Industria De Diseno Textil SA ADR IDEXY
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/13/2013

Operator: Ladies and gentlemen, welcome to the INDITEX Conference Call for the fiscal year 2012 Results. The presentation will be chaired by Mr. Pablo Isla, INDITEX'S Chairman and CEO. This presentation will be followed by a Q&A session comprising two parts. The first part will be dedicated to questions received on the telephone and the second part to the questions received through the webcast platform.

Mr. Isla, you have the floor.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Good morning to all the participants in this webcast conference call featuring INDITEX results for fiscal 2012. I am Pablo Isla and here with me are Ignacio Fernandez, our CFO and Marcos Lopez, Capital Markets Director.

The results for 2012 show the global reach of our business model. INDITEX continues its ongoing multi-concept and multi-channel growth. We now operate a highly diversified business platform. 2012 has been a year of a strong expansion for INDITEX. We have achieved very significant sales growth. We have also had a strong operating performance. The year has been marked by the satisfactory evolution of gross margins, increased efficiencies and tight control of operating expenses. As a result, the Group has generated a strong cash flow.

Due to these facts and the significant opportunities to invest profitably, funds from operations have been invested mainly in the expansion of our business. This growth has taken place through the addition of prime retailer space in markets with high potential.

Our financial performance also allows us to propose a significant increase in shareholder remuneration for fiscal 2012. We have finished the year with operations in five continents through eight formats, with 6,009 stores globally and online sales presence in the most relevant market. We start 2013 with a unique platform that can access growth opportunities globally.

I would like to highlight some key points on these results. In 2012, sales grew by 16% to EUR15.9 billion. Due to the strong sales growth and higher operating efficiency, INDITEX EBIT increased 24% to EUR3.1 billion. Net income grew 22% to EUR2.4 billion or EUR3.79 per share. Return on capital employed reached 39%.

As a result of our performance, the INDITEX Board of Directors is proposing a 22% increase in the dividend to be paid in relation to these results.

Let me now hand over to Ignacio, who will provide you with some detail behind the headline numbers and I will join you later for the outlook section.

Ignacio Fernandez - CFO: Our results for fiscal 2012 continued to show strong growth in all the key lines of the profit and loss account. Revolution of sales has been satisfactory with 14% growth in local currencies.

Like-for-like sales have increased 6% in 2012, with 7% growth in the first half and 6% in the second half.

INDITEX retail space has grown 11.4% to 3.2 million square meters. We have added 322,000 square meters to our retail base over this year. The time weighted growth in space was 10.6%. The ongoing expansion of our Group has led to a global sales platform with the presence in 86 markets and five continents, both in the Northern and Southern hemisphere.

Regarding the gross margin, we can say that we are satisfied with evolution in 2012. INDITEX gross profit has increased 16% to EUR9.5 billion. The gross margin has reached 59.8% of sales as a result of the sales performance, our flexible business model and sustained commercial policies.

Operating expenses are tightly under control. They have grown 14% in the year facilitating the strong sales performance and the significant addition of new retail space. This line includes all the start-up costs for new space and the rollout of online sales.

All the components of the working capital continued to show tight control, (translating) the flexibility of the business model. In 2012, funds from operations has increased 25% to EUR3.3 billion. I would like to highlight the strong investment of 2012 to ensure future growth.

Ordinary capital expenditure was EUR1.1 billion. Extraordinary capital expenditure mainly due to the acquisition of unique retail premises, our 333 Oxford Street/ 89 New Bond Street in London has reached EUR245 million. INDITEX continues to show a strong financial position. Net cash has grown 18%.

I will now handover to Marcos, who will cover some details or the performance of the concepts.

Marcos Lopez Garcia - Stock Market Director: Growing the capacity of our business model to reach global growth opportunities, INDITEX has opened stores in 64 markets over the year to reach 6,009 stores worldwide. Over 2012, all the concepts have increased their sales platform and deepened their global penetration.

As you can see in this chart, Zara continues to represent approximately two-thirds of INDITEX sales and the younger concepts one-third. Zara sales in 2012 have grown satisfactorily at 18% to EUR10.5 billion. EBIT has grown 29% to EUR2.2 billion. Taking as a whole, the concepts have grown very much in line with the Group average. Regarding the younger concepts, I would highlight the strong progression of Pull & Bear, Bershka and Stradivarius.

I will now hand over to Pablo for the outlook section.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Before closing, I would like to elaborate on a number of strategic issues for INDITEX. Regarding the outlook, let me tell you that INDITEX is in an excellent position to take advantage of global growth opportunities. We operate a highly flexible business model and offer a strong fashion proposition with attractive prices.

Our business model avoids the main fixed cost involved in expansion, allowing us to take advantage of growth opportunities wherever they are present. Our global business platform is present in 86 markets, on five continents and through eight formats. We have established online sales in the most relevant markets. We have a strong potential to continue expanding profitably in the coming years.

In Europe, we continue to see significant growth opportunities in both Western and Eastern Europe. It is an area of growth for all our formats and we have online sales presence in 18 markets. We see great potential to expand profitably in Europe for many years.

In Asia, our priority is to leverage the strong presence we have established over recent years. Asia accounts today for 20% of INDITEX sales. Our expansion has been remarkable due to the excellent reception of our business proposition proposed on the latest fashions and the fact that many of the markets are experiencing transformation.

We currently enjoy a very strong position in all the key markets of the region. We're following a multi-concept and online sales expansion in Asia. We see a strong long-term potential for INDITEX in Asian markets.

We also see strong growth opportunities in the Americas, with a number of attractive growth markets. We are also following a multi-concept and online sales expansion in the Americas. Massimo Dutti has launched in the U.S. and Canada. Stradivarius has been rolled out in Mexico and Zara Home in Brazil over 2012.

Online sales have been launched selectively in the United States and Canada. We have continued expanding Zara in Australia and South Africa over 2012, confirming the global reach of our business model.

We will continue to add new stores in both markets over the current year. In 2013, we will continue to optimize our retail base with a number of initiatives. Our recent initiative has been the enlargement of flexible stores.

We are also rolling out the latest image into the newer stores. The average size of newer stores is also increasing. Over 2012-2014 INDITEX is enlarging key stores globally. Flagships like Fifth Avenue, New York, The Place at Beijing, Brompton Road in London, Europeinski in Moscow, Opera in Paris and many more have seen or will see a significant expansion of their retail surface.

We also continue to rollout the new image of our stores at all new openings. Flagships like Parkhouse in London, West Nanjing Road in Shanghai, Faubourg St. Honore in Paris, Ginza in Tokyo, Bahnhofstrasse in Zurich and many more will carry the latest image.

INDITEX is looking for a continued optimization of its retail base through larger stores. The newer stores provide increased product visibility, a stronger (visual) merchandising features and an enhanced in-store experience.

2013 will be a year of a strong expansion for INDITEX. Space growth will be in line with our long-term targets of 8% to 10%. Capital expenditure for the year will be around EUR1.25 billion. INDITEX online operations have seen a very rapid rollout in recent years. Our business model allows a swift expansion of our online sales platform globally.

Zara has built an online sales presence in 18 European markets, the U.S., Japan and China in the second half of 2012. The concepts also have an established online sales presence in Europe. Additionally, some of the concepts have already launched in the U.S. in 2012.

In March 2013, online sales have been launched in Canada for Zara. We will continue to rollout online sales progressively in all the markets in which we are present with the stores.

The next step in this direction will be the launch of online sales in the Russian Federation for Zara in the autumn/winter season.

Regarding shareholder remuneration, the Board of Directors will propose at the General Shareholders Meeting a 22% increase in the dividend for fiscal 2012 to EUR2.20 per share and interim dividend of EUR1.10 per share will be payable on the 2nd of May and a final dividend of EUR1.10 per share including the bonus will be payable on the 4th of November. The total dividend payment amounts to EUR1.4 billion.

Finally, let me tell you that the store sales in local currencies adjusted for the calendar effect of an extra trading day in February 2012 due to the Leap Year have increased 12% from the 1st of February to the 11th of March 2013. As you all know, the spring/summer season is influenced by the performance over the Easter period due to its significant sales volumes.

This is all from us. We will be pleased to answer any questions you may have.

Transcript Call Date 03/13/2013

Operator: Ben Spruntulis, Exane BNP Paribas.

Ben Spruntulis - Exane BNP Paribas: My question is just on your guidance for store openings in the year ahead. Can you give some additional color on the geographic mix of store openings? I think you talked before about 130 store openings in China each year. Also, the mix of flagship stores that you expect to open?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, in terms of our guidance as far as store openings, well, first of all, what I would like to say is, as we were saying during the presentation is that it is much more relevant the space growth figure than the number of openings. The space growth will be in line with our long-term target, 8% to 10%, our medium and long-term target. Then in terms of the geographical mix, you will not see significant differences. This year 2012 we'll have opened stores in more than 60 countries. Of course, the country in which we have opened, more relevant number of stores has been in (China) will continue being the case in 2013. We will continue opening stores in all the different European markets, both Western and Eastern European markets. We'll continue to opening stores in the Americas, in North and South America, in other Asian countries. So, there will not be significant differences from the point of view of geographic mix regarding our space growth plans for the year 2012. In terms of flagship, I would say exactly the same. Regarding flagships, we'll have new flagships and then we also have the refurbishment of existing flagships. Just to give you an example, currently we are refurbishing very relevant stores in Berlin, in Vienna, in London Brompton Road, in Madrid, in (Columbia), so this is a process that we will develop during the year. We will refurbish the relevant stores during this year also in China, in Shanghai and then openings; it will be exactly the same openings in the different geographies, flagship openings in different geographies during the year. So, from that point of view, there isn't any significant change.

Ben Spruntulis - Exane BNP Paribas: Can I just clarify the increase in the average store size, is that driven by the mix between Zara and the younger concepts or is that actually the individual Zara stores you're opening are now larger than the stores you've opened historically.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Not. The mix between Zara openings and the openings of the different formats will not change in any significant way. The idea of larger newest stores has to do with all the branches, but it's a combination of enlarging existing flagships in many different cases and also regarding a newest stores. It has to do with the idea particularly thinking about Zara with this new image that is being very, very appreciated by our customers. This newest stores provide as we were saying during the presentation increased product visibility, a stronger visual merchandising, and in general terms, we could say a better in-store experience and it's something that our customers are appreciating very much, and this is why we are following this route. So, what we are doing in some cases is enlarging existing flagships, one we think they could be bigger and then for the new openings of course when you think about the average sales of our Zara store or any other branded store. You must have remind that when it's a high street location, the size is not always exactly the same, because if you find a very, very good location, you’ll go ahead with the opening, but in general terms what we are trying is to optimize our retail base.

Operator: Geoff Ruddell, Morgan Stanley.

Geoff Ruddell - Morgan Stanley: I was just wondering what impact currency has had on your Q4 sales?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that we do not like to enter into currency impacts on a quarterly basis. In the year it has been positive two points, but you can't perfectly estimate having the evolution of currencies in the different markets. What could have been the impact on Q4, but we don't like to enter into….

Geoff Ruddell - Morgan Stanley: I mean obviously what I was trying to get that is -- that you said in your Q3 statement that your sales were up, I think, 15% on a constant currency basis, half way through Q3 – sorry, for the first half of Q4, and obviously you only produced only 12% sales growth for the quarter. So that would suggest that that was a much weaker performance in the second half of the quarter if the constant currencies – if the currency impact wasn't significant. I was just wondering if there is a currency explanation to that or if sales did slow. I realized it was only a short period of time, but I was just wondering if there was a currency explanation behind that.

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that we always prefer to talk about the season. I mean, you think about the evolution of our sales during the year 2012, you have in the spring/summer season 7% like-for-like, and in the autumn/winter season the second half 6% like-for-like. These – when we talk about like-for-like, it's always in constant currency. So there is no currency impact. There have been like-for-like for these figures. You can see that with that 6% like-for-like sales growth in the second half, we think is a very healthy. So that is why I was saying to you before that we prefer not to focus in any particular quarter. When we analyze our Company, it is always on a full year basis, and of course also, on a half year basis because these are the two seasons that we have during the year. Having that in mind, we are seeing a 6% like-for-like sales growth in the second half of the year that shows what we could say the real evolution of the business during that season.

Operator: Rebecca McClellan, Santander.

Rebecca McClellan - Santander: (Indiscernible).

Pablo Isla Alvarez de Tejera - Chairman and CEO: Sorry, we cannot hear you very well Rebecca.

Rebecca McClellan - Santander: Can you hear me now?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Yes.

Rebecca McClellan - Santander: Can you give us an idea of (indiscernible) disruptive impact there might be from the flagship refurbs?

Pablo Isla Alvarez de Tejera - Chairman and CEO: In terms of the evolution of sales?

Rebecca McClellan - Santander: Yes.

Pablo Isla Alvarez de Tejera - Chairman and CEO: No, no but if I have understood properly your question, you mean if there is any impact on sales coming from the refurbishment of flagships?

Rebecca McClellan - Santander: Is there is any disruption to the (indiscernible)?

Marcos Lopez Garcia - Stock Market Director: Rebecca we’re not expecting any significant – you know this is well planned along the year and obviously, we’ll try to minimize any kind of disruption through all (these processes) of enlarging the flagships, introducing the new image and we are not expecting anything significant from this programs which are for 2012, 2014.

Pablo Isla Alvarez de Tejera - Chairman and CEO: No, (what we could) say, because we have always been refurbishing our stores, this is not anything new, as our average year in the last (10) years we are refurbishing stores because we want what we – we’ll like to talk now about the refurbishments with this new image because we think it's more strategic. It's not only refurbishing new stores, but it's also more strategic because of what the new image is adding to Zara in particular. But from the point of view of disruption or the evolution of the business as Marcos was saying, it is something that we are quite used to do. We have going through refurbishments during many, many years always trying to have the best possible image in our stores.

Rebecca McClellan - Santander: Of the EUR1.25 billion CapEx for 2013, I'm assuming that all ordinary CapEx, all right?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Yes, this has to do really – if you see the ordinary CapEx in the year 2012 was EUR1.1 billion and then this EUR1.2 billion ordinary CapEx in the year 2013 has to do with the normal evolution of the business. It's our estimation at the beginning of the year, because having in mind the space growth that we think we will see during the year 2013. So, yes, all of which is ordinary CapEx, very much in line with the growth of the business.

Rebecca McClellan - Santander: One final small question please, rental expenditures were up only 9% in 2012 in contrast the constant currency sales up 14% or 15%, so can you explain where the difference is there please?

Marcos Lopez Garcia - Stock Market Director: As you highlighted, we have – we are very pleased with the way that rental expenses have performed over the year, and I think it shows the tight control of the Company in the operating level. I agree with you that 16% sales growth in the context of this level of growth in rental expenses is very, very good, but I think is the normal management of the Company focusing on the different aspects of the operations.

Rebecca McClellan - Santander: So this is timing issues or anything?

Marcos Lopez Garcia - Stock Market Director: There are some timing issues as well, but not very relevant.

Operator: Fraser Ramzan, Nomura.

Fraser Ramzan - Nomura: Just actually coming back to the issue of operating expenses, good to see some leverage over personnel expenses, but your other operating expenses actually rose by 30 bps relative to sales and I’m wondering if a significant part of that might be the build of online fulfillments within your cost base; so that's one question. Then my second question was literally just about inventory. Looks like you had about 80 days of inventory at the year-end, which is a sort of five-year high. I’m sure you're going to say you are very happy with that, but are there any sorts of timing issues around the inventory position to consider?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Regarding our operating expenses the first thing I would like to say is that, globally our operating expenses are having very – I would say good performance during the year. The main drive of our operating expense is of course, is a space growth then we also have some as far as part of our expenses are variable and with very strong like-for-like sales growth, then it also has an impact on operating expenses and then you have currencies. You could assume currency impact; regarding operating expense, very similar to the impact on our sales during (the year). Then the different lines of the operating expenses, while there could be one, two points in any particular lines, particularly, if you think about the other operating expenses, if you’ve seen the global evolution of the business and you had something related to logistics, something related to online, because of online growth, it’s not dramatic from any point of view. I think it’s the normal evolution of the business with some specificities. Then, regarding the inventory position, Marcos you could elaborate a little bit.

Marcos Lopez Garcia - Stock Market Director: Nothing materially, if you like to take out to review, you will see that the inventories growing up 14%. So very much in line with the growth of the business. So nothing on that subject.

Operator: Anne Critchlow, Societe Generale.

Anne Critchlow - Societe Generale: My question is about the gross margin. I think over the first three quarters, you saw an increase in the gross margin partly because you had such strong like-for-like sales growth. Now that the like-for-like sales growth has slowed below normal levels in Q4, the gross margin went down. So, should we expect the gross margin to go down in the current year, if we are expecting a return to say 3% like-for-like for the current year?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, first of all, what I would like to say about the gross margin is that globally during the year, we are quite happy with the evolution of the gross margin. The gross margin has increased 45 basis points. In the first half of the year, we have had a significant increase. In the second half, a stable gross margin as we anticipated to you a few months ago that we were expecting a stable gross margin during the second half of the year. What do we think about the year 2013? Our expectation at the beginning of the year is for a stable gross margin for the year 2013. You know that the stable for us means plus or minus 50 basis points because there are so many elements involved in the gross margin that it is very difficult to predict at the beginning of the year, what is going to be the evolution of the gross margin, and you must also have in mind that very demanding comparables that we have regarding the gross margin because of the high levels of the year 2012, but globally, I would say a good evolution of the gross margin during the year 2012, a stable gross margin in the autumn/winter season and our expectation for the year 2013 is in the same line, a stable gross margin for the year 2013.

Anne Critchlow - Societe Generale: Just a quick one on Uterque. You only had three store openings last year and they're still in launch phase. So, could you comment on the prospects for Uterque please?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, Uterque have format in which we're not thinking about a significant number of openings in the coming years. It's very selective. You talked more about cities than about countries, when you think about Uterque expansion because we cannot open Uterques in many different countries. So, the number of openings of Uterque will be limited and it has been the case in the year 2012 and it will continue being the case in the coming years. So it's a good brand. Our customers appreciate very much the brand, but from the point of view of expansion and from the point of view of sales, it will not be a relevant part of our Company.

Anne Critchlow - Societe Generale: Why can't you open it in many different countries?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Sorry.

Anne Critchlow - Societe Generale: What is the reason, why you can't open it in many different countries?

Pablo Isla Alvarez de Tejera - Chairman and CEO: No, what I was saying to you is that with Uterque, we think more about cities than about countries. For example, if we think about a – I don’t know for example – with Uterque, we have gone to China the last year and we have opened in Hong Kong and Beijing, but we cannot think about all the other Chinese cities for Uterque, or if we go to Turkey, we go to Istanbul, we go to Russia, we go to Moscow. We cannot think about all the other cities of Russia, that is why I was saying that the expansion is more limited because of the type of brand we're talking about. So now we have the stores in different countries, but we are not thinking in all these countries to go to additional cities it will be limited from that point of view.

Operator: Warwick Okines, Deutsche Bank.

Warwick Okines - Deutsche Bank: I was wondering if we could just look back at the gross margin across the whole of last year and gross margin was at a record level. I’m sure you -- why people prepare to breakdown all of the elements that drove that gross margin, but could you say whether markdown was at record lows during last year?

Pablo Isla Alvarez de Tejera - Chairman and CEO: As we always say the gross margin it’s a combination of many different thing and we are satisfied with the evolution of the gross margin, the year 2012 that it has a lot to do with everything with (indiscernible) markdowns, fashion trends, currencies, like-for-like sales growth, it’s a combination. So, we never like to isolate any specific element regarding the gross margin.

Warwick Okines - Deutsche Bank: Could you say what the price difference is between Europe and China for the Zara brand, please?

Pablo Isla Alvarez de Tejera - Chairman and CEO: The difference regarding what?

Warwick Okines - Deutsche Bank: The average price.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Average price, China and Europe are very similar. Of course sometimes it depends on the evolution of currencies, but broadly similar in China and Europe.

Operator: Paul Rossington, HSBC.

Paul Rossington - HSBC: Can you just come back to gross margin, which I apologize? Was there any particular factor that just changed that trend in terms of gross margin performance in Q4 relative to the rest of the year? I appreciate it is in line with guidance over the full year, but Q4, obviously, was a negative shift. Any particular factors there?

Ignacio Fernandez - CFO: Paul, I would like to reiterate what we have been saying over the call. We are very satisfied with the gross margin evolution. It is 45 basis points higher than the previous year. You cannot break down gross margin by quarters because we operate by seasons; very strong performance (as half as) stable second half, and all this in the context of 16% sales growth and our expectation for 2013 is for broadly stable gross margin. It is a very demanding comparable. So this is as far as we can go.

Paul Rossington - HSBC: One quick follow-up. The payout ratio and the dividend looks broadly unchanged year-on-year. Should we expect any increase in the payout ratio going forward?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that regarding the use of the cash flow that we generate, our priorities remain the same. The first priority is to invest in the long-term profitable growth of the Company, but we also like to combine these with an attractive predictable shareholders remuneration policy. Our stated policy is 50% payout ratio and then the possibility of extraordinary dividends. This year 50% would have been EUR1.9 per share, we are adding more EUR0.3 per share as extraordinary dividend, which means a 58% payout ratio, 22% increase in the dividend, EUR1.4 billion distributed as dividend. So we think it's very much in line with our policy and we are not expecting any relevant change in that sense.

Operator: Richard Edwards, Citigroup.

Richard Edwards - Citigroup: A quick question on the non-Zara concepts. Massimo Dutti and Oysho seem to have fairly sharp EBIT declines in the year. Could you just give us some sense of the P&L dynamics behind that?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, first of all, what I would like to say is that the brands altogether have had a very good performance. We have double-digit sales growth, double-digit EBIT growth, EBIT margin above 16%, return on capital employed above the average of the Group. So, as you know, we always prefer to analyze the brands different from Zara altogether and not to analyze brand per brand. Considering them altogether within the years 2012 has been a year of very, very good performance for the brands. Then if you enter into the details of any specific brand, you have some brands with very, very strong performance. I would mention Bershka, Pull, Stradivarius Marcos was saying during the presentation. Massimo Dutti had a very, very demanding comparables because of the years 2010 and 2011. In the case of Oysho, the figures are very low. So any small change could mean a big change in percentage terms, but there is nothing very specific to say about that. I would come back to what I was saying at the beginning that globally the brands, most of them are present in more than 50 different countries, very internationalized, very well-appreciated. You must have in mind that we have one brand, which has sales EUR1.5 billion which is Bershka, very big company and then four others with sales above for around EUR1 billion – three others, sorry, with sales above for around EUR1 billion, Massimo Dutti, Pull and Stradivarius. So globally, I would say good performance of the brands during the year 2012.

Operator: Richard Chamberlain, Bank of America Merrill Lynch.

Richard Chamberlain - Bank of America Merrill Lynch: Question for me please on Spain actually. Pablo, just wondered if you can comment on the relative performance in Spain. I appreciate we're talking about round percentages in terms of disclosure, but performance does seem to have strengthened a little bit in the second half, I guess, offset by Asia coming off a bit. So I just wondered in Spain, is that like-for-like sales driven or is there any sort of space impact in the second half to talk about?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You must have in mind (being in) Spain in the second half that we’ll have absorbed the VAT increase. So this means that – well, you understand it perfectly. You know that this means three points regarding sales because the VAT has increased from 18% to 21%. So as far as we'll report, of course, our sales without the VAT, the fact of absorbing the VAT increase that took place at the beginning of September. So for the whole second half, we could say has a technical impact.

Richard Chamberlain - Bank of America Merrill Lynch: Is it your sense then that some of your competitors raised prices because of the VAT increase and you kept your prices stable and that may have led to some market share gain?

Ignacio Fernandez - CFO: Nothing as significant way. I think most of the companies absorb the VAT.

Richard Chamberlain - Bank of America Merrill Lynch: And just one sorry, one small follow-up on back on the gross margin. Was there any mix impact from the higher weighting of China in the mix during the year? Obviously that’s a lower gross margin market and there is a lot of space maturing there at the moment. So, was there any mix impact on gross margin because of China or not?

Ignacio Fernandez - CFO: Nothing relevant from that point of view.

Operator: Jose Manuel Rito, BPI.

Jose Manuel Rito - BPI: Just a question on the flagship stars in the release, you are mentioning that you should expect any large amount of flagship starts in 2014. Is this a step up in terms of future acquisitions in terms of flagships and this year, if you assume – if you think that this should affect the return on invested capital?

Ignacio Fernandez - CFO: No, you mean if this is going to have an impact on return on capital.

Jose Manuel Rito - BPI: Yes.

Ignacio Fernandez - CFO: No, nothing as significant way. It will not change the global picture of the Company. I think the enlargement of flagship is more qualitative than quantitative. It's something extremely relevant for us from a qualitative point of view, it's a strategic, but from the point of view of returns, from the point of CapEx, it has not has relevant impact. You know that the company is very big, so this type of actions regarding various specific stores are very relevant from a strategic point of view and from a qualitative point of view, but not that relevant in terms of their impact for the global figures of the Company.

Operator: Geoff Lowery, Redburn.

Geoff Lowery - Redburn: A quick one please. Can you talk to us about your franchise business? It both grew within the mix and contributed disproportionately to base growth last year. What markets, in particular, driving that trend?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, globally the franchise business is not changing the contribution of the franchise. Franchises represent around 15% of our total business in any particularly because of the calendar of openings are a few malls here and there, it could be a slightly different but globally there isn't any change. You know that our franchises are mainly in the Middle East, in South Eastern, in Southeast Asian countries and in Central America and we are growing very much in line with the rate of growth that we have in other geographies. So nothing very, very relevant to say from that point of view. I mean the evolution of the business is in line with the global evolution of the business in the Company. It's around 15% of our business.

Geoff Lowery - Redburn: Perfect. Just on franchises generally, are there any major markets that you would be interested buying in?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Currently we feel very comfortable with the current structure. So we are not thinking about anything relevant in the short-term.

Operator: Jamie Merriman, Bernstein.

Jamie Merriman - Sanford C. Bernstein: My question is actually a follow-up to Richard Edward's question about Massimo Dutti. I understand that you look at the other non-Zara concepts together, but if we just take the margin move at Massimo Dutti. Can you just give me some idea of whether that was more driven by operating costs or gross margin change across the year? Then just a follow-up on online, I think recently you said that about 80% of your returns from online go back to stores and I was wondering if you can give us some indication of how that has evolved over time as you’ve expanded the online business to more markets?

Pablo Isla Alvarez de Tejera - Chairman and CEO: I would answer to you about online beginning with the final part of your question. The returns that take place through our stores remain at the same level around 80% of the returns take place through our stores which is very good news for us, because of course, we talk about returns but in many cases instead of their – of our returns, it's just because of change in the sales. The customer comes to our store and for us it’s an online return and store sale and if it is a change of the sales formally, but if they are from accounting perspective it is like that it’s online return and store sale, but for us of course is very good news and this has not changed because of the expansion of retail.

Marcos Lopez Garcia - Stock Market Director: Yes, refreshing some numbers about Massimo Dutti, you have to remember Jamie that in 2011 Massimo Dutti EBIT grew by 14% and return on capital employed reach 79%. So you have to put these numbers in the context of the previous ones.

Operator: Andrew Hughes, UBS.

Andrew Hughes - UBS: Another question on currency, I mean a few years ago you have this natural hedge where you buy about 30% from the Far East and you received about 30% of revenue in dollars, but clearly with the Americas and Asia rising, you got a much higher level of dollars received. So does that mean that you do get an impact from a stronger euro and was that behind the pressure on the gross margin in the fourth quarter?

Marcos Lopez Garcia - Stock Market Director: No, Andy the situation remains very much the same. We have (not very much) much, because as you say we (sold in) euros around 65% of total and we sell in euros more or less 70% of total. So there is not a significant currency impact in the gross margin over the year.

Andrew Hughes - UBS: Presumably, as the Americas and Asia grow further, you will be affected by any strength of the Euro?

Marcos Lopez Garcia - Stock Market Director: On the contrary, what will happen is that the net share position we have in dollars will probably be reduced due to the higher number – the higher revenues coming from non-euro countries. So the (not very much) will probably increase.

Operator: We are now finishing the Q&A session. To address the questions received through the webcast platform.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Good morning everybody. We're now going to go through the questions that have come in through the webcast platform. We had some questions, particularly regarding current trading in Spain and the impact of VAT – or the VAT increase, which have been covered during the question-and-answer session. So our first question is regarding the new store image at Zara. Are you happy with the new store image? Can you measure its impact in any way?

Ignacio Fernandez - CFO: Well, I would say, I was referring to this during the Q&A session. I think that globally we are quite happy with the new Zara store image. It increases product visibility, it improves in-store experience. Our customers are quite happy. So globally, we are very satisfied. From the point of view of returns productivity, there aren’t big differences compared to the global figures of the Company, as I was saying before.

Unidentified Company Speaker: We’ve had another question from Patricia Cifuentes, Fidentiis, he was asking about the depreciation charge in the fourth quarter which was around 3% and in the fiscal year that had the depreciation growing around 8%.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, regarding that question depreciation has been mainly in line with ordinary capital expenditure, not very different. So it's difficult to measure depreciation over quarters, but for the full year is very much in line with ordinary capital expenditure.

Unidentified Company Speaker: The next question is a follow-on regarding online. Can you comment on the online reception in Canada and also what are your expectations for the online launch in Russia?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, the online reception in Canada, we launched the online in Canada last week. The online reception has been quite positive. We were expecting that, because online is quite developed in Canada. It's a market in which online saves represent a significant part of proportion of total sales. So, very good reception from the point of view of the number of visits, from the point of view of the number of orders and then regarding Russia, Russia is a market – for example if we compare Russia with the U.S., online penetration is much lower in the case of Russia. But we think that for us it's going to be quite positive. When we talk about online, we always say that online is relevant for us from two different perspectives. One has to do, of course, with the level of online sales, but the other one has also to do with the number of people that are visiting our webpages and then part of them are buying online, but most of them continue going to our stores. So in the case of Russia with the strong penetration that we have in the Russian market and the brand awareness that we have there, we think it's going to be very positive from both perspectives. Just to give you some figures about online visits, currently we are having in the case of Zara, around 2 million visits per day to their webpage. And then all the other brands together add an additional 1 million visits, so 3 million people are visiting our webpage; where webpages elaborates every day, so it's an incredible tool to communicate with our customers. So we continue with the rollout and we think it's positive from these two perspectives.

Unidentified Company Speaker: Final question, which are the geographies that have the most potential going forward?

Pablo Isla Alvarez de Tejera - Chairman and CEO: It's a very difficult to say this or that geography. I think that as we said during the presentation, we are a global company. We have presence in 86 different markets and we are opening new stores during the year 2012. We have opened the stores in more than 60 markets only during that year. Of course, in terms of the number of openings in the year 2012 and this year and in the coming years, China will continue being the most relevant country because of the size of the country and the potential that we see in the Chinese market. Russia, we will continue opening new stores in a significant way, but then in other European countries, the U.S., other countries in America, then in the Americas, then we have Japan, other Asian countries. So globally I think there is room for growth in most of the geographies.

Unidentified Company Speaker: That was the final question. So that concludes the question that's coming through webcast platform.

Pablo Isla Alvarez de Tejera - Chairman and CEO: So, in any case, thank you for attending this conference call. We will have the opportunity to continue answering your questions today, tomorrow or in the coming days. Thank you very much.