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Edited Transcript of CCC.WA earnings conference call or presentation 4-Sep-19 10:00am GMT

Half Year 2019 CCC SA Earnings Presentation

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of CCC SA earnings conference call or presentation Wednesday, September 4, 2019 at 10:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Dariusz Milek

CCC S.A. - Chairman of the Supervisory Board

* Marcin Czyczerski

CCC S.A. - President of the Management Board & CFO




Marcin Czyczerski, CCC S.A. - President of the Management Board & CFO [1]


Good afternoon, ladies and gentlemen. We'd like to welcome you to our new venue on the map in Warsaw. We plan to meet with you here in this location not only during this conference, but also other events in the future. I'd like to welcome you on behalf of the group. I am Mr. Czyczerski, and I would also like to welcome Dariusz Milek, the Chairman of the Supervisory Board is also with me. We also have other people responsible for operating activities and the management team who are present. But I think the 2 of us are going to be able to present to you everything that's happening in the company, everything that's important, and we'll be able to share with you our plans and growth paths.

The agenda for today's meeting is a traditional agenda, the same one as always, and we'd like to present to you the key events, the financial performance, the projects that are underway and then a short recap. And then we'll have some time to have a discussion to talk about what you might find interesting. And perhaps we won't be able to talk about everything during the course of our presentation, so if we look at the key highlights.

So I think it's the fact that we've got the orange background for the 29% upswing in the group's top line. And so as you can see, if we look at the like-for-like figures in April, in May, and so they were negative. This was less than positive. But we do have quite a lot of satisfaction in terms of the level of top line growth we've had in Q2, and we're very happy with how e-commerce top line is moving up by 50%.

And so basically, we can see then that our online activity represents 18% to 21% of -- it's increased from 18% to 21% in terms of the total sales mix. And so we have another good quarter in terms of improving our cash flow as well as financing our inventory with liabilities, payables. And we've been working also extensively on the costs of store operations and, generally speaking, about all of our costs. You had a number of questions about these subjects, and we're very pleased to be able to report very positive results.

The group is present in 26 countries. Compared to what we presented previously, we've added 3 countries: Kosovo, Qatar and United Arab Emirates. So what's in the Persian Gulf is quite important to us. There, we intend to open at 5 countries with a lot of sales potential. We're very pleased with our sales performance to date, but we'll talk about that during a later portion of our presentation.

So we now have 700,000 meters. And so we have an increase of 48 stores year-on-year. So you can see that we're growing to a large extent by expanding our position.

And so if we look at the key events across the time line, each one of these will be discussed, so I won't dwell on them at greater length right now because we're going to talk about each one of them later. What I would like to emphasize, we have some fundamental issues. We're working on the image, the reputation, the brand. We're involved in UNICEF campaign. We're working on technology, on our customer interfaces. We have more and more online channels. And what's quite important, most important to us, and we're going to spend a lot of time on this, this is the development of our product offering.

You can see on our pictures here, the brands, the sports brands. You can also see DeeZee. And so this is not the end of everything that's happening. We're going to continue to dwell on the subject on a later portion of today's presentation.

So begin by presenting what's something that we've been waiting for a long time. You've been waiting for a long time as well. We had a 2-year period of rolling out the e-commerce project. We changed the architecture, we've communicated this to you. We had some difficulties at the beginning of the year in the rollout. But according to our attention -- announcement, so at the end of June, we were able to launch Internet sales through our website. And then we also have the application up and running as of July. We're more than happy with the sales performance. We've exceeded the 100,000 transaction watermark since we started.

So 60% -- or 60,000 of these transactions were from people aged 18 to 32. And so we're lowering the average age of our customers. And so this represents 3% to 4% of our off-line revenue. And so we'll roll this out on our international markets.

So in Q1, we're going to go into, say, Austria and we're going to go across. We're going to roll out sales across other countries over time. So we have the mobile applications, some 600,000 downloads, 82,000 club members. And so this application is a new club card. And so we have our slogan, which is open all the time, so we're available to customers anywhere and everywhere and at all times. And we'll have a much broader offer than the one that's available in our brick-and-mortar stores.

Of course, shoes continue to be our major footwear is our core product. We're happy with this. We also have MODIVO as sort of an extension. So we have some technical difficulties. We have a learning curve.

So in Q2, we've been rolling that out. We're present in 7 markets. It's not spectacular top line growth, but we're happy with the growth we've seen. We haven't spent a lot of marketing on it yet, and so we're basically ramping up that sales channel. And so in the fall/winter period, we want to generate tens of millions of zlotys of sales revenue through that channel.

Another project that's quite interesting which shows how we're, as CCC Group, is looking at advertising. We're moving away from expensive television advertising. We have sort of this FOOT TRUCK we had on the -- we had conversations, interactions with Polish customers on the Baltic Sea. We had, basically, FOOT TRUCK. And so we're quite happy with how this has worked.

So then we have DeeZee, this is the newest pearl in our crown. It joined CCC last year. As we conveyed to you, we talked about how some of the positive impacts should roll out. So we have a new product category. We have a new client target, target group. And we're cultivating our experiences in social media skills. We've been able to sell more than 700,000 pairs of shoes. We have very high margins. We've been able to reach new customers. So most of these customers are totally new. They're younger client groups. So DeeZee continues to have the top position in social media amongst their commitment, and so top line has doubled year-on-year.

So we started with e-commerce through DeeZee in Ukraine. We're starting to sell, in fact, in Q3, but the front-end was launched in Q2. So in Q2, not only e-commerce and sales grow through that. It's not -- everything that's happened, we had expansion in a geographic sense. We're now present in the United Arab Emirates. We're in Oman. We're in Qatar. We are in Saudi Arabia, in Bahrain. So in all 5 countries belonging to the Persian Gulf, we're missing still Kuwait. So the sales we have per store is higher than what we have in Poland. And so we have more than PLN 20,000 and more than PLN 30,000 on weekend dates. So this is a positive surprise in terms of how sales are fleshing out. We have to learn quite a bit more about the product, how to stock stores. But we attach greater hope to this project and we've had up until now. We were so positive that the sales would flesh out so nicely.

If we look at our cooperation with UNICEF, under our triple pack, we have the CCC team, UNICEF and our brand activities, and so we're very pleased with this triple pack.

As you can see on the bottom graph, we've been able to improve the brand perception amongst people who love the brand or very much like the brand over the last 3 months. This is because of our cycling team as well as our activity in UNICEF. And so we've been able to reduce our marketing spend to attract new customers, so we're very pleased with that.

We're doing very well in terms of selling paper bags. This paper bag sales are being utilized, the revenue, to support UNICEF. So that means that we don't have to carry the costs of delivering bags to the stores. So we can say this is a project, to some extent, that's self-financing. At the same time, it gives us a very positive image-related boost.

So if we look at the financial performance, we're showing these results incorporating IFRS 16. And since last year, we changed the shape of our group, especially if we look at what's happening in the German market. So we're reporting this result on continued business and then we flesh out discontinued business. We've already reported these results some 2 weeks ago.

Based on prelims -- preliminaries, a little bit of change. So basically, our top line is up 29%. We're pleased with that top line growth. Gross sales grew a little slower because we started selling the summer collection a little bit later. Realistically, we didn't start until June. We've added a very effective promotional campaign, which has enabled us to sell a large amount of our summer collection. In any extent, this had an impact on our gross margin. We can see that branded sporting shoes also added to this factor, and that's why our gross margin fell by 2.1 percentage points. But this is not something that we see as a negative, especially having in mind how the quarter got started. We believe that this is a pretty good accomplishment.

So the costs, we've reported them, we'll talk about them a little bit more later in the presentation. The change is linked to the provision for the civil law [transact] tax. Based on the purchase of an organized part of our business in 2013, so -- and then we have the 1% to 2% rate that will be applied. If some of you have any questions about that, we're happy to talk about that, enter a discussion. But as a matter of a conservative approach, even though the decision itself hasn't yet been finalized, we've decided to set up a provision in order to indicate that in -- on a conservative basis in our P&L.

We'll talk a little bit more about other income and expenses. So we had PLN 130 million as a result of the bargain purchase of Vögele. And so if we look at the EBITDA, it's PLN 402 million in Q2 last year. This year, it's PLN 321 million. We have PLN 130 million as a result of the bargain purchase of Vögele and so that's why these figures become a little more comparable. We'll come back to that in a moment.

And so if we look at the floor space, we've added 44,000 square meters, mostly in Poland. But this was the slowest growth rate in Central and Eastern Europe. We -- so we grew by 16,000 in Poland, 11,000 in the rest of Central and Eastern Europe. And elsewhere, we had growth of 10,000 square meters. So in Western Europe, we had some closings and that's because of restructuring of square meters in Switzerland. On top of that, we have some other closures of roughly 10,000. That's a record-breaking value in terms of closings.

In this period, we've never closed so many. So we not only opened new stores, but we closed stores. And then acquiring Gino Rossi means that we added another 70 stores, small-sized stores, which added another 8,000 square meters. So that's why we have 702,000 square meters of floor space. And this is a topic that we'll discuss a little bit later.

If we look at the top line or sales growth rate. As you can see on the right side, e-commerce is moving upwards fastly. If we look at like-for-like sales, it's minus 3% after the beginning of this quarter. It's something that we consider to be a satisfactory outcome.

In Poland, we were nearly basically at breakeven. In Western Europe, we have a worse result because we -- the weather that was in place in Western Europe, especially if you look at Switzerland, so this was more winter-like than spring or summer-like. And we also had some dispatching problems because of IT systems and then we're restructuring our logistics in Switzerland.

Where we're going very well, this is e-commerce. We've moved up from 18% to 21%. That's the share that e-commerce has of our sales mix. So we -- at the end of next year, we'd like to move up to 30%. We believe that this is achievable. And we believe that this growth can even penetrate that 30% watermark and we can achieve even higher levels.

If we look at the change in how we're presenting revenue. So from Q2 2018, we've moved from PLN 1.27 billion to PLN 1.642 billion, and this is broken down into 4 line items in order for you to be able to make a quick assessment of how we have grown. So the minus 3% like-for-like, that's a decrease of PLN 25 million as a result of expanding our wholesales operation. Because of what we did in Germany and what's happening in the Arabian countries, we have upward movement of PLN 109 million. Then the expansion of -- so we've added nearly PLN 100,000 in e-commerce. And then Vögele added quite a bit more as well. That was the main part of the M&A activity.

So if we look at eobuwie. So on the left graph, you can see that Poland is no longer the most important segment and now Central and Eastern Europe is the most important segment. This is where we're growing the fastest. And we're pleased by the growth we see in Romania, and so the growth there is very impressive.

If we look at the P&L itself, that's -- things don't look as good as that. We've got up line growth -- top line growth, and we have gross margin growth. And so we have sales expenses, so general administration. And so we have to admit that in April, that we weren't managing the marketing expenditures too well. And so we have to define that the cost of marketing for eobuwie are high and will continue to be high, but they won't be as high as you see on this graph. And this is something that you can treat more as a one-off. So our objective for eobuwie with respect to marketing spend, we would like to be around 15% to 16%. And then starting next year, we would like to be down to, say, 14%.

If we look at our gross margin, we've already said a few words. Let me just reiterate once again that our gross margin in e-commerce has moved up by 1.6 percentage points primarily because of our own brands and also because of our bargaining power. But in retail, you should have in mind that we're promoting more in June. And then we also had third-party brands having a higher percentage of our sales mix.

Then we can look at our SG&A costs. So last -- in Q2 2018, we had PLN 501 million in sales and general administration. Then we had an additional PLN 16 million because of organic growth. As a result of M&A activity, we have PLN 121 million growth. And of course, Vögele accounts for the largest portion of that. And this means that starting from the beginning of Q3, we'll have Romania and this company in our base. And so it won't be such a major task to overcome these costs since it will be easier to explain where the source of cost growth is. And so Romania and Vögele will already be into the base and that's why the incremental growth will be smaller.

So if you look at our cost base after acquiring these companies and the organic growth and the growth of e-commerce, you can see that our new cost base is PLN 682 million. And that's -- what's happening there? We've got incremental growth in marketing spend of PLN 25 million and then we have one-offs. To a large extent, we've been able to neutralize them in the second part of this -- of Q2 in CCC. We've got marketing spend moving down. We're going to have to change our approach. We're going to have to spend less on expensive television advertising and we're going to utilize smarter solutions for marketing.

If we look at some of the other costs here, we have pretty much flat costs. The biggest line item we see is the provision for the civil law transaction tax based on the current report we published on Sunday. So FX gains and losses are inconsequential. And then we have some performance factors. We can distinguish a few others. Generally speaking, the incremental growth isn't very big. It's mostly marketing. And eobuwie, which we treat as -- the marketing of eobuwie, which we treat as a one-off, and then also this provision for the tax on civil law transaction which is also a one-off.

So if you look at our cost per square meter, we can brag about having this move downward. This is measured as SG&A expenses per square meter. Here, if you take a look at each one of the line items, we've recorded a decrease. So if you look at we have PLN 13 per square meter. That's a result of the provision that we mentioned to you for the tax on civil law transactions. And so had it not been for that provision, we would have had a substantial decrease here. And so we're improving our cost discipline and so we're just beginning the process of tightening the belt.

So most of our projects have been launched and we're working on the monetization phase. And that means that the expenditures for these projects are not growing. And we're starting to achieve the first benefits and revenues from these projects. So we're embarking on a new phase of better coordination, better understanding of the business with a smaller number of projects.

If we look at the store operational expenses. The first one then is that we have a change in the mix of these costs. Last year, in our costs, we had the agency commission. And so this is now split into compensation and lease fees. And so it's a little bit higher for personnel than we see initially. We get the PLN 61 million there, so it's not a small cost. So with -- even though there's quite a bit of inflation, we've been able to reduce costs here.

If we looked then at the operating result and EBIT. It stems from the waterfall we're showing you here in terms of what's comparable. So last year, we had EBIT of PLN 272 million. And then we have some one-offs, mostly because of Vögele. So that was PLN 85 million in one-offs. The base changed by PLN 9 million as a result of acquiring companies, where Vögele is negative 13, DeeZee and Romania are positive. So the adjusted EBITDA would've been PLN 178 million.

And then if we look at what's happened during this most recent quarter, we have optimization costs -- sorry, optimization of the costs, so general overheads of PLN 2 million. Then we have in our brick-and-mortar stores as well as in our eobuwie stores. We have -- in Poland, we have PLN 11 million increase. Then because of the marketing expenditures, we're down PLN 25 million in eobuwie.

Then we have other countries. I would emphasize one country here, even though the result is not satisfactory, that's Austria, and Q2, year-on-year has improved by PLN 7.5 million. So the comparable EBIT has moved from PLN 170 million to PLN 150 million, down by 11%, PLN 19 million, and so that's not too bad of a result. But we also have another one-off in this quarter, which is setting up the provision for the tax on civil law transactions, this is a matter of a figure of PLN 21 million. So then our EBIT is quite similar. So the beginning of this quarter was rather soft.

What's very good in the company, and this is something we should emphasize every single time we speak to you, and I think you emphasize it, this is something that's quite positive. It's not something that we've done very well in the past, this is working capital. So inventory, first. So if you calculate that per square meter, so it's fallen by, say, 12% year-on-year. We're much more efficient in terms of stocking stores. And so the stock we have is very new, we don't have old stock. So we feel quite comfortable with this.

So if you look at the level of e-commerce stock, we're up 50% year-on-year. Sorry -- revenue is up 50%, but the stock is up 24%. So it's very good and impressive that top line moves up by 50%, but at the same time we haven't increased our stock. And if we look at our cash conversion cycle, analysts have written quite a bit about this. We've been able to improve this by 60 days year-on-year. But if we move back in time, we can say that this performance is even more impressive, outstanding and our ability to manage cash and turnover ratios is much better than it ever was before. And so I think we haven't said our final world -- word, but every subsequent step is a little more difficult to take than the previous ones, so I don't think we're going to make such major change in the future, but we will continue to work on this cash conversion cycle.

If we look at working capital, it's something that's very worthwhile to try to change our inventory as well as our payables. So we have a program to finance our suppliers or also we extend payment terms and so we don't have a single liability that we haven't scrutinized. So where possible, we want to extend these payables to the greatest extent possible to ensure that we can finance our inventory entirely with our liabilities, and that should improve the company's cash position.

Naturally, this has an impact on our cash flow, enabling us to some extent to finance higher investing cash flow. So what we'd like to highlight here is that the investing cash flow is falling and will continue to fall. We don't anticipate such high cash flow and investing activity in the near future. We're not planning any acquisitions and we don't have any plans for IT architecture. What we're doing now is of a totally different magnitude from what we've done in the past. We don't plan for any such major expansions in terms of floor space. But we'll talk about -- as in the past, we'll talk about that later.

If we look at our financial debts, our net debt, it's at a pretty safe level. We're at 2.6x net debt-to-EBITDA. So Q3 is a little higher than Q2. So I would anticipate that in Q3, we would be a little higher than 2.6. But by the end of the year, we should be substantially below the level we see at the end of Q2. So as a management team, we'd like to have it no higher than [around unity] in the most difficult quarters, so the even quarters, and we're going to work here on our profitability as well as our turnover ratios. So another thing that will help us is that the investment period is something we have behind us and now we're focusing on business optimization.

Now to recap, I don't want to spend a lot of time on this. What I would like to enumerate, however, what's the most important thing is launching our online channel, the new product categories, continuing to improve our working capital, optimizing our store operational expenses and we'll continue to develop on new markets. But what's difficult is that we started to sell the summer collection a little later than in past years. And so the spring collection started so poorly in April and May. Then we have the consolidation of costs of our portfolio companies, so this is in Switzerland. And then we have pressure on the gross margin, and that was because summer got started a little bit later. And then we have the above-average cost of marketing for eobuwie in the first part of the quarter.

So this warehouse is quite important to us because we're going to run all of our operations through this logistic center for CCC, DeeZee, eobuwie, and so we're going to automate that. And in the second half of the year, this warehouse will begin to operate. So on a unit basis, we should reduce logistics expenses by 15% to 20%. And so this is another step towards improving our costs and optimizing them.

And so then we have our showroom. So we can have meetings here with photographers, with influencers, with fashion journalists. We're able to show the products we have. And so basically, people can interact with these products and we can do a slightly different type of marketing than we've done in the past through television advertising. We haven't officially started here, but a lot is already happening in these showrooms.

And then we have the esize.me scanners. We started that in the eobuwie stores. So this was a successful undertaking and we've decided to use this functionality in our CCC shops. We want to launch 150 scanners across the CCC stores in Poland by the end of 2019, and we'll market that. We want to offer products even better to our customers, but at the same time we want to attract them to get information which will enable us to refine our offering.

And if we look at Gino Rossi, it's -- those shoes are in our CCC stores for a relatively short period of time. It's been a good start. The average ticket is higher. And so we're offering this in addition to our flagship brands. So we have -- it's more of a premium shoe, so this is our premium product, Gino Rossi.

And then in terms of your comments about some of our products in our core business where we have Lasocki in other products. So we continue to improve our products in all of these categories.

So we sold 21 million shoes of Lasocki across Europe. I don't think even any of the athletic shoes would have sold so many shoes across Europe. So we sold 21 million Lasocki shoes. So this is something we don't want to change, this is our core. The essence then of this graph is that we're adding other categories that we haven't had up until now. So Lasocki is where it should be and it will become even better.

So in October, we will start a campaign, an ad campaign, in our CCC stores. We'll have a large number of 600,000 products. And we're going to be selling in 18 stores Gino Rossi. And in 650 stores, we're happy with what we've seen, but it's a little too early to make an overall assessment.

If we look at the restructuring of Vögele, so this is an important part of our P&L. So costs, the most important thing is eliminate the Vögele warehouse. And in Poland, I think the information was disseminated that we want to close that warehouse by Q1 2020 and then we'll move several of the functionalities to the head office, and this should enable us to reduce costs by PLN 130 million year-on-year.

So we'll work on products. And then we'll negotiate purchases of brands, third-party brands for Vögele. And so we're renegotiating contracts, but we're closing some stores, we're opening other stores under the new concept of CCC. So this has been quite effective.

So now to recap. I'd like to give the floor to the Chairman of the Supervisory Board to say a few words about what he believes is critical for the company at this point in time. So that's my proposal.


Dariusz Milek, CCC S.A. - Chairman of the Supervisory Board [2]


Welcome. I'd like to mention, for me, as the Supervisory Board Chairman, I have 3 major objectives to oversee. One is collection, expansion and marketing. Those are the 3 things that I want to deal with. So creating collections, having balanced expansion and altering our approach to marketing. All of these things are happening.

As we have a brand portfolio -- portfolio of brands, as the CEO said, we're adding some brands that we're missing or lacking up until now, so in fashion categories as well as in quality. And so they should give us the kind of quality we want to have.

Naturally, all of the growth directions are confirming that. So DeeZee in sports shoes, we've been able to sell 1.3 million sports shoes, and so like-for-like have been sold in Poland, and so this has grown by 3%. But we had a bad April and May, so weather didn't support our sales.

I don't want to say at next conferences that weather has changed anything. We've been -- we've had a basic product up until now across the year. We want people to come to our stores for brands, whereas CCC will never become a boutique, we want people to come and buy fashionable shoes at a good price. And both these brands will give us a guarantee of improving the quality of the collections. We can see that gradually, we're quite happy with that. And we're working on the new products. We can say that, in my opinion, the fall is better in terms of the product. There are some of the additional products we have. So we believe that fall will be richer in terms of fashion, colors. And so the real start for us will be next fall period.

This is not a food store, so altering the collection is something that takes 9 months from the time when the product is created until you can actually stock the stores and then start selling them, those shoes. So we do everything we can. So we believe that in every sales company, the products are the most important thing. So we've got a good distribution network and we've got a good retail network. We've got e-commerce. So 3 years ago, we hadn't sold anything in e-commerce. Now broadly, we can say that in a year from today, we should hit the watermark of 30% of e-commerce sales in the overall sales mix. It's hard to say what we'll be in a few years, 10 years from now, but having branded shoes in our offering means that we're going to continue holding, retaining these customers.

Another element that's quite important for the company is this balanced expansion. So these quarters weren't the best for us, and that's why we have to scrutinize to a greater extent the stores we're opening this year. We plan to open up some 80,000 new square meters, along with our eobuwie stores. And the net -- on a net basis, we're going to also close some stores. And we have franchise stores like in Lithuania, Estonia, Ukraine, big nations as well as several small countries like Kosovo and Moldavia.

So this franchise sales channel is something that we're starting to like again. So we're happy with the sales in the Arabic countries even though the product there isn't a dedicated product. So people there are wearing their sort of advanced -- they have a lot of decorated shoes and their purses are different from ours. But I think once we adjust the products, we have the best partner there. And we're going to be able to open another 100 stores in the Arabic nations. And so we've got 55 million people living there, including Saudi Arabia in those countries. We'll continue to develop that channel.

If we look at our own stores. Next year, we will decrease the number of store openings. We've signed in large number of contracts. We've got very good contracts on much better financial conditions from the ones we had in the past. Sometimes, these are turnkey agreements with a short lease period. But in '21, 2022 -- so 2020, 2021, we want to reduce the expansion of new stores and we want to then replace existing stores and focus better. We want to get better conditions, replace lease agreements.

So Romania and Russia are countries where we're going to expand our presence greatly. So most of the other countries, we already have a good footprint or we have small countries like Bulgaria, Kazakhstan, a large number of shopping centers. We want to focus on the product, on our margins, on our costs. And you can see that, in each one of these elements, if we can add 2%, we're going to be able to earn quite a bit more.

We have a high level of revenues, so we'll continue to maintain a pace of top line growth of 30% so that incremental growth in the future doesn't have to be so impressive. We want this to be aligned to profitability, so profitability becomes one of the major goals of the company.

If we look at marketing expenditures, they will fall greatly. I don't think we need to have such aggressive advertising because we're present in all the cities. We've got very good venues. And over the next couple of years, we'll improve our footprint as we upgrade our locations and so we don't need to spend so much on television advertising. So we want to focus our efforts in terms of marketing on reaching customers through social media, utilizing influencers. So a little old, so we want to try to reach some of the younger people, and this is something that's starting to generate results.

And so as Marcin said, the showroom is open and it's dedicated to show our products and newspapers will have more and more interactions. Up until now, this is something we've not done. So we want to follow a path that's a little bit different from the one we've pursued until today.

And on top of that, cost discipline is quite important. So we have the head office procurement section, so all of our projects have consumed a lot of -- projects have consumed a lot of money. Perhaps there were too many projects happening in parallel, and so most of our projects are coming back into -- coming to shore.

So even MODIVO, which cost quite a bit, has been completed, e-commerce has worked out, esize.me has worked out. So next year, we should be in black. And then in 2021, 2022, we should start generating some pretty impressive financial results.

We're not going to start any new topics. We're not going to start any major topics. We don't anticipate any M&A activity and we're not going to enter or penetrate new markets alone. So we'll have partners who would work with us. So a large number of people want to open CCC stores in other countries, but we'll look at that, but it's going to be the cost borne by others. We're going to have a very good product and so we believe that this will defend our position and so this is the entirety of our business.

And I think I've said everything, unless there may be some questions from your side.

I think that in terms of the key information, we've got a good [time] result, and so we're now more than willing to be at your disposal. So if there's some questions you'd like to post, we've missed something in the presentation or maybe something wasn't fully understood, we're more than willing to share more information with you. So please raise your hand and then the microphone will be delivered to you.

I think it's in the second row we have a question.


Questions and Answers


Unidentified Analyst, [1]


I'm from [Pico] Investment Banking. I have 2 questions. My first question is about eobuwie. In reference to what you mentioned that a big portion of the marketing spend in Q2 can be treated as a one-off. Could I ask you to dwell on what these costs were for? Or was this for specific markets? And the second thing is also about costs of eobuwie in Q2. If we look at Slide 17, we see that costs are up by PLN 75 million year-on-year. And there is an explanation for PLN 60 million. And the question is, is the other PLN 15 million more one-off? Or are we talking about smaller things accumulated that will recur?


Unidentified Company Representative, [2]


The other things, if I remember correctly, these are small things, which we really couldn't sum up in terms of key observations in logistics as we penetrate Western Europe in particular. And since we don't have that warehouse, eobuwie has to utilize leased space from local market players. We'll be able to optimize that in the near future. In terms of marketing, we have some markets like Poland and Czech Republic where the cost of marketing was a little bit higher year-on-year, Poland and Czech Republic. It's not the case that we have a lack of humility. We made some errors in marketing, where we wanted to grow top line, we had some staffing changes, and so some of our objectives weren't fully aligned. So we have a lot of conviction that the lion's share of these costs are one-offs.


Unidentified Analyst, [3]


Okay. And my second question is about marketing costs in the brick-and-mortar stores, CCC. So it fell in Q2. Could we ask you for some guidance as we look forward that should change in policy announced in terms of discontinuing expensive television advertising? Can we quantify that as a percentage of sales? Or what level of savings should we anticipate over the course of the year, let's say?


Unidentified Company Representative, [4]


We have it written out, a full plan per se, but we're going to scrutinize every zloty we spend, [they have to fall.] In my opinion of marketing, generally, we're going to try not to do campaigns and then we'll watch sales growth. Let me add, in terms of eobuwie, so in April and May, they were rescuing our sales, but it's also a matter of defending against other players because like in Czech Republic, we had more competitors, we had to compete with them a little bit, and so things got a little bit out of control. So in eobuwie, if we have less marketing then we have lower sales. The question is what amount of marketing spend we should have? Do we want to have 30% sales growth or a smaller percentage but we want to have profitability? So these are some things that we're going to have to reckon with and reconcile. It's not our ambition to grow by another 30% next year. We want to stabilize our profitability profile. That's our greater concern.


Unidentified Analyst, [5]


So I have a question, 2 simple questions, in fact. So the FX rates there is what is much softer than what it's been in the past. So it's a little bit outside of that stable arrangement. When can we mitigate that? This is something that had the direct impact on your gross margin and so I would ask for your comment here. And then if I could ask for more information about Switzerland, where you've made some savings plans for next year, what sort of loss would Switzerland generate if you're able to achieve all of your plans? And you haven't said anything about Germany. Of course, you've pulled it out of the parentheses, but you're still shareholders there. So if we could learn a little bit about what's happening in Germany.


Unidentified Company Representative, [6]


So in terms of FX rates we budget, we're in the safe zone. I want to give you the specific figures. I wouldn't say that the FX rates have a major impact on the gross margins. It's not something that has a major impact either in plus or in minus. We calculate that in our prices. And at the current euro and U.S. dollar exchange rates, we're well within our budget framework and were still very safe. That's the first thing. If we look at to Switzerland in turn, we don't want to tell you what the result will be this year or next year. We know what we're fighting for and that's not changed.

This year has some problems in the first half of the year. One is because of weather. The second one is because of stocking stores. This was exacerbated by the fact that the company wasn't ready to accept stuff from 2 sources. Now we're starting to allocate products from Poland. And so this could lead to some additional costs. So I wouldn't really venture to say at present what the Swiss result will be.

Certainly, we want to fight. If I remember well, at the last conference, we would like for all of these elements by the end of next year, maybe in Q1, to straighten them out to make sure that at an operating level, at the EBIT level to be in the black across the board. Perhaps the Chairman would like to add something more.


Dariusz Milek, CCC S.A. - Chairman of the Supervisory Board [7]


We're focusing on the operational factors. So changing systems to allocate products directly from Poland, and so this requires a lot of effort but this is something that's being done. In that way, we can have some of those other operations in Switzerland discontinued, and we can close unprofitable stores. And so we're focusing on our activities here. So the total sum of these activities will give us the final result. If we don't take these efforts, then we won't be able to achieve those results. But if we look at Germany, Q1, [2] of the companies in the black, and we're pleased with that and that confirms one hypothesis we had that the stores after rebranding, I think there's 18 stores at present and 16 will still be rebranded, will have much better performance than the same stores selling as CCC but have a similar product offering.

So something we anticipate that the problem in Germany was the fact that we had a low brand recognition. So this is something that's been confirmed to some extent. This is a company that's an affiliate where we have a minority stake. We're cooperating, most of you know, in terms of products, product deliveries. And that's the main element of our cooperation. Everything else is being done by the management team overall and that's their work to be accomplished.

Let me remind you that we're doing more than EUR 2 billion in sales across Europe. And so this is a very good bargaining position. And so Vögele has benefited, which was able to get 10% better discounts. We're not a captive of Vögele, we're not a major captive. So all of their contracts come to an end in 1, 2 or 3 years. So we're talking about revenues of 8% of Vögele. We definitely tend to expand the network. We're cleaning up books there. And so we've walked a full circle. And the same is true with Gino Rossi. So now we're taking shortcuts. And so we've sacked the management teams of these companies, and we're working with them on a straight approach. We don't have large numbers of meetings because there's major differences in culture, and so we're getting rid of 140 persons in the head offices. So we don't need to separate logistics department, management department and procurement. So have a team of 40 to 50 persons in these countries like in Czech Republic, Slovakia. So these were huge cost differences. Swiss people earn much more than Polish people. So we have this. We have to remember that we bought the logo at Vögele, which has been on the market for 98 years. So it's one of the top 50 companies in Switzerland, so it doesn't have any really competition here. It has one of the lowest staff per store ratios since we've got a strong logo. And we have access to the logos of the shoes we're buying. And so we have a market where there's only an 8% VAT. So we can sell everything more expensively. And so right now, we're revamping operations.

And so the point of sales terminals, we're making some logistics changes. We still bear some of the old logistics costs. And so in a couple of months, we'll stop having those costs. So Switzerland is not a major problem. We have to tidy up the products, product management to ensure that products are delivered to the stores on time, that we don't keep products in warehouses. And so Switzerland is following its path. And sooner or later, rather sooner, if there's going to be a product -- a profitable marketplace, so within 1 to 2 years, we're going to have a major plus. So on the basis of the efforts we're taking, we want this market to be profitable for us next year. We're not changing our guidance here.

So we have people in Switzerland who are still in a termination period or have the termination and some of their costs are taken double because we still have the warehouse centers, and we're starting new solutions. So we have some redundant costs. We're focusing on the activities that will lead to a situation which will have a profitable business there. And so this should be done by next year if everything goes well. We talked about Gino Rossi. Above all, we bought the brand name of Gino Rossi. We're selling Lasocki for 21 million shoes. We want to see -- sell 2 million shoes of Gino Rossi. So Gino Rossi generates PLN 30 per [average per more,] that's the higher price. And so that purchase should be paid back within a year. So we bought the stores, we've bought the machines, the warehouse plant, so the production plant. And we have stock of nearly 15 million pairs.

So this is the problem, we have a loss. But if we're successful and do new collection for Gino Rossi, and it'll be in the stores soon, and in the spring, it'll be much better, then we can say that this will be a problem we carry for a single season. Half of these stores will be shut down and the other stores will receive the products on time. So this is not a major scale. We're talking about 8,000 square meters. And I would suggest that perhaps 5,000 square meters of these stores will remain. But this is something that adds value to the brand name, and we'll be able to sell our basic CCC product offering. We don't have major objectives. We want to sell Gino Rossi at 50% above the average price or the basic price for Lasocki. So we will sell men's collections, women's collections, and we're also going to have sporting collection. And we also have a child category in Gino Rossi as well.


Unidentified Analyst, [8]


So one follow-up question about FX. I understand that this is a small enough movement that you can carry it in the price. Is it the case that you won't see any impact until spring of next year or summer and fall?


Unidentified Company Representative, [9]


So I'm not going to tell you what the exchange rate is that we have accepted. So the collection will be delivered in 9 months. So the exchange rate might be lower when we transferred prices. It's just we have to -- again, if you have 50 million shoes and you have to change the prices, the price tags, then you'd have to reprice everything. So we're not going to do that. So we don't anticipate doing. We've been the most attractive. We're not a lower-margin product where we have to worry so much about hedging. And so we also have sales in U.S. dollars or in euros and in Swiss francs. So there's not big problem.


Unidentified Analyst, [10]


What's the -- in your percentage, have you been able to switch to PLN?


Unidentified Company Representative, [11]


Most of the -- nearly 100% is in euros, actually in euros rather.

At the back of the room, we have somebody who wants to ask a question.


Unidentified Analyst, [12]


I'm from JPMorgan. I have several questions. If we look at eobuwie, if we look at Western European countries where eobuwie expansion wouldn't be sensible, if we look at the high costs of marketing and logistics, is it possible to revise your profitability in the future? If we look at the costs of marketing, which have fallen by PLN 9 million in Q2 in CCC, which we can see on Slide 19, do we have any costs of the cycle? So do we know how much the costs were in Q2? Is the cycling team one of the areas where you plan to save money on marketing? And I also wanted to ask about the like-for-like performance in Romania, in Russia where you want to grow more quickly. What sort of like-for-like sales have you had in the first half of the year?


Unidentified Company Representative, [13]


If we think about like-for-like, we're not happy with like-for-like anywhere because we had logistics problems. And there were times, as you know, spring showed up in the middle of February. We weren't ready for that. And once we grappled with that problem, with IT and logistics things, then we had a cold April and May. So it's very difficult to compare like-for-like sales. So we think that the LFL, like-for-like sales will be much better next year. But Romania is very positive, very profitable. We are selling products at higher margins, and this is a market that is very similar to ours in terms of culture.

If we look at Russia, this is a market where we can select our business partners. So our coverage is marginal. So we can select sites and venues. It's much more difficult to grow in Slovakia, Czech Republic or Poland or Hungary. So if you look at cycling sponsoring, this is a question that is puzzling you. We have to look at this globally. Sports marketing is linked to the image of the company, the marketing and the product. So we want to sell through the cyclists our sports brands. We're talking with a couple different brands, but through marketing, we want to promote this. But we have to look at this globally.

The entire budget for sports and UNICEF is not going to exceed 1% of the company. And so if we combine that with Reno, that would be marketing expenditures of 0.7% because Vögele, as you know, it's the logo. So you know that we've always maintained sports groups, and these were big expenditures. So if we add UNICEF, they add expenditures. So the revenues, so we're going to be able to maintain our marketing. And since we have UNICEF written on the bag it's being sold and we're selling it for PLN 1 and in Western countries for 50 cents, so we sell 80 million products a year, so we will have 40 million bags. And so you can see that we're not spending money on those bags. Hence, that would be -- the packaging cost is around PLN 25 million. So if you look at 30, 40 gross times 80 million bags, and these bags were given to everybody.

Now 50% of the people buy the bags, and there are still negative comments. So if we look at all the sports, of course, the spending is bigger, it's global advertising, people recognize us. So it's an investment in our image, in our brand recognition. We're more and more likable as a result of UNICEF, and everything is incorporated. This does not cost the company more. And what we spent up until now, having in mind the sales revenues we have, I don't want to go over into the details because I would -- I'm sure a lot of this performance -- so sponsoring has increased. We spend less on advertising, and we've added UNICEF. Why UNICEF? We want to build -- we would like for our brand to be liked. We're one of the biggest global partners for UNICEF across the world. We're amongst the top 5 retailers. And so these are well-known brands across the world. And so we think this is a great form of advertising. I don't want to talk about the details but let's recognize that in Poland, this is 0.75% of our trade revenues. So you can imagine less costly form of marketing. So we have all of the marketing expenditures. So I don't think if we take everything into consideration, we wouldn't exceed the 3%. We know that in other companies that this figure can go as high as 10%.

So responding to your question about eobuwie. I can assure you that we look at each market and scrutinize each market separately, and we can imagine that we would revise our approach to some of them and how much developing on individual markets costs and what the marketing costs we've already located and defined. I don't want to talk about it right here about the details. We know some of the areas where we're going to grow more quickly, others we're going to grow less quickly. So not all markets are of equal importance. What's important is that we really scrutinize every single zloty we spend because we understand the situation. There's a large number of expensive projects and we don't have this level of profits we had anticipated for a number of reasons that we have already discussed with you.


Unidentified Analyst, [14]


Coming back to the situation in Russia a few years ago, it was said [Centrabo] left the market, and there was a large amount of the market to be acquired. You now have several years of experience in that market. Is it the case that this market is so willing to absorb pure presence?


Unidentified Company Representative, [15]


Generally speaking, our know-how and our stores can be successful on many markets. It's difficult to compare with [Cutting], which has 1,000 square meter stores or [Centrabo], which had only synthetic shoes. We have a complete universal approach with leather shoes, and we have decent margins. Generally speaking, the concept we follow is not something you see anywhere else in Europe.


Unidentified Analyst, [16]


Let me ask about restructuring. So 80% of your debt is short term. Do you anticipate to take up debt on a safer basis in the future?


Unidentified Company Representative, [17]


Yes. So to be brief, yes. You'll see the improvement in the near future. We're starting to do some nice things here. We've spent a lot less. We've added new purchaser. 2/3 of the products we always want, and the same is true of spring and summer. We took into consideration what we still have in stock. Give us until May of next year and the entire financial policy of the company will be tidied up. We want to work on generating more cash, but the debt we'll continue to retain will be long-term debt.


Unidentified Analyst, [18]


And my final question. Could you give us some color commentary about business? How the trading's going in the first 2 months of Q3?


Unidentified Company Representative, [19]


We can't speak of such things. We can't talk about the trading update. You know more about these regulations. Generally speaking, quite frankly, Q3 for us is mainly September, so we don't want to assess anything now. I remember report for Q3 of last year. So September has the greatest amount of potential. Last year in September, we earned minus 16% in like-for-like, and the margins were down. So the potential of this quarter is harbored in September. I think we're moderately satisfied with how things are going to work. We're optimists.


Dariusz Milek, CCC S.A. - Chairman of the Supervisory Board [20]


Yes. Let me add, we want to make sure that our network is insulated from weather. So we have additional shoes, sports shoes. We got to do fashion because fashion is something that sells regardless of weather. So we're not waiting for a customer to come in to change shoes because of weather changes. We want people to come into our stores who are buying shoes regardless of the weather.

If we look at our situation on the financial side, we can say that it's average. Perhaps we galloped too quickly in having a large number of projects, but these projects will start to generate benefits in the near future.

Are we ready for a crisis? I would say, today, we're not ready for a crisis, but we're making such rapid changes in the company that in 6 months, we'll see a major difference in the quality. But we have to withstand until the spring of next year. We've got better collections, we've got things that are more aligned to our stores, we're not maintaining huge buffers of stock. Some factories had to be closed, but a revolution had to be taken in the company. We had long-term partners to whom we did not submit any purchase orders. But as a result, our situation will look totally different in a few months from today, which hasn't affected our margins. We continue to have good margins on our shoes, but we want to sell these shoes at a early period at the top margins. So this was the financial calendar. So on first of February, we want to have all of the spring collection in our stores. We started too late this year. So we want to make a large number of changes in product management, stock category management and sell it first. So I don't have more free time being in the Supervisory Board. That's what I would add.


Unidentified Company Representative, [21]


And the other thing was supposed to be [so sweet.] So we have 2, 3 more questions and then we'll let the internet users pose some questions. So if -- even if we don't reply to all of your questions now, we'll reply by Friday through chats.


Unidentified Analyst, [22]


I would like to ask for an explanation of your discontinued business. If we look at CCC Germany, I understand the network there was sold for [symbolic] zloty, and this was articulated in the discontinued category. Why do you have such a major adjustment?


Unidentified Company Representative, [23]


This is something that's been described in the financial statements. This was fair value, PLN 31.6 million. So today, when we make the final settlement of the overall acquisition, it turns out that the value of the German operation should be adjusted by PLN 31.6 million. It's described in detail in the financial statements.


Unidentified Analyst, [24]


So in the financial line item, so the result improved for now. And then at the same time, there's some options because of EBITDA multiples?


Unidentified Company Representative, [25]


It's quite the opposite. In the line item, we see Reno as an associate. But if we have the option to buy shares in a group, there's PLN 23 million of financial expenses. So that option is worth PLN 23 million less than what it was valued at, at the date of the transaction. And that's the impact. So in the preliminaries for Reno, the results were worse than what we had anticipated. We're on the same continent. Everything we're talking about, we try to avoid talking about the weather. So the results of that group in April and May were worse than what we had originally anticipated. So we don't want to talk about being affected by climate change. So this is a line item that can show up in subsequent quarters. The entire option was worth PLN 100 million. So if this option were to change radically, we could see some -- we can see this coming through the P&L account, both upwards and downwards.

And then we had one more question from a person sitting behind the pillar.


Unidentified Analyst, [26]


I'm from Reuters. I have a short question. You gentlemen said that you wouldn't have additional financial.

(technical difficulty)


Unidentified Company Representative, [27]


In case that we've burned this cash, maybe we're going to be late by 1 month or 6 months late, but we have been able to deliver these products and that we want to consume the revenue, the benefits from these projects.

So if you allow me, we will now allow ourselves to take 2 to 3 questions from the internet and then we'll invite you to join us for lunch. If we have more questions, then let me mention that by Friday, we'll respond to the questions you have through our chat.

We have the question #1. What are CCC's plans in terms of the Gino Rossi production plants? Are you thinking about selling them? Or will continue to be owned by Gino Rossi or will they operate for internal companies or only -- or for external companies as well?


Unidentified Company Representative, [28]


Gino Rossi has been producing 1 million shoes. Gino Rossi itself has got 2 production lines. It's about to produce around 500,000 shoes. We are only going to produce high-quality shoes so what we can send abroad. And we're going to try to have them do these products. So it's the leather, the sole that are the most important things. So we're able to produce in India at a very low price, but that's not all of the products. These are on flat bottoms. If we're talking about complicated shoes, it's still profitable to do it in Poland. We don't intend to shut down the plants. Why would we buy them if we intended to shut it down? We can't do everything. We've got a good understanding of what we can produce in which country. But the group's needs in CCC, we can't imagine that they're going to produce for third-party buyers because we have enough demand in the group. It wouldn't be sensible to have satellite buyers. Thus, the major shareholder planned to increase his stake, having in mind the attractive share price.

I have a large stake. So if the share price comes back by 100, then I wouldn't have to buy anything. So let's not focus on whether or not found the word missing. I don't want to do any type of speculating on shares. Let's just focus on our core operations. My major objective is to rebuild the value and the share price we had previously. To rebuild the share price, you have to see results and that's something that will take some time. I don't anticipate miracles overnight. But we'll meet in the year, and we can then tell one another what we've been successful in achieving. The things that depend on us, we should deliver full stop in full.

I can't tell you whether or not we're going to have a sales tax or not, if we're going to have 5 days a week of sales or 6 days of sales a week, but we've been able to overcome. Even though we're losing 3 sales days a month, we continue to have positive like-for-like. We're adding some products, logistics are catching up. And so if products are in the stores on time, then things will be very good.


Unidentified Company Representative, [29]


Final question, are you starting to think about taking the eobuwie public?

There is no such idea today. So this idea is not coming back to the forefront.

So ladies and gentlemen, having in mind the elapsed time, it's 1:30 p.m. We're going to finish the questioning phase, and I'll invite you to join us behind the scenes, and we can interact with one another. So thank you very much for your attendance. And we'll invite you to come back and join us at the end of October. Thank you. Bye-bye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]