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 third quarter fiscal year 2021 financial results. We have with us today Mr. Vasileios Fourlis, Chairman of the BOD; Mr. Apostolos Petalas, CEO; and Mr. George Alevizos, CFO. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fourlis. Mr. Fourlis, you may now proceed.

Thank you, Maria. Dear all. Thank you for attending the Fourlis conference call. It is obvious that the pandemic is still with us. The present wave is creating additional uncertainty. Our group is facing different environments among the countries where we operate. However, it is evident that our improved e-commerce know-how has been very valuable in our performance. Also, we are optimistic that the negative externalities from the pandemic will begin to fade away during Q2 of 2022. Regarding our results for 2021, our CEO, Mr. Petalas, will present them analytically immediately after. However, it is obvious that 2021 has been a much better year than 2020. Regarding the main initiatives and directions of our group, I would like to mention the following: IKEA is about to open its most advanced city store in Athens, situated in the Mall of Athens. In addition, IKEA is implementing a 4-year plan that includes 3 new midsized stores of approximately 10,000 square meters each in Athens and the countryside. INTERSPORT is also implementing a 3-year plan that includes the operation of a fully automated logistics center during January of 2022 and the upgrading of the store network in all 4 countries. Our real estate investment company, Trade Estates, is targeting for an IPO during 2022. Presently, Trade Estates has a gross asset value of approximately EUR 200 million and a pipeline of an additional EUR 250 million. The listing of Trade Estates will add considerable value for Fourlis shareholders. We have mentioned in the past our intention to expand in a new retail sector. Very shortly, we will be able to announce this new retail sector that will be developed in all our region through an omnichannel of stores and online network. Last but not least, we are initiating a new department in the company called New Technologies Business Development. This department will explore opportunities in the new digital economy. And now Mr. Petalas will present our 9-month results.

Thank you, Vasileios. Hello, everybody. Well, we really live in ample-debted situation over the last 20, 24 months, and that it is -- that makes very difficult to compare the period and the time. So we will try to make -- to give as much clarity and as much comparability in our figures that we announced yesterday. The third quarter is always, in our group in terms of seasonality, an important quarter, along with the fourth quarter, and 2021 Q3 was really a good quarter. Our sales index versus a year ago was 109, and it really compares very much with the third quarter of 2019, which was a normal year. Now adapter is more important given the significant challenges that we are facing and faced during the third quarter in an intensified way. The COVID restrictions in visiting retail stores were really very significant during the third quarter. And even the restaurants in our IKEA stores were completely closed during that period. Also, the global phenomenon of supply chain issues that creates out of stock in several SKUs was and still is one of the headaches that we are facing. So with those challenges, certainly the performance of the third quarter was really very good. Now the drivers of our performance, as Vasileios mentioned before, we are continuously increasing our omnichannel capability. And although we have a long way to go in that sector and that opportunity, we try to do everything possible to improve our online inspiration, the loyalty of our consumers, the product and the categories that we sell through omnichannel, the logistics systems and the improvement -- continuous improvement of our last mile. And that reflects investments in technology, investments in specialized people and investments in customer service. Also, we have to recognize that the pandemic is favoring the sectors that we operate, especially the sporting goods sector because we see globally a significant growth in that category. I think it is important to mention that this sales performance in the third quarter was followed by a healthier gross margin versus a year ago, and that gross margin really compares with normal situation, like 2019. Now let me say a few things about the overall 9-month 2021 results. Sales index 113 versus a year ago, and it is 93 index versus 2019. Our e-comm sales reached EUR 60 million, a figure that we realized in 2020 in the full year. And in full year 2019, our e-comm sales were EUR 30 million. In 2021, we estimate that our e-comm sales will reach approximately EUR 78 million to EUR 80 million. Now the gross margin certainly is healthier versus 2020, and it has been improved and is getting closer to a normal situation, although we know that the online and the omnichannel sales have a little bit of lower margin as consumers -- online consumers prefer more promo offerings. Our EBIT was EUR 18.7 million, about EUR 10 million better versus a year ago. Now this EBIT has been benefit from subsidies and support offered mostly by the Greek government in Greece, and we realized a total, let's say, support of around EUR 10 million in our leasing costs, mostly, but also in labor cost, especially during the period of the closed stores in the beginning of the year. The related amount in 2020 with extraordinary support was EUR 6 million. In other words, we had a benefit of EUR 4 million year-on-year for the 9-month performance. During that period, also, we had higher OpEx because our store network has been increased versus 2020 by small IKEA stores and 7 new INTERSPORT stores. We also had an impact of our -- in our OpEx line during the 9-month 2021 performance by EUR 2.5 million, and that relates with the projects that we do in the provincial IKEA stores to rationalize our operations with smaller stores and we paid in June about EUR 2.5 million severance for a voluntary program to reduce the number of employees in those 2 stores. And certainly, this period has been -- we have incurred higher operating costs because of the investments in our e-comm capabilities, the way I referred before. The PBT in the 9 months was EUR 7.4 million, and the net profit was EUR 8 million. The net debt of our group end of September 2021 was EUR 101 million, approximately, out of which EUR 95 million relates to the retail operation of the group and $6 million approximately relates to the real REIC Trade Estates operation. Now we have though to notice that about EUR 17 million settled trade payables, especially with IKEA International, were outstanding at the end of the year, so at the end of September. And this is going to be fully paid by the end of the year. Also in October, we paid the bond that we launched 5 years ago in Greece, with a coupon of 5%, a EUR 40 million bond fully paid, and this has been replaced by a new bank bond with the cost to be approximately 2.8%. At the end of the year 2021, we estimate that our total net debt will be approximately EUR 125 million, and EUR 14 million approximately out of it will relate to the Trade Estates operation. The CapEx in the 9 months of 2021 was EUR 19 million. The majority of that relates with the new logistics center that we developing out of Athens for our sporting goods operation of the group for the region. It also reflects the small IKEA store in Sofia that we opened during the course of that period and also some prespending for the new IKEA small store that we open in December next month in Athens. We also have launched a significant refurbishment program in our INTERSPORT stores, and we completed 12 refurbishment stores in Greece as of end of September. The full year CapEx is estimated to be around EUR 29 million, and that excludes any additional CapEx related to the Trade Estates operation. Now let me say a few things about some special projects, very important for the future of our group. I already mentioned that the program for the rationalization of the provincial IKEA stores, that in Yannena and Larissa, that go from 20,000 square meters down to 10,000 square meter, is in progress. We completed the voluntary program for the employees, as I said before. And now there is a CapEx in progress, EUR 2.5 million to rationalize this and to reduce the space in every department of those IKEA stores, and this will be completed in January 2022. Also, as you know, we started the rationalization of the INTERSPORT Turkey operation. Last year, this time around, we had 23 stores in place. Today, we have 12 stores. And in those 12 stores that we still operate in Turkey, we have much better economic terms, especially from the leasing point of view, and much higher sales in local currency. We feel that the majority of this brand has been completed now and despite the big challenges of IKEA -- of the Turkish economy, we estimate that in 2021, our Turkish operation will have marginally positive EBIT. As we mentioned before, the new IKEA -- small IKEA store in Athens will be launched in December. And the new logistics center for sporting goods will start its operation in January. And we will start the increased capacity of our IKEA Logistics Center, a project that will be completed by May 2022. Now, as I said before, we did face and still facing supply chain issues. We estimate that our sales, let's say, opportunity would be around 4% of our total sales, if we didn't have those. Although the supply chain issues still are there, but we are confident, especially with IKEA International that they have the solutions, and what they commit to us is this problem will become less and less as we go. Now in terms of the energy cost to operate our stores. Yes, we see also increases like everybody around the globe, increases of 50% maybe. Although the energy cost for our group in the full year is around 4% of our total OpEx. Now a few things about the performance in the fourth quarter, which is also critical in our group in terms of seasonality. October was really good. Actually, in October, we did 5% more than the sales we did in 2019, and this is really exceptional with good margin as well. Now effective November 1, as the COVID issue is expanding in every place, the government and the Greek government as well took some special measures to limit the nonvaccinated people in -- for visiting the stores with special processes and certainly, that impacts the visitorship. So far, we see that November, most likely, will be around 10% to 12% below 2019, again, which is a normal year. And of course, versus last year, it will be much, much higher, as last November in 2020, the stores were closed. Now December, we cannot assess right now, but based on the commitments and the announcements from the governments, we estimate that December can also be a month similar to November in terms of performance. With that in mind, we estimate that the full year EBIT in 2021 can be -- can have a delta versus 2020 full year EBIT of about EUR 20 million. So that means that our profitability is going to be significantly better versus last year. And for this reason, the management has decided to propose to the General Assembly in the coming year for a payment of dividend as our profitability and our cash flow allows that. So with that in mind, I will pass the floor to you for questions and answers.

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

Yes. I have a couple of quick ones, if I may. Firstly, on the supply chain issues, you talked about this 3% to 4% impact on revenues. And I appreciate the granularity. Just wondering, based on what you've been experiencing or hearing from INTER, IKEA and your partners in general, when do you expect things to normalize? Is it a matter of a few months or you reckon that supply frictions will weigh on performance throughout 2022? And on Turkey, just wanted to get your insight in the light of the latest development. I mean is a full exit an option you consider? Or do you prefer to just wait and wait for the political developments before taking a concrete decision regarding your presence there? And last question that pop to mind, actually, I know you mentioned trends at group level in Q4 in terms of current trading. Maybe if you could just comment a bit in the light of the latest restrictions in Romania and Bulgaria. What you've been seeing there? And obviously, I appreciate your comment on Greece as well.

Okay. Well, with the supply chain, many things depend on -- I mean the unrest that has been around the globe with the COVID. Basically, if I summarize for us, IKEA International is trying to do everything, and they have their margins to do it. They have limited to the problem, mostly to a number of 10% of the SKUs that we sell, but those are slow-moving SKUs. That's why the impact to our sales is much less than the number of SKUs. And based on work IKEA International is saying, they believe that the problem is going to become less and less until the second quarter of 2022. Now for the sporting goods, I think the main problem relates with Nike. Nike, a part of the problems in transportation, the shipping, also faces difficulties in production, especially in countries like Vietnam and Bangladesh that are being hit a lot from the COVID. And today, Nike is saying that the problem will be less, but for the spring/summer period, they will be in a position to provide to us about 80% to 85% of the orders that we have placed for that period. We know that they do everything possible to limit that. But for the autumn winter, which is the next season for sporting goods, what they believe is that things will be normal. So from that point of view, we feel that if there are problems, the problems will be less and will be limited in the first half of 2022. Now for -- let me just say a few things about Romania and Bulgaria. Yes, the problem with COVID in Romania and Bulgaria is much more significant versus Greece and Cyprus, mostly because the nonvaccinated population is much, much greater than the vaccinated. And for that reason, there are limitations, there are restrictions, but there is fear as well. And for that reason, the numbers of visitorship are much bigger -- problem in visitorship is bigger in Bulgaria and Romania versus Greece. But overall, we -- for Q4, we believe that -- not Q4, actually, because October was fantastic for us. November and December, we believe that the sales impact versus 2019 same period will be 10% to 12% of the sales. But again, versus 2019. Versus 2020, the sales will be much, much greater because last year, the stores were closed. Now for Turkenergy Vasileios will...

Right. Thank you for the question regarding Turkey. Last year, as you probably remember, we targeted to do 2 things in Turkey. Number one, to stop the operating loss by closing down certain stores that did not meet the top and bottom line targets that we had. In this we have succeeded. So this year, we are operating only profitable stores, plus online sales, plus a very -- a quite limited head office that is very efficient. So this year, we will have -- we will not have negative cash flows. The second target that we had during our plan of last year was to provide for the possibility of a full exit. So last year, we have taken provisions for such a possibility. So in case we decide to exit completely, which is not plan A right now, it is plan B. In case we decide to exit, we do have the accounting provisions for such a scenario. However, as I said, plan A is either to maintain the profitable operation that we have today or other non-loss producing solutions. Thank you.

Our next question is from the line of Kourtesis Iakovos with Piraeus Securities.

First thing -- first question has to do with your new retail concept. Would you feel that you would be able to give us more details during the announcement of full year results? Second thing has to do with INTERSPORT performance in third quarter. We've seen that sales were up 11%, but EBITDA was relatively flat year-over-year. Could you shed some light on this, please?

Thank you. Regarding the new retail development, as we have said in the past, our intention has been to have 3 retail concepts for risk management purposes. And this is the reason why for the last 2.5 years, we have been working on this. We will most definitely be able to give you a lot more details regarding the sector and other things before the results of this year. Apostolos, regarding INTERSPORT?

No, INTERSPORT really had a very good performance in Q3 compared with a very good performance last year as well. So the 9% is really exceptional. Now b, last year, a number of employees was subsidized by the state. This year, after June, there was no any form of subsidy. And c, as I said in my introduction, we are investing in our INTERSPORT operation, especially in omnichannel, in customer service, in technologies. And those costs really reflect, but we do not invest that for the short term. Those are costs that will help our omnichannel operation in INTERSPORT as well as in IKEA to really give us much, much better capabilities as we go for the years to come. So for that reason, we had 9% increase without any subsidy this year, and profitability was flat. But if you see the profitability in the 9 months in the sport is really exceptional. We improved profitability in sporting goods year-on-year in the 9 months by EUR 8 million.

And if I may add a point to what Apostolos said, I think we all have to keep in mind the major changes that are taking place in the sporting goods sector. And mainly the big suppliers like Nike and adidas are undergoing a process of keeping very, very few strategic partners that will be working with them in the near future. It's not a secret that during the last 2 months, more than 80% of the client base of Nike in Greece and in other areas had been informed that most likely they will not be supplied during the next couple of years. The fact that INTERSPORT is a strategic partner of Nike, especially in the performance sporting goods sector, I think, is setting the basis for a competitive advantage for INTERSPORT during the next few years.

The next question comes from the line of Orsini Luca with Antares.

I'm sorry, I could not -- I just listened to the Q&A and not the presentation, so you may have covered that during the presentation. But I hope the others will -- could forgive me. Can you tell me what plans do you have on the real estate and about the potential IPO?

Right. I'll be more than happy to talk on that. During 2022, we plan to list the subsidiary of our real estate arm. Trade Estates has been established since July with a gross asset value of close to EUR 200 million. And during the pandemic, the company has been working hard on creating a pipeline that presently is close to EUR 250 million. Part of this pipeline, of course, is the Ellinikon project, where Trade Estates will own and develop the retail park in the Ellinikon project. Now Trade Estates has some specific characteristics. First of all, it is the only specialized real estate investment company in Greece, and it is specializing in omnichannel infrastructure. This means retail boxes of international clients and e-commerce logistics, and we will continue on this specialization because we believe that there is a gap in the market for such a specialization. The second important thing is that Trade Estates is not simply a real estate investment company, but it is also a development company, a development company, of course, within the framework of its specialization. This is why the pipeline of EUR 250 million is a very significant pipeline compared to the gross asset value of today. So the listing of Trade Estates in the stock market next year will provide the shareholders of Fourlis with substantial value upside and also the new shareholders of Trade Estates during the IPO with the potential of the pipeline. These are the major directions we are taking. And I would be glad to answer more specific questions regarding the real estate.

Yes. If I may, just to understand, is your idea to have the Trade Estates under, one way or the other, the umbrella or the control of the existing Fourlis? Or are you thinking the businesses as 2 separate legs, each with its own merit? Of course, it will be interlinked because there will be rent paid and things like that, and they will probably have very similar shareholders. But is the question, will they be separated or will be one under the other?

This is a very good question. Our intention is for Trade Estates to be a dynamic and large real estate investment company. In order to succeed in doing that, we have to satisfy 2 conditions. First of all, we have to list it because this is the regulation in Greece. In order to have, as you know, the tax benefits, the company has to be listed. But most importantly, Trade Estates should not be a company that houses the activities of Fourlis Group. Today, 95% of the assets of Trade Estates have as tenants Fourlis Group activities, either IKEA or INTERSPORT. However, all our work with the pipeline is to the direction that Fourlis-operated companies will be a minority in the tenant mix of Trade Estates. And after the IPO, Fourlis Group will also be less than 50% a shareholder of the group because of the dilution that will take place with the IPO. However, the shareholders of Fourlis will own a smaller part of a much bigger company. And if your question is, do we intend to carve out and distribute to the shareholders of Fourlis, the shares of whatever part Fourlis owns? This is not something that we have decided upon yet. However, the main thing is that Trade Estates will not be, let's say, a Fourlis Group retail real estate arm. It will be an independent, dynamic, diversified real estate company.

Yes, I can see that. I mean, if your assets are worth, say, EUR 180 million, just for the sake of argument, and you plan to invest EUR 250 million outside. And on the EUR 250 million, probably there will be something which will be IKEA, it will be the IKEA in the fabulous Ellinikon project, you'll probably at the end of the process will be 50-50 IKEA rent, let's call it, sort of Fourlis rent and 50-50 third-party rent. That is what you intend to do. And -- no, my other question was, if you were thinking about distributing the shares to the shareholders, just to have -- to separate completely the opco to the tradeco because that would create value because at this point, the valuation is just stupid.

Yes.

And just [indiscernible]. And the second thing is, would you give the IKEA, the Fourlis shareholder some kind of preferential rights on the real estate arm?

Well, again, these are very good questions. However, we have not decided yet whether we will distribute the shares post IPO to the Fourlis shareholders. First, we want the value of Trade Estates to surface. And we believe that post IPO, having the present assets plus the pipeline, this value will indeed surface. And then we will decide the best way to benefit the shareholders of Fourlis. Really, look, at this point, we are contemplating step by step because we want every step to be a concrete step. So right now, we are building the company. We have a great team, a fantastic talented team. Very soon before the end of the year, we will announce some important acquisitions of assets, very important acquisition of assets and some new developments in the company. Then the IPO will take place. And then we will make sure that the shareholders of Fourlis who have seeded actually, who have put the seed for this business, will benefit from it.

Have no doubts about it.

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

A couple of questions on my side, please. You mentioned EBIT to be up by EUR 20 million for full year '21 on a year-over basis. I just wanted to confirm I heard you correctly. And then you also mentioned some payables you paid to IKEA. What kind of net debt should we assume for year-end '21?

Yes, I do confirm that based on our estimations for the performance for the next 4, 5 weeks, we will be able to have a delta between 2020 to '21 of EUR 20 million better EBIT. Now the thing that I said about the prolonged payments is, I mean, IKEA International helped us during the course of the COVID by deferring the payments. But by the end of the year, this amount will be fully paid. So at the end of the year, we can -- we estimate that our net debt for the group, including Trade Estates and Fourlis operation will be around EUR 125 million to EUR 130 million, fully paid everything.

And that includes CapEx of how much in total? Because you mentioned that each...

The total CapEx is EUR 29 million, EUR 29 million for the full year.

Including the real estate bit or...

Including the known elements of real estate. Now if there is anything new, I mean this is most likely unlikely, yes.

Yes, Yes. No, no, I appreciate that. Okay. And then the other bit that maybe you can give us a bit more color. I mean the EUR 20 million kind of implies some of this, but maybe a bit more qualitative color on IKEA's margin performance in Q3, which was a great recovery from Q2. How do you see that developing in Q4? And potentially any color on '22 maybe, if possible, a bit on the demand side as well, which is always interesting.

We are in the process of developing our 2022 AOB. And I mean, we examined several scenarios. Unless the pandemic really exaggerates to the worst-case scenario, we believe that 2022 is going to be a good year for us in terms of sales. I mean the evidence we have so far is that both categories, sporting goods and home furnacing are benefiting the preference of the consumers as we go. So we do assume that those 2 categories will grow in every country we operate much more than the GDP of those countries. And IKEA is here to really take the lion's share of this increase. And in terms of profitability, we will improve profitability versus 2021. But at the same time, as we develop and build capabilities not only for the course of 2022, like new logistics center, like omnichannel capabilities, our customer service, like last mile. So those costs certainly will affect 2022, but are here to really give us a more favorable potential for the years to come. So overall, we do see 2022 being a much better year in terms of sales and a good year in terms of profitability.

[Operator Instructions] We have a question from [indiscernible] with [indiscernible].

Could you please repeat again the guidance for the store rollout for both IKEA and INTERSPORT as well, just to make sure that I have the correct numbers?

Right. Thank you for that. We have a plan to open during the next 4 years, at least 3 medium-sized stores in Greece.

IKEA, IKEA.

IKEA, right? Of course, 1 in Ellinikon and 2 in the countryside.

Okay. Okay. And with respect to INTERSPORT?

Maybe more than 2 in the countryside.

Yes.

And possibly also in Bulgaria, but it is not set yet. And for INTERSPORT, by the end of our 3-year plan, we will have, besides Turkey, 120 stores, 120 INTERSPORT stores in the 3 countries, which is 60 in Greece, 40 in Romania, 50 in Bulgaria, 5 in Cyprus and another 20 possibly different concept stores.

Okay. But then you said in 3 years from now, right?

The next 3 years.

We have a follow-up question from Orsini Luca with Antares.

Just another quick one for me. You had a very good performance on the margins despite some headwinds. My simple question is, is that performance in terms of margin sustainable? Or is it somehow inflated by the help that you have been given by IKEA or the support that IKEA normally gives in kind of in less nice times.

Luca, just one question. I mean you are referring to the gross margin amount figure, right?

Yes, I'm referring to the gross margin.

Well, our gross margin was and still is very healthy for the concepts we operate. Now we understand that the omnichannel operation has put some pressure because, as I said, the omnichannel, the e-com, the online buyers I mean look more for promo preference versus the store. But as you saw in 2021, we improved the margin versus 2020, and we came closer to 2019. I mean, down the road, the omnichannel will become bigger for sure. Now on the other hand, talking about 2022, in particular, because of the significant supply chain issues across the globe and the difficulty is that the manufacturers have to deliver the product, we believe that the retailers will not make as big offers as they did before. And from that point of view, we do believe that in 2022, we can sustain this at least for 2022, if not more than this period. And certainly, there is a possibility that we may improve that in case that the shortage of product is higher.

0 [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. The conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.

Thank you, Maria.

Bye-bye.