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

[Interpreted] Investors, good afternoon. Welcome to Xtep International Holdings Limited's 2024 Annual Results Announcement Investor Presentation. I am Sophia, Director of Investor Relations. Let me introduce to you our management on stage. They are: Group Chairman and CEO, Mr. Ding Shui Po; Executive Director, Mr. Yeung Lo Bun; Group President, Mr. Tian Zhong; Group CFO, Ms. Ding Lizhi. In today's presentation, where we will conduct this presentation in Mandarin with English simultaneous interpretation. The management will first walk you through the 2024 annual results, and then there will be a Q&A session afterwards. Before you watch the video clip, perhaps we can invite Mr. Ding to deliver his speech for us. Mr. Ding, please.

Honorable investor friends, good afternoon. Welcome to Xtep International Holdings 2024 Annual Results Announcement. My name is Ding Shui Po. In 2024, macro economy still has a lot of uncertainty. However, there are still a lot of opportunities. So there is the national fitness boom. So the sports goods industry continues to outperform the overall retail industry. Running has become the most popular sport in China with Marathon raises gaining popularity. Xtep core brands and Saucony demonstrated remarkable resilience in the running segments and continue to lead the group's market leadership, leading to healthy growth last year. Xtep core brand focuses on the mass market and has been focusing on running for many years. Last year in Mainland China in 6 major benchmark marathon races we took the first place in terms of wear rate in all those marathons, surpassing all international brands successfully influencing the public. And we have consolidated our group's position as the #1 running brand in China. As a niche markets brand, Saucony focuses on the high-end market and has become the second growth curve for the group. In the past 5 years, CAGR of Saucony's revenue has exceeded 100%, and this revenue exceeded the RMB 1 billion last year. Through our brand operation model, we have made effort in products, channels and marketing to enable Saucony to continue its strong growth. Looking into 2025, our strategy is very clear. We'll continue to focus on running and develop in the direction of professionalism and refinement. In this fast-changing retail environment, we are confident that we will take a proactive and pragmatic approach to enhance operational efficiency and deepen brand channel management in order to achieve high-quality growth to generate lucrative returns for investors. Finally, in line with the group's diversified development, we are pleased to announce new appointments. Mr. Ricky Yeung has been promoted from CFO to Executive Director in charge of the group's global business strategy. Ms. Donna Ding has taken over the role of CFO, and she will bring her years of experience in brand operations and financial systems into full play in her new position. So this appointment reflects the group's strategic plan for long-term development and management succession and further strengthens the management structure. Ricky and Donna will work very closely together to help the finance team operate efficiently and inject new energy into financial management to support the development of the group's multi-brand strategy and global business. Thank you all.

Thank you, Mr. Ding. Before our management present results, please now enjoy our group's 2024 concluding video. Thank you. [Presentation]

Now I will pass the floor to our group CFO, Donna to walk you through our results. Thank you.

First of all, welcome to the Xtep's 2024 Annual Results Presentation. Reviewing the year 2024, although the domestic economic development continues to be challenging. The group also achieved remarkable results in 2024. For new brands, we have exceeded our revenue growth target in 2024. Professional Sports segment revenue grew more than 57%. Saucony grew by 60%, becoming the first new brand of Xtep Group to generate revenue of over RMB 1 billion. Page 2 of the PPT. Total group revenue increased by 6.5% to RMB 13.577 billion, of which Xtep core brand revenue was up 3.2% to RMB 12.327 billion. New brands, professional sports segment, Saucony and Merrell saw revenue growth by more than 57% to RMB 1.250 billion, operating profit, up 9.3% to RMB 1.966 billion. Group net profit, up 20.2% to RMB 1.238 billion. Based on healthy cash flow, the Board of Directors recommended an final dividend of HKD 0.095 per share, together with the interim dividend of HKD 0.156 and special dividend of HKD 0.447, payout ratio was 138.2%. Page 4, please. The profit and loss statement of the group. Total group revenue up 6.5% to RMB 13.577 billion. Gross profit up 10% to RMB 5.865 billion faster than revenue growth. Gross profit margin up 1.4 percentage point year-on-year to 43.2%. Increase in gross profit margin was mainly due to significant improvement in Saucony's gross profit margin. SG&A expenses, up 8.6%, the reasons for which are explained in detail later. Operating profit up 9.3% to RMB 1.966 billion. Net profit from continuing operations increased by 4.1% less than the 9.3% increase in operating profit, excluding the reduction in loss on disposal of K-Swiss and Palladium in 2024. This was mainly due to a onetime dividend tax approximately RMB 75 million in 2024 as we repatriated more than RMB 1.5 billion from China to Hong Kong and repaid most of our Hong Kong bank loans. Excluding the impact of this RMB 75 million, actual net profit from continuing operations was up around 10%. So the group's net profit was up 2.2% to RMB 1.238 billion. Net profit margin up 1 percentage points to 9.1%. Please turn to Page 5, our balance sheet. The balance sheet is in a healthy position after -- excluding bank loans and convertible bonds, net cash was up 5.6% at RMB 985 million, operating cash, RMB 1.28 billion, more or less the same as net profit, very stable. And we have 1.2x of current ratio. In 2024, we paid out dividend. So net asset value was down 4.1% to RMB 3.24. Page 6, overall working capital analysis. So 87 days was the total working days. Turnover, inventory turnover days decreased significantly by 22 days from the end of last year to 68 days, mainly due to divestment of K-Swiss and Palladium, which reduced the amount of inventory at the end of 2024. Payment turnover days decreased by 12 days from the end of last year to 101 days, mainly due to early Chinese New Year in 2024, and our early pickup and early repayment at the end of last year. Receivables turnover days increased by 14 days to 120 days compared to end of last year. This is mainly due to the fact that in the formula, the opening value includes KP's receivables, but revenue does not include KPs, pulling up the receivables turnover days. If we exclude the effect of KP turnover days is more or less the same as last year. Please turn to Page 7, business segment performance. First, Xtep core brand. Sales revenue up 3.2% to RMB 12.327 billion. For Kids, there is a growth by around more than 20%. E-commerce growth by more than 20%. Gross profit was up 2.8% to RMB 5.15 billion. Gross profit declined 0.2 percentage points, mainly due to decline in apparel gross margin. But we are confident that this will be stable in 2025. Operating profit was up 3.4% year-on-year. Operating profit margin improved 0.1 percentage points to 15.9%. Professional Sports segments. Saucony and Merrell revenue grew 57.2% to RMB 1.25 billion. Saucony's revenue increased almost 60% to a scale of over RMB 1 billion. Gross profit up 61.5% to RMB 715 million, gross margin up 1.6 percentage points. Saucony and Merrell since 2023 have become profitable. In 2024, operating profit showed significant growth to RMB 78 million. Looking ahead to 2025, Saucony expects to see revenue growth of around 30% to 40%. Please turn to Page 8, expenses analysis. SG&A, up 8.6% to RMB 4.295 billion or 31.6% of revenue, up 0.5 percentage point year-on-year. The rise was mainly because of advertising and promotion E&P expenses, which rose 7.1% accounting for 13.4% of revenue. The increase was mainly due to the fact that on January 1, 2024, we acquired Saucony's brand company in China. So all of Saucony's A&P expenses in 2024 are reflected in the group's expenses. R&D expenses were similar with last year. RMB 393 million or 2.9% of revenue. Staff costs as a percentage of revenue rose slightly by 0.1 percentage points to 5.1% mainly due to acquisition of Saucony China Company and the fact that most stores are D2C stores with corresponding increase in staff costs. Other expenses up 13.5%. There are 3 reasons behind the increase: one, rising proportion of e-commerce sales revenue, which increased related platform fees and logistics and warehousing expenses; two, increase in store rentals for Saucony D2C stores; three, relevant consulting expenses incurred to optimize the company's business operation system. To summarize, in 2025, we will pay more attention to controlling expenses and at the same time, in line with D2C strategy, we will strengthen the building of retail and inventory management capabilities and achieve effective growth through more refined operations. The above is our financial performance. Now I will pass the floor to Mr. Tian. Thank you.

Thank you, Donna. Honorable investors, good afternoon. Now I will walk you through the group's operations in 2024. The core of our group strategy is very clear. We will continue to focus on running. Xtep core brand will be -- will have a professional-to-mass-influence strategy, offering more products with high value for money. For Saucony brand, it is positioned as a century-old running heritage brand. It focuses on elite segment of the high-end market. For Merrell, it focuses on outdoor sports. For these 3 brands, they will continue to achieve good synergy so as to solidify Xtep's market status as the #1 running brand in China to achieve sustainable growth. Xtep core brand has been following and focusing on the established strategy of running. In 2021 within 3 hours wear rate in Xiamen Marathon for the first time surpassed international brands. And in the past 3 years till 2024 in 6 major benchmark Marathons in China in terms of overall wear rate, we surpassed all other competitive brands, and we are #1 in the market. What is worth mentioning is that last year in Shanghai Marathon, for the first time, we surpassed international brands for the first time and became #1 brand in wear rate. So in 2024, if you look at Marathon wear rate we are working hard to implement the professional-to-mass-influence strategy set 3 years ago, and we have achieved good results. If you look at brand synergy, well, just now, I mentioned the 6 benchmark marathons in China and among which there are 5 marathons with global wear rates of more than 40% by Xtep core brand and Saucony. So there is efficient synergy of our group's running matrix, helping us to maintain leadership position in the running field. So -- if you look at Xtep core brand, through our flagship operation model, we have established a momentum with professionalism to form professional-to-mass-influence strategy and drive overall growth with our product metrics. In 2024, we upgraded the Champion running shoe family by launching 160X 6.0 and 6.0 pro and 260X and 360X new products. So there are richer running shoes metrics. So as to meet professional runners needs for channels of Xtep main brands, we continue to deepen retail management and to continue to open large stores and close more ones to enhance customer experience. As of 31st December 2024, adult stores number 6,382, of which more than 65% are 9 generation stores. For Xtep Kids in 2024, it's enjoyed very rapid growth. We have established the positioning of sports experts and collaborated with Tsinghua University and other universities, to focus on healthy growth of young people and create differentiated competitive advantage. As of December 31, 2024, number of Xtep Kids stores was 1,584. Xtep core brand E-commerce. In 2024, E-commerce continued to lead our group's growth. Revenue was up 20% year-on-year and accounted for 30% of our core brands revenue, especially on Douyin, WeChat video accounts and Rednote and other emerging platforms, we performed in an outstanding way realizing growth rate of over 80%. For professional sports Saucony. Well, we clearly rationalized Saucony's positioning, a century-old running heritage, and it focuses on elite sports life. So we, in this way, to solidify the overall attributes. Since 2019 in the past 5 years, Saucony's CAGR growth exceeded 100%. In 2024, we exceeded RMB 1 billion, realizing a double harvest in terms of scale and profits with continuous improvement in operational efficiency and it became the second growth curve of the group. 2024, is the opening year of the brand tactics for Saucony. So we have achieved very significant results. In terms of products, we continue to dig deep into running products, especially running shoes. So there is technological innovation. There are best-selling products like Ultra Speed and then we have increased SKUs for apparel and so on. In terms of products, Peng Yuyan was our spokesperson, and there is professional image focusing on the professional elite. We are strengthening the professional attributes in terms of channels. We work in high-tier cities, core business districts to open big stores. In September and November in Shenzhen, [indiscernible] we opened new-image moon stores. As of 31st December 2024, Saucony had 145 stores in China. For Merrell, it focuses on outdoor sports market and upgrade its core product line around outdoor scenario. It continues to work hard in e-commerce channel and improved its operational capabilities. There was high growth in 2024. For sustainable development, we continue to break new grounds and achieve remarkable results. We are recognized by international authorities with MSCI ESG rating upgraded to A. So making us the first Chinese sports goods company to receive such a rating. In 2024, we announced the 2030 ESG strategic framework, which comprehensively focused on defending the environment and creating a sustainable value chain and putting people at the center of everything we do. So there is a 10-year sustainability plan for the group. Let me summarize our strategy and outlook. For our strategy, we continue to focus on running. In the running field, will form brand synergy. For Xtep core brand, there are 3 things. We'll continue to focus on running to enhance the brand's mindshare; two, we will build a running flagship product matrix to achieve professional-to-mass-influence. Number three, we'll increase investment in DTC business and deepen management of terminal retail channels. For professional sports, Three points. Saucony has clearly positioned itself as a century-old running heritage brand to build my share of elite sports life and enhance the brand's potential. So in 2025, Saucony had to enhance mind share and image. For channels, we strengthened retail channel management and continue to open directly operated flagship stores and new image stores in high-tier cities. For products, we will deepen running shoes and strengthen or expand apparel and lifestyle products to broaden the product metrics. DTC strategy. The group will increase investment in DTC strategy of our core brand, and Saucony brand will adopt DTC-based operation model. For our corporate DTC plan in the second half of 2025 and 2026 we will recover or will -- we cover 400 to 500 stores for the DTC model. For Saucony, in 2025 and '26, we will increase investment in Saucony's brand and channel. DTC model transformation will effectively drive the group's growth in revenue, gross profit and profitability. In China sports industry, while it is steadily developing, we'll continue to consolidate our leading position in the running area, seize opportunities and enjoy new momentum into China sports goods industry. Thank you all. [Statements in English on this transcript were spoken by an interpreter present on the live call.]