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

Yes. On the U.S., now we've had quite a strong business in the U.S., but let me probably just give you a bit more background, right, on -- and in the U.S., it was driven by the by the Jewellery Maisons, to a lesser extent by the F&A Maisons, which were expanding at low-single digit in the U.S. And the Specialist Watchmakers were down at low-single digits, so kind of neutralizing this impact. So the story was really about the Jewellery Maisons in the U.S. Same thing here, as we've seen -- in general, across the quarter, we've seen a sequential acceleration, not only quarter after quarter in the U.S. So, as I said, the American consumer is plus 3%, plus 3% for the first 2 quarters, and then picked up this quarter to about plus 7%. For the Jewellery Maisons, it has been something comparable. In the quarter, we've had a sequential acceleration step by step, and we have shown a double-digit expansion for the Jewellery Maisons in the Americas. This one was pretty broad based, especially when we look at the Christmas business or the festive season business across the Maisons in the Americas, pretty much -- and this is Christmas, right? So we usually have more the iconic, highly identifiable, highly desirable product lines in watches and jewelry and that are in high demand, and that has pretty much worked across the spectrum. The High Jewellery business is important, but it adds to a Christmas business. It's not where we have the highest level of activity. Yes, we do have, for the festive season, High Jewellery deals that are then delivered in December. But remember, the big events we do usually when we launch the collections early summer in June, usually, right? So pretty much across the spectrum. And interesting to note that the Jewellery Maisons have all expanded double digit in almost all regions with the exception of Europe, where the business has been flat, which I take as an achievement, given the fact that a lot of American customers have repatriated their spend from Europe into the U.S. Once again, the U.S., today, the consumer is quite healthy, but the split of where that business with the American customer is taking place has changed quite massively throughout the year. The first quarter -- I think, I spoke about it already at the half year. The first quarter saw strong growth with American customers in Europe, whereas the second and the third has seen the American consumer pulling back spend out of Europe, double-digit up -- I mean, sorry, double-digit down, somewhere between 18% and 20% less spend in Europe, which has entirely been repatriated into the Americas. This obviously benefits the sales in the region. But what we also focus on is to spend with the American clientele. And there, we can see that the -- there has been -- and probably that goes in line with the economic news we have or the stock market performance in the U.S. We've had some enhanced feel-good factor in the U.S. that has definitely helped. Exit rates in the U.S. have been similar, not just for Jewellery Maisons, but in general, have been similar to the quarterly performance, so high-single digit.

And maybe, Burkhart, just on the mood of the Chinese clientele without going into details of product lines?

Yes. The mood of the Chinese clientele, I'm not -- we're not doing Psychology 101 here, right? But -- and I think we've spoken at length about it already throughout the year. There's macroeconomic problems, let's say, in China. We know about the real estate market, and the real estate market once again has gone lower in China. So that's not helpful. And we know that this will take years instead of months or quarters to figure out. That is certainly the nature of real estate challenges or crises. But in general, we've seen, against weaker comps, a strong performance, 42%. I'm not going to go into all the details, but mainland China was double-digit positive. Hong Kong and Macau, so this nearer broad cluster has grown throughout the quarter, depending on the months, somewhere between 60% and 80% and between 80% and 100% for Macau. So, that rebuild is still pretty much intact. Overall, mainland China, or let's say, this Greater China area, 25% up, and the Chinese cluster or the clientele up by over 40%. Business has -- or is still continuing to rebuild in Japan, but mid-teens now of Japanese business is with Chinese. That compares to north of 30% pre-COVID. So I would say the rebuild is probably halfway done. It still pretty much is in sync with what we said at the beginning of the year that will probably take 2 years to rebuild because in Europe or in the Middle East, we only see, I'd say, still more individual customers, not to a group yet. Chinese business in Europe is somewhere between 5% and 6% depending on the month. So they're there, but they're not there in the massive numbers that we've seen pre-COVID. And like we said and that also coincides with some of the data we see out of China that the first wave has seen -- or the first wave after the reopening has clearly seen that domestic tourism, and that includes Hong Kong and Macau, was the preferred route. In December or by the end of the calendar year, we've seen that -- looking at the statistics that domestic travel is back to 91% of pre-COVID level. So that probably has almost run its course. Hong Kong, Macau is still below pre-COVID, and outside of China or outside of mainland China, that is still rebuilding, as I just said.

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

We've had a lot of information, so I'll keep it brief. I wonder, Burkhart, if you can just talk about the overall regional aspect. I think back in November, there was the phrase of like a soft landing in the broader discussion. But when we think about the business today, you've highlighted the exit rates being a little bit more favorable during the period. But if we look at region by region, the U.S., you talked about the resilient economy and you've given us some color on that. Europe, I wondered if you could just give us a little bit of flavor. We've obviously had a lower profit, lower announcement from Watches of Switzerland this morning relating to weakness in the U.K. So I don't know if there's anything within Europe that you're seeing specifically. And then for Asia, thank you for the commentary so far. But I wondered if you could just touch on the mood across the retail partners just obviously ahead of the Chinese New Year.

Yes, Louise, let me try to give you a bit more granularity on how the markets have performed in Europe and also in Asia. It gives you a bit more granularity because there's a lot of moving pieces here. We published one number for Asia, 13%, right, growth for the quarter, but there's a lot of moving parts behind it. Starting with Europe, now, we were positively surprised, I would say, about the resilience of the European consumer because if you look around in some of the major economies, obviously, it's pretty dire sometimes what you see. You live in the U.K. So I think the general environment and optimism going into '24 is not so big. Germany, in recession. So we still see the same context, right, that until the ECB starts to lower rate, which is pushed out now, that we're probably going to go up and down month to the other with a bit of whipsawing in the first half of the calendar year, probably in our first half of our next fiscal year. And we see this really in the markets, Europe throughout the quarter, and we see that market by market, but we see that also when we look at the like-for-like performance. Europe, entering the quarter, probably saw the low point on both counts in October, has rebuilt in November and actually has, in most markets, turned into positive terrain, meaning back to growth, a.k.a. exit rates, right, in most of the major markets in Europe has turned positive. So, throughout the quarter, a sequential acceleration. I'd say France is still -- France and Germany are slightly -- if you look at exit rate, slightly below last year, whereas we see renewed growth in the U.K., Switzerland, Italy to name but those more important markets. And it has pretty much been the same pattern, dropping from September, October, a low point in October and then rebuild. Now, I think this is a pattern that we'll probably, as I said, see for the next 6 months, 9 months. But overall, it has been against the backdrop of a quite strong European consumer expansion. If you look at the quarters, we were 8% in the first quarter, 10% expansion in the second quarter. And then, in the third quarter, we went from 6 -- from 10% to about 6% expansion for the consumer. That is still, I think, quite a healthy expansion, given the economic backdrop. We'll have to monitor how that plays out. But I do see volatility both in the monthly and -- monthly numbers going forward, but also market-by-market deviating trends. Asia Pacific, something, I'd say, similar if -- but let's back out first the performance, let's say, of what we call the Greater China area, mainland, plus Hong Kong, plus Macau. Now here, we've had a very strong, obviously, first quarter, a more moderate expansion in the second, which was a double-digit expansion and a 25% reacceleration in the third quarter, admittedly against weaker comps. The piece in Hong Kong and Macau has pretty much been similar, triple-digit to high double-digit expansion between Q1, Q2 and Q3, same thing for Macau, and whereas mainland China, very strong expansion in the first quarter, high-single digit drop in the second quarter. Once again, that's where the big tourist outflow also started, and then double-digit, mid-teens expansion in the third quarter, so overall -- and with higher exit rates for mainland China for the quarter. So overall, I'd say the Chinese business, as I said before, is rebuilding. I don't know if it's according to plan because it's very difficult to plan in this environment, but we are quite content with the way it's rebuilding, knowing that we have growth potential or growth reserves with -- if we bank on a further expansion of the outbound international tourism business. If you look at the other markets in Asia Pacific, it's been, I would say, a mixed bag. You look at something closer to home for mainland Chinese, Taiwan, it's been, I'd say, a strong expansion in Q1, normalized around high-single digits in the second quarter and slightly negative in the third, nothing really to say about it. Taiwan is a market which is always difficult to read because it usually goes against the trends of the rest of the region, and no specific reason for that. Korea was pretty much flattish to [ low-single digit ] growth across the year and across the first 3 quarters with, however, a much higher exit rate, mid-teens exit rate in Korea for December. We'll have to check on that if that stays the same. The markets where we're challenged and is -- one of the major ones is Singapore. I've touched on that before. We see that there is local wealth effects linked to inflation and especially to exchange rate-driven price adjustments that we've done that applies to a certain extent to most of the dollar-linked currencies in Asia. And Singapore has suffered from that, has also suffered from an outflow of money that migrated there quite massively during COVID from Hong Kong. Australia, same thing, has been negative in the quarter. Probably the same reasoning here. Local pricing has -- or price increases by our brands have impacted the demand, but it's not dramatic at this stage, and we're monitoring that, obviously, going forward. Long answer, but I hope it gave you some color.

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

And just 2 questions for me. The main question, Burkhart, is, so looking at the better-than-expected Jewellery Maisons performance, to the extent you can tell, is it a function of the luxury sector demand being more resilient, demand for jewelry being more resilient? Are you guys accelerating your market share gain? So obviously, it's difficult to assess. It's a bit of both. But based on your market intelligence, which one would you say is the greatest factor of the 2? So I'd be really curious to have your view on that. And then, just -- sorry, just a small clarification on the exit rate, if you're not too tired to talk about it. But you mentioned that December was better than the rest of the quarter. By any chance was the comp base getting a bit easier? Or if you look at kind of an underlying 2-year tack, there is also an acceleration?

Yes. No, the comp base is getting better for sure. But in December, we had double-digit expense in the constant rates, so we're talking absolute numbers that have significantly increased, right, so the absolute volume of the business, and that's why -- and we're not really wanting to brag, but we said EUR 5.6 billion in this quarter is in terms of absolute business volume is the highest volume we've ever had or value we've ever had in any given quarter. So there is not just a question of weakening comps and thus strengthened growth rates in this quarter, but it's also the absolute value and volume of the business has expanded. Now, coming back to your first question, I think what we've seen over the last few years clearly emerging as a trend is that, in a way, brand equity or individual brand equity trumps, no pun intended here, trumps, I'd say, sector attractivity in the sense that, yes, Jewellery Maisons or jewelry business in itself is an attractive segment to be in or to go into, and that's what we've seen a lot of competitors doing. And I think it has many reasons behind it. But one of the big reasons is that it is a product category that is inherently attractive for, I'd say, across generations, including, and that has been, I'd say, quite impressively proven for younger generation, Gen Zs because millennials, we don't even talk about anymore as -- which constitute the biggest part of our business by now. But within the sector or the segment, I think brand equity makes big difference today, probably as well has helped us because in times of, let's say, economic uncertainty -- and I'm not saying that times are bad, but it's at least an economic uncertainty with an outlook, at least when you read in the newspapers, everybody is talking about more difficult, more challenging or more volatile times ahead. It helps to be highly recognized and highly respected jewelry brand through the power of its iconic product lines. And this reassures customers not just in jewelry, but also in watches, if we look at the Cartier watch business and watch performance there. So I'd say, it's primarily driven by brand equity. And we see a clear clustering now. Our jewelry brands have all performed very strongly. The watch brands with the strongest brand equity, they have outperformed the rest of the crowd, and we see it everywhere. And I think our peers see it as well in -- with their strong hero brands or mega brands in their own space. So, I think brand equity makes a difference.

So the brand equity leading to secular market share trends is still there. But again, based on your market intelligence, if you look at recent quarters, would it be fair to say that you suspect that Cartier and Van Cleef have accelerated their market share gains? It seems that we're picking up in terms of our channel checks, but wanted to hear it from you. Would that be fair to say that in recent quarters?

Yes, except market share gains are difficult to gauge quarter by quarter. We're not a first moving consumer goods, but in general trends, I would say so. But there's 2 moving pieces here, right? One is against the competition and one is, let's say, branded versus unbranded. So I think probably on both counts, yes.

Our next question comes from the line of Jon Cox, Kepler Cheuvreux.

A couple of questions for you. A bit of an early New Year's surprise, positive surprise. I'm amazed at how positive your commentary is, Burkhart. If you look at consensus at the moment, for the next quarter, people are pretty much flat, probably constant currency. You're talking about exit rates being better. And I know the comps start to get a bit difficult. But just based on what you're saying today, it seems that you probably do a little bit better than flat for the final quarter of the year. That's the first question. I'll see how that goes. And people haven't really been talking about the YNAP. Just wondering if you can just give us a bit of detail on any further write-downs on that. Your net cash position actually looked a little bit worse than I'm expecting. I wonder if there's some sort of outflows there related to what's happening with YNAP. And then, you talk about you're looking for somebody else to take it over. Just wondering where you are on that, any time frame? How much is the cash burn likely to be for the next couple of quarters? Because obviously, it will be on your books for at least the next few quarters.

Yes. We're positive looking back onto the quarterly performance. And, yes, positive exit rates. So I'd say we take out of this a bit of a positive momentum because our business and our business leaders, they hear a lot of bad news, and it's always good to have kind of the positive momentum we established through positive news throughout the quarter. And like I said, it has been an acceleration. The entry into the quarter was more challenging. Now, does that mean -- and I know that many people are looking desperately for kind of a sign that, hey, the industry has turned the corner. I take a bit of a different view on that. It's not about turning a quarter. I still think -- and if we put away all the projections and we put away all the invested money into our stocks and our shares, we are in an industry that has underlying and over the very, very long term, already proven that they grow and can consistently grow as an industry, and the projections -- positive projections are still there going forward. And you can discuss, but for us, the growth rate has been, over the very long term, sort of 2x global GDP expansion, right? So that brings us to CAGR growth over the long period, probably the last 20 years around -- to around 8% or so. So I'd say that is a positive underlying fundamental. Secondly, we are in a business, in a jewelry business that has, and I've spoken about it before, high protective moats around it. Investments, if you want to go and excel in that business, are quite high and continuous, and significant investments have to go into the business. But if you execute well, your cash back, meaning the cash you generate is quite high. But you have to be willing to consistently invest also high amounts of money into this business. Watches is the same, but probably has a lower underlying growth rate to be expected. Now, right now, we are at a point where we have a few things that concern investors but that also concern ourselves. One is we've had, across the industry, not necessarily for Richemont, but across the industry, we've had a huge hope that when other markets, probably the Western markets start to weaken or to normalize after quite an explosive growth in Europe and in the Americas over the last 4-year cycle, that China will ride to the rescue. And that still is the case, and that still is our assumption in a way, but we've taken a much more subdued view that this would take probably the better part of 2 years to rebuild. And it's not going to be a massive rebound as we've seen in 2021 -- calendar 2021. So we're not -- we've been quite sober about that. And today, at least, this is what we still believe and what we see building or rebuilding. Secondly, the strength of the American consumer and to a lesser extent, the strength of the European consumer is still there, which comes as a surprise for many observers, right, but same thing. Yesterday, in the U.S., you saw the published retail sales, which were beyond expectations, which kind of pushed back the Fed's interest rate lowering scenario by another few months probably. So we're picking up some positive undertones and undercurrents here. Yet we're not unaware that the next -- the fourth quarter has challenging comparatives. I don't want to overstate the case, but I don't want to be highly pessimistic either. We just simply don't know at this stage. It's highly volatile, too many moving parts to be at this stage able to reliably predict any given outcome at the end of the year. I'm not saying we're without visibility, but what I'm saying is we have a very short-term visibility. And I can tell you what I see is that we've taken a positive momentum into the last quarter of the year. We'll see what happens. That's all I can say at this stage. And then, I think the rhetoric that is coming up saying that 2024 will be a year of 2 halves, which, by definition, is always the case, but I think it makes sense that the first 6 months, probably into somewhere or towards the end of summer, will be more challenging comparative to high volatilities there. And there's still a potential that in Europe, other countries slip, and there's still a potential that in the U.S., some accidents might happen. For the time being, it looks like a soft landing, but things can still happen. Whereas once the lowering cycle in Europe and in the U.S. gets underway, we should see more positive news coming out of it. So we have more, I'd say, subdued optimism, which is linked to the strength and the confirmed strength of our brands or the brand equity that drives sales so that we are confident in general about the strength of our strong results that will see us through. The rest is really today very challenging, very difficult to fathom.

And YNAP?

So, that was a long-winded answer on question one. On YNAP, I can be -- I can probably a bit more sharp. So pretty much what we said or what we wrote is what we're doing. So we're looking and we're preparing the process to identify a future majority shareholder or a majority can go up to 100% for YNAP. That process has kicked off. How long will it take? Don't know. We see interest unsolicited today from a number of places, but we can update once we're further down the road -- just to give you an indication, held for sale means you see a reasonable -- or management sees a reasonable chance that the asset will be sold within 12 months, right? That's from an IFRS perspective, one of the criteria to be able to classify that's held for sale. Cash generation, you mentioned that, nothing to say on -- nothing linked to YNAP. We've -- once again, this is a normal process. So we do that with the entities or the businesses that need it. We have recapitalized YNAP during the fourth quarter, but that is all internal. So it doesn't really make a big difference. Nothing to report on the cash side with regards to YNAP. Going forward, what's the cash burn? I have a general idea, but I can't comment on that at this stage because that would mean that I've taken a firm view on how the business development will be.

Our last question for today comes from the line of Rogerio Fujimori with Stifel.

I have actually just one question. I think in your prepared remarks, you called out Vacheron and Fauna outperforming, I think, Specialist Watchmakers. So when you look at your DTC business, are there any thoughts you could share with us in terms of consumer behavior across price points when you look at the sellout date of Baume or Montblanc watches for the Maisons versus Vacheron, for example, at the top of the pyramid in terms of resilience? I think you referred to the strongest brand equity as a differentiating factor. But I was just wondering if your exposure to high-net-worth individual clients is helping you at this stage of the cycle with brands like Van Cleef, Vacheron, Cartier, et cetera.

Let me just try to address the high-net-worth individual question. We are -- and I -- yes, of course, we benefit from high-net-worth individuals. And I think we see in some brands in the soft luxury spectrum, this trend, and we can also see it at -- or through YNAP that the high-net-worth individuals or the VVIP customers, however you want to call them, they take probably more share over time. But if we look at Cartier, we look at Van Cleef for argument's sake, and the volume they sell, the biggest part of that volume is decidedly, let's say, for middle-class customers, if you look at the average price points, let's say, somewhere between [ 5 and 10 ] for watches, not for Van Cleef, but -- and probably [ 10 to 20 ] in jewelry or [ 5 to 20 ] in jewelry. This is more driven by -- if you look at the volume impact, by more middle-class customers than always the high-net-worth individuals. If you look at the watch space, I would try to put it like in a quadrant model, if you want to, in the sense that you have 2 axes. One is price points and the other is basically positioning of the Maison, and I must say also positioning of the Maisons in their own space as compared to positioning of a Maison with a product lineup in a more contested space. If you look at some of our brands that are positioned in the more sporty, more steel segment such as IWC, such as Panerai, such as parts of the Montblanc lineup, but also such as Omega, Rolex, Breitling, this is a more contested space, right, in general, because the sporty, more steel watch -- part of the watch segment is quite important, and that is where a big battle is playing out in a way and that is where you have more competitive pressure. So it's -- and on the other hand, yes, you have lower price points and you have higher price points. And interesting enough, depending on where you position your business, we are more on the very high end of the -- or the higher end of the watch market. If you look at the watch exports, we're always in the upper part. That has performed very well. But what has happened is the very low entry price segment, which is where Swatch and many other brands are positioned, has also expanded recently. That's not where we are present or only with a marginal presence. So our price points are more skewed to the upside, somewhere between, let's say, [ entry 3,000 ] up to you name it. And there, definitely, our exposure to the higher price points has helped us. But I'd say price points higher -- or in general, on average, higher than the rest of the industry has helped us for sure. But then again, you have the very contested space where Rolex is dominating and where some of our brands and some of the Swatch brands are positioned where it's much more contested. So try to look at the business a bit like that and try to read it like that with the insight you get from your own sources.

Well, thank you all. I think this concludes our third quarter sales presentation. And should you have any more questions, obviously, James and I are happy to take them afterwards. So, wishing you a very good end of the day. Bye-bye.

Thank you very much.

Ladies and gentlemen, the conference is now over. Thank you for participating. You may now disconnect. Goodbye.