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Edited Transcript of LPP.WA earnings conference call or presentation 12-Sep-19 10:30am GMT

Half Year 2019 LPP SA Earnings Presentation

Gdañsk Oct 8, 2019 (Thomson StreetEvents) -- Edited Transcript of LPP SA earnings conference call or presentation Thursday, September 12, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Conference Call Participants

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* Maria Mickiewicz

Pekao Investment Banking S.A. - Deputy Head of Equity Research

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Presentation

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Unidentified Company Representative [1]

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Ladies and gentlemen, let's start our conference. Welcome to the conference dedicated to the results after the first 6 months of 2019. Well, the second quarter was difficult, but our results are good, satisfactory.

Let's start with big numbers. Plus 11.3% of group revenues, thanks to LFLs. LFLs grew by 5.7%. In addition, we have a dynamic growth of e-commerce, over 40%. We added 10% of new floor space. Now let's take a look at the map that you are familiar with already.

We've opened new stores in Bosnia and Herzegovina in the second quarter of 2019. This is a new market, 24th market for us, with stores.

Well, the table on the left, let's take a look. A small drop of stores because we are optimizing the network, the chain of stores. So you can see actually several stopped -- stores were gone in Cropp, House and Mohito. But it's because we are actually opening new stores with better infrastructure insight. However, Sinsay has recorded a growth of number of stores.

Now let's take a look at like-for-likes. We had only 1% growth during this quarter, whereas a year ago in the second quarter of 2018, you could actually see nearly 15% growth in LFLs. Last year, we had a very good time, April, May. It was a very warm weather. We had a very warm weather, so the collection was really selling very well, whereas April and May this year were really cold and we started -- we accelerated with our sales in June.

Three brands, Sinsay, Cropp and House, recorded positive LFLs in the second quarter, but it's worth to highlight European markets, Germany for instance as well as Eastern Europe, Ukraine, but also Romania and Russia. You can also see online sales on the right, 45% growth year-on-year. This is a very dynamic growth. This is because we add new markets and they operate very well, the sales there is really good.

In Poland, we have 20% dynamics of e-commerce. However, new markets also add to this result. And as you can see, this quarter was definitely better than the record-setting fourth quarter of 2018. Of course, we have additional expansion plans. Well, e-commerce is almost -- makes almost 12% of the whole sales of the group now. And now floorspace reserved 0% growth. A small brand in Mohito, those 2 brands had a very difficult second quarter, but it is worth to praise Sinsay that is growing very well, 27% growth year-on-year. And definitely, we need to praise House because the brand is growing and this is due to good collections.

And now revenues according to the regions, but I have a good news. In the second quarter of this year, foreign revenues exceeded Polish revenues. That was the first time in the history. During the previous quarter, I was showing you that the floorspace is bigger outside of Poland than in Poland, and this quarter records a higher revenue from abroad than from Poland.

Now taking a look by region. A dynamic growth in the EU outside of Poland, and good growths in other country, Russia for instance, Kazakhstan.

So summarizing the sales and the revenues. 8% growth, so 1-digit growth, whereas so far we had double-digit growth. You know that we are opening bigger stores, nicer, better looking stores. So on the right, you can see the table presenting Q revenues per square meters, and the cost is dropping because we are working on it. But in total, e-commerce and physical stores, well, the revenues per square meter is comparable. There is a small drop year-on-year. How about the gross profit margin, similar to the previous year; 59.3% this year, 59.7% last year. Well, the dollar, USD, is not really helping because the price is growing versus Polish zloty, but we are actually selling off all the collections. We are having really good management and, therefore, the write-offs are smaller and smaller and, therefore, the margin is almost equal as compared to the previous year.

Now looking ahead to the autumn/winter collection. Well, the USD price is not helping us definitely. A year ago, the collection autumn/fall/winter was bought at an average price of dollar, and now we are buying at PLN 3.81. So it is a difference of almost 2%. But this is not a big difference yet. We should be able to handle it to deal with the situation. However, the collections that were bought at a higher price of USD make it risky to actually reach this year's target of the gross profit margin. But let's not talk about the future. We'll see how that will work out.

And now the operating costs. So owned stores on the left. So the rental costs, HR and other costs. Every year, we have 4% drop of the cost because the rental per meter drops down as well as HR per square meter the cost drops. We also have energy and outside services as -- and -- well, as we continue to say, well, we try to outsource as many costs as possible connected with our stores, whereas the headquarters and e-commerce, well, the cost is dropping as well by 5% year-on-year. Well, a year ago, we started to stop speeding up the cost growing, so we hope to keep the cost under control and at a low level.

Well, now summarizing, revenue is higher, 8% year-on-year, whereas the cost is growing slower than the sales. Therefore, we have the natural leverage in our company and, therefore, the operating margin growth by 13%. And we also added net profit and taxes because we had the so-called one-off write-off of the tax asset of one of our subsidiaries because we are merging, and we cannot use this asset anymore. Therefore, we have this one-off event in the second quarter. Therefore, PLN 205 million net profit. And the sales growth by 11%, slower rise of costs. And the operating cost is by 30% better year-on-year. But on the net level, we have a drop-down by 10%. So around PLN 10 million of net profit.

And now we have a difficult slide because it may look not that good at first, but please do not be disturbed. Everything is under control. We are talking about inventories. Inventories grew quite significantly, but this is because we have new inventories and we changed our financial policy. As a company, we keep on learning, developing, the market is changing, our customers are changing, therefore, the higher inventories. And let me explain you the situation. At the end of each season, we should have sales. For instance, spring and summer collection. So -- so far, we started in June and continued in July, and then by mid-August, we wrapped it up.

So in the end of August, we had new collection, 100% new collection in the stores, but the customer is changing. It's -- take -- the sales are taking too long, and we've noticed that the biggest players shortened their sales period. So we also shortened our sales period from 2 months to 1 month, but that meant for us that the new collection needs to arrive at the stores faster. So we wanted to have most of the inventory in our stores in the beginning of August. So that meant that we had to accelerate the production process and actually to bring inventories to the stores quicker. In order to shorten -- for us, in order to shorten this cycle, we need $10 million more per day. So that means that we have to have PLN 300 million worth of inventories that had to be brought earlier.

So if we take away actually PLN 300 million out of it, that it would be PLN 1.7 billion. In addition, we also had sales in July. So we still change our model. We accelerate our sales. We learn all the novelties that happen on the market. Therefore, the growth of inventories. But as I've already said, we have a goal in -- or we want to have better margins in August. But on the right, you can see that our trade liabilities finance our inventories in full. Therefore, the working capital is not at risk at all.

Well, we improved the conversion of the cash cycle from -- down to minus 6 days from 15 days in second quarter 2018. So we have a very comfortable situation. And now about our net cash. Quite safe situation, PLN 600 million cash in our balance sheet. We still want to be a safe company. We still need money for development, but we want this development to be financed, funded more from our internal cash flow, not from the external loans. But as you can see that in this quarter, our investment expenditures were higher than last year. You can see the gray color on this graph. So infrastructural investment. So investment, for instance, in the offices, in the headquarters.

Now summarizing executive summary. Well, we need to highlight that our sales grew outside. So foreign revenues are higher than Polish revenues. We also have 40% growth of e-commerce online sales. We -- our -- the cost of our stores are under control in every single store in our company. We continue being a safe company, and we have net cash in our company.

And now let's move to key corporate events in the past 3 years. So we had a very dynamic development in SEE region. We also opened new stores under new concept in Czech Republic. We have actually implemented RFID. So this is a digital label. Well, we continue implementing it. Well, we actually implemented it. Now we are training the stores and the personnel in the stores. Therefore, we have big teams of trainers, coaches, who visit all the stores, training our people in the stores, how to use it. And well, again, we would like to enter North Macedonia, and we would like to open our first stores there in 2020. And this is our plan.

And now a little bit about Eastern Europe. It is a very good market for us. Recently, we have very good results, LFLs as well as e-commerce. In terms of e-commerce, we added new market in Bosnia and Herzegovina. In April, we launched e-store of all brands in Croatia. We will be launching a new warehouse in Romania to source e-commerce in the region in order to reach the customer quicker. And in the second -- in the third quarter of 2020, we are planning to open a new store in North Macedonia. New openings in Czech Republic, also, of course, in Prague, but also in other stores in Teplice, Liberec and Trebic, a new concept, and the sales is going very well. And we also have good plans for the future for those stores because we will be using them as mini warehouses for e-commerce purposes.

In addition, we also plan to open e-commerce warehouse to use it to send parcels to our customers in Czech Republic and Slovakia.

And now a couple of words about RFID. So this is the digital label for us. This is the hard tag for us. We would like our stores to use -- to be able to use this technology as soon as possible. We want all our personnel to be -- the whole staff to be able to use it. And what does that mean? That means that we have faster inventory rotation in terms of the size, for instance. We will have more efficient replenishment, but we will also work better locally. So actually, the implementation will be faster. So we will also have faster check out. So it will be faster by 60% to 70% because nobody likes queues. So we would like to -- we want to work on the time in order to accelerate this, but also shorter stock taking. Before, we were doing that once or twice a year. It took the whole night and our personnel had to spend the whole night for it. And now, with the help of this RFID technology, one person can do a stock taking within 1 hour. So this is quite an amazing improvement.

RFID is actually a rotating tag. It looks like this antitheft tag, but it is equipped with RFID technology that sends a signal to a device. So it is called rotating because it visits all stores around the world. Well, it is added to every piece of cloth in the factory and then it is sent to our distribution center. We have special channels there, RFID channels, and once actually the tag passes through the tunnel -- through the channel, then all the pieces are actually counted. So if it's said that there should be 50 pieces of cloth in one container, then it is actually counted. So we know that this is 50 pieces, not 49 or 48 or 51. And then in the warehouse, the clothes are repacked to individual packages that are sent to individual stores. So we have a better service, quicker service and better management -- better managing of inventory.

And here we can see investments, somebody painting the walls with a brush. So we had to use a special paint to paint our stores or at least one wall between the warehouse and the sales floor in the store so that the signal doesn't really go through the wall to the warehouse in order to avoid incorrect readings. So we had to actually decrease the range of the radio waves to the warehouse. So it is limited and works only in the warehouse because we want this RFID technology to work correctly. And of course, we have IT -- IT and IT specialists because you can't really buy this system just -- taking it just from the shelves because -- well, maybe you can, but we will know -- we know that it may not be perfect. We still need several years to achieve a situation when those systems will be just good quality lying on the shelves. So we had to actually make a tailor-made software.

So the software has been developed by our own specialists. It has been actually prepared to work on smartphones and tablets, and we have only 1 software, therefore, our employees in the stores can actually use the application very fast and very easily. And there's one more thing that I would like to share with you. We have been counting how many companies have this kind of technology around the world. Only 20 companies around the world that are implementing or have implemented this technology. So you can actually write this in your report that we are actually a very good company, that we are one of the first companies, the leading company in terms of implementing RFID.

Well, the RFID information helps us to manage the inventories on every level. So first of all, we have a quick information for our designers, which clothes are selling well and which are not that popular. And of course, we add quick systems to feedback our designers, but because we actually receive the information from individual stores, we can actually approach them individually to send the inventory that sells well so similar models or the same models, if they are available, they are additionally sent to the stores. So we are selling just the inventories that sell well. So we take care of the rotation. So everything helps us to increase the sales and decrease the rotation and then to improve the margin.

And now one more thing, omnichannel. We talk about that a lot and then we read in the reports that LPP still needs to work on the omnichannel because we still lack some things there. Let me explain this. Well, we have implemented the omnichannel because what's that -- this is the fact that you can actually order online and go to the store and collect it there. So this is click and collect. You can actually return this clothes in the store, actually. You can actually go to the store and order the clothes to be delivered to your home from the level of smartphone that is owned by the employee in the store. So this is working already. And now the device is used for online orders. So generally, desktops or notebooks and mobile devices such as smartphones. In our case, 70% of traffic on our online -- on our web pages is generated by smartphones and nearly 50% of sales is done by smartphones as well, 60% of e-commerce sales was generated and completed via smartphones. These are really good global statistical levels when it comes to sales.

And to -- well, when we were thinking about the development of our e-commerce, we knew that we have to focus on smartphones, on mobile devices. Therefore, we actually prepared everything, adjusted everything to work with mobile devices because this is the future, and one more thing ahead of us. So with the help of RFID technology, we would like to start -- next year, we would like to start deliveries -- online deliveries from the closest store. This will be yet another advantage of RFID technology and e-commerce technology. And next year, we will be doing it. So we will be delivering to our customers from the stores and that will actually help us to decrease the time necessary to complete the sales and our customers will be also more happy.

And now new ecological collections in stores. Well, we focus on that. This is an important thing. Now our collections include more and more eco -- organic cotton. Our designers use organic, more ecological fabrics that have been produced in sustainable ways. And starting next year, we want to -- every brand to use ecological fabrics available on the market. So every brand will be using eco -- eco fabrics.

And now plastic reductions. We all hear it every day that this is a problem. We also joined a global initiative that focuses on decreasing the amount of plastic around the world. So in the coming months, we will be eliminating completely the plastic that is not recyclable or not compostable. But we are also talking about the whole chain of the deliveries, not just the stores. So actually, our e-commerce parcels, how they are sent. And actually, the packaging that is used by our suppliers and how the inventories are sent to our warehouses. So this is more versatile. It's more general.

Now let's move to 2019 outlook. Ladies and gentlemen, we are accelerating. Recently, we were talking about 12% growth in floorspace, now 14%. And on the left, you can see how the floorspace was working in the end of 2018. And now we -- next, we have our former target in the end of 2019 and the current target. As you can see, not really much is changing in Reserved, Cropp, House and Mohito brand, but the biggest growth of floorspace is in Sinsay company as compared to the initial plans.

And now by regions. In Poland, the growth of floorspace will be around 3%. So the growth will be happening mostly outside of Poland, so Europe, except Poland as well as CIS countries and Middle East. Also, our CapEx is affected by it. So the CapEx will grow as well.

And other markets will be opened. So Bosnia and Herzegovina is already opened. And this year, we will also enter Finland as well. So these are physical stores. But what happens online? We keep on having this ambitious plan for our e-commerce revenues to exceed PLN 1 billion. Why -- how do we want to achieve it? By opening new stores in new countries, entering new markets. And ladies and gentlemen, in -- we plan to launch e-store for all EU countries and in Ukraine, and we believe that the new store in the Ukraine will perform very well from the beginning because our customers are waiting for it because they know our brands very well. They've been knowing it for many years. In the EU, it's hard to say. We will start doing that, we will have a quiet launch without a lot of marketing or advertising campaigns. We will be analyzing which country is performing the best and then we will focus on that country with our advertisement campaigns and investments.

Now we maintain our 2019 guidance. So we want to continue the growth with the help of the floorspace development, positive LFLs and e-commerce growth. Well, margin, even though it is still -- it is already a challenge because of the USD price, we still should keep it between 53%, 54%. We -- our costs are under control. We also have net cash, and we would like to continue it.

And the last slide. Tomorrow, we will have the shareholders meetings, and one of the decisions will be to actually ask for a consent for corporate bonds to be issued. We would like to receive up to PLN 300 million. The tenor will be 5 years. And actually, the money should be used to finance the Brzesc Kujawski distribution center.

We also would like to achieve one more goal. We want to be more independent from the banks when it comes to financing, and we are also hearing that this is a good time to issue bonds. It's the time where you can actually issue the bonds with a low interest rate -- at a low interest rate. So we would like to do it still with good conditions [all orders.]

So that's all from me. Ladies and gentlemen, now I would like to hear the questions from you. And as usual, because we are broadcasting our meeting online, please use the microphone when asking your question.

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Questions and Answers

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Maria Mickiewicz, Pekao Investment Banking S.A. - Deputy Head of Equity Research [1]

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Maria Mickiewicz, Pekao Investment Banking. My question concerns costs and the next year plans -- plans for the next year and the growth of minimum wages. How the company will be preparing for that? What will be your response? And also in the context of what is happening this year, so improvement of cost policy -- improvement of cost situation. How about next year?

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Unidentified Company Representative [2]

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Well, this is a difficult question. I prefer to answer that during our next conference when I will be talking about plans for 2020. Today, I can tell you that definitely, we will have to invest more in automatization. Definitely, we have problems with labor force and to find people on the market. And if the government introduces the increased minimum wage, then we will have to pay more, definitely. But definitely, we can manage better the situation in the stores. However, we did quite a lot -- quite a hard work for the past 2 years. But on the other hand, when the minimum wage grows, then it doesn't only influence our cost, but also our revenues as well. The revenues should be growing as well.

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Maria Mickiewicz, Pekao Investment Banking S.A. - Deputy Head of Equity Research [3]

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But my question also is, do you have any possibility to renegotiate the rental cost?

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Unidentified Company Representative [4]

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Well, rental cost for us is a never-ending story. When opening new stores in new locations, well, we have hard negotiations with the owners of the shopping centers to actually have better or lower rental rates. So the rental costs should be dropping down as well.

Yes, please go ahead with your questions.

Michal, whenever you're here, you always have questions.

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Unidentified Analyst [5]

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Well, let me get more details concerning the minimum wage. Now looking at the structure of costs, which percentage is connect -- of your cost is connected with the minimum wage? Will the wages grow across the company when you -- when it -- when the minimum wage will be just a reference point?

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Unidentified Company Representative [6]

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In our stores, the minimum wage, well, the lowest wage is still higher than the minimum wage. But if the minimum wage grows, then we meet and then we check the inflation on different markets. For instance, Poland, Ukraine, what are the growths announced by the government, for instance. So every year, we plan how much the wages will grow on every market for us. So this is the situation, as usual. Still we had to check -- review the wages in Poland. And now this is just connected with the situation on the market. But first of all, we have the whole ladder. We start with the employees and -- senior employees and then the managers of stores. So well, when we -- once we start, we go through all levels. And now we will have to review the performance of our business.

And we know that in our industry, but it's not just about our company, all the companies like that hire young people, often, this is the first job for them, and the wages aren't too high. Therefore, we have quite a rotation in our stores, but we will see the growth of cost definitely. Well, a good thing is that we are operating on many markets, so Poland is responsible for only half of the cost, but the cost will grow definitely.

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Unidentified Analyst [7]

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So concluding the cost of personnel directly in the stores will be higher by 15%, for instance. Can we have this kind of forecast?

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Unidentified Company Representative [8]

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I don't know if this will be the exact number, but I believe that we can expect this kind of growth. I don't know. It's hard for me to say if it will be 15% or 12%. But definitely, the growth will be there.

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Unidentified Analyst [9]

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How about decreasing the headcount?

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Unidentified Company Representative [10]

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Working with RFID technology, we know that many simple things don't have to be done in the stores anyways -- anymore. So everything, the processes are improved in the stores, but we will be working on further improvement of processes in order to minimize the human work in the stores, but this is still a hard work, and I am unable to quantify today how that will help us to decrease the cost of human work versus the cost.

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Unidentified Analyst [11]

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How about the stores that still lack RFID technology. As far as I can remember, it was 200 stores. So in those stores, you have still more potential to have some decreases because RFID will help you there.

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Unidentified Company Representative [12]

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Yes, we have 2 elements there because so far we were still placing antitheft tags on our clothes. That was done in the warehouses, in the back office of the stores. Now it doesn't have to be done because those clothes come already tagged. And that also helps us to save the work process -- to improve the work processes because everything takes less time. So we need less hours to serve the same number of customers. And now we are also -- we also continue to teach our personnel -- our staffs in the stores how to use the technology. And we have teams of trainers who teach the people how to use the technology quick and efficiently.

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Unidentified Analyst [13]

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And now second question. Can you actually tell us -- share with us trading update about the third quarter? How it will happen? How -- well, tell us something about the inventory situation after the second quarter. Were you able to sell it off? Do you see any effects of 500+ or a better weather? Is that working for you?

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Unidentified Company Representative [14]

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Yes, working with inventory and the inventories with new collection that started in August, we had to have space for the new collection in the stores. So we sold the previous collections. We don't really have old stock -- stocks. I don't really -- I can't really tell you anything about the effect of 500+ because I don't have the data yet. Well, we had quite good sales in August because the weather was really good, and September is doing quite fine as well. We can see that people are buying a lot of -- weather is good, people are buying clothes. So we are very happy of what -- about what we see in the third quarter.

We also have one more question.

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Unidentified Analyst [15]

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(inaudible) I have a quick question about USD. I have asked you about that 3 months ago and you said that a comfortable level is PLN 3.8 and for a month the level has reached PLN 3.9 per U.S. dollar. And now a short comment from you. And again, I would like to ask you about some guidance for the future.

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Unidentified Company Representative [16]

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Well, (inaudible) it's still too early. Let's talk about guidance next time during our next conference. I will be prepared for that. And now about USD price. Well, it's not a comfortable situation for us when we reached PLN 3.9 level. It will affect our margin next year. We are still working on the winter collection. The spring is still not in our warehouses. So please ask this question next time, I will have more data, more news to share with you. But we are definitely trying to offset the dollar. Definitely, we will have to increase the prices on the inventory mix in order to minimize the effect of U.S. dollar that's on our margins. So we need to have margins on similar level. I don't know how that will work next year, but we are working on our margins. Therefore, we have this idea in order to shorten the sales time periods down to 1 month because we will only have only 1 month that uses lower margins. And the second month will use higher margins.

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Unidentified Analyst [17]

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In theory, you can actually work on it because you didn't label the spring/summer collection.

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Unidentified Company Representative [18]

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Yes, because we labeled, we tagged only the winter collection. And we can still change the prices for spring and summer collection, yes.

Okay. Are there any other questions?

So ladies and gentlemen, since we don't have any questions, thank you so much for your attention, and thank you so much for attending our conference today and, well, we'll see you in November.

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