Brunello Cucinelli SpA

MIL:BC

Earnings Call Transcript 2019-Q1

[Operator]

[Interpreted] Good evening. Chorus Call operator speaking. Welcome to the Presentation of Results of the First Quarter 2019 of the Brunello Cucinelli Group. [Operator Instructions]

Speakers will be Brunello Cucinelli, Chairman and CEO; Moreno Ciarapica, CFO; and Pietro Arnaboldi, Head of Investor Relations. [Operator Instructions]

I'd like now to give the floor to Brunello Cucinelli. The floor is yours.

[Brunello Cucinelli, executive]

[Interpreted] Here we are. Good evening, ladies and gentlemen. It is always a pleasure to speak to you. It is good to have you online. So it is always, I was saying, a great pleasure for me to make these conference calls because -- truth be told, because somehow it is a way to speak to you, to engage with you. And we always draw a lot of inspiration from such calls. Of course, you must be always willing to listen.

Before we start, I would like to express a great wish to my esteemed Naruhito, the Japanese Emperor, who took power a few days ago. And as you know, it is the last empire of mankind. It's a fascinating thing. And for to define this new era, he chose the expression, it is the era of harmony and hope. I believe that this is a great wish that we should all benefit from, so that we can somehow rediscover that glimpse of hope and harmony, which it has somehow weaned and dwindled over the past times. And somehow, it burdens our soul and the malaise of our soul. So best wishes to our esteemed emperor.

So we all here. There is us. Luca Lisandroni is absent because he is in Moscow today; and tomorrow, he will be moving to the splendid St. Petersburg. So we would like to proceed as follows. I'd like to read out the numbers for the first quarter, then I'd like to provide you lots of visibility on 2019. And then I'd like to talk about the kids line, the kids collection, something we are very much charmed by. And also I'd like to express some comments on e-commerce, Russia and then last but not least, I'd like to talk to you about the Chinese market, which is a very important market from us -- for us from all points of view.

So results. Revenues -- net revenues EUR 160.4 million, plus 8.1% current exchange rate, plus 7% -- 7.1% at constant exchange rates, vis-à-vis EUR 188.3 million -- EUR 148.3 million in the first quarter '18. Then international markets, plus 9%; Italian market, plus 4.2%. We are always very pleased with how our market is doing. Then rest of Europe, 8.7% plus; North America, plus 9.2%; Greater China, 12.7%; and rest of the world, 6.4% plus, all plus. Then -- so there was growth in all distribution -- across all distribution channels. Retail 8.5%, mono-brand 6.4%, multi-brand wholesale 9.8%.

I have tried to comment the data as follows and also this coming years. We can't but be very, very satisfied with this start of the year for our company, which has continued on its linear, sound and balanced growth path across all channels and markets where we are present. Evidence of this are the excellent sell-out rates achieved by the spring/summer 2019 collection. Still inspired by an idea of consistent and balanced growth, we are now tackling the kids line new project with excitement, respect and moderation.

Considering the excellent order intake, and we had already mentioned this, for the full winter 2019 collection, we believe we will achieve a healthy growth target of 8% by striving to always work in serenity and harmony.

Let's now start from 2019. Well, first of all, everything is proceeding smoothly. Honestly speaking, we believe that we have quite a balanced climate here in spring, because very often we would talk about spring/summer, whereas this climate, this weather is very loving, so to speak, to the earth and to business. As you know, we have already collected orders for fall/winter, great results there. So everything is moving according to plan. So we are particularly pleased with how the year is going and also with what we envisage for the full year. We have a fair quality sales, so we expect fair profits from that and also a fair growth for the year to come.

Then over the last couple of roadshows that we did in the world, hopefully, we were able to very greatly convey our 10-year plan, that can be followed -- as we summed up as followed, 8% growth a year, which means doubling results in 10 years' time, may god help us. Fair profits, fair dividends. And we believe that could be stabilized around 50% payout, then fair investments in order to be always contemporary. And we were talking about this just today, about namely the need, especially online, the need for everything to be very contemporary. Then my role, the role of Luca and Riccardo. So once again, from April 2020 -- and by the way, a few days ago, there was the General Shareholders Meeting, we are particularly pleased with how it went. So during the -- this general -- sorry, in 2020, the new positions. I would like to still be Executive Chairman and Creative Director. So somehow some sort of caretaker, safeguard guardian of the brand. This is always something I've been fascinated by.

Luca and Riccardo, however, will be the 2 CEOs, Luca based in Milan because, as you know, the whole business takes place in Milan, and Riccardo in Solomeo, where we have our single production site for everything.

The important thing to mention is that over these months, we are managing the company as if we had already reached next year. We are somehow doing some sort of test. As you know, I come from the product. I'm in love. I'm so fond of the product. 80% of my time is devoted to products. And you know, that I think that the -- what really matters for each company is to have a modern product. I know that I can be boring sometimes. But if you ask me what my concern is, to keep my products modern.

Products. Well, they need fresh, open minds, minds that are contemporary, I would say, genius-like minds. So as usual, it is up to us to be the organizers, the coordinators of the genius that resides in each and every one of us.

Now a couple of words about kids line. Collections are nearly ready. Spring/summer will be presented next June and we are very, very satisfied with this project. Well, for girls, but especially for boys, I don't want to bore you with details. As you know, designing for boys is more difficult, because boys -- well, the age range is 4 to 12 years. If you -- it's pretty easy to have sporty clothing for boys. But if you want to dress them up, maybe for some official ceremony, then it -- that's when it gets tough. And unless -- well, you have to be very careful not to make them look like grownups. So -- but in the end, we believe that these collections are becoming some sort of mini me, reproduction of the grown-up collection. But the pictures that we showed to the best 25 multi-brand accounts that we have worldwide, well, the comments they gave us were very assuring.

Then e-commerce. We are very satisfied with what we have done so far, the grounds covered so far. So as you know, we have one single website and there is -- which is split into 2, the institutional website and the e-commerce platform. And then in a few days, in Russia and -- we will also come out in Russia and China because we want to be present in those markets online too. And then we will have a warehouse in Shanghai, in Moscow plus our DOS stores, so that we can deliver timely -- in a timely and fast manner. Of course, everything happens as if it was shipped from Solomeo, so daily packaging and management.

And now let's move onto a very important topic, China. Why do you say important, you might wonder. Well, it is an issue, a topic we are very fond of. Well, it really demands a lot of commitment from us and maybe we work more than we make revenues, but we really want to devote ourselves in a fully fledged manner to it. And I think that this commitment is important in order to safeguard our brand for the coming decades.

Last year, whilst taking about this project, we called it a celestial empire because we wanted to pay tribute to this millennium-old culture of this beautiful empire. Currently, all our esteemed Chinese, well, what they buy from us is 15%, 16% total of our products. 8% is direct sales and 7%, 8% is basically revenues coming from the tourists, the Chinese tourists around the world.

What about the growth of our brand in this market in order to protect the brand? Well, let's say that in 3 years' time, this 15%, 16% should maybe reach 20%, we would be happy with that, which means that we should have a proportional growth on our side and also a growth of the tourists.

Why would we like to achieve this 20%? Well, because we would like this growth to be well balanced between America, Europe, rest of the world and China growth as a business. I do never want one single market to become too important for a company. Because if this was the case, it could definitely affect the taste when you design the collection. If you are too strong in a specific region, the risk you run is that your collection might be somehow impacted by the taste in that specific market. So if you ask me, in 5, 10 years' time, what would you like to happen? I would like maybe to have 27%, 28% of our business in China between local and tourists, maybe 27%, 28% America, Europe and then rest of the world.

You should bear in mind that we are present in 64 countries and, hopefully, we will reach 100 countries. So some more color on China. I really want to go into detail. We have 2 channels, the multi-brands accounting for 25% of revenues and then the monobrand channel, 75%. As you know, the Chinese are a very well-connected people, so it is always difficult to safeguard the brand. Very often it is the very same customers who demand from us that we stay exclusive. For the years to come, it will be a very important market for everybody for the next century. There's no doubt about this. You should consider that over the last year, we opened just one store in the China world, in Beijing. So this is our strategy, very few openings, but very well-groomed and looked-after store that must be modern and contemporary.

Another important thing in the Chinese structure headquartered in Shanghai that looks after all the stores in China, we have 99% of Chinese employees and we like this very much. Why is that? Because it is easier to understand their culture. They usually come to us -- they come to us very often to better understand us, and we also -- we can better understand them. So there can be a smooth lift, -- kind of smooth, sorry, integration. I always ask them all to be open to be able to listen to spread our way of life. And we have decided to travel more often to these faraway lands more than in other countries, so that we can get to know the culture better because it's a very important market.

I'm very happy that in the Easter holidays, my 2 daughters and family, they decided to travel to China and Mongolia so that they could get to know our Cashmere producers. So they were all very fascinated by their trip to Mongolia. I'm very happy of this continuous, ongoing engagement with these cultures. Because what we want to do is to manage the development in this wide market by protecting the identity of our brand. And I say it once again. This is the true bet for the next -- for the coming 10 years.

And now to conclude, a couple of minutes on the following. Last night, we had some guests at the village. There were 6 young Buddhist monks. They were all very loving, coming from all nations, the U.S., Korea, Switzerland, Italy, very fascinating. And the most fascinating time of all was when, before dinner, one of them made some great remarks on life before we started our meal. So first of all, we ate in completely still, in silence and it's always great to eat in silence, especially if you're not used to it. And what did he say before our meal, "Let's eat with moderation. We must take care that we do not exploit the land. We have to respect the creation."

Truth be told, I weigh 700 grams less. So as my Benedictine monks friends -- my friends say, they say if you eat little, that's the only way you have actually to lose weight. It was a great evening. I had met them with Marc Benioff at Salesforce in San Francisco. We had spoken with them at length. They usually go to Salesforce to talk about mankind and humanity. And we -- we'd like to invite them to us too. We talked about the factory, we discussed about loads of things, the places where we work, spirituality. It was a very fascinating evening for some of our friends from the village who were there and also for ourselves. I can seriously say that we came out of that evening more enriched because of their monastic culture. I like this idea of being open to the world.

So to conclude, what we would like is to convey this idea or this atmosphere where we work, because we are fully aware that we need to innovate on a daily basis. But if we work with concentration and respect and dignity and a fair amount of hours, this is definitely something that can be achieved and because we want to work of course and have plans for 10 years, obviously, but also for 100 years or more for our mankind. Thank you very much immensely. Let’s open the floor for questions. Thank you.

[Operator]

[Interpreted] [Operator Instructions] The first question is by Flavio Cereda.

[Flavio Cereda-Parini, analyst]

[Interpreted] I'd like a bit more colors on the e-commerce. You spoke about China and Russia. So your direct presence, how is it structured? And what kind of resources and/or the outlook in these tough markets?

[Brunello Cucinelli, executive]

[Interpreted] Yes. Very interesting question because we have been working on this for 2 years. In our direct e-commerce here in Solomeo, the first market that connects to us is Russia, but we can't ship from here because of customs reasons. So in 2 weeks' time, we will be operating directly from Russia because we will have a warehouse in Moscow, and we will be collecting the items from our stores in Moscow. And we will provide them, however, the packaging service that will be precisely same as the Solomeo one. The same also goes for China, with the headquarters in Shanghai, with our warehouse and our 16 stores where we can draw the goods from. So the idea is to provide a service is, do you want to shorten your sleeves, you can go to Beijing or Shanghai. Precisely, the same thing -- precisely what happens in our e-commerce here, and we are particularly pleased with the results there. Because you link up with us, it's been 2 years now. And no single customer ever refused an order because [ maybe ] it took a bit longer to make a specific garment. Because if you tell -- I think it is a great service that we do because we also provide details of our -- of the manufacturing process. And as for the future, Flavio, I'm not sure. The only thing I know is that there will be growth there, but we have tried to set up structures, both here in the Solomeo in Shanghai and Moscow, and even if -- in 3 years' time, there was a 300% increase, we just needed to just hire a few resources to answer the phone or to make the packaging. So we are open to a new world in which we believe. But as usual, the physical stores are always extremely fascinating to us. Last thing I'd like to say, when you buy a no-logo product through the online channel, maybe an expensive one, maybe you would like this to be known to others. You would like others to know that you spent $10,000. And of course, if this happens on the physical world, the physical store, maybe the shop assistant will tell everybody about your purchase. This was the case 30 years ago when my friend flew to Paris especially to shop at Chanel, not in Italy, but to Paris, because it was more chic to have a shopper bag in Paris.

[Flavio Cereda-Parini, analyst]

[Interpreted] Yes, very clear. So is -- the 16 stores you mentioned are in Mainland, China?

[Brunello Cucinelli, executive]

[Interpreted] Yes, that's right. Mainland, China. And that's where we can draw the goods from, so that the shipments and customs, it's -- all these issues are solved in Russia too. And also the technological side, the use of the payment forms, the social media that enable them to access the website. It is very -- everything is much easier if you have the technology in place at a single -- at the region.

[Operator]

[Interpreted] Next question from Paola Carboni, Equita SIM.

[Paola Carboni, analyst]

[Interpreted] Just a quick question for the project of Sartoria, the tailoring project in Solomeo, where you say there are very positive feedback.

[Brunello Cucinelli, executive]

[Interpreted] Yes. Very, very, very positive.

[Paola Carboni, analyst]

[Interpreted] Maybe if we could share with us what you meant?

[Brunello Cucinelli, executive]

[Interpreted] Well, Paola, thank you for your question. It's a great question because that's what I said very often. I think that men's suits, people believe that this is a tough market, but what it is really in difficulty is the way in which you style it, because everybody needs to wear a contemporary suit. Because on a Saturday, you wear casual clothes and then on Monday, or you're wearing a suit does not help you to look younger. So we have always -- we have picked younger tailors. And these tailors not only sell a tailor-made suit, but they also give you suggestions on what to buy. And maybe they also tell you how long a trouser should be. They might remember that this last year, they -- you bought something, this year something else is in fashion. And then we have the made-to-measure not just for the basic suits, but also for sporty suits that may be worn by an actor, a celebrity because that's where we come from. That's our heritage. So -- and we do not even call it made-to-measure suits. We call it Solomeo-based tailoring Sartoria, because this idea, custom made or made to measure is not very contemporary. A 30-year-old gentleman would not buy a made-to-measure suit. They might maybe like a tip that you might -- they might want you to tell them to buy shetland or corduroy. It means innovating this ancient outdated idea of

the made-to-measure suit.

[Paola Carboni, analyst]

[Interpreted] Yes. How many stores are involved, however, in this project?

[Brunello Cucinelli, executive]

[Interpreted] Well, about 50 stores. What we like about it is that we have many young customers asking for this made-to-measure. And the reason why they do that is not because of size, but because they believe it is chic. That's why I said that we are very, very, very happy because we believe there's some -- there's innovation there. The suits displayed in the stores are shown in a different way. When you step into the store, you should not be met by a classic-looking suit because that's the usual issue. And then if you buy a suit for $5,000, well, it is a good purchase because otherwise, you would have to sell 8 shirts to achieve the same amount. But the idea of a suit is very important for the years to come. In -- when I was in Russia and America, what I took home is the need to have fresh-looking suits.

[Paola Carboni, analyst]

[Interpreted] And one last thing. Do you think that this project is attracting new customers or are...

[Brunello Cucinelli, executive]

[Interpreted] Well, what I like is the fact that we have young customers because our brand is liked by many young people. Of course, it is expensive. So you can't always buy such an expensive suit at that age, but we have a market and we are very satisfied.

[Melanie Flouquet, analyst]

[Interpreted] I have 2 questions. Maybe I'll ask them in English.

[Audio Gap]

[Brunello Cucinelli, executive]

[Interpreted] Yes, in 2, 3 years' time which means part is us and part is the tourists around the world because there will be an increasing number of wealthy Chinese traveling the world.

[Melanie Flouquet, analyst]

[Interpreted] Yes. And I also wanted to better understand. What is the underlying idea? Is the idea that Brunello Cucinelli has a different amount than the other competitors, which means that it cannot reach 35% or doesn't want to achieve 35%? Or maybe it has to do with the no-logo exclusivity? Why do you have this specific percentage? Or maybe you think that the rest of the luxury world had posted too hard?

[Brunello Cucinelli, executive]

[Interpreted]. Well, Melanie, I don't want to pass any judgments. The ones who judge others have done in this market. But what I mean is that I would like to stay exclusive as far as we can. Obviously, we could grow by 50% too if we wanted to. Instead of having 16 stores, you just open 30 stores. I just have the resource to do that. But as we were saying at the Board meeting, one of our Board members is a lady who is very refined, a former Hermès Board member, a very refined lady, Chinese lady. And she told us that there's a great evolution in China. There is a lot of demand for exclusivity. And if you ask me, who would you like to be in 10 years' time, what I would like is the following: 30% of our revenues in the North America, 30% in China, then Europe. So well balanced across all regions. I'm always very scared of having revenues focused in one single region, but this is just my idea. I went to China the first time the day before the Tiananmen events. I'm very familiar with this market. We would like to try to strive to be and stay exclusive. Melanie, this is the reason, because garments are pretty expensive. So we want to try and govern and manage the exclusivity of the brand in this market, which will definitely be very important for all of us in the next century. But I don't want to pass any judgment on other competitors.

[Melanie Flouquet, analyst]

[Interpreted] Well, it was not a question of judging, but maybe the brand has something special about it.

[Brunello Cucinelli, executive]

[Interpreted] Well, Melanie, what I find is that the Chinese consumers and the Chinese people, in general, are always online. They're very technological. I -- they use many devices. They know everything. And I have the feeling that everything becomes commoditized very easily. And since the dream is always that of having the Cucinelli brand still alive in the future, what we would like to do is to manage growth. This is the strategy. The fact of growing 8% -- by 8% in the next 10 years, it means that in 10 years’ time, we might double. If we grew by 8% between 2028 and 2038, it means that in 2038, we will have just over $2 billion revenues in the future. I think that the world grows faster than our company. So we try and stay alive for a few decades more.

[Melanie Flouquet, analyst]

The other question is about the kids.

[Brunello Cucinelli, executive]

Yes, we started in Russia. No, so it's not about kids, it's the development of the market in general. And we started in Russia 20 years ago. And we developed a great business with Russia -- the Russian multi-brands over the years. And some people said they would never grow, whereas nowadays, we have 130 great, magnificent multi-brand accounts with fantastic visual merchandisers. So -- the same -- now we have 30 multi-brand accounts in China. Therefore, I believe that the same applies to China too as to Russia. I think that will grow too. And by nature, my esteemed Chinese people, well, they are considered tradespeople. So this is what I envisage for them too; 3 years ago, we had 3 multi-brands. Now we have 30 multi-brands and in 10 years’ time, I believe that there will be 200 multi-brands. And why is that? Because multi-brands have a great value. I met -- I came across a very friendly, wealthy Chinese man in Milan. And he said to me this can help us. I asked him, why do you want to meet with me? And he said, I'd like to understand from you how we can safeguard something we do not have a culture for. We're talking about a very wealthy person. So -- and I said to him, you are so rich, so maybe you could build the biggest private library in the world. They have a millennia-old culture behind their back and they're becoming increasingly refined. Of course, our garments are very expensive. They are all handmade, everything about it. And what we want is to convince our young customers to shop in our stores. I have to say that I never want to be too strong in one single individual market. I'd also like my brand to stay Italian, of course. We consider Europe and America as domestic markets. And in China, we are doing the same even it is not a domestic market. But to do that, you need to really have the courage to understand their culture in the widest sense of the term. Thank you.

Thank you. If there are no further questions, I'd like to thank you from the bottom of my heart. Whatever you need, we are here. We are working on our collections, but we will be very happy to answer any of your questions because it is always very interesting to have an exchange with you. It's always enriching as an experience. Thank you.