Geox S.p.A. (GEO) Earnings Call Transcript & Summary

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Geox first 9 months 2024 sales results conference call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luca Amadini, Investor Relations Manager of Geox. Please go ahead, sir.

Good evening, everybody, and thanks for joining our call today. This is Luca Amadini speaking. Like to introduce you the today co-speakers The Geox Group's CEO, Mr. Enrico Mistron; and the CFO, Mr. Andrea Maldi. Mr. Mistron will start by providing you a brief overview and then Andrea will delve deeper into sales results of our first 9 months. Following that, Enrico and Andrea will be happy to take your questions. I would like to remind you that the presentation may contain statements that now reflect reported financial results or other historical information. Any forward-looking statements are based on Group's current expectations and projections concerning future events. Forward-looking statements involve risks, uncertainties and other factors that may cause actual result to differ -- significantly from what is expressed or imply. Many of these factors are beyond the Group's control or estimate. Let me now hand over to our CEO, Mr. Enrico Mistron.

Good evening, everyone. And thank you for joining us to discuss our performance over the first 9 months of 2024. Third quarter sales confirm the trends that we observed in the first half of the year, as we continue to face challenging market conditions. Comparable sales in our direct channels both physical and digital, have shown healthy performance, benefiting from a strong late August and September. This was driven by higher store and website traffic, compared to the same period of last year and a positive increase in our [ convention ] rate. The wholesale channel, however, remains under pressure. During the third quarter, most of the fall-winter 2024 collection was invoiced to our multi-brand customers. As mentioned in our previous call, we have implemented specific actions aimed at reducing our cost base and adapting it to the new market environment and a new revenue level. In line with these efforts and with the network optimization initiatives, we have already undertaken, management has launched an additional review of our distribution model to better meet current and future market demands. As part of this initiative, the Group has started the process of winding down direct operation in China and in the United States, with the goal of replacing our existing distribution model with more effective, locally adapted solutions. It is important to note that operation in this market has not been profitable in the recent years, and their contribution to the Group sales has been marginal. Nevertheless, Geox remains committed to streamline its presence in this market through a new strategic partnership. In particular, we are pleased to highlight that partnership agreement is currently being finalized in China with a prominent international player in these important markets. As previously announced, we were scheduled to present the new business plan this fall. We confirm that the work has been substantially committed, but we have decided to postpone the presentation to next year. This additional period will allow us to further consolidate our expectations for 2025, a year that appear complex and challenging and represents the first year of our industrial plan. Thank you very much. I will hand over to our CFO, Andrea Maldi.

Thank you, Enrico, and good evening, everybody, and thanks for joining our call. I tried to -- during the conversation, I will try to give you a deep dive on the numbers on the first 9 months, and setting a bit of expectation for the year-end. So if we start from Page 5 of the presentation, we can highlight the main figures, the performance of the period in the first 9 months reflects the trends observed in the previous quarter, with the wholesale facing complexity and difficulties in the market, while retail -- it's assumption in line with the previous year. And worth to notice, that we have an excellent outcome from online channels, including both direct web and marketplace. Having said that, we are setting the net sales of the 9 months at EUR 725 million which is 9.7% lower than previous year. And our net working capital is sitting at EUR 163 million, which is 24.7% of our revenue. If we look at the net debt -- the net debt is -- closed at EUR 145 million, mainly with a bank debt of EUR 138 million and the fair value of hedging instruments of negative in that period of about EUR 7.4 million. If we look at the pure net debt, I think that the key message is that we are pretty much in line with the previous year EUR 138 million compared to EUR 139 million in 2023. A quick look at the current trading. We can confirm that the performance of the direct channel, physical one, brick-and-mortar and online is confirming the positive trend. We are now on year-to-date at the week in the range of plus 1% on the physical and plus 11.6% on the digital channel. If we move this -- into a drill down of the saving on Page 7, we can see that our decline from September '23 to September '24 is mainly driven by three factors. The first one -- we are incurring on a -- an FX effect of about EUR 5 million, which is mainly driven by our revenue coming from the Russian market, and this is due to the fact that the Ruble value compared to last year has been on average in the 9 months at the value of 98 basis points compared to 90 basis points last year, therefore the -- 90 basis point this year -- 90 basis points last year. The second effect -- the as also called the perimeter. We are now sitting with the level of our retail physical doors in the value of some 618 shops, which is lower of about 37 units compared to the 655 of the same 9 months in average of last year. And this is giving us a hit of about, as we said, EUR 60 million. The main -- clearly driver of that performance is then -- has to be seen into the wholesale. Wholesale is down EUR 52 million. Including franchising and -- this is in line with the -- more or less with the initial order of the campaign, both in spring-summer 2024 and in fall-winter 2024. While as we said, we have a positive contribution of our direct channels in the region of EUR 5 million for the physical one and EUR 11 million for the DOS marketplace. We move into Page 8, we can see a drill down of our distribution. We have -- as we mentioned, we have a net between a new opening and closing of about 37 doors less than last year. And this is clearly in line with our strategy that has been initiated, a few years ago of streamlining our direct distribution and focusing just on the key markets and key doors -- and just in shops that are profitable from a an EBIT perspective. Clearly, this kind of strategy discussion can be extended matching the words of Enrico on the decision to close the 2 markets, U.S.A. and China, given the fact that so far have been quite complex market, not significantly relevant for in terms of sales for -- in terms of sales, for Geox and bringing us a negative EBITDA, both in 2023 and in 2024. I suggest to look at Page 9. Again a deeper deep dive on the break by channels of our sales. As you can see, wholesale on average is down 15.4% compared to last year. And this is clearly the most -- the channel, which is most impacted by the market condition in these 9 months, and the negative performance is impacting spring-summer 2024 and fall-winter 2024, while from an in-season management perspective, we are pretty much in line with the value that we have registered last year in 2023. As we mentioned before, we have an average -- a brick-and-mortar direct channel cost, which is negative 4.2%. But like-for-like sales -- year-to-date of the direct channel of the physical channel is positive about 2% and the positive contribution is coming, as we said, from marketplace and e-commerce which are 2 bigger driver of growth -- and supported in any case, the [ premiumization ] of the brand and the positioning of our direct sales strategy. I will have -- try to have a look and understand at the sales by region. Clearly, from a regional perspective, all our main region have been impacted by -- the decrease overall of the sales. We registered a 9.6% decrease compared to last year in Italy. Europe the decrease is slightly better, because we have a market with different speed. In particular, we have some good reaction from the U.K. and Benelux market, while Italy, France and Spain despite the good position of our direct sales are overall more impacted by the painful market condition. North America is pretty stable, but considering what we just mentioned about our strategy to review the distribution there. And the Rest of the World is significantly impacted by mainly from -- the vast majority of the country included in the perimeter, while the Russian region itself is performing more or less in line with the same -- more or less in line with last year. If we look at Page 11 and we break the sales by quarter. We can see that out of the EUR 725 million, basically the footwear and apparel have been impacted more or less with the same kind of trend, 9.5% in footwear and 12% in apparel, considering also clearly the nominal value, which is different when we look at the gap. And I would try to have a look at Page 13 -- trying to deep dive a bit more in the financial side. As we mentioned, we have a net working capital which is sitting at about EUR 164 million. I think that we took the opportunity to reduce our inventory. You use our stock of products to generate is. We move all our channels of de-stocking, and this is producing good results. Clearly, the percentage increase compared to the same period last year, mainly due to the fact that our revenue point is lower than -- is lower of about EUR 56 million compared to the first 9 months of 2023. But overall, if you look at the composition of the net working capital, inventory is significantly down -- or down of about EUR 30 million. Receivables are down as well, and we have a lower value of payables in the first 9 months, which is also clearly in line with the trend of the company, which is to using the -- in 2024 destocking strategy and granting value of sales -- lowering the value of purchasing. The results of this kind of discussion is the fact that if we look at the net debt -- from 9 months -- over the 9 months or a year end, with our expiration we can see that 2024 will be a year in which the company will sit more or less at the same level without further burning of cash. Having said all the above and taking into consideration all the discussion that we have just presented. I think that the main -- when we look at the outlook for the year-end, the key point is that we are thinking to confirm the fact that we will be down in the range of the mid-single digit by year-end, which is something that we have said in the previous call, as well. And while from a margin perspective, we are achieving the increase of the 0.5 basis point -- 5%, 50 basis points, which is clearly one of the targets that we have declared at the beginning of the year, and we manage to reach that value at the year-end. I see that -- from a finance point of view and economic point of view, looking at the sales and the cost, the only thing that we can still recommend is the fact that -- as a part of our strategy of reviewing our distribution, mainly focusing on markets like U.S. and China. We are going -- will complete the kind of winding down of operation by year-end. And we are now in the process to deeply review the cost. The one-off costs that we will incur as a part of this transformation that will be needed to winding down the operations, at the same time in terms of representation needs to be considered as one-off and not recurrent and will impact year-end 2024, but we are still under assessment. Thank you. We are now open to get questions, if any.

[Operator Instructions] The first question is from Oriana Cardani Intesa Sanpaolo.

Three questions. I was wondering regarding the wholesale channel. Can you talk about just the trend [indiscernible] The second question is about the business in North America and China. Can you simplify the revenues in these two markets this year loss expected this year, due to the direct presence in these markets? And the third on net debt. Can you give us a...

Sorry to interrupt this is Andrea speaking. I think that your line is breaking. Can you please repeat. We just got to the question about U.S. and we're not getting the question. Can you please repeat? At least from our side.

I will repeat the three questions. Now -- is my voice is better now?

Yes, now, it's much better.

Okay. Great. So the first question is on the wholesale channel. If you can give us the trend that you see for next year? The second question is on North America and China. So can you quantify the revenues generated there? And the loss expected this year due to the direct presence in these markets? And finally, I've got a question on net debt. What is your expectation for this year?

Okay. Thanks, Oriana. And sorry if we ask to repeat. Now it's much better and we got the sense of your question. So I start will start from the first one and looking at the wholesale and distribution channels, we do see a market condition, which is not going to improve according to the industry sector and study in 2025. And we are deeply working as a part of the industrial plan that we are not discussing now on our new products that will be take -- bring it -- go to the market starting from the spring-summer 2026. So therefore, we don't see a strong game changer in 2025, but we will think to follow -- as the market condition and the consumption restriction, which is characterizing the end -- the first 9 months of 2024. When we look at U.S. and China, we were talking -- we were speaking of about a sales impact in the region of EUR 13 million and EUR 14 million each country. This kind of sales were in China, driven by some direct shops couple of outlets and mainly online. When we look at U.S., we are talking about wholesale distribution. In combination, both the country have generated a loss in EBIT -- a negative EBITDA of about EUR 4 million to EUR 5 million in 2023, and we are sitting at the same level in the year 2024. Therefore, clearly, from an EBIT perspective and profitability, the fact that winding down -- the kind of operation by the end of this year is going to improve our profitability in 2025 -- clearly, considering the same market share. The third question, i think that was related to our outlook on the net debt. As I told you, despite the many challenges that we said that we are incurring one-off costs that we are under assessing -- what we are assessing in this period. Clearly, we have a 2024, which -- in which we have been able to mitigate the cash impact. And therefore, we are not expecting to be a financial -- net debt financial position at least the one with the bank, so without considering the fair value of the hedging instrument, which is going to be significantly different from last year. I'm expecting to be in the region of the EUR 1.5 million to EUR 1.10 million which is clearly a small, let's say, a light deterioration compared to 2023. But in terms of -- if you consider the fact that we are thinking to be in the region of single-digit, mid-single-digit decrease of sales, you can imagine that from a cash perspective has been let's say -- an accurate control of cash, review of spending, winning down operation and financing all these kind of things without creating a strong deterioration to our net financial position.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

Okay. Thank you very much all for joining the call...

We do have a question from Carmen Novell, Banca Akros.

Okay. I wanted to ask a quick question on the EBIT margin for the year. If an improvement an expected improvement in EBIT margin in the annual EBIT margin could be derived from the gross margin from the below costs like the advertising and promotion costs?

Okay. It's Andrea speaking. Thank you for your question. I tried to give you the fair answer, which is clearly the improve on the gross margin of 50 basis points together with the decrease on the spending of the marketing cost, which has been strategically decided and planned at the beginning of the year is improving itself EBITDA margin. But on the other side, as we try to describe in our conversation, we are trying to highlight the fact that we have taken strongly decision on our distribution, like the closing of China and U.S. and we are incurring in transformation costs and one-off costs that will depress overall and will offset the savings done from the previous 2 lines margin and saving on marketing cost. Clearly, we will introduce it by year-end -- the concept of EBITDA adjusted because we need to have -- to look at EBITDA from operation and the EBITDA impacted by one-off costs. but we would like to give you further information about the size and the impact of this one-off cost and the magnitude once we have clearly assessed the one overall, we do not expect to have a benefit on our EBIT margin in 2024.

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

Okay. Thank you all for joining today, and we will see you for the full year financial results next -- next year.

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