Modivo S.A. (MDV) Earnings Call Transcript

[Interpreted] Good afternoon. I would like to welcome you to the Modivo Platform Conference to sum up the financial results for Q2 2026. Before we go on, I would encourage you to post questions in the chat function window. We'll respond to those questions in the latter half of today's meeting. Let's kick off with the results achieved in Q2. As in previous quarters, we'll begin the presentation in a nonstandard fashion because on the first slide, we're going to show the results of the group. We're utilizing the adjusted EBITDA to show how we see the actual condition of our core comparable business. As you can see, the EBITDA result is slightly up year-on-year. We give a relatively good assessment of that, having in mind the expansion pace; of course, our ambitions were higher. Well, the driving forces, so CCC and HalfPrice brands are steadfastly delivering high results, EBITDA in new stores and the new stores are paying back very quickly. And so this result, having in mind the nominal sales, means that we have a stable EBITDA margin year-on-year. Let's remind ourselves how we've arrived at these figures. Just as in the previous quarter, we'll begin by cleaning up both quarters from those factors that are beyond our control, especially FX differences. Last year, they improved our results. This year, they softened our results. On top of that, to have an objective comparison, we'll extract the Worldbox results because 1 year ago, we didn't have the consolidation of Worldbox results; we're also getting rid of the wholesale transactions. In that way, we can make a well-justified assessment of the health of how healthy our business is. We'll talk about Worldbox results a little bit later in the presentation. What then is the condition of our core business? We have a record-breaking level of sales. For the first time in the history of the company, we've exceeded the watermark of PLN 3 billion. This is just another one of our stages in our growth strategy. Every subsequent quarter should be record-breaking. The nominal revenue has grown by 3%. But if we look at the comparable business, it's much higher. It's more than 20%. Let me remind you, we have added wholesale sales, which we decided to discontinue for a number of reasons because of a totally different delivery schedule, which means that we have to make inventory available more quickly. And we've focused on organic sales in our own channels and focusing on developing our own off-price network. That's why the best metric is the like-for-like metric, which has high double-digit growth. So we score this very highly, having in mind the high pace of expansion. HalfPrice has grown very substantially, and it's growing faster than the pace of expanding stores. We also have a strategic change in the model that we're undergoing at present. So we're changing the product portfolio. And so generating, of course, the traffic. So this is improving the gross margin, and it's also reducing the amount of cost that we have to bear for payable traffic. And so certainly, HalfPrice deserves to be singled out here. HalfPrice had a like-for-like sales performance of 23%. That is a very good result, and this reflects our ambitions for the further development of this concept. HalfPrice is very resistant to cannibalization, even though it has a high pace of expansion. So we haven't been affected negatively by the high base from last year. This is a very good sales concept with a good and well-defined offering, and customers happily visit it, and they happily come back and visit the store again. So the results of this line of business clearly emphasize that it's worthwhile to continue developing that half-price model. Also, it's true of the shock price, the younger brother. So next year, we believe that off-price will outpace the CCC brand, and it will be the top sales channel. This will be a major change in the group. In terms of like-for-like, the CCC brand has shown itself to be a good-performing brand. And so 4% like-for-like as it continues to develop. And so CCC has defended itself well in terms of its high base from last year, especially in May and July. Now let's look at the gross margin. At the level of the group level, once again, we've improved the margin clearly. And this is a result of the steadfast development of licensed products across all of the brands. So the share of licenses has grown by 22%. It's increased by 14 percentage points and margin has improved by nearly 3 percentage points. Combining this with the information about the growth in the sales pace, this is the best evidence that the HalfPrice offering is developing in the right direction, and it's been welcomed by the customers. The reception has been very good. In Modivocom, in terms of margin growing by leaps and bounds means that we've been able to do that by changing the portfolio. And we have higher percentages of licensed brands and are getting rid of partner brands. We've been able to improve the margin by nearly 5 percentage points, and it's now at an unparalleled level of nearly 46%, not seen amongst the competitors, the market competitors. I would like to mention to you the segmentation within our brands that we've talked about for a while. We're starting with the upcoming collection in the autumn. Segmentation means that our customers will be able to distinguish between the products depending on the price points. So Modivo will be the primary beneficiary of this project. The changes in the gross margin in CCC are a result of optimization efforts for the inventories. Having in mind the statements, we've reduced the inventory stock levels by 16% year-on-year. If you compare that to square meters, that's a decrease of some 23%. That means in upcoming seasons, we're going to have a much healthier stock or inventory mix, and it will not exert any pressure on the gross margin. Now let's take a look at the costs. The cost base in the group and in individual lines of business is directly linked to the development of store space. The cost growth is much slower than the growth in the number of meters that we're selling. The revenue growth is higher than the cost growth, which means we have operating leverage expanding. This is a difference of 1% and 3%. So Modivacom is continuing its disciplined approach to e-commerce. So costs have fallen in e-commerce by 11% year-on-year. And that's because performance marketing spend has dropped by 24%, much more effectively. We'll be able to generate traffic in our sales channels and utilize organic sources of traffic. And we are utilizing the MODIVOclub GOLD to a much greater extent. Of course, the brick-and-mortar stores in the new format, eFootwear, have grown by 50%. We very strongly believe in this format, which will gain quite a bit, thanks to the segmentation and the image marketing that we're going to be doing. Modivocom, in Q2 for the first time in a long time, has been able to do a large marketing campaign, which is a one-off campaign. So it's not something that's comparable year-on-year. So costs in total would be lower by roughly 5% if we were to disregard that campaign. This was for our own brands available in all of our brands. And how has this affected the results of the individual lines of business? Here, as I've shown you previously, we use adjusted EBITDA, which eliminates the FX impact. HalfPrice results, which is the driving force of our strategic growth, have developed or doubled its EBITDA year-on-year. So it's nearly twice the level of revenue. Profitability has improved a lot, which has grown by some 4 percentage points. If we look at CCC, once again, it has the same level of EBITDA as last year. So it has a very robust EBITDA in the high double digits. It would be much better had we not used promotions, which reduced the gross margins. But as I've already said, our priority in Q2 was to clean up inventory in CCC. Modivocom is reducing its reported result year-on-year. Here, we would highlight the impact of the cost item linked to the image campaign for own brands. The impact will be spread over time and other sales brands will benefit from that. Had we not been worried about disregarding that, the result of Modivocom would be higher year-on-year, and the adjusted EBITDA would be around 9%. So as of Q1 2026, we've changed basically the definition of our reporting segments. At the beginning of this year, we had the 3 major lines of business. We're talking about omnichannel sales. As a result, the other channels are shown within the other segments. In the later portion of the presentation, we'll talk about Worldbox. But now let's take a quick look at inventories or stocks. In the 3 major lines of business- CCC, HalfPrice, Modivocom- they were down by 3% year-on-year. After taking into consideration new lines, they only grew a little bit, with a 36% increase in floor space and sales space. So that's an increase of 16% year-on-year. So we've optimized inventory. So we've brought that down, optimized it by PLN 300 million. So that means that the decline per square meter is some 23%. In upcoming seasons, we have a very healthy inventory structure or stock mix, which will not exert any pressure on the gross margin. We want to emphasize at the same time that we haven't said our last word here. We want to continue to bring down inventory. Over the next 2 to 3 quarters, we want to bring it down by the same nominal amount. So we can see the work that's been done on the product portfolio. Above all, we've been reducing the number of partnership brands in our offering, and we're focusing on the most profitable brands. We emphasize that the inventory is down in terms of value by nearly PLN 300 million. So it's down also by quarter-on-quarter despite the fact that we've had to buy stock for the new collection. We have some 50% more in terms of eFootwear stores. So we see the ability to reduce our inventories. HalfPrice has increased the level of inventory as it's expanded the number of stores. Let me mention that we also have the inventory, which means that Shock Price has to have stores. And we're going to start those Shock Price stores in August of this year. So they haven't started generating sales. If we compare that on a per square meter basis, we believe that it's at the optimum level. If we look at the plan for the development of off-price this year, this is where that inventory will be utilized. As we've emphasized in next years, off-price will be the driving force behind the growth of the group. In the latter half of this year, Off-price will grow by some 30%, and CCC is growing much slower at only 6%. We're taking a more selective approach here in terms of making that network more dense. So in off-price, it's going to be bigger as a business than CCC. So this is a major change in the group. We can say boldly that we're a large off-price player. Next year, it's going to be the largest sales segment within the group in 2027. So 85%, 90% of new sales area will be linked to off-price. This is our direction of growth. We very strongly believe in that area of the business, the results, which clearly warrant that approach. Let's go ahead and take a look at Worldbox at this time. As you recall from the previous conference, we stifled Worldbox growth plans until we could verify our assumptions and our targets. First, we wanted to show you that we're able to increase the share of licensed brands, and we're going to be able to improve its gross margin as a result. We are clearly achieving that target versus Q1; we've been able to double the gross margin, and that means we've been able to improve the result of that line of business. So the sales were higher than expected, even though the number of new stores was down. Of course, sales per square meter are far from our target approach, but it's increasing the return on sales. Let me say this is being done without any dedicated marketing, which will be justified once the product offering of Worldbox reaches the optimal level where we have licensed brands representing 80% of total sales. The first half of this year has shown how quickly we're able to improve the profitability of Worldbox stores. As you can see on the graph on the left, over the first half of the year, some 93% of Worldbox stores operating more than 12 months have basically a store-level EBITDA profitability that's in the black. We've been able to improve the EBITDA over this period. And so these 2 graphs show how important it is to have licensed brands and to increase the share of licensed brands in the offering and in sales. So we'll have another opportunity to increase the share of licensed products in Q3 of 2026 when we'll have the autumn and winter collection for 2026. So this will be the next opportunity to do that. We assume that by the end of the year, the share of licensed brands will be some 70% and the gross margin should improve by another 10 percentage points. That means, having in mind that we will continue to ramp up sales, we'll have breakeven achieved. And by the end of the year, it will start making a positive contribution to the group. So we're changing our conservative approach to Worldbox. So we have a limited number of stores, but later, we'll make the decision about what the suitable pace of growth for this format will be in the future. Let's summarize the key information from today's presentation. In Q2 2026, for the first time in history, we've been able to surpass the watermark of EUR 3 billion in sales. We have dynamic like-for-like sales growth of 13%, where in HalfPrice, we had a record-breaking level of 23%. For once again, we've been able to improve our gross margin. At the same time, we've conservatively managed our cost base. We've been able to reduce inventories per square meter. So we can say this was another quarter in which we've been improving, or we've been pursuing the strategic assumptions of the group on a steady basis. Thank you very much. We're going to come back to you for the Q&A session after a short --

Welcome, ladies and gentlemen. We're going to kick off the Q&A session. Let's begin with the first question. Are you worried about the current situation of the company Modivo on the Warsaw Stock Exchange? So it's discouraging investors, as we have a low trading volume of shares.

[Interpreted] I wouldn't like to give commentary on the share price. In my opinion, the company is undervalued, but that's not the role of the management team. What I can say, and to a large extent, I've already said that I've talked about what's happening in the company that we're acting to implement our plan on a steadfast basis to improve individual brands. We have a precise plan. We're doing that on a consistent basis, steadfast basis, unwavering basis. I think we've seen some of the results in CCC; we have consistent results. We've reduced inventory. HalfPrice is improving its results in like-for-like, fast expansion, and we're improving gross margin in Worldbox, which still is not a major element of the group. But here, we're improving results as well. So the company is doing a lot of things. And I'm convinced that in the near future, this will have an impact on the share price.

So in terms of the anticipated expectations, when will we see the impact of the expanding store numbers in terms of EBITDA?

Well, here, the priority is the growth of off-price year-on-year. It's the driving force behind expanding selling space. And this is profitable. The stores have a quick payback period, over several months, up to 12. So it doesn't erode the like-for-like performance because these are outstanding results. So we will observe that. We'll track that on an ongoing basis. In terms of how those stores are being opened, as we see in HalfPrice. So the growth we've seen in sales in this quarter year-on-year, this was above 50%, whereas the selling area is much lower than 50% because HalfPrice is growing through 2 engines: like-for-like sales improvement, and also the expansion in terms of opening new stores.

So, having in mind the current results, does the management team consider a change or an update to the strategy up to 2030?

No. We're not considering any changes. The strategic plans for 2030 are current. We're in the process of pursuing them and implementing them. Of course, nothing is written in stone. We do make some changes. We weigh things differently. We move things. We see how quickly off-price is growing. We're doing more in that area, but we have tools to enable us to achieve our strategic targets for 2030. So I can say that we uphold these plans, and we're taking steps, and the effects are showing that these plans are justified or warranted.

We have a question about Worldbox. Do you want to have an intense marketing campaign for this brand?

In terms of a marketing campaign for Worldbox and the other brands, something that works well is the ModivoGold Club, which is operating very well. The number of customers is growing. It's topped the 2 million mark. So sales are growing extensively as a result of the good reception of the Modivo Gold Club. These are the fundamental tools for promoting. We'll add, of course, some additional items, maybe some targeted campaigns, but I wouldn't assume that we're going to have a major price increase linked to marketing for Worldbox.

Where is the buyback for shares where the Management Board is warranted or authorized to do that? What is the level of share buyback?

I can't say anything new on top of what I've already said at the previous conference. The share buyback plan was accepted. It's been valid for 2 years, and we have a lot of time for that. And we're looking for the optimum moment in time to execute that task.

I think we've already responded to a portion of the next question during the presentation. EBITDA has fallen year-on-year. What part of that fall is a one-off? And to what extent is it a fixed element of the new cost model?

It's not a fixed element of the new cost model that we've had a decline in EBITDA. If we think about the decline, we explained where that came from. We had one-offs like World Box not doing wholesale sales anymore. Those are the most important factors. Then we had the one-off marketing campaign for Modivo, which has increased the image awareness of the stores of Modivo. So that's not something that will be recurring. What we've observed, these are one-offs, and all of the activities we've undertaken are there for increasing or augmenting, enhancing our EBITDA and not to shrink it.

What are the plans for your CapEx this year? And is it possible in terms of your expansion to actually curtail those plans?

The planned CapEx, I think at the previous conference, we talked about that, that we were talking about EUR 700-plus million. We would uphold that level. What's important here is that a big portion of that CapEx is financed through fit-out, and the priority in this CapEx is fast growth of off-price, which gives a payback, a very quick payback. Some reductions in CapEx, some shifts have already been done. We've delayed a little bit the start of the next phase for constructing or building a warehouse for HalfPrice. We're now finalizing the process of setting that up and implementing the project, the first phase of the warehouse, HalfPrice to 0. We want to extract the maximum amount of value in terms of its operating efficiency. We wanted to begin quickly and smoothly with implementing the next phase, but having in mind the priority, which is to improve the financing position in deleveraging, we decided to push that back in time until next year. We've reduced the plan strongly in terms of expanding Worldbox. The priority here, again, we looked at that. We performed work in terms of improving the profitability of that concept. So certain decisive actions have been taken to reduce CapEx. So we have that conviction that the CapEx that is to be incurred and has been incurred is the top priority and will actually give a quick return.

What pace of growth in online sales is the Management Board expecting in 2027? And which foreign markets, international markets, have the greatest growth potential in terms of online?

We treat online sales relatively opportunistically. I say we take an opportunistic viewpoint because our strategy assumes above all that we will develop the offline sales network. But the omnichannel strategy assumes that this is accompanied by presence online, but online is not something that we're actively promoting and developing. What's important in terms of online is that sales need to be profitable. In the past, historically, we had some difficulties. It was a challenge for us. The actions that we've taken, as you've seen today, in terms of focusing on the product portfolio, this has increased sales, which has increased the profitability of sales online. So what we can expect in the future is not so much that we're talking about major growth. We assume rather stabilization year-on-year in terms of the level of online sales. The activities we've taken and are taking are highly advanced, linked to tweaking that portfolio. will not lead to lower sales levels. We believe that the spring/summer 2027 season will be the first season when we'll have flat sales or will start gradually growing year-on-year. But we won't anticipate spectacular growth driven by performance marketing. As we've said previously, the priority for us is to develop off-price.

What are the most important goals that you have for 2027? Do you want to improve their operating results, sales?

Above all, we want to grow EBITDA. And we can say they're obviously linked to one another: growth of EBITDA, growth of operating results, and they're the dominant, predominant factors. And of course, we want to continue to improve our cash flow position; we want to continue the deleveraging process. So as a result of our fast-paced expansion and other challenges that we faced in the past in terms of having excess amounts of inventory or stock, we want to reduce that leverage. But the other efforts that we're undertaking in terms of extending the payment terms, optimizing purchases or procurement of products in terms of when inventory is in the warehouse, we've already achieved some results. You see that in the results of Q2, and that's something that you'll see in the next 2 to 3 quarters to a greater extent. So the improvement of the cash position, deleveraging, I would add that those are very important elements of the goals of the management team.

How comfortable is the company in terms of the banking covenants?

The banking covenants are something that we monitor on an ongoing basis. As I said previously, having in mind the rapid expansion and the temporary growth in inventories or stocks that we have seen, perhaps we were a little too liberal in terms of reverse factoring limits. Over the last 2 quarters, we've seen higher leverage. And in a few cases, we had to communicate with the banks and to obtain some waivers from banks in terms of getting some greater flexibility in terms of the ratio that was laid down in our banking agreement, which was in terms of our exposure; we've reported on that and the current reports. So it's not anything new that I'm disclosing here at this time. We've already talked about that. The banks have always taken an understanding approach to our certain situation. We are in ongoing, constant dialogue, and we're taking efforts that deliver results, deliver impacts. So the waivers were received or granted when needed. And in some cases, they were a little too prudent because we asked for a waiver with great advance notice, but then it turned out that we were able to achieve those targets as originally stated. But as a public company listed on the stock exchange, we want to have a clear level of comfort when it comes to being compliant with the covenants. So we monitor the covenants, we manage the covenants. And for us, the priority is to deleverage the company, and that's something that's producing results, and we will continue to deliver additional fruit in Q3 and subsequent quarters. So we don't see any major risk factor for the company.

So I have another question. How are your factoring limits changing? Have they been diminished quarter-on-quarter?

No. They've not been limited quarter-on-quarter. Some of the factoring limits, we have an ability to freely manage them. So in terms of allocation, it could be factoring.

Is it a guarantee? Is it a loan, like an overdraft facility.