CCC SA

WSE:CCC

Earnings Call Transcript 2019-Q1

[Marcin Czyczerski, executive]

Ladies and gentlemen, we're a little bit behind schedule, but we'll try to catch up. We'd like to welcome you very cordially on behalf of the management and Board of CCC. I'm joined today by Karol Póltorak, the Vice President responsible for developments and strategy. My name is Marcin Czyczerski. I'm the CEO from not long ago. And priorly -- prior to that, I was the CFO.

We'd like to welcome you very cordially, despite some technical problems with the invitation, that you've been able to join us today. And I hope that the time you will devote to us will bear fruit in the form of information of use to your assessment of the company.

We have a traditional agenda. We'll tell you about the events that shaped the results of the company. We'll interpret them. We'll tell you what the management sees. And we'll tell you a little bit about the prospects for the upcoming months and quarter.

In terms of the key events in Q1 of this year, if we look at the numbers, we can be -- we can brag about the very dynamic growth in e-commerce. This was a positive surprise to us. We assume -- had assumed growth, but the magnitude of that growth surprised the company. So we can see that like-for-like in our fixed network was quite good, having in mind the normalization in weather in March, and this also had an impact on the group's revenues.

We had improvement in the working capital more or less 1.5 years ago. The company decided to improve this parameter where it was never that strong and is doing steadily. And we have another quarter in which we've been able to improve the costs of -- operating expenses of our stores to a lesser extent, but nevertheless, we've done it.

Our expansion is one of the key attributes of the company. We've been able to increase the scale of the company by nearly 200,000 square meters, thanks to acquisitions, thanks to organic activity. In terms of M&A, we have Gino Rossi and Vögele. So we have nearly 680,000 square meters, and we have stores in 23 countries. As you know, we stopped working in Germany under the previous model. We sold our operations in Germany to another group, and we're now a minority shareholder. And this is an affiliate within the H&R (sic) [ HR ] Group.

If we talk about the key actions completed in Q1, we can say that they are aligned to the directions of the company and the company we're going to focus on customers in 3 different aspects. So one is the product we deliver to clients. We want our products to meet the needs of our customers in terms of quality, comfort, quality, the technical properties that the products have. The second direction of thinking for the development of the company is our technology to communicate with the customers, our knowledge about our customers. And the third thing is the -- enlarging the scope of reach to our customers through e-commerce and our store network.

And so we've been working on all of these things, and I'll have the opportunity to tell you a little bit about that. So after 8 years of efforts in our fourth approach, we've been able to change the IT architecture in the company almost entirely. So we need to upgrade the finance and accounting system, and it had been replaced in the meantime, but we now have a central solution in the group, and we've upgraded the cash system. So all of the other things, e-commerce in a new approach, in new cloak is being tested. And so we've successfully completed this project with 2 years of efforts. We've had some difficulties, but we'll talk about that.

So we stopped the operations in Germany, as I told you, under that previous model. And at the same time, we are working together with Reno Group, as basically we're a shareholder in that group, so it's an affiliate. We've completed an acquisition of a majority equity stake in Gino Rossi. So we're still in the middle of the process. But above all, this is a matter of executing our strategy that we talked about during Investor Day. We want to utilize our product matrix and the market matrix to a better extent in terms of the products that we're offering. So in March of this year, we started to do the Youngsters campaign, which addresses young people. And here, again, in this client segment, there's a lot for us yet to do. And so we've successfully placed some of the best brands in our stores here, and we're very satisfied, happy with that.

So product integration, expansion, technology, those are the 3 areas in which the company is gradually developing. We continue to show you that regardless of what we're doing, a light -- well, weather is always a contributing factor. So March last year was very unsuccessful, but this year was quite good. So the average temperature in March 2019 and March of 2018, those were totally different conditions. And this also had an impact on our sales. So we do what we do. We continue our efforts. But in the short period, it -- the weather determines the results we achieve. So we can say, in March, we were quite lucky, in April, no. And if you look out the window, without drilling into the numbers, this is not a type of weather pattern that pleases the company at this time of the year. On one hand we can say, last year, that it was much warmer. So we sold a lot more in May, in June than we're selling right now. But on the other hand, starting from the end of April, we were selling 35% of the summer offer. Right now, the summer offer represents 9% of our sales. So that could think about sales potential in the later portion of the quarter. So as shoe companies and apparel companies are reporting, this is not the dream weather for us. And so this will have an impact on our April sales parameters.

The weather we had in March enabled us to have a very good starting position for selling sport shoes, so from third-party brands, so 2% to 9%. So we're going to enlarge that offering and so probably reaching up to around 20%.

So if we move on then to the financial results of the company, as you've indicated, they were disenchanting. Certainly they didn't please us. They were close to our budget. So for us, they weren't a major surprise. This magnitude of the group is growing. We're integrating companies that have basically a similar amount of costs and revenue. Sometimes it's quite the opposite. And so this has an impact on the results of the company. So to sum up this quarter as quickly as possible, the sales is satisfactory.

We have a stable margin, which has positive and negative attributes. And then we have some structural changes. We're stopping to observe Germany, because we have discontinued operations. So there are things that we didn't have 1 year ago, like Gino Rossi and DeeZee. Right now, they're making a negative contribution. And then we have Romania, which is an example of a successful integration and something that's been brought to a positive conclusion.

If we look at one of the fundamental drivers, which is our growing potential through organic expansion, so we're moving along at -- including -- in accordance with our targets. And so we've added 8,000 square meters in Q1. We will speed up to 100,000. So this above all is Poland, Central and Eastern Europe. Romania is the primary location. And then other countries, primarily Russia. So in Switzerland, we're closing more stores than we're opening. We'll talk about that a little bit more later. And then we have growth based on M&A, nearly 80 stores. But they were small stores, so giving us a total of 8,000. So in total 674,000 compared to 660,000, so 14,000 in total.

So then if we look at like-for-like sales, so it's grown by 10%, quite strongly in Poland and CEE. We had a soft result in Austria unfortunately, and this was linked above all to the fact that the seasons in Austria start earlier. And so we've started with new IT systems on the 7th of January, and until the end of April, we were sort of in the startup phase. So the amount of products in March or beginning of April wasn't the optimum level of stocks. But this could have a different impact on different markets. So Austria and Russia were the most heavily affected. But if we look at Russia, weather didn't help us. We -- it was very cold there. So it didn't affect us much in terms of sales losses, whereas March gave us some opportunities in Austria. We didn't really fully utilize them.

So our sales of our spring campaign have been embraced -- received very well. And certainly, the athletic shoes, we see the new brand DeeZee is doing quite well. And so it's a brand that's been -- they're very tough from the beginning of our sales in our various products categories growth. So we can say that we have a very clear positive picture in e-commerce. So we're up some 70%. And so you can see that eobuwie is generating a very strong results with PLN 288 million. We're adding the smaller e-commerce engines, Vögele, DeeZee, eobuwie and CCC in just a few months. And so e-commerce will go through several platforms, not just one platform. And of course, eobuwie is, of course, the most important in this overall puzzle.

If we look at e-commerce stated as a percentage of total sales, it's growing very quickly. It's coming close to that 30%, which is our objective. So on one hand, we continue to be a company that is living based on its brick-and-mortar presence. But we're transforming the company into an e-commerce company, and this is in line with our strategic assumption. If we look at the growth in the various segments, we can see that e-commerce showed the highest pace of growth through eobuwie and in Western Europe. It was by adding the revenues we had from Gino Rossi. And so if we dwell a moment on eobuwie, you say that sometimes we're not saying enough about them and their percentage of sales, because it's going to -- it's growing and will continue to grow. And so we're going to show you more and more information about eobuwie. And so they've moved up by 68%. We're very pleased with the new markets. We're talking about 3 new markets: Italy, Spain and France. Greece and Sweden in our nomenclature are already mature markets. They've been with us for longer than a year, and they represent 5% of sales according to our assumptions.

Our omni-channel stores generated nearly 5% of the revenue. And so this growth is spectacular. If we look at the like-for-like figures, especially looking at the first door that we opened in Magnolia, so we can say that the results prove that this was a good direction effectively. So Poland is moving up as mature market, 36%. And so the percentage of sales in Poland is quite strong. So it's also strong elsewhere, 11%, for example, 113% in Hungary. And of course, we have to invest in marketing costs. And so if you look at our other sales and marketing expenditures, we can say that marketing is the dominant cost category. They were big. They're growing. And over the next 12 months, they will continue to grow.

If we look at the various markets, we have some small battles with smaller competitors in terms of reaching and utilizing certain media. And that means we have cost in process in marketing. But in the long term, we have some ideas about how to manage that through automating our marketing or fan pages and things like that. But marketing is a big line item, and we don't assume that this is going to change in the near future, certainly not in the direction that you would perhaps expect. So our gross margin is moving up in e-commerce. This is because it's still below 10%, but it's still growing.

So we have bigger volume, higher third-party products. We have Vögele and CCC Group together. We're working together and talking together about the volumes, and this is making a positive impact on our margin. And this is one of the strategic assumptions we had when making this acquisition. If we look at our gross margin generally speaking, so we have growth in eobuwie by 2.6%. We're generally speaking about e-commerce, so retail is relatively flat, so we had a positive phenomenon. We could sell more in March, which is a good margin month. So the mix improved. But at the same time, we had more third-party products, up to 10% of our sales. At the same time, the policy of the company was embraced that we wanted to liquidate seasons older than 1 year. So we're not waiting for selloffs. And then we try to liquidate stocks, but we're doing this on a gradual basis across the year. We're giving higher discounts, and those discounts are available across the season, across the year, even at the beginning of the season for products that are older than 1 year. And this is working quite well. So our inventory, even though it's quite big, we want it to be smaller. So this is something that's pretty fresh and it's not generating any major risks. I'll revisit that in a bit.

What's also important, the growth of various cost items are observing or gaining our attention, because the scale of the business is much bigger. We've added 84,000 square meters on average. We've got a lot of growth in e-commerce. And so we have a lot of variable expenses linked to every dispatched package. We've got major growth as a result in cost because of the acquired companies. I always remind you that in the Q2, you'll see once again that we'll have the operating expenses of Vögele, which weren't there in Q2 of last year, but later the base will be similar. So we're talking about a PLN 126 million nearly. And we have a very big line item in this quarter. This is because of eobuwie. On one hand, we see rising competition where the marketing expense is sometimes 20x higher than it was last year in the same quarter. At the same time, we have new sales channel. We have new more omni-channel stores. We've got new markets. We've got esize.me. So the cost of marking and the growth rate has the right to be higher than the growth in revenue.

We have more advertising in CCC, around PLN 8 million. We also have more sponsoring like CCC team. So we set this to be around PLN 10 million per year. And then you have -- you can understand more or less what sort of amount of money we want to give to UNICEF over the next 3 years in terms of supporting children and building a positive image of the CCC and eobuwie brands. If we look at other expenses, they're relatively flat. It's no more than 3% of the base. And so then we have some positive outperformance on FX rates, so which you should draw attention to. We can see that the base of operating business has grown. So Q1, it's usually the case that sales in Q1 aren't the best -- aren't the biggest, but then you have marketing expenditures, which we're treating more or less as an investment in building the brand and building our client base, our customer base, reaching new products, offering new products to new product groups like Youngsters, DeeZee fashion or Instagram and so on and so forth. This is more or less the cost. So we have an increase. So PLN 250 million is the result of the growth of the company by acquiring new companies. So it's some 65% growth.

So if we look at the cost of our stores and the operating expenses of our stores, we have another quarter in which we've continued the positive trend where we're reducing these costs. So we think that this situation could persist into Q2. We've started to improve our expenses. In February, March of last year, there was lot of effort, and our sales team has done a lot of work on it and wonderful work. And so the impact will be smaller and smaller with rental. In some international market, we started a little bit later, so perhaps this would continue into or seep into Q2, but later it will be part of the base. But if we're going to look at some of the -- look for savings, then I think the savings will be in rental expenses, because the new meters that we're bringing onboard, we have a substantially lower cost than the one we've had up until now in the group.

If we look at the operating result, to sum up the P&L, so last year, we can say that it was close to PLN 80 million loss and now it's PLN 150 million. So you can say that the loss has nearly doubled. And even if we have normalized conditions, you would generally see a growing loss because of a bigger cost base, bigger company. And so in Q1, we have only one month in which we're able to sell products at a pretty decent margin. But the growth is exceptionally large. So analytically speaking, it's something that you can drill down on quite easily. We've got a stable position in Poland and eobuwie.

As you observe our segments, Poland and elsewhere, so we also have Gino Rossi in Poland. We also have the eobuwie stores. So the cost base grew strongly, and we're grouping this data together. So in Poland, we can say that costs grew in improportionately (sic) [ disproportionately ] not because of SG&A costs, but because of some of the other circumstances related to the growth of the business. If we look at the companies we started to integrate, their loss is substantial, and this is primarily the case of retail. So losses are almost -- always present in Q1 as a result of the integration processes. that Karol will talk about in a few minutes. We're now at the beginning of the path, but we're consistently implementing measures where you won't see the impact so much in Q1 or Q2, but we know and see that those impacts will be achieved.

If we look at some of the other countries, Austria and Russia, well, in Russia, we didn't have conducive weather. We had a strong fierce winter in March. So the beginning of spring was pushed back to the second week of April. But in Austria, we didn't have a full amount of stock. So in January and February, we didn't have all of the dispatches of product to Austria going on a regular schedule.

So if we look then at our inventory, our stock, we're pleased with our current levels of stock. Of course, if we have PLN 2,500 or more per square meter, that's something that's not acceptable to us. So we'll continue working on it. But year-on-year, we have pretty good performance, 10% nearly in terms of stock per square meter of sales base. Even though we've added new product categories worth some PLN 200 million, we didn't have third-party brands, we didn't have DeeZee, we didn't have baggages. So we didn't have athletic shoes. And so these are the things that are part of our stock now. And so in Q1 of last year, we didn't have them yet. So in e-commerce, we also have MODIVO, DeeZee. And so we also have Gino Rossi joining the crowd.

If we look at the cash conversion cycle, we're pleased with what we've been able to do over the course of the year. And we've been able to shorten or improve the cash conversion cycle by 100 days. That's a good result. You can calculate it, of course, a number of ways. And so the company has shown that it doesn't have any areas where it can't improve. Well, 163 days is much better than 263 days, but we're going to continue to work on improving that parameter. Every subsequent step is going to be more difficult than the previous step. Even so, we will continue to work on that steadfastly. All of this has a major impact on the working capital improvement. So we're still a long ways away from the optimum stand where the suppliers hold their stocks.

If we look at cash flow, so you can say that the improvement in working capital, even though we had the losses, we have a lower level of operating cash flow in the negative side in the red. And so we had investment cash flow because of acquiring companies, developing, of course, our stock position in eobuwie and the technological transformation. And then the financial cash flow is financing. So we decided to stop the IPO of eobuwie, so we're utilizing debt plus cash. And so our net debt moved up in the company substantially by PLN 400 million. Debt-to-EBITDA is high in Q1 and Q3. So now it's 2.8. And we're calculating here according to the old fashion, because that's the way it's described in our banking loan agreements.

So a couple of summary about what was positive, what was negative. So the -- one of the positive attributes was good weather in March. It wasn't too bad in January and February, but we weren't able to leverage that, because we were changing systems and the transfers between stores from the head office to the stores were -- somehow encountered more obstacles than usually. Then we also had significant growth in revenue in the e-commerce segment. Step-by-step, we're becoming an omni-channel e-commerce entity working on 2 very strong engines. We continue to improve our working capital and cost parameters. So we had the stop loss in terms of the sales of CCC Germany.

The negative attributes, again, only 1 month of sales in original prices. So generally speaking, it was a quarter of sell-offs. Then we had 6 fewer trading days in Poland compared to Q1 2018, then the high loss in the WE segment despite the sale of CCC Germany. Investments and marketing, higher costs, much higher than in Q1 of last year, some PLN 40 million up. And so this is something where we assessed the marketing costs as such negatively, but we believe that this is an investment in our future revenue. So if we look at the development integration of companies we've acquired, so Karol is heading up or patronizing this project. So I'll ask him to speak to this subject matter.

[Karol Póltorak, executive]

[Interpreted] So thank you very much, Marcin. Marcin asked me to join him today to say a few words about what's happening, and it's not the case that we've generated losses, but that we're taking a lot of actions and that we have a major upside.

So let's walk through these 4 companies and tell you where we are. So in Vögele Shoes, as we told you at our previous presentation, we wanted to be around 0 EBITDA in 2019. We don't know if our ambition is something that we'll achieve. It's not an easy task to do. And so the improvement in the results and trying to move into the black might be something that will be pushed back until 2020 from 2019.

But what's happening in this company certainly has accelerated the pace of integration. And we're changing a lot in the business model. So in fact, we're changing Vögele Shoes into the company we have, for example, and Skechers is probably the best example. We've got 30-some-odd people working there, and they're managing a market in similar size to Vögele without any type of heavy asset basis, IT systems and logistics centers. So it's a good benchmark. And if we look at the revenue side, we're testing our concept store with a product mix that's more aligned to what Switzerland wants, and we're looking for the optimum percentage of the CCC collection. We're trying to define exactly what in fact that optimum level is.

The results are above our expectations. We don't want to take a position that we have an overinflated expectation here. But we're trying to reinvent in Switzerland, what we've done up until now has worked better than we anticipated. It's something that's fresh topic. So we'll continue to monitor this. So this is a positive fact. So we're preparing to give more in terms of e-commerce, because Switzerland is not just a brick-and-mortar country. E-commerce will also work there too. We can show you this -- or we can -- there is a good -- it's a good market for us. The growth rates are quite strong. So in the middle of the year, we should start leveraging our customer base and our physical presence in stores and nearly 200 sites in order to be able to run the rollout of eobuwie into the Switzerland market. And we want to do this even more quickly than we've seen in other Western European markets where eobuwie has penetrated these markets during the course of the last year. And so you have the loss in Q1. It's worth mentioning that this is a loss that we had anticipated. So the actual loss is CHF 1.5 million larger than we anticipated. I think you mentioned this, Marcin. So perhaps we did too more -- too much in terms of sales. And so we went too deep. That's more or less about Switzerland.

Now we can go on to DeeZee. In terms of the numbers, it's a small business. But this is a big case in terms of how it can affect CCC. We have a good connection, DeeZee, it's been well received. Take a look at the pace. So introducing a new brand, refining it would take much more time. We were able to do this very rapidly. So at a fast pace we did this. This -- we've not said the final word here. So we're going to do this even more quickly in DeeZee in upcoming quarters. So we can say that DeeZee is above plans. We're doing some marketing efforts, [indiscernible]. And so it's present on our social media. So we can say that we're trying to generate jointly added value.

And then we have Reno. So this is a company we're consolidating for some 2 months. So this result is worse than we planned, just like in the overall German market. So it's more or less following the trends on the German market. We're observing a lot, and there's not a lot we can do. But one of the operating objectives -- we have 2 operating objectives, so rebranding the stores and product cooperation. So if we talk about product cooperation, so we've had ordered 860,000 pairs of CCC for Reno for fall/winter season. So instead of losing money in Germany, we're earning like 10% in that volume. So this will grow in subsequent quarters or subsequent collections. But at the beginning, this cooperation is quite difficult. So we have to agree on processes in corporate, IT people, stock, all that sort of stuff, warehousing. So that's how our cooperation is proceeding. We also see some stores that Reno has in fact rebranded into the Reno, and they're operating than the other CCC stores. But again, decent new openings. After you do a new opening, there's always a positive impact. We'll see how long that positive impulse will persist. So things aren't bad, but we don't want to put forward a lot of our optimism.

And then Gino Rossi is the last thing. The transaction is underway. It's difficult for us to say much. So what might not be interesting or not very important could be quite important to elsewhere. So what we could write, we wrote down here. It seems that we're far along the path in terms of achieving our operational and strategic objectives we've ascribed to Gino Rossi. And we're working here together in terms of the collection. So through the Gino Rossi brand, we want to enter the store network. We're working together on the joint campaign, advertising campaign. So we can say that we had anticipated that Gino Rossi would add to our stores. It's already doing.

So if we look at the results in Q1, these results were achieved without a collection, without assets. It's hard for us to give a more colorful commentary than what you can see here. And I think that would be more or less, it -- in terms of the most important things that I wanted to say about these companies, I would add that if you look at Gino in the collection, without prejudging what's going to happen in the future in terms of the collection time, we'll verify that the shoes that we've seen that were produced, the first samples are very good shoes and they smile at customers. And you'll see those shoes that they are very nice shoes. So waiting for the launch of that collection, and we cant wait for that to happen.

If we look at the prospects of the company, what you will see does not exhaust everything that's started, that's happening, that will start. So we're the top company in terms of the number of initiatives that have been deployed. If we compare ourselves or benchmark ourselves to all the other companies on the stock exchange, what could have a positive or negative impact on us? Here you can see that these things are quite positive. In April. May, we've entered 3 new markets. We have a few stores in Kosovo. So it's a new market for us, so a market that will develop quite strongly. We've opened 2 stores in the Persian Gulf. We'll open 7 new ones in the near future. We have another eobuwie sell-on in Olsztyn. It's working well, and we're pleased with this performance. So in the near future, we'll have flagship display rooms, eobuwie in Warsaw, and we'll have another 9. So the rollout of new stores is going quite well.

[Marcin Czyczerski, executive]

And Karol mentioned that we have the CCC concept for Vögele that we've opened 4 stores in Switzerland. So you know the CCC concept, but we're doing that under the Vögele brand, and this shows you also the mistakes that we made in Germany. So the best example is the WIL store. So we had nearly 200,000 in sales in a course of 1 day, even though on Saturday, they stay, sell until 5:00 p.m. So as Magnolia do not have that record and so Magnolia didn't even come close to that figure. So this shows you what you can really do in Switzerland if you're able to work on executing that vision as quickly as possible. We're also closing some stores in Switzerland under the old concept.

So the German -- the Supervisory Board as well as the expansion team are looking at some of the key stores to make the decision about which stores would be modified or closed. So if you want to say a couple of words about Volkestwil new concept, that would be fine.

A lot is happening and will happen in the upcoming weeks. What we've done in the most recent periods, we have a mobile app that's been deployed. So we have several hundred thousand downloads, and we're hoping to have 1.5 million to 2 million by the end of the year. This will be an important method of communicating with our customers, and we'll continue doing that. We want to be at ahead of the pack in terms of the usage of this app. We're going to introduce prior to vacation by the end of June. We'll have a full e-commerce app functionality. This will be a big thing, and that's -- a lot of resources are involved. We want to have 10% of our revenue coming from the e-commerce functionality. And then we'll continue to develop that further. So these are things being done at CCC.

If we look at eobuwie, so we have the launch of MODIVO, but this is something you'll able to see and follow. The group as an organization in shoes is trying to do more in terms of cross-selling. And what we see in our eobuwie platforms, we want to do that also in the MODIVO platform. So we're going to follow how that's going to develop. And then if it does well then we'll go ahead and launch that in other countries. I mentioned Switzerland as another eobuwie market. This will be important, of course, to the -- overall to the group. We already talked about DeeZee in our stores, the first international market. Then we have physical stores and e-commerce. We have the esize.me, which is somehow at the crossroads of those 2 groups. So we want to have a bigger rollout to our stores in the middle of the year. And we're going to give customers basically some screens and the ability to order shoes to their home, not just what's available in the stores, and we can have scans of their feet. And so we hope this is something that will be a new and interesting thing from the perspective of customers and at the same time would generate new sales amongst our current customer base and be able to attract new customers.

That would be it, I think. So for the next 2 years, we can say that there will be a key significance for the operation of the group. E-commerce is going to give us more agility and dynamism in terms of making product decisions and modifying basically the age, structure of our group. And so MODIVO would give us unlimited abilities to develop. And then DeeZee itself already has a positive record in CCC with this new brand, and this shows how quickly you can rollout new products, put them on the shelves, you can do micro seasons within the group. So these 3 things have just got it started or are starting, but they will have a positive impact in the future. For the most part, today, they're just generating expenses.

If we look at some of the other things, some of you might worry, some of you might elate. We're talking about the reporting of sales results. So 0.5 years ago, after consultation in the management team, we said that we weren't going to change the reporting of monthly to quarterly reporting. I don't like to be -- I don't like to change my decisions. But if I make mistakes, it's better to withdraw. The March example shows that we're too large of a company to have so much volatility. With respect to many of our international investors and Polish investors as well as others that we should change this. So we're going to change the method of reporting. We're going to cease doing monthly reporting. We are going to continue reporting April, May and June on a monthly basis.

We're not happy with May. So it wouldn't be proper to change the method of reporting in the course of the quarter. So we'll continue to report the same way in May and June. But in July, August and September, you won't see separate monthly reports, you'll see a single monthly report on the 1st of October. So this will be an extensive sales report. So gross profit, some elements of operating profit. Perhaps we won't have the balance sheet line items that we have in our preliminaries. We won't have any preliminaries anymore. So we don't want to give any commotion or we want to be able to show you the results and give you the analytical research.

So starting in Q3, we're going to move into quarterly reporting. Time will show -- time will tell whether or not this was a good decision. But after we've discussed with our investors, we see that, that shift to quarterly reporting is advisable. So Karol and I will start fielding your questions in a few moments, but I wanted to add a couple words of explanation.

So I would like for you to have certainty that we understand things. The company in terms of what it's doing is focusing very strongly on clients, so product, development of the offering and improving our product attributes are very important. The next thing is the integration of the companies we've acquired and ongoing expansion. We're trying to extend our reach. We need to improve our processes, centralize the services of our companies. And we want to make sure that they're at the like proper size in terms of our profitability. Then we have the technological growth and having stability in the system, CRM systems that we're operating. So these are 3 major areas of activities. The next thing that we've mentioned, April, May. May does have potential to generate better results, also June, but this will be weather-driven. You've got the example of March. It's clearly proven. Whatever we do, the weather is the most important determinant -- determining factor of our short-term results.

Vögele, we're doing what we can to be profitable there as soon as possible. But as we've mentioned, Q1 was relatively close to the budget. Q2, in terms of the Switzerland -- Swiss market, in terms of -- we're talking about the overall group, April and May, it's not a particularly good period.

Then e-commerce and marketing. We're improving our gross margin and the results in eobuwie. But in terms of marketing, it is, was and will be the major cost line item. Having in mind the growth we're seeing here, it's something that this line item will continue to grow. And the gross margin, we see potential to improve that, having in mind the volumes we're selling and our bargaining position. So we have more and more third-party brands, particularly athletic shoes. We'll have other brands, not just sporting brands. And so this will dilute the gross margin, but we're going to earn more per shoe, because they're going to be more expensive shoes. So we're changing here.

So the percentage margin could be lower because of having more third-party branded shoes. But we're taking a different of approach, of course, to selling off the old stocks, because we want to have a fresh, as new stock as possible. And so that would be about it.

So we would open up for questions. We have quite a bit of time. And so I'm not going to try to -- I'm not -- I'm going to try not to cut off the time that you have available in order to post questions. Please ask your questions through microphone.

[Unknown Analyst]

I am going to make -- take a bet on whether or not you're going to talk about the retail sales tax. One question about taxes and one question about MODIVO. When you talk about the growth in e-commerce marketing expenses, what are your ambitions for MODIVO in terms of that marketing? The rollout is silent. When will it be -- a lot of noise generated? And how expensive it will be in terms of positioning the network? What's the size of that budget for the more extensive rollout of that product? And then the retail sales tax, which keeps coming back, we don't know if the government will revisit that. Does this change your approach to business? Are you going to want to do more and more in e-commerce at the expense of brick-and-mortar stores? What can be done here?

[Unknown Executive]

In terms of the tax, we don't want to react to that too strongly, because it's a fresh issue. These are promoted by the supervisory channel. If something applies to everybody on equal footing, then it's okay to us. It doesn't change our approach. In our industry, we want to be the leader in omni-channel approach. So it's hard to imagine that you could go faster in e-commerce than what we're doing now. But if something can add incentive to us to grow e-commerce faster, then we'll be happy. If -- so if the tax is implemented, depending on -- we're not going to be happy. I mean, if we look at the levies that we're paying, we're not paying a small amount of levies or taxes, but we're not going to comment. The rules would be equivalent to everybody, so taxes have to be paid. In terms of MODIVO, we're in the initial phase. It would be hard to talk about further plans and prepare for what we're going to do with respect to the competition. It's hard to talk about that. The basis of marketing in e-commerce is performance. And so basically the budgets will be put in place there. And now if we go on to crossover sales, this is going to be the most important thing. We see that there's a lot of potential.

[Unknown Analyst]

I'm from Santander. I have 2 issues. I wanted to ask about the incentive program for this year and for the upcoming year. How do you see that? I also wanted to ask about Vögele and Gino Rossi in terms of the profitability over the next 6 to 8 quarters. I'm thinking about the net result. When do you anticipate breakeven to transplant in terms of the incentive program?

[Unknown Executive]

We're still in the framework of the program that had PLN 2 billion EBITDA in 2017, '18, '19. We were to do 90% of our objectives in 2017. So we had 70% of the warrants. Last year, we didn't manage to do that. This year is still open. So there's still a lot of open questions in terms of how far along we'll be in October. We continue to take those actions, which will improve the results of the company. So the -- our managers are very strongly committed to the CCC project, and we want to generate and complete our work on these projects to generate the long-term value of CCC. And this is something that we can come back to in terms of management program for 2020 or some sort of incentive block. Certainly, in the second half of the year, we'll think about that if there's going to be some long-term motivators for key personnel. This would be the 301st project. So we're going to push back in time the thinking about that. Then the prospects for Gino and Vögele, so we're not going to comment on Gino. This is a public company. We can talk about what we can expect from the brand Gino in our stores. I think this is about it, all we can say. But if we talk about Vögele, as we've said, our ambition was going to be to break even. That's our objective, our internal objective. And then the managers there have their bonuses focused on EBITDA breakeven. So the ambition for us to do at this year, perhaps it was to go into next year. So we think that the direction is to move upward in terms of profitability if we're thinking about our 8 quarters moving forward. So this will be a simple business, revenue and the margin generated. Because the gross margin in Switzerland, they can do more than they're doing right now. Last year, it was 60%. So with our collections, they can actually push this up. And then we have 20% costs of staff, 20% of rental. Everything else is sales. Then we have administration, logistics, marketing. And this is something that we want to optimize strongly. So there is the direction, let's hope. And so we have to make proper collection, selection decisions. So like the mistake that we made in pricing, so we admit that freely. But this is not a business that's very difficult to conceptualize. So we're thinking about how customers will move from the brick-and-mortar stores to e-commerce. So we're going to have e-commerce in the background. So I think we should be able to basically catch hold of both of those subject matters, so the physical store network as well as e-commerce. No more questions? Perhaps any questions from the Internet?

[Unknown Executive]

We have several questions from persons who are listening to us in the Internet. The first question, what is the final cost of acquiring Gino Rossi? What does cooperation look like now? What are your plans for the Gino stores? So the management team of Gino Rossi has basically put forward a motion to declare bankruptcy of simple products, and so while at the same time trying to sell it. What's the plan there?

[Unknown Executive]

That was your first question. It's a multi-faceted question. We can reiterate what we've said. We can't comment on the decisions made by the management team of a public company in terms of simple, especially since that's outside our frame of reference. We don't make any remarks on it. So we can't -- of course, certain things are happening, we're aware of that. But our operating cooperation, based on contract we signed some time ago, is moving forward. And in line with our thinking, we're going to be happy, we think, with the Gino Rossi products in our stores. I think we've responded to the other questions during the course of our cooperation.

So there are no further questions from the room, if I understand correctly. Is there anyone else who want to ask a question?

So to wrap up, we've had a good quarter in terms of sales. We understand that the costs might have disenchanted you, but I would like to tell you how much we're doing -- how many things we're doing for the first time. So even if you have your car license, driving license, the first day you don't go into German Autobahn and ratchet up the speed to 200 kilometers. So the same thing is true to us. What's happening for the first time in the company is generating primarily costs and not generating results or revenue.

So we have companies like Vögele in Romania, DeeZee, Gino Rossi onboard for less than a year. Not -- more recently, we sold our German position. Germany caused us a lot of pain a few months ago. We've fully changed the IT backbone of the company 2 months ago. We added the DeeZee brand to our stores. Adidas has been added to our stores recently. We did a silent launch of MODIVO. And we have an app that you can download. And then we have a marketing capsule along with the New Year's Eve. So we had a marketing campaign, but the product didn't show up. And then we had the product for DeeZee, but then the campaign wasn't impressive. So we're far away from perfection.

But every next step is better. So we're working very well with UNICEF. We've got the beginning of the season with a new cycling team, and we're shaping the image through campaigns there. We're working together with Instagram. If you look at the pictures we had a year ago and what we have today, we're talking 2 totally different companies. We have our own brand to go to soft, comfort brand. We have esize.me. We have a new warehouse in eobuwie. We have new omni-channel stores working less than a year. We have the sales launch in Arabic countries. We're doing work in Italy and France. And we have new clearance systems. And we were doing restructuring of processes of stores. Just a year ago, we have a new CCC concept in Vögele. We're working with the H&R (sic) [ HR ] group.

So we have in front of us the start of the showroom, our new premium brands, integration with Gino. So if you take a look about how many things we're doing for the first time, well, to a large extent, today, they're an attempt to try to catch our balance, but every quarter that passes will enable us to spread our roots. And we have a wonderful team here in CCC. And so you'll see basically these results in the future, whether you see them in Q2, Q3, Q4 or in 2020, having in mind the number of mistakes we're making, all of that can take more time.

[Audio Gap]

[Statements in English on this transcript were spoken by an interpreter present on the live call.]