SMCP S.A. (SMCP) Earnings Call Transcript & Summary

Hello, and welcome to the SMCP H1 Results Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Célia d'Everlange, to begin today's conference. Thank you.

Thank you. Good morning, everyone. This is Célia d'Everlange, Head of IR of SMCP. Thanks for being with us today for SMCP H1 results. I'm here with CEO, Daniel Lalonde; and CFO, Philippe Gautier. As usual, we'll go through the presentation, and then we'll have the Q&A session. Before I hand it over to Daniel, I invite you to go through our usual disclaimer on Page 2. Please note that unless otherwise stated, all results reported in these documents, so for H1 '19 and H1 '20, are under IFRS 16. And I think, Daniel, that we can start now. The floor is yours.

Thank you. Thank you, Célia. Good morning, everyone. Thanks for being with us today for our H1 results. I'll begin with a quick overview of the H1 results, and Philippe will detail these before we conclude. So as you've seen from the press release this morning, H1 results were meaningfully impacted by COVID-19 pandemic. However, the operational performance was above our expectations, thanks to better-than-expected sales performance and a stronger impact from our cost savings plan. Back in July, you saw our sales numbers. As a reminder, we talked about a minus 33.1% of reported growth and a minus 33.5% in organic growth. Once again, organic growth is excluding De Fursac and at constant currency. This performance includes a gradual improvement throughout the second quarter on the back of store reopenings from 20% of stores opened at the end of April to 97% at the end of June; also from the continued recovery in Mainland China, which returned to positive growth in June; and last, a strong acceleration in e-commerce in Q2 with a 32% growth in sales. In terms of profitability, the adjusted EBITDA stood at EUR 55.1 million, i.e., a 14.8% margin, while adjusted EBIT came in at minus EUR 29.7 million, which is the result of a drop in sales, combined with a reduction of gross margin. This was particularly offset by strong cost-saving measures, which generated more than EUR 60 million in savings versus LY, and enabled us to rapidly variabilize more than 50% of operating costs on a comp basis. Net income stood at minus EUR 88.5 million in H1 versus EUR 17.2 million in H1 '19. This result includes EUR 42.6 million of goodwill impairment on other brands, the division which includes Claudie Pierlot and our recent acquisition, De Fursac, impacted by the pandemic. Pretax operating cash flow came in at minus EUR 49.4 million including a reduction in CapEx versus last year and a relatively limited increase of our operational working capital. And finally, net financial debt stood at EUR 445.1 million, representing a leverage ratio of 5.5, excluding IFRS 16. Importantly, we secured our liquidity position with EUR 219 million of cash at the end of June, following the negotiation of EUR 140 million state-guaranteed loan and a reset of our covenants for 2020 and 2021. Moving on to Page 5, Slide 5. I just wanted to quickly remind you of our H1 numbers by region. In France and Europe, sales were down, respectively, minus 33.8% and minus 33.5% on an organic basis, in line with the group average. The performance reflects a gradual improvement throughout the second quarter in line with stores reopening, even if tourism flows remain largely absent. In the Americas, sales were down 45.5% on an organic basis, showing a greater impact from the crisis as most stores remain closed in that region until the end of June. And finally, in APAC, sales were down minus 26.6% on an organic basis, showing a sequential improvement throughout the second quarter. This performance reflected a good resilience -- strong resilience in Mainland China, which returned to positive growth since June, and this trend continues, and some contrasted trends in the rest of Asia. And now let me turn over to Philippe, who can take you through the numbers in more detail.

Thank you, Daniel, and good morning, everyone. So moving to Slide 7, let's focus on our operational performance. Adjusted EBITDA decreased from EUR 141 million in H1 '19 to EUR 55.1 million in H1 '20, a performance above our expectations. On the one hand, we saw a drop in sales combined with a reduction of 4.8 points of the gross margin to 71.5% due to an increasingly promotional market and, to a lesser extent, some inventory depreciation. On the other hand, we managed to partially offset this impact through strong cost savings measure, which generated more than EUR 60 million of OpEx savings on a comparable basis, i.e., the non-comp being [ De Fursac ]. Here, we are talking about our operating costs, excluding the effect of the IFRS 16 restatement. This means that with minus 73.5% organic sales decline and a reduction of 19% of our operational cost, meaning store cost and SG&A, we have been able to rapidly variabilize more than 50% of our expenses. As Daniel mentioned, this is better than what we were expecting in terms of adjustments of our store cost, in particular during the lockdown period, has been achieved through the renegotiation of commercial leases and minimum commissions in the department stores in all regions, the use of temporary unemployment measures, the strict optimization of working hours in our network and SG&A optimization is that on other records or discretionary spending. Now if we move to the net income on Page 8. You have an overview of the main components of the P&L for H1 2020. Starting with the adjusted EBIT, which stood at minus EUR 29.7 million versus EUR 66.5 million last year. Second, nonrecurring expenses, they reached EUR 46 million. And it's primarily due to a goodwill impairment of EUR 42.6 million on the other brands division, resulting from the current COVID-19 crisis. Depreciation concerned primarily our recent acquisition, De Fursac, and has been caused by the timing, the COVID-19 pandemic arrived just a few months after the acquisition, and then a more prudent approach adapted by the group for its investment and its international opening plans over the coming years. Financial charges were down from minus EUR 28 million in H1 '19 to minus EUR 14 million in H1 '20. If you remember last year, financial charges including minus EUR 12.6 million of one-off repayment charges. Excluding as well IFRS 16, our cost of debt was down from EUR 9.1 million in H1 '19 to EUR 6.5 million in H1 '20, showing a continued optimization of interest costs from 4.1% last year to 1.8% this year. Finally, income tax stood at plus EUR 6.3 million, taking into account the nondeductibility of the goodwill impairment charges and part of the LTIP charges. Consequently, our net income stood at minus EUR 88.5 million in H1 '20 compared to plus EUR 17.2 million in H1 '19. If we talk about cash, and this is on Page 9. In H1 '20, our pretax operating free cash flow stood at minus EUR 49.4 million. This result is better than our expectations and comes from 3 drivers. One, an adjusted EBITDA of EUR 55.1 million versus lease payment of EUR 61.3 million, i.e., net minus EUR 6.2 million. Then CapEx stood at minus EUR 29.1 million in H1 '20. As you know, as part of our COVID-19 action plan, we have decided to reduce significantly our CapEx. So they were reduced from minus EUR 33.9 million last year to protect our cash position. Now H1 is still a bit impacted by timing effects, so the CapEx reduction will become increasingly visible in H2 '20. Finally, change in working capital was relatively limited at minus EUR 9.3 million. It is based on an increase of our operational working capital from 16.8% of sales in H1 to 22.2% of sales in H1 '20. Thanks to the strong effort to manage inventories, we recorded a moderate increase of 12.3% versus H1 '19 of our inventories and plus 6,000 versus December '19 if we consider the sales deterioration during -- we have here. Again, all the actions we have taken are setting up to control our stock in H1 '20, should be increasingly visible in H2, the last reduction of our merchandise purchase for the winter '20 season. Moving to Slide 10, a few comments on our debt. You can see that our leverage ratio increased clearly from 2.2x in H1 '19 to 5.5x at the end of June '20. Net financial debt stood at EUR 445 million versus EUR 387.4 million at the end of December '19, impacted by the operating free cash flow of minus EUR 49.4 million. As you know, in H1, we strengthened our cash position and increased our financial flexibility with the negotiation with all our bank partners of the state-guaranteed loan of EUR 140 million; the suspension of financial covenants for fiscal year '20, that's a holiday covenant; and the easing of financial covenants for fiscal year 2021 as well. So with this financial structure in place, we have clearly a very comfortable cash level, EUR 219 million at the end of June, to face the current context. On Slide 11, you have highlighted the main impact of IFRS 16. As of June 2020, we record on our balance sheet an impact of EUR 492.4 million of lease commitments, and our P&L reintegration at EUR 261.3 million of lease charges in our EBITDA.

So in conclusion, I'm strongly convinced that we are today well equipped to face this challenging period. We benefit from a well-diversified business geographically, with strong brands showing a solid traction with the Chinese consumer. We are well positioned to leverage e-commerce, a key area for us, one that we've been investing in since 2015. We quickly put in place an action plan to mitigate the effects of COVID-19 as the benefits showed in H1. We can rely on the solid financial flexibility to continue to weather the storm. And finally, we are an agile organization, leveraging what makes my team unique, a truly entrepreneurial spirit. In parallel, we continue to pursue our journey, focusing on key priorities and shaping SMCP in a changing world, which includes enhancing the desirability of our 4 brands, accelerating sustainable fashion, creating one unified channel by rightsizing our brick-and-mortar network while boosting digital and omnichannel services, and last, strengthening our unique business model. So thanks for your attention, and we are happy to take questions.

Thank you, Daniel. Operator? Yes.

[Operator Instructions] Our first question comes in from the line of Chiara Battistini calling from JPMorgan.

The first one is if you could actually give any comment on current trading, on the trading over the last couple of months, so Q3 so far. And the second question is on the cost savings that you achieved in H1. How much would you say we can expect to be repeated in the second half of the year? And how much is more structural? Or said in another way, are there any measures you took that are translating [ for leaner ] cost structure going forward?

Okay. Thanks, Chiara. Listen, I'll take your first question and Philippe your second. What I can say about current trading, I think it's the question today. I'll just say a few words. Let me say about 4 or 5 quick points. So first of all, I can say we have a sequential improvement in sales since April, which means that July is better than June and August is better than July. Secondly, Mainland China has been positive since June, every week, and this trend is also improving. I'd like to say also that we've had positive like-for-like in Mainland China since June. France has been more resilient, much better than the trends in Q2. So that's good news. There has been a calendar change, as you know, on the [indiscernible] which were pushed 2 weeks this year versus LY. We started in mid-July versus end of June last year. Europe is more contrasted. We see some -- Germany is resilient on a better trend, and continues to outperform markets like Spain, the U.K. and Italy. And last, North America is still a very tough market, given the current climate, particularly in the U.S. versus Canada. So that's what I can share with you. And Philippe, I'll let you answer the second question.

Sure. Hello, Chiara. So in terms of cost savings, as you saw, we have reduced our cost, our OpEx by 19% on a comparable basis, so that both on our store cost and on our G&A. So I would say there are probably 3 main components in there. You have about 1/3 or a bit more, which is like rent release negotiation or reduction in commission, including negotiation of removing any minimum guarantee of the commissions with department stores, so that's a bit over 1/3. And you have everything related to temporary unemployment and adjustment of hours in our network. So that's another 1/3. And then the rest is all the other measures, structural measures in terms of reduction of SG&A, be that on overhead compensation are increased or discretionary spending. So what I would say -- so yes, very large reduction in H1, also considering there are some valuable costs which are reducing with very large reduction of the sales. If we project to H2, we probably will have as much savings in terms of store costs and some of the variable elements, and partially on the temporary unemployment, which will be much less significant. But then we will continue to see savings on the -- more on the SG&A part. So we will continue to see savings, but not obviously at the level we saw in H1 as the top line improves.

The next question comes in from the line of David Da Maia calling from CIC.

Yes, so my 2 questions are already asked by Chiara, so I have no further questions.

Okay. Thanks, David.

The next question comes in from the line of Kathryn Parker calling from Jefferies.

So my first question is on the department store commissions. And I wondered if the decline in the commissions paid is in line with the decline in sales? Or if you managed to maybe renegotiate for a lower proportional commission and whether the department store concessions performed in line with the freestanding stores? And then my second question is on the inventory write-down versus the impact of greater discounting. And whether you could just give a bit more clarity on how much of the write-down incurred and which collections did it apply to.

All right. Thank you, Kathryn. Like the first question, like Chiara's question, I'll take the first part and I'll let Philippe answer the second. So regarding department stores, as you know, we're all in variable commissions with department stores. It's an important channel for us worldwide, and we typically are in the accessible luxury segment of department stores, the big traffic drivers and the leaders in practically all the department stores in the world in our segment. So it's an important channel. The question was, do we have new rates essentially. I'd say it's something that we do on a regular basis. So we've been negotiating -- we continue to negotiate with department stores even before COVID, with some good results actually. So we've set with some of our key department stores new commission structures that were already in place prior to COVID. I don't think that we accelerated that in COVID because we were already on this prior to COVID. We have -- as Philippe mentioned earlier, we have very, very few guaranteed margins with department stores. It's mostly a variable business for us. In terms of performance versus freestanding stores, I'd say we had slightly lower performance overall in department stores. Mainly because a lot of the business from our department store channel comes from big department stores in key cities, which were more meaningfully impacted by the lack of tourism. So I'd say slightly less than freestanding stores, mainly due to tourism. Philippe?

Kathryn, to your question on the gross margin, as you saw, we had a reduction in the gross margin of 4.8 points versus last year, which was a bit better than our expectations actually. Two components in there. The most important one is clearly the discounting. We had higher discounting, discount rates around 35% -- a bit over 35% in H1. Clearly, the market is much more promotional and we did also more digital, which is a more promotional channel. So that's quite logical and it's like really unprecedented times. And then in terms of inventory depreciation, it's roughly 1 point of margin on inventory depreciation impact on this year. So what I would stress -- like we are on track in terms of inventory. Our stock is pretty sound. As you know, we have taken some strong measures. So the impact is -- yes, it's significant but it's not that huge in terms of inventory depreciation.

The next question comes in from the line of Geoffroy Michalet calling from ODDO BHF.

This is Geoffroy from ODDO. I have 2. The first one relates to the impairment on Claudie and De Fursac. I was wondering why this impairment is mostly to Claudie and De Fursac and not to the other brands? Since in H1 at least, the growth trend was quite similar on all the brands. So is it an expectation of a slowdown in those 2 brands? And the second question is on the promotional rate that you expect in H2. Because I've seen on many websites that the promotions are quite aggressive. I don't know if you could comment a bit on that, and for the gross margin.

Sure. Maybe on your first question, I would say, yes, the impairment relates mostly to De Fursac. The key difference with the other brands from an accounting point of view, is that the other SMCP brands that their values are based on the acquisition price the time by [ Claudie ] in 2016, whereas De Fursac is valued in our books based on the acquisition in September 2019, therefore has a higher value. So we did not have time yet to develop the De Fursac before the COVID-19 pandemic started, which is different from Sandro and Maje, where we had several years of growth in the meantime. So that's the major difference.

Promotional rate.

In terms of promotional rates, yes, I think this year is really [ second ] year with very changing context in general. So you can expect that all the players in the North tend to have higher inventories compared to what they would wish. So that leads to clearly a more promotional market. And I think the customer, they are responding to it. Also this combined with higher [ occupancy ] on e-commerce, which is more promotional. So yes, you could expect this promotional activity to continue. Now maybe it was a bit high partially in H1, but yes, that will continue, [ so for the next year ].

And maybe just to add a point, Geoffroy, to this, our strategy is very, very clearly to sell more at full retail. That's what -- the path we were on prior to COVID, that's the path we're going to get back on as soon as we can. In terms of calendar as well, I can share with you a few things in terms of the promotional calendar on a regional basis, it's not different than last year. Maybe the weakness of some of the promotions or the discounts are a little higher, but in terms of promotional cadence and calendar in terms of days, it's identical to LY. And again, I repeat, our goal continues to be with all my CEOs in the company, all the brands, is to sell more at full retail. That's our company goal.

Thank you.