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Edited Transcript of MDM.PA earnings conference call or presentation 29-Jul-19 4:00pm GMT

Half Year 2019 Maisons du Monde SA Earnings Call

VERTOU Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Maisons du Monde SA earnings conference call or presentation Monday, July 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Bosmans

Maisons du Monde S.A. - CFO

* Julie Walbaum

Maisons du Monde S.A. - CEO & Director

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Conference Call Participants

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* Adam Gareth Cochrane

Citigroup Inc, Research Division - Director

* Anna Patrice

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

* Aurélie Husson-Dumoutier

Kepler Cheuvreux, Research Division - Equity Research Analyst

* David A. Liebowitz

Lizard Investors LLC - Head of Research

* Florent Thy-Tine

Midcap Partners, Research Division - Deputy Head of Research

* Georgina Sarah Johanan

JP Morgan Chase & Co, Research Division - Analyst

* Nicolas Langlet

Exane BNP Paribas, Research Division - Research Analyst

* Tushar Jain

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Maisons du Monde's Conference Call, chaired by Julie Walbaum, CEO, and Eric Bosmans, CFO. (Operator Instructions) And just to remind you all that this conference is being recorded. We would like also to inform you that this event is also available live with synchronized slide show.

During this conference call, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from future results expressed, forecasted or implied by such forward-looking statements. For a more complete list and description of such risks and uncertainties, please refer to Maisons du Monde's filings with the French Autorité des marchés financiers.

I would now like to hand the call over to Julie Walbaum. Madam, you may go ahead and I will stand by.

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [2]

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Thank you very much. Good evening to all of you, and thank you very much for joining this call to present Maisons du Monde's first half 2019 results. I'm Julie Walbaum, CEO of Maisons du Monde and I'm joined on this call, as said, by Eric Bosmans, who recently joined us as CFO, and I'm very happy to welcome to our management team. Laurent Sfaxi, our Head of Investor Relations, is also with us.

Throughout this call, I will be referring to the presentation that can be downloaded from our website, which complements the press release we issued after market closed today. I will start by presenting the highlights of our first half performance, Eric will then detail our financials and I will come back to present our 2019 business initiatives and outlook. After that, we will be happy to take your questions.

Overall, Maisons du Monde delivered a strong top line performance in the first half, leveraging its leading omnichannel and international model with a visible acceleration in the second quarter compared to the first. EBITDA was in line with our expected phasing for the year as well the other metrics, including EBIT and free cash flow. The second half should see continued strong top line momentum as well as a pickup in profitability. As a result, we remain fully committed to achieving our full year financial target and posting another year of high and profitable growth.

On Slide 5, you see how our performance translated into our headline numbers. Our sales reached EUR 564 million in total, including the contribution of Modani, representing year-on-year growth of 10.9% at constant exchange rates. If you consider the Maisons du Monde group only, sales were EUR 544 million, at 8.3% at constant exchange rates and at 4.4% like-for-like. We did see an acceleration of our sales growth between Q1 and Q2. On a like-for-like basis, our sales grew 6.5% in Q2 from 2.4% in Q1. This is a very satisfactory performance and thus speaks to our differentiated model, balance between France and international stores and online.

EBITDA at EUR 46 million was down 4.9% year-on-year and EBITDA margin at 8.1% was down 140 basis points, just in line with our expectations. This anticipated drop mainly reflects a contraction in gross margin due for the most part to an unfavorable foreign exchange effect and to a lesser extent to higher promotional activity. This temporary increase in promotion was driven by a conscious decision to bring down in-store inventory level to prepare for new strategy of streamlined and more impactful collection, in line with the strategic plan we presented last month at the Capital Markets Day.

The remaining difference in the EBITDA comes from marketing and logistic cost incurred at Modani to sustain the acceleration of its store opening plan. We expect EBITDA and EBITDA margin to improve significantly in H2 as reflected in our full year guidance, thanks to the combined effect of a more favorable foreign exchange environment, lower promotional intensity, a higher share of decoration in the mix as per our traditional seasonality and a stronger contribution from Modani.

Finally, we continued to deleverage in H1 and our net debt-to-EBITDA ratio improved to 1.4x at end of June versus 1.5x 1 year ago. Eric will provide more granularity on all these aggregates shortly. But I suggest we first take a look at the drivers of our top line growth in the first half.

Turning to Slide 6, you can see the 4 business priorities on which we are focused over the half. First of all, we have developed new innovations in our offer, reinforcing our multi-style approach with a customer-driven orientation while continuing the development of our B2B activity. Secondly, we have expanded our international and omnichannel footprint by driving our store network development with agility as well as ensuring Modani's expansion in the U.S.A. Thirdly, we have worked on enhancing omnichannel customer experience through online, in-store payments and delivery initiatives. And finally, we have strengthened our customer relationships by reinforcing the personalization of our communication, optimizing our marketing investments and increasing our brand visibility.

Let's take a closer look at each of these priorities on the coming slides. Let's start on Slide 7 with innovations in our offer. As explained during our Capital Markets Day, our objective is to reinforce the differentiation of our offer. We started to implement this approach during H1 2019 by renewing our multi-style and customer-driven approach. The launch of our new indoor, outdoor and kids collections were successful and we received positive response to our new furniture themes developed across very different styles from Californian to Scandinavian or Bohemian. Our outdoor collection broadened and organized for the first time across different styles also met with great success.

The launch of our customizable sofa called So Me in March 2019 was also very well received with a higher order value compared to its category, demonstrating the relevance of product personalization and in-store advice. We also expanded our kitchen furniture offer introducing 3 new styles. Finally, we continued our efforts in developing a more sustainable offer, especially among our kid’s collections.

Today, as a reminder, 60% of our wood furniture offers meets the sustainable criteria; this share reaches 77% when it comes to kid’s furniture. Finally, we launched our third B2B catalog featuring fully integrated B2B environment and 140 bespoke B2B products, designed based on the needs and feedback of our professional customers, that's twice the number of last year. As you know, B2B is a natural extension of our B2C model and we want to accelerate in this business. We have therefore started to increase the visibility of this activity by participating in major fairs across Europe and also developing marketing and PR initiatives. One major highlight of the semester was the opening of the Maisons du Monde Hotel & Suites on May 1, showcasing the expertise and knowhow of our B2B team in partnership with Vicartem Group, owner and operator of the hotel. Our first hotel customers are delighted by this full Maisons du Monde lifestyle experience and customer reviews on booking platforms are truly excellent. The last time I checked, it was 9.2 out of 10 score so it is really showing the true differentiating Maisons du Monde experience.

Our second pillar on Slide 8 is to continue to invest in our store network as part of our omnichannel development. As you can see on this page, we continue to expand our footprint with 15 gross openings in the first half, including 13 Maisons du Monde stores and 2 Modani showrooms. The Maisons du Monde openings were evenly spread between France, where we opened 6 stores, and Europe with 7 openings, including our first store in Portugal where we already have an online presence. The store is located in Faro in the southern Algarve region and first results are very promising.

At the same time, 6 of the stores were closed during the period of which 3 in France, 1 in Belgium and 2 in Italy, as part of the group's active management of its store portfolio. As we explained, we do manage our network in a proactive and dynamic faction, selectively relocating some stores to better locations in the same catchment area or in city centers, strengthening our omnichannel model and reinforcing our brand visibility.

As of 30 of June of 2019, Maisons du Monde operated 343 stores in 10 countries. This includes the Wynwood store in the U.S. We also continued to develop Modani where sales were up about 19% on a pro forma basis in H1, demonstrating the banner's continued commercial momentum. Modani opened 2 new showrooms in H1, bringing its total network to 15 at end June.

Let's now turn to Slide 9 to share our main H1 initiatives around the omnichannel customer experience. As you know, one of our objectives is to continuously enrich the digital experience and we have therefore improved the search engine, proposing refined research capabilities, driving positive impact on our online (inaudible) rate. Thanks to new algorithm, we have upgraded our product categories proposing new features, facilitating product selection for customers. This also resulted in increasing our online conversion rate. Moreover, we have launched 4 e-catalogs, indoor, outdoor, kids and B2B, allowing Internet users to discover the catalog in an interactive and immersive way in just one click through the add to cart. Another key objective of ours is to enhance our in-store experience and increase customer satisfaction. To do so, we have started to develop a bespoke employee training program in pilot stores, focused on customer attention and service. Called Customer First, this program is monitored by our in-store NPS and we are recording encouraging results in the store where the program has been deployed.

As part of our upgraded in-store experience, we are also rolling out our decoration advice corners, which allow customers to get a comprehensive view of (inaudible) colors, ask our teams for tips on how to mix and match products and styles, get personalized goods and order the product selection. At the end of the first half, we had roll out around 150 decoration advice corners across our network. Moreover, as we aim to provide an ever-improving, seamless experience, we have implemented additional payment solutions in Belgium and Spain, giving online access to renowned local credit cards, also in line with our localization strategy.

Preparing for the future, we have also started to further integrate online and offline by testing the long awaited for in-store returns of decoration items ordered online. Based on the positive test conducted in Main Spain, we will deploy this initiative in other countries in H2. All these initiatives are key steps to prepare tomorrow's customer journey, as we described last month during the Capital Markets Day.

On Slide 10, you can see our fourth business priority, which aims at strengthening our relevance to our customers. Let me focus on 3 main highlights. Customization of our CRM campaigns proved to be efficient. Online sales generated by newsletters and trigger e-mails increased by 50% plus versus H1 2018. We are also working on improving the efficiency of our marketing investments again and again through the use of our customer data platform based on predictive customer lifetime value analysis in an omnichannel approach. We have also launched a series of marketing campaigns based on customer lifetime moments.

Finally, we are focusing on reinforcing our brand visibility. Our brand is a key asset that we want to develop. To increase brand awareness, we have continued and pushed further to develop our fan base on Instagram, which is now reaching 2.4 million followers versus 1.9 million at the end of 2018. That is a 26% increase in just 6 months. We have also reached 300,000 subscribers on Pinterest at the end of H1 2019 versus 200,000 at the end of 2018, a 50% increase of that community.

As mentioned earlier, the launch of the Maisons du Monde Hotel was also a real success and one of the benefits was it drove high engagement in social and traditional media. This campaign reached 1.8 million people on Facebook and Instagram and content share were among the favorite ones of the semester. Our communications plan was also marked by 2 other interactive campaigns, Mother's Day's contest across Europe and also the Sustainable climate week in France. The latter event brought together 15 retailers to promote sustainable solutions and raised customers' awareness on climate change. Maisons du Monde teams and customers were among the most active contributors to the international campaign, proving the true commitment to sustainable climate.

As you can see, over the first half, our dynamic and committed teams have deployed several building blocks that did fuel our growth and will also serve our new strategic plan.

Let me now hand over to Eric to go into greater detail of our financial performance.

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Eric Bosmans, Maisons du Monde S.A. - CFO [3]

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Thank you very much, Julie, and hello to everyone. Before diving into the numbers, let me first say how happy I am to join Maisons du Monde at such an interesting moment with a new strategic plan about to be implemented.

I have been very impressed by the enthusiasm and energy of the company's teams. I also very much look forward to an open and constructive dialogue with you.

So let me start now on Slide 12 with our simplified P&L to give you the key numbers that will be detailed in subsequent slides. Please note that the numbers are pre-IFRS 16 to allow comparability with the prior year period. Later on in the presentation, I will detail the main impact of IFRS 16.

Our total sales were up 11.2% at current exchange rates and 10.9% at constant exchange rates to EUR 564 million. That includes EUR 20.3 million in sales by Modani in the period, which represents pro forma growth of 19.2% versus the same period last year. Last year, as we acquired Modani in May, our H1 accounts included only 2 months of Modani sales at an amount of EUR 5.8 million.

At constant scope of consolidation, that is excluding Modani, sales were up 8.5% at current exchange rate at nearly EUR 544 million. On a like-for-like basis, that represents growth of 4.4%.

Gross margin rose 9.4% in the half to EUR 360.7 million. As a percentage of sales, gross margin stood at a solid 64%, down 110 basis points year-on-year that I will explain in more detail in a moment.

EBITDA was EUR 45.6 million, representing a margin of 8.1%. This equates to a decrease of 140 basis points, reflecting mainly the gross margin and some other aspects that I will detail shortly.

EBIT was down 4.7% to EUR 26.7 million and EBIT margin was 4.7%, a decrease of 130 basis points. Finally, net income stood at EUR 7.2 million, down 10.8% year-on-year.

On Slide 13, we take a closer look at the breakdown of our sales and you see that our 11.2% sales growth was consistent in terms of geographies, channels and categories. We continued to see strong momentum in our international sales, which were up by a strong 23.5%, adding EUR 49 million in sales between H1 '18 and H1 '19.

France also grew by 2.7% despite a challenging environment we faced in this market with soft trading conditions partly due to the impact on consumption of the yellow vests movement. Our online sales also continued their fast pace growth, rising by 23.3% with store sales that were up 7.5%.

Finally, we saw growth in both our product categories with furniture sales up 14.6%, while decoration sales rose by 8.1%.

On Slide 14, you see the steady growth of our 2 key drivers, international and online sales, both of which continued to increase their penetration rate in our overall sales. Overall, as you see on the slide, international sales, including Modani, has grown at a compound annual rate of 20% over the past 3 years and now accounts for 45% of Maisons du Monde sales.

Our online sales also continued their fast pace growth. Three-year CAGR of online sales is 21% and online sales have crossed the threshold of 1/4 of our total sales, representing 26% at the end of H1. Digital as a whole, including click and collect sales, is 53% of our total sales. This evolution is completely in line with our increasingly international and omnichannel model.

On Slide 15, you see that our growth is also well balanced between like-for-like and expansion with an additional contribution coming from Modani. Modani's additional contribution versus H1 last year was EUR 14.4 million, bringing our total reported sales in H1 to EUR 564 million.

Between H1 '18 and H1 '19, incremental like-for-like sales amounted to EUR 22.2 million. Our like-for-like growth in H1 of 4.4% is a good number, given a challenging comparable base with H1 2018 like-for-like growth of 4.8% and the previously mentioned soft trading environment in France.

Our like-for-like sales gathered steam in Q2 at 6.5% compared to 2.4% in Q1. Sales from new store opened in 2018 contributed EUR 18.1 million and H1 2019 openings added another EUR 2.3 million for a total of EUR 20.4 million coming from expansion in the past 18 months. The contribution of 2018 openings reflects phasing as the openings were concentrated mostly in the second half. The contribution from this year's opening reflected that effect taking into account closures for relocation.

This year, we planned 35 to 40 gross store openings, of which 2/3 outside of France and around 10 store closures. As in previous years, a greater share of this year's openings will be in the second half.

On Slide 16, we turn to gross margin, which rose 9.4% to EUR 360.7 million. Margin at 64% of sales remains best in class and very robust by any standard. Year-on-year gross margin decreased by 110 basis points. This is basically explained by the combination of 3 factors. First, an adverse foreign exchange effect due to a less favorable hedging rate in H1 of this year versus H1 of last year. As a reminder, we have an exposure to the U.S. dollar as the vast majority of our purchasing is done in that currency.

As Julie already mentioned, we also had a negative impact coming from a higher percentage of sales done under promotions. This increase in promotional weight was deliberate as we wanted to reduce inventory to lay the foundations of our new collection strategy. Indeed this translated into an improvement in inventory that I will address shortly. And finally, to a much lesser extent, a mix effect because the weight of furniture sales was higher than last year partly because Modani is weighted towards furniture.

For the full year 2019, we expect gross margin as a percentage of sales to be stable year-on-year, reflecting a combination of a positive foreign exchange contribution in H2 compared to H2 last year and a lower promotion intensity in H2 compared to H1.

Slide 17 shows how we go from gross margin to EBITDA margin. Our total operating cost stood at 55.9%, an adverse movement of 30 basis points year-on-year. This is attributable to Modani. Our global operating cost decreased to 45.2% of sales, improving by 10 basis points. This result from effective cost management in the core business that more than offset a temporary increase in logistic costs at Modani linked to an additional -- to additional orders [that of] expecting import tariff increases in the U.S. As expected, advertising costs increased as a percentage of sales by 30 basis points. This growth was driven by online marketing costs. This growth was planned in order to support online traffic and brand awareness as well as raising awareness of Modani.

Our central costs represented 6.5% of sales, a 10 basis point increase as we continued to invest in business initiatives to drive future growth, such as data, CRM, digital and IT investments. This leads to an EBITDA margin of 8.1%, a decrease of 140 basis points. This drop may seem significant at first glance, but it is in line with our planned phasing and also reflect Maisons du Monde's traditional back-end loaded profitability.

As a reminder, last year, our H1 margin was 9.5% and our full year margin was 13.3%, thanks to a strong pickup in H2. Well, even more than last year, 2019 will be a tale of 2 halves, with a stronger H2 putting us on track to achieve our full year profitability target.

Now moving on to Slide 18, which shows the bottom half of the P&L. Current operating profit amounted to EUR 22.6 million in the first half of 2019, compared to EUR 21.2 million in the first half of 2018, including a positive change in the fair value of financial derivative instruments of EUR 4.6 million compared to a negative change of EUR 0.8 million last year. Other operating income expenses increased by EUR 0.4 million year-on-year and include expenses related to store closures and some restructuring and contingency charges. Our financial result was in line with last year. It reflects broadly stable cost of net debt of EUR 3.3 million, including a noncash charge on convertible bonds for EUR 2.2 million.

Pretax profit was up by nearly EUR 1 million. However, the income tax charge increased by EUR 1.8 million and therefore, net income was EUR 7.2 million in the first half, down from EUR 8.1 million in the same period last year. Excluding the impact of trade tax, our effective tax rate for full year 2019 is estimated at around 33%, in line with what we indicated previously.

Slide 19 details our free cash flow. Overall, it improved in the half with an outflow of EUR 15.1 million versus an outflow of EUR 62 million in the year ago period. This result in large part from an improvement in working capital requirements, which was neutral in the half versus a cash flow of EUR 44.2 million in the similar period last year. This is mainly due to a reduction in inventory from EUR 241.2 million in H1 last year to EUR 215.8 million at the end of June this year. This is a translation of our previously mentioned stronger promotional activity to reduce inventory. Day sales of inventory or DSI was reduced by 7 days to 196 days in H1 of this year. The change in other operating items outflow year-on-year largely reflects higher income tax paid in H1 this year. CapEx at EUR 23.4 million equates to 4.2% of sales and was mainly geared towards opening.

On Slide 20, let me comment on our financial structure and leverage. Our net debt at the close of the half stood at EUR 204.2 million, down from EUR 213.1 million at the end of June 2018. When equated with our last 12 months EBITDA, that brings our leverage ratio to 1.4x, an improvement versus the 1.5x posted in H1 2018. This gives Maisons du Monde a very sound financial structure. On Slide 21, let me conclude my part of this presentation with a summary of the IFRS 16 impact on our key financial metrics. As you can see, IFRS 16 has a significant impact on some of our key numbers, partly EBITDA, free cash flow and net debt. You will find relevant details and bridges in the appendix of this presentation and in the press release.

With that, let me now hand over to Julie.

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [4]

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Thank you, Eric. I will now turn to our H2 business priorities and conclude on our outlook.

As you can see on Slide 23, in the second half of 2019, Maisons du Monde will continue to implement its business priorities, laying the foundation for its 2020-2024 plan. First of all, we will further enhance our product proposition. We will continue to develop our customer-driven offering approach and that is why we will release new collections for small phases in the back-to-school season, a particularly relevant period for this type of offer. This is for furniture.

In addition, we will start deploying our renewed approach for decoration collections, as described in the Capital Markets Day last month. So this fall/winter collection will be comprised of 17 versus 6 in the previous year, in line with our strategy to offer more but narrower and sharper decoration collections.

Finally, in order to enhance the visual attractiveness of our stores, we will update our merchandising guidelines. This will facilitate our teams' daily work, freeing up time for them to spend on improved customer service. Second, we will continue to develop our store network in an agile manner. Our European store opening and closure program will be in line with our forecast.

Our international expansion will also rely on our different store formats, including a city-center store in Köln, Germany, expected to open at the end of Q4, in order to build brand awareness and drive impulse traffic.

Third priority, we will keep on strengthening our omnichannel experience. In order to increase online and offline integration, we will pursue the rollouts of in-store returns of decoration orders made online in France but also Belgium, Luxembourg, Switzerland and Germany. We will also work on upgrading our salesforce tablet application in order to propose an increasingly seamless customer experience. Our fourth priority will consist in further developing customer relationships through personalization of our communications, and again, optimized marketing. And our fifth priority will be focused on pursuing the development of Modani network with 3 plus showroom openings planned by the end of the year across the U.S.A. Moreover, we will continue testing the Maisons du Monde concept in the U.S.A.

As you can see, our second half will be pivotal to our next growth chapter. Our teams are fully engaged to ensure the successful implementation of these different business priorities.

So let me conclude on Slide 23 with a confirmation of our 2019 outlook. Our first half showed strong growth momentum in itself, also improving environment and reflected both in operational achievements and our financial strategic choices that we made to prepare for our next chapter. Eric said earlier that we have this year a story of 2 halves and indeed, we do expect the strongest second half in line with our expected phasing for the year. We do expect continued positive sales momentum in H2 and an improvement in profitability versus H1. Thanks to the combined effect of our traditional seasonality, more favorable foreign exchange rate, lower promotional intensity and a stronger contribution from Modani, in 2019, we do plan to deliver another year of profitable growth. Sales growth are expected around 10% with further expansion in online and international sales. We also maintain a target of generating EBITDA margin above 13% of sales, while continuing to reinvest profitability gains resulting from improved operating leverage in our different growth engines. Maisons du Monde has a proven and very strong international and omnichannel business model as we demonstrated again in this half. I very much view 2019 as a launching pad for our new 5-year plan that we presented at our recent Capital Markets Day. We do have a clear strategy and a renewed growth model to continue Maisons du Monde story of profitable growth.

This ends our presentation. Thank you very much for your attention. Eric and I are now very happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Nicolas Langlet from Exane BNP Paribas.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [2]

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I've got 3 questions, please. The first one on the gross margin. Can you quantify the impact of FX, promotion and negative product mix in H1? And specifically on FX what's the level of the positive impact you forecast for H2 2019? Second question, can you split the like-for-like in Q2, the 6.5% between France and international? And finally, can you share with us your view on the French market condition for H2 and whatever you see tangible sign of improvement on the market or if it's too soon today?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [3]

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Thank you, Nicolas. So on your 3 questions, first on the gross margin, so it's around 110 basis points drop from last year. Around 60% of this drop is negative exchange rate effect. As you know, we have 15 to 18 months' hedging policy. So the dollars we use for purchasing was based on the previous year where the exchange rate was not that favorable. So this impacts H1 and we will see on the contrary, a positive effect on H2. And Eric can quantify H2 versus H1. But this is 60% of the drop. 40% is linked to the temporary increase in promotional activity after the strategy we described. The mix effect, as Eric said, is to a much lesser extent, is around 10 basis points, which was compensated by another 10 basis points from other factors. So what is to be remembered is around 60% coming from the negative exchange rate effect and 40% from the temporary increase in promotions. On the second question, so we do -- as you know, we do not disclose -- we do not split the like-for-like between France and international. But indeed, we did see an acceleration across our different markets, including France. To your third question around the context and the consumption context, so as I said just now, we did see a better momentum also in France and we could see in this some improvements in the traffic pattern. We also remind that the temporary increase in promotions, which was linked to our strategic choices did boost traffic. And this happened for all of our markets because this strategy apply to all of our markets, not just France. So it is to be seen what the traffic momentum is in the upcoming quarters.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [4]

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Okay. And regarding the FX impact in H2, do you have any figures to share?

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Eric Bosmans, Maisons du Monde S.A. - CFO [5]

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Yes, Nicolas, so this is Eric speaking. So as Julie said, we've got a policy of hedging in advance the dollar. So for H1, those were actually put in place in H1 2017 when the spot was actually extremely low. The spot rate at the time was in the region of $1.06, $1.05. For H2, we hedge at different point in times and basically, we expect a positive impact in H2. And overall for the year, it's about to be neutral and slightly positive, the contribution from the exchange rate, which is actually what was indicated before. So for the year, it's going to be slightly positive with negative in H1 and we commented on that, and a positive in H2.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [6]

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Okay. But if we look at your gross margin guidance for the full year, it implies like 90 to 100 basis point gross margin improvement in H2. If you only have 60 or 70 basis points coming from FX and still a negative product mix, what are the other driver to match your stable gross margin for the full year?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [7]

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Well, okay. So the positive exchange rate is 1. Also, we will have less promotional intensity, which would play in favor. We will have a higher decoration in the mix linked to our traditional seasonality. So these 3 factors should have a net positive contribution so that we can -- we expect a broadly stable GM on a full year basis.

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Operator [8]

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The next question comes from the line of Tushar Jain from Goldman Sachs.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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Probably 3 questions from my side as well. I mean I do understand you don't want to comment on French like-for-like, but is it fair to assume that you still are outperforming the market on an overall basis or you probably are slightly behind because second quarter in France was quite strong? Second question, just wanted to understand in terms of the inventory position, is it fair to assume you are feeling comfortable where it is currently now and we shouldn't be expecting markdown probably not in the second half, but in later in 2020? And finally, there was quite a steep rise in accounts receivable, just wondering if you can comment on what was the reason for that?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [10]

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Sorry, I didn't get your third question, Tushar.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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There was quite a steep rise in accounts receivable, is there anything specific relating to that trade and other receivables?

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Eric Bosmans, Maisons du Monde S.A. - CFO [12]

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Sorry, Tushar, I think the third question probably comes my way, but I didn't get it, so would you mind repeating the question?

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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It looks like there was quite a bit outflow on trade and other receivables. I'm just trying to understand, is there anything specific related to that? Otherwise, I can take this question off-line as well, not a problem.

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [14]

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Okay. I'll take the first 2, Tushar, and Eric will take the third one. So on the over performance of the market, well, as you might remember, we did not publish this slide in Q1 either because our model evolves to become increasingly balanced between France and international furniture and decorations, stores and online. So as it does, these indices seem less and less relevant to us as a benchmark. Historically, we used those as an impact by proxy to give color to the strength of our model, but understanding the weakness of this comparison. So the more we go and the less relevant it becomes. This is why from Q1 we stopped using that comparison. And, as you know, our objective is not to outperform the market for the sake of it, it is to meet profitable growth targets we have set for ourselves inadvertently so to say of the market evolution.

On the second question around markdowns, so as we said, the markdowns in H1 were really linked to our strategic choice to prepare for the next chapter of our growth. It did incidentally have the impact of boosting in-store traffic, but it was not designed to do so. So we do not think that we will need those markdowns in H2. We don't plan to have those to the same extent as in H1 and saying that, we do confirm our full year guidance. And the third question goes to Eric then.

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Eric Bosmans, Maisons du Monde S.A. - CFO [15]

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Yes, Tushar, and well, I'm afraid we have to take this one off-line. I'm sure you appreciate. I have been in the role for about 5 weeks. So it's a very good question, but we'll have to take it offline, I'm afraid.

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Operator [16]

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The next question comes from the line of Georgina Johanan from JPMorgan.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [17]

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Couple for me please, 3 actually. The first one was, sorry to go back to the gross margin, but just to clarify, you are actually expecting less promotional activity in the second half on a year-on-year basis, rather than from an H1 versus H2 seasonal effect. And then following on from that, is it possible to give us the percentage of sales that were actually made on discount in H1, please? And then finally, just at Modani, I'm really sorry, I didn't catch what you said about tariffs impacting logistic costs in Modani or indeed, quite why marketing spend was higher? Could you just give a bit more color on that, please?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [18]

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Sure, Georgina. I'll take your first 2 questions and Eric will comment on Modani. So to clarify the GM evolution and the level of promotion, we do expect it to be lower in H2 compared to H1 this year and we expect it to be stable versus H2 last year. Second question around the percentage of sales and the discount, we do not disclose this specific measure. What I can say is that, yes, we did increase it relatively substantially, but it did stay in very reasonable limits and also much below industry standards. Now Eric for Modani's question.

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Eric Bosmans, Maisons du Monde S.A. - CFO [19]

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Yes, Georgina. So yes, Modani, they saw their goods fallout majority from China. And basically what happened because they were anticipating an increase in import tariffs in the U.S. from China, which indeed happened, the tariffs increased from 10% to 25%, they decided to actually order in advance and basically build up their inventory, which is what they did. But basically they've inventory and storage costs in relation to that. So that's basically what we mean. And in the marketing, well, Modani is still very much in startup phase. It is a fast-growing business, which basically requires investment in marketing. So that's what we mean by that.

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Operator [20]

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And the next question comes from the line of Aurélie Husson from Kepler.

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Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [21]

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Three questions for me, please, as well. So coming back -- I know you have answered partly some of them. So coming back on the outperformance of the market, just wanted to understand. In Q1, you mentioned that you did not outperform the market as much as you may have in the past because you were overexposed or more exposed to decoration versus your competitors. Is it still the same explanation that goes for Q2? My second question is also on the level of promotions. You say you don't disclose the figure of percentage of takedown with the discount, but you have done in the past, so can we assume that it has doubled from the 5% that you have done in the past and can -- what can we expect for next year? Is Maisons du Monde promotional activity becoming more important? And finally, on the U.K., I see on the appendix that you still account at the end of June for the 4 stores, the shop-in-shops in Debenhams. When will they be closed? And what type of impact can we expect on sales from these closures?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [22]

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Thank you, Aurélie. Just to clarify my earlier answer on the Q1 outperformance of the market. I'm very sorry about this noise coming in. That's the coffee machine leaving the light of heat on. So what I wanted to say that we did not publish the over performance versus market because we did say indeed that because of our model, which is structurally overexposed to decoration compared to these indices, it made less sense as the fact that we are more international and more online and so on. So it is not a matter of H1 versus H2, it's just that structurally our model is quite different from the model of the players in those indices. This is why we preferred just dropping altogether this reference in Q1 because for us, it did not make sense in the world how we see it today.

Second, your question around [sales under] discount. So to your question, can we assume that it doubled. Well, it less than doubled. It did stay in a single-digit level. And to answer your question around is it structural. No, it is not. It will drop as early as H2 this year because it was really due to our strategic choice of proving readability of our offer in-store. So we had to clear out a little bit of store inventories just to make room for new collections, which are in higher number compared to last year. So if you wanted to have those collections more visible in-store and more impactful, we had to do this movement. So because it was only linked to that and not used to boost sales, we will reduce this proportion as early as H2 this year. So you should not expect the same proportion in H1 next year either. Third question around the U.K. shop-in-shop, yes, indeed, they are still in our portfolio because we expect to close them at the very end of Q4. So at the very end, actually, should be around the last day of December this year really, and the total -- the combined amount of sales of these 4 shop-in-shops on a full year basis is EUR 1.5 million. So it's really not significant in the magnitude of the size of Maisons du Monde.

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Operator [23]

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The next question comes from the line of Adam Cochrane from Citi.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [24]

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A question on foreign exchange from me. When you look at the euro-dollar rate, I appreciate with the hedging you have in place, you may get a couple of quarters or even a few halves of benefit as you -- as the euro bounced off the lows, but given the sort of trajectory that it's on now, back towards 1.10, 1.11 whatever it may be, is your gross margin going to continue to be moved around significantly over the next, let's say, 2 years on a half yearly basis by foreign exchange? Or is there anything you can do to try and mitigate some of that movement other than just hedging?

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Eric Bosmans, Maisons du Monde S.A. - CFO [25]

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Adam, well, basically, as I said, we hedge long in advance typically between 15 and 18 months. So what I can tell you is that we won't see that volatility in 2020.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [26]

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As you think about the guidance that you gave for 2020 to 2024 and the EBITDA margin coming down before it goes back up, did that incorporate part of that thinking, the impact of that FX, was that included within that guidance at the time?

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Eric Bosmans, Maisons du Monde S.A. - CFO [27]

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Well, we couldn't possibly forecast what the FX would be for 2024, so no, it doesn't.

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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [28]

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But it would for -- you must have some visibility over 2021, for example?

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Eric Bosmans, Maisons du Monde S.A. - CFO [29]

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We have visibility over 2020 and some over 2021. And again, I reiterate, we shouldn't see huge volatility for the next, say, 18 months. After that, well, I just don't know.

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Operator [30]

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The next question comes from the line of David Li from Lizard Investors.

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David A. Liebowitz, Lizard Investors LLC - Head of Research [31]

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Maybe on the EBITDA margin side, obviously, EBITDA margin contracted due to some of the advertising expenses related to the model and marketing initiatives. Could you please give us some color, how much of this really impacted? Obviously, it's up 300 basis points year-on-year. And I have a couple of follow-ups.

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [32]

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Sure. So just to read it from the numbers, the EBITDA dropped by 140 basis points versus last year. And this 140 basis point drop is composed of 110 basis points coming from the gross margin and 30 basis points from operating cost. And the 110 basis points drop on the gross margin level, that is coming at 60% -- around 60% from the exchange rate effect and 40% from the temporary increase in promotions. The remaining 30 bps is coming from, again, a temporary increase in logistics and marketing costs that Eric described. Actually, this was a bit more than 30 basis points, but we did compensate part of it with a leaner structure and some operating leverage at Maisons du Monde level. So the net effect of that is a drop of 30 basis points.

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David A. Liebowitz, Lizard Investors LLC - Head of Research [33]

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Okay. Great. And what gives you guys confidence in terms of how to say that the business is going be very back-end loaded, right? Historically, if we look at the second half EBITDA, it's generally about 4x the first half, right? Based on what you delivered in the first half, this probably means that the full year is going to be pretty significant. Maybe just talk a little bit about that, like how much of it is really kind of within your control to ramp up pretty significantly in the second half, so you will still maintain a 13% EBITDA margin for the full year?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [34]

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Sure. Well, if you do look at the equation that I have just described, first the gross margin, well, we do have very concrete elements that make us believe that we will reach the flat gross margin that we expect for the year. I mean the positive exchange rate is in the books, so to say. The mix should be stable versus last year. So we have like years and years of historical from that. So the share of decoration in the mix is fairly reliable and the promotional intensity is also in the books because that's an envelope we've prepared for in line with H2 last year and much less on H1 this year. So there is no external effect in the positive effects that we expect for the gross margin in H2. So in that, it is in our control. So I'm very confident about that. When it comes to operating cost, again, it is very -- it is identified very clearly in the company. The operating cost I mentioned and around -- the increasing cost around logistics at Modani level does have an impact short term on the EBITDA level that, to be honest, I think that was a good move. Because indeed, the Modani team by ordering these products ahead of the tariff increase will improve the cost on a normative basis. And if they do pass on some of that on pricing, such as most of the U.S. players do, that it will improve that gross margin. So I think that it is a smart move on a long-term basis. And when it comes to marketing, again, that was anticipated. We cannot expect Modani to grow at a rate that it is supposed to grow without some investment in marketing. And again there, I'm very confident because what is marketing at Modani level, it is online marketing, which is very much performance based and that, yes, it is also a catalog, which already proved to have positive effect in driving in-store traffic. And so this catalog did not exist last year, but it will improve brand awareness and further drive in-store traffic. So all of that is very much in our control and this is why we are comfortable about the EBITDA level of H2.

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David A. Liebowitz, Lizard Investors LLC - Head of Research [35]

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Great. And also working capital, obviously, very impressive to see working capital finally coming through. Do you guys feel like working capital you might be running too lean or fairly optimal given the fact that you are still trying to accommodate fairly significant growth going forward?

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Eric Bosmans, Maisons du Monde S.A. - CFO [36]

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Yes, I will take that question. So in terms of DSI, which is obviously a key component, it was indicated at the full year that a normative DSI is in the region of 190 days at the Capital Market Day and 290 days were mentioned. So basically that's where we are at the moment and we do believe that it's where we should be towards the year-end.

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Operator [37]

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The next question comes from the line of Florent Thy-Tine from Midcap Partners.

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Florent Thy-Tine, Midcap Partners, Research Division - Deputy Head of Research [38]

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Just one question on my side. On the store like-for-like growth, according to my calculation, you are quite flat on the Q2 when you had a positive calendar effect. So are you confident to see a positive store like-for-like growth in H2?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [39]

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So as you have noted, we do not guide on like-for-like for specific channel, whether stores or online. And the more we go, honestly, we think like the less we will want to do that because the model is more and more integrated between stores and online. And again, with further implementation of the initiatives that we've started to test around the in-store returns of online decoration orders, the more we go and the more it will be intrinsically put together. So we do not guide on store like-for-like growth.

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Operator [40]

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The next question comes from the line of Anna Patrice from Berenberg.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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Couple questions from my side. First, to come back to other question -- my colleagues' -- other analysts' question on your outperformance versus the rest of the market. It seems that the French market was up high single digit. Your sales were up 4.5% only in Q2. Could you provide a bit more details, what was the impact of the store closures, if there was any meaningful impact in Q2? And also would be good to understand what was the level of support from extra promotional activities. So basically to understand what was the underlying growth for you in France and how do you feel with it? Are you happy with your results in France? What kind of current trading you see? How the Q3 started, especially as in all the news, we, again, see the heat wave. So does it have a negative effect on your sales? I would expect so, but Q3 last year was also hit by heatwaves and also by the football championship. So to see how you feel. You have been not so happy about the current trading. Another question is, on the working capital as well, can you explain a bit more the initial impact? Why it was neutral in H1 and why it was such an outflow last year in H1? And was this net reduction due to promotions or what are the main reasons? And then you said that you are happy with your inventory phase, should be similar for the full year, but should we consider any other specific factors? So you're increasing the number of collections, the number of SKUs probably in phase, is there any [impulse opportunity] here? So some explanation here so that we are not taken by surprise with the full year 2019 cash flow?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [42]

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Thank you, Anna. I'll take your first question and Eric will take the questions 2 and 3. Around the French market, so if we split like-for-like dynamics and store openings and closures, the like-for-like dynamics is as we expected. And we did say at the Capital Markets Day that the trading -- the current trading was improving in Q2 versus Q1 and it did. It is true that we did have at the end of June an unexpected heatwave. Now it will not impact to a great extent the global numbers because it was just a week. So it is -- but indeed, it was not expected when we talked to you at the recent Capital Markets Day. So it did impact, but honestly to a small extent. When it comes to openings and closings, so we did close 6 stores in H1, 3 of them were in France and 3 were abroad, 1 in Belgium and 2 in Italy indeed. I'll now hand over to Eric for questions 2 and 3.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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I'm sorry, I'm sorry. So what was the -- so basically from those 3 closed stores in H1 on the French sales was almost meaningless. What about the extra promotional activities? Was there any support over there?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [44]

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Sorry. Yes, in Q2, the level of promotion which was higher boosted in-store traffic for sure, but -- and also, it was in line -- the boost was in line with what we expected. So it did indeed have the effect that you described.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [45]

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But should it be kind of 0.5 percentage point, 1 percentage point on your French sales?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [46]

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Sorry, I didn't get what you said.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47]

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How much impact it was on your French sales? The extra promotional activities, how much of the impact was on your French sales?

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [48]

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We did apply this strategy across the market, so in France and abroad. So we did not -- honestly, we did not monitor the specific effect in France versus abroad and we would not disclose it if we were, but we did apply the same thing across the market. Because again, it was designed to create extra momentum in terms of traffic. And so we do not plan to boost our sales based on promotion, this is not our model. We accelerated our promotions in H1 just to meet strategic decision. We wanted to do in preparation for our next chapter of growth, but that was not designed to boost in-store traffic. This is why we did not use it in France versus other markets. The strategy was applied across markets.

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Eric Bosmans, Maisons du Monde S.A. - CFO [49]

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Okay. Now to your working capital question, yes, indeed, in H2 last year, there was a significant outflow because the stock level at the end of December was high. Just as a reminder, at H2, the stock was at EUR 241 million coming from EUR 197 million at the end of H1. As I said, we've reached pretty much what is a normative DSI at the moment and we do not expect to see an increase similar to last year at the end of this year. So to your question about more collections, that doesn't mean more SKUs and doesn't mean more stock. So we shouldn't see an adverse effect on the level of stock because of that change.

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Operator [50]

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(Operator Instructions) As there are no further questions from the phone lines, I would now like to hand the conference back to Madam Walbaum for closing remarks. Please go ahead.

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Julie Walbaum, Maisons du Monde S.A. - CEO & Director [51]

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Thank you very much. Well, thank you for your time tonight. We hope to have provided a clear view around our H1 results and prove that again Maisons du Monde has a very attractive omnichannel international model. We will talk to you again for the publication of our Q3 results on October 30. Thank you very much, and have a good evening.

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Operator [52]

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Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now disconnect.