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Edited Transcript of RMS.PA earnings conference call or presentation 26-Feb-20 8:00am GMT

Full Year 2019 Hermes International SCA Earnings Presentation

Paris Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Hermes International SCA earnings conference call or presentation Wednesday, February 26, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Axel Dumas

Hermès International Société en commandite par actions - Executive Chairman

* Eric du Halgouët

Hermès International Société en commandite par actions - EVP of Finance

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Conference Call Participants

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* Aurélie Husson-Dumoutier

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Edouard Aubin

Morgan Stanley, Research Division - Head of Luxury Goods

* Luca Giuseppe Solca

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Juliette Garnier;Le Monde;Journalist

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Presentation

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Axel Dumas, Hermès International Société en commandite par actions - Executive Chairman [1]

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[Interpreted] Thank You for attending. We're going to present to you 2019, which was an excellent year, and I'm sure you'll have a lot of questions about 2020. But let's begin by talking about 2019, and we'll be happy to begin with and happy these great results. It's a real pleasure to be meeting with you here on our premises. I'd like to thank you for coming.

This year, 2019, saw remarkable performance at Hermès, showing the loyalty of our customers in all markets. It's also thanks to the creative abundance in all of our metiers. And we're going to be talking to you about results and profits as well as revenues. In 2019, Hermès' uniqueness made it possible for us to have very high-growth rates. We were able to further strengthen our independent artisans business model. We've stimulated creative abundance through the theme of the year, The Dream. And we created jobs. We'll continue talking about that later. And we continued our commitment to being a responsible and sustainable company. We extended and enriched our exclusive international online and off-line network to be close to local cultures.

Let's talk specifically about activity now, highlights. Sales reaching EUR 6.9 billion, up more than 15% at current exchange rate and up 12% -- and up 12% at constant exchange rates. Again, this is very sound growth, especially driven by volumes, not a lot of scope effects nor price effects. So it's particularly virtuous growth, very positive, very sound growth in our stores. We've seen growth in all geographies and in all business lines.

Recurring operating income reached EUR 2.3 billion, which is up more than 13%. Recurring operating profitability reached 34% of sales after taking into account IFRS 16. We'll talk about that standard later. Consolidated net profit for the first time, going beyond the EUR 1.5 billion mark, up more than 13% after restating for the sale of the Galleria store in 2018. Good cash flow, restated net cash is EUR 4.6 billion as of 31st of December end of the year.

We can see changes in revenue and net income here. We see that over the 10-year period, we basically tripled revenue and multiplied by 2.5 net income, which means annual growth rate is 14% on revenues and 18% growth in profits over the past 10 years. Over the 10-year period, we achieved a great deal. Of course, we have been around for much longer than that, but it's still a 10-year period important.

Creation. What are creations in the year? Very successful, especially -- I allude to men's and women's ready-to-wear, the collections by Nadège, Véronique and the leather goods collections such as new models of Simone Hermès, the Saut Hermès model, the Birkin Faubourg and the Chimère line. We have new designs for men's silk with Cosmographia Universalis, for instance. We also have new color versions, Brides de Gala, Jungle Love; successful launches of the Arceau men's watch. The L'Heure de la Lune got the grand price in the astronomy calendar category in Geneva. And then we have Black to Light in the jewelry line designed by Pierre Hardy. A new perfume, Un Jardin sur la Lagune, launched at the beginning of the year, and Eau poivree, a variation of Twilly d'Hermès was also revealed at that time.

In production, we have continued to remain fateful to artisanal routes, local anchoring. We've inaugurated our 17th leather goods workshop in Isère Fitilieu May 2019. And 4 other projects are underway, and they will be spread out in the coming years. We've already laid the first stone of the leather goods workshop in Guyenne, Gironde and Montereau in Seine-et-Marne for an opening in 2020. Two other projects were announced this year, one, in Louviers in Normandy in 2021; and two, in the Ardennes by 2022. It'll become our 21st leather goods workshop. All our leather goods workshops are situated in France. We've inaugurated a new shoe manufacturing site in Italy, and expansion is planned for the Saint-Junien site in Haute-Vienne and Pierre-Benite for textile.

Distribution network. Extension, new territories opened. We've opened 5 new stores in 2019: two stores in the U.S.A. or one in Orlando and another one in the Meatpacking district in New York; two in Asia, one in Phuket in Thailand, another one in Xiamen in China; and for the first time for a decade, we've opened a new country, Warsaw, in Poland. That is the one you see in the photograph, a beautiful store that I encourage you to visit because it is a former bakery patisserie. The -- we have an Hermès store in a patisserie. Visually, it works well. And we may not have done things differently. It's a different code to rework the patisserie and then open the store. So of course, we adapt to the local customers.

After Europe and China in 2018, the new Internet platform was rolled out in 2019 in Japan in June and Singapore and Malaysia in October. New platforms continue to meet with great success with the traffic, customer flow and conversion rate, great success. In China, we didn't have an online store before the opening of our hermes.cn site.

In communication, we had a lot of events in 2019, with, in particular, the enrichment of our films, the Footprints Across the World; pursuing meetings between craftsmen, artists and clients, with the events demonstrating our know-how with Hermès Hors les murs, Hermès at Work, demonstrating the quality of our designers on the carrés -- Hermès Carré (inaudible) in Paris at the end of the year. And we had great success with our fashion shows, be it in the tennis club in Paris for women's or Mobilier National for men's fashion show and acceleration of events in London and Korea for men's ready-to-wear, Men's Universe.

Hermès continues to organize these wide-reaching events with: an event in Shanghai called Please Check In around leather; jewelry events in Black to Light, which were presented in Paris; and events in Asia and New York. We changed to the editorial line of the Le Monde d'Hermès in 2019. And we had the 10th edition of the Saut Hermès at the Grand Palais. The winner was riding an Hermès saddle.

So quite obviously, we wanted to continue the responsible and sustainable development of Hermès, and we continued our dynamic of job creation because we had more than 1,100 new jobs in 2019, taking the number of total employees at 15,417 at the end of December. Nearly 2/3 of these recruitments were done in France. And a good result also allow us to allot a 5th free share plan for employees worldwide announced in July 2019. Attachment to diversity, professional equality between men and women, gender diversity has been strengthened.

Anchoring in the regions, of course, we are part and parcel of a development logic of the territorial sort of centers with a policy to develop skills with training schools, in-house or outside an environment for exchange of know-how, human-sized manufacturing units, where everybody can call each other by their first name. We support also other initiatives, the sponsorship of competence with local associations such as Réseau Entreprendre 93 association.

We also want to limit our imprint -- footprint. We have strong controls on our supply chain so that we have visibility of our raw materials and the production as a majority in France internalized with long-term relationships with our suppliers. We also work and are ready to find the best possible materials. The support of biodiversity is -- it goes without saying, starts with the construction of our manufacturing units, sustainable building and HQE, high-quality -- environmental quality standard construction. Partnerships have been made with WWF, for example, to make sure that we have a good control of our impact on the environment and non-biodiversity in particular. Limiting our carbon footprint goes through decoupling growth with that of consumption and carbon neutrality of internal activities of Hermès Group 1 and 2 as of 2021. And finally, Hermès objects are there to last. Artisanal mode of production, small quantities best manages the unsold items. And Hermès object is one that can be repaired, and we did 200,000 repairs in the course of the year.

Our commitment in -- we've taken long-term commitment: 10% of executive managers' variable remuneration is subjected to CSR criteria; Hermès participates in collective initiatives such as Fashion Pact, which was unveiled at the G7 summit in Biarritz; and extra financial allocations through the significant improvement; and Sustainalytics or OEKOM just to mention a few; also B-ranked on climate, water and forest.

Geographical distribution, 2019, all geographical zones are growing. You see Europe first, plus 8% with a solid performance carried by the United Kingdom and Italy; France, plus 8% as well, progressing despite the negative impact of the social events in the course of the year; Japan, plus 8, progressing solidly within end of the year, paced with purchases linked to a hike in VAT in October. A new platform, hermes.com, was inaugurated in June; Asia, excluding Japan, plus 18%, continuing its growth in Greater China, despite the Hong Kong event impact as well as the South Asia. The region has increased, the Qingdao store and Hyundai in Korea. The new digital platform was rolled out in October in Singapore and in Malaysia; Americas finally, plus 12%, confirms a good dynamic movement of the whole zone after the opening of Orlando store and the Meatpacking district, too, as well as in Mexico off Masaryk, Vancouver and San Francisco, which were renewed and enlarged in the second half of the year. All of this gives us a geographical distribution, which is almost stable, and this remains the balance and limits our exposure of any one country in particular. We've gained 1 point in Asia Pacific as compared to the previous year.

For metier, all metiers are progressing with, in particular, I would say, the fashion and jewelry. Leather, plus 11%, is progressing. This is thanks to our projects -- development projects that I mentioned in new workshops, in leather workshops, and growing the ones that have been just created with good local anchoring, developing employment and creating social value. The clothes and accessory divisions, plus 17%, confirms this beautiful dynamic growth through the success of the ready-to-wear fashion, accessories and shoes, in particular. Silk and textile, plus 8%, is growing with the collections, which align diversity of materials and variety of creation. Perfumes, plus 4%, carried by the success of Terre d'Hermes and Twilly d'Hermes as well as the novelty, the new perfumes. Watches, plus 12%, shows a solid performance of sales, which reflects the creativity of the collections. As I said, Hermès has already been rewarded fourth time running by the Grand Prix of the watch trade Geneva. And other materials plus watches, tableware are growing with a very good progression of our jewelry collection. Here again, a breakdown of the metiers is stable as compared to 2018 and is balanced, where leather represents 50% of the activity.

Let me give the floor to Eric du Halgouët, our CFO, to present the annual results.

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Eric du Halgouët, Hermès International Société en commandite par actions - EVP of Finance [2]

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Good morning, everyone. Up again by recalling the ways and means of implementing IFRS 16, the standards we're applying for the first time for a full fiscal period, this is to do with lease contracts applicable as from 1 January 2019. Just to remind you, the standard calls for booking a right-of-use at a rental use on the balance sheet. For Hermès Group, this pertains solely to leases for premises, real estate leases, particularly store leases, and this includes fixed rent as well as minimum guaranteed rents when leases cover variable rent.

Now this is a full retrospective basis that we're using, not many CAC 40 countries has done it this way. Therefore, we've restated all financial statements, annual and half yearly, starting from fiscal 2018. Though it's negligible impact on net profit, applying IFRS 16 means increasing operating profitability for a 2-year period by around 0.4 points. In exchange for that, financial income includes a cost of lease liabilities to the tune of EUR 25 million in 2019, which is the interest cost on lease liabilities. Total balance sheet, around EUR 10 billion, increased by around EUR 1 billion by booking right-of-use under assets and under liabilities, a lease of liability.

Now the cash flow chart, operational cash flow increases due to depreciation of rights-of-use, and a counterpart of this is inclusion of repayment of lease liabilities to the tune of EUR 203 million in 2019. Definition of available free cash flow and alternative performance indicator has been adjusted in our cash flow statement corresponding to our cash flow generation, plus or minus in WCR, minus investments, minus the repayment of lease or rent debt.

Current operating income, 34% of sales, which is slightly down compared to 2018. This change is due mainly to gross margin losing 0.9%, including, as expected, the negative effect of foreign exchange hedging division of 1.2 points. That's around EUR 80 million. We observed the dilutive impact due to the conversion effects, was offset by gains on option hedges to the tune of approximately EUR 20 million. In other direction, gross margin saw the benefits in 2019. The positive impact of increased price is slightly above the increase in cost of sales, furthermore, a leverage effect on indirect production costs, thanks to the strong increase in sales. Communication spending, making 5.2% of sales versus 5% of sales in 2018. Other selling, marketing and admin expenses, excluding lease, stable between 2018 and '19 due to the increased selling teams and other things during the year. Other income and expenses, EUR 604 million, EUR 407 million of this is depreciations, half of which are for tangible assets, other half is rights-of-use that are depreciated over the length of the duration of the lease. Other income and expenses also includes EUR 140 million in expenses having to do with the free share plan, up EUR 40 million versus 2018 due to the plan granted to all employees midway through 2019. Recurring operating income goes beyond the EUR 2.3 billion mark, up 13% versus 2018. This is growing at almost the same pace as growth in revenue. After factoring in the net capital gain of EUR 54 million due to the sale of the premises at Galleria Hong Kong in 2018, operating income is up by 10%. Now expressed as a percentage of the revenue or sales, current operating income, 34%, is near its record level in 2017, 2018, in spite of the negative impact of currencies in 2019.

Financial results are a loss of EUR 69 million, similar to the losses booked in 2018. This includes 3 main elements: firstly, interest on IFRS 16 lease debt, EUR 24-some million, plus the booking of hedging transactions for currency transactions. Half of this amount is premiums on options, and the other half is a discount on currencies. Furthermore, there's proceeds from compensation on cash and investments to the tune of around EUR 13 million. Taxes on profits, 33.1% as opposed to 32.5% in 2018. I recall you, the 2018 tax rate had been reduced by 0.8 because of the nontaxable capital gain that was the result of selling the Galleria premises in Hong Kong. Net income going down EUR 1.5 billion, up 9% compared to 2018. This growth is 13% if we restate for the sale of the Galleria premises, which is up almost exactly in line with the increase in operating income. Net profitability reaching 22.2%, near its record level of 23.6% reached in 2018; if we restate for the capital gain of Galleria, was 22.7%.

Now let's talk about investments and cash flow. Operating investments, EUR 478 million in 2019 versus EUR 312 million in 2018. EUR 263 million, or 65%, spent on developing the retail network, particularly with: the purchase of Sydney store premises. The inauguration is slated for June of 2020; cost of new sales, Axel alluded to this, including Meatpacking district in New York and Orlando and also Xiamen in China; also, refurbishment and enlargement costs of around 15 stores are included here, including San Francisco, Vancouver, Amsterdam, Hawaii and Stoleshnikov in Russia, just to mention a few of them. EUR 107 million invested in production, mainly leather production sites, projects in Guyenne, Montereau and Louviers are alluded to; textiles, with the refurbishment and extension of our weaving and printing production sites in Lyon. Lastly, EUR 108 million invested in real estate in (inaudible), among other locations. Plus there are IT and digital projects. We're continuing our development of our digital platform in Japan and in Singapore.

2018 -- 2019 saw a strong growth in cash, up by around EUR 1 billion, thanks to EUR 2.1 billion cash generation and stability in working capital requirements as in 2018, thanks to good control of inventory throughout the retail network. After financing EUR 478 million in operating investments and paying dividends, EUR 487 million, an ordinary dividend of EUR 4.55 per share, plus share buybacks for EUR 53 million, net cash position reaching almost EUR 4.6 billion end of the year. Under IFRS standards, net cash is EUR 4.4 billion after deducting investments whose maturity is about 3 months, around EUR 200 million worth.

Dividend, subject to approval by the next shareholders' meeting will be EUR 5 per share, which is up 10%, almost up exactly in lockstep with operating income. Payout, therefore, will be 34.5%, slightly up compared to 2018, 33.8% -- which is 33.8%, just to remind you of that.

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Axel Dumas, Hermès International Société en commandite par actions - Executive Chairman [3]

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Thank you, Eric. It's a pleasure for me to present the outlook. I'll -- well, the outlook hasn't changed the guidance, thanks to its unique corporate model. Hermès is pursuing its long-term development strategy based on creativity, maintaining control over know-how and ever best quality. So in the medium term, despite economic, geopolitical and monetary uncertainties around the world, the group confirms an ambitious goal for revenue growth at constant exchange rates. 2020 will follow previous year's trend, the strengthening of the craftmanship business model of sustainable and responsible growth.

It is by aligning the state of enterprise and craftsmanship that Hermès renews its creative work in all the metiers. In 2020, Hermès celebrated innovation gesture, constant innovation, the fruit of creativity and the excellence of hand craftsmanship. Hermès recently launched its 16th division, metier: Beauty in March, introduced limited introduction in different stores and to the Internet. For those who are in the room this morning, you can observe some of the beauty objects lying here -- presented here. I will not be trying it on, the lipstick.

Introducing products such as a double-sided scarf, and this is innovation, managed to print the carré on both sides of the -- years of research and development. Here it is. Looks simple, like the figures presented to you by Eric, but there was a lot of work that went into it. And innovations such the cuff bracelets line of anodized aluminum, all of this -- and then the new flagship being opened in Sydney. We bought -- doubled, as it were, in the course of the second semester and 15 enlargements in the course of the year. And we continue to roll out the e-commerce platform in Hong Kong, Macau and, at the end of the year, Korea.

So much for the year. So I suggest that we move on to questions.

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Questions and Answers

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Axel Dumas, Hermès International Société en commandite par actions - Executive Chairman [1]

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Maybe I'll ask myself a question to deal with a subject as what about the virus.

So I'll tell you what we are able to say at this stage. Now as you know, for those who come often to these presentations, I think since the 21st century, we've entered into the VUCA world, volatile, uncertain, complex and ambiguous. And every 2 years there's a crisis somewhere. It started with the 911 in the U.S. then the bazaars in Hong Kong. There was financial crisis in the U.S.A., Fukushima in Japan. There's also the 20th (sic) [21st] century terrorist attacks in Paris, in Barcelona, in Madrid, in London, climate-related events. And unfortunately now, like every 2 years, we have a crisis that is a pandemic crisis affecting everybody.

The priority now measures, first of all, the health of the employees and to make sure that everybody is doing well. So we have an everyday stock-taking, and up until now, no employee in Hermès has been affected by this virus. This virus arrived in a country that's important for our industry, that's China. Important moment for the country, that is the Chinese New Year.

So what can we say at this stage? Well, what we can say at this stage, this year, is it good or bad year? We can't have the figures for Asia before the end of the first quarter, because the Chinese New Year lends a lot of structure to the quarter and which moves in the course of the year. So you can't really have a comparative situation that is legible before the end of the month of March.

But what we can say, however, is that there has been a strong closure of customer flow and stores because of the security measures, 11 stores were closed, 15 if you include Macau, 15 stores were closed for health reasons. And today, we see a reopening, possible and progressive reopening of the stores because today, you only have 4 stores, which are still closed. So we see that we are entering into an operational normalization in China, which is now the normalization of the customer flow, but we managed to open the stores. We're managing to open the stores today. So obviously, this has been affected. And the Chinese have not been able to travel as much as they would normally, with regard to the Chinese New Year.

So this is something that we've been following very closely every day. It's not limited to China, as you know, because there are cases now in Asia and Singapore, South Korea and now in Italy. So indeed, there is an impact, which will be more legible in the first quarter when we will publish the results of first quarter.

What can we say with regard to Hermès? So what we can say is that since our production is up 80% in France, so there's no supply chain problem for us. And we don't think we will have one, except for the Italian situation. Secondly, our fundamentals, which are the desirability of our products, we have all the reasons to believe that this is our ability over and beyond the events, it remains as is. And then the attention that we've been giving to local customers allows us to bounce back with regard to a drop in tourism in certain countries. And obviously, we are waiting for the end of the pandemic. We're following the indications of the WHO like you to see when China will bounce back. So that's what I can tell you about this at this stage.

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Unidentified Analyst, [2]

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I'm from HSBC. I've got 3 questions. 2019 really saw extra performance of other sectors other than leather, if you look at them all in all. Do you believe this is due to various launches, special launch situations? Or do you think that in the longer run, not taking into account coronavirus impact, but in the longer run, might this be sustainable, some categories, product reaching higher levels, greater maturity?

A second question, e-commerce. You mentioned some additional sites in various countries. Could you give us some figures, specifically, growth in e-commerce sales in 2019 and how much of your revenue this represents and what's the upcoming stages might be in terms of geography or possibly adding other products online that aren't there yet?

Third question, you don't give any margin guidance. I mean I suspect even less so due to the virus. But if we think of the major margin drivers, I'd like to know, henceforth, at current exchange rates, what are the expectations vis-à-vis exchange rate impact and also new product launches this year? I'd like to know, do you think there'll be specific cost changes or price changes that we should be aware of and factor into things?

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Axel Dumas, Hermès International Société en commandite par actions - Executive Chairman [3]

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Two questions. First of all, on the metiers, I believe there's no business line in metier which has reached maturity. Look at plus 11% for leather goods performance, which shows the excellent productivity we had in 2019, a bit beyond our targets. Furthermore, this shows that there is very strong demand for our products and for novelties. You can also see this in our financial WCR is pretty much stable in spite of the growth. So we can say that we're bringing out products very quickly.

Next, I've always tried to make sure that each metier reaches its own potential. There's a greater potential in each of the different metiers. When I took charge of the group, we had around 50% in leather goods, even worse than that -- more than that. An interesting thing to point out in the metiers, there are 2 sort of extremes in our industry that go -- that function well. Fashion, fashion does well, ready-to-wear, shoes and then also at the same time, what you sometimes call hard luxury, which is jewelry, watches. I must say jewelry in recent years, which has demonstrated success. Watch is seeing new momentum. There's still a great deal of potential there in all those business lines.

If we take a long-term view of Hermès, very long-term view, our idea is to make sure that we are bringing to the floor metiers with our style that are the products that our customers are looking for. We're not a marketing company. We're there to come up with the most beautiful product to offering and then see what people are interested in. We see there's been a return to fashion and return to jewelry in recent years, and leather is holding up very, very well as well. When I did my first internship at Hermès, it was -- it seems a while back now. But back in 1988, 56% of our revenues was silk and 9% was leather. It just goes to show things can change. Now why was 2019 fantastic? Because all the metiers did beautifully. It won't necessarily always be the case, no doubt about it. But sometimes, you've got years where the stars are in full alignment.

Sorry, as to your other questions, yes, e-commerce. E-commerce, I won't give you figures on e-commerce. Now of course, e-commerce, we're continuing to open in several countries, lots of them. Whenever we open a new site, we add to the product range. We have a rule of thumb for e-commerce. We only show on our sites products that are available for sale. If we don't have them in store inventory, then we don't display them on the e-commerce sites.

Growth through our new site, well, it's due to the improvement in the site, which has increased conversion rates, increased traffic and it also adds things to -- additional geographies, when you add new countries, the U.S. or Europe or areas that we relaunched with a new site that led to improvement. China is a country we opened anew, so you can't compare it exactly with other areas. So yes, there is growth in the Internet, which is well beyond the 15% growth we mentioned to you.

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Eric du Halgouët, Hermès International Société en commandite par actions - EVP of Finance [4]

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Yes. Four things I mentioned for 2020. First, positive impact, which is the currency effect, all in all, on our strategic currencies, there's an improvement of around 4% or 5%. But as I mentioned, we had a EUR 20 million gain on options in 2019 which is nonrecurring in 2020. Second point, the launch of Beauty Axel mentioned. That would mean we'll be investing more in communication in 2020.

Lastly, 2 further elements having an impact on structural costs: now the full year effect of strengthening our structures, which we began in 2019; and lastly, I mentioned this, the full year effect of the free share plan. It had a 6-month effect in 2019 around EUR 40 million, and you'll double that to make for the full year effect in 2020.

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Luca Giuseppe Solca, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [5]

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Luca Solca. I'm from Bernstein. I have a question on your scheduling that you're adhering to. I'm trying to figure out speed, flexibility, which you have in cost-cutting, in the event -- as you might expect, in the event demand were very sluggish in the first half of the year. Also, I'd like to know how fast could you ramp back up your whole activity to be ready for any rebound in demand in the second half of the year, which you may well expect. Is this your rationale?

Furthermore, you talked about pandemic. Are you starting to see impacts, not just on Chinese customers? But if you look at trends by nationality, are you seeing further impacts, a second-tier impact? People traveling less, more generally, maybe the U.S. Should we factor this into our full year equations?

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Unidentified Company Representative, [6]

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Hermès is a fairly unusual business. We're highly integrated. We've got a great deal of production facilities in-house. The job for the executive committee is to take into account all 3 phases. The phase of retail, which is weekly. That's the time line. You talk about a good week, a poor week, and then there's the time line for the metiers and creative people. It's about a year. You design the next creation, deliver the previous one and so forth. And then industry's time line, let's just say, in 4 years, when you start a production site, it takes about 4 years to bring it fully online. These are very time lines that you have to be constantly regulating and doing trade-offs and so forth. For the time being, it's business as usual in spite of it all. In other words, we're continuing with all of our investments, all our long-term industrial investments because we see -- we've got the demand and the desirability certainly continues to be here.

As to collections and purchasing, they're very clear, except for recession. Each store has freedom to purchase as it sees fit. So every 6 months is an adjustment based on demand. As it so happens in February, we have what I would call in our jargon, our podium, that's where every store manager places their orders of novelties and products and so forth. That's why our inventory pretty much self adjust, naturally adjust.

Then take a very short-term consideration, we're cutting costs, if need be, in retailing. For the time being though, we can say that the system is self regulating. The Asia area isn't mainly an area of variable rent. So basically, things are self regulating for the time being. Of course, in our strategies, we've already factored in capacity to contain cost or not, but we're not at that stage or we're actually thinking that through. As I said, we've got a strategy. For instance, communication is to focus on local customers. This is the time to continue investing in our local customers to increase desirability of our brand amongst local customers. That was on the first question.

Now on to travelers more generally. There are 2 points, basically. Firstly, this should probably have an impact on travel retail. The Chinese customers travel a great deal. That's a good portion of travel retail, generally. Next, as to other customers, non-French and non-Chinese. I have no indication. I have no indication that there's been any drop in traveling. But what about Korean customers in South Korea? We saw when in Singapore, there were events. Singapore customers had an impact. So Chinese tourists are impacting travel retail.

There's another subject. The question is, where will this virus head? What countries will it go to? And what would the local impact be if the virus does appear in the country? At this juncture, we are just keeping an eye on how things are changing and evolving.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [7]

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Edouard Aubin, Morgan Stanley. I have 2 questions. The first one, if you would come back to the evolution of your customers in terms of nationality and age in 2019. You don't use the recipes of your competitors to target millennials and the key opinion leaders. But despite that, you have great success with the millennials, nonetheless. So if you could comment on that.

The second question is on cosmetics. Could you please give -- tell us about the launches to be expected in the 12 to 18 months to come in terms of product and in terms of retail? You have mentioned that normally, you will be using your own retail network. But in the medium and long term, to what extent will you be using an external network for the distribution of products?

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Unidentified Company Representative, [8]

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For the customers, you've seen the geographical zones haven't really changed, and we are seeing the strength of our local customers in the countries. And this is something that I follow and I'm really proud of. Giving example, the Japanese customers. Maybe some brand invested less in Japan than others to invest more in China, for example. We stayed, we redid our stores, refurbished stores, worked on our network. And today, we have Japanese customers, very strong, very well anchored. That's why we can make a plus 8% over the year.

And each zone is managed multi-locally. We've got Chinese teams that -- in China and Italians in Italy. So this allows us to actually have multi-strategies as a function of each country. And then, of course, you've got in-house internal rules, where we don't pay somebody for writing an article, whether it be an influencer or a journalist. Maybe we use fewer key opinion leaders, but we do have key opinion leaders right to the beauty of the brand have an opinion, which is personal.

There is a movement in Asia where your very young customers coming, they have the resources and they buy. Sometimes this enthusiasm on millennials are not millennials. One, we're all aging, so demographies such as there's more millennials. And secondly, it's overweighted in Asia because young customers. They have the millennial customers, Asian customers, and sometimes, the two are synonymous. And the success that we have in Asia is because we also have a lot of our customers who are millennials.

As I say every time, we don't have a marketing department, so we never make a product for a millennial or for a given nationality. We try to have more successes and failures. Director of jewelry when I was in -- during department you can have some failures. But we try to have more successes than failures and to find customers and to invent the desire of tomorrow rather than responding to the desire of today.

Now for cosmetics, we're starting -- if we want to be cautious, it's also because we remain cautious with regard to the launch of the 16 (sic) [16th] metier. We want to learn. I can't say that we have a plan because we want feedback and experience. Some products that are not only just sold in our stores because we need to have a lot of space, ready for colors, plus, plus. Anyway so we want to create with -- start with 180 points of sale, 80 in Hermès and 90 outside of Hermès, opening outside with Harrods, Galeries Lafayette, the simpler ones in the U.S. and Seoul. And with this, we will see -- the idea is to grow as a function of the successes and the development and the control over our supply chain.

If we had launched it 5, 6, 8 years ago, the big difference is the digital because there's a -- the large part of the distribution of the retail that will be made to the digital, Hermès digital and just perfumes. So we'll see it as many [those] as perfume because it requires no more work and space, but it's supposed to take the classic distribution, classical retail like our perfumes. We continue with the cosmetics makeup that'll come with the foundation theme and nail foliage, to have a complete offering of makeup even though the lipstick is the most important in terms of figures. And then we will be thinking, we're already reflecting -- if it's not ready, we won't, but add maybe a third line, a third area, which would be the creams, to have the 3 areas and be a worldwide brand.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [9]

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Is it possible to give us a little more about the weight of the Chinese outside of China?

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Unidentified Company Representative, [10]

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That's very variable. That is not something that we actually calculate, but I'll give you a figure really with the -- what we have seen during the events in the fourth quarter. And if you travel, yes, to Hong Kong, go -- if you're Chinese, then you buy more in China. It's not a very relevant indicator for us because often we find effects, sort of leverage effect from one to the other. So we prefer to focus on the growth of the local customers in each of the countries.

Let me give you an example. What happened with SARS in 2003? At that time, it was a very touristic destination for the Japanese. 70% of the sales was made to the Japanese at that time. And then the SARS came. Hong Kong was difficult for the local customers as well. They didn't want to go out onto the streets. They're scared of the virus, obviously. And at the same time, we had a very strong increase of our sales in Japan that offset. So there'll be those rebound effects and one situation offsetting another, and it's impossible to quantify it.

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Unidentified Analyst, [11]

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If you would allow me, I have a short question on the virus. At this stage, do you have an idea about the consumption that could have been sort of put on to the digital. Is that quantifiable?

On the CSR, you spoke about the 10%. That was already your case for the managers. Could you give us more specifications?

And thirdly, the fact that one consumes more secondhand. Does that concern you? I mean do you perceive a change that could be projected in the long term?

And then for the anodized aluminum cuff bracelet, you also make rings. Is that introduction of a new material? Or is it to have products that are more accessible?

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Unidentified Company Representative, [12]

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Okay. I'll try and answer to all the questions more or less. For -- it's difficult to know exactly what is the share of what we would've had or not had. When you have a store that closed down, your sales is 0, and we'll all be at an equal footing. But where we have to be very cautious in this kind of a crisis is you always have side effects. First thing that we did in the beginning out of security was a few days, we closed out the Internet. Because what does Internet do? There's a delivery person who goes on from house to house, and it's very bad in terms of health protections. Today, we put in place procedures within the Chinese context. And we do see that there's a demand, the demand on the Internet remains at the level that we had expected. That's why I said we still have the desirability of our products in China today. But then, of course, that does not replace the closure of the store or the lack of customer flow in the stores, even if there are common customers between the online and off-line, that the customers are sometimes different. Internet will not be replacing the closed stores. So this is also what we see when there are strike days, where there is no peak on the Internet during a strike, where it's difficult to get around. But it gives you a good idea of what is the desirability.

And for CSR, of course, it's the first year. 10% of the variable remuneration composition of the managers is based on CSR criteria. There are three. First is decoupling energy consumption with growth. Second is local anchoring and job creation, that is gender equality in the group community criteria, which are assessed some quantitative, some qualitative assessed.

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Unidentified Analyst, [13]

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My question is off microphone. Can microphone be given? We are to manage myself with pride and Henri-Louis Bauer who is having the Emil Hermès SARL statement partnership.

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Unidentified Company Representative, [14]

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Secondhand -- well, that was your question. You asked me a tricky question here. I'll tell you why. It's not very nice. Secondhand, I find it great, and often, there is no sale in our case. It's the granddaughter who brings the grandmother store -- to the store that we sort of refurbish. The real market in the secondhand is repairs, and Hermès is repairing a product.

And there's a secondhand market, which is different, which is selling new bags as a secondhand, otherwise they won't have the right to do so, but more costly than what you find in the stores. So is that something that harms in the long term? Well I think it's a pity for the customers. We try to produce the maximum so it's real customers who'll be able to enjoy their bag and not sell it for more secondhand. It's a rare company where the secondhand is more expensive than new. So the aim is to increase production, satisfy everybody and to have people -- and sometimes, it's secondhand, sometimes, you also have counterfeited products that get mixed in and so forth. So sometimes people get disappointed when they paid a lot of money for something that is fake. So our main aim is to continue to produce, and I think there's an advantage in buying these bags in Hermès as that sometimes it costs you less than the secondhand and more likely to be authentic.

And for the aluminum cuff bracelets, we never think of price. For the moment, we only make the bracelets. We've got several. No rings at the moment. On the prices, they're more expensive, less expensive, just as fair for not making it not expensive. Now the idea is to have something very light and different. We've got leather ones that style in aluminum. We found this manufacturer of aluminum in California, and we liked him. So we made a project with him, and we'll see. We haven't really sold them yet because we haven't really delivered them. They'll be delivered in April, May. So maybe it'd be part of success or maybe not.

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Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Aurélie Husson. I'm from Kepler. I've got 3 questions, one in the U.S. and 2 on China. Great increase in revenues in the U.S. Two stores were opened, I know that. But why is such great performance in Q4? Was these local customers? Or was this partially due to increased travel, tourism?

Now China, virus. I understand that you need to wait for the end of March to see the full impact. Some industry players have talked about a drop in revenues on the order of 80% or 90% in February for the first 2 weeks of February. My intuition tells me that the power of the Hermès brand is so strong that the drop in revenue during the period was probably lower, also especially since you closed fewer stores. Is my intuition right? I tried to phrase that right.

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Unidentified Company Representative, [16]

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That was beautifully phrased.

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Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [17]

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I have a last question, though, on advertising spending in China. Since February, have you reduced advertising spend in China or you're keeping your media plan as is, precisely to prepare for a return to normalcy?

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Unidentified Company Representative, [18]

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Okay. Three questions. First of all, the U.S., first about the country with a large number of local customers, that's always been the case. U.S. nationals from different backgrounds. To tell you frankly, the U.S. is the country that I thought was most interesting during the year. There would be a great week then a poor week. If you ask the teams why, they couldn't tell you. End the year plus 12%, the trend is great. The stores we opened were all successes, mainly with local customers, but we also think of the reopening of Waikiki, where we have a lot of tourists, especially Japanese. Business, very successful.

The basics, yes, we've got local customers in the U.S. The economy has been looking good in the U.S. This is all made for our strong success compared to 2018, which had also been a very good year, going beyond the $1 billion mark. So the trend is great. It's difficult to do weekly interpretation. When the U.S. election, sometimes people spend time watching the debates and not in stores. We've seen this previously. Anyway, there's strong, very good momentum in the U.S. marketplace.

We'll continue investing there. Think of the San Francisco store we reopened. It's doing beautifully. It's one of the biggest size store in the group. We had that opportunity for extra space, and it's doing very well indeed.

But then you've got great results in New York in 1 week and the following week, a little bit more difficult. But in -- instead, our California is doing well versus other countries where every single week are basically the same. The U.S. fluctuates from 1 week to the next, but ending up in the year at plus 12%. We're very pleased.

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Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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Can you talk about China now?

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Unidentified Company Representative, [20]

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When the stores close, you have 0 sales, 0. Just like everybody else. Then there are in-store traffic considerations. Our stores -- stand-alone stores that are not in main traffic areas are still seeing customers, whereas in malls, a lot of foot traffic, people are more worried to come to the malls. So traffic patterns haven't normalized yet in malls currently. We were impacted. I don't know if we'll hold that better than the others or not, but we were impacted as everyone was by the events, especially in February. There was a good trend in January, no doubt about it. There was demand. I believe we've got local customers outside of China. That's very strong customer base.

Now Chinese New Year is 8-, 10-day period, 15-day period (inaudible) with a strong buying. Then there's a week of traveling where people buy outside of China. We didn't benefit from the 8 to 15 days that was in January, many Chinese purchasing. We saw some of the benefits, but there wasn't a subsequent traveling and travel purchases. There were some difficulties to open some of the stores, some of it had to be closed. Some of it had to shorten their hours and have one separate team of employees and so forth.

Our #1 priority in China, as I've said, are health considerations. We're taking health measures for both employees and customers alike. Next, WHO seems to be seeing and speaking. We don't know, we'll see. For the time being, we're resuming operations, normalizing things, but we can't say in-store traffic has normalized in China yet.

To talk about communication, no. You saw in our financials. We went from 5% to 5.2% communication budget. This is because our communications manager shouted, the (inaudible) is expensive.

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

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So what you're saying to us now?

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Unidentified Company Representative, [22]

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This is precisely the time to invest even more, just saying. So for the time being, we haven't cut communication spend. We may be boosting it, possibly doing more digital and more other communication. We're not going to be cutting communication that's been earmarked for cosmetics. Afterwards though, that's the beauty of Hermès. There are often 2 considerations. 2/3 of our communications spending are spending on events. It's very powerful. And 1/3 is media spend, different from the competitors, conventionally, with 2/3 media spend and 1/3 events. We did it other way around. Some events necessarily will be canceled. We're not going to bring 300 people into the same room right now on certain events. So we'll be settling this. We'll see how much -- how many events we might cancel and how many events money might be reinvested in other types of communication if those events are canceled.

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Unidentified Participant, [23]

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I'm from Investir magazine. Earlier, you mentioned Hong Kong. Give us an update. What was the drop in activity? Has everything been offset elsewhere? You also mentioned Italy. What this proportion for the group in terms of activity, sales and production? What are the 4 Chinese stores that are still closed?

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Unidentified Company Representative, [24]

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Okay. Hong Kong, yes, we did experience -- in Q4, there was a reduction in Chinese travelers to Hong Kong, offset by sales in Mainland China. And we saw our local customer base held up very well. So Asia Pacific, Q4 was up 13%, I believe if I'm not mistaken, which is very, very good. Now if we look at -- give you some greater granularity, in Q4, there's a stronger increase than usual in Mainland China, somewhat of a downtick in Hong Kong.

Your other question, on Italy, this is very, very recent, Italy. This is a brand-new event. Again, no Hermès employees impacted. The Milan store remains open. As I said, 80% of our production is in France. There's a little bit of ready-to-wear and some footwear made in Italy. At this juncture, at this stage, I repeat, we don't have any supply chain problems in Italy. The 4 stores closed in China, of course, Wuhan, Xi'an, Harbin and Tianjin.

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Unidentified Analyst, [25]

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MainFirst. I've got 2 brief questions. First one, are you considering price increases this year?

Question #2, growth in leather, often limited by your production capacity. If there were a drop in demand this year and you maintain capacity, you might have a magnificent year next year, thanks to production shifts.

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Unidentified Company Representative, [26]

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Thank you for imagining a magnificent year. I'm always optimistic. I tend to be a worrying optimist. First, a couple of things. On price hikes this year, we've already done everything. Often, it has to do with the increased production costs, overall, about a 1% increase in cost. Does the Eurozone increase in cost? That's where we've got most of our costs. Then currencies have changed. We didn't increase in some areas so we could reduce price variations from one area to another due to currency changes.

Next point. Still, we can say that all of our leather sells immediately. So there can't be any big fluctuation and go beyond what we can actually produce. Other areas that have more subcontractors that are less severely integrated, they can do ups and downs fairly easily, ramp things up or down. Whereas we have to stay pretty much at the same level all the time. We know where we're going to end up by the end of the year. We know our production is. It takes 16 hours to make an Hermès bag. That bag is made in France. We've got our craftsmen and women. They work 36 hour -- 37 hour workweeks. You can do the back of the envelope calculation, even though we don't do this for you publicly, but you can do it for yourselves. We've got, for the time being, all the raw materials we need to produce. We're always trying to make sure our production hovers around 7% or 8% per annum, sometimes more so. There's less of an uptick, but that's broadly the trend per annum.

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Unidentified Analyst, [27]

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Antoine Riou, Societe Generale. I have a question on the Japanese market. There's a weakness specific to all sectors on Q4 on local customers, the first weeks of January, have you observed a normalizations, the number of the customers sort of normal traffic.

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Unidentified Company Representative, [28]

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Yes, Q4 was affected by the increase in VAT in October, with sales higher than what we could have expected before and a big drop and normalization, which finishes -- which ends Q4. So it's the same trend, but this is a specificity of the Japanese market, which in 10 years have gone from 100% Japanese to some -- what tourists said with the Chinese customers in particular. So today, these Chinese customers are not traveling. So I would say as a function of the houses and the share of the local customers that is Japanese customers, there will be a different impact on Japan. The Japanese have wanted to...

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Juliette Garnier;Le Monde;Journalist, [29]

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Juliette Garnier for Le Monde. Can you just tell us how many stores do you have in China? And where do you manufacture your lipsticks, please?

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Unidentified Company Representative, [30]

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In Greater China, if we take Continental China, it's 26, Hong Kong is 7, Macao is 4 and Taiwan is 6. So gives you 43 stores in Greater China. So we have 11 stores closed in Continental China and 4 in Macao when Macao closed down. Makeup, for the lipstick, the stick is made in Italy. The stick what we call (foreign language) in French. The stick is made in Italy.

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Unidentified Participant, [31]

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Women's Wear Daily. A question on your reflection in China. Do you think you'll join an e-commerce platform like daily.com or Alibaba, the Pavilion?

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Unidentified Company Representative, [32]

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Well, for the moment, our priority is to have this volatility with the Chinese teams to Chinese, and that is what is of concern to us today. And looking at all the little signs, including the bottlenecks in Shanghai, is that's a good thing.

Now on e-commerce, so the -- with great success on our website. So the priority is to continue that. Then some products, perfumes, perfumes will also be sold on other selective distribution, not exclusive, selective distribution of perfumes where we do a test of pop-up stores. And WeChat, why not? We are quite open. But this was a surprise. It was our will and the surprise of others given the success, and we were supposed to see an independent site as ours to have as much customer traffic. Earlier, we would've thought -- one would've thought one could have existed without other platforms that you mentioned, but then again.

Well, thank you. Thank you very much. It's -- well, the irony of life to present the best figures recent years in atmosphere of -- full of angst. We're international company accepts the international problems when they arise and they crystallize, and I hope that we will deal with it above all in a human manner. Thank you very much.

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