Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Kering's 2019 first half results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone. I must advise you this conference is being recorded today, Thursday, the 25th of July, 2019. I would now like to hand the conference over to your speaker today, Jean-Marc Duplaix. Please go ahead.
Good evening or good afternoon. Welcome to Kering's 2019 first half results conference call. I will go through the highlights of the period, and Jean-François will offer some words of conclusion before we take your questions. Let's jump straight to a summary of our performance on slide four. In the first half, we delivered another very strong set of operating figures. Once again, our growth is both ahead of the market and highly profitable. Revenue first. Sales were up nearly 19% reported and above 15% comparable. That's an impressive additional EUR 1.2 billion in revenue year on year to reach EUR 7.6 billion. By region, and continuing the trends we already commented on last quarter, Asia Pacific was a key driver with a very strong 24% comparable increase. Western Europe and Japan posted healthy growth, up 15% and 10% respectively.
The pace in North America was more moderate, up 7%, on top of a 45% jump last year in the same period. In Q2, group revenue increased by 16% reported and 13% comparable. Second, recurring operating income. I have to start with a quick explanation relating to the first application of IFRS 16. The new standard, in use since January 1st, massively modifies lease accounting. We have decided during a transition phase to restate the previous period in IFRS 16, so you have a fully comparable base. Restatements of H1 2018 under IFRS 16 have been available on our website for two weeks. We are also providing bridges to explain how IFRS 16 reported figures would translate into the previous standard. That's the adjusted data you will see in subsequent slides.
This being said, recurring operating income increased by a noteworthy 25% to reach EUR 2.3 billion for a record profitability of 29.5% or 29.2% adjusted. We grew margin by more than 150 basis points despite a dilutive impact from a combination of FX and hedging. It shows how a determined focus on organic growth is driving substantial operating leverage. Third, at more than EUR 1.5 billion, our free cash flow generation remained at a very high level. CapEx is up 23% and represents 5% of revenue. For the full year, you should expect something in the 6%-7% range. Finally, net debt is just above EUR 2 billion, down compared to a year ago, and as usual, higher than at year-end, due notably to the dividend payment. Our definition of net financial debt has not changed and thus does not include lease liabilities.
Switching to slide five, more detail on our luxury houses whose sustained outperformance drove superior margins. Revenue was up 19% reported and 15% comparable in H1. FX was less of a tailwind in Q2, so the overall impact on the first six months is three percentage points. Growth was robust in all distribution channels, with retail up 16% and wholesale up 12%. This achievement illustrates the power of our multi-brand omni-channel approach and the potential of all our houses. Trends by distribution channel and by region were broadly consistent in both quarters. In Q2, comparable revenue increased 13%, with retail up 14% and wholesale up 11%. In retail, Asia Pacific confirmed its strength, up 22%, with sharp increases in mainland China, Korea, and Taiwan. By contrast, Hong Kong and Macau suffered from a combination of high comps, repatriation of Chinese demand, and more recently, some disruption in Hong Kong.
Western Europe was up 15%, supported by both locals and tourists. All key countries contributed to growth. Japan and North America were up single-digit. If we look at Q2 sales of our top three brands by client nationality, the key takeaways are that the Chinese cluster continues its high-growth profile, spending roughly 50% at home, 30% in the rest of Asia, including Japan, and the balance in Europe. Purchases by Chinese customers in the U.S., though quite marginal, were down significantly. Other Asian nationalities, such as Koreans, were also very supportive during the quarter. Europeans held firm as well as the U.S. cluster. Worth noting is that Americans were much stronger abroad, mainly in Europe, than at home, a likely consequence of currency strength. Very few nationalities posted negative performances, mostly Eastern Europeans and Middle Easterners, as in Q1.
Our luxury houses achieved a first half EBIT of EUR 2.4 billion, up 24%. The margin stood above 32%, a gain of 140 basis points. Healthy top-line growth prompted significant operating leverage and margin expansion at Gucci and Saint Laurent. Our other houses increased significantly their profit contribution, led by Balenciaga. At the same time, we are continuing to invest in Bottega Veneta to support the promising repositioning of the brand. An important side note, the combined FX and aging impact was diluted in terms of profitability. The underlying margin expansion was even more remarkable. CapEx in the period, at 3.7% of revenue, was in line with the 2018 first half. We are pursuing selective investments. You should, as in the past years, expect a higher CapEx to sales ratio in H2. I won't comment on the store network brand by brand. You have details in the appendix.
The total store count stands at 1,306 units with 28 net openings in the first six months, an increase of just 2%. Let's now have a look at Gucci on slide six. In the first half, Gucci posted once again a very strong top-line growth on top of high comps in both 2018 and 2017. To put things in perspective, the EUR 4.6 billion in revenue Gucci generated in the first six months this year exceed the total sale for all of 2016. Reported revenue was up 20% and up 16% comparable. In Q2, revenue grew 13% comparable, with retail up 12%, fueled by like for like and further sales density improvement. This is remarkable on a comp base that stood at 43% growth last year. By region, Asia Pacific led the growth, as in Q1. Mainland China and Korea were the main drivers.
Western Europe was consistently solid thanks to locals and tourists, notably Chinese and Americans. In North America itself, the quarter was more challenging. The very high comp base, 52% growth last year, played an important role, along with tough market and traffic conditions in many cities, a situation we also observed at our other brands. Weak inbound tourism did not help either. Every key nationality was up in the quarter with the Chinese, and more broadly, Asian clusters, very dynamic, Europeans and Americans doing pretty well. Wholesale was up 15% in the second quarter, a growth we achieved on a stable number of those. Royalties grew double digits thanks to the good momentum in both eyewear and fragrances. In May, Gucci successfully launched its first makeup line. Product-wise, carryovers further confirmed their appeal together with pure novelties and new options or functions in bestseller leather goods lines.
Coming to profitability, scale and healthy top-line growth translated into record H1 operating margin. Recurring operating income jumped 27% to reach EUR 1.9 billion, more than doubling over two years. Margin expanded 220 basis points to 40.6% or 40.4% adjusted. This represents substantial operating leverage at a time when Gucci keeps investing to strengthen its leadership, dedicating additional resources to communications, omni-channel, and client service initiatives. CapEx focused on rolling out the new stock concept with another 24 stores converted in H1. Stores under the new concept now represent 48% of the total, and the ambition is still to reach approximately 60% by year-end. On slide seven, we provided some highlights on Saint Laurent. Once again, the brand delivered solid mid-teens revenue growth consistent between the two quarters. The house also realized another improvement in operating margin in the first half.
The second quarter was very much in line with Q1. Retail rose 17% with particularly bright performances in Asia-Pacific. Saint Laurent also posted robust double-digit growth in North America, Western Europe, and Japan. Among key product categories, leather goods were particularly buoyant with strong showing from both iconic and newer models. The distinctive ready-to-wear presented last fall hit the stores in the quarter, further elevating Saint Laurent fashion's leadership. Saint Laurent had a strong quarter in e-commerce, up more than 40%. Wholesale was up 14% in the quarter. Saint Laurent posted another sharp increase in operating income. The 24% surge resulted in 80 basis points margin expansion to 25.9%. At the same time, Saint Laurent continued investing to support its development, notably in communications. CapEx was up in the first half to nearly 6% of sales.
You will remember that last year, CapEx outlays were skewed towards the second half. We expect a more even breakdown between both halves this year. Among the openings of the quarter, we should note the new Saint Laurent Rive Droite located in the space formerly occupied by the iconic Colette store. Moving to slide eight, we are pleased with the course at Bottega Veneta. The warm reception of Daniel Lee's creations is starting to translate into more favorable top-line trends. While comparable revenues were still down in the six months, the pattern was reversed in the second quarter. Retail as well as total comps were slightly positive and wholesale was up 3%. The new collections increasingly gain relevance. Revenue was also supported by increased initiatives to favor the gradual adoption of new collections in the context of a transition where existing carryover lines remain a drag on performance.
Sales of the Spring '19 collection has been solid, while Pre-Fall '19 has been gaining momentum week after week. We had particularly good responses across all women's categories and some of the new handbags instantly ranked among the house's bestseller lines. This is true of the Pouch from Spring '19 and also of Arco and Cassette, which have only been on the shelves for two months. We are also attracting new customers in our stores while maintaining good retention rates. Some of the new bags, like Pouch, appeal to a higher percentage of younger clients new to the brand. Arco is particularly popular with our Chinese clientele. Finally, ready-to-wear and shoes are outperforming. Bottega Veneta is working on stepping up production, empowered in certain areas by the use of new techniques and hardware.
As product availability improves, we expect the new collections to account for over half of the assortment in the last six months of the year, versus less than one-third in Q2. Thanks to good cost discipline, we were able to alleviate the impact of operating deleverage. However, Bottega Veneta needs to support its relaunch in terms of product development, samples, and communications, and this had a sizable impact on the EBIT margin. All in all, the house is on track. We have no doubt that its new CEO, Leo Rongone, will pursue and intensify the brand renaissance launched by Claus-Dietrich Lahrs. The two are working closely during this handover period. Our other houses are on slide nine. In H1, they solidified their spots as drivers of incremental growth, while their increasing contribution to group profitability is becoming more and more material.
Altogether, other houses delivered double-digit growth in retail in both quarters and across all regions. In Q2, revenue was up 19% comparable. Retail alone posted an even sharper increase of 34% on top of significant comps last year. By region, growth was very much in line with the Q1 performance. In wholesale, the increase in revenue was more moderate, reflecting the performance of watches, as well as our focus on retail and tightened control over distribution. Balenciaga had another spectacular quarter with strong double-digit growth across all regions and all product categories. This was driven by retail as well as a significant increase from balenciaga.com, confirming the health of the brand's omni-channel strategy. Shoes and ready-to-wear for both men and women performed extremely well, and leather goods improved considerably, underlining the huge potential of this category.
The performance at Alexander McQueen was just as outstanding, as the brand has now consistently delivered double-digit growth quarter after quarter over a long period. Revenues at Brioni were encouraging, especially considering the complete restructuring of its store network with a number of closings during the period. In watches, we had a contrasted quarter as Girard-Perregaux was impacted by slow sell-out on certain key markets, while Ulysse Nardin performed well in Q2 with a very strong month of June. All the jewelry houses posted strong performances. At Boucheron, the Place Vendôme flagship as well as the Japan market propelled sales to double-digit growth with the Quatre and Serpent Bohème lines outperforming. The Jack collection, launched earlier in the year, had a very nice takeoff. Pomellato benefited from excellent trends in its Western European stores, and the launch of its new Brera line has been well-received.
As for Boucheron, its remarkable momentum continues, maintaining strong double-digit growth. First-half operating income of our other houses rose by more than half, and their combined margin was up a solid 230 basis points, thanks largely to the significant contribution from Balenciaga. In addition, thanks to the actions we have taken to develop Boucheron and reorganize Brioni, headwinds impacting the segment's margin are clearly diminishing. CapEx was up in the first half on network enlargement, primarily at Balenciaga and Alexander McQueen. On slide 10, you will find our corporate and other segment. On the revenue side, Kering Eyewear is a lead contributor with external revenue of EUR 321 million in H1, translating into consolidated sales of EUR 259 million, up 21% comparable. Performance was strong in both quarters, fueled by the continued appeal of Gucci, Cartier, and Saint Laurent. Balenciaga and Montblanc, launched this year, have been successfully rolled out.
Kering Eyewear keeps innovating on all fronts, from marketing to supply chain, without forgetting its blockchain traceability project. The negative EBIT contribution of corporate and other is broadly on par with last year at EUR 117 million. Costs incurred in relation to corporate long-term incentive plans decreased, offsetting the rise in other costs related to the group's ambitious digital and innovation initiatives. On the CapEx side, the increase is due to the platform and infrastructure build-up to strengthen our operations. Now, moving on the remaining lines of the P&L summarized on slide 11. Other non-recurring operating income and expenses were EUR 42 million negative, in line with last year. Net financial charges amounted to EUR 134 million. They now include interest on lease liabilities according to IFRS 16, for a total of EUR 49 million.
Excluding this item, financial charges were EUR 85 million, down year-over-year, thanks to a significantly lower cost of net financial debt at EUR 26 million. This is driven by the bond redemptions carried out in the past 12 months as part of our active liquidity management strategy. Other financial charges amounted to EUR 59 million, including, as usual, the ineffective portion of hedging. Corporate tax amounted to EUR 1.4 billion. This includes EUR 896 million related to the settlement with the Italian tax authorities for the period 2011-2017. In addition to our initial estimate, this charge also reflects our assessment of 2018 tax in Italy in light of the settlement's main conclusions. As you know, 2018 was a particularly profitable year.
Excluding this one-off, the tax rate on recurring income is 26.4%, up from last year due to the in-depth reorganization of our operating model, notably with regards to logistics and supply chain. A word on share in earnings of equity accounted companies. As PUMA will not report its Q2 results until next week, the number we are using is based on the current analyst consensus. Group net income from continuing operations adjusted for non-recurring items and the tax settlement reached EUR 1.6 billion compared to EUR 1.2 billion last year. A few comments on free cash flow and net financial debt on slide 12 and 13. In the first half, we generated substantial free cash flow of EUR 1.5 billion. We previously mentioned that we had reached a low level of inventories at year-end, and some of this was rebuilt in the first half to support the growth of our brands.
We closely monitor working capital and all our new projects and organization will enable us to further optimize it going forward. As expected, our tax cash-out is higher, keeping in mind that the bulk of the settlement payment will take place in H2. At June 30th, net financial debt was EUR 1.1 billion after the significant dividend payment of EUR 1.3 billion and some share repurchases. Compared to June a year ago, our net debt decreased by over EUR 650 million. We don't include in our net debt definition the EUR 3.9 billion lease liabilities related to IFRS 16, which you will find in our balance sheet. This ends my remarks. Let me now pass on to Jean-François for a few words of conclusion.
Thank you, Jean-Marc. One year on from our exclusively focusing on luxury, our strategy is clearly paying off. We are delivering a superior combination of organic growth and sustainable profitability, all from a virtually unchanged infrastructure. This stems from the growing desirability of our brands, built on boundless creativity and innovativeness, and on their total dedication to their customers around the world. It is also the consequence of the rigorous discipline we have instilled throughout our group. At both the operational and financial levels. The organization of our houses is focused on executing flawlessly, and we have the right management in place to move them forward. We invest carefully, and we stick to assets that meet our clear criteria, not only regarding return, but also control, scalability, and smooth integration into our platforms. We are just as selective when it comes to OpEx.
We are in robust financial health. This was confirmed by S&P ratings upgrade following the issue of our full year results. As many of you have seen last month when we held our Investors Day, the in-depth work we are doing at group level, in close coordination with our houses, is instrumental in solidifying our transformation and giving us the means to secure continued growth. Our strong worldwide presence, constantly fine-tuned, as well as our global perspective, enable us to secure continued profitable growth wherever it comes from. All in all, while our environment is subject to changes, we are in great shape and highly confident both when it comes to our performances and to our capacity to create value in the medium and long term. Thank you very much. Jean-Marc and I are now ready to take your questions.
Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, please press star and one on your telephone if you wish to ask a question. Please stand by while we compile the Q&A queue, which will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star and one on your telephone if you wish to ask a question. Your first question comes from the line of Erwan Rambourg from HSBC. Please ask your question. Your line is now open.
Yeah. Hi, good evening. Erwan Rambourg from HSBC. Thanks for the presentation and congratulations. Three questions if I may. You've highlighted that you were in a healthy financial situation. PUMA shares have had a great run. You're trading at a discount on valuation to some peers. I'm just wondering if you can tell us what's the thinking around appetite for M&A, potential further share repurchases, and other uses of capital. Secondly, you reached a record high margin on Gucci, above what I believe was more of a midterm target of 40%. I'm just wondering, how do you think about the trade-off between sales growth and margin? Would you be willing to reinvest to support the sales growth, going forward? Linked to that, just the third point on the U.S.
I think we understand fully what the macro impact of FX and tourism flows, how that has affected U.S. growth. Is there anything under your control that you can do? Again, I think the comp base was pretty high, but is there anything that you can do to address the slowdown in the U.S. for Gucci, and for Gucci to pick up growth and go back to positive growth in H2? Thank you.
Thank you, Erwan, for your question. Regarding our financial situation and particularly our stake in PUMA, we are considering several alternatives to deal with this investment and to protect the value of this investment. Today, we do not have any intention whatsoever to dispose all of it. The use of capital is being used today in a share repurchase program, the second phase of the program that we announced a few months ago. It's currently ongoing. Again, we do not intend to launch an additional one before the end of this year. We intend to go to the end of this one and to finalize it. Then regarding potential acquisitions, as always, we are effectively looking at potential targets, but again, with a very strong discipline in terms of quality of the brand and prices for the acquisition.
Good evening, Erwan. As regard to the profitability of Gucci, it's true that we have delivered a very healthy margin improvement in H1. Clearly, we have reached a level which is above the target we had shared during a capital market day a few years ago. It's clearly linked to a very high margin drop-through in H1, thanks to leverage on store expenses and also basically on scale effect on other lines. As I mentioned during my remarks, I think this is even more remarkable than growth margin was diluted by FX and hedging combination, and that we have continued to invest to support the growth of the brand. We expect further margin expansion year-on-year in H2, although much more moderate.
The reason for this is that the base, first of all, is higher considering now also the scale of the brand, it's true that the breakdown of expenses is more balanced from one semester to another one. It's true also that we will continue to support the growth of Gucci, and we have some more ambitious investments in terms of marketing activities and store animation during H2. It's clear that part of the operating leverage will be reinvested during H2, but with still a target to improve profitability as we want clearly to deliver more sustainable and profitable growth. As regard the U.S. situation, I think it's right to mention some macro environment, which is obviously challenging. We observed this also in the other brands of the Group. You know clearly the reason for such a more challenging environment.
In a nutshell, I would say that the U.S. market became, in the past quarters, gradually tougher. It's a highly polarized market, where there is an increased competition to gain market shares at any price. In that context, it's true that we have a very tough compare. You mentioned it. The brand has regained a lot of market shares in the past few years. It's true also that we have not expanded the store footprint during the semester. We had no specific animation on our marketing activities during H1. More globally, for several reasons, and one of them being quite obvious, Gucci has been on purpose, less visible, in terms of communications and clienteling activities to promote units during the first half.
Combined with some depressed traffic trends in some key cities, ongoing refurbishment, because you know that we were late in the U.S. in terms of implementation of the new concept. It's clear it was more difficult to outperform. That being said, it's clear that during H2, we have more activities to support the business. We have a plan, clearly, at Gucci regarding retail, merchandising, clienteling, both with high-end clients and more globally speaking, clienteling at scale with all the different type of customers, and we will have more communication investments. Clearly, there is a plan to tackle the situation in the U.S.
That's great to hear. Thank you. Best of luck.
Thank you.
Thank you. Your next question comes from the line of John Guy from MainFirst. Please ask your question, your line is open.
Yes. Good evening, Jean-Marc and Jean-François. Thanks for taking my questions. Maybe just following on from your comments around Gucci and North America, also from a category perspective, were there any particular categories in the U.S. and maybe across Gucci, in all regions that you saw any specific slowdown in the second quarter, whether it's in sneakers, bags on the carryover side or in ready-to-wear? It'd be helpful just to get some color around the actual category performance. You also talked about CapEx effectively accelerating in the second half of the year. You've delivered a pretty decent free cash flow in the first half of the year. If I go back over the last three years, your free cash flow has more than quadrupled, and I think last year you were just around the EUR 3 billion mark.
How should we think about free cash flow for the second half of the year, given maybe a sharper pace of investment? I would be interested to get your thoughts there. Finally, maybe just with regards to the Gucci operating margin, I think excluding IFRS, it was at 40.4%. I am just trying to get a sense, if you could provide us with some more information around the extent of maybe some of the expense actions or the cost savings that you took. What sort of level of basis point benefit did you see in the first half of the year? Thank you very much.
John, good evening, first of all.
Thank you.
Concerning your question about the situation in the U.S., you may imagine that we won't provide a level of details where we'd be in a position to analyze market by market, product by product, the situation. First of all, it's super important to us that if you look at the U.S. cluster, which is, by the way, the second one for Gucci is not relying only on the Chinese demand. Historically, the U.S. cluster is super important for Gucci and has performed super well in the past few quarters, as you know. It's still up, thanks also to the purchases made by the Americans in Europe. What I can give you is a flavor or some colors about the performance by category. Very briefly, the handbag category is continuously posting very strong results with double-digit growth compared to last year.
The iconic pillars have confirmed their success and are key drivers of the business, both in carryover but also in newness with the seasonal developments. Small leather good and luggage performance is also very strong and sustained. This is once again driven by the strength of our carryover, now that we have rebalanced the offer between carryover and newness. Shoes and ready-to-wear have posted globally robust trends, but normalizing on a very strong comparison base over more than two years, and especially in Western Europe and in the U.S. The performance overall was driven by a strong appreciation of carryovers and novelties from the new season. Globally, I think the U.S. market reacted as a mature market with a higher exposure to ready-to-wear and shoes, and that's the reason why there was probably more normalization than in some other regions.
As regard the CapEx, and the free cash flow generation, more globally speaking. You know that there is somehow a form of seasonality in our CapEx. It's not necessarily true for all the brands. For example, in Saint Laurent, we expect something more balanced, but if we look at Gucci and the other brands and globally the group, we should see more CapEx in H2, that at the end of the day, we can expect that the CapEx-to-sales ratio should be in a range from 6%-7% and probably closer to 7% for the full year. It will depend on the phasing of the investments we have in terms of logistics, but if we are on par with the plan, we should be closer to 7%.
During second half, we will have also the cash out of the tax settlement, the bulk of it, because on the total amount, we have paid less than EUR 100 million during H1. The payment will be fully concentrated on H2, so that the free cash flow for the second half, of course, should be impacted by that. We will be very vigilant, of course, in the context about working cap. If you look at the working cap on H1, on a last 12 months base, and you have this presented on page 30 of the presentation where you have an exhibit showing that in percentage of revenues compared to last year, it's quite well-monitored. Even if you know that we had mentioned during the full year results that we would have to rebuild inventories. We had reached a very low point at the end of last year.
At the end of the day, I would say that if I take your question with a different angle, which is to look at the debt regarding the generation of cash flow during H2 for the full year, at the end of the year, if I consider the ratio based on the IAS 17, so fully comparable to last year, we should be close to 0.4 times the EBITDA in terms of debt. It helps you in your math to estimate what could be the cash flow generation for H2. I'm not sure to get your point for the third question, in the sense that.
Yeah.
Could you clarify, please?
Yeah, sure. Sure, Jean-Marc. Thanks. It was just with regards to, I think, some comments before the half year flagging that the Gucci margins would be strong, but there were some potential benefits around some cost savings and some expense actions that you took in the first half of the year. I was just trying to get a sense of the scale of those actions that benefited or incrementally benefited the margin for Gucci in the first half.
Okay. In fact, I had understood your question. No, I think that there was probably a misunderstanding somewhere because what we had said is that we had the flexibility, and we had made the work during the budget process for all the brands and not only Gucci, to identify what could be the savings, in the case the business would not be exactly where we were expecting. Considering the trend of H1, putting aside the U.S. situation, overall it's very positive and completely on par with our expectations. We had not to activate any specific actions, and on the contrary, we have continued to invest. Besides also the point I made about the U.S. where we have been probably less active in terms of marketing, postponing some actions during H2.
Overall, I think that there was nothing specific initiated by Gucci about the cost base, besides the fact of being, as usual, vigilant and just to make the investments where we believe it does pay off.
Thank you very much. That's very clear. All the best.
Thank you, John.
Thank you. Your next question comes from the line of Thomas Chauvet from Citi. Please ask your question, your line is open.
Good evening, Jean-Marc, Jean-François. Three question, please. As you alluded to, you feel you need to reinvest in marketing perhaps in markets where the brand has slowed down, may lose share relative to peers. I'm thinking the U.S., but also Japan. Secondly, could you come back to the increase in inventories up 25%, I think at reported FX year-on-year. Are you expecting that big increase, in a way, to fade towards year-end as you unwind, particularly the Christmas period? Finally, on Bottega Veneta, it feels that something is happening or could happen. I think there's great hopes there.
Could you comment on the new CEO? Share with us maybe what you think his first assessment of the brand is, what needs to change profoundly. With regards to profitability in this year of transition, can you explain the big swing of 600 basis points in margin in H1, whether this is likely to be similar in the second half? If I recall, you had guided for EBIT margin just below 20% in 2019, and I think that looks a bit ambitious now for BV. Thank you.
Good evening, Thomas. I will take the two first questions. Jean-François will react about the new CEO of BV, and I will come back for the BV margin. Regarding Gucci margin, first of all, there is basically a situation which is that last year, if I consider the EBIT margin with the old accounting standards, the H1 margin was 38.2, while the margin of H2 was already 40.7. As I said, now we have more balanced cost base during the two semesters. You should not look at the variance of EBIT margin only from H1 to H2. You need always to compare to the EBIT margin of the last semester, especially when you reach a certain scale. It's true also that because of the growth normalization, by definition, the operating leverage is not the same.
All that reasons push us to say that operating leverage should be lower during H2 compared to what we have delivered in H1, even if it may be slightly counterintuitive, considering that the combination of FX and aging should be less negative, probably, in H2. It's true that, once again, we have some marketing activities that are in the pipe. Overall, we want to deliver still an improvement of the EBIT margin, very gradual, very wide, very well-prepared, and just making the investments that will pay off. I think that we have a very disciplined plan, and we will execute it. That's the reason why I've mentioned this lower operating leverage. As regard the inventories. Again, if you look at the working cap in percentage of sales, there is nothing specific to mention.
We have just a slight increase, 19.4% of the last 12 months sale to be compared to 19% last year. Overall, it's in line. I think that there were some phasing in terms of deliveries and production here and there, at Bottega Veneta, for example. That probably in terms of building of inventories, we are a little bit more late compared to last year. It's a little bit the same with Gucci. We had mentioned some slight issues in terms of ready-to-wear development and production that could have weighed a little bit also on the inventories level. I think there is nothing worrying, and we are working on it to optimize it during H2. I think that we have all the tools and the levers in place to monitor strictly the inventories level.
Regarding the takeover by Leo Rongone, it's been a few months that Leo actually has been working together with Claus and the team to take the reins of Bottega Veneta and be very quickly effective as a new CEO. He has created very interesting bonding with Daniel Lee, and they now have a very good relationship based on trust and vision, and they share this vision together. Both of them are enthusiastic about the potential of the new collections and the new products, particularly the women's categories. They're very confident that this will pay off in the midterm, and that they will regain very strong momentum for the brand, both in terms of top line and margin.
Regarding the margin, considering the dilution of H1, which is still looking at the old figures or the figures according to the old standard. It's a dilution of something like 600 basis points, which is massive, which is due, first of all, to the top-line momentum, basically. As we already mentioned, we didn't want to make a stupid cost saving at a time when we need to support the relaunch, the renaissance of the brand. It's true that during H2, to support this relaunch, this rejuvenation, we will need to reinvest in design and samples. We need to invest more in teams to have more skills across the board in all the functions. We need to invest more in communications and marketing. There will be still some operating leverage, but not at the same level, of course, as H1.
Maybe to give an indication, that could be something around between 140 and 180 basis points of additional dilution to be expected in H2.
Thank you very much.
Thank you. Your next question comes from the line of Mélanie Flouquet from JP Morgan. Your line is open.
Yes. Good evening. Thank you very much for taking my question. The first question is on coming back on Gucci, sorry. I was wondering whether you could maybe expand a bit on the nationalities performance, because clearly, as you said, the American was traveling in Europe. Your numbers were actually pretty strong in Europe. Also, I imagine the Chinese consumer was pretty strong in Europe. I was wondering whether you could share a bit more by nationalities as to what has happened to this quarter two. My second question is on the Gucci operational leverage. Just to make sure, and that's a quick question, but when you're saying that you expect operational leverage, just a lower one than in H1, this is a comment about H2, so there is still an upper operational leverage in H2 or about the full year?
My next question, sorry, is just trying to understand the tax rate of 26%, excluding one-offs. Is that the new norm? Is this what we should put into H2 and next year? My last question, sorry, is on e-commerce. Could you share with us the growth of e-commerce for Gucci in H1 and H2? Thank you.
Thank you, Mélanie, for all these interesting questions. As regard the nationality, as you can imagine, the Chinese clientele has been super positive, with a huge repatriation of purchases on the domestic market as expected and as it was already the case in Q1. We had almost slightly less than 50% of the purchases made by the Chinese on the domestic market. The Chinese cluster was strongly up. More globally speaking, that's the same for all the Asian nationalities, maybe with an exception of Hong Kongese. After two, or let's say several quarters, very strong and with some obvious explanations also, due to the events we had to cope with at the end of Q2, and especially in the beginning of H2.
If we look at the other Asian nationalities, the business at Gucci was strongly up, especially with a very important nationality, the Korean cluster. It does explain why Korea was quite strong in terms of market. Overall, with the local clientele in the mature countries, let's say that we have a good correlation with GDP growth, so that it's positive. It's positive with Japanese, it's positive with Europeans. Of course, you can imagine we are talking about single-digit growth with this clientele, but still it's positive. With the Americans, it's true that it was particularly strong in Europe. In fact, in Europe, the performance has been driven by good sales with many different nationalities. Not so much with Chinese. Chinese were up in Europe. It's true that the big contribution was the one of the Americans.
The only negative ones we have, generally speaking, across the board, not only for Gucci are, as I mentioned in my speech, the clients from Eastern Europe, Russia, and still Middle East because of macro geopolitical events. In H2, as regard the EBIT margin, yes, I confirm that we still expect more operating leverage in H2. I was not specific on the full year. It was really also on H2 that we expect additional leverage, but as I mentioned, not at the same extent as H1. Regarding tax, let's start with 2019. To be very clear, we expect that the tax rate should be at around 28% for the full year after this 26.34 for the first half. Midterm or short-term midterm, the normative tax rate may remain in that range or in that area. Such rate is above our initial estimates for several reasons.
First, we have accelerated the pace of the reorganization of our logistics and supply chain operations. Second, we have a higher consumption than expected of the loss carry-forward because of the high profitability of our brand above our initial expectation. Third, some corporate tax rate cuts, especially in France, have been postponed for large groups. It was not clearly factored in our plan. The good thing in the acceleration we made in terms of organization of our logistic and supply chain is that half of the impact of the variance on the expected normative tax rate will be offset starting from 2020, 2021, by the use of free trade agreements between Europe and some key countries and markets that could provide in terms of lower import duties that would be booked, by the way, in our cost of goods sold, so in the gross margin.
As I said, that could offset half approximately of the variance between the 25% something that we had announced and the 28%. Longer term, normative tax rate should eventually decrease, thanks to the implementation of the tax cuts in France. As regards the e-commerce, we won't provide any specific figure. What we can say is that we had very good figures in China. We are very pleased with the development of Gucci e-commerce in China. China became the third market in e-commerce now after the U.S. and the U.K. As you can imagine, in the more mature countries, we had more normalized growth rates. In the countries which were underdeveloped for e-commerce, we continue to see some acceleration.
Thank you.
Thank you, Mélanie.
Thank you. Your next question comes from the line of Rogerio Fujimori from RBC Capital Markets. Please ask your question, your line is open.
Hi, Jean-Marc. Thanks for taking my question. Would it be possible to give us a breakdown between volume and price mix for Gucci behind the 13% comparable growth in Q2? Also for Gucci, could you talk a little bit about the brand performance in the millennial segment, which I think was in excess of 60% of total sales last year, and also in streetwear items? I was just trying to understand some factors behind the normalization for shoes and ready-to-wear. My third question is on marketing investment. I think you indicate the phasing more skew to H2 for Gucci. How about for YSL and other houses? Thank you.
Regarding the drivers of the growth of Gucci, clearly, first of all, what is important to have in mind is that Q2 retail sales were driven once again by like-for-like growth. Gucci sales are generated on a broadly stable number of directly operated stores, and as I mentioned before, without any additional stores or temporary stores, so no specific activities on this side. Regarding the sales from directly operated stores, as you know, all sales are at full price. If you look at the performance now in the stores, the sales have been largely driven by volumes. What is interesting, reflecting a significant improvement, as expected and as we had announced, in retail metrics because the traffic started to normalize as we were anticipating.
In fact, despite this normalization of the traffic, we had this increase of sales due particularly by a meaningful increase in terms of conversion rate as well as unit per ticket, cross-selling. Globally, if we look at the retail KPIs, and of course it depends on the region and on the store, but overall, it's positive. It's globally green. We have some red lights here and there, but that's normal in our business to have some issues to fix here and there. Globally, it's positive, and it's clearly the outcome of what we have started in terms of initiative, in terms of tools provided to our sales associates. The price mix is limited. Of course, it can vary depending on product category and region. Overall, we cannot say that the mix and the price has impacted massively the growth rate.
As regards the segmentation of clientele, I think that we have provided in the past quarters some indications about the clustering, segmentation of the clientele. I think, once again, it's important sometimes also to look at the trends on the more long-term basis. What I can tell you is that if we look at the millennials or at the age segment below 35, which is different, but by the way, in the two cases, we start to see also here, let's say, a stabilization in terms of proportion. If we look at the breakdown of the segment clusters, we see a stabilization, which is normal because now we are at full speed in all the age segments. It's clear that the performance was quite well-balanced across the different age segments. Of course, we are still delivering very good growth with the millennials or the below 35.
It's a demonstration thatDespite maybe the situation in the U.S. market, we cannot really see any signs of slowdown or something specific on certain categories in the other countries, in that segment of the millennials. The last point about marketing investments. I think there is a specific situation at Gucci that I have mentioned in terms of phasing of investments. More globally speaking, I think that many of our brands, and especially Saint Laurent, also at such a scale that now the balance between the two semesters in terms of expenses, not only marketing investments, more globally speaking, is more even than in the past. I think that, as I said about the U.S. market, we are in a market which is super competitive with a lot of investments of our competitors. It's clear that we will make some tactical investments.
We will react with a lot of flexibility and agility, as we demonstrated in the past. I think that we have demonstrated that we can deliver profitable growth while investing in our brands. Be reassured, we'll continue to improve the EBIT margin at Saint Laurent and in other brands while still investing to support the trajectory of growth they have.
Great. Thank you very much.
Thank you. Your next question comes from the line of Omar Saad from Evercore ISI. Please ask your question. Your line is open.
Thank you. Good evening. Thank you for taking my question. Two questions. Number one, I was hoping you could speak to the decision to pull back on advertising and marketing in the U.S. market. Do you think that's been a big factor affecting the slowdown there? When do you expect to turn that spigot back on full force? How do you think about that dynamically? My second question on Gucci, a bit more broadly, universally, as we think about some of the unique opportunities that the brand has in terms of digital activation, digital CRM, store remodels, some of the self-controlled factors you have. Maybe you could remind us of some of those factors and what stage you're in rolling those, the Gucci app, things like that, rolling those out. Thank you.
Sorry, Omar, could you repeat the second question because the sound was not good, and we were unable to hear your second question.
Yeah, absolutely. Sorry about that. As we think about Gucci's growth normalization, there's different puts, there's different takes, pluses and minuses. Maybe you could talk more in detail about some of the things that are within your control, the drivers within your control, remodeling the stores, what stage you're at with that, rolling out the Gucci app, digital CRM in the salespeople's hands in the stores. Help us think about these factors as we think about what will the Gucci's longer-term growth rate look like.
Okay. It's very difficult to address your first question because we have a lot of pieces in the equation to understand if we would have invested this and this, what could have been the result of this. I think that it's true that for some reasons, it's true that we have been, let's say, less active in terms of communication, and you can easily understand why. I think that we wanted to assess what was the evolution of the U.S. market, the reaction of the consumers after the issue we had in the U.S. before deciding some more marketing initiatives, because we were fearing that the return on this additional investment would be very poor considering the context. That's the reason why we have decided to be less active. Is it an explanation for the performance? We don't know. It's not the point, by the way.
What we know that now that we have finalized some refurbishment in the U.S., that we have injected some new blood also in the teams in the U.S., we are confident that we have the right organization, the right scheme to address the point. We believe that the performance with the U.S. cluster does demonstrate that the Gucci hit is still there. I think that we have a lot of energy in our teams in the U.S., and I'm sure that they will react. What you have mentioned about after that, all the tools and all the things we can put in place to continue to support the growth or reactivate the growth in the U.S. or in other markets. I think that we don't want to deviate from the strategy and the trajectory we have presented.
The rollout of the application you are referring to, the Gucci application, is almost completed in the network. We have made additional progress in terms of refurbishment, both in the U.S., but across the board, and still with the new concept, we are delivering higher level of growth. I think we will continue to execute the strategy as in the past with probably more vigilance as regards specifically the U.S. market. Once again, we have gained such market shares in the past few years, that it was normal to have this phase where we are considering what are the next actions. What will remain at the core of Gucci is its creativity. That does remain the priority, and we will continue in that direction. Now, if you don't mind, we will take the last question.
Thank you.
Thank you.
Your next question comes from the line of Susy Tibaldi from UBS. Please ask your question. Your line is open.
Hi. Thank you for taking my question. I have three, please. First of all, is there any chance that you could comment on the sequential organic growth trends for Gucci throughout the quarter? Have the trends been homogeneous, or have you seen any deceleration towards the end, especially given the ongoing disruptions in Hong Kong? Basically, I'm trying to understand, what is the exit rate for the brands as we're looking into H2. Secondly, would you be able to provide any color on your expectations for Gucci for full-year in terms of organic growth? Are you in general comfortable with the current expectations, which seem to be around 14% organic sales growth for the full year?
Finally, the results of some of your peers this week have shown an increasing willingness of certain players to increase investments in their brands, despite the short-term negative impact on profitability in order to support the organic sales growth development. At the same time, today, you have delivered a spectacular level of profitability. However, hypothetically speaking, should the sales growth momentum start to decelerate due to external factors, would you be willing to step up investments to support the growth? Thank you very much.
Okay. Take a breath. As regard the exit rate, you know perfectly that we don't comment. We never comment our performances month by month. It makes no sense. You have some shift in terms of calendars, you have some phasing of deliveries. You have some situation of comp base that can change. Obviously, and to be very transparent with you, there is nothing significant to call out. June showing in a way similar trends overall to May, maybe with, I'd say, confirmation in the U.S. that there was a challenging market. Besides this, as regard Gucci and moreover, all the brands, let's say that the expected pace of normalization that we saw in all markets. It would make the connection with the second question about the trajectory, the expectation and so on.
As you can imagine, I'm not here to comment the consensus or what are the expectations of buy side and sell side. You may remember, or you may know that the 14% that you are mentioning was based on H2 with high single-digit growth. We have already commented about the trajectory of Gucci, and I think that considering the momentum of the brand and what we're doing for the brand, we are confident that we can continue to deliver very solid growth during H2, but still with the pace of normalization that we have already commented. H2 should be on our side, quite on par with our expectations and quite consistent with the messages we have already delivered for the brand. Your question about what has been done by some competitors.
Here again, we are not here to comment neither the consensus nor the initiatives of our competitors. I think that we have demonstrated in the past that once again, we can manage both profitable growth and the right investments to support the growth of our brand. I think that we have the flexibility to accelerate, to adapt our strategy whenever we want. We will take the right decisions to support the growth of all the brands of the portfolio. I think what has also to be kept in mind is that all the brands of Kering have delivered very, very strong performances, both in terms of sales and profitability. I think that what is important is also to look at the performance of the portfolio of brands we have.
Great. Thank you very much.
All right. Thank you everyone for joining us on the call today and for your questions. I hope Jean- Marc and I were able to share with you our confidence in our strategy and our performances. We are determined to continue building on the very strong positions we have achieved in the past years and in the first half of this year. We wish you all a quiet and relaxing August. We appreciate your interest in Kering and look forward to resuming our dialogue after the summer. Thank you very much. Have a nice evening.
That does conclude your conference for today. Thank you for participating. You may now disconnect.