OVS SpA

MIL:OVS

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the OVS First Quarter 2020 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 and thank you for being here and thank you among every one of you, investors, which are -- were among the ones that yesterday decided to vote in favor of the prosecution of our adventure in the new -- with the confirmation of the Board, which has been the list which has been suggested by the present Board.

Well, on -- the first quarter has been incredibly impacted by the lockdown, about 2 months of sales has been impossible to be achieved because of the complete closure of stores. And this happened in a very peculiar moment once the company is due to pay all the sourcing of the goods, which are sourced to sustain the spring/summer sales, and during a period of time when, by paradox, the only month which has been opened is the worst month of the year in term of profitability because February is a month characterized by low level of sales and high level of markdown because we are in the tail of the end of the former season while March and April are 2 months with full margin.

Nevertheless, we believe that the results, which have been achieved there, are more than decent considering what might have happened.

If we have a look in the first page to the net financial position only, it's worth mentioning that thanks to the strong cash generation in the second part of last year, we are still in advantage compared to 1 year ago, having obviously absorbed most of the advantage that had been created in the second part of last year.

In Page 3, it's worth looking very fastly at the biggest determinants of the profitability. Because of the lack of sales, we have lost EUR 120 million of gross margin. We had the advantage of the state support called Cassa Integrazione, which automatically enabled us to reduce our cost by EUR 25 million, then another EUR 20 million has been obtained, thanks to what we believe is the amount of the cost reduction in term of rent. I mean what we believe because this number has not been closed in term of final negotiation. We are still negotiating, and this number represent our best estimation regarding the discount that we will achieve in the period relating to the first quarter.

And last, on top of this, call it, not automatical discounts or cost savings, we added another very difficult EUR 15 million of savings generated as a combination of several action at headquarter level, impacting people, advisers, services, et cetera, as a result of all of these net debt, as has been said, has been reduced compared to the level of -- the same level of last year. Also, thanks to the increase of payment terms because most of our suppliers accepted to be postponed in the original payment term without any material, I don't say litigation, but even contrast in term of negotiable dynamics. Most of our suppliers understood that it was simply impossible for us to pay their due payments because of store closures.

In Page 4, the only thing I would like to underline is that the OVS decline seems to be higher than the Upim -- the reduction, but this is mostly because of the different percentage of the franchising business, which is highest in Upim. So basically, the 2 brand performed in a very similar way.

On the consolidated trade working capital, I prefer to leave the word to Andrea Tessarolo.

[Andrea Tessarolo, executive]

Yes. Thank you.

In this difficult context, the company has been able to manage well the working capital. Working capital was lower compared to last year. It ended at -- up at EUR 205 million compared to EUR 219 million. Looking at the main components, as Mr. Beraldo said, we have been able to postpone some payments towards our suppliers. This allowed us to maintain the trade payables in line with the ones at the end of last year.

Of course, we had a decrease in terms of receivables because we invoiced less toward our partner because of the period of lockdown and we had an increase in terms of inventory because of the -- again, because of the stores' lockdown period.

Looking at the CapEx, the company decreased the amount of CapEx compared to last year. CapEx for the first quarter were EUR 2.1 million compared to the EUR 9.4 million of 2019 and this also helped in terms of cash management for the first quarter. Net debt, as Mr. Beraldo said, has been ended as still lower compared to last year with, of course, an increase of leverage mainly due to the lack of EBITDA of the first quarter. In this quarter compared to the other quarter, the first quarter EBITDA decreased by EUR 59 million.

Looking at the consolidated cash flow statement. The cash absorption -- normally the company absorbs cash during the first quarter. This year, we have absorbed EUR 49 million mainly due to the loss in terms of EBITDA. Thanks to the flexibility in sourcing that allowed the group to decrease purchases, the cost reduction implemented, the additional EUR 100 million of finance obtained, as you already know. The lower CapEx forecasted, the company believes as of now that it will be easily able to close all of the longer payment terms by the end of this year.

[Stefano Beraldo, executive]

Okay. Thank you, Andrea.

In term of outlook, basically, it is extremely difficult to make an outlook. Given the situation, it's very difficult to predict what will happen with back to school. Shall we have the school open, partially closed, what about the virus evolution.

In absence of unexpected material changes in the mood that we realize is characterizing the Italian population, we believe that the indication which we have received the first 2 months after the lockdown are very clear. Initially, there has been a tremendous reluctancy to visit store, and this has been true for the first couple of weeks. Then we assisted to a great difference in the behaviors. Very poor traffic in the shopping mall and in the big cities, back to normal in the smaller catchment areas so in many, many stores.

Then gradually, everything continued moving in line with coming back to normal. So in this moment, the traffic is down, but much less than 1 month ago. And the result has been that the month of May in the less than 15 days after the 18 of May reopening, our performance was negative, but much less than we expected. In June, week after week, we started negative also because we had to compare the first half of June with probably the best period of last year in term of weather.

You might remember that in May last year, we suffered hugely because of a very cold month of May. And in the beginning of June, we started having summer. This year, we had a great May, unfortunately, and we have a very bad beginning of June. But starting from the third and fourth week of June, our sales were even higher compared to 1 year ago.

So all in all, the month of June has been slightly negative but much less has been negative, a double-digit negative, but very, very low double digit with a higher margin and much better in the second half of the month. And the month of July is negative compared to last year only because of the delay in the sales period that we asked them. So we were in favor, and we tried to convince the decision-makers to have the regions in our country to postpone the sales, and we are now selling with a much higher margin in July compared to 1 year ago.

All in all, our gut feel is that the situation is gradually coming back to normal with the exception of touristic cities of Milan area, Rome and Naples. But Rome downtown, while we move and we have many stores in the outskirt or in the neighbors of Rome, the sales in those areas are almost similar to 1 year ago.

So on the back of these signals, we believe that our outlook for the remaining part of the year, which is to end up with a negative like-for-like in the second part of the year, and in spite of that, thanks to a combination of a better margin and lower cost, we believe that we are in the position to achieve the target that has been provided to you during the last call.

One thing is worth mentioning, the company is getting more and more flexible. It means that we have been able to postpone or to freeze or to stop to cancel order in season. And we are realizing that our supplier are so supportive in our company, which is long-lasting, fortunately, and credible that we are experiencing no criticity, no issue because of this. There's some part of the world which is not in a lockdown, but in a difficult situation like India where production is slower compared to the expectation. And we expect maybe to have some late deliveries for August, September goods, which will be replaced by some spring good, which has not been sold that we will utilize in case we will have to face late deliveries from some country, but nothing that should change our view compared to the full year expectation in term of profitability and cash generation.

Some good news because the company has also to think to continue remaining alive and not only being immersed in only cost-cutting exercises. For the one of you who are living in Milan, I invite you to see what I think is a beautiful concept there. We are opening several stores in franchising under the name of Croff. The home decoration market has been left without a real champion and the Croff with this new format seems to be a very interesting challenger to Dalahome, let's say, with much lower prices.

We also have a couple of something which is very small, but very nice, which is a store that seems in the ambiance, in the store design, to recall the sandbar atmosphere just to give our customer. And the store has been opened in the beach location of Jesolo, which is a short of Rimini of the northeast of Italy, in Via Bafile which is the most important shopping area. And the store is a selection of OVS goods characterized by the beach atmosphere.

This is to present to our customer what OVS is also in light of the expectation that once these people will visit the store or will realize that OVS is a big container able to present also a very well done beachwear atmosphere and merchandising, they might have the desire to visit OVS, also the one of them that are normally not OVS customers. By the way, the store has been opened a couple of weeks of days ago and the turnover is twice as much as we expected in the first 2 days.

Last point, Conad CEO announced a few days ago without our agreement that they closed an agreement with us regarding the sites, if I may say, the reduction of the space of a certain number of their Auchan hypermarket. I'm sure that you'll recall that I introduced to you several time the aspect that in Italy, the hypermarket situation was changing and many brand like Carrefour, Auchan, et cetera, were in trouble and were looking to reduce the service and that we might have taken advantage of this service reduction.

One year later, this happened, and it is true that we are in final negotiation step in order to open 24, 25 new stores, and we are not talking about the Upim corner inside the hypermarkets, which are doing well, and we are opening with Upim other -- on other Upim store inside Croff in this moment, probably we have 30 or 40 to open in the next coming months. But we are talking about stand-alone OVS and Upim store in a 25 shopping mall, high quality, which were in our radar in the last 12 months, but we didn't enter because we didn't find the proper contractual agreement.

So in this case, we will open next year, in the beginning of next year 25 new stores in very good location, stand-alone inside shopping mall at very attractive contractual conditions. The deal is like a package deal. So we were the only company able to offer a full solution to Conad there. Otherwise, they should have been forced to try to find 1 store to OVS, 1 to Piazza Italia. But because of the moment, it was very difficult for them to find this alternative. So we have been able to enter in this store at the best possible conditions that ever imagined.

Finally, I believe that because of our positioning, we remain probably today the best placed company in Italy to take advantage to what will be a consolidation trend, for sure. So I think that our capacity to manage cost reduction, flexibility, different brands, we became more and more important in the next coming month.

And that's it. So open for your discussions. Thank you. For your question. Thank you

[Operator]

[Operator Instructions] The first question is from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

I have a few questions. The first is related to the gross margin. So if I understood properly, so the missing gross profit was just proportion I should say. So the level of gross margin has remained pretty stable and you are counting on keeping the gross margin stable also for the second half of the year. Don't you see the risk of a pressure on gross margin given the situation, given the aggressive discount that you are seeing on the stores in the cities? And how can you keep the gross margin stable?

Second question is on the saving plans. Savings in your initial statement, I understood that. So the EUR 20 million savings booking in the first quarter have not been closed yet. So I was trying to understand the meaning. So are you still negotiating? How did you book this number while the negotiation are still pending? And can you update us on what is the level of visibility on the full savings for the full year?

And then maybe just the last question is on the format with Conad. Should we expect to be a format -- what size? So is the full format of more than 1,000 square meters or something smaller?

[Stefano Beraldo, executive]

Okay. Thank you for your question. On the gross margin, the question is very clear. I don't expect margin pressure. Maybe I will have sales decrease because I don't enter in too aggressive markdown policies in case our competitor might decide to do it. But my position has been clear even with all our competitor during this lockdown period. We had several discussion. And the most important competitors are more or less aligned in -- for instance, in deciding to agree with my request of postponing the sales. And I had all my competitors in line with my request to postpone the sales. This means that our competitors are not willing to waste the margin that they might generate during the month of July. Given that summer sales -- summer turnover has been partially lost during the month of May, the competitors are willing to make full recovery now.

Clearly, there might be some exceptions. There are exceptions even now in the market. There are maybe groups which are suffering too much, and they are trying to discount even if we are not in sales now because the official sales which start in the beginning of August. But I don't forecast the -- I don't assume this pressure will be tremendous. And in any case, we decided that because of the nature of our assortment, better maybe to have 2%, 3%, 4% like-for-like less given the circumstances, but to keep the merchandise being good for next year and to avoid fighting each other in the Black Friday situations, let's say, as an example. So you will have a solid gross margin, you will see a solid gross margin also in the second part of the year. This is my forecast.

Regarding the rent, basically what happened, we had, as of now, more than 1,500 meetings. It means that on average, we met 3 times the same landlord in order to avoid on one side litigations, and we have no litigation; but on the other side, to assess negotiations, which were still not entirely satisfactory in -- based on our request.

What is happening today is that we might sign today. And if we should decide to sign based on the amount which has been agreed, we should achieve basically 70% of the total rent reduction that we are assuming to be able to achieve. We didn't disclose this number during the last call, and we don't disclose this number now because I don't want to give to my landlord any element to be aware of what I consider a level of satisfaction.

In order -- with reference to the second part of your question, we posted as a cost-reduction component the amount of EUR 20 million because this is the best possible estimation of the cost reduction, which is -- which has to be considered as relating to the first quarter. So -- and then after computing there, I don't know exactly how to say it in English, but you are Italian and you understand what I mean, this is the best possible estimation made according to the best accounting rules that might be done. If I wouldn't assume this number in this quarter, I would maybe give you an idea of a quarter more difficult than expected just to postpone the improvement in favor of the next quarter, just trying to make the bad news more accessible because everyone is thinking that in this quarter, it's a nightmare, which is the case. But -- and then I am the super cool guy because I go with a better quarter in the next quarters. So this is not the way we made the accounting, and this is -- this represents the best possible estimation of the cost reduction.

And finally, regarding Conad, the size is the one of a full format. So these 25 store will be 25 full format OVS for Upim stores, which we make on average between EUR 2 million and EUR 3 million each or once at run rate sales with a good profitability. I hope my answer has been sufficiently complete and clear.

[Operator]

The next question is from Marco Baccaglio of Kepler.

[Marco Baccaglio, analyst]

A couple of questions. The first one is to clarify your performance in June. You said that you were down low double digits in terms of overall revenues and that if it's correct what I understood.

And the second question is about your working capital performance. Do you expect to have additional working capital absorption in the next quarters or what you got at the end of April was more or less the peak?

[Stefano Beraldo, executive]

I'll start from the second question. Yes. I expect to have additional working capital absorption because by the end of the year, I expect to pay completely and entirely the overdue, which we are managing today. So basically, the better cash position that we have at the end of this first quarter has been also generated, as I said, by the expansion of the payment terms versus our suppliers. So we want -- we are planning to achieve the net financial position that you guys I know you have in your record because Andrea told me that basically, you are assuming that the company is going to have about EUR 470 million negative cash at the end of the year. Assuming that assumption is correct, which I'll try not to elaborate because it's Andrea Tessarolo's job, the answer is that this net financial position will be achieved after having fully paid the present overdue. So there is a partial negative working capital contribution.

And the first quarter, which was related to June, as you know, we have not used that to disclose the current trading. But I wanted to give you some color because the situation is so difficult even for you to understand in this moment that I thought it was useful to tell you that we had a negative -- when I mean low digit, I mean that I don't know if it was 13%, 14%, something like that. As a combination of the first 2 weeks that were maybe minus 20% just after the lockdown. And the third, maybe 10%; and the fourth, plus 2% or plus 3%, I don't remember, something like that. I can be wrong there because I don't have the figure in front of me, but more or less, this is the size of the sales week by week. I hope my answer is sufficient for you.

[Operator]

[Operator Instructions] The next question is from Luca Bacoccoli of Banca IMI.

[Luca Bacoccoli, analyst]

Just a couple of questions from my side. The first one is on the available cash at the end of first quarter and if possible, at the end of last month. So I mean at the end of June, just to understand what is the monthly cash burn rate.

And the second question regards the Cassa Integrazione. So the -- your scheme. I was wondering whether the government has started to pay for it or on the contrary, the company is still paying for these state ads?

[Stefano Beraldo, executive]

When you mean cash in hand, you mean the cash in hand, I guess. You want to know what is the cash in hand by the end of May, June?

[Luca Bacoccoli, analyst]

Right. Exactly.

[Andrea Tessarolo, executive]

So end of April, the company was with EUR 40 million cash available in the bank account. Of course, at that time, all the line was fully drawn. So the EUR 433 million line was fully drawn at EUR 40 million cash available. And the second, and now, after that, we start -- especially after the reopening of some stores, we start to pay some supplier. And we have the EUR 100 million from the such so-called special line. And now we have about sufficient cash, I mean, close to EUR 80 million in order to manage the situation. But we are starting also to pay suppliers and others. And this will be mainly the use of cash for the next 2, 3 months. But in any case, there is no risk that we go below EUR 40 million cash available across all of the next month. We have enough line to digest and to manage the company.

[Luca Bacoccoli, analyst]

And if you can please answer to the other question regarding to the Cassa Integrazione.

[Stefano Beraldo, executive]

You want to know if Cassa Integrazione has been paid. The last month, finally, Cassa Integrazione has been paid. So the company anticipated to the employees in May, their salary, in spite of that, we still had cash buffer. To be honest, we always had an important cash buffer since moment one. We never faced the risk to find and to bring the company near to a liquidity issue. We have been always with this buffer. And I repeat, thanks to our supplier and thanks to the fact that the company is considered as reliable by all our suppliers that they prefer to wait because historically, in the last 15 years, there has been many up and down in our economy. And they know that every time that they gave us to the company, they recover their receivables.

So this seems an immaterial and intangible stupid comment, but this is super important for me. In this moment, we had -- I know that there has been companies which has been forced to bankrupt or to bring the books in front of the judge in a court by supplier, which are not ready to trust the company because they were considering that the company should have been not able to overcome the crisis. All our supplier has been extremely supportive. This is why we have the overdue. This is why we wanted to have overdue. I might have paid EUR 40 million more, but we never wanted -- we've put in place an extraordinary committee to manage week by week all the situations. And to be honest -- and the committee was managed by Nicola Perin, the CFO, I've been never called for one meeting in order to decide what to do with suppliers that were eventually losing their patience, let's say. I hope this answer is clear to you and we can go to the next question, eventually.

[Operator]

[Operator Instructions]

[Stefano Beraldo, executive]

Okay. So I think that we have no other questions.

[Operator]

Sorry, there is one follow-up from Domenico Ghilotti of Equita.

[Stefano Beraldo, executive]

Yes. Please.

[Domenico Ghilotti, analyst]

Sorry, I was on mute. So can you hear me?

[Stefano Beraldo, executive]

Yes. Yes, yes.

[Domenico Ghilotti, analyst]

Okay. So a question on the cost savings because we are really doing extremely -- extreme effort, so EUR 60 million plus the other that you are planning for the second half. I'm trying to understand if you're already in the position to understand how much of this can be really structural. So how much can be a structural savings either due to negotiation with lenders or maybe also because you see that you can optimize the productivity in the store and so you can increase the productivity and so on. Do you have already an answer on this or it's too early to say?

[Stefano Beraldo, executive]

I can't give you a qualitative answer, unfortunately. What I can tell you is that we decided to cut cost at store level, maybe even losing some sales opportunity in the reopening phase because I didn't want to run any risk of facing a liquidity issue. So in the moment that we had the approval of the new financing line, I prefer that -- to risk to lose some sales in the store, but to maximize the cost reduction. But the cost reduction has been impressive also because it has been achieved by cutting the number of hours of openings, which is generating discussions with the shopping mall. They would like we remain open since 9:00 in the morning to 9 in the evening, if this is the official working time, and I'm refusing to do that together with most of our colleague, I mean other companies.

So this avoided to have maybe 2 shifts sometime and this is generating impressive savings. And obviously, we are learning. In some cases, we will continue with maybe reduction of the opening times, but we cannot continue acting with the same pressure in term of cost savings at store level.

What we are learning at headquarter level is that with this smart working, which, in my opinion, is killing our economy with a lot of people missing to do their own normal activity with you guys working from home with Milan empty and with the economy is languishing because a lot of people is remaining at home and now in Italy, beautiful country, every Friday of smart works risks to be a Friday of holiday, I think that we are discovering further opportunities of pretending that our managers will be more disciplined in evaluate the quality and quantity and efficiency of their employees.

And we have now onboarded an outsourcing a third company specialized in smart worker in order to end up with a [Foreign Language] board -- with a dashboard of KPIs that every manager will be forced to follow in order to have a better control of the productivity of his team. I think that part of the savings, as we said, we became structural, but not numbers like EUR 20 million, we are speaking about single-digit reductions.

[Operator]

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

[Stefano Beraldo, executive]

Okay. So thank you for being with us and looking forward to meeting you at the next conference, Charles Vögele.

[Operator]

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