TRANSCRIPT BG 1H 05 per invio - Corporate-ir

TRANSCRIPT BG 1H 05 per invio - Corporate-ir

First Half Results 2005 Conference Call
21 September 2005
Operator
Good evening, ladies and gentlemen. Welcome to Benetton Group's conference call on first-half
2005 results. The entire conference call and the Q&A will be recorded. Forward-looking statements
are based on the current expectations of the management team.
I would like to introduce the speakers of today's conference call, Benetton's CEO, Mr. Silvano
Cassano; Benetton's CFO, Mr. Pier Francesco Facchini; and Mrs. Mara Di Giorgio, Head of
Investor Relations. Mr. Cassano, please go ahead. Thank you.
Silvano Cassano - Benetton Group - CEO
Good afternoon. As you might have seen by now, the results of the first semester are broadly in line
with our expectations; if anything, slightly better, although it's nothing to get excited about.
I just want to remind everybody that as we said in the past, our spring-summer season is not being
very good, and that is why in March we announced the strong initiative in terms of mark-up &
consumer pricing, which would then included in our guidance for the year.
The beginning of the new season, autumn-winter, has started on a positive mood, although I keep
repeating, it's early days and we have a long way to go, but certainly the first indications are
positive.
I also want to stress out that last week we kicked off the Barbie Loves Benetton project, the joint
venture with Mattel, the Corporation Mattel. And it has been received very well in the stores, in the
shops, and as we stressed in the past, we're moving very aggressively also to bring fresh product
into our network, and in September we will have the cashmere project, which we think will do
well.
So all in all, we confirm our commitment of investing time and money into the network to bring
fresh product at a competitive price into our stores to make sure the consumer gets attracted by our
new visual merchandising, our new product mix, and our new pricing strategy.
Having said that, let's now look with Facchini, our CFO, to the details of the semester results.
Pier Francesco Facchini - Benetton Group - CFO
Thank you, Silvano, and good afternoon to everybody.
As you all know, this is the first time the Benetton Group published the financial statements
according to the new IFRS accounting principles. Therefore, both the first-half 2004 and first-half
2005 are stated according to these new accounting principles. In particular, the first- half 2004 of the
previous year is the one which was presented and commented during the conference call held on
September, 8th.
Also, the business segments we will refer to during this presentation are the ones commented on
that occasion, so basically the apparel segment, including both casual wear and sportswear; the
textile segment, including both business toward third parties and inter-company business; and other
segments, basically includ ing what is left of the sports equipment segment after the disposal of the
business in 2003.
Having said that, let's get to the numbers, starting from the consolidated income statement.
Consolidated revenues are down by 2.1% from 860 million to 842 million, a decrease of 18 million,
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21 September 2005
taking place basically 100% in the core apparel segment. We will come back to the main drivers of
this revenue trend in the next slide.
Gross profit decreased by 3.1% from 380 to 368 million, a decrease of 12 million with quite limited
decrease in terms of gross margin from 44.2 to 43.8%.
In particular, in the apparel segment, gross margin was basically stable from the previous year, 45.8
versus 45.9%, as a result of different components, different factors. First of all, the decreasing
impact of the mark- up and pricing policy, which accelerated in the second quarter in comparison
with the first quarter, having the fall- winter 2005 merchandising more aggressive mark- up and
pricing policies, as you know. This decreasing effect was only partially balanced by the rising
manufacturing delocalization, bringing significant benefits to our profit and loss account in the firsthalf - as I will comment in the next charts- and also partly balanced by a different channel mix more
in favour of retail having retail a slightly higher weight within our revenue mix in comparison with
the previous year.
Let's come to the EBIT - earning before interest and taxes. You see a decrease of 7 million from
102 million in the first half of the previous year to 95 million this year, a 7% decrease with EBIT
margin down from 11.8% to 11.2%. In looking at these figures you have to bear in mind that the
first-half 2004 was significantly affected by non-recurring charges in the amount of 14 million,
whereas non-recurring charges in the first half of this year are only 1 million. So there is a decrease
in these non-recurring charges of approximately 13 million. If we, in a way, take into account this
factor, the trend in operating margin is quite in line with the one that I commented regarding the
first quarter figures last May.
Net income reached 63 million, 7.4% on total revenues. Below the EBIT line we have lower net
financial expenses, by 1 million approximately, due to the lower average net debt in comparison
with the previous year. We had a reduction of taxes, in particular due to the lower tax rate down
from 26% last year to 25% in the first half of this year. On the other hand, we had a worse
contribution from ForEx results, which was positive last year, which is slightly negative this year
due to exchange rate volatility.
We go to the next page where we have the breakdown of revenues by segment. Let's focus on the
apparel segment, with a decrease of revenues by 2.6% from 790 million to 769 million, and let's
look at the main drivers of this decrease.
First of all, we had the well-known mark-up pricing impact amounting to a minus 4.5%, increasing,
as I said, in comparison with the first quarter when it was -3.3%, as I said, having the fall- winter
2005 collection the more aggressive pricing and mark- up policy. This effect, of course, is expected
to increase farther in the second half because the second half will consist 100% of the collection
fall-winter 2005 and spring-summer 2006 whereas the first-half consisted approximately 45% fallwinter 2005, 55% spring-summer 2005.
The second effect is the volume effect, -6.6%, slightly recovering from the first quarter when it was
-9.8%. So we had the second quarter at approximately -4%. The reason is quite simple. Volumes
were rather weak, as you well know, in spring-summer 2005 and, as Silvano said at the beginning,
we're seeing some recovery in fall-winter 2005 volumes.
The third driver is a positive one, the mix effect, a plus 8.4%. This effect was already there in the
first quarter. It is basically made of two components: there is a temporary component due to the
delivery mix which was unsatisfactory in the last part of 2004, both in terms of product and brand
mix and this is coming back as a mix improvement in the first part of this year; then there is a more
structural and important mix effect related to the collection fall- winter 2005 and having to do in
particular with the increase of hanging garments revenues within the revenue mix.
A short mention also for our retail revenues. They reached 134 million, 31% up from the first-half
2004, when they were at 102 million. This increase is more than entirely due to the opening of new
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stores: we added approximately 60 new stores in average from the first-half '04 to the fir st- half '05,
whereas like for like sales on a currency neutral basis are down, year to date June, by 4.8%. That's a
recovery, that's an improvement, from the first quarter of this year: you surely remember that we
commented a decrease in like for like sales in Q1 by 6.7%, we had a recovery in the second quarter,
and we achieved a -2.7%.
The next page we see the cost of goods sold and selling expenses. At the consolidated level, cost
of goods sold is down by 6 million. The decrease is more significant in the apparel segment, a
decrease of 11 million, which is basically the result of the rising sourcing in delocalization. The
delocalization in the first-half is bringing a benefit to our apparel profit and loss account of
approximately 13 million with the delocalization percentage rising to 71% from the 66% that we
achieved on average in the first half of the previous year. I remember that the average delocalization
for the full- year 2004 was 68%.
The next page we see general and administration expenses. At the consolidated level we reduced
G&A by 5 million from 218 to 213 million, 2% down more or less. This trend is affected by two
major components: on one hand we have the increase in retail costs due to the opening of new
stores; on the other hand we have the decrease in non-recurring charges that I mentioned at the
beginning. These two effects are basically offsetting each other, so we can say that this decrease in
G&A was achieved in the core business, and this confirms the cost-cutting efforts of the Group and
the good achievements in addition to the already satisfactory results achieved in 2004.
The next page we see the breakdown of EBIT by business segment. At the consolidated level,
EBIT is down by 7 million, as we said. 6 million of this decrease took place in the apparel segment,
so let's look at the main drivers of this trend.
We have two basic components. First of all, an improvement of retail profitability with an EBIT
increasing from a loss of 8 million in the first- half 2004 to a 2 million loss in the first-half 2005. So
a 6 million improvement. This improvement is mainly due to the recovery, to the improvement, in
terms of like for like sales that I said, from Q1 to Q2 in particular, and is also due to the particular
good development of our business in Korea. We have 2 million higher EBIT in that country with
revenues booming by around 45% from the previous year.
On the other hand, EBIT in wholesale decreased by approximately 13 million as a result of five
main factors. The first one is the well-known mark-up pricing effect on the negative side. Then we
have a slightly negative joint effect volume and mix with a negative volume effect exceeding the
positive mix effect. Driver number three is the delocalization effect, positive for approximately 13
million on the apparel EBIT. Driver number four is the reduction in general expenses and sales
commission in particular. Driver number five is, as I already said, the reduction in non-recurring
charges, down by 12 million approximately in the wholesale business.
We go quickly to the next page, where we have our EBITDA. At the consolidated level EBITDA
decreased by 10.6% or 16 million with a decrease in EBITDA margin from 18.2 to 16.6%.
The next page we see the already mentioned decrease in net financial expenses down by 1 million
from 11 million to 10 million. This resulted from the decrease in average net debt in the first half,
down from 506 million in the previous year to 463 million in the first half of this year.
As you see, the ForEx results was likely worse than in the previous year. It was positive for a
couple of million euro in the previous year; negative by €1 million this year.
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The next page, number nine, we have the consolidated balance sheet. As you see, the overall
reduction in net capital employed is basically resulting from the decrease in working capital, down
by 56 million from 794 to 738 million. The 9 million assets to be sold refer to two properties, one
former factory in the textile segment and the residential part of a real estate property in Italy, which
are about to be sold or already sold in one case.
The third important remark is especially for the net financial position with a reduction from 568
million in June 2004 to 475 million June 2005, a decrease of 93 million, despite the fact that in July
2004 we paid the residual part of a substitute tax for 27 million, and also the fact that in May 2005
we distributed a dividend by 62 millions.
This balance sheet is also impacted by the consolidation of the new Turkish joint venture that we
announced last May. Precisely, we have an impact on net capital employed for this consolidation
for 18 million and 6 million on the net financial position.
The next page shows the breakdown of working capital. As you see, the decrease in working
capital is mainly the result of a decrease in trade receivables from 773 to 708 million. Of course the
decrease in wholesale revenues plays a role, but we can see also an improvement in receivable
outstanding days. And also, the slightly changed revenue mix more in favor of retail is affecting this
decrease in receivables. And you see it is also generating an increase in inventories which are up by
62 million from the previous year.
On the next page we have the cash-flow statement. Free cash flow improved from the previous
year from 32 million to 43 million. Basically the improvement was in cash from operating
activities, up from 78 to 92 million in the first half of this year. And as you clearly see, it is
basically due to a lower growth of working capital in the first half. The growth was 60 million last
year; it was limited to 33 million in the first half of this year. The investments are slightly
increasing from the previous year from 46 to 49 million, including 10 million increase in financial
assets, in particular referring to the acquisition of the 50% stake in the Turkish joint venture, as I
said at the beginning, for an investment of €6.7 million.
As last we have the usual breakdown of operating investments. The 43 million investments
consist of 29 million network investment, by far the largest part; 6 million in real estate and 23
million commercial investments; 9 million are production investments for 6 million in the textile
segment; 5 million are other investments related mainly with IT projects and basically maintenance
investments.
So the presentation is finished. I think we can go ahead with the Q&A session. Thank you.
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