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Edited Transcript of 891.HK earnings conference call or presentation 22-Aug-19 10:59am GMT

Half Year 2019 Trinity Ltd Earnings Call

HongKong Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Trinity Ltd earnings conference call or presentation Thursday, August 22, 2019 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Cheuk Yin Ho

Trinity Limited - Chief Strategy Officer & Executive Director

* Paul David Haouzi

Trinity Limited - President & Executive Director




Operator [1]


Welcome to Trinity's 2019 Interim Results Announcement Investor Presentation. Before we start, let me introduce the management on stage. We have President and Executive Director, Mr. Paul David Haouzi; and Chief Strategy Officer and Executive Director, Mr. Kelvin Ho.

So without further ado, I'll now pass the time to management to start today's presentation. Thank you.


Paul David Haouzi, Trinity Limited - President & Executive Director [2]


Thank you. Thanks, everyone, for coming. This is a very important moment in the life of our company. We're going to announce our first semester results and hopefully give hope to people here and in the public.

So let me get this first. All right. All right. So quickly, we're going to give you the review of the business, financial results, margins, cost reduction, retail channel contribution, wholesale, et cetera, et cetera. Basically, we're going to explain what we've been doing in the past 6 months, and in fact, in the past year.

Shandong Ruyi has taken over control of the company, basically, a year ago, and we've started to work on the problems that this company has been facing in the past few years. As we all know, the markets have evolved and changed and a business that used to be very profitable, very good gradually along the years became very challenging. And so that's why we -- Shandong Ruyi has ask us, ask Kelvin, ask myself and the whole team to look into this and to try and to find solutions.

And of course, when you have problems on the P&L, you look at all the lines of the P&L. So basically, the approach has been to look at where the problems were and set priorities in order to solve the problems that you could solve not easily, but as fast as possible. Last year, we were in a situation in, I would say, like an emergency room. You get to the hospital, you're really in a bad shape and the doctors start to take care of you. And after the emergency room, if the doctors do a good job, then you pass to the normal room to the general ward and you stay there and try to get yourself fit again. So we're trying to go from that difficult situation to a situation that, in fact, in the past year and in the past 6 months have been gradually getting a little bit better.

So how do you do that? I mean, I mean, we look at our sales and gross margin analysis. What have we achieved and what we're going to explain here, very simple. We've been losing money for quite some time. And last year, the last quarter, we started to be a little bit above the water. And thanks, God, in the first semester, we've confirmed this trend. And what we're going to show you is our results that are clearly better than before and showing some profit.

How do we do this? Success of optimization and restructuring strategies. Basically, I've explained before that this company has, over the years, got a little bit fat, a little bit lazy. And we had to start to run again, start to train again ourselves to get fit. Basically, what does that mean? It's trying to produce the same amount of business with less resources, trying to decrease cost, all sorts of cost, in order to become more profitable.

How do you do this? I mean first thing is about people. With the right team, with the right managers then you probably have a higher chance to make the right decisions, and that's what happened. Basically, what we've been doing is kind of reshuffling our teams and getting some help from people from outside. I was outside 1 year ago. I'm here. And some people -- Kelvin came, and other people in the team came from Ruyi and came from other brands, and we all started to work together in order to make it work. So people.

Online, of course, everyone know that this is a trend that we -- we're working on that. We're not very good yet, I would say, but it's getting better and better.

Then also, when I joined this company, what I've saw -- what I've seen is a lack of confidence in our brands and in our products. And when you don't trust your own brands, your own products, you tend to be shy. And when we talk about money, about pricing, you tend to be a little bit conservative, a little bit too conservative.

Me, I'm not. These are brands -- we have great brands and we're not perfect. Our merchandise is not perfect, but still we have nice things to sell. So when you have nice things to sell and good brands, why would you sell them a little bit lower than you could do before? So basically, we have tweaked a little bit the prices in order to get more money from every sales that we would achieve. That's one thing.

Another proof of lack of confidence was in the discounts. Basically, our sales staff in the store would not be very aggressive and would say, okay, if I give a discount to this guy, then he's going to buy. But sometimes you don't need to do that. Sometimes, your product is good enough. It's just a question of how do you try to convince the people to buy.

Discount may be important but sometimes it's not.

So what you'll see in the figures is that we've given less discount to the customers. So our gross margin -- gross profit margin has improved significantly.

Then also, merchandise, of course, introduction of unisex clothing. This is a trend. Today, you have men wearing merchandise that also could be used by women. And we're trying to take advantage of this trend and also to introduce -- it's not -- we're not there yet, but introduce in the future some ladies wear because at the end of the day, when you open the store and you look at the traffic outside the store, well, half of the traffic is ladies at least.

So why do you open the store and try to grab just half of the traffic with your menswear? You should also try to grab some of the ladies. And the ladies, they like to spend money at least as much as the men and even probably more. All right.

And then, last trend of the industry: bespoke, made-to-measure personalization. This is a heavy trend. In the future, there is no luxury without personalization. I agree to pay a lot to buy this, but I want this personalized for me. I want maybe my name somewhere, my color somewhere. I want it to be like this, like that to fit me. I'm not a perfect fit, so I need some alterations, et cetera, et cetera.

This is a heavy trend. 10 years from now, I would say that 50% of the business would be custom made. This is a trend, and we're trying to take advantage of this. And we have the know-how for that. We have the know-how from Gieves & Hawkes in London. Our tailors, I mean they have been working with the Queen, with the princes, okay? And we have this know-how in China with Ruyi. So we're trying to take advantage of this.

All right. Now the figures. All right. So have a look. What we want to show here is that we have been growing. We've been growing, and we've been growing because we've tried to grow the existing core business and we've tried to enter into new channels. So if you look at our sales figures and if you compare with last year's sales figure, you'll have the retail part and the wholesale part. What you'll be seeing here is that the retail part has been shrinking, and I'm going to explain why. And I'm going to explain to you, to convince you that this is not negative. This is a strategy.

And what you see as well is the wholesale and licensing, but mainly wholesale has been growing very, very fast and very strong. And this is also one key strategy. Basically, what we're trying to show here is that in a luxury clothing business apart from 1 or 2 exceptional brands that are own named, but apart from that, if you base 100% on retail, and I would say, 100% on physical retail, you're not going to make it. You're not going to make money.

So that's why last year, immediately, we tried to take advantage of potential wholesale expansion. And we've been very lucky because our mother company, Shandong Ruyi has exceptional resources to achieve this, especially in Mainland, China. They've been there forever. They are one of the key player in the textile market, and they've been working a lot. We have created a Trinity-Shandong entity that has been working hard and with significant results to create some wholesale business.

And I must say this is the beginning. This is going to grow and grow and grow because China is big, the sky is the limit. So instead of putting all our resources on retail -- retail is very capital-intensive. Retail is detailed. You have to pay rents and you have to pay staff and you have to pay CapEx and depreciation, et cetera, et cetera, and maybe one day, you'll make money. And sometimes, you don't make money. So besides physical retail, we expand into a wholesale business, and of course, we expand into nonphysical retail, digital.

So when we look at -- let's start with retail first. Here, what you see is subtotal retail minus 16% versus last year. This is -- this looks bad, double-digit decrease, but you'll see later that even though we have a double-digit decrease, we know why. And if you look at the profit that we get, the contribution that we get from the retail, you'll see that it's been expanding. It's been growing, all right? So total growth, plus 15%, with shrinking of the retail and a very significant wholesale component that has been helping to create the total.

All right. Retail sales affected by closure of nonperforming stores. So if you ask me, "Do you prefer to have a bigger top line or bigger bottom line?" I prefer the bottom line. So I get rid of most of the nonperforming stores. It's like a portfolio. You have nonperforming assets, you get rid of them, and you put your money somewhere else. So we got rid of quite a lot of nonperforming stores.

Now single-digit same-store sales decline, also a decline, yes. I mean challenge me on this. "Why a decline? You should be growing." Okay. I have the answer here. Do you prefer top line or do you prefer gross profit margin? I prefer a healthy top line, which is achieved with a healthy gross profit margin. So what we did, we said no discounts anymore, less discounts.

So when you do that, what happens? You get 85% of the customers that like the brand. They would buy without the discount because they like what they see. And you have a small proportion of the customers, 10%, 15%, maybe that they say, "No, I want my discount. If you won't give me my discount, I won't buy." That's it. So we have a decrease, but we know why. And we think that it's more healthy long term.

It's more healthy for our brands to stick to a normal discount policy, which means that you get discounts on a very small percentage of the sales, mainly at the end of the season. That's the way it should be. That's the way it was not before we took over. And that's the way we're back now to that rule that applies to any good brand.

So single-digit same-store sales decline but much better gross profit margin. So retail gross profit margin improved by 4.5%. 4.5% is a pretty significant increase. I mean to achieve this within maybe 6, 8 months, I would say, is quite a performance. And of course, with a better gross profit margin, you create better results.

Now let's look at the cost, all right? You sell stuff, you sell merchandise, you open stores and you pay for a lot of cost. And of course, sometimes, your costs are too high and all the profit that you have been created in the stores is gone. All right. So reduced the head counts from 2,117 to 1,667, okay. All right.

We closed stores. So naturally, we have less head counts. But when you look at the office staff, you look at the total, we go from 728 to 512. All right. This is a decrease of more or less 30, 30x -- percent. So think about it. I mean you have 3 guys doing that job, but you needed only 2. So that's what we did.

And basically, within this, mainly last year in the last quarter, a little bit this year, but now this is more or less achieved. So now we have -- in term of head counts, we're close to the normal situation where you can achieve this business without too much fat, without having too heavy expenses.

We closed regional offices that, in my opinion, were not very useful, Guangzhou, Chengdu, Beijing. We outsourced what was possible to outsource. I mean this is a trend. I mean, if you go into those, for instance, logistics service providers, these guys are specialists. They do the job with less resources that you do. So you give them the job, you get rid of fixed cost. And when the business is good, it costs you a little bit more. But when the business is not good, it costs you much, much less.

So closure of nonperforming stores, I've been talking about that. We got rid of 35 stores and of course, it's a pity. I don't like to close stores, but we had to do it, not because our brands are not good, simply, especially in Mainland, China, 10 years ago, a good location, a good mall in Mainland china was not where it is today.

Okay. Hong Kong -- here's Hong Kong. 10 years ago, Hong Kong was more or less the same in terms of retail environment. But go to any city in China and you'll see that 10 years ago and now, the [heart] shopping mall is not the same, most of them. All right. So we had to move -- we had to close stores and move into better locations.

Now that's the important point. This shows that you can lose some retail sales but still make more money. Look at Hong Kong, Macau, from HKD 10 million retail contribution to HKD 20 million. And that's not because all of the sudden, the economy in Hong Kong is better. In fact, it's the opposite. The economy in Hong Kong this year is probably more challenging than last year, but still, we doubled the contribution, and that's only the beginning.

Mainland China, HKD 32 million versus HKD 10 million. We have less stores. How come you make more money? Just because you have kept the better stores. It's very simple. All right. Taiwan, a little bit better. Europe was losing some money, now we're making a little bit of money.

So the total is clearly better, HKD 55 million versus HKD 20 million. That's a very clear improvement. It's not enough, not enough. We're very far from an ideal situation, but it shows that if you go for the good stores, the good merchandise, the good strategy, it produces results. So that's something that is very promising for the future.

What we're trying to do here is be back to a healthy base in order to go global in order to take our brands to the next level. So before you go and expand, you have to clean the mess. You have to get fit and that's basically what we've been trying to do in the past year and in the past 6 months.

Now wholesale. Okay. As I said before, I mean, to be 100% retail based is a very, very difficult strategy, especially if you're not a super, super brand. Of course, if we were those 2 or 3 or 4 super brands that do only retail, that would be easier, but for our brands, it's very difficult.

So back last year, when we start to discuss with Kelvin, with Ruyi, the Ruyi colleagues, everyone, we're trying to find solutions. Okay. Get the retail working better, that was one of the solutions. Or get more e-commerce, that was another part of the solution.

The last part was, well, wholesale. China, I mean, Ruyi has a very, very strong experience of this. So can we use Ruyi's resources and try to achieve something? So Ruyi helps to create this Trinity-Shandong entity and Ruyi's team has started to work. And now you see the results. Okay. We have now a component of wholesale in our total turnover that is significant, and that is healthy.

All right. So what means corporate client in Mainland China? Basically, thanks to Ruyi, we have expanded into the corporate business. You know that all over the world and especially in China, big companies need clothing for their staff. You could call that uniform, it's not the right word. But if you go to a bank, people will wear banker stuff, executive suits. And Ruyi has been the key player in that market in China. And thanks to their resources, they have created for Trinity a lot of business opportunities because one thing is that Ruyi has its own brands that -- not luxury brands, more affordable brands, and Ruyi has licensed these brands to us in order that we create this corporate business.

Beside this, our own brands and especially Cerruti is very suitable to do this business. So we also has -- we have started to do this business, this corporate business for Cerruti. In any company, you have high-ranking officials and they want Cerruti, they want the nice brands. So there's a part of the business that is good for our brands. And there's a part of the business that caters to lower -- less expensive brands.

So that's basically what, together with Ruyi, we've been trying to achieve, and it has been working pretty nicely with a very attractive margin. Of course, not the retail margin because when you sell 1,000 suits, you have to give a competitive price, but still with pretty nice margins. So this has created for us an opportunity to help our bottom line. All right.

So this wholesale today, 50% is our regional distributors, clearance channels, et cetera. You know we know -- we sell bulk old merchandise to not jobbers but people who do clearance business. We've grown the whole -- the e-commerce wholesale as well, plus this corporate client in Mainland China. So that's more or less an overview of the strategy when it comes to the wholesale channel. All right.

So this is what we want to show in term of P&L today, so top line growing of 15% -- 15.6%, so mainly coming from wholesale. Gross profit. Here, if we look at gross margin as the total, you see a slight decrease. This comes from the fact that the wholesale component is higher. And of course, the gross profit margin as a percentage in the wholesale component is lower than retail, but we've shown also the retail gross margin which has been growing by 4.5%, which is very good and very promising for the future.

So basically, it gives us something that hasn't been seen in the past few years, basically, a core operating profit that is significantly higher than what we've been losing last year, so HKD 111 million versus a loss of HKD 160 million. Profit to shareholders, HKD 76 million versus minus HKD 196 million. So I think these are good news, and this is very promising for the future. And that's basically what we've been trying to achieve this semester. And we're very, very happy to show this to you today -- tonight.

Okay. I won't be too long. Now we have a few comments for the future. Opportunities, a lot; and of course, some challenges. All right. First and foremost, product. We're selling products. Whatever you do, if your products are not good, you're not going to sell anything or you're not going to sell too much.

So what's the trend? Is it trend for suits and tie? No, it's finished. We have to go casual. We've been doing this. We've been starting to work with our designers, with our design teams in order to follow that trend. And if we look into details, a brand like Kent & Curwen, which has been faster to adapt to this schedule, where trend is performing better than the other brands. So we're trying to catch up with the other brands, with Cerruti, with Gieves & Hawkes, but clearly, we are aware that the market is changing. The market has been changing and we have to follow this and propose to the market the right products.

I talked about the new trend for customization. We have a huge bespoke, made-to-measure DNA with Gieves & Hawkes, and we're trying to take advantage of this. We've been doing some trunk shows to promote the brands to potential bespoke customers, et cetera.

Now a small point about marketing. I mean the whole thing is changing. In the past, you would add -- you would buy ads in the magazine, in the fashion magazine. It could be ladies fashion, it could be men's fashion. That was one key element in your marketing investment. Today, of course, it's changed. It's all digital.

And in the digital world, you have what we call KOL, key opinion leaders. So this is something incredible. These guys can sell tons of products just by showing them. They have millions of followers. Especially in China, you have some of them that are making crazy money for themselves by promoting products. So we're trying to approach these KOL and do some business with them, try to have them promoting our brands. We need to create content. We need to create a new excitement for our brands because in the past years, it's been a little bit slow.

Of course, challenges, unstable consumer markets. A good example, of course, is Hong Kong. I mean 2 months ago, 3 months ago, Hong Kong was a great market for luxury goods, and all of a sudden, something happens. And the impact, I must say -- I mean we all know that. The impact on the business, on the tourism, on everything is pretty significant.

So when is it going to stop? We don't know. This is what we call challenges because there's not much we can do. At the end of the day, the store is there, the staff is there, the merchandise is there and the customers, they stay in China. They don't want to come to Hong Kong anymore. So these are those -- and this is not Hong Kong -- of course, only Hong Kong. I mean the whole world is -- you have challenges, trade war, et cetera, et cetera. This is pretty unstable, and of course, we have to adapt to this.

Fragile macro economy, that's exactly what we're talking about here. And last, of course, with this trade war, what happens to the renminbi, which is a lot -- a big part of our business, okay? Depreciation versus Hong Kong dollars, et cetera, what's going to happen? Even what's going to happen to the peg in Hong Kong, I mean people are trying to start to think about that.

Anyway, I'll just finish with this. This is the key message. We're back to profitability. It's been the beginning of a long journey with Ruyi and Trinity's team, and what we hope to show next time, full year results, will hopefully will be even more spectacular than this. Thank you.


Cheuk Yin Ho, Trinity Limited - Chief Strategy Officer & Executive Director [3]


Yes. Maybe I would also like to add a few points. So I remember, even last October result announcements, we already mentioned that we were focusing on the profitability, right, than the top line growth. So we have been doing something disciplined-ly. We are not doing magic. So it's a step by step.

So what we have been doing is: number one, we try to increase the profit margin, as Paul has mentioned. So we still see the room to grow, say, the gross profit margin. So right now, we already increased our retail gross profit margin by 4.5% to around 72%. But maybe, by reference, when we were in around 2011, during the peak time, we achieved gross profit margin of 18.7%. So hopefully, there will be another kind of room for us to further improve.

And also in terms of profitabilities, right now, we are successfully maintaining our profitability. Last Q4, we turned to a small profit of around HKD 12 million. So our first half this year, we achieved 6 -- HKD 77 million. So again, given our peak period in around 2012, it was around HKD 540 million. Hopefully there, we have some room to grow.

And as mentioned, apart from discount, profitability, top line -- profit margin, the other discipline is about the cost reduction. Maybe put in perspective, Paul did mention about the lower kind of human resources requirement. [We think that's] sufficient for our current kind of revenue kind of scale. So that's why through this cost-cutting from direct overheads, we can spend HKD 70 million net. And for brand overhead, we can also spend around -- almost close to HKD 80 million net. So this also give rise to the sustain -- more sustainable profitability.

So apart from this, we also look into further growth for each of the particular brand. For example, for KC, traditionally, it's more kind of a less official, more casual, more sporty. So that also suits the current trend. So that's why, although we saw in the result there some kind of a drop in the top line because we closed and closed many maybe less profitable stores, but at the same time, for KC, we also achieved a small same-store growth.

I think this somehow also [portends] for the management team. And the other thing is about -- we also capture about the trend of the casual -- more casual wear.

But having said that, we also have kind of the more [official] executive market. So that's why we came up with the idea that we had to suit a particular market. For example, for bankers, typically, they would still wear these top executive suits. So that's why we would like to enter into discount wholesale market. Also focusing -- it's not a typical kind of lower-tier wholesale market. It's indeed kind of a made-to-measure to those senior executive or professional firms or banks, say, in China. So this is a sustainable demand because you can see, in general, even for us, right now, we wear more casually, but we have certain top professionals and firms still wearing the tie and executive suits.

So I'd say we just want to capture this kind of ongoing trend and also expand into this market. And again, entering into this market would turn into real profitability. That's, again, our focus since we became the controlling shareholders. So hopefully, we'll kind of try to do this kind of step by step, disciplined-ly and see the improving kind of performance.