OVS S.p.A. (OVS) Q3 2022 Earnings Call Transcript

OVS S.p.A. (Milan : OVS) Q3 2022 earnings call dated Dec. 15, 2021

Corporate Participants:

Stefano Beraldo — Chief Executive Officer

Francesco Leoncini — Business Change and Innovation Director

Analysts:

Domenico Ghilotti — Equita Group — Analyst

Ipsita Singh — JPMorgan Chase & Co. — Analyst

Presentation:

Operator

Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the OVS Nine Months 2021 Financial Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Stefano Beraldo, Chief Executive Officer of OVS. Please go ahead, sir.

Stefano Beraldo — Chief Executive Officer

Good afternoon to everyone attending this nine-month call for OVS. Thank you for being there. I think that it has been a great quarter, even stronger than we expected with an incredible month of October, which I think has been partially driven by a general good market trend in general for consumer goods, which started since April-May. But what worth noticing is that our company has largely overtaken the market competitors and the market trend.

One thing that in the slide is not included, I think, is that in the quarter we overcome the other players, both digital and physical. So no company, no brand involved in apparel grew more than OVS in the last quarter, including Amazon and Zalando. So this is what I think is important to note this because this performance has been generated in absence of a strong margin pressures or in absence of commercial promotions compared to last year because in a third quarter in a row, we are reducing our mark-down compared to one year ago and we have an amount of full price sales which is 30% better than the market. So we had about 40% — 47% — 46% — 48% of — market is 47% full price and we are 70% sales, which are full price. So in spite of this absence or very limited pressure generated by mark-down, we have been able to increase our sales, still with a very small component of a new floor space, because, out of the hundred and more or less 100 basis point of growth in market share, 70% of this growth has been generated by same impediment, so by the same store base. And only one-fourth has been generated by new surfaces.

So the second brand who grow more, grew by 60%. So even in absence of increase of floor space, our growth has been the biggest in the market. Same story, there are the losers, which are the usual ones. There is more format, some company which is in trouble, some international company, big brand which is happening in Italy as well and very few winners, and among them OVS S.p.A. seems to be the one that is performing better. We see that this is the consequence of a long list of actions, which has been made, but there was who refers the product are the most important.

Piombo Woman has been launched very satisfactorily, coupling their success of Piombo Man, still a great contribution from women brand invited as concessions in the second part of the year, also men, but mostly women. All these also with a strong reduction of intake, partially because of our decision to buy less in order to be prudent given that the year was supposed to be very difficult and difficult to interpretate [Phonetic]. Lockdown yes, lockdown no, so we decided to reduce our total buying and partially because we suffered because of absence of deliveries, particularly in kids and men, because of shortage of goods or delay from some international market, the sourcing country. In spite of these, the performance has been good and the performance is being good also in this part of December. It means that, again, we have more gasoline in the engine for next year that we already paid, I mean, merchandising, which would be good for next year as well.

So I think that the result has been very positive and the cash flow has been a even much higher than we expected. So I think that a good quarter, a good moment for the company also for the reputation of the company. New customers visit in the company. Thanks to — mostly thanks to Piombo and the new brand that we are inviting.

And I hand over to Francesco Leoncini for a more detailed description of the presentation. Francesco, go ahead.

Francesco Leoncini — Business Change and Innovation Director

Thanks. Stefano, I would start the presentation of the result with page three, in which we have the P&L of the nine month of OVS compared to the last year performance. As we can see, 2021 was much better than last year with the growth of 33% in terms of sales and EBITDA growing more than doubling from EUR40 million to EUR104 million. More interesting could be the comparison also with 2019 because 2020 was of course affected by the lockdown and we are now at just minus 1.3% in terms of sales with two consecutive quarter in which we recovered basically the whole loss that we had — we suffered in the first quarter due to the lockdown at the beginning of the year. This increase in sales translated into a pre-growth in EBITDA, which is now back to above 10% or as incidence on net sales and progressively also on EBITDA and profit before tax. The net financial position, thanks to the good performance in terms of profitability, and as we will see in terms of working capital management, reduced by EUR100 million, much more than the EUR80 million injected as a capital increase, thanks to the performance of the business.

On page number four, we have some details about the performance splitted by channel and by brand, but the performance is good in all of the situation. Sales growing 33%, EBITDA is growing by 161%. In terms of business unit that is OVS and Upim, we see a growth higher in Upim, also thanks to the higher development rate that the brand had compared to OVS which is already well established in the country. While on the other side in terms of EBITDA growth, the performance of OVS is better, because — thanks to the higher incidence of [Indecipherable] and so to a better operating leverage that of course translated more directly the growth performance into EBITDA.

On the page number five, we prepared the couple of bridges in order to better explain what happened in terms of results. The top one is related to the economic performance to EBITDA. In 2019, a year without particular effects and no lockdown, the EBITDA in the nine months was EUR101 million. In the first quarter of 2021, we lost EUR19 million due to the lockdown. In the second and third quarter, on one side we recovered EUR41 million in terms of gross margin and then we had some normalization of costs by EUR18 million, ending to a positive plus EUR3 million versus the 2019. So the boost over the last two quarters were more than enough to, well, almost close — almost good enough to close the gap in terms of sales, but more than enough to increase also in terms of profitability.

On the, let me say a financial point of view, the net debt was EUR400 million about in October ’19. We had over the last eight quarters, three quarters heavily affected by the lockdowns during which we lost EUR236 million. So without any action, we would have ended up at EUR650 million net financial position. But thanks to the capability of reacting in terms of attracting consumer, but even more characteristic of OVS that ability to use the stock, the leftover of the lockdowns to boost the sales to fuel the sales after the reopening, we managed to create EUR300 million. We generate EUR300 million in the quarters without major lockdowns to which we can add the EUR80 million of the capital increase. So we are ending at EUR250 million, that is a EUR150 million below two years ago — three years ago picture.

On page number six, we can explain a little bit more on the working capital, which is the operating element that we, I mean, we managed in order to generate additional cash to the one generated already by the profitability. In particular, on trade receivable, we can see an improvement of EUR5 million versus 12-months ago despite growing business and this was, thanks to the recovery to the reduction of the DSO that as said were extended last year in order to support our partners and they are now coming to a normalized situation. On inventory, we are going ahead in terms of reduction of the stock. So we have EUR24 million lower stock compared to 2020. While on trade payables, that in 2020, we’re a little bit expanded, thanks to special conditions. We are now, thanks to the very positive cash situation, reducing anticipating some payments in order to capitalize a better relationship with the supplier that should help, especially in view of the next year turbulence on inflation.

On page number seven, we have a picture on investments that of course growing versus the last year that was completely — reduced to the minimum to survive the COVID year and we are now back to EUR57 million over the nine months, in line with, let me say, with the original plan.

Page number eight. We have a summary of the cash flow. As you can see, we have a positive impact versus 2020, EUR64 million, thanks to the higher EBITDA. We have, especially, in the change in working capital, EUR70 million improvement. Last year of course, there was an absorption in terms of left over of stock not sold during the lockdowns that we managed to sell this year. We have, of course, a rebound in capex, but the operating cash flow is EUR130 million higher than in the nine months before and adding also the other elements in particular proceeds from working capital, the gap is close to EUR200 million difference in the nine months of 2020 versus 2021.

On page number nine, we have the summary of the mathematics of the growing EBITDA and lower debt that brings from 3.7 ratio on October 2020 to 1.9, so holding [Phonetic] the leverage ratio in 12 months, despite the heading between the two lockdowns of November-December and March-April. So again, OVS is showing the resilience in terms of being able then to accelerate as soon as the market conditions or the legal condition allows to keep the stores open and regain the lost sales.

Then I would now give back to the word to Stefano for an outlook of the last quarter of 2021.

Stefano Beraldo — Chief Executive Officer

Thank you, Francesco. We are now halfway in the last quarter. Sales in November has been good. Sales in December are okay, as well, so are positive as well. Even in December, we decided to skip one last [Indecipherable] promotion. So we are reducing also in the last quarter, the markdown pressure. Nevertheless, the sales level remain atonic. We expect also to have a good month of January in theory, because we believe that the Italian consumer will continue to have a look to OVS, not only as an everyday low price brand, but also a place where to find the good product. Also interesting during the sales period and I mostly refer to Piombo, we are sure that there will be a good performance of Piombo also in the very last part of the year.

From a cost perspective, in spite of some pressure on the logistic cost because of the transportation hikes, we don’t see element which generate concern on the profitability. So at the profit and loss level for the year-end, I don’t expect a negative news, and this is why we increased our guidance from EUR120 million, EUR125 million to EUR10million, EUR15million higher, EUR135 million and EUR145 million. And I feel comfortable in saying that we will be in the higher side of this interval, maybe even better in term of cash generation. We review the positively our guidance of the cash exposure and even in this case I feel I am optimistic at this point of the year.

What for next year? Concern about inflation. Concern about the new variant of Omicron. I see every kind of concern which is affecting probably the vision of our sector in this moment, even today. I see that the share price after these good results decreased largely and surprisingly in my opinion, we have a solid understanding about the future. We believe that the brand has been never, I mean OVS brand has been never well-positioned in the market like today, because of a number of reasons, better stores, once we refurbish the store, we are experiencing strong increase in sales performance on the referred store from a 6%, 7%, up to 30% in some case. So the image of the company is — the brand is great.

Some satellite, some second brand like Croft, for instance, are performing very well. So I believe that all-in-all, from a consumer perspective, the brand is seen as the most sustainable, the most transparent and the one, which is able to satisfy the needs of Italian customer, probably better than anyone else in the market in this moment.

From a gross margin perspective, we will have higher cost as all our competitors and this cost will be transferred in prices. I believe that we will better placed than other companies in transferring a higher cost into prices because of the increased perception of the quality of our brands compared to our competitors and I don’t see a risk of losing our profitability because of this. We are conscious and prudent. We will be prudent in our buying also for next year. We are introducing new brand, new concession in order to increase the level of flexibility, also to react with the third-party brand, to what possibly might surprise us, which means there is still very solid attitude of the demand and what will not be satisfied with increased intake will be satisfied with the increased number of concessions. Most of the concession are doing very well. So I think that there are all the conditions for — still challenging, obviously, because in this business we are used to challenging condition, but a good 2022.

I leave the space to your question. Thank you.

Questions and Answers:

Operator

Excuse me. This is the chorus call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Domenico Ghilotti with Equita. Please go ahead, sir.

Domenico Ghilotti — Equita Group — Analyst

Good afternoon. My first question is related to the topic of the cost inflation. So I’m trying to, you are mentioning some mitigating impact in your presentation press release. Can you elaborate a bit more, first of all on the level of cost inflation that you are facing for let’s say, for the first part of 2022 and on the mitigants that you are implementing?

And second question is on the Stefanel brand, you can just give us an update on the performance after the launch of the first collection?

And the third is on the capital structure, in the sense that you have already mentioned that the repayment [Indecipherable] if you can give us an update also on what can be the saving overall that we can expect for 2022 from the new capital structure?

Stefano Beraldo — Chief Executive Officer

Okay. On the cost pressure, I think that it is clear that every factor will be affected from raw materials to transportation to electricity to dollar increase. So there would be a number of the element that are contributing to generate a cost inflation. The mitigant side are many. From an increased attention to leverage new suppliers, which will generate a better cost condition compared to others. So every year, we have a certain level of churn rate of supplier in order to scout and to find the ones which are more balanced in term of quality and cost efficiency. We are discovering several which we already tested last year, which will represent a good mitigant to this cost increase. Then we are very active in auctions and tender and contractual agreement, based on a medium term in order to mitigate the logistic, the transportation cost increases. So we are not suffering — we are not looking at the 10 times or 7 times cost increase like some smaller company is forced to suffer and we are making that, thanks to our long-term relations with the suppliers, logistics supplier and also to our size and also to our capability to have a proper planning assistant. The fact that we are not forced to buy in the very last minute like some extremely fast-fashion export company might be forced to do, enable us to compensate and to mitigate this aspect, adopting more medium term agreement, which the shipping lines are super happy to have it because this gives them the certainty that the volumes will be secured.

Last but not least, we are not buying that much from China, which is the most expensive from the shipping point of view in this moment and Bangladesh is cheaper than — much cheaper than China in this moment. All these aspects are contributing to mitigate the cost. We are also leveraging new markets like Pakistan, for instance, which is very efficient in this moment. It’s a difficult country, but we have an organization there. We have a presence. We know the market I think better than other competitors, surely better than any other Italian competitors. So I think that from this point of view, we are much better placed than any Italian competitors in suffering and adopting solution in order to mitigate the effect of cost increase.

If this is true, I expect that the average price increase that the Italian market will experience will be higher than they wanted we will be forced to adopt and this means that from a competitive point of view, we should become even more competitive compared to other Italian brand. I think that the only brand which are material in the country, which can compete with us are Inditex and H&M, obviously, which are facing the same problem that we are facing. But at the end of the story, the three of us represent less than 20% of the market and the remaining 80% of the market will be forced to transfer on prices much more than we will do.

The last question was related to the effect of the interest rate reduction. Thanks to the improved financial situation, we expect between EUR6 million and EUR7 million of net savings in term of interest cost.

And the second question was Stefanel. On Stefanel, we are happy for the moment. We are in the very beginning of the story of Stefanel. But basically we are in this moment achieving the same result the Stefanel achieved in year 2018, in spite of having entered in a disciplined approach to margin while Stefanel in that period of was discounting on average 50% their goods and we are only discounting by 20% on average our goods. So with a much more rigid and safe and sustainable marketing strategy, we are achieving the same sales that we’re clearly boosted by excess of discount and that generated — forced Stefanel once still alive, a critical margin result, while we are happy about our margin. So still early to make a final judgment, but the initial outcome is quite positive.

Domenico Ghilotti — Equita Group — Analyst

If I may just follow-up on the cost inflation side. What about the labor inflation? Do you see an issue there? So do you expect to manage also some request from the unions and some revision in labor inflation?

Stefano Beraldo — Chief Executive Officer

They will come. Once the inflation in Italy will become official, so we expect that if in the past it has been 1.5%, it might achieve 2%, 2.2%, 2.5%. So still something manageable.

Domenico Ghilotti — Equita Group — Analyst

Okay, thanks.

Operator

[Operator Instructions] The next question is a follow-up from Domenico Ghilotti with Equita. Please go ahead.

Domenico Ghilotti — Equita Group — Analyst

I wanted to ask you about the the capex plan. So looking at 2022, I don’t understand because I saw that refurbishment were growing and you said quite effective in terms of impact on sales, you are starting to invest in reopening. What can be the plan for 2022 and apart from, let’s say the impact on space, what can be the other priorities in terms of investments of projects that you’re planning for 2022?

Stefano Beraldo — Chief Executive Officer

I think that will be not far from the all the historical level. So you can assume EUR70 million, EUR80 million capex. Part of them dedicated to refurbishments with a still a good and rapid return on the capex, because as I told, the stores that we refurbished generated on average a very healthy 10% on average increase in sales on the store refurbished. And logistic and system will see the other most important portion of investments, not a huge capex spent in new openings. Most of the new openings will continue to be on franchising. So this means zero capex and a very good margin generated by that, either OVS Kids, Blukids Carrefour. This year we opened the plenty of them and we are still in the mood of opening a material number next year.

So most of the capex will be absorbed by a logistic project in order to enter in a real single product and seamless shelf mentality. So basically increasing the level of flexibility of our planning and distribution of single items, single size to the store, based on the sell-through which is generated week after week. So logistic and digital evolution will be the ones what we’d invest the most, together with the refurbishments and some new opening, obviously.

Domenico Ghilotti — Equita Group — Analyst

Okay. And last question is an update on M&A and pipeline of opportunities that you see.

Stefano Beraldo — Chief Executive Officer

We have several small and interesting things that we are looking at. When I mean small, I mean small in term of equity value, eventually. Some opportunity, we decided not to pursue because either we didn’t see enough synergies or maybe the price requested was wrong in our opinion. Some other, we are still monitoring and managing so that other is still open, but nothing still in short-term, ready to come shortly.

Domenico Ghilotti — Equita Group — Analyst

Okay. Thanks.

Stefano Beraldo — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Ipsita Singh with JPMorgan. Please go ahead.

Ipsita Singh — JPMorgan Chase & Co. — Analyst

Hello. Just a couple of quick ones from me, please. Could you just tell me about any delays that you’re seeing currently and has the situation been improving since say, the last couple of months? And looking into the next year, do you believe that there will be a higher promotion in the market because of the delayed arrival of the stock?

And secondly, just on current trading, has December seen a step down from November on a two-year basis? And if so, if you could just give an indication with respect to where it is trending? Thank you.

Stefano Beraldo — Chief Executive Officer

I’m sorry. But I captured the second question I think, but I didn’t and my team didn’t capture the first part of your question. Can you remodulate the first part of your question, please?

Ipsita Singh — JPMorgan Chase & Co. — Analyst

Yes. I think some connection issue there. But it was about the stock delay you’re seeing currently and any promotion expected into next year, given the delayed arrival.

Stefano Beraldo — Chief Executive Officer

No. In term of stock, I would say that because the situation of the stock is much better than one year ago today and also in term of quality of stock, we are better placed, not only term of quantity, but also in term of quality. Likewise, we approach the mark-down this year. So which means that we reduced the markdown. We will continue with the same approach. So unless the need of mark-down will come from a lower market demand, so unless the demand will be very low, we might enter in bigger mark-down but not because of the quality of our stock. We don’t have an issue this year.

Francesco Leoncini — Business Change and Innovation Director

Some of us come to vendor, so that would be the footprint, I understood.

Stefano Beraldo — Chief Executive Officer

Then you are interested in understanding the footprint of our vendors.

Ipsita Singh — JPMorgan Chase & Co. — Analyst

No, I was more talking about the current trends in December, it has been a step down from November.

Stefano Beraldo — Chief Executive Officer

Are they what — sorry, but the connection is not good, [Indecipherable]

Ipsita Singh — JPMorgan Chase & Co. — Analyst

In December, the trading, how less is it with respect to November year or two year.

Stefano Beraldo — Chief Executive Officer

Our current trading in December?

Francesco Leoncini — Business Change and Innovation Director

In November.

Stefano Beraldo — Chief Executive Officer

Current trading in November. Current trading has been okay, has been more or less — has been flat basically, like-for-like, has been flat compared to —

Ipsita Singh — JPMorgan Chase & Co. — Analyst

Well, thank you so much.

Stefano Beraldo — Chief Executive Officer

Compared to year 2020 and also compared to year 2018. Sorry. Compared to year ’19. Yeah, because we are still comparing our turnover with ’19. It has been flat compared to ’19 with lower promotions. I hope I’ve been clear. If the cash flow was — how was the turn over compared to year ’19 because in ’20 we had that the lockdown so turnover is higher than in 2020 in the month of November. The answer is, the turnover has been similar to year 2019, even if in absence or with lower promotions.

Ipsita Singh — JPMorgan Chase & Co. — Analyst

Got it. Clear. Thank you so much.

Stefano Beraldo — Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Stefano Beraldo — Chief Executive Officer

Okay. So in this case, thank you for your attention, and looking forward to meeting you in the next coming session and communication. Thank you. Good afternoon.

Operator

[Operator Closing Remarks]