they're a lot smaller than our big flagship stores. So it's the existing network, investing in it as progressively as we can, plus the other projects that we talked about, like the American Dream that's on the Thank you, Louise. Our next question is from Kate Talbot from Investec. Kate, please go ahead. Good morning, everyone. I'll join everyone else with a couple. Just on the net debt position, can you confirm whether you've actually repaid the furlough At that point or is that to come out? And were there any outstanding rents? In terms Of the mayor's conversion plan, could you sort of confirm roughly how many mayor stores you're planning to convert in FY 22. And my third question is just on price increases. I don't think Rolex has put one through in the last year. I may be wrong on that. But could you confirm when they last put one through? And or have they put one through in the States and not in the UK? Thanks, Kate. So we know the final money has not yet been repaid. So we've gone through the detail, and we'll pay it in the Q1 of this year, for sure. So that obviously is a benefit. In addition to that, As I mentioned, we didn't spend all the capital that we had originally planned. So we came in more like $24,000,000 of CapEx for the year. So there is a push into the Q1 of some of the capital that has been delayed as a result of supply disruptions due to the pandemic. So that's where we are on that. In terms of pricing, we haven't had any notification of pricing so far this year. So obviously, that is not within our control. We haven't included any assumptions of pricing in our guidance. So we'll see where that all ends up. But for now, we haven't heard anything in that respect. You could think there should be pressure on it given the price of gold and sort of where the dollar is going And the strengthening of the Swiss francs, but so far, we haven't seen anything. On the reform program, So we are already in construction for the big Rolex store and Wynn in Vegas. Salvator, we mentioned, should have been finished, Panu, but basic problems To do with the pandemic, things are being delayed, so that hasn't reopened, but hopefully they'll do in the summer thing. The balance of Vermeer's network we have scheduled to do over fiscal 22 and 23, it will all be done during that time. And we've got Maggie scheduled with Zolix in particular. We've had inevitably some movement and dates for these projects. We are literally doing them as Quickly as we can. We have the capital. We know the results we get from them. So we're doing them all as fast as we practically can. And as Andrew said earlier, that results in us having an increase in CapEx for next year for the carry into the year, plus hopefully doing everything that Thank you, Kate. Our next question comes from Frank Manduca of UBS Asset Management. Frank, your line is open. Please go ahead. Good morning, guys. Just a quick couple of questions about the U. S. Really. Just looking at the sort of Split in sales, I'm just wondering whether you're looking at a very similar profile to the U. K. So there's quite a big dominance there towards the luxury watch Brands. And would Rolex be stronger or weaker out in the U. S. Compared to the U. K? And Just following on from that, in terms of how you approach the sort of store opening program, would you approach something like Vegas From a New York store. Clearly, you've got a bigger resident population in New York and a more transient population in Vegas. And I'm just Wondering how that fits in with ordering luxury watch brands, which can take 6 months a year to turn up. So I'd like to hear what your approach is there and how you're thinking about this going forward really? Thank you. Okay. Thanks. So, Rolex has historically and remains a bigger proportion The business in the U. S. Than it is in the U. K. As I said, that was really encouraging about the performance this year in the U. S. Is it is very broad based Across all of the major watch brands, we also had a positive experience actually in jewelry. We re launched The team over there has had a great campaign to re launch from Ears, Julie, and at the start of the calendar year and have had very positive results from that, so that's encouraging. So as I said, the Board's obviously, Rolex, Patek and Odeon Mile are supply constrained. But other brands who are less supply constrained, we've had very positive growth. And our view is that the market overall is significantly underdeveloped and I think it applies to all the major brands That represents overall. With regards to is Vegas different from New York or Florida, yes, there is and we merchandise Major store like that, we merchandise very specifically towards the clientele. We have I mean, physically, it's inside the resort as opposed to Soho being on a street side. But it's a very significant flagship store for us in Rolex that we're opening. So it's Sir, Phil, we've it's a beautiful design that we're doing. It's a 3,000 foot store, slightly bigger, and we'll reopen in October. And between it's adjacent to our multi brand store that contains the tech and Big E, Blompan, JZIA, IWC, ParaE, UBO are really wonderful selection of products. We also have clients who look for differentiated high end products or brands Like Jacob been called, our Board is sold well in Vegas. We have clearly some Wealthy, regular visitors that come through. There's a lot of things to say in Vegas. It's not that we're constantly dealing with a changing traffic. There's a lot of people who go to Vegas very, very regularly, in many cases, several times a year. So they feel as local As a local would do in New York. Well, we do merchandise all of our current major segments, our major Independently in anticipation of the clientele. Okay. Thank you. Welcome. Thank you, Frank. We have a question from Richard Taylor from Barclays. Richard, please go ahead. Yes. Good morning. Quick follow-up on furlough. I know you just said you'll repay the cash in Q1. Is that expense in the members for the year just gone? Or is that for the next financial year? And secondly, are there any other government support schemes that you've repaid that we need to be aware of? Thanks. So obviously, we've accrued 100% of the furlough back into the P and L. So we haven't taken any benefit of that into the numbers of this year. So it's just a cash Transaction? So that's the first one. The second one, we haven't been charged the tax for real estate here in the UK Throughout the year. And obviously, we haven't volunteered to pay it. So we've taken that benefit through because we weren't charged states. So that is part of the benefit that we've had this year in the U. K. And that, obviously, we expect to normalize In next year or this year, I should say. And obviously, therefore, we've guided towards a flat to marginal improved EBITDA Next year, because we don't expect that to continue. Thanks. And the total furlough that was Disclosed at the end terms at 3,300,000, is that the final number? The total furlough that we were eligible for was 6,800,000 So that's the amount that you're expecting to the account? Yes. It's not gone through as a benefit, let's call it that. It's not I mean, it's just it's cash that we have received, but we haven't put in the P and L again because we're repaying it. £6,800,000 Yes, yes. So you've not taken any of that benefit. So versus your previous guidance When you talked about margins being up by 1.5% to 2%, whatever it was, that would have assumed some benefit from furlough. Is that correct? And now you're saying You are no longer taking that benefit? No. What we're saying is that we what we said in the guidance was that we were going to We paid the $3,300,000 that we received in the first half that was disclosed in the half year. And then we said subject to no major disruption, We will evaluate what we'll do with furlough for the balance of the year. And given our underlying We decided that we shouldn't take it. So since the half year, there has been no follow-up benefit, no P and L? No. Yes. Okay. Thank you. And calling in the guidance, if we give that. Sorry, just Richard, just doing that. What is additional, obviously, is a contribution to the foundation, not sure, It was in there previously, €1,500,000 is booked in fiscal year 2021 and €1,500,000 is committed for fiscal year 2022. Thank you. Thank you, Richard. We have a further question from Kate Calvert of Investec. Your line is open, Kate. Please go ahead. Hi. I just got a couple. Just coming back to Richard's question on furlough. So in terms of the cash you've got to repay for furlough, Is it the 3.3 or the 6.8? The 6.8. 6.8. Just a couple of others. CapEx guidance for FY 'twenty two because obviously some of the CapEx has shifted into next year, and you're going to start the Goldsmiths Elevation as well. Yes. So obviously, as I mentioned, we came out at about $24,000,000 of CapEx. So we got $6,000,000 of carrying capital, We just follow our guidance for next year. So if you take that out, it's not that different from what we had guided for this year, a little bit of a step up. But obviously, we're not saying €40,000,000 to €45,000,000 of which €6,000,000 is a roll forward from this year. Okay. And in terms of the Goldsmiths new format you're going to start rolling out, how many do you think you might be able to do in the current year? 4. 4. Perfect. Thank you. Thanks so much. Thank you, Kate. We currently have no further questions. We currently have no further questions registered. So I will hand back to Brian. Thanks, Simona. And again, just thanks everybody for joining us. We're glad to have that year of such change and uncertainty behind us. We really believe that we've optimized the Challenging situation to cover the results that we I think this morning, I think our model was clearly Proven, proven to be successful and competitively advantaged, and we're carrying a positive momentum And to fiscal year 'twenty two on many fronts, I think we've enhanced our relationship with our brand partners. We've got Great support from our teams who have just been fantastic and more and more awareness with the Public out there, more and more business getting developed through referral, which is wonderful to see. So Again, so this year, feeling confident. We think market conditions overall are going to be positive as they currently are now UK and U. S. And we're very well positioned to take advantage of it. And I appreciate you all joining us and appreciate your support for For the investment in our business. So we look forward to seeing you at July 8. We'll have a further update on our final results, And we'll also then get a view of what the next few years could look like in terms of the strategic goals. So I look forward to talking to you then. Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. Have a great rest of your day. You may now disconnect your lines.