Prada S.p.A. (1913) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Prada S.p.A. H1 2020 Results Presentation Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 29th of July 2020. I would now like to hand the conference over to your speaker today, Alessandra Cozzani, Head of Investor Relations. Please go ahead, madam.

Thank you. Good afternoon, everybody, and thank you for joining Prada First Half 2020 Financial Results Conference Call. I hope that you and your families are well and healthy. First of all, I would like to apologize for not speaking with you for the presentation of our full year 2019 results. As you remember, it was March 18, and we were in the middle of lockdown and all stuck at home. But I'm happy today to tell you that since the beginning of May, we have been back at the office, both in Milan and in Tuscany, and in Valvigna today with the top management of the company: our Chairman, Carlo Mazzi; our CEO and Founder of the company, Patrizio Bertelli; and Lorenzo Bertelli, our Head of Marketing and Head of CSR for the group. During the call, Mr. Bertelli will give us an overview of what happened in the semester and how we have navigated during this period. And then I will go through the financial numbers. Afterwards, Lorenzo Bertelli will update you on our marketing and communication projects, and Mr. Mazzi will share with us some final remarks before the end of the presentation. After the presentation, we will all be pleased to take your questions. I yield the floor to Mr. Patrizio Bertelli.

[Interpreted] Good morning to all of you. Of course, I want to tell you about the impact COVID have on our business. And of course, a number of events affected our business. [Technical Difficulty] [ I'm sorry, but I cannot hear Mr. Bertelli speaking. Just a second. ] And of course, what we did, we did our best to contain the impact of COVID on our business and, of course, [ we did so ] both industrially and from a sales point of view. And when necessary, we also resorted to state aid, but we still paid our -- well, 100% of the salary was paid to the workers and just as much to the employees, to the white collars. We gave a major financial contribution because we could not have our employees bear the burden of this unexpected situation. And then, of course, we tried to reopen as soon as possible. On April 27, we tried to take steps to work within the factories. The first month, we had shifts and we had reduced working hours. And starting from June, basically, we managed to go back to normal almost with all of our industrial resources. And that, of course, somehow caused delays in deliveries, product deliveries for the fall/winter collection. The market was very responsive. I must say very -- they were very responsive, especially in Asia, and when Mainland China started to reopen their business on the 23rd of March and then in April, they stabilized. They were very responsive. And just as Taiwan and Korea, Singapore was we closed. And then Australia, New Zealand, Japan was affected by the lack of Chinese tourism, and they were very responsive once again, and clear that Europe was affected just as much, meaning a lack of tourists. And never -- and the local customers somehow offset this lack of tourism. But indeed, we could not achieve the revenues we have announced for -- or that we have in 2019. And then something -- a country that has been supporting us and working well is Russia and Turkey. And the market, generally speaking, were spending on themselves. Somehow, they were looking inward, and the brand was correctly distributed at international, at global level. So we managed to rapidly recoup the lockdown period. What's very interesting to notice is that in July, starting from June, but also in July, we could take and absorb almost completely the losses we recorded on the European market and those of the U.S. market for the clear -- well, for the reasons we all know. And this is very promising indeed for H2 2020 because indeed, we will not know whether or not we're able to fully recoup and have the same revenues as in 2019 because there are a lot of doubt still out there, still a lot of unanswered questions and situations still have to unfold. But the market was very reactive and very fast. Having said that, let me say that we have strengthened our retail network. And we have mainly focused on e-commerce with respect to the past, and we'll give you the figures later, and it will show a good performance through the year. In 2019, we made a strategic decision. I mean the decision we made was we aimed at downsizing our sales in the wholesale channel despite the fact that we have a loss of demand coming from that channel because there are a lot of anonymous platforms out there that [ caused in other crowds ] in market conditions with different prices in different markets and a proposition that was in conflict with our retail network and especially with our brand position. So basically, from 2019, we completely canceled markdowns from stores, and we've dramatically reduced our sales to wholesalers. And the final result, the end result is that Taiwan, Korea and China, we can state that we are, since July, we have increased -- we have had an increase in sales in excess of 50%, 5-0. And that really makes us hope for the best when it comes to the second half of the year. Prada's policy to focus on our own channel, retail channel and on the e-commerce channel is bearing excellent results. In the first half of the year, of course, we are paying for the -- somehow we're feeling the lack of wholesale revenues versus 2019. But generally speaking, our results are sufficiently positive. I think that the strategy we are pursuing is really positioning our brand in the high bracket of the high-end luxury brands and makes it possible for us to achieve contribution margins that are those of a luxury margin with a markup and a gross margin in excess of 73% for 2021. In 2021, we think our gross margin will be hovering around 75%. And that is the level that you can only achieve if you manage your brand and your distribution network, including DFSs, which are managed at business level fully by the Prada Group. And let's now crunch some figures. Let's check the figures, and then we'll answer your questions. Thank you very much for your attention.

Okay. I will start with a picture of our P&L. Net revenues for the first 6 months of the year stood at EUR 938 million, so down 40% year-on-year at constant exchange rate. Of course, the group's strong revenue momentum registered up, until the end of January was abruptly interrupted by COVID-19 pandemic. This has caused store closures around the world at various times since February, with a consequent significant negative impact on revenues. However, we reacted promptly and took effective action to mitigate the impact of the store closures, putting in place a comprehensive program of cost-cutting. These actions included renegotiation of lease agreements, from selling or postponing marketing activities, and cutting all possible discretionary costs from traveling to consultancy and external services. As a result, total operating expenses were at EUR 866 million, down 12% at constant exchange rates compared to the same period of last year. In order to better understand the impact of the stores' closure on our P&L, we have identified all the selling cost pertaining to the stores that have been closed during the lockdown imposed by the governments around the world. And this impact amounts to EUR 112 million. All these costs representing 18% of our total selling expenses generated 0 revenue because of the forced closure. Thus, EBIT net of this amount was negative at EUR 83 million. Including the above cost, EBIT was negative at EUR 196 million. A net loss of EUR 180 million was registered after inclusion of a positive tax contribution of EUR 52 million related to the deferred tax assets [ and ] carryforward of losses that the group is reasonably certain to recover. But there is an important message that I would like to underline before moving to the next slide. These operating loss was generated during the period from February to May when we operated with an average 40% of our stores closed. January was profitable, and we are very pleased to say that June is profitable again. Turning to our balance sheet and cash flow. Our financial structure remains very solid, with a debt-to-equity ratio at a very good 19%. Our net financial position ended negative at EUR 515 million, this is a remarkable result that proves how well we have managed costs and cashouts during this difficult period. Net working capital at EUR 650 million, decreased and remain well under control. Thanks to our direct control of our supply chain and the strong logistics platform, the group was able to manage its stock very effectively without generating excess inventory. Now let's turn to look at our sales by channel and then by geographies. The retail channel was down 32% at constant exchange rates, impacted by the store closures. It's important to underline that these retail revenues are full-price sales, following the decision we took last year to eliminate markdowns. Likewise, we did not change our policy on wholesale, which was down 71% at constant FX due to our decision to downsize this business in order to focus on retail and e-commerce development, as Mr. Bertelli explained before. This decision has increased the portion of our retail sales to 90%, while wholesale is now less than 10%. This chart shows the monthly trend of the retail channel during the semester, which provides further details to show how the situation has evolved. As you can see from the slide, the trend was up double digit in Q4 '19 and further accelerated in January, to be suddenly interrupted by the pandemic with the consequent lockdown, first in China and then in Europe, Japan, Middle East and U.S. As a result of the store closures and restrictions on individual mobility, the retail channel sales trend turned negative from February and experienced a significant decline in April, with 70% of our stores closed. Even the stores which remained open were negatively impacted by restriction on individual movement and reduced business hours. However, it was very encouraging to see the signs of recovery following the reopening of our stores, with significant growth seen in Asia as well as very good signs in all the other markets, driven by local consumption and despite the general lack of tourism. As you may see from the chart, during the month of June, the trend has significantly improved, and July is trending even better, close to single-digit negative, which is very encouraging, considering that we are still operating with an average 5% of the store closed, and there are still many restriction on travel worldwide. Direct e-commerce is showing an extremely strong performance in all regions, growing sales by triple digits during and after the lockdown, up 150 in H1 with a peak in June and July at a 300% increase. Lorenzo will give you more insights in a moment. Looking at retail sales by geography, every region was impacted by lockdowns and restriction on travel. In Europe, following outstanding growth of more than 50% in January and February, retail sales were negatively impacted by lockdowns from mid-March. However, the store reopenings -- after the store reopenings, we are seeing a very good response from local consumption, even though the region is still impacted by the lack of tourists. Asia Pacific was the first market to recover towards the end of March, above all China, where we are recording high double-digit growth since April, as I will show in the next slide. South Korea and Taiwan, which were not affected by store closures, also showed a consistent strong double-digit trend throughout the period. The entire Asia Pacific region reported double-digit sales growth in June despite Hong Kong and Macau still being negatively affected by the lack of tourists. And in July, the region has accelerated also. In America, strong growth above 30% in January, February was again interrupted by lockdown in late March. We are seeing an improving trend recently despite the health emergency is still ongoing. Sustained growth in Canada since store reopened has been driven by local consumption. In Japan, retail sales were positive in January but were interrupted by lockdown since February. Resilient trend were shown in the region recently, mainly driven by local consumers. After positive trends in January, February, the Middle East region also entered a lockdown period. As with the other areas after the reopenings, we are seeing better and better trends. And in July, the region resumed growth. As you can see from this slide, on the right side of the slide, the consumption -- the left, not the right -- the consumption appetite was very strong in Mainland China since the store reopenings, with a remarkable sales trend since April, which further accelerated to over 50% in June and above 60% in July. Overall, China has already well exceeded the level of 2019 sales. I have already mentioned that the overall Asia Pacific region reached double-digit growth in June and July, approximately between plus 15% and plus 20%, notwithstanding the negative trend of Hong Kong and Macau. Here, I wanted to show you the trend if we exclude Hong Kong. You can see that the growth was up 30% in June. And in July, it is accelerating to more than 40%, including an amazing plus 70% in Korea and plus 80% in Taiwan. Let's have a look at what this all meant for gross margin development. Gross margin proved to be highly resilient and stood at 70.4%, supported both by a more favorable channel mix and effective inventory management. However, the positive contribution of these 2 drivers were offset by the underabsorption of fixed costs in the supply chain. Gross margin is expected to improve in H2 '20, given the absence of this deleverage in a scenario of improving sales trends. Let's move to the operating cost slide. Total operating expenses were at EUR 856 million, down 12% at constant exchange rate, a decrease of EUR 120 million during the period. As you can see, effective cost-containment measures were taken promptly from the outbreak of the pandemic, with significant cost savings in all areas. This was particularly the case in selling expenses, which were down EUR 95 million during the period, of which almost 60% was related to rent, mainly as a result of a successful renegotiation of lease agreements with lenders as well as the reduction in the variable component of rents. Advertising expenses went down 7% with traditional media spending cuts and events postponed or canceled. All the other costs were reduced, thanks to our effort to contain discretionary costs. As mentioned at the beginning of my presentation, there were around EUR 112 million of selling expenses pertaining to closed stores during the lockdown. The major components of those selling expenses included rental cost, net of COVID-related discount, labor cost net of social benefits and other selling expenses. Please take into consideration that this EUR 112 million cost could not generate revenues during the period. Here we have the EBIT margin evolution. The EBIT margin has been significantly impacted by the negative sales trend caused by the store closure, but due to the effective cost-containment measures taken promptly in all areas, we were able to mitigate the negative impact on margin. I would like to reiterate once again that EBIT was negative in the period from February to May, but turned positive in June. Let's turn to our CapEx slide. CapEx was significantly lower during the period, finishing up at just EUR 49 million as we focused only on essential projects and canceled or rescheduled most of the renovation and relocation projects that had been planned for our retail network. As I mentioned before, our net working capital remained well under control during the half. We have effectively managed the level of our stock without excess inventory building up, thanks to our direct control of the supply chain and the strength of our logistics platform, which enable us to relocate our inventory effectively across regions even during the lockdown. The lower figure for trade receivable is in line with our decision to downsize the wholesale business. Now I will close my presentation with the usual slide on net financial position. Net financial position ended negative at EUR 515 million at the end of June from EUR 406 million at the beginning of the year. Our efforts to contain cost and expenditures and the effective management of net working capital, ended with an operating cash outflow of just EUR 26 million. That, combined with a very low level of investment and the withdrawal of 2019 dividends, resulted in a net financial position well under control and in line with that of June 2019, that was EUR 507 million. As a precautionary measure and in order to provide additional financial flexibility, the group secured a new revolving credit facility of EUR 300 million that, together with the other committed and uncommitted line and available cash, brought group liquidity to a very safe level of EUR 1.2 billion. Now I would like to hand over to Lorenzo Bertelli.

Thank you, Alessandra, and good afternoon to all. Since the pandemic outbreak, we have adopted our marketing communication strategy to rapidly respond to the changing environment, trying to find new ways to address our audience -- audiences and better target our message to satisfy their needs in this particular period. We're focused on digital initiatives as well as on the empowerment of our e-commerce, which saw an amazing growth across almost all markets in all the 3 product categories. Since last year, our e-commerce is experiencing a strong growth that was accelerated by the lockdowns and that's continued to progressively improve in the last couple of months, reaching an amazing plus EUR 300 million growth during the months of June and July. I would like also to underline that we have weeks in China, also related to the new strategy with 4-digit numbers growth. And we hopefully target for the end of this year, a small milestone for us. I mean, a big milestone for us. That is EUR 100 million target with e-commerce that compared to the past, I think this is a very relevant year for our e-commerce. And this number is the result of a series of investment that we have put in place to announce our digital shopping experience. We have expanded our online offer, revamped Prada's website across emerging markets and launched a new Prada e-commerce in South Korea and Brazil as well as activating new line initiatives such as the Prada Time Capsule, very well received. All the above has been supported by our efficient logistic capabilities, which proved to be strategic in this context. We rely on a strong sales staff who has built long-lasting relationships with our customers worldwide. They proved to be fundamental to stay in contact with our clientele throughout the crisis. Thanks to an enhanced omnichannel experience as well as to advance in listing technologies, we are empowering our store professional to provide a more and more precise customer experience. We firmly believe that the digital and physical shopping experience are needing to exist and near to each other. Our continued investment in digital platform, including [ the rechin ] partnership with a leading international company in customer experience management has proven highly successful as evidenced by Prada's strong accelerating brand heat as well as the very good [ resulting ] performance across various social media. For example, Prada 520 campaign, #pagesonWeibo gained more than 1 billion views in total, thanks to the selected Chinese talent and to use our generated content initiative. This is, I would say, has been a record for us and a very good number for the sector. The last Prada Men's spring/summer season '21 digital fashion show was ranked as the first in term of mention with regards to earned media during the Milan fashion week, of course. Here, I would like to highlight to you 4 market initiatives over the next couple of slides that illustrate how we have adapted our communication strategy to rapidly changing times during global lockdown. These are example of multilayer and multi-channel campaigns, focusing on products like Prada 520, as mentioned before, and Miu-Me and good value like Prada Possible Conversation and Prada Group REMIX that, in some cases, were also considered to target local audiences or were enthusiastically received on our channels. Now I leave the floor to Mr. Mazzi and thank you to all.

Good afternoon to all of you. Outlook. Please, let me repeat that Prada's reaction to the health crisis was principally focused on safeguarding the health of our employees in our communities across the world, with initiatives promoted both by the company and the management teams. For example, we're dedicating our plant in Montone, in Central Italy to the production of 80,000 overalls and 110,000 surgical masks to meet the urgent needs of Tuscany's health care system. The management donated 6 complete intensive care and resuscitation units to Milano's Buzzi, Sacco and San Raffaele Hospitals. And Prada has been one of the few companies -- excuse me, my microphone. Prada has been one of the few companies to implement periodical surgical test to all Italian employees. At the same time, in addition to focusing on facing the economic impacts deriving from the forced interruption of business activity, we made a commitment to preserve our relationship with customers, for which we have been able to take advantage of the large potential of digital technology recently developed by [ our ] department. The positive response of all our local customers, where we reopened our stores is testament in addition to the value of our products, to the strong bond with our customers. These 2 factors represented the fundamental reason for which we are confident in the future of the group. Today, our retail sales are equal 90% of the volumes of the same period in 2019, as we already said, despite 30 stores are still closed, and the lack of tourist flows and travel restrictions caused by the danger of condition in many important markets. Another point to underline is that we strengthened the organization in this period for the future with the new leadership appointments: Chris Bugg, Director of Group Communication; Benedetta Petruzzo, Miu Miu General Manager; Raf Simons, Co-Creative Director; Massimo Vian, chief Industrial Production. Today, it's very difficult to forecast next month's scenario. In a reported -- let me say, a positive hypothesis if significant outbreaks of the pandemic can be avoided, if we are able to reopen the last stores still closed, if we are able to confirm the most recent retail sales trends, we can expect the group to return to breakeven by the end of the year, and then return to the previous levels of revenues in 2021 with a growing pace, in line with the trends seen in the previous months before February 2020. Thank you.

Thank you. We can now open the Q&A session.

[Operator Instructions] And the first question comes from the line of Thomas Chauvet from Citi.

I have 3, please. The first one, if I understood the message correctly, you said you turned back into profit in June and July. Could you tell us what roughly the level of profitability was during this month? And what was the retail growth in July for the group compared to, I think, minus 20 in June? Secondly, on wholesale, there was a EUR 220 million shortfall in revenue versus H1 last year. How much of that is due to your own decision to further close doors? And how much would you expect that to impact the second half in euro million and maybe the beginning of 2021? And finally, on spring/summer '21, how are you preparing for that launch when Miuccia Prada and Raf Simons will present their first joint collection as part of the new designer structure? I guess it will be probably a virtual show. Does COVID affect your ambition for that launch? What are you fine-tuning, changing to make sure you can still maximize the visual and commercial impact more importantly?

Thomas, sorry for the delay. Maybe first part, I will take the first one. Yes, Patrizio Bertelli is saying that you did too many questions, so we need time to reply. Okay. Anyway, I mentioned, honestly, just June profitability. And I have mentioned that we came back to profitability in June. I didn't mention July. But of course, July should be better than June. So it's expected probably to be profitable again. When I say profitable, I'm not including, of course, the contribution of wholesale that we had in June. So I'm just talking about the retail trend. So just talking about the retail contribution, June was profitable, of course. I will not share with you the number, but it's profitable.

[Interpreted] The question was how much of the EUR 220 million were from wholesale were what we wanted to do or were caused by the trend. It was -- we were willing to do that. But of course, we have to consider the U.S. because in the U.S., you have another factor, that is to say either there were bankruptcies or payments not being made or, of course, store closures that reduced our position in the U.S. down about EUR 10 million sales-wise. So we'll have to see -- wait and see what will happen there, in the U.S. department stores in there. And then I must say that all those who developed a parallel platform, we want to avoid those parallel platforms. So the magnitude, the order of magnitude, 70% is something we wanted to achieve with our policy. And for the rest, if we manage to establish clear relations, we can -- we'll still work with those wholesalers. And then there's a market, wholesale market with somehow platforms that are not clear in their behavior and then there's the U.S. department store issue. And then the other question was on how we geared up when it comes to Asia, how prepared and equipped we are to tackle Asia. They account for 45% of our revenues. So we are definitely very much -- we have an insight into the market. The Far East and Japan, we're really focused on those markets. And the growth we are achieving there bears witness to that. However, this is not the only industry we have to look at -- sector we have to look at. When it comes to 2021, everyone is asking about 2021. My answer is always the same. It all depends on when the vaccine will be announced. The moment in which it will be announced, resources will be released, and there'll be a rebound, about 30% rebound of market, a rally. So it will depend on when the vaccine will be delivered to people and countries. The existence of the vaccine will, of course, make the life a lot easier in the market. We thought the situation could be worse in July and instead, July and the first days of August, hopefully, seem to be more positive than what we were expecting in April. But in April, on the other hand, we were all very much repressed somehow. So we saw things worse than they actually were. But contrary to what everybody says that the society will change, I think values will change indeed. And how the product will be distributed, the inherent product value, what brands express the type of originality that these brands express, but I think the market is growing and not declining.

Next question comes from the line of Melanie Flouquet from JPMorgan.

I have a few just technical ones. First of all, I just wanted to get confirmation that there were no meaningful inventory write-downs in what you reported today in your H1. And if that is the case, where did the excess inventory potentially that came out of the spring/summer collection end up? And notably, also, could you on this tell us whether full-price sales were also down around 10% in July, because July is also the sale period, if I'm not mistaken. My second technical question is I see that the right-of-use asset is coming down, if I'm not mistaken, in H1 '20 versus H1 '19. Could you help us understand where that went and what that related to? I imagine stores' impairments? And yes, I'll stop with just 2 questions and I'll come back later if I need to.

Melanie. Talking about the write-down on inventory, we didn't do anything extraordinary this period, the usual valuation. Because our stock, as you have seen from the slide, didn't increase significantly. So we have not accumulated an excess of inventory. The quality of our stock is absolutely high, it's the same as the previous year. So we didn't do anything extraordinary on that point of view. Not sure to have understood your second question is related to the retail trend in July. I mentioned before in the presentation that in July, the trend was better than in June. That is around single-digit negative.

Around single-digit negatives, does that just not mean down 10%, down 9.5%?

Maybe, not far from 10%, but single digit, single digit. The first one, honestly, I have not understood well.

Okay. Can I go back on -- didn't July include the sales period? And how did full-price sales fare in the period? From the sales rather than anything -- you had some, and we saw some nice clients, so...

So Melanie, can you rephrase your question because even the translator cannot understand. Sorry.

I cannot hear you clearly, that's why. I cannot hear you properly.

Can you hear me now?

Yes. Yes.

Yes, slightly better.

Okay. So I was saying July normally is a sales period. I know you're doing a lot less of it, but you're still doing some [ as clients ] we did get sales period for July. So could you tell us within this July number, how full-price sales fared compared to this nearly minus 10?

Okay. I may reiterate what I said before. So retail trend in July was single digit, let's say, close to 10%, slightly less. And the wholesale, of course, is not a major month for [ clothing ] sale, July, but it is possible that we can recover something that we didn't ship in June. As Mr. Bertelli said, if the financial condition of our counterpart is fine and they can the grant the right -- he said they are able to grant good condition for us, we may recuperate (sic) [ recoup ] something in June -- in July, sorry.