AGM 2016

May 19, 2016

Slides

Ladies and gentlemen, I'm going to speak to you for the as strong brands, HUGO BOSS fascinates millions of we do not need to be afraid of the future of HUGO BOSS because we have strong assets to build upon for a successful future. Our attractive brands are well established around the globe. We have a very effective operating platform and above all, employees who work for HUGO BOSS with pride and great passion. The entire HUGO BOSS team is dedicated to bringing the company back to sustainable and profitable long term growth. First important steps have already been taken. But before I discuss them, let me have a brief backward plan. 2015 was the 6th consecutive year of growth for HUGO BOSS. The group increased its sales to over €2,500,000,000 Operating profit rose slightly to €594,000,000 However, the trends weakened during the course of the year. Due to the difficult second half, sales and earnings growth for the full year were lower than initially expected. Last year, we were facing a difficult market environment in many markets. The clothing sector hardly benefited from the generally favorable level of consumer confidence in many places. High priced goods in particular and particularly benefited from the prevailing low interest rate environment. Moreover, consumers spent a larger proportion of their disposable income on such as traveling or visiting restaurants and other product categories. In our core market, Germany, the clothing market showed a stable development. In the United States, our largest individual market worldwide, the discount proved to be a high growth sales channel, putting pressure on the full price business. Additionally, the strong U. S. Dollar had a negative impact on the business with tourists. In the case of China, market researchers estimate that the market for luxury menswear in 2015 fell by 12%, we were not able to buck this trend. Despite the mixed market conditions, we achieved good results against later last year in Europe. The continent remained the group's growth engine in 2015 as in the previous year with currency adjusted growth of 6%. The transformation of our business model towards own retail continued to show good results. As part of this change process, we agreed with our wholesale partners to limit the distribution of the BOSS core brand solely to shop in shops going forward. Together with the expansion of our store network, this change has helped to improve the presentation of our core brand in a more consistent and high quality manner. As a result, the brand's appeal increased significantly, both for local clients and for the growing number of tourists who visit our stores during their stay in Europe. 2015 was a successful year for our women's business. Under the direction of Artistic Director, Jason Wu, we successfully developed further our BOSS womenswear business. The brand's double digit sales growth in 2015 clearly underscores this development. Impressive fashion shows supported the further development. The most recent collection, which was presented in February, was once again very positively received by the International Fashion Press. The fashion was accompanied by an interactive digital campaign in which we offered our viewers across the world various live streams of the show from different perspectives. Across the world various live streams of the show from different perspectives. The whole show, including backstage reporting, was transmitted live on Instagram, where the Hugo Boss account now has over 1,000,000 followers. Ladies and gentlemen, let me briefly summarize the year 2015 from a financial perspective. Group sales rose by 9% or without adjusting for currency effect, it was 3 K. Was by far the strongest core market in the region with double digit percentage increase. The German market also performed robustly, posting growth of 4%. Sales in the Americas region were slightly below the previous year due to a decline in the U. S. Market. Sales were also down in Asia. They shed 3% above all due to losses in China. Sales momentum slowed considerably here in the second half as in the U. S. Market. In terms of sales by distribution channel, currency adjusted sales in the group's own retail business was 7% above the level for the previous year. By contrast, sales in the wholesale channel declined by 3%. Earnings were dented by higher discounts in the group's own retail business and a double digit rise in operating expenses. This was due to the effects of retail expansion, higher marketing expenses and ongoing strengthening of retail related processes, systems and competencies. Nonetheless, EBITDA before special items climbed by 1% to €594,000,000 The net profit attributable to shareholders fell by 4% to €319,000,000 due to higher financial expenses. Irrespective of the slight drop, we are today proposing a stable dividend of €3.62 for the fiscal year 2015. This proposal takes into account our company's strong balance sheet and our confidence in the group's long term prospects. The dividend corresponds to a payout ratio of 78% of consolidated net income and is thus in the upper end of the 60% to 80% range stated in our dividend policy. Thanks to the strong free cash flow development, we have been able to make large payouts in recent years without compromising value enhancing investments. We've even managed to reduce net debt despite the continually rising dividend, we're therefore confirming our dividend policy. In principle, of course, the dividend must follow earnings. Nonetheless, we will consider the improvement of cash flow and the financial outlook of the group when we formulate our dividend proposal for 2016. Acknowledged that the stable dividend cannot compensate for the share price decline last year. Of course, we as the managing board are also not satisfied with the performance. However, rest assured that we together with our employees will do our best to bring the company back to its successful growth track. Let me now have a look ahead, 1st on the current year. In the Q1, the weakening result in the second half of twenty fifteen continued. Group sales fell by 3% on a currency adjusted basis. Sales losses in the Americas and Asia Pacific played a major role in this downtrend. However, the European market also slightly deteriorated in the weakening business with tourists played a major role. As for the wholesale business, sales in the group's own retail business came under strong pressure. Like for like sales fell by 6%. These declines had an immediate impact on our earnings. Hence, EBITDA before special items was down 29%, primarily on the back of higher discounts and inventory write downs, which weighed on the gross margin. In view of special items and higher depreciation, the operating profit and consolidated net income were significantly below the previous year. Ladies and gentlemen, the financial results of the Q1 underscore that we are in the midst of a year of consolidation. We cannot change the market condition, but we know where we need to begin to get HUGO BOSS back on track to achieve sustainable profitable growth. On the one hand, our action plan focuses on strengthening our market position in the U. S. And China. On the other hand, we support profitability and free cash flow generation by savings costs by reducing investments and optimizing our store network. In the U. S. Market, we will focus on improving the quality of our distribution in the wholesale channel, which continues to be of great importance to us, discount battles in the major department store chains have had a significant impact on our results and damaged the perception of our brand among U. S. Consumers. We are counteracting this by limiting the distribution of our BOSS core brand in this channel to shop in shops that we increasingly control ourselves. By taking over the BOSS shop in shops from Macy's, we have already reached an important milestone in this process. At the same time, we are scaling back the presence of our core brand in off price channels, where our collections have been sold at high discount rates in the past. This is a painful process and will take its toll on sales in 2016. However, our brand will benefit from this in the medium and long term future. We're paying equal attention to the Chinese market at present, where we have already achieved a great deal over the past few years with a complete transformation of our business model. But it was purely a franchise business until 2,008 is now a market that is entirely controlled by us. We're so much closer to our customers and can meet their needs and requests much faster today than we could before. To do this, we expect that we still need to deal with a number of legacy issues this year. The first being the closure of around 20 stores, which we have taken over from our partners in recent years. In the majority of cases, we are taking advantage of expiring lease agreements in order to minimize the financial impact. Secondly, we're adjusting our pricing structure, which was much higher in China than in Europe. The price cut of around 20%, which was implemented with the launch of the spring collection was positively received in the 1st few months. Although the trend in sales is ultimately still declining, we still managed to stabilize customer footfall in our stores and significantly increase our sales volumes. Despite our actions in the U. S. And China, we can only expect very modest sales growth this year. We need to accommodate this outlook by adjusting our cost development. In order to do this, we have introduced a range of measures. Over the past few weeks, we have identified savings potential of €50,000,000 compared to our original bad debt plans. By successfully renegotiating lease agreements for the group's own retail business as well as through the strict management of administrative expenses, we will be able to improve our cost efficiency. We will also focus our marketing activities on this kind of measure, which will directly benefit customer footfall in our stores. Furthermore, we will reduce our investments by around €50,000,000 in comparison to the previous year. A significantly slower pace of expansion with the group's own retail business will make a vital contribution to this. Top priority is now given to the improvement of our existing store portfolio. This mainly includes the systematic renovation of such stores, which have reached 8 to 5 years. In addition, we are analyzing the potential to boost our sales productivity, that is sales per square meter. We will therefore systematically optimize the combination of brands, product groups and collections for menswear and womenswear where we believe this will contribute toward the overall success of the business. In areas where these measures are not enough to make sustainable improvements, we will close stores even though this should be associated with nonrecurring expenses in the current year. In addition to the closures in China mentioned before, this mainly relates to between 10 20 stores, which have exhibited the greatest diluting effect on the group's retail market in 2015. After completing the currently ongoing negotiations with the lessors on those stores affected, we will issue information about our further plans with the publication of our 1st half year results in August. Our financial outlook reflects both our operating challenges and the measures that we have taken in recent months. We expect group sales to grow in the low single digit percentage range. A positive trend in Europe will likely offset the decline in sales in the Americas and Asia. In terms of sales by channel, group sales growth will be carried by our own retail business. New openings and takeovers of the past year will support sales increases. On the other hand, we expect to see a mid to high single digit percentage decline in sales in the wholesale business. The reasons for this are the structural changes to our distribution in the United States as previously described and takeover effects. Given the muted overall sales growth and pressure on the gross profit margin from price adjustments in Asia, we are anticipating a low double digit decline in operating profit that is EBITDA before special items. Nevertheless, we will continue to invest in the attractiveness of our brand and not scale down necessary renovations of our stores. Our stores are an essential part when it comes to creating an exciting brand experience and to building long term customer relationships. By opening fewer new stores and focusing on implementing smaller number of projects more quickly, the management of our inventories, we will thus increase our free cash flow compared with the previous year. Ladies and gentlemen, you will notice that we are taking many measures to secure our profitability by saving costs and improving efficiencies. This focus may not always be sexy, but it's correct and important. Our efforts to make short term improvements will not cloud our vision of the company's medium and long term future outlook. Hucoboss operates in a market that has changed at an unprecedented range over the past few years and still continues to change. The premium apparel market segment is facing considerable pressure. In many markets at present, the clothing sector is barely able to benefit from generally favorable consumer confidence. For example, the industry magazine, Textilebergshaft, reports that the apparel retail sector in Germany has shown no sign of growth for 4 years. At the same time, customers' buying behavior is also rapidly changing. Our customers have ever less free time and expect practical solutions in their day to day life. What used to be a stroll around the shops on a Saturday afternoon has now turned into a convenient browse of online shops. Opinions and trends are developing digitally and spread quickly in social media. For us, brands were primarily defined locally in the past. We now need to face the demand of a global consumer who places the utmost importance in a standardized brand experience regardless of where it is and in which medium they come into contact with HUGO BOSS. And ultimately, the perception of our brand and company as a whole is increasingly influenced by the sustainability of our brand. The future cost of HUGO BOSS must focus on these conditions in order to ensure sustained profitable growth in view of a persistently difficult industry environment. Allow me to outline our plans for the future of HUGO BOSS. The following characteristics describe what we as a company and brand will stand for in future. Customer centric, digital, fast, global and sustainable. All our activities over the next few years will be aligned with the vision described by these characteristics. What does this mean exactly? Customer centric means that we place the customer at the center of all our actions. What sounds slightly obvious actually poses a major challenge. I'm convinced that the ability to adapt to changing consumer habits will in the long term distinguish successful brands from those that only feed on their image. Over the past few years, HUGO BOSS has already initiated a fundamental change in its business model. And although we have already become a much better retailer than just a few years ago, we still have a number of tasks ahead of us. Primarily, we will invest heavily in our relationships with our customers and approach them individually across all channels. Customer focus also means that we will align our brand portfolio rigorously with the needs of our target group. Our brands have always stood for premium quality. With the appointment of Ingo Wiltz as the Managing Board member in charge, we will invest even more heavily in always offering a convincing product promise. The BOSS brand is synonymous with fashionable design, highest quality and perfect fit. We will stay true to these roots. At the same time, we will also gear ourselves more strongly towards the lifestyle of a younger target group who want to express its personality through fashion. We will therefore review our brand portfolio. In doing so, we will make sure that all our brands have a clear identity and a systematic emphasis on their respective target groups. We will factor in the change in buying behavior, of the next younger generation of customers. Digital competence is the key to this. Today, more than half of our customers make use of digital sources of information before deciding to buy one of our products. Our hugoboss.com website has always been the most important digital channel for our company. Its role has changed considerably, however. What used to be a purely online sales channel has now become a place where customers are inspired and seek advice regardless of whether they ultimately shop online or in one of our stores. This objective requires us to enhance the website. In late summer, we will roll out a concept that integrates editorial content, product advice and shopping opportunities. From August, we will be providing omni channel services such as click and collect. That is, we will it will be possible for customers to collect products in store which they have ordered online. Online and offline will therefore become 1. In the future, it will be irrelevant where a product is physically located. Our customers will be able to access it at least virtually wherever they are. We have just laid the necessary foundations for this. A good 2 weeks ago, we took over the fulfillment of our online business in Europe from our previous partner, allowing us to combine our inventories that until now had been separated by sales channel. As a result, we are making improvements in an area that is becoming increasingly important to our customers, speed. Social media has become hugely important, which has contributed to the fact that consumers don't accept long waiting times. The collection presented at a New York fashion show today should be available in the stores by tomorrow. And even if current temperatures are not typical of the time of year, a suitable offering is expected in store regardless of whether the collection cycle requires a spring, summer, fall or winter collection. Vertically integrated providers are much more flexible in their response than manufacturers in the premium or even luxury segment when it comes to implementing fashion trends because their business models cannot be transferred to us as they are. Instead, our products have different requirements in terms of the exclusiveness of materials used and the quality of craftsmanship. Nonetheless, we also need to position ourselves for these different customer expectations. Over the next few months, we therefore intend to thoroughly analyze we can simplify and speed up our operational processes. We want to be quicker in terms of development and enhance our collections with flexible concepts, which we can bring to our stores with short lead times. This will not work without making changes to our management culture. To me, speed is also about promoting entrepreneurial thinking and independence among our employees. We want to give individuals more responsibility and create efficient decision making channels to support innovation, not only on our products, but anywhere that can serve customer satisfaction. Today, the customer encounters Hugo Boss in a wide range of places and through a number of different channels. What used to be a straight line between the customer and our products is now a much more complicated network of relationships. Today, the perception of our brands is shaped by our own stores, our website, the way our partners present the collections, social media, mobile offerings and a whole host of other factors. And this doesn't just apply to our customers' home country, but also while they are away. Being one of the few authentic global brands in our market segment gives us the opportunity to win over new customers. However, the increasing complexity of the relationship to customers also creates challenges when it comes to ensuring a uniform brand experience worldwide. We cannot afford to disappoint in this respect. We are therefore focusing our efforts on improving our distribution in the U. S. Wholesale business. We are therefore aligning our pricing structure in Asia more closely to the level in Europe. And therefore, we will also take further steps over the next few years toward harmonizing our sales prices across markets. Further expanding the control over our brand image will help us to do this. In this respect, the share of our own retail sales will continue to grow. Ultimately, the sustainability of our business is crucial for future economic success. Our products are not only popular because of their quality and fit, they stand for success. This is consistently endorsed by our customer surveys. Success means recognition, but also responsibility and obligation. We perceive the success of our business as a responsibility to our customers, employees, suppliers, the environment and society. If we don't fulfill this responsibility, we will lose the confidence of our customers. Sustainable business is therefore of existential importance to Jogoboss. If we don't meet this requirement, we will jeopardize the economic success we are committed to achieve in the interest of our shareholders. Sustainability manifests itself in a number of different ways. It is expressed through the promise of quality we make to our customers. It means we maintain an open and dialogue orientated corporate culture and encourage the potential of our employees. It commits us to observing strict social and environmental standards with all our suppliers and production partners. And it means assuming responsibility for social development in locations where HUGO BOSS actively operates. We're engaging in Ladies and gentlemen, 2016 is an important year for Hugo Bossa. Our trend in earnings since the second half of twenty fifteen highlights the challenges all too clearly. We won't be able to change the market environment, but we know where we need to start in our own business to make improvements. In the short term, it is a question of adjusting costs and capital expenditure to the weaker business performance. We also need to do our homework in the U. S. And China and pull our resources in order to strengthen our core business, menswear. However, over the next few years, we also plan to work extremely hard on the activities I've only touched upon today. The current corporate situation demands genuinely impressed by the energy and spirit of optimism shown throughout the company over the past few weeks. On behalf of the entire Managing Board, I would like to thank all our employees for this. We also thank you, dear shareholders, for your continued support and your trust. We hope you will stay with us in the future. HUGO BOSS stands on a solid base and not only in terms of our finances. We have what it takes to continue the success story of this great company. As it so often has in the past, HUGO BOSS will overcome the current challenges and get back on track to achieve profitable and sustainable growth.