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

Hello, and welcome to the SMCP H1 2021 Results Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Mathilde Magnan, Head of Investor Relations, to begin today's conference. Thank you.

Thank you. Good morning, everyone. This is Mathilde Magnan, Head of Investor Relations speaking. Thanks for being with us today for SMCP H1 results. I'm here with Isabelle Guichot, Daniel Lalonde and Patricia Despointes. As usual, we will 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. And I think we can start now.

All right. Thank you, Mathilde. Good morning, everyone, and thanks for joining us this morning. I'm here today with Patricia Despointes, who's our CFO; and Isabelle Guichot, our new CEO since August 2. So before I give you a quick overview of our H1 2021 results, I'd like to say a few words about Isabelle. Isabelle joined SMCP as CEO of Maje 4 years ago, after more than 25 years of a highly successful and recognized career in the luxury sector within Kering and Richemont. Before joining SMCP, she was notably CEO of Balenciaga for 9 years after being CEO at Sergio Rossi. Prior to Kering, Isabelle also evolved within the Richemont Group as CEO of Van Cleef & Arpels and Lancel after starting her career within Cartier where she spent 13 years in different management positions. She has successfully developed many global brands and brings this rich experience to the group. Isabelle and I have worked closely together over the past 4 years, and I've been impressed by her passion for retail, digital, fashion and her fine knowledge of the SMCP environment and platform as well as our international expertise in the luxury sector. So I'm very confident that with all these assets, she will fit perfectly her new role as CEO of the group and will enable SMCP to further grow in the coming years and become a global leader in accessible luxury. So let's move to a quick overview of the first semester. On Slide 4, Page 4, as you've seen from the press release, we are very happy to announce that our H1 2021 results are back to positive. The operational performance was above our expectations, thanks to a strong impact from our optimization plan on costs, inventories and cash. We presented our sales figures in July, showing a plus 23% growth in organic growth and plus 21.6% of reported growth versus 2020. This performance including -- included a strong double-digit growth in Mainland China, a confirmed momentum in the U.S. going from strength to strength and a very successful store opening in France since May 19 and a strong EMEA performance despite store closures and low tourism. In terms of profitability, the adjusted EBIT stood at EUR 25.2 million in H1, i.e., 5.6% of margin, which is the result of slightly higher gross margin combined with the strong gains on store costs and SG&A. Our net income stood at plus EUR 600,000. Free cash flow came in at EUR 20 million in H1, a continued big improvement versus H1 2020 and December of last year despite a challenging market. And last, net financial debt stood at EUR 365 million, below 2020 and representing a leverage ratio of 3.6, excluding IFRS 16 versus 7.1 in December 2020. We continue to benefit from a solid and healthy liquidity headroom, including an undrawn RCF of EUR 150 million, and we remain comfortable with our financial covenants for 2021. Moving to Page 5. I just wanted to quickly remind you of our H1 sales numbers by region. In France and EMEA, sales were up, respectively, 6.7% and 7.1% on an organic basis versus LY. A very solid performance considering the restrictive measures as we have faced in the first semester, much more important than H1 2020, especially in France where we consider an average 50% of closing impact in H1 2021 versus only 30% in H1 2020. The performance reflects a gradual improvement throughout the second quarter in line with the store reopening, even if tourism flows remain very limited. In APAC, sales were up 48.1% versus LY driven by strong like-for-like growth and a strong performance in Mainland China, both in brick-and-mortar and digital, plus 55% versus LY and plus 24% reported versus H1 2019, a very good performance despite some pandemic headwinds in key cities. And finally, in the Americas, sales were up 67.2% versus LY. While Canada was still impacted by store closures and restricted measures to contain the pandemic, the momentum observed in the first quarter in the United States has been confirmed in Q2 going from strength to strength. Sales exceeding pre-pandemic level, reaching in Q2, 11.3% growth on an organic basis versus 2019. On a global basis, our sales growth was up 23.3% versus LY, driven by like-for-like growth of 17% and minus 16% versus 2019 as reported to reach EUR 453.3 million. This was driven by sequential improvement in all regions despite store closures and restrictions, especially in Europe, low traffic and tourism as well. E-commerce sales reached almost 28% of total sales over the first semester. Now if we look at the breakdown by region, France and APAC represents each 31% of sales; EMEA, 25%; and the Americas, 13%. It's the first semester in the history of the group where APAC is above 30% of total sales penetration. And now let me turn over to Isabelle, who will present some highlights on the group strategy, our One Journey plan.

Thank you, Daniel. I'm extremely happy to join this first publication call to highlight our strategic ambitions. As you know, last October, we presented our strategic plan for the coming years based on a new road map adapted to the new world and the new consumer trends. SMCP has opened a new chapter in its history entitled One Journey for more global, responsible and digital brands. In our last publications, you may have seen some of the key initiatives implemented by our brands. I won't come back in detail, but I would like to remind you our key priorities. This one relies on 4 pillars. First one being to enhance brand desirability by leveraging shopper and reinforcement DNA. We start by adjusting our collection to increase full price sales, simplifying and decomplexifying optimizing the collection structure to optimize sell-through and full price, contributing the sense of scarcity, no season, see now, buy now, wear now, captured a limited position, collaboration with brands and KOLs, and also a differentiated offer by brand. This means also enhancing in-store experience, developing a new selling ceremony for a more emotional in-store experience and more engagement with the consumers to which we are doubling marketing investment on an average from 2% to 4% of sales to be more disruptive and attract more and more new generations than Chinese consumers, innovative digital approaches, gaming, like shopping, [indiscernible], virtual KOLs on new platforms and media formats. Second pillar is consolidate our digital network. It's to offer seamless customer experience with an optimized network with more welcoming and engaging stores and an increasing digital penetration to reach at least 25% in the mid-term. Our digital strategy is based on a strategic customer knowledge and optimized and consolidated inventory with a unified inventory between store and warehouses and the rollout of omni-channel services across brand and geographies. SMCP intends to pursue this approach in each region by adopting a full vision, investing in priority in APAC, in particular in China to benefit from the fastest-growing region of the group for further digital boost and B&M, brick-and-mortar extension in key new Chinese cities. By 2025, APAC should contribute to 50% of the group growth and will represent a meaningful part of our sales. This means also finalizing the optimization renovation plan in France that has started last year and the [indiscernible] conversion to revitalize like-for-like and in order to continue to gain market share and grow organic digital sales. These plans will be largely completed at the end of the year. In North America, we've been pursuing our strategy consistently for many years, which is digital first, and stabilized brick-and-mortar network in the key today. We expect a stable physical store base, but with more desirable stores. In Europe, our customers approach to digital expansion will not be the similar market. We'll complete our existing physical network and strengthen our presence in a few regions like -- such as Portugal, for instance, Germany and others, Poland, Austria. We'll continue our omni-channel development and plan to open more than 30 DOIs per year between '22 and '25. Let me come now to the third pillar, which is to strengthen the specific core business model, keeping agility, speed and efficiency as a key mantra for the group by enabling the implementation of a centralized global deal and client policy that leads to an optimization of our inventories and an increase of full price sales. In other words, buy less, buy better, and get the right purchase in the right place at the right time at the right price by also leveraging an agile and robust supply chain as well as strengthened IT platform, relying on the best-of-breed software. Fourth pillar now, it's accelerating sustainability and contributing to SMCP responsible fashion with a strong engagement on products, on planet and on people. SMCP products, developing an even more desirable and responsible offer, more and more across responsible products, granting is sourcing 100% ethical and intensifying the circular economy initiatives all our brands. This means also developing reliable traceability tools that we will be implementing very soon. Regarding the planet, preserving our planet and its natural resources, reducing our environmental footprint, minimizing air transport flows and implementing our green store concept will be key in this road map. Now let me come to a very important element of people, unveiling the potential of our passionate entrepreneurs in order to strengthen our well-being and professional development, encouraging internal mobility and promotions and prioritizing diversity and inclusion. As a conclusion, I would say that our teams are to be fully committed in the execution of this plan, which will, I'm sure, enable SMCP to reach our targets. Now let me turn over to Patricia, who will be running you through the financial performance in more detail.

Thank you, Isabelle, and good morning, everyone. So moving on to Slide 9. Let's focus on our financial performance. We are very happy to present an adjusted EBIT back to positive, increasing from circa minus EUR 30 million in H1 '20 to plus EUR 25 million in H1 '21, resulting in a margin of 5.6%, a great improvement with all main lines contributing to profitability increase. So looking at our margin structure. The gross margin ratio was up plus 11 bp at 71.6%. From our side, as part of the One Journey strategic plan, the group made solid progress on the strategy to improve full price sales. This way, we managed to decrease the discount rates in all regions by minus 4 points in H1 for in-season products, leading to a 2-point increase in gross margin ratio. On the other side, we have been offset by liquidation initiatives, especially at the beginning of the year, but to be noted that an encouraging improvement of gross margin ratio took place in Q2 '21, which we expect to continue in H2. In parallel, store costs as a percentage of sales decreased from 48% to 41%, so back to 2019 levels, reflecting a continued strong cost management combined with a better absorption linked to the return to growth. As a result, retail margin, corresponding to gross margin in store costs, stood at 30.7%. SG&A decreased from 25.1% to 21.6% of sales, showing an efficient management of those costs while maintaining the right level of investment to support the strategy, particularly in the key topics that we highlighted earlier such as marketing that we decided to boost reaching 3.5% of sales and more to come in H2 to support store openings with a focus on APAC and digital. We were able, at the same time, to be very reactive to challenge our discretionary expenses. Finally, G&A decreased from 7.1% of sales in H1 '20 to 5.9% in H1 '21 stable in absolute value and better result, thanks to increasing sales. Thanks to all those improvements, nearly all the additional management gross margin versus H1 2020 has been converted in additional EBIT. Now if we move to the netting costs on Page 10, you will have an overview of the main components of the P&L in comparison with H1 2020. Net income stands at EUR 0.6 million in H1 '21 compared to minus EUR 88.5 million in H1 '20. This bridge highlights the variance of each mainline, plus EUR 58 million of management gross margin, an increase in marketing expenses fully in line with the strategy and strong gains in store cost and SG&A, as mentioned earlier. Nonrecurring expenses decreased by more than EUR 40 million in 2021 to reach below EUR 5 million in net value as no additional impairment was recorded this semester. Financial charges are rather stable versus H1 '20 standing at EUR 50 million with an average cost of debt standing at 2.3% in H1 '21. Lastly, tax charges stood at minus EUR 0.3 million increasing versus last year, but simply reflecting the return to positive pretax income. Regarding cash on Page 11. In H1 '21, we continued to improve our free cash flow standing at EUR 20.2 million this year versus minus EUR 56.7 million in H1 '20. This is a very strong performance considering that, one, we are back to the level of H1 2019, which was roughly EUR 21 million generation; and two, that 80% of the adjusted EBIT has been converted in cash this semester. Apart from the increase in EBITDA, this is the result of 2 other main drivers. First, a significant improvement of the working capital at EUR 134 million at the end of H1 '21, illustrating all the works done by the brands on inventory, decreasing by 20% versus 1 year ago and by 6% versus December '20, thanks to the execution of our strategy and the efficiency of the new demand planning process implemented last year. Working capital continues to remain a key priority for the group, leading to a virtuous circle from inventory through like-for-like and through pricing. Second, a focus maintained on CapEx management. In line with the strategy, they stand at 4.6% of sales, i.e., circa EUR 21 million to be noted that we expect a slightly higher spending in absolute value in H2. Now moving on to Slide 12 on net financial debt. All that we mentioned helped us diminish the net financial debt by EUR 70 million versus December '20, leading to a leverage ratio decreasing from 7.1 at the end of 2020 to 3.6 at the end of H1 '21. The group benefits from a solid and healthy liquidity headroom, quite stable versus the end of 2020. This is the result of some cost and efficient working cap management. To be noted that we decided to optimize our cash position by supplementing the state-guaranteed loan that has been concluded in 2020 for EUR 53 million, which provides us with liquidity at a very limited cost. Also to be mentioned that all the reimbursement of debt of the semester were made on due date in line with the contract schedules. With these financial structure in place, we are fully comfortable with our cash level. And finally, please note also that early July, we reimbursed the EUR 50 million drawing of revolving cash facility. I will now hand over to Daniel and Isabelle for a group summary.

All right. So thank you, Patricia. Listen, to summarize, I would say a few things. We have recorded a solid sales performance in H1 2021, reaching plus 23.3% on an organic basis despite store closures and restrictions, low traffic and lack of tourism. EBIT and net income are back to positive. And finally, the focus on CapEx and working capital was maintained leading to an excellent free cash flow generation. I warmly thank you for your attention and your presence over the past years. It's been a pleasure to exchange with you since the IPO in October 2017. I also enjoyed your questions, which are often 1 question 4 parts, and your continued interest in our group. While I hand it over to Isabelle, I remain confident and very optimistic for the future of the SMCP Group.

Thank you, Daniel. All the teams and I are committed to the execution of our One Journey road map for the SMCP Group. And now I think we are now happy to take your questions.

Thank you, Isabelle. Rosie, I think we have one question.

[Operator Instructions] So the first question comes from the line of David De Maia from CIC.

Two questions from me, please. The first one on gross margin. I'm a bit surprised to see that your gross margin is basically flat despite the significant reduction of your markdown rate to around 30%, if I remember correctly. You mentioned 200 basis point positive impact. So is it fair to assume that the decrease of your markdown rate has been largely compensated by an increase in the volume of your promotional sales due to some one-off liquidation initiatives? So that's the first question. And the second one on current trading trends during summer in your 2 most important markets, France and China. In France, we saw a sequential improvement during Q2, thanks to a kind of ramp up of the local demand after the reopening. So I was wondering if these improving trends have continued during the summer. And in China, have you recently recorded a temporary slowdown in your growth trajectory in the context of new restrictive measures in some regions to control the spread of the delta variant?

Yes. Thank you, David. Listen, I think the first question is clearly for Patricia, and Isabelle could talk about your second question.

David, thank you for your questions. So maybe I can come back to gross margin ratio. As I mentioned during the call, the positive impact is certain and is really on in-season products, so seasonal collections. And this, we are very happy about that because it's in all regions and in all channels, be it digital or brick and mortar. So the minus effect was very localized on liquidations on credit collections. So it's now over. And this is why we are very confident for H2.

Regarding current trading -- sorry. Regarding current trading, I will start with France. France is progressively catching up versus '19 driven by brick-and-mortar. We see the phenomenon where customers are really happy to be back in stores. Touristic flows are not yet back, except for a few intra-European touristic flows. As far as China is concerned, we remain really confident in China and stayed that strong versus '19. As we mentioned, there have been some local resurgence of COVID and some weather -- external weather factors that have impacted traffic. But overall, we remain confident for the next quarter on which we have high comps, if you remember, currently last year.

Thank you, Isabelle.

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

So my first question is on the One Journey strategic road map. Obviously, this was presented last year by Daniel. And I wondered, Isabelle, are there any changes in maybe the priority of strategic initiatives or the guidance that you'd like to comment on? And then my second question is on the shareholder, given the upcoming maturity of [indiscernible]. And I just wondered if there was any more information you could share on that topic.

Thank you, Kathryn. Maybe I will take the first question and hand it over to Daniel for the second one. One Journey is really the key mantra of the group. It's all the teams of the brand or the original at full speed, developing the omni-channel ship-from-store initiatives. There is no -- I mean, it's really the key ambition of the group, and there is no changes in the direction in that respect, and we see that plan delivering results month after month.

Right. And Kathryn, as well, just a point on that is Isabelle was obviously a key proponent with me in the [ comments ], developing the One Journey plan. So I think we're all -- we've been all aligned on it for quite some time. So that's very good. Listen, on our shareholder, I can't, Kathryn. There's no information I could provide at this point in time. It's obviously not for us to comment on the question. They remain a strategic shareholder as always, but I have no comment to add to your question that you raised.