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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Fourlis Conference Call and live and webcast to present and discuss the full year 2022 financial results. We have with us today Mr. Vasileios Fourlis, Chairman of the Board of Directors; 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. Dear all. Thank you for participating in our annual results conference. Before passing the floor to our CEO, Mr. Apostolos Petalas, I would like to make some introductory comments regarding the market climate and the progress of our strategic plan. Since Q4 2022 and continuing into Q1 2023, there are clear indications of market demand, normalization and improvement, which is reflected in our sales. We believe this is a result of the lasting strength of Greek macro data and overall consumer sentiment. The coming election period might weaken this trend temporarily. I would also like to brief you on the progress regarding our 4 pillars of our strategic plan. IKEA store resizing and store expansion: We have almost completed the resizing of all our existing stores to fit the new consumer trends. Also, we have identified, purchased and are designing our next 3 stores, including Greek, Patras and Athens. INTERSPORT network transformation: We have sold our activity in Turkey and our subsidiary, The Athlete's Foot, in order to focus on our 4 country network of more than 100 INTERSPORT stores. In parallel, we have completed executing a large transformation - renovation program for our INTERSPORT stores to fit our omnichannel approach. I should also mention that our e-commerce logistics infrastructure for both IKEA and INTERSPORT is now fully in place. New retail activity: We have entered the well-being retail sector through a master franchise agreement for Greece, Bulgaria and Romania with Holland & Barrett. The first 3 stores have already opened and are providing good signs of convertibility. Holland & Barrett is our first step in tapping the well-being market. Trade Estates Real Estate Investment Company: Since July 2021, Trade Estates has been operational and is preparing its listing in the Athens Stock Exchange within the year. Trade Estates is the only focused real estate investment company in Greece in retail parks and retail logistics, thus providing strong tenant relations and synergistic cost management. The initial gross value of our assets has increased from EUR 185 million to EUR 300 million by December 2022. Additionally, development projects amounting to approximately EUR 200 million have been signed. Included in our development pipeline is the retail park in the iconic Hellinikon project. And now I would like to pass the floor to Apostolos Petalas. Apostolei?

Thank you, Vasilei. Well, 2022 was another, I would say, challenging and peculiar year with several new challenges, but also with some improvements versus the period before. COVID, for example, was not a major obstacle in our ability to operate our retail stores and our omnichannel stores. So from the point of view of the COVID, the news were good. Also, the tourism industry, which affects a lot the territories that we operate, had a very positive impact. It created jobs. It created income, and we have seen that over the course of the year. Now on the opposite side, the highly inflationary pressure on -- directly on operating expenses, on cost of goods and also indirectly on the disposable income, along with a very high energy cost, certainly affected our operation in one way or another in a negative manner. Also, the geopolitical issues, that impacted the sentiment, especially from March 2022 up until the end of the year, certainly had a negative effect. But most importantly, the main issue that we faced during the course of the year was a significant disruption of the supply chain in our ability to fulfill and replenish our stores. Most importantly, from our IKEA international partner, who really faced the challenges over the last few years from the COVID and from the energy side. And in our sporting goods as well, although in the sporting goods, we are able to manage it in a more efficient way versus the IKEA business. And although the comparisons versus 2021 are not as easy, because 2021 was a year with significant COVID-related issues in our ability to operate the stores, we can say that the fourth quarter of 2022 was really much, much better than the previous period, the 9-month period. Actually, it was twice as much in terms of growth. And the main driver for that was the substantial improvement of the supply chain started from October and it's continuing its improvement. And we can say that as of today, about 80% of the problem of the supply chain in IKEA has been resolved. And that drives our significant growth in the fourth quarter. And as Vasilei said, that continues in the first quarter of 2023 as well. And certainly, the very positive impact of the touristic industry had an effect in the macro environment and in the disposable income in Greece, Cyprus and Bulgaria as well. Now overall, looking to the year 2022, our total sales reached EUR 501.4 million. Index 114 versus the year before, but even if that is compared with a normal year like 2019, the index is 108, and that is really a very good signal of normalization in the marketplace. The brand, the IKEA brand, the INTERSPORT brand are very strong brands. And certainly, as normalization is improving, certainly our group will be experiencing significant growth. And we are very optimistic for 2023. Now I wanted actually to say a few things about the inflation impact on our cost of goods and how we managed it. During the course of the year, we faced cost of goods increases in our IKEA business and in our sporting goods business between 15% to 20%. And the only way for us to manage the gross margin at the healthy levels that we operate was to do actually 3 -- to touch 3 elements. One is to do smart pricing. In those categories that the commerciality and the affordability of IKEA allowed, we did some smart pricing. But we also focused on mix management of our categories in both sporting goods and home furnishing, as well as we did a different sort of promo activity and commercial activities in the stores and in the online operation during the course of the year. As a result of that, you must have seen already that our gross margin not only sustained at the very healthy levels that we experienced over the last, let's say, 3, 4 years, but we improved it slightly because of those actions. Now the COVID period that started 2020 really changed the world, and all the other challenges made to us clear that the world is changing, the market is changing, the competition is changing, the consumer is changing. So we need to change ourselves as well. And for that reason, we did several transformation initiatives during those periods that will give us significant competitive advantage as we go, and we strongly believe that we can get to our vision in 2026 for a total turnover of EUR 750 million and an EBIT of 8%. And those transformations include focus on the consumer by developing the omnichannel capability of the group that is getting -- that is becoming bigger and bigger and bigger. We did invest in digitalization on every element that affects the consumer, either in the online or in the in-store digitalization. And also, we refurbished the majority of our stores, as you know, in our sporting goods, but also in IKEA, by rightsizing those stores that are not justified for a big size. We also invested heavily in our logistics capability because the name of the game actually, in terms of competition, is servicing the consumer. And for servicing the consumer, logistics and last mile investments is mandatory. Now during the course of the year -- of that period and especially in 2020, we did develop the new businesses. Vasileios explained a little bit how bigger Trade Estates became during the course of the year by almost -- I mean, increasing the gross asset value by about 40%. But we also created the team to launch, and we did launch in the first quarter, the Holland & Barrett new concept for which we already have some exciting results. And we strongly believe it is the right thing to do for the future. Now we also faced some challenges in the cost -- operating cost lines, especially from the energy. The energy cost, as you know, was dramatically higher, and that doubled the total amount by about EUR 6 million year-on-year because of this. And also inflation had an impact -- a significant impact mostly on the transportation line related to energy, but also on the leasing line. And leasing is important in a retail operation like ours, with more than 150 different contracts in leasing, because the majority of our leasing agreements have a provision for adjustment for the inflation. Now Vasileios already spoke about the completion of the INTERSPORT Turkey sale and the assets [ would stay ] as well. Now as a result of all those actions and especially because of the very positive performance in the fourth quarter of the year, our operating EBITDA reached EUR 39.6 million, an index of 104 versus the year before. And it is important to say that the year before was a challenging level of EBITDA because of -- due to the COVID, we had many subsidies, either from the leasing side or from the labor side, from the governments in the countries that we operate. Now another very positive element and this is actually the beginning of the positive elements coming from our real estate company, Trade Estates. We had, for our investment assets that are included and acquired from Trade Estates during the course of the year, significant revaluation -- a positive revaluation as a result of the better quality of the agreements -- of the leasing agreements we do, and of the better quality of the tenants we have. So -- and that affected our P&L for the group with EUR 8.5 million revaluation benefit. And as a result of that, our total EBIT was increased by 26% versus the year before, to EUR 33.7 million. And finally, our PBT was EUR 20 million. Now looking to the net debt of the group. The reported net debt was EUR 201 million, approximately EUR 65 million bigger than the year before. But if we isolate the retail operating net debt, it was at the levels of the year before. So the only reason that the total net debt was increased is the important acquisitions that our real estate company is doing. And definitely, this is one of the levers for Trade Estates to create the value for the shareholders as we go according to the plan. The total operating CapEx for the year was EUR 19 million, reflecting mostly all the operating necessity investments, expansion and big -- I mean a large amount for refurbishment of stores, either in IKEA or in INTERSPORT, while the CapEx -- the total CapEx from our real estate company was EUR 68 million approximately. We are optimistic for 2023, knowing very well the challenges, the challenge of the inflation, the challenge of the lower GDP increase in the territories that we operate. But we are very comfortable with the capability that we have developed and developing, the stronger engagement with our consumers, either in their store or omnichannel consumers. We do many changes in the assortment that fit better to the needs of the consumer. And also logistics and last mile capabilities that give to us a better competitive advantage versus the competition. I mean, we want to really highlight the importance of having strategic partners like IKEA. Definitely, the issue with the supply chain that we experienced the last 1.5 years is getting lower and lower, and that gives us opportunities. But also, it is clear that because of the investments and the focus we do in our sporting goods, the big manufacturers like adidas, clearly indicate that characterize our group as a strategic partner going forward with all the benefits, the elements on the assortment, on the economic support, et cetera, et cetera. Yes. And certainly, Holland & Barrett, the wellness sector that we started this journey down the road will give and will exceed our expectations. I mean we are comfortable with that. So again, the first quarter is very similar with the rhythm and the trends that we experienced in the fourth quarter of 2022, and there are many indications that the touristic industry this year will have an exceptional performance as well, and that is all benefit for us. Certainly, the political situation in Greece is something that hopefully will be completed successfully over the next few months and that will not be a barrier going forward. So with that in mind, I would like to give the floor to you for questions you may have.

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

I'm really sorry, I wasn't in the conference call from the beginning. So I was wondering if you could provide some details on the trading update for the first quarter of the year. And if you could provide us some CapEx guidance for 2023 and split it between Trade Estates and retail business. And last, as far as I understand, you plan to proceed with the IPO of Trade Estates in the second half of 2023, is this correct?

Yes. Well, I already referred to, Iakovos, that the running rates of our sales in the first quarter are very similar to the running rates of the fourth quarter of 2022, 2 digits growth with healthy margin as well. Now in terms of CapEx, for the operating element of our CapEx for the retail part of our group, we estimate the total CapEx this year EUR 18 million to EUR 20 million approximately. While for Trade Estates, it all depends on the good quality assets that we are looking around. I don't know Vasileios, you want to.

Yes. Yes. Thank you Apostolei. Well, right now, we are looking at a number of potential assets. Of course, nothing has been decided yet. But definitely, Trade Estates is targeting new quality assets. Now regarding the IPO, yes, our plan is definitely to list the company the second half of 2023, Iakovei.

Okay. And last about a reward to shareholders dividend. Do you plan to propose, I think you will propose a dividend for 2022, isn't it?

Yes. Management is planning to propose to the general assembly a dividend pay similar to last year.

EUR 0.11 per share, Iakovos. This is approximately EUR 5.5 million.

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

Yes. Just wondering, could you talk a bit about the competitive dynamics and how these -- how this bodes with the -- with what you've been seeing, with the strong run rate you've been seeing in Q1? I'm basically wondering who is -- are the small players losing market share, because there are some competitors who have been adding capacity? You guys have also added capacity, that I'm referring to the home furnishing market here. Or is it just that the whole market is actually retracing to more reasonable levels?

Thank you for the question. Actually, we believe it's a combination of all the factors you mentioned. First of all, the total market, we believe, is on a positive trend. And not only in price terms, but also in volume terms, because we must not forget the inflationary factor embedded in sales increases. However, we do believe there is a volume increase also. Now regarding ourselves versus the market, I'd like to remind you that during the past 2 years, '21 and '22, IKEA had a quite serious supply chain issue because of the complexity and the volume -- and the volume of the business. So as this problem is becoming less and less acute, our sales are gaining momentum, and we definitely believe we are also gaining market share. And this, I believe it is becoming more evident during the last 2, 3 months. Now regarding the sporting goods market, we believe that the sporting goods market is also improving. And in the same pattern as in the home furnishing market, we believe we are gaining market share, although competition is becoming quite tough in the sporting goods market. Why? Because we have implemented a very large renovation transformation program for all our INTERSPORT network. And in addition, we have progressed with our strategic partnerships with Nike and adidas. And especially with Nike, now we have the ability to buy and provide many exclusive styles.

I just want to take the opportunity to mention on top of the comments of Vasileios, that the competitiveness of IKEA is increasing, I would say substantially, for the following reason. I mean, all these commodity and energy increase and transportation increase to the industry, to the industry or the home furnishing, actually put a lot of pressure to many competitors of ours to increase the prices by 25%, 30% and 35%. IKEA was always lower priced than the competition. But I mean, thanks to the muscle of IKEA International, we didn't need actually to increase the prices in a similar manner. Our total price increase was between 15% to 19%. So that means that as we go, the price advantage of IKEA is increasing more than it was before, and that gives better affordability solutions to the consumers.

I will ask our operator to allow us to express some questions and reply to some questions that they came through webcast. And the one Mr. Fourlis has to do with the IPO of Trade Estates, something that you mentioned earlier. It is from Mr. John Kalogeropoulos from Beta Securities. Ianni, yes, we are planning to go for a plain vanilla IPO to raise funds from the Athens Stock Exchange up until the end of the year. Of course, always, it depends on the market. And the reason why is because this company, in terms of capital structure, needs to have strong capital, and it depends on the pipeline it is in front of us. So we are planning for a plain vanilla IPO. The size is not known right now. It's not -- we cannot announce something like that, but we have prepared the prospectus. And we have planned to go for this IPO up until the end of the year. And the second question is regarding the trends of Q1 2023 versus previous year. And as Mr. Petalas mentioned, it is similar to Q4 in both concepts, Ikea and Intersport. Another question from Mr. [ Tolis ] is, are you going to open more pickup points in Greece? Mr. Petalas or Mr. Fourlis.

No. We do not intend to open more pickup points in Greece. At the most, relocate 1 or 2.

And one last question from the webcast is from Mr. Katikas from Banking News. It's the second year that we pay almost 0 tax. He's asking for just more color on that for the future years.

Yes. Okay. Well, we do pay tax. For those operations that we are profitable, we do pay tax. But I mean, there are some elements in our P&L that are not subject to taxation. And those are mostly the benefits that the group enjoys from the profits, either operating profits or revaluation profits from Trade Estates. As you know, the real estate companies are not paying taxes, income taxes in the same norm that the operating companies pay. And that certainly is one of the benefits to have real estate companies. So for that reason, in the consolidation P&L, you see that the total PBT and the total net profit are similar. It's because there is a big portion of the profits coming from Trade Estates. Now overall, I mean, allow me to say that if we had the retail operation only in our group, the total effective tax rate with the -- exist with the current tax rate, it's about 18%. Okay, Costantino, I don't know whether we have other questions.

[Operator Instructions] Ladies and gentlemen, there are no further audio or webcast questions at this time. And the conference has now concluded. Thank you for calling and have a pleasant evening.