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Edited Transcript of BOSS.DE earnings conference call or presentation 3-May-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hugo Boss AG Earnings Call

Metzingen May 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Wednesday, May 3, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Alexander Langer

Hugo Boss AG - Former Chairman of the Managing Board and CEO

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* John Frederick Speirs

UBS Investment Bank, Research Division - Director and Research Analyst

* John Guy

MainFirst Bank AG, Research Division - Senior Analyst

* Piral Dadhania

RBC Capital Markets, LLC, Research Division - Analyst

* Thomas Vincent Chauvet

Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director

* Warwick Okines

Deutsche Bank AG, Research Division - Research Analyst

* Zuzanna Pusz

Berenberg, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the HUGO BOSS First Quarter Results 2017 Conference Call. This call is being recorded.

At this time, I would like to turn the conference over to Mr. Mark Langer, CEO. Please go ahead, sir.

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [2]

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Thank you very much and good afternoon, ladies and gentlemen. Welcome to the presentation of our first quarter results 2017.

HUGO BOSS had a solid start to 2017. Though volatile, in many parts of the world through a declining market environment in premium and luxury apparel, we held up well. And I'm particularly pleased with our performance in core markets such as the U.K. and China. Our growth in Germany demonstrates the strength of the brand on its home turf despite the price increase implemented last year. And while we continue to have work to do, we also made good progress in restructuring our U.S. business.

Overall, group sales increased by 1% in currency-adjusted and in euro terms, reaching EUR 651 million in the first quarter of 2017.

By region, sales in Europe increased 3%. Supported by a slightly different timing of deliveries compared to the prior year, the wholesale business contributed high single-digit growth while on retail sales in the region remains stable.

The U.K. continued to outperform and grew by 7% in currency-adjusted terms. Sales in Germany were up slightly, reflecting positive momentum in wholesale in particular. And on retail, a weaker performance in the outlet channel more than offset good performance in our full price stores by conversion rate improvements, and an increase of average transaction sizes contributed to growth.

In the other larger markets, France and the Benelux, sales were down as a result of the weak start into the year, which was not fully offset by an improvement thereafter. Robust demand from tourists, in particular from Chinese and Russian nationals, contributed to growth in the region. Nonetheless, our European business continues to be driven by domestic customers, first and foremost. This group accounts for more than 80% of all retail sales in the region.

Sales in the Americas were depressed by ongoing declines in the U.S. In the overall region as well as the single market, revenues declined 7% in currency-adjusted terms. Nonetheless, performance in the U.S. improved sequentially versus 2016 levels as we limited the declines in both wholesale and on retail.

Sales in the wholesale channel were down in line with our full year guidance of low teens decrease, still affected by the discontinuation of off-price business we initiated in mid-2016. Retail sales were down mid-single-digit. While our mainline stores continued to suffer from significant declines in customer traffic, performance has stabilized in the outlet channel. This reflects better execution as well as the limitation of off-price business in the wholesale channel. So that has clearly started benefiting customer footfalls in our own outlets.

In Asia, overall sales were up 1% in currency-adjusted terms. Disproportionate growth in Mainland China was partly diluted by declines in Japan, Australia and some of the region's smaller markets. Comp store sales in Mainland China were up at a double-digit rate also in the first quarter of 2017, although we have now started lapping the significant price reduction introduced with the launch of the Spring 2016 collection earlier last year. A better conversion rate and a strong unit growth drove the increase. This reflect the brand's improved value proposition, effective marketing and better consumer confidence following at least 2 years of significant declines in the local premium and luxury apparel market. However, China's overall sales growth of 3% fell short of this comp store performance because of ongoing weakness in Hong Kong and Macau and store closures in the prior year.

Our distribution channel on retail sales remained stable in the local currency terms. On a comparable store basis, business was down 3%. After a slow start to the year, performance improved noticeably towards the end of the period, particularly in Europe. However, customer traffic decline dragged down performance over the entire period.

All other metrics improved. By region, comp store sales in Europe declined in line with the overall group. The Americas recorded a mid-single-digit decline. The Asian business was flat from this perspective.

Despite the moderation of store expansion, around 1/4 of the group's own retail sales are not like-for-like yet. This has to do with openings and takeovers in 2016 and the first 3 months of 2017 but also with larger renovations during which stores are taken out of the comp store base. In sum, the non-like-for-like component of retail sales meant a low single-digit contribution to retail sales in the first quarter, completely offsetting the comp store sales decline. We do expect a similarly positive contribution also in the full year, although the size of our retail network will remain largely unchanged.

In the first quarter, we opened 5 new stores, 3 of them in the Korean market. In Europe, our new store in the GUM Shopping Gallery in Moscow was a highlight opening of the quarter. Following the takeover of our franchise store in 2016, we now move to a new 400 square meter location. Net of closures, however, the number of freestanding stores declined by 6 locations. This means that we have now closed 5 of the around 20 loss-making stores we intend to shut down by the end of 2017.

An increase in the number of shop-in-shops predominantly related to a takeoff in Canada more than offset the decline of freestanding stores so that the group's overall store count remained virtually unchanged.

By retail channel, the outlet business delivered the best performance. As mentioned earlier, this was largely due to the Americas, where the channel sales benefited from high price sensitivity among consumers market-wide, as well as the restructuring of our wholesale distribution.

In the 2 other regions, retail performance was very consistent across the different formats with just one exception, online.

Our e-commerce business was down 27% in the first quarter, suffering from a double-digit decline of site visitors as well as from a deterioration of conversion rates, in particular in the all-important season-end sales period in January. This performance underlines very clearly that the focus we placed on in-sourcing key digital activities in 2016 has come at the expense of short-term operational performance.

So while it was right and for the group's long-term benefit to take full control of online fulfillment in Europe and to rebuild customer relationship management in-house, we are challenged to improve e-commerce sales performance as quickly as possible.

For this purpose, we formed a cross-functional task force in January. Since then, we have made good progress in addressing some of the key issues across the sales funnel.

First, we have started optimizing the hugoboss.com website to improve its ranking in the relevant keyword searches, reacting to some significant changes implemented last year in the way search engines determines the order of results.

Second, given our progress in rebuilding customer relationship management in-house, we are increasingly better positioned to capture more customer data online as well as in our stores, so that we can reach out to consumers in a more personalized way. The campaign to reactivate existing customers in February and March yielded some very positive results already.

Third, all development work now adheres to the principle of mobile first, replacing our former focus on desktop and tablet, whose share of traffic have declined.

Fourth, we have significantly shortened load times so that site performance is in line with peers again since the end of March.

Fifth, we have started working on design, content and usability to improve user experience and the site's commercial performance, leading to a stabilization of conversion rates towards the end of the period.

And finally, a clear focus on best-selling items will mean that the offering will lean much more towards commercially important entry in medium price points again, leading to a leaner but deeper assortment with the launch of the Fall '17 collection in August.

As a result of these measures, performance has started to improve towards the end of the first quarter. We are confident to return to growth in our online business in the remainder of the year. In second quarter already, we expect performance to be visibly better compared to the first quarter levels.

Returning to my analysis of first quarter sales performance. Wholesale sales were up 2% in currency-adjusted terms. This performance was better than what we expected for the full year due to some delivery shifts in our European wholesale business. These shifts supported first quarter sales at the expense of the fourth quarter last year as well as the second quarter this year. However, also excluding this effect, the European business continues to trend clearly better than our wholesale operations in the U.S. where weak underlying demand is expected to weigh on sales throughout 2017, although the pressure from the restructuring of distribution in 2016 will fade gradually.

Finally, the license business was up solidly as a result of good growth in the fragrance business, which continues to benefit from the takeover by El Corte in 2016. Performance was driven by BOSS Ascent and the successful launch of BOSS Bottled tonic. Another extension to the BOSS Bottled family of brands introduced in early 2017.

The total BOSS business, of which fragrances are obviously just a small part, declined 1%. This includes the BOSS Green and BOSS Orange lines, which will be integrated into the BOSS brand going forward. The former recorded strong double-digit growth across all major product groups, reflecting healthy consumer demand in athleisure.

Sales of the BOSS core brand, however, suffered from a more restrictive distribution in the wholesale channel.

Sales of the HUGO brand were up 16%, driven by space gains in wholesale as well as increases in on retail. This performance is a further sign of the growth potential the brand has in the contemporary fashion segment. And this is true for menswear and womenswear alike. In the first quarter, a double-digit increase of HUGO sales drove 2% growth in our overall womenswear business, which has developed slightly better than menswear. The latter was up 1%.

Let me now go through our quarterly results in more detail. Gross margin was up 30 basis points year-over-year and reached 64.4%. Margin benefited from a significant decline of rebates in Asia, where the adjustment of selling prices last year led to a strong improvement of full-price sell-through rates. In the other regions, rebate levels remained virtually unchanged. Currency attacks in relation to the devaluation of the British pound and, to a lesser extent, the negative channel mix effect in the quarter offset some of the gains.

Pricing had a neutral impact on gross margin. Note that we did not implement any further price adjustments in the last 3 months and do not anticipate any major changes also in the remainder of 2017.

Operating expenses were almost stable. This still reflects the cost savings we generated in the later stages of 2016, in particular with regard to the renegotiation of store rental contracts. In addition, store closures had a [first] positive effect. As a result, we were able to at least limit the deleverage effect on the negative comp store sales performance in the period. In addition, this year's different saving of marketing expenditures limited cost growth. While marketing expenses remained virtually unchanged in the first quarter, we'll intensify brand communication around the launch of the new BOSS and HUGO collection later in the year. As a result, EBITDA before special items increased 4% to reach EUR 97 million in the quarter.

In the absence of special items and supported by lower financial expenses, net income was up almost 25%.

By region, profitability in Europe improved due to the positive sales trend and tight cost management. However, the Americas suffered from a significant drop in margin owing to the operating deleverage from the negative sales trend as well as some negative inventory valuation effects.

In contrast, sales margin recovered well from prior year's decline, improving by almost 700 basis points in the quarter. This was due to sales growth, the aforementioned reduction of rebate levels as well as the nonrecurrence of inventory impairment charges in the prior year.

Turning to the balance sheet. Trade net working capital was down 1% in currency-adjusted terms. A 4% inventory decline was the main driver behind the improvements. Inventories decreased in all 3 regions, with the most pronounced reduction in the Americas and Asia. And relative to sales in the last 12 months, trade net working capital continues to be up slightly.

Investments were below prior year's level solely due to a different phasing of retail openings and renovations compared to the prior year. Coupled with higher profits and a lower working capital and cash outflow, this had free cash flow turn positive again in the first quarter. Nonetheless, net debt was up slightly at quarter-end.

Ladies and gentlemen, our results in the first quarter, our performance since the end of the period, as well as the measures we will implement in the further course of the year make us confident that 2017 will indeed be a year of stabilization, in line with the plan to return to profitable growth we outlined at the end of last year.

We are reconfirming our financial outlook today. We expect group sales to remain largely stable in 2017, with the growth in on retail compensating for a low to mid-single-digit sales decline in the wholesale business.

On a comparable store basis, we forecast retail sales will perform within the range of minus 3% up to plus 3%.

By region, Asia should perform somewhat better, the Americas somewhat weaker than the overall group. Overall sales in Europe are expected to remain more or less flat on the prior year.

The group gross margin should improve due to positive channel mix effect and the non-recurrence of prior year inventory write-downs. However, negative currency effects mainly associated with the devaluation of the British pound will curb the margin's rise.

Lastly, depending on the sales performance on retail, EBITDA before special items is also expected to perform within the range of minus 3% to plus 3%. As we highlighted in March already, this forecast factors in contingency plans for further cost savings should retail sales remain under pressure for longer than we are currently expecting. Excluded even from these contingency plans, however, is our commitment to drive the transformation through a strictly customer-centric business model and the repositioning of our brands, which we will support with a slight increase in marketing expenses compared to sales.

Net income is expected to increase at a double-digit percentage rate, supported by the nonrecurrence of costs incurred in the connection with the aforementioned store closures.

Finally, we forecast investments and free cash flow in line with the prior year level. With regard to the latter, the expected profit increase will be offset by cash outflows related to the remaining store closures, the cost of which we booked in 2016 already.

In the next few months, we will reach important milestones in the implementation of the strategic changes presented a few months ago. In just a few weeks from now, we will present the new HUGO Spring/Summer 2018 Collection at the Pitti Uomo, with the combined men's and womenswear fashion show, we will showcase the future creative direction of HUGO to the global fashion community gathering in Florence. A few weeks later, BOSS will be back to New York with their menswear fashion show introducing the new brand, Synergy, to relevant buyers and the press.

The Spring/Summer 2018 collection on stage will be the first reflecting the integration of BOSS Green and BOSS Orange in the BOSS core brand. We will present this collection to the trade over summer. Keep in mind, though, that they will only hit the stores at the beginning of 2018. The collection before Fall/Winter 2017 will still be based on the old brand logic. Nonetheless, it already features some elements of the new strategy. In particular, we have strengthened the casualwear offering. In addition, we've aligned the different brands lies more closely so that the overall collection statement is far more consistent across business, casual and athleisure than in previous seasons.

The launch of the Fall collection will also mark some changes in the merchandising of our stores. Specifically, we will be expanding the in-store offering at entry price points to stipulate traffic and conversions. This goes hand-in-hand with the reintroduction of BOSS Green in more stores, considering the brand's strong performance as well as general trends in the markets towards more relaxed casual and even athletic-inspired dress codes.

Ladies and gentlemen, we have exciting months ahead of us. 2017 will be a year of implementation. We will lay the foundations for bringing HUGO BOSS back to profitable and sustainable growth. The feedback from retail partners and customers makes me confident that we're on the right track. I look forward to meeting you here in Metzingen at our Investor Day in August so you can touch and feel for yourself what may -- or what today may still be difficult to grasp. But in the meantime, let me answer your questions on today's set of results. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Zuzanna Pusz from Berenberg.

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Zuzanna Pusz, Berenberg, Research Division - Analyst [2]

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I have just 3 questions. First of all, on the wholesale business, so I understand that the different timing of the deliveries supported your performance in Europe in Q1. I was just wondering, would you be able to quantify that? What was the impact? Was it sort of low double-digit million euro? Just any estimate around that would be very helpful.

Secondly, on the gross margin, so the 30 basis points of gross margin improvement year-on-year, it seemed a bit light given the nonrecurrence of the inventory write-downs from Q1 2016. So I was just wondering, would you be able to walk us through the actual gross margin drivers, including any negative effects, the channel mix and any underlying improvement you may have seen from a rigid discounting? And just also a follow-up question on gross margin. It seems like you also recorded another inventory write-down in the U.S., which I guess wasn't really expected. Can you explain to us what was the decision, why the decision right now? And could it mean that also for the full year, you will see less of an improvement in the gross margin than initially expected?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [3]

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Well, thanks, Zuzanna. Yes, I think we highlighted in the report and also in the call that we benefited on a quarterly basis from delivery shifts, which, by the way, was not managed for us in a way, but it was a consequence of the buying behavior of our wholesale customers who had just put a larger preference on the CIM 2 and CIM 3 in our deliveries at the expense of CIM 1. Overall, what we did at the calculation, without these effects, wholesale sales would have declined to low to mid-single-digit in the first quarter, also in line, what I mentioned earlier, with our full year guidance. Please keep in mind that at the time, when we guided you on our wholesale development in 2013, we had full visibility on the order book. So it shouldn't come as any surprise that we factored this in. And we expect, as I said earlier, still our wholesale business for the full year to perform at these rates. Coming back to your question on gross margin impact, of course there's a bundle of effects, and I think you mentioned them all correctly. Typically, we benefit from channel mix in our business development over last year. So given the momentum we just discussed, channel mix, even with the slight drag on gross margin development, given that we adjust for higher gross margin in the retail business relative to the wholesale business. Also, exchange rates have played a role. I think I mentioned also the British pound, which had a negative impact on gross margin. What was positive was clearly rebates, even stronger than we expected. I think I mentioned Asia as part of the speech. And -- but also in other parts of our business, we have seen an expected positive development from managing rebates tighter than the previous year. Inventory was -- and I think there was -- relates also to your third question. We expected a smaller reoccurrence of inventory write-downs in 2017 compared to '16. So there was a nonreoccurrence of inventories in Asia, helping also to improve our Asian profitability significantly. But we also had almost to the same level of inventory write-downs in the U.S., which offsets the positive impact from Asia. So overall, what -- I think -- quite of an improvement in the quarter. We still expect, as I said, an improvement for the gross margin, so we -- from today's perspective, we see no reason to revise our gross margin guidance for the full year.

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Operator [4]

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Our next question comes from Fred Speirs from UBS.

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John Frederick Speirs, UBS Investment Bank, Research Division - Director and Research Analyst [5]

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I've got 3 questions, please. The first one is on like-for-like. I saw some Reuters headlines this morning quoting you saying that Q2 so far you see no significant improvement in the in-stores trend. I just wondered if you could share which regions were the main drivers behind that sequential improvement. And does that mean you're positive like-for-like in Q2 to date? Also, just on your thinking about the Q1 print. Does that change how you're thinking about the likelihood of reaching the high end of your full year like-for-like guidance range? Second question was on online. We see marketing broadly stabilize overall in Q1, but there's a shift back towards menswear within this. Could you give us a sense of how much online marketing spend behind menswear was up year-on-year? And is this going to be a bigger sequential support as we move through the year? And then lastly on wholesale. You mentioned what the underlying piece was in Q1. I just wondered, if we think about Q2, should we be thinking Q2 down maybe high single digit? Or is there anything else we should be taking into account in Q2?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [6]

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Okay. Just to put everybody on the same page, we have not given guidance on like-for-like on the second quarter, which it's too early to tell and we would be not commenting on -- or giving any guidance on a quarterly base. And we'll come back to this principle also when -- to answer your question on the wholesale development in the second quarter. However, it's true that what -- I think I mentioned that we see the measures that the task force have identified and implemented in the first quarter. They're first and foremost benefiting also our e-commerce business, which was clearly very disappointing in our sales period in January. But during our regular sales, so Spring/Summer, which was still selling, of course, at full price, we've seen that the merchandising is improving, that loading times are better and that conversion rates improved sequentially during the period. And also, CIM, which has been, in many parts, a drag to our business in the past, we have seen now admittedly, on a relatively short period, yet, February, March, but -- that our CRM measures are really now activating customers to bring to our site and improving our conversion rates. So we have seen a sequential improvement. It's too early to give any commitment or guidance on all e-commerce business for the second quarter. But what we feel very comfortable with -- but I think this is almost a must -- that the second quarter will improve significantly better than what we recorded in the first quarter. Overall, as we said, we do expect to return to positive like-for-like in the e-commerce business for the full year. Marketing spendings have been reallocated according to what we outlined and explained to you at the last Investor Day and what we reiterated at the Analyst Conference. So we are now, in the majority, more focused on menswear than we were 12 months ago, that's correct. But keep in mind that still, in our specifics, especially print and online advertising, womenswear continues to benefit in the order of magnitude around 30%. So significantly, to a larger degree, than the underlying size of the business. And this is true across all marketing means, be it our print or digital advertising. On the wholesale, as you've seen, due to order intakes, we caution you always not to get too excited on a above-trend development like we have now in the first quarter. And not to announce the enter to the HUGO BOSS wholesale world, if there is a quarter which is below what the company guides on a 12 months forecast, so you're right to assume that in the remainder of the year, we see a moderation in the wholesale development to bring the development in sync with our overall expectation for the full year. As we outperformed in the first quarter due to the factors that also Zuzanna asked about, we expect, of course, that the remaining 9 months will rather be dilutive that we expected to deliver at the full year guidance in our wholesale business, as I just explained

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Operator [7]

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Our next question comes from John Guy from MainFirst.

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John Guy, MainFirst Bank AG, Research Division - Senior Analyst [8]

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Maybe just following on the staying with online. Could you comment a little bit more around the exit rate? I appreciate that January -- understand that January was significantly worse than the 27% decline you had for the quarter. Appreciate that the task force has come in and made some changes. So what was the exit rate basically in March? Could you also comment around the store closures? You mentioned that for the underperforming stores, you've now closed around 5 out of the roughly 20 stores that you're going to close. Is that going to be an even closure process over the course of the year? If you could also just touch upon France and Benelux. I think the comp basis were reasonably soft for both of those 2 regions. So I'm trying to understand why they were pretty weak in Europe. You did mention that those were better exit rates. So maybe you could just give us a little bit more flesh on that. And finally, on pricing initiatives. You mentioned that there were no pricing adjustments due for 2017, although I think for January '18, you're potentially looking at 10% to 15% price rises in Germany and a 15% price cut in China. I appreciate it's a slightly a longer way off, but how should we think about your budgets for Europe and Asia and growth expectations on the back of those price amendments?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [9]

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Thanks, John. I think go through the list. So as I said, we have seen a measurable sequential improvement. But keep in mind -- in the online business in the course of the first quarter. So we finished the single month of March in positive territory, which I've seen as a very promising sign so that the -- like March and April are the 2 months where we have virtually no rebates offered. So these are the keenest months. February still has the impact from the later stages of our clearance sale. So that gives me some confidence that the measures that we have implemented are effective and. As we've said, this is due to better conversion rates and also better activation. But clearly, this is not yet enough to compensate, you have seen the year-to-date numbers, to the very weak start we had in particular in January. And I would also caution ourself and also you from the market side to take already one month of trading and also the positive -- I think there was a question asked from Fred earlier that I tried to avoid that we have seen a positive start into the second quarter of the year, 2017. The fact that it will be again the period June, July in particular in the online where we know that consumers are particularly receptive to an intelligent but wide enough offer during the sales period. So take it as a sign of confidence that -- there are 2 things in place at HUGO BOSS. We know where we fell short and what are the areas to improve and that we have taken decisive measures which, at least on a quarterly basis, have seen a quite a significant improvement. However, I would wait for the second half year results to see how sustainable and sufficient these measures are. Clearly, not all of them are implemented but are still a list of Autumn items where we need to get better. But I'm pleased giving you, against the backdrop of a difficult start, that we're heading in the right direction. Loss-making stores, it's not significant. But yes, these 5, which were part of the base the last year and which we did not have in operation in the first quarter, had a small but measurable positive impact on retail profitability. So what -- remember that we guided you on a full year base that all 20 stores at about a 70 bps dilutive impact on group profitability is at least partly benefiting. We have not negotiated the exit on all of them. Still on some, we are in renegotiation on the exact exit terms and timing. But we're confident, as we've said, that the vast majority of these stores will be excluded from our store base by the end of '17. So the full year effect of the beneficial -- the benefits of closing these lossmakers will be visible in 2018 numbers. France and Benelux, we are not at the level, as we said. So -- rather, flat to slightly declining compared to this powerhouse, which is the U.K., and, to a lesser degree, the German market. And particularly, the -- in the Benelux market, we also had the impact from some distribution cleanups where we discontinued a set of concession operations and a factor that we mentioned in previous calls already. In all others, it was just a weaker market environment, probably driven -- affected also by macroeconomic factors which have made these markets automatically but comparably weaker than the 2 core markets, Germany and the British market. Pricing, yes, that's correct. We will -- with the Spring/Summer 2018 collection, we will implement the principle same product, same price within the euro zone, which has the effect of price increases or discontinuation of certain price points in Germany. So be it the suits be it the jeans, be it the outerwear jacket, same product, same price across all the eurozone. Keep in mind that this implies also price reduction, for example, in the Swiss market relative to the other European markets. We have not committed on Spring/Summer as the implementation date for further price harmonization in Asia. As we mentioned already at the end of this conference, we are very pleased with the strong like-for-like improvement in Mainland China, and we think that the weakness, which is coming from Hong Kong, Macao, is, to a lesser degree, driven by price discrepancy within the regions or Europe but has more to do with domestic effect in particular and Hong Kong. So we'll probably use the Investor Day in August to give you more details and light on the amount and timing on the price adjustment in Asia. But it has not been announced that we have x percent price adjustment in Asia Pacific with the strong Spring/Summer deliveries. This is only due -- true for the price adjustments in Europe.

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Operator [10]

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(Operator Instructions) And our next question comes from Thomas Chauvet from Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [11]

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I have 3 questions, please. The first one, on the slides about the Americas. You're saying that the discontinuation of the off-price business in wholesale has started supporting sales in your on retail network. What do you mean by that? Do you mean [LFL] in the U.S. are less negative as a result of that? And on the off-price business, are you still on track to reduce the exposure to that business from 20% of wholesale sales to single-digit percent in 2017, as you've highlighted at the Investor Day. I'm talking about the U.S. business. Secondly, on HUGO, what was the growth of HUGO in retail in the period and in wholesale, excluding, obviously, it looks like a big timing shift? Given you haven't got the new HUGO collection yet, would you say that the performance is a reflection of the good momentum of the broader content per segment or the results of some of your specific action you've done on assortment and communication? And do you feel more broadly that the organization is ready and very clear on how to succeed with the Spring/Summer '18 relaunch of HUGO in that segment? And finally, as we are all seeing the luxury demand recovering strongly in most markets, and particularly Europe and Greater China, are you saying the share of luxury versus entry-level price points perhaps increasing in the period? And have you -- still the same view that HUGO BOSS should be staying away from that segment?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [12]

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Well, thank you, Thomas, and let me go through the questions in the order you asked us. What we do see is that the discontinuation of -- there were no volumes available anymore since summer of HUGO BOSS merchandise in these market brand off-price formats. These price-sensitive, bargain hunter consumers have turned, to a significant larger degree, to our factory outlets. Of course, I wished they would come to our full-price stores. But at least on a recurrent base, we think it's a positive sign already to our business that -- where we are in control, where we tend to have also better merchandising execution, ultimately also better brand experience and strengthening our brand equity, that these price-sensitive customers will not have now shifted to our own controlled mono-brand off-price permits. So we're well on track to achieve the target that you reiterated that we will reduce our share of off-price wholesale to less than 10% coming from peak above -- clearly above 20%. And as we explained, just to make this clear to everybody, Our relationship Nordstrom in other majors, which are also operating off-price formats on their own, will limit our ability to bring this down to 0. But it's clearly a strong improvement, which has started to benefit our factory outlet operation in the U.S. In the HUGO development in the first quarter, you are completely right, also benefited from the delivery shifts. So that's one element to it. But keep in mind that there, the share between wholesale and retail, between these 2 brands is actually slightly higher with HUGO compared to BOSS, but it was also driven by a better performance in our HUGO business and on retail and actually understanding that we don't break it down brand line what are the like-for-like development, but it was also due to the fact that the HUGO collection in this HUGO-only or as is now in Champs Elysees and others where we Sloane Square, where we offer HUGO and BOSS in our larger stores, have performed also very positively, underlying that there are 2 important market segments which are benefiting right now from change in consumer preference. One is the athleisure segment. The other one is the contemporary avant-garde segment in the HUGO with both the brand lines and genders menswear and womenswear benefited from that. It's an interesting point in the light also the very strong results we have seen from carrying other more luxury pure plays that in some markets, there's a reoccurring demand, at least for some brands, also on luxury price points. We haven't seen a major discrepancy across all price points. And keep in mind that our new strategy does not include that we will discontinue all BOSS Tailored. So the upper end of our collection. However, what gives us some confidence that -- and we will strengthen this push even in the second half of the year -- there's a huge untapped opportunity that we've walked away for the last 2 years on the entry price point that we want to recapture more on the entry side of our of pyramid, independent whether there's a pickup also on the luxury end and our core is premium, it's not luxury, as we confirm to that. So at the upper end of our offering, we will still be present, but this will not be decisive for return to profitable growth. This will be decisive more on the harmonized premium enterprise parts of our offering.

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Operator [13]

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Our next question today comes from Antoine Belge from HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [14]

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It's Antoine Belge, HSBC. Three questions, if I may. Regarding the German market, can you maybe give your own feeling about how things are developing? But also when you compare to maybe 5 months ago at the Investor Day discussing with your partners, et cetera, how do you feel the German markets for this year and also, as you move towards that season where the price will be aligned. Second question relates to cost savings. So -- and Q1 was still impacted by some of the measures which we started to kick in more in Q2 last year. So I think in the previous conference call, you highlighted that you could find more cost savings. So how should we think about the rate of growth for OpEx for those 3 remaining quarters? And finally, in terms of management, are -- there has been any sort of new hirings and how could things evolve on that front?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [15]

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Yes, let me start with the German market. I think that's not the second quarter where we had a positive if not surprise development in Germany. Remember there wasn't a lot of, I wouldn't call it, criticism or nervousness on the capital market and after our Q3 numbers 2016, which were down 10%. That -- the price adjustment was not accepted by the end consumer or maybe our wholesale customers. Since then, we have now delivered 2 quarters where we were slightly ahead of the overall market segment, which also gives me and that as the whole HUGO BOSS team a lot of confidence that we have a superior good value for money for -- product offering to our German consumers. And we treat these grounds very carefully. And as I answered to John's question earlier, we have now used the last 5 months also to clearly look at all elements of our collection in terms of value for money, that with the offering or the presentation of our Spring/Summer collection 2018, we, first and foremost, have a convincing story through our partners on the German wholesale side and our own merchandising function, that with the improved value for money, with -- and quality on the entry price points, that the overall composition, which has been the euro-priced collection is sufficiently attractive in design language but also value for money for the consumer. Feedback has been very positive. Admittedly, this is still more conceptually being presented in terms of fabric and concept stories because this collection is still in the making. What will happen in our showrooms right now is the so-called pre-Spring collection, which is already much closer to the new, harmonized collections that we'll present in July. But overall, I would say in a nutshell, to answer your question, I've seen increased confidence from our wholesale partners and within the HUGO BOSS organization. And this is something that will be received positively [actually] from the end consumer. This will be -- clearly, we're in for a moment of truth. But you can be sure that in terms of willingness to invest into the product, listen to demand from the market in terms of which price point to start, we are -- we'll do whatever we can to defend our market-leading position. But one principle will be adhered to without any alternative, and that is as of Spring/Summer '18, same product, same price in the Eurozone. So if we see in any category that due to competitive mood, demand from the end consumer, that entry price points have to be EUR 5, or EUR 10 lower or higher, we will consider this very carefully. But if we implement such a step, it is one European price adjustment that we do. The historical differentiation between France and Germany or the Benelux and Austria will be a thing of the past. By the event, also benefiting our capabilities in our e-commerce world, where our consumers anyway expect to be treated equally across all geographies.

Cost savings. I think there was a point and, especially, in outlook and performance so far. I think our performance year-to-date is a very telling proof to the fact that the company continues to be able to control OpEx in a way to mitigate also the impact on negative like-for-like. We expect that the first quarter will mark the low point of our overall like-for-like development for the full year. Remember that we guided for minus 3% to plus 3%. It's based off our assumptions. If markets would be more depressed than we have seen for the last 7 to 8 weeks, we will implement contingency measures that we have defined with all cost center owners, which will be then the priority call on which project, which expenses to be postponed or to be reduced in size to achieve our EBITDA guidance for the full year. These plans are in place. These plans are aligned. We are flexible enough to adjust our spending pattern, be it hiring, be it discretionary spending on project scopes to adjust to the level we can afford given the top line development by market. Does it answer your question, Antoine?

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [16]

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Yes, and then regarding maybe the management team and maybe the sort of the CFO position?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [17]

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Yes, I know, you guys are looking for a new speaker It's a -- you're getting bored by me. Well, we're in very late phases of the announcement. Let me put it that way. I'm quite confident that we will have an announcement around the AGM. I think we would all agree that this was the perfect timing and a good stage to announce a well-reputated new CFO for HUGO BOSS. But I can only confirm that once we have mutual signatures to that. But for my statement, you can see that we are on a very advanced stage to fill this position.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [18]

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And I'm sure you will still be present from time to time?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [19]

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I will, don't worry.

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Operator [20]

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Our next question comes from Piral Dadani (sic) [Piral Dadhania] from Royal Bank of Canada.

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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [21]

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If I could just start on your gross margin guidance. As you begin to widen the entry price of -- in the second half of the year with your Autumn/Winter '17 deliveries and the potential impact of negative price mix we can expect there, should we expect the first half, second half gross margin development to look slightly uneven, i.e., the second half gross margin will be lower than the first half as you get some negative price mix effects coming through? And then if I move on to your North American retail business. Obviously, you've said that there were significant footfall declines in your full-price retail network, but the outlet business has done much better, stabilizing in the first quarter. Could you just confirm for us what the share of outlet is in North America as a proportion of your total retail sales and whether you see that development as structural versus cyclical? And if it's structural, then what actions you can take to prevent further deleverage as we progress through '17 and into '18? And then just finally, on CapEx. Your full year guidance, I think, is for EUR 150 million to EUR 170 million, but your 1Q spend is significantly lower than that on a run rate basis. So could you just explain to us perhaps the phasing of CapEx and whether there is potential that the full year number could be lower than that and free up some further free cash flow generation?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [22]

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Well, thank you. And let's start with the gross margin impact from the bigger focus the company will place with the Fall/Winter deliveries on entry price points. As of mix -- I think we explained it also back when we gave the gross margin drivers for the full year at the end of this conference. Actually, the mix by product categories, whether we sell more clothing versus casualwear or athleisure or even within groups, the HUGO BOSS product range has a very comparable gross margin across multiple product categories. The only category -- and that's something you can test on yourself now, we can't see you, but -- is we always recommend you to have more ties as the most margin-accretive product category. But we will not have a push on ties, but will have a push on the important entry price points. But these will hopefully increase footfall adequately because some of these customers here are more looking for price points did not find this offering in our full-price stores in the last 3 to 4 seasons as we elevated the brand at price points which did not find the reaction or the acceptance from these consumers. So we would like to reactivate these customers. By the way, one of the elements, I think, that has helped us now to improve our e-commerce business also in the later stage of the first quarter that we brought to the attention to the end consumer, that entry price suits a far more visibility placed on the e-commerce site at HUGO BOSS than ever before. It's something you can test this afternoon for yourself. So we have to bring it also to the consumer awareness, that HUGO BOSS has a very competitive and wide offer to this product. But a higher expected sales share of entry price points relative to higher price points will not affect gross margin. But what we need to make sure, that it could be that cash margin would decline clearly makes a difference whether we sell 2 suits at EUR 600 versus EUR 800. This is why it's important that we compensate this cash margin impact by better conversion rates and, as I said, higher traffic rates. This applies, by the way, for all price adjustments, be it lowering prices like we did in Asia, and you've seen that we were able to overcompensate price adjustments or shift some more to entry price points if the market mix is right. In terms of the U.S. retail footfall, I think this question was earlier asked also from -- let me see -- Thomas, I think, asked this question. Is a beneficial footfall developing our factory outlets in the U.S. it is partially attributable to the discontinuation of the off-price business in the market print environment? We would confirm to this view. This has led also to a situation that our factory outlet business has grown stronger than full price in the U.S. It is a business that is already above group average. So factory outlet account for more than 30% on retail sales in the U.S. We don't give the specifics split between full price and off-price by market or region. But nevertheless, we still consider this a positive development considering the point of departure, keeping in mind that 20% of our wholesale sales were within multi-brand off-price performance, which we consider far more brand equity dilutive than our own factory outlet operations.

On CapEx, we can assure you that we will not cut corners in terms of renovating our store network or postponing openings on store projects that we believe into. We have pretty good visibility of historically on our pipeline on renovation and openings. So it is purely timing. Also, due to the fact that we are in the late stages, it's already conceptually done all ready to be implemented, on the both sides, on the new store formats that we will also present to you at the Investor Day, which we think also in terms of in-store execution, we'll have a much stronger impact on consumer perception but also functionality than our current BOSS store concept, which has led to the fact that we have postponed some of our openings later. So the one store we would recommend you to visit, I think opening date is in September or October, is our flagship store in Geneva. This will be our first European store that follows the B7-Plus evolution concept, which will be a showcase to the new in-store execution not only in terms of merchandising but also then in terms of store design. We will share with you on site in August more details to the news on our store concept. But this also has, where it's feasible also to the shift of the execution of this project, to do it already in sync with the new retail format. Does that answer your question, Piral?

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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Yes. So you expect to spend the full EUR 150 million for the full year?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [24]

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Yes, no change in the guidance.

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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay, great. Can I just follow up quickly on your price/volume mix equation? Sorry, I was just talking about the gross margin. I guess your response suggests that you're expecting a full volume response, I guess to the change in the prices. Do -- does that tend to come through immediately? Or does there tend to be a lag?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [26]

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Well, this falls into the category of question better to be answered in hindsight. I mean, so we had examples and we will build on that where our price adjustments have been very well received by our wholesale partners and end consumers. And we know what are key elements of that marketing. Our communications is an important part of that. But ultimately, and this was a question, I think, also asked by Antoine earlier. The product just has to be delivered in terms of our fashion statement in terms of quality, in terms of fit. That's why we said there's a lot of focus on the development and the preparation with our wholesale partners but also our own buying teams to ensure that in particular, with the harmonized entry price points for the BOSS brand for Spring/Summer '18, that these pre-requites are met, but there will be an important data point to share -- to be shared with you at the Investor Day of the first initial buying reaction from our wholesale partners, and we will provide you with more details at the Investor Day and, ultimately, with the first sellout performance which we will not have before we'll report again 12 months from now on the first quarter '18 performance. So in terms of lessons learned from previous successes but also cases where we have fallen short, I feel confident that we have incorporated that. But as we said earlier, let's see, at Capital Markets Day and at Analyst Conference with the delivery of this collection and bringing all pieces into play of the new strategy, overall we expect the year 2018 to be the year of return to growth, and this requires a convincing offer also with the new collections.

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Operator [27]

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Our next question comes from Warwick Okines from Deutsche Bank.

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Warwick Okines, Deutsche Bank AG, Research Division - Research Analyst [28]

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I've got one question on each of your 3 regional retail businesses. Listening to what you said about Europe, I'm surprised. I get the impression you're a bit more confident than maybe the numbers look to me. What reassurance can you give us that the European performance hasn't just been boosted by very soft comp in March which you referred to last year? And how worried are you that Germany's being driven more by wholesale than retail, which has been the pattern for some time, I think? On the U.S., specifically the mainline retail stores, again that's a -- again, it's a negative against a very negative comp from the prior year. Are you seeing any positive signs in your mainline retail business? And thirdly, looking at the Chinese retail business, this time last year, you cut prices 20% at the end of February, beginning of March. So during the Q1 period. Can you just talk about the performance of the Chinese business this Q1 before and after that price cut?

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [29]

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Thank you, Warwick. Well, I think I was clear from my opening statement that we're still operating in a market environment that in almost every part of the road, that's not supportive. And we will be surprised if there's a significant improvement in the underlying market, menswear, premium and parallel to our core business, beyond the level which was, as you know, negative since '16 to seeing any part of the world, a strong growth. And compared to this background on what are the support we get from the market, I'm pleased in particular with the performance in most of European markets and also with the mainland Chinese development. Let's go through by region. As I said, we are seeing now for the first time -- well, our fourth quarter was similar, but the impact in the first quarter was much bigger -- that overall, already quite resilient or robust physical retail business was dragged on by the performance of our online business. And with all of the fair criticism that this needs to be addressed, and I think we have taken measures and we're pleased with the results. Overall, the e-commerce was down for the group 27%. And you know that this is predominantly an EMEA business, which is dragged on our European retail performance overall. So with now remedy measures in place for the European e-commerce business and a healthy above-market average development we see both in the full-price and outlet in most European markets, I'm confident that there is a sales hub with the better assortment, the better buying as we move later into the year. I think we tried to outline that -- what we have done in terms of collection, in terms of our buying decision and by the decision to strengthen athleisure and casualwear offerings in our stores, I'm confident that we'll see quarter after quarter, in particular in the European business, an improvement compared to where we started, that Q1 was, overall, in particular, driven by the e-commerce business, at the lower range of our e-commerce is also here would subscribe to the view that the expected difficult start to the year, where we expect continuous improvement to it and try to caution you that March and April are just 2, not the most crucial months in our annual performance but these give us are trend developments over the last 8 to 9 weeks, which indicates a sequential improvement in line to achieve mainly our full year targets. The U.S., we always position that it's not a quick fix, but it will take at least 12 months to annualize on the wholesale distribution. On the off price and even on the full price, you know that many of our wholesale partners are experiencing still difficult market environments. Again, in the premium environment and also commentary from the industry, other players in the U.S., I can't see any sign of a quick return to growth, in particular in the full-price business. Whether we like it or not, we need to serve these customers across these trade channels that prefer to be it e-commerce, be it factory outlets. As I said, our factory outlets started to benefit from our decision, harsh decision we've taken on the wholesale side. But overall, I expect the U.S. market, and this is the lighthouse for the Americas development, to be from all 3 markets, the one which will remain continuously more challenged than the other 2 despite sequential improvements. Asia Pacific, and you asked about the impact on pricing, I would say it's not sufficient data to tell yet to what degree the annualization of the price adjustment in China will now -- as we start to compete against stronger comps from last year, will dampen the effect in 2017. Please keep in mind that in our numbers, the full impact from the price adjustments only started to kick in at a later phase of second quarter and in particular in the third and the fourth quarter. So I think it's still too early to comment to the fact how strong will be the annualization impact, will we -- are we able, with the better merchandising decision, better in-store execution, try to supplement to that. But I would agree to the view that the improvement, in particular in structure profitability in Asia Pacific, is off to a very good start, as we demonstrated in the first quarter, and that this will be accretive also for the remainder of the year. So it will be a year of transition and stabilization where we'll implement important measures, but it will not be a year where, we based on Q1, can already talk -- announce for the year '17 a return to growth. That was not our intention, and I think our numbers for the first quarter, if you adjust for the wholesale delivery fact, will just confirm the view that the company has always given for the full year '17.

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Operator [30]

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As that is our last question, I will hand back over to, Mr. Langer, for any closing remarks. Thank you.

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Mark Alexander Langer, Hugo Boss AG - Former Chairman of the Managing Board and CEO [31]

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Well, thank you for your time, for dialing in, participating in our discussion. As I assume, there will always be some questions not being answered as part of the Q&A. The team from Dennis is standing by also to follow up on any points that we might have not discussed to the level of detail as you wish. And again, I would reiterate my invitation. You probably will not join us on our AGM even if there is always a nice reason to come to Stuttgart. But if you come to Stuttgart once this year, this will be the one visit will be in August for Investor Day, and I'm really looking forward to welcoming as many of you to this event as possible. Thank you for your time. Have a nice day.

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Operator [32]

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