Hermès International Société en commandite par actions (RMS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 2024 first half financial results. I'm now going to hand over the floor to Mr. Axel Dumas, Executive Chairman of Hermès International; and Mr. Eric du Halgouët, Executive VP for Finance. Gentlemen, over to you.

Good evening, everyone. Thank you very much for joining us for the publication of our 2024 first half results, which take place just before the opening ceremony of the Olympics. I'm very happy today to share the robust H1 results with you against a more complex global economic and political backdrop. In H1, we have continued our strategic investment in production capacity, in our network and also secured our supply chain. We've beefed up our teams, we currently have 23,200 people working for Hermès, 62% of which in France. Hermès carried on with its D&I initiatives, and currently, we have 7.12% of disabled employees, above the legal requirements. These H1 results capture the loyalty of our customers all around the world as well as the strength of our artisanal model and vertical integration and a strong local anchoring, unique know-how, boundless creativity, and exceptional materials. Our model relies on the commitment and enthusiasm of our teams, which I would like to thank today. Now let's take a look at the highlights. H1 was marked by the creations of Pierre-Alexis Dumas team across our 16 categories. For example, in small leather goods, on top of the classics, new products have come along like the Della Cavalleria Élan item, new travel items, the new RMS cargo suitcase. The men and women Ready-to-Wear were very well received all around the world with the show that took place for the women's Ready-to-Wear in New York. And the furniture was also very successful at the Salone del Mobile show in Milan and the Watches and Wonders Geneva show. In April, Hermès unveiled the Hermès Cut, a dynamic sporty piece with its proprietary movement. And then we have the fine jewelry collection, the eighth Les formes de la couleur designed by Pierre Hardy and revealed at the end of June, and you have a picture of it on the screen. We carry on with our production capacity investments across all our divisions. We have 4 small leather goods workshop projects for the next 4 years. For example, that of Riom in Puy-de-Dôme which will open in September after renovating and repurposing the listed buildings. In this first semester, we also started the construction of the L’'Isle-d'Espagnac leather workshop and Loupes Gironde at the end of May. They will be opening respectively, in '25 and '26. We've ramped up our production activity in the other divisions with, for example, the Hermès Manufacture de Métaux unit. They make metal and hardware items, but we've also increased investments in perfumes and tableware. We continue to work at securing our supply chain with our long-standing partners. To support its growth, the group pursues its investment in real estate, logistics, and IT. Moving on now to our distribution network. We have extended our network with new stores under our multi-local approach to bring our collections directly to our clients. For example, at Princeton in the U.S. in New Jersey and in Asia with a new opening in Wuxi in China and 2 openings in Japan. And in France, we also have Nantes and Beijing and Hong Kong Lee Gardens, which have been renovated and extended. Hermès is also very creative in its communication. During the first half of 2024, Hermès in the Making event allowed the general public to see firsthand our artisans at work and see their exceptional know-how in both Mexico and Korea, and that drew in more than 44,000 visitors. We're also very glad to see our horse and riding enthusiasts at the 14th edition of the Saut Hermès at Grand Palais Éphémère in Paris. Now let's take a look at our responsible strategy going forward. During the first half of 2024, the group remained true to its commitment as a responsible employer with an increased headcount by 1,200 people for the H1, including 600 in France. In keeping with our model, the group paid out in February a EUR 4,000 bonus to all employees for 2023 so as to share the fruits of growth with those who make it happen every day. In July, the employees received the second and final round of 12 shares under the Free Action Plan of 2019. And I remind you that the new employee plan was announced last year. Hermès continues to act responsibly when it comes to climate change to protecting biodiversity and natural resources. Our real estate charter is particularly stringent and is applied from the design stage and the construction stage of our new sites, which allow us to reduce significantly our CO2 emissions. Our production sites are also places of training. The École Hermès des Savoir-Faire, for example, was rolled out in Franche-Comté and this place trains saddle-makers, leather good artisans, and cutters. We remain committed to our involvement in the local area where we operate with a special focus on our environmental impact. We also abide by our Science-Based Target for Nature approach. We're currently at the third step of the project where we set science-based objectives in areas such as biodiversity, fresh water, forestry, and soils. Hermès is one of the leading companies undertaking this initiative. In conclusion, Hermès' progress in nonfinancial ratings continues to increase this year and captures our commitments. By way of example, our Moody ESG rating, which is up, and we also received Grand Prix Toutes prize of the transparency awards to reward the quality and transparency of our regulated information. Let's now take a look at our business. At the end of June 2024, Hermès posted a solid performance. At the end of June, the turnover stood at EUR 7.5 billion, up 15% at constant exchange rate, driven by our loyal and new customer base. All regions recorded double-digit growth and the division recorded good progress in a more complex environment. In Q2, sales reached EUR 3.7 billion, up 13% at constant exchange rate. In this more complex environment, all the regions continued with the incredible momentum. Now let's take a look at a geographical breakdown. In the first half of 2024, all the regions recorded double-digit growth. Sales in France were up 15%, and Europe bar France, plus 18%, were particularly robust, thanks to the loyalty of our local customers and the dynamic tourism. Japan plus -- sorry, Japan plus 22%, driven by its loyal customer base. And Asia excluding Japan is growing at plus 10%. And this growth in all the regions -- in all the countries of the region despite the high comparison point in Q2 last year. America plus 13%, with a strong progress in the U.S. And for the other line, that covers the activities in retail sales in Dubai and Abu Dhabi who were previously labeled as wholesale. And the geographical breakdown remains stable year-on-year. Now let's take a look at the division breakdown. End of June, all sectors are growing steadily despite increasing changes. Leather goods and saddlery enjoyed remarkable growth, driven by increased production capacities and sustained demand. Ready-to-Wear and Accessories plus 15% held its positive course with the success of its Ready-to-Wear collections and footwear. Silk and textiles, plus 1%, has sustained growth, thanks to the diversity of creations materials and sizes formats. The perfume and beauty sector is on the rise, supported by latest launches such as Oud Alezan and H24 Herbes Vives. The watches sectors remain stable. And finally, the other Hermès products, including jewelry and homeware, plus 19%, continue to grow strong. Strong growth in leather goods and Ready-to-Wear and Accessories explains the change in distribution of sales per sector for H1 2024. I give now the floor to Eric du Halgouët, Executive VP, Finance, for the financial results.

Thank you, Axel. Welcome, and I have the pleasure of presenting our solid H1 performance. Our revenue exceeded EUR 7.5 billion despite the negative impact to EUR 100 million of exchange rates mainly due to the depreciation of Japanese yen and the Chinese yuan vis-à-vis the euro. The gross margin rate is 70.6%. It was 72.2% in H1 '23. The 2023 H1 rate was exceptionally high due to the combined positive impact of currency hedges, leverage effect of production fixed costs and excellent sell-through. The H1 2024 gross margin rate is negatively impacted, and we forecast this by currency hedges and this will accelerate in H2 2024. Indeed, the impact was offset during H1 by the sale of products bought in 2023 by our distribution subsidiaries at favorable rates. We spent EUR 272 million in communications, a 5% increase year-on-year. And full year, we expect communication expenses to amount to EUR 650 million with more spending planned for H2. Other administrative costs and cost of sales have grown slightly faster than revenue and stand at EUR 1.4 billion. The group has reinforced its sales teams and support functions and is now accelerating its IT projects. Those costs are mainly accounted for as expenses as per the current accounting standards. The other products and expenses, EUR 467 million, are mainly amortization of tangible and intangible assets and amortization of IP. The year-on-year increase is primarily linked to the cost of the free shares granted to all employees in June 2023. The recurring operating income for H1 2024, therefore, stands at EUR 3.1 billion, plus 7% compared to H1 2023. The recurring operational profitability amounts to 42% of sales. That's close to the level in 2022. Our net financial income stands at EUR 141 million. That includes the cost of currency hedges and interest on lease debt as well as financial proceeds. The EUR 70 million increase compared to H1 2023 arises mainly from improved net cash income, EUR 220 million for H1 2024. Our H1 tax rate is 28%. That's a level expected for full year 2024. Net income from associates dropped from EUR 43 million H1 2023 to EUR 16 million, H1 2024 due to the consolidation and full integration of our UAE activities. Net income group share is touch short of EUR 2.4 billion. That's a 6% increase compared to H1 2023. Our net profitability is nearing 32%, not far off our H1 2023 record level. The group continues going from strength to strength. Revenue doubled and net income tripled between 2019 and 2023. Despite the COVID crisis in 2020, our average annual growth rate for revenue and net income for the past decade stand at 15% and 19%, respectively. The group invested EUR 319 million in H1 2024 compared to EUR 250 million last year. EUR 133 million funded renovation work and expansion of our distribution network, mainly in China, the U.S., and Europe with the new store coming soon on New Bond street in London. EUR 91 million were invested in production capacities with new leather workshops in Riom, Loupes and L’'Isle-d’'Espagnac as well as upstream capacities for silk, metal hardware, and perfumes. EUR 94 million go to digital, IS, and real estate investments to support the growth of our sectors. Operating investments will accelerate during H2 to reach a total amount of EUR 1 billion compared to EUR 860 million in 2023. Our operating cash flow grew 8% year-on-year, more or less at the same pace as the operating income reaching EUR 2.8 billion. The change in working capital requirement reflects EUR 600 million of cash consumed similarly to H1 2023. This is mainly due to increased stocks. After operating investments and repayment of lease liabilities, our adjusted available cash flow stands at EUR 1.8 billion. Financial investments include the payment of our majority stake in retail activities in the UAE and minority stakes to increase our vertical integration. Dividends were paid to the amount of EUR 2.6 billion. Hermès International did not repurchase any shares apart from the liquidity contract operations. As a result, our restated net cash position stands at EUR 10 billion on June 30, 2024. Our cash flow makes up more than 45% of our total assets. Our equity stands at EUR 15 billion, representing 75% of our liabilities. At the end of H1 2024, the group has consolidated its sound financial structure, therefore bolstering its independence and providing strong assurances for its long-term strategy. Thank you for your attention, and I now give the floor back to Axel to talk about the future.

Thank you, Eric. Let's now look at the Hermès outlook. Our future remains unchanged. 2024 is a year marked by economic and geopolitical challenges, but we are confidently forging ahead. And we're keeping up the momentum with the unfading enthusiasm of our staff around the world. H2 remains uncertain but Hermès will continue creating jobs and investing in all its divisions. We will inaugurate the Riom Leather Workshop, adding a second site to the hub and expand our stores in Atlanta, U.S., Shenzhen, China and Lille, France. H2 will also see the launch of early fall of a new women's fragrance. Hermès is mindful of its footprint and we remain committed to our climate goals and natural resource preservation goals. By way of conclusion, I'd like to wholeheartedly thank our teams and clients for their loyalty the world over. We're now available to answer your questions.

[Operator Instructions] The first question comes from Aubin, Edouard from Morgan Stanley.

I have 2 questions about revenue growth. One first question about leather goods. There's been a strong growth of H1 is beyond your guidance, which was 15%. Is the annual guidance maintained at 15%? We also see an increased number of days of stock. I believe it's 250. And will there be an increase, therefore, for full year as stocks in leather goods? So in parallel to the growth of leather goods, there seems to be a slowing of the pace of growth of other sectors such as watches that, for the first time in a long time, has seen its growth dwindle. Could you maybe provide some explanations?

Do you want to answer about leather goods?

Well, to answer on leather goods, we confirm our guidance for full year at around 15%, 16% with a price effect of around 6% to 8% and a capacity effect around 6%. With the Chinese New Year, we saw accelerated growth during H1. The increase in stocks is not linked to leather goods. We have more stocks for other products from other divisions, and I'll let Axel comment on that and explain what happened for the other métier, for the other sectors.

Thank you, Eric. Indeed, we wanted to replenish our stocks. This was a deliberate activity. With low stocks, we can't cater as well to our customers. And so that we have aspirational customers, but the number of aspirational customers has dropped. We have our legacy customers, of course. We see new customers come in also, but it's the high-volume activities that see their stocks remain high, so silk and textile and fashion accessories. As for watches, you have, on the one hand side, manufacturing and movements, complications and other watches that have a broader market. And we've seen a diverging performance. And for the luxury, well, jewelry is doing very well whereas watches, not quite as much. And this is true for watches in all companies. But I'm confident that Hermès Cut will set the trend for watches, and we can hope for improved performance.

Next question from Luca Solca from Bernstein.

I had a question about consumption trends depending on countries. You talked about China and the fact they're increasing sales in Japan. Could you explain this more? You have close contact with these customers, and so it would be interesting to have your input. Also, as reading in La Tribune, the Swiss publication that Mr. Puech may have lost 6.2% of his shares. Apparently, those shares may have been stolen. Maybe you could provide us with more information. I'm not quite sure about that information.

I'll answer the corporate question before answering the family question. So you've mainly given the answer in your question. Indeed, we have very locally-based customers. And in Japan, we have a very local customer base and not many tourists buying Hermès in Japan. And the Chinese tend to buy in China. There are a lot of tourist sales in Europe, including in France, where these are mainly customers from China, the Middle East and, to a certain extent, the U.S. So that gives you an idea of where our customers are from. As for Nicolas Puech, as you may know, since 2016, we no longer publish Nicolas Puech's shares in our partner share figures because we cannot control and have no oversight on those shares.

Duverger Adrien, Goldman Sachs, the floor is yours.

My first question is on China. So we've seen a lot of other companies in the luxury industry that has seen a slowdown. Have you noticed any changes in the behaviors of Chinese consumers? Are they not buying luxury goods as much as before? Or are they buying different types or kinds of luxury goods? And for my second question, in your 2023 results, I remember that the margin was a bit bigger in Asia Pacific compared to Japan. So I imagine that there are bigger margins to be made in China. Do you think that this might have had an impact on your margins for H1 2024?

Okay. First things first, for our clients in China, as far as I'm concerned, it's the continuity of the transformation that started in 2010. People are not buying based on how much they earn from their income but based on their wealth. And therefore, it's very much pegged to the real estate market. And we can see that there is less appetite for buying luxury goods and people are saving money more than spending money in China. So there is a drop in the footfall of especially aspirational clients, which are particularly hard hit. Now it's true that the stock exchange and the real estate has a huge impact on our Chinese clients. Now our Chinese clients are also extremely sophisticated. They learn very quickly. And from what I understand, they are currently looking for high-quality products, which is good for us. They don't necessarily want a logo to be affixed to what they buy. And so there is this change which we believe is underway and is a positive for us. And then I'll hand over to Eric. For your second question, you do surprise me because we don't give any margins with a regional breakdown or a country breakdown. So I'm not sure how we can make these comparisons, rather how you can make these comparisons. Maybe Eric can give you some information.

Well, there's one answer that we can share is that the drop of the share of China is very, very small in H1. It's not significant in any way. And then the drop that you can also see is down to the fact that we had nearly no more stock and we had to replenish them. And then secondly, there was the currency impact, which was very unfavorable in 2024 compared to '23. And as I said earlier, in H1, we had a higher sell-through of our products in the network with coverage levels which were -- sorry, hedging levels which are very high. This impact is going to disappear for H2 since we will have the full year effect of this coverage or hedge effect at the end of the year. And still on profitability in Asia, there's also Hong Kong where there's no VAT, but they are very small when it comes to the group's total revenue.

Next question from Thomas Chauvet from Citi.

Two quick questions. First of all, Eric, could you tell us a bit more about the drop in the gross margin? And could you tell us also about the product mix? Because I believe in H2, it should be less favorable since you're planning for a strong slowdown in leather in H2. Second question now on consumer behaviors and on tourism and the strong demand in Japan that is both local and driven by tourism. What are you -- how are you looking at this situation with the Japanese currency, which is seeing its value going down? Are you going to increase prices or change your price policy in Japan at all to factor in this drop in the value of the Japanese currency? And to which extent do you think that local customers in Japan will be affected?

Well, the gross margin drop is mainly down to the currency effect. And the second reason is our sell-through rate, which was a record -- at a record high in 2023 and which dropped slightly in H1, especially in Greater China with the drop in footfall in stores in China. Now regarding the Japanese yen, we continue with our strategy of increasing prices at the beginning of the year and leaving it at that. We had a 2-digit increase at the beginning of 2024. Now for 2025, we are going to assume that the yen is going to increase its value. So that's essentially what we are expecting for next year. We are expecting for the trend to change for 2025.

And now questions in English. The next question is from Melania Grippo, BNP Paribas.

This is Melania Grippo from BNP Paribas. I have got 2 questions. The first one is on the U.S. Your growth in the Americas continues to remain very strong, double-digit also in Q2. Could you please tell us how you see the environment there and if you have seen any meaningful changes also at the beginning of this new quarter? And my second question is actually if you could please remind us your CapEx and tax rate guidance for 2024.

Yes. Well, in the U.S., yes, the situation is quite good actually. And it's -- on top of it, we had the historical comparable are quite high. So it's a great surprise to see the dynamics of the U.S. market lately. I think the U.S., there's very -- difficult to give you a very directional point of view on the U.S. because you've got really the West Coast, which has a very different dynamic than the East Coast. Florida by itself is now a great hub for business, and we have the Central, especially Texas, which is another hub where... And I will say every week, there is a different thing in a hub and another one in the rest. So it's quite difficult to see a directional there. What we see is there is a great dynamic in the market. We were able to have plus 13% in the first quarter, plus 13% in the second quarter. And we see quite a good attraction of our brand in the market. In a way, I believe and probably the same in finance, when there is a tougher time, there is a flight to quality syndrome. And I think we are benefiting in the U.S. to this flight to quality sentiment from our client.