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Edited Transcript of 023530.KS earnings conference call or presentation 9-Aug-19 8:00am GMT

Q2 2019 Lotte Shopping Co Ltd Earnings Call

Seoul Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Lotte Shopping Co Ltd earnings conference call or presentation Friday, August 9, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ji Hwan Seol

Lotte Shopping Co., Ltd. - Head of IR

* Kyong Seo Park

Lotte Shopping Co., Ltd. - Manager of IR Team

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Conference Call Participants

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* HeeJin Park

Shinhan Investment Corp., Research Division - Analyst

* Jin-Hyeob Lee

Yuanta Securities Korea Co., Ltd., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2019 2 quarter earnings resulted by Lotte Shopping. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions)

Now we shall commence the presentation on the fiscal year 2019 2 quarter earnings resulted by Lotte Shopping.

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [2]

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[Interpreted] Good afternoon, ladies and gentlemen. This is Ji Hwan Seol, Head of Investor Relations of Lotte Shopping.

Thank you for joining us in Lotte Shopping's Fiscal Year 2019 Second Quarter Earnings Conference Call. Today, we have Mr. Ho-Joo Jang, Executive Vice President and CFO of Lotte Shopping; Mr. [Jae-Woo Jang] Head of Corporate Strategy for Lotte Mart; Mr. [Sum Wok Ling], Head of Corporate Strategy for E-commerce; Mr. [Yeong Jeon Chae], Head of Financial Division for Lotte Department Store. We also have relevant department heads of planning and strategy from major business divisions present in this room.

Mr. Kyong Seo Park, our IR Manager, will proceed today's presentation in Korean. I'll provide explanation in English. We'll review our second quarter earnings results now. Questions will be taken after the presentation.

I'll now start with highlights on Page 2 of the presentation.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [3]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [4]

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[Interpreted] Page 2 contains the highlights of 2019 second quarter financial highlights. For the second quarter of 2019, Lotte Shopping's consolidated revenue was KRW 4.5 trillion, indicating 1% year-over-year increase.

Domestic Department Stores have shown moderate same-store sales growth through strong sales trend in global fashion, home appliances and electronics categories. However, hypermarkets have shown weak SSSG trend due to sluggish industry trend undergoing and -- as well as the undergoing MD restructuring progress.

For the Overseas operations for Department Stores and Hypermarkets continued to achieve favorable sales growth in Southeast Asia operations.

Lotte Shopping's 2019 second quarter operating profit was KRW 92 billion, indicating 5.7% year-over-year increase. Domestic Department Stores operating profit has been increased by a moderate SSSG. But the operating loss from the Domestic Hypermarket division was increased due to weak SSSG and increased SG&A.

For the Overseas operations, operating loss of Department Store division has significantly improved through efficiency improvement and restructuring efforts in China. Furthermore, Hypermarket unit's operating profits in the Overseas has also increased by 51.2% Y-o-Y, mainly driven by solid SSSG trends in Vietnam and Indonesia retail units. Lotte Shopping's net profit was KRW 77 billion in the second quarter of 2019.

And I'll now move on to Page 4 to explain about the financial summaries.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [5]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [6]

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[Interpreted] Page 4, you can find the summary of consolidated financial results. In the second quarter of 2019, Lotte Shopping's consolidated revenue was approximately KRW 4.5 trillion, indicating 1% Y-o-Y increase. Operating profit was KRW 92 billion, indicating 5.7% year-over-year increase. Net profit totaled KRW 77 billion. Just as a reminder, the consolidated financials include 48 subsidiaries.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [7]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [8]

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[Interpreted] Page 5 is the brief financial summary of each business divisions. I'll now move on explaining divisional operations summary, starting from Department Store on Page 6 of the presentation.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [9]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [10]

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[Interpreted] Page 6 is the Department Store operation summary. Domestic SSSG rate for Domestic Department Store was up by 1.3% Y-o-Y in the second quarter of this year. Sales revenue has increased in home appliances, electronics and global fashion categories. However, men's apparel, sportswear, women's apparel, food and accessories categories have shown weak sales trend.

Despite the increased SG&A expense, second quarter operating profit for Domestic Department Store was KRW 75 billion, indicating 2.6% increase year-over-year, mainly driven by moderate SSSG trend. Just as a note, Domestic Department Store's real estate tax was increased by KRW 5.8 billion year-over-year.

As for the Overseas Department Store operation, sales revenue has declined mainly due to store closures in China. However, and more importantly, its operating loss has been significantly improved by KRW 15 billion through SG&A reduction regarding store restructuring in China.

Solid SSSG trends continued in Southeast Asia operations. For your information, we have provided details of the Domestic Department Store digital transformation strategies for omni-shopping implementation on Page 7 through 9 on today's presentation material.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [11]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [12]

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[Interpreted] If we move to Page 10 is the Hypermarket division explanations. Domestic Hypermarket SSSG rate was declined by 3.6% Y-o-Y in the second quarter of 2019 mainly due to sluggish sales in hobby and fashion categories, which was affected by undergoing merchandising restructuring process. Operating loss of Domestic Hypermarket was increased due to poor SSSG trend and increased SG&A. Just as a note, Domestic Hypermarket's real estate tax was also increased by KRW 2.6 billion year-over-year.

As for the Overseas operation, SSSG rate was up by 1.1% Y-o-Y in the second quarter of 2019. Operating profit of Indonesia division was increased by 30.6% Y-o-Y through a solid SSSG trend in the real -- retail business unit. Operating profit has skyrocketed in Vietnam by 87.5% year-over-year mainly driven by strong SSSG rate, which was up by 7% year-over-year.

Domestic Hypermarket business has been struggling recently, but we are actively coping with the rapidly changing retail environment through profit-focused store renovations, product competitiveness investments and online logistics innovation. For your reference, we also have provided details of Domestic Hypermarket strategies on Page 11 of today's presentation material.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [13]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [14]

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[Interpreted] Page 12 is Himart, the Electronics specialty retail. 2019 second quarter revenue was KRW 1.1 trillion, indicating 1.5% Y-o-Y decline. Sales revenue has declined in large home appliances due to high base effect and seasonal items such as air conditioners have shown weak sales trends in June of this year because of the weather condition.

Himart's second quarter operating profit was KRW 46 billion, indicating 31.5% decline Y-o-Y, mainly due to decrease in gross profit margin, which was affected by intensified price competition in the market as well as sluggish sales trends. Decreased operating profit was also affected by increased labor cost and SG&A. Himart plans to improve its product competitiveness in the market by developing more PB products, expanding premium product offerings as well as home appliance maintenance service expansion.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [15]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [16]

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[Interpreted] Page 13 is the Supermarket division. Same-store sales growth rate was declined by 2% year-over-year in the second quarter of this year. Sales revenue has increased by 1.4% Y-o-Y from fresh meat category. But other categories have shown weak sales trend. Supermarket second quarter operating loss was stretched year-over-year due to store closure impact and undergoing store renovation work. In the second half of 2019, we plan to improve our profitability through sales recovery and cost optimization efforts.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [17]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [18]

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[Interpreted] Financials related to other business units are listed on Page 14 for your reference. In the second quarter of this year, Lotte Home Shopping recorded a KRW 236 billion of revenue, indicating 6.7% Y-o-Y increase. Its operating profit was KRW 33 billion, indicating 48.6% Y-o-Y growth, driven by solid sales trends led by high-margin channel sales, improved SSSG e-commerce and eTV sales.

Lotte Cultureworks, our Cinema division, the revenue was 130 -- KRW 178 billion, indicating 18.7% Y-o-Y increase. And its operating profit was KRW 4.5 billion, which turned into profit generation from loss-making in the same period of last year. Domestic revenue for the Lotte Cultureworks was up by 18.3% Y-o-Y. And its operating profit has also increased by KRW 9.5 billion year-over-year, mainly driven by increased box office sales as well as moderate success from invested films, musicals, concerts and et cetera.

Revenue from Overseas Cinema operations has increased by 24.1% year-over-year in the second quarter of 2019, and its operating loss has improved slightly.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [19]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [20]

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[Interpreted] Nonoperating financial summary is provided on Page 15. In the second quarter of 2019, increased interest expense of KRW 57.8 billion year-over-year was reflected due to new lease accounting standard adoption, and gains on equity method stock disposals were also reflected with the amount of KRW 55.9 billion.

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Kyong Seo Park, Lotte Shopping Co., Ltd. - Manager of IR Team [21]

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(foreign language)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [22]

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[Interpreted] Equity method financial summary is provided on Page 16. Equity method gains from FRL Korea, which is UNIQLO, was KRW 23 billion. And ZARA Retail Korea equity method gain was KRW 2 billion.

I'll now finish today's presentation here. Thank you again for attending today's earnings announcement, and we'll now begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will be given by HeeJin Park from Shinhan Investment.

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HeeJin Park, Shinhan Investment Corp., Research Division - Analyst [2]

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[Interpreted] I have a number of questions. First, about the Department Store and the Hypermarkets, do you have any numbers to indicate the trends of the same-store sales growth of Department Stores and the Hypermarkets since July? And if you could also give us some numbers until the month of August, although it would be only for 1 week. So if you could give us that figure, then that will be appreciated.

And then the second question is about the Hypermarkets and also the Himart. So it seems that for the Hypermarkets, the profitability continues to worsen. And we understand that, that is because of your strategic reduction in the nonfood category. And as a result of that, the revenue from Hypermarkets is also going down. But then when you say there is a strategic reduction of the nonfood category, does that mean it's a reduction in the space itself? Or is it just a reduction of the SKU? If you can also give us some figures to indicate the -- either the reduction of the space or the SKU.

And then also for the Hypermarkets, for the food category, then is there any plan to increase the space for the food category? Or is it going to come naturally as a result of the reduction of the nonfood category?

Then also some more questions about the Himart, the Electronics mart. Because of the increase in the online sales, we see that the GP margin continues to go down and also competition continues to stiffen. And they said that even the dryers, which used to post quite a robust growth in sales, is now slowing down in terms of sales growth. So what is your strategy down the road? And how do you see the profitability -- so what is your profitability outlook for Himart?

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Unidentified Company Representative, [3]

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[Interpreted] Now first, for the Department Store, in the month of July, we see that the sales trend is similar to the second quarter. And it has slightly worsened because of the environment, in other words, in terms of the date of the week. But other than that, we see that overall, the sales trend is roughly similar to the second quarter. And into the third quarter, we will try to maintain the sales trends.

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Unidentified Company Representative, [4]

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[Interpreted] And then regarding the Hypermarket, now in terms of July then because of the weather effect, we see that for the second quarter, there has been some negative growth. But then moving into August, we see that the August has started off on a very good note.

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Unidentified Company Representative, [5]

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[Interpreted] And then for the Supermarkets, from June, we see that there has been some decline Y-o-Y. But on one hand, we will keep trying to promote sales while, at the same time, trying to reduce cost. So for the third quarter, we will try to maintain revenue on a similar level Y-o-Y.

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Unidentified Company Representative, [6]

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[Interpreted] Regarding your first -- the question about the Hypermarkets, about the nonfood category and whether there has been reduction in the SKUs. Now in the second quarter, the nonfood sales have been sluggish mostly because of fashion and TRU, meaning the Toys “R” Us. So in May, there has been high sales because of Children's Day for Toys “R” Us. But then since the bankruptcy of the head office and also the subsequent undermining of the reliability of the brand itself, there have been some impacts itself on sales. And likewise, for fashion, there have been some reduction in the brands. So because of that, we can't really say that it is nonfood category reduction is actually reduction in the SKU.

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Unidentified Company Representative, [7]

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[Interpreted] And then about your question pertaining to whether there is a plan to increase the space for food products. Now looking at the ongoing renewal efforts, what we are seeing is that the grocerant space under the fresh food categories is increasing. Then also the HMR is increasing for the processed food categories. And as a result -- so this is, on one hand, the effort to increase the foot traffic into the stores. And as a result of this, we see that in reality, the space for food categories has gone up by 10%.

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Unidentified Company Representative, [8]

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[Interpreted] And about the Electronics smart stores, the Himart, yes, as you have mentioned, there has been increase in online sales which has pushed down on the GP margin. So from the offline side, we are trying to increase the GP margin. So on one hand, we are trying to increase the percentage of sales for the premium appliances which offer better margins. And then also, we are trying to increase the high-growing stores, which are the omni-stores. And also, at the same time, for the loss-making stores, we are trying to -- we are planning to make some adjustments to the loss-making stores. And also, we are planning to turn some stores into larger sites.

And you also asked about the dryer, in particular. And yes, in the first quarter, particularly because of the environmental issue, the fine dust problem, there has been good sales. But then coming into the second quarter, on one hand, the environment improved. So this has led to a lower sales in dryers. But also, at the same time, as has been reported in the news, there have been some problems with the LG dryers. And as a result of that, the consumers appear to have been delaying their purchase of dryers. Now having said that, because the penetration rate of the dryers currently is not so high, we believe that there is very good potential for further sales growth out of dryers.

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Unidentified Company Representative, [9]

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[Interpreted] And then about the question on the -- regarding the Hypermarkets, the nonfood category, I believe that there was also a question about how we are going to utilize the space that has been vacated by the reduced nonfood category. So I guess I have missed that part of the question.

So now yes, as I have mentioned, there has been a reduction in the fashion brands because of the withdrawal of some brands. So there is some space left over from that. And also we're reducing the Toys “R” Us stores, so there's also space left over from that. But then this space is -- this type of space is not really highly efficient. So we would continue to -- so for the space that has been left over, following the reduction in the nonfood categories, what we are currently planning to do is recruit restaurants that are reputable and more profitable and also some entertainment tenants. So we are currently having discussions with the key tenants.

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Operator [10]

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(Operator Instructions) The following question is by [Sang-Joon Park] from [Kim Securities].

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Unidentified Analyst, [11]

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[Interpreted] I have 3 questions. First is about the current boycott of Japanese products that have been affecting UNIQLO, which probably have affected the company as well, which I'm sure that the company finds to be unjustified and unfair. Anyway, so there must be some impact coming from the boycott. So what has been the actual impact on the company in general, including the impact in UNIQLO?

And the second question is about e-commerce. And you have announced your strategic orientation with the launch of the Lotte Mall in the first quarter. So what have been the sales volume and also the mobile traffic that have been incurred from the new e-commerce in the second quarter?

And then the third question is about the nonoperating site. So there appears to be some profits and losses from -- for the noncurrent site from the nonoperating. So for the second half, do you also expect any significant nonoperating gains or losses to be incurred?

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Unidentified Company Representative, [12]

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[Interpreted] Regarding your first question, of course, there were no such impacts felt until June. But then starting in July, some impact is being felt. But then please understand that because of the timing and because of the current situation, it is not appropriate for the company to disclose details. So I ask for understanding.

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Unidentified Company Representative, [13]

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[Interpreted] Regarding your second question about e-commerce. In the first quarter, our online sales were KRW 1.6333 trillion. In the second quarter, it went up to KRW 1.78 trillion, so that was a growth by about 9% since launching the Lotte ON.

And then in terms of the traffic, in the first quarter, the number of visitors per day was 3.17 million. In the second quarter, it was 3.54 million, up by 11.9%. And as for new subscribers, in the first quarter of 2019, it was 1.02 million. In the second quarter, it was 1.16 million, again, up by 17%.

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Unidentified Company Representative, [14]

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[Interpreted] Now to your third question, of course, in the second half, we will be doing our full closing and accounting as we always do. So not all the numbers are in yet, so please understand that it's too early to respond to your question.

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Unidentified Company Representative, [15]

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[Interpreted] So to be more specific, in terms of goodwill and also the asset impairment loss, they are tallied not on a quarterly basis but on a yearly basis. So we will get the numbers by the third quarter every year, and then we'll do the estimation based on the numbers. So that estimation will be done in the fourth quarter. So again, it is too early to give you the specific numbers this time.

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Operator [16]

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The following question is by HeeJin Park from Shinhan Investment.

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HeeJin Park, Shinhan Investment Corp., Research Division - Analyst [17]

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[Interpreted] So I have a follow-up question to the previous one. So for the Hypermarkets, you mentioned that the space for the food products has gone up by 10%. But then my question is about your restructuring efforts into -- for the existing stores between the food and the nonfood categories. In other words, for the space, you mentioned that it has gone up by 10%. But when you look at the sales growth coming out of the, for example, meal solutions or fresh food, then you see that the sales growth is not corresponding to the increase in the space. So perhaps that means that you have not improved the efficiency enough yet. So I want -- and so perhaps that is why you're also seeing some negative growth out of some existing stores and even losses in some existing stores. So what is the company's strategy or plan to turn around the situation to improve profitability?

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Unidentified Company Representative, [18]

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[Interpreted] Now your question about the increase in the food space by 10% and then how that did not translate into the increase in the fresh food sales. So yes, in the second quarter, the fresh food category growth was about 3%. Now when I said 10%, this was not uniformly across all stores. So in the second quarter, it was for 1 store. And then in the second half, it is planned for 17 additional stores for a total 18 stores this year. Now our overall orientation is to increase food categories and reduce the nonfood categories. And any space that is secured from that, we are going to utilize them for more profitable lease business.

And in terms of the actual benefits, we will not be seeing the benefits right away. But then as we begin to see the benefits, then I'm sure that this is also going to accelerate the growth in the food sales as well. And also in the second half, one major task that we are currently planning is to utilize the hardware in each store to turn them into online logistics dedicated space. So what we are planning now is to have the fulfillment store in each store where the picking and the packing will be done automatically. So then that will turn each store into an online dedicated logistics space. And of course, this is a major change, so this will take some time. But then once this is completed, then we believe that we will be in a very good position to also compete against online stores.

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Operator [19]

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The following question is by Jin-Hyeob Lee from Yuanta Securities.

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Jin-Hyeob Lee, Yuanta Securities Korea Co., Ltd., Research Division - Analyst [20]

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[Interpreted] I have 2 questions. Now first, you did mention the e-commerce. And I wonder, so on a Y-o-Y basis, what has been the growth [in G&B]? And what is the trend so far in the third -- I mean what is your outlook for the third quarter? And then also for the Lotte ON, what has been the number of subscribers so far? And the second question is about the Department Store restructuring, so can you just give us an update on that?

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Unidentified Company Representative, [21]

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[Interpreted] Yes. About the e-commerce, now first, the transaction volume, that went up by 17% Y-o-Y in the second quarter. And the number of daily visitors went up by 29.8%, and subscribers grew by 17%. And I will have to come back to you next time for the performance in the third quarter.

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Unidentified Company Representative, [22]

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[Interpreted] And then Lotte ON, it was launched on June 27. So between June 27 to August 4, 27,000 subscribers newly joined.

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Unidentified Company Representative, [23]

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[Interpreted] And about the restructuring of the Department Stores, in the first quarter, the restructuring was done on the stores in Incheon, Anyang and Young Plaza [Daewoo] store; in the second quarter, on [Fook Yong] store. Down the road, we also remain committed to restructuring, so I believe that we will continue with the restructuring efforts.

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Unidentified Company Representative, [24]

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[Interpreted] And some more explanation about the department restructuring. Not only restructuring, but the company has also been undertaking efforts to turn the department stores into innovation stores. And in last year, there were 6 stores that went through such an innovative store transition. And then in this year, 17 additional stores are planned. And through such effort, we are planning to reduce SG&A cost.

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Operator [25]

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The following question is by [Sang-Joon Park] from [Kim Securities].

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Unidentified Analyst, [26]

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[Interpreted] Now I have a number of questions. First is about e-commerce. So of course, your -- other players are engaged in early morning delivery services and, of course, that there are talks of same-day delivery or nighttime delivery. But is the company also planning for early morning delivery where you will be able to make orders late at night and still receive them early in the morning? And the second question is, have there been any changes to the sales mix since the launch of Lotte ON?

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Unidentified Company Representative, [27]

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[Interpreted] Now first, about the early morning delivery, currently, it is already being done by the Lotte Supermarket online store. And although it is not too large in scale, it is currently being done and also home shopping has recently started for some categories. And for the future, yes, there is some planning being done to increase the early morning deliveries, utilizing the Supermarket and the Hypermarket infrastructure. But then in terms of the specific plan, I would have to come back to you at a later date to give you more details.

And regarding your second question about whether there have been any changes to the product mix since the launch of Lotte ON, we do not have that data at this point.

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [28]

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(foreign language)

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Operator [29]

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Currently, there are no participants with questions. (Operator Instructions)

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Ji Hwan Seol, Lotte Shopping Co., Ltd. - Head of IR [30]

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(foreign language) [Interpreted] We will now finish this earnings announcement now. Thank you for joining us today at the conference call, and further questions will be answered by IR team through individual meetings. Thank you.

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Operator [31]

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This concludes the fiscal year 2019 2 quarter earnings resulted by Lotte Shopping, thanks for the participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]