Earnings Call: Q2 2016

Aug 5, 2016

Good day, and welcome to the HUGO BOSS First Half Year Results 20 16 Conference Call. This call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Langer. Please go ahead, sir. Thank you very much, and good afternoon, ladies and gentlemen. Welcome to our first half year twenty sixteen financial results presentation. I'm pleased to present to you in my new function as Chief Executive Officer today. However, as most of you have known me for years as a Group's Financial Officer, let's skip the introduction and go right into business and our performance in the last 6 months. In the reporting period, adverse market conditions magnified some company specific challenges. In addition, we initiated some bold steps to make progress on our return to profitable growth, accepting a short term negative impact on sales and profits. As a result, overall group sales declined by 2% in currency adjusted terms in the first half year. EBITDA before special items was down 21%. In the second quarter, performance was comparatively better, although group sales were still down 1%, excluding currency effects. Strict pricing discipline and effective cost management curbed operating expense increase so that the decline of EBITDA before special items was limited to 13 percent. Europe was the best performing region in the 2nd quarter year to date. In the Q2, regional sales were 7% above the prior year level in currency adjusted terms. Wholesale sales benefited from a different timing of 4 collection deliveries. On retail sales in Europe developed positively as well, supported by the contribution of new stores and takeovers. By market, the U. K. Continued to be the region's fastest expanding core market. Sales in the quarter were even up 14%. While this performance was helped by some timing effects in the wholesale business, momentum held up well also in the aftermath of the Brexit referendum. In the weeks following the LEAF decision, underlying retail sales even improved compared to earlier in the year and developed in positive territory year over year. Performance in the rest of the region was mixed. Scandinavia and Italy developed very well. Key markets like Germany, France and the Benelux, however, registered declines. Here, weaker tourist demand was a drag on sales. First half year revenues in the Americas were 11% below the prior year period, excluding currency effects. This was due to the U. S. Business, which was down 19% year to date. Double digit growth in Canada as well as Central and South America was not enough to offset weakness in the region's main market. In the U. S, declines were driven by the wholesale channel. Beyond the effects from an overall recessionary market environment in premium apparel, around half of the sales decline in the U. S. Wholesale in the 1st 6 months was due to our deliberate decision to exit distribution formats not in line with the positioning of our brands. Specifically, we started discontinuing business relationship with value retailers, which we had used in the past to help us clear excess inventories. In addition, we reduced the presence of the BOSS core brand in multi brand spaces, for example, at Lord and Taylor and Dillard. Finally, there was a consolidation effect from the shop in shop takeovers at Macy's earlier in the year. These operations are accounted for as own retail now. Own retail sales in the market continued to suffer from double digit traffic declines, which we could not offset with an improvement on average transaction sizes. In order to turn around visitor numbers, the expansion of omnichannel and other service offerings will be key. That's why we have made Click and Collect available in all presenting stores in the U. S. Now. And a few days ago, we launched BOSS On Demand, offering customers a free pickup by Uber wherever they may be. The same way we have Uber deliver package to customer homes, offices or hotel rooms. Other services include express deliveries out of our new store in the Westfield Mall close to Wall Street, in store stylist counseling and a program offering our most valued customers access to many events and gifts money cannot buy. Finally, sales in Asia Pacific recorded a 6% decrease in currency adjusted terms in the 2nd quarter as well as year to date. Growth in all other major markets in the region partly compensated for declines in China. In Greater China, sales were down 14% in local currencies in the first half year, negatively impacted by substantial double digit declines in Hong Kong and Macau. In addition, we have now started annualizing the consolidation effect from the franchise takeovers in China in April last year. In the 1st 6 months, the close alignment of price levels in China with European levels meant that average sand prices in Mainland China declined by around 20% in the 1st 6 months. However, the pricing effect was largely offset by volume increases. Unit growth amounted to more than 15% year to date. This underlines the improvement of our brand's value proposition, which we communicated very consistently in store and across all digital channels. We also progressed with the upgrade of our store network. In addition to several refurbishments, we closed 11 stores and shops on the Chinese mainland in the 1st 6 months. Remember that we outlined our plans to close a total of 20 margin and image dilutive retail locations in the market over the course of 2016. So we are around halfway through the process now. Upon completion, we'll run a more productive, high quality network of stores in premium location, supporting the ambitious plans we have for the brand's long term future in this important market. By distribution channel, group owned retail sales developed broadly stable in the first half year. This was primarily due to the contribution from expansion and takeover activity in the prior year. On a comparable store basis, however, revenues declined by 7%. In the Q2, comp store sales performance deteriorated to negative 8% against a tougher prior year comparison base. All regions performed in negative territory, although Europe still outperformed the rest of the world. Nonetheless, trends in the group's home region weakened slightly compared to the 1st 3 months, explained by the strong growth in Europe we saw in the Q2 of 2015. Globally, an increase of average transaction sizes had a positive impact on retail sales despite the significant price reductions in Asia. However, this effect was more than offset by traffic declines, most notably in the Americas, but also in Europe. This highlights the importance to improve our digital proposition to make sure we effectively lead customers into our stores. In the U. S, we made a lot of progress in this regard by completing the rollout of Click and Collect in all presenting stores. In Europe, we will launch the same service in September, starting with selected stores in Germany, Austria and the U. K. In 2017, then click and collect, order from store and the convenient handling of returns across channels will be introduced in all European online markets. So while the rollout of Omnichannel is progressing, the performance of our online business has been disappointing in the first half year. Channel sales declined by 5% over the period on a currency adjusted basis. 1st and foremost, this reflects a clear priority we have placed on the in sourcing of fulfillment in the last few months. So while the in sourcing of the complete order handing process from our previous partner, Avato, was completed successfully at the beginning of May, there was a focus on further improving the online store. The upcoming relaunch of the site in October will address a number of weaknesses we are currently suffering from. However, from a more structural point of view, we will also have to find an answer to the challenges posed by the growing importance of mobile. The dramatic increase of the share of traffic coming from mobile devices has started to have a meaningful negative impact on our online conversion rate, meaning that sales are down currently despite ongoing traffic increases. Turning to our physical store network. We are in the midst of shifting focus from expansion to maximizing the quality of our existing store base. This means three things. 1st, we continue to selectively add new stores in underpenetrated markets in retail areas as the opening in Lyon demonstrates. 2nd, we seek to further improve successful stores through targeted renovations. Our newly renovated flagship store in Seoul is a telling example here. And third, we use expiring rental contracts to discontinue operations in locations that have not lived up to our expectations. The letter does not only apply to freestanding stores, where we closed 12 locations in the first half year, but also shop in shops. In the last 6 months, we discontinued operations in more than 30 shop in shops at retail partners in Germany, the Netherlands and Belgium in particular. We did so with a view to the small contribution these operations made to our Global Retail business, often not in sync with the management attention required in day to day operation. All of these closures represent the normal course of business for a company with retail operations of our size. However, earlier in the year, we also announced 20 store closures in China and committed to a global review of underperforming retail locations. The latter performed an important part of our measures to safeguard the group's long term profitability. As a result of the review, we have now decided to close around 20 freestanding stores and several shop in shops over the course of the next 18 months. These closures relate to clause loss making stores in all three groups region, among them almost a handful of flagship locations opened the last 3 years. In the financial year 20 15, they diluted the group's EBITDA margin by around 60 basis points. While we are still in the process of negotiating the final exit conditions with landlords, the majority of stores are forecast to close either at the end 2016 or over the course of 2017. Based on the remaining maturity of rental contracts, we expect to incur one time expenses of €46,000,000 predominantly related to early termination payments. In addition, impairments on furniture and fittings will amount to €6,000,000 As a result, provisions and impairments in total amount to €52,000,000 which we booked in other operating expenses and income lines in the Q2 and treated as special items. The cash effect is expected to amount to a low double digit €1,000,000 figure in 2016, with the remainder to be incurred in future years. Closing these stores is a painful exercise without a doubt. However, having had the choice between swallowing a bitter pill today and suffering from ongoing margin dilution going forward, we decided for the first. While the effect on 2016 results will be marginal based on the timing of closures, we expect a first positive impact on profits in 2017 before the realization of the full benefit in 2018. Wholesale revenues declined by 6%, excluding currency effects in the first half year. A solid performance of our European wholesale operations supported this development and partially offset the declines in the Americas that I discussed a few minutes ago. Channel revenues in the 2nd quarter benefited from a higher sales share of the fall collection compared to the prior year. This was the result of the relatively better demand among wholesale partners for some of the collection themes with earlier delivery dates. Adjusted for this effect, 2nd quarter wholesale sales would have been down at a mid- to high single digit rate instead of the reported minus 1% in currency adjusted terms. Obviously, this shift will be reversed in the Q3, where we consequently forecast decline more significantly again, reflecting cautious customer ordering in light of subdued market trends. Finally, let us look at the top line development by gender. In the first half year, menswear womenswear performed broadly in line. BOSS womenswear continued its positive momentum, albeit growing at the lower rates than in the previous year. Once more, this underscores the structural health of the women's hair business, which will continue to be an important part of our group also going forward. Nonetheless, we are placing an even higher emphasis on our key menswear business. This is true from a brand communication perspective, where menswear is benefiting from a far bigger share of our communication budget again as well as from a merchandising perspective. In particular, in Europe, we have just implemented some technical changes to our retail floor space allocation. First of all, we shifted some space to menswear formalwear, our most productive concept. Secondly, we changed the layout of some of our women's wear selling spaces, making sure that they are sufficiently intimate and detached from the rest of our offering. In the months ahead, we will concentrate on defining future brand strategy and the creative direction of our collection going forward. In this context, I'm pleased to announce that Ingo Wiltz will join the Managing Board as the group's Chief Brand Officer in less than 2 weeks from now. I'm sure that his arrival earlier than initially planned will be instrumental in driving progress in this important part of our business. Ladies and gentlemen, I hope that I've been able to convey the different sources of top line pressures in the first half year. Some of them were market related, others company specific. Some of the pressures we were not able to avoid, others we accepted in order to strengthen our base for future growth. So while we cannot and we are not satisfied with the group's current top line momentum, we have been able to limit the effects on operating profit as far as possible. In the Q2, gross profit margin improved by more than 100 basis points, meaning that we almost reversed the declines of the Q1, where gross margin had suffered from higher rebates and some scrapping of old merchandise in China. In the second quarter, we even reduced rebates compared to the prior year despite an overall still highly promotional market environment. In doing so, we sacrificed sales for the sake of brand protection. Even more importantly, however, we benefited from a positive channel mix effect as well as tighter inventory management compared to the previous year. In addition, some price increases in other markets, most notably in Russia, limited the negative effect from the price reductions in Asia. Below the gross profit line, the efficiency program announced a few months ago has clearly started to taking effect. This was true for selling and distribution expenses, where successful rent renegotiations, in particular in Asia, limited cost growth. However, the effect was even larger in the G and A line, where tight operating overhead cost management meant that cost remained stable versus the prior year. Nonetheless, we took great care not to touch expenses vital to reaccelerate brand momentum. Marketing expenditures, for example, remained on the prior year level. Despite the measures to protect profitability, EBITDA was down 21% compared to the prior year. As a consequence of special items and higher depreciation and amortization expenditures, the group's EBIT and net income declined even more significantly. From a regional perspective, profitability held up reasonably well in Europe. In the Americas, operating deleverage from the severe decline of sales as well as somewhat higher rebates led to margin contraction. In Asia, the profitability decline was largely due to the lowering of selling prices in China and some other markets at the beginning of the year, which was only partially offset by tighter overhead cost management. Let us turn to the balance sheet. At the end of the first half year, Trade's net working capital was up 1% in currency adjusted terms, but down by the same rate in reported terms. Relative to sales, this represents an improvement of 20 basis points compared to the prior year period. Inventory growth continued to be well contained, irrespective of the negative top line development. At the end of June, inventories rose 2%, excluding exchange rate effects. Increases were entirely due to the growth in Europe. In the 2 other regions, the inventory position decreased substantially. In line with our guidance, investments were down compared to the prior year and amounted to €79,000,000 in the period. The decline primarily a result of the non recurrence of last year's onetime investment related to the relocation of our New York City showroom. Overall, on retail expenditures remained virtually unchanged. However, while store renovation expenditures increased, spending for new openings declined, a pattern we also project for the rest of the year. Lower CapEx and Trade and Capital improvements were not sufficient though to compensate for the earnings shortfall, so that free cash flow declined to €54,000,000 year to date. As a consequence, net debt was above the prior year level at the end of the period. In the full year of 2016, we now expect group sales to develop weaker than originally expected. This is due to weaker than expected sales performance in own retail in the first half year. In addition, we have decided to accelerate the structural changes in our U. S. Wholesale business. As discussed earlier, we started reducing the BOSS brand's exposure to off price distribution formats in the first half year. In the second half year, the cleanup will be even more comprehensive than initially planned. As a result, we reduced our full year sales outlook for the wholesale business and now expect a decline of up to 10% in currency adjusted terms. In our own retail business, we are obviously working towards an improvement of like for like sales in the second half year. First, the comparison base will ease significantly in all three regions. 2nd, we are adjusting our merchandise offering in China to better cater to the demand that our price adjustments have created and third, we'll continue to drive the group's digital transformation by rolling out omni channel services also in Europe. However, we expect an ongoing difficult and volatile market environment in the remainder of 20 16. As a consequence, our visibility on any potential improvement on trading and on retail remains low. We hence assume a second half year comp store sales performance equal or better compared to the first half year's level. As a result, overall group sales are now projected to decrease by up to 3% on a currency adjusted basis. A stable gross margin development in the full year and disciplined cost management should continue limiting the operating deleverage from a flat to decreasing sales trend. Consequently, we expect EBITDA before special items to decrease between 17% and 23% in 2016. Unchanged to our previous communication, investment should amount to between €160,000,000 €180,000,000 Following the adjustment of our sales outlook, however, we now expect a slightly smaller cash contribution from working capital improvements. As a result, free cash flow is projected to decline slightly compared to the prior year levels. Ladies and gentlemen, we have initiated a number of measures to address our current challenges. We cut down on cost growth. We adjusted prices in Asia to improve the consistency of global brand presentation. We initiated far reaching steps to improve our we initiated far reaching steps to improve our distribution in the U. S. Wholesale channel in particular. And we decided to rightsize our store network by discontinuing operations in underperforming locations. These decisions are painful in the short term, but they had to be taken because they are right for the long term. There will be more work to do, of course, irrespective of the prevailing market environment. We need to further strengthen our brands and our business model. We'll have to become more customer centric, faster and more flexible. These attributes will guide our definition of future strategy and the measures derived from it. I'm excited about what this will mean for the future of HUGO BOSS. While it is too early to go into detail today, I look forward to sharing our medium and long term plans with you when we will meet you for our Investor Day on November 16 in London. But before this, I'm pleased to answer your question on today's set of results and our outlook for the remainder of 2016. Thank question from Fred Spiers from UBS. Please go ahead. Hi, good afternoon, Mark. It's Fred Spiers from UBS. I've got three questions, please. The first is on the 20 retail store closures. Given your indication these were a 60 basis points drag on group EBITDA margin, would it be fair to assume they're about a mid- to high single digit €1,000,000 drag on FY 2015 EBITDA? Secondly, linked to this, how are you now thinking about the overall net change in freestanding stores for 2017 at this stage? And then lastly, on the free cash flow, you're talking about only a slight reduction in free cash flow year on year. Does that mean you still think you can keep it above €200,000,000 this year? And how is that outlook shaping your latest thinking around the dividend? Thank you. Thanks, Fred. Let me start with the U. S. Closures. I think the numbers are slightly higher than you calculated. I mean, we have deliberately not giving an indication on the 2016 numbers because as we said, the impact of the closures will be more felt in 2017 and beyond because we have now intensified our discussion with the landlords on the exact timing and the amounts to close these stores. What we have done, and this is the indication of the 60 basis points that I call, is what if what would have been the performance in 2015, excluding the now identified stores for closures. And here, we calculated 60 basis points improvement. So from that, you can calculate backward the impact on the full year 2015 from the closures. As we explained on previous occasion, we have started to slow down our opening plans going forward, shifted our attention far more in improving performance in existing stores Without giving you an exact guidance on our 2017 expansion plan in the U. S, there will be selective addition to the network. As I said, Lyon was an example now in the Q2 of I think exactly the right expansion where we still see white spaces. But the number of new stores added to our network of future takeovers will be significantly lower than the rate you have seen in previous year. I think we spent some time to explain our now lowered guidance on free cash flow, which we now guided to be slightly below previous year's level. I think it's too early to be more specific on that one, but it doesn't change also our wording on the dividend proposal. Both elements will be crucial going forward. We stick to our dividend policy of paying out 60% to 80% on net income. And as we highlighted at the end of this conference, we will also take our performance and outlook on free cash flow generation in 2016, 2017 into consideration when it comes to phasing our dividend proposal. So no change to our dividend policy from this perspective. Okay. Thanks. Thanks, Fred. We will now take our next question from Claire Hough from RBC. Please go ahead. Yes. Hi, Mark. Thanks for taking my questions. 2, please. The first one, just wondering if you could possibly comment on trading in July and whether any of the markets have worsened since Q2, which led you to reduce the sales guidance for the full year? And that would be the first question. And then second one, I think you mentioned that the full year results that you were hoping to rebalance or try to rebalance the offer between luxury and premium. So just wondering whether there's been any change to the merchandising or pricing architecture here at all. Okay. Let me just clarify on our sales outlook. So this was predominantly driven by a weaker like for like performance than we initially guided the market to expect when we gave our initial guidance for the year with the analyst conference. Back then, we guided the market for the full year on a basically flat like for like development. We now expect to be the full year development more or less in line with we have to accept that the retail like for like development is weaker and probably we have to face a continuous volatile environment also in retail for the second half of the year. In addition, I think that's important. It's not only this retail part of our business. We also decreased our wholesale guidance for the full year with repercussion on the top line guidance because we have now taken more stricter measures to cut off distribution of strategy of price channels in the U. S. You probably have noticed that we increased or decreased our guidance for the wholesale business for the full year now to up to 10% decline for the full year. And this is predominantly driven by the measures that we have taken in the U. S, which will also take even more effect in the second half of the year. In terms of merchandising and price positioning, there are a couple of measures that we take into consideration. One is we have adjusted already for the second half of this year our merchandising offer, in particular in Mainland China, where we now operate at different price points, and this has be reflected also in our buying behavior. So our merchandising teams in Hong Kong have worked very closely with headquarter functions to make sure that we have now optimized our buying decision for winter and pre spring 2017, which will both affect our 2016 performance in China in the light of the new buying behavior. As I mentioned, we have seen strong uplift in terms of volume sales, and we want to make sure that we are not missing on these volume opportunities in China. In Europe, we have taken some more tactical decisions between product categories and also between branch and the lines to maximize retail productivity. In some cases, that has meant to shift more attention into menswear or to shift more attention into formalwear, but basically working with the spring for winter collection with as it was defined and presented in January, February. Going forward, we do expect a rebalancing and a stronger focus of our collection to the price positioning the brand, but we'll continue and we see positive results both in our most premium or highest price offering. It's our full tailored made to measure offering. So we will continue to be present and pursue market opportunities also at the higher end of our product offering. Okay, brilliant. Thanks very much. We will now take our next question from Anton Please go ahead. Yes. Hi, good afternoon. It's Antoine Bege at HSBC. Three questions. First of all, regarding the gross margin, I think you've mentioned a lot of moving parts. I've noted less rebates. So that's a positive channel mix, also positive, but price reduction on the whole negative. So any sort of quantification would be welcome. And also, I'm a bit surprised that given the H1 evolution, which is sort of flattish, you're not expecting a more bullish outlook for the second half. So within the positive of Q2, especially less rebates on channel mix, are you expecting some of them to be non recurring in the second half? My second question is on the management changes. I think you've spoke about one of the changes. Are there any other such as in terms of talents, especially in terms of branding or retail? So what about the CFO position going forward? And finally, regarding women's wear, I think there is a bit of a debate or at least uncertainty amongst investors regarding your commitment to women's wear. So would you say that you will be deemphasizing womenswear or is it just that you would probably be reallocating your marketing budget, which had been skewed towards women's wear in recent years? Yes. Let me start with your question on women's wear first. We continue to be fully committed to our women's wear offering across our BOSS and HUGO brand lines. And as I said, we have seen in a difficult market environment also in the Q2 a continued momentum with our core women's wear offering under the BOSS Black label. I think we all agree that we have overinvested in terms of marketing, in some cases also in terms of merchandising and space allocation to our womenswear business over the last couple of quarters. And what is happening right now, and this should be beneficial for the overall performance, that we are smart on allocating these resources to our biggest profit contributor and this continues to be BOSS Menswear. So it's more a technical adjustment in a worse market condition where we have to make sure that our core business is sufficiently protected by marketing measures that we have to take to protect the menswear. But you can see our upcoming show at the New York Fashion Week again with Boston Womenswear as a clear commitment that we're in the long term participant in the important and for us was the high strategic relevance women's wear apparel market. In terms of gross margin development, I think it was your first question. I think I highlighted some of the positive things that I was happy about in the 2nd quarter, tough trading conditions. However, the markets managed to even reduce rebates overall in the 2nd quarter. We run relatively not a perfect, but a relatively clean ship on when it comes to our inventory situation. But as you can see from our retail sales outlook, we do not expect any significant support from the market in the second half of the year. So overall, we feel comfortable with our outlook on the gross margin projection for the full year. If we see a positive surprise in the Q3, I would be happy to report on that. But also the earlier question as Claire asked about first trading trends in the Q3, we might have seen a slight improvement in the Q3, but the general trend in terms of tourism flow, high promotion activities in U. S. Has not changed with the start of the Q3. In terms of management changes, I think the key message was now that we were successful to achieve that, Ingovils will already start in August. I'm very happy about this earlier than initially planned starting date. There will clearly be a lot of work ahead of us now that we are we have the full board with Bernd Hagen, Ingo Wirth and myself. We are in the midst of preparation for the Investor Day in November. The decision to fill the CFO position again is not for me to take a loan. It's, as you know, from the German governance system, something that involves the supervisory board. So I will not preempt any decision to be taken from the supervisory board. Thank you very much. We will now take our next question from Thomas Chauvet from Citi. Ahead. Good afternoon, Mark. I have two questions, please. The first one, follow-up on your refocus on menswear. One of the initiatives, if I recall, was to relocate marketing spend from womenswear to menswear. So how much was A and P dedicated to Menswear in the first half of twenty sixteen? I think you said in the last 2 years, 70% of the budget was dedicated to womenswear. So how much has it fallen in other words? And secondly, on e commerce, online was down high single digits in the second quarter, I guess, below your expectations despite the insourcing of fulfillment operations. So what were really the main hurdles you faced? And how quickly you think that's fixable? Do you need to invest more than the original plan you presented last November to turn around the business? Thank you. Yes. Let's take your first question on the composition of marketing plans. Clearly, in the second quarter, we were not able to completely reverse some of the already, at the beginning of the year, taking decision on media bookings. So the first half year, we have seen only a marginal change in composition between menswear and womenswear. For the second half of the year, this is far more balanced to the menswear side. I can't give you a precise number right now because we're negotiating this rebalancing of advertising in the digital field or print with our partners. But I expect this to be far more evenly balanced between menswear and womenswear in the second half of the year. And we're currently working as part of our strategic review in terms of media channels, in terms of composition between menswear and womenswear, between our brand lineup, what is the optimal marketing and media plan for our brands going forward. On e commerce, we were clearly disappointed by the slowdown in the Q2. So on the one hand, we were quite successful in in sourcing. However, as I said in the call, we have not upgraded our site in terms of functionality and other services as this is happening right now in a fast moving competitive environment. One of the challenges where we have to find the right answer is that increasingly traffic to our site is not coming from desktop anymore, more but mobile devices, smartphones, tablets. And here, our site is not operating with the same conversion rates. So we have to improve the ease of use, navigation to this now increasingly become a standard way of accessing our mobile sales site. Important step towards this direction will be the relaunch of our website, in particular addressing these shortcomings, which unfortunately will only happen till the end of Q3. And the other element here we announced some initiatives finally taking place also at HUGO BOSS, in particular in the U. S. And key European online markets that we will bring to life and introduce omnichannel omnichannel measures, I'm confident that we will have hopefully some positive impact to report back to you in the course of the Q3. In terms of site improvement, I expect the vast majority of the improvement to happen post the relaunch of the site end of September, beginning of October. Thank you, Marc. Thanks, Tomas. We will now take our next question from John Guy from MainFirst Bank. Please go ahead. Yes. Good afternoon, Mark. I've got about 4 questions, 2 of them are pretty brief. Could you please confirm on the €50,000,000 of cost savings that you articulated back in the Q1, does that include any savings that you'll get with the change in fulfillment online, obviously, now stopping with Avato? And also, could you confirm within a 12 month period that the savings that you get having terminated your agreement with Ivarto will be around €15,000,000 So that's the first 2. Then just sticking with the cost savings. When we look at selling and distribution, costs growth over the first half is running around 5%. Should we think that that's a reasonable run rate over the course of the year? And also think about 2017 with regards to some of the store closures and the transformations that you're making, where else could we conceivably see opportunities for further cost savings? And then finally, just with regards to the sales contribution from Space going forward, what should we be thinking given the fact that the first half looks like it's a mid to high single digit, closer to high single digit sales contribution from space? All right. Thanks, John. Well, the savings from the insourcing on the online business, even though we have never given the exact amount on the saving, but we announced it to be significant compared to the service fee that we paid to Albatu was, of course, already included on our initial guidance for the fiscal year 2016 because it was part of the agreement that we when we did the business case on in sourcing. And I can confirm that the handling costs per piece have now been in line or below our initial expectation from doing the in sourcing. The €50,000,000 cost optimization that we announced was against our original cost plan for 20 16, which we have been rigorously reviewing. And I would like to highlight to you the decrease in quarterly run rate in G and A expenses over the last three quarters, which has fallen from a high single digit rate now if you look at G and A cost alone to flat within less than 6 months. We are not giving a cost line guidance for the remainder of the year, but we can confirm that our full year outlook will continue to see a rigorous review and cost analysis on anything that's not needed as a necessary investment in terms of digital competencies or the impact from full year effects on retail expansion. Retail, and I think that was your first last question on the impact on new space addition. So we still have the impact from further addition even so at a much smaller scale in 2016. But also the full year effect from takeovers that happened over the last 12 months will have a cost impact as well as, of course, a margin and top line impact. But we expect I think this question was earlier asked also from Fred, Fred Spears, that the impact in terms of sales contribution from new spaces in 2017 will be further declining. Areas of further cost optimization will come as part of as we go into our budget process 2017 that we will now have reduced the momentum of cost development in most areas. We continue to see or continue to hold a cautious outlook on the market recovery for the next couple of quarters. So we will not give you a specific fixed cost guidance for the next 12 months. But as you've seen from our outlook in terms of OpEx development for the remainder of the year, we expect the second half of the year to be in line or below the cost development that we were able to achieve as a run rate after 6 months in 2016. Okay, great. And maybe just one follow-up with regards to strategic hires and personnel within the organization. I mean, given the additional emphasis now that you're putting back into menswear, do you think you need a style sort of fashion designer, as it were, to continue to push the womenswear product? Is this something that you're going to continue with? Or are you going to deemphasize that as well? No, I can confirm that both Ingo and myself are very happy, 1st and foremost, him joining us much earlier than planned. So he will have clearly his touch on our upcoming collection, and he will be the mastermind behind our menswear collection going forward. And he will work very closely with Jason to keep the momentum on the womenswear. So there's no need to have somebody added to our team. That's clearly his home turf, and I'm very confident that he will do exactly what is needed to further accelerate our menswear business going forward. That's great. Many thanks, Mark. Thanks. We will now take our next question from Charmaine Yap from Jefferies. Please go ahead. Hi, Mark. Thanks for taking my question. I have 3, please, I think. And first one on space, can you given the store closures, can you are you able to tell us if space will actually decline or will it be flat or marginally growing? Your second question is, I was just wondering if you're able to give us the full price sales penetration as it is now and how it has developed? And also the third one is on the price increases in Russia. To what extent has that happened, if you can quantify, please? Thank you. Well, let me start with the 3rd one. The price adjustment that we did in Russia was basically the reversal from a significant exchange rate impact that we have seen over the last 12 months. So we are still if we take state prices in ruble and convert them back in euro, we are significantly below the level that we had 2 years ago. But we have brought back the price differences in Russia, which was, I think, like 6 months ago, even in line or below the European or the German prices back to price levels that are more in sync to competitive pricing in the Russian market, which has a positive impact now in the Q2. In terms of space growth for this year, we can confirm that we will benefit from space growth for the full year. As I said, the closures that we announced today where we also booked significant restructuring charges were in the majority only tech effect in the course of 2017. And I would ask you to bear with us that we can't give you an impact on sales development in 2017 from space contribution at this point in time. But we continue to expect that in 2016, we will have a mid- to high single digit impact from new spaces. I would expect that it can we will also benefit from space addition going forward, but we can't give you a more precise number for 2017 at this point in time because it's depending on our expansion plans and takeover plans for 2017, which are not finalized and the exact timing of closures, which we announced today where we booked the restructuring charges, but where we're in the midst of process of negotiating the exact timing of the exit of these stores. Does that answer your question, Joanne? Okay. Yes. Thank you. Andy, full price penetration? Sorry, I didn't get what was your question on the full price penetration? Sorry. Yes, I was wondering what the full price sales penetration is at the group now? Oh, you mean the split between full price and off price and on the retail part of our business? Yes. Well, this hasn't changed dramatically because the off price changes that I mentioned was more on the wholesale side where we used off price specifically on the U. S. Part of our business where we have discontinued the relationship with almost all of these partners. So a significant part of our wholesale decline in the U. S. Is related to the discontinuation to that. On the retail side of our business, as you have seen from the momentum we reported in U. S. And shop in shops where this factory outlet, this composition hasn't changed significantly between both sales channels. Okay. Thank you. Thank you. We will now take our next question from Anders Indercept from Macquarie. Please go ahead. Yes, hello. First of all, congratulations to your new job. And my question is the first one. How far are you actually in cleaning up the U. S. Distribution channel to get a feeling on the road map here? Have you just begun? Are you halfway through? So maybe here you can elaborate a bit more. And second question on the store closures overall of the 23 standing stores, but also on the stores you already closed. Could you give us a bit more insight to how much sales you expect to lose related to these store closures? And my final question, just to clarify on the dividend. Do you mean a 60% to 80% payout ratio on adjusted profits or on reported profits? Thank you. Well, let's start with the last one. That's clear. We always talk when we talk about net profit, it's reported. We never gave the market adjusted net profit number. But we also as part of our dividend guidance or policy for the year 2016 gave our commitment that we will also take in consideration 2 additional factors. 1 is free cash flow development for the full year 2016, but also our financial outlook on the year 2017. So it's too early to comment on the latter one, but the core of our dividend policy to pay out between 60% 80% of consolidated net income, I can confirm today. In terms of status of the wholesale cleanup in the U. S, we have been we are well advanced. In most cases, we have completed the exercise to discontinue the collaboration with 3rd party off price channel pure place. So this has been already completed to a very vast degree in the 1st 6 months of 2016. I think as part of the speech, I gave you an update on where we are working with our full price wholesale partners to deepen our relationship. In some cases, this will include the decision to move into shop in shop concessions as we have done in Europe. Here, the 2 most prominent examples are Macy's and Saks. These are the 2 major networks where we have now taken over full responsibility in these spaces. And what I've mentioned with Dillard's and Norton Taylor that we have found an agreement with these partners to limit the distribution and we're always talking about full price distribution, but where the brand environment is more in sync with a brand lower priced brand like HUGO and BOSS Orange, we would prefer to shift distribution from our BOSS Black core brand to these two brand lines to be more in sync with the brand environment. So the latter will continue. We are also in very close discussion with other wholesale partners in the U. S. Even so we have cannot announce on any specific agreements yet to further enhance our presentation, be it in upgrade and source spaces, be it in respect to pricing and promotion activities. So you can be assured that we have a mutual interest, our wholesale partners in the U. S. And to robust to protect brand equity and sales, and we will do this in mutual action steps. But across all three dimensions, which define our wholesale business in U. S, I'm happy with the progress we've achieved. On the store closures, we announced earlier this year that out of this total portfolio of stores that we have taken over from our former franchise partners in China. We'll take advantage of the expiration of certain rental contracts. This was also 20 stores in China, of which we have now already exited around half of them. With the new now at the end of the second quarter announced global store portfolio review. We will have in addition 20 freestanding stores and a number of shop in shops that will be now disclosed based on performance and their dilutive impact on the performance. So this has been announced by us at the analyst conference. We have gone through the exercise. Even so, the majority of these stores are not closed yet. We are in advanced negotiation with the landlords, and we will update you on the exact closure expenditures expenditures and the timing and that's also the sales impact. But today from today's perspective, we expect only a marginal impact in terms of top line and profitability improvement in the current fiscal year. Okay. Okay. And you can't give a rough indication how much sales you will lose from the 20 stores you intend to close by end 2017, 2018? Honest answer to that, I mean, it will be a low double digit number, but it really depends on the concrete timing to that. It will be not felt over the course of we're talking about 24 months, which I think is a realistic timing. But if you want to have a ballpark number, it will be certainly less than €50,000,000 related to these store closures. Okay. Very good. And then a final question on your transition in Germany by dividing certain wholesale spaces or giving some space to YUGO versus the BOSS core label? How has been the overall reception by retailers and of course, most importantly, by consumers? I see that sales was down in the Q2. But overall, what's the feedback here? We received very positive feedback from our wholesale partners, which confirms that it was the right move to for our BOSS like core brand to become more exclusive and to have the right environment. So our BOSS core brand is now only presented at other in third party distribution and brand new spaces. And please keep in mind that in particular, HUGO is the 2nd best selling suit brand at some wholesale partners. HUGO was already ahead of BOSS in terms of in certain categories. So this was not a new brand introduced to most wholesale partners in consumer, but a well known brand, which has picked up the sales momentum very well from our perspective. The wholesale weakness, I think, that's important comes predominantly P. And Wholesale market. Okay. Thank you very much. Thank you. We will now take our next question from Volker Bose from Baader Bank. Please go ahead. Hello, gentlemen. Volker Bose from Baader Bank. First question on your online strategy as an overall observation, is it that consumers are using more and more fashion online portals instead of surfing through the MONO brand online stores. So what is your strategy in order to gain customer traffic and frequencies on your online store webpage? And second question on your comp store sales, minus 8% in the second quarter. Could you give us a split by regions here, please? And I apologize if you have to repeat yourself as I dropped out for a while out of the call. So and last question would be on the one offs. Could you provide here a rough split of the €50,000,000 in the second quarter? And how much of the planned restructuring measures are already implemented? And perhaps a kind of guidance, what amount of 1 offs we should take into account for second half also here as a rough guess from your side in order to be on the same page when calculating the rest of the year? All right. Yes, let me start with the last one. As we clearly highlighted, this has been the full review of store restructuring for HUGO BOSS period. So of course, there will be, as a normal course of business in future quarters, store closures where we will not expand an existing rental contract or we will relocate, but this will always be booked as part of the normal course of business. The roughly €55,000,000 that we booked now is predominantly due to the expenses that we have to book in the context of an early termination of the rental contract. And you can be assured that we do whatever we can to minimize the impact via negotiating exit solutions that are beneficial for HUGO BOSS. And there's a roughly €6,000,000 charge due to the earlier write off in those inventories, furnitures and fixtures related to these operations. But we do not expect anything of significant amount in the second half of twenty sixteen. In terms of comp store development for the by region, you know that we do not disclose Comstor development by markets or regions. But again, Europe, despite the fact it was a negative territory, performed much better than the other two regions. The two markets which clearly have been disappointing were in Asia Pacific, in particular Hong Kong and Macau, where the second quarter continued to be a very difficult one in the U. S. Market. And both of these markets were clearly affected by a very high number of declines in traffics into our stores, which we are not able to compensate by better conversion rates and value per transaction. And this leads into your first question, of course, online is of increasing importance, but we think it's a combination. It's not a separate sales channel as it might have started. We are in a very good position to benefit from this change in consumer behavior when it comes to exploring brands and also to purchase from them. So it's not eitheror. It's a combination of integrating omnichannel service into our store network, but also referring to our physical stores via the Internet. Here we will see, as we announced already in the Q3, the introduction of new services, which should be mutually beneficial both to our physical retail and our online business. I think I mentioned earlier that we need to improve our conversion rate when it comes to visitors that come to our store via mobile devices. This has become the prime channel of visitors to our site, and we are not yet at the same conversion rates for these visitors compared to people who more historically have come to our site by a desktop solution. And I also would say it's not eitheror. In the digital world, monobrand versus multi brand, you know that we are quite successful operating in most markets in multi brand environments where we are almost all cases are the strongest menswear brand, and we are able to operate very successfully retail brands. Take the U. K. As a very good and telling example, but that's true almost for every core market that we operate. And I think that the same rationale will help comes to online distribution. As I said, the our own online presence, which should be leading the industry in terms of capabilities and efficiency, It's a good combination with wholesale online distribution. We just have to make sure that the treatment of the brand the presentation, the multi brand online presentation is in sync to what we do in the physical world. Where that's the case, we are very happy to work with these partners like we do with many of our wholesale partners who have built also quite successful online businesses now. Okay. Thank you. Thank you. We will now take our next question from Philip Frey from Warburg Research. Your line is open. Please go ahead. Yeah. Hello, gentlemen. First of all, on while you elaborated in the past about several measures that you plan for improving your improving your retail like for likes. You mentioned here in the call the mix reallocation and merchandise planning, etcetera. To what extent does the first half performance reflect the full impact already of these measures? Or how much potential do we have in the next couple of quarters from these measures? It's the first one. Secondly, in terms of rental contract, as long when you're currently prolonging contracts, do you see a general willingness of retailers to reflect the declining frequency in lower rental payments or some color on that one? And thirdly, a technical question. While you now depreciated or impaired some of your stores? And as far as I remember, you usually have a larger chunk of impairments for underperforming stores, particularly in Q4. Let's take the technical Let's take the question first. You're right. Due to our IFRS procedures, we will review our total retail network at the end of the fiscal year. The measures of that is much detail described in our annual report. So we treat each store as a cash generating unit. It has to be evaluated whether the assets, most cases that the fixtures, the build out expenses being supported by the future cash flow generated by these stores. Typically, these stores, as we the amount that we do expect, it's too early to speculate on that. But I would not assume, based on the €6,000,000 charges that we have now taken as part of our restructuring, will significantly lower our full year impairment cost as we go through the regular exercise because these two efforts are completely independent to each other. The additional charges that we booked now is more due to the fact that we have now included also some expensive flagship occasion with long lasting contracts. So it will have only a marginal impact on the full year restructuring impairment charges that we booked in the last fiscal years, always in part of our full year numbers. What we can confirm is that rental consideration in many cases have declined over the last couple of months quarters. Unfortunately, that makes our now intention to sublet some of these loss makers not any easier. But we are also, on the other hand, benefiting from that where, in some cases, where we have now much better bargaining power to secure more flexible lower rental agreements in these cases. And as I mentioned, as part of our OpEx development in the 1st 6 months, where this was feasible, we have aggressively pursued opportunities to renegotiate rental obligations for the group. For the improvement in our retail business coming from merchandising, yes, we have seen already some measures to be effective in the first half year. However, the collection as such, the buying decision we're already taking prior to the start of our restructuring program that we started end of February beginning of March. So some of the measures, in particular, in the buying decision, in the merchandising decision, the allocation decision, will only become fully effective globally as we move into the second half of twenty 16. When it comes to the collection, most of where we have started to rebalance our offering between entry and upper range prices will only become fully effective at the end of 2016. So I expect a continued support from much better retail execution over the next 6 months, not only from a short term reallocation of budget and branch underlines, but also have a more thorough review of our planning and buying decision compared to the past. Thanks a lot. Thank you. I think this will conclude our conference call for today. Thank you very much for your interest in our numbers. As I said, please earmark our Investor Day in London mid of November, where we'll be able to give you far more details our midterm strategy going forward. If there's anything you would like to follow-up on Dennis Deber and his team is ready to take your questions also after the call. Thank you very much and have a good day. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.