Fourlis Holdings S.A. (FOYRK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome and thank you for joining the Fourlis conference call to present and discuss the 9-month 2020 financial results. We have with us Mr. Apostolos Petalas, Chief Executive Officer; and Mr. George Alevizos, Group Finance Director. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Apostolos Petalas, Chief Executive Officer. Mr. Petalas, you may now proceed.

Hello, everybody. Thanks for being with us today to discuss the third quarter of 2020, the 9 months as well as the current developments. There's no doubt that this year, 2020, is developing in a very unique year and in many respects, a very unpredictable year. We are a few weeks before the end of the year, and it's really very difficult for us to predict how the full year will look like, especially given the uncertainties regarding the lockdowns in the countries that we operate. One thing that we believe strongly is that the pandemic is going to be an issue that will be over, and we do believe that the next day will be different day. Some sectors will really benefit from this development and some sectors will continue suffering. From our side, in both of our sectors -- based on the running rates that we experienced and also discussing with our big partners globally, both of our sectors, home furnishing and sporting goods, we believe that they will benefit from the pandemic in terms of the consumer behaviors. In our discussion with IKEA International, especially after the first lockdown back in May, the running rates were exceptionally good, and it was so good that it created big supply chain issues as of today that are impacting us to a large extent. But the same thing we understand from discussing with our big suppliers in the sporting goods, Nike and adidas. Now going back to the third quarter of 2020. As you have seen, our sales index overall was 91 versus a year ago. Certainly, it was much better than the previous quarters but below our expectations. And the explanation of this relates to the, mostly, out-of-stock because IKEA is suffering now from out-of-stocks globally. And we estimate that the impact of the out-of-stock performance in the third quarter was about 5% to 6% in our total IKEA sales. In the same time, as you know, the tourism, which is a heavy industry in Greece and Cyprus, has impacted very negatively. And tourism, not directly but indirectly through the Airbnbs, the small hotels, the rooms to let, et cetera, et cetera, that are every year good customers to IKEA, this year, those sales almost disappeared. Also, the restaurant sales in our IKEAs that represent approximately 6% of total sales, due to the COVID -- due to the pandemic are underperforming because the rules now for the IKEA stores are so tight and so strict, the consumers prefer not to visit IKEA restaurants, especially during the summer. Now on the other hand, the back-to-school period also was full of uncertainties as to whether the schools and the universities will open, when they will open. And those are also good periods for IKEA and sporting goods. So looking back to the third quarter, we had exceptionally good performance in July, satisfactory in August, and the performance in September was really down for the reasons we just explained. Now during that period, we were able to keep our gross margin at healthy levels versus a year ago. And most importantly, we had similar index in our operating expenses like our sales. So our total sales in the third quarter had an index of 91 while our operating expenses line had an index of 92. This is really unusual for retail operations where the majority of retail costs are fixed costs. Of course, managing the costs in this difficult situation, especially with the incremental costs that the pandemic has created in order for us to be able to operate, has affected the service to the quality that we wanted to be. And as a result of that, our EBIT during the third quarter was EUR 10 million versus EUR 13 million last year approximately, and the year-to-date EBIT is EUR 11 million. The fourth quarter started much better. In fact, in October, we were able to reach the sales of last year, although we had the same issues with the out-of-stock, especially in IKEA, and also with the impact of the negative economics from the tourism and the impact to the income -- to the disposable income. Now in October, as you all know, we have lockdown in Greece the majority of the month as of today. And also, some stores in Cyprus as well as in Romania are in lockdown during November. And the only way for us to reach the consumers, especially in Greece, is e-com. Now because of our advanced capabilities, things that we developed during the course of the year in our e-com, we believe that we will be able to deliver more than 60% of our last year's November sales in November across the region. Of course, in December, we cannot predict right now. There are discussions from officials that in Greece, the lockdown will continue for some weeks. There is also a very strong rumor that tomorrow the Bulgarian government will lock down all the retail operations for the next 3 or 4 weeks. And also, similar discussions exist in Cyprus and Romania and also in Turkey. So for that reason, at this stage, we cannot really predict how the full year will look like. Now because of the pandemic and the changed rules of the game, we certainly established new priorities for the year. #1 priority for us was, is and will be the health and safety of our people and our consumers. So we are taking all those measures necessary to be able to instill confidence to our consumers and to our employees when they visit and they operate retail. The second main priority relates to cash flow availability. From the very first days, we really conducted our banking partners, our strategic suppliers like IKEA International, like adidas, et cetera, et cetera, and we made several arrangements. And we set an internal target to continue throughout the months until the pandemic is still on to have more than EUR 80 million of cash availability to really face any problems that might appear, and we continue. Actually, every month, as of today, we have more than EUR 100 million cash availability, and that will continue for the months to come. A big priority for us was to accelerate the establishment of the e-commerce capabilities by using state-of-the-art technologies, artificial intelligence and logistics. Today, we have, in every country we operate, e-com. And our e-com sales really are growing day in, day out substantially. And also, the priority to manage operating expenses in this unpredictable, actually, times, unprecedented times is a big priority without really impacting negatively the morale of our people and the hope of our people. And I think we did well in that front. As I said before, COVID will be over, and the day after, those that will be ready to take the opportunity will take it. And Fourlis Group is certainly getting prepared for the day after. As I said, again, we believe that both of our sectors will continue to be more important in the mind and in the pocket of our consumers. We are working to rationalize the store network in the digital war that we are getting in. The e-com capabilities continue to be top priority, and we have several teams working to improve customer service day in, day out and also logistics automation. We believe that the difference in the future will be to exceed the expectations of the consumers. We continue our expansion plan with small IKEA stores, and we want to get closer to the consumer in the city centers across the region. And also, we have a plan to refurbish our INTERSPORT stores, especially those that are flagship stores with several digital capabilities. And we have a plan to complete that over the next 3 years. In other words, we want to become soon the leading omnichannel retailer in the home furnishing sector and the sporting goods sector in our region. In view of those objectives, in 2020, we opened the first small IKEA store in Varna, Bulgaria, 8,000 square meters, back in September. And so far really, the consumers appreciated this move and the service that we are offering. We also prepared the first small IKEA store in the City of Piraeus, a store that we were not able to open because of the lockdown in Greece. So we will open it as soon as we are really -- we have clarity in terms of the termination of the lockdown. We opened a planning studio, Pick-Up Point in Limassol. Throughout the year, we operated also a Pick-Up Point in the City of Kalamata. And we already secured 3 new locations to open small IKEA stores during the course of 2021 in Greece and Bulgaria. In INTERSPORT, we opened 6 new INTERSPORT stores, most of them during the lockdown period in Greece and Romania mostly, including the flagship stores in downtown Athens in Ermou Street. We also opened 2 very modern outlets for stock liquidation with exceptional performance so far and one ATHLETE'S FOOT. And we refurbished with the new standards, the digital standard, 4 INTERSPORT stores in Greece and Romania as well. During the course of 2020, we expanded our logistics center by about 7,500 square meters to be able to service our customers with incremental e-com orders. And we prepared actually a structured plan for the next 3 years to develop a more automated logistics center, a CapEx of about EUR 12 million. And this new logistics center, expanded -- with the expansion of the existing one, will be ready in the beginning of 2023. We are also planning to rationalize the 2 provincial stores of IKEA in Greece and make them with that size that those stores will become profitable. And also, we are working to rationalize our operation in Turkey, an operation that really affected us. And especially now with the economic difficulty in Turkey, the impact of those really make this priority as a top priority for us. Now we are working also to set up our real estate vehicle, although the pandemic has created several operating issues with the Greek authorities, especially with urban plan. But we believe that we are not far away from the date of the establishment of the real estate vehicle. Now the net debt at the end of the year, despite the pressure on sales and pressure on profitability, we estimate that it will be around EUR 100 million reported. But that will include an amount of around EUR 30 million to EUR 32 million of arrangement with credit extensions with our main suppliers, especially with IKEA international due to the pandemic. So with that in mind, I will pass the floor to George to talk to us about more specifics for the performance of the 9 months.

Let's concentrate on the third quarter. So during the course of Q3, IKEA activity per country was 15% lower in Greece, almost flat in Cyprus and minus 6% in Bulgaria. As mentioned from Mr. Petalas, out-of-stock issues and the performance of restaurants and B2B plus the lower disposable income dominated. More specifically, during August and September, the out-of-stock impact was approximately 5% on total sales. Our FB, food and beverage, turnover, we are talking about the restaurants, during the course of the 9 months was 41% -- was minus 41% versus prior year, an impact on total sales of approximately 1.8%. B2B business turnover during the course of the 9 months 2020 was minus 24% versus prior year, an impact on total sales of 1.9%. The gross margin of the IKEA activity for the third quarter was 50 basis points lower versus prior year same period basically due to product mix driven from out-of-stock bestsellers. We continue to work on all the lines of the OpEx. However, we shouldn't underestimate that during the third quarter, we opened the first medium-sized store in Varna, Bulgaria, and we have prepared the small-sized store in Piraeus, which will open when the market will operate again in Greece. Despite the preopening expenses plus the operating expenses of the incremental network, OpEx of IKEA activity during the course of Q3 2020 was EUR 23.4 million, 11% lower versus previous year. The activity of athletic goods in the 5 countries during the course of Q3 was as follows: Greece was minus 4%; Romania, minus 4.5%; Bulgaria, minus 8%; Cyprus, plus 1.2%; and Turkey, 7.5% negative in local currency. The gross margin of the athletic goods activity was 210 basis points lower versus Q3 of 2019. The trend of lower gross margin is better versus previous quarters, but certainly, the yearly gross margin will be driven from stock management activities. Operating expenses during the quarter was EUR 300,000 lower versus previous year despite the increased number of stores we operate this year. On a consolidated basis, operating expenses during the quarter was EUR 3.6 million lower versus same period of 2019. Therefore, despite the lower EUR 12.3 million revenues in the -- during the quarter and EUR 6.6 million lower gross profit, we managed to limit the deterioration of EBITDA by EUR 3.6 million and only EUR 2.9 million on EBIT level. The financial expenses for the 9-month period was EUR 13.6 million, EUR 300,000 higher versus 2019. Interest expense excluding IFRS16 impact was EUR 5.4 million during the 9-month period, EUR 200,000 higher despite the fact that gross debt was approximately EUR 70 million higher with equal amount of cash versus same period previous year. The financial expenses also include EUR 450,000 FX translation due to the Turkish lira devaluation, something that existed also during the 6-month results. Finally, we have realized in the financial expenses an amount of EUR 400,000 negative from the equity consolidation of the mall in Sofia, Bulgaria while in the 9-month results of 2019, the number was positive EUR 800,000, so a swing of EUR 1.2 million. IFRS 16 impact in the 9-month results was as follows: EUR 15.6 million leases not included in EBITDA, EUR 13.8 million depreciation due to IFRS 16 implementation and EUR 4.4 million interest for the same reason, a net impact at the profit before taxes level of EUR 2.7 million negative. During the course of the 9 months of 2020, our free cash flow was EUR 2.4 million positive, something that improved our net debt position at EUR 113.9 million versus EUR 116.3 million in September 2019. Before the current lockdown in Greece, we have estimated that our free cash flow for the year would be negative and equal to our CapEx for the year 2020. Therefore, our net debt at the year-end would be around EUR 125 million versus EUR 106 million at the end of 2019. However, the current lockdown, it was mentioned from Mr. Petalas, gave us the opportunity to extend the credit days with our partners. And we anticipate, at the year-end of 2020, Fourlis Group will have a lower net debt versus 2019 at the level of EUR 100 million. Mr. Petalas explained in detail what we anticipate for the end of the year and how much we have extended for next year due to the credit days. Now last but not least, we continue our share buyback program. We have accumulated a number of 500,080 -- 580,000 shares, equal to 1.1% of our total shareholders' equity. This is for me. And I will pass the floor to Maria in order to proceed with our Q&As.

[Operator Instructions] The first question is from the line of Draziotis, Stamatios with Eurobank Equities.

Just a few questions from my side, please. Firstly, you talked about the OpEx savings of EUR 3 million, EUR 3.5 million in Q3. Could you tell us which the main categories of this curtailment were, please? Secondly, I think Mr. Petalas mentioned the digitization and CapEx plan related to the new logistics center. Could you just tell us what the total investment amount that you have budgeted for the next 3 years is roughly? And lastly, you also mentioned that we've been hearing about potential of rolling lockdowns being enforced in December, maybe in the first quarter of next year as the virus continues to sweep across the country. Could you tell us -- I mean what levers do you have to pull on the cost side so that you can mitigate the impact from this potential extension of restrictions into next year?

So Stamatios, the saving on OpEx is on the other lines. We all know that the major lines we have on our OpEx is labor and lease agreements. So basically, this is how we came through this EUR 3-point-something million during the quarter despite the fact that we have an incremental network and we are open. We are working in all the lines of the OpEx. Now Mr. Petalas will...

Yes. Now let's talk about this CapEx, the project for our logistics. As you know, the e-com was increasing significantly even before the pandemic. And because of the pandemic, the levels of e-com will go even higher. That's one. Now we developed e-com in every country for our sporting goods operation, and all the operation of that is coming out of the Greek logistics center across the region. And three, as we opened small stores of IKEA in the city centers, the majority of the orders of the consumers, those that visit the small stores, should be delivered to the homes of the customers the day after or 2 days later. So that means that in our logistics, we need to have significantly higher capacity and capabilities in an automated manner to be able to send the product accurately and on time to the consumers. For that reason, we will separate the existing logistics center that we have in Athens, which currently operates both IKEA and INTERSPORT operations, and we'll create a new logistics center, a leased logistics center, let's say, that we will put in automated technology. And that will also -- will work exclusively for our INTERSPORT operations, the store replenishment as well as all the e-com operation. That project will be up and running in the beginning of 2023, and the total cost will be around EUR 12 million. Now to your question, how much CapEx we need per year, in 2020, we estimate our total CapEx will be around 20 -- EUR 22 million, EUR 23 million, and that includes the first installment of the new project. For next year where the majority of this project will need to be spent, the total CapEx will be approximately the same, EUR 22 million. And certainly going forward from '23 onwards, those amount will be lower because we don't have a one-off CapEx to run in the future. So summarizing, this year where it's the first installment of this project, along with the opening of small stores, the ongoing CapEx, the total CapEx in 2020 will be around EUR 23 million. Next year will be around EUR 22 million, including the new project. And from '23 onwards, it will be below EUR 20 million. Now regarding cost savings, Stamatios, well, when we have lockdowns, the experience so far is that the government that oblige the retailers to shut down the stores, they offer some, let's say, subsidy for labor as well as for the leasing cost. If that continues, and we have this example in Greece in November, then we can save approximately EUR 4 million to EUR 5 million across the region for every month that the stores are closed.

The next question comes from the line of Memisoglu, Osman with Ambrosia Capital.

You mentioned for November a revenue index of 60, I believe, for the consolidated business. Could you give us any color for the segments? What have you seen for these businesses? How has it been trending over the last few weeks? And I have another question, but I'll wait for your response, if that's okay.

Yes. Well, in November, during the course of the month, we have the lockdown across all the retail stores in Greece, both in IKEA and INTERSPORT. So the only way to sell in November is e-com, and through e-com, we can reach approximately 30%, 35% of last year's sales in Greece. And as you know, Greece represents approximately 60% of total sales. Now in the other 4 countries, our performance is much better, although there are still certain stores in Cyprus and in Romania that are closed. In those countries today, we -- actually, we are able in all the other countries except Greece to reach more than 90% of total sales for the month of November. So the average is, well, it's not different from sector to sector.

Got it, got it. That's helpful. And regarding your financial sources, so obviously, you have EUR 100 million of cash. Could you remind us on additional facilities available?

The incremental EUR 70 million that we managed to disburse was the facilities supported by European Commission and the development bank. So basically, we have released and we have available all the credit lines from the banking sector. And this is why these facilities were extremely low in terms of cost. And this is why I mentioned earlier that despite we increased our debt by EUR 70 million and equal cash, our financial expenses are flat versus prior year.

And George, do you have any unutilized remaining capacity?

As mentioned earlier, our capacity remains the same like the previous period.

Okay, okay. That's helpful.

Obviously, it's not -- our capacity, as you understand, is more than EUR 60 million as we talk. But this is not a number that -- it is something that it is with the banking sector, but it is not committed, as you understand. It is working capital facilities that we used to have in all the time period in the previous.

Osman, if I may add here. Fourlis has a privilege to have strategic partners. Out of our total purchases for goods throughout the year, approximately 75% is IKEA and adidas and Nike. All those 3 partners are really very supportive to us. The first lockdown, I mean, all 3 really were very, very supportive. And because of the new lockdown, they already, in writing, declared to us that they will continue to be supportive. So for that reason, at the end of the year we estimate that about EUR 30 million of purchased goods will not be paid to those suppliers until there is clarity as to when the stores will be opened. In other words, a part of the debt and the facilities we have in place, the EUR 60 million that George already said. Our business partners really are supportive. And from that point of view, we don't see access to cash to be a problem for Fourlis Group.

The next question comes from the line of Tremiterra, Diego with Noster Capital.

Two very quick questions. So first of all, with regards to your CapEx guidance, is there a split that you can give us with regards to growth and maintaining CapEx just so that we can model that out? And secondly, with regards to your stores, medium-sized and small-sized stores of IKEA, do you expect higher sales per square feet within those stores? Or should we expect pretty much sales per square feet to be in line with the larger IKEA stores?

Well, in terms of the CapEx, if I have to give some more color, let's say, our group spends CapEx on certain areas. The ongoing CapEx to operate our 180 stores, IKEA and INTERSPORT, every year is around EUR 12 million. So we need that to keep our stores fresh, up and running, and that includes the technology that we need to install in, et cetera, et cetera. So we have that this year as well. In addition to that, we have expansion for new stores. So we opened either small IKEA stores or INTERSPORT stores. Of course, we're talking about leasing stores, but we need to pay the furniture and fittings. So this is about EUR 3 million to EUR 4 million every year so far. Now on top of that, we have the special projects, and the logistic project is really one of them. So in this year for logistics, we have a total investment of around EUR 5 million for expansion of capabilities and capacities. And especially in this year, we invested around EUR 5 million for 2 locations that we will develop small IKEA stores: in the island of Crete; and in the third largest city in Greece, in Patras. Those plots that we purchased, actually we purchased 50% of those, will be contributed in the real estate vehicle that we plan to establish. And this can be extraordinary CapEx, let's say, for this year. I don't know if that helped.

Yes, that's very clear. And...

Yes. Sales per square meter for the medium and small-sized stores is much larger than the typical stores because, for example, in the medium-size and small-sized store, it doesn't exist, the warehouse. So basically, we have smaller stores, much larger times and visits per year, so higher sales per square meter definitely.

And one last one, if I can sneak that one. With regards to your INTERSPORT and ATHLETE'S FOOT stores, are you still planning on -- does the plan of 160 stores and 50 stores, respectively, still stand with regards to the next couple of years? Or would you assume higher or lower numbers with regards to that?

In terms of expansion, in INTERSPORT family, yes, the numbers we have announced to go for the future in all the other countries except Turkey are still on. Those are the numbers that we target. In Turkey, as I said before, we are working to rationalize this business again and see what is the next step. So for that reason, we have frozen the expansion in Turkey.

[Operator Instructions] The next question is from the line of Kourtesis, Iakovos with Piraeus Securities.

Mr. Petalas, you referred -- just a follow-up. You referred to a negative impact for each month that stores remain closed for potential new lockdown. You said EUR 4 million to EUR 5 million of OpEx. This is just a clarification on this, please.

Yes, yes, yes. That is the experience of ours in the first lockdown. That will be proportionally the experience of ours in November as well.

We have a follow-up question from Memisoglu, Osman with Ambrosia Capital.

Just on the competitive environment, do you have any anecdotes you can share with us from the ground how competition is being impacted in these challenging times. And then I think you mentioned for [ RSC ] digital development or work. Is it just logistics or is it also something that may impact revenue a bit over the medium term? I wasn't sure about that.

Sure. Well, certainly, in the pandemic environment, everybody suffers and the competition is suffering as well. Of course, the smaller companies suffer the most. The fragmented market is facing liquidity issues, ability to import and buy product, et cetera, et cetera. But from the large retailers in the countries that we operate, we have not seen so far any indication that they have big problems, let's say. I think it's too early to assess. But there's no doubt that this pandemic will put a lot of pressure to competition, and some of the companies will not be able to make it the day after. Now in terms of digitalization, actually, digitalization is in every front, and revenue generation is really a top priority. E-commerce -- technology in e-commerce, in customer service, in omnichannel, digitalization in the store to really inspire the consumers and make the shopping easy in the store is also a big portion of our digitalization plans. If you can see our flagship store in downtown Athens, the one that we opened for INTERSPORT, the flagship store in Ermou Street, it's really -- it really includes many, many digital capabilities for the consumers in the store, either for technical information or even to order in the store or even to place an order from home and go to the store and pick it up in an automated manner. So digitalization is not only logistics, but also it's also the artificial intelligence in terms of informing the customers for the status of where they order. This is also revenue-generating and differentiation versus competition. Of course, it is for logistics, especially if you want to have a really automated and robotic logistics systems, where the automation is mandatory.

Your next question comes from Sykes, Matthew with Aberdeen Standard Investments.

Are you able to provide any more detail on the progress of the real estate vehicle at this time?

Yes. What I said before is that our key priority is to establish the legal entity of our real estate vehicle. All the process has been completed for the assets that are in Bulgaria and Cyprus from the beginning of 2020. And from the 5 assets that are in Greece, the 4 have been fully cleared. There is one asset in Thessaloniki, the IKEA store in Thessaloniki that has some details -- let's say pending details to be completed. But because of the pandemic, the urban plan people, either they work remotely or they have difficulty to communicate, and that takes time. But we believe that in the first quarter of 2021, this legal entity will be up and running. And from that point, we start our development plan for the real estate vehicle.

Our plan continue to be to contribute a gross asset value of approximately EUR 190 million, including the 2 plots that Mr. Petalas mentioned, where we were going to develop the IKEA small- and medium-sized stores -- provincial stores in Greece. So EUR 190 million approximately gross asset value and an equity value of approximately EUR 170 million, EUR 172.5 million approximately. This is the plan, and we anticipate that we will manage to establish the vehicle at the beginning of next year. However, we continue to work -- we have the professional management, and we work in order to follow exactly our pipeline.

[Operator Instructions] The next question comes from Tzioukalia, Fani with Wood & Co.

So you mentioned a 5% effect on supply chain management issues on IKEA level. And I was wondering if this is going to be the case for the fourth quarter as well.

Well, yes, that was the impact in the third quarter in our sales, estimated impact. As I said before, IKEA international really had significant performance after the first lockdown. And as a result of that, versus their planning during the lockdown, several fast-moving SKUs disappeared very quickly. And the assured us that they will be able to solve the problem by the coming February. So they believe that with extraordinary productions, et cetera, et cetera, by February of 2021, the problem will be resolved. Now in the fourth quarter, certainly, we are going to have impact of supply issues, but I believe it will be less because of the lockdown in Greece. So our stores are closed, so therefore we cannot lose the same value like we lost when the stores were opened.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Petalas for any closing comments.

Well, thank you very much for being with us. There is no doubt that the times are extremely difficult. But from our side, we strongly believe that the future is bright, and Fourlis is -- and we are doing everything possible that Fourlis will be the winner in the next day. Thank you very much again, and good day.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.