H & M Hennes & Mauritz AB (publ) (HMB) Earnings Call Transcript & Summary

Thank you for standing by, ladies and gentlemen, and welcome to the full year report for 2019 conference call. [Operator Instructions] I must advise you the conference is being recorded today Thursday, 30th of January 2020. I would now like to hand the conference over to your first speaker today, Karl-Johan Persson, CEO. Thank you, sir. Please go ahead.

Hello. Hi, everyone. Welcome to this telephone conference on the occasion of our full year report. With me today is Nils Vinge; Jyrki Tervonen; and also our new CEO, Helena Helmersson; and our new CFO, Adam Karlsson. As you know, we have today announced that Stefan Persson will leave as Chairman of the Board at the AGM in May and suggests that I succeed him as Chairman and that Helena Helmersson has been appointed CEO. We have also announced that Jyrki Tervonen will be the CEO at Ramsbury Invest and will be replaced by Adam Karlsson. I think it's a good moment for these changes since Stefan has been Chairman for 20 years and I've been CEO for a bit more than 10 years. It's also a good point in time since we have had a positive development after some tough years. And we also have a very strong position. I believe we have built a solid foundation for the future and that we have a good plan for 2020 and onwards. I feel confident in handing over to Helena who will, together with Adam and the rest of the team, continue to develop the company and work on the plan that we have. Helena has a long and solid experience from her 22 years within the H&M group. And she will soon present herself briefly. Helena is well-respected and a fine leader who embodies our values. I will be an active Chairman, given approval by the AGM, and look forward to working with Helena, Adam and the rest of the team. And of course, there will be a clear division of responsibilities between us. And I believe we will work very well together. Over the years, I've worked very close with Jyrki, and I'm really happy that he will take on the role as CEO of Ramsbury Invest. We will now get a short presentation on Helena and Adam before we start the presentation of the full year report.

Hi, everyone. This is Helena. It's really nice to be here. I'm, of course, very excited and happy about the new role. And it's a big responsibility, obviously. But I have a fantastic team around me, so I believe it's going to be a very exciting journey. So just a few words about my background. I've been working within the company since 1997 in different roles. I started as a controller and then became a section head, working with assortments within the H&M brand. I've been living in the production world twice in Dhaka, Bangladesh, 2 years, and in total 6 years in Hong Kong, where the last role was Global Head of Production. I've been Head of Sustainability for 5 years. And my last role the past 1.5 years has been as COO, where I have been fortunate to lead several of our important group functions. And I've also been part of the change plans and work that we have mostly within supply chain, so logistics and production, but also in the digital space with IT and AI, and I have also been working with expansion. So again, I look forward, of course, to start in this role and to be in contact with you as we move on.

Good afternoon all. My name is Adam Karlsson. And of course, I really share Helena's enthusiasm and great feel of the responsibility and pride of being here yesterday. Short about me, I've been with the H&M group since 2003. I've held a number of different controlling positions. The last ones have been within the global production team in Hong Kong after I joined the expansion team here in Stockholm. And then for the last 3 years, I've been responsible for controlling within the H&M brand. And as well, as Helena said, really, really looking forward to have the opportunity to speak more to you in the future.

Thank you, Helena and Adam. Helena and Adam will come back for the Q1 presentation in April. And now we will continue with the presentation of the full year report. You will find the report on hmgroup.com, Investor Relations. And before we start the Q&A session, I will give a summary of the fourth quarter and the year and of current developments. Our transformation work continues to bear fruit. It is clear from our well-received collections and increased market share that the customers appreciate the initiatives that we are taking. Increased full-price sales, decreased markdowns contributed to an improvement in profit for the full year and the fourth quarter. Operating profit grew 25% in the fourth quarter while we maintained a high activity level in our transformation work. Sales were good in many markets in the quarter, including in India, Poland, Mexico, Russia and Sweden, to mention a few. For the full year, sales increased by 11% in SEK and by 6% in local currencies. Sales growth was driven both by stores and online with a strong increase in online sales, up 24% in SEK and 18% in local currencies. The current year has also started well. Sales from the 1st of December to the 28th of January increased by 5% in local currencies. And if we look at the stock, we have an improved level and composition. And we expect a further decrease in markdowns in the first quarter. And that will then be for the sixth successive quarter. The positive performance shows that we are on the right track. And I would like to thank all colleagues in the H&M group for a fantastic work during the full -- during the past year. And it's pleasing to note we, with the increase in full year profits, can contribute a further SEK 86 million to the H&M Incentive Program, the reward program for all employees of the H&M group. In light of the ongoing transformation of the fashion retail industry, we've been making significant and necessary long-term investments for a number of years to secure the H&M group's position and long-term development. We have invested a lot in the assortment for all our brands, in digitalization, in the supply chain, including new logistics centers and logistics systems, in our tech infrastructure and in Advanced Analytics & AI. And we're now seeing many positive effects of these investments, providing resources and support for our continued transformation work. We continue driving change through our strategic focus areas. And these areas are, as we have mentioned before, to create the best customer offering for all our brands, which includes investments in the assortment, in our physical stores, online and the integration of stores and online to make sure that we have fast, efficient and flexible product flow, to make sure that we have the right tech infrastructure and to add more growth by expanding through stores, online and digital marketplaces. Improving the customer offering for all our brands is our highest priority and the assortment is the key. And we will continue to invest to offer the best combination of fashion, quality, price and sustainability. More full-price sales, increased customer satisfaction and more returning customers show that we are moving in the right direction when it comes to our assortment development. Customer expectations are increasing all the time not only when it comes to the assortment but also when it comes to the shopping experience as well, both online and in physical stores. And for the physical stores, we have been running several tests aimed at creating an inspiring and easy shopping experience for customers. We have received positive response from customers on many of these tests. And as we are upgrading and opening new stores, we are gradually introducing the solutions that have proved most successful. The online store is being constantly developed as well in everything from navigation, product presentation, size recommendations, payment options, delivery times and different delivery alternatives. And while upgrading the physical and online stores, the 2 channels are becoming increasingly integrated. So rollout continues for services, such as Click & Collect, online return in stores as well as digital features, making it easier for customers to access our entire product range across channels. The supply chain is a key area as well for our transformation, where focus is on speed, flexibility and efficiency to create an even better customer experience. And the work spans the entire product flow and -- where logistics centers and logistics systems are important parts. We have, for example, opened a new high-tech logistics center in Milton Keynes in the U.K. that will replace several existing centers and serve both stores and online. And the implementation of new logistics systems is proceeding according to plan with a number of markets this year. We are also investing a lot in our tech infrastructure. And this includes ensuring robust scalable platforms that enable faster development of new customer apps and technologies. Many of these investments have already brought improvements for our customers and will enable further improvements going forward. Another example of how we are transforming our business is the creation of our new function, Business Tech. Business Tech will gradually replace the previously separate functions of IT, Business Development and Advanced Analytics & AI. In Business Tech, agile teams will work cross-functionally, which will make us even more flexible, fast, more efficient in the area of digital and tech development. The growth of the H&M group continues. As we expand, it is important, too, that we ensure a relevant presence in each market. We are accelerating the optimization of the store portfolio, including renegotiations, closures and rebuilds. For 2020, we plan to open around 200 new stores and close 175, resulting in net addition of 25 stores. Most of the new stores will open in South America; Asia, excluding China; in Russia, Eastern Europe, while the closures will mainly be in Europe, the U.S. and China. The H&M group recently signed an agreement with a new franchise partner in Central America, where the first H&M store is expected to open in Panama at the end of 2020. In parallel, our digital expansion continues. During the year, we are looking forward to opening H&M online in Australia and also launch H&M on the e-commerce platform SSG in South Korea. The individual brands of the H&M group are reaching more and more customers globally, and we are seeing good growth opportunities for all of them. In 2019, we also increased our ownership in the Swedish company, Sellpy. Sellpy is a fast-growing e-commerce platform for secondhand, where the H&M group is now a majority owner. The H&M group has over many years made considerable investments in sustainability. We are convinced that our sustainability initiatives are good for the company, and we see that both our customers and employees care more and more about these matters. We want to lead the fashion industry in a more sustainable direction with faster development of circular solutions, reduced energy use, more renewable energy. And we have very ambitious goals as well when it comes to materials, aiming for 100% recycled or sustainably sourced materials by 2030. We also strive to be a fair and equal company. And we carry out extensive work for good working conditions in the supply chain. Our sustainability work is being recognized by international organizations. The H&M group has, for example, made it to CDP's A List, where -- which names companies leading on environmental transparency and performance, for our work then to mitigate climate risk and contribute to the transition to a fossil-free economy. And according to Corporate Knights, the H&M group is among the world's 30 most sustainable companies 2020. So we are proud of our sustainability work and the recognition it receives. And we're also well aware that a great deal of work lies ahead for us and the industry. If we look ahead, we remain humble, considering the rapid shift in the fashion industry and the challenges it brings in the form of new consumer behaviors and the fast-changing competitive landscape. But I'm really optimistic about the future of the company. With our customer focus, our long-term perspective, great colleagues and strong company culture, I believe we will have -- we have many good years ahead of us. Thank you very much. And now we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Charlie Muir-Sands of Exane BNP Paribas.

And congratulations for your new positions. I've got two questions, please. Firstly, relating to your performance around operating costs in the fourth quarter. That grew but obviously substantially below the pace at which your sales expanded. And I think a lot of us on the call were very positively surprised by that development. Can you tell us how much of that is related to any kind of one-offs or year-end effects or the reversal of one-offs from the prior year as opposed to your view that perhaps H&M could be at a point of starting to leverage its operating costs? That's my first question.

Yes. If we look at the OpEx in the fourth quarter, we have to look at last year as well, where the OpEx development in the last quarter was much higher than the previous quarters during that year, so where the activity level was really high and where we have some one-offs as well. So adjusting for that, I would say that, I mean, the underlying OpEx development was more 4% to 5%. So good cost control, and yes, so that's more the fair view, so to say.

Understood. And my second one is perhaps a more of current or forward-looking question. Clearly, the coronavirus breakout in China is a fast-moving situation. But can you talk at this stage as to whether you see any risks to your supply base, given that it's still a very major country for production?

Yes. Well, I mean we are following, of course, what happens there and sticking to the recommendations from the local authorities. We have a number of stores closed. It's affecting the selling negatively now at the end of the month. So it's very hard to say. We don't know what will happen. We have a lot of sourcing from China. But we also have a very flexible supply chain. So today, it's having a marginal effect. We have backup plans and we'll just see what happens. But for now, we have the supply chain and we have a good plan for that.

[Operator Instructions] Your next question comes from the line of Richard Chamberlain of RBC Capital.

Yes, thank you. So just following on from Charlie's question on OpEx, please. I wondered if you can just comment on the extent to which OpEx was reduced in the fourth quarter by the timing of Black Friday shipments and the product returns associated with those shipments, please.

No, that's not the main reason. The main reason is really, I mean, we have a good running -- I mean, cost control and the main reason is the comparable from the fourth quarter last year, which was really high due to the activity level and the one-offs as well. So that's the main reason. So underlying, we would say more 4% to 5%. And looking ahead, I mean, we -- it's hard to say anything. But I mean if sales continue to develop in a good way, we believe we can have a good chance to have OpEx growth lower than sales growth.

Sure. Okay. And just to follow up on -- in terms of modeling for Q1, what are your -- what do you think we should build in for the extra leap year day this year falling at the end of February? I think it gave you about a 2 percentage point boost to Q1 4 years ago. It looks like it's on a Saturday this time now. So should we expect at least that kind of positive effects on the Q1 sales development?

I think 2 is a little bit high. I would say a bit more than 1.

Okay. So maybe between 1 and 2.

Yes.

Your next question comes from the line of Fredrik Ivarsson of ABG Sundal.

One quick one for me as well. On the gross margin and the external headwinds in particular, I suspect mainly FX, you guide for continuous headwinds in Q1. And I'm curious if you can give some more feeling on whether we should expect Q1 -- oh, sorry -- yes, Q1 headwinds to be of equal size as in Q4 or maybe lower. Some color on that, please.

For Q1, they will still be negative but slightly less negative than in Q4.

And your next question comes from the line of Adam Cochrane of Citi.

One question that's -- that I've got relates to you talked about the logistical changes that are ongoing in Milton Keynes as an example. Would you just be able to update us on how far you are through the logistical changes that are underway? And is there any scope for some double running costs where you're operating 2 systems at the same time that should come out as we look into 2020?

I mean it's a long-term work. I don't think it will ever, ever stop. We have mapped -- based on what we know today, we have mapped up a logistical network in the world, how many houses we should have, where they should be, the size of them, how many for stores, online and the combination, so to speak. We have done a lot of changes to the logistics systems. We still have some transitions to make during the year. So we have come far away but still a way to go there. And then of course, it's also connecting the warehouses in a good way for order orchestrating between the different warehouses. That's work ongoing. And then we have the source as well that also can serve as logistical hubs in a better way than we have today. So it's connecting the stores to the total logistics system. So it's -- we have done a lot. It's starting to create value for the company, but we -- there's more good things to come from the transformation work.

So would you put the better inventory sales ratio that you achieved at the end of Q4 largely down to changes in logistics? Or is it more to do with your buying and sell-through rate?

I would actually -- it's both. But it's more the buying and the assortment planning that is great and the assortment in itself that is appreciated by customers. And so it's more down to that, a little bit from the logistics investments. But over time, the logistic investments will help us greatly. And to answer your other question as well, yes, we have some double costs running in certain areas.

Do you know roughly when they would fall away?

No. It depends. I guess there will be double costs in different areas for -- in different areas of the world. Today, we have double costs in the U.K., for example. And that's a gradual move into Milton Keynes and a gradual moving-out from the other ones. But then at the same time, we will open new centers, where there will be double costs. So it's hard to say exactly a timing.

That's great. Well done on the promotion and the results.

Thank you very much. Thank you.

Your next question comes from the line of Rebecca McClellan of Santander.

Congratulations on your results and your promotions, et cetera. Three questions for me, please. Firstly, where did your full-price sales ratio stand at the end of 2019 versus the historic peak? And secondly, I think last year, you mentioned that some 2/3 of the store part have come up for renegotiation in the coming 2 or 3 years? If that's right, where are you with your rate renegotiations? And what sort of benefit or savings are you finding there? And then finally, do you retain your inventory objectives? And as a percentage of sales, I think it was 12% to 13%.

First question about [indiscernible] it's getting better and better. I think this was the fifth quarter -- consecutive quarter that we have better -- more full-price sales and less markdowns. But we don't give you the exact split. And there is still potential, of course. But it all depends on how the customer offering is received and how customers appreciate the products. When it comes to renegs, we had around 1,000 contracts that we had a chance to renegotiate in '19. And then we'll be -- we expect a similar number for 2020. And so yes, around 2/3 of the portfolio can be renegotiated within 3 years still. So this is rolling, so to speak. And then the inventory target remains. And we still believe we can get there. But we refrain from giving you an exact timing.

Okay. And can you give us some magnitude of the renegotiations that you're achieving?

Maybe you should take that? We are very pleased with the outcome. And I think the team doing renegotiations and our expansion team are doing a fantastic job. I think the environment right now is very good for this. But it's not just about rent per square meter. It's also about location. You can get even better location in a mall or whatever. We can get finance from the landlords. And we can get better flexibility in the contracts, which, of course, is very key at the moment.

Your next question comes from the line of Simon Irwin of Crédit Suisse.

Can I just ask about long-term growth prospects? Because you repeat the ambition of 10% to 15% long-term growth in the -- in today's statement. And yet online is delivering about 3% and space growth -- or sorry, store growth has come down quite fast even though you were only churning about 3% of your stores per annum, which doesn't really feel like enough. So where is that growth going to come from? Are we going to get a reacceleration of store openings at some point? Would you -- are you simply waiting until the online business is sufficiently large to drive that level of growth?

Yes. But it's there as a long-term ambition. Of course, we have much lower store expansion growth rates today. So it will be super tough to reach the 10% to 15%. But it's there as a long-term ambition really as a trigger. But we'll see where we land. We believe we will have a good year. We have ambitious goals. But yes, so that's how it is. We'll see if we get back to 10% to 15%.

Okay. And this thing, I suppose, that surprised me most today was that there were only 40 openings amongst your smaller formats, which I think is the smallest number you've done in about 4, 5 years or so. And I thought these formats were all in kind of structural growth. Is this a pause? Or again, are you kind of reassessing the growth potential for the smaller formats?

Yes. We're shifting more to digital. We see great growth opportunities for all the brands. They are in early stages of development. We are adjusting certain things for certain brands, but we see great growth opportunities. And at the same time, for H&M as well, we believe rents are too high in many markets. So we're waiting a bit and then for better deals as well. It has to make sense for us. So I believe rents will come down further.

Yes, we have set much tougher limits when it comes to rents and flexibility, et cetera, also [indiscernible]. So that's one reason.

And what's the overall sales impact of the changes that you're making to space at the moment? Are they driving higher -- I mean, is this a net increase in space? And are you driving higher sales densities out of these newer stores?

Well, of course, the stores that we do open have very high quality in terms -- and generate a lot of value. And the ones we close typically are not the best ones.

Your next question comes from the line of Anne Critchlow of Societe Generale.

It's on CapEx. I wonder if you could give us an indication, please, of guidance there. You have said you're going to reduce it, but just to have a range or a number.

Yes, yes. We've capped it for this current year. It's around SEK 8.5 billion in constant currency. So that's now the best estimate.

And I've got another question on China because you're downsizing the portfolio. You did it last year and also, I think, this year. What did you learn about the types of locations that are not working?

No. I think we -- I mean we have many stores in China for -- and of course, most of the stores are H&M. And we work well in first-tier cities and even fourth-tier cities. So it's mixed. It can be fourth. It can be third, second and first. And some shopping centers are not as good as we thought, or some locations in general are not as good as we thought. And some [ patterns ] have moved. There's been a lot of rapid expansion and new shopping centers. So I mean it's changing all the time in China, as in most markets, and then we have to adjust according to that.

Your next question comes from the line of José Rito of Caixabank.

So first question, on then the gross margin. How do you see this evolving in 2020? If you can provide some reference to this. And my second question, on FX impact in 2019. There were positives and negatives to the EBIT margin, being the U.S. dollar negative. So net-net, what was the effect on EBIT margin due to FX? I'm not sure if you can clarify this. And finally, just a quick question on the store openings. Is the average size of the stores that you plan to close should be similar to the store openings? So meaning slightly positive contribution from selling area.

Sorry. The first question was the...

Gross margin for 2020...

Gross margin for 2020, yes. We normally comment on the big external factors. Those were negative for purchases made to the fourth quarter in 2019. And the same is for the first quarter in 2020, slightly less negative; and then again slightly less negative for purchases being made to the second quarter compared to the first quarter in 2020. Then it's very hard to say after that, but we also believe that we will see less markdowns in the first quarter by 50 to 100 basis points. And we have a good chance of having less markdowns throughout the year, of course depending on how well the collections are received. So that's what we can say on that. When it comes to the FX development, obviously a super negative impact from U.S. dollar affecting the gross margin. And then on the other hand, we have a positive translation effect for 2019 but margin-wise a negative effect, net effect, for the year. And it -- when it -- I didn't -- I'm not sure I understood the last question correct, when it comes to...

Yes, yes. Basically if you can provide the rest of these store closures in -- the size of the store closures are broadly the same as the store openings.

I would say roughly the same. We're closing more stores in more mature markets. Many of the mature markets has a higher selling per square meter than many of the more developing markets, but we don't only look at selling per square meter. We look at -- obviously at profitability in the stores as well and future potential in the stores. So there are many things we take into consideration when we look at opening a store and closing a store, but overall we are improving the portfolio when we optimize the portfolio. And the new stores that we open, we have a great belief in, of course. Otherwise, we wouldn't open them.

Your next question comes from the line of James Grzinic of Jefferies.

Congratulations on all of new positions from me as well. I just had a very quick one just to flesh out your commentary around the sales and the OpEx growth relationship in the coming year. I presume you're more in control on OpEx than sales. Can you perhaps give us some context on how you think about OpEx growth in the coming year, excluding FX, relative to that 4% to 5% underlying that we've seen in Q4, please?

We don't want to give an exact level, but what we said and what we said -- say is that we have a good cost control. And we still will have a high activity level. And yes, if we see good sales development as we have had in 2019 and beginning of 2020, I think there is a good chance that sales will grow more than OpEx. That's what we can say, yes.

And your next question comes from the line of Dana Telsey of Telsey Advisory.

As you think about the combination of the closures and the lease renegotiations, how do you see the impacts of the closures on online sales, which -- and also the transfer rate of closed stores to either online or existing stores? Have you assessed what that means?

Yes, of course. It's something that we take into consideration when evaluating closures: how we look at the total catchment area; neighboring stores; likelihood of picking up sales, so to say, in those stores; and also the effect on -- what we have learned from other store closures and how that -- and what effect it has on the online sales. So we're taking omni view on -- when we evaluate.

And could it be possible that the online sales, given they're up around 18% this year, get a greater boost next year as a result of this?

I -- it's not the major contributor to growth, but in -- I mean it could. It will have some effect, yes.

And your next question comes from the line of Adam Cochrane of Citi.

Coming into round 2. The -- I thought, whilst we had the chance, it was a question on sustainability. I mean it's obviously a key part of the strategy and keen for that to carry on going forwards. In terms of the customer or consumer demand for the work that you're doing on sustainability, the Conscious Collection, et cetera, can you give us any flavor for how the consumer in various markets may be appreciating the ranges that you're putting out, please?

Yes. We see a big difference between markets, I will say, but the interest is maybe the highest in the Nordics and in Central Europe and in U.K. And then it varies from market to market, but we do customer surveys in every market and we see that the interest in sustainability is increasing year-by-year, which is nice to see. And then with transparency work, and hopefully we will get to a point with an industry standard where it's transparent and clear for the customer, the sustainability scores connected to each product for us and all the competitors. When that is the case and -- I mean that will be a central part in the purchasing decisions for customers. So not only to look at the fashion, the quality but -- and price but also at sustainability, and that will be really good. It will put pressure on us and all other companies in the industry. And then I think it will really matter. I mean where it matters today but also for the business performance and the customer interest.

And when you look at the improvement that you saw in working capital in the period, some of that relating to longer creditor days. Now there's a number of things that might go into creditor days. What was the main sort of moving part that you had within that increase in creditor days? I'm assuming it's not you paying your suppliers on longer terms.

No. We still pay the creditors the same days as in previous years, so that's not the effect.

What do you think could be the benefit to cash flow? What other factors could it be?

Yes, there are several factors, of course. I mean increase in the result is one and then, of course, also that the stock in trade doesn't increase, don't increase as in previous quarters. So all in all, the free cash flow is really getting a boost from last year's SEK 8.1 billion to SEK 18.5 billion in free cash flow. So of course also, CapEx is decreasing. It went down during '19 compared to '18 by -- from SEK 12.8 billion to SEK 10.3 billion, something like that. So of course, that's SEK 2.5 billion in cash flow. So there are several parts in the cash flow statement.

So in terms of next year, you've got lower CapEx coming through. Hopefully, you've got profit moving forwards. Is there anything on that -- on those working capital lines that we should think about that either may reverse out or will be another benefit? Anything to sort of call out on the -- on how we should think about working capital for the current financial year?

I think we still get some improvements from the stock in trade. We have still potential there. I also believe that if our plans is working out, we will also have a good profit development as well. And of course, CapEx, as we mentioned, will go down to approx SEK 8.5 billion from the current year's SEK 10.3 billion. So of course, we see a good potential in increasing the cash flow during 2020 as well.

[Operator Instructions] Your next question comes from the line of Geoff Ruddell.

Can you hear me now?

We can hear you.

Yes. Sorry. Sorry about that. So this -- the conference call this time last year, you called out SEK 560 million of one-off costs. Can I just clarify? My understanding is those were in the gross margin rather than the SG&A. Is that correct?

Most of them were in the gross margin, yes. I think slightly more than SEK 400 million in gross margin, and the rest on the OpEx.

Great. And so if I look at the gross margin evolution this year, you've got a -- in the fourth quarter, rather, you had a 50 basis points improvements in markdown. You were obviously lapping that SEK 400 million from last year, which I guess is probably worth another 70 or so basis points. And then obviously the gross margin came down 20 basis points, so am I right in thinking there was well over 100 basis points of underlying investments in the customer proposition?

It was a combination of investments in the customer proposition, but also don't forget the headwind from the FX.

Sure, but then all of your competitors will have had that as well.

Absolutely, but I mean it is what it is, right? And you can -- the most important thing is always the commercial decisions we take on each product and the markup. And we continue to invest in the offering, as we said many, many times.

Okay. And should we in fact expect further investment in the offering incrementally in the coming year?

We've been always investing in the offering as anyone and I always say, but it doesn't necessarily mean that the margin should be subdued because we also get efficiencies that we can give back to our customers.

And your next question comes from the line of Leanne Carr of Retail Week.

My question is for Helena, please. What your main priority is going to be in your new role going forward?

Helena is not here at the moment. She was only here for the introductions.

Oh, okay. I'll ask you that question. What will be her main priority?

I think I can check with Helena, but I -- maybe I can try to answer that.

I'm sorry. I thought she was going to be on the call the whole time.

No, but what she said earlier was, I mean, we have set a plan that we believe in, and we are executing well on that. That's why we see the positive developments. And now it's -- we can improve in every area. So it's continue to adjust the plan based on everything we -- every change in the market and everything new we learn and continue to do a great work with the teams and to live the values of the company. And that's what she said earlier, and I think that's right...

And what was it about her that made her the right candidate and the sort of clear successor?

I think the Board has made a great decision and was my recommendation to the Board as well. She has great experience from many different roles in the company. She knows the company well. And we have -- like most companies, there is a unique company culture and a very strong company culture, and she knows that company culture very well and she lives the values in a fantastic way. She is a respected leader, open-minded and courageous, I mean, and good in many ways. So I think I'm -- or not think, I'm convinced that she will do a fantastic job together with Adam and the rest of the team. So good choice from the Board.

Great. And just one last question very quickly, just going back to you said that you had plans in place for your supply chain with the coronavirus that's happening. Can you just go into a little bit more detail about what those contingency plans are?

There are so many, so many, I mean, different things that goes into that. It's -- I mean we have a great supply chain. We have a good supplier network. We are present in many markets. And it's not only for this -- for China. We have backup suppliers, backup plans. And we can move between markets. So many different things, but yes.

[Operator Instructions] Your next question comes from the line of Paul Rossington of HSBC.

Well done, everyone, on your promotions again and the numbers today. Just a question on the trial stores: You've developed a number but not many. I think they perform quite well today. Are there any plans at this stage to start rolling out some of the benefits or the learnings from those trial stores to the wider estate? And if so, is there kind of any costs attached to that, that you can talk about? Just some color on what might happen then.

Yes. We're rolling out improvements as we are getting receipts, smaller things and big things that we are testing. The rebuilds will increase during the year, and we continue to test. So as soon as we get good receipts, we will roll them out. So we build based on the learnings we have, so far. We'll increase during the year, and hopefully, we'll get the chance to roll out even more improvements.

Would that impact a material part of the estate in this year, or will it be at the margin?

Sorry. What was your question? If it will...

So will -- the level of rebuilds, will it be material in terms of the estate? Or will it be kind of more at the margin for the time being?

"What is material for you?" What -- yes, but our -- yes, quite a few stores but not -- it's not the majority of the portfolio during 1 year now.

And your final question comes from the line of Simon Irwin of Crédit Suisse.

Could we just finish up on the fascinating subject of IFRS 16? Could we -- could you just give us a little bit more color on some of the key line items as they go through the P&L, particularly what the lease interest charge is going to be? And then give us a rough idea of the kind of rental split as to how much will still be going through the P&L and how much will not and what -- give us a rough idea of what the amortization charge will be as well?

Yes. Well, a lot of questions there. I hope some clarifications can be found in the full year report on future accounting principles, on -- I think it starts with Page 13, 14, yes. Approx half of these stores are included in the IFRS. We are excluding the pure turnover rent stores. And the balance sheet will, of course, be inflated. There's big part of -- the store leases will be seen as debt. And the amount is around SEK 77 billion sort of debt. And then as right-of-use of assets, it's around SEK 73 billion. That's an ongoing for this year. And of course, there will also be some effects on the income statement, but we will during -- the quarters to come during 2020 show both the income statement based on the IFRS 16 but also excluding the IFRS 16 effects. So it's hopefully a helpful tool for all readers to see the impact. And it's a moving target because we are using some breaks. Sometimes we use options. So it's the moving target, the [ portfolio ], so it can differ from quarter to quarter. But our best estimate based on this current year, if we take that as an -- for this 2020 and use the SEK 77 billion and SEK 73 billion of right-of-use of assets, we estimate that the operating profits would increase by 7% to 9% compared to the old way of looking at the income statement. And then profit before tax should have an increase by 2% to 3%, but we will come back to this during Q1 and we will show it clearly in the Q1 and Q2 and Q3, et cetera, report. It's a very, very heavy administrative work and quite complicated. But half of the stores are included in the IFRS lease debt.

It's very complicated from our perspective, but at least that it only means we don't need to change our models until [indiscernible]. So that's one bit of good news.

Thank you. There are no further questions at this time, sir. Please continue.

Thank you. And as mentioned earlier, Helena and Adam will host this telephone conference together with Nils in conjunction with the next quarterly presentation in April. So from myself and from Jyrki, a big thanks for these telephone conferences -- for the telephone conferences during the year. So it's been really nice, and I hope to get the chance to talk to you later on. So thank you very much.

Thank you.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.