Consolidated interim report for Q4 and 12 months 2010

Tallinn, Estonia, 2011-02-15 18:43 CET (GLOBE NEWSWIRE) --   

  Management Report

  Selected Financial Indicators

  In summary, the selected financial indicators of AS Silvano Fashion Group for Q4 2010 and 12 months 2010 were as follows:

* Selected financial indicator includes only the result of continuing operations in 2009

* Financial ratios cover only continuing operations

Underlying formulas:

Gross margin = gross profit / sales revenue
EBITDA margin = EBITDA / 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/ average total assets
ROE (return on equity) = net profit attributable to owners of the Company/ 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
Current ratio = current assets / current liabilities
Quick ratio = (current assets – inventories) / current liabilities

Business results

On overall, according to the seasonality trends of the business Q4 is usually slightly weaker with respect to sales as compared to other quarters; however, December usually is one of the best performing months in a year.

In 2010 the Group’s major markets have continued to recover. Economic situation in Russia, the Group’s key market, was steadily improving. The consumers' purchasing power has increased and unemployment rate has lowered. Russian Ruble strengthened by 3.8% against multi-currency basket in 2010 (from January till December). To compare, in 2009 it weakened by 3.9%. Real effective exchange rate of the Russian Ruble went up by 4.2% against USD and by 15.0% against Euro. Based on the forecasts of the Ministry of Economics of Russian Federation effective exchange rate of Russian Ruble will go up by 5.7% in 2011. Oil and gas prices continue to support Russian economy. As a result, retail sales in the end customer market have been growing since the beginning of 2010. The Group’s sales in Russia in 12 months 2010 were 24.1% above of the respective period in 2009.

The Belarusian market has been stable during 2009 and did not weaken in 12 months 2010. According to preliminary information the estimated Belarusian economy’s GDP growth was 7.6% in 2010. In Q4 2010 retail operations in Belarus demonstrated an increase of 56.6% in local currency terms and 56.3% in EUR terms as compared to Q4 2009. 

Unfortunately signs of the recovery of Ukrainian economy are still not as strong as in Russia.

Despite the difficult situation that remains in the Baltics, where economy suffered the most in 2009, Lauma Lingerie’s Q4 2010 sales in the Baltic countries increased by 76.5% as compared to Q4 2009.

In general, 2010 sales level and market situation confirmed management forecast of business recovery. Q4 sales demonstrated an increase of 25.3% as compared to Q4 2009.

The opinion of the management of the Group is that the markets have entered into the stabilization phase and that consumers have adjusted their purchasing patterns to the new market conditions.

On overall, apparel and lingerie markets are currently undersupplied, especially in Russia, because of limited orders placed for finished garments by major retailers in 2009 while the demand has grown significantly. The situation is favourable for the companies operating their own production units and those capable of fast restock of their retail outlets due to effective sourcing and logistics solutions. At the same time this has brought severe rivalry for local production capacities and the price per labour minute in the market has on average increased by 30-50%.

At the end of the reporting period the Group and its franchising partners operated 412 Milavitsa and Lauma Lingerie outlets, including 50 stores operated directly by the Group and the rest by franchising partners. The Group’s retail focus has been shifted towards the promotion and support of franchising in cooperation with existing and new partners.

Financial performance

The Group’s sales from continuing operations amounted to EUR 93,292 thousand in 2010, representing a 26.0% increase as compared to the previous year. In Q4 2010 sales amounted to EUR 20,857 thousand, representing a 25.3% increase as compared to respective period in the previous year.

Overall wholesale sales from continuing operations increased by 37.7%, while retail sales from continuing operations presented a decrease of 5.4%, mainly due to closures of underperforming stores and the restructuring of the Group’s distribution model that was carried out by the management in 2009. Decrease in retail sales is thus in line with management expectations and follows the restructuring decisions taken in 2009 when loss-making own retail operations in Russia were gradually discontinued. As the result, the proportion of own retail sales in total sales decreased by 5.8% and came at 17.5% of total sales in 2010.

The Group’s gross margin from continuing operations in 2010 decreased and was 39.8%, as compared to 43.5% in the previous year. Q4 2010 gross margin decreased as well as compared to Q4 2009 and amounted to 38.7%. Decrease in gross margin is mainly explained by higher customs duties on materials imported by the Group from the EU after Belarus joining the Customs Union with Russia and by the decline of the proportion of retail sales in total sales.

The consolidated operating profit from continuing operations in 2010 amounted to EUR 17,658 thousand, compared to EUR 3,863 thousand in 2009. The consolidated operating margin from continuing operations was 18.9% (5.2% in 2009). The operating profit and the operating margin in 2009 were adversely influenced by one-off expenses.

Consolidated net profit from foreign exchange rate fluctuations amounted to EUR 805 thousand in 2010 and was mainly accrued in Q1 2010 and mainly related to the intra-group borrowings in EUR and USD.

Effective tax rate for the year 2010 amounted to 22.2% and was lower than expected due to relatively low effective tax rates in Q2 2010 (19.2%) and Q4 2010 (18.7%). Effective tax rates in 2010 and Q4 2010 improved significantly as compared to the respective periods in the previous year. While statutory tax rates in Belarus and Russia remained unchanged, the improvement of the effective tax rate is caused by the terminated loss making operations, lowering profitability of the Group’s largest subsidiary SP ZAO Milavitsa and use of tax loss of prior years in Russia.

Consolidated net profit from continuing operations attributable to equity holders amounted to EUR 12,240 thousand in 2010, compared to net loss of EUR 165 thousand in 2009; net margin from continuing operations attributable to equity holders was 13.1% (up from a negative margin of 0.2% in 2009).

In 2010, the Group’s return on equity amounted to 33.4% (-6.8% in 2009) and return on assets was 20.5% (-3.8% in 2009).

Financial position

As of 31 December 2010 consolidated assets amounted to EUR 65,085 thousand representing an increase of 19.7% as compared to the position as of 31 December 2009.

Property, plant and intangibles balances increased by EUR 657 thousand as compared to 31 December 2009. Acquisitions of property, plant and intangible assets amounted to EUR 2,419 thousand in 2010.

Inventory balance amounted to EUR 15,792 thousand as of 31 December 2010 as compared to EUR 17,019 thousand as of 31 December 2009. Decrease in inventories is mainly explained by optimization of stock levels in the distribution and retail companies of the Group.

Trade receivables increased by EUR 1,230 thousand as compared to 31 December 2009 and amounted to EUR 9,642 thousand as of 31 December 2010. The balance of trade receivables as of 31 December 2010 is in line with seasonality trends and overall increase is mainly driven by increase in sales.

Foreign exchange fluctuations had a positive impact on the Group’s equity, in the form of a positive change in the currency translation reserve in the amount of EUR 335 thousand for 2010. On 21 September 2010 the Group paid out a dividend in the amount of EUR 1,980 thousand. Equity attributable to equity holders increased by EUR 10,734 thousand and amounted to EUR 42,042 thousand as of 31 December 2010.

Current liabilities decreased by EUR 1,922 thousand in 2010, in line with management expectations.

The liquidity position of the Group improved in 2010 with respect to the total balance of borrowings and related maturities. Current and non-current loans and borrowings decreased by EUR 1,769 thousand to EUR 36 thousand as of 31 December 2010. Loans received and loans repaid in 2010 amounted to EUR 765 thousand and EUR 2,542 thousand respectively, including finance lease liabilities repaid in the amount of EUR 53 thousand. In Q2 2010 the Group settled an overdraft facility of AS Lauma Lingerie that amounted to EUR 925 thousand as of 31 March 2010.

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. As of 31 December 2010 PTA Grupp AS’s balance of borrowings and guarantees from Danske Bank A/S Estonian branch that were secured by a surety provided by SFG amounted respectively to EUR 178 thousand and EUR 228 thousand.

Tax liabilities and other payables, including payables to employees, amounted to EUR 4,216 thousand. Provisions amounted to EUR 136 thousand as of 31 December 2010.

Sales

Sales by business segments

Sales by markets

In 2010, the Group focused mainly on the Baltic, Russian, Belarusian and Ukrainian markets.

Total sales by markets

The majority of lingerie sales revenue in 2010 in the amount of EUR 53,721 thousand was generated in the Russian market, accounting for 57.6% of all lingerie sales in 2010 as compared to EUR 43,295 thousand in 2009. Sales in Russia comprise both retail sales and wholesale. The second largest region for lingerie sales was Belarus, where sales reached EUR 25,531 thousand, contributing 27.4% of lingerie sales (both retail and wholesale) as compared to EUR 19,558 thousand in 2009.

Although still affected by the economic situation, sales in the major markets demonstrated a positive trend in terms of pieces sold in 2010 as compared to the respective period in 2009.

The most considerable sales growth took place on the Belorussian, Russian and Ukrainian markets. Overall sales results in 2010 were slightly above management expectations after a difficult 2009.

Changes in the sales strategy introduced by Milavitsa in late 2009 and early 2010 were implemented in 2010 in Russia and Ukraine. The Group aims to increase control over its distribution and its organizational structure has been adjusted accordingly.

To support the growth of sales, Milavitsa 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 were continued in 2010 in the fields of marketing and franchising.

Milavitsa has been recognized as the most valuable Belarussian brand in the report published by MPP Consulting, a Ukrainian brand rating agency.

Intima, the largest and the most respected European lingerie magazine, produced a substantial report on Milavitsa in its September issue which is available at www.intima.fr.

Lauma Lingerie experienced a sharp recovery in sales in their major markets after being affected by the crisis. A new sales and marketing manager with considerable experience in the industry has joined the company.

In terms of lingerie brands, “Milavitsa” core brand accounted for 72.1% of total lingerie sales revenue in 2010 (2009: 74.4%) and amounted to EUR 66,967 thousand. “Lauma Lingerie” core brand accounted for 8.2% of total lingerie sales (2009: 5.3%) and amounted to EUR 7,616 thousand. Other brands such as “Alisee”, “Aveline”, “Hidalgo” and “Laumelle” comprised 19.7% of total lingerie sales in 2010 (2009: 20.3%), amounting to EUR 18,298 thousand.

Wholesale

In 2010, wholesale revenue amounted to EUR 76,536 thousand, representing 82.0% of the Group’s total revenue (2009: 75.1%). The main wholesale regions were Russia, Belarus, Ukraine and the Baltic States. Gradual improvements in sales were observed already in Q1 and Q2 2010 despite the expectations of the difficult start of the year. Wholesale results in Q3 and Q4 continued improving compared to the same period of 2009 demonstrating a positive trend. Substantial growth has been achieved in Kazakhstan.

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. The Group will also seek private label production opportunities where practical.

Retail operations

Total lingerie retail sales of the Group in 2010 amounted to EUR 16,345 thousand, representing a 5.4% decrease as compared to the previous year.

Retail operations were conducted in Belarus, Russia and Latvia. At the end of 2010 the Group operated 50 own retail outlets with a total area of 4,253 square meters. As of 31 December 2010, there were 348 Milavitsa branded shops operated by Milavitsa trading partners in Russia, Belarus, Ukraine, Moldavia, Kazakhstan, Uzbekistan, Kyrgyzstan, Latvia, Azerbaijan, Armenia, Cyprus, Germany, Georgia and Slovenia, of which 25 shops were opened in Q4 2010. Some underperforming shops were closed or relocated. Additionally, as of 31 December 2010, there were 14 Lauma Lingerie retail outlets operated by Lauma Lingerie trading partners in Lithuania, Latvia and Estonia, of which 2 were opened in Q4 2010. International retail expansion of Milavitsa resulted in opening of Milavitsa branded stores in Germany, Georgia and Slovenia. The 200^th Milavitsa store was opened in Russia. Also a Milavitsa store was opened in Tverskaja street, the major shopping street in Moscow.

In 2010 9 new own lingerie stores were opened, including 5 under Milavitsa brand name in Belarus and 4 stores under Lauma Lingerie brand name in Latvia. One underperforming store was closed in Belarus, one – in Latvia, three underperforming stores were closed in Russia and 18 stores were transferred to Milavitsa’s trading partners in the course of the strategy to shift focus from own retail chain towards the development of Milavitsa franchise network, thus terminating the loss making own retail operations in Russia.

  Number of own stores as of:

A number of sales promotions were conducted in the Milavitsa retail chain in Belarus. 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 50.2% growth in local currency terms and a 47.7% growth in EUR terms as compared to 2009 mainly due to the number of new shops opened in the recent year. Sales per square meter in the like-for-like shops have increased as well.

In the Baltics, retail sales decreased by 38.2% as compared to the previous year and amounted to EUR 759 thousand. Decrease in own retail sales in the Baltics is explained by the divestment of Lithuanian retail operations in November 2009.

In respect of lingerie retail in Russia the strategic decision to shift focus from own retail chain towards the development of Milavitsa franchise network was made in H2 2009, that resulted in the termination of the loss making own retail operations in Russia. As the result, the Group’s own Oblicie stores were rebranded to Milavitsa and a transfer of stores to Milavitsa’s trading partners commenced while non-performing stores were closed. During H1 2010 all 21 remaining stores were either transferred to trading partners or closed. As of 30 June 2010 the Group did not have any own retail stores 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

Discontinued operations

Discontinued operations’ reported results in 2009 include operations of PTA (apparel business line) for H1 2009. Results of PTA operations are presented in the consolidated income statement as a single line item under ‘Loss from discontinued operations’.

Production, sourcing, purchasing and logistics

Due to the high demand on the market, similarly to H1 2010, in H2 2010 the Group’s manufacturing companies increased their production and purchasing volumes.

The total volume of production in SP ZAO Milavitsa amounted to 4,688 thousand pieces in Q4 2010, representing a 24.9% increase as compared to the respective period in the previous year. The total production volume in Lauma Lingerie amounted to 264 thousand pieces in Q4 2010, showing an increase of 81% as compared to the respective period in the previous year. Production capacities in SP ZAO Milavitsa in Q4 2010 increased in order to prepare for increased production volumes in 2011.

Investment

In 2010, the Group’s investments totalled EUR 2,419 thousand with investments into retail amounting to EUR 355 thousand. Other investments were made in equipment and facilities to maintain effective production and to add capacity for 2011.

Personnel

As of 31 December 2010, the Group employed 3,193 employees including 411 in retail and 2,064 in production. The rest were employed in wholesale, administration and support operations.

Total salaries and wages in 2010 amounted to EUR 17,980 thousand. The remuneration of the members of the Management Board and Supervisory Board totalled EUR 357 thousand. The members of the Management Board also serve as executives for the Group’s subsidiaries.

Key Events in 2010

  Share buy-back program

On 9 November 2010 the Extraordinary General Meeting approved the Supervisory Council’s proposal to start a share buyback program under the following conditions:

–         SFG is entitled to buy back its own shares from the date of the approval of the buyback until 30 June 2011;

–         The total nominal value of own shares to be bought back by SFG may not exceed 3,960,700 shares, i.e 10% of total share capital of SFG;

–         The maximum price payable by SFG for one share to be 4.00 EUR;

–         The maximum amount payable by SFG for its own shares to be 15,842,800 EUR;

–         Own shares to be paid for with assets exceeding the share capital, compulsory reserves and share premium.

The buyback period started on 15 November 2010. During the period from 15 November 2010 to 7 January 2011 number of shares bought back amounted to 133,629, average price per share amounted to 2.7757 EUR resulting in total cost of 370,911 EUR.

After the transactions listed above, AS Silvano Fashion Group owns 133,629 of its own shares, which constitute 0.34% of the share capital. Under the buyback program, shares up to the value of 15,308,284 million Euros remain to be bought back. The maximum amount of shares that remains to be bought back is 3,827,071.

Registration of share capital reduction

The decrease of the share capital of Aktsiaselts Silvano Fashion Group was registered in Estonian commercial register on 15 October 2010.

The reduction of the share capital was decided by the Annual General Meeting of SFG on 28 June 2010, by which the share capital of SFG was decreased from EUR 25,564,659 (EEK 400,000,000) to EUR 25,313,487 (EEK 396,070,000) by cancelling of 393,000 A-shares owned by SFG.

Share buy-back program of the Group's subsidiary SP ZAO Milavitsa

On 21 May 2010 the parent company of the Group approved the share buy-back program of the Group's largest subsidiary SP ZAO Milavitsa. The terms of the program permit a buy-back of up to 1,967 shares of SP ZAO Milavitsa, representing up to 20% of all shares in SP ZAO Milavitsa, in the period between June 2010 and February 2011 with the objective of subsequent cancellation of shares; the offered price per share of SP ZAO Milavitsa is 3,000,000 BYR. As of 27 January 2011, 256 shares have been acquired by SP ZAO Milavitsa constituting 2.60% of all shares in SP ZAO Milavitsa. The management of the Group does not expect that the shareholding of SFG will increase significantly after the completion of the buy-back program. Changes in AS SFG’s shareholding as the result of share buy-back will take place in H1 2011, provided the Annual General Meeting of SP ZAO Milavitsa will resolve to cancel the shares that were repurchased by SP ZAO Milavitsa.

Establishment of a Subsidiary OOO Milavitsa Logistic

In the light of the increasing business volumes and potential business for the services to be offered to all group companies, a joint-venture between the Group's parent company AS Silvano Fashion Group and largest subsidiary SP ZAO Milavitsa was created in December 2010. The newly founded company targets rendering of the services for both in- and outbound logistics and distribution of the Group's products.

Changes in the Supervisory Board

The extraordinary general meeting of shareholders of AS Silvano Fashion Group was held on 5 March 2010, in Tallinn. The meeting resolved to recall members of the Supervisory Board of SFG Mr. Indrek Rahumaa and Mr. Priit Põldoja and to elect Mr. Risto Mägi, Mr. Stephan Balkin, Mr. Otto Tamme and Mr. Sven Kunsing to the Supervisory Board.

On 24 March 2010 a member of the Supervisory Board Mr. Sven Kunsing presented to SFG an application for his resignation from the position of a supervisory board member, and requested that the application would be provided to the next ordinary general meeting of SFG. The shareholders of the Company acknowledged Sven Kunsing's resignation from the supervisory board on the Annual General Meeting held on 28 June 2010.

On 28 June 2010 Ants Susi was elected as the supervisory board member of the Company

Changes in the Management Board

On 5 June 2010 the term of office of Dmitry Ditchkovsky and Sergei Kusonski as Management Board members of SFG expired. Mr. Ditchkovski and Mr. Kusonski continues to work in the same positions in the management of SFG under employment agreements.

On 5 August 2010 the Supervisory Board of AS Silvano Fashion Group decided to elected Märt Meerits as the new management board member of SFG. On 8 November 2010 the Supervisory Board of AS Silvano Fashion Group appointed Mr. Märt Meerits as the Chairman of the Management Board. Mr. Norberto Rodriguez was appointed as the Vice Chairman of the Management Board

Establishment of an Audit Committee

On November 8, the Supervisory Board of Silvano Fashion Group approved the formation of the Audit Committee on grounds of the Authorised Public Accountants Act. The committee has three members: Ms. Jekaterina Stuge (Chairperson), Ms. Maivi Ots and Mr. Otto Tamme.

Consolidated statement of financial position

Unaudited
 

 Consolidated income statement for 12 months 2010

Unaudited