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Edited Transcript of 787.HK earnings conference call or presentation 30-Jun-20 10:59am GMT

Full Year 2020 Global Brands Group Holding Ltd Earnings Call

Jul 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Global Brands Group Holding Ltd earnings conference call or presentation Tuesday, June 30, 2020 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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Richard Nixon Darling, Global Brands Group Holding Limited - CEO & Executive Director [1]

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Hello. I'm Rick Darling, the CEO of Global Brands Group, and I want to welcome you to Global Brands Group annual result announcement for our fiscal year 2020. We are doing this on a prerecorded basis this year because we're unable to get together with all of you in a room. And so we're using the new technologies that are allowing us to work remotely and discuss remotely and to do our result announcement remotely.

Let me start by saying that, as I mentioned, I think in the interim results from last year, we have been working on a new purpose statement for GBG. And impact the world with brands people love is our reason for being today. And I think it's particularly appropriate given what the world has been going through over the last 4 months. In terms of us using this as a filter to be able to decide which brands we might license, which brands we might build, which brands we take direct-to-consumer and which brands we take to our wholesale partners. So impact the world with brands people love is now the new filter for GBG that determines exactly how we move the company forward.

I want to start the presentation by making a note for all of you that these numbers that you'll be seeing this morning are unaudited. They are management's accounts for the year-end ending 3/31/20. And they have not been audited because of COVID-19. So the impact of COVID-19 prevented our auditors and our staff from being able to travel, being able to physically be in office spaces in our warehouse spaces. And so there was a delay in being able to perform the audit procedures that are required to complete the audit. The audit -- and because of that, we received an extension from the Hong Kong Stock Exchange of 45 days. So our plan now will be to announce, in addition to today's announcement, audited results by the middle of August. And of course, if there's any change in the numbers that are reported in the audit versus what we're reporting today, we'll have a reconciliation for you.

The highlights -- for financial highlights for fiscal year 2020, fairly significant. It's been a very challenging but a very exciting year in many, many ways. Our revenue decreased by 28.5% predominantly because of the brand rationalization and elimination of unprofitable businesses that we set out in our original plan and restructuring to be able to accomplish this year, along with a reduced level of discounted sales to the off-price market. And then, of course, at the end of March, the COVID-19 impacted us fairly significantly in February and March, as all retail shut down for the last 2 weeks, which are fairly significant shipping periods for us. However, total margin increased over 600 basis points. That was one of our main goals of the year was to drive our margin up and improve from 30 -- a little over 30% to over 36% this year. As a result, not only of selling less goods off-price, but a much more disciplined inventory and merchandising system that focused on keeping our open to buy much closer to customer order with less speculative inventory.

Our operating expenses decreased by over $200 million. That was the second goal that we had announced earlier in the year. And this was significantly bigger than we expected and that we thought we could get. And so we're very pleased with that result. And most importantly, EBITDA has improved by a $170 million from a negative $19 million in fiscal '19 to a positive $151 million in fiscal '20. And that really has been the focus of our plan during the entire period.

The net loss attributable to shareholders actually was a little bit negative this year from where it was last year by a $198 million, and I'll show you later in the presentation. That was predominantly due to an impairment charge on goodwill of $286 million that based on the current environment, we believe was the prudent thing to do given the COVID-19 impact and the length of time that, that may impact the company.

Additional highlights for the year. We completed our restructuring as a result of the sale of a significant part of the wholesale business. As you recall, we sold a number of businesses to Centric brands in 2019, at the end of 2018, actually. And we set apart to -- set out to do a full restructuring of the North American business and we had 3 main targets: improve total margin, reduce our operating expenses and improve EBITDA. And as you can see, we exceeded all levels of our expectation on all 3. So we're actually very pleased with the way the restructuring has gone.

In addition, we rationalized our brand portfolio, eliminating nonprofitable brands and those brands that we didn't feel we've reached the profit level in a relatively short period of time that, that would meet our expectations. We began the reorganization of our European business with a new management team, a new President of Europe, Eno Polo, who joined us in September. Eno has been working on a similar reorganization that has taken place in the United States. And actually was in the process of doing that when things shut down in March, and he is now in the process of completing that. I would say, within the next month or 2, the European reorganization will, for the most part, be completed as well.

We had very strong growth in our direct-to-consumer business, now represents 20% of the company. Albeit this year is a little distorted because the wholesale business was more greatly impacted with the shutdown of our retail customers. All that said, our D2C business has become a very important part of the business. Sales this year reached a $160 million. Margins are significantly higher, and we continue to look at that business as a place to pivot as we move forward.

Our balance sheet was strengthened. We reduced our debt by 47%. Our term loan was reduced to $174 million from $375 million, as a result of using proceeds from our controlling shareholder loan that I'll discuss in a little bit. We've implemented the disciplined purchasing system, which lowered our inventory levels and renegotiated payment terms with suppliers and extended, in most cases, our payment terms to a 120 days. Towards the end of the year, obviously, starting at the end of January, when we saw the impact of COVID-19 on China. That was around the third week of January, around Chinese New Year actually. We began, obviously, to look at how we would react in February and March initially to be able to react to the lack of shipping from China and potentially other countries that were using Chinese raw material. That obviously turned into a much more significant event in March. And by the middle of March, most of our retail stores had closed down. We went into a very aggressive mode of preserving cash and lowering our expenses with the expectation that we would have a significant reduction in sales for the first and second quarter of our fiscal '21. And that actually has panned out a little better than we thought, but we made some moves early that I think were pretty beneficial. As a result of the COVID-19 impact and the ongoing restructure and the devaluation of the pound during the last 4 months of the year, the company did breach one of its covenants with the banks. We actually have negotiated a forbearance agreement with the banks through July 31 of 2020, and we're working very closely with the banks and with the financial advisers to reach agreement on either extending the forbearance and we're coming up with a more comprehensive solution. And we would hope to be able to report on that to you when we announce our audited statements in August.

Just a quick overview of the market conditions that we're facing in the U.S. and Europe. Obviously, as I said earlier, the U.S. and European retailers shut down almost completely by the middle of March and stayed pretty well closed all the way through April. Some of the stores in Europe started to open towards the end of April, early May. Most stores in the U.S. started their opening in the middle of May. And I would say that at the end of June of this year, most stores now have been reopened and are starting to do some level of business. As you probably are aware, the first phase opening for most cities in the United States was curbside pickup. So they were not allowed to have customers come into the store, but they were delivering goods and buying online and picking goods up at the curb. The European approach was a little bit different, and they limited the square footage that could be used in stores initially, and that's not normalized in those stores being fully opened.

Retail sales, I would say, are improving at this point. The shoppers have started to come back. There was an early surge in April that I think has kind of leveled out a little bit in the U.S. There's another surge of COVID-19 taking place in many states around the U.S. right now. And so retail has slowed slightly again. But I would say that all in all, retail sales are continuing to improve, and in most cases, exceed expectations, albeit the expectations were fairly low. Of course, we're in a period where we've seen record bankruptcies, both in Europe and the U.S., and we expect that to continue through this year and likely into next year.

The U.S. obviously had a bit of a setback at the beginning of June with the social unrest that took place in most of the major cities, the violence and the looting that took place really forced retailers into closing up their stores for a period of time, it's about a 2-week period of time. I can say that the violence unrest has subsided now. And while there's still protests in the United States and in Europe, to some degree, at this stage, they are peaceful. And I think the demonstrations are having a real effect of getting people to focus on the issues that are being discussed during those demonstrations.

U.S. retail May sales improved over April, albeit April was fairly low. Clothing and accessory sales were up 188% against categories that were way down. So I don't look at those numbers as being very significant. Major Apparel chains are reported reopening their stores. The ones that are open now are operating at about 50% to 70% of what their typical volume would be. And I can say that with the people that we've talked to, the expectations were 60% to 80% down. So most retailers are beating their expectations for initial store openings, and we're watching that very closely now going into our second quarter to see how the next 2 or 3 months lay out. And of course, stores are closing in the U.S.

In Europe, apparel sales fell all the way through April and May. And that probably will continue for some period of time, although they are beginning to recover. We've seen photographs and videos of lines waiting out of certain stores in both Europe and the U.S. Off-price retailers are being very aggressive about the pricing in the stores right now, and they are attracting a lot of consumers that I think had not really purchased product for summer and are doing that now. And we'll have to watch that also to see if that kind of momentum continues. The gradual lockdown in Europe ended in -- really in May, I would say, with the exception of the U.K. and the U.K. is now starting to get back to some sort of normalization, although foot traffic is still significantly down from where it was. And I think the good news for the European Union is that they now have opened up the borders for inter European Union travel for most states. And while certain states, including the U.S., are precluded from going to the EU until the COVID numbers start to I think get closer to where the EU is or below. At least inter-travel inside Europe, which is good for the market. People are planning vacations and taking vacations and be getting to move. And I think the more normal that becomes the better the consumer demand will be.

Our unaudited P&L highlights for the year. I'll run through this fairly quickly. As I said, revenue was down 28% to our reported number last year. The restated column that you're seeing in the middle is apples for apples for those businesses that were discontinued. So when we report on discontinued operations, we have to restate the prior year. So if we look at it more on an apples-to-apples basis, the revenue was down about 12.5% to the restated numbers. Our total margin dollars were down because sales were down. But if you look at the margin percent, it was a significant increase over last year. So over 640 basis points as we discussed. The margin rate is critical to us because as we move forward and start to build and grow businesses that we can maintain or improve this margin level, GBG can become as profitable as it should become. Our operating expenses were reduced significantly from $700 million to $491 million during the course of the year, a $200 million swing. And we're pretty happy with that. Pretty proud everybody chipped in and really went line by line, looking at all the operating expenses to reduce everywhere we could. And this does not include changes that we made now subsequent to year-end as a reaction to the COVID-19 situation.

Operating profits, obviously, the loss went up. That includes the $285 million, $286 million goodwill impairment. Had we not had that impairment, operating profits would have improved. Net loss attributed to shareholders in the same situation. And I think really most critically for the company, we've returned the EBITDA to positive and fairly significantly from a loss of $19 million last year in EBITDA to a positive $151 million. So we're pretty pleased overall while we're not thrilled with the idea that we took the impairment, we understood the reason for it, and we think given the current environment, it was the right thing to do. But we're actually fairly pleased now with the overall results of the company, and the EBITDA improvement puts us on a path now of really improving the business all the way around.

We wanted to show you a pro forma of what the P&L would look like had we not taken the impairments. There were impairments both on the goodwill and intangible side as well as some impairment and costs associated with the discontinued businesses. It's a bit of a different picture. Obviously, the total revenue stays the same, down 28%. That operating expenses, though, improved by 30%. Operating profit or loss would have been around $100 million versus last year's $214 million, so a 53% improvement. Net loss to shareholders from continuing operations improved by almost 30%. That's a number, obviously, that we're directly focusing on going forward. And the net loss attributable to shareholders was about 22% better than it was a year ago and of course, EBITDA. So this gives a glimpse at least of the impact of the noncash impairment charges that were taken and how the business actually performed during that period of time.

We are actually still in the process of weathering through the pandemic. We took action at the end of March when we realized that the store closings were going to be significant, and that they were going to last longer than we had thought. Initially, the stores had announced a 2-week closing, that became very apparent in the U.S. and Europe that it was going to be an extended period of time. And because of that, we took some pretty extreme action to immediately begin to fortress the company from a cash perspective and be able to put together a plan that would allow us on relatively limited income to get through at least a 90 to 120-day period until we started to see somewhat sort of recovery. So in doing that, we had significant furloughs, both in Europe and in the U.S. and continue to have a significant number of staff out on furlough. We have some headcount reductions associated with the businesses that were discontinued. We eliminated the 401(k) contribution, which is the Pension Plan Contribution in the U.S. and took across the Board salary reductions, ranging from 10% to 35% on an annualized basis. And we made those permanent for the year under the idea that it would still take some time even if we're starting to recover from the initial stage of this to really fully recover our costs. As a result, our expenses today are $7 million less than they were even with the restructuring that we did. So we're now at a run rate below $300 million a year. I mean that's been a big plus in terms of giving us the cash capability to fund unlimited income and to be able to extend our period of time as the pandemic plays out. Obviously, travel and entertainment expenses went to 0. And for those of us that we're spending many, many trips in Hong Kong, we now are spending many, many hours doing exactly this. And that's had the impact, obviously, of lowering our costs. And of course, we're not hiring during this period of time.

The balance sheet, obviously, I think, important for us to take a look at. There's really a few key numbers here that I wanted to focus on. Our noncurrent assets reduced by $262 million, predominantly because of the noncash impairment of goodwill and intangibles and the impact of a new lease accounting standard that was used where the lease -- for the full term of the lease as to be put on the balance sheet. Current assets were reduced by $566 million, predominantly with cash used to pay the dividend that was declared last year during the Centric transaction, the disposal transaction that we did. And there was no dividend declared for this year. So that reduced our cash balances.

Current liabilities, there was no dividend, as I said, declared for this year, so there was no payable. We reduced our bank loan. The bank loans have been classified as current and now have been reduced as we talked about earlier and extending our on trade payment terms actually had the effect of increasing our liabilities because we obviously have a larger trade payable on the books as a percentage of the total than we had a year ago. The noncurrent liabilities, I talked earlier about the subordinated shareholder loan that was used to pay down the debt shows up as a noncurrent liability, although for banking purposes, is treated as equity. And in effect, to give you a little color on that, it is a long-term loan, not due until after all the banking facilities, fully subordinated to the banks, noninterest-bearing with no prepayment requirements, whatsoever. So for all intents and purposes, it is very, very close to equity. From an accounting standpoint, we book it as a noncurrent liability from a banking perspective and for covenant purposes, we look at as equity.

Total equity, you can see was reduced fairly dramatically in terms of reported, but it really is based on the noncash issues. Had we -- and the numbers you see below. Had we classified the subordinated loan as equity and not taking the noncash goodwill impairment and the cash write-offs for the brand rationalization, we would have been very close in terms of our equity level to last year. So it's important, I think, to take the total equity into proper context.

Looking forward, as a result of the issues and Black Lives Matter and the other diversity issues that have raised, I think everyone's awareness over the last 4 weeks, 5 weeks, particularly in the U.S. So I think it's a global look. And based on the fact that GBG actually has over 50% of its employees as ethnic minorities. We've always been a company that felt that we valued our diversity, and we used our diversity as a strength. But I must say that I don't think that we have taken it as seriously as we need to take it. We have decided to make diversity, equality and inclusion a strategic principle of the company and are doing a deep dive including many of the people in the company and some people outside the company that are helping us take a real deep look at our diversity and our equality and ensure that we're giving everybody in the company the opportunity to improve themselves and that everyone is on equal footing, both from a performance standpoint and from a compensation standpoint. So this really is now top of mind for us. And I wanted to ensure not just that the analysts and the people that are watching this but our own people that this has become really a critical issue for us in terms of the success of the company going forward.

The impact of COVID-19 epidemic, we believe, will last through FY '21. That's next April. I think there'll be some impact next year. Our plan next year would be to try to get back to where we were before the COVID-19 pandemic took place. I think we can do that. But we think that there'll still be some lasting effect as we go into next year.

Retailers continue to open, and our recovery will begin in the third quarter of this year in terms of starting to get our sales back to some sort of a normalized level. We're going to continue to strengthen and focus on our B2C margin -- higher-margin businesses. These are about businesses on brands that we license, where we have the online rights to the brands, brands that we have built that are own brands that we're taking directly to the consumer. And now you'll see shortly an introduction of our first marketplace called Juniper, which has actually launched in a soft way in June and will open up in September. Juniper actually is going to allow us not only to leverage our own capabilities of building brands for the adaptive market, but we will be hosting third-party sellers and doing a rev share with third-party sellers to build out our marketplace. And we're very excited about that as the company pivots a bit towards being able to talk directly to consumers in different customer segments.

We took the initiative of outsourcing, an opportunity to outsource our SAP and AX enterprise systems to IBM. we concluded that as we speak. So fiscal '21, we think we'll have much greater efficiency and improved performance from those systems. And now that we have kind of gone through the restructuring, and COVID is with us, but we're beginning to get our own handle on it. We're getting ready to enter into new licensing agreements, and we would expect to be able to announce a number of new licensing agreements in the first half of this year.

So all in all, we feel pretty good about the way the year turned out last year. We feel like we have done and the company has done a significant job to put ourselves in a position to weather the COVID-19 storm and put the company then in a broader position to start to grow in the coming 2 years ahead of us. We would have said, I think, originally, that fiscal '21 would have been our growth year, obviously, because of COVID-19, we're now looking it as a year of kind of getting through this problem and finishing up the restructuring. And fiscal '22 will be a year that we think we can start to begin to show some real growth.

So thank you for sitting through the presentation. Please feel free to send questions through our Investor Relations area, contact me directly if you feel comfortable doing that, and I look forward to seeing you in the near future.