OVS SpA

MIL:OVS

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Quarter 2018 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Stefano Beraldo, CEO of OVS. Please go ahead, sir.

[Stefano Beraldo, executive]

Hello. Good afternoon to everybody. The first Q results of OVS is basically confirming our expectation after the conference call we have mid of April. It has been a difficult quarter for the market. The general environment has been difficult. And in this tough condition, OVS has continued to consolidate the market.

Sales has been tough all across Europe because of particularly unfavorable weather condition, which impacted Italy as much; and with the average temperature in the months of February and March 30%, 35% lower compared to the seasonal average; and frequent rainfall.

In spite of this, sales grew by 2%, excluding the sell-in to Sempione Fashion. And the network expanded by 54 store, of which 26 abroad, mainly franchising as usual.

In Italy, market share increased from 7.3% -- from 7.5% to 7.9% versus last year, confirming that OVS is continuing successfully consolidating the Italian market through both OVS and UPIM.

Adjusted EBITDA achieved EUR 30 million, EUR 800,000 higher than first Q 2017, with EBITDA margin slightly increasing. And this has been driven by gross margin, thanks to better intake, as expected, and tight cost control.

The adjusted PBT was EUR 13 million, in line with the previous year. The result has been impacted by the second part of the provision and depreciation which has been taken related to asset linked to the commercial agreement with Sempione. The total write-down of EUR 53 million had a similar impact at cash flow level. And based on the available information, all these depreciation and write-off both in the first quarter, combined with the ones that have been taken in the full year 2017, in our opinion, represent the last portion of asset that might not be recovered.

If we move to Page 3, what I can say is that in spite of the weather, as we said, OVS has been able in a difficult quarter, thanks to the flexibility, the cost-cutting measure put in place since the first months of the year, once we realized that the season was particularly adverse in term of weather; and thanks, as expected, to a material intake increase generated by the better buying condition; thanks to the increased buying capacity, which OVS has achieved during the last couple of seasons. EBITDA margin grew, and the intake improvement was the main driver of this EBITDA margin increase, with an increase at the gross margin level of about I think 200 basis points, which you don't see in this chart. Then, as I said, we started with a tight cost control activity, identifying several items which are generating already in the first quarter the early signals of good results. And we are presently in line with our full year forecast of cost cutting, which we already announced to you during the last conference.

And basically, the combination of higher intake, cost control both at the group level and at store level and also the expected dollar contribution because we hedged a better exchange rate compared to the 2017, all these assets combined are compensating the sales, which has been positive if we look at the network as a total, but has been slightly negative if you look at the like-for-like.

The difference between the reported EBITDA of EUR 54 million and -- the adjusted of EUR 54 million and the reported is explained by EUR 30 million of one-off bad debt provision for trade receivable related to Sempione; and EUR 20 million one-off inventory write-off for the excess of inventory and for the inventory under consignment, both generated by the relation with Sempione Fashion; and lastly, EUR 3 million of accruals for other risk provision related to other possible cost related to this relationship.

Moving to Page 4. EBITDA grew both for OVS and UPIM, as you can see. I think that's worthwhile mentioning that UPIM is quarter-after-quarter, year-after-year improving EBITDA margin and now is close on a yearly basis -- on a quarterly basis seems to be even higher compared to OVS. But this depends from the different phasing, different merchandising mix. But if we look at the full year performance, our expectation is for UPIM to became very close to OVS in term of profitability, as we expected during the last couple of years.

Then at Page 5. I walk you through the working capital. It goes without saying that the working capital has been impacted negatively by the Sempione story receivable -- trade receivable and inventory. Part of the inventory which has been compensated with receivable, part of the inventory which has been returned, part of the inventory which has not been even invoiced to Sempione, all together, are generating this increase in working capital.

The only thing I would like to point out is that if you look at the right side of this chart, you can appreciate that compared to the year -- the former year, when during the first quarter, which normally is a quarter where the business absorbs cash, the cash absorption, once excluded the extraordinary impact due to Sempione, has been lower by EUR 24 million compared to last year.

Basically, compared to the first Q, trade receivable increased by EUR 4 million, driven by the franchisee store. And the DSO improved. The amount of inventory related to OVS business and after the write-off related to Sempione Group -- to the Sempione Fashion Group merchandising, which is EUR 20 million, grew in line with the growth of the [ square meters ], basically, reflecting the normal seasonality of the business. And this is in spite of a lower-than-expected turnover because, as we said in the first Q, overall turnover has been lower compared to our original expectation.

And this is possible because of a better planning and a more reactive sourcing model as much as -- as more -- as we enter more and more into a push-and-pull methodology and in a more-and-more disciplined buying. Even the trade payable doesn't require any particular comment, in my opinion.

CapEx at Page 6, EUR 3 million more than last year, mostly because of CapEx-related -- to an increase in CapEx related to the digital transformation, which is undergoing. And the majority of the CapEx is still absorbed by the new openings. And the new openings are performing well.

In Page 7, you can see some ratio that I think doesn't need a comment from me.

In Page 8, it's another way to present the typical first quarter seasonality, where in the first Q 2016, the company absorbed EUR 63 million; in the first Q of '17, EUR 53 million; and in the first Q of year 2018, which is the present quarter, the absorption is in line with last year once not included the effect of Sempione Fashion.

And finally, an outlook on the next period. And first of all, I would like to say that the market is still challenging within May, which has been twofold. There has been a good part and a bad part, always depending from -- very much from weather. But in principle, the performance is similar to the one that has been generated in the first quarter.

Some aspect related our priorities, which are very important, in order to be able to remain as much as possible untouched or only marginally touched by whatever weather and top line we might have.

We confirm that the refurbishments, which we announced to be done during the summer period, will be done. We have identified 32 stores to be refurbished. They will be financed, as we discussed, by a vendor financing. So basically, what we expect from these 32 store is about EUR 4.5 million EBITDA increase run rate for a total cash absorbed in 3 years of about EUR 17 million, EUR 18 million -- no, sorry, EUR 16 million. So basically, 80% of the cash that will be absorbed in 3 years will be sales generated by the yearly EBITDA.

And there is no upfront cash out because this amount will be financed by vendors, as we made years ago with [ the revamping ]. And the good reason of confirming this refurbishment plan is that the 10 stores, which had been refurbished during the first quarter, on average, generated a 12% like-for-like, while the remaining network was negative, as I mentioned.

Then we plan -- thanks to this dashboard of cost cutting, we plan EUR 7 million, EUR 8 million of savings. And already in the first Q, we have reported part of this amount, which has been already achieved.

Then, we continue assuming to be able to have a gross margin higher than last year, and this is also evident in the first quarter. And that's because of synergies, as we said, and U.S. dollar.

And finally, we are continuing growing out of Italy with our organic growth, which is based on a franchise model, which means that even if we have not been successful in what has been the minority acquisition of Charles Vögele, nevertheless, we receive continuous evidence that in other markets where we are present, we are performing well. And we continue opening new space. This year, in 2018, we plan to open another 40%, 50% of new space, 80% of which in markets where we are already present and where we are, on average, performing reported like-for-like.

We finally may update about the commercial relationship with Sempione. During the last months, several extraordinary things happened, and the most important has been that the Swiss company entered into a moratorium procedure.

And starting from April, we decided to privilege, protecting our receivable and our asset in light of the difficult situation that Sempione was facing. In spite of a continuing [indiscernible] support to the company, modifying our wholesale model into a consignment model, which enabled us, by the way, to start recovering merchandising and also cash, the Swiss company couldn't reverse the negative trend and has obtained the admission to this provisional composition moratorium procedure, which is similar to, for the one of you which are Italian, to [indiscernible]. And even if the Austrian, Slovenian and Hungarian companies have been recording much better results compared to Switzerland, it is not possible to predict if their activities will continue or will be affected by the procedure of the parent company.

The German company has been sold to a third party. In any case, because of the aforementioned aspect, we decided to take all the provisions that we consider as appropriate in order to protect our company from further losses.

And we believe that based on what we know as of today, there will not be any further losses generated by this acquisition. And we are still convinced that the company can continue targeting international growth; and that the consolidation of Italy remains the first priority; and that international growth will be pursued as in the past through an independent business unit by means of franchising growth, which will continue remaining the pillar of this strategy.

So thanks for your time, and I'm open to your questions.

[Operator]

[Operator Instructions] The first question is from [ Eric Carson ] of [ Investor Equity Partners ].

[Unknown Analyst]

How has the weather been in June so far?

[Stefano Beraldo, executive]

Weather in June is okay. Weather is okay.

[Unknown Analyst]

Would you say it's better or worse than, let's say, May, on average?

[Stefano Beraldo, executive]

Better than May.

[Operator]

Your next question is from Andrea Bonfa of Banca Akros.

[Andrea Bonfa, analyst]

My question are related to the like-for-like performance in the first quarter. It would be useful to know a more precise number what was the performance of like-for-like in order to assess some actual, your, let's say, cost saving or growth initiative you are kicking in, in the first quarter. Because, I mean, according to my calculation, basically, you mentioned in the previous conference call something like between EUR 40 million to EUR 55 million of potential either cost saving or growth initiative and -- to which we need to subtract the like-for-like component and other negative element like promotionality or price pressure. So if you could expand on that, on the like-for-like and the magnitude of like-for-like, would be definitely useful. And in particular, again, looking at your whole items of EBITDA expansion expected in 2018 and looking at the performance, which, of course, is a minor quarter of the year, you are still to make up a lot of, let's say, EBITDA growth. Are you confident on vis-à-vis what is the consensus, which is, by the way, by far, your, let's say, EBITDA growth breakdown? I mean, are you happy with the consensus forecast for this year, I mean, assuming like-for-like is, let's say, stable going the rest of the year? And again, as far as the working capital is concerned, I mean, you were mentioning that the working capital is following seasonal -- let's say, normal seasonal patterns. Of course, if we look at the working capital vis-à-vis the last 12-month phase, there is an increase, according to my calculation, of 1.5 percentage point. So are we still -- I mean, how much [indiscernible] is impacting on this figure vis-à-vis also on the previous old stock that you are supposedly dismantling from the poorer 2016 season? So basically, I'm not sure [ how much ] stock you need to, let's say, to get rid of before going back to pre level.

[Stefano Beraldo, executive]

Well, on the like-for-like, you know that when we are at mid of the season, we never comment like-for-like. You may determine a deemed like-for-like by considering that we are not changing so much our development plan in term of the opening. So you can formulate your own conclusion, but I prefer not to mention the like-for-like even because this figure are unaudited and I prefer to continue giving to the market information on the like-for-like based on the end of the season, as we decided to do since we announced our IPO. You asked me if I'm comfortable with the consensus and if I believe that the EBITDA might achieve the amount that the consensus is assuming. I say that, as you correctly said, this is the weaker quarter of the year or in term of our sales. Nevertheless, in this quarter, I think we can see 2 good aspect. One is the gross margin improvement, which is not driven by markdown. This is driven by intake, and the reason for the intake has been already explained. The intake increase is solid. It's not subject to last for 1 quarter. It's subject to last for the full year. So one element of this first quarter, I guess, will continue to remain valid for the rest of the year. The second element for the capacity of this quarter to be very resilient compared to the external condition is that the cost cutting plan has been successfully put in place and is generating exactly what we expected to generate. Then all in all, I don't feel at risk regarding the component of gross margin and cost, which depend from us. Then as usual, the market is what it is. But in this moment, I have no reason why to change my opinion about what you guys, when you discuss with our IR people, are receiving in term of an opinion about the full year EBITDA. So there's a risk. Basically, today, I still feel comfortable, even if I'm nervous, because my competitors are suffering and the market is still challenging, I will say. The final question on working capital, maybe, Nicola, you want to elaborate because you [ have better take ] than me maybe.

[Nicola Perin, executive]

Well, on -- if we consider the last 12 months and the count of the asset as net working capital -- trade net working capital for about 1% of net sales, this is correct. And I confirm the fact that the main reason of this is the fact that we are still digest the [indiscernible] inventory over EUR 50 million that we suffer in -- end of 2017. Our plan is to improve in this area, the inventory location. Unfortunately, due to the fact that we dedicate times to manage this [ international ] activity and the exit of this, we are -- maybe we didn't achieve the results in this time. But still, we are working very hard. And as you can appreciate, in the first quarter, the inventory of the ordinary business of OVS, I mean, without the Sempione Fashion, is improving. The aging of this inventory is improving, and we have an important plan also taking on board some external consultant with a strong experience with other player like us in order to achieve an important improvement in this area. In any case, our trade working capital, let's say, is still below compared to all the other peers. Of course, we are basically from a longer and stable [ BPO ]. But again, it's an area where we are working for improve ourselves.

[Stefano Beraldo, executive]

The only comment I may add to what Nicola said is that we are fully aware that the industry is suffering because of an excess of inventory. We are not alone, but it doesn't mean that we are happy. And because our stock turn can be improved, we enter it again. After what Nicola said, there may be a period where maybe some default you're seeing has been needed because of the Swiss company story. In the last 30 days, we put in place a lot of actions all related to stock management. And from the increase in the post distribution that in the second half of the year, we'll achieve 15% of the inventory, while in the first quarter was only 5% of the inventory to many others. So I'm sure that there will be an improvement in the next 12 months. And all this improvement will transform in cash generation.

[Andrea Bonfa, analyst]

If I may, I mean, looking what happened to the share price [ in terms of float ]. In the future, would you be able to commit in a sort of business plan with an EBITDA target or net financial position target? Or it's not -- you're not taking it into consideration?

[Stefano Beraldo, executive]

We think very often if we can commit to this, but I'm not sure we will we do the right thing, because this market, differently from utilities or energy or other industries, is very much driven from volatility, which depends from weather, from customer habits. And the top line is not entirely in our hands. So to commit to a long-term business plan formally, with a consequence to be forced to have a kind of a fences within reach to move is something I'm not sure it would be advisable. We are thinking about it, but we are not taking any decision.

[Operator]

[Operator Instructions] Mr. Beraldo, there are no more questions registered at this time.

[Stefano Beraldo, executive]

Okay, thank you very much. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephone.