OVS SpA

MIL:OVS

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS 9 Months 2021 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]

Good afternoon to everyone attending this 9-month call for OVS. Thank you for being there. I think that it has been a great quarter, even stronger than we expected with an incredible month of October, which I think has been partially driven by a general good market trend in general for consumer goods, which started since April, May, but what was noticing is that our company has largely overtaken the market competitors and the market trend. One thing that in the slide is not included, I think, is that in the quarter, we overcome all the other players, both digital and physical. So no company, no brand involved in apparel grew more than OVS in the last quarter, including Amazon and Zalando.

So this is what I think is important to notice because this performance has been generated in absence of a stronger margin pressure, so in absence of commercial promotions compared to last year because in the third quarter in a row, we are reducing our markdown compared to 1 year ago. And we have an amount of full-price sales, which is 30% better than the market. So we are about 47% -- 46%, 48% of full-price market. Market is 47% full price, and we are 70% sales, which are full price. So in spite of this absence or very limited pressure generated by markdown, we have been able to increase our sales, still with a very small component of new floor space because out of the 100 -- more or less 100 basis points of growth in market share, 70% of this growth has been directed by same perimeter, so by the same-store base. And only one-fourth has been generated by new surfaces.

So the second brand who grew more grew by 60%. So even in absence of the increase of floor space, our growth has been the biggest in the market. Same story. There are the losers, which are the usual ones, the small format, some company which is in trouble, some international company, big brand, which is suffering in Italy as well, and very few winners. And among them, OVS S.p.A. seems to be the one that is performing better. This is the consequence of a long list of actions, which has been made, but the ones who refer to product are the most important.

Piombo Women has been launched very satisfactorily, coupling us the success of Piombo Men, still a great contribution from women brand invited at the concessions in the second part of the year, also men, but mostly women. All this also with a strong reduction of intake, partially because of our decision to buy less in order to be prudent, given that the year was supposed to be very difficult. And difficult to interpret it, lockdown, yes, lockdown, no. So we decided to reduce our total buying and partially because we suffered because of absence of deliveries, particularly in kids and men because of shortage of goods or delay from some international market, sourcing country. In spite of this, the performance has been good and the performance is being good also in this month of December. It means that again, we have more gasoline in the engine for next year that we already paid, I mean, merchandising, which will be good for next year as well.

So I think that the result has been very positive. And the cash flow has been even much higher than we expected. So I think that a good quarter, a good moment for the company, also for the reputation of the company, new customers visiting the company, thanks to -- mostly thanks to Piombo and the new brand that we are inviting. And I hand the word to Francesco Leoncini for a more detailed description of the presentation. Francesco, go ahead.

[Francesco Leoncini, executive]

Thanks, Stefano. I would start the presentation of the results with Page 3, in which we have the P&L of the 9 months of OVS compared to the last year's performance. As you can see, 2021 was much better than last year with a growth of 33% in terms of sales and in EBITDA growing more than doubling from EUR 40 million to EUR 104 million. More interesting could be the comparison also with 2019 because 2020 was, of course, affected by the lockdown. And we are now at just minus 1.3% in terms of sales with 2 consecutive quarter in which we recovered basically the whole loss that we had -- we suffered in the first quarter due to the lockdown at the beginning of the year. These increase in sales translated into growth in the EBITDA, which is now back to above 10% incidence on net sales and progressively also on EBIT and profit before tax.

The net financial position, thanks to the good performance in terms of profitability, and as you will see, in terms of working capital management reduced by EUR 100 million, so much more than the EUR 80 million injected capital increase, thanks to the performance of the business.

On Page #4, we have some details about the performance splitted by channel and by brand. But the performance is good in all the situation. Sales are growing 33%. EBITDA is growing, as I said, by 161%. In terms of business unit that is OVS and UPIM, we see a growth higher in UPIM, also thanks to the higher development rate that the brand had compared to OVS, which is already well established in the country. While on the other side, in terms of EBITDA growth performance of OVS is better because the -- thanks to the higher incidence of DOS and so to a better operating leverage that, of course, translated more directly the growth performance into EBITDA.

On Page #5, we prepared a couple of bridges in order to better explain what happened in terms of results. The top one is related to the economic performance to EBITDA in 2019, so an year without particular effects and no lockdown, the EBITDA in the 9 months was EUR 101 million. In the first quarter of 2021, we lost EUR 19 million due to the lockdowns. In the second and third quarter, on one side, we recovered EUR 41 million in terms of gross margin. And then we had some normalization of costs by EUR 18 million, ending so to a positive plus EUR 3 million versus the 2019. So the boost over the last 2 quarters were more than enough to -- well, almost close -- almost good enough to close the gap in terms of sales, but more than enough to increase also in terms of profitability.

On the, let me say, a financial point of view, the net debt was EUR 400 million about in October '19. We had, over the last 8 quarters -- 3 quarters heavily affected by the lockdowns, during which we lost EUR 236 million. So without any action, we would have ended up at EUR 650 million net financial position. But thanks to the capability of reacting in terms of attracting consumer, but even more characteristic of OVS, the ability to use the stock, the leftover of the lockdowns to boost the sales to full the sales after the reopening, we managed to create EUR 300 million to generate EUR 300 million in the quarters without major lockdowns to which we can add the EUR 80 million of the capital increase. So we are ending at EUR 250 million, that is EUR 150 million below 2 years ago -- 2 or 3 years ago picture.

On Page #6, we can explain a little bit more on the working capital, which is the operating element that we -- I mean, we managed in order to generate additional cash to the one generated already by the profitability. In particular, on trade receivable, we can see an improvement of EUR 5 million versus 12 months ago despite the growing business. And this was thanks to the recovery to the reduction of the DSO that, as said, were extended last year in order to support our partners, and they are now coming to a normalized situation.

On inventory, we are going ahead in terms of reduction of the stock. So we have EUR 24 million lower stock compared to 2020, while on trade payables, that in 2020, we're a little bit expanded, thanks to special conditions. We are now, thanks to the very positive cash situation, reducing, anticipating some payments in order to capitalize a better relationship with the supplier that should help, especially in view of the next year turbulence on inflation.

On Page #7, we have a picture on investments that are, of course, growing versus last year that was completely -- reduced to the minimum to survive the coming year, and we are now back to EUR 57 million over the 9 months, in line with, let me say, with the original plan.

Page #8, we have a summary of the cash flow. As you can see, we have a positive impact versus 2020, EUR 64 million, thanks to the higher EBITDA. We have, especially in the change in working capital, EUR 70 million improvement. Last year, of course, there was an absorption in terms of leftover of stock not sold during the lockdowns that we managed to sell this year. We have, of course, a rebound in CapEx, but the operating cash flow is EUR 130 million higher than in the 9 months before. And adding also the other elements, in particular, proceeds from working capital, the gap is close to EUR 200 million difference in the 9 months 2020 versus 2021.

On Page #9, we have the summary of the mathematics of the growing EBITDA and lower debt that brings from a 3.7% ratio on October 2020 to 1.9, so holding the leverage ratio in 12 months despite having heading between the 2 lockdowns of November, December and March, April. So again, OVS is showing the resilience in terms of being able then to accelerate as soon as the market conditions or the legal condition allow to keep the stores open and regain the lot sales.

So I would now give back the word to Stefano for an outlook of the last quarter of 2021.

[Stefano Beraldo, executive]

Thank you, Francesco. We are now halfway in the last quarter. Sales in November has been good. Sales in December are okay as well, so are positive as well. Even in December, we decided to skip one last feminine France promotion. So we are reducing also in the last quarter, the markdown pressure. Nevertheless, the sales level remain tonic. We expect also to have a good month of January in theory because we believe that the Italian consumer will continue to have a look to the asset, not only as an everyday low price brand but also a place where to find a good product, also interesting during the sales period and I mostly refer to Piombo, we are sure that there will be a good performance of Piombo also in the very last part of the year.

From a cost perspective, in spite of some pressure on the logistic cost because of the transportation hikes, we don't see element which generate a concern on the profitability. So at profit and loss level for the year-end, I don't expect negative news, and this is why we increased our guidance from EUR 120 million, EUR 135 million to EUR 10 million, EUR 15 million higher, EUR 135 million, EUR 145 million. And I feel comfortable in saying that we will be in the higher side of this interval. Maybe even better in terms of cash generation. We reviewed positively our guidance of the cash exposure. And even in this case, I feel I am optimist for this point of the year.

What for next year? Concern about inflation, concern about the new variant of Omicron. I see every kind of concern now which is affecting probably the vision of our sector in this moment. Even today, I see that the share price after these good results decreased largely. And surprisingly, in my opinion. We have a solid understanding about the future. We believe that the brand has been never -- I mean we as a brand has been never well positioned in a market like today because of a number of reasons, better stores. Once we refurbish the store, we are experiencing a strong increase in sales performance on the refurbished store from 6%, 7%, up to 30%, in some cases, so the image of the company is -- the brand is great. Some satellite, some second-brand like CROFF, for instance, are performing very well.

So I believe that, all in all, from a consumer perspective, the brand is seen as the most sustainable, the most transparent and the one which is able to satisfy the needs of Italian customer, probably better than anyone else in the market in this moment. From a gross margin perspective, we will have higher cost as all our competitors. And these costs will be transferred in prices. I believe that we will better place than other companies in transferring higher cost into prices because of the increased perception of the quality of our brand compared to our competitors, and I don't see a risk of losing our profitability because of this.

We are conscious and prudent. We will be prudent in our buying also for next year. We are introducing new brand, new concession in order to increase the level of flexibility also to react with the third-party brand to what possibly might surprise us, which means a still very solid attitude of the demand. And what will not be satisfied with increased intake will be satisfied with the increased number of concessions. Most of the concession are doing very well. So I think that there are other conditions for still challenging, obviously, because in this business, we are used to challenging condition, but a good 2022. I leave the space to your questions. Thank you.

[Operator]

Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

My first question is related to the topic of the cost inflation. So I'm trying to -- you are mentioning some mitigating impacts in your presentation and press release. Can you elaborate a bit more, first of all, on the level of cost inflation that you are facing for, let's say, for the first part of 2022 and on the mitigants that you are implementing?

And second question is on the Stefanel brand, if you can just give us an update on the performance after the launch of the first collection.

And the third is on the, say, capital structure in the sense that you have already mentioned the repayment of the bullet. If you can give us an update also on what can be the savings overall that we can expect for 2022 from the new capital structure?

[Stefano Beraldo, executive]

Okay. On the cost pressure, I think that it is clear that every factor will be affected from raw materials to transportation to electricity to dollar increase. So there will be a number of elements that are contributing to generate a cost inflation. The mitigants are many from an increased attention to leverage new suppliers, which will generate a better cost condition compared to others. So every year, we have a certain level of churn rate of supplier in order to scout and to find the ones which are more balanced in terms of quality and cost efficiency. We are discovering several, which we already tested last year, which will represent a good mitigant to this cost increase. Then we are very active in auctions and tender and contractual agreement based on a medium-term in order to mitigate the logistic, the transportation cost increase.

So we are not suffering. We are not looking at the 10x or 7x cost increase like some smaller company is forced to suffer. And we are making that, thanks to our long-term relations with suppliers, logistics supplier and also to our size and also to our capability to have a proper planning system. The fact that we are not forced to buy in the very last minute, like some extremely fast ration export company might be forced to do enable us to compensate and to mitigate this aspect, adopting more medium-term agreement, which the shipping lines are super happy to have because this gives them the certainty that the volumes will be secured.

Last but not least, we are not buying that much from China, which is the most expensive from the shipping point of view in this moment, and Bangladesh is cheaper than -- much cheaper than China in this moment. So basically, all these aspects are contributing to mitigate the cost. We are also leveraging new markets like Pakistan, for instance, which is very efficient in this moment. It's a difficult country, but we have an organization there. We have a presence. We know the market, I think, better than other competitors, surely better than any other Italian competitors.

So I think that from this point of view, we are much better placed than any Italian competitors in suffering and adopting solution in order to mitigate the effect of cost increase. If this is true, I expect the average price increase that the Italian market will experience will be higher than the one that we will be forced to adopt. And this means that from a competitive point of view, we should become even more competitive compared to our Italian brand. I think that the only brand which are material in the country, which can compete with us are Inditex and H&M, obviously, which are facing the same problem that we are facing. But at the end of the story, the 3 of us represent less than 20% of the market. And the remaining 80% of the market will be forced to transfer on prices much more than we will do.

The last question was related to the effect of the interest rate reduction, thanks to the improved financial situation, we expect between EUR 6 million and EUR 7 million of net savings in terms of interest cost. And the second question was Stefanel. For Stefanel, we are happy for the moment. We are in the very beginning of the story of Stefanel. But basically, we are, in this moment, achieving the same result that Stefanel achieved in year 2018 -- 2018, in spite of having entered in a disciplined approach to margin while Stefanel in that period was discounting on average 50% their goods, and we are only discounting by 20% on average our goods. So with a much more rigid and safe and sustainable marketing strategy, we are achieving the same sales that were clearly boosted by excess of discount and that generated for Stefanel once still alive, a critical margin result, why we are happy about our margin. So still early to make a final judgment, but the initial outcome is quite positive.

[Domenico Ghilotti, analyst]

If I may just follow up on the cost inflation side. What about the labor inflation? Do you see the -- an issue there? So do you expect to manage also some requests from the unions and some revision in labor inflation?

[Stefano Beraldo, executive]

They will come once the inflation in Italy will become official. So we expect that if in the past, it has been 1.5%. It might achieve 2%, 2.2%, 2.5%. So still something manageable.

[Operator]

[Operator Instructions] The next question is a follow-up from Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

I wanted to ask you about the CapEx plan. So looking at 2022. I'm trying to understand because I saw that refurbishment were growing and you said quite effective in terms of the impact on sales, you are starting to invest in reopening. What can be the plan for 2022? And apart from, let's say, the impact on space, what can be the other priorities in terms of investments or projects that you're planning for 2022?

[Stefano Beraldo, executive]

I think that will be not far from the older historical level. So you can assume EUR 70 million, EUR 80 million CapEx, part of them are dedicated to refurbishments with still a good and rapid return on the CapEx because, as I told, the stores that we refurbished generated on average a very healthy 10% on average increase in sales on the store refurbished. And logistics and system will see the other most important portion of investments, not a huge CapEx spent in new openings. Most of the new openings will continue to be on franchising. So this means zero CapEx and a very good margin generated by that. Either OVS KIDS, BLUKIDS, CROFF, this year, we opened plenty of them, and we are still in the mood of opening a material number next year. Most of the CapEx will be absorbed by a logistics project in order to enter in a real single product and seamless shelf mentality. So basically, increasing the level of flexibility of our planning and distribution to -- of single items, single size to the store based on the sell-through, which is generated week after week.

So logistics and digital evolution will be the ones where we invest the most together with the refurbishments and some new openings obviously.

[Domenico Ghilotti, analyst]

Okay. And last question is an update on M&A and pipeline of opportunities that you see?

[Stefano Beraldo, executive]

We have several small and interesting things that we are looking at. When I mean small, I mean, small in terms of equity value eventually. Some opportunity, we decided not to pursue because either we didn't see enough synergies or maybe the price requested was wrong in our opinion. Some other, we are still monitoring and managing. So the radar is still open, but nothing still in short term ready to come shortly.

[Operator]

The next question is from Ipsita Singh with JPMorgan.

[Ipsita Singh, analyst]

Hello, just a couple of quick ones from me, please. Could you just tell me about any delays that you're seeing currently? And has the situation been improving since, say, the last couple of months? And looking into the next year, do you believe that there'll be a higher promotion in the market because of the delayed arrivals of the stock? And secondly, just on current trading, has December seen a step-down from November on a 2-year basis. And if so, if you could just give an indication with respect to where it is trending?

[Stefano Beraldo, executive]

I'm sorry, but I captured the second question, I think, but I didn't, and my team didn't capture the first part of your question. Can you remodulate the first part of your question, please?

[Ipsita Singh, analyst]

Yes, sure. I think some connection issue there. But it was about stock delays you're seeing currently and any promotion expected into next year given the delayed arrivals?

[Stefano Beraldo, executive]

In terms of stock, I would say that because the situation of the stock is much better than 1 year ago today. And also in terms of quality of stock, we are better placed, not only in terms of quantity but also in terms of quality. Likewise, we approached the markdown this year, so which means that we reduced the markdown. We will continue with the same approach. So unless the need of markdown will come from a lower market demand, so unless the demand will be very low, we might enter in bigger markdown, but not because of the quality of stock. We don't have an issue this year.

[Francesco Leoncini, executive]

And similar to company vendor, so that's a big footprint, understood.

[Stefano Beraldo, executive]

Then you are interested in understanding the footprint of our vendors.

[Ipsita Singh, analyst]

I was not talking about the -- the current trends, in December, has there been a step-down from November?

[Stefano Beraldo, executive]

At what -- sorry, but the connection is not good. You want to know more about that.

[Ipsita Singh, analyst]

In December, the trading, how less is it with respect to November year on 2 years?

[Stefano Beraldo, executive]

Current trading in December...

[Francesco Leoncini, executive]

November.

[Stefano Beraldo, executive]

Current trading in November -- current trading has been okay. It's been more or less -- it has been flat, basically. Like-for-like has been fine. Compared to year 2020 and also compared to year 2019. Sorry, compared to year '19, yes, because we are still comparing our turnover with '19. It has been flat compared to '19 with lower promotions. I hope I have been clear. If the question was how was the turnover compared to year '19 because in '20, we had the lockdown, so turnover is higher than in 2020 in the month of November. The answer is the turnover has been similar to year 2019, even if in absence or with lower promotions.

[Operator]

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

[Stefano Beraldo, executive]

Okay. So in this case, thank you for your attention, and looking forward to meeting you in the next coming session [indiscernible] session. Thank you. Good afternoon. Good evening.

[Operator]

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