Watches of Switzerland Group PLC (WOSG) Earnings Call Transcript & Summary

Good morning, everyone. Welcome, and thank you for joining our webcast and call on the results of the Watches Switzerland Group for the half year to October 2022. Our agenda for the presentation is as follows: I will present an overview of the group's performance and results. Philippa Jackson, our new Executive Director of HR will then provide an update on the progress of the Exenia client experience program, which is helping follow up differentiate our proposition with clients and supporting our growth plans. Kesah Trowell, Head of ESG, will run through our ESG program and the areas we are focusing on within our business to ensure we make a positive difference. Ruth Benford, Executive Director of Marketing, will present an update on the status and activities of the Watches of Switzerland Group Foundation; Craig Bolton, President of U.K. and Europe, will then take you through our U.K. and Europe showroom projects; David Hurley, President of North America and Deputy CEO, will provide a similar update on our U.S. showroom projects; and Will Floyd, our CFO, will then present the financials. Then it will be back to me for a summary following which we will open the lines for Q&A. We are very pleased with our strong first-half performance with the ongoing market share gains in both the U.K. and the U.S. Our U.K. and U.S. businesses achieved strong growth, resulting in group revenue growth of 31% at reported rates and 23% at constant currency. EBIT of $87 million was plus 29%, achieving an EBIT margin of 11.3%, which was down 20 bps versus last year, but that was due to the GBP 5 million prior year benefit on the business rates holiday. Return on capital employed, 27.6%, up 450 bps versus the prior year comparator. In terms of showroom openings and refurbishments, we were extremely busy opening 20 showrooms in the half with Battersea being a standard project. We have successfully launched our business in Europe with trading in line with expectations. We continue to attract and retain the best talent in the industry, and we now have over 2,800 colleagues who are doing a fantastic job with an engagement score from those colleagues of 86%. As at the end of the half year, our group has contributed cumulatively now GBP 4.5 million to the Watch Switzerland Group Foundation and the trustees of the foundation have now donated GBP 2.7 million to our chosen charity partners. The holiday season is now fully underway with Q3 trading in line with expectations. In this chart, we show our calculated total addressable market based on the estimated retail equivalent of Switz watch export values. The market value, as you can see in the graph on the right, clearly reduces in 2020 due to the impact of COVID watch factory closures in Switzerland and then recovers in 2021 and on an LTM basis is now approximately 10% ahead of pre-COVID 2019. Of the term of $23 billion, the largest market is Europe, 23%, then U.S. 17 and the U.K. 7%, all markets that we serve. Our unique model is proven on driving sales and market share gains in all target markets. The luxury concierge team in the U.K. has now grown to 35, and the team are delivering great client service and super-high conversion. We are growing our luxury concierge team in Fort Lauderdale to support our growing U.S. online business. CRM and focused client reach out is our key marketing strategy. We continue to upgrade our leading online businesses. SAP is at the core of our ERP and POS systems. We are driving awareness and direct store and online traffic with impactful marketing. And our Exenia program has taken client experience to another level. Looking at the sales trends in more detail. The rapid growth of our U.S. business means that the U.S. sales in the half are now 41% of the group sales compared to last year of 29% in FY '19 total year of 24% underlying the continued momentum we are delivering in what is a growing market. Our sales in the half were 96% to domestic clients in the U.K. and U.S. compared to 67% in fiscal year '19, which coupled with our track record of strong sales growth underscores the strength and resilience of our category as the supply/demand dynamics meant that we were able to successfully shift our client base towards greater domestic sales as tourism dropped off during the pandemic. Luxury watches represented 87% of sales in the half and our top 8 luxury watch brands represented 78% of sales, underlying a diversified portfolio of world-class luxury brands we retail. I'll now hand over to Philippa.

Thank you, Brian. Good morning. I'm Philippa Jackson, Executive Director, HR, and I would like to update you on our elevated client experience program, Xenia, which we have launched across all of our showrooms. -- exceptional client experience through welcoming and expert service is at the heart of everything that we do and is one of the things that sets us apart. 12 months ago, we made the decision to become involved with the Ritz Carlton to establish our benchmark for luxury service. Looking back, this was a pivotal moment in our decision-making to take the benefits of 5-Star hospitality and to bring them to showroom level, and what better partner than the Ritz-Carlton, who bring the gold standard of hospitality as well as awards and accolades from well-respected institutions such as J.D. Power. We work closely with Antonio Hock, who was universally recognized as a worldwide expert in luxury. And it's worth noting that non-other than Steve Jobs chose the Ritz-Carlton to partner with to design client experience in Apple stores. From there, we launched our Xenia program through impressive and orchestrated global events and conferences, which many of our colleagues participated in. This set the bar high early and effectively brought to life our vision. We created great training programs and embedded the senior standards in our everyday practices. Excellence has become our day job, and we are seeing the benefit of this in our results as we measure what is happening in our showrooms through our KPIs. Let's look at these results in more detail. Our client consultation score has shot up from 65% to 95%. The first impression metric has moved from 71 to 94. And if we look more closely at our mystery shop scores, our WOW pillar is at 82%. Walk-in fact-finding and welcome is now at 93%. And finally, a metric which confirms the dedication of our colleagues is our expertise, control, and passion, and this is now being delivered at up to 95% of occasions. There is a lot to be proud of in these scores, but we are not complacent or standing still. We have plans to further deepen Xenia as we continue to drive excellence and consistency across our group. I will now hand you over to Kesah.

Thanks, Philippa. First of all, I'd like to introduce myself. I'm Kesah Trowell, Head of ESG, and I'm going to give you a brief update about our recent ESG initiatives. Sustainability is at the core of our corporate strategy and brought to life through our purpose to WOW clients while caring for our colleagues, our communities and our planet. Our priorities are to collaborate with stakeholders to ensure the highest level of environmental stewardship across all of our activities to minimize our greenhouse gas and waste footprint and to embed circularity into our business model and celebrate it in our product range. 2022 has been a foundation year as we disclosed our full value chain emissions for the first time. We've set near-term emissions reduction targets in line with what climate science says is necessary to limit global warming to 1.5 degrees, and we've submitted them to the SBTI for validation. We continue to develop our climate transition plans and implement carbon reduction initiatives, and we're monitoring our progress through participation in external benchmarking and indices, including reporting through the CDP questionnaire on climate change for the first time. Well-made mechanical timepieces can be passed down for generations, traded in, or resold. Most can be repaired indefinitely and many materials in the manufacturing process are recyclable. And yet, the luxury watch industry continues to innovate with a focus on responsible sourcing, circular design, production, and packaging. So as well as actively promoting eco-friendly and socially responsible advancements, we're introducing exciting new brands such as ID, a watch manufacturer with a production chain based entirely on sustainable development and the integration of materials with a lower carbon footprint. This includes groundbreaking biodegradable packaging from Notpla, a winner of this year's earth shop price. We continue to see strong growth in the sale of preowned watches and are increasing our repairs and servicing capacity. This includes a new 6,000-square-foot repairs and services center in Leicester, which is due to open in April 2023. This project alone will allow us to more than double the number of highly skilled and accredited watchmakers over the next 2 to 3 years, creating work opportunities and supporting a local economy while helping us to keep more watches at the highest utilization and value for as long as possible. Supplier engagement is fundamental to understanding the impact of the products we sell and the services we use as well as strengthening our resilience and achieving our sustainability goals. We are updating our supplier standards, leveraging the global supply chain management Ecovadis, and we've entered into a long-term partnership with the Slave-Free Alliance to raise awareness of exploitation and prevent risks in relation to human rights from occurring in our operation and supply chain. We remain absolutely committed to continuous improvement and transparency and the steady progress we're making right across ESG as we strive for best practice is reflected in our most recent rating agency scores. -- such as ISS, who last week gave us the highest available quality score for environmental disclosure, and we welcome our recent inclusion in the MSCI Index. And with that, I'm now going to hand over to Ruth Benford.

Thanks, Kesah. I am Ruth Benford, Executive Marketing Director for the Watches Switzerland Group and also trustee for the Watches of Switzerland Group Foundation. I'm pleased to say, as at the end of half 1, the company has made cumulative donations of GBP 4.5 million to the foundation. Out of that, we have currently allocated GBP 2.7 million to our charitable causes, which focuses on supporting those in need in the communities where we work in both the U.K. and the U.S. We have a fantastic Board of trustees who all work hard to support the foundation, including David Gandy, John Hanner, Terence Pare, Mayreportas and Jonathan Joseph as well as both Brian Duffy and myself and the company. In the U.S., we also have great support from our colleagues, Sharing Gold and Lori Nelson. We are pleased to consider some of our partnership with charities to be long-term strategic partnerships. And I wanted to highlight some of those today. We have developed partnerships with 5 food banks, including the support of a mobile pantry project in Newcastle, the creation of a regional distribution center in Leicester and the relocation of the Houston Food Bank -- the foundation also supports 6 city center hubs. And in total, we have donated 915,000 to support food banks in the U.K. We have also donated $375,000 to support food banks in the U.S., including feeding South Florida and Las Vegas and New York food banks. The Food Bank Foundation is another one of our strategic partners. And to date, we have donated GBP 500,000 to provide relief from crisis fuel property for those in need. We also work closely with the Princess trust, and we have donated 400,000 through the foundation. In the U.K., we have donated monies towards core education programs. And in the U.S., we are supporting that enterprise challenge program, a program for young people, which develops and encourages their entrepreneurial spirit. Another U.S. strategic partner is Habitat for Humanity, whose mission is to build strength, stability, and self-reliance through shelter. We have donated $294,000 to buy materials to support the building of houses with the remainder going to support housing affected by recent hurricanes. Our final strategic partner is Crisis, who we have made a GBP 300,000 donation to -- last December, we supported their Christmas campaign. And this year, we have supported the funding of clinical psychologists to help people on their journey out of homelessness. In terms of other charitable support through the Watches of Switzerland Group, we were also pleased to be the headline sponsors of the Princess Trust Palace to Palace bike ride, and we raised GBP 100,000 with 100 colleagues and brand partners riding. Our colleagues are also so keen to give back to our communities. And in total, our colleagues have given over 300 hours in volunteering. Overall, we believe that as a business becomes successful, it has a responsibility to make sure it gives back to those in need. And we are pleased and proud of the work we have achieved through the foundation to date. I will now hand you over to Craig Bolton.

Many thanks, Ruth. Good morning, everyone. My name is Craig Bolton. I'm the President for the U.K. and Europe, and I would like to update you on the significant showroom development program we have been executing here in the U.K. and also in Europe. Half 1 and fiscal year '23 has been a busy period for showroom development, both new developments and refurbishments. -- having opened 14 new showrooms and refurbished a total of 6 within the first 6 months. It has also been a busy period for us in developing a pipeline of major projects for FY '24 and beyond. The most significant development during half 1 was our opening in the iconic battery power station. The development has been years in completion and serves as a great shop in destination, coupled with amazing food and beverage in a fantastic historical set. We've opened in the mall with a flagship watches the Switzerland showroom anchored by Rolex and Cartier plus 4 mono-brand boutiques with our brand partners, Amiga, Brightline, Cuda, and Taco, all performing in line with our expectations. We have continued the rollout of our Goldsmith luxury design, recently completed our more significant development to date in Meadowhall Shopping Center, Sheffield. The images here show the extent of the transformation from what was our previous design to the new concept. The new showroom is anchored by a large Rolex branded room along with large branded areas for Cartier, IWC, Hubo, and Panera. This development also allowed us to open new mono-brand boutiques for Omega and Brightly within the same mill. The new Goldsmith concept is transforming how our clients experience our brand and products, which is supporting our revenue growth. We have continued the rollout into half 2 with Brent Cross and Cribs Courseware opening in November, and we will continue with further refurbishments in the balance of fiscal year '23 and fiscal year '24. The expansion of our U.K. mono-brand boutique division continued as well. In half 1, we opened 9 new boutiques, our latest being 2 new boutiques in Canary Wharf and our first Langen boutique in the U.K. opened in Glasgow late November. As previously announced, we have signed the lease and progressed the design work for our new role expert on all Bond Street. This will be a significant development for fiscal year '24 with a major focus on delivering a world-class retail client experience alongside delivering the very best in hospitality. In Europe, half 1 source opened 4 new mono-brand boutiques. In Copenhagen, we opened boutiques with Amega and Brightlin -- and in Stockholm, we opened 2 boutiques with Brightline, 1 on the High Street and 1 in the mala, Scandinavia. Most recently, on the 2nd of December, we opened our first Amica mono-brand boutique in the city of Stockholm and have recently signed a lease to open a new Tahoe boutique in the Mall of Scandinavia in 2023. I'm also pleased to announce our intention to enter the German market in fiscal year '24. We have built great teams in Copenhagen and Stockholm, and all boutiques are performing in line with expectations, and we are very pleased with our entry into these markets. The dynamics within the markets have been interesting, too. We are finding real brand enthusiasts in the market with a high propensity to become collectors. This is mirrored in the average selling price, where to date, it is some way ahead of our main markets in the U.K. and the U.S. The client feedback on our showrooms, service, team, and product selection has been extremely positive. I look forward to updating you further as we progress our expansion. Now I would like to hand over to my colleague, David Hurley in the U.S. Thank you.

Thanks, Craig, and good morning, everybody. I'm David Hurley, President of our North America business and Deputy CEO of the Watches of Switzerland group. So we opened our expanded May showroom in Boca Raton at the end of FY '22. Anchored by Rolex, we also feature shop-in-shops for Hublou, Omega, Ulises Nordam, Grand Seco and IWC. In Q2 this year, opposite that showroom, we also opened up boutiques for Brightline Tahoe. We've now renovated 8 of our master rooms with a further 6 to be renovated by 2025. Next up will be Datalink. Our American Dream showroom is on track to open end of Q4, adjacent to a new Gucci boutique and opposite Hermes. We're also delighted to be announcing today our third multi-brand showroom in New York at One Vanderbilt. Adjacent to the Grand Central Terminal, where over 750,000 people travel through every day. This 93-floor building is anchored at the top by the Summit experience, which is already proving to be a must-visit location for tourists visiting New York. The traffic to this showroom will be further boosted by the Long Island Railroad Grand Central Hub scheduled to open later this port. One Vanderbilt will be anchored by Cartland Omega, and we're planning to open the showroom in Q3 of next year. Lastly, we were delighted to host an exhibition of the GPHG award winners, commonly known as the watch Oscars at the start of December in our SoHo flagship. This video shows a little bit of what we did to promote the exit. [Presentation]

Thank you, David, and good morning, everyone. I am Will Floyd, CFO for the group, and I will now take you through the financials in what has been another strong period for the group. Starting with the financial KPIs. Revenue growth for the half was 31% on a reported basis and 23% on a constant currency basis. Across both geographies, growth was broad-based across the watch brands. In the U.S., the team delivered 60% growth on a constant currency basis and excluding acquisitions, it was 44%. And -- in the U.K., revenue growth was 8%. We are confident that we are continuing to take market share in both regions. Adjusted EBIT grew by 29% to GBP 87 million with a combination of strong sales and continued focus on the cost base, both contributing to the growth. Margin was down by 20 basis points because we lapped a year that had benefited from GBP 5 million of business rates relief in the U.K. That headwind to the year-on-year comparatives has now annualized I'm very pleased with the return on capital employed performance, which increased from 23.1% to 27.6% as we continue to deliver a strong payback from our capital investment program. I'll now take you through some of the other highlights on the income statement. This is presented on a pre-IFRS 16 basis and excludes exceptional items. The reconciliations to the statutory numbers are included in the RNS. Net margin for the half was in line with last year, reflecting a stable product mix. The 50 basis point reduction in adjusted EBITDA margin reflects the U.K. business rates relief in FY '22. On a consistent basis, FY '22 comparative would have been 13.3%.  Financing costs increased by GBP 0.5 million, reflecting the increase in interest rates during the year-to-date. The effective tax rate was 21.6%, exceeding the standard U.K. rate due to the mix of profitability coming from the U.S. In the full year, I expect the effective tax rate to be around 21.5% to 22% as profitability becomes more weighted to the U.S. We will also have the impact of 1 month of the U.K. corporation tax rate at 25%. So our blended U.K. corporation tax rate for the year is 19.5%. Adjusted EPS increased to GBP 27.8 , growth of 28%. -- moving to the balance sheet, which is presented here on an IFRS 16 basis. The key items of note are the increase in goodwill and intangibles, driven by the acquisition of the New Jersey store, the increase in PPE going from our ongoing showroom investment program, and the increase in right-of-use assets and lease liabilities due to the expansion of the showroom network. Inventory increased by 25% to GBP 384 million, and I will outline the key changes on the next slide. Net debt increased from GBP 14 million at year-end to GBP 26 million at the end of the half, and I'll take you through the key points there when we get to the cash flow. I've set out for you here the key changes in the inventory profile since the year-end. The impact of the New Jersey acquisition was 2% and product for new showrooms was 4%. And -- on the underlying business across watches, jewelry, and preowned in a business that has grown 23% on a constant currency basis, we have increased inventory levels by 14% ahead of the holiday period. We continue to believe that better ranging and product availability will help to drive sales growth, and we have seen better supply on many brands than we did last year. On many brands, we would hold higher inventory if it were available. It is also important to remember that there is no obsolescence risk in inventory and very low cost of storage. The last point to note here is the impact of currency. On cash flow, adjusted EBITDA was GBP 104 million. The working capital outflow of GBP 27 million represents the inventory build less than associated offsets in trade payables the increase in tax payments is partially a timing impact as the scale of the U.S. business now requires us to make payments on account as we go through the year and also reflects the fact that we have now exhausted our U.S. tax losses. I'm expecting full-year free cash flow conversion to be in line with last year's conversion of 69%. We continue to invest heavily in the showroom expansion and refurbishment program with multiple new showrooms delivered across all regions, including the expansion into Europe with 5 boutiques now open in Scandinavia. The corporate office relocation remains on track with the likely move date around the end of the financial year. The M&A spend on the New Jersey showroom was GBP 21 million, the purchase of own shares to satisfy expecting vesting of LTIP grants for all schemes to FY '26. And therefore, the scale of this outflow is substantially one-off in nature, and I would expect a much more modest sum annually going forward. Net debt increased GBP 12 million from year-end, with favorable movements in foreign exchange of GBP 3 million, and includes the GBP 18 million additional borrowing during the period. Today, we are reiterating the updated guidance that we gave last month when we released our Q2 trading update. Guidance is based on the visibility that we have for availability of key brands, reflects confirmed showroom openings, excludes M&A, and is based on an H2 average rate of $1.20 to the pound. We are maintaining the guidance of EBITDA margin expansion of 0 to 50 basis points, with the second half not having the headwind of the U.K. business rates holiday, but with some inflationary pressure in the cost base, notably people costs and IT as we continue to invest in the group infrastructure. We expect the tax rate to increase slightly because of the increasing geographic mix towards the U.S. The CapEx range of GBP 70 million to GBP 80 million includes investment in a new corporate HQ in Leicester, having significantly outgrown the existing facility with key highlights of the showroom investment program being 5 stores in the battery development, American Dream, the Goldsmith Luxury refurbishments and our expansion into Europe. Trading in the first 6 weeks of Q3 is in line with our expectations and underpins our guidance for the full year. We are now 18 months into the long-range plan and have continued to deliver ahead of our targets. Growth in the first half of FY '23 at 31% is on top of the 40% delivered in FY '22. We remain confident that our category is strongly differentiated through the innovation being brought by our brand partners, the scale of our existing business, our expansion into Europe, our multichannel approach, the showroom development plan in both the U.S. and the U.K. and the M&A pipeline, all giving us confidence that we will be able to deliver the plan. As we enter 2023, we have commenced our process to refresh and update the plan for FY '26 and extend the plan period by 2 years to FY '28. With that, I'll hand you back to Brian for his closing remarks.

Thank you, Will, and thank you to all my colleagues who presented today. To summarize the Watch Switzerland model continues to drive incremental sales and market share gains. We continue with our investment-led growth strategies U.K., U.S., Europe, with a strong pipeline of projects. The Exenia program is positively impacting on client relations and sales conversions. We're attracting and retaining colleagues. The Watch Switzerland Group Foundation is fully engaged and working well with chosen partners. We are progressing on our ESG commitment and programs. We now have 188 well-invested showrooms across the U.K., U.S., and now Europe with over 2,800 colleagues. Current trading is in line with expectations, and we remain confident in our guidance. We will now move to Q&A with Will and myself.

[Operator Instructions] Our first question comes from Karina Nugent of Goldman Sachs.

My first one is on the current trading environment. And you've been very clear that Q3 trading to date has been in line with your expectations. I remember you saying back at the full-year results that the guidance that you've put out embeds a degree of caution, particularly as you go into the second half of the fiscal year. Does that mean that, that more cautious scenario that you were thinking about is actually playing out? And are you seeing any changes in consumer behavior and any differences between kind of high-end versus low-end spending, particularly within the core watch category? And then my second question is more longer term in nature. -- we've had recently so on Rolex and their work in the secondary market and authentication. Can you talk about how that -- how you think that might impact what Susan going forward? I see you're opening a repair and servicing center next year. How big do you think second half could be as a part of your business over the medium to long term?

Thanks for the question. I mean yes, we are trading is in line with the expectations that we had and therefore, implicitly in that is the act that we are experiencing market conditions less really certainly well in the first half. So pretty much size, we've predicted well -- and Don, you said changing consumer behavior, high and low end within the core watch category. The answer is not really, but there's no sort of determine trends, consumer trained and within watches. The geologic category, which is obviously smaller for us, it's less than 8% of our business. It's a bigger percentage in this quarter, obviously of customers, but still relatively modest, but that's got more impact on traffic and so on and consumer sentiment. So we may be seeing an impact so far in Customs in that category, but even taking that into our current and what we're experiencing with everything else that we're doing. There's other things that major traffic in London and New York is up versus what it was before, airport business is up. So it's a mix. less of things that are going on. But all together, it leads us to see that the key for the cadence that we've had issued previously. On your question on certified product, flood product. We think it's a very, very positive sort of for Rolex. Overall, for the industry, we're very positive about it. We've been interacting with more for the best part of the last year on the subject. We are looking to get active in the program as quickly as we practically can. We're working through with Rolex Other quantity of products that we have or that we regularly bring in. And so we're very positive about it. It will bring, I think, disciplining credibility to the PON category. If we'll meet the authorized retailers are clearly advantaged and they can't get it because this option is only available to authorized retailers. -- we can sell the products on late, which wasn't obviously isn't the case at the munis. We haven't put a value on -- and yes, we are not we're not seeing what it is but we are working a way through what is something new and exciting and as soon as we have to think about the bill impact, of course, will update accordingly..

We will now move to our next question from Jon Cox from Kepler.

Jon Cox here. A couple of questions for you. Just back to what my colleague was saying in terms of more recent trading. I wonder if this is more prevalent in the U.K. It's interesting you rolled Europe into the U.K. I know it's early doors as it were at the moment. But I guess that Europe would have added maybe a point also to the U.K. And so then your growth is maybe around 7% or so. And I know the medium-range plan is higher than that. And just versus the U.S., that looks obviously very, very robust there. But can you sort of try and strip out the impact of M&A in the U.S. and maybe the new store openings versus just renovations. That might just be helpful for us? That's the first question. Second, just on Europe. You're talking about the average ticket is far higher than the U.K. and the U.S., which is a pretty interesting comment. I wonder if you could just elaborate on that and what it may mean in terms of payback on the openings there. And as an add, can you just remind me how much you're roughly when you open a store versus a renovation, the difference in the cost profile, I wonder if you can just remind me on that. And then a couple of questions. One on the free cash flow. Obviously, a lot of stuff going out in terms of working capital. Just wondering what you think will happen there in the second half of the year. Will that just unwind? Or will you continue to build that inventory, as you've mentioned? And then lastly, on the tax side, you've alluded to higher U.K. taxes coming up and also obviously selling more into the U.S., should we expect for FY '24, a tax rate maybe closer to 25%?

Okay. So thanks a lot for questions there, some of which we can answer and somewhat to give you on behoove, 1.5 year wasn't 1% overall. The openings we've only just recently opened in Copenhagen. We just opened in Stockholm. We're a bit later on the openings, and we originally had our planned, but what sense that the stores have been opened, they've been trading in line with the expectations that we had, which were reasonably ambitious, but we are trading in line and what we're very pleased what they experience. And then just jumping ahead, we are pleasantly surprised the apport for higher-priced products in the market. Again, it's bad LDs Craig mentioned and has pie on the video. But that's a pose surprise, it's a confirmation of the analysis of the market that has the money and the interest there in these markets, if you clearly give a beautiful store presentation and great client service. But we haven't predicted that the average price point would be as positive as it's so far too early to see that as a result, we're calling the trend any differently. We haven't split out Europe. Obviously, time goes on, we eventually will. But we're managing it as an pane division in the UK and Europe together. The ones trending is in U.K., U.S., I think it's fair to say that was definitely more glomera in the U.K. overall. The U.S. handling this period of high inflation and impacting the economy certainly that we've been able to do in the U.K. So Gavin, we have responded to predictive kind of macro conditions impacting consumer sentiment. I think it's fair to say that's more of an obvious issue in the U.K. that is in the U.S. added directional back thinking we expect and whatever on. So there's quite a bit of disruption overall in the U.K., all of which we've taken it to our and concluded that in our guidance overall. The times acquisition in the U.S., I think we disclosed. So we have a 60% constant commentary growth in the U.S. if petite acquisitions of 44. If we don't ever take out the impact of refurbs and wherever and mono-brand openings. We have a lot of activity to get on and we have a lot of programs and projects. So it's very bad to be able to see what would you call like-for-like has never been that we focused on at all acquisitions fair enough. We are reporting the number before and after an acquisition, but everything else we do report -- so it's quite on cash flow in fact. Yes, Jon, a couple -- you picked out on the cash flow. So the working capital, I'm expecting that to come back in the second half of the year. And we're guiding to free cash conversion around the 70% level that we achieved last year. On the tax, we're not giving guidance on future years at this point, but you're aware of the tax rates globally and can work that out, but we'll be giving full year guidance for -- or guidance for next year as we get to the end of this financial year.

Our next question comes from Kathryn Parker from Jefferies.

My first question is on the opening of your third store in New York. And I wondered if you could share any more details on the timeline and possibly the size of the store and what attracted you to this location in particular? Then my second question is on the confirmation on entry to Germany and Creek section. And are you able to share maybe what type of stool you're opening? Is it a mono-brand or multi-brand and further details on that? And finally, I just wondered if you could give us an update on the refurbishment program in both the U.K. and the U.S., how many stores have been done and how many are still remaining...

Thanks, Kathy. So we love this location design -- it's a brand new building #1 and bid effectively connected to an Central Station. So that's where we get to 0.5 million people daily effectively passing this location. There's amazing new building that's being built is up to the best part of 100 stories are on the top of it. They have a tourist attraction called the summer, where you can go that's really a bit better well done. It's obviously last all around, you see all over the reverse Manhattan. It's fantastic. And then you can actually take a glass elevator and cobenefits of the if you can stomach it or it also it's a gratuitous attraction. It's hugely passing commuter traffic is probably all the traffic that comes in from Connecticut in particular. So we love it. We love the space that's there. It's not a huge store. It's 0. It will be on, as we said, with Cartier and we got the luxury watch brands have been agreed as well and we'll start working on. I was choosing one final brand we do occupy a key space there, but also have our preowned presentation in it. So very positive on it. We're a send out which is why we are an obviously. And our goal would be together open in calendar '23, which means it's got to be open by October. So that's our goal I don't see not being anything obvious that we slow down on the space is there, the gray box. We're getting things worked on but the landlord of course. And then our brand partners are developing their furniture as well. So any positive about it, tumstatement for Watches Switzerland and Manhattan, high, high visibility, and we think in good traffic and business as well.

That's been on the refurbs. In the U.K., we've already opened 2 5. We've got 3 more to come. There's one in Bayesian Dadeland coming up in the second half -- in terms of your question of when will we be done, I can't think about it like that. This is kind of an ongoing program. But when we finish to go around once we'll go around again, it's really important, but we keep the fan experience at a really high level across the estate. And so I think the level of spend we're making an investment we're putting in this year, you should see it's an ongoing investment to keep lysate where it needs to be...

I was just going to say I had another question on Germany. If you could give a detail on the entry to the country...

My apologies, I don't know is it then manage to below some by apologies. And so one answer we're opening I think in Berlin, we've been pretty clear in saying that we are looking at Europe and particularly for the uniform to any more specific geographically, looking at all of the appropriate shopping environments to do our thing. And we have a lot of encouragement support from our brand partners and what we're looking at doing. We're looking multi-brand, we're looking mono-brand but looking for acquisition opportunities. So it just so happens, and we've always said we will announce whenever we've done a deal and given I don't think we normally sort of a highlight in one more and that's opening. But given that it is a new geography and overall a new country, we often just mentioned it, but relatively small, but our inventions and our Robin very strong and positive and experience so far, as I mentioned, in Scandinavia is becoming.

Our next question comes from Kate Calvert from Investec.

Three for me, please. The first one is on the U.K. The profits are down, obviously, year-on-year, and you highlighted the GBP 5 million of rates. But could you talk us through the impact of opening Europe on the numbers? I mean, is it quite small in the context of things? And also, are you expecting Europe to be loss-making on a full-year basis? The second question is also slightly connected and on the U.K. The GBP 5.4 million of U.K. showroom opening costs -- does this include battery within that? Or should we expect quite a significant amount more capacity opening in more the second half? And my final question is back to Germany. Could you give us an idea of how big of the German mono-brand opportunity is given, I think Germany, Rolex's second largest market in Mainland Europe...

I'll pick up the U.K.-related ones. So yes, we have got European start-up costs in the U.K. and Europe disclosure. We need to invest in the right level of backup to make those store openings a success. And so there is a bit of a headwind in there. But it's not massive. And in terms of the full year, I'm expecting it to be there or thereabouts on breakeven. But we not hung up on that in the short term. The important thing is that we build the right platform for us to grow across the medium term. in terms of base showroom opening cost, that's in the first half. There will obviously be more share remain costs in the second half, but that's related to the other stores we've got and back to see in there.

We've got some past in H2.

No, Battiston 1.

I think that honestly, a, we always we clearly have a huge presence here, but we've been active for a century or so. And so there's opportunity in the U.S. that you've seen the pace and the way we've gone about executing it. And there's opportunity in Europe, but in some respects, more complicated than the U.S. we deal with. -- centralized organizations that cover the entire market, of course, in Europe is some basic or structures in countries what delight I must say is that we have to prepare for entering the European market. We have all of our systems in POS and donations and Scores and German. We've done a great job of recruiting and we're playing teams over here for training and our teams in the U.K. then over help with the phase and training within the store. I think it all worked really, really well. So I think in terms of how we execute, I feel very good. So I feel good about the market opportunity there. But because in the spaces, we've got to find the deals they've got to negotiate and support of our brand partners at all big time and as with everything else full as we close on deals and specifics, we'll update you. Clearly, when we do the long-range plan, we'll as opposed to when we did it in '21, we now get actual experience on Europe, and we'll hope we'll have more by then. And we'll give you an update on what our mission then...

[Operator Instructions] And we have a follow-up question from Jon Cox from Kepler.

Just a bit of a question on the European expansion. And you're expanding mono-brand stores. They're not necessarily Rolex at the moment. What happens as you go into Europe? Do you actually have to acquire dealerships or will roll external and say, okay, we're going to offer you something in some city somewhere? Or will it be more you have to do M&A of dealerships in Europe to get Rolex onboard to roll out the model in the way maybe you've done in the U.K. with a multi-brand store with Rolexes the anchor and then start to add mono-brand stores on to the side of it and stuff?

Yes. If you look at the experience in the U.S., it's obviously a in approach [indiscernible] Most of the representation of rollouts have been through acquisition. New York is different. New York was completely new stores that we opened. Since then, we have identified an opportunity and agreed with Rolex we'd open up a multi-brand with a major feature in Rolex and Cincinnati. But the majority of it has come through acquisition. I think in Europe, we do see opportunities, obviously, like we did see in Manhattan. So I think it's likely that even more of the representation would be dependent upon acquisition.

Okay. And did you find that hinders, I'm just talking about the sort of organic rollout with the new stores, your strategic partners which are great brands, but maybe not quite as coveted as Rolex, Patek and AP?

Yes. I think definitely, you've got -- you've got dealings if it doesn't casting parts and the monobrand auction. Also some Balti options as well, I think, ticker trouble, I know we could get agreement and execution quite everything else takes time. But listen, we're marketing at all. And I do think looking at our U.S. experience is a good reference to Will what you think we could do in you.

And what we say in Europe is that by fiscal year '26, it would be between 5% and 8% of the total, and that included our assumptions on acquisition and mono-brand and some element of ecom. -- and so on. And I think that remains your best indicator from us at this point. And we'll update you on at all early next year when we do our plans through to fiscal 2018.

And just on sort of M&A, generally, with the -- in the cash flow statement, I must admit I wasn't aware of that acquisition. I just sit in the point the cash flow statement. But you've done that $660-odd million of the minimum $150 million. Do you have much more you may do already this year? Or is it going to be more spread out? Or is it going to be front-loaded just compared to the original midterm plan as it were?

Yes, more schedule, I think it's fair to say. And hopefully, we'll remain ahead of schedule. But all these deals a overload we're going to be patient and consider it to vendors or we clearly have to interact with the brands and will so they do take time. But we are, to your point, ahead of that schedule at this point and we make no secret the fact would be that we're active with various potential deals at any stage of lignite.

There are no further questions in the [indiscernible]. I'd like to hand the call back over to Scott Banerman for any webcast questions. Over to you, Scott? We've had a few questions from the webcast. The first question is from Melania Grippo from BNP Paribas.

You confirmed your FY 2023 guidance, which are the risks that you face? What concerns you most? And then Rolex pre-owned project, are you joining the project? Could you please expand on why you expect it to be positive for the brand sales? And what kind of profitability this could generate?

So for Millennial CPU, I've mentioned allays that we are enthusiastic about it feeling it's great. We haven't genuinely got numbers on it yet. Obviously, on working through some options. We still have some questions that we need answering particularly on capacity and speed of the throughput role things are by authenticating all of the products and guarantee and that takes up obviously a flow-through, and we're just working out all of those logistics at this point. But I mean, I think it's great and it gets a big advantage in this category to posters like us. And others gives, I think, a great deal of credibility and confidence to consumers to know that they're buying Rolex been certified by the company being lent achieved by them and then retail by other or like very, very possible vertebral risk certain opportunities over in the guidance. We have a bit okay in supply, we will get confirmation of the calendar year supply in January, I believe it all was conservative in our estimation. -- and our supply for meters calendar year we're totally confident all as we've been. And I think we've been appropriately conservative on our expectations for the first 4 months of the next year. We are but also confident of our ability to gain market share. We've been doing it. We have external evidence and confirmation of our market share gain. We've continued to invest and support our businesses in every label store investment, marketing, technology and client experience and therefore gaining share overall. Our consumer is less affected to buy by the cost of it aspects overall. So is going to category in that sense will be less impacted. -- but it's not today risk, of course, as there was massive consumer confidence in sand and I guess everybody would be expected. We are anticipating that consumer confidence and therefore, consumer discretion sends would have been negatively impacted, and we've bolt that into assumptions at this point. As I mentioned earlier, probably more UK new than U.S., but boom. So we try and be as thoughtful on the guidance as we can with the best part of just over 4 months ago, we're feeling confirmed enough to make the statement of our confirming our guidance.

Next question is from Richard Taylor from Barclays.

With the inventory increase, thank you within the inventory increase. Thank you for your detailed breakdown. In addition to what you have disclosed, how much is from pre-owned watches within inventory? And how are these watches valued? I was thinking about this against the recent decline in secondary market values and what you pay for acquiring preowned inventory.

Thanks, Richard. So on preowned, that is included in the numbers. Obviously, it's a relatively small component of the increase in the like-for-like inventory. I would find that the biggest inhibitor to growing the preowned part of the business is the availability of inventory and bringing that in. So I don't have concerns around we have risk on inventory valuations on preowned. We buy them the discount their value cost in the balance sheet. And we make a decent markup on them. It's less than the overall margin, but it's still good margin. And so I'm very comfortable with where we sit on pre-owned inventory valuation...

I'll just add to that, Richard, we haven't seen any pressure on pricing on margins on the on feet it's been a good and growing business for U.K U.S.

We've been no further questions at the moment. So I'd like to pass back to Brian for any closing remarks.

Okay. Thanks, Scott. Thanks, everybody, for joining us. A big thanks to my colleagues for putting together the presentation, a vile looked at earlier, thanks for your questions, everybody. If get, there's a lot of early parts, but we feel pretty good trading so far in this quarter and what we're experiencing in Christmas. Not without its challenges, but I think we've anticipated most of them and clearly competitor thinking. Colleagues are doing a tremendous job as you always do, this is really hard work and thing for the Chimes for -- they're all with the usual enthusiasm and data. And I think a fantastic job -- and that is on the call just wishing everybody happy Christmas and good new year, and we'll look forward to sticking to you again to make our quarterly update post-January. Thanks, everyone.