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Edited Transcript of FFGRP.AT earnings conference call or presentation 12-Apr-17 3:15pm GMT

Thomson Reuters StreetEvents

Q4 2016 Folli Follie Commercial Manufacturing and Technical SA Earnings Call

Athens Apr 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Folli Follie Commercial Manufacturing and Technical SA earnings conference call or presentation Wednesday, April 12, 2017 at 3:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George Koutsolioutsos

Folli Follie Group - CEO

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Conference Call Participants

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* Stamatios Draziotis

Eurobank Securities - Analyst

* Iakovos Kourtesis

Piraeus Securities - Analyst

* Julie Gasser

Allianz Global Investors - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining Folli Follie Group full-year 2016 financial results conference call.

At this time, I would like to turn the conference over to Mr. George Koutsolioutsos, CEO.

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George Koutsolioutsos, Folli Follie Group - CEO [2]

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Ladies and gentlemen, good afternoon. It's my pleasure to present to you today the last quarter, fourth-quarter 2016 and full-year 2016 results for our FF Group.

I am in a position to introduce our results where we achieved our record sales and profits for our group for another year. We had a strong finish of the year, especially on the jewelry and watches division. We achieved our record and historic cash flow generation for the year, especially the last quarter. We are also on our lowest net debt to EBITDA ratio for our group at year-end 2016.

We achieved all this despite a continuing challenging environment, both economical and geopolitical, in the regions that we are trading. We had also a soft Greek Christmas period. Nevertheless, we continue also investing, especially in capital-intensive markets like the North America region.

We are continuing our investment in technologies, streamlining our processes and our supply chain. It is a changing environment in retail, so it's not only about economic or geopolitical issues. I think we said that in the past we would like to be ahead -- a step ahead of others, so we are very focused on that, which is already having a positive impact on our working capital needs.

This is our historical business model to be working capital intensive, so through all this processes, restructuring and investing, especially on technology, we believe that and we see already that we are -- it's also impacting on our free cash flow generation. And we believe short to medium term our business model will start changing and, thus, producing much more -- much less working capital needs and more cash flow generation.

This is our introduction and let's go now to the details of our results.

As I said in my introduction, we had a strong performance of the group during the last quarter with -- although we were comparing also to a very strong last quarter of 2015. Nevertheless, we had a very good finish despite, as I said, all these uncertainties and economical issues around the world.

Group revenues increased during full-year 2016 by 12.1% for the same period last year. A small, very small positive currency effect, if we pick this out, would be 11.53% increase.

The group gross profit increased by 5.4% with respective margin 45.8% against 48.7% for the same period last year. Group EBITDA increased by 10%, reaching EUR291.9 million with a respective margin of 21.8% and just 22.2% for the same period last year. The net profit for the period reached EUR222.5 million, which is an increase of 21.8%. Net debt to EBITDA, the net debt stood at EUR106.2 million, which is a net debt to EBITDA ratio of 0.36.

Next, in more detail for the full year of 2016 revenues reached EUR1.3373 billion compared to EUR1.193 billion, which is an increase of 12.1%. Operating profit reached EUR262.3 million compared to EUR238.5 million, which is an increase of 10%.

The net profit of the group reached EUR222.5 million compared to EUR182.7 million, which is an increase of 21.7%. EBITDA reached EUR291.9 million compared to EUR265 million for the same period last year, which is an increase of 10.1%.

Next, the performance for the last quarter of 2016 Q4. Revenues reached EUR381.1 million compared to EUR317.6 million, which is an increase of 20%. Operating profit stood at EUR93 million compared to EUR84 million, which is an increase of 10.8%. The net profit reached EUR110.4 million compared to EUR78.4 million, which is an increase of 40%, and the EBITDA reached EUR99.5 million compared to EUR89.9 million, which is an increase of 10.7%.

Next is the revenue split by activity. Jewelry, watches, and accessories reached EUR977.8 million compared to EUR857 million, which is an increase of 14.1%. Retail and wholesale reached EUR178.1 million compared EUR164.7 million, which is an increase of 8.1%. And the department stores reached EUR181.4 million compared EUR171.4 million, which is an increase of 5.8%. So, overall, all activities had a growth for last year.

Next is the revenue split by geography. Out of the total, Asia represented 66.7% of the total, Greece 22.5%, Europe 9.7%, and North America 1.1%.

Next is the revenue split by activity. Jewelry and watches and accessories represented 73.1% of the total, department stores 13.6%, and retail/wholesale 13.3%.

Next is the EBITDA by activity. Out of the total, jewelry, watches, and accessories represented 91.6% of the total, department stores 5.2%, and retail/wholesale 3.2%.

The CapEx split by activity; first of all, the total CapEx for last year, which was an important year and record as CapEx consumption and expenditure was EUR98.3 million. Jewelry, watches, and accessories absorbed 90.2%, 5.9% for the retail/wholesale activity, and department stores 3.9%.

Next we have a new chart where we show the CapEx development as a percentage of revenues. So you will see actually we went back to 2008, where at that time the CapEx was 5.1% out of the total revenues. Went down in 2013 to 1.6% and then climbing up to today to 7.4%.

We wanted to show that this is cyclical. We are in this phase now, but as I also previously stated, we are going back on a back trend for the coming short term, in terms of years. [We are] at peak and now we are going down.

Next is the debt evolution. Going from the last quarter of 2015, where the net debt was EUR132.2 million, somehow stable with a little kick in Q1 2016 and now we're at low levels in the Q4 2016, which reached EUR106.2 million of net debt.

Next we have also free cash flow evolution. This again it's a new chart. We like to show you this chart every full-year results because it makes sense on a full-year basis than actually seeing quarter by quarter where there are factors that can influence that and are not really comparable quarter to quarter.

So the free cash flow, which is the last line, 2014 was EUR19 million, 2015 was minus EUR7 million, and 2016 was plus EUR43 million. Cash from operation, it's growing even thought we are paying more taxes. Working capital requirements is much less than last year, although we are investing also at the same time. So, bottom line, it's a much stronger cash flow for 2016 and that is our historical best cash flow.

Next it's going to activity by activity now, starting with jewelry, watches, and accessories. Full-year 2016 the revenues reached EUR977.8 million, increased by 14.1%. Here we have the opposite because we are also -- as a currency effect, we have a negative, very slight.

On constant currency, the growth would be at 14.6% instead of 14.1%. So a good performance in Asia and we have quite an important negative currency effect because of the British pound.

Gross profit for the full year reached EUR474.9 million, increased by 5.6% with the margin lower, 14.6%, but with a very strong gross margin for the last quarter which reached 56.2%. So higher than the overall margin of last year.

Operating profit reached EUR248.8 million, increased by 11.7%, with a margin almost the same, 25.4% compared to 26% for the same period last year. EBITDA increased by 11.9% reaching EUR267.5 million, with respective margin of 27.4%.

As at the end of 2016, we operated in 31 countries with 763 points of sales. For those who are looking at the historical, we are actually decelerating new point of sales, actually this year was even less. As a full year this is part of our strategy, as we said before.

With a new concept, bigger shops generating more revenues, and with a new look and it looks like it has a positive impact because we have an acceleration of growth, despite not accelerating new point of sales, especially for the Folli Follie brand, which this is the process and the strategy. Which is not the case in Links of London, where we are in the phase of going internationally and so having new point of sales every year.

Next is retail/wholesale. As the remarks, I would say that to be able to grow 8.1%, this was our achievement for last year from EUR178.1 million to EUR164.7 million. We think it's a very good performance looking at the situation of the market that the spending is still deteriorating in the Greek market.

We have a very good over performance in Romania and Bulgaria, but as the main is coming from Greece, almost 60% of this business, we feel that it's a very good performance despite pressure on margins. As the market has become more and more discounted, we are adapting to this reality. We look for opportunities, but at the end of the day we think it's a very good performance.

EBITDA reached EUR9.1 million compared to EUR9.8 million, which is a decrease of 7.6%. And this activity counted as year-end of 2016 173 points of sales in Greece, Romania, and Bulgaria.

Department stores, which is the next activity. Still resilient all these years through this hard economic crisis and consumption crisis in Greece, especially for lifestyle products. Nevertheless, we had another year with an increase in sales which reached EUR181.4 million; EUR171.4 million last year, which is an increase of 6%. Gross margin just slightly higher 35.6% compared to 35.3% last year and an EBITDA EUR15.3 million compared to EUR16.1 million, which is a decrease of 5%.

Again, for both these last activities things could be even better if we had not such a soft Christmas period, but I think that -- and this is not only our belief, but the market belief that it probably was the worst Christmas period from the beginning of the crisis seven years ago.

This ends my presentation of the last quarter 2016 and full-year results for the year. As I said, we are very pleased with the results. We have a very strong finish in our activities and we are looking for another good year for 2017, despite all these challenges that we are all facing in various markets and consumer behavior, retail, online, and so on.

So I will pass the floor to you. Thank you for your attention and please feel free to step up for any questions you may have.

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Questions and Answers

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Operator [1]

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Stamatios Draziotis, Eurobank Equities.

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Stamatios Draziotis, Eurobank Securities - Analyst [2]

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Thank you very much for taking my questions. My first one has to do with the JWA division. Could you help us understand a bit what happened in Q4? Because you had very strong top-line growth on much lower gross margins relative to the same quarter last year. What drove this very robust growth and what was the main driver of the margin erosion? Was it channel mix?

And related to the gross margins, how do you see the situation playing out in FY 2017, please? That was my first question.

Second question is with respect to this sort of rationalization of rentals we've been hearing that has been taking place for high street stores upon rental revenue coming in Hong Kong. Could you tell us whether this has been the case for you and give us an idea of the extent of price correction and any guidance as to the potential benefit that you expect in 2017, please?

And, thirdly, a question on your store network. Should we actually be factoring in space growth for your JWA division in 2017 or will you be rationalizing capacity further as you reorganize the network, focusing on these new large-sized mega-stores? Thank you.

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George Koutsolioutsos, Folli Follie Group - CEO [3]

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Starting with your first question about the gross margin. Yes, there is a pressure on gross margin. I would say it's not so much on the channel mix. We are growing, but there is one factor for sure which is the online business that is booming in China. And let me tell you that 11/11 was our record-ever sales turnover in one day in our history for the brand, which is a slightly discounted offer.

We have also booming business that is coming from outlet shops. There are a lot of investments right now in mainland China that are these big villages where we operate, but as you see, it's not affecting so much on our margin because we have also products made for outlet and we try not to jeopardize a lot our margins there.

And, thirdly, it's also operation in duty-paid travel retail again in China, which is a booming business, where actually you must have a slight better price and it's a bit more expensive to operate. But this is also important for the brand awareness, plus the franchise business.

So we think that where we stand -- and actually for the last quarter we did quite well recuperating. That's why I said in a previous quarter that this is not the trend but it's something exceptional that has to do with not comparing exactly the same things. But, nevertheless, we think that this is a margin that we can keep and be growing so we don't see any deterioration of this margin in the coming quarters actually. Either stabilizing or maybe a bit better.

Now your second question about rentals, the big thing about rentals is Hong Kong to be honest. Yes, in every market we try to, depending on the case, to rationalize rents, but the big thing is in Hong Kong. As you say, there's a lot of news flow because this is affecting all brands, all retailers in Hong Kong.

So we are in a phase of actually -- London is getting very hard, as you may have read in the news flow. In our case, starting from May till October I would say this is the phase where we are phasing out locations that are still very expensive with old rents that are very high and actually we believe by year-end our network will be in a normalized rental environment.

But keep in mind that Hong Kong is still one of the highest, even with a new rent that is sometimes even half or more -- or less than previously is still a very expensive market to operate, but this is needed today because all this is bottom line for us. So we are still in this phase and by October this year all our network, with better quality because we move in some cases in better locations, will be normalized and having a positive impact on our profitability in this market, which is a very important market for us.

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Stamatios Draziotis, Eurobank Securities - Analyst [4]

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Just as a follow-up to that, the extent of price compression that you have been experiencing is like similar to 20% or 30% that we've heard from other brands operating in the region? Roughly or --.

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George Koutsolioutsos, Folli Follie Group - CEO [5]

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It's even more and I'll give you an example where it's our flagship today in Hong Kong that we had our flagship that we moved in a better location. We used to pay I give you now -- okay, I'll translate in euros just to understand it.

It's a shop of 150 square meters. We used to pay EUR300,000 per month, EUR320,000 per month. We moved to a much better location. We are paying EUR160,000 per month and now, as we didn't do a long-term lease specifically, what we are negotiating now, because it's expiring, is to get it for EUR80,000.

So in this case it was from EUR320,000 per month to EUR80,000 per month. And this is -- but the average is at least 50% less we will be from the historical high after October and better locations.

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Stamatios Draziotis, Eurobank Securities - Analyst [6]

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Okay, that's clear. So you probably don't remember the third question, which would be on your store network. Should we expect, because you talked about the fact that this -- the JWA division operated fewer stores in 2016, should we expecting something similar in 2017, i.e., fewer shops but larger shops with higher sales densities?

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George Koutsolioutsos, Folli Follie Group - CEO [7]

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Yes, this is the aim and even Hong Kong, to go back to Hong Kong to give you an example, because when the demand was much higher we had 22 locations only for the Folli Follie brand. So at the end of this process, with better locations, bigger shops, and better rentals agreements, we are going to end up with 13, maximum 14 shops. So much less and, hopefully, generate more sales, as I said, upon reaching the same level as in the past.

This is the aim, but okay at the same time we are expanding. We're opening new markets and we are expanding existing markets, so this is for our -- if you want -- your question is about if we had to freeze today and not opening any new shops this would be the model. Probably have a little less shops and generating much more revenues, but of course we are adding because we're going in every market. So at the end of the day that will be a growth as point-of-sales.

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Stamatios Draziotis, Eurobank Securities - Analyst [8]

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Okay, that's clear. Just a last follow-up from my side regarding what we said about channel. Could you update us in terms of the percentage of sales from wholesale and franchises versus retail in JWA and how you expect this to evolve in the coming years, please?

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George Koutsolioutsos, Folli Follie Group - CEO [9]

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Are you talking about only mainland China or in general?

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Stamatios Draziotis, Eurobank Securities - Analyst [10]

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In general.

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George Koutsolioutsos, Folli Follie Group - CEO [11]

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In general, we have said that already. Just one thing because you asked me a third question, but we didn't cover exactly. In terms of space growth, yes, this was your question, but I think you asked about square meters.

Again, I have to remind you that our model is not based on square meters. We're talking about jewelry, watches, small items that we can generate double or triple turnover in the same space. We don't need to double space in order to make double sales.

The concept has to do with a bigger shop and better located in order to present the new concept to give a different customer experience, because this is the need of the market and not so much that we need double space to make double turnover.

Now going to your question in general, the ratio was because we are very (inaudible) has not changed so much. We're talking about 65%, which is for savings against other department stores or franchise or airport locations, and 35 is directly-operated freestanding shops, either in the street or in shopping malls.

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Stamatios Draziotis, Eurobank Securities - Analyst [12]

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And we shouldn't expect this to change significantly over the coming years, I presume?

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George Koutsolioutsos, Folli Follie Group - CEO [13]

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Well, it shouldn't, but I cannot predict because we have all this online business, first of all, that is only growing and this is affecting overall. At the same time we believe that doesn't mean that the retail will die. I think that as we speak today 90% of the world's consumption in retail is done in brick-and-mortar. It's not -- the 10% in online for any product.

But, of course, you to give a different customer experience so this will not die. It will be always the biggest part of the retail parts, so as we grow globally of course will add more and more sales. So whether these will balance it's more the demand of the brand and awareness and the current pacing of the market. So it's not here to really be firm that this will be the exact model for the next coming years.

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Stamatios Draziotis, Eurobank Securities - Analyst [14]

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That's clear. Thank you very much.

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Operator [15]

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Iakovos Kourtesis, Piraeus Securities.

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Iakovos Kourtesis, Piraeus Securities - Analyst [16]

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Good afternoon. First question on my side has to do with your capital expenditure for 2017. If I recall correctly, you guided for around EUR60 million. Could you please update us on your CapEx requirements for 2017?

Second thing has to do with your free cash flow generation. As you mentioned, it was a record free cash flow for 2016 for the group. How should I think for this going forward? Do you still see reduced working capital requirements for 2017?

And third question is if you would provide us with an update of how do you see the first quarter progressing for the group in the various segments: jewelry, retail/wholesale, department stores? As far as I understand, both retail/wholesale and department stores came under pressure in terms of profitability during the fourth quarter, possibly due to Greece. If you could provide us some more color on this and how are you progressing with China.

And if you -- in your intentions if you keep on generating free cash flow, if you plan to return to dividends as of 2017. That will be my questions.

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George Koutsolioutsos, Folli Follie Group - CEO [17]

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Okay, thank you. Starting with your first question was about the CapEx for 2017. Yes, you are correct; we are -- we confirm that we are aiming for around EUR60 million of CapEx, so much lower than last year.

On the cash flow generation, yes, this is our aim. And all these models of this business model is changing slowly is to have less working capital needs and bigger cash flow generation. Without giving a number, this is our focus from now on.

The [color] of the first quarter, I would say that as I said Christmas -- the only factor is Greece. That Christmas was probably the worst Christmas period from the beginning of the crisis; the same as the starting of the year. But as you saw, we are resilient somehow to that. So to be flattish I think this is where we stand, more or less, for Greece, which we are quite happy because we know that the market is 25% down at least.

And the same with going to department store. We see a very good outlook and especially from -- because we are -- as a model, we are catering the visitors who is coming to Greece and this is going to be, by far, the record year for Greek visitors. And we see that already happening today as we speak, even in the last days of March. We have -- and in Athens, even in Athens we have visitors coming and Chinese and from many other regions, even Europeans and Russians, that these are already affecting positively our results.

So this was -- actually we never had that historically. When we are talking about this business selling to tourist visitors we actually were talking about a very small season which was a three-months period from, let's say, maximum end of June to middle of September. But we see that this year for the first year this is showing that it's coming much earlier, and it's even in Athens as a destination.

That's why we are cautiously optimistic and -- but right now, if you want to see the real market, today it's -- we are leaving the worst period of the beginning of the crisis, which is not that easy to operate when we are talking about after seven full years. Now we are in the worst situation as consumption in Greece.

At the same time, we have also a very good performance, continued performance in Romania and Bulgaria, which is counterpart in cycles that now we are investing. We were not really not present almost at all in Cyprus and we are developing our brands with a direct subsidiary in Cyprus and shows very good growth. The rest is in a very good trend as we talk about the Folli Follie brand and Links of London.

Now dividends, yes, this is related to the cash flow generation, the needs of investing, and the source of our also revenue in terms of profitability. So we want to see Greece and Europe going more as a profitability, which is also the less expensive for the Company to distribute a dividend compared to bringing money from abroad.

Where Greece is still in a situation that is not clear, politically speaking, Europeanly speaking, so we like to be cautious at this stage and going quarter by quarter and see, first of all, what is the development in terms of cash flow which shows very good signs. And also the environment and the taxation environment and so on. In order not to jeopardize just for the sake of giving dividend and losing a lot of money in this process, than to invest that we believe we are in a good momentum for all our activities.

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Iakovos Kourtesis, Piraeus Securities - Analyst [18]

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If you could shed some light on your first-quarter performance in sign, I can see that you achieved first quarter of 2016 a growth of 15%. Would you say that you stand above these levels during first quarter 2017? If you could shed some light on this please.

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George Koutsolioutsos, Folli Follie Group - CEO [19]

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Yes, the trend is good, but be patient. Be patient; but the trend is good.

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Iakovos Kourtesis, Piraeus Securities - Analyst [20]

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Okay. What part of or percentage of the online accounts for your top line?

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George Koutsolioutsos, Folli Follie Group - CEO [21]

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Excuse me?

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Iakovos Kourtesis, Piraeus Securities - Analyst [22]

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What percentage of your top line accounts for the online business?

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George Koutsolioutsos, Folli Follie Group - CEO [23]

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Overall, for all activities, whatever, it's online we are still in the single-digits. Our aim is to double that and even for the next five years I've said that we would like to be almost 30% of our business, which is very big, but we are investing on that.

So we see already the fruits in whatever we do and, thus, this year and next year would be the year of implementing all this investment technology. We believe that the upside is huge. But as we've talked, if you want to take a percentage overall our business, we are in the high single-digits.

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Iakovos Kourtesis, Piraeus Securities - Analyst [24]

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Thank you very much.

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George Koutsolioutsos, Folli Follie Group - CEO [25]

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Welcome.

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Operator [26]

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Julie Gasser, Allianz Global Investors.

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Julie Gasser, Allianz Global Investors - Analyst [27]

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Good afternoon. Thank you for taking my question. I just have two questions on my side. It would -- can you please tell us where is your cash located? Is it in Greece? Is it in Asia? Could you please make us an update on it?

And I have a second question regarding your receivables. Is the Asian part of your receivables the biggest part or which country is the biggest part of your receivables? Thank you very much.

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George Koutsolioutsos, Folli Follie Group - CEO [28]

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Okay, thank you for the question. The cash, going to your question, it's outside Greece mainly. In Greece it's the need for everyday operations and it's minimal, the cash we hold in Greece. So the main and almost everything is outside Greece.

Now for receivables, we have various buckets. It's in Asia, not in one market; in various market because we have receivables mainly with department stores, with franchise business, and some wholesale accounts in the travel retail.

The travel retail, its receivable, which actually is the longest receivable in terms of payment, but we treat centrally from Hong Kong. Because we deliver either it's an airline, a British Airways, in-flight sales or it's even an airport location wherever it sits in the world, this is something that we invoice and we ship from Hong Kong. So this creates a receivable in Asian regions, but this is a global business.

So if you want to see it as a balance sheet of receivables, for the jewelry and watches division -- if this was your question, because we have receivables in every activity -- this is coming mainly from Asia.

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Operator [29]

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Stamatios Draziotis, Eurobank Equities.

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Stamatios Draziotis, Eurobank Securities - Analyst [30]

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Just a quick follow-up. There seems to be -- about the EUR15 million amount, which relates to provisions, which as far as I can tell is non-cash. Could you tell us what this is?

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George Koutsolioutsos, Folli Follie Group - CEO [31]

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Actually, the main it's -- except the usual provision we do for merchandise, either it's from the fashion business or even from jewelry. We do provisions for everything because we are a fashion company.

The rest is from impairments. So the valuation of -- from real estate or whatever has to do with the business.

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Stamatios Draziotis, Eurobank Securities - Analyst [32]

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Okay, thank you.

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Operator [33]

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Excuse me, there are no more questions registered at this time. You may now proceed with your closing statements.

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George Koutsolioutsos, Folli Follie Group - CEO [34]

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Okay. Again, ladies and gentlemen, thank you very much for attending the fourth-quarter and full-year results for our group.

Again I said we are very pleased with the results. We're in good momentum, despite the environment in every market, and we are looking for a good year with all its obstacles and challenges for 2017. Again, please feel free to call us or send us in the mail to our investor relations department or finance if you have any further questions or going to go deeper in some more details regarding our results. Thank you very much.