CCC SA

WSE:CCC

Earnings Call Analysis

Strong Quarterly Growth and Strategic Cost Management

In Q2 2024, CCC Group saw a record revenue of PLN 2.574 billion, up 6% year-on-year. The company’s like-for-like sales rose by 12%, while EBITDA margin for its CCC brand hit 26.1%, a 5 percentage point increase. HalfPrice showed a significant 23% growth, with EBITDA margin improving by nearly 13 percentage points, reaching 18.5%. Modivo also saw a modest revenue increase, adjusted to 6% when considering local currency. Strategic cost management resulted in a positive cash flow, despite higher inventory levels, ensuring robust financial health and readiness for future expansion.

Record Revenue Performance

In Q2 2024, CCC Group achieved a remarkable revenue of PLN 2.574 billion, marking a 6% increase year-over-year and setting a new historical high for the company in a single quarter. Notably, if not for unfavorable foreign exchange factors, the revenue growth could have reached approximately 11%. The CCC brand itself saw a significant uplift, growing by 7%, driven by strong offline sales, while HalfPrice benefitted from a robust 23% growth in revenues, indicating effective profitability focus rather than just top-line growth.

Improvement in Profit Margins

The group showcased impressive improvements in profit margins. The EBITDA margin for CCC rose to 26.1%, up more than 5 percentage points year-on-year, while HalfPrice achieved an EBITDA margin of 18.5%, indicating strong operational leverage. The combined EBITDA for the group reached PLN 401 million, a nearly 6.5 percentage point improvement from last year, suggesting the company's successful cost management strategies.

Strategic Cost Reductions

A significant part of the success in Q2 was attributed to disciplined cost management. The overall cost-to-income ratio decreased to 40.7%, with aspirations to drop below 40% in the second half of the year. This is crucial as historically, such a ratio below 40% is indicative of optimal operational efficiency in the retail sector. Despite an increase in inventory levels, the intention is to ensure readiness for the upcoming seasons, thereby sustaining revenue momentum.

Challenges faced by Modivo

While the overall outlook is strong, Modivo's performance was less favorable, with revenues declining slightly. The EBITDA margin remains low at 3.5%, largely affected by foreign exchange fluctuations, resulting in an estimated loss of around PLN 30 million in gross sales. The management is focused on rectifying cost inefficiencies, with expectations for improvements in the next quarters as the company works to optimize inventory levels and purchasing costs.

Future Growth Projections

Looking ahead, CCC Group aims to capitalize on its strong market position with ambitious expansion plans. The company has set a target to open 60,000 square meters of new HalfPrice stores and another 17,000 square meters for the CCC brand in the latter half of the year, with expectations to maintain robust profitability metrics. The anticipated like-for-like sales figures are projected to exceed 16%, enhancing the overall operational leverage significantly.

Robust Cash Flow Generation

Operating cash flow generation remains strong, with CCC and HalfPrice reporting PLN 340 million and PLN 83 million respectively. This robust cash flow positions the company well for continued strategic investments and handling operational costs effectively. The emphasis on maintaining a healthy cash conversion cycle will further bolster the company’s financial stability.

Restructured Financing Arrangements

The company recently secured long-term financing with favorable terms, which is expected to enhance operational stability for the next five years. The refinancing not only brings down financing costs but also aligns with the growing scale of operations, thereby creating favorable conditions for future growth. The increased reliance on reverse factoring is expected to optimize working capital management.

Earnings Call Transcript 2024-Q2

[Dariusz Milek, executive]

Good afternoon, ladies and gentlemen. I'd like to welcome everybody very cordially to sum up Q2 2024 in the CCC Group. Can you hear me now? I'm sorry.

I'd like to welcome all of you very cordially to recap Q2 2024. So we have continued to improve our results by leaps and bounds for another quarter. We've refinanced the group successfully. This was very important to us. We have a high cost discipline in the group. So we're down in every line of business in terms of our cost ratio.

We have good like-for-like sales, some 12%. And we've improved margins by leaps and bounds by 5%, in HalfPrice, we've done it by some 13%. And so we have the leading EBITDA margin of 26% in the industry. And so we've continued to improve the EBITDA in HalfPrice by 18%. So it's the second quarter in a row in which we've actually improved in Modivo. Can you hear me? So the planned acceleration of HalfPrice, we'll talk about that in the latter half of the presentation.

I'd like to give the floor to Lukasz who will tell us a little bit about the financial results.

[Lukasz Stelmach, executive]

Thank you very much. Ladies and gentlemen, so let's go through the details now. If we talk about the financial results and we'll start with the discovery. Sorry, we'll talk about what the group has done in Q2.

So we have PLN 2.574 billion in revenue. This is an increase of 6% year-on-year. This is the historically highest level of revenue that the group has generated in an individual quarter.

We should also remember and say that the results of this quarter and the margin -- well, this was all burdened by what was happening with FX rates. So the Polish zloty was improving. And had the FX rates been neutral on a year-on-year base, the increase would have been even higher. And from the group level, it would have been 11%. And the most positive impact would have been on the group's revenue in Modivo.

And so if we walk through the discussion of the individual segments and what their contribution was to the group sales, we should first point out CCC. Here, sales were up by 7%. What's important here that we've continued to optimize the sales area by some 2%. So we have an increase of like-for-like sales of some 12%.

If we look at HalfPrice, HalfPrice is growing the most strongly by some 23%. In zlotys, in the local currency, it would have been even higher at 26%. And so this increase is positive in the sense that in this quarter, we focused on the profitability of HalfPrice and on the margin and not just on maximizing the top line as such.

And so this is particularly important. So in the Modivo Group reported in zlotys, it's up by a little bit less than 1%. But if you were to look at local currency, then the revenue would have been up around 6%.

And so now if we look at the results of the various lines of business. And let's say first, we'll begin with our biggest brand, which is CCC. As I said, it has grown by 7%. And this is primarily as a result of our offline sales. It's grown by 6% and online is down by 6%.

But this is an intended effect of our policy that we're directing our customers to the most profitable channels. And from our perspective, offline is the most profitable. We have the highest margins there. We don't incur additional margins. And that's why offline share in CCC and across the group is something we're observing.

So what's important is that we continue to improve by leaps and bounds. The margin is nearly 60%, as we had stated, announced previously. So what we announced, we're delivering. So we're continuing to make savings on costs. And this means that the EBITDA margin in Q2 in the CCC brand is 26.1%. And so that's an increase of more than 5 percentage points.

So we can say quite boldly that this is a typical level of profitability in the retail industry. And this is something we're very proud of. It's something that we will want to continue improving. All of this has made, or translated into an increase in operating profit by some 24%. And this is another quarter in which we can say that CCC is participating strongly to the overall operating profit of the group.

And so now we can talk about the results of our second brand, which is the HalfPrice brand. HalfPrice has grown by some 23%. Revenue is PLN 414 million. So the like-for-like sales figure is slightly negative. But we should have in mind the base effect.

In Q2 of last year, we were pushing basically sales in terms of discounted sales. And so we had a 35% for like then. And so we can say that the overall like-for-like is still very decent. But in Q2, we were maximizing margin. And as a result, we have the margin improving by nearly 13 percentage points. And in the second quarter, that was dominated by revenue, and then we also have cost savings. And so this is the positive effect of operating leverage.

So HalfPrice has been able to make a spectacular improvement in its profitability. It's up by 17 percentage points. And so we now have an EBITDA margin of 18.5% profitability. And so we're moving closer to the 20% watermark. That's what we treat as the benchmark. We're going to want to cross that benchmark and stay above that benchmark persistently in the long term. And so this is a record breaking result if we compare this to other more seasoned players in the HalfPrice marketplace.

Maybe a few words about Modivo itself. In Polish zlotys we're growing by less than 1 percentage point. But if we calculate this in local currencies, then the growth would be 6%. And we owe this growth to eobuwie eFootwear. In Modivo, we have a slight decrease in revenue. So the margin is flat year-on-year. But if we were to calculate the margin in local currencies -- I'll talk about that in a moment, then the result would be a little bit different.

What I think deserves attention in Modivo is the robust work we've done on cost side. So we've reduced the cost ratio by nearly 3 percentage points cost to income. And we can say that this ratio is pretty good at 37.3 percentage points. And that means that the EBIT is 26 percentage points and the EBITDA margin is 3 percentage points, just 3%.

But as I've said, if we look at the Modivo Group, what is particularly important is what's happened with the FX rates. And they had an impact on the results of Q2. As you can see on this slide, if we were to calculate this in the local currencies, as other players do, then the increase in revenue would be 6%. In euro, the margin would be higher by 6 percentage points for -- and the Romanian lei, it would be up by some 70% and Czech crowns roughly by 8%.

So as a result, the group -- Modivo Group, lost roughly 3 percentage points of its margin. And that means more than PLN 30 million in gross sales. And across the group, we can say -- we can talk about the loss of a margin or gross sales of roughly PLN 100 million, because of the other brands. We can say foreign sales is perhaps a little bit lower, but in terms of the absolute values, it's quite important. So in Modivo, it's 30 some odd million, but in the overall CCC Group, it's roughly PLN 100 million is the combined impact.

Let's go on now to a discussion of the P&L across the group. I've already talked about the top line up by 6%. We have a record-breaking level of nearly PLN 2.6 billion, but we haven't said our last word. And I'm sure that every subsequent quarter will be record-breaking.

But it's worthwhile to underline that Q2 was a record-breaking quarter. We have a record-breaking gross margin, and so 49.5% in Q2. So the nominal reduction in costs, even though sales have grown, and we've been able to reduce costs by 1%. That means the cost ratio was 47%. So the reduction year-on-year is 3%.

And as we said at the most recent conference, we are moving in the direction of 40%. For us, that's what we consider to be the benchmark. We're not only moving in that direction, we're moving in that direction swiftly. And you see that we're reporting the cost ratio of 40.7%. And so in the second half of the year, we'd like to drop below 40%. So it's like 40.7% now. And so as a group, we want to get back to that level.

I think the last time we were at that level was in 2017, where cost-to-income ratio was sub 40%. From that point in time, costs went up, but now we're coming back to a level of costs that's the top level in the industry that we work in.

So if we look at the operating result, it's sort of by some 214%. EBITDA is above PLN 400 million at PLN 401 million. So if we were to calculate it in the foreign currencies, as I said, it would be up by PLN 100 million. So it'd be roughly PLN 500 million, but we report in Polish zlotys. So in Polish zlotys, it's PLN 401 million. And the EBITDA for the group is a little under 16%. The improvement is nearly 6.5 percentage points year-on-year.

Let me say a couple words about operating -- financial flows, sorry, financial cash flow. So we can see that CCC in both of the brands, CCC and HalfPrice, we're generating cash on our operating activities. So PLN 340 million in CCC, and HalfPrice, PLN 83 million.

But as a result of stocking up for the next season, and as we develop the licensing model and taking actions against certain possible distortions -- we'll talk about them in subsequent slides, we also see some fluctuations in inventory. So inventories have risen in HalfPrice and CCC. So investment, cash flow, so CapEx is the development of the sales network. So the net flow is roughly minus PLN 80 million.

In Modivo, we see the progressing work as we optimize the level of inventories. And this has generated positive cash flow. And we're working on the debt and the maturity. So we can see that primarily in Modivo and CCC. And so that's why in Modivo, we have positive flows.

Now let's take a look at the debt structure of the group. As you know, the debt in the financing structure is based in 2 business units, so in CCC and Modivo. So we have CCC and HalfPrice. And in the business unit, which we call CCC, we see a slight increase in net debt, which is primarily the result of stocking up for the autumn-winter 2024 season.

And this also stems from the fact that we weren't able to use our factoring line because we were shoring up the financing. And so we had to curtail or shut down some of that factoring line. And so that means we were using the reverse factoring to a lesser extent at the end of July.

But in terms of our net exposure, which is -- talks about reverse factoring as well, we can say that we're more or less flat year-on-year. So quarter-on-quarter we have an increase of 4%, quarter-on-quarter. But flat year-on-year.

But if we look at the finance or banking ratios, so with respect to EBITDA, we can see these are totally safe levels, and we've reduced them greatly compared to what we were reporting several quarters ago. So we feel now very comfortable with where we are at present. But as we move into every subsequent quarter, we'll see that impact related to greater financing on the balance sheet of the suppliers.

So this gives us the ability to improve our insurance ratings for our suppliers. And so suppliers can basically get insurance and have longer days outstanding. And so as we reduce the turnover of -- we're going to reduce the debt in business units in CCC compared to what we're reporting at present.

So in Modivo, in turn, we have a gross debt up by PLN 95 million, which is more or less because of capitalization of the bonds from the bank. And then we have this offset with the lower utilization of factoring. And to some extent, this is a seasonal effect.

Maybe a couple words about the results of CCC. In a moment we'll talk about HalfPrice over the longer run. We usually talk about results in the most recent quarter, but we'd like to show you what's happened over the last 12 months. It's not the case that we're dealing with some sort of improvement of results that was happening by chance or moving results from one quarter to another. Here on this slide, we can show you the results over a 12 year -- 12 month period, excuse me.

As you can see over the last 12 months, the last 4 quarters, the profitability in terms of EBITDA at CCC has grown from 12% to 22%. So this is an improvement in the course of a year of 10 percentage points. This is a result that means that in Q4 our profitability will be around 26%. And this is the right level that would be beating the best results in the industry.

So on one hand, this is something we're satisfied or proud with -- proud about, but this certainly mobilizes us or urges us to work even more efficiently to toil harder. And we believe that it's absolutely possible to achieve a watermark of 30%. And this is the direction that we want to go.

In terms of the HalfPrice results, we're dealing with a similar improvement. This is a brand that's relatively new. We opened the first store roughly 3 years ago. So the average age of our stores, we could say is 1.5 years. And in this short period, we have a profitability in excess of 18%.

And once again, we've improved over the last year by 10 percentage points from 8% to 18%. And this is a level that surpasses the level of profitability generated by players in the HalfPrice industry. And we benchmark ourselves against them. And so this model is producing the intended financial results. And the trajectory is the right one.

But as we move forward, and we'll say in just a couple of moments, we're going to be able to accelerate, pick up the pace of development and tap into that operational leverage improvement. And so we will want to report to profitability in the upcoming quarter in excess of 20%.

So the improving results at CCC and HalfPrice have enabled us to do what we reported to in mid-July. That means we've been able to complete the process of securing new financing. This took a bit of time, more than you had assumed, more than we had originally assumed. But in part, this was partly due to factors over which the company didn't have any control.

But at the same time, we wanted to make sure that this was suitable to our needs at the best possible conditions, and we're comfortable that we've been able to deliver to the company and the shareholders financing that's suitable. And so it's bigger and more adequate and more suitable to the growing magnitude of the business.

Its substantially less expensive than the previous financing package, which was pre and post-COVID terms. And so it gives us stability over the next 5 years because it's long term financing. And this contract has been signed for a 5 year period. And it's got a more optimum structure or composition in line with the needs of the company. So factoring -- reverse factoring is up 2x.

And so as the CCC brand and HalfPrice continue to improve their profitability to be in line with the top players in the industry, and having in mind the financing that we secured, this means on one hand that we're going to be able to accelerate the development of our tried and true formats.

Up until now we can say that our pace of development and growth was not as fast. And we understand that the fixed costs, in our opinion, are at an optimum level. And having in mind these fixed costs at a certain level, we should have an additional operating leverage improvement impact or effect. And this should improve the results of both brands and as a result of the overall group.

Another effect that we want to work on is continuing to optimize the structure for financing procurement and purchasing. We have more reverse factoring, which gives us the ability to finance purchasing more effectively. But as we improve the results, that means we'll have better ratings amongst insurers.

And as I've stated previously, we'll be wanting to finance basically through the balance sheets of the suppliers, and that means we can shorten the turnover period for inventories. So in CCC and in HalfPrice, we want to come below, substantially below 180 days. And that would give us an opportunity to be genuinely cash flow positive. And this is a task for the upcoming weeks, quarters and year.

That's it in terms of my discussion of financial issues. Now we can go on to business development. And I go ahead and turn over the floor to the CEO.

[Dariusz Milek, executive]

Before I begin my spiel, we're going to talk about expansion and inventory and products. I wanted to add a couple words to what Lukasz said, even though Lukasz said a sufficient amount. This is very important information. So our sales have fell from e-commerce from $0.52 to $0.37 for omnichannel. We can actually move customers between channels. We know that in retail, so we don't have any sales costs after we pay for the staff costs and we pay for the rents. So we have a much higher profitability there.

And I had promised you that we will not complain about weather, about FX rates, and about other external factors, so soft consumer. But since almost everybody's reporting FX volatility, certainly our EBITDA could have been higher by nearly PLN 100 million. And so that means we would have much faster improvement.

And so if you're benchmarking us to players like operating in Europe, these are major differences. So in Romania in the Czech markets, our like-for-like is around 0, but we're up 15% in the local currencies. So at some point, perhaps those currencies will be neutral or give us a boost.

Right now, I wouldn't worry about it too much, because we can say that our results as at present are satisfactory, having in mind where we are today. And we would have revenue of PLN 2.7 billion as opposed to a little bit under PLN 2.6 billion. This is the last time I'm complaining about external factors.

If we talk about the soft consumer, we're actually pleased with that. So if we look at unemployment, we're the second country after Malta with the lowest level of unemployment. And we have -- only Malta has a lower unemployment ratio, and we have less expensive footwear. And so our model was very resistant to crisis.

So CCC is maybe a mid-shelf brand, we have a good price, and you can get a good priced product with a high margin for us. And then you have HalfPrice, which has a lot to do if a crisis hits. So we have the ability to secure residential, commercial units or space at a very affordable price. And so then the stock products for HalfPrice -- we live in HalfPrice having products on the shelves.

And so I think we should also mention that Modivo results are not satisfactory. Let me confirm that. So we have EBITDA at 3.5%. But if we look at a ex rates, and so 70%, and the Romania and Czech Republic are the leading markets here, we can say that we've lost roughly 5% in the margin. Why is the margin softer in Modivo? This is the main reason of the retraction in margins.

And so we want to -- we're working with costs, making sure the costs are under control. A lot has been done to be able to generate higher returns in the future. So we have lower purchasing costs for this autumn. And so we had products in HalfPrice, 2x to 3x more. And now we have 1/3 of that stock. And so we don't have the feeling that our stock or inventory is becoming obsolete.

So this is something that we're doing very well, if you look across our -- what's happening with inventories, what's happening with the products we bring into the group. And so that's just something I wanted to add. I wanted to make sure that everybody would understand.

So our priority was not to, was not to fight for revenue. We were doing that in -- more in the offline, so footfall, as opposed to e-commerce. So we were looking for margin.

I wanted to add -- I'd like to ask all of the representatives of the banks that we were able to secure the financing in recently in -- at the end of July, we're able to complete that. This will have an impact on the costs in upcoming quarters. So you don't see those costs here yet -- the new costs. I wouldn't say that this was madness. There was a lot of effort and toil that we put into that. We had promised that we would do that by mid-year. For us, that's the second quarter.

But as you know, some things were independent of us because there were some difficulties with guarantees. So I'd like to thank you very much. This is a new era of quality that's not perhaps perceived yet. But this should give us an ability to grow without any fetters. And we were developing HalfPrice at a very difficult and challenging time. And we can really see the results now.

Now I want to say a few words about business development, having completed the discussion of finance. Here, we show you how much profit HalfPrice is generating. So we have the global players on the left side, we have global companies with high levels of capitalization. And nobody has up until now generated at this level of EBITDA for their brands.

So as Lukasz said, so with some of our stores, we're just getting started. And this is also incorporating the FX rate effect in Romania and Czech Republic. So we feel quite good with this. We've learned how to do this business.

I think we've got very good products. We have a lot of product opportunities. We're well prepared to deploy this model. We want to open up another 60,000 square meters of new space on good rental conditions. We feel very good. We're generally attracting and commanding very high margins. So HalfPrice doesn't mean quarter price.

So we had -- like-for-like, has taught us something that we had a decline there. So in the second quarter, we've started -- you see that we're doing better. We're scrutinizing the calculations, and we're up to nearly 19%. And that means we're going to be able to continue our expansion in the most promising area of our business model.

So if we go one page further. If we look at HalfPrice markets in Europe, as you can see, on the left, the American model that says it should be 12% to 8%. We believe it should be 15% in HalfPrice. There's a lot of half price companies, a few leaders there with large revenue.

And if we look at Europe, we can see that Europe is very -- has a modest position in this model. We have the U.K., which has one single market participant, maybe not a competitor, but a market participants. If we look at Poland and Germany, it's 1%, 2%, whereas the rest of Europe is 0. We have discounts, you have outlets, but you don't have a genuine bonafide off price model.

I'm not sure if I should explain the difference between a discount, an outlet and an HalfPrice. So we have a large number of brands, different brands in different categories -- 17 categories, I think: so beauty, home, food and footwear, and apparel and toys. So basically, we're buying everything that's branded and at good prices.

And we sell in this concept, this concept has been embraced well. We have a lot of footfall, a lot of traffic. We have, I think, 132 stores. So I'm at the end of August, he's at the end of July. So we're prepared to open more stores in the latter half of the year.

And if we look at the next slide. So if you look at the population in the U.S. and the rest of Europe, you can draw conclusions that there's a place for us to grow. There is work for us to be done. Of course, we want to develop where we already have our bases. We have our headquarters in Swiss market. We're talking about our expansion where we want to do this in Central and Eastern Europe.

If we were to draw a graph under these assumptions, where we can develop, where this model is very profitable. In Q2 of last year, we couldn't respond to that question, where we have much better products. And we have many more categories and financing that would mean that we could open 50 stores per year. So 50 stores per year with 2,000 square meters, that's 100,000 square meters. But this is something that's doable. It's a colossal figure. And we feel good with that. We'd like to open at least 50 HalfPrice stores in our region per annum.

So if we were to add -- we want to open another 50 stores of CCC, that means we would have 130,000 square meters. Is that a lot? I don't think so. This is roughly 20%, 25% of our business per annum. Did I scare everybody? It's not the case.

I understand we were talking about different products, different brands, different margins, different sourcing, different products. At that point in time in the past, it was totally different. Now we're really prepared and we're gradually going to pick up the pace, accelerate.

If we look at CCC, where we could plot down stores. I see some 400. 100 in Poland, 100 in Romania, then one Bulgaria, in Ukraine once things calm down. Why do I say 400 CCC stores? If you look at the profitability, so we have a 42% EBITDA in Poland. Basically, we have an EBITDA where others are just starting. So we can't stop that.

If we look at the profitability of foreign stores it's about 31%, it would be 34% abroad, if we didn't have FX rates. We didn't have such wonders here.

And this is all a result of cost discipline. We've reduced the head office cost. We've centralized things. We're managing things within a single organization that's much more effective. We've improved our like-for-like. We've improved the conditions. If you see minus 2 in space, basically, it's not that we've closed something, we've brought order to the things. So it's very important that we -- I think the worst store EBITDA is 24%.

So these are sufficiently impressive results that we should not be worried about cuts or slashes. So it's 27% EBITDA in Poland for HalfPrice, 20% abroad. And so if we adjust that for FX differences, this would give us a 24% EBITDA figure. These are all startup operations, on average, 1.5 years. Some of them have just been opened. So the cost are -- there's a big cost burden. You have to send products to the stores where nothing has been sold yet. And so we can say that the EBITDA figure might be even higher for stores that are up and running.

And so if we come back to the CCC brand stores, I want to show you that we're able -- we were only reducing and closing stores in markets. During COVID we lost Russia. So from 940, we came down to 800. So we were in this phase of restructuring reorganization of our business -- retail business. And we've put it a -- erect on legs very strongly.

We've got global brands. We have the licenses. I don't want to reiterate that because it's going to be boring too. And so we have -- we had much bigger stores in the past. Now we have around 600 square meters, and we have much better rental conditions.

We're developing -- with the assistance of shopping centers, we get quite a bit of fit out. We have several brands, we have HalfPrice, we have CCC, eFootwear, and some others. So maybe there's not a lot of other things. But these are all desirable elements from the point of view of management of shopping galleries, and we have a low level of penetration in smaller communities.

Basically, we see that in small communities, we have good results. We have high margins, low costs. And so we have retail parks in smaller communities. And so the banking system has been unstuck. And so quite a few of these investments are actually in the works.

So I wanted to sum up that we're going to continue to expand, continue to grow. That's the way I feel things. And that's the direction we're going to pursue. So 20% is not, from my point of view, we're not talking about a trip into space, in terms of what we're going to be able to do in the retail industry. So inventories, I understand that you're disquieted in paper. This looks quite disquieting on paper. But I feel good with these figures. And that's quite important.

We have -- let me say why this has happened. We have ambitious sales targets for the latter half of the year, you're comparing us -- we believe that our like-for-like will be higher than the 16% figure from the past, for lack of seasonality, other things that happen. So we have ambitious targets. But we have to do achieve these targets with products, we have to have products.

We have a high margin licensing model. So if we add a new brand, 300,000 shoes in a given brand, that's nothing, so that's 300 pairs per store. So you've got 10 shoe boxes. So basically, you wouldn't see this 1.5 shelf. So you don't have to actually build it very much if we have a large number of stores. I'm not talking about that. But we have a lot of ambitions in wholesale sales. We have this licensing, we have an obligation to run wholesale sales, and so this is a highly profitable muscle. It's not very much CapEx.

We have the factories. This could be the most profitable channel in terms of wholesale sales. We have a large number of reputable brands, and a lot of players want to have these products in their stores from capital. And so basically people, I thought they were going to be afraid because CCC has it, and they wouldn't want to have it. But it turns out they want to have it. And we're ready to handle this in wholesale business. So this could be a big boost.

So we had to prepare that we're going to open 60,000 square meters of HalfPrice stores and 17,000 square meters in the CCC so the expansion will be in the latter half of the year, just like we were closing, opening, and HalfPrice wasn't able to make up for that. But we have to have basically products for an additional 80,000 square meters of space, and so we need these products.

If we look at the overall supply chain, this is the most important thing. So in our panic, we were acting more quickly. We already have all of the products in our warehouses, so as of August, all of the new products should be in the stores. We're now replacing collections, and so this has happened ahead of schedule. An additional -- we were spending an additional boost because we were paying less for containers. Container prices are starting to grow.

So July was good, but July has given us a good sales result, but it's not in the quarter results. June was less. We're earning money. This is the fuel for our business. So our business model is changing, we have very high margins. It's better to have products than not to have. If you have a 70% first margin on products and not have the products, that's a huge defeat for the organization.

So how much does financing cost us? As of the 1st of August, we pay less for financing. So if you look at the financing cost per month, 0.6% for sales. But this is at the cost of sales, so it's 0.2%. So if we think it's another 70 percentage points that walk away if we have it in the duty warehouse. So it's 0.2% for stock. So we want to make sure that every sales week was used.

So if we receive products too late, because there's a problem like in the Suez Canal, what would happen then? We would lose sales, we would lose profit, and we would have to incur the costs of rent and the costs of staff. So this is a very good move.

We're all worried about what's happening in Bangladesh. Bangladesh is not a problem because it's only 8% of our purchases compared to other, say, apparel products companies. And so we're very well prepared.

Another thing, what's happened in HalfPrice? We purchased a large amount of attractive stock -- branded stock, and it's not the case that it will wait a month or 2. Basically there's an offer, and you have to buy it and bring it into your warehouse or not. We have very good branded products, I'm almost surprised. So we have a lot of good offers, more than we would need. And so we're very well prepared for the season.

And when we talk about products are being on the seas for 15 days longer, and we have 200 to 232 days, these are the figures. Then we have a problem only for half of that period because the rest of that is because the products were on the seas for an extra 2 weeks. Of course, in paper it's a problem, but this will be handled in the next quarter or 2, and we're going to get back down to 180, 190 days.

And so from the moment when the product is shipped from the factories until it reaches us, it's for us. And so HalfPrice, we're buying a lot of products here in Europe to a large extent. So we think in ,HalfPrice we'll be able to drop that turnover days to 120, including the sales periods, having in mind the growing HalfPrice, we should get well below 180 days in inventory.

And so for factorings, so we'll be able to finance all of our development based on the outstanding balance with suppliers. That's our program. That's our idea. And so within a year, we're going to be able to be fully financed by our suppliers at the next stage, and that we won't be financed by our factoring, but a factoring offered by suppliers. But of course, we have to have good financial results, sound financial results for them to be able to, that's the path. Of course, our suppliers have to have good results.

If we talk about the costs of expansion that I'm talking about, so I can tell you with full responsibility that the assistance we're receiving from shopping centers are fit out versus our investments. So within half a year, every CCC store pays back. And 11, 12 months, every HalfPrice stores generates payback. So this model means that our investments in stores have a fast payback period. And that's the goal for organization in the near term.

I think I've said pretty much everything about inventory that I wanted to say. Let me reiterate. Inventory is a problem for this season and for the supply chains where we are surprised by them. As the head of this company, I couldn't allow a situation to occur in which we wouldn't have any product.

Let me show you this table. So PLN 565 million is on the seas. So it's already booked as inventory here, even though it's still on the seas. So half of the growth is products we have on the sea. It's already booked in our ledgers, but it's still on in route. So I've got PLN 250 million of basically -- if something were to happen in the supply chain, we would win. And our stores have a better stock. So PLN 150 million more, that means we have more HalfPrice stores in CCC are better prepared to have higher quantities of products. And so this is an additional explanation of why we have additional inventory.

I think above all, you want to hear that this is new stock and not obsolete stock. That's true. Basically, this is new stock that's available for sales for the next 4 to 5 months. These are big numbers, but we're not playing with small numbers. We're a big organization, a big company with high margins. And so basically products have to be in store on time. And I think that's it about inventory for now.

What we declare this 200 days period, I hope that there will be no problem for us to accelerate the supplies, deliveries in the future. And the situation will normalize, but in any case, it is stable. So how should I frame this? I'm not sure how to frame it. Have you really grasped the business model that we have? So we have this HalfPrice. We don't have old shoes, because HalfPrice is utilizing everything that we have.

So if you look at margin, if we have a 75% margin, well, nobody else has that type of margin at first price, and in our stores at better prices. So we're selling our products with a 40% discount in HalfPrice. So that means I still have another 60%. So 52%, sometimes you have to do, maybe have to have a 1/4 price.

Well, this model doesn't allow you to have any obsolete shoes or footwear. So the problem of obsolete products is over forever. So I'm thinking about the blended margin -- first margin, blended 73%, 74%. In the autumn, it's even better, some 2 percentage points higher. So we can be quite calm about the margins we'll produce, plus you have the licensing. So if you can ask about the categories and prices, I can tell you everything that you want to know.

So this is something we're making sure that our costs are in line, the margins are in line, like-for-likes are where they are. Sometimes you can't generate the higher like-for-like figure because of competition. There is a lot of aggressiveness, lot of discounts, price declines, reductions. Everybody's trying to get out of its product. We have products that are totally different, so we could be able to attract a higher margin, and that's our model. And as we develop -- as we grow the HalfPrice business unit, we won't have problems ever again with obsolete stock. This is a problem of the past.

I think I've said everything, Lukasz. I think it's now time for the Q&A session.

[Unknown Analyst]

I'm from [ Bosch ]. I'm not sure if I've grasped this model. I think more or less I do understand it. What is the link between inventory and the wholesale sales, in licensing and how much revenue and at what margins can be generated?

[Unknown Executive]

I can't tell you that, because we're still collecting POs. But you said this is linked to inventories, well, maybe some tens of millions. We're developing this model. It looks promising, but I don't want to say how big it's going to be yet.

[Unknown Analyst]

So having in mind the freedom of development, what would be your CapEx in 2025-2026? How much do you intend to allocate to CapEx in 2025-2026?

[Unknown Executive]

Well, we want to be around PLN 250 million for CCC and HalfPrice total.

[Unknown Analyst]

And the level of cost savings in Modivum. I understand that you've achieved the cost savings. Is there anything left to cut?

[Unknown Executive]

There's always something to cut. It's not the case that we're always adding something. You can't. This was a major achievement to reduce cost by 6%. We're more agile, faster, leaner, meaner. So only advantages. But we're certainly going to look for savings, and I think we know where. But one of the major declines of cost will be new development. So our cost will fall because new stores will actually generate a contribution to EBITDA. So we're thinking about coming down by 1%. We want to have synergy across all support functions.

This is something where the potential hasn't been fully tapped into. We're looking at that cost-to-revenue ratio of 40%. We want to drop below that.

[Unknown Analyst]

Why do you say 40% is the best one?

[Unknown Executive]

So we had PLN 900 million in inventories. You said it was good. That wasn't really good. That was bad. Having PLN 900 million in -- it was PLN 1.1 billion -- PLN 900 million, so PLN 900 million was bad.

We had empty shelves, stores, but we had a totally different situation in July of last year where we had to show good cash flow. But that wasn't something that was good. So even 40% would not be a good cost-to-income ratio. I don't want to look at saying this ratio is good. I want to just think about how much more we can cut. This CapEx of PLN 250 million, this also includes the central distribution office in HalfPrice.

[Unknown Analyst]

I understand that the factoring level is transitional. Which level should we anticipate at the end of the year? And to what extent do we think that financial expenses could fall in the latter half of the year, H2 as opposed to H1?

[Unknown Executive]

We don't have a fixed figure in mind. We want to continue pursuing this path. It's hard for us to say how much it will be at the end of the year. We'll be in constant dialogue with the financing institutions, but we want to increase that number in terms of savings from interest expenses.

Well, financing is less expensive, and the structure composition is more effective or optimum for us. But on the other hand, it might be bigger in terms of available financing. Basically, if we're going to make this comparable across a year, if next year would be more our goal, so PLN 70 million. So not everything will have been launched by then. It might be PLN 20 million.

[Unknown Analyst]

Have you been thinking about moving production to Bangladesh or from Bangladesh to somewhere else, or is that not a topic?

[Unknown Executive]

We don't have any production, or I'm sorry, purchasing. We don't have to buy from Bangladesh. We're very flexible. I can tell you what we have in mind in terms of Bangladesh. We don't have duties, and that was why this is a savings only for apparels, because you have to have transport of products from China.

We're comparing apparel to footwear. It's a technological process to a greater extent in footwear, so basically we wouldn't reallocate or relocate footwear production from China to Bangladesh. Once we stopped worrying about producers -- we stopped worrying about producers when we stopped having production ourselves.

But in apparel, when we start doing licensing of apparel, then this will be a problem that we'll have to grapple with.

[Janusz Pieta, analyst]

Janusz Pieta from mBanku. I have a question about expansion for CCC stores. Up until now, the trends were to optimize space. Where is the source of the idea to expand in the CCC segment and not focus solely on HalfPrice, and where do you plan to open new CCC stores?

[Unknown Executive]

I can't see you. Where are you? Oh, sorry. I see you were trying to hide behind somebody there. CCC is a more effective model than HalfPrice up until now. If we compare by meter, square meter, whatever, sales density. It's a faster rocket. Well, 400 stores. If we add 600 square meters, this is not a major increase. But HalfPrice has a lot more opportunity because the space is much larger.

Why shouldn't we open CCC? Well, we're closing less expensive stores -- some more expensive stores or additional stores. Some stores weren't as effective or basically expensive, contracts are coming to an end. That doesn't mean that the format hasn't proven itself. We can see that we have a 40% profitability here in Poland, 34% abroad.

[Unknown Analyst]

I'm not really sure if I understood you really. Your idea is not to open anything? The 400 stores, is that net or gross? Or are you saying that you're going to open new stores and close?

[Unknown Executive]

We're saying that there's 800 now and we'll reach 1,200. And geographically, I'm just 100 in Poland, 100 in Romania, 40 in Bulgaria, and so on and so forth. 40 in Ukraine, I'm just sort of more or less speaking. And then we have to go to the market, do some look site selection, we'll look at each site separately. We've been doing this for 30 years. We're not just taking whatever's available. We have to have good stores, good conditions for running the stores.

Ladies and gentlemen, so our stores are earning better elsewhere than in Warsaw. We have low costs, no competition. And so everything's moving forward. But we can't -- you have to have, you know, 350 square meter stores and not bigger stores in certain locations.

[Unknown Analyst]

One other question, in terms of the inventory levels, as you explained, this results partially from -- so you're thinking about Pajeczno, which is community outside of Czestochowa, that's 75,000 residents.

So you said that the higher inventory level comes from wanting to have better stock stores. But in subsequent quarters -- what's going to happen with slower rotation? I'm not sure what you mean.

[Unknown Executive]

I'm just saying that we're not burning things in July. We're basically preparing for market entry. Let me repeat. Inventory, that's an investment for the upcoming 4 months. So we'll meet at the end of January, and you'll be quite surprised to see what will have happened with the inventory.

Any other questions from the room?

[Unknown Analyst]

I have one question about the market and strategy. Do you believe in e-commerce still?

[Unknown Executive]

Of course, e-commerce is the future. But we're at a point in time where everybody wants to be great. Everybody's giving price discounts. We have a way. We have good conditions negotiated as a group. And we're opening these brick-and-mortar stores with goods. Maybe we'll learn as a startup in Modivo.

Well we've had some PLN 100 million in revenue, and we're not earning money. Whereas, we feel quite good with this bigger amount of footwear. And so we could sell the shoes in e-commerce, perhaps we need to curtail things. Maybe we shouldn't talk about how many new customers we have at a loss because we have retail channels. We just have to skillfully use these channels. Of course, e-commerce is the future.

We believe in the omnichannel model. So it depends. Sometimes e-commerce share will grow. Sometimes it will shrink. It was above 50% now. It's clearly below at 37%. But our response is the omnichannel approach. I believe that Modivo in the next half of the year will achieve its targets. We have new technologies, new apps. Everything's prepared well. And after the upcoming half year, we'll be able to give an assessment of what's happening with Modivo.

And if we look at our EBITDA versus the market, we're in line with the market. If we calculate, basically, the FX differences in euro, there's no difference. They're happy. We're not just happy. We're saying it's bad. That's the difference. Because we're saying it's going to be much better.

And our omnichannel model cannot be denied. It's good in retail. It could be strong in e-commerce. Basically, we have an omnichannel model. So we have customers who are the market leader. So I think we'll have 40% of the Central and Eastern European market in the near future. And so in Poland, it's around 30%. But we're not stopping. We're going to continue to attract market.

So if you have questions. If there are no questions from the room, we have quite a few questions from the internet.

There's one question that appears here. Is the expansion of stores in CCC and HalfPrice, will this at least temporarily reverse the trajectory of the cost/income ratio in subsequent years?

It should improve the trajectory. Because the goal will be to accelerate the operating leverage effect. So the cost to income ratio should improve even more.

The next question. Where would you like to open new HalfPrice stores primarily? Where is the consumer for these products? And will there be a problem with gaining access to commercial space in these locations?

I'm not sure how to respond to that question. Up until now, we haven't had any problems with finding commercial space. I don't think we'll have problems in the future. The HalfPrice model is so desirable, that there are basically competitions. Oftentimes, they're willing to build a new building for us. So basically, a 2 level building with escalators, standalone building. But up until now, we've been rather reticent -- not reticent, but we've been doing it slowly. Not everybody believed in that model, not everybody besides ourselves.

There's a large number of questions. Please go ahead. We want to have reasonable questions. I'm not -- like how many residents live in a given community. There's a lot of questions about the IPO of Modivo. Is this still a topic?

The second half of the year will us -- show us the truth. We have to build the model and the value of Modivo. We're not as dependent on the IPO as we once were. This is not a priority. We're thinking about it. But we want to have some time, another 2 quarters, and then I can respond what the scenario might be. Today, we don't have satisfactory results for us, nor is there a market for IPO at present. That's the response at present.

When will the company buyback the bonds ahead of schedule, which was discussed in the press release in July?

By the end of the year.

[Dariusz Milek, executive]

Lukasz, why are you reading so long? I'm looking for questions that don't recur.

[Lukasz Stelmach, executive]

Do you intend to go back to paying dividends in the near future?

[Dariusz Milek, executive]

That's the goal. We're doing all of this in order to be able to have good results, positive cash flow, in order to return to being a dividend company. So the refinancing, profitability of our brands, factoring 100% for products, large fit outs for our newest stores, then we can think about having 50% for dividends, 50% for further development. That would be a normal approach in a few quarters.

So next year, things are going very well. The model that we thought up, we need another 6 months in order to respond to questions about what's going to happen next.

[Lukasz Stelmach, executive]

If we look at the level of sales in Q2 and CCC, how did it come out versus your expectations? Did you not have higher expectations? And to what extent was the average price responsible for like-for-like, and to what extent was volume?

[Dariusz Milek, executive]

The 3 elements, like for like, margins and costs. Margin was great. Like-for-like was decent. Everything depends on like for like, we have margins. If you give higher discounts, that's enough to give one press release that we have a 40% discount, then we have 20% higher like-for-like, but that's not the idea. Is to sort of -- we want to have customers buy things to earlier because having a discount there.

But generally speaking, the first price is lower. But that also means that we have a lower level of discounts. So the positive like-for-like, is done through volume primarily. And our ambitions are always higher. But 12% like-for-like, is a very decent result. Benchmarks against the market.

[Lukasz Stelmach, executive]

You mentioned of opening any footwear store with products. Could you say a few more words about that?

[Dariusz Milek, executive]

We're going building a store with physical products. So we were starting with matching with Marcin Czyczerski. There was a physical store. And then we thought we were going to be just purely technological. And then a lot of products are being ordered, and they're not being picked up in the stores. And so we have this strange slogan, so people aren't coming in to pick up the stores and they're supposed to measure them and not buy them until they measure them or try them on.

So well its innovative a lot of things people don't have around the world. But Americans get very impressed by that, but there's not a large amount of money from it. We want that retail footwear business to be as profitable as CCC and eFootwear. And basically, we have per pair a higher profit, EUR 100, so with a 40% margin you have basically more cash as opposed to a pair of shoes that sold for 40 years with a 40% margin.

So you have Boss, Guess, these separate brands. So the higher medium to higher shelf. So we have to have a physical contact with products in the room, and then we have to have transactions in store. So today, everything the products are being shipped across the country left, right. So we have 50 stores, and we have to think up something to start earning money. So we'll think up something, come back and brag about the results we've delivered.

[Lukasz Stelmach, executive]

One of the final questions. What is the biggest challenge you see in terms of delivering on the development plans?

[Dariusz Milek, executive]

I don't see any challenges. It's that simple. We've been opening and closing stores for 30 years. So now we're going to focus on opening stores. So having in mind what happened over the last 4, 5 quarters. We think that its -- we're going to be moving down, we know the market very well. We know all of the developers. So it's their concepts for their shopping galleries, without us no shopping gallery can be opened. And so we enter retail products, we're the anchor renter. So I don't see any problems. I don't see any threats to this approach.

Of course, sometimes you have to wait for a spot because somebody's contracts coming to an end. But basically, what I said is the minimum of what we're going to open on very profitable EBITDA figures at store level with fit-outs paid for by the lessors, the landlords. I don't see any majors.

I mean the question is what -- maybe some sort of black swan. You have to respond to that question, what might not -- what might happen, something besides a Ukraine's war and COVID some of the things there are things we're not going to get upset by things that we don't have any impact on over. But we're going to be able to deliver on what we're saying we're going to do.

So at the end, we have -- in chat, we have not questions, but lots of statements of respect and thanks for what you've done, Mr. CEO, Mr. President and the whole team. So there's a lot of endorsements from the Internet tens upon. Thanks.

Well, we're just getting warmed up. You can't clap after you've just heard the prologue. So you were calculating how many stages we have. I think we're at -- we've only presented the prologue. So the stages are in front of us. So I'm not sure if you've really grasped everything I've said. This business model we have developed, crafted is -- does have a major competitive advantage. I'm not saying it's good or bad, it's got an advantage.

There are always some difficulties, maybe they'll apply to us to a lesser extent because we're on the safer side of things. We've got rents paid as a percentage of sales. We've got fit out. We've got factoring. We have suppliers who want to work with our group. We have shopping centers that would like for us to open stores with them. And basically, we don't have companies in Europe that are actually growing right now. We're the largest company in Europe, Central Europe, that's actually developing, expanding its position.

So many organizations are stepping back. They're talking about e-commerce. They don't need to have that footprint where we believe strongly in the retail business. And you can see that in our results. And we have to do that wisely, sagaciously, and you have to have good margins on your products. So product is the most important. And this is -- we use the product to generate revenue. We have to have the products in place.

I'm not sure what else I could add to all of this. I think that would be it. Thank you very much.

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