Silvano Fashion Group
Quarterly report

Consolidated interim report for Q1 2012

Tallinn, Estonia, 2012-05-18 17:30 CEST --  

Management Report

Selected Financial Indicators

In summary, the selected financial indicators of AS Silvano Fashion Group for Q1 2012 and Q1 2011 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

Effective from 2011, Silvano Fashion Group consolidated results include the effect of hyperinflation, which, in short means that our income and expenses shall be inflated by the CPI growth factor of the hyperinflationary environment, and then translated into euro – our reporting currency – at the period-end exchange rates. The same is applied to the non-monetary assets and liabilities of our balance sheet. Most of our expenses are in the (hyper)inflationary environment (Belarus), which, in essence, is good for our cost structure (in foreign currency, our expenses typically are lagging behind the inflation). Common sense in this situation is that the profitability of the business should increase. Therefore, the reader should be wary that hyperinflation adjusted numbers need to be analyzed carefully.

Q1 2012 shows a healthy growth in sales compared to Q1 2011, the clean growth (without hyperinflation correction) was 13.3%. The reasons behind this are higher demand on our core markets (i.e. Russia and Belarus) in Q1 2012, recording sales of the swimwear (having higher than average margins), strong Russian ruble and higher prices in Belarus. Due to IAS 29 adjustments in the production cost and change in inventories, our reported EBITDA growth was adjusted downwards, but still showing a growth of 22.5% over the last year and reaching EUR 7 425 thousand. Hyperinflation had also an adverse effect on the accounted gross profit margin (41.7%) and EBITDA margin (25.5%). Net profit for Q1 2012 totaled EUR 6 132 thousand.

Russian economy, the Group’s major market, is continuing to over perform our budgeted expectations. Russian economy advanced by 4.9% (GDP growth by Rosstat), Russian ruble remained strong throughout the whole quarter As a result retail sales in Russia have shown continuous improvement during Q1 2012. The Group’s sales in Russia in Q1 2012 grew by 15.4% compared to the sales level of Q1 2011, reaching EUR 18 609 thousand and representing 64% from the Group’s total sales.

The Belarusian market was strong in Q1 2012, the consumer segment was influenced by a modest 5% consumer price index growth and very stable currency environment. In Q1 retail operations in Belarus demonstrated an increase of 5.7% in EUR terms, reaching EUR 3 926 thousand (the clean result without hyperinflation effect was EUR 3 806 thousand). Clearly, Q1 2011 comparable base numbers are very strong because of the last year’s devaluation expectations.  The Belarusian market, including wholesale, accounted for 22.7% from the Group’s total sales.

Ukraine continues behind Russia, but also behind Belarus in economic recovery and development. By the Ukrainian State Statistics Service, the country’s GDP advanced by 1.8% during Q1, 2012. The Group sold for EUR 1 574 thousand in Q1 2012 in Ukraine, a modest decrease by 1% compared to 2011. The management shall dedicate more attention on this market in the near future.

The Baltic retail market has clearly recovered from its worst, our Q1 2012 sales improved by 17.5% in the region. Due to minor net exposure (1.8% from the Group’s total sales), the positive development does not have substantial effect on our profit numbers.

Overall, Q1 sales demonstrated an increase of 14.3% as compared to Q1 2011, whereas most of the growth originates from the “other markets”, which significance shall receive more attention in the future reports.

At the end of the reporting period the Group and its franchising partners operated 514 Milavitsa and Lauma Lingerie stores, including 55 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 29 088 thousand in Q1 2012, representing a 14.3% increase as compared to the previous year. Overall wholesale increased by 15.8% and retail sales – by 6.6%.

The Group’s gross margin in Q1 2012 increased and was 41.7%, as compared to 41.4% in the respective period of previous year. Such an insignificant growth of gross margin is explained by following hyperinflation adjustments on gross profit:

• Hyperinflation adjustment on inventories (-EUR 1 million);
• Hyperinflation adjustment on sales (+ EUR 0.2 million);
• Hyperinflation adjustment on income statement in terms of cost of production (-EUR 1 million).

The consolidated operating profit in Q1 2012 amounted to EUR 6 844 thousand, compared to EUR 5 619 thousand in Q1 2011. The consolidated operating profit margin was 23.5% (22.1% in Q1 2011). Hyperinflation effect on operating profit beside mentioned above effect on gross profit is also caused by the hyperinflation adjustment on income statement in terms of administrative, sales and other operating expenses in the amount of approximately EUR 60 thousand.

Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 386 thousand in Q1 2012. SP ZAO Milavitsa accrued a foreign exchange gain in the amount of EUR 388 thousand that was mainly caused by sales denominated in Russian ruble, which appreciated against Belarusian ruble in Q1 2012 by 4.8%.

Effective tax rate for Q1 2012 amounted to 18.4% (16.3% in Q1 2011). Notwithstanding the decrease of income tax rate in Belarus from 24% to 18% starting from 1 January 2012, the fact that company fully utilized accumulated tax losses in Russia and hyperinflation adjustments to financial statements (which are not taxable), effective tax rate increased compared to Q1 2011.

Gain on net monetary position in Q1 2012 amounted to EUR 78 thousand and was recognized as a result of following hyperinflation adjustments:

Consolidated net profit attributable to equity holders amounted to EUR 5 333 thousand in Q1 2012, compared to EUR 5 089 thousand in Q1 2011; net profit margin attributable to equity holders was 18.3% against 20.0% in Q1 2011.

Financial position

As of 31 March 2012 consolidated assets amounted to EUR 75 924 thousand representing an increase of 10.9% as compared to the position as of 31 December 2011.

Property, plant and intangibles balances increased by EUR 597 thousand as compared to 31 December 2011 the key reason being the hyperinflation effect on opening balance amounted to EUR 816 thousand.

Trade receivables increased by EUR 7 651 thousand as compared to 31 December 2011 and amounted to         EUR 17 115 thousand as of 31 March 2012. Inventory balance increased by EUR 2 883 thousand and amounted to EUR 24 431 thousand as of 31 March 2012. Increase in trade debtors and stock balance was in line with the seasonality trend of the business.

Hyperinflation effect on opening balance had a positive impact on the Group’s equity attributable to equity holders, in the amount EUR 1 924 thousand in Q1 2012. On the overall basis, equity attributable to equity holders increased by EUR 7 261 thousand and amounted to EUR 49 725 thousand as of 31 March 2012.

Current liabilities decreased by EUR 974 thousand in Q1 2012. Decrease in current liabilities is explained by settling of corporate income tax liability for 2011 by Belarusian subsidiaries in March 2012.

Current and non-current loans and borrowings increased by EUR 70 thousand to EUR 90 thousand as of 31 March 2012. Loans received and loans repaid in Q1 2012 amounted to EUR 100 thousand and EUR 26 thousand respectively.

Tax liabilities and other payables, including payables to employees, amounted to EUR 6 784 thousand. Provisions amounted to EUR 320 thousand as of 31 March 2012.

Sales

Sales by business segments

Sales by markets

In Q1 2012, the Group focused mainly on the Baltics, Russian, Belarusian and Ukrainian markets.

Total sales by markets

The majority of lingerie sales revenue in Q1 2012 in the amount of EUR 18 609 thousand was generated in the Russian market, accounting for 64.0% of all sales in Q1 2012 as compared to EUR 16 128 thousand in Q1 2011. The second largest region was Belarus, where sales reached EUR 6 594 thousand, contributing 22.7% of lingerie sales (both retail and wholesale) as compared to EUR 6 165 thousand in Q1 2011.

Sales in the major markets demonstrated a positive trend in terms of pieces sold in Q1 2012 as compared to the respective period in 2011.

In terms of lingerie brands, “Milavitsa” core brand accounted for 73.9% of total lingerie sales revenue in Q1 2012 (Q1 2011: 74.7%) and amounted to EUR 21 429 thousand. “Lauma Lingerie” core brand accounted for 6.4% of total lingerie sales (Q1 2011: 6.8%) and amounted to EUR 1 870 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 19.7% of total lingerie sales in Q1 2012 (Q1 2011: 18.5%), amounting to EUR 5 698 thousand.

Wholesale

In Q1 2012, wholesale revenue amounted to EUR 24 874 thousand, representing 85.5% of the Group’s total revenue (Q1 2011: 84.4%). The main wholesale regions were Russia, Belarus, Ukraine, Kazakhstan, Moldova and the Baltic States. Substantial growth has been achieved in Russia, Kazakhstan and Moldova 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 2012 amounted to EUR 4 123 thousand, representing a 6.6% increase as compared to the previous year.

Retail operations were conducted in Belarus and Latvia. At the end of Q1 2012 the Group operated 55 own retail outlets with a total area of 4 751 square meters. As of 31 March 2012, there were 436 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Germany, South Africa, Lithuania, Estonia, Georgia and Slovenia, resulting in net increase of 16 shops during Q1 2012. Additionally, as of 31 March 2012, there were 23 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia, Estonia and Albania.

In Q1 2012 1 new own lingerie store under Milavitsa brand was opened in Belarus.

Number of own stores as of:

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 5.7% growth in EUR terms as compared to Q1 2011. The growth was mainly due to the number of new shops opened in the recent years.

In the Baltics, retail sales increased by 3% as compared to the previous year and amounted to EUR 197 thousand.

Own stores by concept

Production, sourcing, purchasing and logistics

The total volume of production in SP ZAO Milavitsa amounted to 5 285 thousand pieces in Q1 2012, representing a 7.3% increase as compared to the respective period in the previous year. The total production volume in Lauma Lingerie amounted to 382 thousand pieces in Q1 2012, showing an increase of 1.1% as compared to the respective period in the previous year.

Investment

In Q1 2012, the Group’s investments totaled EUR 368 thousand with investments into retail amounting to EUR 54 thousand. Other investments were made in equipment and facilities to maintain effective production and to add capacity for 2012.

Personnel

As of 31 March 2012, the Group employed 3 328 employees including 446 in retail and 2 152 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and related taxes in Q1 2012 amounted to EUR 4 825 thousand. The remuneration of the members of the Management Board and Supervisory Board totaled EUR 130 thousand.

Consolidated statement of financial position

Consolidated income statement