Xtep International Holdings Limited (1368) Earnings Call Transcript & Summary

Investors, good afternoon. Welcome to Xtep's 2023 Annual Results Presentation investor session. I am the Investor Relations and Sustainability Director, Sophia. Let me introduce to you our management in attendance, Chairman and CEO, Mr. Ding Shui Po; Director, Mr. Tan Seng; our President, Mr. Tian Zhong; CFO, Mr. Yeung Lo Bun. Today's presentation will be conducted in Mandarin with English simultaneous interpretation. Our management will first present the 2023 annual results followed by Q&A. Before our management presents, please enjoy our corporate video, concluding our achievements in 2023. [Presentation]

Now I will pass the floor to our Chairman and CEO, Mr. Ding Shui Po. Mr. Ding, please.

Investors, ladies and gentlemen, good afternoon. I am Ding Shui Po. Thank you for attending Xtep's 2023 Annual Results Presentation. 2023 is a year full of challenges. Consumption is being restored gradually and slowly. But then in consumer products, well, sportswear saw the best growth. And in 2023, it is our 15th anniversary of our listing. So originally, we were a local company. Now we are a global multi-brand company. Looking at macro level, with Sports Nation policy of China, basically, sports has penetrated to a wider and wider Mass. And according to National Statistics, in 2023, in terms of sports industry, we have got already 2.89 square kilometers and 370-odd kilometers in length in terms of sports distance. And in 2023 for Marathon races, there is strong recovery already, and it is already the prepandemic level. And for some races, number of registrational enrollment exceeded 200,000-odd. In the past, usually, it's only at 30,000 to 40,000. And in the past year, we helped athletes, and we broke Chinese Marathon records 2x, and our wear rate has all along been #1. Now when it comes to our profession and our professional sport standard, we are influencing the Mass and running is a determinant in our growth. Looking at numbers. In 2023, for our core Xtep brand, whole year retail sell-through achieved 20% year-on-year growth. Inventory turnover days 4 to 4.5 months. This is a healthy level. Saucony is the first profitable brand for us and its revenue and profit reached a record high. Now our core brand focuses on Mass sports for the new brands, they focus on high-end markets. In terms of channels, products and marketing, they built differentiated portfolio. In terms of our strategies, our core brand and new brands achieved synergy and the synergy is more and more realized. Xtep and Saucony together lead our group to become #1 running brand in China. In the future, we will continue to focus on running, and we will make use of our professionalism to affect a Mass my share. And we are going to meet diversified needs of consumers. Now last year, we acquired the Chinese business of Saucony and Merrell. And for new brands in the China market, our confidence is being materialized. Now I will pass the floor to Mr. Yeung and Mr. Tian, so that they will present our financial performance and results. Thank you.

Thank you, Mr. Ding. Good afternoon. Welcome to Xtep's 2023 Annual Results Presentation. Looking back into 2023, global economy continued to see uncertain development. At the beginning of the year, after the pandemic in China, economic growth had been fast. And our retail sell-through for our core brand at the beginning of the year was positive, especially in March and April, that was 40% sell-through growth. However, in May and thereafter, growth momentum slowed down significantly. For core Xtep brand in 2023 for the whole year, retail sell-through achieved 20% growth. This is better than our peers, and it is much better than the overall China's retail performance. In 2023, Xtep Group's major goal is to maintain growth and to clear inventory, and we have achieved these already. Please turn to Page 2 of our PPT. Looking back into 2023 whole year results, our total revenue growth was 10.9% at historical high at RMB 14.346 billion. For core Xtep brand revenue growth, it is 7.4% to RMB 11.947 billion. For new brands, Professional sports segment, Saucony and Merrell, revenue growth was almost 100% at almost RMB 800 million. And Athleisure segment, revenue growth was 14.3%. In the China region, the growth exceeded 200% at RMB 465 million. Saucony became the first profitable brand among the 4 brands. In only 3.5 years, it's achieved such profits -- and also more than 100% growth thereafter every year. So this shows that when we operate multiple brands, we are very capable. Our profit achieved historical high at RMB 1.03 billion, up 11.8% year-on-year. For core Xtep brand, our profit grew 10.4% at RMB 1.486 billion. Our group inventory came down significantly by 21.6% to RMB 1.794 billion. Comparing with the interim result stage inventory of RMB 2.407 billion, where it is a significant decline of RMB 613 million or 25.5%. Channel inventory has returned to a healthy level at 4 to 4.5 months level. For the 5 brands, their store counts globally as of December 31, 2023, was 8,583, an increase of 549 year-on-year. Our operating cash net inflow grew 1.2x to RMB 1.255 billion, and it is more than our net profit of RMB 1.03 billion. Because of our healthy cash flow, the Board recommended a final dividend of HKD 0.08 per share, and payout ratio was 50%. Since 2008 listing, we have maintained a good dividend payout. We have never paid less than 50% of profits to shareholders. We'll continue to keep this good record. Next, Page 4 of the PPT, income statement. Revenue growth, 10.9% to RMB 14.346 billion. Gross profit grew 14.3% to RMB 6.05 billion. It is faster than revenue growth because gross margin was up 1.3 percentage points to 42.2%. SG&A rose 18.4% to RMB 4.909 billion. The reasons for the increase will be explained later. Operating profit up 7.9% to RMB 1.58 billion. Net profit, up 11.8% to RMB 1.03 billion. Net profit margin up 0.1 percentage points to 7.2%. For 2024, no matter whether it is in Mainland China or overseas, because of economy and consumption needs, we believe that the year will still be a difficult one, but we are still confident to achieve considerable growth. Now we have to maintain healthy inventory level. And for 2024, our target group revenue growth will not be less than 10%. When there are new brands making profit and with some growth in our profit margin for our core brand, our net profit growth will be faster than overall revenue growth. Page 5, consolidated balance sheet. Now this is at a healthy level. We have net cash position. Current ratio last year was 1.9x. It improved to 2.1x. Bank borrowings are mainly used in dividend payouts in Hong Kong. So more than 90% of our business is in Mainland China. And remittance to Hong Kong is subject to capital control. And for shareholding profit, we have to pay 5% share profit tax. And because of the interest rate in China has come down and Hong Kong's interest rate went up, so last year, we already started to apply to remit funds to Hong Kong. And in the first 3 months of this year, we successfully remitted RMB 1 billion to Hong Kong, and we repaid RMB 1 billion of borrowings to reduce interest expense. And then we paid RMB 435 million to buy Saucony and Merrell, China's 50% shareholding, and also RMB 490 million spent in CapEx. And we also paid dividend of RMB 470 million. So the details will be explained in the information. Now the operating -- the total working capital days turnover was 16 days more than same period last year. But comparing with interim report 2023 of 88 days, it has improved 5 days. Now if you look at inventory turnover days, the interim level was 107 days, and it came down to 90 days, more or less the same as the end of last year. And for absolute amount, the decline will be even more significant. And in 2023 year-end inventory is -- came down by 21.6% to RMB 1.794 billion. Comparing with the interim period of RMB 2.407 billion, within the half year, it has declined RMB 613 million or 25.5%. Receivable turnover days, up 8 days to 106 days. And it is within our 120 days credit period. And then for our core brand revenue growth, 7.4%, RMB 11.947 billion. And for kids, its growth is 11%. Gross margin went up 0.7 percentage points and gross profit up 9.1% to RMB 5.013 billion. Operating profit margin, more or less the same as last year, 15.8%. Net profit grew 10.4%. Net profit margin 12.4%, higher than 12.1% of last year. This is because of good tax planning and we reduced tax expense. Looking into 2024, because consumption situation is not very positive for core brand with running and also kids business drive, we believe that there will be stable growth. But for the time being, our target will still be more conservative so as not to have too much inventory. And we have our own supply chain in our group. So if we think the market is turning positive, we can react fast. So as such as now, our group's target growth is 10%. It is a more conservative minimum growth that we expect. And then for Professional Sports segment, for Saucony and Merrell, revenue growth almost 100% at RMB 796 million. Gross margin came down 0.9 percentage points, mainly because last year we started the franchise model. Wholesale income gross margin will be lower than direct operation. And last year, wholesale accounted for 13% roughly of the total. Operating profit, RMB 8 million. Saucony's profit is around RMB 10 million. Merrell, a small loss of RMB 2 million. Saucony has become the first profitable brand among the 4 brands -- 4 new brands. Looking into 2024, for Saucony and Merrell, they will have quite good growth. But because the volume started to increase, and so the economy is also uncertain, we believe that the sales target in 2024 will be 30% to 40% growth. And then K-Swiss and Palladium, Athleisure segment, revenue growth, 14.3%, this is mainly from China. Overseas business came down around 9%. China's sales last year at the same period was RMB 143 million. It grew more than 200% to RMB 464 million this year, accounting for 29% of the segments. Gross margin last year was 37.6%. It improved to 44.8%. Because in China, sales was DTC based. DTC gross margin is higher than overseas wholesale-based business. Now in China, DTC scale continued to increase. So we believe that gross margin can continue to improve. Operating loss, RMB 184 million. Last year, it's RMB 189 million. So there is a slight improvement. Looking into 2024, overseas business will continue to face uncertain challenge. And we believe recently, some of our competitors announced rather weak 2023 results, the inventory has increased relatively. So for overseas business, we are relatively conservative. However, in China, with strong growth, we believe that in 2024, K-Swiss and Palladium overall speaking, will see quite good growth. However, in China, growth was mainly from channel expansion. And the channel is mainly DTC. We will also increase advertising expenses. So this year for Athleisure segment, it will still incur a loss. However, we will control the amount of loss so that it won't be bigger than that in the past 2 years. Page 8, SG&A. SG&A, up 13.9% to RMB 3.536 billion, accounting for 29.6% of revenue, up 1.7 percentage points. The reason behind the increase is that A&P expenses rose 17.2% or RMB 230 million, accounting for 13.1% of sales. It is bigger than the budgeted amount by 11% to 13% for the following reasons. First, in 2023, marathon races have resumed normal. So we restored normal sponsorship. In 2021, the University -- well University game should be hosted, however, it was delayed to 2023, so expenses increased in 2023. Sales was smaller than expected in 2023, but some sponsorship fees have already been contracted and it cannot be canceled. So that's why the share of A&P expenses of revenue was more. But we expect that in 2024 it will go back to 11% to 13%. We attach much importance to our products being competitive at the same time in terms of performance or functional running shoes, Saucony or Xtep. So for our R&D expenses, it grew 33.9% or RMB 100 million. It's 3.3% of total sales. We believe that in 2024, this ratio will be at around 3%. Besides, we have done some organizational optimization. We have reduced manpower. So staff costs came down 6.5% to RMB 562 million. And last year, it accounted for 5.4% of revenue, this year 4.7%. So that is my presentation on financials. Now I will pass the floor to Mr. Tian. Thank you.

Thank you, Ricky. Investors, good afternoon. Now I'm going to present to you the operations of various brands. In the past 1 year, Xtep grew as #1 running shoe brands in China has even bigger market share. So Page 10, let's look at core Xtep brand. Now under the brand strategy of running shoes #1, we continue to reinforce our #1 leading position in the running area. According to Sullivan's information, in 2023, in China marathon races, among all running shoes, our wear rate is #1 in -- as of March 2024 in Beijing, Shanghai, Guangzhou, Xiamen, in 6 major marathons. For sub-three hour runners, our Xtep shoes' wear rate is as high as 31%. It is much higher than all the other brands, including international brands by around 10%. In Beijing marathon, we are more than the #2 position by 20%. Now Page 11. Why is it that our running shoes can continue to be well received by runners? We think that we have done the following right. Number one, product innovation. We insist on the annual iteration of 160X champion running shoes. Our performance continued to be upgraded. Number two, we use professionalism to affect the Mass. We expanded and widened the product matrix. So we transfer the carbon fiber plate technology to Mass shoes. So that we offer better performance price ratio, and we lowered the threshold for professional run issues, for example, 260X and 360X since launch in beginning 2024, we received very good market feedback. And our sales rate is also much faster. Now for our running -- Xtep running club as of end of December 2023, we have 65 clubs with more than 2 million members. So this has become a very valuable private domain traffic source. And then when our brands are being upgraded, now, for example, in basketball, we launched new products. In 2023, we introduced [ Yitian Huang ] and also LING REN 1.0. And then we also have pop stars influence. Pop stars including Beasley and Jeremy Lin. So we are able to offer better products to young consumers. For sustainability, we have created environment-friendly marathon. And then we discharge our social responsibility in the running area. In 2024, in the Xiamen Marathon race, among 30,000 participants, we make use of recyclable or recycled fiber to make the athlete's t-shirts to reduce pollution. And then in terms of channels, we open larger stores and we opened good stores. We expand store area and we upgrade store image. As of December 31, 2023, we have 6,571 Xtep adult stores, more than 60% are non-generation stores. Xtep kids, our positioning is, we are a sports growth experts for adolescents and also kids. And then last year, we worked with Shanghai Sports University and Tsinghua University, and we improved the anti-shock technology in -- at our 160X-champion running shoes to the kids shoes and we introduced XTEP 100 2.0 PRO. And then in March this year, we introduced the A Growth Sneaker for kids. So we reintroduced or we redefined professional comfort. And we offer better protection system for the kids. Altogether, we have 1,703 stores for Xtep Kids. And then for new brands, we sped up our development. In terms of brand influence as well as our sales capability, we achieved good results. Now Saucony has been the first profitable international brand, and this shows that Xtep Group has good capability in operating international brands. Page 15. Saucony's profitability is mainly because of clear positioning and also sharing of resources with core Xtep brand. For positioning, Saucony's brand position is [indiscernible]. So in other words, running elites and also social elites. For Xtep's position, Mass sports. So there are synergy and differentiation in terms of resources. If you look at our running club, as well as our R&D center, sharing resources and also sharing of marathon running resources, we have achieved some good results. In December last year we acquired the Chinese business of Saucony and Merrell. So this shows that we have confidence in the China market. We also have confidence in our own operation capability. Page 16, under the lead of Saucony professional sports segment has achieved almost 100% growth. For Saucony channels, the stores are mainly in high-tier cities. And for Tier 1 and new Tier 1 cities, more than 80%. At present, there are 110 stores, an increase of 41 stores from 2022. And then the brand continues to sponsor [ IAAF Shanghai ]. So in other words, we are focused on the dual Elite groups. And we focus on precise marketing of competitions. And then for Merrell, we focus on outdoor activities and also fast running. Then for K-Swiss and Palladium, Chinese business growth was fast. In scale, it increased by more than 200%. For K-Swiss, the positioning is mainly DTC. It is focusing on high-end shopping malls in high-tier cities. It has entered the nation of Macau. So this is an important step in the high-end developments. And we will also be focusing on Asia Pacific. As of December 31, 2023, K-Swiss has 101 stores in Asia Pacific, an increase of 29 stores from 2023. Page 18, for Palladium. Chinese market has finished the brand rebuilding or reshaping. Development was fast. Results growth has exceeded expectation. So we are aware of young consumers' consumption habit. So we make use of Wang Hedi, Jeremy Lins, and other celebrities fan effect. And we have got many best-selling styles. We enhanced the brand awareness. And gradually, it has become a brand well-liked by young people. As of December 31, 2023, Palladium in Asia Pacific has 94 stores, an increase of 38 stores from 2022. So our stores are mainly in high-tier cities and core business districts and high-end shopping centers. Prospects. Xtep Group insisted on the development model of being #1 running brand in China. And for our core brand, we focus on Mass sports. We will continue to focus on running, and we will continue to reinforce the market awareness of world running shoes, China Xtep. We will improve our products, especially in expanding our market segment. And then in terms of channels, we'll continue to open bigger stores, better stores, and we will enhance our image and experience for offline. For online, we'll focus on being #1 in running and we will offer more products with higher performance price ratio. For international new brands, we will focus on high-end market, and we will try to creates growth for the second curve for brands led by Saucony. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]