CCC SA

WSE:CCC

Earnings Call Transcript 2018-Q1

[Marcin Czyczerski, executive]

I'd like to welcome you very cordially on behalf of myself, on behalf of the entire management board as well as the CC Group.

So we have 3 items. We have to look at the financial results as well as the results in Q1. We want to talk about the key events, which led to the quarter looking like it does. Then I'm going to say a few words about the new IFRS 16 reporting standard because we're one of the first companies, at least one of the largest companies, that has elected to implement this standard. In our communication, we're trying to provide you with some comfort and understanding in terms of how the financial statements will change. Well, of course, reality, it's not going to change at all as a result of IFRS 16, but I want to say a few more words about IFRS 16. And since we're more or less in the middle of Q2, I want to say a few words about the prospects for this quarter in terms of what's happening now. And then at the very end, we'll have our Q&A session, and so I hope to engage in an interesting discussion with you.

So if we start with the key events in Q1. First, we've introduced IFRS 16. To be brief or succinct, this means that the costs of renting stores are recognized slightly differently. We have 1,200 agreements, nearly 950 almost are first stores. And so the impact of this altered approach is quite important in every one of our financial statements. I'm just giving you a short bit of information here. Later, I'll walk through that more quick -- more in depth.

So the optimization of processes. So in August of last year, the CEO mentioned about this. You're gradually being able to see the initial impact of optimized processes that I'd like to allude to what you should expect later this year and in subsequent years. And then there's something that we don't have much impact on this, but this has an impact on us. We don't have an impact on it, but it has an impact on us. So up until the end of March, the winter period had a big impact on our financial results, our sales results and basically delayed utilization of our Spring Collection, which had an impact on our financials. So as of 1 April, we have had a beautiful spring, and we're very pleased to see the arrival of spring, and me -- I'm also pleased as the CFO.

If we look at the numbers in Q1, we have now 934 stores. We're selling in 20 countries, so we shouldn't add 17 to 12 and say, this doesn't give us a result of 20. In some countries, we're selling online, not offline or the other way around. So we're present. We have footprint in 20 countries. And we're, of course, developing various channels independent of one another.

This quarter has very unsatisfactory results in terms of top line, down 4%. And we have lower LFL, like-for-like, down 20%. And I'll say more about this later in the presentation. We're pleased that even though the weather wasn't conducive because the company didn't operate it in a vacuum, we've been able to grow our online revenues by some 52%. Perhaps this is something that's not fully appreciated, but if you look at our peers, our competitors, we can say that our Internet arm is doing quite well. As I've said, we're -- we have a footprint in 20 countries. You can -- for now, we're in Europe. As you can see, we have Italy through our Internet arm, e-commerce arm. We have Romania that was announced in Q1 as a market that we would penetrate. And so on 26th of April, we have a company that's operating there within the CCC Group.

We're also -- we have a footprint of 934 stores, some -- it's up by some 30-odd stores. And we have -- if we look at these numbers, we've got more selling space. We don't have any of the e-commerce stores so the numbers aren't very big, but this will change gradually. So we're thinking about how those eobuwie stores should be recognized in this table. So I would invite you to take a look at them when you come into [ François ].

So we have a good quarter in terms of selling sales area. We're at some 19,000. So according to plan, both on a gross and net basis. So the increase of space in Poland was quite up, 8,500. So 40% of that was actually enlargement. And this is quite important because every type of enlargement gives us an opportunity to sit down with the landlords, talk about the new [indiscernible] store, we can talk about the costs of rent. And this is something that you'll observe this year, in subsequent quarters and in subsequent years. This will have a positive impact on the level of costs and the financial results. I can't declare today how big that impact will be, but it will be material.

If we look at the growth in sales area, we're quite happy with what's happening in Russia. This is going to be the second most important market in 2018. And so as I've mentioned, we want to double our business, having some 20,000 square meters of sales space opened and a number of new stores. So the average square meter size is growing, so it's currently 591.

So if you look at our like-for-like sales performance. So the weather has caused a situation that in the second -- or the middle of February, so the second 10 days, basically, we've had the emergency break turned on. We can start with -- on the right side of the graph. So the weather wasn't supportive to us until March, until the end of March. So we still had the Winter Collection in our stores in March, so we had until January and February, a little bit warmer. But we were able to improve our sales year-on-year. But when we started to have the Spring Collection coming in, that was on the 6th of February. And then through the 20th of February, we started to switch in our Spring Collection. Then the temperature suddenly fell or plummeted. You've got the weekly temperature, so it was a difference of minus 15 degrees. But in some weeks, we even had a decline of 20 degrees. And basically, that meant that the sales collection stopped selling at that point. But every one of us, as a customer, has to have shoes. So this is not loss sales, but sales that have shifted to Q2, into April and into May. And this is something that we're observing at present. So the impact, especially exerted by March, the very low temperature means that in Q1, we have a very atypical from our behalf negative like-for-likes at minus 20%. Of course, we're not pleased by that, but this is now history. And actually, we would prefer had it been otherwise, but even if we look at April, we can see that these are figures that will not have an impact on our full year results.

So we're now at 15th of May. I told you last year that after a poor April or even early May, I wouldn't write off, that's what I said last year. This year, I think we should be patient in terms of the midyear results because Q1 is something that we can make up for.

So if we look at the sales split or sales mix. So basically, in every segment, things were down. Whether we talk about Central or Eastern Europe, Germany or if we're talking about wholesale, we were losing. We have an additional impact in March of the first time that Sundays weren't -- we have the Sunday trading ban. As customers, we're learning about the Sunday trading ban, so sales are now spreading over the neighboring days, Friday, Saturday and Mondays. We've had good Mondays, so we can say that we're -- clients are learning about the Sunday trading ban, and we have an impact. It's not really clear which Sunday is a trading Sunday and which one's not a trading Sunday. So we need a little bit more time to assess this phenomenon.

Certainly, on the cost side, we're making some adjustments so we're counting on being able to neutralize this effect. If we look at quarterly sales in the various segments, we can see that this is a type of episode. And we can see that e-commerce has grown its share from 15% to 24%. But we'll probably be closer to 20%, 1/5 on a full year basis for e-commerce. And this is a result of the fact that offline was doing poorly and then online was doing well. And so Q1 was characteristic in the sense that e-commerce is very strong and a lot is being purchased through e-commerce.

And so this is a repetition of the numbers we saw on the previous slide. So we can see that revenues fell off, tapered off in offline by 14%. So it's much more seasonal. Whereas our online revenues were up 52%, having in mind the weather conditions. And I'll dwell on this at greater length when we get to the overall results, what we can anticipate for the rest of the year in terms of the EBITDA as well as in the future. Because based on what you write, we see that there is a little bit of disquiet based on what you've written.

So if you look at our financial results, assuming that nothing's changed up until the end of this year, we're going to probably show our figures, reported figures the same way you see them today. So to ensure comparability, we would like to show you the quarter as if we had not introduced IFRS 16 so you can observe the performance of the company. At the same time, in tables, we'll show the impact of IFRS 16 in every table -- in every quarter in terms of its impact on cash flow, balance sheet and P&L. So in trade, this impact is very high, so we want to show this as transparently as possible to show you the results in both classifications to understand how much IFRS 16 is affecting the financials of the company, our financial results and what the performance is on a quarter-to-quarter basis without that.

And so if we look at the gross margin evolution. In Q1, IFRS 16 doesn't really have much application here. So you look at Q1 2018 to Q1 2017, this doesn't really show the strength of the margin of CCC in this year. So you can see at the group level, it's down by 0.9%. This results from the lower margin in eobuwie. We'll talk about why in a little bit, down 2%. And so we also have the growing percentage of the Internet arm. We're up to 25% of total sales in e-commerce as opposed to 15%. So we can say that it took 1 percentage point of the group margin away because of the expansion in e-commerce.

We have to remember that the calendar effect made -- let's return to this. If we look at the distribution of sales in the various months, March, traditionally speaking, generates roughly 45% of sales in the quarter. In 2018, it was down to 37%. That took away from us 1.2% of the margins. So having all this in mind, and you'll be able to observe this throughout the rest of the year, the margin is quite strong in the group. You can see that slightly if you look at the offline channel where it's up 0.9%, especially in Poland and Central and East Europe as a result of the fact that we had a strong dollar plus we have warehouses, so there's less of a temptation to sell it off because we can always put it in the back-office and wait. It's dangerous to accustom customers to having sell-offs, large sales, so we see a lot of upside for the company over the course of the year.

So if we look at our OpEx. You can see without IFRS 16, so you can see that our costs overall have fallen year-on-year with respect to Q4 2017 when we had PLN 512 million, now they're at PLN 441 million. They're higher than Q1 2017 by PLN 75 million. Well, what was that cost about? We had the costs of stores, which were up by PLN 37 million. We have higher rental expenses by PLN 13 million, so the total enlargement gave us 19% more. But if we look at the decrease in rent per square meter, we had a positive impact of PLN 5 million. So in rental costs, we were growing slower than elsewhere. The same is true of payroll, so we had -- up by PLN 11.5 million. But if we look at the space increase, they should have grown by PLN 6.5 million. And then we have the performance of the various markets by PLN 4.2 million. And this is what we saw between the quarters.

If we look at the other costs of sales. So we have year-on-year, PLN 22 million. So we have the increase in costs in eobuwie and PLN 10 million is marketing. And so you can see that we have 4 new sales windows, and each one of them had to be promoted sufficiently in our e-commerce arm. The most important thing is market share, sales growth, so we don't feel any danger to the margins we have in eobuwie compared to what you've seen in 2017.

If we look at overhead. Well, they've grown by PLN 18 million. So PLN 10 million is the cost of the incentive program from the management. In Q1 2017, we didn't have that. So to have a full picture, you have to incorporate all of these elements. So now if we break down those 2 channels of sales for stationary sales, so the -- in the brick-and-mortar stores, so they're growing less quickly than the growth in space or floor space. The second channel, which is up 52% e-commerce, the costs are growing more quickly because we're getting a bit ahead of the sales growth we want to accomplish. So we want to open up new markets and we want to open up a new form of operations, which would also entail some new costs. So once again, to simplify, you frequently utilize this, we do as well in order to calculate SG&A per square meter.

We have 2 strong sales channels, which we should treat separately from one another in order to understand the overall group performance. So if we subtract e-commerce sales, which are per square meter, but they're not at all driven by square meter cost, so you can see that our cost operating expenses have grown very little, PLN 9 per square meter per month. So roughly by 2.5%.

So if we look at the most important element, we're a commercial company, sales company. So if we look at the operational stores, and you can see that we have the lowest level of SG&A cost per square meter. So you can see that rental costs have fallen by PLN 3. You can see that our personnel costs have grown by 2% year-on-year. But if you look at what's happening on our major markets, we're treating this as the performance of the company, which will grow over the year because we're working very hard on the performance to ensure that our payroll costs are done well. I can't -- I won't say where we can go with this, but we have a lot of potential here.

As we've indicated, we have one advantage that we're growing the group very strongly so we can move our employees to stores that are being newly established. So our other expenses have fallen per square meter quite substantially.

And here, you can see what's happening in our deposit warehouses where we're saving per pair of shoes. This is roughly PLN 6 per pair of shoes, so we were transporting 10 million pairs in our 2 major collections. So over the course of the year, the -- this is the maximum potential we can talk about and gradually, we'll be able to deliver. Time will show how much we can do, but the actual costs which you can find in our financial statements, this is what they look like. It's very difficult to give any estimates. I want to do that, but we can look at the cost from the previous period. So the OpEx of our stores per square meter, SG&A per square meter, are very stable or have even shown the first elements of optimization. This is a little bit different from what you first have read when looking at our P&L or financials.

So we can see March where we had lower sales year-on-year. We believe that because of lower sales in Q1 are also January and February, fully satisfactory, we could have lost roughly PLN 250 million in sales. This is more or less what we had estimated as well we could have delivered. This means that our gross margin is not the level we thought it could have been in. And even though the costs per square meter are satisfactory, they still are the base. And the fact is that our gross sales return in Q1 is not sufficiently high. And so then the operating result is lower. So at the end of the day, our net profit is lower by PLN 100 million, more or less. And this is something that has occurred in Q1, and this is something that we can make up for in Q2.

So now a few words of commentary about our e-commerce. If you look at our EBITDA margin, well, the EBITDA margin has fallen by some 18 percentage points, so by 6.5 percentage points. And so we can say that even in that 13 percentage points, we've improved our results. So e-commerce is not working in a vacuum, it's been able to defend itself even though the weather was kind of poor and it generated very good operating results. Our competitors are praising that they are very happy that they've been able to stay profitable because they're at 0.01%. We have 8.5% even though we had this type of weather and what was happening in March, and we have marketing costs, which are growing quite strongly. And this is something that's justified. We'll talk about that in just a moment. So despite the fact that weather was not helping us, despite the fact that our e-commerce arm is growing so strongly and we're incurring higher marketing expenses, we can say that the EBITDA level is at the same level as last year. One could be worried by this, but in fact, this is truly a success.

So now if we can go on to stocks inventories. So some of your doubts -- so I would prefer, of course, for our stocks to fall gradually quarter-on-quarter. So we believe that we have more or less 130 million extra in stocks, which in Q2 we're converting into cash by higher -- having a higher sales. So you can see the green portion is the higher size of the e-commerce arm, that's up by around 100 million. So you can see, this is the stock which we have prepared for sales, for opening new stores, enlarging stores. And so new stores are being opened day in and day out. And so basically, we have to have that merchandise in our central warehouse. So we have to remember about our model. So we have stock not just for our ongoing sales, but also with respect to the new square meters that we're going to roll out. So we're going to have some 19,000 new square meters this year. So if we look at the stock we have, it's roughly 150 million in the warehouse, which should be delivered to just accommodate the new stores.

I would concur with you that there's a lot of potential here, and we're going to achieve that potential. By the end of this year, this picture will change radically. We have an internal consensus in the company that the stock should be reduced and this is the purest form of financing for us, which we have in Polkowice, which is to convert our stock into cash. And we're going to work on this by having a better supply system, by better planning of our purchases as well as allocation and replenishment.

So the next graph confirms what I've said, which is that we don't have stock left over from previous seasons. Most of the stock has been sold. What we have is basically spring. So we're successfully selling this in April and May, making up for what we didn't sell in March. So we want to work on this. We see a lot of potential here also, again, with any declarations concerning the specific sales figures.

So if we look at the sales growing stock means that, that was up. So year-on-year, we're a little bit better. But in compared -- compared to Q4 and the missing sales from Q1, the growth in stock, we've frozen more cash. And that means we have a little bit more debt. We still are on a positive trend in terms of net debt-to-EBITDA year-on-year, but we're still not at a satisfactory level.

So under IFRS 16, we've shown you in our current report for the authorized capital issue, we want to be below 1. And this is the goal that we want to stick to in our reporting. So we're at a pretty good level, but it's a little bit distorted. Let me mention at the same time that as we prepare to implement IFRS 16, we changed with all the banks -- well, we changed the wording of the covenants in such a way now with all of the banks that the leasing liabilities are not part of the net debt-to-EBITDA calculation. We also started our talks in terms of 30 June of this year in terms of the company -- the bank that's organized a bond issue for us for last year. So we want to make sure that the wording is properly designed to make sure there's no doubt. So we want to make sure that we're fully compliant with all of our contracts. So IFRS 16 when we show it -- well, we're going to extract the lease expenses from the calculation of IFRS 16 for the purposes of net debt-to-EBITDA.

So now if you look at cash flow in terms of what's happening with the stock and sales, we can say that they're more or less characteristic of what usually happens in Q1. Generally speaking, we don't have a satisfactory level of OCF, operating cash flow. But having in mind what happened with stock and sales, we can say that it's not a bad result, that we're more or less similar to what we had in Q1 2017.

So if we look at our liabilities, we continue -- well, these -- we financed the supply chain by liabilities managing the maturities towards our suppliers. We've got [ PLN 100 million ] in this program. And so in Q2, Q4, in that period, you can see how much this will change in terms of our working capital. And at the same time, this will have an impact on our operating cash flow. And so this is something that's been long-awaited in terms of the company.

And so now if we can go on to IFRS 16. So the company has made the decision to use or simplify the retrospective approach, so it's not going to convert or transform what happened last year. So basically, this simplified approach is done through adjustment of retained earnings at the day of initial application. So why did we decide not to use the approach of transforming 2017 results? So making this transformation is a very arduous and comprehensive process. So we started to prepare for this because along the way -- because we're changing our ERP system to use a system that's several generations, newer and better. So the repository of data about contracts with our stores which will generate the input for the new system. So it's to be done in such a way that's not manual. We were relying on a large number of Excel spreadsheets, and this is kind of the standard that's followed in Poland. Yes. So we've had scans of documents, contracts, we counted the number of contracts. We had 60,000 pages in these documents, so we took all of these fundamental data. And so from the beginning of 2017, we've been working on this product. We've put together a knowledge repository about our stores in terms of our lease contracts as well as operating data in terms of how information flows across the company.

So here you can see this diagram, there's a lot of work that had to be done to supply the data, the data inputs. So we had several FTEs working on this. Up until now, this was done manually. And now we have an electronic system, and this is something that we really needed. And we decided to dot our i's and cross our t's here. We talked with one of the -- and we implemented this with one of the top 4 -- big 4 companies to make sure that we wouldn't replicate certain activities next year. So between Q4 2018 and Q1 2019, outside of other IT projects, we're going to have 3 monumental IT projects, a new warehouse system, which will also have positive business effects. We'll have a new ERP central system, and we're going to have the first e-commerce system for CCC. And we're on plan, on schedule. We don't see the risks. But as our CEO recently said, I can treat this as a complement, we have a German approach and we planned far ahead. And there's a lot of work to do, the training to do, everything in the accounting department, the IT department, and all of this that should happen at the turn of the year. So we wanted to do this now. And that way, we can forget about everything and we'll have this transfer done earlier. And we've done this very precisely, fastidiously. We've audited all of the processes using in-house employees. So we put all the data into the new system from the old system. We built logarithms and verified the data. We did this with an adviser from the big 4, and we also asked our chartered accountant, our audit company, EY, to sit with us and audit the overall process over a 2-week period and to use a big sample of documents to ensure that it's complete and the process is accurate. And so we got a good assessment. We're not the only players in this industry. And the fact that we've done this is something that positively sets us apart from the others. So you know how much certainty we have about the data and you know that the company has done a lot of work. And perhaps others have still not done this and will have to do it in the future.

So IFRS 16 is basically information about the numbers and not about how CCC implemented it. So it's worthwhile knowing these numbers. So we had talked about several billion zlotys. Basically, we have drilled down to an individual zloty level. So everything begins with the calculation of the contracts, lease contracts, which is now the right-to-use assets. So it's somehow been treated as PPE, property, plant and equipment. So this is not something that's totally new. We've shown the total value of our leasing contracts around PLN 2.5 billion. But here, we have a very specific number. And so it's not a separate number in the footnote. At the same time, we have -- with the exception of certain exceptions, we have the lease liabilities, which is PLN 2.4 billion also. So the difference goes through our retained earnings. And this is the simplified element of the retrospective approach.

Our P&L also changes because we have now the costs of depreciation and amortization, and this is part of the OpEx for our stores. And so then, we have the removal of the cost of third-party services rental. And so we have an interesting impact on our operating cash flow that's quite positive. So we'll no longer have rental expenses in our OpEx. And so they'll be in our financial payments. So our OCF under IFRS 16 will, in fact, improve.

So now if we look at the elements of -- individual elements of our financial statements after implementing IFRS 16. There's no special surprise here because we've shown you this earlier. So PLN 332 million is gross sales. So our cost of operating stores is higher by PLN 6.5 million. So rental costs have fallen by PLN 104.5 million. And so then we have depreciation of PLN 111 million. So the difference is PLN 6.5 million. And so in every quarter, this will come down. So as a result, our -- we'll have a decline in our EBIT by PLN 6.5 million. But since we have additional depreciation, our EBITDA will grow by PLN 111 million. And at the same time, we have financial expenses because these are financial expenditures, liabilities. So we'll have interest as a result of revealing this discount per quarter, and we also have FX gains and losses. So as a result, the difference -- we can say that the net result falls by PLN 15.2 million not in terms of cash flow, this is something that's balanced. But over time, this difference will fall.

If we look at the balance sheet, the main difference is to treat the right-to-use these assets as an asset. On the asset side, on the equity and liability side, we have our lease liabilities. So in total, as a result of moving this through retained earnings, this will have an impact on our total equity; and then from the point of view of the reader of our financial statements, the impact of moving rental expenses out of OpEx and into financing activity. So this changes and the approach is changing amongst chartered accounts, accountants and amongst the big 4 companies. So this cash flow approach has been discussed all the way through to the end of last week with them.

So there's a lot of changes, as you can see, in terms of how we present things. In reality, nothing is changing. The company has a poor first quarter, a poor March. We've done a lot of work in some of our departments with a lot of support from third-party companies in order to transform our financials into IFRS 16. That means we can check that off. Now we're focusing on what's happening now, what's happening in upcoming quarters, and there's a lot to happen in terms of these prospects. We'll have new square meters, new floor space. We will have roughly another 100,000 square meters of new floor space. We're opening up new markets. We're tidying up our sales network and we're growing it. We talked about a new target group of customers, new type of products -- segment products, so sneakers, sports shoes. And we have a positive beginning of Q2. So I'll say a little bit more about that. So we've reported and as in our current reports. So in the upcoming period, we want to open up 6 new markets on our franchise base, Kazakhstan and Georgia, with Beta where we opened up Romania and Moldova. And Kazakhstan is a country with a lot of offering a lot of opportunity. We're working with a big, ambitious partner. We're going to open at least 60 stores next year. The first one will be opened in the United Arab Emirates. And we'll begin our adventure in the Near East. So our e-commerce on -- has started with a phenomenal start in [indiscernible] omnichannel, so roughly 1,000 square meters. It's performing very well in terms of its showroom and the logistics space and the e-commerce across [indiscernible] metropolitan area within a few hours. So we're just beginning of this story. In December of last year, we opened up Sweden; in March, we opened up Italy; in April, Spain; by the end of the year, we'll open up France.

In terms of marketing, we're picking up the pace. We have quite a bit of challenge to face here, and there's a lot of opportunity. A lot of -- these are big promising markets. So we're also developing organically and doing some M&A activity. We're tying up our network, our sales network. So we've taken over 41 agency stores, which we had in Eastern Poland. And so we have 37 existing stores in foreign construction. And so the gross profit was PLN 8.5 million in our partner. And it should be bigger just because of the size. And so this is going to be something that's going to give us a positive impact. We're pleased that our franchisee has decided to open up maybe 50 stores in the upcoming 3 years in Ukraine, so we're very pleased to see that. Romania's opening is quite important.

The net profit in 2016, we didn't report in 2017 yet that's why we have the net profit from 2016, PLN 5.3 million. So we can see the revenues and profits are growing. They should have improved year in and year out.

So if we look at the number of residents in Romania, it's roughly half the size of Poland. And that's a market where our products are seen very well. People there spend more on clothing. So we've got 50 stores there -- 55 stores. So there's a lot of potential there for us. If we look at the new target group, Youngsters, as the CEO mentioned in August of last year at our interim conference, there's a lot for us to do in terms of sneakers, sports shoes amongst our millennials, the Youngsters, people, we want to target in all of our campaigns. We've started that, we anticipate that the impacts will come later. We have to build the image amongst target group. This is not something that should gain immediately once you start a campaign. But we do see some positive impacts from the campaign. We've done so far the new brands in our stores, bigger premier stores. People we are calling youngsters, different ways of communicating with them through social media. We've been passive here, and we've been preparing the e-commerce arm to do this for us. Hence, we have a large interesting campaign that was done on several markets, 5 markets, starting on 23rd March 2018.

So if you look at the data for April, as we try to wrap things up, you can see the cumulative sales on a year-to-year basis is higher in April. So the company has shown, and you could have heard that this -- heard from us previously, and you can read it in our financial statements. We use FX hedges, so we have a positive impact from the dollar exchange rate. But we don't want that just to be the only thing that will impact our margin. So how big of an impact this will be on our margin, depends on what's going to happen on the overall situation, and how large our sales will be.

For us, at the end of the day, the financial result and the total gross sales result, we're taking pains to ensure that it's good as never before. So we're confident that we'll have something to show you a little bit later down the road, that's something that will happen later. And we'll have the opportunity to talk about that in August when we get to the next conference, interim conference. So I'll go ahead and open things up for the Q&A session. Our IR manager, Bartlomiej Piekarski, I'd like to congratulate him here that he received the distinction for us and as a company and of course, business 2017, gives us a word for having the best IR. So we're very pleased, and so you can talk to him during the lunch. So I'm here at your disposal. So if you have any questions you'd like to pose at this time then I'd like to go ahead and tell you that I'm at your disposal. Let me remind you that we have a streaming session from today's meeting, so I'll ask from questions -- I'll ask for you to ask your questions through the microphone to make sure that everybody can hear it and it can be translated. So are there any questions? Okay, so we've got the first question.

[Unknown Analyst]

I have 2 questions. My first question is about the program to extend the terms of payment to suppliers. To what extent in Q3, Q4 should we see more positive impact over the longer term? How much potential do you see in terms of extending the payment terms?

[Marcin Czyczerski, executive]

I don't want to give any guidance. I'd like to -- one of the analysts here says that a realistic level would be to move from 40 days to 90 days, and looking at what the company can do and how much funds we have available on to this program and how well we're developing. This is probably a figure that would be possible to be achieved. And this would mean, more or less, mean more than PLN 500 million, more or less. But that's more or less in terms of what's realistic but without giving you any estimates.

[Unknown Analyst]

My second question is about IFRS 16, in terms of the EBITDA goals that you have in your incentive program. The goals we have in 2018, 2019, PLN 650 million, will they be adjusted or will they remain unchanged? How should we treat them?

[Marcin Czyczerski, executive]

Frankly, I'm not sure how to respond to that question. This is not something that we have discussed. I don't have any considered responses. We have some goals that are defined in the management program, incentive program. This is a change in the method of presentation, so this will be important for us if there is to be a change in respect of 2018, so this will be treated in 2019 at the shareholder meeting when they look at what happened in 2018. We're focusing on the operational targets, and we're showing the IFRS 16 additional D&A, so I wouldn't combine those two things. But this is not something that was the subject of any discussion at the management board meeting and there's still quite a bit to do. The CEO submits an application to the supervisory board, the supervisory board approves that. If we want to change anything, it has to go through the shareholder meeting. So this is not really the time and the place to engage any sort of considerations. For now, there's no change.

[Unknown Executive]

Here's the question. The Question is from upfront.

[Unknown Analyst]

I have a question for net debt-to-EBITDA. Net debt doesn't include IFRS 16, it doesn't include this leasing, but EBITDA does. So it doesn't here.

[Marcin Czyczerski, executive]

So if you look at our EBITDA, after Q1, it was PLN 111 million from a quarter. But we've shown you here 2-0, this is the annualized EBITDA based on the reporting methodology used in 2017.

[Unknown Analyst]

But the contracts with the banks, what sort of EBITDA, the covenants, what will they include?

[Marcin Czyczerski, executive]

That's an interesting question, but to ensure that we show things transparently, that'll be without any impact from IFRS 16. We shouldn't include anything in the numerator or the denominator.

[Unknown Analyst]

So full Q1 has a dip in profitability? So this is a result of your expansion, also abroad.

[Marcin Czyczerski, executive]

Well, there are 2 fundamental facts here at plate. One is the margin, and the margin also comes from expansion. If we look at new markets, we want to have a profitable offering, so when we want to sell a new type of stores, so we have a higher level of promotions. And so that does have an impact. The second thing is marketing. We also have poor weather, and the poor weather applied, not just to our e-commerce arm but also to its competitors. We had a marketing bit of war in Q1. We don't see anything like that now. So I shouldn't concur with some of the voices that have been raised that 8.5% is the long-term goal, and that our e-commerce will drop to that level.

[Unknown Analyst]

So in the full year basis, do you think you'll be at the same level?

[Marcin Czyczerski, executive]

I won't give a full year projection, but we have sort of a one-off negative impact in Q1, so I don't really see any major risk for this on the full year basis.

[Unknown Analyst]

And the e-commerce, what about your result in Poland?

[Marcin Czyczerski, executive]

Well, we don't give that type of breakdown. Poland should grow by some 50% quoting PMR. So that was the PMR gave us that kind data with respect to 2017.

[Unknown Analyst]

Are you very happy with April because of the change in weather?

[Marcin Czyczerski, executive]

April should have been a little bit better. And if you look at the sales growth rates, we would be happier if it would be even better. But we're happy.

[Unknown Analyst]

So in Q2, you think you're going to be able to offset Q1?

[Marcin Czyczerski, executive]

That's what we're trying to do. Whether or not we'll be successful, it's not something that depends only on us. Well, we have some good fortune in terms of weather. Right now, we're on a good path to achieving that. But we're in the middle of an open period. I can't really say anything more than what I've said up until now. I can't really fully respond to your questions to the extent that I would like to.

[Unknown Analyst]

What about your CapEx for this year, along with your acquisitions and your logistics in e-commerce, how much do you think you should spend on CapEx?

[Marcin Czyczerski, executive]

Based on what we've shown you, up until now, PLN 150 million is what we're going to spend on opening stores or in stores. We're building new warehousing capabilities also in the e-commerce. We've given you some figures on that subject. We've also declared how much we would spend on our acquisitions. So if you total that, it comes up to more than PLN 400 million, that's my total, sensible. Well, that's a matter of mathematics.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

I'm from [ mBank ]. My question is about the cost side. And you have the SG&A falling per square meter. But we also had a decline in sales in various months, and there is no sales premium. So if we look at the bonus for employees, there probably would have been growth here.

[Marcin Czyczerski, executive]

It's good that question has been asked, in Q1 2017 we didn't have the sales bonus, so the base is clean. So we can make a clean comparison looking at the performance on a stand-alone basis. In Q2, when you receive our reports, so either the CEO or I will have the opportunity to talk a little bit about it. We'll have a month which will be slightly incomparable, so April 2018, we'll have the incentive program. We can calculate them per square meter to be a little higher, but we didn't have that in April 2017. But as of May, we'll be more and more closer to have a comparable data. But Q1 is not distorted by having a different type of base.

[Rafal Wiatr, analyst]

Rafal Wiatr from Citi. I wanted to ask about your stocks, your inventories. You said that some of the stock is waiting for your newly deployed space. Could you say a few words about that, because on one of your slides you said 40% is spring? I understand that you're going to open these new square meters in a different period from spring. Is there any risk that you'll get stuck with a portion of your collection and it will be difficult to sell that off? What will you do with your stock, will you retain that until next year or is there a risk that you'll have to do something with that? That's one question. The second question, what is your target range of stock per square meter that you'd like to achieve? That's the second question. And I'll also allow myself to ask, how can you explain or how do you explain to yourselves that despite the weather, you've been able to sell much better in your e-commerce arm as opposed to your brick-and-mortar stores? Is this because of your e-commerce arm entering new countries?

Well, there is no weather to go out and shopping, and people were doing shopping because it wasn't worthwhile to go out in a bad weather. I mean, what's -- how do you explain that?

[Marcin Czyczerski, executive]

Well, that could be partially true. But starting with your first question, it's a very good question. The response is more a matter of hypothetical responses. Most of the collection is spring and summer. That's in terms of the numbers. We continue to sell spring and summer. So after Q2, this picture will look totally differently. We'll continue to open new stores, also in this quarter, quite a few stores. Even today, we opened our second store in Estonia. We have a few in the final phase, so the merchandise will be delivered in April and May, so we'll be able to liquefy -- liquidate quite a bit of our stock. So the techniques of managing our stock, I wouldn't want to dig -- drill down into that, because that's part of our competitive advantage. But generally speaking, what we don't sell, we put it in our central warehouse and then we sell it the next season. We have a lot of repetition in our models, so we have a good utilization ratio in terms of the stocks we retain for the full year. And now it's a little bit more simple because we don't have any additional logistics work to be done by employees in terms of shipping or transporting. So this has an impact on the HR processes. It's not taken to the head office, we put it into the warehouses, our deposit warehouses, which are located either in the stores themselves or somewhere else. And we're starting to create something like that in larger stores, like in Germany or in Austria and some places. We convert part of the nonperforming commercial space into a warehouse, and that's given us a good impact. And you'll be able to observe that. So I prefer not to -- well, I prefer to have smaller amounts of stock, the fact that we have this much isn't a problem for us in terms of what we could do with our stock. I would be far from saying that I can give you any real estimates. We have some thoughts about how low we can go, and we have an internal consensus in the company that we'll deliver that, and then you'll see it. We want to work on the level of stock. And this is part of the company's commitment for our stock per square meter to fall. And then responding to the last question about e-commerce, when it's cold, people sit in front of their iPads and they have to do something with their time. Well, that we have a different type of client groups, so made something for CCC to think about long term, our product, our client segment. Well, this is a product that's first need -- primary need, depends a lot on impulse purchasing, whereas it's a fashion product in the e-commerce. And this is subject to totally different phenomenon in different impulses, so fashion trend drive sales. What's happening in the web? So we have a totally different client group here -- target group. And so I think if you look at your own customer experience in the Internet, and when you go to brick-and-mortar stores, well -- so if you compare shoes and tires, and there's quite a bit of sensitivity to weather patterns.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

I'm from [indiscernible], I'd like to congratulate Bartlomiej for IR. He's doing a lot of good work. I wanted to come back to the stock. Could you tell us what more or less the mix is in terms of how much of the stock is 1-year-old, 2-year-old and 3-year-old?

[Marcin Czyczerski, executive]

I would be happily give you that information, but then I would have to -- guess I don't have that -- those figures in my head. 3-year stock, if it appears at all, this is just some sort of tail which is there in the system. But most of our stock is up to one year, and there's maybe a very small portion that could have more than one year. Within a 2-year period, I would say the vast majority would be there. I don't have the figures in front of me, sorry.

[Unknown Analyst]

When I'm thinking about profitability, the EBITDA margin in e-commerce, so in Europe they are around 8%, 10%. In 2017, you're up of -- in double digits. Should we anticipate that you'll come down to the average in the industry or do you have some sort of advantage and that you are going to be higher?

[Marcin Czyczerski, executive]

We have one big advantage. We've got the best e-commerce solution. We focus on a target group, and we believe that this is something that is a key selling point for us. And we compare 2017 with our margin of double-digit EBIT, and we see the delta between us and others. Then we also have to compare also Q1. I don't want to talk about the competition on a specific numbers. We do what we want to do. The competition does what it wants to do. But the delta between us and everything else is the same. Everybody, as a result of the weather, basically dipped. And I don't see any reason for this to apply across the quarter. I would be closer to the idea that giving consideration to the similar pace of growth, our margins should be similar to what we saw in 2017, perhaps netting for some small distortions like extreme weather conditions. So I think we'll be closer to what we reported last year. This is more of an anomaly because the delta is the same. So the biggest competitors, we have 8.5% profitability, and whereas the competitor said that we've retained profitable even though the weather was bad.

[Unknown Analyst]

So you think -- what's the reason for being able to have a higher margin?

[Marcin Czyczerski, executive]

We've got the best e-commerce. We're very focused on 1 product. We know this product well. We have grown on this product, we're capable of buying this product. We buy the product well in terms of the margins. And we're buying it well for the customer group, and we're capable of merchandising that well. We see some potential for long-term development in terms of cost of marketing. Right now, we're focused on market shares and sales growth.

[Unknown Analyst]

My last question about logistics. Can you tell us what your CapEx is for logistics this year?

[Marcin Czyczerski, executive]

Basically, we have done a warehouse on [indiscernible], and you can see it in our financial statements for Q1, it was roughly PLN 10 million. And then we have the e-commerce, which is roughly PLN 100 million. Time will show to what extent that will be sufficient. It depends on the performance on our stock. So we're gradually looking at our most modern warehouse up until recently, where we have even more modern solutions, which enable you to reduce the amount of stock, because you're able to deliver to stores in a different way. So we're going to look around at that.

[Unknown Analyst]

The question is when.

[Marcin Czyczerski, executive]

[indiscernible] catered all of Europe in e-commerce, that's the assumption, but time will tell. We want to serve you from here, and we want to check what's going to be possible. So if we can sell to Greece, it seems that we should be able to supply to Italy and France. We're looking at how others are doing this. Others are doing this differently, so we're treating this with some amount of humility. Why others are doing it differently, our model seems to be ok.

[Unknown Executive]

Maybe the final question, one gentleman. I don't want to take too much time away from you. I'm sorry, perhaps I talked too long.

[Unknown Analyst]

I'm from UBS, I've got 2 questions. One is about groups of questions, quite a bit has been said about e-commerce. I'm thinking about logistics, it's a little bit hard to imagine that on a very competitive market, you can send products from [indiscernible] to Sicily. It will take several days to get there, and as we know that we have a higher percentage of returns. It's hard to imagine that you're going to be able to generate similar margins as on a smaller market. Do you think about any investments in logistics? And generally about your e-commerce, will your company be able to complete this expansion using its own funds or would you have to issue some debt or some rights, equity?

[Marcin Czyczerski, executive]

So responding to the first question, the response is more or less time will tell. The fact that we're going to -- we can always make the decision to raise equity and invest there. Well, in Italy, we have a much farther distance to cover from our central warehouse. We have higher quality of delivery of products. We're able to deliver much quicker than the competition. People can see how quickly we want to deliver products. We've got very smooth, lean machine, so we're going to follow this path in Spain, perhaps if we reach a higher scale. Once we reach a higher scale, we'll be able to harness greater capital. And if that is the case, then we would look at the second topic. We're able to meet their needs, utilizing the current financing program we have as a group, and this is where we're focusing on. So for now, there are no major net capital needs for eobuwie, and so we're able to finance that with operating.

[Unknown Analyst]

In terms of sourcing, when you're selling Nike or Adidas in Spain, their shoes, are you buying them centrally or it's every country? Does every country belong to the local distributor and to make sure that prices are more or less comparable in a given country?

[Marcin Czyczerski, executive]

Our e-commerce is big enough that we're handled by the region, Europe. So the brands we have, well, Poland can coordinate what's happening in Poland. But the coordination of sales and supply also from the head office of those brands that you mentioned as well as other brands. So the distributors don't change prices depending on the market. I can't respond for every brand, but this is what we're trying to do.

[Unknown Analyst]

The second group of questions, I'm sorry, my favorite topic. If I look at Germany and Austria, and the stores there, with the exception of individual cases, we haven't had any openings. Are the stores that have been ramped up, they've been ramped up for 2, 2.5 years, when do you believe that these stores will be fully mature, and we should be able to start generating return on equity?

[Marcin Czyczerski, executive]

This quarter and March had an impact on many things, including on Germany and Austria. Year-on-year, we were -- we fell short by PLN 13 million and we're looking at the IFRS, impact is around PLN 6 million. So we can't brag about anything here. There are several material things that we're doing on both of these markets. So we can observe in individual quarters, some positive phenomenon.

[Unknown Analyst]

What are we counting on?

[Marcin Czyczerski, executive]

Once we treat Austria separately from Germany, then Austria, in the most recent quarter, has quite a bit of chance, should be back to black, even though it was never in the black. Well, time will tell again. We assume that the times will be conducive to us. So once again, in terms of Germany, we don't plan any major openings. We plan to reduce the floor area by converting part of it into warehouse where we're negotiating strongly the rental expenses. We see potential there. We also have seen some nearly textbook mistakes we made, so we're going to improve that. And so Austria will develop without any major pace, so we assume that we'll achieve that level of potential that we'll be able to think about doing some marketing next year, Q1, and then we'll have the big check for that market. But we do have an optimistic mindset towards that market that Austria is close.

[Unknown Executive]

Are there any questions? Or something I'd like to ask but we are well over time. Maybe we should have one question from people who are observing us in the Internet. I don't know if we have any questions.

[Unknown Executive]

After Q1, have you plan -- changed your plans for the rest of the market -- for the rest of the year?

[Marcin Czyczerski, executive]

So this is the sole question. So in terms of what's being discussed at the management board meeting, what we've declared at the previous meeting, in Q1, we didn't do too well in sales, March didn't do well. So on the 26th of March, the CEO mentioned that, and we said to you that our full year targets aren't changing. At that time, we knew less about what would happen in April and May. Now we can speak about it with full conviction. So let that be a summary of this conference. I'd like to thank all of you for your attention, and so I'd like to invite you to come to the next conference, which will take place in August, I think on the 19th of August. So we'll send you an invitation. So once again, thank you for your attention, and see you next time. Bye-bye.