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Edited Transcript of 787.HK earnings conference call or presentation 14-Nov-19 10:59am GMT

Half Year 2020 Global Brands Group Holding Ltd Earnings Call

Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Brands Group Holding Ltd earnings conference call or presentation Thursday, November 14, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Richard Nixon Darling

Global Brands Group Holding Limited - CEO & Executive Director

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, everyone. Thank you for joining the Global Brands Group Holding Limited Fiscal Year 2020 Interim Results Analyst Briefing.

Here today on stage with us are Mr. Rick Darling, Chief Executive Officer and Executive Director; Mr. William Fung, Chairman; and Mr. Mark Caldwell, Chief Financial Officer of Global Brands.

We will begin with a presentation, followed by a Q&A session. Now I'd like to invite Rick to begin his presentation. Thank you.

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Richard Nixon Darling, Global Brands Group Holding Limited - CEO & Executive Director [2]

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Thank you and thank you all for coming. I just said to William this is the brave soul group that was able to make it here, so we appreciate you taking the time and energy. I know this is not a easy time to be able to travel right now in Hong Kong, but thanks for coming, and hopefully, we can make it productive for you.

So welcome to our interim results for fiscal year 2020. Hopefully, we'll be able to give you a pretty good overview of what's happened with the business in the first 6 months of this year and some indication of what we're thinking about in terms of initiatives that we're planning on working on going forward.

I want to just talk for a minute about this slide and the purpose statement that we've developed for the company, the impact the world with brands people love. You all know that we have gone through a significant restructuring and that this year was really about getting the company rightsized in terms of the operating costs and the margins and putting the P&L in a sustainable level. But while we were doing that, it was also very important, particularly for our people, to understand why we were doing it and why we are going to try to build this business as we go forward. So this statement was really the result of work that was done through discussions of hundreds of our staff around the world in different offices to get a feel for what they're thinking about why they like to come to work at Global Brands Group and where we should be going.

And obviously, it's 5 or 6 very clear, very important worlds -- words. Impact the world, obviously, has a lot of meanings to it in terms of having great brands but also, I think, reflected our people's feeling about becoming a leader in sustainability and environmental impact and social initiatives and being able to support the communities that we do business with. And I think that's going to be a key feature for us going forward. Of course, brands is what we are. We are a builder of brands both internally now and by using strategic relationships with our licensors. And then brands that people love really reflects the idea that we want really solid, consumer-connected brands as we look at the business going forward. So our purpose statement today of impact the world with brands people love becomes something that each day we kind of look at as our filter for decisions that we're making about the business.

As you know, the business now is segmented into 3 segments, 2 wholesale segments and our service segment. The North American businesses and European businesses are both traditional wholesale-type operations. Brand Management is a service-related business. All 3 have become very critical to the company, and I think we're pretty well balanced in terms of being able to look at all 3 as potential growth initiatives. North America now has our fashion apparel business; our footwear business; and accessory business; and what we have now defined as the sports and lifestyle group, which was really the group that was built around Spyder and now includes Dakine and Saga, 2 new brands that we instituted this year that give us some seasonal balance to the ski business that we have with Spyder. Our European business, I think you saw last time that we were talking about it in 2 segments, apparel and -- footwear and apparel business -- footwear and accessory business and an apparel business. We now look at it as a pan-European business of apparel, footwear and accessories. And then, of course, Brand Management is broken into 2 businesses, our relationship with CAA. So CAA-GBG is a joint venture with Creative Artists Agency in California, and Seven Global is our joint venture with David Beckham. And I would say that the Brand Management business is increasingly important to our business model, continues to grow and is at this stage, really, the more dominant business in that category today.

First half results, I think I'm pleased to report, that -- are significantly improved over the same period in 2019. We had set 3 goals going into this fiscal year. One goal was to significantly reduce the operating costs of the company while remaining stable on the top line and improving our margin. And I can say that we've done all 3. I think it's a testament to the team that really has looked at those 3 goals and spent the time and energy to make sure that we were accomplishing them.

Our top line declined by about 5%, really based on businesses that didn't exist this year that were existing last year, some home businesses and categories that we had earlier discontinued going into the beginning of the year and some effect on top line of the foreign exchange situation in Europe, but fairly small difference. Total margin had significant improvement, 600 basis point improvement from last year to over 33.5% -- 33.4%. That was really done in 2 ways. The first way was the remerchandising of the business and focusing our attention on regular price sales versus off-price sales, and that was a big part of this change. And the second part was the move that we had discussed about, moving our sourcing out of the U.S. and Europe to be closer to the needlepoint in Asia to begin to impact the FOB pricing for the company. Both of those things have left -- have led to this improvement.

Operating profit or operating loss, in this case, improved significantly from a $105 million loss last year to a $50 million loss this year, and that includes about $26 million in onetime, one-off expenses that took place in the first half of the year, fairly significant amount that we don't see as recurring going into next year. So in effect, had we not had the one-off expenses in the first half, we would have had about a 75% improvement in our operating profit position. And we think that, that will continue to improve, and that would have fallen all the way through the rest of the P&L right down to the EBITDA. And I think the significant line item here really for a business and a business that's recovering is the EBITDA number. So we went from a $40 million negative EBITDA in the first half of last year to an $80 million positive EBITDA this year. So almost a $120 million swing in EBITDA performance for the company.

This really gives you a feel for the last 18 months. So I thought it was important to show a bit of the progression of where we've been. So this progresses from the first half of 2019, where we're really doing the comparison this year, into the second half of 2019, which was post the Centric transaction that we did in North America, and then the first half of this year. And really, I think that pretty clearly we've been able to improve on not just the revenue side and keeping it stable but improve the margin performance over that 18-month period and the EBITDA performance. So it's not a 6-month and 6-month comparison. I think we can now say that we are on trend to continuing to improve the performance of the company.

Our operating cost reduction, I think you will all recall, was really the key initiative this year. If you recall, we initially had a goal last November that we announced of reducing the operating costs by $100 million. We reset that goal with you in June when we met and had reset that goal to $140 million. I'm pleased to say that we are now on track this year to achieve about $170 million operating reduction, $70 million of which we've accomplished in the first 6 months of the year, and the balance will be accomplished before the end of the fiscal year. So the actual operating costs going into the year for the business were around $630 million. And at the end of the year, we'll be in the $450 million to $460 million range. So it puts us in a position now of having our operating costs in line with the business -- the size of the business after doing the transaction that we did last year and gives us a much more sustainable business model. We actually did that by decreasing costs across the board.

So selling and distribution expenses declined. Those expenses include our actual warehousing and logistics of delivering goods to customers. We actually have consolidated the warehouse locations globally from 35 to 8, which was a big, obviously, change in the way we were doing that distribution, and we are leveraging our relationships with the distribution centers much stronger than we have in the past. These costs also include our distribution costs. So in Korea, we obviously have a retail operation. And selling and marketing includes the rents on those spaces, along with the rents on concessions in Europe, where we have some concession businesses in Italy, and then typical marketing expenses that are affecting the brands. On the merchandising and administrative side, that is really, I would say, back office. It includes staffing reductions, which was fairly significant, obviously, in order to achieve this kind of a number. The actual reduction in staffing was fairly significant for the first 6 months but also includes rent expenses, IT expenses, corporate finance expenses. So across the board, if we were to list all of the expense categories, with the exception of those that we may not be able to control like depreciation or something like that, we've been able to reduce expenses in almost all categories of the business.

A little bit on the macro environment. I think it's funny because, after now looking at this first statement, it's kind of maybe understated to say that the U.S. political environment is volatile. I think it's maybe a bit of an understatement. It's probably the craziest environment that we've seen politically in our lifetime, and I don't think that's going to rest anytime between now and the election. That said, there was a lot of talk coming out of some of the political parts of the dialogue about the company and the economy going into recession in 2020. I think that's really probably not the case. I think we're pretty confident to say that, number one, in an election year, it would be very rare to see the economy go into recession. And then secondarily, all the indicators taking place in the U.S. economy right now remain strong in terms of employment numbers and inflation numbers and interest rate numbers and corporate earnings. Wages are actually on the rise finally after many, many years of being stagnant. So I think, for at least the foreseeable future, we think the U.S. economy remains vibrant.

That said, retail sales in the last 3 months, particularly in the department store segment, which is an important part of our customer base, have been pretty weak. So August, September and October, all 3 months showed decline in year-on-year sales in the department store segment, albeit the e-comm segment grew but not at the same rates it had been growing in the past. I think the 3-month growth rate was about 18%, which is still significant but certainly lower than what we've seen in e-comm in the past. So a little bit of a softening, I would say, at retail and particularly the brick-and-mortar guys. There continues to be a migration to e-commerce, which is pushing now brick-and-mortar traditional retailers to reduce floor space. We've had 9,000 stores in the U.S. -- store locations in the U.S. close this year so far. The prediction is about 11,000 stores will close between -- for the year between -- so the balance, [we thought], between now and the end of the year. That will be the largest single reduction in retail selling space in the United States on record. While that's happening, we also have about 6,000 stores that have closed in Europe. So I think this is a trend that has been happening for the last few years and is continuing, and that is the actual reduction of real retail selling space, regardless of whether it's a store closure or a different use of floor space in particular locations. The brick-and-mortar retailers are continuing to consolidate. That being said, 3,000 stores have opened in the U.S., and some of those stores relate to e-comm companies that are now moving into more of the traditional retail space to really become omnichannel retailers at that point.

And one interesting thing recently, while we talk about the department store business in decline and we talk about retail at brick-and-mortar being different, there were some really spectacular retail spaces opened this year. So those of you that have been in New York and maybe had an opportunity to see the remodeled Saks Fifth Avenue store in New York -- and it's really, I mean, amazing, really truly amazing. And now with the relationship that they're established with Barneys, there'll be a 50,000 square foot Barneys store inside of Saks Fifth Avenue on Fifth Avenue, which is really innovative. More importantly, Nordstrom's, for the first time, opened up a tower that is beautiful. I mean really an incredible experiential space with 8 restaurants, personal shopping, delivery to home. I mean they're really, really reinventing what the department store might look like. And again, that's done in Manhattan. And Adidas opened up a brand-new experiential store. So I think there's -- while there's a lot of closing happening and a lot of conversation about department stores in decline, I think the good guys are really realizing that there's an opportunity to build exciting new space in the market. And so I think the idea that department stores might be dying, I think, is grossly exaggerated at this point. And there are some good spaces.

On the trade front, there's progress -- appears to be progress being made between China and the U.S. on the trade side. We are hopeful that an agreement for what's being called Phase 1 trade deal could take place actually over the next few weeks. I would be the first one to say, though, that, that really kind of changes on a day-to-day basis depending on the mood of President Trump and the mood of Xi Jinping, but it seems like they are working towards trying to do a deal, at least on lower-hanging-fruit parts of the discussions they've been having, relatively quickly. And part of that discussion is right now including the rolling back or deferring of some of the tariffs that the U.S. had put in place and China had put in place. Now whether that actually happens or not will be -- remain to be seen over the next few weeks, but there is some discussion of deferring the 25% tariffs on toys and electronics and some apparel products that were to go into effect in December and deferring those for the time being and some discussion about even rolling back the 15% tariffs that were put in on footwear and apparel categories that affect us in September and possibly rolling part of that back.

That said, the tariff impact on GBG is actually quite minimal at this point. We have, as you know, been moving for the last year to mitigate the tariff situation on our production in China. We continue to do that and have moved a lot of production to India and Vietnam and Bangladesh. About 65% of our footwear now has been moved out of China, which was the biggest category of product that we had in China, and apparel has continued to migrate. And I think that probably is settling to a point now where we're at the right kind of a mix in terms of our product in China. I was asked recently, if the tariffs went away, would we move back to China? Probably not. I think there's other mitigating factors, but it might slow down our desire to move any further. I think that's probably more the way we'll -- from my perspective, I think in our supply chain there will be a need for Chinese production. Chinese manufacturers are still more innovative than any other manufacturers in the world. They can do now smaller quantities faster and at higher quality levels than other markets, so there is a place for a company like Global Brands Group to have a position in China going forward into the future.

On the trade side, U.K. and Europe remains weak. It's been weak. Most of our business is concentrated in the U.K., Germany and Italy. All 3 markets are slightly different, but I would say none of them are really robust at this point. So we're operating in an environment that is fairly soft and continues to be soft in Europe. As I indicated before, 6,000 stores have closed in Europe as well. So the trend that's taking place in the U.S. is also taking place in Europe.

And then last but not least, obviously, there's still tremendous uncertainty around Brexit, although it seems to be coming to a head over the next few months. We've kind of been thinking that for the last 6 months or a year, that this thing would be resolved. From our perspective, it's putting a little bit of a damper on consumer sentiment in the U.K., obviously, because there's some uncertainty about what it's going to look like either at the end of January with a hard Brexit or sometime after that with something softer. I think the elections probably will tell us a lot in terms of how the Brexit progresses going forward, but it remains still uncertain, and I think that, that casts a bit of a difficult consumer sentiment in the U.K.

We've set these 5 initiatives for the second half of the year. We are still focused, we are not done with the OpEx reduction. I can say that we are not necessarily setting another public goal beyond the $170 million, but we will go beyond it. And we are looking at a number of areas now that can -- that we can continue to improve and create efficiencies in our operating expense line, really not just to finish up now the 2020 year but to get ourself ready for 2021. We are further reducing our working capital requirements by managing our inventory in a much more profound way than the company has in the past. We are not buying speculative inventory that ultimately ended up in the hands of the off-price market, and we are focusing on regular price retail sales and inventory that is matched to orders as opposed to inventory that is being bought on speculation. In addition, we are working on a factoring program both in the U.S. and Europe that would help us with our accounts receivable a bit better, particularly in Europe. And we've extended payment terms with most of our supply base now in cooperation with our supply base over the last 6 months and extended those terms slightly to give us a little bit better position from a working capital standpoint. We're very focused now on ensuring that we continue to improve working capital over the next foreseeable future.

We are continuing to rationalize the existing brand portfolio. We have eliminated some brands during the first 6-month period. We are now looking at the rest of the portfolio very objectively and determining whether there are still brands that may be underperforming and may or may not be part of the future of the company. And we're being very open about it and objective about it and taking a deep look in those brands that we think that we can improve and, if we think that we really can't improve them, starting to put together a strategy to potentially exit some of them. But I think this idea of rationalizing our portfolio in a company like ours is something that should be done all the time. It's not something that you do once in a while. It's something we need to be looking at on a regular basis. Just like a stock portfolio, there are things that are good 1 day and maybe not so good in a year or 2 and so you sell them. And so in this particular case, we need to look at our brands and be objective about their performance.

That being said, for those of you that have been involved with the company for a while, you'll recall that the original thesis behind LF USA and then GBG, the spin-off of GBG, the original thesis was to develop strong relationships with strategic brand owners that had active, live, important consumer brands. And post the transaction that we did last year, we've kind of left that a little bit. So we are now focused in developing dialogue and conversation with a number of very significant, strong consumer brands that are owned by strategic brand owners and in categories that we can do for them like footwear that they may not want to do themselves. And that was actually the original premise of how we built this business. The original premise was to be best-of-breed supplier of those product categories that major brand owners didn't want to do themselves but would shepherd the brands themselves and really take care of the brand. We got away a little bit from that, I think, over the last couple of years, and we're now focused back on that part of adding to the portfolio. I won't obviously be able to get into specifics on it, but I would say that, hopefully, over the next few months, we'll have some news to share in terms of what that might look like, more likely for 2021 and beyond, not to impact this year.

And then establishing greater integration of the U.S. and Europe is a key focus of ours. We've now hired a new President in Europe. Eno Polo, who is sitting in the back, the second to the back row, has rejoined the company after being with the company a few years ago. He was President of Havaianas in Europe, joined GBG, left GBG, became President of Havaianas in the U.S. and now come back to GBG. So we've told him, well, that's it. You come back, get away with that too many more times in terms of trading between the 2 companies. But Eno joined us in September and already has made a big impact on how he views our European business. Eno is working very closely with Ron Ventricelli, who you know is the President of North America. And Eno and Ron are really looking at, wherever possible, leveraging each other's capabilities.

So in Europe, we have great capability to design accessories, and now Europe will become our design center for accessories, whether it's a U.S. brand or a European brand. We have great brands in the U.S. in footwear that had never been exposed to Europe. Those brands are now being marketed in Europe and some of the brands that we have licenses on in Europe are being marketed in the States. So we still have 2 distinct geographies. We think there's a lot that we can accomplish by integrating them a little closer.

On the operational side, our footwear platform now is global, so there is no European or U.S. sourcing platform. It's one sourcing platform globally for all the footwear brands, and that's given us some pretty good leverage in terms of being able to take advantage of factory relationships and being able to do the product development in a much more efficient way.

So that really wraps up the presentation. I think I can sum up from my perspective that I'm pretty pleased with the first half results. That said, we have a lot of work to do.

So I'm pleased with the fact that we've improved in 2019. We still are in a loss situation, so that has to be addressed. And I think that while we made a lot of progress in the first half, we're looking to really make a lot more progress in the second half and then, of course, going into 2021. And I give credit to our -- really, our management team and our staff because this was heavy lifting during this period of time to make these changes, and I think it was approached positively, as positively as possible when you do this kind of a restructuring. And I think that we involved a lot of people, and there was a lot of communication so that people in the company knew what was happening. And I think people took it very seriously after the Centric transaction. I think it was pretty clear that we had to make some changes. So it wasn't shocking to anyone that we had to kind of really dig in and do it. And I think that will continue as we move forward.