Silvano Fashion Group
Quarterly report

SFG: Consolidated interim report for Q4 and 12 months 2011

Consolidated interim report for Q4 and 12 months 2011

Tallinn, 2012-02-29 17:49 CET -- Management Report

Selected Financial Indicators

In summary, the selected financial indicators of AS Silvano Fashion Group for Q4 2011 and 12 months 2011 were as follows:

* Note: As of December 2011, the economy of Republic of Belarus was considered as hyperinflationary for the purpose of IFRS reporting. This has an effect on the financial statements for the whole financial year. All annual adjustments have been reflected in adjusted Q4 numbers.

Business Results

Year 2011 has been financially the strongest in our history, and we have reached the pre-crisis sales levels with positive operating cash flow and insignificant net debt.

The growth in business volumes was well supported by the low cost production environment, more specifically, the production cost in EUR terms in Belarus. Unfortunately, the inflationary environment in Belarus, and the classification of the country under the “hyperinflationary” environment terms by the International Accounting Standards in Q4 2011, has made the interpretation of the interim reports complicated (we have elaborated on this in more detail in Note 16 of the report). Therefore, we are outlining the key business drivers for 2011 that should guide the investors in their investment decisions:

• Total sales reached 107.7M EUR, an increase of 15.5% compared to 2010;
• EBITDA, probably the best indicator for businesses’ ability to generate cash, advanced to 29.6M EUR, an increase by 52%;
• Production volume reached nearly 22 million units, representing a 19% increase a year;
• Points of sale: total number of shops (own + franchise) advanced to 473 points of sale, an increase of 61 stores a year, or 15%;
• Cash distribution to shareholders reached a record of 0.29 euros per share.

Our sales mix by regions has not changed significantly. Russia remains our core market with more than 62% of the Group’s total sales. Thanks to our strong own local retail network and extremely high brand awareness in Belarus, the country is generating 22% of the total sales. The next significant market is Ukraine with almost 5% of the Group sales, followed by other CIS countries. The sales in the Baltics reached 5.8% from the total, significant part of this is considered re-export to Russia. The fastest growth of franchise stores in Russia implies to likely improving sales there.

Economic situation in Russia, the Group’s key market, stayed firm throughout the whole year. Q4 strengthening of the Russian rouble against Euro and other currencies is a positive factor to our business. Russian retails sales data indicates nearly 7% growth for the country, the best figure since the crisis in 2008. This is best summarised as sustainable economic growth, low inflation and a federal budget surplus. We estimate a CPI growth of around 5%, stable RUB/EUR and RUB/USD environment for 2012.

The Belarusian consumer market stabilized in Q4, so did the currency. The dual exchange rate policy was abolished, leading to more transparent exchange rates.

Ukraine has surprised us with exceptionally strong local currency and buoyant demand. At the time of release of the current report, there is no clarity on the Ukraine-Russian gas deal, having significant impact on the consumer spending ability and economy as a whole. We nevertheless anticipate inflation for 2012 around 8%.

The Baltic markets have recovered from the bottom, reflected also in the retail statistics. We would, nevertheless, anticipate significant changes in the consumer demand for 2012.

At the end of the reporting period the Group and its franchising partners operated 473 Milavitsa and Lauma Lingerie outlets, including 54 stores operated directly by the Group and the rest by franchising partners.

2011 sales demonstrated annual increase of 15.5% compared to 2010. 2011 EBITDA climbed to EUR 29,581 thousand, an increase of 52.4% compared to 2010.

Financial performance

The Group sales amounted to EUR 107,768 thousand in 2011, representing a 15.5% increase compared to the previous year. Overall wholesales increased by 20.4% and retail sales decreased by 6.8%. 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.

The Group gross margin increased in 2011 and reached 43.3% compared to 39.8% 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 27,911 thousand during 2011, compared to EUR 17,658 thousand in 2010. The consolidated operating profit margin was 25% (18.9% in 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. Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 17,551 thousand in 2011.

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 38,832 thousand in 2011, compared to EUR 12,240 thousand in 2010; net profit margin attributable to equity holders was 36% against 13.1% in 2010.

In 2011, Group’s return on equity (ROE) amounted to 92.1% (33.4% in 2010) and return on assets (ROA) reached 58.1% (20.5% in 2010).

Financial position

As of 31 December 2011 consolidated assets amounted to EUR 68,506 thousand representing an increase of 5.3% compared to the year-end. Trade receivables decreased by EUR 195 thousand, reflecting effective debtors management, and totalled EUR 9,447 thousand as of 31 December 2011. Inventory balance increased by EUR 5,801 thousand, reaching EUR 21,593 thousand. 

Current liabilities increased by EUR 4,356 thousand in 2011. The main constituent for the increase was income tax liability. 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 decreased by EUR 16 thousand to EUR 20 thousand as of 31 December 2011.

Tax liabilities and other payables, including payables to employees, amounted to EUR 1,980 thousand. Provisions amounted to EUR 1,194 thousand as of 31 December 2011.

Sales

Sales by business segments

Sales by markets

In 12 months 2011, the Group focused mainly on the Russian, Belarusian, Ukrainian and other CIS countries’ markets. The share of the Baltics sale has for reporting purposes increased significantly due to increased re-exporting activities of Baltic wholesalers via Baltic countries towards Russia.

Total sales by markets

The majority of lingerie sales revenue in 12 months of 2011 in the amount of EUR 67,172 thousand was generated in the Russian market, accounting for 62.3% of all sales compared to EUR 53,721 thousand in 12 months of 2010 (an increase of 25% y-o-y). The second largest region was Belarus, where sales reached EUR 23,786 thousand, contributing 22% of lingerie sales (both retail and wholesale) compared to EUR 25,531 thousand in 12 months of 2010 (a decrease of 6.8% y-o-y).

The most considerable sales growth (in percentage terms) took place on Ukrainian and other markets, whilst Russia remains the core market with solid sales growth.

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 12 months of 2011 in the field of marketing and franchising.

In terms of lingerie brands, the sales mix did not change substantially compared to Q3 2011.