Full Year 2017 Burberry Group PLC Trading Statement Call

Apr 19, 2017 AM BST
BRBY.L - Burberry Group PLC
Full Year 2017 Burberry Group PLC Trading Statement Call
Apr 19, 2017 / 08:00AM GMT 

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Corporate Participants
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   *  Charlotte Cowley
      Burberry Group plc - Director of IR
   *  Julie Brown
      Burberry Group plc - Chief Operating & Financial Officer

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Conference Call Participants
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   *  Antoine Belge
      HSBC, Research Division - Global of Consumer and Retail Research
   *  Daniele Gianera
      Macquarie Research - Luxury Goods Analyst
   *  Helen Michelle Brand
      UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst
   *  Julian Easthope
      Barclays PLC, Research Division - MD
   *  Louise Singlehurst
      Morgan Stanley, Research Division - MD
   *  Mario Ortelli
      Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst
   *  Melanie Anne Flouquet
      JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail
   *  Rogerio Fujimori
      RBC Capital Markets, LLC, Research Division - Analyst
   *  Thomas Vincent Chauvet
      Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director
   *  Zuzanna Pusz
      Berenberg, Research Division - Analyst

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Presentation
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Operator   [1]
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 Good morning, ladies and gentlemen, and welcome to the Burberry Second Half Trading Update Analyst and Investor Conference Call. My name is Courtney, and I'll be your coordinator for today's conference. (Operator Instructions)

 I will now hand you over to your host, Julie Brown, Chief Operating and Financial Officer, to begin today's conference. Thank you.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [2]
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 Good morning, ladies and gentlemen, and welcome to Burberry's Half 2 Trading Results Conference Call. Since this is my first set of results with Burberry, I would like to say how pleased I am to be part of the Burberry team and look forward to meeting you in the coming months.

 This morning, there are some slides to accompany this call which are available on our website. I will cover 3 main areas: first, an overview of our total revenue performance in half 2 and comparable sales by region; second, an overview of progress against our 5 strategic pillars; and third, our outlook. And with me this morning is Charlotte Cowley, our Head of Investor Relations. And we'll be happy to take your questions at the end.

 So first, our revenue performance. In an uncertain environment, we continued to take action to strengthen the brand and reposition Burberry for growth. In the half, our retail revenue was up 3% underlying and up 19% at reported exchange rates. Comparable sales were up 3%, with Q3 up 3% and Q4 up 2%. Wholesale and licensing revenue were in line with guidance, down 13% and 38%, respectively, on an underlying basis. This reflects the implementation of strategic priorities, in particular in the U.S., in Japan and in Beauty. Overall, total revenue was down 1% underlying and up 14% at reported exchange rates.

 Looking at comparable retail sales by region. Asia Pacific delivered a low single-digit-percentage growth. Mainland China accelerated through the half with positive footfall trends and grew at double-digit percentages in the fourth quarter. Hong Kong declined. Footfall improved through the half. And improved conversion supported sales, although partially offset by product mix, contributing to lower average unit prices. Korea, our third largest market in Asia, declined, impacted by the macro environment and the actions we took to reduce promotional activity in the market.

 Next, EMEIA, which delivered double-digit-percentage growth. There was continued strength in the U.K., with growth from both domestic and international customers. We saw an improved performance in Continental Europe, particularly in France. And Continental Europe saw improved trends from domestic customers; and strengthened tourist sales, particularly the Chinese. The Middle East remained challenging due to reduced footfall.

 Finally by region, Americas was down by a mid-single-digit percentage. Against a highly promotional backdrop, we took action to protect our brand, shortening our markdown period compared to last year. The relative strength of the U.S. dollar led to U.S. customers shopping abroad; and, for instance, in the U.K. where American spending levels grew by nearly 90%. These 2 factors weighed on our mainline and digital performance, with domestic and tourist spend in the U.S. reducing, while American spend globally was broadly unchanged year-on-year. In the U.S., footfall was down double digits, but with a clear focus on retail standards and execution, KPIs such as conversion and average transaction value were positive.

 By product category, accessories outperformed with mid-teens growth in leather goods, with a particular strength in bags. This reflects an area of focus for Burberry, but this is also a fast-growing area of the market by comparison with apparel.

 In wholesale, revenue was in line with guidance, down 13% underlying. Over half of this decline came from Beauty due to our decision to rationalize wholesaler distribution and a reduction in distributor stocking levels. In addition, wholesale revenue was lower, partly reflecting our strategy to elevate the brand in America.

 And finally, licensing revenue declined to GBP 12 million, largely reflecting the planned expiry of the Japanese Burberry licenses, as we've moved to a direct retail operation in Japan.

 Now I'd like to turn to our 5 strategic pillars: product, productive space, e-commerce, operational excellence and people.

 Before that, a quick word on brand and our February show. The 78 one-of-a-kind couture capes from the show finale are touring the globe, currently in Shanghai, having previously been in Seoul, Milan, New York and are now heading to L.A. and Dubai. In terms of social media reach and engagement, the show was live streamed for the first time on Instagram. Our London show space Makers House attracted 50% more visitors than September '16 and welcomed over 30,000 people through its doors. The Portrait Studio led to visitors generating over 4 million impressions on social media. And in terms of commercial performance of the collection, we are pleased with the customer response, with sales up 25% compared with September and a particularly good performance in apparel, reflecting a strong response to newness in fashion.

 In other product areas, we delivered strength in ladies bags, an area of strategic focus, with sales up almost 20% in mainline. We introduced tropical gabardine trenches, a lighter-weight fabrication of our iconic trench, and this is performing extremely well. In men's, we introduced an expanded lightweight cashmere trench program, which also delivered great results. And looking ahead, we will introduce more innovation in the pipeline in outerwear, scarves and in bags.

 Under productive space in retail excellence, our improved conversion more than offset the macro trend of declining footfalls globally. We increased investment in our team of Burberry Private Clients by over 50%. And this team, together with sales associates, booked significantly more personal appointments year-on-year, delivering exceptional customer service, with an average transaction value double the global average.

 In addition, we rolled out our customer feedback tool from 20 to 270 stores online -- and online. And this tool, based on Net Promoter Scores, has provided us with over 10,000 pieces of customer feedback to date. The feedback is very positive, but we're also addressing areas identified for improvement. For example, we've recently implemented a delivery tracking system for digital orders to address customer needs.

 In e-commerce, digital continued to outperform in the second half. Mobile delivered the majority of the growth. With improved conversion in traffic, mobile sales rose by nearly 50% year-on-year. And in China, the enhanced local website delivered strong results with a near doubling of direct-to-consumer sales, and the site now loads 4x faster than previously. Finally, we soft launched our customer app in the U.K., with plans to roll it out to the U.S. and other English-speaking countries from Q1. Our digital channel has delivered double-digit growth in revenues this year, and we estimate it influenced about 70% of buying decisions. We believe that a multichannel approach to customers is the way to optimize the relationships going forward, and Burberry is well positioned to deliver this given our leadership role in digital.

 Under operational excellence, we have made excellent progress. We've identified 4 major areas of change: one, procurement; two, process optimization; three, inventory management; and four, IT and technology. So first, procurement is now managed globally, and we've identified 6 key categories of spend in which to drive significant savings. This is being supported by the rollout of Ariba-guided buying. Second, we have mapped our key business processes and identified significant synergies and opportunities to simplify the way we work. Third, we continued to progress our omnichannel journey, with good results on product availability; and exciting plans to improve our luxury service to customers, including enhanced delivery options, quicker delivery times and a facilitated returns process. And fourth, we've defined ways in which standardized systems and information can drive increased efficiency in our organization. All key functions are collaborating and involved in this transformation, including IT, finance, procurement, HR and the supply chain. And I'll return to this topic at our prelims in May.

 On inspired people, we've continued to evolve our organization and simplify our way of working. We're also in the process of strengthening talent and capabilities at all levels. We've initiated a global program to inspire and motivate outstanding performance throughout our business.

 In the program overall, we now have milestone tracking for each of the major programs I've outlined, supported by a new tracking tool linking milestones with accountable owners and managed through benefit delivery. We've delivered the planned savings of GBP 20 million this year, and we're on track to deliver our target of at least GBP 100 million annualized savings by full year '19. And just to update you on our share repurchase program, we've completed GBP 100 million of the GBP 150 million announced to date.

 Now a brief word on Beauty following our announcement on the 3rd of April. We entered a strategic partnership with Coty to accelerate the growth and development of Burberry Beauty. Through this partnership, we will benefit from Coty's deep industry expertise and first-class scale and distribution. Importantly, we will continue to lead on the creative elements of the Beauty business, ensuring we can build on our work to date to reposition and elevate the brand. The financial impact of the deal will be neutral to adjusted PBT for full year '18 and accretive thereafter. And for the purpose of your models, we will continue to receive wholesale revenue in the first half, and this will become a licensing revenue stream in the second half for full year '18.

 Finally, let me turn to outlook which incorporates the changes in Beauty. There is no change to our expectation for full year '17 adjusted PBT at constant exchange rates. As regards currency, the expected impact of year-on-year exchange movements on reported adjusted retail/wholesale profit at the 31st of March rates is around GBP 130 million positive. This is GBP 10 million more favorable than the benefit outlined in our January trading update, and so we expect to see this benefit flow through into your models.

 In terms of guidance for full year 2018. Regarding retail revenues, we expect no contribution from net new space in 2018, as our focus is on productivity and the refurbishment of existing stores. Regarding wholesale in half 1, we expect to be down by a mid-single-digit percentage, reflecting some business disruption as we go through the transition on Beauty. Excluding this, half 1 wholesale is expected to be broadly unchanged. Licensing in the full year is expected to be up about 20%, including the income stream from Beauty in half 2. In terms of foreign exchange, assuming the rates at the 31st of March prevail, currency is expected to cause a GBP 10 million headwind on adjusted PBT compared with the previous guidance of a positive impact of GBP 20 million to GBP 30 million. The majority of this adverse 30 to 40 movement is expected to be offset by an improvement in underlying performance. And hence, for the purposes of your models, we expect some slight decline in PBT results in full year '18.

 So in conclusion, 2017 has been a year of change not just due to macro trends but also the way Burberry operates as a business. We've experienced significant revenue headwinds as we've made strategic long-term choices in relation to our brand. We continue to reposition ourselves in the U.S. and Japan, and we have now partnered with a world-leading fragrance player in Beauty. Our focus is on the brand, our products and the execution of our 5 strategic pillars in returning Burberry to growth.

 With that, I'm pleased to take your questions. Given that we'll be speaking to you again in a few weeks, we would ask you to try to limit your questions to 2 per person so that we've got sufficient time to speak to everyone on the call. And we can always come back to you later if required.

 Thank you very much.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Our first question comes in from the line of Zuzanna Pusz from Berenberg.

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 Zuzanna Pusz,  Berenberg, Research Division - Analyst   [2]
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 Just so -- the questions from my side. First of all, on your FY '18 outlook. So as per your guidance, I understand that the FX has turned more negative. However, you say also that the majority of that is expected to be offset by the underlying improvement in business. So I was wondering whether you could provide a bit more color on that. And how does it stand in relation to the, I think, GBP 480 million in PBT that consensus was looking for ahead of today's trading update? And exactly to what extent can we expect the FX impact to be mitigated? And secondly, maybe if I could just ask on your like-for-like performance, can you tell us a bit more in terms of what has been the volume growth and what was the price/mix contribution in Q4?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [3]
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 Okay, thank you very much, Zuzanna. Yes, so in terms of full year '18 consensus, we have got it at GBP 480 million. We would expect that to shave down now because we've had a significant swing on foreign exchange. As you know, in January, Charlotte was indicating in draft form that it was likely to be positive due to the way rates have moved but also hedges rolling off procurement contracts. We expect it to now be negative to the tune of GBP 10 million in 2018, so broadly, we would expect consensus to come down slightly because we've got exchange headwinds being offset. The majority is being offset by underlying performance improvements. Just in terms of your second question about the like-for-like, price is broadly flat in Q4, so the increase has really been all down to volume. No change to price. As you know, we made price changes. The latest one was in November in the U.K., which was the increase that we made.

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 Zuzanna Pusz,  Berenberg, Research Division - Analyst   [4]
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 And sorry to -- just to follow up. So the price was neutral, so that's just volume. And was there any negative, well, mix given some trading down or...

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [5]
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 So in terms of -- there's been no change to price in Q4, but if you're comparing it with the prior quarter in the prior year -- sorry, Q4 in the prior year, then there will be an impact on price because we made adjustments to prices in Asia earlier in the year. So downward prices to Asia earlier in the year. So if you're comparing it with the prior year, the same quarter, you will have a price impact, if that's what you're looking at.

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Operator   [6]
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 The next question comes in from the line of Helen Brand calling from UBS.

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 Helen Michelle Brand,  UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst   [7]
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 Just to follow up on the fiscal '18 PBT, can you just give us a guide or a steer around what you're assuming there in terms of underlying inflation on the cost base compared to that mid-single-digit uplift we've talked to previously? PRP, are we expecting that to step up again in '18? And also, any early guide, I assume that includes some of the cost savings onto the GBP 100 million by fiscal '19. Secondly, just on the Q4 like-for-like, the U.S. saw quite a big deceleration in the quarter. How much of an impact did the shortened sale period have on the U.S. like-for-likes versus what the underlying was doing? And what are you -- or your plans there in terms of turnaround in the market?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [8]
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 Okay, yes, certainly. Just take each of those. I think my guidance of 2 questions obviously didn't work on this occasion. So just going through each of those: The first one, in terms of cost inflation, we are going to come back to the guidance fully in May rather than guide on individual line items at this stage, but what I will say is that we expect it to be below the mid-single-digit percentage underlying in terms of cost inflation. But we will come back to more specific guidance in May. In terms of the performance-related plan, just to give you the history, as you know, no charge in 2016, no bonuses were paid. We've got a charge in full year 2017 of GBP 40 million. In 2018, this will be a headwind because essentially, the target -- or the assumption in the budget is that the bonus schemes pay out at target level, so there will be a swing, an adverse swing, built into our numbers for full year '18 relating to PRP. So then moving on to your next question, in terms of the cost-saving program or the operational excellence program, we've delivered the GBP 20 million exactly as we said in the current year. We are still guiding to being at or above GBP 100 million by full year '19. And what I'll do is I'll give you specific guidance on the phasing of that when we come to the May results because we're trying to keep this just as a trading update at this stage. Now the U.S., the question about the U.S., so in the U.S., in the fourth quarter, we deliberately undertook brand-elevation activities. The U.S. is an extremely promotionally sensitive market at the moment, with heavy discounting going on in department stores. And clearly, there's a lot of change in that marketplace taking place. And I saw some statistics recently that indicated the number of store closures in the U.S. has been to 2,900 to date compared with 1,200 in the prior year, so there's clearly a lot of turbulence in the U.S. market. We decided to deliberately shorten the sale period. It would normally be running until the third week of January. And for Burberry, we decided to curtail it and stop it on the 9th of January, so there was quite a considerable shortening in the order of 10 days. We haven't split out the actual monetary impact of that. Clearly, we've got multichannels operating including digital, retail and wholesale. It will be very difficult to do, but it definitely had a drag on the results. And then the other factor, you mentioned about the turnaround in the U.S. I think we still believe we've got brand-elevation work to do in the U.S., but in terms of the sort of turnaround, we are putting a lot more emphasis on fashion and newness. We've put a lot more emphasis on the category of accessories and in particular the leather goods and the bag range, and the results are really showing through. I mean we went through the phenomenal response we had to the February show. And we also went through with you the impact we've had on the leather goods category, mid-teen growth, and ladies' bags was up 20%. So we're starting to see the benefits of this. This will impact globally, obviously including the halo effect that we'll get in the U.S. I think it's really also very important for me to say that Americans globally still really like the brand. So obviously, with an international brand like Burberry, what we find is price arbitrage takes place across the different regions. And just by contrast, we've had 90% growth of American spend in the U.K. And we've had a fall in our American numbers, but broadly, there has been little change in the spend of American consumers, if we look at it across the world. So I think that's a really important message in terms of the strength of the brand globally.

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Operator   [9]
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 The next question comes in from the line of Antoine from HSBC.

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 Antoine Belge,  HSBC, Research Division - Global of Consumer and Retail Research   [10]
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 It's Antoine at HSBC. One question actually on the product category. I mean you mentioned that bags did very well, yet you had a slowdown, especially when you look at the basis of comparison which was 5 points easier, so can you maybe point out to the other lines which are doing less well and especially if you're seeing a significant slowdown especially in terms of trenches?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [11]
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 Yes, okay. So I mean the reason we saw this overall was, if I take it by region, the fourth quarter was very much influenced by the work we did in the U.S., where we did deliberately curtail sales because of the markdown period. We also did similar activities in Korea, which is our third largest Asian market, where again, we deliberately curtailed markdown. And in addition, the fourth quarter was influenced by Asia because clearly, macro factors affected Korea. And so we saw a downswing in Korea that was quite marked in the fourth quarter. And Hong Kong was also impacted by product mix changes, resulting in price coming down in Hong Kong, so that impacted our Hong Kong performance year-on-year. In terms of the product lines, we have seen an amazing strength in accessories. We've seen an amazing strength in bags, but what we've also got here within the product lines is a slight phasing difference because, the DK88, which is the new bag, we're actually only going to be marketing that fully in May. So we've got a slight phasing difference occurring there. And in terms of product lines, we did see apparel being tougher. And scarves were tougher because we had the Scarf Bar in the previous year and we also had the surge in rucksack sales also in the previous year. So there was some mix effect going on across each of the different categories. Apparel was generally tough. I think it's important to say this. I saw some recent data recently from one of the large consultancy firms on the market. And the view was for full year '16 the market as a whole grew by 1% to 2%, but it's really interesting that apparel declined by minus 4%. And clearly, our weighting towards apparel is very different to some of our peers which are more focused on leather goods. So it's an important factor in the mix to consider.

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Operator   [12]
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 The next question comes in from the line of Thomas Chauvet from Citi.

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 Thomas Vincent Chauvet,  Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director   [13]
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 Firstly, on -- Julie, your comments about the American, if I understood well, customer base was broadly unchanged quarter-on-quarter. You said there were improved trends in the local European customer base. Can you comment on the Chinese consumer in the quarter? I would have expected this to improve markedly, but it doesn't look like it was the case. Is it because of Hong Kong or Korea or the markets where the Chinese have not been spending as much? Secondly, on Beauty, a bit of a boring question, but can you recap the accounting mechanism, in particular, the booking of the GBP 130 million cash proceeds above the EBIT line? But also, on that GBP 50 million of cash proceeds you should get from the transfer of inventories in October, is that number net of potential inventory write-downs that you've identified? So I think you're guiding for Beauty in the first half to be down 15%, 20%, so I guess the GBP 50 million are net of potential write-down. Or is it something we should wait to hear from you later in the year? These are my 2 questions. And just a very quick follow-up to clarify on the FX headwinds that you're now seeing: I'm not sure if you answered on whether you're taking action in terms of pricing, for instance, or maybe additional FX hedging instruments to mitigate this pressure; or you're happy with the price gap as it is.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [14]
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 Okay, certainly. So I'll take the China trends or the nationality trends. Charlotte will take the accounting on Beauty, and I'll come back and take foreign exchange. So in terms of China, we did see an acceleration in Chinese spend globally. We saw an increase in the second half. Chinese expenditure globally increased in mid-single digits in the second half, and that compares with the first half where it was a decline of mid-single digits. So we saw quite a big swing in China half 1 to half 2. We saw some acceleration in the fourth quarter over the third quarter. So again, it's been a good trend, high single digits in the fourth quarter, we saw. The Chinese are buying both in their own market; we saw an improvement in Continental Europe not in the third quarter, but we did in the fourth; and the Chinese are also buying very strongly in the U.K. So we saw an increase in the U.K. of -- in the order to 40% to 50% significant increase in the U.K. Just to clarify on the American situation as well: American spend globally was broadly flat in the second half, but what we did see was we saw a slight difference between the 2 quarters. So in the third quarter, we had a slight positive in American spend. In the fourth quarter, we had slow -- a slight negative in low single digits. So overall for the half year, it was broadly flat. So I'll turn to Charlotte to talk about Beauty accounting, and then I'll come back on foreign exchange.

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 Charlotte Cowley,  Burberry Group plc - Director of IR   [15]
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 Thomas, yes, so in terms of the cash, yes, you'll see that in terms of that coming through in the second half. Clearly, that will flow through over time through the P&L and there will be some offset in terms of one-offs. And then in terms of the inventory, I mean, clearly, that will depend on the inventory at the time of transfer, so we'll be able to come back to that once we get to that date.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [16]
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 And then turning to foreign exchange, which is your final question. So I think there were 2 parts to this one: one was relating to foreign exchange instruments and the hedging policy; and the other was really action on pricing. So in terms of foreign exchange instruments, we do hedge in terms of forward contracts some of our procurement obligations going forward. It can be as high as 100%. 50% to 80% is probably the norm. So some of this will get locked in, but clearly, because the exchange rates have moved, the contracts at which we're, well, contracting at now at a different rate to the ones we had, which were more favorable ones last year and that's impacted. It's one of the reasons the exchanges swung really. Although translation is positive in both years, we're getting a transactional negative effect on procurement contracts now in full year '18 coming through with the exchange guidance we've just given. I think no fundamental change, but it is something we're looking at in terms of the hedging contracts and the degree to which we hedge because exchange is so volatile. I think, if anything, you'll probably see us taking more hedges out just to try and protect the business and give the business time to respond to a somewhat volatile exchange situation we're dealing with even as of yesterday. In terms of pricing, this is an interesting question. We -- as you know, we set -- we've got a global price architecture that we use. And we do ensure that exchange rates are taken into consideration when we're setting pricing and we're doing pricing reviews. And you can be sure that we'll continue to do that going forward, so as exchange rates move, you can see us -- you'll see us taking adjustments accordingly. And I think it's something that's a very live topic at the moment. I don't want to go any further on it, but it's something we're looking at, at the moment.

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Operator   [17]
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 The next question comes in from the line of Julian calling from Barclays.

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 Julian Easthope,  Barclays PLC, Research Division - MD   [18]
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 Yes, I've got 2 questions, if I may. First one, on the wholesale business, you said that if you exclude the Beauty, it's basically underlying flat. I just wonder whether the U.S. would be -- still be down in that this year as you continue to clean the business. And just within Beauty within the wholesale, is it -- does it have a similar regional mix to the wholesale division or to the retail division, or a completely different mix? Just that we can get our FX right when we strip it out in the second half. And the second question, it really comes back to bags. I know that you're looking to actually develop some iconic shapes for Burberry. You've also been up 20% in -- for the fourth quarter, for the -- for your -- for women's bags, so I just wondered if any of the existing bags you would now consider to be iconic.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [19]
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 Yes, sure. So if I take wholesale; Charlotte, I think you're going to take the Beauty one and foreign exchange; and I'll take the bags one. In terms of wholesale in the mixture, so although we said excluding Beauty, it will be broadly flat in full year '18, there is a mix effect going on within the regions there. We do expect wholesale in the U.S. to continue. We will -- we expect that to continue to decline into full year '18. We will continue to do brand-elevation activities there. It's really important too is that our wholesale partners and the department stores have the same positioning of the Burberry brand that we do. So we've put a lot of investment into the U.S., as you know, with Rodeo Drive. And we really want to make sure that we elevate the brand in the U.S. market. So what you're probably seeing there is a U.S. decline but being offset by account gains in other regions in terms of the wholesaler network globally. So I think Charlotte's going to take Beauty, FX; and then I'll come back with bags.

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 Charlotte Cowley,  Burberry Group plc - Director of IR   [20]
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 Yes. So think about Beauty predominantly a dollar and a euro business. Certainly, in terms of the costs of Beauty, it's more euro.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [21]
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 Yes.

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 Charlotte Cowley,  Burberry Group plc - Director of IR   [22]
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 Yes.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [23]
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 In terms of bags, we've got 3 leading bags -- bag ranges. And we are creating, deliberately creating a family of bags. So the first one, our leading range, is the banner, which is extremely successful. And so that's #1. #2 is our rucksack, and #3 is the Buckle tote. And I don't think we'll ever -- because the trench coat has got such a heritage and has been for so many years and really symbolizes Burberry, along with the scarf, I don't think it will reach that level, but we certainly want to make inroads into the bag market. And I think we're very excited and optimistic actually about the DK88. As you may or may not know, DK88 is the codename for the original trench or original gabardine. And therefore, it was Christopher's decision to call the new bag the DK88. And as you've probably seen, if you've seen the product, it's extremely high-quality leather but it's embossed with the markings of the gabardine. And so we'll be launching this fully in May. We've got a full marketing program going out in May relating to this, and we're very excited about it being complementary to the bag range.

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Operator   [24]
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 The next question comes in from the line of Mario calling from Bernstein.

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 Mario Ortelli,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst   [25]
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 The first question, about the guidance on space for fiscal year '18. You're guiding for a flat space increase. Can you give us an idea of how many openings, closure; and how many store or refurbishing are you planning for fiscal year '18? The second one is about Asia Pacific. And Marco Gobbetti now has been standing there about 3 months. What are the initiatives that Mr. Gobbetti, after these 3 months in Asia Pacific, is planning to do for the brand? And if he has already plan -- already execute anything.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [26]
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 Okay, sure. So just in terms of the stores overall, we've got -- in the mainline, we've got 8 new stores planned. So we've got 3 coming in China, 2 in Australia, Kuwait, India and United Arab Emirates. And then we've also got a number of closures taking place. In total -- obviously, these are not the same size, but we've got 13 closures taking place, just to run through the main ones: 3 in China, 3 in Hong Kong, Italy, Dubai, India, Japan, Kuwait, Australia and the U.S. And this is all very much in line with elevating the brand, so in some cases, we are moving location to have the right adjacencies for the company overall. And we're also engaging in refurbishments, but it's really important as well that we're very, very focused on using the -- I guess, the existing footprint in total and driving more productivity out of that store network. So broadly, 2/3 of our retail CapEx will be spent on refurbishment, and that's really key. Okay, so the second question related to Marco and Asia Pac. So I think, as you probably know, due to Marco's contractual obligations to his previous company, he's taken over as the President of Asia Pac and the Middle East. And I was actually there with him just a couple of weeks ago. And he's very, very focused on, I guess, looking at the retail network; working with the regional team in areas that we can use to drive business further, bringing his experience from Louis Vuitton to bear; and also just generally looking at working with the regional team and looking at the pricing architecture, the retail store networks, the position of those stores and retail productivity. I mean that's really where his real expertise is. And so we're actually very, very excited about -- and I think Christopher mentioned in his quote, we're very excited about the fact that -- and Christopher is excited about the fact that he can spend a lot more time on design, which he absolutely loves. Marco can spend time on the area where he is very strong in terms of the retail productivity, the retail network. And of course, I've come with, I guess, different industry experience in terms of operational efficiency. So we're already working together, and we're a very strong team.

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 Mario Ortelli,  Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst   [27]
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 And if I may, just a clarification: On digital, Burberry was always a frontrunner. Would it be a responsibility more on the shoulder of Mr. Bailey, or Mr. Gobbetti?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [28]
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 I think with every area of the business, they'll be working in partnership. We -- Christopher often refers to Marco as his partner, so I think it's working in partnership. Christopher is still in charge of all the creative aspects, including the way the brand looks and feels to the consumer, so there'll be a large part of that where we'll still see Christopher's hand, I'm sure.

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Operator   [29]
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 The next question comes in from the line of Louise Singlehurst calling from Morgan Stanley.

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 Louise Singlehurst,  Morgan Stanley, Research Division - MD   [30]
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 I will keep to 2 questions. Firstly for me, I mean, could you -- Julie, could you just talk to us about the process or the review going to the decision with Coty and the strategic partnership that you've announced there in terms of the decision-making process arguably? And then secondly, just on talent, you've talked a lot about it. There's been some important changes, including yourself coming along this year, but are we pretty much there? You've obviously had some big changes to the creative team as well, particularly with relation to the bags and the leather product, but are we pretty much done on the talent side?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [31]
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 Yes, so it's in terms of Coty and the decision relating to Beauty, clearly, we were -- I think, just stepping back, we were very -- we'd undertaken, I guess, a serious cleaning-up of the Beauty business since we took back the license. And we were really pleased. I mean U.K. distribution, for instance, had gone from 3,500 distributors to 35, so drastic changes were made to elevate the brand of Beauty. And then what we decided to do was having done that within our own control, we really looked at how we will be best placed to maximize the brand from that point onwards. And clearly, it was a competitive process. We had a number of bids that came in relating to it, and we were really looking for the -- first of all, it was really about quality of the partner and having a like-minded view towards the business. Because we'd done so much work on elevating it, we wanted them to be absolutely aligned with that, and Coty really shone. And then Coty's distribution and scale really was a big factor as well. And they also distribute other luxury brands, so that was a factor in the decision-making process. Clearly, the final factor and very important factor, especially coming from the CFO, was the financials relating to the deal. And the financials were very attractive too as we got to a position where we could get the deal to be neutral to us in full year '18 and accretive from 2019 onwards. And as you know, in deal-making areas, that's quite rare, so we were really pleased to get a deal like that. So that was really the decision making. I hope that addresses your question, Louise, relating to that.

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 Louise Singlehurst,  Morgan Stanley, Research Division - MD   [32]
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 That's great.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [33]
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 In terms of talent, we -- I think a company will always look for the best talent, always. And it makes -- especially I know from my own experience, it makes such a big difference if you've got the right people in the right leadership roles. They attract great talent, and it makes a huge difference to an organization. So I see this as being a big driver for our organization going forward. And I don't think we should ever stop. I really don't. In terms of 2 key appointments recently, we've had Sabrina coming in from Dior. She's obviously had the experience of ladies' leather goods in Dior. She'll be heading up our leather goods design. So we're really, really pleased to see her join the organization. And then we've also had Claudia join us from NET-A-PORTER. She was a cofounder with NET-A-PORTER. So we're delighted about that because she'll really be responsible for creating a cohesive and consistent link between our product content and customer and also strong editorial for Burberry, developing inspired storytelling to support our brand and project initiatives. And Claudia started in January. We've had a number of meetings already to discuss some of her ideas. So yes, 2 great starts.

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Operator   [34]
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 The next question comes in from the line of Rogerio calling from RBC.

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 Rogerio Fujimori,  RBC Capital Markets, LLC, Research Division - Analyst   [35]
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 Julie, I think you've -- guys mentioned that the American costs or spending was up in Q3, if I add local opportunities and purchases abroad. So could you please quantify the American cluster growth in Q4? And related to that, I think you've said that the Chinese cluster is up high single digits, and I believe it's nearly 40% of the business. So which nationalities are bringing the average down to 2% in Q4? I think you mentioned Korea and Middle East, but are there any other important clusters holding back overall performance?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [36]
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 Okay, thank you very much, Rogerio. Yes, in terms of the American cluster or Americas, what we saw, I think just in Q3, Americans globally -- this is as a nationality, we saw a slight positive trend in Q3. And it was a very low single digit, slight decline in Q4, but it was -- we're talking about very marginal changes here. So I think the big message with regard to the American cluster globally is that they were broadly flat in half 2 versus half 1, because quarters can be a little bit misleading overall. And then, in terms of China, I mean, standing back, China, we're really, really positive about the trends we're seeing in China; and very big difference between first half, second half; and increasing improvement through the fourth quarter. So we are very enthusiastic about what's happening in China right now with our Chinese consumer. The things that -- the countries or areas that were dragging down the overall Asia Pac result were largely Korea is a factor. And here, we've got obviously the macro situation, that the travel ban of -- impacting South Korea has clearly impacted the Chinese going into South Korea and that's had an impact. And the Middle East continues to be a very challenging market, obviously, linked with the price of oil. We have seen declining footfalls in this region. And we've also seen declining sales from, I guess, people, the nationality, the nationality in other regions as well. So it's a general -- we think it's linked with the price of oil generally. Those are the main things. Hong Kong, I think as we mentioned, Hong Kong, we had -- compared with the fourth quarter in the prior year, we had the price adjustment that was made, and that's affected product mix and price negatively in Hong Kong. Important to say, though, that conversion is up in Hong Kong.

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 Rogerio Fujimori,  RBC Capital Markets, LLC, Research Division - Analyst   [37]
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 Okay. And sorry, and just one quick follow-up. Was the local customer growth in U.K -- or U.K. ex Chinese and ex Americans, also up in the second half?

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [38]
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 It was, yes. It was. So we had overall very strong growth in the U.K. for the half year, approaching 40% overall. And it was a mixture. Broadly, it was -- Q3, it was 50-50. It moved slightly in favor of the traveling consumer in the fourth quarter, but broadly, it was, again, a mixture of both tourist and domestic. It was something like 45-55 local to international in the fourth quarter and 50-50 in the third quarter.

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Operator   [39]
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 The next question comes in from the line of Dan calling from Macquarie.

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 Daniele Gianera,  Macquarie Research - Luxury Goods Analyst   [40]
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 Two questions, I promise. The first one is on Japan. And do you have any updates on the Japanese plans? Especially, if I'm right, it was actually not mentioned in the new store openings, so I was just wondering on that region. And the follow-up on that is on the lower cost inflation you mentioned. It looks like it's driven by maybe a change in views of net new openings. And I was trying to understand if there was a change in the competitive regional expectation of new stores. And maybe if you could just comment on if there's a change in size of these stores you opened this year compared to what they are closing as well.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [41]
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 Okay. So if I take Japan, and then maybe Charlotte can give more flavor on the size of the stores opening and closed -- closing. So Japan, we didn't call it out specifically because there have been really no change in the trend between the third and fourth quarter. So we're still experiencing a sort of mid- to high single-digit decline in Japan. I think the market is challenging generally. We've seen other people comment on this. And we also experienced it very much the same between the third and fourth quarters, so no real change there. In terms of the stores in Japan, we've got 6 mainline stores in Japan and we've got 31 concessions. So that is broadly similar, I think, to what Carol had mentioned previously. There may be 1 or 2 changes there but nothing significant. And I think, as you probably know, we are, I think, still relatively small -- compared with the Burberry brand globally, still relatively small in Japan because we're moving from a license to a retail operation. And we've been somewhat cautious in building out that retail operation, probably more cautious than we were -- originally had designed to be because we just wanted to make sure that we get the right space and we put the brand in the right position in the Japanese market so that we build on some of the strengths that we've established in Asia. So Charlotte, do you want to take cost inflation and the size of the stores?

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 Charlotte Cowley,  Burberry Group plc - Director of IR   [42]
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 Yes. So in terms of cost inflation, I'd just think about us being very tight on all areas of discretionary spend. I wouldn't sort of overplay any thought in terms of size of stores. In terms of absolute selling space, for '18, I think broadly flat. So think about the ones that we're opening will on average be slightly larger than the ones that are closing given the number of closures is larger than the number of openings.

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Operator   [43]
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 Our final question comes in from the line of Melanie calling from JPMorgan.

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 Melanie Anne Flouquet,  JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail   [44]
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 Two questions. So the first one is regarding your scarves and trench coat business. I was wondering what you expect moving forwards. Do you expect the trend towards newness and towards bags to continue? And what can you do to revive your scarves and your trench coats business in an environment that seems to have this appetite for newness and this pushing in bags? My number two question is I was wondering whether you could share with us the percentage of your retail sales that is done in outlets and whether you feel this is at the right level.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [45]
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 Okay, thanks, Melanie, very much. So taking -- in terms of scarves and trench, we have got -- as you say, newness drives sales here and we're very focused on that. In terms of the trench, we have recently launched tropical gabardine and new styles of trench around that in the February fashion show. This has gone extremely well. I have to say we have been somewhat supply constrained. In particular in Asia, tropical gabardine being a lighter version of gabardine, has gone down extremely well in the hotter climate, but we have had some supply constraints in the fourth quarter relating to that which we're now addressing in the first quarter. And we have got an exciting range of scarves to come. I'm not in a position of being able to disclose too much of that at this stage, but it's continuing the themes that we've got at the moment but there will be an element of newness, excitement, freshness relating to this. And I know, without giving too much away, that it's an area Christopher's extremely excited about. So we look forward to sharing that with you when I'm commercially able to do so. As you mention, bags are so important to us. We're delighted with the 20% growth in ladies' bags. We see this as a growing area of the business. We see it as an important area of the business because you don't have some of the sizing issues you've got with apparel with bags. And therefore, as you know, we've got a very strong presence already with the banner. The rucksack was a great success last year, continued this year; and the Buckle tote. And we'll complement this now with the DK88, which is a higher-price bag and, hopefully, will have a special place in the range because of the history of the codename and the trench leather that we're using. Just in terms of retail outlets, we don't give any disclosures around that. Overall, we may look to take some reductions in this space which is part of the brand-elevation work we're doing globally, but I think with an apparel company -- it's different, obviously, with different companies, but with an apparel company, there will always be sort of broken sizes. And there will always be, when you're dealing with fashion ranges, at a point when the product may get delisted if it's a fashion product. And that's when you do need an outlet channel, but it's very important that we, I guess, control it, and we will do that going forward.

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Operator   [46]
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 Okay, so we have no further questions coming through, so I shall hand it back over to yourself, Julie, for any concluding remarks.

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 Julie Brown,  Burberry Group plc - Chief Operating & Financial Officer   [47]
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 Okay. Okay, well, thank you very much for your attention. Thanks for taking part in the call. We look forward to speaking to you on the 18th of May, in our prelim results announcement; and look forward to meeting you certainly straight after that point. Thank you.

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Operator   [48]
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 Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets.




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