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Executives

Nils Vinge - Investor Relations Manager

Jyrki Tervonen - Chief Financial Officer

Karl-Johan Persson - Managing Director

Analysts

Chamberlain - Bank of America

Simon Bowler - Exane

Anne Critchlow - SG

Erik Karlsson - AKO Capital

Wayne Cooperman - Cobalt

Jamie Merriman - Bernstein

Charlie Muir-Sands - Deutsche Bank

Christodoulos Chaviaras - Barclays

Simon Irwin - Credit Suisse

Rebecca McClellan - Santander

Nicklas Fharm - SEB Equities

Richard Edwards - Citigroup, London

Dana Telsey - Telsey Advisory Group

Paul Rossington - HSBC Global Research

Omar Saad - ISI Group

Hennes & Mauritz B F (OTCPK:HMRZF) Q2 2013 Earnings Call June 19, 2013 8:00 AM ET

Operator

Thank you for standing by and welcome to the Six-Month Results for 2013 Conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question and answer session, (Operator Instructions).

I would now like to hand the conference over to your speaker today, Nils Vinge. Please go ahead, sir.

Nils Vinge

Thank you. Welcome to the telephone conference on the occasion of H&M's six-month results 2013. I have our CFO, Jyrki Tervonen with me and will be happy to answer your questions after the presentation. You will find the presentation slides for this telephone conference on hm.com. Please look at the slide second quarter 2013.

It's been a challenging period for fashion retail in many markets. H&M sales grew strongly in Asia. For example, in China, Hong Kong and Japan, but in total group sales were not satisfactory. This was mainly due to the tough macroeconomic climate that continued to affect market conditions in many countries as well as unfavorable weather in March, Large part of April in several of our large markets.

Group sales increased by 5% in local currency in the second quarter. On comparable units, sales increased by 4%, compared to the same period last year. The continued strengthening of the Swedish Krona against most sales countries' currencies led to substantial negative translation effects both on sales and results.

Translated into SEK, sales including VAT amounted to SEK 36.9 billion, just illustrate the size of the effects. Sales would have been SEK 1.8 billion higher using the same exchange rates as last year. Reported net sales in SEK amounted to SEK 31.6 billion in the second quarter, unchanged compared to last year.

Gross profit was 19.3 billion, corresponding to a gross margin of 61.1%, compared to 61.7% in the second quarter 2012. Largest reason for the difference was increased markdowns. The high stock-in-trade going into Q2 in combination with unusually cold weather during the spring led to higher markdowns than planned. Markdowns in relation to sales had a negative effect on the gross margin of 90 basis points compared to Q2 2012.

Meanwhile, the combined effects from external factors such as cotton prices, cost inflation and the U.S. dollar was more or less neutral on purchases for the second quarter, compared to the corresponding period the year before.

If you look at the next slide, you can see how the gross margin has developed since the year 2000. Seeing in the longer perspective, the gross margin in the second quarter this year is still at a good level.

Please return to the slide second quarter. Looking at costs, SG&A increased by 5% to SEK 13.3 billion. In local currency, the increase was 10%. The increase was entirely due to the expansion into our investments in IT and online as well as & Other Stories in new fashion brand.

Although, most of these large and long-term investments have not yet generated revenue, we see and that's why it is necessary in order to build an even stronger H&M. At the same time, tight cost control is very important and cost control remain good throughout the group also in the past quarter. Costs in comparable stores decreased compared to the second quarter last year.

Operating profit amounted to just about SEK 6 billion, corresponding to an operating margin of 19%. Profit after finance margins was SEK 6.1 billion, compared to SEK 7 billion last year. Profits were negatively affected by increased markdowns long-term investments and substantial negative currency translation effects. After a tax rate of 24%, net profit amounted to $4.7 billion that equals earnings per share of SEK 2.81, compared to SEK 3.15.

And, now looking at some other key figures, please turn to the slide key data. Stock-in-trade increased 12% in SEK and 16% in local currency compared to the same time last year. The increase is mainly explained by the expansion, but also by the fact that sales did not increase as much as we had planned.

The inventory level as of 31 of May was higher than planned, mainly due to the cold spring, but the composition of the stock-in-trade is satisfactory. Cash flow from current operations was SEK 11.2 billion up from 10.7 billion. The increase is mainly due to lower tax payments early in the year.

Investments in terms of CapEx rose to SEK 3.4 billion from SEK 2.6 billion and consisted mainly of investments in new stores, but also in IT and logistics. The financial position of the group remained strong. Liquid funds amounted to SEK 9.1 billion, compared to SEK 13.5 billion. Return on equity was 45% compared to 48%, last year.

Now some words on our expansion. Please turn to the slide, expansion. Our global expansion continues. Earlier this year, we ramped up expansion to around 350 stores net for 2013 from previously planned 325. We have opened more than one store per day this spring. We opened 98 stores in the second quarter and we closed 8. Today, we have more than 2,900 stores globally.

We are increasing our presence in Asia. We now have 200 stores in six countries. China is the single largest expansion market of the group, but we are also growing in Japan, South Korea, Singapore, Malaysia and Thailand. We are also expanding with our other brands, COS, Monki and Weekday, and we are of course looking at more countries in this exciting region.

We have a business model that enables us grow deeply into each market as well as to expand successfully in new countries. In March, we took our first step to (Inaudible) the first H&M store in Chile. It was an amazing opening Santiago de Chile, with more than 2,500 customers queuing up at the flagship store in Costanera Center. Thus far, it is one of the best selling stores of the group.

We see great potential for H&M to grow in this part of the world, and we are looking at other markets. H&M is present in 49 markets across five continents. The first stores in Estonia, Lithuania, Serbia and Indonesia will open in the autumn. Next year, Australia will become the new market for H&M, as we will open our first store in Melbourne, and we already see a great interest in H&M ahead of launch.

Please turn to the next expansion slide. H&M is also expanding online. In August, H&M will launch shop online in the U.S. In parallel, we continue our work on the rollout of online globally with the aim of adding more online countries in 2014. So, we are growing with all our brands and especially with COS, which has had a very good development and is expanding in Italy as well as in new markets. We're also very happy with this fantastic start of our entirely new fashion brand & Other Stories.

Please turn to the next slide. We have launched on 8th March, customers' response has been [positive] throughout the spring. During the second quarter, & Other Stories has opened a total of seven stores, London, Copenhagen, Stockholm, Berlin, Paris, Milan, and Barcelona. We are looking forward to continue expansion. For example with second store in Berlin will open in the autumn.

Shop online at stories.com is available in 10 European markets and is also performing above expectations. The fantastic response by customers clearly shows that the long-term work of developing in & Other Stories has been the right thing to do. In parallel, we are broadening the offering of the H&M stores. One example is H&M sport as we presented earlier this year.

Please H&M will launch a considerably extended and updated sports concept for women, men and children at beginning of 2014. The new sports concept will be launched in H&M's existing online marketing and in selected H&M stores in around 15 countries to begin with. And now, we are also delighted that H&M will address the Swedish Olympics team both, for the winter Olympics and Paralympics in Sochi in 2014 and for the Summer Olympics and Paralympics in Rio de Janeiro in 2016.

Our design teams are developing these collections in close corporation with the group of Swedish Olympians, including gold medal winners such as (Inaudible). Our customers will also benefit from the R&D corporation as the clothes regimens, updated sports concepts will also have been tested by the Olympic athletes.

Now, before we start the Q&A session, just a few words to summarize. After many years of brining private consumption up until 2007, recent years have been clearly tough for fashion retail, including the past six months in naming the H&M's large markets. Still we have performed relatively well. We keep taking market share in most markets and we strengthened our position in customer service.

H&M's business model works everywhere and allows us to grow deep into each market, so the potential to expand is huge. We are also making substantial long-term investments that will generate large revenue in the future. Our position is strong and we have an attractive offering and we see that sales in June have started well. Sales increased by 14% in local currencies from first 17 days of June, compared to the same period last year and we have strong collections campaigns for the autumn.

And now, we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first request from Richard Chamberlain from Bank of America. Please ask your question.

Chamberlain - Bank of America

The first question I have got please, or two questions. First one is on the gross margin. You indicated in the statement that gross margin was down 60 bps, that you had a markdown impact of 90. What was the balance, the plus 30? Was that coming from mix and pricing? Was there something else driving that?

Nils Vinge

Well, as you know the gross margin is affected by a lot of different factors. There may be 25-30 difference, so keeping 30 bps is really not something material.

Chamberlain - Bank of America

Okay. So, there was no one major factor then. There's moving gross margin positive. Okay. Thanks. Then second question just on the current trading number that you gave for the first 17 days of June. Have you noticed an increase in the promotional activity, industry promotional activity so far in June in your major markets?

Nils Vinge

Well, so performance up to 17th of June is a mixture of course of the sales and [price] selling. We are looking at the different markets. We see quite heavy summer sales and when we are looking at our own selling, we started sales more or less in the same week as we did previous years, but coming back to these sales activities in different markets, it's a quite bigger campaigns and reductions [what we see].

Chamberlain - Bank of America

Okay. So, the timing, the calendar timing sounds about the same, but the depth of promotional activity sounds little bit more than last year. Is that fair?

Nils Vinge

Yes. That's quite fair. We have started the sales in most of our countries, the same week as we did last year. I think, we have seen certain countries it's maybe delayed one week, but more or less the same starting point as last year.

Jyrki Tervonen

The depth varies a bit from country-to-country, but this year is of course for the group in total.

Chamberlain - Bank of America

Okay. So, it would be more, say, your new cadence within Japan lot of (Inaudible) as an example. Yes. Okay. Okay. Thanks very much.

Operator

Your next question is from Simon Bowler of Exane. Please ask your question.

Simon Bowler - Exane

Hi. Just wanted to ask a quick question on the long-term investment that you've been making. If I recall correctly at the start of the year, you stated these would be higher this year than they were last. And also the timing of the cost would be quite variable between quarters, so I was just wondering would the increases [happening] halfway through the year whether you can confirm still you view the investments will be high year-on-year and also how you expect that to play out between the first half and the second half.

Jyrki Tervonen

We feel that the long-term investments this year will be on a higher level than last year. Exactly how they will fall in Q3, Q4, but there are no major shifts between first and second half of the year. But on an aggregate level, this year the investments will be on the high level.

Simon Bowler - Exane

Okay. And, at this stage do you have any sense on whether these will continue into the next financial year, or is that how they play out across the second half?

Jyrki Tervonen

They will continue also during 2014, but we have to come back to the levels when we are in connection with the year end closing.

Simon Bowler - Exane

Okay. Thank you.

Operator

Your next question from Anne Critchlow of (Inaudible). Please ask your question.

Anne Critchlow - SG

Good afternoon. It's Anne Critchlow from SG. I have a question on China and Russia, because it seems as if these countries are producing the weakest comparable sales figures as far as we can calculate. Could you comment on those please?

Jyrki Tervonen

No. That's not correct. I think it's always difficult to look at the revenue increase and the other source, because we are challenged somewhat to depend upon [offering] in the quarter. That was now say they don't have the weakest. As a matter of fact, China has a very good development.

Anne Critchlow - SG

Okay. Thank you. And, just a quick comment also please on your sourcing, with the focus on Bangladesh, whether your cost of goods sold be slightly to rise or whether you be shifting sourcing to other regions?

Jyrki Tervonen

Well, the sourcing is something we always work on, and Bangladesh is one important country and China is still the most important sourcing country and we always look at new markets, but it's not that we are going from one country to the other. And, again, the sourcing, there are so many factors in the sourcing where cost of course are important, but it's also fashion, it's quality, it's lead times, it's sustainability et cetera, but yes we see an increase of salaries among the suppliers. Of course all in China for us, but also in countries like Bangladesh, where we are actively contribute to this, because for [reasons] of course, everybody needs to be able to level their salaries.

Anne Critchlow - SG

Okay. Thank you.

Operator

Your next question from Erik Karlsson from AKO Capital. Please ask your question.

Erik Karlsson - AKO Capital

Hello. Thanks for taking my question. I have a question on the online rollout. You indicated, you would open several markets next year. Could you just tell us what gives you the increased confidence on that you will be able to accelerate this now, and which markets do you are the very most attractive to open online? Thank you.

Jyrki Tervonen

Well, this is of course one important element in the long-term investment and we are working intensively with the preparation for global rollout and that's why we have more confidence now in announcing that we ambition at least is to announce several countries over the next year, but we will come back with more information about what markets they will be.

Erik Karlsson - AKO Capital

Thank you.

Operator

Your next question is from Wayne Cooperman of Cobalt. Please ask your question.

Wayne Cooperman - Cobalt

Hi. I was just wondering if you would comment on what the capital spending plans for this year and next year might be, and given the high dividend, if you would consider cutting the dividend or you will just spend negative cash flow while you grow?

Jyrki Tervonen

The CapEx for this year, when we went into this year we said the capital expenditures will be somewhere between SEK 7 billion and SEK 7.5 billion, and it leaves more up towards the SEK 7.5 billion for this year. When it comes to future dividends, that's clearly a question from the board of directors and finally a decision to be made in connection with the annual general meeting.

Wayne Cooperman - Cobalt

And, just in theory are you guys okay paying out a high dividend and just having negative cash flow after CapEx or that's more of a board question?

Jyrki Tervonen

As I said, all this dividend question, it's a question for the board of directors.

Operator

Your next question is from Jamie Merriman of Bernstein. Please ask your question.

Jamie Merriman - Bernstein

Hi. Good afternoon. Thanks very much. My questions are about some of your newer markets where you are planning to launch and I was just wondering if you could tell us a little bit about how you are thinking about the southern hemisphere collection, maybe what you have done from a personnel perspective to build out that launch?

Then also from a distribution perspective, in launching the store in Chile, what distribution capabilities do you have for the region and have you already also started in Australia along the same lines?

Jyrki Tervonen

That was a few questions in one, but I'll try to answer as good as I can. The logistic questions since I was Head of Logistics prior to this position. I am very proud of the logistic setup in the company which is very, very scalable, and they have a very efficient logistics supply chain and in South America, we worked together with the third-party supplier.

Jamie Merriman - Bernstein

Okay.

Jyrki Tervonen

…it's outsourced. And, obviously if you look at the figures, we had a great success. We were the first store in Chile and the customers have really, and they really appreciate H&M and our collections, so we have now a solution for how to handle the reversing things, but exactly how we do it? I will tell you, but obviously this customer is (Inaudible) good fashion and latest trends. And regarding Australia, we have signed one store in Melbourne and it's a fantastic site and we will come back to you with more details later.

Jamie Merriman - Bernstein

Thanks very much.

Jyrki Tervonen

Welcome.

Operator

Your next question is from Charlie Muir-Sands of Deutsche Bank. Please ask your question.

Charlie Muir-Sands - Deutsche Bank

Good afternoon, a couple of questions on the gross margin, and then onto the OpEx.

Jyrki Tervonen

Is one at a time.

Charlie Muir-Sands - Deutsche Bank

Okay. Yes.. So, on the gross margin I think you've probably in the past given us some indication as to what you think the outlook for aggregate external factors is. Do you think that they will be neutral or positive as we get into the second half of the year?

Jyrki Tervonen

Let me make it clear, when we are talking about these external taxes like cotton capacities, salaries, transpiration and the currency effects mainly from the seller. We are talking about these external factors that's more or less what we are saying is spot prices and/or market prices.

Our prices can of course be something else, but for the coming quarters as we aggregate these four, five external factors that the effects on our purchases would be then in Q3, new growth maybe slightly negative and that also goes for the fourth quarter.

Charlie Muir-Sands - Deutsche Bank

That was great. That's very helpful. Then on the OpEx, the first question is on your comment on same-store costs being down year-on-year. Was that only or overwhelmingly because the volumes and the sales were down, or is there a cost saving program or would they have been down anyway?

Jyrki Tervonen

We have a really good cost control. It's one major part of our mindset within the group to bring the cost conscious and that yet in the comparable stores in that second quarter, they were down in comparable stores the operating cost, but one have to remember also that that most of those operating expenses are more or less fixed on the short-term that we can adjust and have some kind of a flexibility stocking in the stores, but also there it differs a lot from market-to-market.

Some markets we have to set the schedule for one month ahead other markets it's more flexibility. So, of course when have a quarter with a like-for-like development from minus 4, then it's really, really hard to balance it out in a quarter.

Charlie Muir-Sands - Deutsche Bank

Yes. Very clear. I suppose what I'm trying to get to the bottom of it. Is it sensible to assume that you are able to deliver declines in same-store costs in the subsequent quarters, because of ongoing cost saving initiatives whether they were down in Q2 purely as a result of the weak revenues?

Jyrki Tervonen

I think if I try to explain, we are always looking into the cost situation. We don't have any huge cost saving programs going on except that we are looking at the traveling expenses. That's something that is going on, even with the turnover development, which is better than minus 4 and like-for-like, so doing it both in good times and bad times then you come out each year in the work.

Charlie Muir-Sands - Deutsche Bank

That's very clear. If I could just move on to the non-like-for-like OpEx, is the cost of opening new stores the same as it ever was and therefore this extra cost growth purely related to strategic initiatives, or is there an element also of the cost of growth going up?

Jyrki Tervonen

No. I think it's simple answer on that, but obviously it is somewhat much more costly to open up a new store in Chile than adding a next store in Germany, right? But, again, the increase in OpEx is expansion and the long-term investment.

Charlie Muir-Sands - Deutsche Bank

Great. Thank you. That concludes my questions.

Operator

Your next question is from Christodoulos Chaviaras of Barclays. Please ask your question.

Christodoulos Chaviaras - Barclays

I think that was a good try. Hi, guys. Chris Chaviaras from Barclays. Two questions for me one at a time. You are talking about the continuation of the investments in fiscal year 2014, but I was interested in finding out the timing where you are going to see revenues going up, because you have talked about investments actually yielding into higher sales.

And, could you help us maybe with a couple of examples of the investment that you have done, what you expect and the timeline with that. Is it possible? Like I guess you have invested in the online platform that, which you expect to get benefits as you launch online. Is this the main part or what other parts could consist revenue growth?

Jyrki Tervonen

Yes. It's as you mentioned online is one part which is starting to generate revenues. In August, we are opening the online sales in U.S. And, as we said earlier in this conference call, we have the ambition to open several online countries during 2014. That's our exactly examples of long-term investments that we have down the past two years and now they are starting to generate revenues.

Another example & Other Stories. Third example is the broadening of our existing concepts like the sports concept, but until now they have of course more or less cost a lot of investment money, but we are so assured that this is the right and wise thing to do for us in the long-term and they will generate big revenues in the future.

Christodoulos Chaviaras - Barclays

Well, that is a fair comment, but do you expect for you to have to invest more in the online platform as you are allowed in the new countries in 2014 or should we consider that this investment is now done?

Jyrki Tervonen

I think it will continue of course. Each markets we have to make some adoptions for (Inaudible) things and as I said also the long-term investments for 2014 will continue about exactly how what level that we have to come back to in connection with the year end, so it's not that that we are just making one-time investment. It will continue, but it will be on a reasonable level and it will be within our CapEx for year, so it's not a dramatic thing.

Christodoulos Chaviaras - Barclays

Okay. That is fair. My second question then is on the cash and the dividend, and I totally understand that you're not going to say what you are going to do with the dividend that happens in January, but you have commented in the past that you do like to above the 50% payout ratio which is the norm which you always exceed though.

You like to give out shareholders excessive cash and your cash has been going down for at least two consecutive years now. There was another 30% down year-on-year this quarter. Is there a level of cash that you consider as non-excessive, i.e., is there a threshold where you say that "you know what? We don't want to give more of our existing cash position." Is there a such level?

Jyrki Tervonen

I think, we are looking at the cash situation. We still have a strong balance sheet and the strong financial position and I think that the most important when looking at the cash situation is that we will be able to expand 10% to 15% per year and also have the opportunity to take the opportunities at the [write-off]. I think that's the mindset when looking at the cash situation within the group, so I think that's a lot if we have a long-term goal to increase 10 to 15 stores and also to have the flexibility to take opportunities that might come up, so of course we should have the funds for that.

Christodoulos Chaviaras - Barclays

Okay. Is the SEK 7 billion to SEK 7.5 billion then the normal kind of CapEx level, going forward? Do you think? Should we assume something like that?

Jyrki Tervonen

We will come back to the level for next year. This year it mostly likely will somewhere between, yes, more or less SEK7.5 billion. But as we said earlier, it's a moving target. It can go up and down and when it comes to next year, of course, we will still remain the expansion 10 to 15 more stores next year, but they are not negotiated and the major part of them, so what these capital expenditure will be 2014 that we have to come back to.

Christodoulos Chaviaras - Barclays

That's fine. Okay. Thank you very much for that.

Jyrki Tervonen

Thank you.

Operator

Your next question is from Simon Irwin of Credit Suisse. Please ask your question.

Simon Irwin - Credit Suisse

Good afternoon, gentlemen. Firstly, just could you talk a bit more about LatAm? I mean, obviously, we have had one store opening in Chile and we have seen the numbers which look quite high, but obviously judging by your comments, you are planning on opening kind of many more stores in many more markets.

Given very high levels of import duties in Latin America, how do you price yourself in Chile? How would you expect to kind of price yourself in other markets and which other markets you are looking at?

Jyrki Tervonen

We see definitely at big potential in Latin America, and we are very happy the entrance in both Mexico and Chile, but you are right. I mean, most countries in Latin America has difficult import barrier et cetera that we are of course looking into. So, I can't comment on when we will enter and price levels, but for us it's always about having the best [fashion, quality], best price in every market.

Simon Irwin - Credit Suisse

Do you think you might have to source some product locally?

Jyrki Tervonen

We are open. We are very pragmatic and we have been sourcing in Latin America and Mexico before, so we don't do alternate things.

Simon Irwin - Credit Suisse

Okay. Can you just talk a little bit about your admin expenses, okay? Because, they're obviously going up relatively fast at the moment while other costs are quite static. Firstly, are they predominantly Krone-oriented and headquarters kind of based or are they in a kind of lot broader mixture of currencies and where is that money being spent?

Jyrki Tervonen

The majority is Swedish states today. It's our organization here in Stockholm, and as you know we have profit and loss, where we have some functions going up in the cost of goods sold like the buying organization, (Inaudible), but the rest of the admin departmental functions in Stockholm, they will be there like IT, for instance, part of IT is there, so they are more Swedish Krona-based.

Simon Irwin - Credit Suisse

So, should we expect to see that continue at a similar level through the rest of this year?

Jyrki Tervonen

I think, we are looking at both the selling expense and administrative expenses. We have a good cost control and it's more or less reflecting the expansion that we have and all these long-term investments when we are ramping up the long-term investment or when we are building up the new concept that of course we also need to looking to the organizational when it comes to the administrative costs.

Simon Irwin - Credit Suisse

Okay. Just one final one. The net interest income in the first half is down third on the prior year. Are there any kind of particular [features within that]?

Jyrki Tervonen

It's a natural results from the fact that this is (Inaudible) and interest rates are low.

Simon Irwin - Credit Suisse

Thank you.

Operator

And, your next question is from Samantha (Inaudible). Please ask your question.

Unidentified Analyst

Hi. Good afternoon. I just wanted to know in the second quarter in terms of sales were there any products categories closing accessories anything that were underperforming.

I am just curious, we talked about the weather, unseasonably cold weather, sharp et cetera, et cetera, but did anything sort of swap or fell flat or what kind of feedback are you getting from the shop in terms of the product and how popular the product has been?

Jyrki Tervonen

No. We are happy with the collections and we see that it mostly put our traffic in the stores that have been weaker due to the weather and macro.

Unidentified Analyst

Okay, but no products in particular that didn't do well. It's a [fall] issue?

Jyrki Tervonen

Absolutely.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question is from Richard (Inaudible). Please go ahead with your question.

Unidentified Analyst

Thanks very much. Two questions, one is U.S. centric. How do you plan to build the inventory to support the online business? Will it be all the skews that are seen in stores, or will it be an edited assortment? And the second question relates to first, first. Go ahead.

Jyrki Tervonen

Yes. As it is right now, it's a same product in stores and online in the continued market even though it's still not 100% neared in online, but we are working on expanding the offering also online. Today, I think it's just about 50% or something you can find online and I guess that would be the start in the U.S. as well, but I think, as we develop over time.

Unidentified Analyst

And, regarding South America, the different seasonality, do you have a separate line when you go into South America and then into Australia? Or is it last season's product being introduced to those markets to adjust for the weather?

Jyrki Tervonen

We have developed a national departures to (Inaudible) to provide mix to these markets, so the they can find seasoned products and make [trends], but we don't go into detail exactly how it's loaded.

Unidentified Analyst

I understand. Thank you very much.

Jyrki Tervonen

You are welcome.

Operator

Your next request from Rebecca McClellan of Santander. Please ask your question.

Rebecca McClellan - Santander

Hi. Good afternoon. Rebecca. A couple of questions, firstly on your CapEx, the SEK7.5 billion full-year guidance if that's what we want to call it implies a flat second half CapEx package despite an increased number of openings. Does that imply that there's some forward CapEx in the first half or there's some one-off CapEx, perhaps, CapEx of a one-off nature in the first half or is a question of timing?

Jyrki Tervonen

I think it's a matter of timing. The target of SEK 7.5 is still there but as you said, this is of course a moving target could be even lower or higher. This is the best estimation as of today.

Rebecca McClellan - Santander

Okay, It's all of a recurrent nature?

Jyrki Tervonen

Say again please?

Rebecca McClellan - Santander

There's no particular one-off CapEx within the target? Secondly, can you just give us an idea of, I saw a comment on Bloomberg this morning about negotiating sourcing in (Inaudible). Could you give us a word or two on that please?

Jyrki Tervonen

Yes. Of course, we are looking into this but there is nothing new to tell the market. There's nothing to say that.

Rebecca McClellan - Santander

Okay. Advanced stage or is it?

Jyrki Tervonen

I don't want to comment. We will see.

Karl-Johan Persson

Yes. We are looking into that, but as you said no decisions made, but let's see in the future if we start to also use the big, nothing neutral for that.

Rebecca McClellan - Santander

Thank you very much.

Karl-Johan Persson

You're welcome.

Operator

Your next question is from Nicklas Fharm from SEB Equities. Please go ahead.

Nicklas Fharm - SEB Equities

Thank you very much. Good afternoon. I have two questions. One at a time. Firstly, I would like to ask you about your performance, say, over the past half year or in the most recent quarter, in terms of like-for-like.

Do you think you are actually being losing market share in, say, your key Nordic plus U.K. France markets which is something like half of your business, or do you think you have actually performed in line with the market or maybe even taken market share?

Karl-Johan Persson

It's of course always very difficult for me to specify what is the market, which is different from the way you define it, but I mean, we have grown in 5% in the first six months and most of our markets have actually had declining new markets. That's exactly we have taken market share. Of course, then there are in some markets have been strong than the others and then also have to look at the, if you take the U.K. and the U.S. for example, where we very strong development last year.

Nicklas Fharm - SEB Equities

Could I also ask you a follow up question on the like for likes recorded in, say, now in fiscal Q2, negative 4-ish. How does that break down in terms of [foothold], conversion rates and maybe price mix?

Jyrki Tervonen

Main is you reach the [foothold], our conversion rates are up and also the average receives, but the foothold is down. That's mainly foothold.

Nicklas Fharm - SEB Equities

So, once you got the customers in your store, they actually liked what they saw. Can I ask you finally on the issue of currencies? Given the quite negative translation effects that you have been experiencing now for some time in your P&L, in particular, is there any discussion to actually change the currency of reporting at H&M?

Jyrki Tervonen

No concrete, but of course we have got this question several times and why don't you report in Euro et cetera, so of course if we have had the euro based reporting, the development have been quite different during, especially looking at the years where the Swedish Krona has been strengthening, and so I can’t remember exactly, but when sometimes when we look to 2009, I think it was in Swedish Krona development from 2009 to 2013 was something like 20% and if we would have euro as the reporting currency, I think it was around 50%. So, of course, that's how it goes when the Swedish Krona is strengthening and vice versa of course. No concrete plans to change the reporting currency.

Nicklas Fharm - SEB Equities

I understand. Thank you very much, guys.

Karl-Johan Persson

Welcome.

Operator

Your next question is from Richard Edwards from Citigroup, London. Please ask your question.

Richard Edwards - Citigroup, London

Yes. Hi. There was a question on your U.S. store portfolio. I noticed you shut seven stores in the first half is more than any of your other markets. I just wondered what drove those closures. Any themes you could pick out of that?

Jyrki Tervonen

Yes. Most of them were old stores and not so profitable. And, in some cases they were let's say we had a better store across the street or in the same mall or whatever, so yes --.

Richard Edwards - Citigroup, London

Should we still assume store openings for the year on a net basis? And if so, can you give us a rough sense of how many stores you might open this year in the States?

Jyrki Tervonen

Well, we definitely would see a lot of the store openings in the second half in the U.S. So, we said that U.S. looks to be the second largest expansion market for this year.

Karl-Johan Persson

Maybe I should add, just closing down stores is quite normal for us if we find a better location (inaudible) or we need more (Inaudible) so it will always add a rotation in the closing down some stores when it's coming up at better locations.

Richard Edwards - Citigroup, London

Okay. Thank you.

Operator

Your next question is from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey - Telsey Advisory Group

Good morning, everyone. As you think about pricing and the components of the gross margin, how is inflation, raw material costs impacting future pricing, going forward and does it adjust regionally? Thank you.

Karl-Johan Persson

Well, as we said before, if you aggregate the external factors as we call on, which includes also raw material like cotton, catastrophe, transport, et cetera, they are roughly neutral or slightly negative for Q3 and Q4 as we see today, but again this is before we negotiate and we before we work for improvements efficiency gains et cetera, so this is pretty very market prices and stock prices

Dana Telsey - Telsey Advisory Group

And just one other quick thing on the newer concepts that you have versus the core H&M and online, qualitatively, do you see the returns of the business changing at all with online coming into the mix and how that contributes to the bottom line? Thank you.

Karl-Johan Persson

We are very excited about online opportunities that creates for us, and for us we see it not just as another channel, we see it as a we talk about seamless offering and multichannel and that's why we are investing so much in this. It's one to just set up a pure online store, but we are really looking to make it integrated with the retail store. And, so from a margin perspective, we don't see, if you look at the online operations we have already in eight markets in Europe, they are very successful and possibility is on par with recent operations.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

Your next question is from Paul Rossington of HSBC. Please ask your question.

Paul Rossington - HSBC Global Research

Good afternoon. I have got a question about your expansion profile from a store perspective. It just appears that you do not materially, even though the U.S. and China might be your biggest markets of expansion from a single or two territories per store, you are not materially diluting your exposure to those four European markets, which are, A, most challenging, and, B, where we might expect you to face the biggest threat from increasing competition.

Is there some timeframe or a target you are aiming for to reduce your exposure to Europe via expansion in some of these Asian or American markets? Can you give us any timeline or percentage target of revenues somewhere?

Karl-Johan Persson

No time line and no percentage target for revenues, but I mean, this is very prognostic that we see and we still have a huge potential to grow in Europe and I think that's one of the strengths of the company and the business model, but we can still expand in, what you call, mature markets perhaps. We will have the business model that works in big cities and smaller cities and mid-size cities as well as shopping malls, so there's a lot of potential for us to grow for many years in Europe and on top of that, we can grow in new markets in the U.S. and Asia, et cetera.

Of course, if you look at the opening so far this year, around 28% or something or 23% is actually happening in Asia and Russia and those are we call emerging markets. For us they are all new markets.

Paul Rossington - HSBC Global Research

Okay. Thank you.

Karl-Johan Persson

Welcome.

Operator

Your next question from Omar Saad from ISI Group. Please ask your question.

Omar Saad - ISI Group

Thank you. Hi. I was wondering if you could discuss any changes that you are seeing either globally or regionally in the evolution of the competitive landscape.

Are you seeing a lot of new entrants, whether it is bricks and mortars, fashion retailers or online retailers? And, are they having an impact in the marketplace or is your leadership position still so dominant that it's not really having an impact? Thanks.

Karl-Johan Persson

I think the fashion apparel is one of the most competitive industries in the world, and that's why we can never sit down and become complacent. We have to always be on our toes and try to improve things and that's why continuous improvement is one very important value of the company and we see of course obviously online retailers coming to the market as well as new bricks and mortar payers, but at the same time we also see competitors going out of the business.

So, I think all-in-all, I mean, it remains a very tough and competitive market and we can never relax, but we see lot of opportunities and we have great confidence in what we do.

Omar Saad - ISI Group

Thank you.

Operator

(Operator Instructions). And there are no further requests at this time. Please continue.

Nils Vinge

Okay. Thank you all very much for participating in this conference call, and welcome back for the nine months results on the 26th of September. Good bye.

Operator

That concludes the conference call today. Thank you for participating. You may disconnect.

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