Silvano Fashion Group
Quarterly report

Consolidated interim report for Q1 2011

Tallinn, Estonia, 2011-05-10 17:46 CEST --  

Management Report

Selected Financial Indicators

 In summary, the selected financial indicators of AS Silvano Fashion Group for Q1 2011 and Q1 2010 were as follows:

Underlying formulas:

Gross margin = gross profit / sales revenue
EBITDA margin = EBITDA / sales revenue
Net profit margin = net profit / sales revenue
Net profit margin attributable to owners of the Company = net profit attributable to owners of the Company / sales revenue
ROA (return on assets) = net profit attributable to owners of the Company for the last 4 quarters/ average total assets
ROE (return on equity) = net profit attributable to owners of the Company for the last 4 quarters/ average equity attributable to equity holders of the Company
EPS (earnings per share) = net profit attributable to owners of the Company/ weighted average number of ordinary shares
Price to earnings ratio = Share price at the end of reporting period/earnings per share, calculated based on the net profit attributable to owners of the Company for the last 4 quarters
Current ratio = current assets / current liabilities
Quick ratio = (current assets – inventories) / current liabilities

Business Results

SFG business results in Q1 for recent years proved to demonstrate highest margins because of swimwear and fashion collections predominantly being sold. The sales level is usually lower than in high season of Q2 and Q3, however margin rise in Q1 2011 was very strong. The Q1 results were slightly higher than budgeted, which was supported by steady market growth in Russia, more obvious recovery in Ukraine, strong sales in Belarus and recovering Baltics’ markets. Q1 total sales amounted to EUR 25,455 thousand, EBITDA — to EUR 6,060 thousand, and net profit — to EUR 6,291 thousand.

Russian economy, the Group’s major market, is doing very well. Russian international monetary reserves in Q1 went up by 4.8% and reached USD 502.46 billion. Russian Ruble strengthened by 10.5% against USD and by 5.3% against Euro in Q1 2011. Oil and gas prices continue to support Russian economy. As a result, sales in the end customer market have been growing during Q1 2011. The Group’s sales in Russia in Q1 2011 were 24.7% above the sales level of Q1 2010.

The Belarusian market was very strong in Q1 2011, supported by salaries/wages increase in Q4 2010 in the country in general. According to the preliminary information the estimated Belarusian economy’s GDP growth was 10.9% in Q1 2011. In Q1 retail operations in Belarus demonstrated an increase of 53.0% in BYR terms and 49.6% in EUR terms as compared to Q1 2010. However, in March the Belarusian economy faced severe impact of current account deficit. Moody's Investors Service has downgraded the government of Belarus' foreign and local currency bond ratings from B1 to B2 and has assigned a negative outlook to the ratings due to the country’s significant near term external financing gaps, and the medium term difficulties of reorienting the current external debt funded, domestic demand-led growth model. Moody's immediate concern is the external financing requirements of Belarus' large current account deficit, which was about 16% of GDP in 2010. As a result starting from March, 16th there were difficulties related to forex market in Belarus. The situation is expected to stabilise during Q2 2011.

Ukraine is behind Russia in economic recovery and development, however, it is gaining momentum and SFG Ukrainian sales in Q1 were up by 89.0% compared to Q1 2010.

Economic situation in the Baltics is improving. Q1 sales in the region increased by 5.5% as compared to Q1 2010.

Overall, Q1 sales demonstrated an increase of 26.9% as compared to Q1 2010.

At the end of the reporting period the Group and its franchising partners operated 424 Milavitsa and Lauma Lingerie stores, including 52 stores operated directly by the Group and the rest by franchising partners. The Group’s retail focus remains similar to previous year by promoting and supporting franchising partners mixed with own retail development in home markets (Belarus and Baltics).

Financial performance

The Group sales amounted to EUR 25,455 thousand in Q1 2011, representing a 26.9% increase as compared to the previous year. Overall wholesale increased by 31.4% and retail sales – by 7.7%. Q1 2010 retail sales include retail sales generated in Russia in the amount of EUR 978 thousand. However own retail operations in Russia were fully discontinued by the Group in H1 2010 following the restructuring decisions taken in 2009. Thus like for like increase in retail sales amounted to 48.0%.

The Group’s gross margin from continuing operations in Q1 2011 increased and was 41.4%, as compared to 40.9% in the respective period of previous year. Increase in gross margin is mainly explained by the increase of average sales price as the result of change in the structure of sales with increased level of more expensive brands.

The consolidated operating profit in Q1 2011 amounted to EUR 5,619 thousand, compared to EUR 2,845 thousand in Q1 2010. The consolidated operating margin from continuing operations was 22.1% (14.2% in Q1 2010). Despite the cost of inflation affected all the areas of the expenses, the costs overall did not exceed the Group’s revenue growth and the Group’s ability to increase the earnings. The operating profit and the operating margin in Q1 2010 were adversely influenced by loss-making own retail operations in Russia, which were fully discontinued in H1 2010.

Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 1,630 thousand in Q1 2011. SP ZAO Milavitsa accrued a foreign exchange gain in the amount of EUR 1,539 thousand that was mainly caused by sales denominated in Russian Ruble which appreciated against Belarusian Ruble in Q1 2011 by 8.8% and by short-term deposits denominated in Euro, which appreciated against Belarusian Ruble in Q1 2011 by 6.4%.

Effective tax rate for Q1 2011 amounted to 16.2% (26.2% in Q1 2010) and was lower than expected due to the decrease of statutory tax rate in Belarus from 26.28% to 24%. The improvement of the effective tax rate is as well caused by use of tax loss of prior years in Russia.

Consolidated net profit attributable to equity holders amounted to EUR 5,089 thousand in Q1 2011, compared to EUR 2,472 thousand in Q1 2010; net profit margin attributable to equity holders was 20.0% against 12.3% in Q1 2010.

In Q1 2011, the Group’s return on equity amounted to 38.1% (12.5% in Q1 2010) and return on assets was 23.4% (6.7% in Q1 2010).

Financial position

As of 31 March 2011 consolidated assets amounted to EUR 68,691 thousand representing an increase of 5.5% as compared to the position as of 31 December 2010.

Property, plant and intangibles balances decreased by EUR 877 thousand as compared to 31 December 2010 the key reason being the impact of the foreign exchange rate in the amount of EUR 844 thousand.

Trade receivables increased by EUR 2,929 thousand as compared to 31 December 2010 and amounted to EUR 12,571 thousand as of 31 March 2011. Inventory balance increased by EUR 1,508 thousand and amounted to EUR 17,300 thousand as of 31 March 2011. Increase in trade debtors and stock balance was in line with the seasonality trend of the business.

Foreign exchange fluctuations had a negative impact on the Group’s equity, in the form of a negative change in the currency translation reserve in the amount of EUR 3,121 thousand for Q1 2011. On the overall basis, equity attributable to equity holders increased by EUR 2,381 thousand and amounted to EUR 44,423 thousand as of 31 March 2011.

Current liabilities increased by EUR 1,297 thousand in Q1 2011, in line with management expectations.

Current and non-current loans and borrowings increased by EUR 184 thousand to EUR 220 thousand as of 31 March 2011. Loans received and loans repaid in Q1 2011 amounted to EUR 265 thousand and EUR 69 thousand respectively, including finance lease liabilities repaid in the amount of EUR 2 thousand.

In 2009 the Group divested its loss making apparel business line through the sale of shares in its former 100% subsidiary PTA Grupp AS. At the date of disposal the Group had outstanding guarantees issued to Danske Bank A/S Estonian branch securing certain borrowings and guarantee limits of PTA Grupp AS. As of 31 March 2011 PTA Grupp AS’s balance of borrowings and guarantees from Danske Bank A/S Estonian branch that were secured by a surety provided by SFG amounted respectively to EUR 45 thousand and EUR 203 thousand. However as of 25 April 2011 all amounts subject to guarantees have been fully paid down.

Tax liabilities and other payables, including payables to employees, amounted to EUR 4,841 thousand. Provisions amounted to EUR 390 thousand as of 31 March 2011.

Sales

Sales by business segments

Sales by markets

In Q1 2011, the Group focused mainly on the Baltics, Russian, Belarusian and Ukrainian markets.

Total sales by markets

The majority of lingerie sales revenue in Q1 2011 in the amount of EUR 15,049 thousand was generated in the Russian market, accounting for 59.1% of all sales in Q1 2011 as compared to EUR 12,066 thousand in Q1 2010. Sales in Russia for Q1 2011, comprises wholesale only and both retail sales and wholesale in Q1 2010. The second largest region was Belarus, where sales reached EUR 6,165 thousand, contributing 24.2% of lingerie sales (both retail and wholesale) as compared to EUR 4,883 thousand in Q1 2010.

Sales in the major markets demonstrated a positive trend in terms of pieces sold in Q1 2011 as compared to the respective period in 2010.

The most considerable sales growth took place on the Belarusian, Russian and Ukrainian markets.

Changes in the sales strategy and organizational structure introduced by Milavitsa in late 2009 and early 2010 were implemented in 2010 in Russia and Ukraine. As a result the Group increased control over its distribution channels.

To support the growth of sales, Milavitsa continued conducting additional marketing activities in Belarus, Ukraine and Russia and implementing supportive measures in the opening of new franchised stores. Joint programs with dealers and distributors were continued in Q1 2011 in the fields of marketing and franchising.

Lauma Lingerie demonstrated a slight increase in sales in the first quarter mainly due to their performance in Ukraine, Baltics, Belarus and Kazakhstan. Sales in Russia decreased as compared to Q1 2010.

In terms of lingerie brands, “Milavitsa” core brand accounted for 74.7% of total lingerie sales revenue in Q1 2011 (Q1 2010: 73.8%) and amounted to EUR 18,930 thousand. “Lauma Lingerie” core brand accounted for 8.4% of total lingerie sales (Q1 2010: 9.1%) and amounted to EUR 2,129 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 16.9% of total lingerie sales in Q1 2011 (Q1 2010: 17.1%), amounting to EUR 4,282 thousand.

Wholesale

In Q1 2011, wholesale revenue amounted to EUR 21,472 thousand, representing 84.4% of the Group’s total revenue (Q1 2010: 81.5%). The main wholesale regions were Russia, Belarus, Ukraine and the Baltic States. Substantial growth has been achieved in Russia, Ukraine and Kazakhstan mainly due to the success of the Milavitsa wholesale partners.

Additional activities were introduced in the non-core markets targeted at the diversification of the Group’s sales towards the Western European countries. Some markets will be approached through sales agents, while others will be served by local dealers.

Retail operations

Total lingerie retail sales of the Group in Q1 2011 amounted to EUR 3,869 thousand, representing a 7.7% increase as compared to the previous year.

Retail operations were conducted in Belarus and Latvia. At the end of Q1 2011 the Group operated 52 own retail outlets with a total area of 4,414 square meters. As of 31 March 2011, there were 356 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Cyprus, Germany, Georgia and Slovenia, resulting in net increase of 8 shops during Q1 2011. Additionally, as of 31 March 2011, there were 16 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia, Estonia and Albania, of which 3 were opened and 1 was closed in Q1 2011. The 400^th Milavitsa store was opened in Belarus on 1 April 2011. In February a Milavitsa store was opened in Kreschatik street, the major shopping street in Kiev (Ukraine).

In Q1 2011 2 new own lingerie stores were opened, including 1 store under Milavitsa brand name in Belarus and 1 store under Lauma Lingerie brand name in Latvia.

Number of own stores as of:

A number of sales promotions were conducted in the Milavitsa retail chain in Belarus including a co-branding campaign with Oriflame. Own retail operations in Belarus remain one of the key priorities for the Group’s further sales development in the country. Overall retail operations in the country demonstrated a 53.0% growth in local currency terms and a 49.6% growth in EUR terms as compared to Q1 2010 mainly due to the number of new shops opened in the recent year. Sales per square meter in the like-for-like shops have increased as well.

In the Baltics, retail sales increased by 16.6% as compared to the previous year and amounted to EUR 153 thousand, which is mainly explained by the increased retail expertise and improvements introduced in the stores.

Own retail operations in Russia were fully terminated in H1 2010. As a result Q1 2010 retail sales include retail sales generated in Russia in the amount of EUR 978 thousand, while Q1 2011 retail sales were generated in Belarus and Latvia only. The strategic decision was made in 2009 to shift focus from own retail chain towards the development of Milavitsa franchise network in Russia. Certain structural and management changes have been made in the Group’s Russian operations (including the establishment of a separate franchise department) to implement the selected franchise development strategy.

Own stores by concept

Production, sourcing, purchasing and logistics

The total volume of production in SP ZAO Milavitsa amounted to 4,927 thousand pieces in Q1 2011, representing a 16.0% increase as compared to the respective period in the previous year. The total production volume in Lauma Lingerie amounted to 378 thousand pieces in Q1 2011, showing a decrease of 12.0% as compared to the respective period in the previous year.

Investment

In Q1 2011, the Group’s investments totalled EUR 403 thousand with investments into retail amounting to EUR 32 thousand. Other investments were made in equipment and facilities to maintain effective production and to add capacity for 2011.

Personnel

As of 31 March 2011, the Group employed 3,202 employees including 420 in retail and 2,037 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and wages in Q1 2011 amounted to EUR 5,007 thousand. The remuneration of the members of the Management Board and Supervisory Board totalled EUR 38 thousand.

Consolidated statement of financial position

Unaudited

Consolidated income statement

Unaudited