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Edited Transcript of GEO.MI earnings conference call or presentation 30-Jul-19 3:35pm GMT

Half Year 2019 Geox SpA Earnings Call

Biadene di Montebelluna Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Geox SpA earnings conference call or presentation Tuesday, July 30, 2019 at 3:35:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Livio Libralesso

Geox S.p.A. - CFO, General Manager of Corporate, Financial Reporting Manager & Director

* Mario Moretti Polegato

Geox S.p.A. - Executive Chairman

* Matteo Carlo Maria Mascazzini

Geox S.p.A. - CEO & Executive Director

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Conference Call Participants

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* Fabio Fazzari

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Geox Group First Half 2019 Results Conference Call. (Operator Instructions) The call is chaired by the Geox Chairman and Founder, Mr. Mario Moretti Polegato; the CEO, Matteo Mascazzini; and the CFO, Mr. Livio Libralesso. Mr. Moretti Polegato will make a brief introduction in Italian, and a translation will immediately follow. Please go ahead, sir.

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Mario Moretti Polegato, Geox S.p.A. - Executive Chairman [2]

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(foreign language) [Interpreted] Good evening to everyone and welcome to Geox Group's First Half 2019 Results Conference Call. Our CEO and our CFO will comment on the details in a few minutes. The first half of 2019 presented particularly challenging conditions, characterized by extremely unusual weather in all the main markets and by a strong competitive pressure. The solid financial position of the group allowed us to continue with our relevant planned investment program, progressively converting mono-brand stores to the new X-Store concept and in-sourcing, following the success in Europe, the online channel in North America.

The direct online channel marginally affected by weather conditions continued to show a solid growth, plus 26%, confirming the validity of our choices and showing that the Geox products are well received by customers. When faced with continuing difficult market conditions and decidedly important challenges, the group is even more focused on pursuing, with determination, the strategic lines set by the 2019-2021 Business Plan.

On this regard, I want to announce 2 new, recent, important license agreements with WWF and Disney, which will expand our children's collection in the forthcoming season. The license agreements are totally coherent with Geox' values and Geox' G&A, sustainability, fashion and well-being.

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Matteo Carlo Maria Mascazzini, Geox S.p.A. - CEO & Executive Director [3]

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Good afternoon, everybody. This is Matteo Mascazzini. Thank you for joining us commenting the highlights of our results of the first semester for Geox. You should have our presentation -- you should have just received the presentation. If you go to Page 2, we'll start with the key notes. Total sales for the first half of the year were EUR 399.4 million. That's minus 3.5% compared to the same period last year. The most relevant explanations are the following.

For wholesale, we record a minus 2.8% compared to last year. This is actually -- of course, there's a minus in front it, but we feel it's a result which is encouraging because if you remember the initial order collection, which we disclosed for 2019, went down minus 9.1%. So we managed as we discussed in the previous presentations to counter that. Of course, we did a more solid portfolio of orders, and we managed also to improve reordering [and the sales of those over] stocks. So in essence, we recouped almost 2/3 of that lack of sales.

When we talk about DOS, it's a bit of a reverse story. So we are up compared to the same period last year, almost 1%, plus 0.8%, but it's due to that positive space effect. If you remember, we ended Q1 on a positive note also for like-for-like and then as we warned back in the presentation for the first quarter, we suffered April and May due to the bad weather, really unusual condition that hampered the beginning of the sales season. And even with a positive June, we did not manage to go back into that territory. So the like-for-like is minus 2.2%, hence the perimeter effect is like plus 3%.

In all of this, as the President mentioned, the online channel is still performing very beautifully in a plus 26%.

The franchising area actually dealt us a bit of a disappointment. So you see a minus 21.9%. If you remember, first quarter was approximately minus 13%. We were assuming that when we had pretty much the same negative perimeter effect, -10% in Q1, but we were assuming that was going to be absorbed more quickly for the year as we closed the more than 30 stores in Q1 of 2019 in reality as you will see in details later on. We kept on rationalizing the basis of our franchises in Q1 and Q2 of 2019 as well.

So the impact to remain the same from a perimeter point of view. From a like-for-like point of view, slightly negative, in low to mid-single digits, hence slightly worse or comparable to the DOS. The delivery shift in terms of -- for order to be delivered in Q2 but we'll be delivering in Q3, dealt another few percentage points to the negative inventory result.

Speaking about gross margin. Relatively good news there, plus 50 basis points compared to H1 of 2018. We are -- that we were basically on track delivering the improvement in the initial margin due to the improvement in our industrial and logistic areas. However, of course, we have to be a little bit more promotional reacting to the environment surrounding us in the DOS, hence we partially deactivated that advantage. In terms of EBITDA, we are -- this is, of course, not inclusive of IFRS 16 impact, we are -- EBITDA is EUR 18.7 million compared to EUR 25.2 million in the first half of 2018.

As far as our net financial position is concerned, again, net before the application of new IFRS 16, we are at minus EUR 30.8 million, minus EUR 19.7 million at the same time of H1 2018.

Just remember, this is the time of the year in which the absorption of cash is the highest in terms, we'll see later in detail, the customer operating activities, the management and the working capital, and hence the free cash flow is actually pretty, pretty positive, and so we are quite happy about that. The President already mentioned our cooperation with World Wildlife Fund and Disney. And this is something that we'll discuss a bit more in detail, and it's certainly very much in sync with our strategy.

If we flip over to Page 3, and we have a few more comments about the channel. In wholesale, we continue our quality over quantity strategy, and this is something that is part of our strategic plan. It is a bit of our mantra. It's done to preserve financial risk and preserve the image and pricing position of the brand.

Again, the trend basically improved compared to the initial orders collection, which as we said, we will not -- we will no longer disclose because we believe that the in-season management will basically trump and make this data not particularly relevant to us. In terms our franchising, again as I said before, 48 net closures in H1 2019, more than what we expected, less conversion to DOS. We are being extremely prudent in these decisions, as we were saying. It's not really part of our proactive strategy to recapture franchisees. So we do so only when it's truly promising and it's really servicing a sizable market and we expect this source to be profitable and successful in the longer, and otherwise, we simply don't proceed.

Like-for-like as we said, not so different from the DOS, maybe slightly, slightly worse, but still in mid-single digits. And of course, as we said before, maybe a few percentage point of impact in terms of deliveries that shifted to Q3. DOS, as we said before, EUR 176 million compared to EUR 174. And then again, as we mentioned, basically on the perimeter effect vis-à-vis, like-for-like, which is negative. If you look at the split in terms of channel impact on the total, you see that the DOS are increasing and basically regaining what the franchisees are losing. The wholesale remain stable but truly the face of our distribution does not really change. On Page 4, again, a few more details about the trend. We were coming from a couple of quarters in which we performed slightly positively in terms of like-for-like for our DOS. So it is a disappointment to present an H1 which is negative due to the second quarter or the semester.

And as we said before, in April and May, we truly had to experience pretty much like a lot of our retailers, particularly in Continental Europe an impact of traffic strongly diminished. And this truly -- we try to counter it as much as possible. The success of collection was actually quite strong in 2019. If you remember, we disclosed the initial number in which we were ahead -- very much ahead of schedule at the beginning of the season. And then of course, we were strongly impacted. And we were promotional, again, through that period to ensure a bit more attractive flow in our stores. And then again, but also managed to deliver a good June, but then when we went into sales, the sale season has been a bit softer for the same reason.

Again, DOS online, as we see, we managed to keep on the momentum of Q1 and Q2. We actually increased a bit, plus 26%, as to the same period of last year. And good news basically in the 1 year anniversary of a recapture of the e-commerce website in European countries, we did the same for our North American operation, U.S. and Canada, we recaptured at the beginning of July. Hence, it will be run directly by us for the remainder of the -- on Page 5, very quick couple of notes about the different regions. Italy, basically pretty much on line with general trend. So wholesale, again, network optimization and quality over quantity impacted a bit even though we had better reorders. In terms of the DOS, slight growth due in [percentage] perimeter and slight decrease in the like-for-like of almost 30% direct online increase.

Europe, same story about wholesale. In terms of DOS, a bit better, a couple of markets over performed. So overall the like-for-like is pretty much flat, and hence, again, we could enjoy fully the increase in the perimeter with a positive number for DOS.

And here again, plus 35% direct online channel, again, very, very successful.

In NORAM, we kept on -- the task of cleaning up distribution is proving to be a bit more expensive in terms of an effort like-for-like or slightly negative. And here, too, we are basically aggressively pursuing a restructuring of our presence there, making sure we're only present in appropriate locations.

Again, another plus 36% in the online channel, and we really hope for a brilliant half of the year now that we took over directly operations.

In the rest of the world, a positive performance, basically flat, slightly positive by 0.7%. It's mostly due to Eastern Europe, that had a very, very solid both retail and wholesale performance, of which we are particularly happy. Instead, in APAC, the wholesale was slightly positive, but it was impacted mostly in the Chinese market -- in the greater China market. Of course, the turmoil in Hong Kong impacted our fairly intensive DOS presence there.

And as part of our strategy to improve our performances online, we replaced the (inaudible), the mid-layer party that supports us in our presence on Tmall and JD. We went with Bagdoom, which is an affiliate of Alibaba. That meant a couple of months of basically a slight time to take over. We won't call it a disruption, but clearly, it meant a slightly delayed launch of the spring-summer collection online.

If we go to the following page, Page 6. This is a view by product, and it's a bit misleading because apparel seems to be decreasing more than footwear, but in reality the future of apparel is quite bright in terms of our presence in store. So apparel, as of the end of the semester, is up in double digits both ladies, even stronger in also men in our own DOS, with a great reaction of our clients to the collection, but also we're very happy to report a good collection of orders for winter season.

So while here we see the same incidence, the 9%, and above, we see minus 5.8%, that's minus 3.3% in footwear in reality. From a strategic point of view, I think apparel is proving to be a good success.

On Page 7, we basically have a couple of projects, which we put there to basically indicate that when we hit on all key points in terms of strategy. On the left side, you see the sustainable version of iconic NEBULA, which has the upper with a fabric made by recycled PT, 2.5-, 1.5-liter bottles upper and a partially recycled outsole. And we're very happy to report that it has been launched in the past few months and has been incredibly successful in our stores, been [rated] the #1 product.

So what we wanted to say that when we truly deliver on the premises of Geox, which is innovation and sustainability, we're being excellent. When we tick all the boxes, we truly have greatly successful products. President mentioned before, World Wildlife Fund and Disney. The World Wildlife Fund, as you can see it here, will be a product which will satisfy both the expectation of the kids and the sustainability and environmental sensitivity of the parent. We'll use organic cotton and recycled materials, will be in our stores before the end of the year. And the same will be true for our Disney-based cooperation, for which I cannot disclose more information at this point. It would be the subject of a specific press release. Now I will leave it to CEO (sic) [CFO] Livio Libralesso to comment over our network evolution and the financial statement component.

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Livio Libralesso, Geox S.p.A. - CFO, General Manager of Corporate, Financial Reporting Manager & Director [4]

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Thank you, Matteo. Please turn to Page 8 to comment on retail network. The total number of store is 987 after 28 net closure. In particular, total DOS are 448, 12 or 3% more than June last year. Franchise stores are 406, minus 48 or minus 10% compared with June last year. Store under distribution agreements are 133. The rollout plan versus -- the new concept X-Store is in place, and today, the network has 180 location under the new concept.

Now let's turn to Page 9 for the income statement. Please note that I'm going to comment the column excluding the impact of IFRS 16 in order to have a fair comparison with last year.

Sales are close to EUR 400 million as widely commended by Matteo. H1 '19 and also full year '19 should be considered as a transition characterized by a channel rationalization. And so the space effect is the main driver of the minus 3.5% of June sales. In particular, I underline, again, the perimeter by channel effect that is minus 3% negative in wholesale, 10% negative in franchising and 3% positive in DOS.

Provided that we do not assume any material further rationalization, these effects should remain unchanged in relation to full year top line. So it's quite easy to run the math.

The additional factors that might add to top line in H2 are in-season performances, I mean like-for-like for DOS and franchising and reorders, promo and closeout sales in wholesale.

Gross margin is 50.9% on sales, delivering a 50 basis points of improvement. In May, I said that the previous guidance regarding 100 basis points was becoming challenging, and H1 result more than confirm that indication. As a matter of fact, the unseasonal weather condition in April and May forced the industry to be more promotional, and consequently, increasing the average discount has impacted the benefits arising from the confirmed additional supply chain efficiencies.

In a while, Matteo is going to comment the outlook both on top line and gross margin.

Selling and distribution, EUR 22 million, are under strict control and delivered a slight decrease compared with last year following the top line.

G&A rose at EUR 165 million, and they show an increase of EUR 4.7 million. This is due to 3 main reason: First, the effect of the 3% increase in the number of DOS due to the net openings and conversion mitigated by the savings deriving from a tight cost control on payroll and events; second, an increasing logistics in order to manage the level of service and the temporary new warehouse relating to the excessive inventory experience last year; third, the group is also increasing marketing expenses in co-op advertising with brick-and-mortar key account and performance in digital marketing relating to the web. These expenses amounts to EUR 5 million, EUR 1.5 million more than last year. And that being actually included in G&A being considered the commercial contribution and the web DOS monetary expenses.

A&P is at EUR 13 million is actually in line with last year. EBITDA at EUR 18.7 million defining a margin of a 4.7% on sales compared with 6.1% last year. EBIT was EUR 1.6 million. Income taxes at EUR 3.2 million. And it is important to underline that the group did not recognize approx EUR 2.5 million of deferred tax assets.

Finally, the net loss, mainly driven by the drop in the top line, is EUR 3.9 million that became EUR 5 million after EUR 1.1 million of negative effect induced by the adoption of IFRS 16.

Please turn to summary balance sheet on Page 10. Balance sheet is very solid and healthy. The invested capital is EUR 367 million, financed by a very low level of debt, just EUR 31 million, 8% of invested capital.

In this chart, you can see also the total effect of the IFRS 16 adoption, with EUR 312 million of right of use recorded as an asset and a similar amount recognized as a financial debt.

Let's go now to the following page to comment on working capital. Please turn to Page 11.

Operating working capital as a percentage of sales is equal to 29% compared with 29.8% in June '18. This positive change is mainly due to the good performance of receivables in line with sales trend in wholesale and franchising and the inventory, given that we are successfully managing to solve the issue regarding the excessive inventory deriving from last year.

Moving down to Page 12, there is the cash flow statement. Let me describe the highlights, commenting again the column excluding IFRS 16 impact. Funds from operation are at EUR 17 million, in line with last year. The working capital absorbed EUR 22 million, EUR 10 million less than last year. Capital expenditures are EUR 12 million, in line with June '18 and mainly related to DOS refurbishment. In May '19, the company paid EUR 6.5 million for dividends and in June started a share buyback program to [service] stock dividend plan investing at that date EUR 0.7 million.

At the end, including the fair value of derivatives for a total of EUR 0.7 million, the net financial position is a debt of EUR 31 million compared with EUR 20 million as of June '18.

Let me now hand over to the CEO for the outlook regarding 2019.

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Matteo Carlo Maria Mascazzini, Geox S.p.A. - CEO & Executive Director [5]

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On Page 13, a few words about the outlook for the remainder of the year.

In terms of wholesale channel, as we said before, the strategy of quality over quantity in terms of preserving image, price positioning and also the financial security of our operations, we continued in the collection of the orders impacting the collection of the orders for winter 2019. So we foresee at the end of the year result, which will be between low and mid-single-digit for the entire year, so something that's already and that's what we have observed in H1. Clearly, this will be subject in terms of upside and downside to our success in terms of restocking our clients and doing in-season management with reorders and the like and finalizing the sales of previous season's inventory, in which we have been successful so far.

In terms of the optimization of the network of franchise stores, it will continue, expect it to be less impacting on the second half of the year. So we expect the perimeter effect to be slightly lower than what we've observed so far. But then again, it will be up to the like-for-like performances of the franchise stores to deliver an improved performance toward the end of the year.

In terms of the DOS, we expect the perimeter impact to continue. We will open a few new stores mostly in China, in which the (inaudible) been active in pursuing new and more updated location. We will convert a few franchise stores. And as we said before, we'll be extremely careful in ensuring those are strategic decisions. And we will not stop the review of our existing stores, and we might still close a few underperforming one that do not fit the bill in terms of the image in terms of future performances.

We will continue all the activities in terms of refurbishing the stores, impacting the visuals, impacting the merchandising choices and also, of course, putting even more pressure on the retail excellence program, for which we expect improved performances in terms of KPIs in the stores in the second half of the year. Having said this that we expect a better like-for-like for the next part of the year, we do, but of course, all of this is subject to the performance in a specific retail dynamics in the market: Traffic, the predisposition to purchase of our clients and of course, the promotional environment that will be surrounding us. This will be linked also in terms of the production of improvements in gross margin.

Between franchisees and DOS, probably the network will remain fairly stable. In terms of e-commerce, as we said before, main investments in recapture of a North American website. So we do expect performances to continue strong. Just one -- or otherwise, we will be comping in Europe our own operations and website in the second half of the year versus comping the previous third-party operator in H1.

So we'll still expect great performances, but we will have to face more challenging comps.

In terms of the IT and project investment, we said before how important our organizational and information technology projects will be in defining our future internet servicing, the wholesale and retail, both in brick-and-mortar and online in terms of CRM, [in terms of] availability, merchandise planning, product planning. So all of these are well underway, and we expect them to produce results, albeit in a bit of a longer term.

In terms of productivity, we remain very much focused on continuing the improvement in terms of operating as a lean organization and containing cost, in which we have been successful in H1 as highlighted before by our COO. So what can we expect for the rest of the year. Of course, we present in 2019, a 3-year strategic plan, '19 to 2021, expecting '19 to be a transition year as we discussed many times with you. Of course, so we still expect '19 to be a transition year. And we'll do our best to try to implement the strategies we presented in the plan.

We'll continue the rest of the year some process of our network, and this will have in the perimeter impact highlighted before again by our COO. Of course, we'll be operating in a frame of increased or decreased volatility in the market, and this of course will define the starting point on which our operational progresses will be measured.

We mentioned before the impact of promotional sales. So depending on our performances in terms of like-for-like in DOS in the second half of the year, we'll have to face more or less promotional competition from our competitors and depending on that we will manage to salvage more or less of improvement that we're still experiencing and we expect to experience in terms of gross margin. So to sum it up, as the President said in his speech at the beginning, certainly a challenging year, but however, only reassures us that our strategy is the right one and only pushes us to deliver them more accurately in a superior way. Thank you. I guess we are open now for a few questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Fabio Fazzari with Equita.

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Fabio Fazzari, Equita SIM S.p.A., Research Division - Analyst [2]

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The first question is regarding the online. I was wondering if you can give us more details in terms of which category -- which products are driving the good performance in the online and which level of -- at which level of price did you sell on this channel, if there is also here contribution from the markdown. And in general, what we can learn from this strong performance in the online? This means that the difficulties that you are facing in the DOS are only related to the channel and the different habits of the customer? Or -- and this means that your products are working?

Or maybe -- so is not true, my point. I don't know, maybe if you can help us to elaborate more on the DOS performance versus the other parts of the business. The second point is related to a clarification of the guidance for the second half. To maintain the level of gross margin you achieved in the first half, which kind of scenario you have to face a positive like-for-like and probably less markdown than you made in the first half? Or with a similar situation in the second half versus the first half you will be able to achieve anyway this 50 bps of gross margin improvement?

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Matteo Carlo Maria Mascazzini, Geox S.p.A. - CEO & Executive Director [3]

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About the first question, in terms of difference in strategy results between online and brick-and-mortar. In terms of sales online, I think the products that are performing are not the similar vendor ones that we have in the brick-and-mortar. And to your point, this is really reassuring to us and because they are very strong performances that online kept even through the April and May, super tough months, reassured us that it wasn't really an issue of the collection as much. It was an issue about the purchase behavior and the retail propensity and the retail traffic we were experiencing in our key brick-and-mortars.

Of course, the incidence of (inaudible) is quite a bit lower in terms of the total overall weight because it's slightly -- we started actually putting online very seriously only this year. The results are excellent. We are sold out in a lot of styles we're presenting. It's still a bit less than the normal incidence we have in our brick-and-mortar. In terms of the promotional component, we are truly starting to run our omnichannel strategies in a very cohesive way. So we started, for example, to have a joint CRM effort using merging the databases of both online and off-line. Hence all the promotions that are online are absolutely in line with the ones that aren't in the brick-and-mortar, hence truly delivering a consistent approach to the clients.

We are also -- so we have also started, and we are basically delivering now in 100% of Italian stores the first omnichannel possibilities. So you would be able to order online, collect online, return the stores what you bought online. And by the end of year, in fall, we expect to have e-commerce in-store, which we think is going to be very, very strong, particularly for smaller locations in which you basically will be able to avail yourself of the selection of online while you are visiting a store. So I think this is truly -- as we said before, it's very reassuring that we kept on consistent success in the online. We are very much aligned with online and brick-and-mortar.

And in terms of possibilities of omnichannel, as we said, it's a vision that we truly very strongly believe in that will be very synergistic in [our document]. Of course, as we said, we took over the U.S. as we expect to see similar results there as well and we're starting to comping ourselves. So it would be, of course, an additional challenge for us. But the reading we have on the product, which is an immediate reading is really extremely useful for us to know we are on the right track with the collection. And I'll leave it to Livio to answer the gross margin strategic component of your question.

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Livio Libralesso, Geox S.p.A. - CFO, General Manager of Corporate, Financial Reporting Manager & Director [4]

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Thank you, Matteo. So provided that in 2019, spring-summer collection delivered initial gross pricing, gross margin a little bit higher than for winter. It means in case we will experience exactly the same scenario, the same mix and the same pressure on markdown, probably there will be eventually an additional dilution and consequently, at year-end the gross margin expansion will be present, but just a slight gross margin expansion. In case we will be able to have a better like-for-like compared to minus 2.2% in our DOS network. As of June, for sure, this will help in order to provide additional gross margin expansion.

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Operator [5]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Matteo Carlo Maria Mascazzini, Geox S.p.A. - CEO & Executive Director [6]

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So thank you very much again for joining us for this call. We hope we clarified the performances of Geox in H1. Thank you, again, and have a good afternoon.

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Operator [7]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]