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Edited Transcript of 1913.HK earnings conference call or presentation 12-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Prada SpA Earnings Call

Milan Apr 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Prada SpA earnings conference call or presentation Wednesday, April 12, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandra Cozzani

Prada SpA - CFO & IR

* Patrizio Bertelli

Prada SpA - CEO

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Conference Call Participants

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* Thomas Chauvet

Citi - Analyst

* Erwan Rambourg

HSBC - Analyst

* Mariana Kou

CLSA - Analyst

* Melanie Flouquet

JPMorgan Chase - Analyst

* Rogerio Fujimori

RBC Capital Markets - Analyst

* Paola Carboni

Equita SIM - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Prada Group full-year 2016 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Alessandra Cozzani, Chief Financial Officer. Please go ahead, ma'am.

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Alessandra Cozzani, Prada SpA - CFO & IR [2]

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Good afternoon to all of you. I'm Alessandra Cozzani, Group CFO, and I'm pleased to welcome you to Prada Group's full-year 2016 results presentation. Today, I'm here with Mr. Bertelli, CEO, and Mr. Mazzi, the Chairman.

As for today's presentation, we will start with an overview by Mr. Bertelli, after which I will go through the numbers for the period and Mr. Bertelli will give us some updates on our commercial activities and the outlook for the Company. At the end of the presentation, we will be happy to take your questions. I will hand over to Mr. Bertelli.

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Patrizio Bertelli, Prada SpA - CEO [3]

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(interpreted) Good afternoon. Good afternoon, everyone. I'll deliver a short comment on sustainable growth and pathway to sustainable growth. Our actions have been performed, especially in order to create structure dedicated to managing the digital presence of the Group and to developing e-commerce and online strategies for the Company.

The new organization is a very articulated part of our group and we expect to start delivering early fruit in the second half of 2017, so we already started to roll out the plan in some geographies and we'll complete it by the end of the year.

Also, we have focused on launching new product, considering price points and strategic products that we enriched our offer with. Something else with it is the rationalization of our structures. We cut costs and we generated satisfactory economic performance. That's making the Company much leaner and more efficient.

We also worked on the reduction of inventory and we will elaborate on that later, so all the programs together ended up generating a positive net financial position and the capability to self-finance all of our growth and CapEx.

We've seen improvements, especially in the second half of the year and, in particular, in the fourth quarter, which will be the presentation that Ms. Cozzani is going to deliver. Thank you.

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Alessandra Cozzani, Prada SpA - CFO & IR [4]

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Thank you, Mr. Bertelli. This year, we drew on all the levers available to us in order to improve productivity and efficiency across the globe. We have focused on our retail network and commercial strategy across the structure of the business and our working capital (inaudible).

The initiatives that we have taken have made the business leaner, more efficient and more responsive to the evolving marketplace. Despite net revenues being down 9% at constant currency, we maintained a satisfactory level of margin. Gross margin remains pretty stable at around 72% thanks to the improvement that we made to industrial efficiencies.

Excellent progress that we have made on reducing costs had a stabilizing effect on operating margins, particularly in the second half with an EBIT margin of 13.5% and EBITDA margin of 20.5% for the full year. Net income for the year is EUR278 million representing 9% on net revenue.

Turning to the balance sheet and cash flow, the improvements that we have made to our working capital management have delivered excellent results. As a consequence, we have delivered very strong operating cash flow of EUR632 million for the full year. Thanks to our high level of cash flow generation, we were able to fully self-finance CapEx of EUR250 million, fully cover the proposed dividend and reduce the level of debt. At January 31, the net financial conditions turned positive to EUR23 million from negative EUR111 million at the beginning of the year.

Taking a closer look at the net sales by channel. Overall, sales have shifted from 13% in H1 to minus 6% in H2 at constant exchange rates. Exchange rates had a slight negative impact this year of around 1 percentage point.

For the retail channel, we have seen sequential improving trends across the year. This improvement was especially visible in the last few months of the year, December and January. This is thanks to the proactive steps we have taken on rebalancing the product portfolio, refreshing the offer with novelties and restyling the store.

While sales increased by 15% to EUR504 million, the strong results have been largely driven by the excellent performance of our tailor partnership with (inaudible).

I would also highlight the strong performance of ESS in Korea in H2.

Looking now at the net sales by geography. Most of the key regions saw improving trends in second half of the year with some particularly strong performance in a number of areas, including mainland China, UK and Latin America.

Performance in Asia-Pacific was very dynamic in H2. Mainland China recovered in Q3 and accelerated significantly in Q4 to deliver double-digit growth. We saw improving performance in Hong Kong and a return to positive growth in Q4 in Macau.

In Europe, we saw double-digit growth in H2 in the UK driven by (inaudible), taking advantage of the weaker sterling and also by local consumption. Russia also outperformed with double-digit growth throughout the year.

By contrast, weaker trading conditions in Continental Europe was largely due to the continued impact of Federalist incidents on tourist flows. In France, this was most notable in H1. However, there was significant improvement in the final quarter. Net sales in the Americas were impacted by falling tourist flow. However, there was positive performance in Latin America led by Brazil and Mexico and improving trends also in Canada in H2. Overall, H2 saw a less steep decline. After five years of consecutive growth, sales in Japan declined as the stronger yen discouraged Chinese tourists.

The steps we have taken to enrich our offer with highly innovative products and to grow them, our range of price options are already producing better results. Looking at each product in more detail, we saw improvement in the second half of the year in leather goods where there was particularly high sellthrough of the novelties introduced this year.

We introduced new families of bag in H2 with some very important launches in Q4 and we are encouraged by strong customer reaction to the launches. Footwear is stable with our performance in H2 by Miu Miu and ready-to-wear saw very good results throughout the entire second half of the year with particularly strong retail trends in both Europe and Asia-Pacific.

There were improving trends across all brands in the second half of the year. Prada moved from minus 14% in H1 to minus 7% in H2 with a significant improvement in the fourth quarter. Miu Miu sales improved significantly in H2 with positive growth in Q4.

Church's saw positive growth throughout the year with sales growing 6%. We have made excellent progress on reducing costs across the business, which has enabled us to deliver stable EBIT margin in the range of about 13%, 14%.

As you can see on this slide, we made impressive headway on improving our cost structure leading to the excellent results of reducing total operating expenses by 10% year-on-year. We have applied a rigorous action plan and a disciplined approach in managing costs resulting in a leaner, more efficient and flexible organization.

We have reviewed the organization and our processes and driven efficiencies across the business, including the retail operations and corporate headquarters. We have reduced labor costs mainly freezing turnover. We have brought certain activities in-house resulting in reduced spending on consultancies and services. We have renegotiated rents in every region and trimmed all discretionary costs in all cost centers.

As this slide demonstrates, notwithstanding the sales decrease, our disciplined approach to costs, capital expenditure and working capital allowed us to achieve strong operating cash flow this year, much higher than last year.

In the second half, we produced the highest level of operating cash flow in the last six semesters. The strong reduction in inventory was achieved thanks to the more efficient production planning and stock management and inventory levels are now at 17% of sales.

Capital expenditure has reduced year-on-year as our focus has shifted from store openings to store renovation. In 2016, we have opened 28 stores and closed 26 and renovated around 40 stores. CapEx is now approximately EUR250 million, which we consider normalized levels.

This slide provides an overview of how our net financial position has evolved over the last year. As you can see, the strong contribution of operating cash flow and the reduction in our yearly capital expenditure enabled us to cover the dividend payment and improve our financial position by year-end. Net financial position at year-end is a net cash of EUR23 million representing a EUR134 million improvement on our net debt position last year.

Thanks to our strong cash flow, and as a sign of confidence in the future growth of the Group, this year, we raised the full-year 2016 dividend to EUR307 million. This represents a dividend payout ratio of 111% and a dividend per share of EUR0.12. The dividend represents 3.1%, one of the highest in the sector. Now I hand over to Mr. Bertelli for a commercial update.

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Patrizio Bertelli, Prada SpA - CEO [5]

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(interpreted) Again, back to the starting point where we began with all our digital activities, we now hired a manager, Mr. (inaudible), and Mr. (inaudible) will develop the retail side for e-commerce, digital and media. She will bring her expertise.

By the end of the year, we will roll out the global e-commerce platform to China, Korea, Australia, New Zealand and Russia and the other countries will follow in 2018. Then the e-commerce plan will be completed to offer all the products that we offer in stores, so we'll launch women's and men's ready-to-wear and Miu Miu collection. So all the products that are offered in our physical stores networks will also be offered through our e-commerce network.

Another activity was started and we've actually been working on that as we speak is the new release of Prada's and Miu Miu's website. We are going to improve the experience through the website. It's going to be more appealing. We want to actually improve our CRM systems and we want to provide a more consistent online experience based on storytelling of Prada's DNA.

We want to convert our presence in social media into sales. Women's have increased and improved in our collection to customers environment of deepening the connection between social media and actual sales channels like WeChat and (inaudible). Hence, our stores will become a starting platform for all of our digital activities.

As far as retail is concerned, we are actually continuing the rationalization of our network with some select openings and some closures. Most of the closures are due to the fact that landlords asked us for illogical rental increases. So we believe that the landlords have actually taken some positions on rentals, which is absolutely going against the trend of the retail and property market, especially considering that brands are increasing their digital presence.

We decided to renovate the Miu Miu and Prada stores with some improvements to presentation, in particular to simplify, to make it more current. This was actually a limited cost renovation project. It was about EUR200,000 to EUR300,000 per renovation. We are embarking in a big pop-up store project, which, today, as we speak, we are opening three pop-up stores in Japan that are going to stay open for two weeks. And both Prada and Miu Miu will have a significant number of pop-up stores in the next two months.

Prada men, Prada women and Miu Miu will open anywhere between 30 and 40 pop-up stores throughout the rest of the year. Pop-up stores will be used for the presentation of new products and of new proposals, so as to create excitement and buzz with the consumers, with the shoppers.

As far as products are concerned, the problem -- the issue is not so much the actual price point. What we wanted to do was analyze product processing and flows and the perception that new clients feel about Prada, whether they are offered online or whether they are offered through the retail network.

We believe that an integrated e-commerce offer encompassing all social media (inaudible) will eventually become complementary to the activity we always carry out through our own retail stores.

As far as wholesale is concerned, we should point out that wholesale has become a digital activity too. In the past, it wasn't rational or logical to serve too many wholesale customers, whereas now it makes a lot of sense because wholesale distributors actually support us in rationalizing our offer and our proposals by acting on different sales channels. So we have opened relationships with NET-A-PORTER and Mytheresa. We are in the process of evaluating other possible partners too, and so, of course, we increased our sales through this wholesale channel.

The wholesale, as compared to the year before, increased by 15%. I believe that this part of the business will grow even further in the future, and even in this sector, we see a lot of competition emerging between the different e-tailers in terms of their positioning and in terms of their price positioning too.

So we are actually using these portals as e-commerce e-tailers and we are going to run our own sites so that we may actually make the most of our CRM data to understand exactly what markets we are serving in a very strong and specific manner and we may want to provide specific products for specific markets at different moments in time.

Then licensing, licensing is still recording positive trends in both fragrances and eyewear. And we know that licensing is not just performing well, but increasing as well. So there are no signs of slowdown in our licensing business for fragrances and eyewear.

Hence, to conclude, I think we can really focus our attention on a number of activities that I (inaudible) different, complementary to retail because we see this as one and only endeavor. So we believe that, today, retail must encompass the physical stores and all the activities that are supporting them, which is all the digital activity we engage in.

Pop-up stores are a project that may actually be compared to fast fashion in a certain way. It is quick, it is fun and exciting and it integrates our digital strategy beautifully. Actually, coming up with new, fresh, creative ideas and quick turnaround times has always been our specialty, so creating a significant number of pop-up stores in different seasons for our different brands makes us really comfortable in our ability to be very creative and to come up with fresh, new, exciting proposals.

Since we are confident we found better management balance than we did in the past, in particular, we are more confident about the process management organization, logistics and marketing, so we are confident in our business today and tomorrow and, eventually, the Board of Directors has suggested to distribute a dividend of EUR0.12 per share, i.e., an increase of 9% on last year and this is certainly possible through the excellent cash flow generation we recorded. Thanks for your listening. We will now open up the floor to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Thomas Chauvet, Citi.

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Thomas Chauvet, Citi - Analyst [2]

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Good afternoon. Thank you for taking my questions. I have three. The first one, if we look ahead with your new product initiative in handbags away from the Galleria lines, your new retail store concept, pop-up stores, focused on customer service, etc., have you been able to turn retail like-for-like into positive territory in February and March? (inaudible) you were suggesting the end of last year was better. How does the beginning of 2017 look like in retail?

Secondly, on the cost side, you've done an incredible job in both halves. Last year, it felt like a real cultural change at the Company. I think OpEx was down 8% or so in the second half. What are your options this year in case like-for-like we are not turning that quickly into positive territory? Are you planning to downsize the structure further, or we should expect OpEx to grow from here?

And thirdly, assuming continued efforts on working capital and cost discipline this year, how should we think about the payout ratio? Could you give us a guidance for the year ahead? Thank you.

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Patrizio Bertelli, Prada SpA - CEO [3]

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(interpreted) Well, in the trend we recorded in February and March is positive enough, and as far as the like-for-like performance is concerned, please remember that we shouldn't look at the revenue side only, but the cost side as well. You certainly noticed we are heavily engaged in cutting costs. We believe we still have some extra margin to make this even leaner and better, and also we are engaged in a big CapEx investment activity on pop-up stores and, in particular, we want to invest heavily in the digital program.

So, as we continue, we should look at the impact this has in our retail stores too. We believe that these two things are not separated. They are not different from each other. This is possibly (inaudible) in the past because possibly our structures were not efficient enough or well-organized enough, but both the retail network and the digital network both belong to the same world and to the same source of revenues.

Then as to the dividend payout, well, this year we can certainly afford paying out this kind of dividend because we are confident we have all the leeway to do it and I believe that next year we'll be able to do the same as well. I can't tell you whether we are going to distribute EUR0.12, but we are very, very likely to stay in the same range that we have in the last few years.

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Operator [4]

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Erwan Rambourg, HSBC.

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Erwan Rambourg, HSBC - Analyst [5]

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Hi. Thank you very much for taking my questions. Sorry to belabor the point about short-term trading, but we've heard from others in the sector that they are experiencing a rebound in Europe, notably Continental Europe, as well as Asia and so I'm just wondering if you could comment on what you are seeing in terms of potential rebound in those two regions today.

Secondly, I understand there is a lot of opportunity to renovate stores, so maybe if you can comment on how many stores you could renovate this year and how we need to think about the store count, i.e., are you still going to close more stores this year than you will open?

And then thirdly, more of a long-term question. If you think about the margin profile of the group, given a more demanding consumer, probably a more costly consumer to recruit and retain, what do you think is a sustainable long-term margin goal at the EBIT level you can have? You went from high 20%s to low teens. What can we hope for over the next five or seven years? Thank you.

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Patrizio Bertelli, Prada SpA - CEO [6]

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(interpreted) Thanks for your questions. Yes, what you said is definitely true. We do have a lot of positive signs, as far as we are concerned. In particular, we see a big rebound in China, including Macau and Hong Kong. As far as Europe is concerned, the lion's share goes to the UK, of course, and there are some areas where growth is less brilliant.

In Korea, for instance, we suffered like everybody else, because of the political turmoil. Certain governments are even actually actively discouraging their citizens to travel into South Korea because of the elections and because of the situation with North Korea, so political turmoil has a big impact on our market.

We live in a period of time where politics and everything that happened after 2008 from Iraq onwards certainly didn't leave the world in a very easy-to-manage position. So from time to time, we see turmoil, we see turbulences, we see concerns that actually block tourist flows because of fear, because of tension, because of concerns, like (inaudible) for instance, after November last year. So that's the kind of unsustained development we have to be prepared and budget for.

Now, retail stores. It's not really a question of opening or closing stores. We only need to open a very limited number of very strategic stores like -- we are going to open a Prada store in Brussels, Belgium. The main thing we want to do is give the stores a new identity, which should be designed, catered for the needs of certain new consumers. The consumers are actually changing their identity quite deeply in the last 10 years, so it's certainly not the case of consumers not wanting to buy luxury or sophisticated products anymore, but we need a totally different approach.

I mean the whole digital activity and the whole digital environment made people able to just look at pretty much everything without ever being seen, which is the big difference vis-a-vis the past. In the past, people had to walk into the stores, they had to ask and talk to the sales associates, whereas, today, anybody can do everything they want wherever, whenever and without actually having to physically go around.

So this makes -- this means that retail stores also need to have an identity which is certainly different from what they had 10 years ago. I'm not talking about a global revolution in the retail stores; I'm talking about new incentive systems, new fresh ideas to encourage people to buy products, the need to look faster, to look even more exciting.

Then you asked about our long-term perspective, certainly not worse than now; hopefully better. So I feel confident. I have no problem on the future market expectations.

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Operator [7]

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Mariana Kou, CLSA.

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Mariana Kou, CLSA - Analyst [8]

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Thank you, management, for taking my questions. I have two questions. The first one is on margins by brand. Just wondering if you could share some color with us in terms of the margin difference between Prada and Miu Miu. Now I know we have seen some losses in the past few years in terms of the gap between the two, so just thinking longer term what sort of scale we should expect Miu Miu to get to and where the operating leverage will come in from Miu Miu in terms of contributing to the Group margins. That's my first question.

And the second question is more a question on management's view on M&A activities. There seems to be some -- a bit more pickup in M&A in the retail space. Just wondering, because I think a few years back when we were talking about during the IPO process, we were definitely not really actively looking, but, at this point, given the very strong cash flow position that we are in, would we consider some M&A activities? Thank you.

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Patrizio Bertelli, Prada SpA - CEO [9]

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(interpreted) Hi, Mariana. Talking about margins by brand, of course, everybody can imagine that Prada has a higher profitability than Miu Miu because we have many times said that the level of costs for Miu Miu is, except for a level of sales, bigger than this, but, of course, Miu Miu is -- the margins of Miu Miu are improving because we have taken many actions, particularly this year, in terms of commercial activities, but also in terms of rationalization of costs. So Miu Miu is expected to increase profitability in the next year.

Cash flow generation is not a code, but it's the effect of the activities we embarked and so it didn't happen by chance. What we want to do with this big cash flow is mostly self-fund our growth activities and development activities in an industry we are not fully familiar with yet, i.e., digital, but it certainly requires a big investment in human resources and consulting and development. So this is the main purpose, the main reason why we want to invest our EBIT cash flow.

As far as M&A is concerned, we are certainly not thinking about them now, but we have no buyers. We will be happy to review opportunities if there was. We can change our mind vis-a-vis five years ago.

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Operator [10]

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Melanie Flouquet, JPMorgan.

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Melanie Flouquet, JPMorgan Chase - Analyst [11]

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Yes, good afternoon. I actually wanted to come back on the e-commerce that seems to have been a big focus of yours throughout last year. There was a step change in third-party e-commerce for your business. I was wondering whether you expect full-year 2017 to be another big growth for wholesale, but led by third-party e-commerce again. That's my first part of the question on e-commerce.

And the second part is your own e-commerce seems to be undershooting what you are now doing with third-party e-commerce. Would you also expect a step change here to conclude starting in 2017?

My second question is on current trading. I'm sorry to come back to that, but I am not sure I got the answer. Are your like-for-likes back to positive territory in February and March, please?

And my next question is on costs. You did mention that you expect to still be cutting costs in full-year 2017, so I was curious to hear a bit more about that, and notably, a bit of a boring question within this, you had a change in accounting policy in full-year 2016 on D&A. I was wondering some of this was a catchup in full-year 2016 of several years. I was wondering what you expect that charge to be in full-year 2017. Thank you.

And sorry, one last if I dare. The pattern box, if you have any update. Thank you.

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Patrizio Bertelli, Prada SpA - CEO [12]

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(interpreted) Hello, Melanie. So as far as e-commerce is concerned, as you pointed out, we are very, very much focused on it now, of course, but you know very well that offering all the products we carry in stores through e-commerce as well is very complicated work and is very demanding and it's engaging a lot of people in activity today. So, of course, it will take some time, let's say two, three months, to start seeing the actual results of what we are doing today.

We are rolling out e-commerce in China and so on and so forth, but what happens is e-commerce will eventually increase our wholesale presence too because the more we become visible in digital, the more we will increase our visibility and wholesale too. So the end result of that activity will be a higher level of visibility on the market through a different channel besides the, let's say, usual retail stores and so this is certainly going to drive attention to the wholesale channel too. And as for the rest, Ms. Cozzani will answer you.

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Alessandra Cozzani, Prada SpA - CFO & IR [13]

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Hello, Melanie. Coming back to the current rating, I would say that the better condition that we have seen in the last couple of months, I'm referring to December and January, are still there. As I mentioned, as Mr. Bertelli mentioned before, China turned strongly positive. Same as for Macau. Hong Kong has rebounded. Europe is good, driven particularly by UK. France, came back to positive growth. Asia-Pacific overall is good, same as Europe. US is better, still negative, but better. Japan probably remains soft.

Talking about the pattern box, I have -- I read your note this morning. We have applied and we have been evicted in June, but we are still waiting to discuss with the current tax authorities the calculation of meter. That's why we have not put yet the benefit in fiscal year 2016. So probably next year, so 2017, we will have the benefit -- the tax benefit for three years, 2015, 2016 and 2017.

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Melanie Flouquet, JPMorgan Chase - Analyst [14]

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And on the costs are in the D&A charge and the costs --?

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Alessandra Cozzani, Prada SpA - CFO & IR [15]

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In terms of D&A, of course, we have already said presenting H1 that we have changed the sum of the useful life. They are not expecting to -- of course, to change anymore, so we'd probably be in line with 2016.

In terms of costs, we still have some room and we will continue to find efficiencies and to rationalize the structure everywhere.

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Melanie Flouquet, JPMorgan Chase - Analyst [16]

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Thank you very much.

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Operator [17]

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(Operator Instructions). Rogerio Fujimori, RBC Capital Markets.

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Rogerio Fujimori, RBC Capital Markets - Analyst [18]

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Hello, hi, everyone. I have three questions. Gross margins were down 50 bps in the full year. How should we think about the gross margin outlook for 2017? The second question is about marketing as a percentage of sales, 5.4% in 2016. Should we expect a stable ratio this year?

And my third question is about the Chinese customer base, buying locally and abroad. Could you share how much the growth rate in Q4? Thank you.

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Alessandra Cozzani, Prada SpA - CFO & IR [19]

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The gross margins for this year were pretty stable. Correct, we lost about 50 basis points. Consider that it was a great result to me because the channel mix, the product mix and the regional mix was a negative driver, so this result was achieved thanks to the industrial efficiencies that we have reached. In terms of next year, we are not expecting a big difference, so the gross margin will be stable, probably pretty in line with 2016.

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Patrizio Bertelli, Prada SpA - CEO [20]

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(interpreted) As far as communication is concerned, of course, the tendency is reducing the investment in printed advertisement as, again, advertising and communications through digital media and website.

For 2017, we are working on a communication budget, which would be dedicated 25% to 30% to digital communication and website. So the investment we are now making in the digital world, of course, encompasses and includes this big communication spend and (inaudible).

As time goes by and as we define the e-commerce platforms and everything, we are going to engage in online, we are going to review our communication spend and budget too. But, anyway, we are, of course, going to increase our online communication as against our printed communication.

Then you were talking about Chinese customers. Are you talking about Chinese customers globally wherever they shop? I'm not sure what I (inaudible) right.

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Rogerio Fujimori, RBC Capital Markets - Analyst [21]

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That's correct.

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Patrizio Bertelli, Prada SpA - CEO [22]

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(interpreted) Okay. Well, globally, they certainly increased and they increased anywhere between 1% and 2%. I think it's about 1.6%, 1.8% more, and as far as the growth of the Chinese shoppers in China, it grew even more than that. I don't have the exact percentage of the costs, but actually they did increase. Actually, I am advised that, in China, the Chinese shopper increased their shopping by 15%.

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Operator [23]

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Paola Carboni, Equita SIM.

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Paola Carboni, Equita SIM - Analyst [24]

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Yes, hi, good afternoon, everybody. Just a quick question on cash flow, in particular on the inventory. Do you believe this 17% [incidence] is sustainable or what should we expect for 2017 in this respect? Thank you very much.

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Patrizio Bertelli, Prada SpA - CEO [25]

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(interpreted) Well, for 2017, well, you know, much depends on how a company wants to manage stock turnaround, vis-a-vis, sales. So we believe that a suitable amount to feed our stores typically would be carrying anywhere between four and five months worth of stock. So with good planning and good connection between local subsidiaries and central merchandise (inaudible) the ideal level of stock for retail. And so, of course, that has an impact on planning raw materials and procurement and some other houses may have different percentages in mind.

We've kept our objective of 17% and I think we can confirm it for the future. And whether it is 17% or 18% is not really significant, but the most important thing is how we manage our process. We may increase our stock by maybe 1%, 2%, but that may vary with long-term strategies.

The fundamental target has got to be less than 20%, and then, of course, if it is 1 point more or less, it is not -- no big deal. It's a strategic decision.

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Operator [26]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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Editor [27]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.