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Edited Transcript of 210.HK earnings conference call or presentation 29-Mar-17 1:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Daphne International Holdings Ltd Earnings Presentation

SHANGHAI May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Daphne International Holdings Ltd earnings conference call or presentation Wednesday, March 29, 2017 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Che Li Lin

Daphne International Holdings Limited - CFO

* Chih-Kai Chang

Daphne International Holdings Limited - CEO and Executive Director

* Wen Che Shih

Daphne International Holdings Limited - COO

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Presentation

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Unidentified Company Representative, [1]

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Good morning. Welcome to the 2016 Annual Results Announcement Presentation of Daphne International Holdings Limited. Let me first introduce the management representatives: CEO, Mr. Kevin Chang; CFO, Mr. Jerry Lin; and COO, Mr. Jonathan Shih. Now let me pass the stage to the group's CEO, Mr. Kevin Chang, to take you through Daphne International's business review for 2016. Kevin, please?

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Chih-Kai Chang, Daphne International Holdings Limited - CEO and Executive Director [2]

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Good morning, ladies and gentlemen. Thank you for joining us today for our 2016 annual results announcement presentation. Our business environment in 2016 remained challenged -- the business environment in 2016 remained challenging for retailers in China. China's GDP growth decelerated from 6.9% in 2015 to 6.7% in 2016, the lowest in the past 26 years. Online competition became more intense as more shoe brands used online channels to clear their excess inventory with very aggressive promotions. Meanwhile, operating costs including rental, labor costs continued their increasing trend in 2016.

These developments post more challenges to retailers, who have already been plagued by the prevailing weak consumer sentiment. In addition, affected by negative operating leverage together with extra charges for rationalization of inventory, stores and personnel, the group experienced a very tough year in 2016.

The group stepped up its rationalization of stores with a net decrease of 1,030 POS in 2016. Meanwhile, as a result of the aggressive effort to liquidate aged inventory and a prudent approach to inventory management, the group's inventory level decreased by 32.4% to approximately $1 billion as at 31 December, 2016 from approximately $2 billion in 2015.

Despite the rising operating costs in China, stringent expense control measures and rationalization initiatives enabled the group to reduce its operating expenses by 20.4% in 2016. Meanwhile, the group's drive to liquidate aged inventory helped improve its net cash position from approximately HKD 450 million to approximately HKD 690 million.

Leveraging Daphne's strong brand equity, the group's e-commerce business unit continued to achieve strong growth and remained profitable. The group also commenced the groundwork for new branding and product strategies of 2016 -- the group also commenced the groundwork for new branding and product strategies of 2017 since the fourth quarter of 2016.

Now let me invite our CFO, Mr. Jerry Lin, to review the group's financial performance in 2016. Thank you.

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Che Li Lin, Daphne International Holdings Limited - CFO [3]

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Thank you, Kevin. This slide illustrates the annual results of 2016 compared with those of last year. The group's turnover decreased by 22.4% to approximately HKD 6.5 billion. If measured at constant currency, the decline -- the group's turnover decreased by 22.4% to approximately HKD 6.5 billion. If measured at constant currency, the decline was 18.1%.

Gross profit fell by 29.9% to $3.31 billion. Operating loss was HKD 819.5 million. Loss attributed to shareholders was HKD 819.1 million.

In terms of turnover breakdown, revenue attributable to the Core Brands segment was at 88% of the group's total turnover, while Other Brands business increased to 12%.

The group's gross profit margin decreased by 5.5 percentage points year-on-year mainly due to the following reasons: increased weighting of aged products in the sales mix, aged products sold at lower price, highly promotional market. However, new products' gross profit margin was comparable to that of last year.

During the year, the group took aggressive effort to liquidate aged inventory and adopt a prudent approach to inventory management and provision as well as stepping up rationalization of stores. As a result, the group achieved a net decrease of 1,030 POS in 2016.

Extra charges were resulted due to the group's rationalization plan and increased staff severance payment. The group OpEx decreased by 20.4% year-on-year which was broadly in line with the declined turnover under inflationary environment.

In 2016, the group's gross profit margin decreased by 5.5 percentage points year-on-year despite a decline of rental costs and substantial reduction of other expenses including labor costs, depreciation and logistic expenses. Operating profit margin dropped by 6.7 percentage points year-on-year.

During the year under review, as a result of the aggressive efforts the group made in clearing its aged products, inventory turnover days improved by 17 days to 201 days compared with last year. The inventory level continued to reduce by $677.1 million to 1.414 -- the inventory level continued to reduce by $677.1 million to $1.4 billion as compared with that of 2015. After review of its inventory level, the group made an inventory provision of $34.2 million.

In 2016, the group's CapEx decreased significantly by 63% year-on-year due to substantial reduction in new store openings. The average debtors turnover and average creditors turnover were 13 days and 130 days, respectively, while cash conversion cycle was 84 days.

Next, let's look at other key financial indicators for 2016. The group improved its net cash position, its cash and bank balances amounting to HKD 990 million as at 31st December 2016. Benefited from aggressive liquidation of aged inventories, the group net cash increased by HKD 238 million from approximately HKD 450 million in 2015 to approximately HKD 690 million in 2016.

Now I will pass to our COO, Mr. Jonathan Shih, to take us through our operational highlights of 2016. Thank you.

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Wen Che Shih, Daphne International Holdings Limited - COO [4]

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Thank you, Jerry. During the year under review, the group accelerated the rationalization of stores with a net reduction -- during the year under review, the group accelerated rationalization of stores with a net reduction of 1,030 POS including 999 Core Brands POS and 31 POS from Other Brands. The group's total POS was 4,900 at the end of 2016. In view of the soft market condition -- in view of the soft market conditions, the group accelerated closure of nonperforming stores since the second quarter of 2016. As at the end of 2016, the number of POS for Core Brands totaled 4,598, represented a net reduction of 999 POS including 110 directly managed stores and 189 franchise stores.

In terms of breakdown of the group's Core Brands sales network by city tier, Tier 3 to Tier 6 cities continue to represent approximately 2/3 of our network, similar to that of last year. The group now places emphasis on store quality in its sales network development. We will carefully review our channel strategy and make adjustments accordingly to drive better balance in channel mix. In the long term, the group will continue to maintain greater representation in lower tier cities.

In 2016, same-store sales recorded a year-on-year decline of 11.7%, and average selling price decreased by 4.8% to RMB 159. However, the average selling price and gross margin of new product launched in 2016 were similar to those of 2015.

In 2016, the group's turnover of Core Brands business declined by 23.1%. If measured at constant currency, the decline was 18.8%. The drop was mainly due to the year-on-year reduction of 17.8% in store number and negative same-store sales growth.

Gross profit margin decreased by 6.4 percentage points due to increased weighting of aged products in the sales mix and more aggressive discounting to liquidate aged inventory.

Operating profit margin decreased by 7.8 percentage points mainly attributable to decrease in sales, substantial decrease in gross profit, negative operating leverage, prudent inventory management and provision and charges for rationalization of stores and personnel. As the turnover growth of e-commerce did not offset the decline of turnover in mid- to high-end brands and other brands, business turnover -- as the turnover growth of e-commerce did not offset the decline of turnover in mid- and high-end brands and other brands business -- as the turnover growth of e-commerce did not offset the decline of turnover in mid- to high-end brands and other brands business, turnover of Other Brands business decreased by 2.4% to HKD 813 million year-on-year.

Gross profit margin of the Other Brands business slightly dropped mainly due to increased weighting of e-commerce business sales. In addition, the mid- to high-end brands performance slightly improved with reduced losses, despite the number of POS reduced year-on-year by 9.3%.

Benefited from increased contribution of profitable e-commerce unit, Other Brands business recorded an operating profit of HKD 7.8 million. Leveraging Daphne's strong brand equity, the group's e-commerce business unit remain on track for sales growth and continue to be a profitable business unit. Its sales growth is mostly driven by sales revenue -- leveraging Daphne's strong brand equity, the group's e-commerce business unit remained on track for sales growth and continue to be a profitable business unit. Its sales growth is mostly driven by sales volume. The e-commerce business recorded an increase in gross margin as the group enhanced its promotional strategies.

Now let me invite our CEO, Mr. Kevin Chang, to summarize the group's outlook.

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Chih-Kai Chang, Daphne International Holdings Limited - CEO and Executive Director [5]

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Thank you, Jonathan. Now I'm going to share the company's strategies and outlook for 2017. We would like to take on a new look while the group is turning a new page this year.

First of all, we have established a new corporate identity system and designed new logos for the group's core brands, Daphne and Shoebox. Here, it shows Daphne's new brand logo. These new brand logos have been introduced in promotional activities for the new spring and summer collection of 2017. In addition to the new logos, the group also plans to introduce new store images to project a new and vivid brand image. Here, it shows Daphne new store image concept. Here, it shows the new store design sketch of Shoebox. In order to drive differentiation of our Core Brands from the competition and meet more sophisticated customers' expectation, the group will carry out major brand revamp program in 2017. Apart from the new brand logos and new store images mentioned, the group will also initiate crossover projects and adopt new marketing approach.

The group has appointed professionals who lead the design process for the revamp of brand identities. In regard to a new brand image, we have placed emphasis on the stylish and chic elements to enhance our appeal to young and more discerning customers today.

The group's new brand identities aim to tell customers that Daphne is different from other brands through a young, contemporary, trendy and vibrant brand image. To make the brand even more interesting and alluring, the group will initiate crossover projects in partnership with upcoming star fashion brands, online key opinion leaders and celebrities to broaden its appeal for different niche groups of customers and offer a platform for its marketing.

As the most significant crossover project in 2017, the group will collaborate with Opening Ceremony, a hip and cool fashion brand from the United States. The first crossover collection will be available in fall 2017. Opening Ceremony is a star fashion brand from the United States which is highly regarded by fashionistas. Leveraging its unique design concept, the brand is influential in the fashion industry. In recent years, Opening Ceremony has been collaborating with major brands and leading the fashion trend. The group expects to increase its appeal to different types of customers through its collaboration with Opening Ceremony.

As part of the brand revamp program, the group will also adopt a new approach of marketing. The group will first conduct a thorough review of its marketing programs to enhance cost efficiency in its future marketing activities. In addition, we'll place emphasis on online marketing and strengthen online communication with young customers.

Meanwhile, the group will leverage the upcoming crossover projects and seasonal product launches to drive sales growth. The group will also expand and restructure its marketing team to enhance its marketing effectiveness and efficiency, and appoint professional marketing agency to conduct integrated marketing campaign.

Apart from brand revamp, another key strategy of the group is product upgrade, which includes product design and product quality. In addition to expanding and reorganizing its product design team, the group has appointed a prominent designer with rich experience in renowned global and regional women shoes brands to lead the group's design team and help revitalize the creative processes.

The group plans to rearrange its product range and portfolio to offer more diversity in the products of Core Brands, as well as to adopt to the recent market changes and latest fashion trends. Meanwhile, the group will restructure its production supply chain management functions to support the upgrade of product quality and design. Through a major product upgrade, the group aims to enhance the brand proposition of the group's Core Brands and therefore, increase its competitiveness. The product upgrade also strengthens product differentiation against local regional brands and offer opportunity to increase the average selling price in the future.

Consolidation of the group's store network has almost completed. The group will continue to optimize its sales channel mix by decreasing the proportion of street stores and the total number of retail outlets. The group may consider to have a net increase in the number of its stores in 2017 if the retail market becomes more stable in the coming months. Meanwhile, the group will pursue higher penetration in channels offering more stable performance and foot traffic. Besides, the group will consider a gradual expansion of its franchise scheme.

The group will make every endeavor to sustain the strong growth momentum of its e-commerce business. For instance, we'll leverage our extensive store network to accelerate the integration of online, offline businesses to gain synergy. We'll increase pre-sale offers and drive more interaction with online customers to increase their loyalty and sales. We'll also enhance cross-functional efforts to improve performance of our e-commerce business.

The group has pledged to enhance customer shopping experience so as to freshen up customers' perception on its Core Brands and increase its competitiveness. Therefore, the group will focus its efforts of operational management and customer service -- therefore, the group will focus its efforts of operational management and customer service. For instance, the group will enrich its training system and offer more training to all levels of its front-line staff. We'll also adopt a new standard of service, add new elements to the service culture and apply service monitoring scheme more widely in our store operations. In addition, the group will invest in its people, both frontline and back office to enhance staffs' capability and efficiency, including building a talent pool, enhancing various incentive schemes.

In short, the group business strategy in 2017 is to enhance customers shopping experience and drive sales through an uplift of Core Brands image, upgrade of its products and continuing its optimization of sales channels, both online and offline. By being focused in 2017, we'll invest in key areas. We will be dedicated in driving differentiation, increasing our competitiveness and enhancing customer shopping experience. We'll be disciplined and diligent in executing our strategic plans. Our target is to revive our growth path and achieve turnaround as soon as possible. Our vision is to become the most popular mass fashion brand with leading market share and customer reputation, while creating superior shareholders return. Thank you, everyone.