Silvano Fashion Group
Quarterly report

Consolidated interim report for Q2 and 6 months 2011

Tallinn, Estonia, 2011-08-08 22:10 CEST --  

Management Report

Selected Financial Indicators

In summary, the selected financial indicators of AS Silvano Fashion Group for Q2 2011 and H1 2011 were as follows:

Underlying formulas:

Gross profit 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

Silvano Fashion Group enjoyed a healthy start since January 2011, and the growth of sales on main markets continued throughout Q2 2011. The fundamentals for our core markets are solid: Russian Federation, SFG major market, is supported by oil/gas prices, growing consumers' purchasing power, lower unemployment rate, and strong Russian Ruble. The inflationary pressure and higher spending has nurtured healthy growth in lingerie sales in Belarus. The Baltic markets have recovered from the slump in consumption and are signalling increased consumer spending. Ukraine – one of the underpenetrated markets for SFG continues on the favourable track, which we see from the increase in our sales numbers in the region.

In general, H1 2011 sales level and market situation confirmed, and to some extent – exceeded - management forecast for business growth in 2011. H1 2011 sales from operations demonstrated a 20.2% increase as compared to H1 2010.

H1 2011 EBITDA was EUR 18,533 thousand, an increase of 88.7% compared to H1 2010; H1 2011 normalized net profit (excluding effect of foreign exchange, mainly due to the devaluation of Belarusian Ruble) stood at EUR 11,003 thousand and up by 58.8% compared to H1 2010.

SFG business results in Q2 were driven by high season sales. Due to higher share of classic collections in the sales mix for Q2 the margins were slightly lower than in Q1. However, the Group yielded strong margins due to the devaluation of the Belarusian Ruble (effective on 24th of May, 2011, by 53% against Euro).

Consequently, during H1 2011, the Belarusian currency depreciated against Euro by almost 79%. As devaluation brings competitive advantage to the exporters, SFG management expects cost savings and increasing efficiency of its current operations in Euro terms.

Higher than budgeted Q2 results were also supported by steady market growth in Russia, recovery in Ukraine, strong sales in Belarus and recovering Baltics’ markets. Q2 total sales amounted to EUR 30,739 thousand, EBITDA - to EUR 12,473 thousand, and normalized net profit - to EUR 6,342 thousand. Q2 sales demonstrated an increase of 15.1% compared to Q2 2010.

At the end of the reporting period the Group and its franchising partners operated 449 Milavitsa and Lauma Lingerie stores, including 52 stores operated directly by the Group and the rest by franchising partners. The Group’s retail focus in 2011 is set to promote and support franchising partners.

Financial performance

The Group sales amounted to EUR 56,194 thousand in H1 2011, representing a 20.2% increase compared to the previous year. Overall wholesales increased by 23.9% and retail sales – by 3.2%. H1 2010 retail sales include retail sales generated in Russia in the amount of EUR 1,264 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 22.4%.

The Group’s gross margin from continuing operations in H1 2011 increased and was 48.3%, compared to 40.6% in the respective period of previous year. Positive effect was observed in Q2 2011 mainly due to devaluation of Belarusian ruble, which generates cost savings in Euro terms in Belarus.

The consolidated operating profit in H1 2011 amounted to EUR 17,767 thousand, compared to EUR 8,930 thousand in H1 2010. The consolidated operating profit margin was 31.6% (19.1% in H1 2010). Significant growth in operating profit margin is mainly explained by the fact that most of Group’s revenue is denominated in Russian Rubles and Euros whereas significant part of the costs is linked to Belarusian Ruble.

For the second half of the year SFG Group foresees positive cost effect from the devaluation of Belarusian Ruble that has positive effect on the gross margins, hence also to the profitability of the Group.

Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 14,288 thousand in H1 2011. The main constituents to the foreign exchange gain in the amount of EUR 14,183 thousand are sales denominated in Russian Rubles and short-term deposits denominated in Euros.

Effective tax rate for H1 2011 amounted to 22.3% (22.2% in H1 2010). The number is lower than expected due to the decrease of statutory tax rate in Belarus from 26.28% to 24%. The Group continues utilizing the benefit of tax losses of prior years in Russia.

Consolidated net profit attributable to equity holders amounted to EUR 20,723 thousand in H1 2011, compared to EUR 6,171 thousand in H1 2010; net profit margin attributable to equity holders was 36.9% against 13.2% in H1 2010.

In H1 2011, Group’s return on equity (ROE) amounted to 74.3% (33.4% in H1 2010) and return on assets (ROA) was 43.6% (20.5% in H1 2010).

Financial position

As of 30 June 2011 consolidated assets amounted to EUR 58,999 thousand representing a decrease of 9.4% compared to the year-end. Part of the decrease is related to the payouts to the SFG shareholders (capital decrease), the devaluation of the Belarusian Ruble being another factor, decreasing the value of assets based in Belarus in EUR terms.

Property, plant and intangibles balances decreased by EUR 4,205 thousand compared to the year-end; the key reason being the impact of the foreign exchange rate decrease in the monetary amount of EUR 5,599 thousand.

Trade receivables increased by EUR 3,784 thousand as compared to 31 December 2010 and totalled EUR 13,426 thousand as of 30 June 2011. Inventory balance decreased by EUR 2,931 thousand and totalled EUR 12,861 thousand as of 30 June 2011. Reduction in inventory balance is partially related to the seasonality trend of the business.

Foreign exchange fluctuations had significant impact on the non-monetary currency translation reserve (adjustment reserve for the revaluation of foreign currency assets and liabilities), which decreased by EUR 23,298 thousand in H1 2011. Since currency translation reserve affects directly owners’ equity, on the overall basis, equity attributable to equity holders decreased by EUR 9,781 thousand and amounted to EUR 32,261 thousand as of 30 June 2011.

Current liabilities increased by EUR 3,866 thousand in H1 2011, in line with management expectations.

Current and non-current loans and borrowings increased by EUR 31 thousand to EUR 67 thousand as of 30 June 2011. Loans received and loans repaid in H1 2011 amounted to EUR 724 thousand and EUR 658 thousand respectively, including finance lease liabilities repaid in the amount of EUR 4 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. During H1 2011 all amounts subject to guarantees have been fully repaid.

Tax liabilities and other payables, including payables to employees, amounted to EUR 8,571 thousand. Provisions amounted to EUR 481 thousand as of 30 June 2011.

Sales

Sales by business segments

Sales by markets

In H1 2011, the Group focused mainly on the Baltics, Russian, Belarusian and Ukrainian markets.

Total sales by markets

The majority of lingerie sales revenue in H1 2011 in the amount of EUR 34,738 thousand was generated in the Russian market, accounting for 61.8% of all sales in H1 2011 compared to EUR 27,472 thousand in H1 2010. Sales in Russia for H1 2011 comprise wholesale only, but include both retail sales and wholesale in H1 2010. The second largest region was Belarus, where sales reached EUR 13,203 thousand, contributing 23.5% of lingerie sales (both retail and wholesale) compared to EUR 12,036 thousand in H1 2010.

Sales in the major markets demonstrated positive trend in terms of pieces sold in H1 2011 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 organization structure introduced by SFG-held SP ZAO 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, the Group 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 continued in H1 2011 in the field of marketing and franchising.

SFG-held Lauma Lingerie demonstrated an increase in sales during H1 2011 mainly due to their performance in Russia, Ukraine, Belarus and Kazakhstan, the proportion of the sales in the Baltics eventually decreased.

In terms of lingerie brands, “Milavitsa” core brand accounted for 73.4% of total lingerie sales revenue in H1 2011 (H1 2010: 73.3%) and amounted to EUR 41,094 thousand. “Lauma Lingerie” core brand accounted for 8.0% of total lingerie sales (H1 2010: 8.1%) and amounted to EUR 4,479 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 18.6% of total lingerie sales in H1 2011 (H1 2010: 18.6%), amounting to EUR 10,414 thousand.

Wholesale

In H1 2011, wholesale revenue amounted to EUR 47,679 thousand, representing 84.8% of the Group’s total revenue (H1 2010: 82.3%). 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 local 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 H1 2011 amounted to EUR 8,308 thousand, representing a 3.2% increase as compared to the previous year.

Own retail operations were conducted solely in Belarus and Latvia. At the end of H1 2011 the Group operated 52 own retail outlets with a total area of 4,573 square meters. In H1 2011 4 new own lingerie stores were opened, including 3 stores under Milavitsa brand name in Belarus and 1 store under Lauma Lingerie brand name in Latvia, 2 stores under Milavitsa brand name were closed. As of 30 June 2011, there were 379 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Cyprus, Germany, Georgia, Slovenia and Estonia, resulting in net increase of 31 shops during H1 2011. Additionally, as of 30 June 2011, there were 18 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia, Estonia and Albania, of which 5 were opened and 1 was closed due to store relocation in H1 2011. The 400^th Milavitsa store was opened in Belarus on 1 April 2011. In February a Milavitsa store was opened on Kreschatik street, the major shopping street in Kiev (Ukraine). Estonia became the 15^th country where Milavitsa established franchised retail operations.

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 23.3% growth in EUR terms as compared to H1 2010 mainly due to the number of new shops opened in the recent year. Devaluation in Belarus has also contributed to consumer spending rush despite the increase in prices. Sales per square meter in the like-for-like shops have increased as well.

In the Baltics, retail sales increased by 5.7% as compared to the previous year and amounted to EUR 368 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 H1 2010 retail sales include retail sales generated in Russia in the amount of EUR 1,264 thousand, while H1 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 10,453 thousand pieces in H1 2011, representing a 21.5% increase compared to the respective period in the previous year. The total production volume in Lauma Lingerie amounted to 776 thousand pieces in H1 2011, showing an increase of 20.7% compared to the respective period in the previous year.

Investment

In H1 2011, the Group’s investments totalled EUR 2,156 thousand with investments into retail amounting to EUR 91 thousand. Other investments were made in equipment and facilities to maintain effective production and to add capacity for 2011.

Personnel

As of 30 June 2011, the Group employed 3,206 employees including 416 in retail and 2,028 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and wages in H1 2011 amounted to EUR 9,024 thousand. The remuneration of the members of the Management Board and Supervisory Board totalled EUR 56 thousand.

Consolidated statement of financial position

Unaudited

Consolidated income statement for 6 months 2011

Unaudited

Märt Meerits
Member of the Management Board
Silvano Fashion Group
Tel +372 684 5000
E-mail: info@silvanofashion.com