Compagnie Financière Richemont SA (CFR) Earnings Call Transcript & Summary

Good morning. Welcome to Richemont 2022 Full Year Results Presentation. It's nice to see you again in person, and we thank you for coming to Geneva. Welcome also those of you watching the webcast. Joining us today from Richemont are Johann Rupert, Chairman; Jerome Lambert, CEO; Burkhart Grund, CFO; Cyrille Vigneron, Cartier's CEO; and Nicolas Bos, Van Cleef & Arpels CEO. We would like to remind you that the company announcement and financial presentation can be downloaded from richemont.com, and that the replay of ideas will be available on our website today at 3:00 p.m. Geneva time. Before we begin, may I draw your attention to the disclaimer on our presentation and company announcement regarding forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. So coming back to the presentation. First, Jerome will take you through the year's financial highlights and sales, then Burkhart will review key developments within our business areas, group financials and key achievements within ESG. He will then hand back to Jerome for the conclusion, which will be followed by a Q&A session. I will now hand over to Jerome.

Thank you, Sophie. Good morning, ladies and gentlemen. Thank you for joining us today, and welcome back live in Bellevue. Sales for the year reached a new level at EUR 19.181 billion. This represents a 44% increase versus the previous year and 37% versus 2 years ago at constant exchange rate. At actual exchange rates, sales grew by 46% and 35%, respectively, versus 1 or 2 years ago. Operating profit more than doubled to EUR 3.4 billion, growing much faster than sales reflecting significant operating leverage. The operating margin reached 17.7%, a 650 basis points improvement over the prior year. Excluding on a onetime item relating to the suspension of our operations in Russia, operating margin would have reached 18.6% of sales. Profit for the year increased by 61% to EUR 2.079 billion. Cash flow from operating activities rose by EUR 1.4 billion to EUR 4.6 billion, and our net cash position increased by EUR 1.9 billion to EUR 5.3 billion. Our strong financial results reflect a significant increase in sales and profit and provide more resource to invest in the brand equity of our Maisons for a sustained and responsible growth. The double-digit sales growth was broad-based across business areas, demonstrating the strong desirability of our creation based on highly distinctive designs and savoir faire. High gross margin and good cost control led to a much improved operating results, both at group level and across business areas with a particularly high profitability level for the Jewellery Maisons and a noteworthy Maisons improvement and the Specialist Watchmaker. This translates into a strong cash flow generation, as just mentioned, and we are pleased that our long-term focus on client centricity has led to an increased level of direct client sales, comprising online and retail sales of 76%. We continue to progress on our sustainability journey and have increased our ESG commitment. Our science-based target were validated by the SBTi during the year, and our sustainability teams were strengthened by the recent appointment of a Chief Sustainability Officer. The Board's ESG expertise was also increased with the election of an ESG specialist as non-executive director now chairing our Governance and Sustainability Committee. And Burkhart will tell you more at the end of his presentation. I briefly take you now by business -- through the sales performance by business area at actual exchange rates over the 1 and 2 years comparison period. We achieved a strong double-digit growth in all business areas, both on a 1 and 2 years comparative basis. On a 2 years comparative basis, growth rate in all business areas and accelerated in the second half compared to the first half of the year. Of particular note is the outstanding growth of the Jewellery Maisons throughout the 2 years. Looking in more detail at the quarterly sales performance by business area, on a 2 years basis at exchange rate, one sees at the growth rate at most business areas accelerated over each quarter during the year. Remember, of course, that the fourth quarter across all business areas benefited from less challenging comparable at the quarter ended March 2020, marked the early stage -- as you know, it's marked the early stage of the pandemic. Growth at the Jewellery Maisons was particularly strong and reached triple-digit growth in the first quarter. Let me now take you -- now walk through the group sales performance, first by region, then by distribution channel. So sales in all regions posted double-digit growth compared with the prior year, with the strongest growth rates in America, Middle East and Africa and Europe. Europe and the Middle East have both seen strong demand from local clientele. While as you notice, inbound tourism remains steep, subdued in Europe. Middle East benefited from the reopening of Dubai to international travel in July and from the Expo Dubai 2020 between October and March. Asia Pacific, America and Europe contributed the most to the sales increase, each growing by more than EUR 1.5 billion. With its sharp growth rate, the share of the group sales in the America is nearing now the one of Europe. Also worth noting, it is that Middle East and Africa has now surpassed Japan in terms of sales. Sales in all regions were above a pre-pandemic level with a very strong double-digit growth in the Americas, Asia Pacific, Middle East, Africa. In Asia Pacific, sales in major markets such as China and South Korea grew by double digit compared to both prior year and 2 years comparative basis. There were sequential quarterly acceleration on 2 years comparative basis in almost all region, with a particular good progression in Europe and Japan. In the fourth quarter, Asia Pacific sales were impacted by pandemic-related lockdown in part of Russia, while the conflict in Ukraine affected sales in Europe towards the end of the quarter. Richemont suspending commercial activity in Russia on 3rd March after stopping Ukraine operation on 24th of February. Let's now turn to sales by distribution channel. Starting with our largest channel by far, retail, which contributed to 57% of group sales, up from 55% last year. Year sales growth by 51% and by 53% on 2 years comparative basis, an increase that was broad-based across all business areas. Retail definitely benefited from 25 stores opening net in addition to the acquired 48 Delvaux stores as well from the traffic of the stores resuming after the lockdown of last year. Online Retail generated 19% of group sales compared to 21% in the previous year, of course, following the easing of pandemic-related store closures a year before. Sales increased by 27% year-on-year and by 38% versus 2 years ago. And if you exclude online distributors, online sales rose by 42% compared to the previous year, driven by a continued localization of website and further development of distant sales. And while all business areas achieved strong results, it was particularly notable with a Specialist Watchmaker indeed from a lower base. Direct to client sales, including both retail and online retail, represented 76% of group sales. Finally, wholesale sales increased by 45% compared with the previous year with strength across all business areas. Compared to 2 years ago, it rose by 8%, notwithstanding 22 net franchise store closures, primarily at Buccellati and Dunhill. Both Jewellery Maisons and Specialist Watchmaker exceeded recover level with a double-digit increase at Jewellery Maisons. Wholesale sales made up 24% of group sales, in line in proportion with the prior year. The robust growth in online retail at our Maisons led to a 6% online penetration rate when we exclude the online distributors. And these were noteworthy performance during a period. As you noticed, they delivered such a strong sales growth combined with reopening of retail stores and, of course, the restart of international travel. During the year, Fashion & Accessory Maisons had the highest online penetration rate. It's already 16%; followed by the Jewellery Maisons, 5%; finally, Specialist Watchmakers, 3%. Burkhart will now take you through the year's highlight by business area. Burkhart?

Thank you, Jerome. Let me review our business areas with all the numbers at actual rates and starting with the Jewellery Maisons which, as we all know, comprise Buccellati, Cartier and Van Cleef & Arpels. Sales were up by 49% versus last year and by 54% versus 2 years ago. Growth for the year was strong in all regions, led by Asia Pacific, the Americas and Middle East and Africa. All channels recorded double-digit growth with a notable increase in retail. The operating margin reached a robust 34.3%. This excellent performance was primarily the result of 3 factors: significant sales growth; higher capacity utilization, reflecting the strong growth in demand; and disciplined spending. These factors enabled strong operating leverage that drove the 330 basis point increase in the operating margin. Now let us look at the main developments at the Maisons during the year. So sales in the jewellery and watch category were excellent with notable performance on the jewelry side from Love, Clash and Panthère at Cartier; Alhambra and Perlée at van Cleef & Arpels; and the Opera Tulle and Macri collections at Buccellati. For watches, Cartier benefited from the relaunch Santos, Tank Must, including the innovative solar beat model and contributions from Ballon Bleu as well as from Lady Arpels at Van Cleef. The reach of the Jewellery Maisons' digital network further expanded with Van Cleef & Arpels launching its e-commerce activity in China and Saudi Arabia, which contributed to supporting the growth of e-commerce in the regions. The renovation of the Cartier retail network progressed with major reopenings, including Geneva, Rue du Rhône, Milan, Montenapoleone and Riyadh Centria Mall. Buccellati continued to upgrade and expand its retail network, opening 9 new directly operated stores across the world, notably in Seoul at Galleria, Dubai Mall and South Coast Plaza near Los Angeles, among others. Buccellati also integrated its distribution in Japan. ESG initiatives included the creation of the watch and jewelry initiative 2030 with Kering, which marks the beginning of a collective journey to ensure the industry creates positive outcomes for the planet and its people. Cartier successfully organized the Women's Pavilion at Expo 2020 in Dubai, inviting visitors to celebrate the central role that women have played throughout history. Van Cleef & Arpels supported numerous educational events worldwide, including from hands to hands, an event designed to share jewelry skills and know-how with local schools in [ Lyon ]. Buccellati began switching its gold sourcing to Richemont's responsible gold supplier called VALINOR. Let us now review our Specialist Watchmaker business area, which consolidates the results of 8 Maisons. Sales of the Specialist Watchmakers increased by 53% versus last year and 20% versus 2 years ago. There was strong growth in direct to sales -- direct to client sales, sorry, which now exceed 50% of sales. There was solid growth in all channels and regions with notable strength in retail and in the Americas, where sales rose by 118%. Growth was also driven by strong local demand in all regions. The operating margin rose to 17.3% with an operating result almost double compared to 2 years ago as a result of higher sales, higher manufacturing capacity utilization and continued cost control. Let us now look at some of the key developments over the past year. Many of the Maisons as well as the business area itself have reached a new scale, with the Specialist Watchmakers generating sales of EUR 3.4 billion, driven by double-digit growth at all Maisons. Strong performance of iconic collections continued, including the performances of the Lange 1 at Lange & Söhne, Riviera at Baume & Mercier, Pilot at IWC, Reverso at Jaeger-LeCoultre, Luminor at Panerai, Polo at Piaget and Overseas at Vacheron Constantin, just to name a few. The Maisons have been transforming the business model over time to become more agile, engaging with our clients through new event formats, such as the hybrid Watches and Wonders fairs, as an example. The specialist watchmakers have been driving forward their ESG initiatives, notably through targeted partnerships. Recently, Panerai entered into a 2-year collaboration with UNESCO that focuses on education, citizen science and industry involvement. Specialist Watchmakers are studying other areas where equity design and new material can help creation. One example of this is at IWC. During the recent Watches and Wonders fair, they revealed a new collection of straps developed from 100% bio-based material using a mix of natural rubber, natural fibers and oils derived from up-cycled waste of the agri food industry. This brings circularity into the field of watch straps. Let's now move to the online distributors. Sales at the online distributors grew by 27% year-on-year and by 15% versus 2 years ago. This solid growth was broad-based with double-digit increases in all regions, driven by the Americas, Asia Pacific and Middle East and Africa. The business model shift that we have initiated is on track. The operating loss for the year was limited to EUR 210 million, included significant one-off costs linked to the adjustment of the operating model post Brexit. That control of costs and investment led to an operating margin of negative 7.5% versus a negative 10.2% a year ago. The EBITDA loss was reduced to EUR 24 million, and YNAP stand-alone EBITDA reached breakeven before the exceptional reward payments to group employees and the contribution of the Chinese joint venture with Alibaba. Before we look at some key developments over the past year, let me add that discussions with our luxury new retail partners continue around exploring opportunities for closer future collaboration. As we've said before, this is quite a complex project, and we hope to conclude in the near future. Now back to YNAP. The business model shift is progressing well. Several brands at NET-A-PORTER and MR PORTER have launched so-called e-concessions, with some using a combination of 1P and 3P and others are exclusively 3P. More recently, YOOX. successfully launched its marketplace in Europe, onboarding almost 80 sellers and nearly 50,000 new products. Key localization initiatives have included the development of the Middle East and China with other markets in preparation. As an example, in March, MR PORTER fully localized its Middle East store so that now NET-A-PORTER and MR PORTER Middle Eastern customers enjoy personalized site language and product merchandising, addressing local nuances with the support of an expanded local personal shopping team. That's a long sentence. THE OUTNET is seeing solid growth. It has successfully launched its menswear offer, expanding its assortment into new product categories to attract a wider customer base. The new resale service started with NET-A-PORTER last October. It has been extended to MR PORTER business -- sorry, customers in Germany, Hong Kong, the U.S. and the U.K., enabling them to resell ready-to-wear, accessories, bags, jewelry and shoes. At Watchfinder, expansion outside the U.K. has contributed significantly to growth momentum and is increasing as a proportion of sales to around 25% of sales from only 6% 2 years ago. Building on its success, the watch trading program with Cartier and the Specialist Watchmakers has continued to be rolled out and is now available in 92 stores. Finally, let us move to the other businesses, which primarily include the group's Fashion & Accessories businesses and the group's unbranded watch component manufacturers. Sales in our other businesses increased by 53% compared with last year and by 15% compared to 2 years ago. This performance was broad-based across channels and regions, led by retail, online retail and the Americas. Excluding the impact of the consolidation of Delvaux from the 1st of July 2021, sales were 45% higher than in the prior year. On a 2-year comparative basis, growth rates accelerated throughout the year with double-digit growth for the last 3 quarters. The business areas operating loss was significantly reduced to EUR 47 million. This improvement was largely a result of good operating leverage through higher sales, higher gross margin, strong financial discipline and stepped-up investments into brand equity. Let us now look at some highlights of the past year. The Fashion & Accessories Maisons have been strengthening their creative capabilities with the hiring of new creative directors at 3 Maisons. Building on the well-received first collections from these new creative directors at Chloé and Alaïa in the first half of the year, Montblanc launched in March its first leather collection designed by its new creative director. Both Peter Millar and Delvaux showed notable performance during the year. Peter Millar, including the G4 brand, saw excellent growth in footwear and outerwear. Delvaux, which contributed over EUR 100 million in revenues with a robust performance of its bullion and top pet collections, has brought exceptional savoir faire to the group. Our F&A is a further invested in the retail network with targeted store openings, including new boutiques for Peter Millar in Dallas, for Chloé and Montblanc in china, Dunhill in Japan at Ginza 6 and Delvaux in South Korea to support direct-to-client sales. In parallel, Chloé has continued to optimize its wholesale network. E-commerce investments in digital marketing and creative content across the Maisons have driven digital sales higher, notably at Peter Millar. The Fashion & Accessories Maisons have further embedded ESG into their operations. You may remember from the first half presentation that Chloé was the first luxury Maisons to achieve the very demanding B-Corp certification. Montblanc has launched 3 collections in leather using up-cycled nylon to reduce the impact on the environment while Peter Millar received GRS certificates and transaction certificates to help with supply chain transparency on all fully recycled products. Let me now walk you through the rest of the P&L, starting with gross profit. Gross profit increased by 53% versus the prior year to EUR 12.079 billion. The gross margin rose to 62.7%, increasing by 290 basis points compared to the year ended March 2021. This improved margin includes the positive impact from higher manufacturing capacity utilization, particularly at Cartier, a further shift towards retail, a favorable country mix and targeted price increases. This was partly offset by rising precious metal prices, the impact on cost of a strong Swiss franc and the phasing out of PVC as well as a EUR 70 million valuation adjustment on inventories held in Russia. Let me now look at net operating expenses. At EUR 8.637 billion, operating expenses were 35% higher than the prior year, significantly less than the 46% increase in sales. At constant exchange rates, operating expenses grew by 34%. The increase reflects higher sales as well as the non-recurrence of pandemic-related one-off costs -- sorry, one-off items in the prior year. It also included additional reward payments to group employees to recognize the strong contribution to the group's exceptional performance during the year. I will now walk you through the expenses by category. Selling and distribution expenses, which accounted for 48% of total operating expenses compared to 51% in the prior year, increased by 29% at actual exchange rates and by 28% at constant exchange rates. The increase was partly due an increase in store openings, particularly in the second half of the year, and increased variable lease costs, primarily in Asia Pacific. As a percentage of sales, selling and distribution expenses improved to 22% of sales compared with 25% in the prior year. Communication expenses were higher by 81% at actual exchange rates and by 79% at constant exchange rates. We increased investment in brand equity and resumed with in-person events, such as high jewelry events and Watches and Wonders in Geneva, which returned as a physical event for the first time in 3 years. Communication expense ratio was close to 10% for the year, in line with pre-pandemic levels. Fulfillment expenses rose by 37% at actual exchange rates and by 35% at constant exchange rates. They remained at around 3% of sales, in line with prior years. Administrative expenses were higher by 18% and by 17% at constant exchange rates, reflecting continued investments in IT and an increase in headcount. Good cost control contributed to expenses rising significantly less than the increase in sales. Administrative expenses improved to 9% of sales compared to 11% a year ago. Other expenses of EUR 344 million were 26% higher than the prior year, both at actual and constant exchange rates. The increase can primarily be explained by the EUR 98 million charge related to the uncertainty surrounding future operations in Russia. Other expenses included a EUR 173 million valuation adjustment, which mainly consisted of the amortization of intangible assets recognized on acquisition. Net operating expenses as a percentage of group sales decreased from 48.6% a year ago to 45%. Operating profit rose significantly versus the prior year, more than doubling to EUR 3.4 billion. As a result, the operating margin increased by 650 basis points to 17.7% compared with 11.2% in the prior year. As pointed out in Jerome's introduction, excluding the EUR 168 million charge related to Russia, operating margin stood at 18.6%. Let us now review the rest of the P&L items below the operating profit line, starting with finance income. Net finance costs amounted to EUR 844 million compared to net finance income of EUR 25 million in the prior year. This EUR 869 million negative swim primarily related to 2 factors. First, a EUR 194 million net foreign exchange loss on monetary items versus a EUR 49 million net gain in the prior year. Secondly, we incurred a EUR 538 million noncash fair value loss compared to EUR 188 million gain in the prior year. These fair value adjustments mainly related to investments in Farfetch convertible notes and the option of additional shares in Farfetch China, whose values are driven by the variation of the underlying Farfetch share price. In addition, EUR 188 million fair value adjustments were incurred on short-term bond funds. These were only partly offset by a EUR 8 million gain on hedging activities, which was a positive swing of EUR 88 million compared to the year ago. Let us now turn to the profit for the year, which increased by 61% to EUR 2.079 billion with a profit margin rising by 100 basis points to 10.8%. The increase primarily reflected the higher operating profit, partly offset by the negative swing in net finance costs just mentioned and higher taxes. Our effective tax rate for the year amounted to 19.6%, in line with our expected 19% to 21% range. There was a significant EUR 1.4 billion increase in cash flow generated from operating activities to 4.7 -- excuse me, EUR 4.6 billion. The 44% increase is mainly explained by the much increased operating profit for the year, coupled with a measured increase in net working capital, higher inventories to support the sharper growth in sales as well as the higher trade receivables were offset by additional liabilities. Let us now turn to our gross capital expenditure, which amounted to EUR 871 million, 70% higher than the prior year. Capital expenditure as a percentage of group sales, however, amounted to 4.5%, in line with pre-COVID levels. 46% of gross capital expenditure related to point-of-sale investments, including internal and franchise boutiques as well as external points of sale. Most of the spend was in boutique renovations and relocations at Cartier. These included renovations of Rue de Lappe in Paris, Montenapoleone in Milano and Changdong in Seoul and the reallocation of the Jeddah Hayat Mall store in Saudi Arabia. Gross capital expenditure also included the opening of the Van Cleef & Arpels boutique in Taipei Breeze and the Dubai Mall for Panerai amongst the overall 25 internal store openings net. Manufacturing accounted for 17% of gross capital expenditure and related primarily to R&D, increased jewelry capacity and machinery, mostly at the Jewellery Maisons and the Specialist Watchmakers. Other investments accounted for the remaining 37%, mainly reflecting ongoing investment information technology at YOOX NET-A-PORTER. Let us now turn to free cash flow. Free cash inflow amounted to EUR 3 billion. The EUR 1.2 billion increase compared to the prior year is mainly the result of higher cash flow from operating activities, partly offset by high capital expenditures. And now on to our balance sheet, which remains very strong, with shareholders' equity accounting for 50% of the total. Net cash increased to EUR 5.251 billion at the 31st of March 2022, up from EUR 3.393 billion at the end of the prior year as a result of the items discussed previously. The Board has proposed a total dividend of CHF 3.25 per 1 A share or 10 B shares, made up by -- of an ordinary dividend of CHF 2.25 per 1 A share or 10 B shares, up by 13% over the prior year as well as an additional special dividend of CHF 1 per A share or 10 B shares subject to shareholders' approval at the Annual General Meeting to take place on the 7th of September 2022. This proposed increase of the ordinary dividend as well as the proposed special dividend reflect our excellent results, robust net cash position and the confidence of the Board in our long-term growth prospects. Please remember that 2 years ago, the cash dividend paid was supplemented by the issuance of a shareholder loyalty warrant with a value upon issuance of CHF 0.34 per 1 A share or 10 B shares. Before summarizing the past year's performance, let me share how committed Richemont is to ESG matters and how progress looked like during the year under review. Let me share the external recognition we have received for the past 20 years of work devoted to sustainability. First, Richemont was recognized as an industry leader with a AA rating by MSCI, recognizing our low exposure to ESG risks and our management of those risks relative to peers. MSCI noted, in particular, Richemont's responsible sourcing program and carbon footprint management. Second, Richemont received a 10.7% risk rating score from the ESG rating agency, Sustainalytics, putting the group among the top 2% of nearly 15,000 companies rated worldwide by the agency. As mentioned, Chloé became the first luxury Maisons to obtain the demanding B-Corp certification, demonstrating the highest social and environmental performance standards. We have made strong progress on the environmental pillar of ESG. Our science-based targets have been validated by the science-based targets initiative and provide us with a defined structure to reduce our carbon footprint while future-proofing our business for greener growth. In this context, Richemont was recognized for its leadership in corporate sustainability by the global environmental nonprofit organization, CDP, achieving a place on its A-list for tackling climate change, one of only 200 companies out of 12,000 ranked. Richemont was also recently named among the Financial Times Climate Leaders for 2022. We're recognized amongst the 4 [indiscernible] companies across Europe that have achieved the greatest reduction in the greenhouse gas emissions between 2015 and 2020. Last year, we joined the RE100, a global initiative of the world's most influential companies all committed to 100% renewable power. We're making good progress on our ambitious goal of 100% renewable electricity across all our sites by 2025. Today, we are operating with 92% renewable electricity worldwide, an improvement of 28% since 2020. During the year, we set a target to eliminate polyvinyl chloride, or PVC, a plastic which is nearly impossible to recycle from our creations and packaging by the end of calendar year 2022. We are on track to achieve that target. To contribute to a more circular fashion system, a new luxury resale service powered by Reflaunt was originally launched by NET-A-PORTER in the U.K. then expanded to Hong Kong and Germany. The service has since been introduced in those 3 markets at MR PORTER resale, the first dedicated luxury resale service for menswear and at THE OUTNET for mens and womenswear. Moving to social. We are pleased to be ranked by Forbes among the world's top employers, ranking 113th out of 750 companies. This is a tribute to all the work achieved by the team over the past 2 years to become a more people-centric organization. We have notably defined our vision for diversity, equity and inclusion around our belief that diversity is everyone, with a newly appointed Group Director of DEI as well as DEI champions within each region. We have partnered with the equal salary foundation with a goal of 100% equal pay by 2024. Our community investment spending has increased to EUR 42 million or plus 17% versus a year ago. Beneficiaries include charities involved in health care, social and economic development, education, women's welfare and children. Moving now to governance, each year, we refine our governance processes to ensure we can fuel the level of change we need to become a truly sustainable business. We have strengthened our sustainability governance both at the executive and Board levels Dr. Bérangère Ruchat is our first ever Chief Sustainability Officer. She brings an outstanding track record in delivering sustainability performance through setting ambitious ESG goals, building innovative partnerships and developing strong teams. She will further raise our sustainability ambition and further embed sustainability across the group. Building on the successful establishment of our Board of Directors, Governance and Sustainability Committee under Clay Brendish in 2021, we were delighted to appoint Jasmine Whitbread as the committee's new chair. Ms. Whitbread is an experienced Non-Executive Director with extensive experience in ESG initiatives. Moving back to numbers now with a summary of our financial year performance. Sales were significantly above both last year and 2 years ago, showing a significant step change at group level and at most Maisons. There was good operating leverage, leading to a sharp increase in profitability, which in turn led to a strong operating margin. We saw excellent performance from the Jewellery Maisons and the Specialist Watchmakers and a notable improvement at the online distributors and at the Fashion & Accessories Maisons. We have established a solid ESG foundation that can be built upon, notably with the validation of our science-based targets. We are proud of our external recognition, but look for continuous improvement. To help us on this journey, we strengthened the ESG team with the recent appointment of a Chief Sustainability Officer and increased expertise at Board level. Back to you, Jerome.

Thank you, Burkhart. Just adding a few sets of conclusion to your conclusion. So before closing, let me reiterate the main highlights of our fiscal year 2022 by business area. First, starting by Jewellery Maisons, which enjoy a leading position in the jewelry industry, driven by a combination of unparalleled creativity, high savoir faire and impeccable execution. Our Jewellery Maisons are renowned for the highly distinctive, attractive and timelessness design. These factors that has led to a solid track record of outperforming the luxury industry in both sales growth and profit margins recycle. This year is no exception. Sales exceeded EUR 11 billion and operating margin reached 34.3%. Specialist Watchmaker have continued to transform the business model, investing in luxury in retail. Our approach centered on client initiative with expression flagship, new service with added benefits such as watch trading service through Watchfinder as well as experience program to [ assist ] clients beyond their sales transaction. And for the example of this innovative concept include Jaeger-LeCoultre [indiscernible], discovery program on [indiscernible] or experiential and unique outdoor adventure program offered to the buyers of certain Panerai watches. As a result of our focus on online and physical retail distribution, direct-to-client now exceeds 50% of sales for Specialist Watchmaker. Strong and enduring demand for many collection previously mentioned has led to reach iconic status for a -- and creating long-term value for our clients. All these factors contributed to the strong 53% sales growth. And our total sales exceeded EUR 3.4 billion with many of our 8 watch Maisons, reaching a new scale in sales and new historical high. This, in turn, resulted in operating profit almost doubling compared to 2 years ago and translating into an LC 17.3% operating margin. We sell over EUR 2.8 billion, our online distributors on their side generating gross sales of 27% and 15% compared to 2 years ago, respectively. Supporting further growth is a shift in business model. And the shift in business model is on track at NET-A-PORTER, MR PORTER, YOOX while, separately, Watchfinder continue its development in watch trading program across the group. When it comes to our Fashion & Accessories Maisons the renewed and with a robust sales growth of 53% compared with last year and plus 15% compared to 2 years ago. And we are very pleased that key Maisons have delivered profitable growth with several -- while several others now so close -- are very close to breakeven. Growth was partly driven by positive contribution from the renewed creativity and leadership, both at Chloé and Alaïa. And we expect now a similar benefit from the new Montblanc creative director. Finally, let me highlight the proprietary savoir faire in the high end, there's a good manufacturing that the acquisition of Delvaux has brought to Richemont, notably with 2 lesser workshop in center and East of France and the one seated in Buccellati. Now just a few more words to conclude before we move to the Q&A. At Richemont, we are well positioned for long-term growth and opined by the enduring appeal, timelessness, beauty and quality of our products, which are passed on from generation to the next. And we are increasingly multiplying touch point with our clients. We are developing a closer relationship and are better able than ever to serve them. We are pleased to see that -- we appeal also to younger and younger clientele. We'll continue to invest in long-term brand equity to ensure that our Maisons and business have the adequate resource and talent to build on the new scale that have reached and grow responsibility. Over the past years, we have made significant effort to gain in agility and adaptability, facing, I would say, a volatile market condition. We have also helped our retail partners better manage inventory level and thus protecting our brand equity, therefore, in the same time. Richemont is in a strong financial position with a robust balance sheet. The current market condition with the conflict in Ukraine increased health restriction in China, higher inflation around the world and higher interest rate, create uncertainty and volatility. And we remain more than ever focused on the long term while maintaining a close eye on development in order to adapt our operation as needed. And I would like to close this presentation by thanking all our colleagues throughout the organization for their dedication, ingenuity and discipline. Together, as the motto of Richemont, we'll carve the future. This concludes our presentation. We'll now open the floor to questions. Thank you.

We start on the left-hand side. And please, if you could give your name and company. So I think it's you, Louise, and we'll go -- all right, I think, all of you. Okay.

It's Louise Singlehurst from Goldman Sachs. It's great to see everyone again in person, it's been a long time. I wonder if I could start off with the obvious question with regards to China. Would it be possible to get an update on the operational environment, what you're seeing at the moment? But more broadly, I think Mr. Rupert, you were talking this morning of potentially a slower recovery. Is it possible to give us an indication of how you're thinking about the market in terms of is that more logistics and impediments to traffic returning to stores? Or should we all be being a little bit more prudent in terms of how we think about the underlying strength of the Chinese consumer? And then my second question with regards to YNAP, thank you for confirming that the talk is probably still ongoing with regards to luxury new retail. I just wondered if you could talk to us whether the initiatives that you outlined back in November that all of those, whether it be distribution, discussions with Farfetch and platform solutions, are still all on the radar, including that minority ownership stake, and whether in terms of, if there are talks, we don't come through to any solution and they come off the table. Is YNAP today positioned for strength in online going forward?

Sorry, I didn't get your name from the start.

It's Louise Singlehurst from Goldman Sachs.

Okay. Louise, our -- the view that I expect from China is anecdotal. It's from reports that I got from friends of mine in China. Entrepreneurs and people who are plugged into the society, the Chinese friends, they really cautioned me against making the assumption that post the economy opening up or the lockdown stopping that we'll see the same bounce back as before in China and in the United States as in Europe and in Japan. It's not doom and gloom, it just said don't look for triple-digit growth. I don't think it's going to be like we have in the United States at the moment. We stated in a different -- they're in different period of the cycle, really. And the problem that we have today is there's so much information out there. And if you focus on luxury goods, you focus on this, on that once you really have a very broad picture. One of the biggest pictures you can have is to have a look at the number of ships that are aligned offshore, not only in China, but in L.A. and all over. I have friends in the shipping business, well, MSC right here. And we have a real supply chain problem. People can't find the containers. The top 2 or 3, yes, but there's a gridlock. Try and book a container today, you can't. The prices have rocketed dramatically. Now e-commerce, people have to ship goods, and I thought I'd never ever see the thing like when hurricane hit our distribution center in Italy. I thought it happens once in a lifetime. But I'm just glad we're in nonperishable luxury goods. I would hate to be in a fast fashion. I would hate to be in a position where this my fall or my spring warm my seasonal goods somewhere. So we must expect that China's reemergence after lockdown will not be as dramatic, 70%, 80% growth. That's all I said. And that's all I said, please, folks because we, as humans, try to overextrapolate. If things go down, we think they're going to help. If things go up, we always overextend the thread. It's humanity. You look at all the various cycles. We operate -- we love to predict a discontinuum. And it was in that vein that I said, please do not assume it's going to open and it's going to be a boom. Also, China's growth rate has slowed down. As hard working as they are, as smart as they are, I'm not sure that any society undergoing that lockdown will be able to grow 6%, 7% or 5%. So yes, it will be a while before they'll return, but there will be a period where people are fearful of losing their jobs, not with us, but with big corporations. And I suspect this is anecdotal from what friends are telling me there. So I just wanted to caution you not to put in your projections China opening and it goes up again. We've -- I was saying to my colleagues, in July this year, I will be 46 years that I've been involved with Cartier from when I was 26. So I saw '87. First I stagflation in America. And whatever anybody, you have -- none of you, you're too young to have been through stagflation. It's a nightmare, a true nightmare for industrials for the real economy. And so I saw '87. That's when we're starting wristband -- in the middle of wristband, October 87, then the .com. And then for merely being conservative and saying things getting out of hand in 2007, they called me Rupert the bear. I don't think that was bearish. I should have thought Rupert the realist would have been nice. But it happened in 2008. And then I'm sorry, but the central banks of the world have behaved irresponsibly. They've created too much liquidity globally. And they penalized the backbone of society, the conservative element of people who are actually saved. And they drove their pension funds into equities because you could not earn anything with negative interest rates. The worse than that, they benefited the people with capital because one could borrow at 0%. And the people who needed capital in smaller and medium-sized businesses did not have that same benefit. As a result of being driven into equities, the share price is rocketed. Then, of course, we had the whole new economy. With free capital, we make money or free cash flow in 15 years' time. Well, that's being sorted out in a hurry right now, but it's all the price of -- if you get something for free, you abuse it. In England, where it rains all the time, you're out of water meters, but they have a shortage of water because you don't pay for the water you use. Give any human being something that's wrongly priced, and we abuse it. We abused all the natural resources of the world over now centuries. Capital was given for free. Free enterprise can't work without the earn right. Now things are turning to normality. I think that Europe, the United States, Japan, we're all going to have a dose of reality. It's for that, that we prepared our balance sheet. We went and borrowed 8, 12 and 20-year money. But what I think in the end will be negative rates, if you take what we're paying and you take the inflation rate. And we've prepared ourselves for a period where this growth won't be 30%. I mean, I recall when we had the wrong incentives and our watch business was growing in around 2012, '13 to 2015 at 35% compound. What did we do? Oh no, now we look at the turnover square meter. We take up the leather goods out of Cartier. We put watches. So we handed the leather goods business to the other companies. And then the democracy rights started in Hong Kong, and you can actually take that date, the watch business trader. Hong Kong was the biggest watch market in the world. And we suddenly found out that we had far too many watches. It was in November. So we had to clean the watch market up. It took us 4 years, get the excess stock. At the same time, we're doing online. And I hear these questions about online, online, online all the time under losses. It's not -- our business is doing relearning tremendously in our joint venture with Alibaba. These are investment costs. But early this morning, I had the discussion with Cyrille about at least in America. I was saying you had to explain to me. You will never ask me that cost. But if you take the present value of that cost, it's much more than 40 million in building pipelines. What we're doing is we're building pipelines, digital pipelines. It's just another -- it's not a panacea, it's not a cure for anything, but it needs a route to market, but more importantly, a route to product for the consumer. And if you don't do it, you will be left behind. You will be left behind if you don't believe it. For instance now, I'm not too hot on bitcoin or cryptocurrencies because in the end, it will deprive central governments of taxation. And no government can survive without taxation. It's a utopia to think that you can get free medical services free, blah, blah, blah. So in the end, there will be a reaction. But the science upon which it's based, we absolutely believed in. And fourth intensity, we will certainly be using the math if I can put that. I'm just worried at times that people focus on the wrong things in our business. YOOX, NAP, Farfetch, we are learning a lot. And I dare say, they also learned from some of the work that Cartier, for instance, that they've been doing. And we're learning a lot from José. And José is not arrogant, and he said that in luxury new retail is learned a lot from Ali and also from Cartier. And yes, we have had discussions with other partners, but it's very, very complex. And I would say it's advanced enormously. I'm not claiming any credit for it. It's zero, nothing. I'm not involved in it. But I know it's important that we do it. But you worry about it. Do you know what our annual expenditure in leases, annual expenditure? It's in the accounts.

It's 1.1 billion.

Yes. Compare that to our total investment in online. If we succeed in online, we'll be able to turn quite a big percentage of our fixed costs into variable costs. Now that's the play. I prefer businesses with higher variable costs and lower fixed costs. And so it's something that I promised you years ago that we'll try and we'll attempt to do it. But that's what we're going to try and continue to do. So don't worry about it. It's not going to explode, it's not going to increase in costs. We're pretty close to where we want to be. I have -- in fact, yesterday, I ask the people I said, we do it or we drop it, okay? So that both sides can understand that this is not another 3, 6 months, blah, blah, blah. We all agree that we've got to do it and now do it and don't have [ authorized ] pride. Remember, I ran an investment bank and I worked at Lazard's. And the problem that you get when you get into deals, then both sides of these M&A types, we have to prove their worth. In the meantime, the guys want to do the business. They just want to get on, but they're like 2 peacocks. No insults to our or their side, but they missed the big picture. Sorry, it was my biggest problem, always running Rand Merchant Bank and even at Lazard's. We have a client who just wants to get the deal done. The other bank, they have a client. In the middle, you get 2 investment bankers and lawyers. But trust me, they can be even worse. Who wants score points, score points. We are not in a position where it's a disagreement between principles, if I can put it like that, okay? And it's a buy in from Cyrille and from Nicolas and from -- our Maisons. They bought it. So that's been a tremendous -- there's been a tremendous progress. I was a bit surprised by the market reaction today because operating profit missed, what's it, 200 million or what?

Yes, about that when you remove...

Whatever the people said...

Didn't miss our expectations, but okay.

No. But Russia that we fully provided for is nearly that much. ForEx, you added, we're not going to give you -- I mean, our sales have exploded. Our costs are under control. I'm happy and some of the friends here who are sitting in the front will -- looking at you, yes. No, no, we'll tell you I'm not often happy, but don't tell me to give you the future. I can't. If I knew, I'd tell you, but I have no idea.

I think it's Patrik. We will go that way. It's easier because you always -- your hands at the same time. Yes, we go left to right.

Okay, we'll go -- don't worry we'll get to you. It's Sophie, then blame Sophie. Blame -- yes.

Patrik Schwendimann, Zürcher Kantonalbank. Thank you first for the special dividend, much appreciated. Then my questions, do you see already any negative impact due to the wealth effects like stock markets, some real estate effects in China? That's my first question. Second question, what are your cost expansion plans in this more or less uncertain environment? Is that still some catch-up effect for the current year? That's my second question.

If you look at the wealth effect, I think those who are very concentrated plays. I think the same people who are in the same funds and in the same beds, which is a crowded exit that they all experienced. So I don't know. We haven't seen it yet.

No, we haven't seen it yet, if I might add in China, and we had the question this morning when we're speaking with the press, "Do you see any change in behavior of your -- in your clients in China," and the answer was, "Well, we don't see our clients today because -- and it's more than a joke. I mean it's 40% of our network is close to date. And with a large concentration in our -- in China's biggest cities and commercially relevant for us. So we are really, today, in a lockdown environment in China, 100 stores closed out of 250.

Also online, if you see.

And online with the -- let's say, the ricochet effect of having distribution centers closed temporarily over the last weeks. Online, it has a spillover effect onto those stores now or onto those online stores. Now the -- what we can say is it's happened before. We've seen effects going into lockdown and coming out of lockdown. Now can we project them out at the same way, in the same way and the same strength as we've seen the rebound? We're not sure. We're cautious. We don't know. We'll find out because as the Chairman stated earlier, we are probably in China at a different stage of the cycle, but we only will know that with hindsight and you as well. So the only thing we can say, we take care of our people in China. We have found alternative routes to actually bring the inventory in -- into China because we cannot depend on a single point of entry in Shanghai. So we found alternative routes.

Legal.

All compliant. Don't worry about it.

Fully taxed, legally.

We're not docking with ships in the middle of the night now in strange locations because, obviously, especially in our luxury side, we have additional compliance obligations, et cetera. So that is all set up. The inventory levels we have are fine, meaning no excess inventory and no missing inventory in China. Our stores, our partners are well-equipped with that, and we're ready to open back our doors when that is possible. And I think that's the best thing we can say today about the China market. Do we see any changes in consumption patterns today? We simply don't know. It's a very recent phenomenon, and we will have to see what happens when we open our distribution again.

We do not see anything. That's why it's right to say it's anecdotal. And it's better to earn 5%, 10% on the downside and not shoot for the stars. But the added -- we actually used inventory that was on its way to China and center to Japan because we're short of product. We're working flat out, but you cannot ask -- you know it takes 20 years to train a proper watchmaker at Lange, Vacheron, these places. You can't just say, "Okay, do 15% more." This human capacity element, waiting lists. So there's a shock absorber. We don't have excess stock, our stock is clean. That's the key to me, and we do not have perishable stock, which is just lucky. We weren't good enough at fast fashion. Otherwise, we would have had a lot of excess stock as well.

And to the point now, we are still under capacity constraints today despite the big effort that we have done in recruiting and developing our team.

We added 1,500 people in Switzerland alone.

Where we are now, 10,500 people working.

But it's a strange world, did you think you would get -- that you pay a big premium for a secondhand Range Rover? If you look at the motor car industry, there are not more discounts, but you wait 20 months because of -- so think about other industries. Think about being dependent upon microprocessors. It's -- there's a dynamic that has changed. And even if the United States today starts building, it's 4 years. I'm told, you can't do it within 4 years. So globalization saved the West from inflation. The Chinese were more efficient and they produced the goods cheaper and better. That's what led to President Trump, because the job losses. So there are many things that are happening. You should read Ray Dalio's book on The Changing World, the latest one. I think he's got a -- he's not only a smart investor. It's a very good book. But we're in a good shape, okay? And stop asking me about things that have variable costs that are planned. It's not a negative contribution. It caused an investment loss. We are spending the money, not because we have to, but because we're busy building access for our clients to us and us to them. And I've learned from Alibaba the value now of really knowing your clients. Look at our watch business. For years, we only captured 18% to 20% of the data because of the wholesale nature of it. We go to an 8-year warranty because our quality is good enough and guess what? The client data is coming in. And now look at how are [indiscernible]. But in the past, nobody would give you their data. Now if they waiting for a Vacheron or a [indiscernible], they give you their dog walker's telephone number. Just in case you missed them that you can call day or night or please let us know. It's a crazy world out there. You go with 18-month waiting list, it's not nice. As we spoke about that a secondhand Range Rover with 30,000 miles on is more expensive than a new one. But those -- that won't last [indiscernible] the item, but we've got bottlenecks in -- basically, the supply chain is going to take a year or so to unclog and that's really what I'm saying. I don't think -- we're not seeing danger signs of flashes or drops, but don't project 30%, 40% growth per annum for anybody. If anybody tells you that they don't know what they're doing or they're lying. I don't know what's worse.n Sorry.

Edouard? We'll go that way [indiscernible]. Zuzanna and afterwards...

So Edouard Aubin, Morgan Stanley. So coming back to the share price reaction today. So I think, obviously, the main thing is the disappointment is the lack of operating leverage for the Jewellery Maisons division. So if we step back, lack of operating leverage -- so if we step back and we look at the earnings season, right, in the luxury space, the leading luxury brands have posted record high, almost all of them, record high operating margin. And obviously, 1 of the drivers, not the only driver, but one of the driver was operating leverage. If I look at Cartier, Van Cleef, you should be posting record high sales density at your stores today, so how come you're not getting more operating leverage? I understand you're investing for the future, but so are your peers as well. So is that the best? And related to that, is that the best we can get in terms of operating margin for the division? I know you're extremely reluctant to give guidance.

My friend, how many goods will we sell if we give people or true operating margin? If we tell everybody, this is what we make on XYZ, we gave the truth but there are lots of costs in these divisions.

So I'm, obviously, not asking for any trade secrets, but -- so that's, I guess, my first question. And I'm sorry, the second one is on Specialty Watchmaker. So you -- I guess a very simple question, what type of top line growth do you need to pose to be able to get some operating leverage? Because Burkhart, you've talked in the past about the move to DTC. My understanding that you're cutting a bit the number of POS, number of POS is more or less stable. So again, sales density going up. Could you -- if in a scenario where you have sales up mid-single digit, could you have operating margin expansion? Because, again, of DTC changes to DTC.

Well, happy to see you in person, but I'm a bit troubled by the question you asked me because I don't understand what you mean the lack of operating leverage. This is this -- I mean, jewelry businesses are very significant businesses. They've crossed the EUR 11 billion mark in sales today, and they have a 34%, 34.3% to be precise operating contribution, up from 31% a year ago. Now where is the lack of operating leverage on that? I just want to understand that. Secondly, same counter question on Watchmakers, 17.3% operating contribution following a 5.9% operating contribution a year ago. Now I think there is -- and I'll be very, very clear about that, I think there is overblown expectations that have definitely not been fueled by us because you remember, when we had the first year results out there and the discussion we've had out there, that we said we have a very strong first half operating contribution. But if you look at the seasonality of it, it was probably overblown and we have not been arguing for the contrary because we had a cyclicality in the sense that -- and you've seen it through the numbers. We had sequential acceleration of our sales base coming out of this pandemic throughout the entire year. So we have seen all our maisons gradually, step-by-step, increasing redeployment of capital into their businesses on many fronts, including in communication, and I'll speak to that. Including in hirings, including in let's say, retail or boutique projects, meaning CapEx, including into manufacturing and capacity increases that we desperately need for the Jewellery Maisons, and to a lesser extent, for the watch maisons. And we have said that in the second half and always and going into the current fiscal year, we will see a step-up of investments into our businesses for the long term. And that this will play out in the second half of this year, and it will play out going into fiscal year '23. Now let me give you some additional insight. If you look at the expenses in the first half and in the second half, and you put them in relationship to sales, I'll be very precise. In the first half, full expenses, overall expenses on sales were 41.4%. You can do the math. It's all out there. In the second half, it was 48.2%. How shocking, 6.8 percentage points higher on sales. Now if we drill into that, it's a very simple math here, 6.8 overall. 3.6 is communication spend. We have increased our communication spend by 81% this year. So that is a big driver of it. There's another 1.5 percentage points out of the 6.8 that goes or comes from selling distribution expenses. What's behind it, projects, meaning depreciation; hirings, meaning staff costs and additional reward payments because after -- that we have given to each and every employee in this company to recognize their very significant strong contribution that they have done over -- not over many years, but especially during those last 2 years. So that is 1.5 percentage points of those 6.8. Third one, Aviator is nonrecurring expenses, meaning Russia and the risk adjustment or impairment we did on our Russian assets that actually has played a part in our expenses. That's 1 point of those 6.8, and has also played an additional part, has had an additional impact of EUR 70 million on our gross margin or gross margin rate. So that explains 90% of the worry or the miss or however you want to qualify it. Now we all know how the game goes, right? I mean we have a reported earnings of EUR 3.4 billion. Okay, we had stuff back in, I can do the math, I'm very easily at 3.6, 3.7 in that range.

But that's to avoid.

Yes, I know. But that's -- I know -- but I mean, -- let's not kill ourselves. We have investors and others.

You all feel a little bit sore about it.

No, it's fine.

No, you can explain it. The fact of the matter is I said years ago to grow dividends by 15%, and we always retain more in the business. We need certain operating profits in order to get those operating profits, we need to build brand equity. That's my job. We paid EUR 310 million for Van Cleef. They'll have a free cash flow of over EUR 1 billion this year, right? That's our job. We could raise prices quite significantly, like some of our competitors have done, but if my fears are correct, and there's a slight slowdown in demand, are we going to drop prices or do you treat clients properly, and you don't use this Lange & Sohne, the first steel, the Odysseus. I had to push them up a little bit because the market initially Steel, Odysseus, I said it will sell, relax. Now the waiting list is nearly 2 years. I didn't jump the queue T.his thing was made about 20 times before I said, "Okay, you can go." I see every product that's made unlike what some of the bloggers write. I play golf, you know. Every product, we see the 6 of us, who work with each management. The bracelet wasn't up to standard. Now the moment if you get it, you put it, Phillips -- the watch auctions, you get 3x more than what you pay us. We could double the price, and they will still go. But then what happens? Does the client still trust you? So our flexibility of price elasticity, which to me is the key driver. What you folks should worry about is the price elasticity and the brand equity. Because when things become ubiquitous and they're all over and logo-ed, then clients start looking and they start seeing logo-ed people that they don't want to associate with. And guess what? Three, 4 years later, the brand is in trouble. That's what I look at as an investor. I look at is the thing ubiquitous? Is it everywhere? When I say we don't like discussing margins is gross margins, but you get your net margins. We have operating leverage, trust me but...

And growing.

Sorry?

And growing.

And growing, but we -- Russia, we didn't have to write everything off, but we just said that's the write-off. It's a bit conserve, the relax we have operating leverage. That's why I like, Edouard, that's why I like variable costs. I share your issue.

So to give some other part that we have to face in about 2 years, the price of gold will have gone up, the price of diamond really up, where [ Swiss franc ] base, it really went up. On the market side, U.S. and China are not known to be placed with cost of operation are low, and we have been growing super well. So to consider margin, the way we did with 2 things. With distribution costs, of course, grow in countries like that, and the cost of operation is on manufacturing costs, very high, shows we have really consulted well. So you're very picky on how -- what it means overall. So leverage has been huge on the past 2 years based on these factors, which shows brand equity is very strong.

We -- look, I would be really concerned if the brand equity didn't allow us pricing power and, therefore, operating leverage. Your turnover doesn't go up that much and your fixed costs stay down without making money. Look at our free cash flow. It's not that long ago that we spun out VAT and I get a lot of cash in the luxury goods business because I said, "God damn it." Are we ever going to create cash out of luxury goods, because the tobacco we got rid of our liquor and hotels and stuff and stayed with luxury goods. And I was worried about the cash flow. And today, the cash flow is superb but we worry about cash flow.

Zuzanna?

Zuzanna Pusz from UBS. I have 2 questions. Sorry, if -- I guess, there's been already some good questions out there. So probably we will be entering a dangerous territory as we go to the left. So my first question will be on -- I worry about Luca. My first question will be on well, you probably won't like it, but of course, you don't want us to ask about the future because it's a bit difficult to predict us, predict it, but you can probably tell us a bit about the past and April is past. So maybe you could give us a hand -- can you give us some idea about the trends you've seen in April.

I promise, okay. I promise, okay.

And you used to -- and would you be able maybe to tell specifically if APAC was still positive given the drag from China? So that will be my first question.

Yes. Yes.

It is? Okay, perfect. So my second question will be on pricing. I think Mr. Rupert made some fair points that obviously, the consumer doesn't want to feel you take advantage of them. But obviously, there's a huge inflation, right? So the cost of bread, milk goes up, I'm pretty sure the consumer can accept the cost of jewelry going up. So would you be able to maybe share with us the level of price increases you've been seeing? I mean, I've read on some blogs online that I think it was roughly double digit for Van Cleef, mid-single digit for Cartier. But knowing you have a global pricing policy, it would be just helpful if you could tell us a bit because we, obviously, see lots of pricing. And given that my first question was answered quite quickly, maybe if I could just ask about the costs related to Russia, was it mainly Jewellery Maison? Because it would help us get an idea of actually what was the underlying margin for Jewellery Maison? Because I guess if it was all Jewellery Maison, then the margin was in the mid-30s, which is a decent margin still.

Actually Burkhart...

Sophisticated for me but...

Yes, but Burkhart, this question was asked is a number of time on the web. Whether we would provide some color on the segments.

It's our cost of doing business in Russia. It's broader. It's not just Jewellery Maisons, et cetera. Remember, we're paying the salaries. We don't have a business.

When it come to inflation and the rise of the cost or is it will create the necessity to increase the price. Our Chairman spoke from the price elasticity just before and indeed, building the brand equity over the last years have been making us capable to increase quarter by quarter or semester by semester, the price. So we have been constantly, I would say, adjusting, not moving up by pressure by pressure, but adjusting price over the last 3 years.

Yes, sorry, sorry. You see why are I getting into these things. You're technically correct. But it implies a strategy of taste -- taking of increasing profits through pricing, we have not done that. We've not used pricing in order to increase our profits as a tool. We use efficiency, we use turnover. So because we have a global pricing, and it is pretty difficult if you have a boom year and not a boom there and currency fluctuations to try and keep a stable price, a universal price for clients. But we've not used pricing as a tool that is really -- we can offset the costs. but we've not deliberately raised the prices to increase our operating profit.

So I guess that's the question, how much were you able to offset the costs this year.

We can easily absorb the costs. because if it gets over 7%, 8%, we won't have the same governments in place, trust me. We have that price elasticity.

So my message was we are not late with price is composition in this case. So we don't have to absorb 2 years of delayed thing or whatsoever. Price reflect cost reality.

No. Yes. Yes. That's right.

So we have increased our price in May single digit to offset the price cost of the goal.

Correct.

And also to rebalance the worldwide price because the euro is very low, dollar is very high, and it creates some pricing imbalances. So it's single digit, and it's normal.

Single digit for Cartier or for Jewellery Maison?

Single digit for Van Cleef as well, depending on the countries. I think it's not because most of our clients don't travel anymore that we should give up with our fair pricing policy. It requires discipline, and the increases have been very different. And actually, there were higher increases in Europe than in other markets where the exchange rates were more favorable.

Sorry. I think that, by the way, is what I tried to say less eloquently. Clients can't travel. So it would be unfair to price [ coach ] people who can't travel. So if you want your people to keep on loving you like what they did with Van Cleef, treat them fairly. Okay, Luca, I'm fully [ braced ].

Luca Solca from Bernstein. My first question is again on operating leverage so that I want to check that I understood correctly, because what I think is potentially mysterious in your accounts today is that you broadly grow the Jewellery Maison and the specialist watch makers this year by the same amount, approximately 50%. But you increased your EBIT for the Specialist Watchmakers by more than 11 percentage points and "only by 3-odd percentage points" for Jewellery Maison. Is the answer in between the lines that SG&A has been leveraged, but you've been more cautious and absorbed a negative effect on gross margin because of the raw material price inflation that you experienced in -- sorry, in the Jewellery Maison connected to gold and precious stones and so on? Because this is even more mysterious when you take into account that the Jewellery Maisons are much more direct to consumer. So they should have an even higher operating leverage and fixed cost base in your directly operated stores. So I think this is my first question. The second question relates to Russia. You were pointing out that you sort of wrote off costs even beyond what you should have done.

Sorry, I didn't say that. Okay.

No, no, sorry, sorry. I was misinterpreting, but maybe you wrote off. You were prudent in writing off costs. How much more is there, if by a misfortunate situation, you had to stop operations altogether?

Yes. Zero.

Zero.

Okay. Great. And then the third question, if I may, relates to [indiscernible]. I would put the discussions you have with third-party partners to decide, not too interested in that. You took over this company a while ago. You've been running it for a number of years. How far are you, you think, from getting best online retail division not to produce a negative contribution to EBIT?

Well, I think the last one, Burkhart said excluding the development costs in China, it's neutral, it's EBITDA neutral.

It's the best EBITDA since the company was created.

EBIT-neutral as well, from an EBIT viewpoint?

EBITDA was a word.

Okay, okay, look, let me just try to solve the mystery.

I'm going to be interested in listening to this as well. I've never heard it from the other side.

It's not so mysterious, I would say.

No, I know, but I want to hear how you explain it to him in contrast to how you explain it to me.

Yes, I'll try to be aligned with that. Okay, so basically, we're talking about 2 elements that, let's say, explain the difference. One is the gross margin, which has a significantly different movement between 1 year and the other. Remember, last year, we have very quickly rebounded on the Jewellery Maison side and have actually reverted from, let's say, the first half of the year, where we had a negative impact, very strongly negative impact across the board in the manufacturing entities, which actually hit the Specialist Watchmakers very strongly, and actually throughout the entire year. A significantly negative impact on the last year's results, meaning the base for this year, whilst Cartier actually on the gross margin side. I just had a very small remaining loss at the end of the year because they're very strongly rebounded in manufacturing, capacity utilization starting basically early summer of last year. So their gross margin was basically not strongly impacted last year, which from that basis, grew across both maisons this year, but to much lesser extent than on the Specialist Watchmakers who actually ended last year with a significant negative gross margin impact. Now this year, that has completely reversed. We are no longer going into last fiscal year, we started basically to add capacity and capacity utilization and actually are now short of not capacity per se, but short of the human capacity as the Chairman stated in the beginning because it is difficult to train these watchmakers up so quickly to the level of quality that we require. So there's a significant gross margin swing in there. The cost base has expanded slightly more in percentage compared to last year.

Sorry, if we could just say there are no more discounts in watches.

Yes. The cost base has expanded slightly more...

Sorry, for instance, Lange has [indiscernible] percent. All that is the difference between you pay your deposit and you finally get your watch and the currency fluctuations. Now that was not the case before. Watch are all same. But no, but I'm saying, look at the car industry and then think with the watches. I suddenly a 10% discount comes back. That's a huge swing.

Third, third right. So watch base -- sorry, cost base has expanded slightly more the Jewellery Maisons than at the Watchmakers than at the fashion accessories maisons. So we've -- and why is that? Because we actually have -- we've had throughout the entire Panama, the cycle where Cartier, Van Cleef, the Jewellery Maisons rebounded first meaning started their investment cycle or reinvestment cycle or first, then the watchmakers then the other maisons. And this has exactly been the same profile this year. So slightly higher cost expansion at the Jewellery Maisons followed by the Watchmakers, followed by the fashion accessories maisons. So it's that profile. In a nutshell, gross margin swing, it is much more important, yes, and the watches and wonders that actually...

I've got to remember to give him what he told me.

So what did I tell you? That -- no, but it's gross margin driven. And then on the level behind, it's a slightly lower reinvestment. Hope the mystery is solved.

Okay. Next one to Rogerio.

This is Rogerio Fujimori from Stifel. I have one question perhaps for Cyrille and Nicolas and another one for Burkhart. I think you've mentioned the price that millennials now and younger account for 65% of sales of Cartier. So I was just wondering, I think after a banner year, how -- can you talk a little bit about the changes in terms of -- in terms of a customer mix profile when you think about the contribution for growth that you saw from new customers buying for the first time versus existing customers. And also, basically the contribution from high net worth individuals versus the affluent middle class buying a Tank or a Bijoux for the first time and maybe implications for marketing. And then for Burkhart, basically just some thoughts in terms of fiscal '23 outlook, high level in terms of the key drivers for gross margin that we should think about, and your CapEx priorities and levels, given obviously the uncertainty in macros and your priorities. How are you planning CapEx for fiscal '23?

So the part of having new customers in luxury, I think it's a constant for the old industry. And luxury is growing because the wealth of the world is growing for the affluent middle class of the world whether in the United States or China or Singapore or including Australia, Vietnam and so forth. We see in all countries, some affluent customers coming up. So this is not new, but we have to grow both to keep loyal customers and to grow for new ones. And so far, we are think doing that balance quite well. And what we see they are younger because the new affluent customers in countries like China, Middle East are younger compared to Europe, for instance. So that's just a fact. And we see, even in the United States, very young customers coming to our store. It doesn't prevent also the material customers to continue and to enjoy it. So the overall, we see that the percentage is growing to something younger because the new markets are dominantly younger and first-generation achievers. So that's just this point. So I don't know if there was a consent on your question or not, it's just, I think, an evolution, which we...

[indiscernible]

You see the European trend where basically there were no Chinese group coming and what you see was basically local customers on all generation, they have been really, really happy to buy in our stores. And we can say this one as a loyal or can have a loyal customer base as a whole, and they have come to us quite well. So it's not only new customers from new countries, it's new customers from everywhere and also existing customers coming to us because they think the long-term value. So the balance is quite well, I think, in all price categories and in all generations. Do you want to comment?

Yes, I fully agree. What I might add is that on the different categories, we mentioned last year that high jewelry was probably the most hit with the first year of the pandemic with the absence of international gatherings and events and launches. And this year, it managed to come back to prepandemic levels, meaning that we had the same type of attractiveness in very high net-worth individuals, as well as in more in upper middle class buying where there was business, which was not the case a year ago. So there is a year to come back. And regarding the new role of clientele, interestingly, if I take the example of Japan, for instance, which we can consider more mature market in terms of the implantation, for instance, of Van Cleef & Arpels, kind of stable network, stable presence for nearly 50 years. We've seen in the last 2 years, a very, very strong growth of younger clientele, which is extremely interesting and reassuring because it's not about new clienteles in a new country discovering the brand, but it's really a new generation that's still -- or not that's really attracted by the cost of the brand. Although we don't necessarily try to be kind of younger-centric. At Van Cleef & Arpels, we don't have celebrities. We don't have metaverse and stuff. And yet, we have a 20-year-old, 25-year-old that really are ready to spend a couple of hours in line in front of the store to get a piece. So that's quite, I think, a very, very good factor.

Knowing in Japan that whilst distribution and demography is not specifically a young country, and we saw -- so we had a hydro event in Kyoto who's been extremely successful with having young customers and also in a Tier 1. And Japanese age very, very well. So it can last quite long. So there was another question there on extracting guidance, right? I mean CapEx, you've seen, we're at [ 4.5 ]. We've been, for quite a number of years, I would say, leveling off now with I would say, a good state of the network. We've obviously throughout the pandemic have...

You have to relax because you are keeping control with my full year cover. Yes, basically, we make sure that the guys don't go crazy because if you had to allow some of the people on my right, and some of the people in the room, and they see free cash flow, let's find ways to spend it.

Okay, well, in their defense, they generated as well. So Rogerio, [ 4 to 5 ] is where we are, and we're comfortable with that range.

You guys are going to laugh because this is not kind of normal business. But we will look because I see them all the time, and I see all the products, and that's the key business to the future pipeline. That's the real business to see what they plan a year from now, 2 years from now. And then having been in it with a line, I mean, if you add it up, the people and the people around the table, it's well over 100 years, and you kind of know what's going to sell and you get excited about some of the new products. And then after a while, some of these people don't need. It might -- to have a t-shirt with coach or baby sit on the back, okay? Because at some levels of companies growth you have baby sit on the back or coach. But with these people, I learn more from that. So for instance, a few years ago, at the end of each meeting, I ask, is there anything that you know that I don't know?

Which is uncomfortable as a question.

Okay. Is there anything that you know that's very important that I should know? And in the beginning, the guys would drive off and then somebody in the car would say, "No, we didn't discuss that." And then they call my PA and, "Can we quickly come in?" Now there's -- it's open. Everybody knows that question make up. But I ask Nicolas, now this is where I would drive Burkhart crazy. I said Burkhart, now they're busy fine-tuning their budgets, okay, because we look at the products, we look at the possibility and how they will sell. Then we look at the margins and then we say, "Right, we can't afford more than this in costs", because that's what we can make. I think that pricing is not me only. It's a group of people, that's proper pricing. You do peer group pricing. And then I said to Nicolas, what would you do if I gave you another 100 million? Do you remember the question, Nicolas?

Very well. It was okay, not too tricky.

Okay. So what did you say?

No, I said that we would buy exceptional storms.

You said, "Please could I have it?" Burkhart and what's going on over here. I've said my budget, "I said you've got it." And he went and bought exceptional stones and he turned it into 300. So it's not the exact business model. Trust me when I tell you more fiction is written on Microsoft Excel than on Microsoft Word. Let that sink it. The biggest friction I've ever seen is written on Microsoft Excel. Remember, I used to write it by hand when I was doing credit at Chase Manhattan. I knew all these banks were going to get into trouble because idiots like me were the credit analyst. And trust me -- if somebody comes in with a PowerPoint and an Excel and I have -- and especially if they're very good at it, it's the questions that you can't see on the Microsoft Excel. Those are the tricky ones. So we can give you all the numbers, et cetera. But the real issues are we making products? Are we designing products? And are we making products that in 3 to 4 years' time, we think will sell at the right price? And right now, a few years ago, you will recall, I was very concerned. I mean, I bet my Finance Director, EUR 1,000 per million operating profit that he was wrong.

Not me here.

No, no [indiscernible]in the year 2000. We're sitting in September, and they show me the year's profits. I'd tell you, "Are you out of your mind"? It's going to be off that. This is in Luxembourg and now we're arguing. They say at that, I see you mad to even allow it. So EUR 100,000, EUR 1,000 per million operating profit, allow it to pay me in wine because he's run out of cash. But that was not me being smart. It was seeing the pipeline. And seeing it calm down in the market. And those -- this is why I can't really communicate because we're betting that our taste is going to be in demand. I mean that's really Nicolas and Cyrille. In Cartier, they're both machines, if we hit the right product, it goes through the roof. We say both machines that you've got the brand, Anima, and the reach globally. And I think that's really the issue. And there are a few brands in the world, I could say 8 or 10, maybe opposition and us, et cetera, that have got the brand equity and the distribution reach and the supply chain sorted out, and that's d*** difficult. So I don't know whether that answered your question. We should one day let one of them, I can pick one, country or product , to [indiscernible].

I'm going to have so many requests.

No, we have at Wendy [indiscernible], I've known she's a director. I've known Wendy for -- what since 1983, '84. She said, "Could I attend a product committee meeting?" So she came on Tuesday, and she came up and my eyes were like that. She now understand the business, where every product as -- she's, "Now I understand the business." We -- concepts and products to discuss and then how are we communicating it and that's the real business. So what other questions?

I think Carole.

Carole Madjo from Barclays. Two questions for me, please. The first one on watchmaking. So you mentioned the fact that, of course, there is a big risk around ubiquity.

Sorry?

A big risk on ubiquity in the watch space. But on the other side, do you also see a small risk of losing out consumers because of the lack of supply? So basically, how do you about the risk of adding [indiscernible] consumers who may not be able to find a watch as fast as they want to get one basically.

Dealer.

Or client.

Or client.

Yes. Do you see risk of losing out consumers because we do not have supply in the watch industry?

Our maisons will have to watch, for deposits, be deposits. And with 0% interest rates, these people put the deposits down. So we don't reserve a watch without a sizable deposit. You know it's terrible, but the higher the price, the more the people want it.

And when it comes to your point as well you saw the DTC direct-to-client percentage increasing, which is as well the best way to maintain relationship with the clients over the time. The Chairman mentioned the extension of guarantee, which is also the opportunity to maintain for service, for contact and it's a change in the business model that you're no longer only somebody that is pushing a door on one single transaction and disappear. You become, I would say, you enter in contact with the Maison has never. So it has changed, I would say, thanks to DTC, it's another dimension definitely.

Do you know what's also very interesting? It's aligned with your question. The clients especially during COVID, have taken a lot of time to narrow down their choice and studied so that the conversion -- and this is apart from -- it's nearly luxury new retail. They would be very well-informed, they would understand exactly what they want to buy, and the conversion ratio in the stores picked up. They're just a lot more informed, male, female, everybody. And so they are pretty clear into their choice before they don't comment and ask for guidance as much as in the past.

Okay, very clear. And one last question...

I can comment also on that as well.

Yes, happy to.

See, the watch industry used to be very inert and having a long time of adjustment about 9 to 12 months. We have managed to make to 3 months and to have a significant adjustment in demand planning, capacity adjustment and response to make it flexible, up to 50%, down to 50%, keeping full employment and having stock management in the middle that works. We have come to be super fast compared to other big competitors in that area, and that's why we've been able to adjust reasonably well, having a kind of tension but nothing when all the stores will be empty and see our stock in our stores, in our dealers, they are pretty okay. On certain reference, we are short, but not that much, not have stores entirely empty at some can face in certain countries and first in brands. So don't underplay our ability to adjust our flexibility model in super high speed super speed for watches. Watches are slower naturally than fashion, but it's fine.

And the second question on jewelry. Actually, on the -- in the longer term, when you think about the brand Buccellati, which you acquired a few years ago. What is the potential of this brand in really in a few years' time? How big can it become, of course then?

It's growing faster than we -- it's a year ahead of plan. Is that a good way of saying it?

Exactly. I think there is no objective in numbers, I would say. It's definitely here to grow because there are only a handful of brands that really have a very, very specific distinctive style and a real history, and Buccellati is one of these. Still a bit of a secret brand. It's developing quite nicely. We've opened more stores. We've developed communication but at an organic pace. And yes, as the Chairman said, we're pretty much in a year in advance compared to the plan we had when we acquired the brand. So it's going to take years, but it's going to grow quite nicely.

Unfortunately, we have a very strong manufacturing base in Italy on which we invest massively. And we also very clean environment friendly, and we can cooperate with utility to bring additional resource in -- especially in Milan. So we cooperate quite well on that.

Thank you. Well, it's already 2 hours. So I guess we could -- the only thing I was looking at web -- so the areas not covered, some questions are very short answers. One of them is on the -- any guidance on A&P and explanation of increase in central costs, which is really relating to Russia. And then there is a question for you, Mr. Rupert. So I'm just going to read it. It's an M&A question.

It's a what question?

M&A, merger and acquisition question.

Okay. So I hope it's not from an M&A lawyer that I just insulted, okay.

No, no, it isn't. "So you are the top player in jewelry and watches, but you like critical mass in leather and accessories. Your French competitors like mass in jewelry and grab Tiffany. Should you not do the same to bulk up the soft luxury and perhaps bring in a broader skill set given your French [indiscernible] .

It's from a lawyer who has asked me this 10 times before, I guess. So the answer is I think we all understand now that we're not for sale. [indiscernible] is not for sale and neither of us are for sale. So the party that wants to buy everybody now knows we're not for sale.

I think it's clear. And maybe it was -- if you were interested in another brand, but the outside...

We've got the -- they were the originator, they designed the first hand bag, and it is a beautiful business. Truly beautiful business. But I'd also like to say thank you to my colleagues for really caring, for instance, the Ukrainians and for our people in Russia, after the invasion. I mean there was a lady at Delve whose in-laws was stuck in the Eastern Ukraine, 1991. We sent in people, bullet holes through the cars, got all the people out. These are the stories we don't talk about of the human suffering and the work that the people did. I'm bloody proud of the way they looked after their colleagues, really. I don't know when the madness is going to end. But we've budgeted for it, if I can give that assurance. And I'm a lot happier than I was 5 years ago. I mean, 5 years ago, before we started cleaning up the watch business, and we were starting to invest and I plead that was with our fellow companies. My words got twisted, as usual, when I pleaded with our other big luxury goods companies that we should work together. And I said, "This is a big boys game." It gets twisted into being sexist that I want women and out and men to run it and big men. Now either learn English and understand that when you say a big boys game, you mean much bigger than us, you're fighting Amazon. Oh, this was quoted again by the business of fashion ladies, et cetera, as proof, how sexist. People who work here will tell you that is not the truth. But that's why I'm now talking. It was in an off the cuff plea and stupid [ Jose ] didn't come up to me because he was in the audience. As Jose said to his wife, "If they do it, I don't have a business." And 4 years later, I meet with him. I said, "Jose, why didn't you come? I was standing outside smoking with your wife." We went outside, "Why didn't you come along? We would have both saved a fortune. I would have gone 3P immediately." "No, no, I was is too shy." I said, "Please," so I did come in 2015, we wouldn't have advanced this long down 1P. We wouldn't have been linear that long, and that's the funny coincidences in life. Now we've met we like each other, and you can do a blend of 1P and 3P, a hybrid model. But those are the coincidences. So when you ask me planning, and this and that, that, you bump into somebody in an elevator and the course can change as long as you've got the flexibility. And the other thing, my biggest pleasure is Watches and Wonders -- sorry, it's [ Homo Faber ]. Homo Faber is my biggest pleasure. And I didn't see any of you there. That's the future of luxury through luxury, the craftsmanship of the ladies and the men as this was the quality of the work is that's Europe's advantage. And we built our businesses on those people through artisans and craftsmen. And it's a dying breed and we want to, in the next 2 or 3 years, connect them with clients, to give the craftsmen and women, face in front of their children, and to create a bridge with the clients. The stuff they make there, it's mind-boggling. The lacework, the -- through artisanal skills, that is true luxury, going and seeing them. So I would rather -- if you want to come here next year, I would suggest that you go to the Homo Faber because we'll stamp your ticket at Home Faber, and then you come and talk luxury, It's that's where I learn. It's astonishing what these people are doing, and they create jobs. Thank you.

Well, thank you. I think it concludes this session. Thank you very much for coming. Very nice again to see you in person. And thank you also those of you watching us. The session is over. Have a good day. Bye-bye.