Compagnie Financière Richemont SA (CFRHF) Q4 2023 Earnings Call Transcript

Compagnie Financière Richemont SA (OTCPK:CFRHF) Q4 2023 Results Conference Call May 12, 2023 3:30 AM ET

Company Participants

Sophie Cagnard - Investor Relations

Johann Rupert - Chairman

Jerome Lambert - Chief Executive Officer

Burkhart Grund - Chief Finance Officer

Cyrille Vigneron - Cartier CEO

Nicolas Bos - Van Cleef & Arpels CEO

Conference Call Participants

Zuzanna Pusz - UBS

Ashley Wallace - Bank of America

Louise Singlehurst - Goldman Sachs

Patrik Schwendimann - Zurcher Kantonalbank

Edouard Aubin - Morgan Stanley

Carole Madjo - Barclays

Rogerio Fujimori - Stifel

Sophie Cagnard

So good morning and welcome to Richemont 2023 full year results presentation. Thank you to those in person for coming to Geneva, much appreciated, and also to those of you watching the webcast.

I am Sophie Cagnard. And joining today from Richemont are Johann Rupert, Chairman; Jerome Lambert, CEO; Burkhart Grund, CFO; Cyrille Vigneron, Cartier CEO; and Nicolas Bos, Van Cleef & Arpels CEO.

As usual, the company announcement and financial presentation can be downloaded from richemont.com. And the replay of this video webcast will be available on our website today from 3 p.m. Geneva time.

Before we begin, may I draw your attention to the disclaimer on our presentation and company announcement regarding forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.

So first, Jerome will take you through the year's highlights and sales. And then Burkhart will review our business areas, the group's financials and key ESG initiatives. He will then hand back to Jerome for the conclusion, which will be followed by a Q&A session.

I will now hand over to Jerome.

Jerome Lambert

Thank you, Sophie. And good morning, ladies and gentlemen. Thank you for joining us today.

I'm pleased to report that, notwithstanding the ongoing volatile and uncertain environment, our financial results reached several new heights this year. Sales for the year rose by €3.2 billion to close to €20 billion, having increased by 14% at constant exchange rate and 19% at actual exchange rates. Operating profit rose by €1.3 billion to €5 billion, partially benefiting from lower onetime items compared to the prior year. These strong results led to an operating margin of 25.2%, up 280 basic points year-on-year.

Profit for the year from continuing operation increased by 60% to €3.9 billion. Cash flow from operating activities reached €4.5 billion. And our net cash position increased by €1.8 billion from last September to €6.5 billion.

The strong results achieved by our group were broad-based. Sales increased across all regions, distribution channels and business areas, with double-digit increase in almost all regions led by particularly strong growth in Japan and Europe. Retail sales once again showed a marked outperformance with a solid double-digit progression, reflecting continued demand for the high-quality craftsmanship and excellence of our products.

Our direct-to-client sales has increased overall to represent 74%, yet another increase versus prior year, highlighting the continued transformation of our business model. And finally, there are significant growth across all business areas. The operating margin improved across all continuing business areas, as Burkhart will detail shortly.

The group further progressed on its ESG journey, and let me share a few highlights. We have reinforced our ESG platform's foundation and strengthened our commitment to embedding ESG in our operation. This is evidenced by both our Chief Sustainability Officer and Chief People Officer and CEO of Region joining the senior executive committee this year. We have phased out our PVC from -- out PVC, not our PVC, phased out PVC from our products and packaging by our target time line and reached 97% use of renewable electricity. We have been recognized as an employer of excellence in Switzerland, France and China. Richemont was notably nominated for the third consecutive year as a winner of the 2022 100 excellence employers of China award as well as the 2022 excellence in diversity and inclusion award sponsored by 51job.

Let me now walk you through the group sales performance, first, by region; then by distribution channel.

What we saw this year is the strong -- is the group's strongest performance in Japan and across Europe. Japan led the way with 56% increase in sales at constant exchange rate with strong double-digit increase across all channels and business areas. Sales in Europe were 31% higher than the previous year, driven by outstanding growth in both retail and wholesale channel; and a solid performance across all business areas, with strengths in main location led by France, Italy and Switzerland. Sales included strong contribution from locals; and benefited from inbound tourism, mainly from the U.S. and the Middle East.

In Asia Pacific, mainland China and Macau were heavily impacted by health restriction during the year. Excluding these 2 location and Hong Kong, sales in the region rose by over 30% with significant double increase in Southeast Asia, most notably in Australia, Singapore and Thailand. Sales in Middle East and Africa region grew by 13%, driven by solid domestic and inbound tourist spending, [predominantly] in Dubai and in Qatar. The largest absolute contribution to group sales growth came from Europe and the Americas, with each growing by around €1 billion.

Sales in the fourth quarter progressed by 22% year-on-year, with double-digit increase in all region; on top of that, what was a very challenging comparative, with the highest growth rate generated by Japan and Asia Pacific. It is worth highlighting that the first quarter also showed a significant improvement compared to the third quarter in both America and Asia Pacific, the latter benefiting from a combination of the Chinese New Year holiday and the easing of restriction in China.

Let us now -- turn now to sales by distribution channel, starting with retail at constant rate, where directly operated store contributed to 68% of the group sales compared to 66% in the prior year. The solid 17% growth in -- came from -- on top of a challenging comparative prior year. There were double-digit increase across almost all region, notably in Europe and Japan, led by strong growth at the Jewellery Maisons and the Specialist Watchmakers. Retail sales benefited from 23 new stores opening, mainly in Asia Pacific region. Fourth quarter sales posted a sharp 24% increase over the prior year period.

The online channel, comprising the group's online directly -- online sales directly generated by the group's Maisons and Watchfinder, contributed 6% of group sales, broadly in line with the previous year. Sales rose by 6%, with growth led by double-digit increase in America, Japan, Middle East and Africa. Performance in the channel was fueled by robust growth in the Specialist Watchmakers, which showed an increase in all region. Sales in the fourth quarter were up, slightly up, year-on-year versus previous year.

Finally, wholesale sales -- comprising 26% of group sales, wholesale grew by 8% with strong double-digit increase in all region, except Asia Pacific. And it was driven by most business areas. Fourth quarter sales significantly increased year-on-year while facing a very challenging comparative in the prior year period.

As a consequence, the group's proportion of direct-to-client sales, which include sales in our directly operating store and online retail sales, increased to 74% of group sales. Jewellery Maisons continued to have the highest rate of direct-to-client sales at 83%. The Specialist Watchmakers had the highest progression in their direct-to-client sales from 51% to 56%, sustained by the development of their retail and online capabilities.

Burkhart will now take you through the year highlight by business area. Over to you, Burkhart.

Burkhart Grund

Thank you, Jerome.

Let me review our business areas, with all numbers at actual rates and starting with Jewellery Maisons. Sales increased by 21% for the year, with broad-based growth across all regions and channels. Sales were particularly strong in Japan, Europe and in the retail channel. The fourth quarter saw a 27% increase in sales year-on-year with very strong growth across all regions. The Jewellery Maisons operating margin reached almost 35%, a 60 basis point improvement over the prior year. This high margin reflects the good operating leverage generated by a combination of the sharp sales increase, increased utilization of manufacturing facilities and well-controlled costs while continuing to invest in distribution and communication.

Let us now look at the main developments during the year. The year saw strong performance across all Jewellery Maisons, all product segments and all price points, especially from our Maisons iconic product lines. In jewelry, this included Panthère and Trinity at Cartier, Alhambra and Fauna at Van Cleef & Arpels; and Macri and Opera Tulle at Buccellati. In watches, there was notable performance from Panthère and Santos at Cartier; and from Extraordinary Objects at Van Cleef & Arpels. In December, Cartier relaunched the iconic Grain de Café jewelry collection, which was originally introduced in the 1930s by Jeanne Toussaint, with early signs of strong demand. Van Cleef & Arpels has continued to extend its Perlée collection both for jewelry and time pieces.

Our Maisons are increasing their manufacturing capacity, in order to support the strong demand they are experiencing, with the opening of a new manufacturing site in Italy for Cartier and the expansion of 2 ateliers in Italy for Buccellati. Van Cleef & Arpels is currently investing in a new manufacturing facility in Lyon, with additional manufacturing sites to be added over the coming years.

Cartier has continued its store upgrade program, with 51% of stores already under its new concept, a material increase from 38% at the end of the previous year. Recent reopenings included rue de la Paix in Paris, George Street in Sydney and Maison Cheongdam in Seoul. Van Cleef & Arpels, with 11 net new store openings, reached out into new territories with a store opening in Auckland, New Zealand; and opened in new cities such as San Francisco. The 5 new boutiques of Buccellati included mostly openings in Asia.

There have been several notable ESG initiatives during the year. Cartier's new manufacturing site in [Torino] assures environmental best practices. These include solar panels expected to provide 20% of the site's electrical needs and an investment into a hydroelectric power station that produces energy to power the facility in Torino as well as a new facility being built in Valenza. Van Cleef & Arpels continued its de mains en mains initiative to support the transition -- sorry, the transmission of know-how in jewelry. And a few months ago, Buccellati achieved RJC COP certification and should be RJC CoC certified by December 2023.

Let us now review our Specialist Watchmakers, where sales rose by 13% for the full year. These were double-digit increases at many Maisons; and across almost all regions, except for Asia Pacific which posted a slight reduction. By channel, both retail and online retail rose by double digits. Fourth quarter sales also increased by double digits, led by retail sales. The business area's operating margin was up 150 -- 170 basis points to 19%. This 24% increase in operating result outpaced the rate of increase in sales, with the strong operating leverage largely due to the combination of double-digit sales growth, pricing power as well as continued cost discipline.

Let's now look at some of the key developments over the past year. There was solid performance from both iconic core collections and bestsellers, including notably Polo at Piaget, Reverso at Jaeger-LeCoultre, Pilot watches at IWC, Overseas at Vacheron Constantin, Luminor at Panerai and A. Lange & Söhne. Continued increase in direct-to-client sales now at 56% or 500 basis points higher than the prior year underlines the successful retail transformation from having a majority of sales in wholesale to a majority of sales directly with end clients, including the franchise mono-brand boutiques that are accounted for in -- under the wholesale channel. Proportion of sales in mono-brand environment increased to close to 3/4 of sales, as a consequence.

There have been several flagship store openings aimed at providing an elevated client experience -- and would be good if the prompter would advance now. Thank you -- which these openings include the new IWC Taikoo Hui store in Shanghai, where clients can immerse themselves into distinctive themed environments to discover the various product collections. Vacheron Constantin's reopened flagship store in the Dubai Mall offers the opportunity to interact with a watchmaker on site or browse the Vacheron Constantin archives digitally in a large-screen format, among other unique features. The further rollout of the innovative TimeVallée multi-brand boutique concept included 16 new openings during the year, bringing the total now to 38 boutiques. New openings have taken place in China and also in other key cities such as Doha or Lucerne. New formats are being tested, such as a new digital boutique in India and a first-ever opening on a cruise ship.

This year, the Specialist Watchmakers have strengthened the role of their heads of sustainability either through recruitments or upskilling, making these positions more strategic and embedded in business decision-making. All the Maisons went through an ESG skills development process, including at the CEO level.

Finally, let us move to the Other business area, which primarily includes the group's Fashion & Accessories Maisons, the group's unbranded watch component manufacturing and real estate activities, amongst others. Sales rose by 19% year-on-year, sustained by a strong performance by the Fashion & Accessories Maisons, while Watchfinder sales were negatively impacted by lower demand from the U.K. domestic clientele and a subdued preowned watch market. The growth in sales was led by very high growth rates in Americas and Middle East and Africa. There was strength across all channels.

Sales in the fourth quarter recorded a double-digit progression equally led by the Americas and the Middle East and Africa. The negative Watchfinder impact was more than offset by the €94 million profit generated out of Fashion & Accessories Maisons due to higher sales, improved pricing power and strong financial discipline. Overall, including all activities, the segment's operating result reached €59 million.

Let us now look at some highlights of the past year. We've seen strong growth from collections such as the Meisterstück writing instruments at Montblanc; Crown Sport clothing at Peter Millar and footwear at G/FORE; and from the Brillant and Tempête leather goods at Delvaux. Alaïa and Chloé have been acclaimed for the new collections presented during the year leveraging the momentum gained since the appointment of their creative directors, namely Pieter Mulier and Gabriela Hearst. Another highlight has been the opening of the MONTBLANC HAUS in Hamburg dedicated to the Maisons purpose to inspire writing and showcase the history and heritage of writing instruments.

Sales have benefited from enhancements in the retail network, namely Montblanc's new boutique concept in Paris featuring a new in-store experience; and key refurbishments at Chloé, with improved performance in the refurbished stores. Alaïa and Delvaux have entered new regions with their first boutiques in the U.S., in New York Soho; and in the Middle East, in Dubai, respectively.

Demonstrating continued progress in ESG, Chloé has introduced the Chloé vertical initiative to place a unique digital ID on product labels enabling users to trace their items from field to finished piece; and access their ownership certificate as well as care, repair and resale information. Peter Millar has increased the use of recycled fabrics and upcycling unused products, while Chloé already used 62% of lower-impact materials in its spring/summer 2023 ready-to-wear collection.

Let us now turn to the group's financials, starting with gross profit, [which] increased significantly by 23% to €13.7 billion. This resulted in the gross margin rising by 200 basis points to an all-time high of 68.7%. The main drivers of the increase were a combination of more favorable geographical sales and channel mix, price increases and higher manufacturing capacity utilization, which more than offset higher input costs.

Let us now look at operating expenses, which were 17% higher than the prior year, while group sales increased by 19%, partly benefiting from lower onetime items. At constant exchange rates, operating expenses rose by 12% versus a 14% sales increase. I will now take you through the expenses by category.

Selling and distribution expenses increased by 19% at actual exchange rates and by 15% at constant exchange rates, accounting for 54% of total operating expenses compared to 53% in the prior year. Most of the increase related to the development and enhancement of our retail network; and the growth in retail sales, notably in Japan and South Korea where many leases have variable rents. As a percentage of sales, selling and distribution expenses represented 23% of group sales, in line with the prior year. Communication expenses were 17% higher at actual exchange rates and 12% higher at constant exchange rates, to support sales. They represented close to 10% of group sales, in line with a normalized 9% to 10% range.

At around 1% of sales, now that YNAP is classified under discontinued operations, fulfillment expenses increased by 19% at actual exchange rates and by 13% at constant exchange rates. Administrative expenses rose by 20%, and by 13% at constant exchange rates, mainly due to a stronger Swiss franc and planned investments in IT. At 8.5% of sales, administrative expenses were in line with the prior year.

Other expenses of €103 million were €96 million lower than the prior year primarily due to lower onetime items in the year under review. As a reminder: Prior year numbers included charges related to the suspension of commercial activities in Russia. And this year under review, we incurred onetime charges of €66 million, net, the main element being €55 million of Watchfinder goodwill impairment charges.

In conclusion, net operating expenses as a percentage of group sales improved from 44.3% a year ago to 43.5% this year.

Operating profit reached €5 billion, a new high for the group. This represents a 34% increase over the prior year and outpaced the 19% sales increase. As a result, the operating margin rose 280 basis points to 25.2% compared with 22.4% in the prior year. Let us now review the rest of the P&L items below the operating profit line, starting with financial income.

Net finance costs improved to €314 million compared to €841 million in the prior year. The €527 million reduction was primarily related to the following items. Firstly, there were noncash fair value adjustments of €54 million compared to €538 million in the prior year, a €484 million difference. These charges are linked to investments in a Farfetch convertible note as well as an option of additional shares in Farfetch China whose values are driven by the variation of the underlying Farfetch share price, in addition to the group's investment in externally managed bond funds and money market funds. Secondly, net interest expenses, excluding those lease liabilities, improved by €46 million compared to the prior year level. And finally, a positive €56 million year-on-year gain on mark-to-market adjustment in respect of hedging activities was partly offset by a €43 million increase in foreign exchange noncash losses on monetary items.

Sales at YNAP, now under discontinued operations, proved resilience given the challenging environment for digital distribution pure players, rising by 4% compared to the prior year. The operating loss at €3.6 billion was mainly driven by the €3.4 billion write-down of YNAP net assets. Over the full holding period of YNAP, the sum of both positive and negative valuation adjustments on acquisition and disposal of NAP and YOOX investments amounted to a negative €1.3 billion. As of today, there is no change to the timing of the expected closing of the transaction previously communicated to you, this being by the end of calendar year 2023.

Let us now turn to the profit for the year. Profit from continuing operations progressed significantly, rising 60% to €3.9 billion, with the profit margin increasing by 500 basis points to now 19.6%. The increase primarily reflected the higher operating profit and lower net finance costs just mentioned, partly offset by higher taxes. Profit for the year of €301 million was impacted by the €3.6 billion loss from discontinued operations. As indicated last November, our effective tax rate for the year for continuing operations was 18%, on the lower side of our envisaged 18% to 21% range absent any special unforeseen items.

Cash flow generated from operating activities robust -- was robust at €4.5 billion, reflecting a strong operating profit from continuing operations offset by increased working capital requirements mainly due to higher inventories to support sales growth and our further retailization of the group's businesses.

Let us now turn to gross capital expenditure, which amounted to €981 million. As a percentage of group sales, this item reached 4.4% of sales, broadly in line with a year ago. 48% of gross capital expenditure related to point-of-sale investments, including internal and franchise boutiques as well as external points of sale. Most of the spend was allocated to boutique renovations, upgrades and relocations, notably at Cartier. These included renovations on rue de la Paix in Paris, SKP mall in Beijing and Fifth Avenue in New York. Several additional Maisons opened stores at the Chengdu SKP Mall in China, including Van Cleef & Arpels, Vacheron Constantin and Delvaux, to name just a few.

Other investments, which made up 33% of CapEx, mainly related to IT spend. Finally, manufacturing accounted for the remaining 19% of gross capital expenditure, related primarily to R&D, increased jewelry capacity and machinery mostly at the Jewellery Maisons.

Let us now turn to free cash flow, which amounted to €2.8 billion. The €213 million difference mainly reflected marginally lower cash from operating activities, higher capital expenditure and the nonrecurrence of the €86 million proceeds from the disposal of an investment property in the prior year. These items were partly offset by lower acquisition of other noncurrent assets given that last year's numbers included the investment in the China joint venture with Alibaba and Farfetch.

And now on to our balance sheet, which remained solid, with shareholders' equity accounting for 47% of the total. Net cash amounted to €6.5 billion on -- at 31st of March 2023, up €1.3 billion over the prior year as a result of the items discussed on the previous slide and notwithstanding an [€810 million] increase in total dividend cash outflow.

The Board has proposed a total dividend of CHF 3.5 per 1 A share or 10 B shares, made up of an ordinary dividend of CHF 2.5 per 1 A share or 10 B shares, up by 11% over the prior year; and another special dividend of CHF 1 per 1 A share or 10 B shares, subject obviously to shareholders' approval at the Annual General Meeting on the 6th of September 2023. This proposed increase of the ordinary dividend and the additional special dividend reflected the group's strong results, significant cash flow generation and robust net cash position.

Let me now share an update on our ESG progress. In terms of external recognition, Richemont was acknowledged as an industry leader with a AA rating by MSCI for its new -- sorry, for its low exposure and management of ESG risks, notably in terms of responsible sourcing and carbon footprint management. Richemont received a 13.9 risk rating score from the ESG rating agency Sustainalytics for its low risk exposure with strong management, positioning the group among the top 7% of the 20,000 companies rated. The group was also recognized one -- as one of the world's best employers by Forbes for the third consecutive year.

On the environment pillar of ESG, Richemont has been acknowledged by CDP for its actions in water management, improving to a B score in 2022 for a second year reporting. This year, for the first time, we disclosed our water withdrawal from surface water and seawater and aligned with GRI standards. A member of the RE100 since 2021, we have reached 97% of renewable electricity across all our sites and are well on track to our -- to achieve our ambitious goal of 100% renewal electricity for 2025. We have met another key milestone with the complete phase-out of PVC, as discussed by Jerome already, from our products and packaging.

In line with our commitment to monitoring resource consumption and reducing waste, waste sent to landfill decreased by 61% in 2022, amounting to a reduction of 870 tonnes. Finally, as part of our strategy to manage greenhouse gas emissions, we have successfully mitigated 89% -- sorry, migrated 89% of our service to the cloud, reducing our energy consumption and optimizing our data storage.

In terms of advancing our social priorities, we value being named one of the most attractive employers in Universum's national rankings for Switzerland, France and China. These accolades are from Richemont's commitment to offering a strong workplace culture based on trust and creating opportunities for our people. We are notably fully certified gender equal pay by the EQUAL-SALARY Foundation and -- in Switzerland and France, 2 of our largest markets in term of head count; and are on track to become 100% equal pay certified worldwide by next year. Our group has a healthy gender balance, the percentage of women reaching 57% of the total workforce, 40% of our senior executive committee and 31% of our Board.

Now turning to governance, where we initiated comprehensive changes across our group functions, regions and Maisons to fully integrate ESG principles into our strategic and operational decision-making processes. Reinforcing the importance of this transversal discipline, we appointed Dr. Bérangère Ruchat, the group's Chief Sustainability Officer, to the senior executive committee. Taking a compliance-driven approach, our ESG reporting is now in accordance with the GRI standards. We have added content to meet new EU and Swiss regulatory requirements, including the new Swiss conflict minerals and child labor due diligence and transparency obligations, long title, I know; as well as the EU's Corporate Sustainability Reporting Directive. We have further strengthened our ESG framework foundations with priorities drawn from an updated double materiality matrix to best identify and assess ESG impacts.

Finally, we upskilled our 250 business leaders, including all the CEOs of our Maisons and regions, with dedicated ESG [trainers]. We also rolled out a global training on the use of our new internal Speak Up platform. As a next step, we will extend the platform to external stakeholders to allow them to voice their concerns and contribute to Richemont's ongoing commitment to transparency and ethical conduct.

I now hand back over to you, Jerome.

Jerome Lambert

Thank you, Burkhart.

And before closing, I would like to [technical difficulty]

Johann Rupert

[Indiscernible]

Jerome Lambert

Yes, because of sound, I guess. Okay, thank you. So before closing, I would like to take you more -- so adjustment between sound and image. So now we have the sound -- now we have the image, not the sound. Thank you.

So as said. So let me take you through some exciting elements happening this year with fashion and accessory. Indeed, this year, fashion and accessory rebounded, not only rebounding strongly but has reached record-high sales [this time]. This growth trajectory has been further confirmed this year with new sales. -- [Voila]. Thank you.

Record for the category, posting solid growth and a profitable result for the first time since 2019.

Looking at the different Maisons individually. As I was -- had the opportunity to present to you just before, we had notable performance this year and, I could say, again this year. I spoke from Alaïa and Pieter Mulier appointment. Or since the Pieter Mulier appointment as creative director in '21, it's amazing to see how Alaïa is growing both in term of sales but also in term of desirability, collection after collection. It has allowed Alaïa now to expand its retail network, with Alaïa coming back to the U.S. with a brand-new shop in Soho neighborhood in New York.

Chloé, as I said, is also on a positive dynamic here since the appointment of its creative director in 2020, with new aesthetic across its product offering. And finally, you have Delvaux. It is enjoying a successful journey since its integration into the group. It's this year the first full year, in fact, within Richemont; and it achieved a very sharp growth since that acquisition. It has been -- it's remarkable -- the positive reception of the latest collection have been remarkable. It's true for Tempête that -- or Brillant that you mentioned but also for [Lange line] that is being introduced this year. For Delvaux, it's also an important year in term of retail development with a new shop in Dubai; or in Tokyo, Omotesando.

Not to forget is the very strong sales momentum at G/FORE and at Peter Millar; and in the case of G/FORE, supported by an impressive growth. [There is a blossoming] expansion into Asia, notably South Korea. And as we said, Peter Millar is impressive by both its growth and size today.

These success illustrate the Maisons' remarkable journey capitalizing on their heritage, craftsmanship, creativity; combined as well with the infrastructure and backing of Richemont, our backbone. We will continue to support all our Maisons to enable them to flourish. If you allow me, let's focus maybe on the reason behind that success. And let's say that the success of this year is the, first, result of an unrelenting focus of the group for 5 priorities across all the F&A Maisons.

First, enhancing the desirability of our Maisons. Here it's the creative directors of our Maisons that have been playing a remarkable role. And their creative capacity have been reinforced with the arrival of Pieter Mulier at Alaïa, Gabriela Hearst at Chloé or Marco Tomasetta at Montblanc. There were already talented creative framework in place at Delvaux, at Peter Millar and G/FORE, of course. The increased appeal of our F&A Maisons has translated into higher traffic in our stores and our website. It increased our pricing power.

The second big focus of the category has been on local clientele, and that across all geographic. It is able -- us to manage the fluctuating trends at international level. They've been providing us as well a solid base for future growth. Delvaux has been a prime example of the success of this focus over the past year, consolidating a strong clientele base in South Korea and Japan, 2 major market for the Maison.

Third pillar, our increased ambition in leather goods, symbolized by the successful, again, integration of Delvaux; and accelerating or building capacities across all Maisons from the creative side with the product development but also through the manufacturing.

Fourth pillar of our -- of effort of our success, the promotion or the strong focus on direct-to-client engagement, with 2 first element: first, the upgrade of our retail network, yes, with strategic opening this year for Alaïa in New York, Delvaux in Dubai and Tokyo and also, not to forget, the new concept shop of Montblanc reopening in Champs-Élysées boutique in Paris. And second, there is the acceleration of our strategy to create the ultimate omnichannel experience with [indiscernible].

Finally, our ability to excel in our operation in order to offer clients products they desire at the right place consistently. Over the past year, we have strengthened our teams across the whole organization, reinforced agility and flexibility in our operation and accelerated our time to market and managed our inventories effectively. We remain focused on these properties. It's just the start of the journey. We'll raise the bar for all of them and as we progress in our ambition to drive sustainable and profitable growth in the category.

Now a few more words to conclude before we move to the Q&A.

Our strong operational and financial performance was highlighted by sales reaching close to €20 billion with double-digit increase in all business area. Operating profit reached €5 billion, a strong improvement in profitability, with all business areas generating higher sales and profit. As a result, our cash flow from operating activities was solid at €4.5 billion.

We have significantly advanced our journey in Luxury New Retail with the signing of an agreement last August with Farfetch and Alabbar, under which YNAP and our Maisons will adopt FARFETCH Platform Solutions. The agreement is subject to a number of condition, including the receipt of certain major control approvals. Closing is expected by the end of calendar '23.

By elevating both our Chief Sustainable Officer and our Chief People Officer and CEO of Region to the senior executive committee, we have made an increased commitment to embedding ESG in our operation. We have further strengthened our ESG team at the Maisons [and at Richemont], and we will continue to set up -- to step up our ambition as a group in this important area. We have a strong balance sheet, as Burkhart said, giving the group the flexibility and adaptability to nurture our Maisons to reach their full potential in a sustainable and responsible manner, seize opportunity as they may arise and also weather economic cycle while delivering attractive returns to our shareholder.

We are confident both in our resilience and long-term prospects. Our Maisons are strong, well positioned to meet local demand and cater for future growth in tourism, including from a more significant resumption of travel by Chinese customers beyond neighboring markets. We have flexibility in our manufacturing facilities and newly added capacity at our jewelry Maisons. This give us the agility required to navigate today in uncertain macroeconomic environment. We are well positioned to deliver profitable and responsible growth over time. And I would like to close this presentation by thanking all our colleagues for their commitment, creativity and resourcefulness over what has been a remarkable year in a very volatile and uncertain environment. Together, we craft the future.

And this include -- this concludes our presentation. We now open the floor to your questions. Thank you.

Sophie Cagnard

Okay, thank you, Jerome.

So before you ask questions, please clearly announce your name and company's name.

So I saw Zuzanna. And I think it was, yes, Ashley, as -- it's difficult because, more or less, everybody -- afterwards -- yes, Louise. And then we'll start with Jerome and so on because otherwise we'll -- too difficult. So please, Zuzanna, go ahead. And thereafter, Ashley.

Question-and-Answer Session

Q - Zuzanna Pusz

Zuzanna Pusz from UBS. I have 3. So first of all, maybe, would you be able to comment a little bit more about the performance by nationality or region, I guess, just to give us a little bit of color around the Chinese consumer last quarter? Because I presume they started to travel. So it would be interesting to know, also the American cluster, Europeans, just broadly speaking, to know how various clusters are performing given more travel. And also specifically it would be interesting to hear your thoughts about the Americas because, as you've mentioned during the presentation, there was some improvement last quarter versus Q3, which is a stark comparison to your peers. So I would imagine you're clearly doing better. The brands are doing better. You're more higher-end position, but just any thoughts on that would be very helpful. And...

Johann Rupert

Let's stop there. And...

Zuzanna Pusz

That was just 1 question...

Johann Rupert

Because by the time we get to 3, we're going to get one. We'll give you two more. Sophie, she can add 2 more.

Sophie Cagnard

Yes.

Johann Rupert

She will have one and then two and then three.

Zuzanna Pusz

Okay, I promise the 2 other ones are very short, but...

Johann Rupert

Okay, make other one first.

Burkhart Grund

Are they yes-or-no questions...

Zuzanna Pusz

No. The second one is kind of yes or no. So pricing...

Johann Rupert

Okay, one.

Zuzanna Pusz

Pricing...

Johann Rupert

So we'll stop at one. And then I'll you two and three.

Zuzanna Pusz

Okay, perfect.

Johann Rupert

Thank you. Well, I think we'll move on to one. The general resumption of purchasing in the United States was quicker time-wise than in China. You will recall that -- I guess it's a year ago. We said that China will take longer to open, which was contrary to the popular belief, well, simply because we had more information and, I would say, better sources. And even highly informed Chinese friends and colleagues and our partners at Alibaba were surprised by the sudden lifting of the restrictions. And apparently this happened because a great number of football fans watched the World Cup. And they heard [crowds], but initially it was only focused on the players. And they, when they started seeing people sitting without masks, local disturbances broke out; and they lifted.

I actually told some Chinese friends that they would not be able to stop Omicron. They may as well use it to have a type of vaccination for the population because, even [indiscernible] they wouldn't stop it. Remember it was first discovered in South Africa. We [indiscernible] so we have the data, so when I made that prediction it would take longer, it was expected. So the next thing that we've seen, it was very traumatic. The Chinese saved an enormous amount of money during that period, but it was a traumatic experience. It was a total lockdown. And their first expenditure was just human going out for diving, traveling, so it was more spent on services.

Yes, we've seen individuals traveling. So individuals have come to Europe and Hong Kong and Macau, et cetera, but not the tourist groups. So yes, the expenditure is rising, but it has not risen as of yet as it did in the United States; a little bit more caution because they -- even though they've spent a lot, they have not gone and crashed their credit cards. It's important to note that their behavior has been more sober, and -- but it's carrying on. Now we know, in terms of traveling, because of the prebooking and the airlines and the hotels, that we shouldn't expect a lot of Chinese tourists to come in groups to Europe before the end of summer. That's just data-driven.

Now in the United States. I'm always surprised that we as humans do not like to predict any [discontinue]. Things get better; we always think, are going to get better. And that's why -- we got it worse. We think they're always going to get worst -- worse and carry on, but it -- in the history of what I've read about economics and finance, we've never had a sustained period of 5, 8, 10 years where the cost of capital was 0 or close to 0. And this is bound to have an effect. And you will recall, in the past, I've criticized the central banks. And I've also said it's unfair and it would lead to social unrest. Now they contracted, but to move the [funds rate] by 500 basis points in a year when all the liquidity into the banking and nonbanking, shadow banking business and then to increase interest rates by that much was really quite reckless.

And of course, the first people that got caught were the bad executives who didn't learn banking 101, which is match your deposits with your liabilities. Do not -- and this was exacerbated by the enormous liquidity that entered the system with lower economic -- with lower borrowing demand, so what did these idiots do? Bought long-dated bonds, long-dated securities. And even criminal was that the FDIC -- a share price goes down by 60%. As my son said, you'd think that they'd go pay them a visit. I'm in a major bank. I mean, if I had to be a regulator, I see the share price goes down by 60%, I would have been there, but their risk officer was working remotely. A big number of SVB senior executives were in -- working remotely. Then they assume moral risk by bailing them out, so now every depositor can go interest shopping, with the hope that they will be bailed out, but the FDIC was not constructed to bail out Harry and Meghan and Oprah Winfrey who had $500 million with SVB. It was to protect smaller.

So to answer America, do not look at Richemont or luxury goods. Look at the aim of the Federal Reserve bank which is to restrict, to bring down inflation. And for that, they'll have to restrict credit. The sadness is that, the farmer in the Midwest who wants to borrow money for a tractor, he is going or she is going to be affected because there is already a contraction of credit. So the United States will not be as buoyant as a year ago. Will it return? Yes. Will it be soon? I actually think we're in for a harder landing than we hope for because we do expect it. Will it affect us?

Yes. It will affect everybody. However, we're lucky, as we've said, [indiscernible] said a few years ago, we fly on 5 engines. 1 engine has a misfire. We've got 4 more engines, so at the time that it may slow down -- China is picking up. When, for instance, the COVID restrictions really -- but we just redirected some of our high jewelry and stock to Japan. [We're in both]. So one must anticipate these things. Will it be a boom year? I suspect that America started slowing down in November. And our results do not look [and says, "Mister, no. I liked it that Sephora did well]." And I didn't speak about the rest, too much. We've also had one Maison that I'm not going to mention. They did, had a very -- a good first quarter, but generally we sense a slowdown in the United States. Is that a fair answer?

Zuzanna Pusz

A very fair answer.

Johann Rupert

Okay. And now the next 2, a -- binary questions, you said.

Zuzanna Pusz

[indiscernible].

Johann Rupert

Okay.

Zuzanna Pusz

On pricing. It is a very simple one. Can you tell us -- that's maybe for Burkhart or Cyrille, Nicolas. What's been the pricing you've implemented in April, especially for Cartier and Van Cleef & Arpels?

Johann Rupert

I will answer that one, which is they didn't increase prices by as much as I wanted them to -- no. They felt that one has to look over the medium to long term; and that we shouldn't be using shortages, et cetera to raise prices. So we have generally not increased prices as much as our competitors. And Cartier, for instance, only took an increase in April, so don't look at Cartier and think price increases.

Zuzanna Pusz

Was the prices low digit? I mean...

Johann Rupert

Sorry...

Burkhart Grund

Done at just 1%...

Zuzanna Pusz

And I mean, was it high single digit?

Burkhart Grund

Someone wrote 10%, if I recall correctly. That is incorrect.

Johann Rupert

Yes. It's incorrect.

Zuzanna Pusz

But it may have been between 8% to 10% on some items, right?

Johann Rupert

No.

Burkhart Grund

5%

Johann Rupert

It's in the medium single figures.

Zuzanna Pusz

Okay, perfect.

Johann Rupert

Okay. Thank you.

Zuzanna Pusz

And the last one. And I hope you will like that one because it's a bit more long term, not the classic short-term questions we ask. And so maybe if you could tell us a little bit more about what you're doing on production capacity. Because we've seen in a slide you've been investing a little bit more. Obviously demand is really strong, so it's a nice thing to see that you're seeing growth; and sort of your belief in the business obviously in the long term, as you're investing more. And last thing, Burkhart, I wanted to say: We've noticed the special dividend for a second time in a row. Because I know, last year, no one noticed it. So I just wanted to say that's been appreciated.

Burkhart Grund

Thank you.

Johann Rupert

The special dividend. We look at our capital requirements over the next 3 to 5 years, and where we feel we have the capacity, we will return the capital. Having -- I promised 15% 10 years ago, compounded. And we're around about just above that, Burkhart. I didn't know how bad things were going to get. I should revise that somewhat, but we're also getting another CHF 1 billion in November from the warrants. They've been very profitable for those who kept them, but we looked at that. So in order to pay the dividend, we have to look at our capital commitments and what we need to -- and remember the one thing none of you have written about is the bonds that we issued. [They watch it]. It's 11, maturity...

Burkhart Grund

11.2, yes.

Johann Rupert

11.2 years maturity, 1.3%. Because we suspected that the easy money would change sooner or later and that interest rates would go up. So we have that capital available as well. And it's really making sure that the next 5 to 10 years -- we got stress tested during COVID. We forget, April 3 years ago, we lost €438 million in a month, 1 month. That's when Burkhart and I stopped sleeping. Because me, immediately I extrapolated this by 12. And you start getting panic stricken. Luckily, we actually came through; and this company was stress tested. I really hope we do not go through that again, but it now makes me sleep a lot better, to know that we have the resilience and the flexibility; and that our colleagues, even though some have to be persuaded -- should I say -- the Anglo-Saxon people took it to more -- quicker and more readily than the non-Anglo-Saxons in our company, but everybody got on line. Special dividend is what it is. It's a special dividend. Thank you. And Burkhart -- see. Why is it -- make the special dividends...

Jerome Lambert

Yes [indiscernible].

Burkhart Grund

Yes, there are steps to looking...

Zuzanna Pusz

There's the manufacturing [indiscernible] in manufacturing?

Jerome Lambert

Yes, yes. When it comes to production and manufacturing, maybe today at Richemont, roughly more than every 4 person or every 4 colleagues is working in production of -- and logistic, so -- and it takes time to train. It takes time to develop capacity, so we keep investing in our capacity. Last year, we said it was roughly 1,500 new colleagues that joined us in production. This year, I was checking statistic. We are exactly in the same volume number. And when it comes to facility, same story. We have 2 or 3 facilities opening on a yearly basis, mid-size. Because we are not in mega factory. We are in mid-size factory, and this year will not be different. We'll have 3 to 5 new facilities that will open either in Switzerland; or in close Europe, between Italy, France or Germany.

Sophie Cagnard

Maybe Cyrille and -- I don't know if Nicolas want to comment further.

Unidentified Company Representative

Yes.

Cyrille Vigneron

So you have been following us for quite some time, so you know from our fiscal '20 or basically calendar year 2019 how much we have grown, both Van Cleef and Cartier. And so this requires additional volumes, of course. So we have facilities for Cartier in France and Italy and Switzerland, and of course, we had to expand. So we have just reopened a manufacturer in [Torino], but of course, this was in the making for 3 years. And the other one coming in Valenza was also prepared before. And we need this capacity extension. We also have a network of partner suppliers who we also encourage to also invest. There is this very strong demand in jewelry, especially branded jewelry; and we expect this to continue to grow. So there is competition, but it's also a growing pie, so it requires additional capacity, basically, we control.

Johann Rupert

It's -- it actually leads the excess demand. It's actually quite concerning at times, especially in watches where the waiting list on some Langes and -- some of the watches, Vacheron, some Cartier pieces were up to -- closer to 2 years. And I -- constantly, I have to explain to -- let's use Lange. That in order to make some of the Lange watches, the ones -- the sports, ODYSSEUS, you must have been -- a lady or a gentleman, a watchmaker for at least 15 years, probably 18 years, they say 20 years, to be able to put this -- to make this watch. Now 20 years ago, there were not too many young people queuing up to be watchmakers in Glashütte. And when we tell them it's actually limited by artisanal skills and hands and eyes and, "Please visit the factory before you're telling us we're creating artificial demand," then they get it, but there are some clients that already own €10 million, €15 million worth of watches that cannot understand it. But so it's not creating artificial demand. I did tell them to calm down on the communication, thought, because why do you communicate a watch that you can't get on a waiting list for. So we have to expand, but both in Cartier and in Van Cleef, it's also a question of a culture and the training. It's not just building a plot.

So for instance, Delvaux. We chose to go where there's a culture, where people already have the skills, which is one of the reasons why we're so strongly promoting Homo Faber to -- a lot of the great artisans of Europe have said to us their children are not really interested. And when you visit them, you find that they're great artisans, but they don't even understand the Internet. So they have a website. Clients cannot find it. Only -- that's why, when you go to Milan -- our Milanese and Roman friends, they show us things that we didn't know existed. They don't go to Rodeo Drive or Bond Street or Champs-Élysées or Montenapoleone. They've got their own people. We -- it's not just press a button and open and manufacture. It's training.

One of my big problems with work from home, which I'm going to have to address this afternoon with a town hall. I expect that it was my son's generation who would all say, "No. I want to work from home. [expletive] No. They are being deprived from being -- from learning from people who are 45-year old plus. Now why, if we hire a very talented 25-year-old man or woman, should we allow his or her boss to set that up when [Karlheinz's] people go to the -- to work? The sales staff go, but us, who are really the overage -- I mean, if you're not in designing or manufacturing or selling, you're overage, in reality, okay? But we have this attitude, "We'll work from home." How are you going to transmit the culture? So your question, that question is -- I mean we can build a plant, but who do we get inside? So there's an inelasticity which is not easily met, but of course, it's very critical to us not to lose those skills, so you will see more of a vertical integration. That is your real answer.

Sophie Cagnard

You can give the microphone to Ashley?

Ashley Wallace

Ashley Wallace from Bank of America. Congratulations on an outstanding results. I have 2 questions. My first question is on jewelry. Can you help us understand how you think about the midterm demand for jewelry in light of increased competition? And how you plan to prioritize your investment in the brand as a result of that?

And then my second question, if it's okay to ask now, is on Specialist Watchmakers saw a nice margin development this year, up to 19%, so I think the highest level in 7 years. But it's still down from the peak of 27% a decade or so ago. I was wondering how we should think about the margin from here. Essentially, is there more room for improvement? And if so, ultimately, where does that come from?

Jerome Lambert

[indiscernible] Nicolas will continue. As I said before, there is a growing demand for jewelry and for the branded jewelry overall. So as far as -- there is a growth in the world wealth, there is growth for luxury goods, and there is an increasing growth for jewelry. So even if there is more competition, there's much more demand. So there is room for many. And in terms of international brands in jewelry, they are very few, not so many. And so there is room for growth. So as far as we -- if we believe that there is room for economic growth in the world, and there will be room for growth, additional in branded jewelry. So that's why we have to be ready for that, but knowing there's also high volatility, as Johann mentioned, and so we can't expect just linear growth. We have to be ready for cases where we can have contractions and cases where we have rebounds, as we have seen in the past to now 10 years.

Nicolas Bos

So I can really confirm, I think, as we know, and we repeat it very, very often, it's still a market where non-branded creations are dominant, so there is still room to grow for brands. And there are not new geographies, but if I'm thinking of an example like Thailand, for instance, which is a country with a very, very strong history of jewelry, it was a history of local jewelers and local designers. And in the last few years, we've seen that market really opening up quite strongly to international brands, Cartier, Van Cleef, others. And that's now becoming quite a significant market, which it wasn't for us even 5 or 10 years ago. And we have many other examples like that. So we're quite confident that it will take time, it will take additional investments. There will be cycles, but there is still a lot of room for growth, yes.

Jerome Lambert

Maybe when it comes to specialist watchmaker, just to keep in mind that in 2017, the demand of the Chairman, or instruction of the Chairman, they call for a big reset of our -- of the where we will be in capacity to develop our business in a more sustainable way called true demand, with a strict follow-up of what was the sellout, what was the sell-in, in parallel, the Maisons being investing a lot of energy and time, both in focusing on innovating within the [econ] and in quality. You saw the result. We had some difficult years while we had to readjust the model on the true demand, we have [indiscernible], buy back the stock years ago, the results...

Johann Rupert

Again, the human nature of over extrapolating a trip, watchers were doing that. So we incentivized colleagues on that, never thinking that democracy riots would break out in Hong Kong, and this happened. You can tie it to -- because it's the biggest watch market in the world. We like that. We found out excess watches. Everybody Rolex. Initially, it was us and Rolex who really acted soberly and just cleaned that up. Now we really monitor sell in and sell out.

Jerome Lambert

And then somehow, in a year like this year, it was very fragmented or had a lot of volatility in the heart of our clientele for the watches, meaning here in China. You saw in the result our stress test, and you saw through the COVID as well that despite all that, you had the leverage. Despite all that, you see an increase of further profitability, showing in somehow, if not the strength, at least already the sustainability of the model itself. [indiscernible] gradual. It takes time.

Johann Rupert

Yes, but it's also the secondhand watch market is we -- it needs to come down. The ODYSSEUS, when Wilhelm and his colleagues came and presented that steel watch to me, and they wanted to sell it at €28,000, I said, you're mad. It's too little. So we settled with €34,000. Months later, somebody bought the watch, and then we had quite a discussion with him, put it up for sale at auction, it sold for €89,000. Then another rather

-- a future non-Lange & Sohne approved client sold his for €93,000.

So now you would say normal economics would say, move the price to €45,000, €50,000, but we look at the input and the costs, and we -- and that -- to refer to an early question, we think there's a fair price for a product. Because if you want your clients and their children to be your clients, then you treat people properly. And that also means that there's a residential value for their watches that they don't buy. I mean if you buy a new -- think of Tesla. You go and buy a car for $16,000 or $20,000, and then Mr. Musk decides, now, I'll sell it for $12,000, what do you think the guy paid $16,000 feels like, or the lady?

So you've got to treat people long term. So when you talk about margins on watches, it's not just let's take what we can get. It's building a long-term trust with the client, which really does play into the pricing decision. We have a situation where Cartier did a limited addition of the Pebble watch, 150 pieces. And on -- tomorrow, at the Phillips auction, watch #71, which the lady must have designated the number, because she got her watch before I got my watch, I then asked him, I asked him, please make this watch 150 at buy price exactly the same as all of you, okay? So before number 150 gets, she's putting it up for auction tomorrow. So you can imagine a phone call that you got when I got the Phillips catalog, but there's a craziness in the secondhand watch market and the speculation.

Sophie Cagnard

Louise, please go ahead.

Louise Singlehurst

It's Louise Singlehurst from Goldman Sachs. Just thinking about the longer-term trend. I wonder if we consider that the Jewellery Maisons over the past 10 years, I wonder if I can ask Mr. Rupert in terms of how you did versus your longer-term plans back then? And if we look at the numbers, I mean, you've grown more than 2, 2.5 fold.

Johann Rupert

1976. We paid $7 million. We still have an argument, was it $6 million or $8 million? But we settled on $7 million. 33% of Cartier more. So it's been -- I've said to a friend of mine, he and I have been together that he asked with the last 3 wives, okay? It's -- and in the '80s, Cartier didn't do very well at all. So it's been up and down, but I would say, Cyrille, what would you say? From about the [Northeast], 22,000, 2,000. A steady trend has happened. If you do things properly, and you carry on doing things properly, and then Van Cleef, it meets your very lofty expectation.

Louise Singlehurst

And I don't want to overextrapolate trends here, to your earlier comment. But in terms of the next 10 years, I mean, can it be done again? Is it more of a demand or also...

Johann Rupert

Women going to tell men, I don't want that. Please, you answer me.

Louise Singlehurst

I'll take that as a yes.

Johann Rupert

We've just got to keep brand equity high that the teenage daughter says to a dad, like a friend of mine in New York, when he bought her another brand, and the daughter said to him, "What have I done wrong?" Why did -- mentioning her friend, "Why did she get that? What have I done wrong?" He called me, he said, he bought shares [indiscernible]. It's [Felipe]. He said, "I have to go and buy shares in exchange."

No, you've got to get brand equity and keep it going and keep desirability. You know, Louise, some years ago in a conversation, I said that we need to grow by, let's say, 15% a year. Means we need to grow our cash flow by 15% a year, which means we need, and in the end, we've got to grow our desirability by more than 15% per year and keeping the brand DNA pure.

My nightmare is with TikTok and social media. I see every ad lumped on with our colleagues, I see every product. Balenciaga would never ever have occurred at [indiscernible]. And trust me, Bud Light would not have happened. It's not our role to be social adjudicators. We have colleagues, shareholders, commercial partners of all sexes, races, religious beliefs, and we're not -- as I said, I don't have a dog in that fight.

We just want to have stayed true to the culture of Cartier, stay true to the culture for Van Cleef, Lange, all of our products, and not get greedy. Don't pick low-hanging fruit, just grow within yourself and keep the brand's equity top of the mind. So in 10 years' time, yes, I expect Cartier and Van Cleef and -- yes, and hopefully, we'll have then Delvaux, Buccellati, and grow them. We've been able to do it up until now.

Van Cleef, we don't want to give you the figures, but Van Cleef has been a phenomenal success. We're seeing first signs at Buccellati. We've seen signs at Delvaux. And they mentioned all of the euros, the designers. We've got a gentleman, Mossimo Giannulli, who is G/FORE. He's a genius. He's an absolute genius, [L.A.] is his third business. They've moved G/FORE. Now Scott not only bought G/FORE. I don't get the credit for that. It was a psychographic, I sent him away with that stuff. I mean, that was green. It's too young for me.

Now it's the only shoes I wear, because you can put them on, walk for 10 miles without getting blisters. He's a genius. But in Korea, they've moved him in the department stores from the sportswear to the luxury goods floor because the turnover and profit per square meter equals that of CHANEL. We -- I have really -- the positioning of Cartier and Van Cleef and Buccellati, it's so clear. CHANEL is clear. You wouldn't look at the successful. It's a very clear position. And that's -- my colleagues have successfully managed to maintain that.

Louise Singlehurst

That gives us a very favorable look in terms of growth outlook. I wonder if I can move to Burkhart and just ask about the 35% margins, we're back to actually where we were. I think it was around 35% back in 2013. But obviously, the business in [indiscernible] has changed phenomenally in terms of scale and distribution channel. Over the next 10 years, obviously, very good growth prospects. Can we think that the margins -- are they mid-30s, is that now...

Johann Rupert

No. No, he's prohibited from making the mistakes that Jan du Plessis made. Alan, when was that? 22 years ago. Alan and I are sitting there, and the next moment, Jan du Plessis starts talking about the projected margins, and Alan and I [indiscernible].

Louise Singlehurst

I tried.

Johann Rupert

Okay answer, but I could say we're happy with where we are, as you can imagine, and the second answer would be ask me in 10 years. And then you get a concrete answer. But you tried.

Patrik Schwendimann

Patrik Schwendimann, Zurcher Kantonalbank. The first question on the growth, watch have reached a new record level, also strong brand equity. What do you think here in the mid to long term? Is there any further improvement because of an even strong brand equity and also scale effect? Or would you say you're now happy with this margin? That's my first question.

Second question regarding the Chinese consumer. What was the exposure to the Chinese consumer before COVID, so including tourists? And what is it currently?

Johann Rupert

Obviously, we try to operating leverage. But you know it's containing costs. And as we've said, if you look at the goodwill that we wrote off in the noncash charges, you briefly referred to it, our online investment over 20 years was about €1.3 billion. That's the cost that we wrote off. But we've spent in CapEx and leases, what was it, 4.3...

Jerome Lambert

On the network, yes, on the network.

Johann Rupert

We want to increase the asset turnover per boutique. I think that's the best way of describing online. When a customer, he or she, gets into a boutique, wherever we've done it successfully, the client conversion ratios jump through the roof. Also, you move, your asset turnover will go up if you properly know exactly where all your stock is. So it's visibility, it's data.

We will hopefully get there through better physical stock management based upon better data, not only data looking back about where everything is, what is where, but also being able to predict where it will be needed. And none of you have asked about ChatGPT, where will that fit in. Because trust me, if I were you, I'd seriously worry about ChatGPT. It's going to affect a lot of people that don't quite expect it. Where will it fit into the Farfetch module? I was fortunate to meet Microsoft's head of quant, and that fell [indiscernible] lives in Seattle, and he said, Austria, and studied in Switzerland.

Last September, they just tested it internally to see what are people going to use it for, because they were worried. People are writing novels, and people were writing poetry, and it was loved, it wasn't bad, because we know it's going to get into bad answer. Then you leased at December, 100 million people. Today, it's 200 million people.

Now when you ask me how the tech advances, I cannot tell you, except we'd better know how to use it when it appears. So in terms of -- what you're really asking is how can we continue to improve efficiency? Is that a fair -- because that will increase the profit -- the operating leverage. I wish I could answer you, except we answer ourselves every day.

Patrik Schwendimann

But brand equity, right, and all it is [indiscernible].

Johann Rupert

Brand equity, today, you go and ask ChatGPT, what do you think of Cartier?

Burkhart Grund

Patrik, just -- let me just be specific on no guidance. And I'm just trying to explain why we also are very reluctant to give guidance, even indications, right? And that is, if you look at the gross margin specifically, you mainly have -- basically, you have 4 elements in there, right, that influence the way the gross margin goes. Two are in our control and, two are not under our control. So those that are not under our control is exchange rate and it's, let's say, input prices, which is commodities, gold, diamonds, whatever, and it's labor, right? Both have been volatile in availability and in pricing. So we don't -- we cannot control that, and that has always been the case.

And in recent times, if we think about the volatility of diamonds that we have -- diamond pricing that we've had, or the availability of skilled labor, and it's not just bringing them in, but it's also upskilling them over very long periods of time.

Johann Rupert

But hang on, Russia invades Ukraine, 50% of our business is -- I mean the small diamonds come from Russia. I'm saying at that time. We shut our businesses the morning of the invasion. We didn't wait for days for the all the stock to clear. We shut it. We immediately said we're not buying diamonds from Russia. Suddenly, I had some very interested colleagues. So we went to another major supplier immediately. Luckily, we had very good relationships with them. They rejigged their business system to help us, so we could act morally.

Now you tell me, please, what's going to happen in the next few years? Then we can have a long lunch, and I can tell you what my answers may be with my colleagues. But every day, Burkhart, we speak obviously all the time, who would have thought of COVID? Who would have thought that the Russian invasion of the Ukraine? We just got to be flexible. And what I'm really happy about, we've got a team of people really working on our IT system now that will give us flexibility and speed and transparency. We can't promise you margins. But what I can promise you is the same questions you ask of us, we ask ourselves. It's better to be invested with people who worry all the time.

Burkhart Grund

Probably just to tie it up, the other -- the elements that we manage is our pricing, but within the limits of our fair pricing approach and policy, right? So -- which is geared for the mid to long term, stable client relationships and productivity in our operations. And that is what we worry about, and that's what we focus on, right? So 4 elements, 2 are in our control, sort of, 2 are not. And that's why making lofty predictions, one way or the other, are difficult to uphold over time. Just the nature of the business.

Patrik Schwendimann

In regarding to Chinese consumers before COVID, what's the exposure roughly in tourists, and what was the...

Johann Rupert

It's very difficult because we don't go Chinese consumers, Japanese consumers. We know where people buy. But if you say ethnic Chinese people, a lot of ethnic Chinese people bought products in Paris, but it varies year by year. A very powerful percentage of our consumers. But let's say for APAC, Europe, United States, that's what you -- that's been for the last 20 years, and then it changes.

Burkhart Grund

I mean, if we focus, we all know the numbers, they're not ours, but let's say across the industry, we were talking about 33% to 36%, more or less.

Johann Rupert

Please, do not get this stuff because we don't know, is it year's time?

Burkhart Grund

No, no, but it's out there. No, that's what I'm saying, pre-COVID, you back-solve, when you look at our financial statements, that our Chinese -- and we call them residents now, or by residency, we're at 24%. But that is a snapshot, let's say, in a balance sheet sort of approach, where you look at a snapshot end of last fiscal year. How it's going to play out, what the weight is going to be in a year's or in 5 years' time, I have no idea.

Johann Rupert

I have an idea, countries that studies them, science, technology, engineering, mathematics. And we don't spend all the time debating woke issues around campuses will be bigger buyers of our products in 5 to 10 years. My biggest fear is how will the West react to the inevitable growth of China. It's inevitable. The people are smart, they work -- study like you all, and they work like you all. And this, by the way, I said 10 and 15 years ago. Those people tend to get richer. Okay, so expect them to get richer.

Burkhart Grund

And share that with us.

Johann Rupert

Yes.

Sophie Cagnard

Patrik, if you can hand over to Edouard. And then afterwards, I think [indiscernible] and maybe we'll end afterwards.

Edouard Aubin

Edouard Aubin, Morgan Stanley. So sorry to follow up on the China and Chinese nationals. It seems that [indiscernible] this year, I mean the up-to-date calendar year, that the growth in terms of luxury spend is driven either by high net worth individuals spending rather the middle class participating, so recruitment. Is that what you're observing so far?

And also, if you could please tell us, on the 2-year basis, i.e., versus '21, are you seeing an acceleration in terms of the trend in April, May versus the first quarter of the -- calendar quarter of the year? Well, I think it's more or less stable. Just quite excitedly, I know you don't [indiscernible].

The second question, I'll do them in order. But flagships, so you spend a lot of time talking about how you've renovated, invested in your network, and indeed, the [indiscernible] store, Cartier is very impressive. But some of your friends and peers are investing also massively, and not just in hard luxury a few weeks ago, but also in soft luxury. In their flagship, they're putting restaurants, cafe, museum within the flagship. So do you think there is -- the bar has been raised in terms of flagship, and there's been -- there might be an inflection point to expect from you guys? So that would be my second one.

And then lastly on M&A. Your balance sheet is indeed incredibly strong. You're returning capital to shareholders, you've announced that this morning. But obviously, you have the balance sheet to make acquisition. I know no one knows what you expect over the long term, but what would you say is the probability that you make a material transaction over the next 12 to 24 months? And could it be in fashion and leather goods, if that's the case?

Johann Rupert

Okay. I came from M&A. I tend to find in my past that the companies that are easy to buy, the companies that you buy, normally, there's a reason why they're very easy to buy. And you always underestimate the difficulty of fixing it, and the most difficult thing is inevitably the culture. That takes a lot longer that anything else. We have been more successful in buying even smaller companies with great culture, and then empowering them.

If there's a financial meltdown, yes, maybe we'll look at bigger companies that are not performing because of exogenous factors, external factors. And yes, then we look. But at this stage, the terrible thing is the companies that are really nice are not for sale, okay? And that's across the board.

To get back to your first question. Sorry.

Edouard Aubin

VIC clients.

Johann Rupert

Yes. I tried to allude to that. Sorry, it was in the press this morning. I said the first sales here are happening, but it is wealthy, I wouldn't say high net worth, wealthy individuals that are traveling. There are no big groups that we've seen or on the horizon, so they've bought in China related, in Singapore, in Macau, in Thailand, and starting in Singapore. But it's initially been high net worth individuals, if you wish to call them that.

In terms -- I am skeptic about taking a Maisons name and getting into food and beverage. You cannot control the quality. You change the chef and hotels -- the hotel, I owned a hotel, it was the most [expletive] thing I ever did in my life. They never call to say they had a great time. But boy, let the chef be late or something, you get your -- and Leopard Creek, Southern Sun managed it. They didn't know that. But hotels are particular businesses that should be left to hoteliers. And the Belmont group, I knew the previous owner, he was a genius, okay? It's good.

But for us to start the hotels and restaurants, no. We've got enough problems with our own dining facility here. These people eat the most incredibly boring food, the Swiss, here. I mean…

Edouard Aubin

It's healthy.

Johann Rupert

I know it's healthy, but...

Jerome Lambert

And we have good cartesian plane.

Johann Rupert

No, I know. But no, food and beverage, no. And yes, they're lifting the bar, but are we going to be opening restaurants and food and beverage at Cartier or Van Cleef? No.

Jerome Lambert

And when it comes to flagship, we have renovated most of them. There are still some coming with [indiscernible] or Fifth Avenue in New York, or [indiscernible] in Seoul, Taipei 101. ,and they've been incredibly well-received. So we don't believe that the luxury jewelry should become a department store. Some believe it, definitely.

Johann Rupert

Don't go that far.

Jerome Lambert

We think we have to be exclusive, yes, inviting, and to make us most beautiful as we can, and they have been very, very well received. So I think we have done what was right for us.

Sophie Cagnard

Carole, yes, go ahead.

Carole Madjo

Carole Madjo from Barclays. Two questions, please. The first one on the jewelry segment. You mentioned that there is a bit more competition now on the sector. And I was wondering if you're also seeing that in terms of retaining talents. So do you see now a bit more war of competition to attract the talent and to keep them at the headquarters level, stores level, et cetera? That's the first question.

The second one was on the Chinese market and most of all on the island of Hainan, which you also just mentioned before, and which, of course, is becoming a bigger point of focus lately. Can you share a bit more insight on how you view this market? How big is your exposure in Hainan today on your key brands? And how many stores do you expect to open going forward? And last point on that, I think when we think of Hainan, there are still concerns about discounting gray markets or weaker infrastructure. So how do you tackle these challenges in order to avoid brand dilution?

Nicolas Bos

I can try to answer on the first one. Yes, there is increased competition in jewelry, not so much because there are so many new brands. And I think at the end of the day, if you think of major American brands, they've been there for a very, very long time. But of course, now there is major reinvestment into them. And as it was mentioned several times, we are really working in activities where building expertise, building culture takes a lot of time, and probably more time than the speed of development, or the pace of development of that market and that industry in the last few years.

So that calls for, yes, competition over talents in the workshops, in head offices, in design studios everywhere, which is healthy to some extent. And then it forces all of us to be more attractive and to find ways to better trend, better return, better motivate our teams across the board, and this is probably something that we're going to see for some time because, once again, it will take years to really trend the next generations of craftsman, the next generations of designers, and this is going to be the case, and we deal with it.

Jerome Lambert

And so the world of luxury is a rather close world where everyone knows everyone. But if we see the balance of who we have attracted and who has been taken or wanted to have a follow-up in their career is quite balanced. So we don't see that there is a kind of a specific part of imbalance in this kind of talent questions and retention, but also recruitment, training development. I think we need talent, and we recruit them. And some of our colleagues also sometimes prefer to take different direction to their career. And as far as things are as they are now, it's quite fine. But we have to try and develop.

Cartier has been for the 20 years kind of a school where many of the Jewellery Maisons have people coming from Cartier at some point there. And you can look in the profession, those who at some point were either here or in Van Cleef. We can see it's been there for quite some time. So it's not so different now than before because as Nicolas said, basically, it's the same brands, just have changed hands.

Johann Rupert

Okay. Summary is we have a product committee meeting. And so in Cartier, they'll come regularly, Van Cleef, everybody, and we'll meet. The new products and new campaigns, it's now been going for decades. Whenever anything goes off code, and we know before Cyrille, there were quite a few that I'd sell.

Now how do we know it's off code? Because you look at it. But then the clients look at it, and they see this is off code, and then they don't buy it. Now I don't care if you've got $1 trillion, if you try to imitate that code, the clients are too sophisticated. So when you look at Van Cleef, you know it's Van Cleef. Other people have copied the Alhambra, they try and copy Cartier, the clients know.

So the strongest protection against people, I don't care how much money and I don't care the sizes that they build it, is that we stick to our DNA and our codes. Because if we sit there, Cyrille and Nicolas, and we know it's slightly off code, the clients, sure as hell, are going to know it. And that's our protection. And it's very difficult. We've tried it, to buy something that is at a lower-price category and a lower category and to lift it up. It's easier to buy a Buccellati and democratize it by making it more accessible than it is to do the reverse. We'll just stick to our knitting. No restaurants.

Carole Madjo

And then on -- so I may on Hainan?

Jerome Lambert

Just on Hainan, first, the number of visitors of Hainan for this year and last year is expected -- since their opening is expected this year to be something like 87 million. it's 3 to 4x Dubai. You know it well. So it's an important place for tourists shopping like many others. There, our Maisons are present with our local partner. As you know well as well, you cannot operate directly there. It's not what it used to be still today, which is fine, and it represents a fraction of our business in China. And you know as well, a big characteristic of Richemont is that our products is numbers, so we can follow our products and we can ensure then that their distribution is done in a qualitative way.

So no concern in terms of exposure because it's a fraction of China -- of the rest of China, let's say, and nice recovery. Will it be as big as it used to be a couple of months ago or a quarter ago? Let's see. And you know well as well that Hainan is set to be a more and more resort business, shopping practice, regular or standard business practice. So nice to have. Nothing to worry.

Sophie Cagnard

Rogerio.

Rogerio Fujimori

Rogerio Fujimori from Stifel. I have one follow-up on the mix dynamics at Jewellery Maisons and a follow-up on watches. I think you've mentioned that you have been less aggressive on pricing than competitors. So out of the balance with a very strong growth in Jewellery Maisons in the last 3 years, the last 12 months, how mix has been -- how mix has contributed to growth given the success of iconic models and the brand equity getting stronger and stronger? So just interested to see how average selling prices are moving?

And then on watches, as China recovers, the U.S. slows, and the European and Japanese markets seem to be holding up well. Have you seen any divergence in terms of category trends with watches being a little bit more exposed to wholesale and the preowned market, as you've mentioned, cooling a little bit, slowing. I appreciate watches are much more DTC and much more geographic balanced than before.

Jerome Lambert

Yes. I can start by the watches. Thank you for your question. It's indeed a very interesting one. And in the lines well as well, what was said by the Chairman as well before with the change of business model during the last 10 years, and accelerated during the last 5. So indeed, the Maison being more and more operating, either in their own shop. And we have seen 56% for Specialist Watchmakers or with our partner. Because ultimately, you're working with good partners all over the world as being behind their development of our Maisons for centuries.

And if you take the external boutique, personal internal boutique, you have already more than 3/4 of our total sales. So that capability of developing qualitative in time -- for a long-term relationship has been changing our business approach. Therefore, much less exposing us not only to wholesale, I would say, to stock of wholesale, if I may. Because the biggest exposure in this case is not so much that you work with a partner, but that between you and your partners somewhere, there is an imbalance between what you sell him and what he sells out. And then when it reduce speed, you don't have a factor of 1:1 in effect, but a 1:10. And there are -- the stress test that we have been through during the last 3 years have been showing us that they're organizing our model around fundamentals was an absolute necessity, if not the only solution.

So for the time being, again, it's not a wholesale exposure that will cause a breakdown of the model. And again, as the Chairman was saying, now the watches, before, it was on -- it was more for the jeweler and the 5 engine, while our watch business was powered with by 1.5 engine. Now the watch is also powered by 5 engine.

Johann Rupert

I also think that we had a change of strategy stroke philosophy, whereas some of major Maisons would launch a new type of watch like every 3 to 5 years and massively push that, whilst the previous massive boost still have stock in wholesale. Guess what happens? You make your own products obsolete by making this new one the watch to have. So we stopped that. Said no, you must concentrate more on classic watches that will not -- no planned obsolescence anymore.

If you look at Audi, Audi resale value, you can't really see when an Audi was made. Porch 911, you've got to be like Frank Vivier, who's a lunatic, to say that's a 1967 or 1994, but then he doesn't know how many liters is in each car, which was quite astonishing. I mean, what's the size of this engine? Then go ask somebody if you don't really know the question. But some people have managed to contemporize without -- take an Audi A8 versus a Maybach, who the hell wants to be seen in a Maybach or a Rolls-Royce Cullinan? Could it be -- Audi, you don't quite know A6, A8, et cetera, and they don't radically change. So there's a residual value to the cars. If you change all the time, you buy something for your daughter, your wife, yourself. And 3 years later, they say, you've got last year's model or 3 years ago's model.

So look at, for instance, to give an example, the IWC Pilots. My era was Gunter Blumlein, the man who really [indiscernible]. Genius. And there was an IWC Pilot's Watch still made by him that I spotted that came up for sale. And I bought it, and I wear it. An IWC watch, people would say, "Oh, that's interesting." Then they look at it, they didn't know it was done in 1991, but it was recognizable as an IWC Pilot Watch.

Say, if you look at IWC Pilot Watches, if it's 2 years ago's model, the retailer doesn't have to go and discount it at 40% because there's still a demand. So it's an art. So when you ask about Hainan gray markets, what you asked earlier on the watch market, we would design a new watch, pump it, push it, reward the people for selling it, incentivized. Now it's a lot different. And we want to be able to have that residual value with the client. So you won't see a huge launch and then taping down, which were the big basic philosophy behind it. It's a different philosophy.

And by the way, as much as we try to add value here, our best sellers were done 30, 40 years ago, and we've just tuned it, the Tank, the LOVE bracelet, Alhambra. It is very difficult to tell creative people. There was a famous German architect who said the best is always simple, but simple is not always the best. It's hard to tell creative people, do not try to be too creative because you're going to jump off peaks.

Now Nicolas, I mean, especially you, Cyrille, to have to tell them, listen, just remember the [indiscernible] Cartier, that's where we have previous management, current management and hopefully future management, and we interact to keep that corporate memory and DNA because that's what the clients want.

Rogerio Fujimori

And on the other question, your mix, volume pricing.

Nicolas Bos

Yes. No, we're not mentioning mix on the commercial margin, I think that you have different type of mix between categories. And I speak for Van Cleef for instance, it has remained quite stable, basically, the growth that we've seen, or the development that we've seen have been in the different categories, from high jewelry to more daily wear jewelry and watches. It's more the mix by network that has tightly evolved, where even though we are a retail company, we also operate some external stores that were basically the sales are wholesale sales at wholesale price. And that channel has not increased at the same pace as internal retail or online sales. So the respective weight of full price retail sales is higher. So this is where you have a mix effect as far as we are concerned.

Jerome Lambert

I would say, in our case, we have 3 components. Think, of course, increase in volumes, but the increase is -- value has been stronger, meaning there have been higher increase for higher price point, not only for high jewelry. For instance, on watches, we have a very high demand for gold-on-gold panther, for instance, we have difficulty to supply.

So it's meaning shifting the average price point higher, and basically in all regions. And then, of course, price increase is also added. But this part is like a minor part. I was saying higher average price point and talk a little bit of price increase. But I say the price increase was mostly to carry on for the inflation that came from gold, from diamond, from Swiss franc that we had to take over. Dig into again also currency fluctuation that last year were very strong. So we could not increase some of them in dollar, [indiscernible] was very high, and things shifted again, so we could rebalance in a different way.

Sophie Cagnard

It's already 11:31. So I don't know whether you want us to take questions online, they are -- a lot of them have been answered already. Maybe a very short one, a quick one to answer relating to the A&P rate. Why the 20 basis points reduction from 9.9% represented to 9.7%. I don't know, Burkhart, if you want to reply to that one? And then there's another one, it's on the communications rate.

Burkhart Grund

I can answer that. It's a very quick answer. Don't read anything into it. I mean, 19% sales growth, 17% A&P growth. It's close to €300 million additional communication spend compared to the prior year. Don't read anything into it. No shift in strategy whatsoever behind it.

Sophie Cagnard

And then we have a question on F&A Maisons, whether the group's F&A Maisons are benefiting from the quiet luxury trends. So that's maybe more for...

Johann Rupert

Quiet luxury, we've been preaching for 5 years. You have all heard that we're saying less bling. The Audi example, yes, quiet luxury. We believe in its style, not fashion.

Sophie Cagnard

So I guess this concludes today's presentation. Thank you very much for your participation. And for those of you here, please join us upstairs for some refreshment.

Jerome Lambert

Those of you who've been here long enough, when Joe Kanoi was Chairman, he hated meeting with anybody and analysts because he had a particular difficulty in pronouncing focus that, often, hours before, he would practice focus. And then he'd get here and start, every now and again, they'd be aligned, we have to focus, and Joe would go. Any case, thank you all for coming.