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Edited Transcript of SMCP.PA earnings conference call or presentation 25-Mar-20 8:00am GMT

Full Year 2019 SMCP SA Earnings Call

Apr 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Smcp SA earnings conference call or presentation Wednesday, March 25, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Célia d'Everlange

SMCP S.A. - Head of IR

* Daniel A. Lalonde

SMCP S.A. - Founder, CEO & Director

* Philippe Gautier

SMCP S.A. - CFO & Operations Director

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Conference Call Participants

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* Chiara Battistini

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

* Geoffroy Thibault Antoine Victor De Mendez

BofA Merrill Lynch, Research Division - Associate

* Kathryn Parker

Jefferies LLC, Research Division - Equity Analyst

* Marie-Line Fort

Societe Generale Cross Asset Research - Equity Analyst

* Murielle Andre-Pinard

HSBC, Research Division - Analyst

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* Richard David Francis Edwards

Goldman Sachs Group Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the SMCP Full Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 25th of March 2020.

And I would now like to hand the conference over to your first speaker today, Célia d'Everlange. Thank you. Please go ahead, ma'am.

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Célia d'Everlange, SMCP S.A. - Head of IR [2]

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Thank you. Good morning, everyone. This is Célia d'Everlange, Head of Investor Relations speaking. Thanks for being with us this morning for SMCP full year results in this very particular and unprecedented context. Daniel Lalonde, CEO; and Philippe Gautier, CFO of SMCP, are present on the line.

Despite the fact that the 3 of us have not been able to come together in person at the office, we did our best to organize this call, and we hope that the sound will remain clear as our phone connection are not always the best quality. If one of our line is not working properly, another one will take the lead, especially during the Q&A session. As usual, we will go through the presentation, and then we will have the Q&A session.

Before I hand it over to Daniel and Philippe, I invite you to go through our usual disclaimer on Page 2. You will note that, unless otherwise stated, all financial data and comments are disclosed pre-IFRS 16 to maintain an economic reading.

And I think we can start now, Daniel.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [3]

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Yes. Thank you, Célia, and good morning, everyone. Thank you all for joining us. As mentioned by Célia, these last days have been very unusual for all of us, especially for Europeans and Americans, who are now experiencing the same situation that Asia did a little more than a month ago. I would like to let you all know that my thoughts are all with you and your families, and I hope that everyone is safe and healthy.

I'll begin with a quick overview of 2019. Philippe will detail our financial results, and I will conclude by giving you an update of the group situation in relation to the impact of COVID-19.

As you've seen from the press release, 2019 results are roughly in line with the updated guidance. Back in January, you saw our sale numbers. As a reminder, we talked about 11.3% of reported growth and 8.7% in organic growth, i.e., excluding De Fursac and at constant currency. 2019 showed a robust sales growth considering that we operated in a very challenging environment, with the continuously sluggish French market and the sharp market deterioration in Hong Kong in H2 '19.

In terms of profitability, the adjusted EBITDA was up 1.6%, and adjusted EBITDA margin came at 15.4%, particularly impacted through the second semester by the sharp deterioration of the market in Hong Kong and the performance of Claudie Pierlot, which has been slightly below what we were expecting beginning of December. These have led to a lower store cost absorption.

The net income stood at EUR 51.6 million in 2019 versus EUR 50.2 million in 2018. Excluding the refinancing penalties related to the early redemption of our high yield, net income was up 14.1% in 2019. For operated cash flow, we generated EUR 62.4 million in 2019. This is excluding minus EUR 1.9 million of IPO-related cash out, the latest cash out of this type, by the way. This is also before tax. And finally, our leverage stood at 2.2x EBITDA following the acquisition of De Fursac. This remains sound and manageable.

Moving to Slide 5. I wanted to quickly remind you of our sales numbers. As previously mentioned throughout the year, we have seen an improvement both in total sales growth and like-for-like driven by a strong fall/winter collections for Sandro and Maje.

On the like-for-like side, the performance is flat for the year, but including a sequential improvement to 0.8% in H2 '19. With an 8.7% of sales organic growth, the year benefited from a strong double-digit international sales growth of plus 14.1% at constant currency driven, first, by a very strong growth in APAC at plus 25.8% at constant currency; and second, by EMEA, which stood at 9.8% in constant currency.

Meanwhile, France showed a relatively good resilience at minus 0.7% considering a continuing challenging environment, marked by the yellow vests at the beginning of the year and significant strikes in Q4. Overall, we continued to gain market share in France. According to the IFM index, the French market declined by negative 1.3% in 2019.

And now let me turn it over to Philippe, who can take you through the numbers in more detail. And afterwards, I will be back for current trading and outlook.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [4]

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Thank you, Daniel, and good morning, everyone.

So moving to Slide 7, let's focus on our financial performance. Adjusted EBITDA increased by 1.6% to EUR 174.2 million, resulting in an adjusted EBITDA margin of 15.4%. Overall, impacted by a bit lower-than-expected sales performance this year, particularly driven by the sharp deterioration of the market in Hong Kong and by Claudie Pierlot.

Looking at our margin structure on the right side. The gross margin was down 130 bps at 74.5%, mainly impacted by, first, some pricing market adjustments in the U.S. where we have decided in H2 '19 to adapt some of our prices to the current market practices; second, an unfavorable mix led by the significant disruption that we have seen in Hong Kong.

As a reminder, Hong Kong generated one of the highest gross margin of the group. And by a higher share of price sales as we saw strong performance in most of our outlet centers, the contribution of outlets to the turnover increased from 9% in '18 to 10% of our sales this year. This is also due to the liquidation that we have done in Q4 '19, representing circa EUR 5 million of sales, always done in a comfortable way and through trusted partners.

In parallel, store costs as a percentage of sales increased to 41.4% (sic) [41.2%]. This unfavorable store costs absorption comes from the lower-than-expected sales performance. We also had the impact of the events in Hong Kong, with stores operating well below capacity. This impact has been amplified by the opening of circa 25% of new stores in Hong Kong in the midst of the crisis.

We have been active on the front of mitigating the costs, particularly negotiating rent relief with our key landlords in Hong Kong, a lever that we will continue to use in 2020. As a result, retail margin, which corresponds to the gross margin minus forecast, stood at 33.4%.

Finally, SG&A rate decreased from 18.9% to 18% of sales, showing an efficient management of this cost while maintaining the right level of investment to support future growth, clearly in the area that we highlighted earlier this year, such as our Asian platform, digital and retail excellence.

Another example is the Oracle finance platform that we have successfully implemented in North America, in our largest European countries, including France, and more recently in China this year, and which gives us an increased visibility on our costs. We were able, in the same time, to be very reactive to challenge our discretionary expenses, such as overhead costs, travel or external services through negotiation with our key service providers.

Now if we move to the net income, which is Page 8, gives you an overview of the main components of the P&L for 2019. Net income stood at EUR 51.6 million in '19 compared to EUR 50.2 million in 2018. These figures include minus EUR 12.6 million of one-off costs, refinancing penalties that we incurred in H1 '19 related to the early redemption of our high-yield bond. Excluding those one-off costs, net income increased by 14.1% on a comparable basis from EUR 52.1 million in 2018 -- sorry, EUR 50.2 million in 2018 to EUR 59.4 million in 2019.

The bridge highlights the variation of each item, excluding those one-offs, to make economic analysis more relevant. I will start with the plus EUR 6.1 million of adjusted EBITDA and LTIP gains, which includes EUR 2.7 million of adjusted EBITDA gain, as mentioned, and a decrease of EUR 3.4 million of the LTIP charges this year. D&A increased by EUR 9 million from 3.6% of sales in '18 to 4.4% in '19 on the back of the additional investment that we made in '19 to support the continued expansion in Asia and to ensure that we have the right infrastructure in IT.

Nonrecurring expenses were slightly up by EUR 2.2 million as anticipated. And notably, they included transition costs to a fully integrated platform in Mainland China, some one-off lease fair value adjustment in Hong Kong and the De Fursac M&A fees. Financial charges, which included the significant one-off cost of EUR 12.6 million due to the early redemption of the high-yield bond.

Excluding these one-off costs, financial charges decreased actually from EUR 16.9 million to EUR 13.6 million, down EUR 3.3 million, showing a continued optimization of the cost of debt from 4.7% in '18 to 2.7% in '19 as we completed the full refinancing of our debt. This reduction in our cost of debt will have a full year impact in 2020.

Lastly, tax charges stood at EUR 26.5 million. This is a reduction of our corporate income tax rate from 44.3% in '18 to 33.9% in '19, including the CVAEs, the French credit tax. Excluding this last item, the tax rate stood at 30.3%. The income tax benefited from the deductibility of LTIP charges or 2.1 points versus last year, following the implementation of a share buyback program as well as some positive one-offs, 3.1 points linked to the retroactivity of these deductibility. Excluding this one-off, the normalized rate would have been around 37%.

What about cash? Let's look at Page 9. In 2019, operating free cash flow generation before IPO-related costs and tax stood at EUR 62.4 million. This is a result of 3 drivers: adjusted EBITDA, up by 1.6% to EUR 174.2 million; CapEx increased by EUR 13.2 million from 5.5% of sales in '18 to 6.1% of sales in '19, including additional investments mostly related to the continued expansion of our footprint in Asia; as well as one-off investment in infrastructure and IT, such as our new finance platform with Oracle and some extended capacities in our European warehouses.

Then we have seen a slight improvement of our operational working capital for the first time since '17. It went from 16.8% of sales in '18 to 16.6% in '19. This is mainly due to the implementation of a new process in demand planning, which helps to better control the level of inventories of our international business units. Cash out in change of work cap has been substantially reduced by EUR 15.8 million versus last year.

Operating free cash flow after tax, which includes EUR 40.9 million of tax cash outs stood at EUR 19.7 million, mainly impacted by the higher cash out in tax and the higher CapEx, while cash out in nonrecurring item has been reduced by EUR 8 million versus last year. Looking forward, cash out in tax and CapEx will be moderated in 2020.

Now moving to Slide 10. We have put in place this year a new financial structure, following the early redemption of the high-yield bond as well as the acquisition of De Fursac. You can see that our leverage ratio has increased from 1.6x in 2018 to 2.2x at the end of 2019. At the end of December, net financial debt stood at EUR 387.4 million, mainly impacted by the acquisition of De Fursac. Higher cash outs in terms of tax and financial charges, which included the EUR 12.6 million of penalties.

If you know, in H1 -- as you know, in H1, we took the opportunity to reimmerse the balance of our high-yield bonds and to cancel our prior RCF. We have signed in May '19 a 5-year credit facility totaling EUR 465 million, comprising a EUR 265 million term loan and a EUR 200 million last year. With this new financial structure in place, we have optimized our cost of debt from 4.7% in '18 to 2.7% in '19, and we have extended our debt maturity. This new structure will provide strong foundation to face the current short-term headwinds.

On Slide 11, we have highlighted the main impact of IFRS 16, which is fully in line with what we expected. As of December 31, 2019, we recorded an impact of EUR 504.3 million in terms of lease commitments and EUR 112.2 million in terms of the integration of lease charges in our EBITDA. This represents an average remaining length of lease of about 4.5 years. IFRS 16 is almost neutral on EBIT, which will now become a better indicator of our business.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [5]

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Thank you, Philippe.

Now if we can turn to Slide 13. I would like to give you an update on the impact of COVID-19. We are now near the end of March. So for Q1, we are beginning to have a pretty good assessment of what it means for us.

Since our last communication, the COVID-19 epidemic has continued to spread outside of China, leading most European countries and, more recently, North America to take strict measures in attempt to contain the spread of the epidemic. In this context, our top priority is to ensure the safety, health and protection of all our employees and our stakeholders as we put in place a global crisis team since January to manage the situation on a daily basis.

In parallel, we are actively implementing several initiatives to reduce our cost base, and we are postponing nonessential investments to partially absorb the impact of this unprecedented crisis. At the same time, liquidity has also been a key priority, and we have mobilized last week all of our credit lines in order to weather the storm. I will comment on that in just a minute.

And finally, a few words on sourcing. In China, which represents an important area of sourcing, we have not experienced any important delays in production. Most of the factories resumed mid-February, and the few delays that have occurred should be absorbed.

Overall, our production for spring/summer '20 is fully secured, while more than 60% of our fall/winter '20 production has already been produced. In the European basin, some of our factories are fully operational, while some others have stopped their production. We are reacting to this by shifting our sourcing to other areas to complete the fall/winter collection, among other initiatives on the collection planning.

On Slide 14, a couple of comments on the current status by region, starting in APAC. So in Greater China, almost all of our physical stores are now opened compared with up to 70% of stores closed at the peak of the crisis in February. However, a vast majority, about 75%, of stores are still operating on shortened hours. Things are moving in the right direction, however, with traffic showing early signs of improvement from minus 80% to 90% declines in traffic in February to now minus 50% to 60% in March.

Regarding our e-commerce channel, which represented 15% of our sales in China in 2019, it has been operating normally throughout the crisis. In China, we registered strong results in e-commerce in Q1 2020 with sales growth in excess of 50%. In the meantime, in countries such as South Korea and Australia, where stores are operated by our partners, physical stores remain open but traffic is extremely low.

In EMEA, including France, 100% of our physical stores are closed in most European countries since mid-March, including key countries such as France, Italy, Germany, Spain and, more recently, the U.K. Finally, in countries operated by our partners, such as the Middle East, physical stores are temporarily closed, with the exception of Dubai. In Russia, they remain open for now. The European distribution center is open to ensure exports and e-commerce, which represented 15% of our total sales in 2019. So far, in Europe, the results are modest, but we are at the early stages.

In the Americas, all of our physical stores in the U.S., Canada and Mexico have been closed since mid-March. However, our distribution center remains open to ensure we continue our normal e-commerce operations, which, in 2019, represented about 25% of total sales. Just like Europe, results are modest, but we are at the early stages.

So now let's turn over to Slide 15. In these uncertain times, we have also launched a strong action plan addressing the entire group cost structure, aiming at mitigating the impacts of COVID-19 situation on group profit and cash generation. This plan includes 4 priorities. First, selecting the essential investment projects such as our digital road map and postponing to H2 2020 or next year all other projects in order to significantly reduce the amount of CapEx for this year. In parallel, we have decided to significantly reduce the number of net openings by more than half and select our key openings, notably in China, to balance our investment between future sales growth and cash management.

Overall, the CapEx envelope should be reduced meaningfully by 30% to 40% versus LY. Second, we are actively working on optimizing our OpEx, notably through rent renegotiations. We have already achieved some rent relief both in Asia and Europe, and we expect to achieve the same in North America. In the meantime, all discretionary spending is reduced to the essentials.

And finally, regarding overheads, we are working on several actions in line with local government stimulus packages and existing local legislation. Third, we are slightly adjusting our collection plan between spring/summer '20, fall/winter '20 and even spring/summer '21. We have reduced the open-to-buy for the fall/winter '20 collections. And last, we continue to centralize our inventories to ensure to have the right product at the right place at the right time. Fourth, I'd like to mention that all of our distribution centers are fully operational today.

This has been a key strength in China during the crisis as we recorded some very strong results from our e-commerce channel, even if it's still modest in Europe and North America. Last, as I mentioned earlier, we have immediately mobilized our credit lines to ensure that we have sufficient liquidity to face the crisis. We have thus decided to draw the full capacity of our RCF, which was not used. And based on this, we benefit from a strong cash position of more than EUR 200 million.

Before we conclude, I'd like to say a few words on Q1 2020. In this unprecedented context, SMCP sales and profitability are meaningfully impacted. As we've described, the group has taken immediate measures to ensure the health and safety of our teams and stakeholders as well as to mitigate the economic impact and protect our cash flow. Considering the rapid progression of the outbreak and the uncertainties around its duration, it is impossible to communicate relevant forecast for full year 2020, both in terms of sales and profitability.

At this stage, we are expecting Q1 2020 sales to be impacted after a strong start to the year, especially in the APAC region. We've experienced a very sharp decrease in traffic in Greater China in February. If Greater China is today showing some early signs of improvement, the spread of the epidemic is now strongly impacting the economies, both in Europe and North America. So based on these elements, Q1 2020 sales are expected to be down by slightly more than 20% on a reported basis. We will continue to monitor the situation closely, and we'll update the market in due course.

To conclude, 2020 will be a year dedicated to building on our fundamentals while weathering the crisis. What remains unchanged is that SMCP's strength is underpinned by a unique business model, a portfolio of strong international brands and a very, very talented team. Importantly, we benefit from a well-balanced business geographically, which should allow us to better navigate in this fast-moving context. Today, the teams are fully operational and focused on preparing the recovery. With our internal digital tools, we are able to maintain our key processes and work efficiently. The leadership team meets daily, and we are actively managing the crisis as well as planning for the recovery.

So thank you for your attention, and now we're happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first one comes from the line of Chiara Battistini.

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Célia d'Everlange, SMCP S.A. - Head of IR [2]

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Chiara, can you please speak slowly and ask your question one by one to ensure that we heard you well. Thank you.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [3]

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Okay. The first question I have is on the inventories and the excess stock. I was wondering if you could give us some color on how you're managing the excess cost and -- resulting from the situation. And also, if you could give us any color on your expected gross margin pressure, especially in H1? I appreciate it's quite early in the situation, but any color on this would be very appreciated.

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Célia d'Everlange, SMCP S.A. - Head of IR [4]

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Okay. Thank you. So Daniel, the first question is related to our inventory excess, so give a bit more color and to see how we can manage it.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [5]

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Okay. Thank you, Célia. Can you hear me?

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Célia d'Everlange, SMCP S.A. - Head of IR [6]

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Yes, very well.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [7]

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Yes.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [8]

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Okay. So thank you, Chiara. Listen, I'll say a few words, and then I'll let Philippe maybe complete on the excess part. So listen, from an inventory and a collections perspective, so what the teams are doing is a couple of things. On the collections plan, so we're seeing with -- there's some capsules, for example, in spring/summer that we could easily shift and that we're supposed to launch later on that we can easily shift either to fall/winter '20 or spring/summer '21. That's one thing. So there's some room within our collection plans to make some adjustments and to take benefit to account for the crisis.

The second point I'd say is on the fall/winter collections. So we've reduced meaningfully the open to buy on the fall/winter collections. And we will also probably have a stronger -- more carryovers from one collection to another of products, we think, makes sense from one season to the other. So those are the few words, and maybe I'll let Philippe complete.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [9]

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Sure. Sure, Daniel. So as Daniel mentioned, we have put in place many actions, and many actions in terms as well of demand planning, which explain the reason why our working capital is now improving. And this is largely due to the inventory position, where we have an inventory growth, which is now on track and in line with our total sales growth, which is a strong improvement compared to last year, where our inventory growth was twice as much as our sales growth. The situation is on track, and we have been very strict in managing our open to buy.

Another thing I would add is like, as you have seen, we have done some liquidation as well end of '19, and that we have continued to do so a little bit in Q1 as well, which means that we have the sales -- we start from a sound situation in terms of excess.

In terms of pressure on the gross margin, we already saw some pressure in '19 related to the liquidation that we could say is around 40 bps from the evolution that you saw in '19. So this type of pressure is likely to continue a little bit similar to what we saw in '19. Now it's still a bit early to tell because, obviously, it depends how the crisis is going to unfold. So I will stop in terms of forward comments here.

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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [10]

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And my second question would be on e-commerce performance in Q1 so far. You've said that e-commerce is growing in excess of 50% in Q1. Could you be able to give more color by region maybe and commenting on the evolution of that in China versus Europe and Americas in the quarter, please?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [11]

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Yes. Sure. Célia, I -- it's okay. You don't need to repeat. I understood. So Chiara, a couple of quick words on that. So the first point is all our e-commerce operations are working today in all regions. The comment I made about the excess of 50% growth relates only to China. So since the crisis, we've seen some meaningful increases in our e-commerce business in China, and that's in excess of 50%. In Europe and in North America, it's very early to tell. So we're very early into the closures of the physical stores. And I'd say at this point in time, it's more modest than the performance that we've seen in China.

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Operator [12]

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Your next question comes from the line of Richard Edwards.

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Richard David Francis Edwards, Goldman Sachs Group Inc., Research Division - MD [13]

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Can you hear me?

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Célia d'Everlange, SMCP S.A. - Head of IR [14]

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Yes. Very well.

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Richard David Francis Edwards, Goldman Sachs Group Inc., Research Division - MD [15]

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Cool. Just a quick question on your new credit structure. Do you have any covenants attached to that you could share with us?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [16]

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Yes. So maybe I'll let Philippe say a few words about that.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [17]

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Yes. So obviously, like our cash position is key, so we have taken the measure, and we have turned fully our RCF, like, a couple of days ago. And as you know, we are able to control our cash. We can control a lot of these cautionary OpEx and CapEx to generate significant cash. Yes, we have covenants in place, which are at the level of 3x EBITDA. So that's EBITDA, excluding IFRS and net debt, excluding IFRS. So obviously, we are monitoring the situation.

What I would say, we have been in very close contact with our banks. They are very supportive throughout the crisis. So we are very confident in this stage on our position.

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Célia d'Everlange, SMCP S.A. - Head of IR [18]

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Do you have another question, Richard?

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Richard David Francis Edwards, Goldman Sachs Group Inc., Research Division - MD [19]

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No. That was it.

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Célia d'Everlange, SMCP S.A. - Head of IR [20]

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Okay. Thank you, Richard.

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Operator [21]

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Your next question comes from the line of Rebecca McClellan.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [22]

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Can you hear me?

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Célia d'Everlange, SMCP S.A. - Head of IR [23]

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Yes. Very well, Rebecca. Thank you.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [24]

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Just on -- could you give us any sort of granularity about the rent relief, the sort of extent of it or -- and is it of immediate effect, please, when it -- once negotiated?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [25]

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Yes. So Rebecca, thank you for the question. I can probably take that one. So I'd say a couple of things. Since we've started earlier on this process in Asia, again, it's not all finalized yet. And it takes various forms throughout different landlord partners. But for the moment, I'd say we're -- just to give an indication, we're more in the close to EUR 900 million to EUR 1 million worth of rent relief so far in that particular region.

And in terms of -- and it's not finished yet. In terms of Europe, it's very early. We've just mobilized all our teams and all our key landlords last week. So we're in the process of negotiating some rent relief. I can say at this point in time that they've been very -- they've acted in -- as strong partners. So they've been very receptive to the conversations we're having with them. And it's going -- I'd say it's going very well, and it's something that we've just begun in North America.

So I don't have enough -- we don't have all the visibility yet in those markets in Europe and North America. But I can say that discussions are very productive at this point with our partners there, and then we have some more meaningful results or tangible results I mentioned earlier, in Asia, in Greater China.

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Célia d'Everlange, SMCP S.A. - Head of IR [26]

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Rebecca, did you have another question?

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [27]

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No. That's it.

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Célia d'Everlange, SMCP S.A. - Head of IR [28]

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Okay. Thank you. Operator, I don't know if we have some other question. It seems that the line is very busy. So we could -- I'm not able to connect. Do we have a question?

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Operator [29]

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We have one more, ma'am, yes, from Kathryn Parker.

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [30]

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Can you hear me, okay?

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Célia d'Everlange, SMCP S.A. - Head of IR [31]

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Yes. Thank you.

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [32]

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Okay. Great. So my first question was on staff costs. So primarily, staff working in your stores. And I wondered -- and have you been able to maybe reduce people's hours or reduce numbers of some of your temporary staff in order to mitigate the impacts on profitability?

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Célia d'Everlange, SMCP S.A. - Head of IR [33]

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Okay. Yes. Did you hear the question?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [34]

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Yes. Do you want me to take that, Célia?

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Célia d'Everlange, SMCP S.A. - Head of IR [35]

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So your question, Kathryn, was on override, no? Your question was to know if we were able to reduce the number of hours, and if we have the capacity to optimize cost on that end, right?

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [36]

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Yes. Exactly. So whether you've been able to cut some temporary staff, and then we [believe we could see you also transact].

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [37]

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So Kathryn, with relation to staff costs, you were mentioning mainly staff costs in the stores. As you know, all -- the majority of our stores are closed today in Europe and North America. So what we've done, and we're working with our global HR teams and with our crisis management teams as well to work according to the local government mechanisms that, I must say, are very different country to country in terms of what they provide for people who are not working today because there's essentially -- -- from the store manager to all the sales associates, their stores are closed. So they're not working today. So we're working country-by-country to find the best solutions to support our teams as best as possible during this crisis. That's about as specific as I could be, but essentially no store associates are working today because the stores are closed. We're looking into the same issue at all our head office teams, et cetera, et cetera. So our principle is to be as fair and supportive with all our teams in these challenging times.

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Célia d'Everlange, SMCP S.A. - Head of IR [38]

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Thank you. Thank you, Daniel. And by the way, we are working country-by-country, and the legislation is moving very fast today because all the regulation is not yet complete for this exceptional period of time. So that's why it's really a moving part, and we are monitoring the situation to support our team. Thank you, Kathryn. Do you have another question?

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [39]

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Yes. I just -- I had one final question on the interest cost and what your expectations are for this year and just given that you've drawn on the RCF as of mid-March. So I suppose that would mean an increase in interest cost payable?

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Célia d'Everlange, SMCP S.A. - Head of IR [40]

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Okay. Thank you, Kathryn. So Philippe, the question is about the interest cost for 2020. What is our -- what are our expectation for 2020? And your second question was the position of the RCF? I don't hear that well. What was your second question on RCF? Sure.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [41]

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Go ahead, Philippe.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [42]

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Yes. I think I got the question. Basically, you have an interest cost that we explained for 2019, roughly at 2.7%. So that's what you could take into consideration, give or take. Maybe you have a slight -- will be slightly higher than 2.7% because we will have a bit more cash on hand. So let's say, it could be around 3% at the ballpark. And then we will -- as the crease unfold, how we best optimize our interest cost. But that would -- it should be around 2.7% to 3%.

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Operator [43]

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Yes, ma'am, it comes from the line of Marie Fort.

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Marie-Line Fort, Societe Generale Cross Asset Research - Equity Analyst [44]

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Just one additional question about CapEx. Could you precise where the CapEx will stand at the end of the year? And another question, do you share with your main shareholder who you -- any views on the situation China? And are they trading now? So...

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Célia d'Everlange, SMCP S.A. - Head of IR [45]

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Okay. Thank you, Marie-Line. So 2 questions about CapEx at the end of the year and share our view on the situation in China.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [46]

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Yes. So Célia, I can take that. So Marie-Line, on the CapEx side, what I can say is we've had on our daily calls with our global teams, so we went through all the store CapExs. We reviewed them all very recently last week throughout the world. And as I mentioned, we will be most likely taking the net store openings this year. We will divide by half and focus them on key areas. And notably, probably 50% -- more than 50% of those will be in Greater China region. That's one thing. So we're very selective on the stores, and we push back as much as possible on nonpriority stores to 2021.

We've also had a keen eye to -- on the nonstore CapEx to keep some very strategic projects for us, mainly around our digital road map, one project we talked about last year. For quite some time, it's what we called unified commerce, ability to ship from store and to see every piece of inventory at all times throughout the world. This is a very important project for us. It will be a breakthrough. So we've decided to keep some investments in our digital road map and then shift others to 2021. The end result is, as I mentioned earlier, more than likely, our CapEx will come down -- will be optimized this year only on priorities and will probably be down 30% to 40% versus 2019.

Your second question in terms of Ruyi, obviously, we had a Board meeting yesterday with all our Board members, including the people from Ruyi in China. We've been in contact with them fairly frequently. So the view -- their view from China, I think we're just all experiencing the same things. Again, the view is that things are slightly opening up. As I mentioned earlier, the stores -- so we share the same view that the stores are almost all open, with the exception of 2 stores in Wuhan and 2 stores in Tianjin so far. The rest of our store network is open. But as I mentioned earlier, the traffic is still minus 50% to 60% versus LY, but that's better than February, which was minus 80% to 90%. So I think we share a bit the same views on the overall China market, I would say, at this point in time.

I don't know if I've answered exactly your question on the views, but maybe I'll stop there for now.

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Célia d'Everlange, SMCP S.A. - Head of IR [47]

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Thank you, Daniel. Marie-Line, thank you. We have our next question, operator? Hello, operator?

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Operator [48]

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Yes, ma'am, it comes from the line of Murielle Andre.

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Célia d'Everlange, SMCP S.A. - Head of IR [49]

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Hi, Murielle, can you hear us? Maybe you are on mute.

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Operator [50]

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Hi, Murielle, please check if your phone line is on mute. Due to no response, we will proceed to the next question, comes from the line of [Giles Crespo].

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Unidentified Analyst, [51]

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[John Bertoluis, IS] I had a question regarding possible government support. If it has already been asked, feel free because I couldn't attend the initial time of the conference due to the line being very busy. So my question was SMCP, being a French-based operation with a Chinese majority shareholder, do you feel it will be eligible for government's support be in term of debt guarantee or debt relief? And if you have already had contact with organizations of PPI, could you give us a color of those contacts?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [52]

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[Giles], I think I'll give that question to Philippe.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [53]

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Yes. I think, you just mentioned, there are different types of government support. I would say one of the most meaningful is in terms of the mechanisms that Daniel mentioned in terms of temporary unemployment in France, and you have equivalent systems in most of the European countries and slightly different in the U.K. or U.S., but in general, you have a possibility to have short-term or temporary unemployment, which is -- well, can be a significant relief in terms of short-term cost. So that's one thing, and that's obviously we're eligible like anybody else. So I would say in principle, we are eligible whatever the shareholder [thing] of our group.

And what I would say, like, as I mentioned, we are very confident in terms of our financial structure due to the action that were explained by Daniel. And we are in close contact with our banks. So, so far, there is no need here. What is sure is that we have seen the support of our banking relations, and we have very important French banks among these ones who are key partners. And of course, there is some kind of influence in the government to -- so that the banks are providing support. So we are benefiting from the support of our key partners for sure.

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Unidentified Analyst, [54]

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Philippe, if you allow me a very short follow-up on that, because I couldn't hear Daniel comment without going back to the whole thing, Daniel or you mentioned anything about covenants on existing long-term debt?

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [55]

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Yes. As I mentioned, we have covenants of 3x EBITDA. So obviously, we are monitoring that. Too early to tell to say exactly what will be the impact of the crisis. That's why we're very confident, and we benefit from the support of our banking relations.

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Célia d'Everlange, SMCP S.A. - Head of IR [56]

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Okay. Thank you. And it's excluding IFRS 16, the 3x EBITDA ratio for the covenant. Thank you, sir. So I think that Murielle is back on the line. Operator?

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Operator [57]

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Yes, ma'am. I'll just open his line.

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Célia d'Everlange, SMCP S.A. - Head of IR [58]

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Thank you. Hi, Murielle.

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Murielle Andre-Pinard, HSBC, Research Division - Analyst [59]

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Is this okay?

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Célia d'Everlange, SMCP S.A. - Head of IR [60]

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Yes. Hi.

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Murielle Andre-Pinard, HSBC, Research Division - Analyst [61]

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Just one question regarding SG&A. I would like to know, what is your flexibility on that? And if you have an objective in terms of evolution in value for the full year to try to limit the impact of the crisis.

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Célia d'Everlange, SMCP S.A. - Head of IR [62]

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Okay. Thank you. Philippe, did you hear the question about SG&A?

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [63]

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Yes. Absolutely. What I would say, Murielle, is we have quite significant flexibility on our SG&A. Maybe a way to look at it is if you look at the evolution from over 2 years from 2017 to 2019, we went from 20.3% SG&A ratio in '17 to staying at 18% in 2019. So we have been able to deliver quite a lot of SG&A rate gain over the period. So we can be very proactive. And I would say we are working on all aspects. So you have discretionary expenses. A good example is travel expenses is going to be very meaningfully down as you can imagine.

We are working on optimizing our overhead costs, and we talked about some of the mechanisms that can be helpful in this type of short-term crisis. So we're active on that. And we obviously control our overheads very closely. And then we have been much more active in terms of negotiating our external expenses with all our consultants and suppliers. So I would say that's the key aspect, and we can be very flexible on that. So we expect we can continue to improve the SG&A rate. That's what I would say, but I would not go much further.

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Célia d'Everlange, SMCP S.A. - Head of IR [64]

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Okay. Thank you, Murielle. Do you have another question?

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Murielle Andre-Pinard, HSBC, Research Division - Analyst [65]

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No. It's okay for me.

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Operator [66]

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It comes from the line of Geoffroy De Mendez.

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Geoffroy Thibault Antoine Victor De Mendez, BofA Merrill Lynch, Research Division - Associate [67]

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I just have one. I understand you're not going to give guidance for the full year 2020. But given you probably have very good visibility on Q1 already, basically the end now. Can you just give us a sense of the drop-through in the P&L of a minus 20% revenue growth from Q1, which is your guidance? Just -- so let me understand the absorption in the P&L.

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Célia d'Everlange, SMCP S.A. - Head of IR [68]

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Philippe, did you hear all the question?

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [69]

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Hi, Geoffroy Yes. Hello. We are not going to give you guidance in terms of EBITDA for Q1 because we usually don't, and we don't report our results by quarter. So that's the reason.

Maybe what I would comment to give you a feeling is that we consider that we have some significant flexibility in our store costs. And the rule of thumb that we are using is to say that we have about half of our store costs, which are variable. The rest is fixed, but even the fixed portion can be challenged. And Daniel mentioned the work being done on the rent relief, which can be very meaningful. So this could be about like not having a charge for the month when the store are fully closed for quite a lot of landlords. So that's an example.

If you look at our focus, as you know, we have about 1/3 of the overall store costs, which is commission. And this is with -- commission with department store, and this is variable fully. And you have 1/3, which is the rental, 1/3, which is the staff cost, and we talked about the measures that can be taken on staff costs. So we can have some flexibility there. And then SG&A, as I mentioned, we have some levers to pull there as well. So that's what I can tell you to give you a color.

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Operator [70]

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Comes from the line of [Kelly Gonsalves].

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Unidentified Analyst, [71]

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Sorry, if you've answered the question before, I joined a bit late. So I was wondering, given a lot of your closing outs are going to be closed for quite a while, I was wondering how you were planning to manage inventory and whether we should expect significant inventory haircut because you are not able to sell it. And so when you start reappointing, whether it's in Europe or the U.S., all of it will have to be clear at the discount. I was wondering if you could comment on that, on your view on this?

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Célia d'Everlange, SMCP S.A. - Head of IR [72]

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Okay. So yes, Daniel, it's -- yes, we already had the question about how we would manage the inventory, Daniel?

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [73]

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Yes. Okay. Well, I'll say a few words on that, [Kelly]. There's a few points. The first point is in terms of collections -- the collection plan. So as you know, today, we're in spring/summer '20 collections. Fall/winter will start later on. And we're already starting to work on the design for spring/summer '21. So what we're doing now is that we're looking at some capsules and some themes that have not yet launched in the spring/summer collection that we're going to launch later, to move those either to fall/winter or to spring/summer next year. So that's one thing.

Number two is also, there'll be, I think, a slightly larger amount of carryovers that will go from season to season that we've planned already. So that's some work that we're doing on collection management from the fall/winter collection. Today, we've bought roughly 60% of the fall/winter collection. And on it, we've imposed or have imposed some strong open-to-buy limits on limiting the number of pieces that we buy for fall/winter as well.

So those are 2 initiatives that we're doing in collection management. And last is we are centralizing even more as we speak, all of our inventories, to make sure we have the right product at the right time at the right place. So those are things that we're doing to mitigate -- well, first of all, to optimize our offers -- our offer in the next, I'd say, the next 12 months, but also to mitigate and to optimize the actual inventory.

Philippe, did you want to add anything to that?

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [74]

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Well, I would just say that we are starting from a sound basis, as I commented, end of '19. We had already implemented all the demand planning processes for about 1 year now or more than 1 year. We had done some one-off liquidation operation in the end of '19, pretty meaningful with [trend-set] partners in a controlled way. And while doing that, again, a little bit in -- we did that again a little bit in Q1 '20. So we have been very active, very proactive on that impact.

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Célia d'Everlange, SMCP S.A. - Head of IR [75]

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Okay. Thank you, Philippe. Operator, I think that we do not have any more questions on the line.

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Operator [76]

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We have one more, ma'am.

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Célia d'Everlange, SMCP S.A. - Head of IR [77]

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Sorry. Yes.

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Operator [78]

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Comes from the line of [Christian Smith].

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Unidentified Analyst, [79]

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I would like to go back to your shareholder that was mentioned earlier, which is obviously -- not obviously, but it seems to be in kind of a little bit of financial difficulties themselves. So I was wondering whether the shareholder or its representatives on the board ever discuss with you whether some support would come from SMCP to the Ruyi Group by kind of issuing dividends or lending money upstairs or doing anything of that kind?

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Célia d'Everlange, SMCP S.A. - Head of IR [80]

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Okay. So Philippe, we have this question about Shandong Ruyi to know if SMCP could bring some support to our shareholder through dividend or some other elements.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [81]

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Yes. Hello, [Christian], the short answer is no in the sense that there is no, like, spread dividend, which would be distributed or things like that. Maybe a couple of things. The way we are set up, we are fully independent from Ruyi, from management point of view, from an operational point of view because there is no integration anywhere. They are more of a strategic partner, and there are absolutely no exchange of financial flows with Ruyi.

There is no shareholder recharge, for example, there is no intercompany financing. Our financing is truly independent from Ruyi. We don't have necessarily the same banks. And in our financial documentation, it prevents us from doing any significant distribution to Ruyi. So there is nothing that could be expected from this front.

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Célia d'Everlange, SMCP S.A. - Head of IR [82]

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Okay. Thank you, Philippe. I don't think that we have no more questions. So maybe we will stop here. Thank you very much. Sorry, the line was very busy, so some of you have not been able to connect.

I would like to remind that you will have a replay as well as a transcript coming in, let's say, 24 hours maximum. The next step will be the Q1 sales publication on April 29. Thank you very much.

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Daniel A. Lalonde, SMCP S.A. - Founder, CEO & Director [83]

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Yes. So Célia, maybe -- yes, I'd just like to thank everyone for participating on this call this morning and all your very good questions, and wish you all the safety and health in the months to come. So thank you, everyone, for joining today.

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Célia d'Everlange, SMCP S.A. - Head of IR [84]

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Thank you. Bye-bye.

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Philippe Gautier, SMCP S.A. - CFO & Operations Director [85]

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Thank you.

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Operator [86]

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That concludes our conference for today. Thank you for participating. You may all disconnect.