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

Ladies and gentlemen, welcome to the Richemont Full Year '23 Interim Results Presentation. I'm Alice, your call operator. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Sophie Cagnard, Group Corporate Communications and Investor Relations Director. Please go ahead.

Thank you, Alice, and good morning, everyone. Thank you for joining us for Richemont's Half Year Results Presentation for the period ended 30th September 2022. Here with us today are Jerome Lambert, Group Chief Executive Officer; Burkhart Grund, Group Chief Finance Officer; Cyrille Vigneron, Cartier's Chief Executive Officer; and James Fraser, Investor Relations Executive -- sorry, James. We would like to remind you that the company announcement and results presentation can be downloaded from richemont.com, and that the replay of this audio webcast will be available on our website today at 3 p.m. Geneva time. Before we begin, I would like to draw your attention to the disclaimer on our presentation and company announcement regarding forward-looking statements. Turning now to the presentation. Burkhart will begin by discussing key highlights and group sales. I will then provide further detail on the performance of our Maisons. Finally, Burkhart will take you through the financials and offer some concluding remarks. This presentation will then be followed by a Q&A session. I will now hand the call over to Burkhart.

Thank you, Sophie. Good morning to everyone listening, and thank you for joining us today. Before going into the financials, I would like to highlight that following the announcement last August of the agreement to sell a controlling interest in YNAP to Farfetch and Alabbar to create a neutral industry platform, YNAP's results for the period ended 30th of September 2022 are presented as discontinued operations and its assets and liabilities are transferred to assets or liabilities held for sale in accordance with IFRS rules. Remember that this agreement is subject to a number of conditions, including the receipt of certain antitrust approvals. As a consequence, YNAP's finals results are now reported within the other business area. Prior year period in H1 income statement figures have been represented accordingly. Sales for the 6 months period ended September 2022 for our continuing operations grew by strong double digits with a 16% increase at constant exchange rates and 24% increase at actual exchange rates. Sales were positively impacted by favorable currency movements during the period, adding 8 percentage points to group sales growth. Operating profit increased by 26% over the prior year period to EUR 2.7 billion, delivering an enhanced operating margin of 28.1%. This represents a 30 basis point gain in operating margin over the first half of last year. Profit from continuing operations rose by 40% to EUR 2.1 billion. Cash flow from operating activities at EUR 1.5 billion was robust. Our net cash position at EUR 4.8 billion was solid, especially considering the EUR 1.9 billion dividend cash outflow in September, which represented an EUR 810 million year-on-year increase. The strong sales trend seen in the first quarter of our financial year continued into the second quarter, such that half year sales grew at double digits across all business areas, channels and regions at actual rates, except for Asia Pacific where reported sales increased by 3%. The stronger sales increases came from the Americas, Europe and Japan region-wise and from our directly operated boutiques channel-wise. The strong operating profit from continuing operations reflects the benefits of past decisions. Along with watch inventory buybacks, we effectively managed the sell-in, sellout ratio while optimizing our wholesale network. These actions have led to a sound inventory position and stronger partnerships with our multi-brand retail partners. Improved manufacturing processes have provided more agility to better address changes in demand. Parallel, we embarked on our digital transformation journey, providing another route to market, which has proved particularly beneficial when stores temporarily closed. This has enabled us to aspire to realizing our Luxury New Retail vision where frontiers between bricks-and-mortar retail and online retail disappear. The recent agreement with Farfetch and Alabbar was a key milestone in our progress. More on this later. We continue to advance on our ambitious sustainability goals focusing on reducing our environmental footprint, amplifying our social handprint and refining our governance. We are ahead of schedule on our 2025 goal to source 100% of renewal electricity, refining our human rights strategy and have undertaken proactive engagement with stakeholders, including NGOs. More on that later as well. Let me now discuss the group sales performance in more detail, first by region and then by distribution center. Unless otherwise stated, all comments refer to year-on-year changes at constant exchange rates. Almost all regions showed strong double-digit increases, led by Japan in terms of rate of increase, thereafter Europe and the Americas. 76% sales increase in Japan was driven primarily by local clientele. Sales were also supported by a nascent return of tourists, primarily from Southeast Asia, and also from a favorable comparison base due to boutique closures in the prior year period. Sales in Europe, up 45%, benefited from inbound American and Middle Eastern tourist spending and robust domestic demand. Sales in the Americas region rose by 22%, with a significant growth of 29% experienced in the first quarter of our financial year, softening to 14% in the second quarter as American tourists were traveling to and buying in Europe. Sales to the American clientele overall remains strong. The largest contribution to the overall sales increase in value terms came from the Americas and Europe. The momentum in Asia Pacific improved significantly, with second quarter sales up 6%, leading to sales decline for the 6 months period moderating to 5%. Although continued health restrictions in parts of China weighed on sales, the region benefited from sharp sales growth in other markets, such as Australia, Singapore, South Korea and Thailand. Group has a well-balanced geographical mix. Asia Pacific represented 39% of group sales; the Americas, 23%; Europe, 22%; Japan and the Middle East and Africa together 16%. It is worth noting that the Americas' share of group sales has surpassed that of Europe and the U.S. is at par with Mainland China. Let us now turn to sales by distribution channel. Retail delivered the strongest channel performance with sales increasing by 21%. The strong performance was driven by double-digit sales increases across all business areas and regionally by the Americas, Europe and Japan. Momentum accelerated in the second quarter, particularly at the Jewellery Maisons and Specialist Watchmakers. Retail sales contribution to group sales rose by 3 percentage points to 76 -- 67%, excuse me, compared to the prior year period, making retail by far the latest contributor to group sales. Online retail sales at 6% of group sales, increased by 9% with growth across all business areas. Growth was particularly strong at the Specialist Watchmakers, where almost all Maisons showed significant double-digit sales increases. Within the regions, Japan and the Middle East and Africa registered the sharpest progression rates, albeit from a relatively low base. While the Americas, up double digit, remained the largest contributor to online retail sales. Now moving to wholesale sales, which includes sales to monobrand franchise partners, to third-party multi-brand retail partners as well as sales to agents in addition to royalty income. 27% of group sales, wholesale sales rose by 6% versus the prior year period. Fashion & Accessories Maisons contributed much of this growth, with most Maisons posting double-digit increases. Almost all regions posted strong double-digit growth led by Europe and Japan. Direct-to-client sales, which represent sales in our directly operated stores and online retail sales, grew their contribution to group sales to 73%. The DTC rate was highest at the Jewellery Maisons at 83% and above 50% both for the Specialist Watchmakers and the Fashion & Accessories Maisons. This high level of direct interaction enables us to better know our clients, hence serve them better now and in the future. Over to you, Sophie.

Thank you, Burkhart. We'll now review the business areas with all comparisons at actual rates. Let me start with the Jewellery Maisons, which include Buccellati, Cartier and Van Cleef & Arpels. Sales increased by 24% with double-digit growth in almost all regions, led by Europe and Japan, with an acceleration from the first quarter to the second quarter. Direct-to-client sales represented 83% of sales, a 3 percentage point increase over the prior year period as both retail and online retail sales outperformed. The operating results rose by 22%, a direct consequence of strong sales growth, good gross margin due to pricing power and targeted investments into distribution and communication. Operating margin amounted to 37.1%. Let us look at the main developments over the past 6 months. The Jewellery Maisons posted excellent performance across all product categories. Jewelry sales were sustained by iconic collections, which included Trinity and Clash at Cartier; Alhambra and Fauna at Van Cleef & Arpels; and Opera Tulle and Macri at Buccellati, to name a few. Watch sales included notable performance from the Tank and Santos collections at Cartier and Poetic Complications at Van Cleef & Arpels. The retail network was further developed during the first half of the year. New openings included Chengdu Shin Kong Place, and Singapore Marina Bay Sands for Buccellati; Nanjing MixC City Mall for Cartier; Van Cleef & Arpels stores in New Zealand in Auckland and first flagship store in Seoul, Cheongdam-dong. The renovation program continued notably at Cartier with New York 5th Avenue and Paris 13 Paix, which we opened on 28th of October after 2 years of major renovations. Buccellati's website was relaunched with enhanced user experience and a new e-commerce capability. The segment's focus on sustainability continued during the period. Cartier, within the context of the group's 1.5 degree climate strategy, reinforced measures to reduce the environmental footprint of its worldwide operations by having all stores and manufacturing sites newly built or under renovation LEED certified, by working on sourcing 100% renewable energy and removing single-use plastics. Van Cleef & Arpels progressed in its objective of 100% RJC chain of custody certified finished goods products with approximately 3/4 of suppliers already certified. Buccellati nears the completion of a process for becoming RJC certified. Let us now review our Specialist Watchmakers business area where sales in the first half grew by 22% versus the prior year period. This solid growth was driven by double-digit increases in almost all regions and a strong increase in direct-to-client sales. Sales in all channels grew, with particularly significant growth in retail and online retail. The operating results increased 35% to EUR 506 million, leading to a 240 basis points operating margin improvement to 24.8%. This achievement was driven by solid sales growth and strong cost discipline. All Maisons grew sales during the period, with excellent performance of iconic collections such as the A. Lange & Söhne Lange1, Baume & Mercier Riviera, IWC Pilot, Jaeger-LeCoultre Reverso, Panerai Submersible, Piaget Polo, Roger Dubuis Excalibur and Vacheron Constantin Traditionnelle. Direct-to-client sales increased to 54% this year from 47% of Specialist Watchmaker sales for the same period last year. As part of the network development, there was a net increase of 12 directly owned stores and 9 franchise stores, mainly in Europe and Asia Pacific. New openings included Panerai in Zurich, Bahnhofstrasse; IWC in Dubai Mall; and among the renovations, Vacheron Constantin in Dubai Mall. There was also continued development of e-commerce capabilities and services with notably the go-live of e-commerce and customer relationship centers for Panerai and -- IWC, sorry, in Mexico. In terms of development within the multi-brand environment, the TimeVallée retail concept was rolled out further, with 9 new boutiques in the first half of this year compared with 7 openings in the first half of last year, almost all in China. Finally, let me share that we have put in place a strong governance mechanism through a newly launched Specialist Watchmaker Sustainability Committee to provide our watch Maisons with guidance and leadership on ESG topics. In September, the Watches and Culture Sustainability Forum was held in Geneva to promote sustainability in the watch industry, notably around climate change via diversity, equality and inclusion. Let us move to the other business area, which includes the Fashion & Accessories Maisons, Watchfinder & Co., the group's watch component manufacturing and real estate activities. Sales rose by 27% year-on-year, with most Maisons and regions posting significant increases. Regional growth was particularly noteworthy in the Americas and in the Middle East and Africa. All channels saw higher sales led by wholesale, owing to increased recognition for renewed creativity and relevance from international wholesale buyers, notably from the U.S. Operating profit amounted to EUR 56 million, up 33% over the prior year period. Excluding a real estate transaction in the prior period, operating profit grew triple digits. Operating margin was 4.3%. Almost all Maisons recorded significant growth, supported by strong contributions from both new and existing collections in our Fashion & Accessories Maisons. New collections included the Montblanc Extreme leather line, Chloé Fall 22 and Alaïa Summer/Fall 22 collections. Existing collections received notable contributions in clothing from G/FORE at Peter Millar; the leather goods from Chloé Nama line; and Delvaux Lingot Small leather Bag -- Small Bag, sorry, as well as from Montblanc Meisterstück within writing instruments. Chloé recorded good growth alongside Montblanc that benefited from an improvement in travel retail and strong and successful product launches as well as stepped-up merchandising competence. Alaïa, Delvaux and Peter Millar have all seen particularly solid performances during the first half. The Maisons have continued the upgrading of their retail network with notable retail openings, including Chloé MixC Mall in Shenzhen, the first ever boutique in the Middle East in Dubai Mall, and Peter Millar in Charlotte, North Carolina. Notable renovations, including the Alaïa boutique in Dubai Mall as well as Montblanc flagship stores on the Champs-Elysées in Paris. Sustainability initiatives are also underway across the F&A Maisons and are focusing on improving transparency and traceability of our products. Significant progress has already been achieved in leather. Watchfinder, which is now part of the Other business area, further strengthened its international operations with new shops in France, Switzerland and the U.S. To better serve our clients on a global basis, Watchfinder has a new servicing hub in Madrid and the U.S. logistics hub in Dallas. There was a further rollout of its watch trading program through the Jewellery Maisons and the Specialist Watchmakers. This concludes the review of the first half performance of each business area. Burkhart, over to you.

Thank you, Sophie. Let me walk you through the rest of the P&L, starting with gross profit. Gross profit was up 27% on last year, leading to an enhanced gross margin of 68.9%. The 140 basis points increase reflected favorable currency movements, geographical mix and a larger share of retail sales as well as price increases, that altogether more than offset higher input costs and inflationary pressures throughout the supply chain. Let us now look at net operating expenses, which rose by 28%, a rate slightly above the 24% sales progression rate. Given the particularly subdued level of OpEx increases in H1 of last year, followed by a marked increase in H2, notably related to headcount, this is a good outcome. Selling and distribution expenses increased by 27% at actual exchange rates and by 19% at constant exchange rates. They represented 22.8% of sales, a slight increase versus 22.3% of sales in H1 '22 (sic) [ H1 '21 ]. The increase was driven by higher retail sales affecting variable costs, such as leases and commissions and the growth of the group's retail operations. Communication expenses were up by 33% year-on-year at actual exchange rates and by 24% at constant exchange rates, reflecting reinforced investments in communication to support sales growth and build brand equity. As a percentage of sales, they amounted to 8.3%. This ratio is 60 basis points higher than in the prior year period but still below the more normalized range of 9% to 10% for the full year. Fulfillment expenses, that is -- that are the costs of fulfilling online orders from our Maisons and Watchfinder, rose by 33% year-on-year at actual exchange rates. With YNAP expenses now shown in discontinued operations, fulfillment expenses represented only 1% of sales in the current and prior year periods. Administrative expenses were 24% higher than in the prior year period at actual exchange rates and 15% at constant exchange rates. The higher spending was in line with the increase in sales and largely reflected a stronger Swiss franc, increased logistics and IT-related expenses. As a percentage of sales, administrative expenses remained at 8%, in line with the prior year period. Overall, net operating expenses amounted to 40.8% of group sales. This leads us to operating profit, which at EUR 2.7 billion increased by 26%, reflecting higher sales, improved gross profit and controlled operating expenses. As a result, operating margin increased by 30 basis points to 28.1% of sales. Let us now review the rest of the P&L items below the operating profit line, starting with finance costs. Net finance costs eased by EUR 180 million to now EUR 202 million, mainly explained by 2 items. First, there was a positive EUR 150 million reversal in the line net foreign exchange gain on monetary items, moving from a EUR 55 million loss in the prior year period to EUR 95 million gain this half year. Secondly, fair value adjustments reduced by EUR 88 million, reflecting reduced fair value losses on the convertible note and options related to the Farfetch investments. Following the announcement of the agreement with Farfetch and Alabbar  on the 24th of August to sell a controlling interest in YNAP, subject to a number of conditions, including the receipt of certain antitrust approvals, YNAP is reclassified to discontinued operations. The assets and liabilities have been reclassified to assets held for sale and liabilities held for sale on the balance sheet, while the results for the year-to-date are presented as discontinued operations. Comparative purposes of prior year period and H1 income statement figures have been represented to reflect this change. During the first half, sales from discontinued operations, mainly composed of YNAP sales, excluding intersegment sales, increased by 11% at actual exchange rates and by 4% at constant exchange rates. Growth at YNAP was led by NET-A-PORTER and MR PORTER, while YOOX grew revenues by mid-single digits and expanded its marketplace offering with the introduction of the home and art category. FengMao revenues grew at high double digits compared to the prior year period with the NET-A-PORTER Tmall flagship store now retailing over 400 brands. Factoring in the EUR 2.7 billion noncash asset write-down, operating result from discontinued operations translated into a EUR 2.9 billion loss. Profit for the period from continuing operations increased by 40% to EUR 2.1 billion, mainly reflecting the higher operating profit. After the EUR 2.9 billion loss from discontinued operations, the loss for the period amounted to EUR 766 million. Our effective tax rate for the first half of the financial year from continuing operations was 18%. It is in line with our expectations of the full year tax effect, absent any special unforeseen items occurring in the second half of the year and is within an envisaged 18% to 21% range. Cash flow generated from operating activities was EUR 241 million lower than the prior year period at EUR 1.54 billion. The increase in operating profit for continuing operations was more than offset by additional investments in working capital, including in precious metal inventories, partly impacted by a stronger Swiss franc versus the euro as well as higher levels of receivables due to strong sales growth. Let us now turn to our gross capital expenditure. Investments totaled EUR 377 million, a 38% increase over the prior year period. At 3.5% of sales, capital expenditure was slightly higher than the 3.1% ratio in the prior year period. 47% of gross capital expenditure related to point-of-sale investments, mostly renovations and relocations of directly operated stores. New store openings beyond the ones previously mentioned, included Van Cleef & Arpels in San Francisco; A. Lange & Söhne in Boston, Alaïa in Tokyo; and Chloé in Shanghai. It also included relocations and renovations such as [indiscernible]; Vacheron Constantin, Dubai Mall; Delvaux in Paris; and Montblanc as well in Seoul. Manufacturing spend increased to 19% of the overall spend and was mostly related to Cartier and Van Cleef & Arpels to support their strong growth. Other investments made up 34% of CapEx and included IT investments predominantly. Let us now turn to free cash flow. Free cash inflow of EUR 808 million reflected lower cash flow from operating activities and higher capital expenditures, mostly offset by lower net acquisitions of other noncurrent assets. The prior year period included the investment in the China joint venture with Alibaba and Farfetch. Our balance sheet remains strong. Shareholders' equity accounts for 46% of the total. Net cash amounted to EUR 4.763 billion on the 30th of September 2022, a EUR 488 million decrease compared to the 31st of March 2022, which is more than explained by the dividend cash outflow. The dividend payment of EUR 1.851 billion reflects an ordinary dividend of CHF 2.25 per A share, plus a special dividend of CHF 1 per A share, which was approved by shareholders at the AGM in September. Special dividend is a recognition of the excellent performance achieved and adjusted towards our long -- loyal long-term shareholders. I would now like to provide an update on our sustainability program viewed through the ESG lens, starting with the E for environment. In line with our ambitions to reduce emissions, we are on track to source 100% renewable electricity for the group before the end of 2025. In Europe, our objective is to reach a 10% energy saving target for gas and electricity in offices and boutiques in the next 6 months. This will be achieved by a series of energy saving measures, including reducing temperatures by a minimum of 1% across all sites. Top priority for Richemont over the coming years is to safeguard biodiversity. We're currently working with biodiversity experts to conduct a materiality assessment to identify key materials and supply chain elements in terms of its impact. This will form the group's biodiversity targets as well as our strategy with these targets. We aim to finalize our strategy in the latter part of 2023, we'll keep stakeholders updated in due course. Looking at the social element of ESG, we have reviewed and updated key internal policies to ensure that respect for human rights is embedded into our decision-making processes and our engagement with suppliers. One such policy is our supplier code of conduct, which is required to be signed by our suppliers. Code now better reflects emerging best practice, notably in the areas of business and human rights and whistleblowing. We are introducing this December, the Richemont Speak Up Platform, open to external and internal stakeholders, in line with the UN guiding principles for business and human rights and the EU Whistleblower Directive. In parallel, we are further refining our human rights strategy. Governance remains core to our sustainability ambitions, and with the appointment of our first Chief Sustainability Officer at the start of this calendar year, we have now embarked on the next phase of our sustainability strategy. This year's sustainability report was redesigned our ESG ambitions and will continue to be grounded in the UN's Sustainable Development goals. To prepare for the integrated reporting requirements during calendar year 2024, that is to say in our fiscal year '25 reporting, we have aligned the external assurance process for all voluntary and mandatory ESG reporting with our financial reporting. We believe that companies should be a force for good in society in general and the communities in which they operate in particular. In this context, we are in constant dialogue with our key stakeholders to ensure alignment of objectives. Most recently, we have stepped up engagement with NGOs on the topics of climate, circularity and human rights. In August, we announced a partnership between Farfetch, Alabbar and Richemont to accelerate our Maisons' Luxury New Retail ambition YNAP into a neutral industry-wide platform for the benefit of all brands and end clients. At the completion of the initial stage, which is subject to a number of conditions, including the receipt of certain antitrust approvals, YNAP is to be co-owned by Farfetch with 47.5%, Alabbar with 3.2% and Richemont with 49.3%. Both Richemont Maisons and YNAP are to adopt Farfetch Platform Solutions or FPS, a leading integrated omnichannel platform. For the Richemont Maisons, FPS will power the websites and provide an integrated solution between the online and physical retail operations. Several Richemont Maisons will also open e-concessions on the Farfetch marketplace, widening their offering to attract and retain more customers while optimizing working capital needs and meeting brand partners' requirements to establish a direct relationship with end clients. For YNAP, this will help accelerate its shift towards a hybrid retail marketplace model. Accessing a technology natively built on 3P with integrations with most of the luxury brand partners YNAP works with, will save precious implementation time. An additional benefit for Richemont is to achieve economies of scale by running a single standard and benefiting from innovations across all stores simultaneously. As for the next step, there will be no action taken until antitrust clearance is received. We will, in time, start studying how best to potentially adopt Farfetch Platform Solutions. Lately, analysts and investors have asked how Richemont is likely to fare during a significant downturn, whether we have become more resilient compared to 2008. Cannot respond directly to that question given the number of unknowns, but we can highlight how different Richemont is today compared to 2008. First, with more than EUR 19 billion in sales and EUR 3.4 billion in operating profit for our 2022 financial year, we have experienced a step change compared to fiscal '08 sales, an operating profit of EUR 2.7 billion and EUR 0.8 billion, respectively. We have progressed strategically from being very wholesale distribution-driven to becoming online and physical retail distribution-focused. The proportion of wholesale sales has halved to 27%, online retail sales have emerged to reach 6% of group sales. Overall, our direct-to-client sales have increased from 42% to 73% of group sales. This high level of direct client interaction enables us to know who our end clients are, understand their needs and receive insights on the evolution of the level of demand to appropriately adapt the group's production and investments. In 2008, watches were predominant, representing 48% of sales compared to jewelry at only 24%. Today, the weighting between watches and jewelry is more balanced, with jewelry having increased share to 48% of group sales and watches accounting for 37% of group sales. With Cartier, Van Cleef & Arpels, Buccellati and Piaget, Richemont is in a strong position to capture the growing demand for branded jewelry in a market which is so vastly unbranded. It is not solely a matter of Richemont versus peers, but it is the branded versus the unbranded market, with the conversion to branded likely to be a strong, sustainable trend. We have continued to evolve our offering with both higher and more welcoming price points as well as different collections that appeal to different customer groups. This pricing architecture allows scalability across price points for our customers. This was consistent and balanced pricing around the world and across our markets. Based on the prices seen at auction and strength of demand, many of our Maisons' collections have reached iconic status, the latest being Submersible at Panerai and Traditionnelle at Vacheron Constantin. As we have strategically extended our global reach, the weight of the Americas and Asia Pacific has increased, such that these 2 regions contribute 62% of group sales compared to 40% in 2008. Sales are broadly equally split between Europe, Greater China and the Americas as Southeast Asia being roughly the size of combined Japan and the Middle East. This emergence of 5 engines makes the group more resilient than in 2008. In terms of individual markets. Today, the U.S. is roughly the size of Mainland China, which itself is close to Europe at around EUR 2 billion each for the half year. We have been first movers to introduce better discipline in the manage of our watch inventory now managed through the sell-in, sell-out KPI. Our watch inventory within our multi-brand retailers and at Richemont continues to be in a healthy state today as a result. The quality of our watch distribution with fewer partners, but more partnership, has been enhanced. Parallel, we have gained an agility and flexibility in our manufacturing entities and supply chain, enabling us to better adjust to meet changes in demand. The most visible displays of this were first seen during the Hong Kong events that disrupted sales in this important watch market. And then, of course, during the COVID pandemic outbreak, where we initially had to stop all nonessential production to subsequently ramp up as market emerged from lockdowns. As a result of this transformation, Richemont's operational performance has been strong since we all entered the COVID pandemic. If we examine the performance of our watches and jewelry combined over the last 5 years, these 2 product categories have generated strong growth, delivering a CAGR of 11% and compared with 6% for the closest [ period ]. Similarly, if we look specifically at the sales of watches as a product category, Richemont has outperformed the watch market when looking at the Swiss watch export data, especially since 2019, and this whatever the price points. Before turning over to the Q&A, I would like to summarize and offer some concluding remarks. For the first half of this year, Richemont showed excellent operational and financial performance with sales close to the EUR 10 billion mark, driven by double-digit increases across all business areas and distribution channels. Operating profit from continuing operations also increased by double digits to over EUR 2.7 billion, translating into an improved operating margin of 28.1%. The solid performance was underpinned by a unique portfolio enduring Maisons. Our business areas grew markedly by double digits and profitably. The Jewellery Maisons consolidated their strength with a 37.1% operating margin. The Specialist Watchmakers ongoing transformation of the business model is successfully translating into higher profits with a 24.8% operating margin. And at the Fashion & Accessories Maisons within Other, almost all Maisons grew sales strongly and the business area generated a 4.3% operating margin. There, we are looking to build scale and invest for the long-term. In addition, with the agreement reached with Farfetch and Alabbar, we have progressed significantly in our Luxury New Retail agenda. YNAP and our Maisons will adopt Farfetch Platform Solutions to realize the Luxury New Retail vision, all conditional to receiving regulatory approvals. Regarding sustainability, we are stepping up our ambition, refining our strategies and improving key internal policies. Our team is working on all required ESG aspects to ensure we remain focused on delivering sustainable, responsible and profitable growth. Finally, we have a strong balance sheet to weather economic cycles and seize opportunities that may arise. Uncertainties abound, but we look to the future with vigilance and confidence. So this concludes our presentation. Thank you for your attention. And I will now hand back over to Sophie.

Thank you, Burkhart. We will start the Q&A session shortly. [Operator Instructions] Thank you. The floor is now open for questions.

[Operator Instructions] The first question comes from the line of Ashley Wallace with Bank of America.

Sophie, Burkhart, I have 2 questions actually. They're both around the gross margin bridge chart that you presented today, which is really helpful. And thank you for the incremental granularity. My first question just relates to the fact that within that bridge chart, it shows that there is gross margin pressure coming from utilization and other. Can you help us understand what exactly that is? And then my second question is on the FX and the impact on gross margin, which was positive in half 1. Can you help us understand a little bit how we should think about the gross -- the FX factors going into your gross margin into the second half? Will that still be a positive contribution?

Let me answer, Ashley. Let me just answer the first question first. That depends on how the exchange rates go in the second half, which we don't know. And we don't, as you know, project this out. So I cannot really answer that question. With regards to the first question, in the gross margin bridge. What we have? We have a positive FX impact which we have flagged here in the gross margin bridge. And then we have today for the first half, and once again I'm careful on that, we have a favorable country and channel mix effect, which we have in the middle column there. Obviously, with Europe and Japan up and China relatively subdued or even down in real terms in the -- in the first half, we have a positive channel -- country mix coming out of that. Channel mix, more retail, less wholesale also benefits, but to a lesser extent. In the third -- sorry, and in this column, we also have aggregated the positive impact we see or we have from the price increases that our Maisons have done. Price increases have been in the area of 4% to 8% over this year, meaning the first 6, 7 months of this year, and we've done them in 2 waves. The impact we have, and that is, you see a negative impact here in the third column is exactly why we do these price increases, which is the adverse effect of raw material price increases, especially gold, where we see the biggest impact at the Jewellery Maisons. In our books, gold price has increased over the prior year, impacting our gross margin now with about a 14% increase. So that is what we see in that third column -- fourth column.

Okay. So it's mainly raw material price increases rather than underutilization of production is the...

There is no underutilization of production. We are stretched on the other side, actually. We are still struggling in some of our Maisons to rebuild inventory and there is no underutilization of capacities whatsoever. We're a short in product in some areas.

And then maybe connected to that -- sorry, if you don't mind, Sophie, just 1 really quick follow-up. What was the amount of the precious metal purchase you made in the first half -- all this out in terms of like the inventory -- the impact on inventory going up was to do with the precious metal purchases?

Okay. Yes. No, that's an easy one. I mean we -- with the outbreak of war or the invasion of Ukraine, to be specific, we have obviously looked at critical inventory categories in terms of raw material. And we've -- I think we've spoken at length in May about what we've done on the diamond sourcing side, not only to be compliant but also to diversify our sourcing strategy. But we've also looked at other raw materials such as platinum and we have increased -- and rhodium, yes, and we've increased our holdings of these raw materials. And that's why we focus on cash generation so that in challenging situations, we can actually have the means at our disposal to upgrade or upsize our inventory holdings in these critical materials. And that's what we've done.

The next question comes from the line of Edouard Aubin with Morgan Stanley.

Edouard Aubin, Morgan Stanley. So congrats for the really great set of results. So 2 questions on Jewellery Maisons margin, because obviously, that was a key topic of discussion during the full year results back in May. So the first question, Burkhart, is you were able to more or less maintain a historic high margin -- operating margin level for Jewellery Maisons despite the step-up in marketing, and I guess, bonus as well. So what were the offsets to that? Was it the gross margin expansion mostly or you get some operating leverage as well? So that's question one. And then looking ahead, if you look at the -- on average, the second half tends to be -- I know there is wide dispersion, but on average tends to be around 300 basis points lower than the first half. I know you don't like to guide, but should -- is there any reason to believe that the seasonality would not be the same this year than in previous year? And more long term related to that, again I know you don't like to guide, but in the past you indicated to the market that you think Jewellery Maisons should be around 30% to 35% type of range in terms of margin. Are you ready now to revise upward in the 35% to 40% or at least in the around 35% type of long-term range?

Well, I can revise that to a 20% to 50% range, if that helps your modeling. No, I mean, I think we're still comfortable with that range, especially given what we've been saying over a number of years now that it's a category in which you have to consistently deploy capital into. And especially now into a category, which, yes, has very sound underlying growth drivers, the unbranded versus branded part of the market is still quite big. But it is and has become a category which, as we've discussed a number of times over the last years, is highly attractive to competitors now. And we've always said that we are willing to spend whatever we need to spend to maintain our leading position. So in that context, that's the best I can give you, that we're still comfortable with that range at this point in time. Coming back to H1, yes, you're right, pricing power, meaning increased enhanced gross margin has helped or enabled the Jewellery Maisons to maintain their operating margin more or less in the same range, above 37%. And that has been what has played out here. Now the cost increases, and that applies across the board and across the business areas for the continuing operations, have mainly been driven by full year effects of increased investment into people and store networks in the second half of last year. So it's 2/3, 1/3. So we have a full year effect that explains more or less 2/3 of the cost increase on the fixed cost side and about 1/3 is ongoing investments or additional investments in people and network. Guidance for the second half of the year, a, we don't really like giving guidance; b, I think there are so many uncertainties out there that I'm a bit hard-pressed to be helpful on that element. But you know the business cycle, you know the H1, H2 cycle. Directionally, that is what we're looking at, that we're going to have, on the operating contribution side, a lower second half than in the first half.

The next question comes from the line of Zuzanna Pusz with UBS.

Sophie and Burkhart, I have 2 questions.

And Jerome and Cyrille...

Sorry?

And Jerome and Cyrille are here as well.

And James.

Yes, Cyrille, I have 2 questions. I think one you would like, the other one you may not necessarily like. So the first one is on the consumer. I've seen some headlines you were talking a little bit about the consumer trading up. So would you be able to maybe share some high-level thoughts around what you're seeing by maybe age group, by nationality, anything interesting you could call out around the consumer behavior. And I think specifically, if you believe that perhaps in an inflationary environment, jewelry and watches tend to actually benefit more, so that whole argument about higher cyclicality is even more flawed in this environment. And the second question, which, sorry I have to ask, but would you be able to give us maybe any color on the exit rate? I know you don't like commenting on specific months, but we always have to ask and we always try to understand how we should think of the next quarter. So anything high level, if October was in line with Q2, was it a bit lower, higher, anything you could share would be very helpful.

Zuzanna, it's Cyrille speaking. So when it comes to the consumer, what we have seen in the past 2 years, first, have been a very strong growth. It was 2 years ago on Chinese customers domestically. And lately also with American customers, whether they buy in the United States or in Europe. And since last year, we have seen basically coming up also of customers from Japan, from Korea, Singapore, Thailand, Australia, so basically everywhere. In age group, we have seen also across the board on -- an increasing trend from young customers to buy expensive pieces. And basically with by our own customers tendency to go upmarket we see on strong products and brands, so ours, but not only ours, waiting lists on key products or unlimited edition or launches. And so this has been basically in all countries. So we see more, yes, trading up and then increasingly young customers coming in the -- on our radar. So -- and this has been also visible, say, in new developing areas and I mentioned so, Southeast Asia, Middle East, Far East. Coming back of Japanese customers very sharp from this year. And we see not only that for watches and jewelry, but also about other categories. And if you see the result of key players in the market, I guess, some fashion accessories are also doing well. The key is more to have strong brands, and Maisons, compared to the others, but it's not only for watch and jewelry, but watch and jewelry doing pretty well.

And Jerome Lambert speaking, from -- for the -- how was the last weeks after the semester? What we can see here from the end of semester is a very strong trend in retail, 2-digit maintained. We see it in many geographies as we highlighted as well in the report, and it has not changed. So they are -- while China is still under pressure, we see a very solid and strong development in many other continents, Burkhart highlighted, Japan [indiscernible], Middle East, Southeast Asia, Europe. So it's broadly on that. Said that, we know that we are meeting in November and December, a very strong comparative ahead of us. So and that's what we have to see.

I think it's a very good point, Jerome, that you make. Remember, the last -- our Q3, which is the Q4 calendar year, is not only, in general terms, our biggest selling quarter, but also we've had very strong growth across many of the geographies that are still performing well today. So we're running against tough comps here. But as Jerome said, broadly in line, but with a normalizing trend due to higher comps after the close of our second quarter.

The next question comes from the line of Louise Singlehurst with Goldman Sachs.

We can't you hear very well, Louise.

Can you hear me now? Is that better?

Yes.

Nice. Better.

Can you hear me okay? Great.

Yes.

You must all be absolutely delighted with the performance in the first half. Two follow-ups for me, if I could. Just on the margin point, Burkhart, I suppose the key question is just to double check. I think I know the answer from the commentary that you've given. But is there any particular phasing of costs from first half into second half? It sounds as though there was quite good cost control in the first half, but any particular projects we should be aware of going into the second half? Or we think we're back to a normalized phasing just to make sure it's a normal path seasonally first half, second half? And then the second question was a follow-up to Cyrille, if I may, on the cohort, particularly at Cartier. Are you seeing a slowdown in the number of new customers coming on board? Is it more of a point of getting a higher spending within existing customers or any point across the regions or category that you can call out between the watches and jewelry side?

Yes. Louise, this is Burkhart. On the first question, nothing to flag up at this point in time.

And on our side, so we don't see a slowing down on the range of new customers. We see across buying trends for both new customers and young customers and existing ones. So there is no change in there.

Great. And could I just ask a quick follow-up on pricing. The 4% to 8%. Can you just remind us where you are in terms of the regional pricing differences? I know that you always try to have a global price policy, but given the move in FX, is there more scope for price increases, I guess, in the obvious place being Europe?

It's Cyrille again. So we try to stay within the bandwidth about 0% to 5% on pricing before tax. With the currency move, tend to be slightly higher than that in the United States and in China. And so when we do price increase, we take into account the natural price differential coming from currencies as well. So meaning not to have necessarily all across, but mostly in the regions, of course, with the European base, and then to see, depending on the country and currency, how to adjust in the best way possible.

Louise, remember, we always target a very tight band around the -- either European or Swiss anchor points for prices. It's been more challenging the last 12 months or 6 to 12 months than in previous periods, but we still stick to that -- to that pricing philosophy and apply it.

The next question comes from the line of Charmaine Yap with Redburn.

I also have 2 questions. And sorry to follow on. Number one is, can you talk about your presence or exposure in Hainan, please? Are you present there? Is it through wholesale arrangements? How big is this? Just to give us a feel. And how has that developed after this disruption in August? And then also a follow-up on in terms of the consumer. You talked about newer consumers, younger but also do you think that this is a reflection of anything that you've done in terms of product, marketing, price points? Or do you think it's just like a reflection of the strong brand that you've nurtured over the years? I'm trying to get a feel of was there anything special that or change -- materially changed from the product and branding side of things? Or is it just a strong consumer?

Jerome Lambert speaking. Hainan indeed is a very interesting territory, has been as well a very interesting territory for its quick growth over the last 2 years. Said that, our Maisons are present there through a franchisee and external partner. So here, our exposure is linked to, in this case, to the wholesale top line development and dynamic. We monitor always the stock there. So in somehow the evolution of the sales will reflect in this case the evolution of the sellout without stocking effect. And as you can see as well, the growth in the last quarter and in the whole semester has been more driven by retail. And somehow the less important this year of Hainan in our business is being largely compensated by the dynamic in retail. That's what you have already seen during the whole H1. And for the time being, we don't see worsened or better trend for the months to come. If there is a place where that's even more volatile, in this volatile rate, it's definitely Hainan. But it's fully under control, and it has been fully absorbed, as you can see in the numbers during H1.

And it's Cyrille speaking, so Hainan had been strongly developing and it's the priority of the Chinese government. And infrastructures both in Sanya and Haikou in the north, there are many developments of mall. And so in the midterm, it will be one of the important trading areas with also free trade agreements between the rest of Mainland China. So we continue to invest, mostly indirectly because cannot have full license now in both Sanya and Haikou. And in the short-term remains volatile, but probably it would be one of the area would be to open first and probably will resume trading quite rapidly when the entire COVID policy softens. So that's just for Hainan. So it will remain a long-term growth and short-term volatile move. When it comes to the overall change in customer base, there are 2 things. Of course, the old element to doing some global rebranding exercise that we did in the past 5 years have borne fruit and so being well in demand for younger customers. But overall, and thanks to awareness and development of social media, we see an appetite from young customers to expensive product, coming to watches, for instance, very early stage to collect the species and so forth. And so we see that for us but also our colleague in the watch division. So there are 2 factors. Of course, how the brand itself can be demanded and relevant for young people. And on that, we do pretty well. And on the other side, the appetite for young customers for sophisticated pieces that they are looking for. And we see especially Middle East, in China, now also in Korea, where young customers go for pieces that we would expect them in the past to come later in their life cycle.

And to confirm what Cyrille says for the other watch collection, there's strong growth in the last 12 months. It's primarily coming from this younger generation in the new geographies with this new multi-local approach. So indeed, that's something we can confirm.

Can I just follow up to see in Hainan, do you mean you are there just in watches? Or do you also have presence in jewelry through wholesale arrangements, franchisees rather than multi-brand? So both categories? Or just watches?

Jewelry as well. So we have a monobrand boutique in Sanya, which is dealing everything. So it's just a franchise store, but it's doing everything. And there will be new stores coming in Haikou.

It's just the same model that is applied by the regulatory environment there. We cannot step out of that. Obviously, we would prefer to run our own retail operations.

And there are some other areas in the region where travel retail is also operated through partners.

The next question comes from the line of Luca Solca with Bernstein.

Again, Luca Solca from Bernstein. I wonder if you could give us a bit of perspective on Chinese demand and -- with a focus on its reactivity. What we see from our own analysis of in-store traffic is that once lockdowns are removed, consumers come back quite quickly. And so I wonder if you see any sort of underlying slowdown or macroeconomic-related reason to be more prudent about Chinese demand coming back. Or is the current performance in China, in your understanding, more related to COVID-19 lockdowns. And if they were removed, then Chinese demand could be coming back rather quickly. The second question is on what you've been reporting this morning, that you continue to be alert on M&A opportunities. I remember that at one point you mentioned that you feel, Mr. Rupert mentioned that he agreed that in fashion and leather goods, there's a need for Richemont to build scale. Wonder if M&A could potentially be a tool to address that issue? Or if you are focusing now your attention to the luxury portion of the market?

Thank you for the question, Jerome Lambert speaking. Just for China, the -- it's a very large question and somehow I need to -- and in China, if there is one thing that we have been learning throughout the last, not only 3 months, but 30 years, it is that it's a country where new theory are written every month. So I won't try to write a new one [indiscernible]. What I can say is that we see stronger demand in e-commerce and -- at a quicker path since the end of summer. So if it would have to give a signal that the demand is in China present and is strong, it's probably a factor that we could highlight and an element that would -- could bring us to say that without measures linked to the zero-COVID policy, it could bring a potential positive element. You know that travel in China is today very disrupted. And of course, we see a lot of China roads, international tourism, but the in-country tourism or in-country travel, it's so very, very important for our activity for our retail, for activity into the country, but also for island like Hainan and others where the activity has been very disrupted by the measures. So if measures are removed, there will be less barriers to our business, less disruption and it will ease the business. That's what I would say from do we read something there.

And it's Cyrille. To add on that, if we would remove the store that were closed on the like-for-like base for the stores open, that it will be still in positive territory. We have done a high jewelry event in Shanghai and those customers who could come were very buoyant and had very good result when compared to previous year. So if all the stores would got reopened, we can get the results to be better than what they were. Then can there be some impact on the overall economic disruption? We don't know. And we have to see how the softening of the COVID policy brings, if it lasts, and how it can come in the next month. But we cannot guide on that. We have to see how it unfolds.

Sorry, Luca, and on your second question, I mean, I can't really helpful here. I can only say no change in our approach. We monitor, we look at all the opportunities that might present itself in the market and then take a view on that basis. Can't be more helpful than that.

The next question comes from the line of Antoine Belge with Exane BNP Paribas.

A few questions on China. I think in Q2, Asia was up 6%, that was China negative. And so you mentioned that negative mix impact from China underperforming. Can you remind us why the gross margins are lower in China and by how many points? And finally, a question maybe for Cyrille. You touched about China reopening internally, but what would be, in your view, the consequence of Chinese traveling again in Europe, in the rest of the world? Is it pretty neutral for you because you tend to have the same price and it will be just a transfer of consumption? Or do you think that for some reason, it would lead to more spending from the Chinese overall?

Yes. Antoine, let me just try to tackle the first 2 questions. First one, China in Q1 was highly negative, around 30% down. In the second half of the year -- sorry, of the first half, meaning our second quarter, China was up 9%. This is at actual rates. So if you go back to constant rates, actually, China in the second quarter was flattish, slight -- very, very low single-digit actually. So basically on the same level. Now China, we don't break out profitability levels by market or by major market. But what we do have is we have higher landing costs in China, as we all have, which, over time, will gradually lower because there are agreements, for example, in the watch space over a 10-year period of time to reduce duties. So it's a duty-driven impact, in this case, positive that we have or slightly positive that we have on our gross margin in the first half. Question -- the third question on China, if travel restrictions, outbound travel restrictions fall and what would be the impact, let's say, on China itself and on other regions? Speculative. But I probably hand it over to my colleagues, either Cyrille or Jerome?

Historically, when the border reopen, there, it brings the demand to a higher level at least during a period of time. The opportunity of traveling, the opportunity of changing the journey and creating available time for shopping is always a positive impact, at least at start, on the demand level. Cyrille?

Yes. And we can expect this to restart first in Asia. So Chinese traveling to Hainan and Hong Kong and Korea and Thailand and Japan. And it probably will create a positive move. Europe will come probably later. And as far as then if the Chinese economy, which has been kind of a constrained, then has to expand, and then this expansion will create the global demand, it will increase. And difficult to know which part will be in domestic China and which part will be just nearby, but we can expect the Chinese customers to grow, especially if the renminbi remains high, which is quite likely for the time being.

Yes. And this is actually just kind of expressing our view based on, I'd say, past experiences, right? Travel has a slight net increase of purchasing. Secondly, regional tourism has been very much the focus of our Mainland Chinese customers pre-COVID, meaning Japan and the other geographies. So in a way, they're near abroad for mainland Chinese customers. Hainan is a completely new dimension now compared to 3 to 5 years ago. So that, we'll have to find out together. And then there might be a higher proportion of sales that remain within China. But we simply don't have these data points yet, that needs to be proven. And all of that is on the assumption that at one point in time, zero-COVID policy in China is weakened and international travel, both outbound and probably for business purposes, inbound, is lifted or improved. So these are a lot of what-if scenarios. Obviously, we discussed them. Obviously, we are prepared for that. But today, the growth that we have over the last 12, 18, 24 months is mainly driven by local customers. We see a very strong shift in Europe. We see -- if you look at the performance of Japan, for example, right now, it's almost 100% driven by local customers. Tiny bit of travel coming in, but most of the performances you see are driven by local customers.

Maybe 1 slight follow-up, because so if you're quite bullish about Chinese travel internationally, doesn't -- sort of across sort of issue on the way you will maintain the good experience for the local consumer in Europe? Because in Europe -- I think your sales are now back to normal without Chinese. So there's probably going to be a bit of an issue about the traffic in the store.

Antoine, just 1 disclaimer here. We're not bullish. We're just saying what if and what if COVID -- zero-COVID is weakened or abandoned as a policy, and what if Chinese -- Mainland Chinese customers travel again. This is what we have observed and experienced in the past. And this is what, based on current knowledge, we would expect to happen in terms of flows again. We have not expressed our view on the quantum of it, et cetera, et cetera. So let's just be very careful here. We're still in a very early step with the measures announced this morning. There are awakenings. We don't know what the impact can be. We'll have to find out.

And to add on that, the -- as I say, the proximity move will probably go faster for the rest. I know the -- to come to Europe, the Chinese visitors need to have a visa. And they need to have also a travel agency also to have the license to move and to book the capacity. So usually, there is -- when things reopen, there is at least 6 months before things can really materialize. And as you probably know, the airline company and airports, many have also problems in addressing volumes and number of passengers. So again, meaning that the aircraft also have to expand their capacity. And then the hotels as well and many. So there will be a part where things will redevelop mostly close to China and then probably to Dubai and then probably later to Europe. So we'll have time to see how it comes. It will not come overnight. It cannot because of visa and because of airplanes and because of travel agencies.

The next question comes from the line of Rogerio Fujimori with Stifel.

Sophie, Burkhart and James, I have a follow-up on the Jewellery Maisons and the Specialist Watchmakers. So for the Jewellery Maisons, what is the magnitude of the contribution to growth we should expect for the full year from the increased retail space based on H1 and the pipeline of reopenings for H2? I can see in Slide 43, 4 internal openings for Cartier, 6 internal openings for Van Cleef in H1. We're aware of the big flagship reopenings recently and it looks like the U.S. is a big priority for the company. So if you could elaborate on that, it would be great. And then especially for Watchmakers, I think you recently disclosed that Vacheron was approaching EUR 1 billion revenue mark. So do you see actually the high-end watch Maisons like Vacheron outperforming the more aspirational watch brands like say, Baume & Mercier Alhambra or has the performance been uniform across price segments? And related to this high-grade scale in Specialist Watchmakers, is the mid- to high-teen percentage still the long-term margin potential for this division?

I will first answer, so it's Cyrille. We have to realize that our retail network has been very stable for the past 4, 5 years. So we have gone to a full renovation program, and so we reopened. There are some relocations, some scrap-and-build policy. But overall, there is not a kind of a geographic expansion, which is so massive. We think in the coming months of future, there are some areas where we need little more mini store, but not so many, and it will not come so much in the next half. So the growth is more organic growth of demand developing. And fortunately, also, the renovated store are well received by our customers and they perform well. But it's not a question of expanding the network, it's just organic growth. On the other Jewellery Maisons, I think it's probably similar. Even if Van Cleef had a very compact network and probably is expanding a little bit more. For the rest?

Yes. Sorry, if I might just step in quickly. I fully agree with what Cyrille said, that's more a scrap-and-build with a very slight extension. Van Cleef is, I would say, finalizing their footprint over the next few years, where they have some stores to open or geographies to cover in Europe. And third, Maisons Buccellati is a very different story, very different phase of their growth cycle or expansion cycle, where actually, we have opened some stores in China, in Southeast Asia, first store in the Middle East, to actually cover white spots. So we're really in different phases of the life cycle here.

And when it comes -- Jerome Lambert speaking. When it comes to the Specialist Watchmakers Maisons, we have more than 1 Maisons that have a large size. I won't comment that information that you mentioned saying one Maisons is closer to a certain level of turnover. But what I would more tend to say is that we see growth in a large number of Maisons within the Specialist Watchmakers. And it's more linked to other factors than just size. It's -- one is common between all of them is to be you're multi-local. So if you built your dynamic on more than 1 territory with the volatility that we know these days, you have better chance on a long-term period to benefit from the fact that China, U.S., Middle East, Europe can have differentiated growth trend. The second factor is definitely the capability for this Maisons to accelerate their direct-to-client dimension and some of our Maisons has very quickly accelerated their direct-to-client approach. You have in our -- in the appendix of the presentation of today the boutique and the evolution of the boutique per Maisons will give you a good reading of through that who can have a quick growth. And as you mentioned Baume & Mercier, the Maisons has been quite vivid, quite strong [indiscernible], small size, the small scale. But the iconization with [indiscernible] is quite successful. So at their own scale and on their own contribution, they are not below the trends that we see with the others. So it's more multi-local, more DTC and more iconization. And the strength of this iconization that creates differentiated growth. Size is probably less from a matter, particularly in the year like this year with the volatility that we have around.

I agree. And then Rogerio, last -- your last question, let me be -- or just remind you what I said is that midterm, we said we see there's a potential to go from -- from a range of 17 to 20, to go to the higher end of that range. But -- and then we'll take stock and we will -- have a look at what we believe is the right level of investment that we need to put into these Maisons and where it will bring us in terms of operating contribution. And that might well go above that level. But as we -- as Jerome was saying, we are -- or as we have said over many years, we are building the Maisons for the long-term. We have to invest consistently into our Maisons so that we are able to build brand equity. That starts with the product and that continues across the quality of our distribution, be it physical or digital. And because only strong brand equity with strong products will drive top line and actually pricing power. And that is what the Maisons have been doing in the watch space over the last 5 to 6 years. It was a painful decision to buy back the inventory to address quality issues in the distribution network. But as we said in our presentation, we believe that both watches in the Specialist Watchmaker division at Cartier, which were facing the same challenges, that these strong actions that were taken and the very consistent and disciplined execution of the strategy ever since, has led to strong enhanced brand equity. Iconization of product lines drives desire end demand for these watches to higher levels. That is what we've been experiencing, reaping the benefits of past decisions over the last few years. This transforms today into enhanced operating contribution. You see the numbers for the half year. Obviously, for the full year, they won't be at that level, as we know. We have a strong investment cycle in the second half with Watches & Wonders. We have higher communication spend in the second half. But directionally, we are seeing that we have rebuilt operating contribution and we expect that to continue. When we reach the 20%, we'll have another conversation.

The next question comes from the line of Carole Madjo with Barclays.

Carole Madjo from Barclays. Just 2 questions from me, I guess 2 follow-ups. The first one to come back on the Watchmaker and mostly the expansion towards DTC. Is there any limit to how far you can go here? Do you have any kind of target in mind of how big DTC can be versus wholesale? That's the first question. And then the second question, just to come back on pricing. So I think you mentioned, of course, this 4% to 8% price increase year-to-date. but can you come back on whether or not you plan to do more price increases for the rest of the year?

Jerome Lambert speaking. It's a very interesting question because there are many models around, as you know well, and then you have Maisons today out of fresh malls that are only wholesale, or at least there is one -- big one with a crown in its name, it is quite known, and you have Maisons that tend to be completely retail or [indiscernible] completely. Completely, if you take [indiscernible] Maisons in this case. And within our portfolio Maisons, we have the different models. There will be always one limit, which is in certain territory, we don't have subsidiaries and we have a presence. And it can -- it's a franchisee stop -- franchisee shop with the partner. So there will be most probably always a remaining 5% to 10% for most of the Maisons that will remain structurally in terms of business. Is there a limit to retailization, which is internal shop, external shop for certain Maisons? No. For certain of our Maisons, their distribution will be -- exclusively mono-branded, because from their side, from the exclusivity, from their service, they need -- that they need to give in time of [ tenacity ] of product, monobrand shop with partner or internal boutique is the best solution. Not to forget that the digital penetration is progressing as well for the Specialist Watchmaker and the growth rate in digital sales or in e-commerce for the Specialist Watchmaker is very, very strong, so a very large 2 digit. It's still a small penetration rate, but it's very, very strong. So I would say for certain Maisons, no limit to retailization. But said that, for many of the Maisons, we'll keep an hybrid model and we'll keep an approach where we'll have internal boutique, franchisee and multi-brand, because they have a very large number of clients and they have quite a spread of that clientele in many, many large territories and geographies. If you take the U.S. and you take Maisons like IWC or Panerai, we want to give a good service of our clients all through the U.S. and we have excellent partner to make it. And therefore, we'll have as well external boutique next to our internal boutique and in certain geography as well, some remarkable and very strong multi-brand shop. Here, again, the channel is not a driver for us. The driver is always the client. And for certain Maisons, the best way to get to the clients, the best route to the end client is not forcefully and always as a direct one. Said that as well, we opened a flagship boutique with IWC in Zurich, more recently in Dubai, and they are doing -- they have an amazing commercial activity. But besides that, some of this boutique has yearly traffic that pass the hundreds of thousands of visitors. So the impact that you have in terms of bringing new clients to your boutique, explaining your word and your environment at a scale which is 5 digit in terms of end client or end prospect or -- and people being interested by the product, it's unique. And that what DTC can bring as well and what DTC brings as additional source of growth for Maisons.

There was also a question on pricing.

So when it comes to the pricing before December, which is not a good moment to change, but after that we will act if necessary. There are some inflationary trends, and the price of gold, which is also priced in dollar and diamond. And then the overall inflation of cost of goods. Also, have in mind a lot of our cost of goods is in Swiss franc, which is pretty strong as well. So if we need to increase it again, we might, but we'll see in the coming 3 to 5 months.

The next question comes from the line of Thomas Chauvet with Citi Research.

A few follow-ups, please. Firstly, on the U.S. consumer, I think in the media interview this morning, Cyrille, in your last quarter, you were saying the U.S. consumer was slowing. Are you seeing a bit more volume pressure in entry price points, which is what some of your fashion peers are experiencing? And I think Cyrille mentioned earlier there's is trading up to a higher price point. Secondly, last month, one of your shareholders requested Chairman, Mr. Rupert, to elaborate on the succession plan. Mr. Rupert discussed this in a press interview to Finanz und Wirtschaft. I guess you don't [indiscernible].

We can't hear you, Thomas. Thomas, we cannot hear you. We could not hear you.

Can you repeat the second question, was such a pleasurable one?

Sorry, Is that better now?

Yes.

Yes.

Yes, we can hear you now.

I'll repeat the second one, sorry about this. Yes, last month, one of your shareholders asked for Mr. Rupert to elaborate on the succession plan that he referred to in the press article, in a press interview to Finanz und Wirtschaft. So I guess you don't intend to respond to the request and Mr. Rupert is not here today, but is there anything you want to add to that? And just a follow-up on pricing -- sorry, on the profitability of the watch category. Can you comment whether Cartier watches were more profitable than your Specialist Watchmaker business in the first half? And is that now a reflection of scale, higher DTC penetration, maybe the share of quartzy watches in the mix.

It's Cyrille speaking, so don't get me wrong, I didn't say that U.S. customers were slowing down, it's the growth rate has been, and Burkhart mentioned, normalizing. Meaning it's still double-digit growth on high comparable. So the growth percentage is a bit softer than before on high comparable. It doesn't mean the customer is slowing down. They are not. They continue to grow. And they grow in the U.S. and they grow also in the rest of the world, where they have been very buoyant, especially in Europe. And in terms of "entry price product," we don't see any pressure, meaning that all categories have been growing. And we have even facing some shortages in some products. So there is no, I think, big differences in our product category. We are in the fine jewelry segment, and we are not in silver, we're not in price point that might have different kind of customer base, but we don't see that.

Okay, Thomas, on the second question, you're right, we do not have a comment to make on that. And third question, sorry, can you remind what the third...

Profitability of Cartier watches...

Sorry, don't break down profitability and -- but having watches and jewelry which are strong means that it's been profitable on both sides, but we don't make breakdown by product category.

That will be the last question, I think, given the time. Maybe 2 more.

The next question comes from the line of Patrik Schwendimann with Zürcher Kantonalbank.

Patrik Schwendimann with Zürcher Kantonalbank. A question maybe for Cyrille, what do you think -- what do you think is the current percentage part of branded jewelry and how much was it 2 years ago? That's my first question. And second question. The global luxury consumer still seems to have enough money to spend. What do you think are the reasons behind that?

The difference between jewelry and watches is that we have less kind of a global view on the market. Because for watches, as most of the luxury watches are come from Switzerland and there are some statistics of Swiss export, we can measure quite well the market share. When it comes to jewelry, many things are not so visible. So difficult to draw a global partner. Safe to be that branded jewelry overall would be at 20%. The more we come to the plant, be more kind of a fine jewelry, it's higher, because many players are producing some kind of cheap products. You have to see also whether you consider some brands as branded or not, especially in China, whether you consider Chow Tai Fook, Chow Sang Sang, Lukfook part of the activity, and that's quite difficult. In Japan, whether you consider Mikimoto and Tasaki, probably yes. If we consider Yondoshi or [indiscernible], probably no. And so it's a bit difficult to draw specific lines in there, say, well, it was 2 years ago and what is now. What we see is the attraction for branded jewelry is growing and growing basically everywhere, but we don't have formal statistics that we say we can measure them precisely.

The next question comes from the line of Rey Wium with SBG Securities.

Just a quick one. The online sales growth was 9% as opposed to the group sales of 16%. So there's a lag. And also, if I tie up with the expansion of brick-and-mortar stores, am I reading it right between the lines that you are probably getting a bit more optimistic again of brick-and-mortar versus online? Or is this just a temporary situation?

Jerome Lambert speaking. Thank you for your question, particularly at that time of the day. How are you? Just one thing to keep in mind, you have and you're close geographically. In China, in March and April, partly May, we had this year a very severe disruption of all the supply chain. And digital penetration is important in China, and China is an important territory. So in the percentage, the performance is also reflecting this weeks of crazy interruption of e-commerce. And in proportion, China is more important in e-commerce than retail -- brick-and-mortar retail of China in the absolute total. So here, you have a distortion created by that relative importance. And when it comes to digital expansion, I think that -- well, not only, I think, what we have been investing this year in the development of our call centers all around the world, in the different continents, is showing that we remain very active into creating this new route to client, more imprint than ever where direct contact with people from our Maisons in brick-and-mortar or through the phone is important or more system sales throughout all what have been built recently and will be further built with Farfetch for the future. So here, I would tend to say that we remain quite equal and quite balanced in the approach, but we do believe 100% that it's very strategic and crucial to keep investing in the new [indiscernible].

Yes. And if I might add to that. I think it's also just a market or a customer reality today that we're still a bit in a reopening phase, and we spoke about Japan, once you're able to serve your customers in your stores, you have very strong increase in stores, in store traffic and a, I'd say, normalization of traffic in your online stores. If you look at external reference points, the online distributors, they all have had a boom in the first 12, 18 months of COVID and have, in the last 12 months, seen a return to much lower growth rates. Usually, if you look at the revenue line, somewhere in the low to mid-single digits, which is the current growth rate of -- across most of the online distributors. So that means, yes, there is a trend back into stores. Obviously, we then have markets that are disrupted like China, where we see through rolling lockdowns where we see that online is actually getting stronger. So it's really that dynamic that is playing out. The nature of the retail store engagement with customers has changed a bit over the last 12, 18 months. We have many more appointments which actually drives the transformation into sales rate much higher because actually the customer treatment is enhanced. It's prepared, it's suited to the customers' needs. The product assortment is targeted. So customer has, let's say, remunerates that with a much higher transformation rate into sales. But the digital or the retail, you can look at it from 2 different perspectives. You can see it as separate distribution channels or you can see it as one distribution channel. And it doesn't really matter where the transaction happens. It is purely the customer's choice. And our way obligation or that's our conviction is that we have to build this multi-stakeholder ecosystem around the customer and then the customer chooses, at which given point in time he or she will transact in a physical store or in a digital store. We really see it as 1 channel.

Well, I think it now concludes our Q&A session. So thank you very much for your participation. We look forward to speaking to you very soon. And obviously, in the meantime, to read your analyst reports. Have a good day. Bye-bye.

Thank you.

Thank you.

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