Good afternoon and thank you for joining us to speak about Prada's results. Good afternoon And thank you for joining us to speak about Prada's results for the 1st half of twenty sixteen. I'm joined by Aleksandra Cozzani, our Group CFO. We take you through the financial results in detail and by Stefano Cantino, Cantino, our group strategic marketing director will provide an update on the commercial progress we are making. We'll then be delighted to take any question you may have.
Turning to Slide 3, as you will have seen from the number, the condition in whole of our major markets remain extremely tough and this has continued to impact upon our trading with sales figures down year on year. The macroeconomic backdrop remains depressed and has not significantly improved compared with the last year. In addition, currency fluctuation and geopolitical uncertainty have impacted the tourist flows around the world, reducing a key source of sales. Now that also influenced by the economic conditions, spending patterns among international luxury consumers are changing and evolving and we will say more today about how we are leveraging our unique stylistic identity, heritage of craftsmanship and manufacturing capabilities to respond to this challenge with new collection in all product categories across our brands. We are also responding to the challenging climate by progressing our action plan and by successfully implementing our cost efficiency program and the initial results of that are extremely encouraging.
We have preserved operating margins with EBITDA at 21% of sales and EBIT at 14%, thanks to an effective program of industrial efficiency. We have managed to deliver a significant reduction in operating expenses year on year and thanks to our strong operating cash flow helped by more efficient inventory management, we remain financially robust with a healthy net financial position. We fully self financed growth and the normalized CapEx and with the expansion phase of store network now behind us, our focus is increasingly on store refurbishment rather than growth. We are also reviewing our channels to market and earlier this year launched partnerships with leading e tailers. The initial results have been encouraging and we will update
further on
progress later in the year. On Slide 4, I have set out the key elements of the strategy by which Prada is adapting to evolving marketplace, of course, always while leveraging our unique luxury heritage. We have in the past adopted a cautious approach to online sales, but we are now setting ourselves a target of doubling online sales every year for the next 3 years, albeit from LOPE. We will significantly grow online sales with the rollout of our own e commerce platform into the most important new territories and aim to achieve coverage of all major global markets within the next 2 years. Our first target is to launch our online sales platform across China, Hong Kong and Singapore by the end of 2017 with work on the other major countries continuing.
At the same time, our online offer is becoming broader and deeper with improved online services such as click and collect, preorders and so on. We are also working on improved digital engagement with the new generation of consumers, raising the profile of the brand with millennials As well as refining the product offer, we are strengthening our offer at all strategic price points, enhancing personalized and localized experience. And integrated with these, we are rolling out new store concepts that also embrace a more intimate and personal customer experience. As I mentioned, our systematic review of cost is ongoing and we are also looking at every area of our business to create a leaner organization, which is already showing results with enhanced operational flexibility and efficiency. Finally, we expect further rationalization of the retail network with selective closure at Prada in non strategic location as well as downsizing the Miu Miu store portfolio in the outlet channel.
My expectation is that with all these initiatives underway, 2016 will prove to be a turning point for the business and we are back on a sustainable path to growth. I will now hand you over to Alexander to talk through the numbers.
Thank you, Mr. Matti. Let's begin by looking at the first half results in brief. As Mr. Matti has already explained, our sales performance continues to be impacted by tough trading conditions.
Net revenue for the half totaled more or less 1 $500,000,000 down by 15% year on year, 13% at constant exchange rate. We were able, however, to maintain a stable gross margin at 72%, and it is thanks to our efforts to improve industrial efficiency. Expectation and EBIT of €250,000,000 or 14 percent of revenue. Net income for the period was 142,000,000. Euros Turning now to the balance sheet and the cash flow.
Our action to reduce inventories helped support strong operating cash flow that in the period reached EUR 276,000,000 This enabled us to self finance capital expenditure of EUR around EUR 100,000,000 during the period and to maintain a healthy net financial position, having also distributed $280,000,000 of dividends during the period. Taking a deeper look at the net sales by region and the channel. The retail channel remains under pressure and sales fell by 18% year on year or 16% at cost and exchange rate to €1,300,000 However, wholesale sales were up from last year, benefiting from positive initial results from our recent partnership with leading retailers and double digit also organic growth at churches. Turning to each geography. Asia Pacific, which accounts more than 30% of our retail sales, continues to operate against a challenging economic backdrop.
On Congo and Macau, continued to be under pressure. But compared to last year, the downward trend has stabilized and in the last couple of months we have seen some sign of improvement. Mainland China that was also stopped during the period has recently demonstrated encouraging improvement, helped by an increasing trend of repatriation of Chinese consumption to domestic market. Sales in Japan were impacted by the appreciation of the Japanese yen and the flow of tourists from China has decreased since the beginning of the year, while local spending has remained quite resilient. Europe saw a sharp decline in tourist flows, a trend that has persisted since late last year due to ongoing security concern.
However, sales domestic consumers in all European markets performed much better. Within Europe, areas of positive performance were Russia, where we saw double digit growth in volumes and the U. K. That has recently turned positive. A fall in tourist flows in North America and the subdued sales domestic consumers to weigh on sales in the region.
We did however see extremely good performance from our stores in Mexico and Brazil. Our most resilient region was the Middle East where sales were mainly driven by positive local consumption. As I mentioned before, sales through the wholesale channel were up on last year, driven by positive initial results from our partnership with leading e tailers Net A Porter and MyTeresa, which Stefano will talk you through in more detail later. We also saw strong organic growth from churches over the period. You will find the usual charts with breakdown by region product brand in the appendix.
We have taken many actions to reduce costs across the business and the strong progress we have made on cost savings has enabled us to deliver a stable operating margin this half. You can appreciate it in this chart where you can see the evolution of the EBIT at the EBIT margin. Overall, the reduction in operating expenses excluding D and A delivered 600 bps margin offset. Total operating expenses reduced by 12% year on year. If we exclude P and A that is a non cash item, the reduction on cost was €94,000,000 11%.
We have been very rigorous in our approach to cost reduction in order to create a leaner, more efficient and flexible organization. Over the 1st 6 months of the year, we reduced labor cost, mainly freezing turnover and reduced significantly general and administrative expenses and we continue to seek ways to trim these further. We are systematically meeting landlords to renegotiate rent. And this activity has already resulted in better rent agreements across Asia Pacific. Investment in our brand remains paramount and while our advertising spending decreased in the first half, but this is not indicative of the full year trend and we will continue to maintain our average yearly advertising spend.
We don't want to cut advertising spending, but the mix of our budget, however, will shift from traditional media to digital communication projects. The group has a strong track record of generating a high level of operating cash flow. For the last 12 months, our operating cash flow to EBITDA levels have been above 80%. This has been supported by our effort to reduce the level of inventory to a more efficient production planning and stock management. You can see this trend clearly on the right hand side of this slide.
Stefano will talk in more detail about the optimization of our store network shortly, but let us turn now to look at the capital expenditure for the first half. As we have anticipated, the phase of retail expansion implying important investments is over and we have shifted our focus away from store openings to optimization and refurbishment of our stores network. Our CapEx spending has decreased as a percentage of sales to 7% over the period. We have opened in the period 4 net stores and have refurbished 16 stores. Finally, our strong cash flow generation enable us to maintain a healthy net financial position, which now stands at $246,000,000 broadly in line with July 2015.
I'm now pleased to hand over Stefano, who will give you our commercial update.
Thanks, Alex. And licensing as well as our digital, e commerce and merchandising strategy. 1st, retail. Our return network is a core strength of the business. The customer experience is a crucial element of selling luxury.
And in store, we remain our key avenue to delivering a unique luxury and unequivocally Prada experience. Our store network is of course also how we deliver the level of service that customers expect. We are going through a process of resizing the network that will leave us linear, more strategically placed in key markets and in optimum position to evolve with our customer needs. As a result of our rationalization, 2016 saw 20 opening and slightly more closing at 25 store at the group level. In addition to store rationalization, we remain alert to systematic rent negotiation and pursue this avenue carefully, particularly in Asia Pacific region, where we have a higher store presence.
Our customer experience within our store network is something we continually review and seek to enhance. Prada is truly innovative in design and the expecting evolution in translating this to the shopping experience is vital to our brand. We have introduced new store concept across our network to create unique shopping moments for all product categories and generate a more intimate and individual shopping experience for our customers. For instance, the new Prada store in the GUM destination in Moscow features a succession of intimate rooms on 2 levels, with the menswear and womenswear collection surrounded by luxurious furnishing and exquisite materials. This follows successful openings in Plaza 66 Shanghai and Canton Road, Hong Kong.
This major store opening was accompanied by a capsule collection exclusively available at the Prada Gourmet, which revisited the teams developing the fallwinter2016 women's wear fashion show. Miu Miu opened a prestigious new store in Canton Road, Hong Kong dedicated to bag, accessory, footwear and ready to wear collection. The space expand over to store in which the iconic gold damask fabric interpreted in a pale blue tone to create an atmosphere at the same time harmonious, intimate and contemporary, covers the world together with floor to ceiling mirrors. Slide 16. Now to wholesale.
What I'm pleased to report, we have developed a strong platform to progressive grow, thanks to 2 key initiatives that as you have seen have already demonstrated encouraging sign of progress. We have now concluded the rationalization of our wholesale network having in on our best in class strategic partners that comprise well known USA and European department store. We will continue our path of building meaningful relationship with key strategic accounts that truly understand Prada and our customer needs and can be trusted with our iconic brand. In addition, our strategy of providing limited edition of collection to this partner has been received very well by customers. Our debut on Net A Porter and MYTHEREZA proved extremely successful.
It is still early days, but I'm delighted to report early signs are highly encouraging. And we look forward to continue our work with these 2 companies and their support of the Prada brand. Our refined wholesale focus will continue with Prada's launch on the Renault Mr. Porte from menswear in September. We will also expand our e commerce negotiation for Miu Miu as the strategic opportunities arise.
Slide 17, licensing remains an important trend to our business and brands and continues to show good growth momentum. Our new launches have performed well, particularly to the both Miu Miu fragrance. The first fragrance for the brand and supporting advertising and social media campaign, featuring Stacy Martis, embodying Miu Miu Playful Spirit and Character, and was a resounding success in all geographies. We also launched flagship Prada fragrances, La Femme and L'Homme Prada, and they've for the first time in the history launched an iconic male and female fragrances at the same time. The LaSalle and L'Ome Prada collection, epitomizeis, Prada Spirit and Heritage.
And the collection has already demonstrated excellent traction with customers. Turning to our glass range, we introduced our latest flagship partnership, Buluc Xotica, the Prada Mut collection. The range is graphic and geometric in its design and was supported by a well received digital film campaign featuring model Vanessa Moody. The Miu Miu Shenic collection, it has been supported by excellent digital content, storytelling and a short movie. This collection truly embody the DNA of both our brands, and I'm very pleased to report that both overperformed market.
Slide 18. Moving now to digital. True to our iconic global status, we have large following across social media platform that continue to grow rapidly. As we grow our online presence, we seek to evolve with our customer increased expectation of digital communication and to seize the opportunity to talk with potential new customer, in particular millennials. Social media is of course an important customer engagement avenue that allows us to increase the frequency in which we interact with our existing customers and drive customers to our existing store.
We have continued to focus our attention on evolving our voice across all social platform, platform to perfectly reflect and drive our unique brand DNA and develop innovative social media campaigns and project to light the frequency of our engagement with followers. China demands a highly specialized approach to social media and we successfully launched on Sina Weibo in February 2016, while our WeChat presence continues to expand rapidly. Instagram is an important platform for us, and we are working on the potential launch of shoppable content with selected key items. Slide 19. E commerce remains a big and exciting opportunity for Prada and the strategy we are carefully building to cement our long term future.
The rollout of our e commerce platform in all major markets over the next 2 years represent an important milestone that will enforce our presence across strategic counties such as China, Hong Kong and Singapore in the first phase and will then expand to countries detailed here from the Middle East to Malaysia. We are well on the path to fully integrating and absorbing e commerce within the group, all the while maintaining the unique Prada luxury shopping experience. Flowing from the earlier point around the evolving expectation of today consumer, the desire to see and investigate collection and products online and then purchase offline again, beneficially increase our touch points with new and existing customers. And we will continue to develop our omni channel offer and deepen the relationship between our digital offering and physical store. And finally, we look forward to continuing to develop our partnership with major retailers.
Slide 20. Continued innovation and vibrant new interpretation of the visionary and iconic Prada brand are essential drivers of our leather collection and business. Novelties, by which we mean new shapes, materials, details and interpretation of our iconic styles cover all price ranges and have been received incredibly well by customers. Our localized merchandising policies has progressed well and seen localized campaign such as our charm campaign, featuring iconic bag with sat and embellishment tailored to specific market, notably China and Japan. Launched successful and demonstrate our deep understanding of our customers and market.
In addition, we have continued to increase our price harmonization on new products. Thank you for your time. I now leave you with Mr. Matti for his outlook and closing remarks. Thank you.
Thank you, Steve. Prada is an iconic brand. The measures that we have talked about today reposition the business to prosper in the new evolving landscape. We have a clear vision for the future and our unique heritage means we are strongly positioned to succeed. Indeed, our action plan is underway and already delivering the result.
2016 is a turning point and we are now firmly on the path to sustainable growth in revenues and earnings from as early as 2017 and it is our intention to provide more detail on our path to growth at the strategy update later on this year. With that, I would now like to open the call up to Q and A.
Thank And we will take an opening question from Luca Solca of Exane BNP Paribas. Please go ahead. Your line is open.
Yes. Good afternoon. One question about your digital development. You seem to be emphasizing in the past that digital for you would be primarily about communication. But during the call, you stressed the partnership that you have with Mycaresa and Neta Popet, for example.
I wonder what the logic is of developing digital through wholesale partnerships and what you plan to do when it comes to direct retail online and whether this is going to be emphasized more in the future and going to be a more important part of your activity. Secondly, and on an unrelated subject, I see in the report you issued today that you are changing the depreciation policy, which is impacting your results by about $27,000,000 if I understand correctly. If you could please give us more background on that and what brought you to make this decision? Thank you very
much. Thank you, Luca. I will give you the answer about digital communication. Speaking about the digital communication strategy, we already reinforced our digital communication through our site and through the major social media. And this is something that is today visible if you go on all the major social media.
And I think that the level of engagement that you can have on our site can be compared to the recent past. So I think that the improvement that we have declared in the past are already effective. And we will continue to reinforce our digital presence in term of, of course, advertising online, as already mentioned by Alessandra and in all the others opportunities there. Speaking about e commerce partnership, I think that this is more a commercial opportunity. Of course, Net A Porter is one of the key partner and they are very active in term of marketing, digital marketing.
And of course, we will build together additional content and we will develop with them different part of communication depending on different opportunities. So you will see and it is visible that our partnership is probably the Q1 for the current year.
I will take the question on Q and A, of course. I think it's quite normal for a company through its life and it's also requested by the International Accounting Standard to review the useful life of the company in order to make it more close to the reality. Probably last time we have done this was, I don't recall exactly 14, 15 years ago. During this long period of time, we have, of course, significantly increased our experience in terms of managing retail. And we now deem that the 10 years limit that we have before was not anymore in line with the reality.
That's why we have decided to move from 10 years to the lease agreement. That's the main rationale. You can find everything very well explained in the announcement. And I also would like to underline that we have done this, of course, in accordance with our auditors.
Thank you very much indeed.
If I can add a little notice regarding the amortization. The point is that we realized that we have a lot of shops at a value of 0 in our balance sheet still working. The reason is because the most important part of our investment in a new shop is real estate work. For instance, escalators, elevators and this kind of, let me say, investment don't disappear in 10 years. Of course, they disappear if the contract of lease is short, but this is still a rule that we are applying the shortest among the duration of the lease contract and
the life
of the shop. This is very simple and this is our real experience.
Maybe one additional question on direct engagement in digital retail by Prada. Stefano, if you could expand a bit more on that and what you propose to do on this side?
Yes. I think that we mentioned actually the key move will be the shoppable experience via Instagram that we are working on it. Think that this probably could be the best and the next opportunity in term of really have a better exchange between online and offline as a unique channel.
Understood. Thank you very much.
Thank you, Luca.
Our next question comes from Janet Kloppenburg of JJK Research. Please go ahead. Your line is open.
Good morning, everyone. Good afternoon or evening to you. Forgive me. I wanted to ask a couple of questions on the trends you talked about in Asia. You said that you saw some encouraging trends in Hong Kong and I believe Mainland China.
And I'm wondering if that means that the declines are moderating and if we should expect that continue in the second half or what the outlook is there. Also on marketing, I just wanted to confirm that marketing expense would be up in the second half year over year. I think you said flat for the year, but maybe increased in the second half versus last year. And I wondered if you could talk a little bit about performance of the fall line across categories. So I've seen the upgrades you've made and the opening price points, and I'm wondering if you're seeing progress across leather goods, footwear and apparel.
Thank you.
Hello, Janet. I will take the first two questions. In terms of trend in Asia, we mentioned that I think if I have to talk about Hong Kong and Macau, for example, even at the beginning of the year, the trend was negative, but not deteriorated. So it's a kind of stabilization was already seen across the 6 months. Recently, so I mean July August, even if it's a bit early today we have seen real sign of improvement in all Greater China, I mean Hong Kong, Macau and and also mainland.
In terms of So you're
saying it's too early Alessandro, you're saying it's too early to say that there is going to be further improvement?
I think it's a bit too early to understand if it is a real trend sustainable. Of course, we do believe that is we are seeing probably, of course, a sort of repatriation of shopping, they are probably spending less traveling the world and they are buying more at home. This is, of course, probably a trend in the sector, but we are quite convinced that these are also the signs of all the activity that we are doing in terms of product and in terms of enhancing services that are delivering results.
Okay.
In terms of marketing expenses, what I said is, let's say that we are not cutting marketing expenses, advertising and promotion. So the decrease that you are seeing in the first half is just the phasing. So we are going to spend more in the second half. So for the whole year, the marketing expenditure will be more or less in line with last year. What we are doing, that's probably something that Stefan has already mentioned, We are allocating more budget to digital to events rather than traditional media.
Sorry, you want to say something, Janet? No?
No, no, no. Thanks.
Speaking about merchandising, I think that in price ranges, the key point is that we have to cover all the price ranges. So we cannot miss any one of them, because there are a lot of opportunities at each price line on the highest one and also at the entry 1. What is key that I already mentioned before is to have novelties for each price range. And even on the iconic bag to have embellishment, new addition, new materials. And of course, that gives to the product a new flavor and a new image.
Okay. And are you seeing progress across all categories or
Yes, sorry. The second part, I mean the second part, yes. Speaking about categories, we have seen especially in during August an amazing reaction for ready to wear in general and more specifically in China for the Miu Miu brand as for shoes. And of course, our Prada shoe business remains strong and also the fashion show was very well received for Prada as well.
Okay. Lots of luck going forward. Thank you.
Thank you.
We will take our next question from Antoine Belge of HSBC. Please go ahead. Your line is
It's Antoine Belge of HSBC. Three questions, if I may. First of all, given that there were not many store openings in the first half, can we assume that the same store sales growth was close to the 16% you reported for the minus 16% that you reported for retail at constant currency? My second question relates to your comment about improvement in July August in Asia. So you're talking about a sort of repatriation of spending from Chinese.
That it'd been that overall on a worldwide basis, your sales are still trending more or less like in H1 or are you still on balancing an improvement sequentially? And my third question relates to the EBIT margin. So if we take into account notably the change in depreciation policy, which is going to help you over the full year, Do you think that an EBIT margin of, let's say, 15%, 1.5% can be achieved over the full year? And actually, I've got just a clarifier on the previous question because I think regarding marketing, you said that marketing would be stable over the full year. Are you talking as a percentage of sales or in euro term?
Because just in H1 only, marketing expenses were down 22% in euro term. Thank you.
You want Juan? Your first question, yes, your assumption are reasonable since we have not opened many stores, just a couple. The same store sales growth is more or less in line with our organic growth. Talking about trends, yes, I have to mention that we have seen also a sort of sequential improvement during the period with the Q2 better than Q1. And more or less, August is trading close to probably this what we have seen in the second quarter.
Your third question was the EBIT that we are expecting for the rest of the year. Of course, we are of course, it's difficult in this moment to make a reasonable forecast in terms of sales, because there are a lot of uncertainty everywhere. What we have under well control are the costs. So we have a clear idea of the level of cost that we will reach in the second part of the year. And let's say that probably with a slightly improving trend in second half and same successful action on cost, we are probably we will be probably more in line with last year rather than close to 15% maybe.
Okay. Sorry, just maybe on just a clarification. So you mean on last year on a reported basis or updated for the change in the depreciation on amortization?
I'm probably more referring to the EBITDA margin. So we are quite confident that with a slight improvement in the sales trend, we are not diluting the EBITDA margin, let's put in its way.
Okay. So 22.6%, if I'm correct.
Sorry, what? Sorry, I didn't
I mean, so just yes, I mean, the EBITDA margin last year was 22.6%. So what you're saying is that you think that if all the elements that you've mentioned are proven true, then you can reach 22.6 percent EBITDA margin this year?
22 point 6% is a bit too precise. Let's say around 22% is reasonable.
Okay. Thank you.
We will take our next question. 65.
No, but your proposal is not very much challenging. So we can accept you can accept your challenge proposal that we'll work in order to reach this goal.
Thank you.
We will take our next question from Melanie Flouquet of JPMorgan.
Just a confirmation that from the restatement, we should expect similar impact on depreciation of harmonization of around €27,000,000 in H2. My second question is whether there was any timing we should be aware of on CapEx. So maybe if you can update us on CapEx expectation for this year. And I was wondering when you mentioned third question, sorry, current trading and you mentioned July August improved in Asia. Again, I go back to this question, you said Q2 was better than Q1, but in July August, which you seem to be highlighting as an improvement in Asia.
Was that also true worldwide, to be precise? And then, sorry, 4th question. You mentioned on the call, Mr. Massey, that you expect the return to sales and earnings growth in 2017 By the sound of the guidance you're just giving on EBITDA, this may actually happen already in H2. Is this your expectation?
Thank you.
Hello, Melanie. The yes, more or less the effect of the change in the depreciation will be similar to H1, probably something less, which will be around $50,000,000 year on the whole year. In terms of CapEx, as you have already seen in the first half, we are, of course, spending less because the expansion phase is over. For the whole year, I would expect the level of capital would be in the range of €200,000,000 to €150,000,000 more or less depending on probably how many stores we'll be able to refurbish under the new contract. The question on trend in Asia, can you rephrase that?
Yes. You mentioned, sorry, on the call that quarter 2 was better than quarter 1 sequentially, but you also highlighted in the presentation that July August seem to have trended within Q2. July was better and August was also sounded better even if it's not part of Q2. This is in Asia that comment. I was wondering whether worldwide you're also seeing this?
Or whether more specifically, you've seen a deterioration in Italy and the repatriation accentuating towards China and Hong Kong in July August? Thank you. Tourist flow seem to have deteriorated quite recently in Italy, so I wondered whether you were seeing this. And your comment of the battle on Hong Kong and China was also encompassing a higher degree of repatriation.
Of course, I cannot be very precise, but the signs that we have seen in Hong Kong, Mainland China
are
quite specific to that region. I cannot see that we have seen any big changes in the other region during the last couple of months, no?
Did you see a deterioration in Italy by any chance in July August or not at all?
Not really. No, not a deterioration.
And then sorry, H2, could that be in growth in sales and earnings?
Growth in sales and earnings in H2 is quite challenging. Of course, I repeat, we even it's too early, we are seeing some sign of improvement. We are expecting a better H2, of course. But it's difficult to think that the second part of the year will have a positive trend, honestly.
I'm sorry, I venture a last one. How big do you think 3rd party retailers can be as a percentage of your total sales? Is this maybe next year and in the next 5 years? Is this really meaningful? Or is this helping you to enhance the brand financially?
Your question is related to wholesale in general
including No, yes, to ethailing, 3rd party ethailing since this is quite a big part of your
Specifically to ee retailers, right?
Yes, retailers, third party retailers.
I think that we can of course, it is our decision because there are a lot of opportunities. And so the growth can be between let's say in terms of percentage I would say between 15% 20% in general in order to keep the image and of course the brand position at the right level, yes.
Sorry, is this 15% to 20% of what? Sorry, of wholesale?
You asked for the how much will be the increase for the question, right?
No, but I don't know the base. No, I'm asking how big it can be. In other words, if you can give it as a percentage of wholesale or of your total sales, the 12.90 of Yes.
The volume on you are referring to the weight? Yes. Okay. The actual, let's say, proportion is yes, but I need to give the weight on the total. So the percentage of the retailer distribution is actually around 10%.
Around 10% of wholesale today.
Of wholesale of the actual wholesale. And I think that 10% of the total wholesale channel and I think that we can say that can remain at this level or let's say between 10% 20% for the next few years.
Perfect. Thank you, Rodrigo.
This could be the right percentage, maybe a bit higher for the Miu Miu brand, if I have to be very specific, because of course there are probably more opportunities for this brand.
Thank you very much.
Thank you.
We will take our next question from Andrea Felsat of Bloomberg. Please go ahead. Your line is open.
Hello. I just wanted to ask, you're talking about the change in the depreciation policy from where you are to the lease term, what's your average lease term please?
Average duration of the rental agreement is not the data that I can have exact capacity among 8 years.
Around 8 years?
8 years because there are many shops with the duration of 5 years and some shops with the duration 6 plus 6 means 12 years. So on average, but it's my personal estimation.
Okay. So that shouldn't be that much different to where you are at the moment, yet you've got quite a big benefit. Could you explain how that's come about please?
The difference is not so enormous. Yes. You say that is big, you are right. But you have to consider that some of our shops' rental agreement were near and so we amortized in the past time for the usual. Now we are spreading the rest of the value of the investment in the residual portion of the amortization.
Let me say an example. A shop with a rental agreement that expire in 1 year. We had to amortize the full residual value in this year. But now if we decide that to excuse me, not I'm wrong. A shop, we have an expiring date of 12 years.
Yes.
And until now, we amortized for 9 years. In the past method, we had to amortize the residual value in just in 1 year. In this new, let me say, rule, we have to divide the residual value in the last 3 years. I don't know if I was clear. So you get The immediate impact is higher than the impact that we will have let's say in the next year.
Right.
This calculation also verified by our
Right.
So there is no wrong calculation. But I can understand that this is a new point. But in my personal opinion is not so important because what is important is EBITDA. And EBITDA is not impacted
Sorry, what do you mean by EBITDA?
Cash flow.
Sorry, what do you mean by ABTR?
EBITDA is earning EBITDA. Yes. Okay. Yes. But EBITDA is very important margin because it's the base of the cash flow.
This is very important. My personal opinion, the only thing that is important in result of a company is cash flow.
Right.
EBIT, earning and every gross margin in my personal opinion is no matter.
Right.
The only thing very, very important is cash flow because the problem is that we are judging the company with the result of 1 year. It's important in the universe perspective to judge a company in landscape of maybe 100 years from the beginning to the end.
And in
this case, we need
a bigger help.
But it's still pretty helpful to get that It's still pretty helpful to get that boost to the bottom line, isn't it, particularly with sales under pressure?
Hello?
What do you mean?
It's very useful to get that boost from the lower depreciation charge when sales are under pressure.
Yes, but we think this is the point. What is the right approach? It was the old one or it is better than new one. This is the point. In our opinion, this new method is more, let me say, representative of the reality.
This is the only reason because we changed it because I repeat, in my opinion, the EBITDA is the only margin very interesting. But I don't want to say that I am right. I could be wrong, but I think to be right.
Okay. Thank you very much. Thank you.
Thank you. Thank you to you.
We will take our next question from Paola Carboni of Equita SIM. Please go ahead. Your line is open.
Yes. Hi. Good afternoon, everybody. I have a few questions. Very quickly, on the Chinese cluster, if you can comment specifically about that on a worldwide basis.
So whether the improvements that you have seen in July August is true not just for Great China, but also for the Chinese cluster overall. What's your perception in this respect? Secondly, in terms of categories and still on the improvement seen in the last couple of months, I was wondering if you can elaborate a little bit with us about the timing of the new launches, new product launches in handbags, which hit stores in order to understand how much they helped this improvement of July August