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

Good day, and welcome to the SMCP '23 H1 Results Call. Today's call is being recorded. [Operator Instructions] I will now hand you over to your host, Amelie Dernis, Head of Investor Relations, to begin today's conference. Thank you.

Thank you. Good evening, everyone. This is Amelie Dernis in charge of Investor Relations speaking. Thanks for being with us today for the communication of SMCP H1 results. I'm here with our CEO, Isabelle Guichot, and our CFO, 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 Isabelle and Patricia, I invite you to go through our usual disclaimer on Page 2. And I think we can start now.

Thank you, Amelie. Good evening, everyone. Thank you all for joining us today to talk about 2023 half year results with first the key highlights on results and business initiatives. And then Patricia will detail our financial performance. Let's move on to Page 4 with the key highlights of the semester. In a challenging environment, the group delivered a dynamic sales performance with a record level of revenue and a resilient profitability. Sales at the level of EUR 610 million, up 8% on an organic basis and growing 9% at constant foreign exchange rates, driven both by like-for-like, plus 5% and network expansion. The Network continued to grow in Q2 with 23 net openings of POS, reasonable and selective openings in key areas to fuel future growth. The adjusted EBIT up EUR 36 million, represents 6% of net sales and it's 2 points below H1 '22 impacted by inflation, old seasons liquidation plan, matched underperformance and higher weight of IT projects in H1. However, net profit remains positive at EUR 14 million. Page 5. You can see the evolution of the first semester sales since 2019. H1 '23 level of sales reached an historic level with 8% organic growth -- plus 8% organic growth, in line with the guidance after double-digit growth 2 years in a row. Globally, at group level, the discount rate in H1 is stable for the current season with some progress in Asia and digital, which compensate an increase in North America. I've already said we're satisfied by the level we reached for in-season discount. Digital sales grew slightly faster than the rest, resulting in a slight increase of digital sales share. Page 6 now. The group growth is driven by APAC with a 43% increase in Q2, resulting in a global H1 growth of 19% and Europe was 5% in France and 9% in EMEA. After a period of double-digit growth, America is slightly decreasing in H1 in a very challenging and promotional environment, which is a good performance for our brands compared to market trends. Canada is explaining the major part of the slight decrease, U.S. being more resilient. It is key also to highlight the double-digit growth of Sandro and also of our other brands, Claudie Pierlot and Fursac in H1. The good performance of APAC leads to an increase of 2 points for this area in the mix of sales. By brand, other brands also make progress in the mix, obviously. Finally, the [ mix ] retail, wholesale remains quite stable at circa 90% retail and 10% wholesale. Let's talk now about sustainability on Page 7. I'm proud to announce some key achievements of the first semester. First, on the product side, increased from 50% in fiscal year '22 to 56% today, the share of sustainable materials and products in our collections. As a reminder, we communicated on the full capability project in Q1 publication with 33% of Spring/Summer '23 fully traceable. Then on the Planet side, we continue to preserve our planet and its natural resources with the objective to have more responsible stores. For that, we have switched the stores of 8 countries to green energy, France, Germany, Spain, U.K., and Italy to name few and more to come. On People side, we are very proud to announce that we've been certified by ChooseMyCompany as a Happy at Work Place. I will now present to you the most recent key initiatives of our different brands to highlight all the work that we're doing on desirability. First, Sandro on Page 8. We invite the franchises and designer [indiscernible] expected universe in a capsule collection. [indiscernible] designers who likes to travel between Paris and [indiscernible]. It places at the heart of his practice and commitment to the preservation and revival of traditional craft. The [indiscernible] an intimate attachment with craftsmanship are the point of encountering [indiscernible]. Let's move on to Maje. We alighted the collaboration with key opinion leaders to emphasize the brand desirability. Maje has the great exposure on social media for the world. For example, you can see in the middle of the slide, Page 9, the very influential Sofia Richie wearing a dress and a bag from the Maje collection. Page 10. Let's move on to Claudie Pierlot for the spring/summer '23 collection. Claudie Pierlot invites customers to a pool party for a photoshoot in La Samaritaine, Paris, the iconic store at Rue Pierre Charron and through a corner of [indiscernible]. The dress code is timeless, white and shades of blue, summer in the city, cool and casual. Fursac, Page 11, made a very legend first appearance at the Red Carpet in Cannes Film Festival, where the brand expresses amazing offer of evening wear. [indiscernible] celebrities in a more casual occasion that you can see on the right hand to [indiscernible] Rami Malek with a very nice jacket -- casual jacket from Fursac. In Q2, Fursac also presented its Spring/Summer collection at Paris Fashion Week. The items from the new collection are expressive yet more accessible. It is the perfect embodiment of the perfect philosophy, closer made to last and age gracefully before becoming the coveted vintage of future generation. Page 12, the group continues its expansion with some very nice openings in the second quarter, 2 examples of importable in China, one in Nanjing Deji, which is one of the top most in the city of Nanjing and also in China and one in Shenzhen, which is, as you know, one of the most dynamic cities in the south of China. As you can see also on the slide, Fursac continues to open beautiful stores, the example of the newly opened store of Toulouse. We continue, of course, our extension, Page 13 through partners in Turkey, Mexico, you can see here on Page 13, the example of the new Maje store in Istinye Park, in Istanbul, has been very successful -- already big success. And also we continue to expand our digital presence [indiscernible]. We now have Claudie Pierlot and Fursac live on Farfetch. This is a very important partner for the group, delivering worldwide. So we are very happy to have now our 4 brands offered under Farfetch platform. Thank you, everyone, for listening to me and then let's ask Patricia comment to the financial results.

Thank you, Isabelle. Good evening, everyone. So let's start with a bit more granularity on the sales performance on Slide 15. Starting with France with a sales of EUR 204 million, plus 5% versus last year. The environment was quite difficult in Q2, especially on the social side, tried impacting customers morale [indiscernible] and calendar effects with notably the official sales period pushed by one week compared to last year. [indiscernible] many good points can be underlining performance of our brands for the first semester by brand with good figures for Sandro and other brands positive in France, both in Q1 and Q2. By [indiscernible] strong progression of digital sales posted in Q1 and in Q2. And in terms of like-for-like, both in [indiscernible] and in digital. Openings of the semester to place mostly in Q2 with 7 new stores. EMEA now we saved at EUR 189 million, progressing 9% [indiscernible] 7% like-for-like. So once again, a very strong semester in this area and except in the U.K., most of the big markets performed really well. In retail, Spain, Germany, Italy, [indiscernible] or strong deposit during the semester. Regarding partnered market, Middle East is extremely strong in all the countries of the area. Openings also contribute with 15 additions in Q2. On Slide 16, in America, EUR 80 million sales for the semester, slightly negative versus last year at minus 4% organic after 2 years in a row of outstanding performance and EUR 80 million is way higher than pre-COVID. Just like in Q1, the decrease in the first semester is mainly due to Canada. U.S. sales are resilient, low single-digit negative versus last year. The market was more promotional than after -- the performance of Sandro was pretty good with a positive like-for-like in the U.S. this semester. In Asia, H1 cost plus 19% organic growth with a much better trend or sector in Q2 versus Q1, plus 3% in Q1 and plus 43% in Q2. Continental China is plus 62% organic versus last year in the second quarter. Other markets performed also very well, some are listed on this slide, Hong-Kong, Macau, Singapore and Malaysia. Strong like-for-like performance of more than 13% for the region this semester. And finally, the performance is also sustained by the integration, as you know, of Australia. Now let's go to P&L on Slide 17. Management gross margin came from 74% to 73% in H1. Retail gross margin in season remained quite stable for the current collection. The increase on discount rates remained in line with last year for most of the brands, except Maje and for most of the areas except America. The total gross margin was affected by a bigger share of season with the same liquidation operation in China related to 2022 collections, which were pretty hit, as you remember, by COVID restrictions and also in [indiscernible] for the Spring/Summer '22 collection. We will see later in the presentation that those liquidations, which were a bit higher than anticipated, also helped us to decrease more than anticipated the level of inventory. As far as OpEx were concerned, we lose 1 point of absorption, mostly [indiscernible] in relation with IT investments. The rate of G&A remains quite stable. As all in all, EBIT margin comes from 8% from '22 to 6% in '23. We expect a very different profitability profile between H1 and H2. First, our Maje consumer collection underperformed versus last year versus expectations, leading to an underabsorption of cost. We know that this should change very quickly as the reception of the Fall/Winter collection, which is more commercial is very good in our stores. And second, some of effects, not significant one by one, but not helping when you add them, for example, the [indiscernible] received in H1 last year and some phasing of marketing expenses. On Slide 18, I won't go into too much detail in the bridge between '22 net income and '23 net income. Nothing really special to mention. We have already talked about EBIT, nothing special in nonrecurring nor in financial results, but slightly lower income tax expense lead us to EUR 40 million revenue net, which is lower than '22 that remains very positive. On Slide 19, a few details on inventories and CapEx, after year 2022, significant increase in inventory, the level goes down by 5% in H1 despite the increase of revenue of plus 8%. This is something very important for us, and we are happy about these changes. It was important to reverse the trend, especially in China. CapEx amounted to EUR 24 million for our operating investments, i.e., 3.9% of sales, completely in line with our target and not very different from last year. So good control. On the 2 very important aspects. Net debt now on Page 20. The amount of net financial debt remained quite stable at circa EUR 300 million. We have negotiated an extension of our core financing for additional years, as you can see in the chart on the right. As you may remember, we have 3 main lines of financing, a term loan issued in 2019, the maturity of which was in May '24. A revolving credit facility has also exactly the same maturity. We have extended this total facility loan plus RCS by 2 additional years until 2026. Second, state-guaranteed loan issued in 2020, June 2026 is unchanged. And third, another one issued in 2021, which was due to mature in '24 has also been extended and has now matured on June 27. Consequently, our liquidity significantly improved. We are very happy about this expansion, which demonstrates the commitment and support of our pool of banks, which unanimously approved this extension, and we are fully secured in terms of liquidity for our future development in the coming years. Moving on to Slide 21. The first semester was marked by a challenging environment. By that, we are well focused on achieving the targets. And in this respect, we have built a solid action plan to deliver the performance we expect and thus we -- expect more operating leverage in [indiscernible] in H1. To long pillars in this action plan, one about supply levels and one about securing profitability. In terms of top-line, we anticipate a more homogeneous performance. By brand has already expressed, in this presentation, all collective measures have been taken at Maje to ensure the success of the full winter collection and make the underperformance [indiscernible] nothing got to parent assist in the history of this brand, which remains highly profitable and actually the most profitable of the group. We also count on our international footprint. It's obvious that the [indiscernible] region. It has been true over the past 4 years and navigating through several continents is extremely helpful to maximize sales and mitigate risks. H2 last year was marked by a very complex environment in place China, which is now normalizing. And this will help both sales and profit for this area. We will, of course, continue our full price strategy. And for example, we expect [indiscernible] include in this respect on the collections and performances gets a strong traction. Finally, most of the opening [indiscernible] is concentrated in H2, meaning that perimeter effect will be more visible in the second semester. This was called supply. Bottom line-wise, we have already activated a savings plan or no discretionary costs. We also prioritize our investments, both in marketing and IT. And finally, all the leadership team is fully focused on productivity to better absorb our cost. In particular, we work on optimizing staff allocation and selling in-store to increase productivity.

Thank you, Patricia. I think this latest slide you presented is really important, and I can only confirm that we are completely concentrated on delivering performance. The good sales performance of H1 demonstrates once again the strength of our brands, and we managed to keep a resilient profitability despite a very challenging environment. Thanks to the action plan that you just saw. We strongly believe that we can achieve and confirm our '23 ambitions. Our next update will be at the end of October for Q3 sales. Before we move on to the Q&A, I just wanted to answer before you ask it, obviously, usual questions about shareholding. There is no update to share on this topic as of now. And the sales process initiated by the receivers of the GLAS in March is still in progress. You will understand that we cannot share more comments more about this topic. I think now we can move to the Q&A.

Thank you, Isabelle. Okay, rather, I think we have one question.

Yes. Thank you. [Operator Instructions]

[indiscernible]. I have 2 questions on my side. The first one is about the lower level of gross margin. How much of this is due to destocking? And the second one is about the EUR 6.1 million in other -- in the others in the cash flow statement on Page 11 under the investment expenses. So could you give us some color on that?

I can take both questions. So I will start with the second one, which is a very easy answer. It corresponds to the acquisition of the Australian and New Zealand network. You will see more details in the -- the half year [indiscernible] report that will be issued very shortly before it. And on the first question on gross margin ratio. So the one point, you can consider that health is linked to discount rates increase from liquidation of all collections. There is a little bit of mixed channel impact. We mentioned quite a stable ratio retail, wholesale. But when you look at the figures at [indiscernible], there a little bit of more wholesale versus retail and the rest various impacts, including a slightly higher rate of outlet sales on this semester.

Thank you. I think we have another question.