H & M Hennes & Mauritz AB (publ)

Karl-Johan Persson - CEO Jyrki Tervonen - CFO Nils Vinge - Head, IR

Chiara Battistini - JPMorgan Cedric Lecasble - Raymond James Charlie Muir-Sands - Deutsche Bank AG Richard Chamberlain - RBC Capital Markets Anne Critchlow - Societé Generale Simon Irwin - Crédit Suisse AG Andrew Hughes - UBS Investment Bank Geoff Ruddell - Morgan Stanley Dana Telsey - Telsey Advisory Group Paul Rossington - HSBC Investment Bank Adam Cochrane - UBS Investment Bank Simon Bowler - Exane BNP Paribas Omar Saad - Evercore ISI

Hello everyone. Thank you all for joining us today.

You are very welcome to this telephone conference on occasion of the H&M Group's full-year and fourth quarter results for 2017. With me is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge.

I will start with a short introduction about market and our performance in 2017, Nils will take us through the financial details. And then I will talk a little bit about our digital investments and how we accelerate our transformation to meet customer expectations in a rapidly changing market.

After that, we will be happy to answer your questions. And you will find the slides to this telephone conference on h&m.com.

As most of fashion retail is changing rapidly. At the heart of this development is the digitalization and it is driving the need to transform and to rethink faster and faster.

The competitive landscape is being redrawn and is looking different today and very different than just 10 years back. There are examples I mean the new big players like Amazon and Alibaba, new business models are emerging, and in an ever connected world, a lot of niche players or everything that's in e-commerce players that are able to reach customers in a way that they would not have been able to say 10 years back.

As a result, the customer behavior is changing fast also, with the digitization more and more shopping is moving online, mobile shopping has grown a lot in recent years and this results also in reduced traffic to a lot of physical stores around the world. And the mobile hello has also become central for customers to read, research, explore the shop fashion, as well as for sharing content and inspiration with friends.

So this increased transparency is of course a good thing for customers and it boosts their expectations, and therefore, customers are also expecting much more from us all in everything from the assortment, the design, value for money, personalization, newness of products, sustainability, and convenience. So it's a different competitive landscape change consumer behavior and all companies are one way or another affected by this and all companies are in different phases of adapting and many are having a tough time and in that process, price pressure is growing as well.

And while the shift brings a lot of challenges, we also see a great deal of opportunities ahead, and we believe that we're well-positioned to seize these opportunities, and I will tell you more about this shortly, but first a few words on 2017. Sales including the VAT amounted to SEK 232 billion, an increase of 3% in local currencies of 4% in Swedish kronor.

This was clearly below our own and the market's expectations, but there are also quite a few bright spots. Several parts of our business performed well during the year.

The H&M Group online sales developed well. The new business portfolio with our newer brands such as COS, Monki, Weekday, and Other Stories, in H&M Home also continued to perform well, both in physical stores and online, and we also launched a new brand ARKET in a successful way and thereby adding to our platform of brands to grow within the future.

Sales were also good in our new H&M stores which have delivered according to plan. In comparable H&M stores however performance was weak in many of our large mature markets and this development narrowed the shift in the market from offline to online.

And also we have to say that we have not improved the shopping experience as quickly or as rapidly -- as to rapidly increasing customer expectations require. In addition, in the fourth quarter, there were some imbalances in parts of the assortment of the H&M stores and that also has affected our performance and this is obvious -- this is something that we are correcting.

In parallel with these developments during the year we also continued investing for the future within a number of important areas and I will tell you more about this in a moment. But first I hand over to you, Nils.

Thank you, Karl-Johan. Looking at some profit numbers, gross profit was SEK 28 billion in the fourth quarter compared to SEK 30 billion last year.

This corresponded to a gross margin of 55.4% compared to 57% in the fourth quarter in the previous year. Due to the weak sales in the autumn at H&M comp stores markdown costs increased by 130 basis points as fair sales.

Looking at the market conditions for external sourcing factors such as capacity, transport costs, salaries among suppliers, currencies, and raw material prices, taken together there were slightly negative during the purchasing period for the fourth quarter compared to the corresponding period the year before. Gross profit for the full-year was SEK 108 billion corresponding to a margin of 54%.

For purchases made for the first quarter of 2018, the market situation for the external factors is considered to be neutral overall compared to the corresponding purchasing period for previous year. Looking at selling and administrative costs, cost control in the Group remains good in the fourth quarter SG&A increased by 2% into SEK 23 billion.

In local currencies the increase was 4%. For the full-year SG&A increased by 6% in Kroner and 5% in local currencies.

For the fourth quarter, profit after financial items was SEK 4.9 billion and for the full-year profit after financial items amounted to SEK 21 billion compared to SEK 24 billion in 2016. Net profit was SEK 4 billion in the fourth quarter equaling earnings per share of SEK 2.41 compared to SEK 3.57 in the corresponding year earlier period.

And with a tax rate of 22.2% for 2017, net profit for the year was SEK 16.2 billion compared to SEK 18.6 billion the previous year. Earnings per share was SEK 9.78 compared to SEK 11.26.

And looking at some key data. Stock-in-trade on the 30th of November amounted to SEK 33.7 billion an increase of 6% in Kroner.

Currency adjusted the increase was 7%. The stock level was higher than planned as a result of sales development during the autumn being considerably below the Group's sales plan.

Combined with weak sales at the beginning of the first quarter 2018, this is expected to lead to an increase in March of around 150 basis points to 200 basis points in the first quarter of 2018 compared with the same quarter last year. Cash flow from the current operations was SEK 21.6 billion compared to SEK 23.8 billion.

And investments in terms of CapEx totaled SEK 2.5 billion compared to SEK 13.3 billion, and for 2018, CapEx is expected to be in the range of SEK 12 billion to SEK 12.5 billion, with a big shift from new physical stores to digital. Liquid funds amounted to SEK 9.7 billion compared to SEK 9.4 billion.

At the end of the financial year short-term loans amounted to SEK 9.7 billion, with an interest rate of 0 to 7 basis points, SEK 9.3 billion of this is in the Nordic countries while SEK 425 million is spread in various local markets outside the Nordic countries, wherein some H&M sales markets local rules and currency restrictions make it more favorable for the Group to use local funding. The board of directors will propose The Annual General Meeting a dividend of SEK 9.75 per share to be paid out in two separate portions.

However, in view of continued high investment areas such as digitalization, the board of directors will investigate the possibility of offering all shareholders an opportunity, but not an obligation to reinvest the dividend received by the newly issued H&M shares. This is known as dividend reinvestment plan.

Further information on this including the timetable will be communicated at a later stage before the AGM. If the reinvestment plan is introduced the H&M Group's largest shareholders, the Stefan Persson family and related companies intend to reinvest the dividend received in 2018 in the plan.

Return on equity was 26.8%. Our global expansion continues to create new jobs.

During the year the number of employees increased by approximately 10,000 which means we are now more than 171,000 colleagues in H&M Group and this translates to 123,000 and 178 employees full time. And now, back to you, Karl-Johan.

Thank you, Nils. We are a company with a lot of strengths and one of them is our size.

But despite us being a big company, we still have a relatively small share of a large and growing markets. Another strength is our portfolio of brands, we have eight unique brands today, with business models that are proven offline and online and all of them scalable.

We also have a strong company culture and a very competent employees and our long-term approach is another strength. Our way is to always focus on our customers, stay true to our business idea, and invest for the long-term.

Of course we also want to perform well in the short-term perspective and lately we haven't done this well enough. And therefore, now, we are accelerating our work, our transformation work, and we have three main action areas connected to this and one is to improve the core of our customer offering for all our brands.

It's also to invest enablers for an even better customer offering and it is also to invest in driving growth and expand in new ways. And if we can just say a few words on these areas we will talk more about them in detail during the Capital Market Day.

Our first and most important action area is to improve the core of our offering and this goes for each brand of course. We have grown rapidly in the past years, and I believe, we haven't focused well enough on our customers.

And this goes mainly for the H&M brand and this we need to change. We must always have the best customer offering for all brands and this, the most important part is our assortment our product.

And so the best offering and to improve and to have more relevant assortment when it comes to the mix of the products, the sign of the product, value for money, this is it and also to sustainability. We also need to improve our physical stores.

They need to be more inspiring and more convenient customer experience and be more customized to local needs. We have tested a number of new things in various locations globally with successful results in the form of positive customer feedback and sales.

And based on these learnings we are assessing a plan to be able to scale this up. At the same time, there is a need to constantly optimize the store portfolio in order to secure that each market has a store network that fit customer demand and the new shopping patterns.

We're also developing the digital stores to make shopping easier and more aspiring, and this includes I mean improving things like navigation and making it easier for customers to explore our assortments, offering the best repayment options, and fast and convenient delivery options. In parallel, we are also integrating our physical and digital stores to offer our customers, a great, seamless shopping experience with services ranging from Click and Collect, online returns in stores, Scan and Buy opportunities, mobile payments and also better deliveries.

The second area is to invest in enabler, so new technologies and new ways of working to improve the customer offerings. And the first area there is to improve our supply chain and we are investing a lot to become even faster, more flexible, and more responsive, all the way from product development and design through logistics and sales.

Connected to this we will also invest even more in AI, in advanced analytics. And we see big potential here across the board from assortment planning to supply chain and sales.

And we will also continue to prioritize investments in our tech foundation and this includes rolling out our scalable and robust platforms, but we also need to invest lot in having faster development of consumer phasing apps and also broadening our use of technologies like Cloud, RFID, and 3D. Our third action area is to drive growth.

We are expanding in both new and traditional ways. We are expanding our online presence.

In 2017, we added another eight online markets, nine including Kuwait via franchise. Today, H&M brand has e-commerce in 44 markets and in, 2018; India will become a new online market for H&M, as well as Saudi Arabia, the United Arab Emirates via franchise.

And looking ahead, we will expand online to all markets where we have stores and more markets added to that. We will also broaden our assortment and rollout our online stores to more markets as well as linking new platforms.

In March 2018, both H&M and H&M Home will launch on Tmall in Mainland, China. Tmall is the world’s largest e-commerce platform where we already offer our brand Monki and Monki has showed very good performance in China and Tmall which is owned by the Alibaba Group will be an important compliment to our existing physical and digital stores in China.

We are also in for advanced talks with Alibaba to extend our collaboration to include the other brands of the H&M Brand on Tmall. At the same time, we still see room for expanding the physical stores in many regions and countries.

Emerging markets are a main focus for new H&M stores going forward, markets with strong underlying growth, but we also see potential for new stores in other places. For 2018, our best assessment is that we will open around 390 new stores and close approximately 170, resulting in a net addition of approximately 220 new stores for the H&M Group and this will also mean a lot of renegotiations.

Our other brands will also be a part of the expansion. Building new brands is an important part of the growth strategy of the H&M Group and we are developing and launching new brands for new needs and segments.

We have eight brands today in addition to H&M the Group includes COS, Monki and Other Stories, Weekday, Cheap Monday, ARKET, and H&M Home, all of them are unique and all are scalable and they combine the advantages of being small players with a backbone and economies of scale offered by the H&M Group. And by testing new things small scale, they can provide also provide learnings to the rest of the Group.

Soon we will launch our 9th brand, Afound. Afound will be an off price marketplace offering a carefully selected, broad, and diverse assortment of discounted products from well known quality brands, external as well brands from the H&M Group.

Afound will launch with both digital and physical stores during 2018 starting in Sweden. The first Afound store will open in Stockholm.

In parallel, we are also working on new ideas, new business models that will drive us forward and there are many interesting ideas in our pipeline for 2018 and the years to come. So this was the short overview of 2017 and an introduction to our main action areas and expansion plans.

Before we move over to the Q&A session, some words on current trading and the outlook for 2018. All in all we feel 2017 was a year where we made many step forward and did more groundwork for the future.

But we have also made mistakes, which slowed us down and these we are correcting and at the same times we're speeding up our transformation agenda. But the ongoing industry changes are challenging everyone and this will continue in 2018 and this is clearly visible in our sales at the start of the first quarter of 2018.

The growth target of the H&M Group is to increase sales in local currencies by 10% to 15% per year with continued high profitability. And this is our long-term target.

In view of our transition work to meet the major shift in the industry, we do not expect the growth targets to be reached in the current financial year. But we have what it takes to navigate through the turbulent times that our industry is going through, we have the experience needed, we have great colleagues, great company culture, and we have our long-term perspective, we have a clear action plan that we are now implementing at full speed.

So we look optimistic. When we are optimistic we're looking ahead.

We would also like to remind you about our Capital Market Day. Capital Markets Day on the 14th of February where we will present more details about our brands and business as well as our action plan to drive further future growth.

We're looking forward to go into more details on this at the Capital Markets Day where we will have plenty of time to elaborate. Thank you and now we're happy to take your questions.

Good morning. Hi, thank you for taking my questions.

My first question would be on the cost of the online and convenience initiatives you are implementing especially following your announcement last weekend that you're introducing free delivery and returns, so what kind of cost that we should be thinking of going to the P&L from 2018? And then, going back to your comment on the expectations for growth for 2018 not being at the 10 to 15 medium-term target, should we though expect the like-for-like to return to positive territory in 2018 would you say?

Thank you.

Yes. I'm not sure if I got it correctly, but the cost connected to our online store and the introduction of the free returns and delivery, this is something that we are introducing to club members in the countries where we have the H&M Club and the H&M Club we are rolling out to -- the plan is to roll it out to all the countries.

So I mean it's an ongoing work. We don't know what the demand will be for this but we had a strong belief in it that it will be very much appreciated by club customers.

And if that's the case -- we -- I mean it's happy customers will lead to good performance for H&M and we have the strong profitability in our e-commerce part of the company and we're looking forward to show and talk more about during the Capital Markets Day. We feel very confident in that business is the right thing to do.

When it comes to 2018, I'm not sure again if I heard you correctly, but we had, 2017 was a year below our expectations and the market's expectations and partially due to the shift in the market, but also we haven't delivered -- we haven't improved good enough and also we made some mistakes connected to the assortment mix for the H&M Brand which has affected the quarter four sadly and also the start of quarter one. So a tough start to the year, below our expectations, but I believe we will gradually improve during the year, and we will see by how much, it's also uncertain times for the whole industry as I have said.

So I don't want to give an exact figure, but gradual improvement and we're not meeting the best figures for the second half year 2017 and we are gradually improving. So we believe that we will at least see better sales and better profit second half 2018 compared to second half 2017.

So Q2 should still be a transition quarter?

I mean quarter one has started below expectations, so we have higher reductions as well. Quarter two, I think part of this will continue.

So I don't expect a big change but I mean it's I think we have lot of improvement as well. But we will see what I can say is gradual improvement and I believe second half 2018 will be stronger than second half 2017.

Yes, good afternoon gentlemen, Cedric Lecasble from Raymond James. I have a follow-up question on your assortment issues and you mentioned assortment mix problems in Q4 and at the start of Q1.

Could you be a little more precise and explain to us what happened and beyond this what are you currently doing on your assortment to make it more attractive and don't you think that you could eventually make a little more with less rationalizing the number of SKUs, could you elaborate a little bit on that? Thank you very much.

Well I mean first of all I think it's important to say, I mean, we are developing nicely online. We still have the strong sale and we do customer surveys in all markets and we have a good position for the H&M Brand and a much appreciated assortment.

But if you compare quarter four to quarter four the year earlier, we made some structural or we made some mistakes and that's not to say that the attractive -- the assortment can always get better, but it's more connected to the assortment mix. We had, I mean, too much on certain products and too little of that we shouldn't have had and too much -- too little of products that we should have had.

And this is always the case but it was more, you always want more of the best and best of the least good news, but it was more evident and we made some mistakes connected to this. So the structure or the mix of the assortment connected to prices, connected to fashion level, connected to product type, without going into too much details.

Normally we're quite good at it, but we made some mistakes during quarter four and that affected the selling and also leads to higher reductions now. The good part is we know what it is and it's something that we can correct.

But at the same time, as I have said earlier, one of the prioritized areas is for all brands to improve the core that is to say the customer offering. And the most important part is to improve constantly improve the assortment and we will focus a lot on this to make it even better, even more relevant, and we will also invest in this to improve quality, improve prices, improve speed of buying, and with it comes newness as well, so a part is connected to investments as well.

And how does is your online assortment compared to the physical assortment, how do you play with those proposals?

I mean now we're developing nicely online, we are expanding, we are improving the store, we're also broadening the assortment online, and that we will continue to do. So but where we have had a weak development as I mentioned earlier during the year is in H&M's comparable physical stores.

So we are exploring new concepts around the world and the good thing is that we have got -- we had some really good receipts from customer feedback on the shopping experience and also good sales selling receipts. So now, the next step is to just test a little bit more to verify and then to scale it up.

And this mix issue, sorry --

But, but -- you go, you go, yes.

No, just this mix issue on the assortments that you had, is it phasing out towards the end of Q1?

Yes, it is, I mean, some part of it is I mean connected to the high reductions that we are expecting now and that we will have in quarter one. And then we will see how February goes and then we -- hopefully we're in a better situation entering quarter two when it comes to the stock situation.

And then again, I believe gradual -- we will say gradual improvements over the years.

Thank you. We would follow-up at your Investor Day.

Yes, good afternoon. My first question is on the inventory position and your markdown.

I appreciate you still have one month left to go in Q1, but given that your inventories continue to rise faster than your sales and basically you are not buying as much inventory presumably the age of it must be getting up a bit longer. Do you think that you'll be carrying too much inventory by the end of Q1 and therefore be expecting further markdown in second quarter?

And then the second thing is that now we seem to be swinging at least from negative input cost pressures to neutral and perhaps given where currencies are, you might be enjoying a tailwind later in the year, how should we be thinking about your priorities there in terms of supporting the P&L as opposed to the reinvestments you alluded to particularly around price and quality? Thank you.

Yes it's -- we went into quarter one with too high inventory, as we said, and this is something that leads to higher reductions in quarter one, and then, hopefully, we will be in the best situation entering quarter two. It's too early to say anything about the second quarter.

At the same time we are also improving our work in the supply chain to become even faster and more flexible. So we're buying later we have quicker deliveries or quick lead times from the time to sales which is good.

And what was the second question, I'm sorry, was connected to --

The potential tailwinds -- experience cost pressures.

Normally we comment on the, I mean the big external factors influencing the purchasing costs, such as, currency, cotton prices, transports, production capacity, and so on and now we have the favorable situation connected to the dollar versus the selling currencies and that is -- has been against us for quite a while now but now it's in our favor. And that of course is a good thing and but there are so many other factors influencing the gross margin as well.

So we don't want to give a guidance but of course that helps.

Thank you. And if I may ask one final cash flow question, you have given us the guidance on your CapEx for the year which is effectively for still for it to remain high even though you are opening much fewer stores.

I appreciate the investment in areas like digital do you think this is an area where you're spending harder to catch-up or even with slower store opening perhaps next year capital expenditure will remain high?

When it comes to the capital expenditure for 2018 we estimate it to be around the same level as 2017, SEK 12 billion to SEK 12.5 billion, with the same currencies used exchange rates for 2017. As you said, we are shifting the investments more towards the digital and the share for brick-and-mortar is going down.

When it comes to 2019 it's too early to say, but the direction is that we are shifting more to online digitalization, AI, and et cetera, as Karl-Johan mentioned earlier.

Yes, exactly. But at the same time we have these tests for the physical stores that are really -- looking really positive.

And if we continue to get the receipts we -- I think -- we're on -- we are or they miss and we will be in a great position to ramp up the rebuilds of the H&M Stores. But, yes, that's a good thing.

And as in previous years this is a moving target of course. There are a lot of negotiations not ended.

So this capital will probably be something else during the year but we will in normal order give a new guidance maybe in the half year report or in connection with the Q3. But this is what the estimate is at this time.

Yes, thanks very much. Chiara asked a question on space guidance please, you said I think in the statement that you are planning to open 220 stores next which is growth I think of around 4.5% for the year in terms of store terms.

Should we expect the net space though to be opened to be a little bit lower more like maybe 3% to 4% but presumably you will be closing larger H&M stores and I think you said that you are opening almost a 100 non-H&M stores. So should the space growth be a little bit lower than that in the coming year?

A little bit lower, yes.

Okay, all right, thanks. A little bit lower.

And just -- and also a financing one, why was the cash tax paid, I think it was higher than the P&L charge for last year, what was the main difference for that?

That's normally in a lot of countries you have a preliminary tax and it’s normally based on the result from the previous years and also an upgrade in the result. So what we have if you look in the balance sheet we have a tax receivable approx SEK 2.3 billion.

So a lot of countries they use the preliminary tax schedule and the companies are paying it in during the year. And in our case, when we went down in result, we have paid too much gross and that's tax shown in the cash flow statement.

But if you look also in the balance sheet, we have a tax receivable, as I said, amounting to SEK 2.3 billion.

Thanks good afternoon. My question is on Afound.

Are you planning to put clearance for that for the H&M brands into Afound and if so will you ship them from local warehouses to a central stock position?

Well, yes, maybe but that's not the main idea. The main idea is to bring something new to the off-price market it's a huge market, it's a market that is growing and I think we have a great opportunity to take a big part of that.

And to do that well we have to bring something new and that is by bringing in well created assortment of carefully selected products from a lot of brands. So a lot of external brands from different price segments, a lot of well known brands but of course also our own brands.

But the Afound team will choose for products to offer to the customers. So it will be I mean a great wide assortment and fantastic deal.

So it's, if you want stylish products and the great deal that's the place to go, we believe. But we will tell -- we'll start in Sweden and we'll see how it goes.

Okay, thanks. I will ask it another way.

Will it be current season product or previous season product from the external brands as well as H&M?

A mix, it will be current season, it will be last season, it will be vintage clothing, so it will be a combination.

Okay. Thank you.

And then one question please also on Nyden, I read in the trade press that this was a brand you are planning online only premium in the Millennials and is this something that is actually happening or was it sort of fake story?

No it's actually we said earlier today that we have two new ideas that we’re looking into two business models with I mean great potential if we do it well and we will talk more about that later. Nyden, is something different, it's a small test that we are I mean it's a small team working on it and it’s something that we will test during the year.

But it's not -- it's not one of the two I mean, business models that I mentioned earlier today.

Hi gentlemen. How much damage do you think you were doing to your brand by the constant clearance markdown because it seems to me you guys have stuck in a cycle of ever increasing inventory, ever increasing markdown, and declining full-price sales?

And I'm wondering why this year is going to be any different to the last three?

Yes, well of course we have to improve. As I said earlier, we are investing a lot in the supply chain to become even faster, more flexible, more responsive.

We are looking into our production capacity and production stepped up, we are mapping up and making investments in the whole logistics networks to have more optimal garments flow. We believe that that will help us a lot.

The investments in AI will help us to quantify even better and allocate the assortments even better. But then of course the most important thing is to continue to develop products that our customers like for all brands and that I believe we will do.

And those two -- those things in combination will help us to come down in inventory level to better levels in relation to sales. We do --

Carry on.

Yes. We also of course -- do we constantly monitor?

We do anonymous surveys in all markets to see where we stand, our brand strengths, and what the customer feedback is for our assortments and so on and we still have a really good position in all markets. So still a good position, strong brand name but of course we want to improve.

Right. Relative to the historic levels, your inventory levels are approximately 30% higher therefore you got a huge amount of inventory which clearly didn't want to buy at full-price which you're trying to sell through the business.

I mean how much damage do you think that was -- those are going to do to full price sales over the next six months or so as you try and sell this through? And why are we not going to get into the same problem in six months time as we've been going through for the last 18 months then?

Yes, see what I mean obviously we're not -- we are not asking for the inventory level going into quarter one, sales did not reach our plans, and as a result of that we have a too high level and the reductions will be higher in quarter one, as we said 150 to 200 basis points higher in relation to sales. By doing that I think we will enter quarter two in a better situation and gradually we will improve over the year with a better assortment and some of the other improvements connected to our production and supply chain work, we will come down better levels.

But I don’t want to give an estimation of exactly how at what levels we will reach in a certain quarter.

Okay. And looking through the country mix of your sales, there are some markets obviously which stand out, I think particularly weak, can you just talk us through the performance of the brand in China and the U.S.

in particular?

Yes. I think the things we -- the things we have spoken about the shift from online to they are from physical stores to online, but the general decline in customer traffic is something that we see in most markets, we see it in China, we see it in U.S., I mean we have two giants in Alibaba and Amazon growing a lot in those two markets.

We also have the mistakes that we have done during end of quarter three and quarter four in the assortment mix affecting all markets, but actually affecting those two markets more than the average. And then, as I said earlier also, I think we are looking back into reflect on what we should have done better, we should have improved the store experience more than we have.

But we are working actively on that and finding these new concepts that hopefully we can scale up. So that’s a combination of various things.

And in terms of the in-store experience how far it runs your trial and when do you think that there will be something that's kind of really noticeable at a Group level?

The trials the store concepts yes it's mainly for the H&M Brand, we have a lot of tests then around the world, we are, I mean the aim is to get the receipt before the end of 2018 and have the opportunity to ramp up the rebuilds in 2019 exactly when in 2019 we don’t know yet but during 2019 we want to start hopefully we have all the receipts we need to start the rebuild program.

Great, thank you everybody. Just going back to the stock issue that we just talked about, was that really the cause of the imbalances that you mentioned across the ranges that you had too much old stock sitting in distribution centers affecting the flow of new stock to the stores or were those imbalances caused by other factors?

Sorry I'm not sure if I understand the question.

Yes, you mentioned that within terms of the product ranges there were imbalances so you didn’t have enough of your best sellers and you had too many sort of poorly performing lines. Was that a direct result of just having too much stock in the business because just thinking that your main competitor probably sitting at about 1% stock to sales ratio and you are up at 17%?

So just feels like it’s perhaps making it more difficult for you to function properly as a business with just that that level of stock sitting somewhere within the business, I assume it’s within your distribution pipeline somewhere and is it clogging up new stock actually getting through to the stores?

No, that's not the case. I mean if we look at this we -- I mean the whole H&M Group world has gotten more complex.

We are a multichannel today compared to 10 years back we are present in many more markets, a lot of differences in customer groups and so on. So we need a more quicker, more flexible supply chain, and that's why we are investing a lot in this and we will see improvements connected to that.

But in quarter four we did some mistakes as well in the assortment mix, and I mean that is -- that affected the selling negatively and that resulted in a higher inventory level that we now have to deal with deal it with and work with. But we are correcting that and hopefully we won’t do the same mistakes again.

And in addition to that I hope we see a lot of other improvements in the assortments and as a result from the investments that we're doing in the supply chain.

Can you identify how much stock is over 12 months old?

No, we don’t. I mean I don’t have that figure here but I mean it's more connected to quarter three and quarter four and we have excess inventory but that we are dealing with now in quarter one.

Right, okay. And so just one another small question while I'm on, you have a small amount of debt which you say is from institutions outside the Nordic region and you’re paying at least 8.75% interest on that, I mean why are you doing that?

Yes, the reason is that is more favorable for the Group, of course we are entering countries with local regulation and currency restrictions. Some countries we finance it with equity for instance then we locked in a lot of money, it's very expensive all more or less impossible to get it back, other countries if we give internal loan then we can’t deduct the interest from those loans.

So in each case when we are entering a new market we are looking into what's the most favorable way of financing the expansion and the start up of a country. So that's the main reason.

All right, okay. And the debt position overall with your -- I suppose you are saying that net debt shouldn’t exceed one-times EBITDA that obviously gives you quite a lot of headroom with EBITDA at SEK 30 billion and the fact that your dividend presumably will half from the SEK 16 billion payment, I’m just working out why you think net debt might actually get any way near that one-time's EBITDA if you are paying half your dividend and equity?

Okay, it's one point net to EBITDA is not a goal in itself. It's just to clarify that we have a conservative view when it comes to leverage ratio and that the goal what we are aiming for as always to have a strong capital structure which means basically that we have a strong liquidity and the financial flexibility to as in the past be able to expand and invest in continued growth.

So one shouldn’t look into that we are aiming for 1.0 as a optimal capital structure, it’s more about to show that we had a conservative view when it comes to leverage ratios.

Yes, good afternoon, thank you. Could I just ask a slightly long-term question about your space growth and your store number plans obviously you are slowing the space growth quite significantly this year, is that something we should think of as a sort of temporary reaction to events or something we should see as happening ongoing?

We will have net openings for the coming years as well but the percentage increase net store openings will come down.

It will come down further from the sort of I guess four-ish percent this year.

Yes, but not a big drop for 2019, but it will be gradually a lower percentage increase from net new stores.

That’s very helpful, thank you. In which case how you’re going to get to back to the sort of 10% to 15% long, I know it’s a longer-term target but how you’re going to get to 10% to 15% sales growth if new space is giving you say 3% contribution to sales?

Then you really have to do double-digit like-for-likes every year?

It's a longer-term sales target. We will talk more about it during the CMD when we can go more into the details about our plans.

I mean most of our growth focus will be connected to the online stores where we had a good growth where we believe we will have a good growth for the coming years, and that will; I mean year-by-year will take a biggest share of the total. Same with the new business portfolio not huge as a part of the company today but it -- convinced about strong growth for many years to come and year-by-year that will take a bigger share of the Group.

We have new business models with great potential that we are exploring as well. And then I mean it’s important to say we have a strong belief in H&M physical stores as well, the trend now has not been great, we haven’t reached the goals that we set up.

But if we just take one example if we can get their receipts we want from the new concept stores that we’re testing which are showing really good selling receipts and we can ramp that up to many more stores. I mean there is opportunity there as well.

But we don’t want to say exactly when or we will reach the target by 2019 or 2020. We are aiming for it and we’re working very hard to get there.

Good afternoon everyone. As you think about your expense structure and you mentioned about renegotiating leases, what are the opportunities in the expense structure given the the lower sales to get some leverage, what are the push and pull whether it’s labor, whether it’s occupancy costs?

And secondly on stores you mentioned improved experience, what are you looking to do that we should look for over the year? Thank you.

Well when it comes to the expense structure, I mean, there are certain minimum levels of course we have certain flexibility of course with certain store operation costs. But one of the great opportunities that we see is to renegotiate rents and that we are doing and we will focus a lot on that, we see a big shift in the market, new stores that we open we will of course be picky as always but maybe even picky to ensure that they are quality locations that we believe in for the long-term and that we get great deals and flexible deals otherwise we will not open.

And your second question was about the customer -- improved customer experience. Well with online sales growing, we -- as most -- it's becoming easier to buy online and the stores need to offer something more.

And more of a great experience not only as a place for buying garments maybe offering other things as well, and also practicing a nicer interior, easier to shop, easier to return, easier to get maybe other services as well. So we are looking into a wide range of things that we are exploring in a lot of different locations, some are working out well, some are not working out, and we’re taking out the best and putting that together in a package and again it's something that we’re looking forward to scale opportunities in 2019.

And as the business gets a bigger online component, does the profitability of the business adjust because of an increase rate of online sales?

We have a good profitability in our online stores and we will go into again about this in more detail in during the Capital Markets Day.

Hi, my question is about Afound. I’m just wondering if you are able to get any detail on when we will see Afound in the UK and what kind of brands will be a good fit for Afound and who you expect the customer to be?

Well we haven't decided. We will start in Sweden and we’ll see how it goes, we have strong belief in it and if it is successful then we will look for other markets.

And UK is a market that will be, I mean it is a big market, it is a market that we know well and it’s more with started off there and it's one of the markets that will be next in line. I can’t tell you about all the brands that we have signed but we -- there are a lot of external brands, great brands and so there are many brands I think that would fit well to Afound.

Customers' people liking rate designs at very attractive prices and I think that group is quite big, it is a huge market, is a huge segment and it is growing. So we'll see if we are successful and then we have a really good opportunity to capture a big part of the segment.

Are you expecting the customers to already be shopping elsewhere within the H&M Group or bring a new customer to the business?

Both. I think it's a combination of giving existing customers something offering them something else and also attracting new customers.

Okay. I've got a couple of questions.

The first one, please, you talked about investing in the supply chain to deliver or sort parts of shorter lead times. Can you actually give us some quantification or examples of what you've done?

Have you materially improved your open to buy ratio, or what percentage of the revenue base do you expect to be able to benefit in this way, just some kind of quantification our gauge of what you've done there? Thank you.

It is hard to quantify, giving you specific numbers. But of course it is helping us, so we have a bigger open to buy and more flexibility as Karl-Johan talked about.

We are also investing a lot in specific distribution centers and more atomization which gives much better and faster KPIs and more efficiencies so we can deliver not just next day delivery but even same day delivery in some cases we have stores for example. But we will talk more about this on the Capital Market Day.

Okay, thank you. On the non-H&M brands, can you just remind us, actually what they represent as a proportion of sales as of today?

I imagine it's still relatively small within the mix.

Right, we will -- again, this is that the same we have to say something for the Capital Markets Day. But we will talk probably about that.

Okay. I have one last question, which I don't think is about the Capital Markets Day then.

On the dividend reinvestment plan, are you actually purchasing shares or issuing new shares? It looks like you're issuing new shares which sounds like a script of a -- than a reinvestment plan to me.

That is why -- the fact is, if you're issuing new shares, this will actually be dilutive to EPS, if I remember that correctly or maybe --

Yes, the recommendation from the board, it's more for them to comment on but they're exploring it further, got the ideas to offer existing shareholders the opportunity for either the full dividend or to reinvest in newly issued H&M shares. And for us, so as a family we intent to reinvest the full dividend into the company because we believe in what we're doing.

Understood. But it's definitely is newly-issued shares -- just to clarify?

Yes.

Yes. Okay.

Thank you.

Thank you.

Hi, I would like to ask you about this sound project if you already have a number of brands you're going to sell and how much you think it's going to impact on your revenues, you have -- you forecasted a percentage on your turnaround that this should represent in your opinion?

How much -- did you -- what’s the question, how many brands we have?

Yes. As a band is going to be about distributing brands not just the H&M brands but also other brands that not belong to a company you already have portfolio a number of brands you can mention?

And the other question is about how much do you think is going to impact in your business it's more a business not a distributor rather than the traditional H&M business as far as I understand that.

Yes. So but I mean plenty of external brands.

Majority of the brands that will offer in Afound will not be our own brands then we will carry -- Afound will carry the H&M Group brands as well. But plenty of brands in the process, so I'm hopefully adding more brands and how much it will affect the turnover is too early to say.

I mean we have a strong belief in it, but we haven't launched yet. So as always when we launch a new brand we launch them, we learn, and we adjust and then we take it from there.

But again it’s a huge market and if we do this well we have really good opportunities to add a lot of turnover to the Group.

If I may ask a last question do you have any plans of other collaborations with well known fashion designers as you did in the past?

You mean for the H&M brand?

Yes, for the H&M brand. Yes.

Yes. I mean it's something that we -- I mean this is a small part of the business but something that we have done well over the years and there is a good excitement from customers and interest from designers as well, so we have some interesting ideas.

Hi, good afternoon. A couple of questions from me, if that's all right.

Firstly, when you think about what actually went wrong in the design process, the ranging in Q3 and Q4 is there any correlation between what seems to be going on with some of your sort of fashion misses, the increase in markdown, at the same time as you're trying to make a fundamental transformation within the business. I actually taking on so much behind the scenes, that there's some of the so-called business practices are maybe being missed?

And then secondly you talked about fixing the range issues. Have you -- what changes have you actually made is it personnel changes, is it process changes, are these things put in place -- are you happy that things are going to be different going forward or just that we won't make that same range and mistake again but it could be another one next season.

Thanks.

Yes. First of all I would like to say it's not I mean it's not passion mistake or design mistakes.

We could have done things best there as well is more securing the balance in the assortment and more of a controlling making sure that we haven't I mean a better balance then we have had during the quarter. So obviously we, we're correcting that.

And when it comes to the team, I mean, yes, but we've had a lot of growth over the years for the H&M brand and for the Group in total. And I think we have to be self-critical and learn and a little bit we have lost the focus on the core the customer offering for the H&M brand is not worse I mean it's at a good level still apart from the mistakes made in quarter four but we haven't improved enough during the last couple of years.

And this, we are correcting and that's why we're focusing extra much on this. And we have also strengthened the management team for the H&M brand by bringing in Madeleine Parton who is a great colleague and I think will -- now will be a great addition to H&M brand.

And a new creative Director in Samuel Fernström, so just mention to two new colleagues who have joined us in.

In terms of thinking about the online growth in the periods, you set out your 25% per annum target. With the online channel are you seeing the same level of discounting and customer behavior online over the last couple of quarters as you saw in-store and how you -- how does it range and a balance issue rather than just people not coming to your stores.

Yes, exactly I mean we know how many people come to the stores and we know there is a underlying I mean in the whole market there's a traffic decline and we have customer counters and so on, so it's easy to see. I mean we have ramped down during the last couple of years roughly in line with in the physical stores in line with the traffic declines.

But in quarter four we did worse than that and that is connected to the imbalances and the assortment is affected the online sales a bit as well in quarter four but we have had a good development online sales development throughout the year and it was also good in quarter four, but it affected the stores more than the online store.

Okay, fine. So the last one is, when you sort of think about what investments you’re going to make both with the digital side, you are talking about store, store refurbishment program maybe accelerating in 2019, is there every chance that your -- in terms of as you look at 2019, you are wanting to finish the investments within the online and the digital piece and you have to layer on a large store refurbishment CapEx charge on top of that.

Sorry, I lost you there. Can you say that again?

If you look at FY 2019 are you going to have to continue to invest where you are currently investing in terms of digital and online and you are going to have to put a CapEx in for store refurbishments as well?

We will see how I mean how many stores, when we get to that situation how many stores we decide to refurbish during the year and also the net new stores will come down, I mean that's likely to happen in 2019 and 2020 and we don’t know the numbers for that yet and then we will continue to ever invest a lot in the connected to the online business.

Okay. And so one final one when you think about Tmall in China, if I’m a Chinese consumer will I see the same price on Tmall as I would say in an H&M store?

Well it will be, I mean there might be periods where there are some differences but we want to keep the same offering out of I mean I think that's good for us as well to try to keep it in line with the rest of the offering in the country. I mean our stores in our own online store.

Good afternoon and three quick questions from myself. Firstly, can you talk a bit about where the store locates sorry where the store closures are located?

Secondly can you put any sort of number on what you would view a desirable level of inventory relative to sales to-date? And thirdly you are showing some extraordinary good cost control over the past 12 months, is that something becomes harder to do if you look to invest more into the store experience or those investments purely kind of CapEx and reallocation of existing costs?

Yes store closures I mean are approximately 170 for the year, I mean it will be in many markets mostly more mature markets for us where we have a lot of stores mainly around Central Europe, Northern Europe, Southern Europe, also a little bit in the USA, some locations in China. So it’s -- I mean we take it market-by-market and we look at its center or location we believe that we have look at the rent deals that we have take a full view and then we try to optimize the portfolio market-by-market.

So it will be in most markets and what was your second question sorry it was?

Inventory levels?

Okay, yes exactly, sorry about that. It’s -- we don’t want to put the number on it but we will try to see improvements quarter-by-quarter by the work that we do, the improvements we make and also the supply chain work.

So that's the aim and when it comes to cost control, yes it has been good, we still can improve further and when it comes to the new customer experience, I mean, it's too early to say but the test that we have are showing good sales increases, yes there of course are higher but the sales justifies that and the profit levels are good. But it I mean it’s early days, we are still exploring this test, but selling and profit wise it looks really promising.

Thanks for taking my question. Good afternoon.

Just one follow-up on the dividend, could you elaborate maybe expand upon some of the statements in the press release about the rationale behind the decision to make this offer on the dividend. I think there were some comments around taking into consideration the financial position and freedom of action of the parent company and the capital structure targets help us to understand how this strategy addresses some of those concerns.

Thanks.

I’m sorry but I think it’s more for the board to comment on that. I mean they proposed this.

They are exploring it. I mean from my role as the CEO I think it’s a good thing, part of that dividend will stay in the company, and that we can -- where we can use it for good investments and that is something for the board to comment on really.

Hello, hi sorry actually that was my question. May be just as very quick follow-up on the dividend, on the exchange ratio what value per share would be used, would it be the share price, the level of the share price or any other value, please?

Thank you.

We'll come back about all the details that we're investigating right now. Sorry.

Thank you all very much for participating in this conference call and we wish you all a good day. Thank you.