OVS S.p.A. (0OV1.MU) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the OVS First Half 2023 Financial Results Presentation. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Stefano Beraldo, CEO of OVS. Please go ahead, sir.

Thank you, and good afternoon to everybody. First half in my opinion, has been very good. And it could have been better, if a normal weather in May would have been in place. May have been extremely rainy and cold and until mid of June, weather has been adverse. In this challenging environment from a weather point of view and not in our opinion, from a consumer attitude point of view, the market share has been growing and the market in which we operate has been stable. We are very happy with the results, which we obtained on the women's segment, which is for the probably sixth -- fifth or sixth consequent half, the one which is growing the most. And this is important because women is the opinion leader in the decision in our business. On this good trend of the women, we are particularly satisfied about one -- the result of one strategic decision that regard the launch or the enlargement of the space dedicated to B Angel, formerly called Baby Angel. This segment is more dedicated to younger women. We almost doubled the intake dedicated to this segment. And the sales as of now, are achieving almost plus 100%. It means bringing in the store new customer, new younger customers, which are also benefiting the turnover of our new approach to the Personal Care, which is another segment of which we are very happy. We are growing steadily in the last 8, 9 months at the pace of plus 40%. We are also happy with the refurbished store. We refurbished more or less 15 stores during the first half. And on average, the sales increase of the newly refurbished store, including the ones that we refurbished last year, is about 7%, 8%. This rate is very interesting because it means that the quality of the space of the store in an environment where people is coming back to store after the pandemic is a good signal that our customers are still paying a lot of attention to the quality of the environment. Finally, as we declared in terms of expectation for the next half, assuming that the top line might remain solid and this will depend from external condition also, but we made a lot of initiatives that can legitimate our expectation to continue with a solid growth in sales. We expect a further increase in profitability. Also, as we said, mainly because the cost of goods sold will be lower, thanks to the already mentioned decline in raw material costs and transportation costs. Free cash flow, we expect to be in line with last year in spite of higher CapEx due to the optimization process -- automation process, which has been almost completed in our Pontenure distribution center. That's it for the moment, and I hand the word to Francesco Leoncini.

Thank you, Stefano, and good afternoon to everybody also on my side. I'll start on Page 4 with a short recap of the main financials. So we had the first semester with sales growing 4% versus last year, mostly driven by like-for-like. And this was achieved despite the cited adverse weather conditions in the most relevant month of May and mid-June. This growth delivers an increase also in EBITDA of EUR 4 million, 11.8% is the increase of EBITDA margin or the Net Sales. And this data is relevant, not only versus last year, but when you compare with a semester with similar conditions like the 2019 that is the pre-COVID. In the first semester, at that time, we had EUR 62 million. So the increase versus the pre-COVID situation is really, really material. The net result is increasing 5.5%. And the net debt situation is EUR 242 million with a further slight decline in the leverage ratio 1.3 versus 1.36 last year. The current trading until beginning of this week, of course is positive. And this is another element that makes us confident on the results of the year. I move to Page #5 to provide some more details on the P&L of the first semester, sales growing 4.1% to EUR 29 million versus last year. On the gross margin, we had a slight decline in the percentage. And this as expected, is due to the fact that we suffered the tail of the price increase in the spring summer collection, while starting from winter '23. Basically, we are back to pre-COVID prices and so a normal situation. We -- the decline in the gross margin percentage could have been worse if we didn't act properly also on the markdown management, avoiding useless promotions, for instance, during the rainy days of May, when the client nonetheless was not interested in buying goods and carefully management the inventory during the month of July, which is dedicated to end of season sales. We had some increase on SG&A, mostly on the rent item where there is a sort of automation due to the [indiscernible] that is the inflation rate that comes into effect on the rents but we are undergoing a major negotiation program with the landlords to avoid the full application of this rule. Negotiations are undergoing, so we cannot factorize yet in the results of the semester, but we expect to have to complete them by the end of the year and so mitigate the impact on the full year. We -- as everybody knows, this semester was also characterized by the increase in the interest rates, this is not really reflected on our P&L because most of our financing is through the sustainability-linked bond that has a fixed rate so only on the revolving quarter we had the impact of the higher interest. This drives to an increase in terms of net income, which is even higher than the one at the EBITDA level with a plus 5.5%. I move to Page #6 that, as usual, provides some more breakdown of the results. By channel, we see that the direct operator store, which is, by far, the most relevant channel of the company is growing 5%, 4% due to the like-for-like growth and another 1% due to perimeter growth. Franchising on the contrary is flat and it is mostly due to phasing since franchising comes also from invoicing business to business to our partners. And this year, we moved to August, some of the July shipments also to allow an easier clearance of the spring summer goods. So we expect to fully recover this in the second semester. In terms of EBITDA, there is -- we have to highlight the excellent performance of the OVS brand that managed to fully exploit its operating leverage. And so it's growing by 9% on EBITDA, while UPIM that is more characterized by the franchising business is basically flattish. And again, we expect to recover in the second semester when the phasing of the franchising will normalize. I move to Page #7 with one of the key points which is the trade working capital. On the receivables is quite clear. We had a reduction in the values also due to the phasing of the invoicing, as I just mentioned. The inventory is flatter versus last year. On one side, penalized by the missed sales that we had in this last month because of course, we were ready to fulfill and higher demand from the consumers. Despite that, and so not having reached the full potential, the potential of decline in inventory the rotation is improving. The stock is flat while the cost of goods sold is increasing 6% in the semester. And this is due to the fact that the full winter '23 purchases will be lower than last year for main effects including the fact that each product is costing less than previous year. Trade payables is reducing by EUR 50 million, mostly because of this lower full winter '23 purchases and this, in the end, is one of the key elements that is moving the cash flow of the semester, but is also the key element that allows us to be confident of a recovery in the second half of the year, basically having EUR 50 million less to pay -- to be paid to the supplier means that we should be able to generate much more cash in the second half of the year. Page #8, the investment. 2 comments here. On one side, we highlight even more of the switch between the new openings that is additional [indiscernible] additional square meter and refurbishing. We completed in 2022, the refurbishing of the Milan stores. 2023 is focused on Rome stores. And as said by Stefano, the results are really strong. The key differentiator versus last year is the investments in logistics. We are finalizing the automation of the Pontenure distribution center moving automation also on the e-commerce side that now has a size that allows us to have this investment in automation of the shipment business to consumer. So in total, we have EUR 4 million more versus last year. Page #9 is the summary of the items that we just discussed. So we have an absorption of working capital, which is more or less EUR 30 million more versus last year and that we expect to fully recover in the second half of the year. So no major comments on this element. Page #10, again, is a summary on the picture of the financial position at the end of July with EUR 242 million of net debt adjusted after having -- let me say, had a cash out for about EUR 42 million in dividends and share price. Share that at 31st of July were about 7% of the capital, about EUR 20 million in a situation where the leverage ratio is more or less constant around 1.3 million times the debt versus EBITDA. And on that, let me say, I give the word to you for questions. The Page 12, outlook that was already commented by Stefano in the introduction. So if there is any questions, we are ready to answer.

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] at this time, the first question is from Francesco Brilli of Intermonte.

A couple of questions from my side. The first one is on inventory. Just if you can provide us with a quick comment on these items. If we had to assume that they are remaining slightly higher until next spring/summer season or you were able to lower it already in August and in September in light of this prolonged good weather conditions? And the second one on this respect, if you can provide us with some additional color on the very latest weeks, this very, very good weather condition and warm temperature if they are somehow delaying the start of the next season.

Well, thanks for the question. On inventory, yes, you already gave the answer. We had excellent sales in August. And we started September in spite of the weather, which is still warm in line with last year, a bit better than last year. So all in all, the inventory that end up being a bit higher than our expectation in the end of the fiscal semester has been already partially sold during August and September and then we have to outline every time that year after year, we are increasing the portion of inventory, which is subject to last much longer than in the past. So the seasonality is getting lower and amount of items that we can bring at full price to the next year is getting higher and higher. So we don't have any issue on the inventory this year. In term of late -- last week's performance, yes, they might have been higher, obviously, because weather remained very warm. But we are positive in September, as of today, like-for-like. We are largely positive in August, like-for-like. So we might end up with a good third quarter that might have been even better, like the last quarter. But as I say every time, the seasonality of our business must be analyzed season by season. So -- and the only way to really understand the performance of our company is looking at the first semester result and second semester result. So the experience tells that what we didn't sell in May we have sold in June. And what we will eventually not sell in late September will be sold at least a big extent in October. That's it from my side.

The next question is from Daniele Alibrandi of Stifel.

Have 3 questions. First one, if you can give us a visibility regarding the price mix and volume breakdown of like-for-like in H1. Second question is a follow-up on working capital absorption in H1. Can you please confirm that the absorption will be almost totally recovered in H2 like last year? This was my take, just to be sure about that? And the third one on -- again, sorry, on the current trading and the positive growth -- so in August, September, if you can please clarify if you are seeing low single digit or mid-single digit quarter-to-date increase? And maybe related to that, if you can please comment on the resiliency that you expect from your customers given a few companies in the -- per sector are flagging a more cautious sentiment from local [indiscernible] Europe and Italy, which seems not to be the case for you.

So I'll start from the last question. It seems that other companies are more conscious. This means that I'm not conscious about what is happening. But in the last 3 years, I've been very conscious about what was happening. And obviously, I will make a mistake sooner or later. But I don't see -- still, I don't see any material signal of the huge problem that anyone is looking in front of us in the last 3 years. And as a matter of fact, the market is still stable. The expectation for the full year market was to have a positive like-for-like for the market. The market is more or less flattish today. So I think that I continue to be realistic, means that I don't want to take medicines if the illness is not there. And in this moment, I don't see signals that the customers are scary or are buying less than what I was expecting, other than because of weather situations, which is a typical aspect of our business. So basically, that's why we continue to have a good perspective of the second half also because what is in our hand, which is a cost is moving extremely favorable compared to last year. The first question regarding price volume mix. We had more or less a minus 3, minus 4 quantity and plus 7 plus 8 price, which is the tail of the price increase over the last year. In terms of capital absorption, yes, already Francesco told you get that because of a different phasing. The first half has been impacted in a different way compared to last year. We remember that the first half is a cash absorption half in our business. But we have all the evidences and the most important is the strong reduction on supplier payables that in the second half, assuming a normal level of sales the cash generation will be in line with the one that we had last year. Finally, again, on -- on the total year, sorry, so the cash generation for the total year will be in line with what has been generated last year. Finally, in terms of current trading, we already elaborated on it. So as I said, excellent conclusion of the spring/summer season with as expected, a strong growth in August as a tail of the sales higher than normal due to the fact that in May, the sales has been lower than normal. So there has been a kind of postponement of the buying from our customers. September started as expected. Even last year, September was warmer than the average of the last 10 years probably. And because we are conscious that there is a kind of a switch in the seasonality, summer start a bit later and autumn as well starts a bit later. We have been -- we prepared our intake also in terms of a mix between lightweight and heavyweight in regard to this consideration. So no surprise as of now.

The next question is from Federico Belluati of Kepler.

My question is regarding staff costs, which are decreasing from last year. So I was wondering if you can give us some color, please.

Staff cost is decreasing versus last year as a balance between 2 elements. We didn't have any material salary increase as of now compared to what will happen starting from the mid of second half and next year, obviously. And we had a volume reduction. So we compensated the modest salary increase with the reduction of hours.

The next question is from Domenico Ghilotti of Equita.

First is a follow-up on this question. So if you can give us a sense of what is the sale increase that we should factor in for second half and then 2024, last -- another question is on the price mix and volumes. How do you see the second half? So the contribution of volumes and price mix. And on another perspective, it seems that the space contribution is almost 0. So do you expect this to remain the same? Because I read also that you are exiting some flagship when there is an excessive request for rental increases.

Okay. Thank you for the question. Salary, as anybody knows, there will be a new labor contract starting from next year, basically. Most of the elements of the contract has been already agreed but not all. There are still discussions undergoing. We expect a modest increase in the second half of this year, a higher increase next year. And we are ready to balance this increase with a combination of lower hours because of the volume decrease and utilizing part of the strong intake reduction that will be generated, thanks to the raw material cost decrease. I have also to remember that the new contract is still under negotiation. So difficult for me to tell you how much it would impact. It will be millions, for sure. But I'm not in the position to tell how much today. Important to say that we have -- we are convinced that there will be a full compensation of the salary increase, thanks to the margin increase. In term of price volume relations in the second half, as announced, we will dedicate part of a strong intake reduction to reducing price in kids' segment, mostly in the entry level. We already made some adjustments during the first half to a price of entry level, and this exercise gave us very good results. That's why after 2 consequent semester where we have lost market share in Kids, we recovered and we increased more than the market. In the second half, this price reduction will be more material without penalizing the margin because -- again, the cost reduction will be higher than the price reduction. Men and Women will not be impacted by price reduction. We don't see any reason why to do it because in this moment, we are happy to attract a new, more demanding customer buying Piombo, buying BAngel and ready to pay some price increase, price premium in order to have a better product and we will continue with this strategy. Vice versa, UPIM will be more oriented to become even more competitive, in order to capture those needs that are mostly oriented to look for a better price. In terms of space contribution, basically, we didn't have a positive balance in terms of new square meters. We remodeled and we are continuously remodeling our footprint, trying to exit from the less performing store and opening new locations in order to take advantage of better location once we leave a position, and we find a similar one in the same catchment areas at better economic condition or with higher potential. But in general, excluding some exception like the one that we mentioned because it was an important store of UPIM, where we were losing EUR 300,000 per year. And because the landlord refused to renegotiate, we have found a new tenant, and we are enjoying a EUR 600,000 goodwill. So next year, we will have a recovery of EUR 300,000 EBITDA and EUR 600,000 one-off, let's say, cash generated by the store. But all in all, we are not in the mood of reducing the footprint. Even this year, we opened a new franchise store and by the end of the year, we will have a number of stores that including the new franchise will be higher than 40, 50 stores, I think, compared to last year.

And just to be sure. So when you say in the second half, you will have basically on the kids some price reduction on the other, say, categories, no price reduction at all. So overall, so you are expecting some contribution, some recovery from volumes from this compared to the first half, let's say, you are seeing volumes slightly positive while prices will not be neutral at best.

We expect that the volume will not be negative in the second half. And so we expect that a modest like-for-like because we are conscious. We are not in a booming market. So demand is not exciting. So in general. So we are not considering that the like-for-like can be generated simply by the market. We believe that a modest like-for-like will be generated -- I consider modest, I say modest, but basically in line with the one that we had in the first half, so not that bad, to be honest, will be generated mostly by new projects like the ones that I remembered the increase of the young women, Baby Angel -- BAngel, the strong increase in perfumery that at the same space, will generate another big element of our combined growth. So most of the growth will be generated by a combination of higher productivity of the space, which means also volume, obviously. There is another element that will contribute to the growth, which is the good success of Piombo women. So if in the Men, Piombo achieved almost 17%, 18% of the total Men turnover. Women, which started later, 2 season or 3 seasons later, is presently accounting for 14% of the total turnover, but the trend is growing. So we expect that we will have another booster to our growth generated by this segment. So women in general, Piombo [indiscernible], Piombo women and BAngel as main driver of this premium performance. Perfumery very solid, very strong with 40% like-for-like, even assuming that the 40% like-for-like, will become 30% or 25%. This will be another great driver for our growth. And when we mentioned volume, we missed mentioning the volume opportunity because otherwise, we could tell you that the volume are increasing by 10% maybe. But we mentioned only the volume relating to the apparel segment. If I include the volume of perfumery, even volumes are increasing obviously.

Okay. My last question is on the purchases for the second half. So I understood that you will have lower prices. And so we will see inventories coming down also due to the fact that you are factoring in lower prices. But what about volumes? So are you buying less units, less volumes on a [indiscernible] or are you planning for a second half full winter positive or similar to last year in terms of volumes.

In terms of volumes, we are planning to buy basically the same. But because of the quality of inventory and the initiatives, we believe that our sell-through will increase. So that's why we expect to have a better sell out even if we buy lower quantities compared to last year.

The next question is from Andrea Bonfa of Banca Akros.

I got one question. I do apologize I joined the conference call a little bit late. But if I understood correctly, you were mentioning on the rent on the, let's say, automatic inflation on the rent, that you accrue this inflation in the first half accounts. But you work by year-end, you can release some of these, let's say, accruals. Is that correct?

Yes. The reason why we didn't post any result from the negotiation is that negotiations are still undergoing, but like we did in the past, we will post, we will, how to say, account for the discounts only when the agreement has been signed. This normally happens in relation to the end of the year. So once we are close to the end of the year, November, December, we normally sign most of the agreement with the landlord. So the -- my opinion, based on the discussions that we are having with landlord is that we will have a material amount of savings that will be posted in the second half. Technically, based on regular accounting principle, we didn't have any element to make provision in this first half until the negotiation has been signed.

The next question is from Luca Bacoccoli of Intesa Sanpaolo.

Some question from my side as well. So the first one regards the different phasing of the invoicing to the franchising. So I was wondering if you can tell us what is the amount of sales shift to the second semester. The effect -- sorry, second question regard the labor cost increase in 2024, if this increase will be enough to recoup the inflation in 2023 and 2022. So more directly, what is the labor cost increase that we have to take into account next year. And the other question is on the Stefanel and Gap brands, which seems that are not yet performing very well. The EBITDA losses is increasing in the first semester. So I think that the startup phase is longer than initially expected that at least by my side and that's it, thank you.

Thank you. On the invoices, I need the help from Francesco, Francesco.

Yes, around EUR 5 million to EUR 8 million that will be shipped -- that are shipped -- that have been shipped because they were invoiced during the month of August.

Okay. On the salary increase, obviously, the answer is no. So we will not have a salary increase. Unfortunately, for our employees, we will not have a salary increase, which is recovering entirely the inflation, which happened in 2022 and '23. So as I said, there are still negotiations undergoing. There will be a gradual increase diluted in more than 2 years, I guess, still not certain. But unfortunately for them, it will not entirely recover the inflation. Otherwise, we should have a problem of 12 to 13% probably. Stefanel and Gap. Gap first of all, Gap we are very happy with the turnover. Turnover of Gap is increasing high double digit, either in the flagship of Rome and also in all the outlet stores that we inherited by this new business channel that we decided to try to enter. This means that our activity of buying and selecting the right merchandising is giving great results and we had the top management of Gap in Rome last week. I was with them visiting the store. They are super happy of what we are doing. We are managing the operation much better than they were doing because we have a knowledge of retail in Italy, obviously, much higher, but also they are impressed by how our activity of buying and selecting the right goods, the right weights, the right colors, the right printer is improving the performance. The reason why we suffered is only technical, not nice to say, maybe, but they've been extremely lazy and slow in reacting to the general environment of cost increase in Far East in logistic, supply chain in general. And because of our agreement provide that they transfer their goods at cost FOB or -- and we pay a royalty basically. The cost increase has been much higher compared to the cost increase that we experienced. Once after many meeting with them, they realized that they might have done much better, not nice to say maybe and maybe harder to believe because we are a small company, only EUR 1.5 billion, and they are a big company, probably EUR 7 billion, EUR 8 billion, I don't remember. But they realize that our sourcing is much better than their sourcing. So what happened is that they improved their buying. And in the second half, we will be already benefiting from better intake with them, but most of the improvement will be in the next year. So this negative performance will be in our opinion entirely counterbalanced in the second half and will generate a good profitability next year. This is our opinion. On Stefanel, vice versa, we had more or less the same pro forma the last year. We are not super happy. It's true. We are still missing to achieve our target of sales. Our franchises are more impressive than I do from our collections. So we are still a bit reluctant to open many other stores. We are still working on the assortment in order to improve the collection before pushing the accelerator on the development. That's it.

Okay. Very clear. And just a follow-up question, if I can, on the rents because I'm not sure I mean understood the trend for the second semester is correct to say that in the absolute amount, the rent for the second semester may even drop year-over-year.

Let me say it in a different way. In the first half, you have seen from the accounts, a rent increase that will not be replicated in the second half. So you have not to assume that the increase of rent in the first half will have to be doubled in the second half. Because in the second half, we will finalize a certain agreement for sure, that will account for millions. Today, I cannot know if there will be EUR 2 million, EUR 4 million, EUR 6 million or EUR 7 million. But this is the range we are talking about. So in a full year, you will have a rent increase, but not two times the rent increase that you had in the first half.

[Operator Instructions]

Okay. I think that no more question is coming. So thank you for your attendance and looking forward to seeing you during the next third Q results. Good afternoon or Good evening.

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