H & M Hennes & Mauritz AB (publ)

My name is Josef Ahlberg and I'm Head of Investor Relations. We welcome you here today for our six month report for 2024. Those of you who are here in the room are of course welcome, but today we have also invited participants over webcast. So for the first time we will be webcasting this event today. So warm welcome. We will start with the presentation of the second quarter by our CEO, Daniel and our CFO, Adam Carlson. We will then answer your questions. After the press conference, there will be individual interviews with the media as usual. And with that, please, Daniel, welcome to the stage.

Josef, and good morning. Good morning to all of you here in this room, and also good morning to all of you joining us via the webcast today. In the second quarter, we take another step in showing that we are on the right track. We closed the second quarter with the strongest profit that we have seen in many years. We gradually improved our sales strength, we strengthened the gross margin, and we continued to have good cost control throughout the quarter. The spring and summer collections have been very well received by our customers, which can be seen in the improved sales trend throughout this quarter. We are seeing growth across all our customer groups and we see a positive trend across all our geographical regions. I am very proud of all our colleagues who have contributed to a very strong result in the second quarter. We have had full focus on executing on our plan to strengthen the H&M brand in the quarter, and I will return later on to talk more about that and more about the investments we were making to strengthen H&M. But first, I will hand over to you, Adam, to take us through the financial results for the second quarter.

Thank you very much, Daniel. Good morning, everyone. First, some comments on the sales development for the second quarter and the six months of 2024. Do we need some help with the We're good to go. Thank you. The H&M Group's net sales in the second quarter increased by 3% to 59.6 billion, and in local currencies increased by 3% compared with last year. Net sales in the six-month period increased by 1% to 113.3 billion SEK. And in local currencies, net sales were in line with previous years. sales development gradually strengthened during the second quarter and as daniel mentioned the spring and summer collections have been very well received which is reflected in the improved sales trend We have seen a positive trend in all regions during the quarter, enabled by our strong customer offer. And to highlight some of the markets, we have seen strong improvements. We have Central Europe with Germany. We have Eastern Europe with Poland that continues to grow. And in Asia, we have India, Korea, and Japan that are also growing rapidly. We also saw an improvement in the sales trend in North America. We're not fully where we want to be, but our plan for the US with improving the customer offer and optimizing the flow of garments is starting to give effect. And if we move away from sales and start to look at profit and gross profit and gross margin, Gross profit for the second quarter increased by 11% to 33.6 billion, and this corresponds to a gross margin of 56.3%. The improvement work throughout the supply chain and the cost and efficiency program and more normalized external factors that influences the purchasing costs resulted in a stronger gross margin in the second quarter of 2024. Selling an administrative cost, SG&A expenses developed well during the quarter with good cost control. For the six-month period, selling an administrative cost increased by 1% in SEC compared with the same period last year, and in local currencies, these expenses were in line with last year. And this is thanks to good operational cost control combined with the cost and efficiency program that was initiated during the end of 2022. And I would say despite then the inflationary pressures that we see, we were able to keep the cost base growth low throughout the quarter. The program's actions had already started to have an effect from the second quarter of 2023. And in the first half of 2024, the remaining parts of the cost and efficiency program were implemented and the cost of the program are now essentially taken. Operating profit for the second quarter increased to 7.1 billion, and if we adjust for the one-time cost associated with this program, it was 7.3 billion, corresponding to an operating margin of 12.2%. And if we zoom out and look at the trend for profitability, we are doing the quarter delivering on all components of our profit improvement plan. We see positive sales development. We see strong gross margins as well as good operational cost control that all had positive impacts on the operating profit. And as the picture shows, we are in a strong trend with the fourth consecutive quarter of improved margins on a rolling 12 basis. Moving on to stock, the stock in trade decreased by 1% to 38.5 billion and the currency adjusted the stock in trade increased by 2% compared to previous year. We see the composition of the stock to be very strong with a very high share of current season garment. The stock in trade represented 16.3% of rolling 12-month sales and a strong development despite the conscious decisions relative to last year by for more sales growth looking ahead. The investments in the supply chain and the integration of the sales channels continue to contribute, and with a higher share of nearshoring, a more flexible supply chain and more purchasing in season, we see that we are well positioned to continue to improve the stock to sales development. However, a reminder that we continue to plan for extended transport time due to the connection of the situation in the Red Sea. So overall, earnings improvements combined with the strong development we've had over the inventory levels led to a very strong cash flow generation for second quarter. And similar to the operating margin, we are in a very positive trend, increasing cash flow generation. For the second quarter, cash flow from operating activities amounted to 12.6 billion, an improvement of 5.1 billion compared to 2023. which continues to enable our increased investment ambition. For the six-month period, investment into the core business amounted to approximately $4 billion, and looking ahead, we see that our strong financial position enables us to further increase the pace of investments, and we foresee that the CapEx for the year will land within the range of $11 to $12 billion as previously communicated. This is much driven by the increased investment rate in our store portfolio. We have also, as a final remark, commented on the sales condition to reach the 10% margin for the year. And to give some context to that, I can give two examples of factors that we've seen that may impact us. We've had, during the second quarter, a spike of the cotton prices, our most important material. And also a reminder that, of course, the strengthening of the SEC compared to euro, us being a company with a higher share of cost in Swedish crowns versus selling, may have a negative impact on the translation effect and thereby the profits in Swedish crowns. So that was it for this. And thank you very much. And over to you, Danne.

And as you mentioned, Adam, with the help of the strength sales trend and then good continued cost control, we have achieved the best result and the best cash flow that we have seen in several years in the second quarter. Thanks to the solid foundation that we have built in the company, we can now make larger and more forward looking investments to further strengthen the brand, strengthen the customer offering and strengthening the shopping experience. We are convinced that the investments that we will do will strengthen H&M in the long term in a large and growing market. With a sharp increase in profit for now four consecutive quarters, we are well on the way to achieve our long term goal of exceeding profitability that exceeds 10 percent over time. Our goal on operating margin of 10 percent for the full year 2024 remains in place. However, as Adam spoke about and gave some more context about, we see that the conditions for achieving the level this year have become more challenging. As it's assessed that the external factors from both the purchasing cost and the sales revenue, which includes the material effect that you spoke about and the currency effects, will impact us more negatively than we expected for the second half of the year. The most important prerequisite for achieving the goal will be to see a further strengthening of sales at a higher pace than what we have seen in the second quarter. To achieve this, our main priority is and remains the H&M brand. H&M has a fantastic position with several billions of visits to our physical and digital channels each year. We have more than 200 million active members in our loyalty program, and the customer is at the center of everything that we do. We have always worked to make fashion available for the many, and with our business idea, we can offer the best combination of fashion and quality at the best price in a sustainable way. We have in-house one of the largest design teams in the industry who put all of their efforts into creating fashion for all our customers and all our brands within the group. Creativity and inspiration is at the core of all our collections, and that is clearly visible, for example, in the H&M Spring and Summer Collection, in our H&M Studio Collection, as well as in the COS Atelier Collection, to mention a few of the collections that have been really well received by our customers during this spring. In May, H&M also joined fashion biggest night of the year, the Met Gala, where several celebs walked the red carpet wearing one-of-a-kind designs created by our H&M in-house design team. And we would like to take the opportunity now to look at a short video sharing some of the H&M summer collection, the studio collection, and the Cos Atelier collection. So please enjoy.

I feel like I can hear the water crashing. I envision myself standing right underneath the waterfall.

I love the idea of being by the beach. I just basically see nature taking over.

I imagine myself walking through the forest and feeling a freshness.

This autumn, we are taking the next step to enhance our customer offering. Our designers have created an absolutely stunning collection with great quality at an affordable price. You see some of the samples presented here next to you, but that's a small piece of the collection. Connected to this collection, we will also create surprising moments where our customers will be able to discover the collection in new and exciting ways as part of both global but also local fashion campaigns. There will be a number of different fashion events and exciting collaboration happening throughout the fall, and this will be visible in our physical stores, in the digital channel, but also in social media. We are excited and are looking forward to share more with you about the increased ambition for the H&M brand coming back after the summer. We also continue to develop the customer experience in our stores with a unique, inspiring and modern brand experience. During spring, we opened, as you know, upgraded stores in New York, in London, but as well as in Seoul and Tokyo. The reception so far from our customers have been absolutely fantastic, and we are now accelerating the pace of investments and bringing this new updated store formats to stores in Paris, in Milan, in Berlin, in Stockholm, in Hamburg, in Munich, as well as in traditional stores in New York and London. These stores will have the very latest version of our digital services, and they will also offer a locally adapted assortment that will create an even better experience for our customers. We would also like to take the opportunity to show a short film about the excitement connected to the openings that we have done in New York, London, and as well in Seoul. So please have a look. Beyond the stores, we are continuing our investments in our supply chain to reduce time from design to customer, to increase higher precision, and to widen the range and create an even more relevant assortment for our customers. At the same time, we continue, as Adam said, to integrate the digital and the physical sales channels for a smooth customer experience, but also to achieve greater product availability for the customers by using both channels. We are, on top of this, upping our digital game. The new digital experience is all about creating and improving the design, create updated still and moving content, as well as curated pages and stories for our customers to experience the fashion in a more exciting way. This will give the customers more inspiration and clear recommendations for how to style our products, but also which fit will suit them the best. We have done successful tests of the updated digital experience during spring, and we will now launch it across our most important markets in the fall. Moving on to our lifestyle brands, we continue to see a positive development in the second quarter. The lifestyle brands cover our sports offering, our home offering and our beauty offering. H&M Move's latest spring collection that offers garments for all types of training has been very positively received by our customers and actually exceeded our own expectations on sales. With that, we continue to strengthen our sports collection by offering products that have the best combination of fashion and function at an unbeatable price. Moving on to H&M Beauty, they also had a strong second quarter. We had some successful opening of the beauty flagship stores in Norway that we are now bringing to Stockholm, and we opened beauty flagship stores in Stockholm during the fall. Sustainability sits at the core of our customer offering, and the H&M Group's sustainability vision is to lead the change to a circular fashion industry with a net zero climate impact, and we are taking important steps towards our ambitious climate goals. As we communicated in the last quarter, we have reduced the greenhouse gas emissions by 20% compared to the previous year in 2023. And recently, a report was published where H&M came out on top in the report published by the organization Stand Earth. They assessed the progress brands are making in reducing emissions and transitioning into renewable energy, and they looked at the 11 top fashion brands in the world. According to StandEarth, we were awarded with the highest total score for leading supply chain emission and renewable electricity targets for our tangible financial support to our suppliers and the engagement we provide to the suppliers. Our continued investments into innovation means that we are parallel with reducing the climate impact through emissions also taking steps in how we improve our circle transition. We continue to increase the percentage of recycled or sustainable source materials in our collections and 2023 we reached a level of 85%. Our goal is for 100% of our materials to be made from recycled or sustainable materials by 2030. So, coming to the wrap-up of the quarter, when we summarise the second quarter, we believe we once again demonstrate the strength and the robust financial position of the H&M Group. We have a strong cash flow, we have improved profitability, and we also see through the second quarter an improved sales trend. We recognize that the situation in the world around us continues to be uncertain and households continues to have high living costs. As always, our biggest priority is to make sure that we create the best possible value for money in each and every market. And then with a strong focus on our customers, with our engaged and passionate and committed colleagues, with an increased rate of investments, we see good conditions for continued profitable, long-term and sustainable growth. Thank you so much for listening. We will now open up for questions and to handle us through that or take us through that. I welcome you, Josef.

Thank you, Daniel. All right. We will start now with questions from those of you who are present in the room, and then we will take questions from those of you who participate via telephone. And a kind reminder to please introduce yourselves and ask one question at a time into the microphone that our host gives to you. With that, please, can I have your questions? So we start here at the front.

Thank you. Daniel Schmidt from Danske Bank. Daniel, you mentioned that given the circumstances when it comes to sort of external factors, sales growth is going to become even more important to get to the 10% margin target for this year. And you say that it has to be higher paced than we had in Q2. When we entered this year, you basically said that we need moderate growth. Could you shed some more light on what's really needed, you think, in the second half in terms of sales growth to get to the 10%?

I will start and then I'll ask you to fill in, Adam. But looking at our sales trend in general, we see now that we had four strong months of sales growth, which gives us more confidence in the long-term ambition to achieve the 10% target. Then we recognize that some of the external factors, like the months we mentioned, have turned more negative than we thought a quarter ago for the second half year. We guided for sales growth in the low single digits to the mid-single digits, and we see now that we need to be in the upper part of that range for the full year, which puts higher expectations than on the second half year.

Maybe just one more on that topic, sorry. But you stick to the fact that you also mentioned that sort of the headwind that you've seen in terms of net openings or net closures of stores is going to turn into a tailwind as we get into the second half of this year.

Especially as we get into the fourth quarter of this year, we see a positive tailwind. So we've had a small negative headwind throughout this year so far from that we close most of the stores in the beginning of the year and rebuild and reopen and open towards the second half of the year. And that will turn into a positive tailwind for us in the fourth quarter. Yes, thank you.

Niklas, please go ahead. Yes, Niklas Ekman from Carnegie. Can I ask you to elaborate a little bit on June sales? This is obviously minus six. That's on a very tough comparison from the year prior. How does this compare to your expectations? And does the minus six, is that in any way involved in your slightly more cautious guidance on margins for this year? Has that impacted your view on the margin outlook?

So starting off with putting it into context, if you look at the sales trend over time, as we mentioned in the Q1, we saw that February came out as a stronger part of Q1. We have seen strong progress of sales for return from a minus two to plus three in the second quarter. So in the four month trajectory, we are more confident about the sales development standing here today than we were a quarter ago. looking into shorter sales trend that's always tricky because then the external factors have a more significant impact we had last year a very cold may uh cold may and then a warm june in central europe and north europe which are some of our key markets this year we have seen the inverted weather shift Combined with that, with the good stock composition, both in absolute numbers, but also the composition and the freshness of the stock, we've been able to delay a few of the discount activities, which we believe is positive in the long term, but short term it can have a slight negative impact on the sales performance. And that's also what we have seen in June. What we see is that the second part of June with more normalized weather, we are back to a more positive sales trend, and that gives us confidence looking for the rest of the quarter.

Excellent. Can I also just ask on the magnitude of the external headwinds that you're talking about in H2?

There are a couple of components, and we try to at least show them as clearly as we can. And we have the material basket with some minor changes. It's a brief reminder as I said it before as well about the the strengthening of the Swedish crown Then of course, we don't have a crystal ball here But if we extrapolate the current spot rate and compare it to the average for the second half last year, we see a delta So that's pretty much what we're saying. So it's difficult to quantify the headwind but just in our simplistic world We extrapolate the spot rate and that gives us a negative currency effect Okay.

Thank you Magnus

Thank you. First, I want to ask about your markdowns guidance. I mean, you guided for an increase in markdowns this quarter, and it ended up flat. And now I think, Daniel, you said that you have a very good composition and a very fresh assortment. So from that perspective, how come you now guide for a markdowns increase again in Q3?

If we start with the guidance for the second quarter, I think that is a receipt that we have seen strong reception by our spring and summer collections. And that's why we've been able to use less markdown than forecasted. Looking into this third and the fourth quarter, we are very focused on the sales growth and activating the customer base. And we can use reductions for solving stock and unproductive stock. stock that isn't well received by the customers but we can also use it to activate the customer and engage the customers in period of external effects like weather and then that's where we're also guiding for for a slightly higher reductions because we see a need to activate the customers we see price changes that we have done have been well received and that's also a way to use reductions to make sure that we actually have the best possible value for money offering in all markets across the world that that's really interesting because then we should

take this as you are very determined to drive top line in the second half of the year and were you to be successful as you said you were in the Q2 quarter and that you elaborated now in fact in June that you did not need to to start your summer sales as early as last year and so on. Wouldn't that perhaps, if you are more successful in H2, that might actually imply that the markdown effect of margin that you anticipate now might be better than you expect, and that in itself could lead to you actually achieving your margin target. Is that a way to read this?

That's a nice scenario that we would be happy to sort of present in Q3, Q4, but I don't know if you want to elaborate.

But there are a couple of components entering this period with a higher new season share, which of course technically just improves the probability that we can sell full price throughout the period. So that is of course a contributor. that we see then as daniel said we will need to be agile with our strong focus on driving sales we we use this as a tool also to wake up the custom we fulfill that there are certain parts of the of the the autumn here where we have as you said negative weather other other concerns we need to have so Are our strong determination and we are set up to drive full price sales during the the third quarter and the fourth quarter to a higher extent But we still guide now for the need of activating the customer as we also mentioned that are some some headwinds the consumer still has high Living cost and and the inflation rate is still slightly elevated. So so that's why we guide for more room to activate

And coming back to the belief in when we look at the second half year, we are making significant efforts to drive top line. And we feel very positive about the reception for our spring collection and summer collection, especially if you look at women's wear and kids wear. We have seen a really strong development throughout the quarter. And with the emphasis of really putting focus on the H&M brand and elevating the fashion offering, elevating the store experience, the digital experience, we have a really optimistic and forward leaning plan for the second half year.

And perhaps a bit of a detailed question on June sales. Sometimes, or maybe more normally, you would say first to 25 June or so, an outcome, an actual outcome, and now you give an estimate for the full June month. So may I ask for 1 to 25 June, was that the same number, minus 6, that you also expect for the full month? Or have you extrapolated that improvement, sequential improvement, in the final period of June here that you saw?

We try to give the best sort of description of how June looks now. And sometimes with calendar effects, whether they end up, we do the one to 25. And other times we take the full month as the best sort of indication of how we're currently trading. But as Daniel said, we've had a much stronger second part of June when weather is normalizing, and we're now back to a more normal activation level with the postponed markdowns. We now see that we're on par with that for the last part, and then we see the sales trend improving out to June.

Right. A final one for me on India. You said you had a very good traction in India. Can you give an update on your expansion plans in India, please?

We see I can start and then you fill in. We see India's a very important market for us. It's a market where H&M entered early on, where we entered in with a big ambition and we have created a really strong position, both with the value proposition, but also in the in the customers minds. We see that it's a market that is growing at a high pace and with all the geopolitical shift, it become even more important for us. So with that, we are accelerating the plans for India and see that as a potential strong growth opportunity in the specifics.

As you said, we're always trying to allocate our investment where they make the biggest sense and resonate well. So India is a market where we'll continue to increase focus. And part of the increased capex we see now is to boost some of these high-growth markets. And India is a super interesting market with a high potential. So it's a bigger share of our forward-leaning investments to capture that potential.

And we also see that we can with our global offer when adapting it to the local needs and partnering up with Indians designers that we've done and that will most likely most likely do again. We see that that resonates really well with the local community, but it also resonates on a global level. So it's very beneficial for us to be closely engaged with the Indian market.

OK, we have a question from a city next dress.

Andreas Lundberg, SBA. You stopped reporting monthly sales some years ago. You're still doing the current trading. Why are you doing that, given the volatile performance, typically? Do you want to comment?

Sorry, is the question why we continue to release monthly figure?

Our current trading figure.

We feel this is really requested by the market, so it's to accommodate that request. And then we try to contextualize it, of course, to help with the interpretation of it. I think it's a valid question.

Looking short-term into the retail industry, it is very volatile. The customer is very dependent on external factors on that short-term perspective. I think when we assess... Our performance and the confidence in the long run will look at the last four months, and will look at the last four consecutive quarters development. I think that the short one month should be handled with caution.

Back to the external factors, input cost and so forth. You had a pretty negative effects up until Q3-23, right? And I think you said those effects were neutral on a year-on-year point versus Q2-22. My question is, given that Q2-22 was kind of very harsh, it seems now you're guiding for even a worse situation in Q3-24 versus Q2-22. Can you comment a little bit more on that? Thank you.

We, in also the spirit of transparency, we try to sort of convey our perception of the external factors affecting us. So we do have some increased transportation costs. As you know, there are some congestions in particularly the the air transport even though we we have a very low share of air we still affected by by that part we have some some cost connected to the longer transportation through the the or based on the Red Sea situation and then on top of that then we've seen a a luckily a very sort of isolated spike in the cotton prices but but as we are buying later later we are also sort of subject to those kind of increases in input cost and so We tried just to capture that totality and we guide them for a slightly worse mix of those factors throughout Q3 than compared to previous years. So it's sort of the macro environment that we tried to describe and how we interpret it.

How important were these external factors for the second quarter? I guess there are other factors affecting you as well. You talked about supply chain, fewer suppliers and so forth. Can you share more some light on those factors going forward?

I think if you look back six months ago, it was probably two thirds external factors. You know, we had extreme situation in many of our sourcing parts of our value chain. It has clearly shifted to a lesser impact of the macro factor and more sort of the benefits of the work we do with the supply chain, how we consolidate the supply base, how we work with efficiency throughout the warehouse structure and all of it. And So I think it has shifted from the majority of external factors in Q4, Q1, and then it's becoming a lesser part of the improvements in Q3. lastly financial one your gearing is set in the low end of your target range can you comment about the buyback mandate please we the agm gave the board the mandate and it's uh from being a very static mandate that we had the last two years it's now a more flexible mandate that the The board intends to use if they see that there are no other better opportunities to create both customer but also shareholder value. And right now, the board makes the assessment that the plan we're presenting here is the right way to use the capital. But of course, we will get back to it as it's a flexible mandate. It's always evaluated towards other alternatives. But right now, we and the board believe that this plan is the one to back. So that's the comment on that.

have been the lady or or the front higher or tiger sold the markets I was just wondering if we could get some more flavor in terms of the wording regarding June so you said you had a negative sales development at the beginning of the of the month but that it recovered due to some normalization whether does that mean or can we read that as a positive sales development at the end of the month there was a just less negative

We want to be really cautious in commenting on the short term deviations because it might send the wrong signal. So again, I would encourage to look at the last four months sales development and look at the shift from Q1 to Q2. That's what gives us confidence in the direction that we're heading. If we although very specific, looking at the last week, it is positive, but I would be very, very cautious to use that because, but we are confident that when we come back to normalized activity levels and when we come back to a weather, a neutral weather effect, we feel confidence that we're back to a positive trajectory.

Fredrik Evarsson, ABG. Can we come back to the margin or gross margin progression short term? You guide for more markdowns and negative impact from external factors. Do you still think you can expand the gross margin during the second half of the year?

it's difficult to predict exactly because it's going to be a lot about how how we continue to drive full price sales and and as we said we we have more confidence now than we did three months ago that that the the customer responds really well to the to the more uh relevant uh sort of and the the um inventory um composition that is more more updated which is a good thing Then we have the external factors that are very, very difficult to predict. So we don't give guidance, but we see that we are taking steps towards what we call the long-term normalized levels of the gross margin. And how that will evolve quarter by quarter is difficult to assess. But trajectory-wise, we're on the right track. And that then is a core enabler of our long-term ambition to be above 10% EBIT margin.

Okay, thanks. And then you've been piloting a new website in Denmark, I think. Is that what you're planning to roll out in your key markets during the fall?

Yes, so we have had a piloting period in Denmark with the ambition to increase the excitement level, the inspiration to over time generate more organic traffic to the site because it becomes a starting point for the customer to start their inspiration journey. Given that it's a major shift, we have tried it in one isolated market and then based on those learnings we have now rolled out for all customers in Denmark and we are also piloting it in second market in Europe in Italy and those learnings were building in for the full rollout and the updated sort of improved version of what we have piloted is what's going to be rolled out to the key markets in early fall.

And what's the sort of key learnings in terms of unit economics? What's the key improvement measures that you see in Denmark now versus the rest of the world?

What we are looking for in Denmark is to make sure we believe we have a site that is very effective when it comes to transactions. We quickly convert the customer and what we to drive organic traffic and to drive increased spend. We need to increase the spend time with us on the site to further inspire and increase the average basket size. So we're looking for higher organic traffic, a larger basket size. And then we're looking for overtime than also a higher perception of us as a brand, because we believe that would strengthen our position in the long in the long term. Good. Thank you.

Okay, we take the final question from the room and then turn to questions from the telephone conference. So please, Daniel.

Yes, thank you. Daniel from Danske again. Daniel, you mentioned that you've seen a very good reception when it comes to newly refurbished stores, London, New York, Seoul, Tokyo. Could you shed some more light on what you actually see in terms of sales improvement after you've refurbished compared to the same period last year?

Also here, our total portfolio is more than 4,000 stores, and here we're talking about a handful of test stores, so I would be cautious to sort of extrapolate the trend from those stores into the full portfolio. That's the work that we're doing during the fall when we have a Large amount of validation stores to more solidify the improvement that we see that we also can use as investment decisions moving forward So we are still in the validation phase, but we go into the validation phase with a very positive indication sales wise both from traffic but also from conversion and average stand and which is a combination of inspiring the customer, but also a big part is in this stores. We worked better with optimizing the assortment to really be relevant for the customers in that specific location. And that combined with increased availability and increased service and a full Omni offering allows us to better service the customer that drives up conversion. And that's positive news.

And out of those 250, most of them are going to come in Q4 then? Yes. Yes. Okay. And just maybe just one follow-up on the U.S. You said that you're making strides, but you're not fully where you want to be. Could you shed some more light on that? You invested in price, and that has started to pay off simply, but at a slow pace, or?

We were speaking about a couple of things where U.S. was more hit than the rest, given the size of the market and all, and that was particularly the lower volumes that was a consequence of the increased prices. So now we are working with the whole commercial offer and by strengthening the price position, that also resolves some of the other questions that we had with availability in stores with lower sales share and so forth. We're in a positive momentum, but as I also mentioned, we see further potential to strengthen the US, obviously, but compared as well, we speak a lot about trends here, but Q2 to Q1, we see a positive trajectory based on these actions.

And the positive receipts we get from Q2 is a lot connected to what we said we would focus on. How do we create the most outstanding value for money? How do we have the best products for our customers? And then we see a volume-driven sales increase in Q2, which would take us a positive receipt that we are on the right path.

Thank you for those questions. So now we turn to the operator and see if we have any questions from the phone participants.

Thank you. If you wish to ask a question, please register by the link in the confirmation email and then dial in and press star 1 on your telephone keypad. Our first question for today comes from William Woods of Bernstein Associated General. Your line is now open. Please go ahead.

Good morning. Two questions. The first one is just on Q3. Obviously, I think you'll compound most of the big price increases that you've put through over the last year. And so to get that inflection, you'll need more volume. Have you seen any real conviction that the volumes are recovering, or do you think you need to pass on more price into the second half?

Thanks. As I just mentioned in the previous question, we see that Q2 sales is driven by volume. So we see a good volume recovery throughout the second quarter.

And then the second question is just on obviously the materials costs. We last spoke at the kind of end of March when cotton prices were up, and I think your commentary was quite neutral on external factors. Is there anything else that's changed since then in terms of cotton feeding through, or is there something else that we should be aware of in the materials costs?

No, nothing beside then that, of course, based on on that, they spiked earlier spring. The the trickle down effect once we purchase and start to sell them will will come into the third quarter. So it's just a reminder of an effect early on on on the input prices will have a postponed effect on on the on the gross margin looking ahead. So it's nothing else than that.

OK, thank you.

Thank you. Our next question comes from Richard Chamberlain of RBC. The line's now open. Please go ahead.

Thank you. Good morning, guys. I have two questions. That's all right. The first one is just going back to your statement about inventory composition. I think you say that you think it's good. You also said it'd be good, I think, at the half year last year. But how do you compare Compared to last year, how do you sort of view the composition now, in particular the amount of previous season stock that you have, the freshness of the current assortment? That's the first question.

So we see with the work that we have done in throughout our supply chain that we can now react quicker than we were able to do in the past. We have seen good opportunities for increasing stock levels with good commerciality coming into the second or the third and the fourth quarter. That means that what we have now in the stock of garments that have been purchased very recently, which gives us good confidence that we have a very relevant stock coming into summer and especially coming into the transition between summer and fall, where we see great opportunities compared to where we were last year. I don't know if you want to give more flavor to that.

I guess how we also think of it's always relative. We come out of a very complex situation with the pandemic that sort of distorted the supply chain and made effects. We had the war in Ukraine that started imbalances. So we still saw a relative improvement last year, but we also mentioned a year ago that we we purchased cautiously and and when we sort of do they retrospect on q3 we saw that there were more potential in a fresher stock with more availability and that is the question that we now have addressed okay great thank you and my other one was some just noting the recent increase in the Swedish Brown against other major currencies affect any of your

cash flow projections for the second half. So, for instance, the FX guidance that you've given, will that be affected by the currency or the FX movements?

I wonder if I fully captured the question.

I can try to answer, and then you can fill in, Adam. So with the strengthening of the SEC, are investments happening in other currencies will be translated into a lower SEC value? So it takes our sort of booked capex a bit lower. So that's a correct observation, Richard.

And the same with the inventory, of course. It's also in local currency, so the inventory valuation, of course, in Swedish crowns will be affected. So I think there are some profit effects and then some balance sheet effects that will trickle down to a fairly neutral cash flow effect, if you see it.

Yeah, got it. Okay, great. Thank you.

Thank you. Our next question comes from Sridhar Mamakali from UBS. The line is now open. Please go ahead.

Yeah, good morning. Thanks for taking my questions. I'll go with two as well, please. The first line, Daniel, you've talked about accelerating sales to mid-single-digit potentially in the second half. Can you perhaps talk about your level of conviction around it? Clearly, you've signaled the margin today. On the sales, do you need to step up markdowns, promotions, activation? And or do you need to further adjust prices to deliver that single-digit growth? That's the first question. Secondly, I think the external factors you've talked about, they will very likely then persist into next year, whatever is playing out for second half this year. I guess, can you perhaps then talk about some of your self-help measures on the supply chain development to offset Any gross margin pressures? That will come from external factors. And also your thoughts on what should we be thinking about as G&A cost savings? Clearly, you'll annualize the $2 billion SEC this year. As you think about margins into next year and the year after, how should we think about your focus on costs? Thank you.

So that's actually three questions. So if Daniel starts with talking about the sales development into second half and the conditions for it, then we move into external factors, perhaps led by Adam and the SG&A development.

Starting to talk about the confidence about the sales development. Again, Q1, we reported minus two. Q2, we report plus three. That delta give in that there is a lot of good signals that we are on the right track when it comes to how we invest in price towards the customer, how we activate the customer, how we invest in the experience and in the... in the assortment. So what we are, when we look at Q3 and we look at Q4, we are accelerating our efforts towards those receipts that we have received in the second quarter. And that's also, as Adam said, we might need to activate the customer depending on external needs. That's why we flagged for a slightly higher reduction budget or reduction forecast in the second half year. In essence, it is really to double down on what we have seen working well for us, especially connected to the women's and the kids' performance in the second quarter and accelerating that into the second half of the year to get to the strong development for the full year.

And moving on then to gross margin and supply chain. We have been running a supply chain excellence program where we see the benefits. So we spoke about sort of there were a combination of factors and these are the factors that we can affect. And then we've been speaking about that. We have consolidated the supplier base and work differently with how we how we integrate ourselves with them. That work will continue, and we're now moving down to not only the first tier of our supply chain, but also the second tier and onwards. So we still believe that there are potentials to continue to improve the availability of value-adding sourcing, so to say. On top of that, of course, we do have connected to the overhead and the SG&A cost a super big focus on leveraging on the work that we've done now on resetting the cost base. Everything from the store portfolio work that we've done and also on the overall administrative cost side. We are committed to continue that work, but primarily then to leverage that work with improved sales development and the focus on driving profitable sales ahead.

Maybe to shed some light, looking at the last four consecutive quarters, we have a very strong profit development, and that is part of the work of... Really scrutinizing the cost that we don't see have a positive effect for the customers and shift those Costs that are not productive to investment towards the customer in the assortment in the experience in the brand And that's what we intend to continue to do Next question comes from Nicholas Champ of Barclays. I

Your line is now open. Please go ahead.

Good morning. Most of my questions have been answered, but just to come back on your current trading performance, a minus 6% decline, could you please provide a little bit more color regarding your geographic performance by region? Do you see any change compared to Q2, H1, any region that is suffering more than another, especially including for the U.S. market, for instance, you flagged? Did you see any improvement in June compared to Q2?

Thank you. Should I take a stab? I think, again, just to re-emphasize that those short-term fluctuations should be handled very cautiously. When we look at the shifts, I think it's primarily connected to Europe. That's where we see the major weather impact, and that's where we see the volatility in sales performance. It's not connected to the US progression or to Asia. It's mainly connected to Europe, where the weather has a significant impact on our short-term trading.

Perhaps to add a bit on the situation last year where we came from a cold May again with a built-up demand, a pent-up demand for the summer types. And then we had an early launch of sail and a weather shift that was very favorable with warm weather last year. So that explains the high comparable numbers from last year. And then we had this opposite shift this year with a very strong sales trend and favorable weather conditions in May turning into a colder June.

Thank you. Thank you. Our next question comes from Monique Ballard of Citigroup. The lunch is now open. Please go ahead.

Thank you. Morning. Just two questions from me, if I can. The first one, obviously, you talked about and flagged the selective price investments in the product offering. You talked about that in detail, specifically around the US. I'm just wondering whether that needs to be, or you're expecting to temper that slightly in the third quarter, just giving those higher buying costs, particularly the cost of costumes?

I think it was slightly difficult to hear your question there, Monique. So I'll try to repeat based on what I think you said, and then you can confirm if it is correct. Sorry about this. So you're asking about the US and the price investments we are doing now and how we see that in relation to the input cost development, what it will mean for gross margin. Is that correct? Also the effect, I think, on pricing.

Yes, and the price investment question wasn't just for the U.S., just generally. Do you have to scale back the price investment slightly given the higher input costs?

So I think if I start from a strategic point and from our promise to our customers, we always want to make sure that we offer the best combination of fashion and quality at the best price in each and every market. And that is the starting point where we look at long term. How do we how are we competitive? How are we in a strong position for our customers? And that's the starting point then. Parallel to that, to enable that and still achieve the positive profit development, it's crucial that we work really intensely on the cost side. Of course, a lot on the COGS side on optimizing reductions, but also looking at all the other costs that Adam talked about so we can scrutinize and make sure that we are running very efficient operations to be able to have the most competitive customer offer. That's the mindset, and that's how we look strategically at our price offering.

and the message we want to convey is the trajectory of both profit development, cash flow generation, and now the addition of the positive trajectory of the sales, and that is what we want to leverage. We could have played another game, pulling back all of the initiatives that Daniel was talking about, but we still believe that we are in a long-term trend of great improvements, and we want to leverage that towards the customers. So we're not short-term fixing this because of blips in the material cost, but rather emphasizing the plan to drive profitable sales growth.

Understood. Thank you. And just one more question. And it's just on the online stores that you'll be launching in the larger markets in autumn. Obviously, you've already been piloting in Denmark. You'll soon be piloting in Italy. I just wondered if you could give any specifics on what type of improved conversion you've seen from the CERA recommendations or any impact you've seen on potentially reduced online returns ratios from things like the improving of the SIPs.

Uh, in general, we don't give specific details of what we see. The only thing we can share is that we feel very confident to move ahead. And then on the second part of the question, when it comes to improving the size and fit guidance that we see that we don't, we do for. Among other markets, the pilot markets, but that's also a general rollout that we've seen has been really positively received in both conversion and less returns. So improving the size and fit recommendations and guiding the customer to the right fit for them, that has been very beneficial, but that's been at a larger scale than just the Denmark pilot.

And to add on that, an important part of the test period has been linked to fine-tuning how we can avoid dropping in conversion, because the current site that we have, the online shop, is very effective for high conversion rate. So we want to keep that, but then add on further inspiration. So adding the additional inspiration without harming conversion has been what we have been fine tuning and reaching our results. So we feel confident to roll this out.

And what that should lead to is then increased organic traffic where we see an opportunity so that we need to acquire less traffic and get that organic flow instead. And we should also lead to a longer dwell time, which allows us to drive a higher basket size.

Thank you.

Thank you. Our next question comes from Adam at Co-Train of Deutsche Bank. Your lines are open. Please go ahead.

Good morning, guys. Two questions. Firstly, Can you try and explain to us what has changed structurally, maybe within your design process, how quickly the products are either being designed or whether some of your designers are being given slightly deeper remits to change? deeper in ideas which you think are working and how that flows into maybe more of the nearshoring and the reordering shorter lead time capabilities. And then within that, how far along that journey are we now? How much of that is still to come on some more structural changes within the organization? And then the second question is, with regards to the 10% margin, to get to a mid single digit sales growth now. Is that all within your own hands? Or do you think you require a stronger underlying market to get there?

Thanks. I'll tackle the first question and then I'll ask you to take the second one, Adam, but then starting off in our ambitions to increase and raise the level and raise the ambition for the H&M brand, the number one priority is product and assortment. We see that the reason why customers fall in love with H&M and the reason they stay with us is connected to the assortment and having the most relevant product. That's why we put tremendous emphasis on that part of the business and a tremendous emphasis on our in-house design team. If I would highlight three structural things that we have worked on that is starting to generate the positive impact, I would say that the first one is empowering our design organization with even better tools. There is so much opportunities in the digital landscape today. combined with our 200 million loyalty members that allows us to better forecast and better understand how trends are developing and what are the most important and relevant trends and where is the most exciting commercial opportunities coming within the market. So empowering our design organization with better tools to enhance their creativity and their design work is one piece that we're working on. Secondly is working about creating a simplified organization. I am a firm believer in removing layers and creating holistic accountability for the best people working closest to our product. So we are working on removing layers to make sure that our designers become closer to our suppliers, closer to the customers, so that we work in a quicker, more effective way and more efficient way. and that we become quicker from interpreting the trends until they're in the hands of the designer actually becoming a garment. So that's a second part that we have implemented over the last six months with very good receipts. And then the third one is what you alluded to, it's how we have developed our supply chain and the responsiveness of the supply chain where we have created more efficient flows to especially then enabled by near market investments and having a larger share of our assortment being sourced in proximity to the customer and to the demand that allows us to react quicker, which then means that we can take later decision on a design on the design timeline. And with later decision making, you have more relevant information to make the right decision. So those three things, how we empower the design organization with improved tools, how we reduce layers to create speed and simplicity in the organization, and then how we work with nearshoring to to be more responsive. Those are the changes we're driving. We have taken good steps over the last six months. It's part of why we believe that our spring and summer collections are being well received. It's part of why we have a belief coming into the third quarter in the customer offering. But we still see that there is a tremendous opportunity ahead, and part of the investments that we are talking about will be geared toward further strengthening our design capabilities moving forward.

I think you almost answered, I think, the second part of the question as well. We will most likely reflect back on Q2C that there are more things we could have done. But I think given the trajectory that we're on and the actions we're taking, whether we have it 100 percent in our own hands or it fits other things, we don't know. But I have never seen a stronger plan to drive sales growth. We have an inventory that is relevant, that is geared for growth. We have the investment that Daniel was speaking about, about the fall launch of the collection that you saw, and we have also long-term worked on the physical experience that we're scaling, and the addition to the question here regarding the digital experience. I think we do have three really, really strong components for driving growth, and we strongly believe, given the trend that we see, that we are on to something that will generate a positive trend towards the end of the year.

If possible, can I take in one more on the new store format? If the idea is that you are looking at work and you're replicating across more stores, is this something that we need to see across the entire store estate? Or is it only something that you're going to do in larger city flagships rather than across the whole store estate?

We are developing a format that we think can be scalable to the entire store portfolio, and then it will, of course, depending on the location, the competition, the strength of the location, it will look differently between a really, really strong key city location and a more regular mall store, but it will link to the same brand experience, it will link to the same service package that will include similar improvements of the availability of the customer offer. So it is developing a format that is scalable. Then, of course, we are looking at where to invest and we continuously look at how do we optimize the portfolio to make sure that we only have stores in the locations where there is a great customer demand and where we believe we can offer a great customer experience. And that's connected to the fact that we are still seeing both consolidations and opening as a work to optimize the portfolio. So we develop a program that we intend to roll out for the complete store portfolio, but we intend to roll it out where we see that we have a strong location and a strong position that we believe in for the long run.

That's great. Thank you. Thank you. Our next question comes from Warwick O'Keens of BNP Paribas. The lines are open. Please go ahead.

Thanks so much. Good morning. My first question is that in your segmental reporting, you show that America's profitability stepped backwards quite a long way. I was wondering if you could just elaborate on why that was, please.

The segment reporting is a consequence of our transfer pricing structure, so I would not put too much emphasis on the segment reporting. It's a formal demand that we have to represent how the corporate structure look and how the profits are kept in the market. I would rather look at the sales trend if you look at the beginning of the report, if you compare the Q1 and the half year to the second half year. I think that's a reflection of how the U.S. is performing.

Thank you. I've got one more housekeeping one, and that's that you've indicated one-time costs of $199 million in Q2. Were there any booked in Q1? I don't recall you commenting on that before.

161 million was the number for Q1, which was highlighted in the cash flow statement.

Thank you. Thank you very much. And my final question is, you've talked quite a lot about the opportunity to drive more organic traffic online with your new format. But you've got over 200 million members. Do you think you're using that membership effectively enough? Because that should be a great source of organic traffic. Thank you.

It's a very good point, and it's a very good strength that we have more than 200 million active members. It's both a great source for insight and better customer understanding, but it's also, to your point, a great source of organic traffic. And we work actively with CRM program to how do we work with lifecycle management of that entire customer base. We see further opportunities for strengthening that, and we have ambitious plans for how to further leverage that tremendous asset that is our loyalty program and that customer member base.

Thanks very much. Thank you. Our final question for today comes from Georgina Johanan from JP Morgan. The lines are open. Please go ahead.

Hi, thank you. Good morning, everyone. Two questions from me, please. I'll ask them separately. The first one, appreciating that sort of all of your initiatives are on track and you're seeing sort of good signs on volumes and so on. However, as someone sort of asked earlier, I think, you know, there's always external factors in the market that can impact demand with weather and whatever else and, you know, political issues. Things going on at the moment. So just wondering, I mean, this is the first time I think the stock position is up for over a year on a year-on-year basis, XFX. And I guess what I'm trying to understand is, historically, you perhaps have not been best in class at managing clearance when external factors impacted demand. negatively. And has that been something that you've also made changes to in the business? You know, if we see demand really negative, would you be able to clear through that stock that you bought for growth in a more efficient way than historically?

Yes, I mean, data and insights, of course, helps us to become more precise in all of this. So we have a much better and a more proactive read on when particular parts of the stock stops or doesn't start to become productive. And then we can more effectively discount it earlier at a lower cost than previously where we... We waited potentially and then had to mark down at a much higher share. So this is where we're sort of data comes into our daily business and helps us to make more more grander and more more proactive decisions. So I would say that our ambition or recall it for more capability to run markdowns more effectively clearly has improved.

I think we also have improved by having a larger share of the digital business complementing the physical retail and taking steps in starting to use both channels to better optimize the stock. And here we have a lot of potential ahead of us, but we're also taking the first steps that will help us also with optimizing clearance moving forward.

Really helpful. Thank you. And then my second question was just on the freight spike that we've been seeing. Can you just help us with a reminder of when you actually negotiate those contracts and so on? I guess what I'm trying to understand is if the higher freight spot rates that we're seeing at the moment is are actually impacting you in H2, or if that's kind of an incremental headwind into next year. I think this question was asked earlier as well, but I guess I'm just trying to sort of get clarity on when you negotiate and how often you sort of negotiate and so on with your trade contractors, please.

The two components, the majority is, of course, the international freight by sea, and that is a slower cycle where we're less dependent on short-term spikes. But we and everybody else is competing about the air freight capacity, and that is where we have seen a spike that may affect us slightly right now. So we are more protected when it comes to the big flows, the international sea freight, but we are exposed to the spot market when it comes to other means of transport.

How much are you... Apologies, go ahead.

I just wanted to reiterate the comment we made last quarter on the outlook for freight and sea freight in particular there, because we do negotiate those rates during spring. So with the new contracts kicking in sort of late springtime, we anticipated that to translate into our slightly higher COGS towards the fourth quarter.

Thank you. And just one quick follow-up, if I may. Of your sort of volumes, what proportion is coming in via air freight now, please?

It's a very low part, but it's also a tool we use for some markets where we have the nearshoring. And the nearshoring for the big sales market are right, but the nearshoring for other markets is not right, so to say. So we sometimes produce in Europe, and then we fly it to more distant markets. So it's a slightly higher share this year than last year, but still a...

low share compared to other other companies in our industry thank you very much thank you at this time we can't have no further questions so I'll head back to the room thank you very much before we wrap up I just want to see if we have any final questions from the room so we have two more questions from the room

Hi. Again, Daniel from . Could I just sort of try to clear out all the sort of questions regarding external factors back and forth five times now? Clearly, sort of you've seen the spike in cotton in early March, and that's impacting in Q3. And then you also mentioned and reiterated that you have slightly higher freight costs in Q4. But then again, if you look at the cotton price now, it's actually down 30% versus that peak. Is that going to then reverse into a tailwind in Q4 and Q1, or is that going to be for later?

That is a positive for the late part of the year, obviously, if it remains like this. You have that three- to six-month delay about, so use that as a rule of thumb, how that may impact us. And then we don't know about the combination of all of these factors, but that isolated is more positive towards the end of the year than it looked a couple of months back.

Thank you.

Yes, Magnus Roman, Capitula. Very quickly then, coming back to the last question on the call, i.e. the freight costs, a majority on sea, quite clearly. And can you be a bit more precise on how many times per year you negotiate this? So this spike in freight rates that we see now on sea, when will that sort of kick in as an effect for you?

So we mainly lock in our freight rates for a 12-month period. So it depends now when we come to next spring what the situation in the market looks like at that point in time. But the fluctuations in the market in general have limited impact on us at the moment on the sea freight side.

So normally at the start of the year and one annual duration.

We usually have that discussion with our partners during early spring and then lock in the rates for a 12-month period. Thank you. With that, I think we have answered all questions. So thank you very much for coming today. And thank you for listening. I and Daniel and Adam wish you a great day ahead. Thank you.

Thank you very much. Thank you. Thank you.