CCC SA

WSE:CCC

Earnings Call Transcript 2018-Q3

[Marcin Czyczerski, executive]

It is now 12:01, ladies and gentlemen, so we'd like to go ahead and get started punctually. So if our technical team is ready, then I would propose that we go ahead and get started.

I'd like to welcome you on behalf of the entire management team. I'm here alone today. I'd like to share with some information on the Q3 2018 results. And I'll had the opportunity to provide you with some information about the prospects the company has in the upcoming quarters. Just one moment, ladies and gentlemen.

So sorry, I have a small technical difficulty. Could I ask you for some technical assistance at this time?

[Technical Difficulty]

[Marcin Czyczerski, executive]

So it's not important how you get started, it's important how you finish up. So I'll go ahead and go on to today's agenda at today's meeting. So we'll start with the earnings report for Q3. We're going to sum up what was good, maybe some other things that weren't as good as we had thought, and then we'll look at the prospects for the end of this year as well as into subsequent months and quarters and years. And then later, we'll have a Q&A session.

I understand that you'll have a large number of questions, and I can even surmise on what subjects. If we talk about some of the key events that shaped this most recent quarter in terms of what we were working on, so the acquisition of the company DeeZee in July. It's a relatively small company in terms of its top line. But it's important to ask because it's another way in which we're going to make inroads into e-commerce and we're going to be able to penetrate younger customer groups, more focused on fashion. We have some ideas in terms of how we want to develop the fashion category in our stores to lend more energy and vision to much more rapid growth. And so I'll talk about then this in the upcoming quarters.

The next thing is that we're more and more present online. So in August, we opened up the service, which is called reserve and collect. So this is our next step in terms of setting up in Q2 next year having a full online channel. And we've also opened up a new market for eobuwie, which is France. And so this is a matter of executing our target this year to open up new markets. And so we started to talk about new brands in August as well. This is a statement of how the company is operating, how it's developing its segments in terms of products. One of the sales hits in August in terms of the back-to-school campaign was Reebok. This is a new sports brand, which is now present in our stores. In subsequent quarters, we'll have out there equally important brands, even more important brands than Reebok, and so we believe that in the near future, we're going to become the sales leader. So we've announced a strategic cooperation in terms of the utilization of the Gino Rossi brand in our stores. So we'll start probably with the Autumn-Winter selection in 2019. So then we've had the open day for investors, institutional as well as individual retail investors.

It was very nice to welcome you there. So for those of you who didn't have the opportunity to visit us, there are a few highlights from that meeting. We made a presentation of our landmark project, which is esize.me, which enables us to obtain customer data in a unique fashion, but it also enables us to personalize the eobuwie website. And so oftentimes, people are uncertain whether or not they have the right foot size. Now we're very pleased with the scans we've been able to get. And so if you look at the conversion in terms of the 3D foot scanner, so this is one of our competitive advantages, but we can say this project is going very well. Another thing is we have 4 independent -- 4 different methods of expansion, how we're developing now and how we're going to develop in upcoming years. So we're talking about organic growth, M&A activity, e-commerce as well as franchise. So we've also said that we have franchise and we have franchise requests from across the world. And so this is a long-term cooperation undertaking, but we don't see any real barriers to growing this approach.

So we have new brands, new segments. So we're adding sports premium category as well as fashion in our stores. We also have comfort in order to have a full array of products for a broader range of customers. This is something that's already transpiring, but you'll see the outcomes in 2019 to a much greater extent. So we're confident that if the weather won't undermine our plans, this will contribute to a high increase in sales density.

So there are a few other accessories that we're adding. We have a strong product team. So this is one of the things that we're attaching great importance to in terms of the ongoing growth of the company. So what was of cardinal importance in Q3, and unfortunately, it wasn't so positive for us. This is a fundamental risk. And so unfortunately, it materialized quite often. So this was the weather.

Let me explain to you what you see on this graph on orange. You see the temperature of this year in September. The gray color is last year's temperature and the black is the average for the last 30 years. So we had a record-breaking heat or hot September. So what you can see at the bottom is the difference in sales of winter and autumn collections compared to spring and summer collections. What are the differences, especially the ones that are sold in September? So we can say the average sales prices in the autumn and winter 2x bigger because there's very strong shoes. So in September, we're at the end of selling out the shoes from the spring and summer. So we're finishing up the sales. We're just recovering cash. We're not really making much in terms of margins. So as you can see, on average, the margin we had in these 2 categories, you can see the major difference between the gross margin -- differences between summer and spring collections and autumn and winter. So we were selling at margins higher than last year's. But the overall mix was distorted by the fact that we were selling 30% to 90% fewer autumn and winter shoes compared to last year, so compared to how much we sold last year in September because of the weather. So this, you can see the picture of September sales as well as the margin you could see in our results.

So I'm aware, sometimes we hear these messages that you really wouldn't want to hear too much about the weather, but we emphasize and I think most of you in your analyses emphasize that this is the biggest risk the company carries and the only area where we have no impact whatsoever, or we have a very limited impact.

What does the CCC Group look like in terms of its financial figures, the overall figures? So we're up by nearly 70% in terms of our online revenues. The overall group's revenues are up 26.4%, naturally compared to or versus Q3 2017.

So we have negative like-for-like in the brick-and-mortar, mostly because of stores, mostly because of what happened in September. So we now have 683,000 square meters of space floor, so up 36%. So we've got very dynamic growth of an organic nature, and we're very pleased with that. So we can see that our store costs are falling. This is quite positive. The trend that we talked about to you, so it took place again in this quarter, and we will continue to work on the subject. And we can talk about more quarters where this trend should continue to roll out.

And you probably remember from the early 2017, we said the biggest pain that we have to deal with. So it's not entirely optimum what's happening with our working capital. So we're doing our best to manage it well. And so our trade payabilities (sic) [ payables ] have grown by PLN 720 million.

So as I said, the company is present -- the group is present in 23 countries. We've added France. So we've got some -- more than 1,000 stores. So we've increased the number of stores by 284 to 1,181. So we have our own stores, we have franchise stores in Baltic, in Moldova and then we have the Western countries where we're operating through e-commerce.

So I've already talked a little bit about the rapid growth in sales area. And so the 4 major contributing factors to changes, so we have closings. This will be continue we believe or we assess each case separately, each store separately. We look at its profitability, also looking at the environment and what's happening with the stores. And so we're going to open new stores. We're going to close stores in order to build the best possible mix.

The other thing is we mentioned last time which was to convert some of this space into warehouse space in Germany, and so we have an additional 71,000. And then we have another 88,000 coming from KVAG. And so we have the biggest impact in Western Europe, then in Central Europe, in Poland. So basically, this is split rather evenly.

If we look at the organic growth, we can say that in Poland, Russia and Hungary, we had the greatest amount of increased space. So this is in line with what we said last year. If we look at our sales in like-for-like stores, this is certainly not something that fulfilled our expectations, and it was quite disenchanting overall. So we have a high base. We knew that we had nontrading Sundays. This is something that differentiates this quarter from previous quarter. So again, weather is the biggest contributing factor primarily in September, so we're down 9%. Of course it's disenchanting, disappointing. We're aware of it. So Poland did relatively well. Also, having in mind these nontrading Sundays, the overall market in Poland in terms of like-for-like sales. Everybody else is down by 10% compared to CCC. So this minus 4% isn't too bad. If you listen to what the leasers are saying, we're not maybe joyous, but our competition is in traumatic straits. So this is the impact that weather has on our industry. And it is being said that this is the most difficult year that people remember from the time when retail started to grow. So we can see that online has grown 70% year-on-year, and this is in line with our expectations, and it's even a bit better than what we expected.

So if we look at eobuwie, we're quite pleased to see that we have more and more e-commerce sales, 20% of total sales. So this is something we think we're going to be able to achieve on the full year 2018, and we think this trend will continue to grow out.

And so if you look at the sales of the group, so additional meters and the acquisition of Vögele and then the e-commerce sales through eobuwie, where we've added another PLN 110 million to the top line of the group in Q3.

We're also pleased that eobuwie, so our retail online shoe business, is growing quite evenly. The growth is evenly spread. So we've grown quarter -- or year-on-year by basically 2/3. So we can say that Poland is maybe not as important in the overall structure, the overall split, having in mind the additional countries that are being added, we're quite pleased with the performance of the new countries. And their percentage has grown from 3% to 8% within the course of a year of total sales. We've added France this quarter. So we're selling shoes there. We're making our first shipments. And of course, we'll happily share with you information about sales in the future.

If you look at the future -- or sorry, if you look at the financial results. To ensure that everything is properly understood in our P&L, what we're going to show you in parallel, we're going to show you the results using IFRS 16. And without it next year, everybody will move in that direction. So then we'll have the base next year where everything will be done with IFRS 16. But this year, Q3 and Q4, we're showing you in both scenarios, and we have all of the further analysis where we utilize without IFRS 16, but we're showing the P&L with and without it.

So sales weren't as high as what we wanted, but having in mind the weather as well as the high base effect, we can say that we were unable to achieve a high result. And so the gross sales result, because of the weather effects and the fact that we didn't have the winter and autumn collection really in our sales in September, this means that also, if you look at our gross margin as well as our gross profit on sales, they're lower than last year.

So then again, if you look at cost of sales and sales internal management, to administration, so there are some positive aspects that I'll talk about in a few moments because as the organization gets bigger the total amount of costs grows. And there's also some impacts from FX volatility. In some places, we had a positive impact. In some places, we had a negative impact. And that's why we had a positive impact in terms of FX gains. And if you did -- as we did the valuation of our results at the end of the quarter, we had a bit of commotion in our P&L overall.

If you look at the operating results, EBIT, so it's much lower year-on-year. But giving consideration to the fact that in Q3, we have only 1 month in which operationally we can earn money because we're above our operating leverage at September. So that PLN 3.4 million is a very poor result, but at the same time, it doesn't look so dramatic because this is the only month that we [ own ] in Q3 was in September, and it was a very difficult month for us.

And so if we look at the things by segments, again because of the weather factors in each one of the segments outside of e-commerce and wholesale, we can say the results are -- have deteriorated. And if we look at the DACH countries in particular, primarily because of Germany, in Germany, we're making attempts to improve our margins, our revenues and trying to reduce costs. We're happy with the cost reduction. We're also happy with the merchants. We're dissatisfied with performance in terms of sales. And as a result and we've already communicated this to you, we're considering a number of different options on how to solve this problem in terms of Western Europe. And when the time comes, we'll communicate to you on the subject more extensively.

If we look at gross margin and comparisons year-on-year, I think I've already said enough, but I would draw your attention to the fact that we have very positive information in the sense that we've been able to improve our gross margin year-in, year-out in terms of eobuwie. So the e-commerce arm, so it's grown by 0.3% as a result of the growing economies of scale, the bargaining power. And so we believe that this situation will continue to improve. And so if you compare this with the major competitors of eobuwie and look at their results in Q3, you can see that their gross margins were subsiding or falling. You can see that our retail e-commerce arm is doing very well.

Now if you look at the cost analysis using the methodology we proposed recently. So costs were growing because of organic growth. So we have an increase of PLN 71 million as a result of opening up new stores and the growing e-commerce and some of the costs that grow pro rata to revenue in terms of e-commerce, the next big block of this bridge. And this is the result of taking over our franchise partner in Romania as well as Voegele in Germany. And so these costs generate also results as well as revenues. So it's not the case that we've just incurred additional costs.

Then we had the motivation program. We didn't have a base for that. Then we had marketing. So the growth rate is slightly lower rate than in previous quarters and this is because of eobuwie gaining strength in the marketplace.

Then we have the other costs. As we've said in previous quarters, the cost performance because of how costs operate, payroll is important as well, and they may also have these deposit warehouses. Well, the percentage of the overall split is not bigger. It will be bigger next year, but we're centralizing procurement procedures where we can have PLN 10-plus million savings. So the difference is some PLN 51 million, and this is not where things come to an end. So there are several other cost items. I'll talk about them in a minute, where we're going to continue our efforts to optimize them. And we assume that if nothing else happens, the cost per square meter should be under control, and we should be able to continue to [ optimize ] them.

If we look at our SG&A cost per square meter, in our brick-and-mortar network, they've fallen from PLN 328 million to PLN 308 million. So we went down from PLN 221 million to PLN 186 million from quarter-to-quarter -- I mean Q3 2017 to Q3 2018. So this is because of rental costs, payroll costs and other costs. So they've fallen by 24%. And this is not just because of a like-for-like premium but other premiums or bonuses. We have lower costs -- payroll costs per square meter. But in terms of the lower sales bonus, the difference is around 35%, everything else is a matter of optimizing processes and having the right number of staffs. So even though we had costs growing and payroll moved up, you'll see over the next couple of quarters that we will also see on a quarter-on-quarter and a year-on-year basis, that we'll be witnessing further optimization, which you don't fully see and you will see fully next year.

This is rental costs. At the current rates we're getting for a square meter are much lower than the ones we've had up until now, but they usually take force from beginning of a new calendar year. And so you'll see this in subsequent quarters. And so as the costs will fall per square meter in rental rates. And certainly, as we have these deposit warehouses, this is our new concept, and you'll see this in 2019 to a greater extent.

We have a positive mindset when it comes to the other cost groups. The optimum point in terms of building new functions, technological functions, IT, e-commerce, marketing, we've already achieved the optimum level now. The revenues should grow faster than the costs for those functions, than the SG&A costs. So the improvement in profitability should become more visible in subsequent quarters.

Of course, there's one additional thing to have in mind that the weather follows its own whims and fancies, and so we'll have to follow the weather in upcoming quarters.

If we look at the balance sheet of the company, we've already said after Q1 that the company is working strongly on its working capital. We asked for a little bit of time so we could be able to show you this. As you can observe, so our inventories are starting to fall quarter-on-quarter. Today, if we look at our retail, in our warehouse and our stores, we have the same inventories we did last year even though we've added another 130,000 square meters of selling area. So our goal is to bring about a situation in which we'd have more selling areas, square meters, but we'd have the same level of stock. And that means we've got even more potential, although it may be more difficult to extract that potential, but we want to continue working on the inventory to bring down this per square meter. To a large extent, this will depend on weather.

We've also been able to improve our financial liquidity, even though Q3 wasn't particularly beneficial to us in terms of sales. So net debt is down by nearly PLN 0.5 billion. And our ratio of net debt-to-EBITDA is substantially lower. I want to emphasize our overarching goal, which is to have the company's financial security procured. And we have a risk focus. So we were telling you how we want to finance the company's operations. We were looking at macroeconomic risk, and so weather factors took place. But even though the weather materialized, CCC is very strong in terms of its financing. So the adverse phenomenon taking place on the shoe market also give us an opportunity for the future. We see this in such a way that in next year, there'll be fewer shoe companies trying to divvy up the pie because the overall standing of the industry is not so interesting.

So if we look at our work on payables as well as stocks or inventories, also through our program to finance suppliers because we've got some PLN 480 million. And then we're also just extending the payment deadlines for our suppliers. And we have a more mature approach to managing working capital. So we've been able to release nearly PLN 420 million, which I believe is an exceptionally good result, having in mind the tough weather in September. So we have -- even though the weather wasn't positive, we have very strong position because our operating cash flow was positive, and we'll continue to work on that to ensure that we're going to be at a similar level and give the company an opportunity to extract this internal financing.

So maybe to recap at this time. What has contributed to the company's results in this quarter? So a long hot summer. So you can't sell the summer period for 6 months, so some are continued into September, so the relatively low sales of the autumn and the winter collection. So when the weather was in favor, we were able to sell quite well. Then we have France coming online and DeeZee, and we've also started the Reserve&Collect. We want to emphasize that. We want to utilize the opportunities to grow our presence in retail. We want to continue doing that in terms of e-commerce. And we want to give customers the best what we have to offer in those 2 worlds.

Then we're developing our product offering. We have a new product category: sport, fashion, premium. We also have accessories. And then we have bags. And we're working on financial discipline. We're working on a profitability and we want to release our working capital. All of these elements that you see on this slide can be summed up in such a way the company has 7 major blocks it's working on. So profitability, so we want to improve margins, but that's not something that always depends on us. We have a lot of potential to improve our margins. But to the extent we're capable of doing that or not depends on the external conditions, so the weather, the ambient conditions, but we're doing our best to be more disciplined financially in terms of how the stores are operating and other costs. So we want to continue working on that very intensively.

The next thing is our working capital. This is clearly one of the most important issues for the company, to reduce the stocks by extending payment deadlines and to make sure that they are able to balance with one another. And so if we take over Vögele -- we've taken over Vögele. And then we have DeeZee. We have also the Romanian franchise taken over. So our ambition is to ensure that this company is profitable. So we've got 5 major blocks of operations we're pursuing there for DeeZee. And so we're counting on being able to do this over the course of this year.

The main thing is we want to offer our product to the Swiss market. This is something that's already happening, and this is showing the impact we have. We have -- 15% of the products in Switzerland are from us. And we're able to increase the margin 15% -- [ 15.2 ] percentage points above what Vögele was generating. And so we're concentrating on our new categories. The CEO is working on it and we're looking for new ideas on this product without changing the fact that Lasocki is our flagship product. We know what's our strongest position. And so we have stores where we're able to sell more.

The next thing is our digital transformation. And you'll have the opportunity to observe this, that in the near future, we're going to have more infrastructure. And so expansion in the areas we've talked about, and then following one of the options we mentioned for Germany, and so we're testing and looking at them, scrutinizing that. So in some of -- in terms of things that have been stated and what's on the horizon in front of us, so I'm not really able to say much more about them until they crystallize. But we're preparing to launch our eobuwie store on the Warsaw Stock Exchange. We want to take it public, but we want to retain our position as the majority stakeholder. But we want these 2 business models which sometimes mix things up. We want to have them totally separate from one another. We want to show clearly how much eobuwie is worth, and we want to gain -- get separate financing that's focused on the rapid growth because it has the ability to grow. And we'll execute that growth having in mind those new countries, the technological opportunities that exist and then looking at what's going to be done in the e-commerce field having in mind the Spring-Summer Collections next year.

So as I've mentioned, we have the new IT infrastructure. 2/3 of what we're talking about will be launched on 7 January. These are big programs, but this will be done. We're on target. We're on track. So the company in terms of its logistics concept, the amount of products, we're going to have multipacks, which will make it possible to reduce the level of stock in our stores and central warehouse.

So in May of next year, we'll have new infrastructure, the e-commerce. We're going to have some sort of bonus because of the technological delay backlog. But we're going to utilize the best available technology, best solutions, which goes beyond what's available amongst other players. So the new product categories for improving our profitability of -- at KVAG. And we'll come back to this, also the work on our working capital, and we're going to be able to see that in the results and the activities we're taking. So these things taken together are the main drivers. And this is going to change this company in comparison to the past Q3 results or the past for us. To a large extent, this was due to the weather. We can't affect the weather, but the Management Board continues to perceive the potential -- the upside of the company. In the same way, it hasn't changed anything what happened with the weather. And we have these prospects in mind, and we know what we're doing and why we're taking certain actions to extract the value.

So I think I've given you a big information load. And so I think you're going to have a large number of questions. I can surmise what type of questions you'll have. Maybe I would just point out that on top of the fact that you can pose these questions, you can ask these questions to our IR people. You'll find them in conferences. So we'd invite you to meet with us. And I want to say, as we understand what's happening and the large number of positive comments that we want to start report sales on a quarter basis as opposed to monthly basis. But we want to be a transparent company, and we understand and see what's happening with the share price.

Sales information drive prices, so we won't switch to the quarterly cycle. We're going to keep our monthly cycle to make sure there are symmetry in terms of you knowing what we know when we know it, so you'll understand the performance. But having in mind all of the tools that we're launching, we're going to change the way in which we report our preliminaries. We want to do this not 2 weeks before the reports, maybe on the first or second working day, along with the sales results for the previous quarter. And you'll have the ability to see our sales information, our operating data, our margins, but on a quarterly basis. So sales results we'll continue to publish monthly. But our quarterly data, we're going to try to stop doing the prelims that we've been doing up until now. Maybe we'll give smaller packages of data. But at the very beginning of the subsequent quarter, that's going to be reported. We'll give you some information, and this should give you better and more quick insight into what the company's performance is.

That's it in terms of what I have to say. And so I'd like to go ahead and give you the opportunity, at this time, to pose your questions.

[Unknown Analyst]

I'm from Santander. I wanted to ask you when will you start to sell shoes in the normal brick-and-mortar stores at CCC because you had poor sales what's happened in the quarter for sales and half the month was pretty good, one could say 1/2 was good. Last year, all of October was a bad summer. It was about 14%. What's happening in October and November because of the weather? So December -- we'll see what's going to happen in December. Last year, the whole quarter was rather poor because we had promotional margins in December. And so this doesn't look too interesting. So I could ask you to make a couple of comments about what's coming up [ that ] rather important?

[Marcin Czyczerski, executive]

In terms of -- you had many questions. When we start to sell, well, our collections in our stores? My thinking is the time isn't before us. I don't concur with the idea that October was -- weather was half and half in many analytical reports, research reports. And I can refer your attention to them. There were some weather analyses that October was much warmer this year than last year. And year-on-year, we had better weather from October 1 to October 4 and the last 3 days of October. Otherwise, it was poor. Of course, I can pour ash on my head because of the weather in October, and for last year, that doesn't change anything. The company is aware of what it has an impact on and what it doesn't have an impact on. It works hard on what it can have an impact on. And so we can see the performance of this category. If we look at Reebok and back-to-school, so by adding new categories of clients into our stores, we're intensifying intelligent or smart marketing. We're very strongly present in the internet. We think this is going to drive sales. But if we think about doing tea leaf reading, it's not entirely correct to -- or advisable to follow just the weather or trying to predict the weather. And I tried to say that, to a large extent, a lot of these things depend on weather. And the weather hasn't been conducive to the industry overall this year. And if we look at Q3, like-for-like was at minus 4%. And if we look at the biggest competitors had like-for-like sales contracting by 14%, we're not proud of our results, but our results are better than others.

[Unknown Analyst]

My question about December, last year, the margin was very low. I would assume that in December we're going to have to have very attractive promotions for customers. Can you imagine that the margin would be even lower in terms of percentage? Can you imagine that there is room to fall? I mean, we were closer to the floor last year, I think, if we look about the gross margin stated as a percentage.

[Marcin Czyczerski, executive]

Well, my concern is that this quarter is reminiscent of Q4 2017, so October wasn't favorable. Customers were waiting, thinking about seasonal sales. I'm also aware that we have Black Friday and so on and so forth. And then we have the end of autumn. So things could turn out to be quite similar. Whether it's going to be lower than last year, it's hard to say. It depends, to a large extent, on external or ambient weather conditions. So we'll communicate with you in January on what's happening in Q4. So things might be similar, but we would prefer for October to be more reminiscent of October 2016. We had great weather from the beginning of October, and sales were stellar. That wasn't the case this year. But you saw that more at the level of sales than we could see it at the level of margins. No more questions?

[Unknown Analyst]

Anything about the dividend for 2018?

[Marcin Czyczerski, executive]

For '19 -- for 2018? Did you not get the previous dividend? Well, the sequence of events, first, we have to know what the financial result is of this year. Then as a Management Board, we have to give some consideration to the subject to make a recommendation and the shareholders have to make their decision. Our dividend policy hasn't changed. We're not changing it, which is 33% to 66% paid out as a dividend. But we have a bank covenant that says that it shouldn't be higher than 50%. That's the framework we have to work in. I can't say anything else. But honestly, I'd like to know what our result is going to be at the end of this year, at least in terms of weather, it's not [ dependent much ].

[Unknown Analyst]

After Q3 last year, you had a profit of more than PLN 149 million and now it's PLN 113 million, so will there be a revision of your dividend policy? Are you thinking about the subject?

[Marcin Czyczerski, executive]

No. I can see everything.

[Unknown Analyst]

I have 2 questions. My first question is...

[Marcin Czyczerski, executive]

I can hear you.

[Unknown Analyst]

What's happening with weather? What's happening with sales? We've seen that. My question is how this will affect the future. I'm not thinking just about you, but in terms of what you're observing across the market. You said that the rest of the market is more soft than you -- does that mean that the competition could take some very anxious-like decisions or efforts to have deeper-than-usual discounts? And will this affect your approach to stocking stores in the future? How should this be treated?

[Marcin Czyczerski, executive]

This situation certainly affects our competition. So we have a totally different situation cash flow than our competition, so they're doing things. But I think their situation is fundamentally more difficult. If we look at cash flow or the results, what I know that many shopping centers -- while our competitors are stopping to work there and withdrawing from shopping centers, where they're very profitable for us. So we think where we thought that they should have been generating good results for our competition, so that means the competition is not able to make money there.

[Unknown Analyst]

What's going to happen in the long term?

[Marcin Czyczerski, executive]

Of course, we're not happy with the misfortune of others. That wouldn't be very nice. But as we've said today, so others' sales are falling. Our market share is growing. So far, our market share is bigger. We'll have more categories, which won't be available at others because there'll be fewer others. And having in mind our marketing and available with normal weather, well, that would suggest if all of these things interact with one another, perhaps we then will have a pretty good result, pretty decent result. In terms of our purchasing policy and our stocking policy, our approach is that we try to balance procurement with our suppliers and that's why we're reducing stocks. We're reducing them more slowly than we could. Please have in mind that we have a large number of suppliers that work only for us. This is one of our competitive advantages, the fact that we have this supply chain. So this would be incorrect for the company if we were to do something too suddenly.

[Unknown Analyst]

So the overall shoe market -- footwear market is changing, or will change strongly after this year. If you look at the earnings calls of competitors in Europe, they have various categories, apparel and shoes, and shoes are a dramatic category this year. We have no doubt we've been able to walk through this with -- while keeping our feet dry, but others have had a pretty dramatic go of things. But there's no idea for you to sell strongly in the autumn, but you're waiting until the end of this season to sell off things and then the next season.

[Marcin Czyczerski, executive]

That's correct. We are fortunate that a large percentage of our product range is similar to last year's collections, and so we're able to sell this at first prices in the new season. And so having in mind the new functionality we have as of February of this year, which is the deposit warehouses. So we don't have to pick up shoes, bringing them back and then redeliver to the stores. So we're able to use the deposit warehouses, the warehouses on stores in order to make those shoes available in the next period.

[Unknown Analyst]

My other question is about last evening's press release that many things can't be told, you said yet, but we can talk about some things. Could you say a few more words about RENO? We're able to find some information on the subject, but I would ask you to confirm. We talked about 530 stores. Is this only the German market? Or is it an operation that extends farther across Western Europe? The other thing, there was a statement made in the press release about participating in the cost of closing some of the CCC stores operating in Germany. What sort of magnitude are we talking about here?

[Marcin Czyczerski, executive]

We released a press release. We didn't do that happily. We've been saying that we've been working on a variety of options, and we continue to say that we have several options in terms of how we want to deal with what we call the German problem. What we communicated yesterday was a possible transaction with RENO. That was one option. I didn't want to dwell on it too much. But we've started with RENO. We delayed the information because of the welfare of this transaction. We still maintain several options. That information started to show up in international press. Had that not happened, we would have continued to work on this to assess the options and communicate everything with a more in-depth and mature approach. I can only say at this point, we said what we could say in that press release. I don't want to dwell too much on RENO itself. I would assume that the information you can glean from the German trade register might be sufficient. There are several hundred stores. What are this group's strengths: wholesale sales, store-in-store, which is quite important element of their sales; e-commerce, which is also important to them. According to our best knowledge, that's a profitable company. But it's a well-known store, 138 years it's been in business. If you need more information, to maintain symmetry of information access, I would suggest that you look at the publicly available sources in the internet or in the German commercial register. But in terms of what we want to do, if this potential option, which is one of many options, is materialized, we've also given in this current report yesterday certain 3 blocks, important blocks. The first thing is the acquisition of a minority stake in RENO, so it's a 30% stake. We talked about 32% in the press release. The next thing is the option of developing this in the future. Another option is to sell our current operations to RENO and to support them in terms of the integration with our current stores with RENO. And other thing that I want to draw your attention to is the ongoing sales in Germany through the RENO group and that the commercial arrangement that's there.

[Unknown Analyst]

What sort of parameters -- economic parameters this might have in the future if is this something for discussion?

[Marcin Czyczerski, executive]

Amongst the multiple parties here, and since this is just one of the options, we're in course of discussion. We're bound by a strong NDA, nondisclosure agreement. Having in mind the gravity of the situation, the importance of the material, the market abuse regulation, you're fully well versed with this subject, that I can't say anything else even though I understand this is the most interesting point. But what I can say is what the CEO of the group said, we'll overcome. We've been working with this for the last year or 2, and we're going to try to deliver a communique or a press release with a little more definitive information by the end of the year. Thank you.

[Unknown Analyst]

I've got several questions about the IPO of the e-commerce shoe arm. What are the reasons you've decide to dilute your position in such an attractive asset? Are you thinking about CCC selling shares, existing shares? Or you just want to dilute the capital by issuing new shares? And I'd like to ask you for an update on the equity stake held by Mr. and Mrs. Czyczerski?

[Marcin Czyczerski, executive]

I have a similar response to the previous one. Everything that we could tell you, we've already told you. We're at a very preliminary stage and we're structuring a possible IPO of eobuwie, so we would slowly separate these business models to have more transparency in their assessment, which would also have an impact on the valuation of the overall group. We believe that the current valuation of CCC doesn't fully reflect the value of eobuwie separately. We also see some potential in eobuwie that's not entirely perceived, so it would generate in the future a large amount of revenue, top line, a lot of profit. But it also needs a lot of capital to continue. We have a large number of ideas with it. And there's also some capital needs to finance that development. We want to give some opportunities for this to grow. It's a phenomenal approach. It's something we're starting from the product and using technology and getting great technology. So we want to give them this opportunity to write this history on their own to a greater extent, and this would be beneficial to CCC because then the greater rate of growth should be even higher. And at the same time, it would be good for us and good for them. If we look at the P&L, minority stakes were negative in this quarter.

[Unknown Analyst]

My first idea was that there was a loss in eobuwie, but I understand that Vögele was consolidated for a portion of the quarter. What portion of that loss is coming from them and to assure us that eobuwie was positive result?

[Marcin Czyczerski, executive]

Eobuwie had a positive result. This is because of Vögele, but because of FX changes, also Russia to some extent, because the ruble against the dollar moved in an unfavorable fashion, so we had big changes in the course rates -- exchange rates. And it's around 100 million because of eobuwie, primarily because of weather. So if I can say something more about Vögele, I can happily say without getting ahead of myself in terms of the facts, we're only midway through the quarter, not even yet. But if we look at that company and looking at the synergies that we had talked about when we acquired it to give them the opportunity to sell our products, we can see year-on-year that this company has materially improved its sales and its gross margin. And so the products -- 15% to 20% of the products sold there are from us. So our product is a good product for most markets. But there's a difference between the German recognition of our products, 15%, 20%. Well, we have after 5 years -- well, Vögele has been there for 100 years with 98% awareness there in Switzerland. So we're going to work on that together to become a very positive impact over the midterm.

[Unknown Analyst]

You mentioned Russia. You don't have 100% in that company?

[Marcin Czyczerski, executive]

No. Any other questions?

[Unknown Analyst]

Maybe I would ask about Vögele. Do I understand you well, that you grew top line in Q3?

[Marcin Czyczerski, executive]

I didn't hear the beginning.

[Unknown Analyst]

Did you have top line growth in Vögele year-on-year?

[Marcin Czyczerski, executive]

If I said that I had in mind, I made a mistake. I was thinking about October and November. In Switzerland with sales down by double digits, if I remember well, it was around 12% down. The overall market was at a comparable level of performance. And so this was not an individual thing for Vögele. To be honest, our impact at CCC on the sales results in Vögele was very minimal. We just started.

[Unknown Analyst]

I wanted to ask one more thing about that press release from yesterday. Do I understand you well that you would sell off the entire network you have in Germany? You would buy a 32% stake and then you would sell the network, if I understand this press release. It wasn't easy to walk through it, but do I grasp it well that according to this press release, you would sell off 100% of what you have?

[Marcin Czyczerski, executive]

If that's how you understand it, that's the correct understanding.

[Unknown Analyst]

Well, you issued the press release. Do you understand it the same way? Very similarly, if that would be the case, does that mean then that you would exit the German market and you wouldn't have any direct store and you would only have a 30% stake to the extent that you don't exercise that option, which would be listed there?

[Marcin Czyczerski, executive]

I wouldn't go so far[ however ] in the [ next thing ] what would happen if something were to happen. We're talking about the various options. If that option is that option, then I can guarantee you that we won't leave you with a dry press release based on your feedback. You appreciate the information load in our presentations. We could have given you more information about RENO and also on the subject that you just mentioned. Right now, it's just one of the options. And if we have the word if twice in a single sentence, it's better not to respond.

[Unknown Analyst]

Maybe I'll ask it this way. From today's vantage point, as you look at things, is the company of the opinion that in a year we'll still have stores in Germany, and we'll be the owners of those stores, or not necessarily?

[Marcin Czyczerski, executive]

I'll try to respond in different words. I'm not going to give up here. The company has alternative options which look at different scenarios which are mutually exclusive. So I can't estimate the probability of the execution of any of these options and I can't respond to your question unequivocally.

[Unknown Analyst]

So you could sell and you could also continue to retain new stores next year?

[Marcin Czyczerski, executive]

That's something you could understand, and I can promise, and that if we crystallize one of the options, then the Management Board will make a formal decision. And if the subject matter pf that decision would be some sort of transaction, even the one that you've mentioned, then we will properly communicate that to you, and we'll give you comfort in terms of how we present that and we'll discuss the specific case.

[Unknown Analyst]

And then my final question. Since I have the microphone, could you mention 3 countries with the highest profitability, at the top 3 and the bottom 3 that aren't profitable in eobuwie?

[Marcin Czyczerski, executive]

The highest profitability, without even following the sequence here, but -- so Central Europe, including Poland but also Greece. From the bottom, we have countries where we've appeared most recently, and this is a result of the fact that the allocation of marketing expenses to the revenues is different. And since some of these markets like Sweden, Spain and France, well, logistics are more of a challenge than in Slovakia. But when we were looking at some of these markets like in Greece and Romania, which is a favorable country in terms of profitability, we see a lot of progress.

[Unknown Analyst]

Now I promise this is my last question. The next countries after Poland, we're talking about 75%, 50% of Poland's profitability?

[Marcin Czyczerski, executive]

Very similar profitability. Very similar to Poland's, but not 75%.

[Unknown Analyst]

I have one more question about the motivation program and the objectives for this year. PLN 650 million for EBITDA, but it doesn't really say if this is with IFRS 16 or without IFRS 16. So this means that the goal will be achieved or not, so you'll have a reserve of -- a provision of PLN 10 million per quarter. What might be the solution in 2018? Or how would this be reversed?

[Marcin Czyczerski, executive]

The reversal of what?

[Unknown Analyst]

Well, the -- sorry, the solution of what you're going to do with the motivation program. What's -- are we talking about EBITDA, including or under IFRS 16 or without it?

[Marcin Czyczerski, executive]

This might be more of an attention getter for you as opposed to us. I can -- profitability, integration of companies, working capital, new product categories, digital transformation, Germany at the very end. We'll see what comes out. We haven't calculated the management programs for 2017 yet. So this isn't really taking up much of our management focus. Well, you see that we're working on a number of things. We see a lot of potential where we're focusing our attention. So when we sum up this program, and -- so we look at each year separately. But we'll do this according to our regulations up to 2020, and then we'll respond to that. But today, this isn't even on the agenda for discussion amongst the Management Board, perhaps managers, some might be talking about it but not the management team.

[Unknown Analyst]

One more question linked to payroll. They've fallen substantially. How much of a decline can we anticipate per square meter in 2019?

[Marcin Czyczerski, executive]

We started to work on payroll expenses in February of this year. We started to see some results in Q2, not at the beginning of the quarter. If you add to this what I said, that 2/3 of the performance that you see comes from the improvement of the process and rightsizing FTEs, well then a similar phenomenon is something we might see in 2019 Q4 and Q1 2020, and probably at a slightly smaller level in Q2 2020. But I hope the effect will be a little bit smaller because that would mean that we're paying our employees. This would mean that we're starting to sell better and we're selling bonuses. We're spending money on bonuses because of like-for-like sales. Any more questions?

[Unknown Analyst]

One more question about prospective impact of the U.S. dollar impact on sales per square meter in 2019. Some things are linked to optimization. We talked about 1 to 3 percentage points during investor days, but on the other hand, we'll have the negative impact exerted by the U.S. dollar. To what extent are you able to assess the adverse impact exerted by the U.S. dollar on the collections in 2018?

[Marcin Czyczerski, executive]

There's no impact. We had forwards for that collection. We already have a large portion of the collection in our warehouse, and so we bought it when the dollar was down. We have the program to finance our suppliers to draw this process out over time. So I think the impact is overstated here. It's not the same level as with other entities. It's less than 30% as opposed to 90%, which is what some people say. So we have the impact that's positive and negative being of a much smaller magnitude. So for a long time, we'll see a positive impact because we also do the FX rate between the U.S. dollar and the Polish zloty. I don't want to reveal that, but nothing bad is happening to the margin. So if the weather is okay, then you'll see

[Audio Gap]

There are no more questions. Okay, that's miraculous. Okay. I'm not going to ask you if you have any more questions

[Audio Gap]