Q4 2004 Inditex Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

JOSE MARIA CASTELLANO, DEPUTY CHAIRMAN & CEO, INDITEX: Okay. Good evening. And thank you very much for your time. We are going to begin with a presentation of the results of Inditex for the year 2004.

We will begin that the year 2004 was a very positive year for Inditex for several reasons. First of all, if you analyze the P&L of the Group, you will conclude that the year 2004 was the year most profitable for us, and the gross margin was the highest in the history of the Company. 53.5%, and the net income was 11.1%.

It was due to several reasons. The main factor was [inaudible - technical problems]. We are managing very different concepts. And all of them performed very similarly well some of them.

I would like to remind everybody that 2 years ago in 1 meeting I did we commented that Oysho was underperforming. I remember that Oysho in the year 2002 lost E14.9m, and this year Oysho earned E15.6m. And in those times, 2 years ago, we changed all the management team of Oysho. And that measure was extremely positive.

1 year ago, in 2003, 2 concepts were underperforming, Pull and Bear and Stradivarius. And this year they over performed -- they recovered the normal performance of the Group. And due to mainly because we changed both management teams in Pull and Bear and Stradivarius.

Second, third that year, the year 2003 was not very positive for us. We increased net income only 1%. And this year we increased net income 41%. It means that we estimate the average increase in the net income is more or less 22%. It means the Company was stable. Back to the normal profitability of the last 4 to 5 years.

And due to the strong cash position of the Company that, at the end of year, was E508m. During 2004, the Company has invested money in buyback shares in our operations in Italy, in Japan. And we bought the franchisee operation of Massimo Dutti in Mexico.

Here you can see the main drivers of the year 2004. And I will [inaudible - technical problems].

OPERATOR: Ladies and gentlemen, just to inform you all, we do apologize, the main line has been disconnected. Thank you.

JOSE MARIA CASTELLANO: Like-for-like was 9%, previous year 1%. The average is more or less 5% the normal path of the Company. It means that the business model has worked because 1 year was not positive, but last year was in a positive for us.

The comparison was not fair because with only 1%, it is very -- or quite easy to increase the like-for-like above 6%. Like this year [Pull & Bear] was 9%. But the average of all the years was 5% the normal like-for-like of the Company in the last 10 years.

My colleagues will show you 2 graphs that in my opinion are related to this graph. 1 is the return on capital employed, and 1 is the EBIT margin of every concept.

You will realize that all the concepts have performed very well. We have many things to do. We can still improve the profitability of all the concepts, including Zara. But for us it means that the Company is stronger than the growth of the Company 4 years ago when the IPO.

And secondly, from our point, the Company is working extremely well because all the concepts are profitable, with high profitability, are growing extremely well. And until now we don't have any special concern about any format in the Group.

And the breakdown of the sales per areas you would like -- like the last years Spain is losing weight and the rest of Europe is gaining weight because we are opening more shops in France, the U.K., Germany and so on than in Spain. This is the normal part of the last 4 or 5 years to us.

And now, that is all. I am going to hand over to my colleague, Borja de la Cierva, who is going to explain to you the main financial issues of the year 2004.

BORJA DE LA CIERVA, CFO, INDITEX: Thank you. The P&L of 2004 shows growth in every key line of the P&L. And all the key lines saw growth above 20%.

Q3 and Q4, obviously, are the best peformers because of the lower comparable of the previous year due to the difficult environment in the autumn/winter collection of 2003.

And drivers of these results have been 2. First, like-for-like, that gives 9%. And the second is the gross margin. We will elaborate on it later.

We predict that these results have to be analyzed on a 2-year component growth rate. And doing so, you will find that we have 5% like-for-like. But it's exactly our medium-term targets. We have achieved our ambition on the time of the IPO.

There is a lot of consistency in compound growth rates in sales, EBIT and net income. Around 20% in all the lines.

Starting with sales growth, on top of our 16% like-for-like, we have produced the stores -- the system stores have delivered a 9% sales growth. And currency reduced overall growth by 2%. The difference between 1 that was sold first half and second half comes obviously from the lower comparable in the second half of 2003.

We have added almost 200,000 square meters with the 322 net openings. And let me remark the 3 main features of this new space. First, it's immature because a new store needs a couple of years to achieve its gross speed sales density.

Second, this new space includes bigger stores. And it also has some impact on sales densities, because a double-sized store never produces a double turnover.

And third, this new space is more international. And I mean that as we get bigger and as we get more international, operating expenses grow faster than sales.

9% like-for-like reflects the modest performance of the year 2003. And also the like-for-like in the third and fourth quarter reflects the difference in top-line growth in those three and fourth quarters of 2004.

Let me go to elaborate a little bit on gross margin. You have here the impact in gross margin, 110 basis points coming from currency. And the rest, 227, coming from what we call inventory management.

We perform our buying activity produce higher mark-ups. And those higher mark-ups comes from better sourcing due to volumes and also for the weakness of the U.S. dollar. Part of our sourcing comes from Asia. And we took advantage of that weakness of the dollar.

We reversed the negative impact of currency in 2003 through 2 different ways. First, pricing. We have increased prices in those countries in which currencies suffer the most in 2003. And we have increased local sourcing in those countries until more or less 30% as an average.

Then the part of improvement comes from better inventory management. What does it mean? It means the ability to keep initial commitment as low as possible in order to reduce the impact of mark-downs at the end-of-season clearance, both in volumes and in prices.

In Q4 of 2004 we had a very solid position of inventory. And consequently we let margins -- it lift margins up against sales. We produced lower sales, probably than expected. But with better margins we have very low position of inventory. We sold it with lower mark-downs, producing lower sales but bigger or higher gross margin.

Let me add that the improvement in gross margin is very consistent across the Group. All the formats have increased in their gross margin. Those with the worst performance in 2003 have improved the most, obviously. And our estimate for 2005 is not to produce further improvements. This 53.5% on sales of gross margin is the top end of our estimate for 2005.

Concerning operating expenses, I would like to say -- to remark 3 things. First, that is according to guidance. Second, and more important, it's according to Company budget. It means that the increase on operating expenses is under full control of the management.

Third, the increase in operating expenses is the result of the international expansion of the Company. And this, again, it's always the same dynamics in Inditex. As we grow internationally we produce higher cost because personnel and occupancy costs in difficult countries, let's say France, U.K., Germany, are much higher than in our mature or core markets.

Remember that around 33% of our space is still immature. And we always try to offset this higher cost through gross margin improvements. Not always we have it. But on the medium term, we usually compensate the gross margin and the higher operating cost. And that is the reason for achieving this year the highest EBITDA level ever.

Very quickly, the non-cash expenses. Fixed asset …