Silvano Fashion Group
Half Year financial report

Consolidated interim report for Q2 and 6 months 2012

Tallinn, 2012-08-24 17:30 CEST -- Selected Financial Indicators

Summarized selected financial indicators of the Group for 6m 2012 compared to 6m 2011 and 30.06.2012 compared to 31.12.2011 were as follows:

Underlying formulas:
EBITDA = net profit for the period + depreciation and amortisation + net financial income + income tax expense + gain on net monetary position
Gross profit margin = gross profit / revenue
EBITDA margin = EBITDA / revenue
Net profit margin = net profit / revenue
Net profit margin attributable to equity holders of the Parent company = net profit attributable to equity holders of the Parent company / 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 environment

Whilst the Western economies show signs of fragility and almost non-existent growth, the core markets the Group enjoy recovery in consumption and contribute to steady, organic growth of our business. In June 2012 a 500^th store was opened under Milavitsa franchise. In April 2012 the 300-store landmark was reached in Russia, our core market. Total geography of our franchise partners now covers more than 20 countries, including Milavitsa and Lauma Lingerie branded stores. Evidently the openings contribute to the sales growth in the future.

The most vibrant growth we saw in the CIS markets (CIS stands for Commonwealth of Independent States). For instance, our sales in Kazakhstan, Moldova, Kyrgyzstan and other CIS markets are improving steadily (y-o-y growth above 40%). Strong presence in the Belarus retail market, stabilization of the economy and the currency led to improved sales (both in pieces and in net sales) there. In Russia, our key market, solid demand contributed to a 14.7% sales growth compared to the sales data for 6 months 2011. Ukraine’s total sales improved by 16% on comparable period basis, the Group expects further improvement in the growth rate there. Baltic consumer markets are generally in a better shape than a year ago, the markets comprise slightly below 3% of the Group’s total sales. Overall, the Group increased its sales for 6 months 2012 to 65 501 thousand EUR, an increase of 16.6% compared to the same period of prior year. Q2 2012 added 36 413 thousand EUR in sales, an increase of 18.5% compared to Q2 2011.

On our core markets, Russia’s economic growth is undisputable, though with some deceleration. By Rosstat preliminary data, the country’s GDP in Q2 2012 advanced by 4.0% year-to-year (4.9% for Q1 2012 compared to Q1 2011). Russia’s ruble, slightly losing against the Euro in Q2 after strong appreciation in Q1 2012, contributes to healthy retail demand. However, the Group’s sales in Russia for 6 months 2012 totaled 39 813 thousand EUR, a 14.6% growth compared to the same period a year ago.

Belarus economy showed somewhat more modest numbers for the GDP growth. By Belstat, Q2 GDP growth stood at 2.7%, for 6 months 2012: 2.9%. Nevertheless, the price inflation pushes the consumption, hence the sales in Belarus have improved compared to 2011. The hyperinflation adjusted sales in Belarus totaled 15 516 thousand EUR for 6 months 2012, a growth of 17.5% over the sales of the comparable period last year.

The reflection of the Ukrainian economy by the State Statistics Service showed real GDP growth by 2.5% during first 6 months 2012 compared to year earlier. The year-to-year GDP growth for Q2 2012 was 3%. Ukrainian sales totaled 4 015 thousand EUR for 6 months 2012, showing an improvement of 14.0% year-to-year basis.

Baltic economies are still the top performers in the Eurozone. Estonia’s GDP growth amounted to 2% in the Q2 2012. Latvia’s GDP shows the highest growth rates in the Eurozone, whereas the Q2 2012 GDP growth was 5.1%. Lithuania’s GDP growth stood at 2.1% in the Q2 2012. Our sales in the region totaled 1 825 thousand EUR in 6 months 2012, up from 1 798 thousand EUR in 6 months of 2011. The new additions to the Group’s sales team are expected to strengthen our position in the Baltics in the future.

At the end of the reporting period the Group and its franchising partners operated 533 Milavitsa and Lauma Lingerie stores, an increase of 84 stores over the number a year ago, including 54 stores operated directly by the Group and the rest of them by franchising partners. The Group’s retail focus remains similar to previous year - promoting and supporting franchising partners mixed with own retail development. In the wholesales segment, the sales improved by notable 16% year-to-year.

Financial performance

Positive effect of the devaluation on the cost side has been leveled out by increased expenses for labor, utilities and to some extent materials sourced from Belarus. Further to this, hyperinflationary accounting requires us to apply certain accounting methods that have negative impact on Group`s financial results and margins in 2012 (see also an analysis below).

The Group`s sales amounted to 65 501 thousand EUR during 6 months 2012, representing a 16.6% increase as compared to the same period of previous year. Overall, wholesales increased by 16% and retail sales – by 20%.

Higher sales volumes required us to build up larger stocks, which are expected to decrease significantly during Q3 2012. As normal course of business, we shall start building up the inventories in Q4 2012.

The Group’s gross profit margin during 6 months 2012 decreased and was 38.8%, as compared to 48.3% in the respective period of previous year. Such decrease of gross margin is explained by last year`s devaluation of Belarusian ruble and following adjustments on gross profit of 6m 2012 caused by application of hyperinflationary accounting:

• Hyperinflation adjustment on sales (+1 million EUR in 6m 2012; +0.8 million EUR in Q2 2012);
• Hyperinflation adjustment on cost of goods sold  (-4.6 million EUR in 6m 2012; -2.6 million EUR in Q2 2012);

Consolidated operating profit for 6 months 2012 amounted to 14 243 thousand EUR, compared to 17 767 thousand EUR in 6 months 2011. The consolidated operating profit margin was 21.7% (31.6% in 6m 2011). There is also a hyperinflationary effect on operating profit besides mentioned above effect on gross profit, it is also caused by the hyperinflationary adjustments to income statement in terms of administrative, sales and other operating expenses.

Consolidated net financial income amounted to -154 thousand EUR in 6 months 2012. SP ZAO Milavitsa accrued a foreign exchange loss in the amount of 412 thousand EUR that was mainly caused by appreciation of Belarusian ruble against Euro in 6 months 2012.

Effective tax rate for 6 months 2012 amounted to 22.6% (22.3% in 6 months 2011). Notwithstanding the decrease of income tax rate in Belarus from 24% to 18% starting from 1 January 2012, effective tax rate increased compared to 6m 2011. This is due to the following facts: the Group fully utilized accumulated tax losses in Russia, the Parent company collected dividends from its subsidiary, application of hyperinflation adjustments to financial statements (which are not taxable).

Consolidated net profit attributable to equity holders of the Parent company amounted to 9 661 thousand EUR in 6 months 2012, compared to 20 723 thousand EUR in 6 months 2011; net profit margin attributable to equity holders of the Parent company was 14.7% against 36.9% in 6 months 2011.

Financial position

As of 30 June 2012 consolidated assets amounted to 84 086 thousand EUR representing an increase of 22.8% as compared to the position as of 31 December 2011.

Property, plant and intangibles balances increased by 1 262 thousand EUR as compared to 31 December 2011 the key reason being the hyperinflation effect on opening balance amounting to 1 483 thousand EUR.

Trade receivables increased by 7 635 thousand EUR as compared to 31 December 2011 and amounted to 17 665 thousand EUR as of 30 June 2012. Inventory balance increased by 2 259 EUR thousand and amounted to 23 807 thousand EUR as of 30 June 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 of the Parent company comprising 4 162 thousand EUR in 6 months 2012. On the overall basis, equity attributable to equity holders of the Parent company increased by 3 885 thousand EUR and amounted to 46 349 thousand EUR as of 30 June 2012.

Current liabilities increased by 9 252 thousand EUR in 6 months 2012. Increase in current liabilities is explained by recognition of a liability to pay dividends in the amount of 9 875 thousand EUR, dividends were paid out in full in July 2012. Current and non-current loans and borrowings increased by 12 thousand EUR to 33 thousand EUR as of 30 June 2012.

Sales structure

Sales by markets

The majority of lingerie sales revenue during 6 months 2012 in the amount of 39 813 thousand EUR was generated in Russia, accounting for 60.8% of total sales in 6 months 2012. The second largest market was Belarus, where sales reached 15 516 thousand EUR, contributing 23.7% of lingerie sales (both retail and wholesale) as compared to 13 203 thousand EUR in 6 months 2011.

Sales in the major markets demonstrated a positive trend in terms of pieces sold in 6 months 2012 as compared to the respective period in 2011.

Sales by business segments

During 6 months 2012, wholesale revenue amounted to 55 332 thousand EUR, representing 84.5% of the Group’s total revenue (6 months 2011: 84.8%). The main wholesale regions were Russia, Belarus, Ukraine, Kazakhstan, Moldova and the Baltic States.

Total lingerie retail sales of the Group in 6 months 2012 amounted to 9 966 thousand EUR, representing a 20% increase as compared to the previous year. Significant part of the growth is attributable to inflationary environment in Belarus, growth of sales measured in units totaled approximately 11% for 6 months 2012 over the same period last year.

Own retail operations were conducted in Belarus and Latvia. As of the end of 6 months 2012 the Group operated 54 own retail outlets with a total area of 4 700 square meters. As of 30 June 2012, there were 456 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldova, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Germany, South Africa, Lithuania, Estonia, Georgia, United Arab Emirates, Iran, Slovenia and Belgium, resulting in net increase of 84 shops compared to the end of Q2 2011. Additionally, as of 30 June 2012, there were 23 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia, Estonia and Albania. For Lauma Lingerie, the Group expects openings in Belarus, Ukraine and Russia in the near future.

Production

Total volume of production of the Group amounted to 11 976 thousand pieces during 6 months 2012, representing a 6.7% increase as compared to respective period in the previous year.

Investments

During 6 months 2012 the Group’s investments totaled 535 thousand EUR with investments into retail amounting to 92 thousand EUR. Other investments were made into equipment and facilities to maintain effective production and to add capacity for 2012.

Personnel

As of 30 June 2012, the Group employed 3 332 employees including 464 in retail and 2136 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and related taxes in 6 months 2012 amounted to 10 456 thousand EUR. The remuneration of key management of the Group totaled EUR 180 thousand EUR.

Consolidated Statement of Financial Position

Consolidated Income Statement

         Aleksei Kadõrko
         Chief Financial Officer
         00 372 6845000
         info@silvanofashion.com