Wyniki finansowe LPP SA za 4Q 2018 roku.

Hello, good morning, I warmly welcome you to the conference dedicated to the results for the fourth quarter of 2018. We are today in Warsaw at the Hotel Warszawa. We haven't been here before, but it's a very nice place. As we saw earlier, this hotel reminds us a lot of our headquarters in Gdańsk, also with a lot of industrial style. Industrial vibes, concrete and wood, everything combined with good taste. So a new place to hold a conference. Today I even have two mannequins with me. We are showing the 'Echo' collection, because today, besides the report for the fourth quarter of 2018, we will also publish an integrated report, the CSR report, which we will also talk about in a moment. Well, ladies and gentlemen, let's move on to the results for the fourth quarter of 2018.

Big numbers: at the end of the year we had 1,765 stores operating in 23 countries. We increased our retail space by 9% during the year. Our like-for-like sales, i.e., stores operating for more than 12 months, grew by 7%. And if we add the dynamically growing online sales, which allowed us to increase our sales in the past year, we have a very nice almost 15% sales growth for 2018. Please also look at the map. I remind you that we added three new countries last year: Israel, Slovenia, and Kazakhstan in the fourth quarter of last year. The number of stores increased by 22, and you can see the largest increase in the newest brand, Reserved, but there are also decreases in other brands. A decrease in the number of stores in other brands means that in Poland we are rationalizing our store network, closing smaller, underperforming stores, while investing heavily in new, larger, ergonomic stores.

A bit more about like-for-like sales. Please see the chart on the left. We had over 2% growth for Reserved in the fourth quarter of 2018. Looking at this chart, we can say that the third and fourth quarters were not very good because previously we had double-digit growth. But please note that in the third and fourth quarters of 2017 we had high growth, so going from double-digit growth to single-digit percentage growth is still a good result. We are very satisfied with these results. Online sales in previous years grew over 100% year-on-year. This year, in the fourth quarter, we have 70% growth, still dynamic, and we doubled or exceeded 70 million PLN in sales for the full year 2018 online.

How did sales look by individual brands? Of course, Reserved generates the largest sales: 45% of sales is Reserved. All brands, as you can see on the chart on the left, except for Mohito, grew in sales in the last quarter of 2018. If we were to rank our brands by sales, naturally Reserved sells the most, then Cropp and House. And if we treat e-commerce as another brand, it would be fourth in terms of sales, also surpassing Mohito. So Mohito is at the end, and all our brands are growing nicely thanks to new, better collections for the winter season. Sales by region: of course, Poland still accounts for over 50% of total sales, but sales in Europe, in European countries outside Poland, and in Western countries are growing very nicely, with 20% and 15% respectively. Outside the country, that means outside Poland, Europe and Western countries are growing fastest. In Poland, quarter-on-quarter we had only 3% growth.

Total sales in the fourth quarter grew by 10%. And there is no denying that sales per square meter are declining, but they are declining because we are opening increasingly larger stores. New stores in the new concept have over 2,000 square meters. The young brands, Cropp and Mohito, we open stores of 600-700 square meters. The average of these stores today is 350 square meters. So you can see that the growth in store area leads to sales per square meter going down, but the costs of maintaining these stores also go down, which I'll talk about in a moment. Gross margins were very nice in the fourth quarter, almost 60% gross margin, thanks to good collections and because we stick to our policy of selling everything at full price during the regular season and only selling older collections at the end of the season. This policy of waiting, also applied individually to each store, helps us increase gross margins.

You can see on the right side the US dollar exchange rate. 90% of the goods we buy are paid for in dollars, we buy in Asia. The exchange rate has a significant impact on our margins. In the first half of the year, we bought the spring-summer collections at a dollar rate of 3.4060, which also helps maintain margins. Now looking at where the dollar is today at 3.80, you probably already know that the spring-summer collection will not have as good margins this year 2019 as it did last year. But we are strongly controlling our costs. We try to manage them well. Please look at the costs of own stores on the left. I remind you that we look at three components: at the bottom, rent of 93 PLN per square meter per month, which is lower than last year; we have 55 PLN personnel costs per square meter per month, which is also lower than 51 PLN last year; and also the so-called other costs or depreciation, energy consumption, materials usage at 59 PLN, lower than 61 a year ago. So overall, we have a 4% decrease in costs in own stores. When we add stores and central costs and also e-commerce, we also have a decrease per square meter of 3%, but we ate into the high base of 2017, because we had the opening of the store in London with a massive campaign and some other one-off costs, so the base was high. Hence we have a good result of a 3% decrease in costs per square meter overall.

Let's move to the results. The fourth quarter: 10% sales growth, costs growing slower, less than 7%. We always care about maintaining this leverage, on the one hand cost efficiency, and gross margin which was almost 2 percentage points better year-on-year. Thanks to that, operating profit in the fourth quarter was better by 15% and net profit by 4% year-on-year. And the full-year results: sales growth of nearly 15%, costs growing slower, better gross margin, annual margin slightly above 54.70%, and operating profit 30% better year-on-year thanks to our operating leverage in the business model, and net profit over half a billion PLN. So a very good year behind us. We are satisfied with the results, indeed a record net profit in the history of LPP.

A bit about inventories. Please see that inventories are at a similar level as in the last quarter: 1.59 billion PLN. You always look, and I do too, at the indicator of inventory per square meter, which is lower than in the third quarter and even lower than in the fourth quarter of last year. So inventories are under control. We have no old goods, we sell everything on an ongoing basis. Better inventory management on one hand, and on the other hand better management of liabilities or working capital overall. I remind you that we had a goal for this year to equalize trade liabilities with inventories. In the third quarter, we even had higher liabilities than inventories. Now they are at a comparable level. This situation results from seasonality in orders and purchases, which is obvious for our industry. Nevertheless, we managed to achieve this goal, i.e., equalize liabilities with inventories, thanks to which we released quite a lot of cash from working capital. This can be seen on the chart on the left: 750 million PLN in net cash at the end of the fourth quarter of 2018. Plus, we don't count here another 50 million in money market funds.

We need money, my dear people, because we are investing, investing very heavily. On the right side, we have capex of 150 million PLN in the fourth quarter of 2018. And for three years, you can see that this bar at the bottom, green or bluish, is investments in stores. It is getting a bit larger, but a gray part appears on the chart, which is infrastructure investments, as we informed some time ago, construction of offices, new logistics centers. 150 million PLN on infrastructure in the fourth quarter of 2018. Summarizing the whole year 2018, we had good sales growth, very strong online sales growth, thanks to which sales are at a very high level. We control costs, and our business model produces cash which we will allocate to further investments.

In the second part of the presentation, the most important events in the fourth quarter. Certainly the most important event is the opening of a new market, the 23rd market: Kazakhstan. We opened the first stores there. Ahead of us are further investments in this country; we will enter other cities. I'll talk about that in a moment. Also, we are developing strongly in southern Europe. We had many store openings in Serbia. We are opening more stores in other cities in Romania. In southern Europe, our collections are selling very well, so we want to invest even more in that area. And a very interesting joint project with Liberty and the British Vogue. Together with that esteemed editorial team, we created several models that were sold in our stores in London, Berlin, Warsaw, and Moscow, as well as online. It was a special collection, a few models related to New Year's Eve, kept in a 1970s tone. We talk about it because our brand Reserved, we believe, is becoming more and more a global brand. Thanks to cooperating with such editorial teams as British Vogue, we are noticed. We are able to create this global brand better and better. Additionally, we use our store in London for image purposes.

You can see that we have done a lot of work in the last two years to improve collections. We started with the women's collection of Reserved; the collection is already improved, much better. We improved the children's collection of Reserved. And now it's time to improve the men's collection. I think that from this year, the collection will significantly improve. We see the first positive results in sales. There will be many new trends, many new elements that I think will attract men to our stores. Besides these events that are media-catchy, like the collaboration with British Vogue, opening another market, we also had a very important project that I think will fight for our future in the coming years. It is related to RFID technology, i.e., radio frequency identification, which is an electronic tag. But I must say right away that it's not a fabric tag as you often think. We are talking about the so-called anti-theft clip, the same one you see when you buy our things in stores, those plastic, quite large ones. Now they are slightly smaller clips with an anti-theft function on one side but also with an electronic chip, i.e., RFID technology, where each individual item, each individual piece, has its own unique number.

What does that mean? Why do we need this RFID technology? First of all, it's about investments. These are definitely costs because we have to ensure the circulation of these attaching clips. The attaching clips are put on the clothes at the factory. Then they go to our logistics center. We read from each carton electronically how many pieces are in each carton, so we check the declared shipping lists against what we actually ordered in the carton. Then we send it to the stores. And then in the store, the clip is detached at the checkout by the cashier or salesperson. The electronic clip just needs to be detached, and the item is automatically scanned at the checkout. There is no need to do additional steps of reading the barcode. So we have faster sales. And this chip later returns to the logistics center and goes back to the factory. So this so-called attaching clip will travel a lot around the world. This cycle of clip rotation will cost us 60 million PLN annually in all our brands. Additionally, we have investments in IT infrastructure: new software, new systems. We need to buy equipment for logistics centers to read RFID technology, plus of course each store must have special devices to read these codes or electronic tags. So these are investments on one side, and on the other side we gain greater efficiency in stores. As we wrote here, receiving deliveries in the store is significantly faster than before. Customer service time at the checkout is significantly shortened. Additionally, we have better information about where our goods are, and we can replenish missing models on the sales floor faster.

You see that today customers are very impatient. If a customer looks at a dress, or more often a female customer looks at a dress and there is no size, she runs away to another model. People no longer want to ask the salesperson if my size is available. So this technology will also allow us to replenish missing models and missing sizes from the back room faster, onto the sales floor. Besides this, it's also important that the clips are no longer applied in the store as before, but at the factory, which additionally allows us to free up certain resources in terms of labor at the store level. But what do we get in return? Primarily, reading various studies on this technology, many companies, we can see that experts and specialists say that the implementation of RFID increases sales by 3% to 8%. So we assumed that if we increase sales by only 3% thanks to this technology, that’s already a lot, and the technology will pay for itself and even allow us to reap additional benefits. How does the implementation schedule look? In 2018, we carried out a pilot of this technology, prepared the devices and our IT systems. So in 2019, we will roll out RFID to all our Reserved stores, and from next year we will also do this technology for our other brands. So we count that from 2020, at least for Reserved, we will achieve the full effect of these additional sales thanks to RFID technology. Looking even further into the future, I think that when we talk about online deliveries, we could speed up deliveries to the customer by doing them from the store level rather than from the central warehouse. The store packs the goods and sends them to the customer from the nearest location. RFID technology will enable this. So this is a very important future-proof investment.

And, ladies and gentlemen, another important piece of information. Exactly a year ago, we released the first integrated report, titled 'Let's Get to Know Each Other Better', where we talked more about our company, who we are and what we do, what we design. And today we have the second edition of this report, the second year, which we called 'Polish Company, Global Brand'. In this report, we talk more about the supply chain. We focus on factories in Asia, especially in Bangladesh. We show that we cooperate with international organizations, and we show that all our factories are audited, not only by us but also by an international organization, for example the British company. We also talk in this report more about environmental responsibility, about the 'Echo' collections that appear in our stores, about the fact that we do not use animal materials in production, and that we use new materials, cellulose materials, like this Tencel, new technologies that will allow us to produce more eco-friendly clothing. We also boast about our charitable activities. At the end of 2017, we established the LPP Foundation, which began to fully function in 2018. Last year, we allocated over a million PLN to various types of donations, both monetary and in kind, to over 100 different public benefit organizations throughout Poland. Additionally, we support young people who are entering the labor market. Often these are children from orphanages. We help with a program called 'First Fitting' to help them enter the labor market, help them find their way in the market by assisting with writing CVs, preparing for the first job interview, and also showing how to work in stores and at headquarters. Some of these people with autism find employment. I encourage you to read this report. It is available on the website. We also have printed copies at the entrance; if anyone wants to take one, please do.

Alright, the next, third part of our presentation is the plan for 2019, probably the most interesting for you. I'll start with retail space. We plan a slightly faster growth in retail space this year than last year. I remind you that last year we grew by 9%, and now we plan growth of 11%. Please note that in Poland the growth is really minimal, only 1% growth in retail space. So the company will grow mainly in EU markets and still in Western countries, as well as Russia, Ukraine, Kazakhstan, and Belarus. Looking at individual brands: while in 2018 the largest growth was in Reserved and Mohito, this year we will grow more in a balanced way, i.e., besides Reserved and Sinsay, we have a double-digit growth plan for Cropp and House. From 2 to... we are entering two new markets this year: Bosnia and Herzegovina is one market, and the market of Finland in the fall. I can boast, although I'll say more at the next conference, that the market in Bosnia was already opened by us in March. First stores have been opened in Bosnia and Herzegovina, so we are operating according to plan. The planned capex for this year is 860 million PLN, a bit more than last year. The reason: we will spend 670 million PLN on stores alone. What about these stores? A lot is said about the internet winning, that it's not worth investing in a stationary network. I disagree with that. We believe that it is worth developing both distribution channels. On one hand, of course, the internet is developing very dynamically, as you can see from our sales data. But on the other hand, we believe that the future is omnichannel, i.e., both channels. That's why we invest in new stores, more ergonomic spaces that are also equipped with new technologies: new lighting, new ventilation, new types of climate control systems. We believe that is the future. So we must also invest in stores. However, we now have an investment peak. In the years 2011-2013, we signed many lease agreements for new stores. The average life of such a lease is 7-8 years. Now is the period when these agreements expire. We are extending them, of course, on better terms on one hand, but on the other hand, we are simultaneously preparing these stores, i.e., adapting them to current market trends, equipping them with new technology, also so that customers feel good in such stores, want to return, and the shopping atmosphere is much better. Please note in this table at the top you can see our investments. We will allocate 670 million to stores in 2019, then 620, then 450. So really, the investment peak in stores is the next 2, maybe 3 years. But on top of that, there are also investments in offices, as well as 200 million PLN for...

New offices in the years 2019-2020, and additionally we have investments in logistics, which is 400 million zlotys spent in 2020-2021 on a new logistics center in Brześć Kujawski. We also have expenditures of three billion zlotys, of which this year I recall 860, 980 next year, and 820 the year after, and we will return to normalized levels of about 500 million zlotys in three years. There is also this line, inconspicuous or lost among the big numbers: IT and other systems, 50 million zlotys each year we want to allocate to investments in IT technology and improvements, also e-commerce of course. And our goal is to exceed this year 1 billion zlotys in online sales. We also need our long-term goal: we would like to achieve a 20 percent share of total sales within the next three years. How will we do it? We plan to open new stores, new countries. This year we will open an online store in Ukraine and a pan-European one, meaning all EU citizens will be able to buy our products in our online stores, always delivered from Poland but across the entire European Union. Is this an easy task? Probably why we need to invest further in e-commerce logistics infrastructure. Hence this year we will build a logistics center in Romania that will supply goods to Southern Europe, but only in the online channel.

Full year targets for 2019 are essentially similar to what we showed you last year. We maintain the goal of digital sales growth, on one hand achieved through positive like-for-like growth, and on the other hand through further e-commerce development. The group's margin should be in the range of 54 to 55 percent. Although if you remember, it was 50, 50, 47 percent for 2018. It seems to me that due to the high dollar exchange rate, we will rather move in the lower part of that range, closer to 54 percent. We will of course continue to strictly control costs and try to maintain net cash, wanting the company to develop safely and with financial comfort. Our opportunities are primarily entering another country, opening new stores in new countries. That is the main goal, continuation of e-commerce, and as I said, implementation of IT – these are the main pillars and chances for company growth in the future.

A little more about the annual summary, I want to talk about the most important regions. Poland – the region of Central and Southern Europe, Central Europe – namely Poland, Czech Republic, Hungary, and Slovakia. In Poland, the market is saturated with over 900 stores, probably that number will decrease, but we will build nicer, larger stores instead. In Czech Republic, Hungary, and Slovakia, we will definitely remodel our stores, build nicer stores, and develop e-commerce, but this region is already quite saturated. So we will develop more strongly in the Balkans, Southern Europe. Romania, recently opened market, Slovenia, and just opened Bosnia and Herzegovina. In this region we will develop very strongly, with the opening of a warehouse in Romania that would supply all these countries. The Baltic countries – nice markets, very profitable, but small markets. So here we will do remodeling and modernization of the stores we have, and probably not much more. However, the results we have after remodeling the first few look very promising.

Eastern results – how are things? Good. Eastern meaning Russia, Belarus, Ukraine, Kazakhstan – our newest market. On one hand a big country, but... Kazakhstan, a country where we will definitely develop over the next few years. It is an interesting country because we have 10 cities with a population above 250,000 people, and looking at how well we started, we hope we could eventually be in those big cities with about 40 stores. Important for us is still the Russian market – development potential, especially in e-commerce, but we are also building in other cities, and there are many. Ukraine is also an interesting market with low competition, so we will develop further there. And Belarus, where we are currently present in a franchise model, but we plan to change that – we would like to buy back the stores from our franchisees and run this business independently. More details at the next conference.

Western Europe – we are currently present in Germany and the UK. We temporarily do not plan any other changes. We will keep the stores we have, we will not open new ones, but we will not close them either. So we focus on improving sales in the stores that already exist. And the next market – Finland in October this year, on somewhat different terms, significantly different than before, because we are opening in a new shopping center where rents are comparable to what we have in Poland, not expensive street-level rents. So we are curious how this market will receive our collections. I admit that viewers already know our brands because they often go shopping in Estonia, where for many, many years they can also buy our products. And additionally, we will open the pan-European store that will allow us to sound out which Western European markets will buy our goods best. So it is partly an investment in the future, partly uncertainty about how it will go, but on the other hand certainly a great opportunity for us for the coming years.

The last market – the Middle East. The biggest disappointment from our side, I think I can say, because we planned to open many more stores in this region. But many of them are franchised, so we are dependent on cooperation with our franchisee, who, due to the difficult economic and geopolitical situation in the region, does not have much appetite for further investments. So the number of stores is not growing as we would like. However, we are doing well in Israel, we are developing our business there, so we count on opening more stores in that country.

Ladies and gentlemen, another informational point: we finish this part of the presentation with the change of the fiscal year. You know that this year we will have an extended year, a 13-month year. The first three quarters will be the same as before, from January to March, Q2 and Q3 also, but Q4 will have 4 months, so we will not finish work in December but in January. And from next year, 2020, our fiscal year will begin in February and end in January, so we will have a normal 12-month cycle. But please note that this change is more natural for us – as a company we start introducing new spring collections in February and end the year with January sales of the winter collection. So shifting the fiscal year by one month will allow us to better manage, or better convey information, or it is easier for us to work in a calendar that starts in February. Then we have consistency of external reporting with internal reporting – within the company our budget has always been set from February to January, so it will be compatible.

Second slide about IFRS 16 – a major change in reporting regarding lease agreements. Please note that in the balance sheet, our assets will increase by 3 billion zlotys from this year, and liabilities by the same amount. Half of the rents will be subject to this new regulation, resulting in an increase in amortization of 600 million zlotys for the full year. This means that EBITDA will be significantly higher, there will be a positive impact on EBIT, but there will also be financial interest costs. On top of that, we must add currency differences – we cannot predict whether they will be positive or negative, but they will be significant. I think at the next meeting, at the conference in a month and a half, I will tell you more. Additionally, we will probably present our results in both the new and the previous standard, because even for me personally, it's easier to understand what we have shown so far without IFRS 16. So I prefer to live in that ideal world to see if the company is heading in the right direction, if trends are positive, and if we are all developing with more certainty.

And the last slide: we proposed, and I await approval of this proposal, a dividend of 110 million zlotys, which is 50% increase year on year, 60 zlotys per share. A major change also regarding the payment date: until now we always paid dividends in September, but from this year we would like to accelerate and pay dividends always in June. Good, that's all from my side. Thank you very much for your attention.

40 minutes, according to plan, I think. So if you have any questions, I invite you to ask them. We will have to do it as before – questions at the microphone because we need to translate them for the online broadcast. Go ahead.

A difficult question because IFRS 16 changes so much on the side of currency differences that I am unable to answer whether it will be better or not. Generally, as a company, we will of course try to do everything to improve. We had some significant tax-related items, it seems that is behind us. So we will fight for an increasingly better margin also at the net level, but today I cannot say how much it will differ from the current one.

We are looking at our costs more closely than before because we see the trends in the dollar and we see that gross margins will be under significant pressure. Therefore, we are looking more strictly at costs. I think the growth per square meter will be significantly lower than it was in 2018. To answer not directly but somewhat around: we will certainly continue to strictly control our store costs, we will reflect on the approach to purchasing in stores, and there will definitely be lower growth in central costs. Additionally, a major goal for e-commerce this year is the optimization of logistics costs because we are delivering more and more shipments abroad, and the most expensive is the so-called last mile. So we are working on logistics solutions, including the distribution center in Romania, to reduce logistics costs. Generally speaking, this year we will very closely watch our costs to offset any decline in gross margin on one hand, and on the other hand we ourselves are still uncertain about sales. Indeed, the first quarter started well, but that was also a matter of weather. Last year from April sales started very well; I remind you we have a very high base for Q2 2019. So looking from today's perspective, working on costs is what should help us improve results this year.

Indeed, seeing the amounts we spend on store investments and on the other hand looking at the growth in square footage, you understand that either we are building too expensively or something is wrong. Everything is fine, but it is true that rebuilding, modernizing, and lifting stores costs us a lot. Of the amount you see for new stores, about half is the amount we allocate to rebuilding and modernization.

The 54-55 percent guidance is for the comparable 12-month period. If it is a 13-month year, then in that moment it might be a bit lower. Regarding IFRS 16: at the EBITDA level, total costs may be about 40-50 million zlotys lower under IFRS 16 compared to the previous standard. But on the financial side, the interest costs will unfortunately be higher. So the total costs including IFRS 16 due to interest may be about 50 million zlotys higher for the full year.

As a group we have a fairly strong position. We get a lot of contributions, about 137 decisions per year are returned. But looking through the prism that we most often get contributions when entering a new shopping center, where sales are not yet known, in the case of existing shopping centers we only do remodeling. Of course, we try to stay in the best centers that have good sales, and such centers are not keen on giving contributions because they know they are good on their own. So in modernization, the contribution rate is significantly lower than when entering new objects.

Looking at the group level, in Q1 I report 11% growth. In Poland, I only have a percentage. Indeed, abroad we grow faster and the consumer there is stronger than in Poland. So maybe not referring only to that data, but I can confirm that looking at all the countries in our portfolio, Poland is one of the weakest performing. On the other hand, we see that the ban on Sunday trading had an impact, we haven't fully recovered the lost Sundays through increased online traffic. However, thanks to our geographic coverage across Central and Eastern Europe, as a group we cannot complain.

I don't remember the cities. However, we are talking about store closures that are already designated for 2019. These are all our loss-making stores, not only in Poland but also abroad. So we are talking about a total of 32 thousand square meters to be closed entirely. But not only Poland, also abroad, though most are in Poland. Yes, yes.

Generally, holidays help sales. The week before the holidays is always very good. Now, looking at the last two months, March was very good for us, but also because the weather helped. Last year March was cold, so weak sales in Q1, and from Q2 in April last year we had very good sales because it was quite sunny, essentially the beginning of a warm summer. Looking at the beginning of this April, we indeed see slight declines on platforms, but the pre-Easter week starting Monday should improve the balance for the whole month. But we don't deny that the base for Q2 last year is very high. The warm weather helped the entire apparel industry a lot, so we know we have an ambitious task if we want to improve results.

Good, do you have any more questions? I don't see any. Well then, thank you very much. And taking the opportunity that it is before the holidays, I wish you peaceful, healthy, family holidays and I invite you to the next conference which is soon, in a month and a half at the end of May. Thank you.