OVS SpA

MIL:OVS

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Quarter 2019 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]

Good afternoon to everyone, joining this conference. We'll start giving you a few comments about the market that was still tough in the period. In spite of it, our market share increased continuously by another 15 basis points in April and net sales remained stable compared to the first quarter of last year. Modest expansion of the network in this first quarter, more -- some more stores will be opened in the second quarter. And EBITDA basically in line with our expectations, lower by EUR 5 million compared to the same quarter last year.

As a result of the higher markdown, which are somehow the tail of the heavy markdown period started in August -- July, mostly August 2018 and continued during the month of, especially January and also February. In order to come back to normal in term of stock level and you will see that we are very well on track on this trajectory.

Despite this nonrecurrent markdown and the negative weather in April, the effectiveness of the cost control activities already put in place starting from mid of last year and continued during this year, and I will say, even increased during this year, are largely offsetting the lower gross margins.

Continued improvement in the cash flow, as expected. We gave you guidance about our priority of managing cash more than EBITDA in this period, and we have been, I guess, successful in improving the cash flow of the first quarter by EUR 36 million compared to the same quarter of last year.

And as a result of it, the gap in the indebtedness compared to the last year periods is continuing to decrease from the peak of EUR 105 million in October 2018 to the current EUR 22 million.

In Page 3 we walk you through the main KPIs. Sales remains stable, as I said, in spite of a very tough month of April when the market reported by Sita Nielsen, was down by almost 10% because of weather. Basically it has been very cold, windy and rainy.

Adjusted EBITDA, as we said, achieved EUR 25 million, EUR 5 million less and let me give you, given only by words, a breakdown in term of a bridge analysis from the EUR 30 million of EBITDA of the first Q last year and the EUR 25 million of EBITDA this quarter.

The bridge analysis is the following: EUR 4.7 million is the negative impact on EBITDA of lower sales. EUR 5 million is the impact on EBITDA of nonrecurrent markdown. EUR 4 million -- EUR 4.1 million is the positive effect on EBITDA of SG&A savings and EUR 0.6 million is the effect of other savings or revenues. So the final effect is from EUR 30.1 million to EUR 25.1 million EBITDA in the quarter, as I said, and I repeat again, EUR 4.7 million negative sales impact; EUR 5 million negative effect of markdown; EUR 4.1 million positive SG&A and EUR 0.6 million other.

In term of cash generation, it's worth pointing out that the cash flow of the last 2 quarters has been EUR 83.6 million higher compared to the same period of last year. And EUR 36 million has been generated in the present first quarter in term of improvement compared to the same quarter of last year.

Only one comment regarding the IFRS 16 accounting principle. This is the first time our company adopt the -- as many other company I guess, the new accounting principle, which is representing, in a way, which we consider not clearly representative of the real situation, the overall indebtedness.

According to this accounting principle, aiming at recognizing the rights of use our leased asset, basically the aspect that on the vast majority, about 90% of our rent, we have early termination clause and which enable us to leave the lease without paying any penalty. This aspect is not considered. So basically, the amount of deemed indebtedness, which according to this principle, is equivalent to EUR 896 million, basically, is only the personal liability for an amount of EUR 116 million, which represents the amount of the rent due before the date of the break-up option.

In other words, we underline that more than EUR 700 million out of this EUR 800 million do not represent any form of liability of the company.

I will move to Page 5, probably because -- so Page 5, the consolidated trade working capital. Basically, to say that inventory, you can see from the right box, the right graphic on the right side of the page, inventory peak of October '18, that was mostly due, as explained by our decision to stop delivering to a Swiss customer, has been drastically reduced during the second part of the last year and during the first Q of this year. Obviously, it took taking some extraordinary markdown to get rid of this, but the cash flow generated has been material and also in term of quality of the mix, today, the level of stock, which, in spite of the increased network is more or less similar to last year, is much better compared to 1 year ago.

Today, about 80% of the stock is new goods while in the same moment 1 year ago -- in the '18 October, sorry, the ratio was 70% new and 30% old.

So this mean better quality and likely a better performance in the next coming months because of the quality of the stock.

Finally, one comment on trade payables. They are decreasing not because the TPO are decreasing, but because of the lower intake. I think the decision to buy less coupled with the higher elasticity and flexibility that we are able to achieve and that we will continue working in order to improve in the next coming quarters, has been extremely important to reduce the risk in spite of a difficult market condition.

Our intake has been lower compared to last year about 10%. And thanks to this, we reduced the amount of payables, which is also looking forward, an important element to assume that in the next coming months, the cash out will be lower compared to last year.

Page 6, CapEx. CapEx has reduced compared to last year in spite of continuing, dedicating attention to the network, and as a matter of fact, we refurbished a material amount of store, 20 store have been refurbished at a much lower CapEx per square meter, thanks to an innovative solution identified by our store design department. And the result of this light refurbishment is, in any case, good in line with our expectations with on average plus 6% top line growth of the refurbished store compared to the store not refurbished in the adjacent areas.

Let's move to net debt and leverage where the ratio EBITDA on net debt and the leverage of 3.2 if we look on the -- how to say, not on the monthly, but on the fixed amount of debt and -- tells us that 3.2 is composed by an EBITDA of EUR 139 million, which is MtM EBITDA, which includes EUR 30 million of nonrecurring markdown experienced in the second half of 2018. Basically, in this ratio, this time, we are including the worst moment of EBITDA once in the second half EBITDA has been impacted by EUR 30 million of nonrecurring markdown and the net debt is referring to a peak of the season.

Normally in our industry, in our company, April is the worst period, sometimes together with October -- September, October, but this year given the cash flow profile from now on net debt will go down with -- will go down only until the end of the year. Also thanks to the lower purchase that we made as said and as a matter of fact, this past half given also the results of May and June, which is already almost completed in term of calendar, our cash flow should allow the company to reach the same level of indebtedness of 1 year ago by the end of the second Q. So with another round, call it, of cash generation of about EUR 20 million.

Page 8. Some further comment on the cash flow statement. As you can see from this chart, the change in net working capital has been positive compared to last year -- to the same quarter of last year with the reduction of EUR 28 million. Lower CapEx as expected by about EUR 9 million and the result of all the components of the working capital movement generates EUR 5 million cash absorbed in the 2 quarters -- in the last 2 quarters, once in the same 2 quarters of 1 year ago, the absorption has been EUR 88 million. So the improvement has been EUR 83 million compared to the same period of last year.

And finally, in Page 9, an outlook of our company and our business. There has been a good start of 2018 (sic) [ 2019 ] in February. Weather was normal and markdown higher than normal, generated higher turnover. Then March has been, call it, neutral and April has been very negative from a weather perspective. May has been negative as well, as you -- I'm sure, you have noticed with rain, cold weather and floods somewhere, which impacted sales obviously.

The reference market in the 2 months, according to Sita Nielsen, declined by 9% in April and by 11% in May, respectively. Then June. After the first 2 days of June, everything changed drastically. Weather came to normal and the typical elasticity of the demand, particularly in kids, because our company is more sensible to the basic needs than the fashion challenges, there is -- the reaction has been impressive and the sales increase has been and is being really material in the last 3 weeks and we expect that still it will continue up to the end of the month.

Basically, according to this, even in presence of the very weak May, we believe that the EBITDA generation in the second quarter will be able to meet our target for the first half, thanks to the very positive rebound of the month of June.

When also thanks to this very good performance and the lack or, call it, the reduced dimension of our stock, particularly in summer goods, the company doesn't need to proceed with the same markdown the last year. So we will have one familiar trend less compared to last year. And we are deciding in these days not to make any presale compared with to what we did last year.

Another comment that I think it's worth to be made is that the strategy of trying also to find the solution to be less impacted by the weather volatility, one of this being represented by the B2B activity that we are starting -- generating with important hypermarket change in our country is working.

And as a matter of fact, a few days ago, we signed another agreement with a further big Italian group, by the way, the biggest, and we will enter in other 5 shop-in-shop, 3 will be Finiper, [ Gaina ] and 2 will be in Carrefour.

We believe that this stream of revenues testifies that capacity of our company to be very solid in the merchandising, in the capacity to structure and develop a good merchandising with the right sourcing, with the right flexibility. And the success that we are experiencing in the first about 20 -- today, there are 27 shop-in-shop in hypermarkets, is a good indication that this strategy can be implemented and I will put my -- all my effort, personal effort and the team will put its all the effort in order to largely scale up this opportunity.

Maybe one comment about digital. The company is involved in a very heavy number of actions regarding improvement in the digital experience. Only, as an example, a couple of months ago, we decided to give inputs to the recently developed OVS ID project and in 2 months, we have either converted or achieved new customers through the digital, moving from plastic -- or from not being customer and we are new 810,000 digital customers, only half of them being former registered customers. This represents 30% of our total loyal base customer, they buy more, they buy more often, they buy higher ticket. And starting from the second half of 2019 a new loyalty program will allow the asset to increase the capacity to profile its customer.

And finally, just as another example, we announced that the first kind of personal digital shopper will be started in the second half of this year as well. So basically, there's a lot in the field of digital improvements.

Last, after the shareholder meeting has been made, the process of refinancing started again in line with the time schedule. We had, in fact, meeting last week and the meeting outcome was good, also thanks to the support of the numbers. The main exceptional factors that negatively impacted by -- impacted the year [ '14 ] has been understood. Our feedbacks has been very positive from the banks, the cash generated has been largely appreciated and we see that all the banks involved in our financing are very supportive.

So that's it for my side, and I'm happy to receive your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Fabio Fazzari with Equita.

[Fabio Fazzari, analyst]

I know before you said that you are confident to achieve the target that you had in mind for the EBITDA at the end of the first half. If you can give us an indication of when we have to expect -- where we have to expect the EBITDA at the end of the first half? And with the visibility that you have today if you can give sort of guidance or some indication for the full year? The second question is related to the debt refinancing. I was wondering if you have an idea speaking with the banks of where we have to assume the cost of debt could be next year?

[Stefano Beraldo, executive]

On the first question, I prefer not to give you too much, not to say much more than I said before. Not easy to give guidance at this moment of the year. Weather and not only weather, still are elements there, we are not taking orders from our customers. So we are basically basing our sales assumption on the real behavior of the consumers. I can say that all in all, we have a better mix of inventory compared to one year ago.

We have, for sure, lower markdown compared to 1 year ago and this is because last year markdown has been importantly impacted by one-off markdown that we don't need to do anymore given the inventory situation. So I'm comfortable about being able to, at this point in time in the year, in spite of the tough May, but also thanks to the good performance in June and the cost-cutting activities and the better margin, I'm confident that I will be able to achieve the consensus, which is in place in this moment.

And as far as concerned the first half, again, I think that as I said many times this year, this year will be a year where the first half will be lower compared to last year because of the tail of the markdown and the second half will be hopefully much better, I have to say, hopefully, because we believe that in principle, there are all the elements to do much better, even without considering the weather possible normalization because last year, weather has been really unusual. But even in absence of recovery in top line, we believe that we are on track in order to achieve our full year target, which you have in your consensus.

And as far as concern the refinancing, we are talking about the credit extension in this moment. And as I said, all the banks have participated to the meeting and there were all the banks, has been very supportive. They made a question, but basically they understood that the cash generation comes not from one-off activities, but from a -- from the capacity to improve the business model aspects that were important in order to generate cash and that the top line is not suffering too much. So basically, they are giving us the comfort that the credit extension would be achieved successfully. And in this moment, we are confident that we might maintain the same cost of money and we start our negotiation with this in mind.

[Fabio Fazzari, analyst]

Okay. And the extension for how many years or for one year?

[Stefano Beraldo, executive]

We had discussions about 2.5 or 3 years.

[Operator]

The next question is from Andrea Bonfa with Banca Akros.

[Andrea Bonfa, analyst]

Most of my questions have been answered. I got a more generic question regarding your rents. In particular, you mentioned during some previous conference calls, it was not the last one, that your new rents are around EUR 200 per square meter compared with historic one of EUR 300 per square meter.

And I'm wondering and considering your attrition on the various expiry date of your rents that if you are able to obtain this clearance also on those rents which are expiring, this is my first question.

The second one is more long term. If you're already hedging 2020 fiscal year and -- which cost of -- which exchange rate on the U.S. dollar?

[Stefano Beraldo, executive]

Thank you. On the rent, I must say that all the new rents are, as I said, compared to the same quality, I believe, all the new rents are much smaller than the old ones. Old rents that we renegotiate after the expiry normally are easily reduced to the new market condition, but what is more important I confirm that we are continuing renegotiating existing rent agreement, thanks to the clause of early termination that we have on 90% on our agreements. So it is going more easy than in the past also in light of the general market condition to be negotiated during the period of maturity of the rent without waiting for the expiry. Nicola, help me on the hedging, please?

[Nicola Perin, executive]

Right. Of course, we started to hedge according to our normal seasonality with 2020 intake volume. So far, we have, I can say, about 1/3 of spring/summer already hedged -- spring/summer 2020 already hedged with a very positive spot tariff compared to all the current spot tariff. And we will continue it, but we will take the opportunity when the market will show some positive windows.

[Andrea Bonfa, analyst]

And if I may ask you, what's the average length of your rents if it's possible? Is it 6 to 7 years? Or is that possible to have an idea or?

[Stefano Beraldo, executive]

In this moment, it is a bit lower. It's a bit less of 6 years, precisely 5.8. I repeat to the benefit of all of you, this maturity is not an obligation. Normally, we have a 6 plus 6 and 5.8 refers to basically the average of our maturities, but important to say that it means that we have the right of remaining in the store at the existing rate for almost 6 years once or 90% of this agreement we have the right to early terminate with a 12 months' pre-notice.

[Andrea Bonfa, analyst]

And finally, if I may, is that possible to -- more precisely, how much you spend or rent on a yearly basis? We consider aggregate number just to be sure that we are -- we got the same amount.

[Nicola Perin, executive]

We are having a profit there -- EUR 150 million -- it's about -- the gross is EUR 172 million, but we have some positive rent, so we rent some space and the net is about EUR 134 million.

[Stefano Beraldo, executive]

EUR 134.

[Operator]

[Operator Instructions] Your next question is from Luca Bacoccoli with Banca IMI.

[Luca Bacoccoli, analyst]

Just 1 simple question on the cost savings in the first quarter, which if I understood correctly [ a real event ] on the EBITDA bridge of about EUR 5 million, so I was wondering if we can, let's say, multiply this figure by 4 just to have an idea of the savings -- cost savings for the entire full year '19. Or you expect some momentum in the coming quarters, thanks, for example, the continuing renegotiation on the rents cost?

[Stefano Beraldo, executive]

Basically, you can. Yes, you can assume that this amount can be multiplied by 4 with an exception. During the internal work, which I did with my team in order to find a viable solution to reduce cost without reducing the level of service or the attention to the customer or to the product, we decided that about EUR 2 million or EUR 3 million of increased marketing expenditure will be -- has been approved. So basically, in the first quarter, you have, because we didn't have particular marketing cost here, you see EUR 4 million, but if you -- if you have to try to determine what can be that net full year cost saving, you can say EUR 4 million times 4, minus EUR 2 million, EUR 3 million of higher marketing. So the net amount of this will be plus EUR 13 million, something like that.

[Luca Bacoccoli, analyst]

Right. So it's -- one have to assume that once and if the top line restart gaining momentum, this cost will come back. So I mean you will be less stricter on managing the OpEx?

[Stefano Beraldo, executive]

No, because most of these cost reductions has to do with efficiency with each coming operation and with rental savings, which is the most important. And before we would increase rents, it will take decades because as we said that today rent for new rent are 25% lower compared to 10 years ago. So it would take 10 years of recovery of our country before material increase rents. So the answer is no. More than 50% of this cost saving will be maintained to the advantage of the bottom line.

[Operator]

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

[Stefano Beraldo, executive]

Okay. Thank you very much. Thanks to all and see you at the next conference. Bye-bye.

[Operator]

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