OVS SpA

MIL:OVS

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS 9 months 2019 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.

[Stefano Beraldo, executive]

Thank you. Good afternoon to everybody.

It has been a good quarter and several positive things happened in this quarter. First of all, we had a much better quality of sales which boosted margins, thanks to lower markdown activity both in the sales period, like August, and also during the period of the quarter, also in the other months. We had a very good and very consistent cash generation, which generated an improvement of EUR 31 million, which became EUR 49 million once we exclude from the comparison the nonrecurrent cash generation happened in the same quarter of last year due to the disposal of the headquarter for EUR 18 million. So the real improvement is about EUR 49 million on a same comparable basis. And finally, the material breakeven cost reduction, which continues benefiting the profitability of the company. All this in a still challenging market, once again, not because of macroeconomic issues but still, again, because of mostly weather issues as weather still once more has not been supported contrarily to what we expected.

If I start making a comment on the sales, which has been slightly lower compared to 1 year ago, one thing was been pointed out. After having already mentioned that the higher quality and, consequently, the lower markdown, this impacted mostly the month of August, which typically is a month where the sales level depends heavily from the pressure of markdown and because this year, we decided that the pressure should have been much lower as the quality of the stock was better. Obviously, the volume which we sold and also the absolute value of turnover in August has been lower, as expected. Very good September and slightly modest October on the back of a weather which has been as poor as last year, if not worse, and all across the period, as I told, lower markdown. But after this, it's worth mentioning also that if we break down sales between directly operated stores and franchisee stores, the directly operated stores sales have been stable, while the franchisee store has been lower as a result of deferred sell-in to our franchisees. And the reason for this is that we didn't want to fill them with the same amount of intake that we made last year in order to avoid the risk of leaving them with too much stock. So because all the year has been managed with the priority of being more flexible and efficient and more cash productive, we decided to lose some opportunity to sell in to our franchisee. But the good news is that this will result in a better sell-in in the last quarter of the year, so the quarter -- the fourth quarter of the year.

Basically, also EBITDA, it's worth to be mentioned how it grew because we almost entirely recovered the gap versus last year that at end of July was of about EUR 19 million and today is EUR 3 million. So EBITDA this -- in the quarter recovered almost entirely the gap that was generated in the first half of the year.

I think that the slides are very clear. Page 3 and 4, I think I have nothing to add to this chart.

Maybe on Page 5, it's worth mentioning again that the gross margin went almost, I will say, back to normal as the full price sales mix increased, as we said, and this is expected to continue also in the last quarter. And I think it's worth also insisting that the reduction of cost is -- became structural. So we have achieved a much lower breakeven point for the company, which will be beneficial also to the next coming quarters.

In Page 6, some comment on working capital. You can notice a huge decrease of trade receivable, which is mostly attributable to a couple of aspects. One is that the tighter control of franchisee payment terms compared to the past generated the highest portion of this improvement, and this is good because it means that there is not a critical commercial issue in being in business as a franchisee partner. Otherwise, you should have noticed the other opposite effect. And the second aspect, it is that last year, there has been a write-off of about EUR 10 million of -- for the -- in the fourth quarter for the receivable held towards the German subsidiary of the Swiss customer. So this reduction is basically an accounting aspect, not a cash impacting change. You can also notice the reduction of inventory, which is equivalent to more than EUR 20 million. And I think it is worthwhile mentioning that in the 9-month period, there is an increase of inventory of EUR 8 million, EUR 8.7 million. This is cyclical, typical of our business model, and it is by far the lowest amount experienced in the last 5 or 6 years. So it means that there are all the precondition now that the Christmas sales are in place to continue posting a material reduction of inventory also at year-end.

On Page 7, you can see that even in the case of the CapEx, as expected, we reduced the CapEx, and this is partially because we reduced the number of openings, we reduced the number of refurbishments, as we said, not because we have not any more refurbishments opportunity or openings to be done but simply because the full year 2019, has been explained now 1 year ago, was supposed to be managed with a great priority to cash generation and to bring to normal the margins, which is happening in the second part of the year, as you can see from these quarterly results.

Page 8, the consequences of all these aforesaid things in terms of net debt and leverage. There has been a significant inversion of the trend in terms of financial leverage. As you can see in July '19, the debt at the closing date, the ratio of debt to EBITDA was 3.3x; right now is 2.8x and still subject to improve. And all this as a combined result of the strategy of buying less, buy later, hopefully, buy better, more flexibility, lower CapEx and strong attention to the working capital -- I would say strong discipline on the working capital management.

So from my side, nothing to mention on Page 9. And in terms of outlook, let me say that we don't have a more recent market figure. We can say that the Black Friday, which was -- that happened -- that took place in the end of November, has been weaker compared to last year. And this is not an issue for us because last year, I remember that it was a perfect storm, where the very warm weather started changing suddenly few days before the Black Friday, so giving to the customer the possibility to increase their buying at 20%, 30% discounts. While this year, during the Black Friday, weather was still relatively warm, with lower sales at a lower margin. But suddenly, after the Black Friday, weather started changing, becoming colder, and we are experiencing very good sales now at full margin. Then I think that it's worth mentioning again, that the strategy of penetration with a shop-in-shop of Upim, which is a very popular value format, into the hypermarket is becoming a reality, as I already said. But we have 2 more agreements signed: 1 with the Carrefour and 1 with Coop. So we start moving from relatively small and qualitative players like Panorama and Finiper to larger, Coop is the biggest hypermarket chain in Italy and international like Carrefour, players.

And we have a material amount of openings expected to be held in year 2020. And the profitability here is very good with very limited or no CapEx. EBITDA is expected to grow even in the fourth quarter. In, let me say, prosecution of the trend that has been implemented in the third quarter, and this is basically as a result of a much lower markdown compared to last year because the quality of the stock is much better, as most of you -- or the ones of you that follow the company know. While the improvement in working capital continues to remain a pillar of the strategy both in terms of credit management but mostly in terms of inventory management with the prosecution of activities aimed to buy later, to buy better, to buy more flexible, to buy less.

A couple of points still on the good result of our new advertising campaign and the change which is taking place in the perception of the company, which is more and more driven to conscious sustainable aspect with the introduction of several content which are all related to sustainability. We have used PET to make our fiber to our fleece. We have used fishnet to make our swimming dresses. We are usually increasing the quantity of secondhand goods that we recycle to the benefit of the environment. And also very -- and the introduction -- I think we are probably the only one in Italy introducing in our -- excluding from our denim the permanganate, which is a chemical weapon that most of our competitors are using for the -- to improve the washing process of the denim. So there's a lot of energy and activity in aspects which are relating to a sort of secular change that we believe that our customers are facing. And the consequence of it is also that we have good signals from some new product which we are introducing, which is more qualitative compared to the past, like cashmere and the parka. And I'm happy to say that the 2 bestseller product in this moment are the parka, which we sell at EUR 149, with padding in Thermore, which is appreciated by our customer as a symbol of high quality; and the cashmere sweaters, which are selling extremely well.

So it means that our strategy to continue remaining a value company, always able to be present in the enterprise level but also to be able to stretch our prices up to more qualitative product is working.

And basically, that's it. And I'm ready for your questions together with Nicola Perin and Andrea Tessarolo. Thank you.

[Operator]

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

[Fabio Fazzari, analyst]

The first one is related to the CapEx. We saw that especially in the third quarter, the level was really below the level of last year. I was wondering also, considering the fact that the market remains very challenging, if you need to start again the refurbishment. And how much should be a normalized level of CapEx that we have to expect for the next year, if this could be probably more in line with the EUR 80 million you spent in 2018? And the second question is related to the gross margin. I was wondering if you can disclose the improvement of the gross margin in the third quarter.

[Stefano Beraldo, executive]

On CapEx, I will tell you that, no, we don't need to necessarily to increase the number of refurbished stores. The good aspect is that we have developed, as probably already mentioned, a new technology to refurbish in a very effective way our store with the utilization of a film across the walls, which is reducing drastically the cost of changing the way the store looks like by reducing the cost by 80% for all concerned -- the walls. So all in all, we had a reduction of about 30%, 35% on the typical restructuring cost compared to the former version without missing the introduction of plants and woods to give a more warm and cozy characterization to the stores. So the level of CapEx that is expected to continue in the next year is about between EUR 50 million and EUR 55 million unless we enter in more aggressive opening opportunity, but what we consider normal will be in that range. As far as concerning the gross margin, what I can tell you is that we had an improvement between 250 and 300 basis points compared to the same quarter of last year.

[Operator]

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

[Luca Bacoccoli, analyst]

Two questions from my side. The first one is on the third quarter top line performance. You mentioned that in October, weather conditions were not supportive, probably worse than last year. So could you please tell us to what extent the negative temperatures or, let's say, unseasonal weather conditions were responsible for the top line decline in this quarter and possibly to what extent the top line decline is due to the lower intake?

And the second question regards the 2020. So basically, this year, the priority was cash generation. And I was wondering what is your priority for next year between top line growth, margin expansion or still debt reduction.

[Stefano Beraldo, executive]

Thank you for the question. As far as concerning the first question, not easy to give you a precise answer because I remember that the negative factor has been 3: has been weather, has been lower intake and has been lower markdown because, clearly, I may say that, for sure, in August, the weather impact has been 0 because August is not a month where you suffer because of weather, unless you had a very, very rainy August that can be a benefit because people go to the shopping mall and they go less to the beach. But this year has been a normal -- has been a good August. So I would say August has been neutral. And entirely the negative like-for-like of August, which has been material, has been only driven by lower markdown. And the reason for the lower top down of the quarter has been entirely attributable to the negative month of August, and this is because of lower markdown. You can imagine that once you reduced by 20%, 25% of the markdown pressure, you have some customers which are less attracted to buy because they were used to -- only to visit OVS in order to find extremely attractive prices. And if they didn't find it, they walk to some other store. But this is safe and good for us.

Then in the month of September, we had an internal comparison. What I can tell you is that if I compare the OVS top line with the Upim top line, given that OVS and Upim in November made more or less the same turnover but in October -- sorry, in October made more or less the same turnover. And in September, OVS had a 4% sales top line that was positive but lower compared to Upim, this is the equivalent impact of the lower intake because I only caused OVS to have a lower intake, and I left Upim with a normal intake. And the reason for this is that OVS had been much bigger. I decided to privilege for the cash generation the biggest brand. And to leave the Upim, which is growing and opening stores and also filling of product the hypermarket, I didn't want to leave Upim with a shortage of merchandising. So it can be equivalent to 3% -- 2%, 3%, 4%, this is the range.

And -- but I remember the rest -- all the rest and the weather, you asked about weather. Okay, the weather has been similar to 1 year ago, which is incredible because 1 year ago, weather was warmer October in probably 100 years. This year, what happened, October has had more or less the same average temperature. But if you look into the statistics, you will see that the temperature in the morning was a bit warmer compared to the temperature in the morning of last year. And what happens in the morning is important because the mother are bringing the kids to school. And if they don't feel that there is like 15 degrees, but there is maybe 16 or 17 degrees, this is changing because when the temperature are at better level, 1 or 2 degrees of difference more or less can make the difference. And even in the last part of October, temperature has been very disappointing. I can take -- I'll walk you through this 3 number. In August, temperature was warmer than last year 2.6%, but this is 0 impact. In September, temperature was 2.5% warmer compared to last year, very modest impact. In October, temperature has been 8.6% warmer compared to last year. And out of this 8%, the last week of October temperature has been 10% warmer compared to last year. I can't say what is the impact of this. But contrary to the expectation, it has been, again, negative. But fortunately, we have reduced the intake, thanks to this bigger flexibility that we have, and so we are not experiencing a disappointing result in terms of stock. And thanks to the higher margin, this more than compensated the lower top line.

In terms of priority for next year, it will be a combination. Next year will be a combination of EBITDA and cash generation. I think that cash generation will remain very high, maybe will not contribute in the same extent to change in working capital, so there will be positive recovery in terms of working capital, probably not as big as this year. But it will be -- it will benefit from a higher EBITDA because based on a normal expectation in the first half of next year, we will not have what impacted us in the first half of this year, which is the unusual nonrecurring markdown. And we will stabilize the level of markdown to the level that already in the present quarter and in the next coming quarter, which we are now at half of it basically, will be stabilized. So I expect a material EBITDA increase and a solid cash flow generation as a combination of maybe a bit lower improvement in working capital, higher EBITDA and similar CapEx.

[Operator]

The next question is from Marco Baccaglio with Kepler.

[Marco Baccaglio, analyst]

First question is if you can update us on your shop network. So I've lost a bit track of how many shops you have own and franchise and what is happening also outside Italy in terms of development. Maybe if you can say a word about that.

And the second question is about your inventories. I was looking at the past, and you normally arrive at the end of the year with around 25% inventories over revenues over the previous 12 months. So I was -- probably my estimates that you have around 27%, 28% for this year. I would like to know if these -- all the target is still feasible given your plans in 2020.

[Stefano Beraldo, executive]

Well, on the shop network, I don't have all the numbers in front of me. What I can tell you is that we closed 7, 8 OVS and Upim stores. Part of them relocated. Part of them simply closed. We opened about 15, I think, more or less, maybe 1 more or less stores, DOS, Upim and OVS. So it has been a year characterized mostly by improvement in the quality of the network other than from pure growth as expected, as I think I told several months ago. There has been, again, a number of opening of franchising stores either in Italy and internationally. I think that in international, we opened 60 stores international. We closed about 40 small corner, mostly corner. And the network is now 1,679 stores. Most of them in terms of number are small store kids store franchising. To give a color, we had a very good performance of all our kids stores across Europe. We are present in about 50 countries. We are doing very well in Saudi Arabia. We are doing very well in Spain, where we are becoming one of the most important kids brand, still inside El Corte Inglés and also on stand-alone stores. And I think that also the initial good results provided by a few openings of Croff, which is the home decoration format of Upim, are very, very encouraging. As far as concerned -- this was the second question. Did you have another question? Yes.

[Marco Baccaglio, analyst]

Yes. I was asking about inventories.

[Stefano Beraldo, executive]

Yes, the inventory, I don't have the figure in terms of percentage on turnover. I think that what I can confirm is that we expect to have about EUR 20 million of improvement compared to the year before. So the level of improvement that we have today, I think we will end up with the same level or hopefully even slightly better. To be more clear, today, we have more or less EUR 20 million advantage -- EUR 22.2 million improvement compared to 1 year ago. We have a reduction of inventory of EUR 22.2 million compared to 1 year ago. Even if we have a maybe 2%, 2.5% square meter more today, including the franchisee, I don't have this figure now, but you can consider maybe 2%, 2.5%. So this improvement is even higher once you consider that I have a slightly bigger network. At year-end, we believe that we will end up with at least the same level of improvement, if not more, hopefully. This will depend very much on the sales from now to the end of January. As of now, this November sales has been okay. December sales has been good as of now. We are in the middle of the last [ heavy purchase ] now, which is doing well. So hopefully, we can land where we expect or even slightly better.

[Operator]

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

[Stefano Beraldo, executive]

Okay. Thank you, and thank you all. And let me say Happy Christmas to each of you. Goodbye.

[Operator]

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