Edited Transcript of LPPP.WA earnings conference call or presentation 21-May-20 10:30am GMT

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Full Year 2019 LPP SA Earnings Presentation Gdañsk Jul 10, 2020 (Thomson StreetEvents) -- Edited Transcript of LPP SA earnings conference call or presentation Thursday, May 21, 2020 at 10:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Magdalena Kopaczewska LPP SA - IR Manager * Przemyslaw Lutkiewicz LPP SA - VP of the Management Board & Financial Controller ================================================================================ Presentation -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [1] -------------------------------------------------------------------------------- Welcome, ladies and gentlemen. My name is Magda Kopaczewska, and I am responsible for investment relations in LPP. And today, I have pleasure to welcome you to our video conference, which is devoted to the financial results for the previous year. It's untypical. It's a 13-month-long year and a very historic one. On our video conference, we will also discuss our preliminary results for the first quarter of this year. And also -- it is also untypical because of the COVID influence, and we'll also discuss our plans and the challenges facing us this year. Before we start, let me introduce the Vice President of the Management Board, Mr. Przemyslaw Lutkiewicz, who will present in details, the result. As usual, the second part of the conference will be focused on a Q&A session. And right now, we encourage you to ask the questions during the conference via chat. That's all from me. And let me give the floor to Przemys. Thank you very much. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [2] -------------------------------------------------------------------------------- Welcome, ladies and gentlemen, on this conference devoted to LPP results for the fourth quarter of 2019. We will discuss the financial results. And as Magda said, this is historic results. We will try to do it quickly because we will probably focus more on the preliminary results on the first -- of the first quarter and our plans for the months to come. Summarizing 2019. We've been operating on 25 markets with off-line stores and on the 30 markets with online. We have 1,740 stores and like-for-like were positive. As a result, adding the online sales, the wholesale was increased by 13%. Take a look at the map here, let me explain the legend. The green areas, we marked here the online and off-line stores. The gray area, we marked only the countries where the traditional stores are present, and the blue countries with the online presence. Additionally, we added the information that is probably most interesting to you. How many countries is under lockdown? If you see here in Russia, our very important market, the first foreign market apart from Poland. Russia, Romania, these markets, at the moment, there is a lockdown on stores. Our flagship store is also not in operation in London. As we informed previously, we've been involved in very hard negotiations about decreasing rent levels with the malls. So in Poland, not all stores are in operation in shopping malls. Here you can see also how many stores are open, almost 800 stores are in operations. And Magda mentioned that, but let me just stress it clearly, 2019 was a 13-month-long year. It started on the 1st of January 2019 and finished at the beginning of January 2020. So the fourth quarter that we are discussing today is also an untypical one. It's a 4-month-long, from October until the end of January 2020. Showing these data, we tried to give you the most proper overview of the whole information. So we showed the base of this comparable 4 month period of the previous year. I would also like to stress, we are not changing the fiscal year. 2020 will be the standard 12-month year, but it started in February. It will finish in January 2020 -- 2021. In order for you to have a better overview of the situation and could work on the base data, we will provide you with comparable data. So data for the quarters of the previous year in this shifted module from February to January. At the end, in the backup of the presentation, in the backup slides, you will also find a chart with a preliminary profit and loss accounts according to the changed quarters. Let's move to the sales results. As you can see on the left, the whole year, the whole period covered in this slide, we had positive like-for-likes of the fourth quarter as well, 1.4% of growth. And the most growing like-for-likes is such brands as Mohito, House and Sinsay. On the right, you can see a dynamic growth of online sales. Here we try to present the lighter color, the fourth quarter of 2018, the 4-month-long. And the current one, the fourth month -- 4-month period of the fourth quarter of this year. So growth of [over] 50%. What is important in the fourth quarter, the online sales constituted nearly 15% of the total sales. Let's have a look at sales by brands. Sinsay and the e-commerce have recorded the highest growth of over 50%, Sinsay, because of the dynamic floor space growth. This is reflected in this chart on the right. We are very pleased that all our brands recorded growth. What is commendable is the Mohito brand, which after -- well, let's say, weak quarters, may consider this quarter as successful. The increase in sales is more than floor space increase. Let's discuss now the regions. In Poland, 4% growth. And as you can see, the foreign market have been noting increasing growth. As we mentioned in the previous quarters, also in the fourth quarter, the foreign sales exceeded the domestic ones. Overall, quarter-to-quarter, fourth quarter comparable to the fourth quarter of the present year, increased by nearly 14%. On the left in the chart, you can see the growth division into e-commerce, retail and other -- other sales outlet. I'm wondering what it would look like in the next conference, how this chart will look like. The e-commerce share will definitely be more. On the right side of the chart, you can see the revenues per square meter. We've been building a larger store. So the growth on sales -- the growth is decreasing because of the rent. If you compare performance in Europe, there are several percent decrease per square meter. But in the Eastern markets, the growth per square meter is increasing. Overall, if you have a look on the bottom here, LPP Group, including the online sales, we had flat sales. Here, we have the total of online sales and traditional sales per square meters. Let's move on to gross profit margin. On the left, you can see the seasonality of our margin. The fourth quarter, it seems it's lower than in the fourth quarter of the previous year, only because the fourth quarter is the 4-month-long one. And January is the hardest here. In January, this is the sales-offer time. So January significantly affects our gross profit margin. On the right-hand side, we compare year-on-year. And here, as you could see in the fourth-month quarter is identical. Let's have a look at costs. On the left, the chart with the cost shows the 5% decrease year-on-year. And all the elements, all the particulars are falling. Rents are lower, personnel costs and the so-called other costs are also lower. On the right, the chart shows the overall cost per square meter, and we have the increase by 2%. This increase is a result of a very dynamic e-commerce growth and the resultant costs connected with logistics. Financial results for the fourth quarter now. In the first 2 lines, you can see the fourth enlarged quarter according to IAS 17 in order to compare the dynamics year-on-year. And the reported results, the IFRS 16, which is obligatory since the 2019. This actually presents the full report. So it had the increase in revenues by 14% to PLN 3 billion. Similar level is the margin level, but the cost increased higher by 15% year-on-year. Therefore, the operating profit increases to PLN 400 million, 8% year-on-year. Net profit, at the bottom, according to IFRS 16, PLN 310 million for the quarter. The whole 13 months accumulatively of 2009 (sic) [2019] you can see almost PLN 10 billion. It's an increase of 13% year-on-year. Margin is -- year-on-year is a bit lower. The positive offset is that the costs are increasing a slower pace, 10%. Therefore, the operating profit is increasing 17%, and it was over PLN 800 million. At the end of January 2020, we recorded over PLN 1 billion of inventory. It's PLN 1,570. It's a quite good results for us, and I'm mentioning this because there's been a lot of changes in terms of inventory management strategy. We've increased this exchange -- inventory exchange. So the spring and summer intakes were quicker. So that's from February, we are able to provide new collections to the stores. Also since they have been developing very fast, the inventory intake is higher. e-commerce is also on the increase. So we need to ensure the appropriate level of inventory. It's not recounted in square meters, obviously. Therefore, this ratio, PLN 1,500, PLN 1,600, this is the optimum ratio for us. On the right, you can see the working capital. The long-term goal that we set for ourselves, matching liabilities to inventory level, for several quarters has been achieved, and the fourth quarter was the same of the last year. So the trade liabilities were higher than our inventory. And now let's move to net cash. As at the end of the year, the company was not in debt. So net cash was nearly PLN 800 million. Let me remind you that at the end of the year, we issued bonds worth PLN 300 million. On the right, you can see in the chart, the CapEx. The fourth quarter, as usual, this is the highest number of expenditures. This time it was the same, down by 17%. Summing up. The past year, we could say that it was a good year. The foreign sales exceeded domestic ones because of the increased development abroad. Double-digit online sales growth was recorded and would be -- we had control of costs of all stores and a good financial situation in terms of 2020. 2020 surprised everyone. It's been a big black swan, which appeared in February and drastically changed the situation in many industries, including the retail clothing industry. Recently, we've given you some results for the first quarter. Let me discuss briefly now. Revenues was lower year-on-year, it's the quarter from February to April, by 1/3. The gross profit margin by 6%. Because of the online sales offers that have been going on, it's impossible -- we had a large loss at the end as a result of that. Looking at the situation of the first quarter. As you remember, in February and March, until the half of March, most of the stores were opened, but afterwards, throughout March and April there was lockdown on stores. Here in the slide, you can see the 4 months of this financial year, starting from February to April due to lockdown throughout Europe. And in May, where particular countries start to go back to normal in terms of their trade policy. For the 3 weeks of May, we recorded 84% decrease year-on-year in traditional stores. So what is positive in this situation is the green line, the e-commerce sales, very good results recorded already in February and March at 72% and 62%. And given the lockdown on traditional stores, we have recorded an increase in online sales. A 250% increase in April, and what is encouraging, a 381% increase in May. It's well known, and our brands are well known, and they fare well. And the second thing, customers have been changing their customer habits and their preferences. They start to move online. It seems that these dynamics will be maintained in the coming months, taking into consideration that it's more difficult to ensure safety and compliance with procedures in traditional stores to make the customers feel safe entering the stores. The column in the middle shows the -- how lower sales we have year-on-year. In April, almost minus 70% drop in sales and minus 43% for the 3 weeks of May. It's worth emphasizing this online dynamic and also the fact that during the pandemic, while the quarantine was on as we were locked down in our homes, everything worked well, and we've been doing our utmost to increase online sales. This is discussed in the following slides so a lot of initiatives and actions taken in the e-commerce area for us to have the most sales. e-commerce remains the only channel for us once the shops were on the lockdown. We've been doing a lot to sell as much as possible. So adjusting, streamlining our apps and websites in terms of mobile, in particular, to the needs of the customers, more outlays on marketing and attracting new customers, a lot of offers. I call them smart offers, they increase the traffic and interest, but they do not have a negative effect on our margin. The most important thing, I would like to add, given such high sales result, no company -- or it's difficult for companies to move to this mode -- changes in the logistics. We've been successful in that area because we believe that only in flexible, dynamic companies may actually survive in these difficult times. So very quickly, we have transformed our logistics procedures. And our most important logistics center in Pruszcz Gdanski, we have kind of transitioned to e-commerce and changed its model. So we increase our shipment possibilities, and during these times, this is key for the customer, by 300%, 400% increase, 4x increase in sales. From the logistics perspective, we have managed to ensure fast delivery of the goods to the customers. Additionally, our logistics centers in Romania, in Slovakia and Russia, they also support the local market. So the pace is ensured. So the following slides discuss costs. As you know perfectly well, our 2 categories of -- base categories of cost are rentals and personnel costs. Rentals are the key elements of our costs and taking into consideration what happens -- or the lockdown that happened, everything suggests that trade, in general, has changed considerably. We don't know how much it has changed and what the ultimate model after COVID will be. But as of today, we know the traditional stores will not be visited as frequently as it was before. This is reflected in the e-commerce statistics. Very intensive dynamics of online sales indicate that traditional stores will be in trouble. Looking to the future, we decided not to leave -- that we cannot leave the rental levels at the same results. We've been in very strong negotiations with the malls in order to have them -- have rentals dependent on -- we note the drop in sales, it's impossible for us to pay as high rent as in the past. As we announced, I would like to mention that as well, given the 30% of our floor space, we decided to start negotiations on the new terms of rentals for our stores. You will definitely ask this question, so let me just give you a head start. As you can see in the slide, 1/3 of the stores where we terminated the contract on time. To summarize this, there is a risk, hence we are taking this risk into account as to the opening of stores. Some stores will never reopen. But we believe that some agreements may be achieved with the shopping malls and in this difficult situation, we may come to some agreement. But let me emphasize one more fact. The changes in customer habits, less frequent visits in stores observed right now, means that we cannot pay as high rents as before. Because of the changing situations, we also decided to adapt our development plans. Many plans and development plans for this year, we moved to the next year, hoping that it will be (inaudible) to our development plans to 8%. And the majority have been actually achieved in the first quarter. For the second quarter, we have openings, in Russia in particular, planned. An important element of the new strategy or strategy for improving the financial liquidity and long-term survival of the company is renegotiation of the rent for the rental spaces. Another important element is personnel costs. Very difficult decisions, but decisions which are necessary in order for the company to operate in a long-term perspective. First of all, decreasing the salaries in Poland and abroad alike, in our companies abroad. The Management Board resigned from their salaries for the pandemic time. Also, the Supervisory Board members resigned from their salaries for the time of the pandemic. In Poland, the average decrease in salaries in stores and headquarters give 40% subsidy to salaries. The most generous are such countries as U.K., Germany or the Czech Republic. But there are also countries that do not provide any help. These -- on our markets, these include Russia, Ukraine and Hungary. Taking into consideration the funds, the subsidies obtained, we've gained -- we've got PLN 22 million and a similar amount we obtained from the government of other European countries. Summing up all these actions, we've been discussing several aspects. Revenues post-lockdown, the only source was e-commerce, and we have done our utmost to increase these online dynamics. In the previous years, we -- our priority was 50% or 100% growth. Today, we said, why to limit ourselves? Why not 200%, why not 300% dynamic growth? Let us do it as high as possible, but maintaining this smart pricing policy so as not to disturb the margin. And this policy seems to be paying off. The margins are the reasonable (technical difficulty)_CapEx on infrastructure on the stores. Here, we decreased as much as possible. We have stopped several investment projects. We decreased the orders for the second part of the year, but as Management Board, we recommended to the Supervisory Board that dividends is not paid out. All these actions aim at maintaining the company -- maintaining the good financial standing of the company. The weeks that have been -- past us show that the customers will focus on -- pay attention to affordable clothing. The cheapest ones have recorded the best results in sales. The customers will be more selective and probably focused more online rather than in traditional stores. What we've seen is like the universal to home office, so we've been observing the trends in terms of shopping for clothes. Leisure, home wear clothing is preferable for the customers. We've also seen the influence of new environmental trends on the choices of our customers, therefore, more eco wear collections are present in our stores. On the right, you can see the medium price range for 1 piece in particular brands. These are not very high prices. It seems that given the situation, we are positioned well as a company so as to be in a good standing after these difficult times and to sell well. Online store -- online sales is very important, but we do not believe that 100% of the trade will move to Internet. We believe in omnichannel, so combining those channels of distributions. We will probably not need as many stores. We would need to optimize the traditional store chain. But it's worth emphasizing that we will be combining the 2 models, the e-commerce and traditional stores. We're focused on RFID technology, this electronic tag, and continue to streamline the shopping in both channels. Click-and-collect option or buying in stores and have a delivery to our place of residence. Does it mean stopping the development of traditional stores? No. But it will look differently. It will be quality-based, we will demand more fit-outs, more subsidies to creating our stores. We want the rents to be based on -- be variable, not fixed. Looking into the future, it seems that most of these developments will be generated abroad. Let's have a look at online sales growth for the 13 months last year. It exceeded strongly, over PLN 1 billion. The target for this year is exceeding PLN 2 billion. Looking at the dynamics of the previous month, it seems that it's quite realistic. In the traditional stores, on the other hand, we limited our plans to 8%. In the bottom line, you see the breakdown by region. Poland is 2% year-on-year; 10% in Europe; 15% in CIS countries, so in (inaudible) region. And looking at the results so far, they encourage us to continue our investments. But as I would like to emphasize again on positive terms. 8% increase in floor space. Most of this has been already achieved in the first half. For the second, we will have only a few stores to open. When it comes to CapEx, we lowered it again. The situation has been so difficult. PLN 2 billion inventory, lockdown on stores and the only possibility of generating sales in the online channel, but we are not planning very large -- very big sales offers. Our aim is still to maintain a healthy profit margin. So the second part of January, the standard periods will be devoted to sales offers. Now we encourage the customers to visit the stores and to buy online while maintaining the good profit margin and pricing policy. We do take into account that some of the stock from the collections of all the spring and summer will be moved to the autumn collection. It's very difficult to say how large will be this part. The sales will start soon. And afterwards, we will be able to say more about that. Importantly, orders for autumn and winter have been reduced by 40% in order to secure the financial standing of our company. Summing up the risk, targets and opportunities for this year. The big target, the main is to, of course, maintain financial liquidity so that the company can survive in long-term so that it has funds for salaries, for meeting its liabilities and for paying for goods. We are doing our utmost to improve the situation. We are planning, however, it's very uncertain. The revenues fall should not exceed 30% year-on-year. Gross margin, it will be lower by 5, 6 percentage points because of the sales offers and the high dollar exchange rate. On the left, you can see the whole list of risks that we have noted that caused this uncertainty as to the results for this year. First of all, what will be the model of customer behavior after COVID-19 pandemic? And what traffic in stores will look like? What will people want to buy? This is still an unknown factor. Another risk is the second wave of infections that might come. The changes in the economy are also uncertain, in the tourist industry, in the entertainment industry. Everything is still under lockdown. It's -- the possible increase in unemployment will also affect our customers, their shopping habit, which will translate into sales, of course. Another big uncertainty is related to rental and whether we will manage to negotiate the rental decreases. Another uncertainty is about selling the spring/summer collections. The high U.S. dollar and euro FX. For us, Polish zloty is important, but ruble as well. We're trying to obtain external funding also. We've been -- we're still waiting for some decisions of external institutions on this matter. When it comes to our priority, it's safe financing. I would like to stress that we are not planning issuance of new bonds or shares, we would like to survive this crisis based on bank credit lines. We've been using our credit lines to the maximum. We've asked the banks to increase the external financing. It seems that at the moment, we will be able to increase the bank financing by the PLN 700 million. Additionally, we have applied for the financial support with -- to the government. We haven't received any response yet. So let me emphasize again, the target is to run the group through the difficult times with good financial liquidity so as not to ask our shareholders to provide any capital. In the long term, we want to go back to normal also in financial terms. So our goal is to maintain a safe balance sheet. And to return to development in the post-crisis time, we are prepared for the possible second-infection wave. We want -- in the long term, we would like to be sure that we can function without any larger fluctuations because of the aid obtained. If the situation proves better than expected, we're also able to -- ability of companies in our perspective is the key to success. To summarize, I would also like to tell you about our new next report. It's the nonfinancial one. It's an integrated report that is published by us today. I strongly recommend to visit our website and to have a look at this report. What is important in this report, we emphasized the 4 pillars of the CSR strategy, so the ecological production, ecological clothing; and also the chemical safety of production; decreasing the use of plastics in packaging and our products; and the fourth pillar, green buildings, so energy savings technology implemented in our stores, warehouses and offices. Thank you very much, ladies and gentlemen. Now let's start the Q&A, especially the questions that we expected. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [1] -------------------------------------------------------------------------------- So it's about rent, could you update the process of renegotiation of rent? How much of the 400,000 square meters will be able to have new contracts signed, on what terms? And how many stores and what area will be closed in Poland? And comparing it to abroad. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [2] -------------------------------------------------------------------------------- In Poland, let's start here. This is the most difficult way of negotiations and the most comprehensive type of negotiations. In -- on foreign markets, we've also been negotiating, we've been trying to negotiate rent levels. Many stores opened in Poland are in place in the shopping malls, which belong to international developer groups. So we have been engaging in discussions with them. It's really hard to say what the outcome will be. I shouldn't actually mention any progress. In these negotiations, about 1/3 has already been negotiated but 2/3 are still in ongoing negotiations. And the effect, the final effect is still uncertain. It's been tough negotiations and both parties wants to negotiate the best terms for themselves, fair manner. We do not want to have unprofitable stores. Of course, we understand the argument of the other parties. And also in collaboration with banks, we're trying to negotiate satisfactory terms for all parties. How many of these stores will be able to have different changes? And it's very difficult for me to say. I wouldn't like to say, let me just emphasize that there is a risk that not all of the stores will be reopened. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [3] -------------------------------------------------------------------------------- Another question, it pertains to online sales. What's your capacity for online growth? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [4] -------------------------------------------------------------------------------- The growth that you see now, 300% -- over the few weeks that have passed, we've been doing a lot of projects that in normal conditions take months. These fast adaptations in new conditions is rebuilding of logistic centers, streamlining process, remodeling of the key logistics center into the one that handles e-commerce. From the start, we are able to handle 400%, 500% growth, and its extra expenditure in terms of online in the next budget. When it comes to online expenses, we consider advertisement costs to acquire new customers. This has been happening. We are spending the money, but in a very reasonable, well-thought-out manner. We are looking at the return on this investment. We see what is positive, a lot of new customers that used to buy online -- in traditional stores now move to the online channel and stay with us for longer. What is interesting, these customers, they transfer their off-line customer habit into online. So the structure of online sale has also been shifted. We can see copying -- 1-to-1 copy of the habits from traditional to online stores. It also seems that when it comes to logistics perspective, what we can do, what we have done already, which is maintaining these organizational capacities, our logistics center in Romania, Slovakia, Russia, they have been operating. We've been supporting that, but it will not be a lot of -- when it comes to cost. They're variable. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [5] -------------------------------------------------------------------------------- Another question pertains to the new customers. When it comes to online sales, what percent of online sales in April and May was generated by new customers? And how much was the increase in sales when it comes to the previous customers? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [6] -------------------------------------------------------------------------------- I can't answer that. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [7] -------------------------------------------------------------------------------- Mostly these are statements. In the base scenario, you assume reduction of the floor space by 30% by the end of June 2021 and a decrease in revenues by 30%. Without taking into consideration of the lockdowns, please comment. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [8] -------------------------------------------------------------------------------- Stress test is very important and not only for us but for other companies as well. So we have been doing our internal tests and Ernst & Young, the external auditor, to carry out stress tests. These were done with very conservative assumptions, up to 30% of possible store closures in Poland. Also in our scenario, when the sale is not returning to the level of -- from before COVID and we have 70% of normal sales in stores. Given these assumptions, it seems that it's been difficult. We can face problems, therefore, we applied for additional funding from banks. And as of today, thanks to the bank funding and the government crisis-response policies, we are in a good position. We are keeping our fingers crossed for the stress test not to be so pessimistic. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [9] -------------------------------------------------------------------------------- Another question also pertains to online sales. It's about comparing EBIT margin on online to the margins from the last year. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [10] -------------------------------------------------------------------------------- We have been analyzing our online EBIT margins for March and April and it seems they are higher. These margins, the EBIT margins are higher year-on-year, thanks to this good work on costs and also thanks to the good work on higher margin, so margin at the level of the trade margins does not fall below 50%, which means that EBIT is higher by 1 to 2 percentage point higher than year-on-year. It was 11% for the last month. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [11] -------------------------------------------------------------------------------- Another question pertains to information about the level of returns in e-commerce, whether this has changed in any way. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [12] -------------------------------------------------------------------------------- In terms of the percentage volumes, it's not changed. It's still 23%, 25%. But of course, the volumes are increasing. So the -- so the statistics remains stable. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [13] -------------------------------------------------------------------------------- Next question is what can be expected in the coming year, taking into account the planned changes in the collections? Or about the spring/summer collections. I think it was said what it will look like. On my part, I would like to mention that the trends will be varied. But first and foremost, it will not be so much a fashion orientation. It will be more universal. And you would like to swiftly move from one season to another. It will not -- the seasonality will not be so strictly visible. It also happened due to the warmer winter months, it already happened. Let me also say that April and May were, as usual, the months, the periods of increased demand for female collections. This is related to the introduction of new collection and the Easter period and the first communion in churches. But right now, what we've noted this year, there has been a considerable decrease in terms of demand for very formal collection, evening dresses. But on the other hand, there is increased demand for the knit models. And as Przemys mentioned before, so people focus on comfort, home wear and spending time at home. We will also pay attention to pricing of our collections and ecological. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [14] -------------------------------------------------------------------------------- Let's listen to the experts, the ladies are experts in this area. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [15] -------------------------------------------------------------------------------- The next question. When it comes to termination of the contracts, do you have any financial -- any contractual penalties? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [16] -------------------------------------------------------------------------------- Not at the moment. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [17] -------------------------------------------------------------------------------- How do you assess the online growth compared to your competitors? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [18] -------------------------------------------------------------------------------- We have been looking on the market, and it seems that the 300%, 500% levels that we've been achieving are very high, and it's higher than the market's level. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [19] -------------------------------------------------------------------------------- Online? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [20] -------------------------------------------------------------------------------- After lockdown, in the beginning, it was not so quickly increasing. But with the following weeks, the dynamics was more visible. Now we see the acceleration of online. Triple increase has been observed, and the dynamics has been increasing as well. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [21] -------------------------------------------------------------------------------- When it comes to the fall in sales, are you considering selling inventory online in later date? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [22] -------------------------------------------------------------------------------- It's a good question. We've been considering this aspect, we've been talking to companies that run online platforms. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [23] -------------------------------------------------------------------------------- We haven't heard that -- there was no chance to cooperate with Answear platform. But the findings were negative when it comes to this cooperation. Another question, what about the increase in online sales by brands? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [24] -------------------------------------------------------------------------------- The highest dynamics is recorded in the Reserved kits and Sinsay brands. Lower dynamics, which was also before the coronavirus pandemic, lower dynamics were reported in Cropp and male Reserved. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [25] -------------------------------------------------------------------------------- Some questions refer to -- what about the share of returns in -- compared to the previous quarters? Are you expecting the fall in returns to -- in the following months? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [26] -------------------------------------------------------------------------------- What we see is some kind of trend that people buying online, our customers like to return the goods in the traditional stores, and this trend will probably be maintained for 2 reasons. This is convenient and the sales network is large, so it's easy and convenient for the customer. So that, we'll probably maintain. We need to negotiate good terms and conditions for the stores so that they can reopen and handle the returns online by courier companies. At the moment, we see that courier companies have also been increasing their capacities in terms of delivering, their operational capacities. We don't see any problems in this area. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [27] -------------------------------------------------------------------------------- What's the impact of the situation in Bangladesh and the U.S. dollar on the sales and purchases? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [28] -------------------------------------------------------------------------------- In Asia, we observed a lot of problems depending on the countries. First, the Chinese markets was under lockdown. And after that, other production markets were closing. Until this day, India, Indian markets have -- is still closed. Slowly, it's coming back to normal on this market. The situation is all the more difficult that a lot of companies from our industry started to decrease the orders because of the lower sales dynamics. The situation on production market is, I would say, stable, but there are less orders. Is it influenced by -- are the productions influenced by dollars? Yes, we can negotiate better prices, but it's only a few percent decrease. The factories also try to adapt to the increased safety standards, they need to invest in the safety of their own people. Therefore, they need funding for their own internal investments. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [29] -------------------------------------------------------------------------------- What about traffic in traditional stores, how many people buying at the moment in traditional stores? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [30] -------------------------------------------------------------------------------- You have to differentiate bigger cities and smaller cities. In bigger cities, people very often buy online, so the traffic is less, is 20%, 30% of what was before the pandemic. In smaller cities, they record more sales. It's about 60% of the normal traffic. It's worth mentioning still that the customers who do come to the stores, they buy, so the effectiveness is greater. There are now not people who just walk around, but they simply buy the product. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [31] -------------------------------------------------------------------------------- Is it possible for you to estimate in any way whether you get market share in e-commerce in Poland? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [32] -------------------------------------------------------------------------------- We do not have such direct data, but it seems that whether we have several hundred percent increase and other companies record double-digit or simply lower results. It seems that we, as a company, have been gaining a good position here. And this 300%, 400% growth is not outside Poland but it is also in Poland. Poland also records a 300%, 500% growth in sales. It's still the most important sales market for us. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [33] -------------------------------------------------------------------------------- Is it possible for you to send directly from the store to the client? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [34] -------------------------------------------------------------------------------- We've made some attempts in this area. We've been trying to work on that. It's promising. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [35] -------------------------------------------------------------------------------- What may be the net debt of the end of the year? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [36] -------------------------------------------------------------------------------- It's -- I cannot answer this because I cannot predict any financial results, and the second half, there are too many uncertainties. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [37] -------------------------------------------------------------------------------- Do you consider investments in online platform like CCC in the shoe industry? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [38] -------------------------------------------------------------------------------- 300%, 400% increase that we have been noting is sufficient for us. But to focus on, we are not considering any platforms right now. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [39] -------------------------------------------------------------------------------- Do you observe any consolidation moves in the industry and takeovers? Are you participating in such projects? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [40] -------------------------------------------------------------------------------- No, we are not participating in such projects, and we stick to our strategy. We do not get involved into some mergers and acquisitions. We focus on our organic growth. Whether we see increased activity in this area, rather not. In this COVID situation, each player tries to focus on their own liquidity to survive and to maintain the continuity of all processes. We've had some takeovers, but it's abroad on American or U.K. market. It's not as universal. For the moment, everybody is trying to survive the COVID pandemic. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [41] -------------------------------------------------------------------------------- Another question about competitors. Do you see any interesting moves when it comes to Inditex or H&M? Are they surprising you with anything? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [42] -------------------------------------------------------------------------------- In general, we do not comment on the strategies of our competitors, and we would like to stick to this rule. We will not answer this question. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [43] -------------------------------------------------------------------------------- If online has become such an important channel of sales, are you considering more precise data in your quarterly or annual statements? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [44] -------------------------------------------------------------------------------- Yes, definitely. Starting this year, 2020, where the quarters are shifted, and we need to adapt the reporting to this situation with the COVID pandemic and online. We're changing our reporting methodology, and you will hear the details soon. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [45] -------------------------------------------------------------------------------- What salaries level are you expecting in 2020 and possible changes in terms of employment? -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [46] -------------------------------------------------------------------------------- We are not -- at the moment, we're not expecting any changes. We want to simply run through these difficult times. We would like to believe that sales will go back to be as flexible as possible in terms of adapting the salaries to the sales growth. -------------------------------------------------------------------------------- Magdalena Kopaczewska, LPP SA - IR Manager [47] -------------------------------------------------------------------------------- It seems that all -- this is all in terms of questions. Very well. Thank you very much for your attention, ladies and gentlemen. And we'll see you soon, in a months' time. Thank you very much for your attention. Thank you for listening to the stream live. Time runs fast. We've been moving this results conference. It was supposed to be last month. But in a month time, there is another one scheduled, this time pertaining to the results of the first quarter of 2020. Stay healthy and see you on the next conference. Thank you. -------------------------------------------------------------------------------- Przemyslaw Lutkiewicz, LPP SA - VP of the Management Board & Financial Controller [48] -------------------------------------------------------------------------------- Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]