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Edited Transcript of BOSS.DE earnings conference call or presentation 2-May-19 12:00pm GMT

Q1 2019 Hugo Boss AG Earnings Call

Metzingen May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Thursday, May 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Stoehr

Hugo Boss AG - Head of IR

* Yves Müller

Hugo Boss AG - CFO & Member of Managing Board

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Conference Call Participants

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* Andreas Inderst

Macquarie Research - Senior Equity Analyst

* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Elena Mariani

Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands

* John William George Guy

MainFirst Bank AG, Research Division - MD

* Jurgen Kolb

Kepler Cheuvreux, Research Division - Analyst

* Melanie Anne Flouquet

JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail

* Philipp Frey

* 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

* Volker Bosse

Baader-Helvea Equity Research - Co-Head of Equity Research

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Presentation

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Operator [1]

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Good afternoon, ladies and gentleman, and thank you for standing by, and welcome to today's HUGO BOSS First Quarter Results 2019 Conference Call. (Operator Instructions) I must advise you the conference is being recorded today, Thursday, the 2nd of May, 2019. I'd now like to hand the conference over to your speaker today, Christian Stoehr. Please go ahead, sir.

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Christian Stoehr, Hugo Boss AG - Head of IR [2]

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Thanks, Liana, and good afternoon, ladies and gentlemen. My name is Christian Stoehr, I'm heading up the Investor Relations activities at HUGO BOSS, and I would like to welcome you to our first quarter 2019 financial results presentation.

Today's conference call will be hosted by Yves Müller, CFO of HUGO BOSS. (Operator Instructions) So let's get started and over to you, Yves.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [3]

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Thanks, Christian, and good afternoon, ladies and gentlemen. Also from my side, welcome to all of you who join us for our first quarter results conference call. In the next 20 minutes, I will present to you our most recent financial performance before opening the floor to your questions.

From our press release earlier this morning, I'm sure you have noticed that the EBIT's development during the first quarter was negatively impacted by a number of factors, among others, measures aimed at driving the organizational efficiency, timing of marketing spend as well as currency effects. Before we take a closer look at our first quarter bottom line performance, let me start, however, by quickly reviewing some of the developments we have witnessed from the top line perspective.

About 6 months ago, during our Investor Day in London, we presented to you our strategic framework up to 2022, which I'm sure you are all familiar with. Back then, we laid out our strategic growth drivers, which will not only help us to outgrow our industry in the years to come, but more importantly, will also enable us to grow in a sustainable and profitable manner.

4 factors are particularly crucial for our midterm top line ambition: Significant growth in our online business, a gradual improvement in retail productivity, exploiting our growth potential in Asia and above-average growth of the HUGO brand.

I'm pleased to report that all strategic growth drivers, online, retail productivity, Asia and HUGO have either enjoyed over proportionate growth in the first quarter or made further progress. First and foremost, our own online business recorded its sixth consecutive quarter of strong double-digit growth. Alongside growth in our digital flagship hugoboss.com, the expansion of online concession also contributed to this development.

Secondly, we were able to increase retail productivity by 3% on a 12-month rolling basis in the first quarter, driven by the successful rollout of our new store concept as well as our various initiatives to optimize our store network, including rightsizing or relocating some of our stores. This marks an important step forward towards the targeted midterm CAGR of 4%.

Thirdly, Asia/Pacific once again clearly outperformed the other 2 regions. In particular, in Mainland China, the strong momentum of previous quarters continued, as reflected by double-digit growth on a comparable store basis. And finally, HUGO sales grew 4%, supported by double-digit increases in the important casualwear business, reflecting HUGO's growing relevance in the contemporary fashion segment.

Overall, currency-adjusted group sales increased 1% in the quarter, as growth in Asia/Pacific and Europe was mostly offset by sales decreases in the Americas, which I will come to in a second. In euro terms, sales grew 2% to EUR 664 million, as similar to year-end 2018, currency effects provided a slight tailwind to our sales development, mainly reflecting the appreciation of the U.S. dollar versus the euro compared to the prior year period, resulting in a positive translation effect.

So let's take a closer look at our regional top line performance, starting with the Americas, where currency-adjusted sales declined 8% in the first quarter, reflecting sales decreases in both the U.S. and Canada.

While we had initially anticipated that our business in the U.S. might face a somewhat slower start to the year, considering our difficult comparison base on the prior year period as well as wholesale delivery shift effects from Q1 2019 into Q4 2018, we also have to acknowledge that the overall market environment was rather unfavorable for premium apparel or consumer discretionary, in general, in the first quarter of 2019.

In particular, store traffic turned out to be rather muted at the beginning of the year, reflecting softer U.S. consumer sentiment as well as lower tourist purchases. And last, but not least, although on a more technical note, please bear in mind that the later Easter holiday in 2019 has also negatively impacted our business in the U.S. during the first quarter, something we expect to reverse as of Q2. The most recent trends witnessed during the month of April have confirmed our expectation of a sequential top line improvement in our own retail business.

We, therefore, remain confident that our sales performance in the U.S. will gradually pickup over the course of 2019. This development will be supported by ongoing momentum in our own online business as well as the further optimization of the merchandising mix in our brick-and-mortar stores, where we continue to see a strong potential around our casual and athleisurewear offering.

To conclude on the Americas, let's take a quick look south of the border. We continue to enjoy robust sales momentum in Latin America as reflected by mid-single-digit increases in the first quarter, driven by strong improvements in Mexico and Brazil.

Moving over to Europe, our largest region. Sales in Europe were up 2% on a currency-adjusted basis, despite ongoing political uncertainties that continue to weigh on the region.

While our own retail business recorded robust growth, up mid-single digit in Q1, our wholesale business ended the quarter slightly below the prior year level, reflecting the negative wholesale delivery shift effect from Q1 2019 into Q4 2018.

Consequently, our business in France ended the quarter below the prior year level despite a positive like-for-like performance in Q1, which is even more impressive considering the ongoing protest in the country and the negative implications they have on tourism, in general. Our businesses in Germany and Benelux remained stable compared to the prior year, broadly in line with the overall market development. And last, but not least, the U.K. continued to outperform the rest of the region. With 5% currency-adjusted sales growth, which was driven by double-digit improvements in the own retail channel, our business in the U.K. was able to withstand the negative implications arising from the ongoing Brexit uncertainties.

This brings me to Asia/Pacific, where sales for the region increased 4% excluding currency effects. We continued to be encouraged by the strong performance in Mainland China, which, as I have already mentioned, recorded double-digit comp store sales growth in the first quarter of 2019. Unsurprisingly, and no different to 2018, Mainland China was thus once again a driving force behind the region's overall performance.

While this development is supported by the frequently discussed repatriation of local consumption, it also reflects the broadening of our local customer base as a result of our highly attractive price value proposition. Beyond these effects, we have implemented many initiatives from marketing to distribution, all aimed at further strengthening our brand awareness in the market.

Our performance in Hong Kong and Macau was, as expected, somewhat weaker in the first quarter of 2019. While this development is partly related to the aforementioned repatriation of the Chinese spend, it is also attributable to the fact that most -- both markets have seen a number of important store renovations and closures over the last quarters aimed at optimizing our store network, which has left its mark on the first quarter sales performance.

Looking at Asia/Pacific other major markets. Sales in Japan and South Korea also continued their strong momentum from previous quarters and recorded low-double digit and high single-digit comp store sales growth, respectively.

Moving over to the performance of our channels and starting with our own retail operations. Group-wide, own retail sales increased 3% on a currency adjusted basis in the first quarter. This development was driven by a 4% increase in comp store sales, on top of a 7% increase in the prior year period. While comp store sales in the Americas declined slightly, reflecting the aforementioned challenging marketing environment -- market environment, Asia/Pacific and Europe recorded strong comp store sales improvements, up high single digits and mid-single digits, respectively.

The like-for-like performance was driven by a slight increase in visitors and conversion rates. The average selling price instead recorded a slight decline, reflecting the higher share of casual and athleisurewear in our product mix.

Moving over to our own online business, which grew 26% on a currency adjusted basis. This development was supported by a very healthy low double-digit sales increase on a comparable basis. In addition to sales increases on our digital flagship, hugoboss.com, the expansion of the concession model over the course of the last year also contributed to sales growth.

Turning to the wholesale channel, where first quarter sales declined 4% on a currency-adjusted basis. This development, however, does not come as a surprise as it's largely driven by delivery shift effects from Q1 2019 into Q4 of 2018, something we had already flagged with the publication of our full year 2018 results back in March.

Within our global wholesale business, and no different to previous quarters, online continues to clearly outperform the brick-and-mortar business. While our business with large marketplaces and online platforms of leading department stores grew at double-digit rates, sales with stationary retailers were down in light of the pressure arising from ongoing traffic declines.

Finally, sales in the license business were up 8% in the quarter, reflecting healthy growth in all product categories, including eyewear, watches and fragrances, with the latter returning to growth following a rather difficult performance in 2018.

Speaking of fragrances. It is our clear ambition to return to a product launch cadence in 2019 and beyond, which does not only characterize the BOSS and HUGO brands as clear innovators in the space, but also enables us to grow substantially. In this context, our fragrance business in 2019 has already seen 2 important product launches with positive feedback received by our customers. Only a few weeks ago, shortly before Easter, we launched BOSS Bottled Infinite, an extension of the BOSS Bottled family with Hollywood actor Chris Hemsworth acting as the face of the global advertising campaign. And earlier this year in Q1, we launched HUGO REVERSED, a new fragrance for our HUGO brand.

To conclude on our top line performance of the first quarter, let's have a look at the development by brand. Sales of the BOSS brand were stable on a currency-adjusted basis. Increases in casual and athleisurewear driven by the ongoing trend towards casualization were compensated by the slight sales decline in businesswear.

HUGO sales in turn increased 4% on a currency-adjusted basis in the first quarter, while casualwear continued to grow at strong double-digit rate, sales in businesswear declined, reflecting strategic distribution changes in the prior year aimed at strengthening the positioning of HUGO in the contemporary fashion segment.

Let's now take a closer look below the top line. Please bear in mind that the following comments exclude the impact of IFRS 16. We laid out in detail the exact implications following the first-time adoption of IFRS 16 in our quarterly statement.

Starting with the gross margin, which declined by 20 basis point to 63.8 percentage points in the first quarter, as the positive channel mix effect, reflecting over proportionate growth in our own retail business, was more than offset by negative currency effects. But the latter is a direct consequence of the appreciation of the U.S. dollar versus the euro compared to the prior year period, and reflects our U.S. dollar denominated sourcing activity, which, as you know, accounts for a good 1/3 of our total sourcing activity. All other effects that have been visible in 2018, be it markdown management, inventory valuation or quality investments, were broadly neutral in Q1.

Moving on to the operating expenses, which increased 7% in the quarter, resulting in a decline in EBIT and net income of 22% and 21%, respectively. To give you more granularity on the bottom line development, let's take a closer look at what impacted EBIT in the first quarter.

In total, there are 3 main elements that weighed on EBIT in Q1. Firstly, selling and distribution expenses grew 6%, mainly reflecting the negative phasing effect of marketing spend compared to the prior year. As a reminder, marketing investments were particularly low in the first quarter of 2018, because of the shift of expenses from Q1 2018 into Q2 2018. This year, in contrast, our marketing spending is more weighted towards the first quarter, reflecting the launch of our Porsche collection as well as the global campaign shoot for the BOSS brand's upcoming fall/winter collection. In addition, we stepped up the spending in performance marketing to further support the growth of our online business. In total, the timing of marketing spend had a mid-single digit EUR 1 million impact on EBIT in Q1.

Secondly, administration expenses increased 10% in the quarter, mainly due to further digital investments aimed at driving the digitization of our business model. To give you just 2 prominent examples. During the first quarter, we started to work with our new online marketing agency in China to fully leverage our digital capabilities and to accelerate growth in the marketplace.

In addition, in the U.S., we have completed the rollout of omni-channel services across the entire market and upgraded the back-end system to our European standards. Administration expenses were also impacted by cost related to organizational changes, which will help us to speed up operational processes and drive efficiencies in the years to come. Let me be clear that those costs were rather one-off in nature, hence Q2 should not be affected by these onetime costs, which altogether amounted to a mid-single digit EUR 1 million amount.

Last, but not least, currency movements were also a drag on operating income, reflecting the depreciation of the euro against several major currency. In total, currency movements had a low single-digit EUR 1 million impact on EBIT.

Coming now to the balance sheet. As promised at the beginning of the year, we continue to make progress in bringing inventories down to a more normalized levels without diluting our gross margin development. At the end of Q1, inventory growth saw a further decline, as we ended the quarter with an increase of 9% on a currency-adjusted basis compared to an increase of 14% at the end of 2018.

While we were encouraged by this development, we will clearly continue to focus tightly on inventory management and expect a further reduction over the coming quarters. As a result, trade net working capital increased in line with inventories, up 8% currency adjusted at the end of March.

Looking at our investment activity. Capital expenditure increased by EUR 13 million in the first quarter, reflecting the anticipated step up in store renovation and the further expansion of our IT infrastructure. Consequently, our free cash flow development was negatively impacted by a similar magnitude.

With this, ladies and gentlemen, let's change perspectives and look ahead at our expectations for the full year. We remain confident of achieving our full year top and bottom line guidance as communicated in early March and reconfirmed today.

We continue to forecast group sales to grow at a mid-single digit rate in currency-adjusted terms, as we expect top line momentum to accelerate over the next quarters. We are confident that robust momentum in our own retail business will continue, and therefore, forecast comp store sales also grow at a mid-single digit percentage rate in the remaining quarters of 2019. Besides the robust growth of our like-for-like business, we project a strong acceleration in our non-like-for-like retail business. Regarding the latter, 2 factors will be decisive. Firstly, we expect important growth stimuli from the further expansion of the concession model in our online business, especially in the second half of the year. New e-concessions and those we initiated in 2018, will clearly contribute to strong double-digit growth that we forecast to continue for our own online business also in the coming quarters.

Secondly, we expect store optimizations that are either already underway or planned for the coming months as well as major renovations to drive our top line performance. Let me give you some examples. We will soon be renovating our strategic important store in Chicago, which is reopen planned for Q3; and also our biggest flagship store worldwide, Champs-Élysées, which is currently under renovation, will be converted to the new BOSS store concept just after summer. Adding to this, only few days back, in April, we have reopened our big outlet stores in Woodbury, New York City; and Bayston, near London; as well as our flagship store in Tokyo, Roppongi Hills.

From the bottom line perspective, we forecast a strong acceleration of our earnings development over the next quarters. Let me walk you through a couple of factors that will contribute to double-digit EBIT growth in the remaining 9 months of 2019.

Firstly, compared to Q1, we expect an improvement in the gross margin in the remaining quarters, supported by easing currency headwinds as well as ongoing positive effects from a more favorable channel mix. Q3 will most likely represent a peak in improved markdowns simply due to the relatively low comp base.

Secondly, the quarterly shifts that led to higher marketing expenses in Q1 are expected to balance out over the next quarters. For the year, as a whole, we continue to expect our marketing budget to develop more or less in line with our top line.

Thirdly, we expect the reorganizational measures, that I outlined previous, to take effect in the coming months. The measures have been completed in Q1 and will contribute to EBIT growth over the course of the next year. Our efficiency program, initiated back in November of last year, is also -- is expected to deliver its first positive result in the coming quarters.

These 3 factors will contribute to strong bottom line improvements in the coming quarters with Q2 expected to return to EBIT growth. For the year as a whole, we continue to forecast EBIT to grow at a high single-digit percentage rate and thus, faster than sales.

And with this said, ladies and gentlemen, I'm now happy to take your 2 questions [in a while.]

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Andreas Inderst.

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Andreas Inderst, Macquarie Research - Senior Equity Analyst [2]

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Two questions. And the first one on your full year outlook. After the first quarter, do you feel actually less or more confident to reach the full year earnings guidance given in March? And the second is related to your EUR 5 million, EUR 6 million one-off costs in the first quarter restructuring measures. Can you actually elaborate a bit more on that? What is behind the restructuring? And can you quantify the benefits in the rest of the year and maybe in the medium term?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [3]

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Thanks, Andreas, for your questions. Coming to our first question regarding confidence regarding earnings. I have the same confidence like I had like 6 weeks ago. So I'm really confident that we can achieve our full year guidance. Coming to your second question regarding the one-offs. The major effects were related to the combination, like we said, because we want to reduce the complexity of the brands. We combined, especially in the sportswear, our brand and operations. And with this, there were coming some severance payments. So these were expenses that have been accrued in the first quarter. So this will give a relief of the cost base in the upcoming years because we reduced the number of people with this regard. And secondly, we reduced the number of directors, one in the U.S. and one in our headquarters here in Metzingen. These were the effects.

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Operator [4]

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And your next question, it comes from the line of Jurgen Kolb.

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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [5]

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On your online business, the growth of 26%. Could you please give us some additional details as to what drove that in terms of concession business, in terms of additional countries that you may have opened up? And in this [way] also how is the status of your negotiations with pure-plays in terms of switching to the online business? And especially, then on the U.S. business, obviously, a little bit weaker than what you expected. Would you expect to see a little bit of a turnaround here in the coming quarters as well? Or do you think that the U.S. business will probably stay rather weakish for the rest of the year?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [6]

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Yes. Thank you, Jurgen, for your questions. Regarding online overall, yes, we improved our net sales performance by 26%, and we clearly had on a like-for-like basis double-digit growth. So on the respective markets, we were already operating, we were clearly seeing a good underlying momentum with double-digit growth in our existing operations, be it our own homepages in those 12 respective countries or from online concessions. And in addition to this, we have added some of those concession partners in Q4, and they really outperformed. So we more than doubled our net sales actually in online concessions. We are very optimistic because in the course of the year, as you know, we will convert Zalando completely in the summertime from wholesale to online concession model. And we have signed further agreements in Russia, in the Baltics and in France to convert from wholesale to concession partners. So overall, we are very much on track and we are about to convert several new department stores and marketplaces with this regard. Regarding the U.S. business, overall, we are guiding for low- to mid-single-digit improvements over the course of the year. I think the first quarter has been really affected by a number of effects. Be aware that last year, there were a lot of tax credits -- I'm talking about 2018. A lot of tax credits coming from the Trump tax reform that gave -- especially that gave a boost to consumer discretionary spendings. So we are seeing this, and we already saw a slight decline over the -- over 2018, over the years. So the comparable base will be easier in the course of the year in the United States. And actually we saw a reverse effect for Easter already this year -- this month in April.

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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [7]

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And maybe one quick follow-up on the tourism business in the U.S. Is that a big share of your business in the U.S. market?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [8]

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No, it's not very important.

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Operator [9]

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And your next question, it comes from the line of Antoine Belge.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [10]

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Two -- Antoine Belge from HSBC. Two questions. First of all, is it possible to maybe elaborate a little bit on your performance in the Mainland China, not so much about the numbers, but also what you're seeing maybe in terms of product mix, especially formalwear versus casualwear? Also if you think that in terms of pricing, you already have the right pricing for that market? And my second question is regarding your guidance and also your comment about what was expected versus unexpected. I think you admitted that the U.S. market has been a bit worse. And also regarding FX. I mean, the -- it seems that the dollar has even strengthened since you've published your full year '18 results. So -- but then you're still confident that you can offset that. So is it by further cost cuttings. So is there still room to be getting more than the -- or saving more than the EUR 40 million that you have to achieve already for this year?

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Christian Stoehr, Hugo Boss AG - Head of IR [11]

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Sorry, Antoine, this is Christian speaking. I guess, we had some technical issues, but the second question, which was a long one, but can you ask it again from the beginning, please?

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [12]

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Okay. So I mean, you had flagged a lot of things when you published your full year '18 results, yet there are also some things that have evolved, apparently the U.S. market was tougher, and also the dollar has strengthened. So -- but yet you're still confident to achieve the high single-digit EBIT growth. So is it, the mitigating factor, is it more cost cutting in addition to the EUR 40 million that you already have to achieve for this year?

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Christian Stoehr, Hugo Boss AG - Head of IR [13]

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Antoine, thank you very much, Antoine, for your questions. First of all, regarding China. Yes, we -- regarding on a like-for-like performance, we achieved double-digit and we were very happy to see this growth in our very strategic market in China. We are very convinced that with a price premium of 30% to 40% in China, we are really well positioned. We have a very good price -- value proposition in China, and we have clearly increased our customer base in the last year. Especially since we overtook the last franchise partners in 2015, we have clearly increased and improved our customer base. So what are the typical Chinese customer? One is really -- one customer is more in the formalwear sector, really is up to the highest -- high, top, top premium products in formalwear. So just to give you an indication, as of today, 8% of our net sales overall broadly come from Mainland China, but the Made to Measure orders, more than 50% of the Made to Measure orders come from Chinese Mainland consumers. So you see, we have a very good proposition in the higher -- top high quality, and we are really perceived as an upper premium brand there. In addition to this, there is another Chinese customer which is very much addicted to wearing logos in the casualwear, athleisurewear area, where we gained, especially in the last years, a lot of more customers. So overall, we remain very bullish for the -- especially for the Mainland China market, and we see since -- and since the VAT has come down in April now from 16% to 13%, we really see that sales are very nicely developing. Regarding the other effects, we see actually that in comparison to prior year, that if the dollar remains stable, that the difference between the prior year dollar development will go down in the course of the year. And on the other side, we have some positive effects from other currencies, say, it comes from renminbi or for the time being from the British pound. So this overall will neutral during the course of the year and that's the reason why we don't see the necessity to cut further costs or to go deeper in cost-cutting.

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Operator [14]

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And your next question, it comes from the line of Philipp Frey.

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Philipp Frey, [15]

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Two questions from my side. But firstly, could you elaborate on the level of cost savings on your -- on that EUR 60 million program that you actually have realized comparing to what you expect for the remainder of the year. Is it fair to say that what you've realized in Q1 is well below what you expect for the full year? And secondly, the IFRS 16 impact on net earnings looks just much more dramatic than one would have expected. Can you elaborate a bit on that one, is the Q1 run rate something, well, which we basically should annualize or how should we view that?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [16]

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Yes. Thank you very much, Philipp, for your questions. First of all, regarding cost savings. Regarding the efficiency program, we are well on track. We achieved what we have planned so far. And gradually, cost savings will come from the efficiency program, mainly when it comes to rental contracts, rental sales and pay to sales and even CapEx to sales. Especially in the retail environment, we see positive effects coming from the efficiency program. On the other hand, like I pointed out in Q1, since we started with the efficiency program, in some cases, you have restructuring expenses that have to be accrued and then you see the positive cost effects in the upcoming years. Regarding IFRS 16. Clearly, just to say it again, we completely guided our figures excluding the IFRS 16 effect. And so to speak, we still refer to our statements in the annual report that we published in 2018. We are continuously reassessing actually the effect because it's a very complicated accounting issue overall. And once we have new knowledge about any developments, we will publish them.

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Philipp Frey, [17]

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Okay. So you -- that in our -- in essence, means we should not just annualize that what we've seen here in Q1?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [18]

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No, you should not.

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Operator [19]

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And your next question, it comes from the line of Thomas Chauvet.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [20]

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Firstly, a follow-up on e-commerce. In the 26% online growth, sorry, what was the exact underlying growth versus the impact of Zalando? And you mentioned new concessions, and can you confirm these concessions are captured in space contribution, not like-for-like? Secondly, in your earlier comments, Yves, on April trend, you said LFL improved in the Americas on Easter timing. How about the group overall? Could we get a flavor of China and Western Europe LFL, has that held up versus the first quarter? And just a follow-up on the reporting of this restructuring charge. In the past, you had booked redundancy payments. If I recall well, in special items over the last couple of years, there has been a few special items related to redundancies. Any reason why it was different this time?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [21]

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Yes. Thank you very much, Thomas, for your questions. First of all, I start with -- actually there were 3 questions. So I start with the last one, regarding the special items. Like we said, during our full year picture of 2018, we said there is no -- in the future, there will be no nonrecurring line in the future because we abandoned it, because we wanted to -- because of a lot of requests of investors and analysts saying there should be not this kind of special item list. So by saying this, this would have been one-off items that would have been posted in nonrecurring items. But for this time being, because we changed our reporting with this respect, we are not showing this under nonrecurring. Just for your transparency, if we would have booked this, like we said, we would have seen a mid-single digit amount in our nonrecurring. Regarding our current performance, regarding Easter, we made a kind of qualitative statement regarding U.S. And -- but as you know, we don't do this on a monthly basis because otherwise it gets really too complicated and too tedious. So -- but overall I can say, we are very confident to achieve our full year guidance. And regarding your question on -- to online growth. Clearly, we have -- I don't know if I really got this. We clearly have a positive double-digit like-for-like growth and the even more higher growth in regarding online concessions. Perhaps to give you a different flavor, in 2018, for the full year now for 2019, in 2018, online concessions made only 10% of our own online business. And at the end of the year 2019, because of the conversion during the course of the year of Zalando, we will achieve -- we will double this to 20 percentage points of online.

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Operator [22]

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And your next question, it comes from the line of Piral Dadhania.

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

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I'm just curious around the phasing of marketing as we progress through 2019. Obviously, there was a big change in the first quarter of the year, up double-digit relative to a base period, which was down double-digit. How should we think about the phasing of marketing as we progress through the year, please?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [24]

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Yes. Thank you very much, Piral, for your question. Actually, the marketing spending was clearly a timing effect. And I would say, if you compare it to the very low base to the marketing spends in Q1, overall we managed like, everybody does this, the marketing cost on a budget basis for the full year. And there was just a kind of timing effect now for the Q1, which will -- which means that actually under proportionate development for the upcoming quarters. Overall, our guidance remains the same that the marketing spendings will grow with the top line growth. So clearly, a simple timing effect from -- into Q1.

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

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Okay. Understood. And then if I can just move on to admin costs. Obviously, there were some one-offs in that admin number of EUR 80 million. Should we expect any further one-offs as we progress through the year or is it fair to say that most of the restructuring type charges have now been taken in the first quarter?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [26]

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Yes, you can say this that the restructurings, especially coming out of the efficiency program, were done now in the first quarter.

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Operator [27]

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And your next question comes from the line of Volker Bosse.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [28]

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I would like to start with Asia/Pacific, 2% to 4% of sales growth, which looks a bit shy. If I see Mainland China, was up double-digit, strong momentum in Japan and South Korea. So which countries have been negative or not fulfilled expectations to sum up to 4% in the region in total? And the second question is more kind of clarification question. Do you include into your comp store sales figure your own online sales, which means is it fair to assume a like-for-like excluding online sales? What would the figure be in that case? Or how do you define it?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [29]

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Thank you very much, Volker, for your questions. Regarding the online issue, overall, like we were saying already in the answers of the other colleagues, we include a like-for-like online perspective once online is really like-for-like. So this means in our like-for-like performance of 4% increase in Q1, the like-for-like online is included, first [message]. And secondly, if you would then exclude this, the like-for-like, let's call it the physical like-for-like, would have been 3% and this has 1 percentage points, which is the effect of online, because it grew double-digit. I think this puts color to your question. And regarding Asia/Pacific, yes, you are overall right. Japan and South Korea were good. Mainland China were good. But actually there was a -- there were a lot of store renovations and some closures in Hong Kong. Although Hong Kong overall was low single-digit positive. It was in total retail numbers negative because of store closures. For example, we closed our stores in the IFC mall, for example, and we are about to renovate more stores. And the same is actually true for Macau. In Macau, we see a kind of slowdown in traffic overall and the quality of consumers that are coming to Macau as well there is -- well, of lower quality, let's put it like this, and this was a drag of our own -- of our Asia performance. And in Macau, we are about to renovate 2 stores as well. Well, this was the reason why the overall Asian figure looks lower than what you might expect.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [30]

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Australia, sorry, to come up. How was Australia?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [31]

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Australia was more or less flat.

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Operator [32]

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And your next question, it comes from the line of Melanie Flouquet.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [33]

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Can I ask you what is actually happening in the outlets? Sorry, if I missed it. But could you share with us what has been the growth in the outlets compared to your full price sales? And how will you see this evolve being over time? And my second question is back, again, and my apologizes, but drilling a bit further on this, on your concession element contribution. It's very clear that you're saying, last year 10% of your online sales were concession and they are going to 20% by the end of this year. How should I think about this in the contribution that there will be in H1 '19 versus H2 '19, because I imagine there is a phasing and a big acceleration in H2 '19 as you start consolidating the casual portion of Zalando?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [34]

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Thank you very much, Melanie, for your questions. Yes, you are asking regarding online concessions regarding the phasing. Yes, it's true, because -- and during the summertime, we will convert 1 big European marketplace in the casualwear, athleisurewear. And this will drive a tremendous growth in the second half of the year. So there will be a kind of phasing, especially in the second half and a boost in net sales coming from online concessions regarding this conversion of this big European marketplace and by adding new partners. And regarding the development outlet and full price business, both were positive in the first quarter -- both were positive on a like-for-like basis.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [35]

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And if I come back to the sentiments that you just provided to us, by H1 '19, what would be the percentage of online concession in your on-commerce, please? Compared to the 10% in 2019, are you able to share that with us?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [36]

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So if I get the question right, so you're asking what will be the online concession share in H1, right? This is your question?

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [37]

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Yes, yes, yes.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [38]

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So there will be a slight improvement of -- I would say, from 10% to -- in the beginning of the teens of -- regarding online concession product in online.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [39]

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So a big, big acceleration in H2, which means that in full year '20, we will be on an even bigger share annualized than the 20%?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [40]

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Yes, yes.

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Operator [41]

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And your next question comes from the line of Elena Mariani.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [42]

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This is Elena Mariani from Morgan Stanley. One quick question on your full year guidance at the EBIT level. I understand that you're now not really splitting up the nonrecurring items, but you did in the past. So we know from 2018 is that you had approximately EUR 13 million of nonrecurring items within your OpEx. What you've said so far suggests that we're going to have only around EUR 5 million of exceptionals in 2019, which is what you've booked in Q1. So is it fair to say that there is a EUR 7 million difference that we should take into account between 2018 and 2019, when we calculate our EBIT margin progression? I'm asking because, if this is the case, then quite a lot of your improvement in your EBIT margin is going to come from this less -- this reduction in extraordinary items, so I just wanted to clarify that we are not going to see any additional nonrecurring items through the rest of the year. That's question number one. And then question number two, just a clarification. Your space contribution in retail seems to be negative in the first quarter. Can you help me to understand why that's the case given that you already have some benefits from these conversions? And is it because you've closed -- is it the closure of the stores? I just wanted to better understand.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [43]

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Thank you very much, Elena, for your questions regarding the space contribution. Yes, we declined in space in Q1 -- yes, in Q1, and this is because we are -- most of them are rightsizing stores, especially in Europe and in the United States, and this is clearly one big measurement in order to improve the sales productivity overall, and of course, the sales efficiency -- the retail efficiency as a whole and really drive profit in the retail space because of rightsized stores. This is one big factor. And regarding EBIT level, we are clearly committed to have a high single-digit improvement in EBIT, which is an operational performance.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [44]

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Okay. So the high single-digit improvement would be underlying, and so we're not factoring in these nonrecurring items? Sorry, I'm just trying to understand.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [45]

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Yes, that's right.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [46]

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Okay, so we shouldn't really take into account this potential benefit from this EUR 8 million of difference in extraordinary items that you would have between 2018 and '19? Okay. That's very clear. And maybe one small follow-up. When you give your guidance for full year and you talk about this reacceleration in organic growth, you've mentioned 3 components. One is like-for-like, which should probably reaccelerate from the 4% you've had in Q1. The second is the benefit from the conversion into concessions, which you've kindly quantified. And the third one would be the store renovations. So these 3 components would allow you to get from the 1% constant currency growth you're reporting in Q1 to the mid-single digit for the full year. Is it fair to say based on what you've just disclosed that the biggest component of this acceleration is going to be this conversion of revenues into concessions? Or would you say that it would be broadly balanced between like-for-like improvement, renovation of stores and concession?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [47]

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I think it will be -- overall, it will be well-balanced. I think there is a slight -- a little bit more improvement coming from the online concession conversion. But overall, don't over-estimate different effects coming from these 3, right? Like-for-like performance is one big thing. Be aware that we have an easing comparison base as well in the upcoming quarters. And of course, we will have tailwind of this conversion from wholesale to online concession. And thirdly, clearly what you do is you stop renovating in September because you have a big Christmas and big fall/winter business, and that's actually where you stop actually renovating stores and you want them to be open in this period of the time of the year. So these are the 3 major effects. And I -- if I would rank them, they are all very important, of course, like-for-like is the most crucial, yes.

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Operator [48]

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And your next question, it comes from the line of John Guy.

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John William George Guy, MainFirst Bank AG, Research Division - MD [49]

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Two questions, Yves. I can't get away without commenting on cash flow. So when we think about trade net working capital up 8% and inventory is up 9%. From an inventory perspective, that's better than what we saw in 2018, but obviously still pretty high. Could you, within your guidance framework, give us some sort of indication as to where you think inventories need to be by the end of the year in order to reach that EUR 210 million to EUR 260 million free cash flow range that you have guided towards, especially within the context of a negative EUR 60 million in old money, as it were, pre-IFRS 16? That's my first question. My second question on regional profitability. I guess, focusing on the U.S., you've given that low single to mid-single digit guidance for the year. I mean, you were barely break even in the first quarter. How should we read the opportunities from a profit perspective in that particular region?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [50]

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So coming to your cash flow questions. Clearly, we feel committed to generate a cash flow between EUR 210 million to EUR 260 million. This is what we reconfirmed today. And clearly, what we want to do is, we want to get sequentially the inventory level down. So at the end of H1, you will see that the inventory level will go further down. And clearly, we want to get it into minus sector at the end of the year, that inventory should decrease in comparison to prior year at year-end of 2019, and this will be clearly supportive for our free cash flow. And regarding regional profitability, it's clearly the case that the profitability, especially in the United States, has to be improved. One big effect will come from store optimization. We see tremendous potential in rightsizing our store network and of running the right business model, especially with wholesale partners. In terms of negotiating trade terms and converting in some cases as well from wholesale partners to concessions. And thirdly, from a brand perspective, we have to upgrade our brand especially in the United States. And to gradually reduce our outlet business in the United States to clearly underline our high -- our premium positioning in the United States.

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Operator [51]

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There are currently no further questions at this time, sir. Please continue.

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Christian Stoehr, Hugo Boss AG - Head of IR [52]

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Okay. Ladies and gentlemen, if there is no further question, then I would like to close the call. And both Yves and myself, we thank you for joining today. As always, if there is any further questions you might have, please feel free to contact any member of the IR team. And with that, thank you very much for your participation. And we wish you a very good day. Thanks, and bye-bye.

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Operator [53]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect. Speakers, please stand by.