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Edited Transcript of ITX.MC earnings conference call or presentation 13-Mar-19 8:00am GMT

Full Year 2018 Industria de Diseno Textil SA Earnings Presentation

La Coruna Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Industria de Diseno Textil SA earnings conference call or presentation Wednesday, March 13, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ignacio Izuzquiza Fernández

Industria de Diseño Textil, S.A. - CFO

* Marcos López García

Industria de Diseño Textil, S.A. - Capital Markets Director

* Pablo Isla Álvarez de Tejera

Industria de Diseño Textil, S.A. - Executive Chairman & CEO

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Conference Call Participants

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* Adam Gareth Cochrane

Citigroup Inc, Research Division - Director

* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* Chiara Battistini

JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail

* Michelle Wilson

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Paul Rossington

HSBC, Research Division - Analyst

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* Richard B. Chamberlain

RBC Capital Markets, LLC, Research Division - MD of Consumer Retail

* Simon William George Irwin

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Inditex Conference Call for the Full Year 2018 Results. The presentation will be chaired by Mr. Pablo Isla, Inditex's Chairman and CEO. This presentation will be followed by a Q&A session comprising 2 parts, the first part will be dedicated to questions received on the phone and the second part to the questions received through the webcast platform.

Mr. Isla, you have the floor. Thank you.

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [2]

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Thank you. Ladies and gentlemen, good morning. It is my pleasure to welcome you to the presentation of Inditex's 2018 results. Joining me here today are Ignacio Fernández, our CFO; and Marcos López, Capital Markets Director.

I would like to start this presentation with 2 important points. In 2018, Inditex has continued developing the long-term strategic initiatives that have made our business model increasingly differentiated and at the forefront of fashion and sustainability. We are totally focused on providing our customers with a unique experience through the execution of our global fully integrated store and online model. We remain committed to expanding our business with a strong focus on quality and our long-term principles.

In line with the comments made to you over recent years, Inditex is generating a strong cash from operations and requires a lower capital intensity going forward while achieving significant growth and enjoying a very strong financial condition. With these 2 ideas in mind, we are very much looking forward to the global growth opportunities ahead of us.

Inditex generated a strong operating performance in 2018. Sales in local currencies grew 7%, very satisfactory. The different components of sales growth also evolved positively throughout the year. Like-for-like sales growth was 4% on a demanding comparable. I will elaborate on the quality of this metric later.

Online sales grew 27% to EUR 3.2 billion. Online sales now account for 12% of group sales or 14% of sales in markets in which we have online sales offered to customers. As a result of our performance, we have achieved an EBITDA of EUR 5.5 billion, which corresponds to 11% growth in local currencies.

It is certainly worth commenting that free cash flow is also increasing. Based on this, the Board of Directors is proposing a new dividend policy to the Annual General Meeting, keeping in mind our principles of providing an attractive and predictable remuneration to our shareholders. The new policy will result in a 17% increase in the dividend to be paid in relation to the fiscal 2018 results.

My opening comments focus on the major differentiating factor enjoyed by Inditex. We operate a unique global platform that fully integrates stores and online and offers huge growth potential. Our business model combines stores and digital seamlessly, and we are ready for the opportunities that this brings with current and new customers.

The characteristics are well-known but unique. Our business model with central inventory allows us to serve our customers on a global basis through a portfolio of high-quality stores and direct online sales. To reinforce our position, we have optimized 90% of our retail space over the period 2012 to 2018. We are also offering online sales with same-day delivery in key capitals and next-day as the global standard.

The strength of the business model is reflected in the like-for-like performance of 4% over the year. It is worth highlighting that the consistency of this 4% performance in the year was quite remarkable. In 2018, we achieved positive like-for-likes in both stores and online. We also achieved positive like-for-likes across all geographical areas and across all concepts.

In 2018, we have been very active with our space portfolio. We have reinforced the differentiation of our key global flagships with the opening of very visible stores. Gross new space in prime locations grew 8%. We decided to accelerate the optimization program, and the result was 4.7% net space growth.

We believe the strong optimization process we launched in 2012 has resulted in a key competitive advantage. On a total store base of 7,490 stores, 3,364 have been opened in the last 7 years. On top of this, we have refurbished 2,374 stores, including the enlargement of 1,019 stores. We have also absorbed 1,401 small units. Both the quality of our network and the sheer level of integration between our stores and the online platform provides us with the right model for the current competitive environment in fashion.

A good example is our flagship in Milan, Corso Vittorio Emanuele. In Paris, I would like to highlight the relocation of our Zara flagship to 54 Boulevard Haussmann. Another recent opening is the imposing new Zara flagship at Karl Johans gate in the most emblematic location of Oslo. In Bilbao, we have opened one of the most prominent stores in the group. This process is set to continue in 2019 with the stores like Zara at Hudson Yards, the most emblematic development in Manhattan in decades. We aim to open this store on Friday.

All this with a seamless integration of stores and online as can be seen in the click-and-collect section in our Milan store.

In 2018, Inditex has achieved sector-leading online sales of EUR 3.2 billion, an increase of 27%. Online sales account for 12% of group sales, 14% of sales in the countries in which we have online sales.

In 2018, online launches have taken place for Zara in Australia and New Zealand. In November, we launched online sales for Zara in a further 106 markets. Zara collections are now available in a total of 202 markets. We have some important online launches lined up for 2019.

We can confirm the total integration of stores and online by 2020 with a single inventory, be it online stockrooms or stores. We can also confirm the development of the same-day, next-day online proposition over the same time horizon.

I will now hand over to Ignacio, who will provide you with more detail on the financial performance of the group.

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Ignacio Izuzquiza Fernández, Industria de Diseño Textil, S.A. - CFO [3]

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Thank you. In 2018, Inditex has had a good operating performance. Net sales reached EUR 26 billion; EBITDA, EUR 5.5 billion; and net income, EUR 3.4 billion. We achieved strong growth in sales, EBITDA and net income in local currencies, as you can see in the right-hand side column of the chart.

Sales growth has been satisfactory. Sales in local currencies grew 7%. Like-for-like sales growth was 4%, with space contribution of 3.5%. Let me add that Inditex decided not to participate in the promotional activity widely seen in the sector since September.

The currency translation on sales was around minus 3.5% in 2018. At current exchange rates, the impact on sales is expected to be slightly positive in 2019. Inditex continues expanding its global sales platform. Like-for-like sales growth has been positive in all geographic areas.

Given the execution of the business model, the gross margin has increased 39 basis points to 56.7%. Gross profit increased 4% to EUR 14.8 billion. We have sustained our commercial policies over the period.

Operating expenses are tightly under control. They have grown just 4%, reflecting the growth in sales, demonstrating the efficiency we are achieving in the business.

The growth in depreciation and amortization reflect the impact from the sale of 15 premises in 2017 as well as the costs associated with the provisioning for 2018 absorptions in 2017.

Operating working capital remains negative as a result of the business model. The working capital evolution is in line with the performance of the business, with very tight control of current accounts, specifically our inventory position, which is up just 1%.

In 2018, cash from operations increased 2% to EUR 4 billion. Ordinary capital expenditure fell 2% to EUR 1.5 billion, reflecting the lower capital intensity. At the same time, the dividends paid in 2018 increased 10% to EUR 2.3 billion, and the net cash position grew 5% to EUR 6.7 billion.

Inditex continues to enjoy a very strong financial position. Inditex will start applying the IFRS 16 standard in fiscal 2019. While this standard will produce presentational changes in the financial statement, it does not affect the cash flow of the business.

Under current estimates, IFRS 16 may result an increase in fiscal year 2019 net income of between 2% to 4%, and a lease liability of EUR 6.5 billion to EUR 6.9 billion. We will provide further detailed information in due course for you to take into consideration regarding our first quarter 2019 results, the first to be released under IFRS 16.

Let me just pass you over to Marcos now to cover the performance of the concepts.

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [4]

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Thank you. Inditex has decided to integrate the reporting of Zara Home operations into Zara due to the increasing synergies between these 2 concepts. The goal is to leverage operational and brand management of the store and online platform in a combined manner.

We plan to progressively incorporate Zara Home products from next Autumn-Winter onwards onto the Zara website into some markets. Based on this, Zara now represents approximately 70% of group sales, the younger concepts around 30%.

Over 2018, we have continued with our global expansion. We opened stores in 56 markets over the year. Global online launches have continued rapidly, as you can see.

The younger concepts grouped together have performed satisfactorily. In the year, Pull&Bear and Stradivarius have performed strongly.

I will now hand over to Pablo for the outlook section.

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [5]

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Thank you, Marcos. In recent years, we announced to you a number of strategic initiatives to strengthen our global fully integrated store and online model. We plan to continue developing these key long-term priorities to increase organic growth. The goal is to increase the differentiation of our business model to provide a unique customer experience. We also expect to obtain strong cash flows and a lower capital intensity while focusing on long-term growth opportunities.

Inditex online operations continue to see very rapid growth. Our business model allows a strong development of our online sales with same-day delivery in metropolises and next-day as a global standard. In parallel, with the total integration of inventory and full implementation of RFID, all Inditex concepts will offer online sales in any market in the world by 2020. We want to make our fashion collections available to all our customers wherever they are.

The next step is the launch of Zara in Brazil on 20 March. Zara will also launch in Dubai, Egypt, Indonesia, Israel, Lebanon, Morocco, Saudi Arabia, Serbia and United Arab Emirates all in May of this year.

We are in a unique position as we enjoy a global platform that fully integrates stores and online as the way to provide the best customer experience. We continue developing new initiatives in a fully integrated way as seen in Zara's 19 Campaign, the Collection 01, the Shades of Beige collection, the Kids campaign and the sustainable collection, Join Life, now available in all our concepts.

As I mentioned in the opening, we will continue to increase the differentiation of our stores through the global fully integrated platform. Our stores are larger and more prominent, and this results in a stronger customer experience, enhanced by the advantage of the full RFID rollout and the integration of click and collect.

Sustainability is a key part of our strategy. This principle is embedded in all different activities of our business and growth plans. For the third year in a row, the Dow Jones Sustainability Index has singled out Inditex as the retailer with the best practices along the environmental, social and economic dimensions. Inditex has been a member of the Dow Jones Sustainability Index since 2001, consistently being placed at the top end of the retailing category.

The Board of Directors is proposing a new dividend policy to the Annual General Meeting, keeping in mind our principles of providing an attractive and predictable remuneration for our shareholders. the new policy will increase ordinary payout to 60% from 50%. The board will further propose the distribution of a total bonus dividend of EUR 1 per share to be paid in relation to fiscal years 2018, 2019 and 2020.

Based on this, for fiscal 2018, the Board of Directors is proposing a dividend increase of 17% to EUR 0.88, comprising an ordinary dividend of EUR 0.66 and a bonus dividend of EUR 0.22. In this chart, you can see the evolution of the Inditex dividend over recent years. Accumulated dividend payment since 2001 have reached around EUR 20 billion combined with a strong growth rate.

In 2019, we will continue expanding our global fully integrated store and online platform with increasing organic growth and a stronger differentiation of our model. For 2019, we expect like-for-like sales growth of 4% to 6%. We now have a lower capital expenditure requirement for expansion. Ordinary capital expenditure for 2019 will be around EUR 1.4 billion.

For 2019, we expect gross new space in prime locations of around 5% to 6%. Gross openings should be at around 300 stores, and you can expect the selective absorption of around 250 stores. This should result in an increased free cash flow generation. The store and online sales in local currencies increased by 7% from 1st of February to 9th of March 2019.

And this is all from us. We will be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Richard Chamberlain from RBC.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [2]

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Just a question, please, on the bonus dividends that you're proposing to pay over the next 3 years. Could you give a little bit of color on the likely phasing of those dividends? I think you've mentioned EUR 0.22 for this year, but should we expect a gradual increase over the next 2 years?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [3]

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Thank you. What I will do, if you allow me, is to elaborate a little bit more about our dividend policy. Well, first of all, the thing -- the first thing I would like to say is that, as we were saying during the presentation, that we are having strong cash flows in the company. Of course, we always say the first priority is to invest in the long-term profitable growth of the company, but at the same time, we are able to combine this with an attractive and predictable shareholders' remuneration policy. And then this new dividend policy that the board is going to propose to the Annual General Meeting has 2 elements. The first one is to increase the payout ratio from 50% to 60%, which we think is quite meaningful. And the second one is to give more visibility to the extraordinary dividend. That is why the board has decided to distribute this total of EUR 1 per share between the years 2018 to 2020. Of course, the first year, as far as we have this movement from 50% to 60% payout ratio, that is why the part of extraordinary dividend is EUR 0.22. The distribution of the remaining EUR 0.78 between the 2 next year is something that the board will decide in the month of March, how to split the EUR 0.78 between 2019 and 2020.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [4]

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Okay. Great. And just while I've got you, can you just comment as well on the depreciation, please? It was quite low as a percentage of sales in the fourth quarter. I mean, I was expecting -- obviously, it was going to be much higher than last year. But it was lower, I think, than it was 2 years ago. So just any comment on depreciation.

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [5]

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Yes, you're right, Richard. In depreciation, in the -- you have to remember that there are 2 calendar effects. In the fourth quarter of 2017, we sold 15 premises, and this is reflected there. But we also decided to fully provision in that quarter all the absorption costs for 2018. And this is reason for this...

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [6]

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Right. Yes, got it.

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [7]

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Yes, those are the reasons behind the difference.

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Operator [8]

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The next question comes from Paul Rossington from HSBC.

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Paul Rossington, HSBC, Research Division - Analyst [9]

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One question, please, on the impact of absorptions. Clearly, you opened slightly less net new space in the last financial year than you guided to previously. Could you give us an idea what the impact of absorptions or net new space growth will be in this year?

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [10]

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Well, Paul, you're right. In the presentation, we mentioned that the space growth -- gross was 8% in 2018. We decided to do a bit more absorptions this year. Obviously, that the quality of the space for us is a critical metric. And we say that's the reason why net space growth at the end of the year was 4.7%, so marginally below. For this year, what we expect is gross space of 5% to 6%, which could result in net space of around -- growth of around 4%.

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Operator [11]

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The next question comes from Anne Critchlow from Societe Generale.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [12]

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My question is about fulfilling Zara orders from store. I think your target was to roll that out to all Zara stores this year, so wondering if you did that? And what percentage of orders are now fulfilled from store and whether you're going to roll this out to the other concepts in the coming year?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [13]

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Well, thank you, as you know, this is a very relevant strategic movement for us. This total stock integration, this has been totally completed in Zara at the end of the year 2018, also in Massimo Dutti and Uterqüe. And now we are in the process of implementing in the other brands. Our idea, of course, is to have this total stock integration in all the concepts in the year 2020. In terms of how relevant it is, we prefer not to elaborate very much at this stage because the year 2018 has been the year of the implementation. But for us, as you know, it's something very relevant, it's very important, it means to offer our customers all the product available not only online -- in the online stock rooms, but also in the store stock rooms is very efficient from the point of view of maximizing full price sales.

And as we always -- our main target also always is to offer the best product to our customers. So it's very efficient also from -- or mainly from that point of view. Very strategic project. It's something we believe very much on. As I was saying to you, I think it is too early to talk about figures. But it's a key, key element in what we consider this fully integrated approach between stores and online. Of course, online sales growth is very healthy, you have seen in the presentation we are having 27% online sales growth. Now it is -- in the markets in which we have online presence, it is 14% of total sales. But for us, what is really, really relevant is this fully integrated approach between stores and online. And this stock integration is a key element of this approach.

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Operator [14]

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The next question comes from Chiara Battistini from JPMorgan.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [15]

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I was wondering, could you provide us also an outlook for the gross margin for 2019 or for the first half of '19 in a similar way as you've done for H2 last year? And the second question would be on profitability of online versus offline. Can you make any comment on how you see -- how you've seen that evolving in 2018 and how you think about that also going into 2019, please?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [16]

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Yes. Well, about the gross margin, the first thing I would like to do is to remark the gross margin evolution during the year 2018. You must have in mind that with 3.5 negative currency impact, we have been able to increase our gross margin in the full year, and both in the first half and in the second half. And as we provided to you the profit and loss account without currency impact, without currency impact, you would -- you can see that the gross margin increase was nearly 80 basis points. So I think we have had -- we have achieved a very healthy gross margin during the year 2018. And it has a lot to do with our approach. We are always talking about quality, quality of our product, quality of our stores, quality of our online offer.

In terms of the gross margin for the coming year, for the year 2019, what we can tell you is that our estimation would be a stable gross margin during the year. As you know, we always say that stable is plus/minus 50 basis points. But we are not seeing any external impact on our gross margin at this stage thinking about the year 2019. At current exchange rates, currency impact would be slightly positive. And then we're not seeing any external factor having an impact on our gross margin during the year. So that is why we say a stable gross margin for the year ahead.

And about the online profitability, I would say what we have said before that it is not dilutive, that we are able to -- for us, it's very relevant, this idea that you have always in mind that we have a big -- a relevant part of our customers that decide to have deliveries in the stores. We also have many customers that decide when they return, they go to the stores to return their garment. This is, of course, helping in this idea of online not being at all dilutive. And I think this is more and more evident when you see our results. Because online, representing in the markets in which we have online presence, 14% in total, 12% of sales, with 27% growth. And you see that our EBITDA margins during the year are stable. So I think it is more and more visible in the results that online is not at all dilutive.

For us, what is very relevant is that, of course, we have this 27% online sales growth, but at the same time, we have been able to have positive like-for-likes in the physical stores, which is also something worked -- very relevant. And we continue seeing traffic increase in our stores. And it has a lot to do with the store optimization plan that we have been developing since the year 2012 and that we were mentioning during the presentation. This idea of opening very relevant stores, being very demanding regarding the openings, refurbishing and enlarging existing ones and absorbing smaller stores that -- within that in the current strategy with the fully integrated approach, are not as meaningful as they could have been in the past. So this whole idea of the store optimization plan, which we have dedicated a huge investment in the last few years, I think it makes a very, very strong difference when you think about us compared with the retail environment.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [17]

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Great. Actually, sorry, can you just remind us now what how much of your returns happen in stores and how much of your online orders are picked up in store?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [18]

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Similar figures, as we have mentioned before. Of course, it changes in the different markets. But we're talking about 1/3 of in-store deliveries around and around 2/3 of in-store returns. Similar figures. No significant changes regarding this. Of course, it's more relevant in the countries -- in the markets in which we have a more significant number of stores than in the markets in which we have a not-so-significant number of stores. But not big differences from that point of view.

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Operator [19]

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The next question comes from [Warwick Okines] from Exane.

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Unidentified Analyst, [20]

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My question is on medium-term space growth guidance. This time last year you guided for growth of 4% to 6% over the next few years. Do you still think that's an achievable corridor of guidance over the coming years?

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [21]

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We believe that it's sustainable, yes.

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Unidentified Analyst, [22]

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And given the absorption process is now 90% complete, what should that mean for the growth in FY '20 of net space? Do you think that we might be higher than in FY'19?

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Marcos López García, Industria de Diseño Textil, S.A. - Capital Markets Director [23]

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Again, I think the guidance in the presentation were very, very clear in the sense that, for us, quality of the space is as important as the growth rate. This is why, for example, in this year, you see that despite 8% space growth gross and we decided to accelerate the number of absorptions because we believe that the competitive environment requires that, a strong combination of very important flagships and online, and this is why the net to went down to 4.7%. For the coming years, we see, in the case of 2019, 5% to 6% gross space, which is obviously the absorptions takes place over the year, and we examine this very, very carefully. And we expect a net space growth of 4%, and we believe this rate is sustainable.

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Operator [24]

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Our next question comes from Simon Irwin from Crédit Suisse.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [25]

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Can you just talk a little bit about OpEx trends? Overall, OpEx was -- OpEx to sales rose 40 basis points last year despite, as you say, a reasonable LFL. Can you talk about the prospects for OpEx in the year ahead, particularly whether you expect any impact from the minimum wage increase in Spain?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [26]

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Yes. Well, first of all, answering the final part of your question, we are not expecting any impact coming from the minimum wage increase in Spain. We are paying significantly above the minimum wage in every market. But of course, in the Spanish market. So our salaries in the stores have nothing to do with the minimum wage. It is something which we are paying significantly above, I would say, 30% above -- more than 30% above the new minimum wage. So it's a quite significantly above the minimum wage. So from that point of view, we are not expecting any impact.

Regarding OpEx management during the year, I would say that we are quite satisfied with the evolution of OpEx. With 3.5 points of negative currency impact, we have been able to have OpEx growth very much in line with sales growth. And as I was saying, the EBITDA margin of the company remains stable even very slightly, slightly positive because it's 10 basis points above the previous year. As you can see in the note because in the full year results we disclosed 3 lines of OpEx: personal expenses, rental expenses and other operating expenses. You are seeing that personnel expenses grew in line with total OpEx role. This is a logical trend of the business. And it means that in the stores, what we are doing is to increase, in a very significant way, the efficiency of our operations. So what we are doing through technology, through RFID implementation, through many different initiatives, we are increasing the efficiency of our operations in the stores.

Then rental expenses grew below total OpEx growth, and this has a lot to do with the new leasing agreements and the renegotiation of the existing ones. This is an area in which we are quite active. And then other operating expenses, where you have all the other expenses and particularly the expenses that have to do with online because online has now rental expenses and nearly no personnel expenses. And this line is growing above the total cost growth of the company because of the very significant rate of growth in terms of sales that we have online. But globally, very healthy. I would say, OpEx growth evolution in a year in which -- with 3.5 negative impact coming from currencies, it is very difficult to compare. But if you would analyze on constant currency basis, you can see what would have been the EBITDA growth. So we think we are managing our cost in a very efficient way. And we shouldn't see -- without currency impact and with healthy like-for-likes, as we are expecting, we shouldn't see any cost deleveraging in the coming years.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [27]

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And you wouldn't expect to see any kind of secondary impacts coming through in terms of services that you absorbed in Spain, for example, in terms of transportation or anything like that -- security, cleaning, all these other areas where you're effectively a buyer of labor?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [28]

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Nothing that we could not compensate with the efficiencies that we are permanently introducing in the business. But just to clarify, the minimum salary is something that has an impact on a very small percentage of total workers in Spain. I'm not talking about Inditex, I'm talking about the global markets. So it is something which is not having an impact in most of the collective agreements that you are seeing in the different sectors, in which salary increases could be between 2%, 3%. So very much in line with other European markets. This issue about the minimum salary is something very specific about the minimum salary.

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Operator [29]

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The next question comes from a Rebecca McClellan from Santander.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [30]

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On the online growth in 2018, was that largely constant parameter given this sort of late launch of the 106 countries in the year?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [31]

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No, of course not. These new markets that will launch in the final part of the year is something that has more to do with offering our product to our customers in those markets than to think about something meaningful in terms of sales. It is 99% coming from organic growth, from like-for-likes, in the markets in which we're already present. So it is 99% organic, I would say.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [32]

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And is it right that the economics of the sort of smallest peripheral markets is largely going to be borne in by the customer in their average ticket in terms of VAT and logistics [performance], et cetera?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [33]

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Well, but these small markets that you are mentioning, as we said when we decided to launch in those markets, it has much more to do with making our product available to our customers in those markets than thinking about having any significant level of sales. So in terms of total online sales, as I was saying to you, it's not meaningful at all. But we were not expecting this to be meaningful. So it is much more this customer service than thinking about additional sales in a significant way.

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Operator [34]

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Our next question comes from Adam Cochrane from Citigroup.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [35]

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Just sort of a clarification question, really, on the OpEx side. You did a great job looking at the rent expenses, particularly in the year. As we look into the next year, are these ongoing processes? Is the rate that you saw in reflection to the like-for-like similar to what we can expect looking into next year?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [36]

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Well, it's very difficult to be so precise about 1 point above or below. But what I can tell you is that, of course, rental expenses will grow significantly below total cost growth. Because of, as I was saying to you, because of the new leases, and at the same time because of the negotiation of many of our existing leases. So you could -- you should expect very, very moderate rental expenses growth.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [37]

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And in terms of thinking about your sort of online global expansion, is there any particular costs that we need to be aware of in terms of warehousing, IT, et cetera, that's coming through? Or is it a case of business is normal in 2019 and '20?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [38]

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No, you shouldn't expect any significant cost. As we are saying in regarding online and -- well, next week, we are launching in Brazil in this fully integrated approach between the stores and online. Then in the month of May, we are launching in many other markets. And then in parallel, we have this global coverage of online even in the markets in which we don't have currently stores. Of course, the most relevant part of our online sale will continue being sales in the markets in which we have the stores. But regarding costs, nothing relevant to think about in the coming years. It's an ongoing operation. And as I was saying to you, believing very, very much in this fully integrated approach between stores and online that we think is giving us increasing traffic in both direction. The store is helping online, online is helping the stores from every point of view.

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Operator [39]

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Our next question comes from Michelle Wilson from Berenberg.

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Michelle Wilson, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [40]

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Could you talk a bit about your sourcing? I saw some articles in a local Portuguese press reporting that you've been moving sourcing out of Portugal into Turkey. So could you give us an update on what proportion of items are being sourced in Spanish and Portuguese markets now and what impact that's had on gross margin, the shift out of Portugal into Turkey, over the last year and what impact it might have on the year ahead?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [41]

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Nothing significant from that point of view. For us, of course, in any particular season, there could be this or that depending on many different things and also depending on fashion trends and many different things. For us, proximity sourcing is extremely, extremely relevant, particularly Spain, Portugal and Morocco as the main areas of proximity sourcing. Then of course, Turkey is also relevant. And globally, in proximity, we're having around 60% of our total sourcing. And we are not thinking about any type of change from that point of view. So as I was saying before, in any particular season, there could be this or that. But of course, Portugal will remain a very important sourcing country for us. We have more than 150 suppliers there who are very, very integrated with us, who have been working with us for many years and growing with us. And as I was saying to you, proximity is a key element of the differentiation that we have as a company in terms of the flexibility, in terms of the ability to react during the season, in terms of the quality of our products. So we are not thinking about any significant change from that point of view. I would say that this idea of proximity sourcing plus the central inventory position are 2 very, very relevant elements, as you know, of our business model. And this is, of course, something that we continue to believe in very much thinking about the future.

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Operator [42]

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Thank you. Ladies and gentlemen, we're now finished with the telephone Q&A session to address the questions received through the webcast platform. Thank you.

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Unidentified Company Representative, [43]

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We received a number of questions from the webcast platform. The first of which is, can you elaborate, please, on the efficiencies you've talked about during the presentation?

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [44]

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Well, as you know, for us, this is a permanent effort from every point of view in the way we operate our company. Of course, RFID is a technology that allows us to run our stores more efficiently, our stock integration that I was mentioning before. Also, as you perfectly know, we have invested very significantly in logistics using the latest technology that improves distribution, improves our business model, improves customer experience. So our idea, of course, is to continue acting this way to continue finding efficiencies in the way we operate our business. This is a permanent effort. And it's a combination of the way we operate our business plus technology that helps us to run our operations in a more efficient way. So I would say this is a permanent process all across the company, a permanent effort, and we are quite dedicated to these efficiency initiatives.

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Unidentified Company Representative, [45]

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And then you covered the CapEx through the presentation, there's a number of questions on CapEx expectations going forward. I don't know if there's any other comments you'd like to make.

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [46]

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Well, what I would say is that, for us, CapEx is something relevant because, for us, it's always a priority to invest in the long-term profitable growth of our company, in terms of openings, in terms of refurbishments, in terms of enlargements, logistics, technology. And at the same time, we are now a company which is -- we have a lower CapEx necessity than we had in the past. As we are saying, ordinary CapEx for this year, for the year 2019, having in mind the number of openings, enlargements, refurbishments, logistics and technology will be around EUR 1.4 billion. And thinking about the future. Of course, CapEx growth, as we said in the last few years, should be below space growth. So this combination between a strong organic growth, a strong like-for-like, we must -- I would like also to mention again that this 4% like-for-like that we have achieved the year against very demanding comparable, so very healthy like-for-like sales growth evolution with like-for-likes growth both online and in the physical stores. And then continue investing, but at the same time, lower capital intensity looking forward. So this is what I would say in terms of CapEx.

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Unidentified Company Representative, [47]

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That completes the webcast questions.

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Pablo Isla Álvarez de Tejera, Industria de Diseño Textil, S.A. - Executive Chairman & CEO [48]

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Well, thank you to all of you for attending this conference call presentation. And in any case, of course, if you have additional questions, we would be ready to answer them through our Capital Markets Department. Thank you very much.