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 9 Months 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. Good afternoon to everyone. Let me start with a comment that if the quarter would be a movie, the main actor has been the weather in this period with an incredibly long, late-starting and long-lasting summer. Which basically destroyed our expectations that were for a record. Here, given that the margin and sales that we achieved before the very tough weather that impacted the -- the period from mid-October to mid-November should have been equivalent to the ability of achieving the highest-ever result. Nevertheless, we have been able to mitigate this extremely adverse meteorological conditions, and end up the 9 months still with an increase in the like-for-like sales basically, and also a modest increase in -- but to be honest, not the 9 months, as of today, so sorry for misleading you. As of today, including also the current trading, we already are achieving a modest increase also in EBITDA versus last year. In terms of cash flow, obviously, we suffered the lack of sales that we expected to achieve in the aforementioned period. But the good news is that, again, with the very good current trading starting from mid-November to today, we are achieving our goal or better than our goal in term of cash flow generation in the period, and we estimate to end up the full year, as we said, with a final increase in gross margin and a cash generation of about EUR 45 million to EUR 55 million. That's it for me, and I hand over the word to Francesco Leoncini.

Thank you, Stefano. I will quickly drive you through the document that was published yesterday. And I would start on Page #4 that summarize the points already mentioned by Stefano. In particular, the fact that we continued our overperformance versus the market with market share increasing to 9.6%. On Page #5, we have some more details on the income statement. I said the Q3 was twofold, with sales landing at minus 3.5%. But this, as we say in Italian, is a sort of [Foreign Language], is a twofold moments with double-digit decline in the central 4 weeks, but growth in the rest of the period. These landed to mentioned performance. And over the 9 months, we are still with a positive sign. The EBITDA is declining by EUR 2.6 million, as basically the impact of the inflation. We started the year with close to double-digit inflation rate, and we managed to limit this -- the increase on cost, thanks to characteristics of OVS, which is the careful management of -- the micro management of all the store costs. On the other side, we also kept under control the promotional pressure, and this allowed to, in the end, limit the reduction of EBITDA to EUR 2.6 million, 2%. The profit before tax is positive, EUR 60 million, and includes the slight increase in depreciation and the higher cost of money on the financial charges. Page #6, we provide some more color on what happened in the 9 months. In terms of sales by channel, we see the stores that are mostly full format that are increasing 2.2% while the franchising, which is mostly kids, declined by 1.4% because as -- by structure, let me say, the kids category are more exposed to weather than the adult ones. The -- in terms of performance of OVS and UPIM, UPIM increased a little bit more, thanks to a higher growth in the perimeter. And this led basically also to the result on EBITDA plus 0.8% in UPIM slightly declining minus 1.4 in OVS. I will spend maybe some more words on Page #7 on the trade working capital. The comparison with 2022 we think is not so meaningful because last year, the company anticipated significantly the purchases in order to avoid any risk of disruption on the supply chain. And so ended up with strange values, let me say, on both inventory and trade payables. So going into the details, we compare then to 2021. On trade receivables, we have a slight increase of 5.5%, which is mostly due to the fact that at the end of October, we accorded some term extension to our franchisees in order to accommodate the fact that also on their side, they had some lower-than-expected sales in the Q3. But the situation is under normalization now in the month of November and December. So this will just turn out to be in a higher cash flow in Q4. As said, inventory and trade payables somehow needs to be looked at jointly. And in 2022, we had a peak on both terms because we purchase a lot, and this was still to be paid. More meaningful the comparison with '21. And here, we see an increase in trade payables by about EUR 50 million that represents the growth of the 15%, 16% growth of the company over the period. And about EUR 60 million higher inventory, which -- more or less 50% due to the fact that also in inventory, the company is growing. But on the other side, the fact that we were prepared to much higher sales so far. And so we have some leftover that -- some unsold stock that will be fully recovered in 2024, as already happened even after the COVID, the closures in 2020 with full inventory sold in the following year. Here we are talking about, of course, much smaller, smaller values. I go to Page #8 for an overview on the capital expenditures that are 10% increasing versus last year. We changed a little bit the mix between the new openings and in-store projects following our intention to have -- to push on the like-for-like growth. And so we are -- last year, we invested in the refurbishment of Milan stores. This year, we did the even larger action on the Roma stores or the Rome stores, and they are coming out with sales growing 5 to 7 points more than the rest of the like-for-like perimeter. We are going on with the investments on digital transformation and logistics. We are close to complete the automation of the e-commerce side, let me say, on the Pontenure distribution center, and we will see the positive effect on profitability starting from 2024. The Page #9 represents the cash flow statement, which sees basically the absorption of the working capital as main driver on the results compared to last year, with about EUR 50 million more cash absorption that possibly will be [ revised ] in the Q4 and also some other elements like the higher -- the higher CapEx and the financial charges. But the -- as said also by Stefano, the view and the numbers that we are preparing see a recovery, a strong recovery in Q4 on the cash flow. Page #10 has a view on the net debt that technically is slightly increasing in terms of leverage on EBITDA versus 2022. But in absolute values, we remain well, well below the 2x, which is, let me say, that -- the normal for a retailer. I then move to the outlook for the fiscal year. We are already on 14th of December. So we have -- we are quite confident in the numbers for the closure of the year. And we are seeing very positive sales in the start of the Q4 thanks to general performance and also the performance of specific projects like B.Angel, that marks the return on -- of OVS on -- in a dialogue with the younger generations. And in Altavia, which on the other side is the first step on the sport universe, which is a development acts for the following years. So the numbers in terms of EBITDA are already positive versus last year with the closure of November, and we expect so -- to close the year with a slight improvement versus next year. I'll [indiscernible] then to Page 14, the closure with the announcement on of the call of a shareholders' meeting to have a couple of points, the distribution of an extraordinary dividend of EUR 0.03 per share and the continuation of the buyback program. On this, maybe, Stefano, you want to say some words on the...

Okay. I think that there will be a question on it. So -- but we answer to question, I'm sure.

Perfect. So we leave space to questions, and thank you for attending.

[Operator Instructions] The first question is from Daniele Alibrandi of Stifel.

The first is on current trading. You mentioned positive growth in November and December. So I was wondering how you judge your consensus, which is currently forecasting still a negative low single-digit growth for Q4. So just a word on the consensus sales figure of [ EUR 1.5 billion ] in '21. The second question, I was surprised by the mix and the resiliency of UPIM profitability and -- and also its growth. It was flat, but it was quite surprising to me. And these were better than OVS. So can you please comment on the driver of this performance? And the last 1 would be on the indication you gave on free cash flow improvement in Q4. So if you can guide a little bit better if you expect, I don't know, a slightly negative working capital change or [indiscernible]? Thank you.

I was thinking about the beginning of your question, because I -- it's difficult for me now to understand why the consensus simulate assumption for a negative like-for-like growth in the fourth quarter, which we don't have. So we don't foresee any negative like-for-like in this -- in the fourth quarter. As of today, we are positive. Mid-single digit. So it should be a surprise for me to end up the quarter with a negative like-for-like. So this is the first question you asked. Why UPIM is performing at the top line level and margin level better than OVS. Basically, UPIM is facing a higher number of new opening compared to OVS, number one. This is not material, but it's a part of the answer. The second part of the answer is that UPIM sales strategy has been different from OVS. UPIM has been more aggressive than OVS in the sales period. And the sales increase has been mostly generated during the month of August. Last aspect on UPIM, UPIM has the recovery compared to OVS because UPIM performance in terms of growth, in terms of profitability is still below the OVS. We are working hard in order to bring UPIM with it's different positioning, market positioning to achieve a similar result compared to the one of OVS. In terms of cash flow, it's a bit complicated for me to describe all the movement which are generating the cash flow projection. First of all, sales, obviously, which are the most important aspect of the fourth quarter, sales are positive after the very negative result of sales in the third quarter. As we said before, we were prepared also in terms of stock to a much better third quarter. And incredibly adverse weather conditions, which impacted severely the market. And that's why I'm happy to notice that we have been able to surpass the market in spite of being highly exposed to [ kids ], which normally is mostly penalized by weather than the other segment of business. So it makes me comfortable that the company is very solid. And coming back to your question, sales are the main driver of this recovery, and then other working capital moves receivable from franchisee. We have been -- we decided to give some breath, let me say, to the franchisee partner, which has been so heavily penalized also because they are mostly exposed to [ kids ] in the tough period where their sales has been forced to suffer so much. So we gave them some credit delay, and they are recovering because they are in good health normally. So they are now paying what we allow them to delay in terms of cash collections. And then other movement supplier payments, which are all generating a positive effect in the last quarter.

The next question is from Alberto Gegra of Equita SIM.

I have 2 questions. The first is on growth. Sorry, I probably missed it. So can you clarify which is the split between the new store growth and the like-for-like? And the second about margins. So in particular, which was the level of gross margin in the 9 months? And what do you expect for the full year 2023?

Very difficult question. We are talking about small numbers. So I might say that the 50% of the growth is like-for-like and 50% of the growth is new openings, more or less. And I'm looking to my team and they say to me, yes, this is the right answer. And the second question regarding margin, we never disclosed really margins. What I can tell you is that the margin I want to give you a qualitative impact, which is very important also to review visibility on the future. In the third quarter, the gross margin was expected to increase. And all in all, in all the second half, as we said in the previous meeting, the gross margin was expected to increase as a result of much better sourcing conditions due to the reduction of cost at raw material level after the spike incurred in year 2022. And second reason for this was that we should have expected to remain very disciplined in markdown. What happened in the third quarter has been a bit disappointing because the only month which has been not impacted by weather, which was August because August has been hot as normal, we sold very well. We had a very high positive like-for-like, but unfortunately, during the month of sales. And sales were still keeping into account the lower margin that we had in the first half of the year because we were selling the spring/summer goods. Then starting from October, which has been hot since the mid of the month up to mid of November, super hot, we entered in a period of good margin because it was characterized by the higher margin, the higher intake margin of the autumn/winter goods, but unfortunately, sales has been lower. So in the mix, even if on the peer-to-peer, comparing apple with apple product, the margin was higher. But unfortunately, because the mix of the sales generated in August was higher, the overall margins suffered. Again, the good news is that starting from mid of November, when...

Mid-October.

Mid-October, sorry, mid-October, weather normalized. We started selling again the goods with the new margin, which is much better than the last year ones. So long story short, the margin starting from mid-October to end of the year will be much higher compared to last year.

The next question is from Federico Belluati of Kepler Cheuvreux.

Most of my questions have been already answered. So I have just 1 question. It's regarding the weather impact. Both Q2 and also -- and mostly Q3 have been impacted by the weather. So I wonder if you can quantify as more or less the impact of the weather? So maybe 9 months are in sales with all this effects, in your opinion?

I think we have lost about EUR 40 million -- EUR 40 million to EUR 50 million sales this year because of weather.

The next question is from Andrea Bonfa from Banca Akros.

I got a very simple question. The new buyback plan for a further 10% of shares, is that a time frame by which you want to close that initiative? Is it in everything to be done next year? Or how much do you want to spend next year, just to give us an idea? Because more or less this year, you spent something like EUR 30 million.

No, Andrea, there is not a time frame. Basically, the decision to enter in this second buyback call to the General Shareholder Meeting is only technical by chance, we are today at the end of almost 3-year period of buyback. We started 2.5 years ago, more or less. And we completed this plan basically during these days. So this Board meeting was the opportunity -- the only opportunity for us to enter in a second and final obviously, buyback plan. But just because the law allows us to achieve the 20%, we decided to avoid other calls and to enter in this second call, but there is no way that we are thinking to -- not only to when, but even if to complete a second plan. So there is no deadline, there is not any predefined amount that we want to achieve. It will depend from volatility, market conditions, share price and sensibility of the Board, because at the end of the story, we are only asking to the General Shareholder Meeting to agree with us that buying back share within the limit of the law represents an element that the company can utilize in order to react to excess availability, offering liquidity measure to shareholders that might desire to exit from -- so as we use as of now, so it took 2.5 years, but it doesn't mean that at the end of the next 2.5 years we'll be up 20%, maybe we will be at 11% or at 9%, no one knows. Not a 9%, but I mean, we could even not put in place any -- any new buy. So a long answer, because I wanted to give you not only the specific answer, but also the framework we decided to ask our shareholders to agree with the Board regarding the opportunity to expand the buyback program.

The next question is from Luca Orsini of One Investments.

Stefano. Can you hear me?

Yes. [Foreign Language], Luca.

Okay. Now just 3 quick questions. I mean this topic that you've touched in the past. On the business is, can you give us a little bit more color on what's going on, on the average ticket and also on the attitude of the new customers and some more color on the new age of the customers? So it is more or less the same question on 3 different angles. And then the second question you [indiscernible] reveal the time is, are you canceling the shares that you bought, this 9%? Just take your EPS up by 10% by doing nothing? That's it.

So I got 2 questions Okay. Luca, average ticket is increasing. So it is very good news. Average ticket today is about EUR 35, when 3 years ago was probably EUR 27, EUR 26, EUR 27. And the reason for this is that we have been able, as demonstrated by our CRM system, to attract new customers. I know that you know the company sometime, I think you buy things in our company. And you know that brands like Piombo, which, to the benefit of everyone, is a brand that we own entirely. So it's not a third-party brand -- has been able to suggest a new style to create a new opportunity for different customers. More demanding, more affluent, which are visiting our stores. And the fact the average ticket of the customer, which are buying mostly Piombo and this, we can be able to understand from our loyalty program is even higher. It's about EUR 50. So good news. Second good news, which refers to the second component of your first question, is that the attitude of our new customer is to be younger. This is not an attitude that this is an anagraphic condition. And this has been -- this is happening thanks to 2 different things. One is that a couple of years ago, we started reengineering our beauty sector, transforming from a, let's say, commodity makeup into a more in the brand research and innovative offer. And the result of this is that we are attracting a lot of new generation. I mean, young women, girl, which are generating in this moment a 40% like-for-like sales increase in perfumery, which is becoming an important segment of business for us, moving the penetration of perfumery from 5% to 6.5%. All generated by younger customers. And September that -- I'm very happy to note -- to notice that this idea is working. We are leveraging this event, which is represented by a new generation of women coming in the store, offering them also an innovation in our women's segment, introducing the B.Angel that we evolved, if I may say, from Baby Angel, and we transformed into B.Angel. We gave the mandate to elaborate and to develop B.Angel to a new manager, which is an existing manager that was in charge of other aspects of the business. She is a talented person, and she gave a new energy and a clear position to this assortment. We -- this year, we doubled the intake dedicated to B.Angel, which is young girl, or young women, let's say, better to say young women from 20 to 28, let's say, years old. To my memory, it never happened that -- if I double the intake, I more than double the sales, but this happened this year. There has been a new corner, a new merchandising, a new style. And I'm happy to say that the sell-through generated by this segment is higher than last year, even if the total sales are more than double the last year. So new customers and higher average ticket. Regarding the second question, the cancellation of the share, there is no plan for this. In this moment, we are considering still that shares might represent also an opportunity to be used as a compensation in case of M&A operation, paper that we believe is not fully valued, not fully appreciated by the market, let's say, a bit undervalued in our opinion as a Board, can represent a good opportunity for a seller, which eventually decides to sell his company. But -- which is frustrated by the low multiples of the sector, which means that if they receive cash today in exchange of their participation, the cash maybe is not enough for them to be induced to sell. Vice versa, if they receive may be a mix of cash and shares, they can also aim that share value might increase. So their -- the total value for their asset might increase. These are speculations, obviously, because we don't have anything in front of our -- in our desk ready to be completed. We have a lot of opportunity in our desk, but no one at this moment is under finalization. But now, in this moment, we are not thinking to any kind of cancellation.

The next question is from Francesco Brilli of Intermonte.

Many questions has been answered. I have 2 quick questions and more general questions. The first one is if you can share with us some additional color or, I mean, a few numbers on the -- on the view of the Altavia ski collection, which I've read today in the press release, it was particularly successful, if you have some from number to share with us? And the second one is more general in light of this year. I mean -- and in light of the weather changing, I was wondering if you have from a strategic point of view, if you are considering some changes, also some action to place the -- I mean, the climate change this year for the 2 main season was -- I mean, when it heavily impacted by climate changes, going forward, are you considering some actions or some different buying or inventory mix or something to -- I mean, to react to, to be ready for this kind of changes in weather?

On Altavia, we are super happy. Let me say that I'm enthusiast about what we have been able to create. And I invite all of you. I hope that many of you are skiers. In these days, you can finally ski. I think that we made a great result, probably in terms of technical aspect. We created a collection. This is the second year that we approached the ski. But last year, it was really, really more than a pilot. With some share, which has been well done, but not presented in a way that was a real marketing launch. This year, we decided to enter more seriously on the back of the first lessons that we undertook during the first pilot. We were conscious that the quality should have been excellent. And once I realized it was 9 months ago that the quality should have been excellent, we decided to make this agreement with worldwide champion that -- which is recognized as a winner in the ski, but also a real, reliable day-to-day person, a person that you can approach, person who has a family, et cetera. And Deborah Compagnoni was the right name. She spent a lot of time working with my team and working with the style department, the technical department in order to adjust, modify, improve and finalize the better fitting, the better the features. Let me only tell 2 things. On the most technical items, the shell and the pilot jacket, we have 20,000 water column of water resistance, which is the highest standard in the market. So if you go to Decathlon, you will find from 5,000, which means basically with a drop of water, you are completely wet, to 20,000 only in the highest quality item that they have. But even if you buy an Arc'teryx or a Peak Performance ski jacket, you never find more than 20,000 water column. So we are at the highest level of technical features in the market and by far at the lowest price. Because we set the shell at EUR 149 -- I think EUR 129. So excellent technical result. And at the turnover level, we are surprised because in spite of being still in the beginning of our hopefully good trajectory in the sport segment, we achieved as of last week 25% of sell-through, which, considering that it has been achieved in less than 3 weeks, is one of the highest results in every product category. Obviously, the highest level of sales has been achieved by all the knitwear items of the technical underwear, call it, the one that when you need to ski, gives you protection from cold, which is super elastic and technical, which is our bread and butter, to be honest, even if we adjust into a sporty and technical version. But we are surprised by the good result also of the more -- of the outdoor, the share, the pants, et cetera. So very happy with Altavia. Regarding what we are thinking in order to find solutions to the weather climatic change, which is really in place since many years, I would say that dedicating efforts and space to the beauty area represents, in my opinion, the best answer. We started with makeup 6, 7 years ago. We learned, because it was not our core business. We developed and we improved our understanding, and we are now increasing space, sales density and margin, generate -- elaborating also in-house collections of skincare and makeup, which are generating good sales and even higher margins. So the effort which are -- which we are dedicating to improving merchandising space occupancy, dedicated to beauty is probably the best answer to your question. Other answers are more technical, less strategic, like working more on mid weight in the garments for the mid-season than on heavyweight. And entering this mentality of the onion effect. So people is more and more used to dress with different layers of garments, from the lighter ones to the heavier ones, other than simply using coats or every -- heavy coats. But all these aspects are more related to the operational kind of answer. From a more strategic point of view, I will say that introducing an increasing beauty represents a good way to deseasonalize our business.

[Operator Instructions] The next question is from Luca Bacoccoli from [ Intesasanpaolo ].

Can you hear me?

Yes.

So 3 questions from my side. The first one regards the CapEx mix. So I was wondering if next year, you feel -- we prefer investing or refurbishment rather than opening new stores, as was in the case of this year and what if I'm not wrong in 2022? The second question regards Altavia. You mentioned the very great success, maybe even unexpected. And I was wondering how you -- do you think to leverage on this -- on this success? So for example, extending the offering or the penetration, because if I'm not wrong, not all the shops have Altavia assortment available for customers. And the final one is on 2024, it's a bit maybe too early to call, but just a qualitative comment on the profitability trend. So -- as for sure the labor cost, which is going to be an important headwind next year. But on the other hand, you should benefit in full from the lower intake costs. So I was wondering how those 2 elements, maybe even including the rents, are moving each other? And what is the end results?

The question on CapEx. I remember that in year '22, the mix was not exactly like in 2023. So we have still more openings, more CapEx dedicated to opening them to the refurbishment, if I'm not wrong, but I'll ask my team to double check. In 2023, we decided to push on -- yes, I think I'm right. In 2023, we decided to push on refurbishing store. Because as Francesco said before, and as we said during some former call, our main goal now is not just to open stores in Italy. We will continue opening stores. There are still a lot of opportunities to enter in a targeted shopping mall. For instance, we just opened near Milano in Cascina Merlata, a store which is performing even better than we expected. The store is performing super well. For some reason, Inditex is not in. For some reason, other brands are not in, and we are overperforming also because of lack of competition, which demonstrates that if any time there is a new nice shopping mall, we want to be in because this shopping mall is growing sales from other malls but also from street vendors, et cetera. So there are still opportunity to grow, but we believe that we have to complete our efforts to rejuvenate the image of our store because with the traffic, which is back in the store with the reduction of the growth of e-commerce and the rediscovery of the experiencing the store and the fitting rooms, et cetera, we needed to give our customers a more homogeneous image of OVS, which is in line with the one that you can see many in most of our Milan stores but which is not the same in other areas. So that's why we invested more in Rome, which is the most important market share area for us, either in terms of penetration and also in terms of size of the market. So that's why in 2024, we will continue focusing on refurbishing stores. We have several clusters of stores, not all will deserve the same level of CapEx, but we are happy with the return because Francesco, which is prudent, has said that the increase of sales range is between 5% and 7%. But I can tell you that most of the store where we make our CapEx, if we don't rejuvenate, they might also maybe lose 1%. So the real gap is between 6% and 8% and even 9%, which is very good results. So either from an economic point of view, financial point of view and also from an image and intangible value point of view. Profitability outlook for next year. You already mentioned all the element of the equation. We have a labor cost increase, which is true. Still, we don't know why we will -- it will stop because the unions are still negotiating heavily. So I don't think it will happen from 1st of January. So there will be an impact -- material impact next year. Fortunately, as you said, we have cost advantages because of, as you mentioned, the lower intake cost, thanks to the raw material cost reduction that we benefited -- of which we benefit this year only for 6 months. And next year for the full year. So the compensation -- the combination of these 2 aspects together with the like-for-like growth, together with a modest increase of number of stores, together with an improvement in the international, together with an improvement in e-commerce is inducing us to expect, call it, reasonable increase in profitability at EBITDA level for the full year 2024. Too early to give you more indication. And we will also pay attention as usual to cash flow. Our aim is to gradually year after year increasing the cash conversion. So we expect next year, a good year in terms of cash generation. The last question you mentioned was regarding Altavia. You right -- you're right in basically suggesting us to consider the possibility to leverage and expand. Somebody might remember that last year, when we made our first small steps in the quarter, we also introduced in some stores a small collection of bike, but even most importantly, a small collection of tennis and padel. And I started thinking to tennis and padel 2 years ago because I thought that being an all the tennis veteran is better. I was convinced that this year should have been the year of tennis. With a group of young talented tennis players, Italian tennis players that were supposed to generate new interest for this quarter, which is happening. So next -- this year -- or next year, in spring/summer, we will be present with a wider offer of Slazenger for tennis and padel with a new design and we'll be present in a higher number of stores. And in spring, you will find in the store, the spring version of Altavia dedicated to outdoor sports and activities like hiking, running and trekking. So basically, we will expand our effort in the sport gradually as usual because we don't like to create exaggerated expectation, but we prefer to make a step after step, a good gradual performance, learning by doing.

Okay. Thank you for your answers. Just a follow-up on the cash flow generation, which is a key, of course. It's reasonable if you prefer to say that in 2024, you are going to recoup the cash flow generation, let's say, lost this year because of the unsold stock, or it's a too optimistic assumption?

No, no, no. The first.

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

So thank you. And if I may, I wish Merry Christmas, maybe in advance to everyone. Thank you.

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