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

Investors and media friends, good afternoon. Welcome to Xtep's 2025 Interim Results Online Webcast and Conference Call. I am Sophia, Director of Investors Relations. On the line, we also have our management, including Group Chairman and CEO, Mr. Ding Shui Po; Group President, Mr. Tian Zhong; Executive Director, Mr. Ricky Yeung; Group CFO, Ms. Dona Ding. Today's webcast and conference call will be conducted in Mandarin with English simultaneous interpretation. The management will first go through the 2025 interim results, followed by a Q&A session. After that, well, I will explain the procedures for Q&A. Before our management presents, please enjoy the group's 2025 interim results video. [Presentation]

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

Investors, media friends. Good afternoon. Welcome to Xtep's 2025 Interim Results Presentation. I'm Ding Shui Po. Despite the overall economic pressure in China, the government has continued to increase investment and support for public health and sports activities. This demand for -- the demand for sports goods has been steadily growing with running category performing particularly well. In the first half of 2025, leveraging our strengths in the running category and our status as China's leading running brand, Xtep once again secured the highest overall runner adoption rate and wear rates in major events such as Xiamen, Wuxi and Lanzhou. Saucony also ranked second and third in overall wear rates. For Xtep brands, professional to mass influence strategy, it has successfully penetrated the mass market and increased market share. Saucony has also made significant breakthroughs in the running sector. As a century-old running brand, Saucony has successfully established a premium sports brand image among elite athletes and cultivated a mindset for elite sports lifestyles. We're further strengthening our brand strategy and business scale, deepening our focus on running, expanding our apparel and lifestyle product portfolio, opening new concept stores, enhancing store efficiency and driving sustainable growth for the group. Our group strategy of focusing on running is very clear. We will capitalize on the peak season for marathons and running events in the second half of the year, leveraging the synergies between the Xtep Core brand and Saucony to expand our influence in the running sector and further increase our market share. With the government's various supports for the sports sector, we are confident in the long-term development of the sports industry. To address the rapid changes in China's retail market, we will implement more refined operational management to improve efficiency, laying a solid foundation for the group's sustainable growth while creating greater returns for investors. Thank you all.

Now I will pass the floor to Dona and Mr. Tian, so that they can present to you their financial and business analysis.

Welcome to Xtep's 2025 Interim Results Presentation. In the first half of 2025, the Chinese government continued to implement various economic stimulus measures and the macroeconomic environment is gradually improving. The group's various brands also achieved steady growth in the first half of the year. The Xtep Core brand, Mass market maintained stable performance, while Professional Sports division continued its high-speed growth. Please turn to the second page of the PPT. Our group's total revenue was up 7.1% to RMB 6.838 billion. Among them, the revenue of Xtep Core brand increased by 4.5% to RMB 6.053 billion. Professional Sports division, comprising Saucony and Merrell saw revenue increase by over 32% to RMB 785 million. The group's operating profit increased by 9.1% to RMB 1.305 billion. The operating profit margin improved by 0.4 percentage point to 19.19%. Net profit for the first half of the year was RMB 914 million in the same period last year, the group included 2 fashion sports brands, K-Swiss and Palladium, which incurred a combined loss of RMB 106 million. Therefore, the group's net profit for the first half increased by 21.5% year-on-year. Annualized return on equity was 19.7%, an increase of 3.3 percentage point year-on-year. Our cash flow remained healthy with operating cash flows of RMB 774 million and net cash increasing by 94.3% to RMB 1.913 billion. Based on the strong financial performance, the Board declared an interim dividend of HKD 0.18 per share, a year-on-year increase of 15.4%, maintaining dividend payout ratio of 50%. It is worth emphasizing that since our listing, the group has maintained a dividend payout ratio of no less than 50% for 17 consecutive years, fully demonstrated our long-term commitment to shareholder returns. Now please turn to Page 4, showing our consolidated income statement. Total revenue was up 7.1% to RMB 6.838 billion. Gross profit was up 6.9% to RMB 3.074 billion, with gross profit margin of 45%, remaining stable year-on-year. SG&A expenses increased 9.5%, with the reasons for the increase to be detailed later. Operating profit increased by 9.1% to RMB 1.305 billion, outpacing revenue growth. Operating profit margin improved 0.4 percentage points to 19.1%. Net profit from continuing operations increased by 6.4% to RMB 914 million, including losses from K-Swiss and Palladium brands in the same period last year. The group's net profit was up 21.5%. Our net profit margin increased by 1.6 percentage point year-on-year to 13.4%. Now please turn to Page 5, our balance sheet. The balance sheet remains in a healthy state. Bank cash increased 8% to RMB 3.218 billion. Operating cash inflow, RMB 770 million, maintaining a stable level. In the first half of the year, we repaid all Hong Kong dollar loans and some domestic loans resulting in a reduction of over RMB 1 billion in bank loans. Besides, we issued RMB 5 billion in convertible bonds in the first half of the year. After deducting bank loans and convertible bonds, net cash increased nearly twofold to RMB 1.913 billion. Current ratio improved to 2.2x and net asset value per share was up 9.6% to RMB 3.55. Please turn to Page 6. Analysis of our operating capital. Total working capital days increased by 3 days to 90 days compared to the end of 2024. Inventory turnover days increased by 23 days from the end of last year to 91 days, mainly due to an increase in inventory for the core brand within 3 months to prepare for the peak season for marathons and running events in the second half of the year, requiring us to increase inventory. Inventory beyond 3 months remains at a healthy level. Besides the launch of the new brand Saucony in the second half of the year also necessitated increased inventory. Inventory levels are expected to return to a healthy level by year-end. Due to increased inventory, accounts payable days also increased by 18 days compared to the end of last year, reaching 119 days. Accounts receivable days outstanding decreased by 2 days compared to the end of last year, reaching 118 days. Page 7, performance of each business segment. First, the Mass market. Revenue increased 4.5% to RMB 6.053 billion with e-commerce growing at a faster pace and kids business performing better than adult business. Gross profit was up 4% to RMB 2.641 billion. Gross margin slightly decreased 0.3 percentage points, primarily due to increasing proportion of kids sales composed with slightly deeper e-commerce discounts compared to last year. Operating profit, up 1.5% year-on-year to RMB 1.21 billion. Operating profit margin, down 0.6 percentage point year-on-year to 20%, primarily due to an increase in SG&A expenses, which will be explained on the next page. Next, Professional Sports division. Revenue from Saucony and Merrell increased by 32.5% to RMB 785 million, with Saucony leading the growth. Gross profit was up 28.7% to RMB 433 million. Gross profit margin, down 1.6 percentage points to 55.2%. This is mainly due to increased sales of lifestyle and OG products in footwear, coupled with a higher proportion of apparel sales. These products currently have a smaller sales volume, resulting in a slightly lower gross margin compared to professional functional products. In the first half of the year, operating profit was up nearly 2.4x to RMB 79 million. Operating profit margin improved to 10%. In the second half of the year, Saucony will continue to launch new products and marketing campaigns with profits reinvested into the brand. The Professional Sports division's operating profit margin for the full year is expected to remain at a mid- to high single-digit level. Page 8, cost analysis. The group's overall expenses increased 9.5% to RMB 2.123 billion, accounting for 31% of revenue, up 0.6 percentage points year-on-year. In the first half of the year, the number of domestic marathons running events and participants increased significantly compared to last year. So our sponsorship of Marathon and running events also increased accordingly. Besides the brand upgrade of Saucony, with the brand upgrade of Saucony, we also increased marketing investment. Therefore, advertising and promotion expenses was up 7.3% year-on-year, but remained stable at approximately 12.6% of revenue. R&D expenses was up 20.4% year-on-year to RMB 190 million, accounting for 2.8% of revenue. The increase was primarily due to: one, increased R&D for the next-generation Champion running shoe series 160X and expansion of the product portfolio for Xtep Core brand; two, increased R&D investment in apparel and lifestyle OG products for Saucony. Future R&D expenses will also be controlled at around 3% of revenue. Staff costs increased by 4.5%, accounting for 5.6% of revenue, a decrease of 0.2 percentage points. Other expenses increased by 12.6%, primarily due to rise in e-commerce sales, which led to higher platform fees and logistics warehousing costs. Looking ahead to the second half of the year, we'll continue to enhance efficiency through more refined operational management to achieve sustainable growth. The above is my presentation on financials. I will now pass the floor to Mr. Tian.

Thank you, Dona. Honorable investors and media friends, good afternoon. Now I will go through our group's operations for the first half of 2025. Group strategic core. The group remains firmly committed to our core strategy of focusing on running. For Xtep Core brand, we will deep -- we are deeply rooted in the Mass market, driving growth through flagship products and leveraging professional to mass influence strategy. For Saucony, we are clearly positioned as a century-old running heritage or running brand. We established an elite sports lifestyle mindset and consolidate our image as a high-end sports brand. For Merrell, we will focus on professional outdoor sports. The group continues to strengthen synergies among the 3 brands, consolidate our market position as China's leading running brand and drive sustainable growth. Page 11. In first half 2025, the popularity of marathon running in China continued to rise. According to data from the Chinese Athletics Association, over 300 marathons were held nationwide in the first half of the year with over 3 million participants. If you look at some top marathon events like Wuhan Marathon, there are more than 450,000 registered participants breaking the past record and almost 100% increase year-on-year. And for Wuxi Marathon, over 400,000 registrations with full marathon success rate of just 6%. So we continue to perform very strongly. In top marathon brands, Xtep maintained highest wear rates overall speaking. For Saucony, in Wuxi Marathon, Saucony rose to second place in overall wear rates, surpassing all international brands for the first time. The group's efficient and coordinated running matrix enables us to maintain a competitive edge in the running category. Page 12. Xtep Core brand continues to upgrade our professional product portfolio with flagship products driving growth. On 15th August, that is last Friday, we launched the new generation of Champion running shoes, 160X 7.0 PRO, which further breaks through in professional performance and continues to help athletes achieve outstanding results. Page 13. We expanded professional product matrix and strengthened our professional-to-mass influence strategy. In first half 2025, we introduced the 360X 2.0, the new generation style. So from daily wear to training, it is a full -- it is an all-round product. And then with comfort and high value for money, we gained widespread market favor with this Qing Yun cushion flagship running shoes. Now we will continue to optimize retail channel management and upgrade customer experience. In first half this year, we accelerated our expansion into shopping malls and outlets, opening large-format stores while closing small ones with a focus on improving store efficiency. As of 30th June 2025, the number of Xtep adult stores stood at 6,360 with about 70% being new image stores. For Xtep Kids, in August this year, we -- for X-Youth, we introduced the growth sneakers. So for young people, we offer stability and support for their growth. And then with Tsinghua University, Shanghai Sports University and also other sports institutions for youth sports demand, we offer a full range solutions. So through AI health test, an examination with the results, we will introduce or we will select the right shoes, and then we offer scientific sport solutions for them. So on an all-around basis, we help youngsters achieve better results in sports. And in August, we took part in an expert team organized with 8 authoritative institutions, and we published the playbook on youth sports and growth. We focus on R&D, medicine, sports and health professional findings. These institutions include the Maternal and Child Health Services Division of National Health Commission, Institute of Sports Medicine at Peking University Third Hospital and Center for Sports and Health Sciences at Tsinghua University. So we establish a sports growth system to provide scientific guidance for youth sports growth. As of June 30, 2025, X Young operates 1,564 stores in Mainland China, primarily managed by authorized distributors of the group. And we will also open more new image stores. Page 16. In relation to e-commerce in the first half of the year, e-commerce continued to drive the group's growth with revenue achieving double-digit growth and accounting for over 30% of the Core brands revenue. E-commerce operations focused on running sector, refining a product portfolio centered on the 2,000-kilometer flagship product while enhancing flexible supply chain capabilities to improve rapid replenishment capacity and drive high-quality development of e-commerce operations. For Professional Sports division, Saucony is positioned as a century-old running shoe brand. We focus on elite groups. We expand channels and enhance marketing and diversify product offerings to establish a premium sports brand image. And then regarding brand marketing, we launched a comprehensive large-scale marketing campaign centered around the release of our flagship product, the TRIUMPH 23, and through 5 consecutive years of sponsorship of the Hood to Coast China, we have demonstrated the brand's professional capabilities. At the same time, we will continue to dig deeper into running. In the first half of the year, we launched TRIUMPH 23 in July and other popular products. We will enhance or reinforce consumption scenarios. So for apparel and OG product lines, we are continuously expanding consumption scenarios in this regard, gradually increasing apparel and OG lifestyle products to enrich our lifestyle product portfolio. For Saucony, it continues to open brand stores in core commercial districts of high-end cities to further strengthen our high-end sports image. We also accelerated offline store opening. In January this year, we opened a concept store and a boutique store in Hangzhou Wanda Plaza and Beijing Sanlitun, respectively, continuing to improve store efficiency and same-store sales growth. As of June 30, 2025, Saucony operates 155 stores in China. For Merrell, we focus on professional outdoor tracks with trail running, hiking and water hiking as our 3 core products. The division will deepen our online layout and continue to tap into the potential of outdoor market. Then regarding sustainable development, please turn to Page 23. So in the area, we have always been committed to the vision of becoming a leader in sustainable development with corporate governance as the cornerstone and have continued to focus on 3 pillars: protecting the environment, creating a sustainable value chain and being people oriented. In the recently released 2025 MSCI ESG rating, Xtep achieved AA rating, marking our fourth consecutive year of rating improvement. We are the first Chinese sports company to achieve AA grade, leading the industry. For environmental protection, we are a signatory to the ZDHC strictly managing chemicals. We also innovate through initiatives like old clothing recycling and the production of regenerated fiber clothing, forming a green closed-loop system. In terms of social responsibility and corporate governance, there is stable enhancement. Finally, I would like to summarize our strategy and outlook. Please turn to Page 24. We will continue to focus on running, strengthen the synergy among different brands and drive high-quality growth, so that we can reinforce our position as the #1 running brand. And we lead growth through flagship products, expand product portfolio, leverage professional-to-mass influence strategy and solidify our group's position as China's leading running brand. We'll continue to deepen channel management, advance the DTC strategy and respond to rapid changes in market demand. For Saucony and Merrell, Saucony will target at elite consumers, continuing to reinforce the elite athletic lifestyle mindset and build a high-end sports brand image. In terms of products, it continues to deepen the focus on running while expanding its portfolio of apparel and OG products. In terms of channels, Saucony will strengthen channel management, slightly accelerate the opening of channels and concept stores and flagship stores to enhance customer experience. Against the backdrop of the continued positive development of China sports industry will further consolidate our differentiated competitive advantage in the running sector and drive our group's sustained growth. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]