H & M Hennes & Mauritz AB (publ)

Nils Vinge - IR Jyrki Tervonen - CFO

Anne Critchlow - SG London Rebecca McClellan - Santander Chris Chaviaras - Barclays Fraser Ramzan - Nomura Charlie Muir-Sands - Deutsche Bank Simon Irwin - Credit Suisse Nicklas Fhärm - SEB Adam Cochrane - UBS Jamie Merriman - Bernstein Andrew Porteous - HSBC Geoff Ruddell - Morgan Stanley Tushar Jain - Bank of America Assad Malic - Citi

Welcome to this telephone conference on the occasion of H&M's nine month results 2015. With me is our CFO, Jyrki Tervonen and we will be happy to answer your questions after the presentation.

You will find the presentation slides to this telephone conference on hm.com. H&M continued to perform well in the first nine months of 2015 both in terms of sales and profits.

Our collections were well received for all group brands. We continued our successful expansion with stores and online and we kept taking market share.

As our offering is reaching more and more customers everyday, we're also developing and improving our ranges in order to make our offering even better. This summer, for example, we launched our new concept H&M Beauty and it has got off to a very good start.

We've also continued investing long-term in areas such as IT and online to further strengthen the H&M Group and secure future expansion. Please turn to the slide sales.

In the first nine months of the year, sales including VAT reached SEK 153 billion, an increase of 12% in local currencies and 21% in SEK, which is a good proof that our collections are well appreciated worldwide. In the third quarter sales increased by 11% local currencies.

Translated into SEK sales including VAT amounted SEK 53.4 billion, an increase of 18% compared to last year. Sales were strong in June and July, but in August sales were negatively affected by the unseasonably warm weather in many of our large European markets.

We also made a strong comparable with growth of 19% in August 2014. Looking at the month of September, the weather has become more normal and in the period of the 1st to the 22nd September sales increased by 12% in local currencies compared to the same period last year.

And now to look at results please turn to the next slide. Gross profit in the third quarter was SEK 25.7 billion.

That corresponds to a gross margin of 55.9% compared to 58.3% last year. The combined effect on the purchasing cost from external factors remained negative.

This is mainly due to the strengthening of the U.S. dollar.

Markdowns in relation to sales increased by 30 basis points compared to the third quarter last year mostly due to the increased price activities in August. For the nine month period gross profit amounted to SEK 75.2 billion with a gross margin of 56.9%.

Please turn to the slide SG&A. Cost control in the group remains good.

In the third quarter, selling and administration costs increased by 20% in SEK to SEK 18.8 billion, the local currencies increase was 12%. The increase in SG&A is mainly related to the expansion and the long-term investments.

To look at profits, please turn to the next slide. Profits developed well in the first nine months of the year although in the third quarter profits were negatively affected by the transaction effects from the strong U.S.

dollar on purchasing costs. Higher costs for our long-term investments also impacted profits negatively as to the weak August sales and the subsequent rise in markdowns due to the unseasonably warm weather.

In the third quarter, profit after financial items was at the same level, as last year at SEK 6.9 billion and in the nine month period profit after financial items increased by 11% to SEK 20 billion. Please turn to the tables' sales and profits.

With an estimated tax rate of 23.5%, tax amounted to SEK 1.6 billion in the third quarter. Net profit [indiscernible] was SEK 5.3 billion equaling earnings per share of SEK 3.21 largely unchanged from the third quarter last year.

In the nine month period, net profit increased by 12% to SEK 15.4 billion this equals an EPS of SEK 9.29 up from SEK 8.31 last year. And now for some other key data, please turn to the next slide.

Stock in trade on the 31, August amounted to SEK 25.2 billion an increase of 40% in SEK. In local currencies, the increase was 38%.

While the reported increase in the stock in trade is high, both the composition and the level of the stock in trade are considered good with higher proportion of new garments compared to the same time last year. The increase in stock in trade is explained mainly by the value increase caused by the strengthening of the U.S.

dollar and also by the store and online expansion. Also a large part of the increase in stock in trade were precisely SEK 1.2 billion is due to a book keeping effects arising from our previously communicated change in the process around invoice management for sourcing.

Cash flow from current operations was SEK 17.8 billion compared to SEK 18 billion. And investments in terms of CapEx totaled SEK 7.9 billion for the first nine months of the year compared with SEK 6.4 billion in the same period last year.

Investments covered mainly new stores but also IT and logistics. For 2015 as a whole CapEx is still expected to reach approximately SEK 11.5 billion based on exchange rates from the 30 November, 2014.

The financial position of the H&M Group remains strong, liquid funds were SEK 11 billion compared to SEK 13.5 billion. Return on equity was 44.7% compared to 46.1%.

And now for some comments on expansion, please look at the slide Store Expansion. H&M strong expansion continues.

The plan for 2015 remains intact meaning approximately 400 new stores net. The largest expansion is taking place in existing markets with China and the U.S.

in the largest expansion markets. We added 164 new stores net in the first nine months of the year bringing the total numbers of stores to 3,675 stores at the end of the third quarter.

This means that we will open around 240 new stores net in the fourth quarter alone. We are adding five new H&M markets this year Taiwan, Peru and Macau have already opened and all have had a very good start.

In October, we will open the first H&M stores in India and South Africa. The first store in India will open in the Select Citywalk mall in New Delhi and in South Africa, the first store will open in Cape Town in the V&A Waterfront.

Today, we also announced three new H&M markets for next year, New Zealand, Cyprus and Puerto Rico. Now, some more from our other group brands please turn to the next slide.

Expansion continues for COS and Other Stories, Monki, Weekday and Cheap Monday. In 2015 expansion focuses mostly on Other Stories and COS.

COS will add four new markets this year. Bahrain opened their franchise in February, Luxembourg, Hungary and Canada are planned to open this autumn.

COS will open in the Czech Republic in 2016. Please turn to the next slide.

In parallel to our rapid store expansion we're also adding ecommerce in a growing number of markets. H&M's online store hm.com is opening in 10 new markets in 2015, eight of them had opened already it's Portugal, Poland, the Czech Republic, Romania, Slovakia, Hungary, Bulgaria and Belgium and customer reception has been great in all of these markets.

With addition of Switzerland and Russia, this autumn H&M will be available online in 23 markets by the end of this financial year. In 2016 a plan is to offer ecommerce in a further nine existing H&M markets.

These markets are Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania and Luxembourg. We'll also continue to broaden the H&M product range, please turn to the slide H&M Beauty.

In July, we began the launch of our new concept H&M Beauty, which is now available in 700 stores across 28 markets and online. Following a very good start we will continue to roll out H&M Beauty to more stores already by the end of November H&M Beauty will be available in a total of approximately 900 stores in 42 markets and online.

We're also developing other new concepts and brands which we will communicate more on at later dates. And now before we move on to the Q&A session just some words on current development.

We have an exciting fashion season ahead of us and like we said initially sales in the first three weeks of September were up 12%. Meanwhile if we look at market conditions regarding sourcing as the U.S.

dollar strengthen further during the sourcing period to the fourth quarter, purchasing cost for the fourth quarter have been even more negatively affected and the purchasing cost of the third quarter. As always, we're continuously reviewing our customer offering in each market so we are monitoring the market closely to ensure that we offer the best combination of fashion, quality, price and sustainability.

And now we're happy to take your questions. And as usually please remember to only ask one question at a time.

Thank you.

Hello. Thank you.

I've got two questions, the first one is about current trading, are there any calendar affects in the final week of September that we need to take account, please?

No. There is no major calendar affects in September.

Okay. Thanks very much.

Sorry, in fact that's it for me. Thank you.

Okay.

Yes. Hi, good afternoon.

Good afternoon.

I've a couple of questions, firstly what was your average selling price at the beginning of September 2015 versus the beginning of September 2014, please? And my second question is, given sort of the slight weakness in renminbi and a bit of time on your side.

Have you managed to mitigate some of these further pressures in the fourth quarter such as COGS outlook?

Again Rebecca, I'd like to remind you, is one question at a time, it's easier for everyone. But I do remember your first question was regarding ASP.

And unfortunately we do not for competitive reasons we do not comment the ASP, sorry. And what's your second question?

And just with a bit of time on your side, have you managed to mitigate any of these U.S. dollar related pressures in the COGS as we go into the fourth quarter and into the first half of 2016?

Of course, we are looking at the U.S. dollar effect for the purchases we have done for Q4 as Nils previously said, it’s even a more negative effect for those purchases.

And we are always looking to different ways of mitigating negative effect. But exactly how we're working with our pricing et cetera that we will always keep to ourselves for competitive reasons.

Okay.

But, always as we have said, we are always looking to finding efficiencies and changing sourcing market et cetera.

All right. Thank you very much.

Hi, guys. I do have three questions but they are very short, one at a time.

So the first one, the first one on Russia, you and I've seen some significant growth there, I wonder what is the composition between price and volume, have raised price in Russia?

Russia, we are very happy with Russia. And as you say we do very well and we continue to expand.

It was very happy to launch ecommerce already this autumn. Regarding pricing et cetera, we don't want to give too much details, but what happened last year especially was that the ruble depreciated quite substantially towards most other currencies.

And I would say every retailer had to compensate and increase prices and we have also adjusted, but I would say less probably than the rest of the market and thus increased our competitive advantage even further.

Okay, very helpful. And then on China, on a more negative note there, if we try to decompose some sort of like-for-like [indiscernible] negative but understandably you do grow stores quite rapidly there.

Even if you do operate online, does it come may be to a surprise of the existing store base not as productive maybe or this is in line with your budget in the past about China?

We continue to expand very rapidly in China. We are very happy with the development and also the profitability and we launched ecommerce as late as last year last autumn.

And then of course from quarter-to-quarter there always be a volatility, so no concern really for the numbers in China. I would say the contrary we look there is a huge potential, we will continue to expand very rapidly this autumn this quarter.

So we really are optimistic for the future going on in China.

But of course in Q3 if you compare to Q2, yes, the local growth is less than in Q2 for sure but we are still on the good level when it comes to the turnover and the profitability. So we are, as Nils said, continuing our rapid expansion in the Chinese market.

Okay, thank you for that. And last one on the 4Q store openings.

So in 4Q, you're going to open close a store number in order to hit your 400 which is close to the number that you opened the entire 2011. It is the highest in a quarter historically, by quite some amount.

Are there any concerns that you have that -- should we be seeing either maybe the locations are being comprised, or it just happens to be timing issue from Q3 to Q4 and it’s business as usual? What I'm trying to get to, sorry, that is a longer than I thought, question.

But, what I'm trying to get is, is to realize how you are planning went on because it is an extraordinary amount of new stores that you are opening. And I wonder whether there are any profit implications even in the near term?

When it comes to -- if we're comprising when it comes to store location or terms, we never comprise on those. We've all always stick to have the high-quality, the best day location and good terms, flexible terms.

Some years it happens, we usually are very heavy in the second half year and Q4 as well. And so they are -- as you said business as usual, yeah, it's a huge amount of stores that we are going to open.

But, we have fantastic teams in the countries and we are quite confident that we will open the stores in due time and that will be a very good -- very good stores contributing to our portfolio.

Okay. Thank you very much.

You're welcome.

Thanks very much. Good afternoon.

I have a question about the comment in the release this morning that you're looking into launching other new concepts and brands and that you will come back to us at a later date on this. From that should we think that your long-term investments that are now getting very, very long-term are going to continue into next year and perhaps at a even higher level in current year, what I'm asking is when might shareholders expect your EBIT margins to stop falling which is just continuing at the moment?

Yes. At the moment of course, the main impact on the EBIT margin is the strengthening of the U.S.

dollar and the hit [across the region] [ph]. But, when it comes to the long-term investments, yes, we're looking into some very interesting new ideas.

And we're comfortable that they will make us much stronger in the future. Of course, it will and in that long-term investments will most probably continue next year, they will but exactly if they are increasing or staying on the same level that we have to come back to in connection with the year-end reporting.

But for sure, there are new ideas coming up.

Okay. Could I just ask half an extra question?

Yes.

Your comments around Chris' question on the level of openings in the fourth quarter, would you have already taken quite a lot of pre-opening cost in the P&L in the nine month period as supposed the slight concern with so many openings. Is this going to hit your SG&A on a like-for-like basis in a big way in Q4?

Yes. Of course, it's not exactly that all the cost will be in Q4.

A lot of cost is already in within the nine months. But there are of course coming up about that.

It's more or less in the same pace that we've every year. So there shouldn't be such dramatic changes.

Thanks. That's very helpful.

Thank you.

Welcome.

Good afternoon.

Good afternoon.

I've question about the currency. Clearly, you have indicated that the pressure is greater in the fourth quarter.

If currency exchange rates are maintained when is the worst quarter for you, is it Q4 or is Q1 even tougher?

Well, still we've a lot of purchases to be done before Q1. So we were -- we don't whether the U.S.

dollar will be ahead of us but I would say that if the currency rates are more or less on this level, I would guess that the impact on purchases prices in Q1 is more or less the same as in Q4.

Okay. And then the second question, is your CapEx guidance is given on a legacy exchange rate clearly your openings are not necessarily weighed to our existing revenue OpEx exposure.

Could you help us by trying to translate that guidance into SEK currency exchange rates?

Yes. We have to come back to that.

But, you're correct when we guide for SEK 11 billion to SEK 11.5 billion. It's the year end closing date rates that we're referring.

So of course, it can be more when we've translated it to average rates as we are doing in the P&L. So for sure that's an effect up.

Let's come back to that a sec, because we have 214 new stores to open, it's quite a huge amount to still open. So it will be much clear picture when we've opened all those stores.

And then my final question is, trying to disaggregate your revenue growth by country or region and adjusting for space. It appears that your southern European business has been performing a lot better than Germany and some of the other Northern European markets.

Do you think about it a consumer phenomenon or particularly around the rough weather in Q3?

I think this combination translates -- we're stating now for more than a year. We've seen positive signs in the macro in those markets and we've seen very strong development.

And it continues. But also, I think that I mean the offerings we had has been very well received and we've very strong teams in place.

Yes. I would say looking just purely on the Q3 figures, it's a mix.

It's a mix as we state in August we were hit much more in the northern parts of Europe. We performed well in the southern parts and as Nils said the macro in many countries in South Europe especially when looking in the Spanish macros where the unemployment rate is going down quite quickly.

So there are good macros also in South Europe.

Thank you very much.

Good afternoon, gentlemen. Given renewed bouts of volatility with emerging market currencies, are there any markets where you have material number rentals and not in local currency?

No. Most of the rents are in local currencies.

So particularly in Russia, I suppose the obvious one to think about, you don't have any dollar or euro rents there?

No. The vast majorities purely in rubles and also good terms with turnover and et cetera.

Right. And just following on from that given the kind of weakness in terms of currencies and demand, does this change your view about the pace of accelerations in some of these markets that actually now might be quite a good time in some of these markets where you are not -- you don't have a very substantial commitment to some emerging markets?

Yes and no. I mean we always have a long-term view and as you say in difficult macro situation with our long-term view and strong financials, there might be opportunities for us to expand even further yet.

Great. Thank you very much.

Good afternoon.

Good afternoon.

Can I just ask you -- you talked in last quarter discussing internally at least change the longer term target or guidance that you give every year to open 10% to 15% new stores. Could you elaborate on how those discussions are going and the reasoning behind the alternatives and what they are please?

Yes. It's nothing new.

We've been discussing the relevance of the existing target of 10% to 15% stores because today with online and there is -- nothing different form between ours and franchise, it doesn't become so relevant any more. But most important thing is, we're not planning to slow down.

The ambition to grow remains but we haven't decided yet how to -- what target to use.

It could be that we are continuing with a 10% to 15%, Nils said with online different concepts et cetera it's getting more irrelevant as a figure to talk about stores. And then of course there are different options if we are sticking to increasing in sales per year or maybe not to have any big financial KPIs but still communicating in a way that the market understands that we're continuing with our high expansion rate and with continued high profitability and good financial position.

So we are looking into two differences solutions and suggestions and we're also looking into what the other peers -- competitors how they're communicating and so but we haven't decided yet what -- what the outcome will be. So but still internally we will regardless what the end result will be.

So regardless that we will internally of course work as we have done with really very clear goals when it comes to store openings expansion, profitability et cetera.

Thanks. Can I also ask you -- I think you've indicated that your net dollar flow is at a range of 35 billion to 45 billion every year.

And that's just according to Torres [ph] and I start theoretically or mathematically and a static assumption that gross margin should have been down by SEK 4 billion in Q3 or 400 basis points at least. Now, obviously adjusting for the markdown effect there is only within "about" 200 basis points fall.

Could you let us in on what were the main drivers that had an impact on sort of the actual outcome versus the static and mathematical effect? Please.

Yes. Okay.

There are static or mathematical or theoretical effect is of course -- one thing but the reality how we're buying is not exactly as we've been talking to several [indiscernible]. We try to give you guidance in what direction the purchase prices are going by say okay look across two quarters back for those garments that we're selling in Q3 et cetera.

But in reality, we're not always buying in that pattern. We buy sometimes even earlier some basic garments or we have lead times within three, four weeks.

So it's a mixture. So the realities and that mathematical result will give, if you calculate was it like SEK 4 billion on a base of SEK 40 billion to SEK 50 billion, I hope you understand that.

Yes.

So that's one way of looking to it. And of course, the mathematical results that will be as you've calculated but the reality when we're buying exactly to which currencies and the selling patterns ahead.

So it will be a different result than the mathematical or theoretical. But there are of course always things that we try to mitigate.

But, we will always stick to our business concept and thinking long-term and start from the custom offering.

So in short, what you're telling us is that the main reason for that the static model doesn't work in this case is that there is too many differences in lead times in sourcing. It's not pricing or cost of goods, but its lead times.

Is that correct?

There are so many different factors affecting our gross margins as we have been talking -- it's like 20, 25 different factors affecting the gross margin. And we don't want to elaborate and go into each of these.

We give you some major factors behind it those four, five macro factors that we have been talking about. But otherwise, we don't want to elaborate what the gross margin is built up.

And we understand that you're keen to know but we respect we don't want to give it away to our competitors. We don't have any patterns.

So we really want to speak that and have that information for us, only for us. Sorry.

Okay. Thank you.

Good afternoon guys. Nice simple one for me.

In terms of your new store formats that you're introducing both the existing ones where you're rolling them out and the new ones that you're developing. Can you remind us of the rationale as to why you felt it was necessary to move beyond the core H&M brand please?

Oh, it's very simple. I mean so much many opportunities it's a way to reach a broader customer base of course and also we can capitalize on 2015 and backed on the infrastructure, logistics, sourcing et cetera.

I think the success so far, for example, COS and Stories are very good, it proves off that the model, the rationale works.

So as this proportion expands over time your business model is becoming increasingly complex. Do you think there is more that you could do to help our understanding of how the company looks and how its developing, what are the different drivers to these different concepts are because the -- there is slight danger from the outside that its becoming we simplistically looking at a very increasingly complex business?

But for us luckily -- there are so many opportunities and our ambition -- we've long-term and we want to develop the company further and luckily our target is not to sell shares as you know.

And Andrew when it comes to the complexity of the business COS its getting more complicated with different brands, different channels et cetera. But if we speak to what Nils said that we see a lot of opportunities we have the H&M brand; we have the COS; we have Stories; we have Monki and Weekday et cetera.

So clearly we can see that we are finding a potential in the market for those. We see new customers or even same customers but asking for different kind of fashion.

So I think we are just finding the opportunities and investing and taking care of those opportunities that we identify on the market that we are doing something better than the existing markets for those brands. So that's the whole idea and of course, we have said that we are investing a lot in building up the new formats.

But I think we see that COS is performing very well also Stories, but for Stories, it's still in the beginning and we have still a lot of work to do.

So it's more to do with -- not with a lack of opportunities for the core H&M brand in your existing markets but you can see additional opportunities with other brands?

Exactly.

Yes. I think they are complementing each other very well.

Okay. Thank you.

Thank you. Good afternoon.

Good afternoon.

My question is about the U.S., in the release and previous releases, you've noted that the U.S. is one of your large opportunities for store growth from here.

And just thinking about you have everything and maybe starts in the U.S. today, what do you think the right number of H&M stores in that market and obviously it seem to me less retailer start to reduce store numbers, so I'm just wondering where do you think the cap is?

We refrain from giving such numbers. We speak to the fact that there is still lot of potential for us and we're very happy with the development momentum we have in the U.S.

both for our store and also online.

Okay. Thank you.

Welcome.

Good afternoon, gentlemen. Could you just come back to more short-term trading, can you just call it weather there has been any sort of spill over from weather impacts in August into September or whether there were any specific drags on short-term trading that you're seeing?

It's always very difficult to tell and there is always we say that you shouldn't focus too much on monthly number. You should look at over a season.

And again, September we're quite pleased, 12% is okay, it's about the rate we had for the year in local currencies.

Okay. Thank you.

Welcome.

Hi, it's actually, Geoff Ruddell of Morgan Stanley.

Hi, there.

Just a quick question, obviously, August was very difficult because of the weather and you therefore exited the quarter with I imagine a lot more stock you intended and stock was up about 40% year-on-year. And my question is when does the -- when would you be taking the markdown for that, because presumably a lot of that markdown hasn't actually occurred during this quarter?

Well, we're looking at the stock. We consider both the level and the composition of the stock to be on a good level that the increase that you mentioned 40% in Swedish krona 38% in local currencies.

It's mainly explained by the strong dollar that has made our purchasing cost much higher and as we book the stocking trade at cost it will take the stock discount [ph]. And there are of course our normal expansion in the increase and then the change in the handling of our supply and invoices.

But when we are looking at the stock level and the composition we consider it as a good. But, just purely looking at that we are not so afraid of that markdowns but it's far too early to say about the markdowns in the Q4 because we still have over two months to go.

So you don't have any significant excesses of summer stock left over?

No, no.

Actually as we indicate we have more fresh garments in the stock than we have compared to the same time last year.

Yes.

Thank you very much.

Yes. Hi, good afternoon.

Two big questions from my side. Just on the first one, can you tell us what would be the full year currency benefit on the revenues at the current FX that you're currently running at 10% for the first nine months just one thing -- can you give us any view on that one?

You mean the translation effect?

Translation effect, yes.

Sorry, we don't tell any of those guidance -- no, no we don't, sorry.

Okay. And the second question, just want to understand on Sweden you closed five stores in the third quarter, it's just the timing issue as you are relocating the stores or the number has permanently come down from 177 to 172?

Yes. I mean we always when we look at the stores we relocate sometimes we closed down when we come to the end of the contract.

That's quite normal. And as an investor you should be aware because we normally -- typically don't close down profitable and successful stores.

Thank you.

Welcome.

Yes, sorry very quick one, can you give us the amount of stores that you had in the 22nd of September?

No. We don't have that number right in front of us, but we will give you the number by the end of September, we give you the full month sales number on 15 of October.

Okay. That's all right.

Thank you.

Good morning guys, afternoon guys. Sorry, my question has just been asked by Chris.

Okay.

Thank you.

Thank you.

Okay. Thank you all very much for participating in this conference call.

And welcome back for the full year results on the 28th of January next year. Bye.