Silvano Fashion Group
Quarterly report

Consolidated interim report for Q3 and 9 months 2011

Tallinn, Estonia, 2011-11-08 18:31 CET -- Selected Financial Indicators

In summary, the selected financial indicators of AS Silvano Fashion Group for Q3 2011 and 9 months 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

  Year 2011 has so far been great success to SFG. Strong consumer demand in our core market Russia combined with the lowering production cost per unit due to currency devaluation in Belarus created ideal conditions for improvements in sales and gross margin at the same time.  The seasonality effect of the third quarter is a further contributor to the increase in sales, both in volume and in monetary terms. The same parallel can be drawn with Q3 in 2010.

Economic situation in Russia, the Group’s key market, stayed firm throughout the whole three quarters. Nevertheless, Russian economy is not isolated from the global economy, thus the expectations of the consumers and the retailers about the outlook of the future have deteriorated. One of the indicators is the volatility and trend of the currency pairs EUR/USD and EUR/RUB whereas Russian rouble has weakened throughout the whole Q3. Despite oil and gas prices that continue to support Russian economy, the world financial markets uncertainty and up-coming political campaign in Russia resulted in vulnerable economic situation in the country in Q3, probably extended into Q4 2011.

In Ukraine, the infamous gas deal court case might result in slowing down of US and EU financial support of the Ukrainian economy with certain pressure on the Ukrainian authorities, which can eventually worsen consumer demand.

The Belarusian consumer market has been affected by de facto devaluation of the local currency and multiple exchange rates since Q2 2011. Q3 2011 retail sales were partially driven by the willingness to get rid of local currency and convert it into consumer goods.

The Baltic markets have recovered from the bottom but the growth outlook is vague. Nevertheless, 2 new Milavitsa and 1 new Lauma Lingerie franchise store have been opened in Estonia, which ascertains that there is hope for improvement. Our own retail network sales stalled in Latvia (9 month y-o-y unit sales dropped by 1.2%, compensated by slightly higher mark-ups at the stores).

At the end of the reporting period the Group and its franchising partners operated 462 Milavitsa and Lauma Lingerie outlets, including 53 stores operated directly by the Group and the rest by franchising partners.

9m 2011 sales demonstrated annual increase of 19.5% compared to 9m 2010. 9m 2011 EBITDA climbed to EUR 31,049 thousand, an increase of 96.1% compared to 9m 2010; 9m 2011 normalized net profit (excluding effect of foreign exchange, mainly due to the devaluation of Belarusian rouble) stood at EUR 20,967 thousand and up by 82.1% compared to 9m 2010.

Third quarter sales amounted to EUR 30,355 thousand, EBITDA - to EUR 12,516 thousand, and normalized net profit (excluding effect of foreign exchange) - to EUR 9,964 thousand.

Financial performance

The Group sales amounted to EUR 86,549 thousand in 9 months 2011, representing a 19.5% increase compared to the previous year. Overall wholesales increased by 22.9% and retail sales by 4.7%. 9 month 2010 retail sales include retail sales generated in Russia in the amount of EUR 1,268 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 16.0%.

The Group gross margin increased in 9 months 2011 and reached 51.1% compared to 40.2% in the respective period of the previous year. Positive effect was observed in Q2 and Q3 2011 mainly due to devaluation of Belarusian rouble, which generates cost savings in Euro terms in Belarus.

The consolidated operating profit amounted to EUR 30,008 thousand during 9 months of 2011, compared to EUR 14,511 thousand in 9 months of 2010. The consolidated operating profit margin was 34.7% (20.0% in 9 months of 2010). Significant growth in operating profit margin is mainly explained by the fact that most of the Group’s revenue is denominated in Russian roubles and Euros whereas significant part of the costs is linked to Belarusian rouble.

SFG foresees the positive cost effect to continue also in Q4 due to the devaluation of Belarusian rouble that has positive effect on the gross margins, hence also on the profitability of the Group.

Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 12,679 thousand in 9 months of 2011. The main constituents to the foreign exchange gain in the amount of EUR 12,485 thousand are sales denominated in Russian roubles and short-term deposits denominated in Euros.

Effective tax rate for 9 months 2011 amounted to 22.5% (23.0% in 9 months 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.

All dividend and capital reduction payments to SFG shareholders during the reporting period have been carried out without any additional tax burden to the Group.

Consolidated net profit attributable to equity holders amounted to EUR 27,638 thousand in 9 months of 2011, compared to EUR 9,619 thousand in 9 months of 2010; net profit margin attributable to equity holders was 31.9% against 13.3% in 9 months of 2010.

In 9 months of 2011, Group’s return on equity (ROE) amounted to 77.3% (33.4% in 2010) and return on assets (ROA) reached 49.4% (20.5% in 2010).

Financial position

As of 30 September 2011 consolidated assets amounted to EUR 62,852 thousand representing a decrease of 3.4% 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 rouble being another factor, decreasing the value of assets based in Belarus in EUR terms.

Property, plant and intangibles balances decreased by EUR 3,758 thousand compared to the year-end; the key reason being the impact of the foreign exchange rate decrease in the monetary amount of EUR 6,207 thousand.

Trade receivables increased by EUR 1,571 thousand as compared to 31 December 2010 and totalled EUR 11,213 thousand as of 30 September 2011. Inventory balance decreased by EUR 644 thousand and totalled EUR 15,148 thousand as of 30 September 2011. Reduction in inventory balance is partially related to the seasonality 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 22,161 thousand in 9 months 2011. Since currency translation reserve affects directly owners’ equity, on the overall basis, equity attributable to equity holders decreased by EUR 2,208 thousand and amounted to EUR 39,834 thousand as of 30 September 2011.

Current liabilities increased by EUR 3,361 thousand in 9 months 2011. The main constituent for the increase was income tax liability that increased from EUR 608 thousand to EUR 4,391 thousand. Most of the income tax was recognized in Belarus as a result of higher operating profits and gains from currency exchange fluctuations both originating from devaluation of BYR.

Current and non-current loans and borrowings increased by EUR 7 thousand to EUR 43 thousand as of 30 September 2011. Loans received and loans repaid in 9 months 2011 amounted to EUR 711 thousand and EUR 681 thousand respectively, including finance lease liabilities repaid in the amount of EUR 7 thousand.

Tax liabilities and other payables, including payables to employees, amounted to EUR 8,594 thousand. Provisions amounted to EUR 233 thousand as of 30 September 2011.

Sales

Sales by business segments

Sales by markets

In 9 months 2011, the Group focused mainly on the Baltics, Russian, Belarusian and Ukrainian markets.

Total sales by markets

The majority of lingerie sales revenue in 9 months of 2011 in the amount of EUR 53,199 thousand was generated in the Russian market, accounting for 61.5% of all sales compared to EUR 41,186 thousand in 9 months of 2010 (an increase of 29.2% y-o-y). Sales in Russia for 9 months of 2011 comprise wholesale only, but include both retail sales and wholesale for 9 months of 2010. The second largest region was Belarus, where sales reached EUR 21,868 thousand, contributing 25.3% of lingerie sales (both retail and wholesale) compared to EUR 20,019 thousand in 9 months of 2010 (an increase of 9.2% y-o-y)

Sales in the major markets demonstrated positive trend in terms of pieces sold in 9 months of 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 9 months of 2011 in the field of marketing and franchising.

SFG-held Lauma Lingerie demonstrated an increase in sales during 9 months 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 72.8% of total lingerie sales revenue in 9 months of 2011 (9 months of 2010: 72.6%) and amounted to EUR 62,794 thousand. “Lauma Lingerie” core brand accounted for 8.5% of total lingerie sales (9 months of 2010: 8.0%) and amounted to EUR 7,332 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 18.7% of total lingerie sales in 9 months of 2011 (9 months of 2010: 19.4%), amounting to EUR 16,129 thousand.

Wholesale

In 9 months of 2011, wholesale revenue amounted to EUR 72,634 thousand, representing 83.9% of the Group’s total revenue (9 months of 2010: 81.6%). 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.

Logistics and production issues caused significant undersupply of wholesalers by Milavitsa in August which was partially recovered in September. By the beginning of October some Russian wholesalers were overstocked by Milavitsa products.

Lower than expected retail sales and wholesales in August-October coupled by the negative macroeconomic forecast and rouble foreign exchange rate fluctuations in Russia led to moderate outlook for Q3-2012 by Milavitsa trading partners.

Retail operations

Total lingerie retail sales of the Group in 9 months of 2011 amounted to EUR 13,621 thousand, representing a 4.7% increase compared to the previous year.

Own retail operations were conducted solely in Belarus and Latvia. As of 30 September 2011 the Group operated 53 own retail outlets with a total area of 4,689 square meters. In 9 months of 2011 5 new own lingerie stores were opened, including 4 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.

Number of own stores as of:

The 400th landmark reached

As of 30 September 2011, there were 390 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Germany, Georgia, Slovenia, Iran and Estonia, resulting in net increase of 42 shops during 9 months 2011. Additionally, as of 30 September 2011, there were 19 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia, Estonia and Albania, of which 6 were opened and 1 was closed due to store relocation in 9 months 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 and Iran became the 16^th country where Milavitsa established franchised retail operations. Retail operations in Cyprus were terminated decreasing the number of countries with active franchised retail operations.

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 68.8% growth in local currency terms and a 17.0% growth in EUR terms as compared to 9 months 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, though not that significantly. Sales in some Belarusian shops dropped after the most recent price increase. Additional price increase has been scheduled for November 2011.

Having mentioned standstill in the volumes sold via own retail stores in the Baltics, retail sales remained at the level of previous year and amounted to EUR 604 thousand. Improvement of the efficiency of sales and increase in both volume and sales revenue shall be addressed during 2012 and beyond.

Own retail operations in Russia were fully terminated in H1 2010. As a result 9 months of 2010 retail sales include retail sales generated in Russia in the amount of EUR 1,268 thousand, while 9 months of 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 15,309 thousand pieces in 9 months of 2011, representing a 22.3% increase compared to the respective period in the previous year. The total production volume in Lauma Lingerie amounted to 1,214 thousand pieces in 9 months of 2011, showing an increase of 35.2% compared to the respective period in the previous year.

Investment

In 9 months of 2011, the Group investments totalled EUR 3,541 thousand with investments into retail amounting to EUR 118 thousand. Other investments were made into equipment and facilities to maintain effective production and to add capacity.

Personnel

As of 30 September 2011, the Group employed 3,244 employees including 416 in retail and 2,062 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and wages in 9 months 2011 amounted to EUR 13,440 thousand. The remuneration of the members of the Management Board and Supervisory Board of the parent company totalled EUR 77 thousand.

Consolidated statement of financial position

Unaudited

Consolidated income statement for 9 months 2011

Unaudited