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

Ladies and gentlemen, thank you for standing by. I am Pope, your Chorus Call operator. Welcome, and thank you for joining the Fourlis Group conference call and webcast to present and discuss the 9 months 2023 financial results. We have with us today Mr. Vasileios Fourlis, Chairman; Mr. Dimitrios Valachis, CEO; and Ms. Elena Pappa, Investor Relations and Corporate Affairs Director. [Operator Instructions] 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, Pope. Dear all, good afternoon, and thank you for joining us today. We are delighted to welcome you to our conference call where we look into the financial highlights of Fourlis Group during the first 9 months of 2023, and then we'll be happy to answer any questions you might have. Past few months have confirmed the resilience of our business model and the strategic initiatives and ability to define our group. Our commitment to optimizing operations, creating efficiencies, managing debt and creating value for our shareholders remains firm. We have made the appropriate investments, and we undertake initiatives that position us for even greater growth and expansion. The solid performance of our retail business activities sets the stage for the commencement of operating leverage, signaling operational efficiency and sustainable growth. Our operational efficiency combined with favorable economic prospects, positions us for profitability and substantial value creation for our shareholders. The successful IPO of Trade Estates and the expected deconsolidation from Fourlis Group mark a milestone and a strategic move aligning with our commitment to unlocking additional value for our retail activities and our shareholders. I would like now to pass the floor to our CEO, Mr. Valachis. Dimitrios?

Thank you, Vasileios. Good afternoon from my side as well. I would like to start with a standout achievement. Our group revenue reached almost EUR 390 million in the first 9 months of '23, a 10.5% increase over the same period last year. And if we exclude the business with the sport in Turkey and TAF, we divested earlier this year. This growth rate grows up to 15%, which is a result of our strategic initiatives, our market leadership and our adaptability to the market trends. Our retail home furnishing segment posted a 17.5% increase year-on-year, driven by IKEA's market leadership and strategic positioning. Retail sporting goods exhibited resilience, achieving a 9% year-on-year growth if we take out Turkey and TAF, reflecting our commitment to staying at the forefront of the evolving retail landscape. At the same time, we maintained a solid gross profit margin at 45.4%, at last year level, which are the core, the strength of our business model. As regards to operational efficiency and earnings growth, our emphasis on prudent control over operating expenses coupled with optimization strategies, de-escalation of inflation and a positive operating leverage effect led to significant 29.1% growth in our operating EBITDA reaching EUR 31.5 million compared to EUR 24.4 million last year the same period. This operational efficiency is reflecting our EBITDA as well but excluding the impact of asset revaluation gains, increased by a substantial 45% during the 9 months of '23, reaching EUR 20.2 million. In line, the group's profit before tax increased by 42%, reaching EUR 6.1 million in 9 months '23 from EUR 4.3 million in 9 months of '22. As a result, the retail net debt has been reduced by EUR 13 million from EUR 107.6 million, down to EUR 94.4 million in the 9 months of '23. This reduction, which will continue and will be even more evident after the deconsolidation of Trade Estates is aligning with our strategy to optimize the group capital structure and enhance our financial position for future growth initiatives. Before moving into the segment analysis, I would like to highlight here that we are very optimistic about the future. We are by now well invested to capture the upside potential, and we proceed with our strategic plan that involves: number one, staying at the forefront of our markets, delivering top retail experience for our customers at affordable price; two, developing further our omnichannel approach and our e-commerce capabilities; number three, enhance our well-structured store network in all our concept. In IKEA, as you know, we have completed the remodeling and the resizing of our store network. Now we are focusing on new stores and shops. Next month, we are opening a new shop in [ Veliko Tarnovo, ] Bulgaria and in Greece, the next 3 years, we're going to have 3 new stores. The last quarter of next year '24, we will open the new store in Patras. The first half of '25, we will open the new store in Heraklion, and the first half of '27, we will open the new store in Ellinikon. In Intersport, we have almost concluded the renovation in Greece and started the renovation in our Romania and Bulgaria shops. Within 2023, Intersport opened 3 new stores in Greece, in [indiscernible] and one in Romania in the retail park level. We are continuously searching for new opportunities for network expansion in all our countries and particularly in Romania and Bulgaria, where there is a significant growth opportunity for us. In Holland and Barrett, the first half of the year, we have opened 3 new shops in [indiscernible]. In July this year, we launched our e-commerce platform with very positive results. And now from September onwards until now, we are -- we launched our 360 campaign that will increase the brand awareness for Holland and Barrett. In December, or in November, actually next week, we are opening our new store in [indiscernible] and in the first 2 months of 2024, we will open another new store in [indiscernible]. And we have planned a number of store openings within 2024. Our plan also involves intensifying our approach to exploit inefficiencies, centralizing and simplifying processes through the use of digitalization. The recent addition to the Board of Directors and the creation of the Digital Transformation Committee highlights our commitment to grow fast in this area. Last but not least, we celebrated a significant milestone with the completion of the Trade Estates IPO. The next landmark is the Trade Estate Deconsolidation Fourlis Group, a strategic move, which will unlock further value for Fourlis Group shareholders. And with this, I pass on to Elena to give us more details about the segments. Elena?

Thank you, Mr. Valachis. Starting with the retail home furnishings activity, the RHF activity has once again demonstrated its resilience and strategic excellence, contributing significantly to the group's overall success. The retail home furnishing segment achieved a 17.5% increase in revenue, totaling EUR 260 million. This growth is a testament to IKEA's market leadership, improved stock availability, increased visitorship and our strategic positioning that capitalizes on favorable market trends. Looking closer, we have witnessed a robust 15% increase in IKEA's revenue in Greece, which represents a significant portion of our RHF revenue. Furthermore, international markets have shown exceptional performance with a 21% increase in revenues. Our focus on operational efficiency and strategic decision-making has resulted in improvement in retail home furnishings profitability. Prudent control over operating expenses and optimization strategies have played a crucial role in achieving these outcomes. The RHF operating EBITDA in 9 months of 2023 increased by 52% to EUR 29 million with a margin of 11.1%. Excluding revaluation gains, EBIT increased by a remarkable 70% to EUR 23 million from EUR 13.5 million last year with a margin of 8.9% from 6.1% in the respective period of last year. Our success is grounded in a well-defined strategy. The group remains firm in its commitment to an omnichannel presence, a well-structured store network, robust e-commerce initiatives, digitalization and, of course, an unparalleled expertise in home furnishings and customer service. Moving to the retail sporting goods segment. The RSG segment has navigated challenges with resilience and strategic foresight. In the 9 months of 2023, RSG revenue amounted to EUR 129.3 million reflecting our strategic focus on customer service and key investments. On a like-for-like basis, that is excluding the disposed activities, the Athlete's Foots and Intersport Turkey, retail sporting goods witnessed a 9% growth compared to the same period of last year. On a like-for-like basis, RSG revenue increase, representing 60% of the total retail sporting goods revenues increased by 13% during the 9 months of 2023 compared to the same period of last year. Meanwhile, retail sporting goods revenue from international markets increased by 2.5% year-on-year in the 9 months of this year, reflecting a moderate performance in the Romanian market. Recently, in Romania and in preparation for its expansion, we have undertaken an organizational restructuring. We already see signs of improvement, and we are positive for our future growth in this market. Despite facing challenges from irregular weather conditions that impacted most in Q1 and Q3 of 2023, our gross profit margin stood at 44.9% during the 9 months of '23, indicating a trend towards stabilization. Through our focus on cost optimization, we have managed to partially offset the pressure on gross profit. Excluding the impact from TAF and Intersport Turkey, retail sporting goods operating EBITDA in the 9 months of 2023 increased by 2%, reaching EUR 7.2 million with an EBITDA operating margin of 5.7%. The EBIT for the same period stood at EUR 2.2 million with an EBIT margin of 1.7%. Our strategies ranging from cost optimization, network expansion, enhanced e-commerce and organizational restructuring position us for future success. The gradual de-escalation of inflationary pressures will further contribute to our anticipated profitability enhancement. Moving into our Retail Health & Wellness segment. The results from our Holland & Barrett operations are truly encouraging. To recap, we initiated our venture with the opening of 3 Holland & Barrett retail stores in Greece, complemented by a robust e-commerce platform and a successful marketing campaign. The recent months have brought positive and promising results, marked by increased traffic, higher conversion rates and elevated sales in both our offline and online ventures. Motivated by the great potential in the health and wellness market, we stand strategically positioned to capitalize on this evolution. Our commitment remains firm to an ambitious plan of opening around 100 physical stores in Greece, Romania and Bulgaria over the next 5 years. And finally, regarding Trade Estates. Trade Estates established in July of 2021 has undergone significant developments and milestones marking its presence with a robust performance in the real estate sector. In just 2 years of operation, Trade Estates gross asset value increased by 81%, growing from a value of EUR 185 million at its inception to EUR 334 million. Simultaneously, the net asset value increased by 30%, up by EUR 53 million from EUR 174 million to EUR 227 million. The company currently owns a portfolio of 12 income-generating assets and 1 asset under development. Before its recent IPO on November 3, Trade Estates executed 2 strategic moves. Firstly, on September 11, Latsco Hellenic Holdings acquired 4.2% of Trade Estates from Fourlis Group. And secondly, on October 10, Trade Estates signed an SPA with REDS to acquire 100% of the shares of the entity holding and managing SMART PARK, the largest retail park in Greece. This strategic move is going to increase Trade Estates' gross asset value by approximately EUR 127 million to EUR 460 million, and it's now to EUR 245 million. In terms finally of the IPO, that was successfully completed on November 3, offering 29,107,983 shares at EUR 1.92 per share, totaling EUR 55,887,327. The share capital increase was fully covered with Fourlis Holding 63%, Autohellas 9.7%, Latsco 3.1%, IPO Investors Holding 23.4% and the management 0.8%. The offering, which was met with solid demand positions Trade Estates for an exciting future of growth and development. At this point, we are at your disposal -- at your disposal for any questions you might have.

Okay. Let's start with the written questions that we have received.

Sure. I will start reading. This is a question from -- by Mr. Edward Bazan. This is a question for Mr. Fourlis. What is the timeline for selling down for lease stake in Trade Estates below 50%? And do you envision spinning off that stake in a stock dividend? Or will you be selling it to the market by a secondary offering?

Right. Thank you, Ed, for the question. We believe that Fourlis has to drop below 50% by the end of 2024. And we have not decided yet. But obviously, there are 2 ways to do it. Maybe both ways will be used either via a secondary placement or a carve-out or a combination of the 2. In any case, it's a 13% stake. It's not a very large stake and we will find the best way to do that. Of course, after the lockup period and in a way that will not hurt the existing shareholders of Trade Estates, obviously, too.

Can you comment on how prevailing inflation has impacted or changed asking rents and construction costs?

Right. Okay. As you know, we face rent from both sides as a tenant, but also as a landlord. And in most cases, there are -- in the rental contract, there is an inflation parameter that is taken into account on an annual basis. So obviously, the inflation parameter has dropped during the last few months. And I think we are entering into a more normalized period. Now construction costs are now stabilized. They have increased definitely, in some cases, even up to 30% during -- especially during '21 and '22. But we now see a deceleration in the construction cost. However, we are not back at the 2019 levels by any meaning. So in general, we can say that construction costs have increased by about 25% during the last 3 years.

Okay. Let's do an audio and then we'll get back to the written ones. Operator, please.

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

Yes, I just have a question regarding, I guess, price mix, I would call it, and what this means for -- both for top-line growth and margins. So obviously, Q3 was cycling the price increases that you have taken last year. I'm just wondering what the outlook on the pricing front is? And maybe if you could shed some light on actions you've been taking to on the mix front. And what this means for gross margins next year? I mean, you said in your presentation that -- and we saw that from the results of the gross margin, especially for IKEA have been -- I mean they've been holding up, not just holding up, but they've been expanding. So I'm just wondering what the -- what the overall effect will be in your view next year as prices roll off and as we are lapping the quite elevated margin levels.

Yes. Thank you for the question. As you correctly say, in quarter 3, we don't have any price increase effect, in fact, our prices remain flat. And in IKEA, we had started selective reduction in the [indiscernible] prices. We have a positive trend in the raw materials and in the cost of goods, and we forecast this to continue next year. We don't plan to increase our prices, but we plan to maintain our gross profit as a group at present levels. And of course, the pass -- the savings we will have on the buying cycle to our consumers staying within our core values of our offering, that is to say to give affordable prices and stay competitive, give for the right product, the best price they can find for this quality in the market. So in summary, we have ahead of us a positive trend, reducing our cost of goods. Part of it will call -- the major part of it will go to the prices staying competitive, and we will maintain our market, our margins, so we can continue growing and increasing our market share.

Okay. Let me read one of the written ones from [indiscernible]. How is business looking at IKEA in the last part of 2023 and sporting goods and the target sales of Holland & Barrett in 2025? Also for the deconsolidation to be complete, you should distribute Fourlis shareholders, the sales of Trade Estates. This will be a clear cut to eliminate the holding company discount. That's it.

Yes, I will take the first part. We are having a very strong performance in November. Our growth rate is really at a high level, double-digit plus. And we expect the same in December, so we are very optimistic about the year-end. And we believe that the current trend that we are facing in November will continue on to December. As regards to Holland & Barrett, it's a bit early to give you numbers for 2025 as we are waiting for the results of our campaign, and we collect all the information from the shops and the [indiscernible] platform. What I can confirm is that our '26, '27 target continues to stay the same, and we target something around EUR 50 million sales in the 3 countries that we have plant our presence that is Greece, Romania and Bulgaria.

Right. Now regarding the deconsolidation, it will be very difficult to distribute all the Trade Estate shares to the shareholders because as you understand, a big part of the capital of the group lies with this asset. So this is a big discussion. We will be more than happy to discuss that further [ Luca ] but at this point, we have no such plans. But our most important target at this point is to grow to Trade Estates as much as possible. And maybe that issue is a very good discussion topic for our next shareholder meeting next June. But until that time, there is sufficient time to think about it.

Let's continue with another written one from [ Philip Kudi ]. Thank you very much for organizing the earnings call and the presentation. First one, how do you intend to finance the pipeline growth in M&A at Trade Estates? Second one, what do you consider -- what do you consider to be the right level of debt at the retail operations, i.e., full lease excluding Trade Estates?

Right. Thank you, Philip. Now we have all the necessary banking lines for the growth of Trade Estates up to 2027 to cover the entire pipeline that we have. That means the combination of the capital increase that we did through the IPO, plus the banking lines that I just mentioned before, will cover all the growth of trade states, including the Ellinikon development in 2027, and that should bring us to about a 50% to 55% LTV.

Okay. We are presently in the retail business...

What do you consider to be the right level of debt at the retail operations, i.e., fully lease excluding Trade Estates?

As I said, we are now reducing our debt and we are presently at EUR 94 million, and this will go further down until the end of the year. We are targeting to have net -- I would say, a normal target for us is to stay below 3x EBITDA, the operation. That's a target that we would like to achieve as we run the operation and finance our growth and our investments through our performance. That's more or less the framework on how we are addressing our decisions for capital adequacy.

Okay. Right. Let's move on with another written one, and then I'll pass over to the audio. From [indiscernible], thank you very much for organizing the earnings call and presentation. That -- we did that, apologies. Okay. Can you please give us some color on the weakness of Romania sporting goods business?

Yes. I would say that after the -- during the COVID period and after the COVID period, our main focus was to maintain and grow our position in Greece. We put a lot of efforts on that, and our investments were prioritizing in the Greek business. As a result, we were not focusing so much on the Romanian business. And now we feel it's the right time to invest again, to grow our margin and our presence in this area. Keeping in mind that in this country, keeping in mind that this is a very competitive market with high discount rates, and then we have to be careful how we grow our presence there. But that's more or less the reason we prioritized Greece and Cyprus that we grosses -- yes. We prioritize these countries, and we have achieved our objectives there together with e-commerce. And as I said, Romania was on the second priority now, also given us -- Mr. Fourlis correctly says that the high food inflation at this country that it does not affect positively the trends in the market, but this is a market that certainly has a very positive upside, and we are going to invest in the next couple of years to take an opportunity on this upside with our investments.

Let's take an audio, please, question.

[Operator Instructions]

The next written one is from Ms. Christina [ Papani ], how do you explain the reduction in income despite the increase of sales by approximately 10%?

Yes, as you said, the sales has increased by 10.5%. And as we said, if we take -- if we exclude Turkey and TAF, this is going up to 15% and this is -- you can see that has a positive impact in our EBITDA and operating EBITDA that grows 29%. The -- and our EBIT that is going 13.8%. But you will see our EBIT is 13.8%. We will -- you can notice though that this is not the operating result. This is affected by the assets revaluation positive effect of EUR 5 million last year. If we take the [indiscernible] revaluation now, then the EBITDA now, EBIT margin is growing by 45% and 42%, respectively. So in a nutshell the results, you see us reducing is mainly logistic -- issue of an accounting issue with the revaluation of the assets plus the profit before tax, the increase in interest expenses due to higher interest rates.

And here, maybe I should add that the picture at the end of the year will be totally different, and it will be totally different because the revaluation of the assets of Trade Estates will be much higher at the end of this year due to the new acquisition of the largest retail park Smart Park, we have already announced during the IPO process that we have approximately 15 million to 20 million positive NAV revaluation that will be accounted for in the consolidated statements of Fourlis Group. So it will more than makeup for the lagging in revaluations of the 9 months results. So by the end of the year, we will have the full picture of the improvement in the performance, in the operating performance of the retail business, plus a much improved picture in the reevaluation of our assets in the real estate business.

Moving on to the next written one by Mr. Edward Bojan, thinking out 5 years from now, how important will Holland & Barrett become as a percentage of total group revenues and profits?

Yes. As you probably know, we have a plan to reach by 2026, EUR 750 million sales in our retail business. Holland & Barrett is expecting to contribute not less than EUR 50 million in this growth. That's more or less our plans that we consider at this point. And we think that we are on track of this. Of course, it's too early, and we'll have to complete one full year of operation and make our adjustments in our plants in order to come with more details.

Maybe this is a good point to remind to our listeners that in 2018, we designed our 2025 vision, the so-called 2025 vision that consisted of the restructuring of our retail businesses, the addition of an extra retail business, the growth plan and CapEx of our retail businesses and, of course, the implementation of the real estate company. Now due to COVID years 2019, 2021, the goals that we had set for 2025, will be achieved either 2026 or 2027, especially depending on the construction finalization of our third largest IKEA store in the south of Athens, which is Ellinikon. Now the numbers that Dimitrios mentioned are part of this 2025 vision and we are definitely working very closely to achieve these numbers that we had designed.

Moving on. Mr. [ Vasileios Fourlis ], could you give us guidance for the whole year? Also, what are your investment plans for 2024 in each division?

Okay. It is for -- in the operating side, excluding the revaluation of the assets that Mr. Fourlis gave you some hints before we're going to continue the growing trend that you see in the first 9 months, and that's more or less what we can say for the closing of the year. As regards to 2024, we are in the last phase of finalizing our budgets and our update of our business plan for '25, '26, so we kindly ask you to stay a little patient until our next conference that we'll be ready to provide you more details for our 2024 plans.

We have no more written questions, but we will pass over to the audio in case there is an extra one.

[Operator Instructions] At this moment, we do not have any further audio questions.

So we would like to thank you very much for your attention, and we look forward to the next presentation. We will have our annual results. and all the developments for our new projects. So good night, and thank you very much.

Thank you very much.

Thank you.

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