Good morning. Welcome to Richemont 2022 full year results presentation. It's nice to see you again in person, and we thank you for coming to Geneva. Welcome also those of you watching the webcast. Joining us today from Richemont are Johann Rupert, Chairman; Jérôme Lambert, CEO; Burkhart Grund, CFO; Cyrille Vigneron, Cartier CEO; and Nicolas Bos, Van Cleef & Arpels CEO. We would like to remind you that the company announcement and financial presentation can be downloaded from richemont.com, and that the replay of this video webcast will be available on our website today at 3:00 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 United States Private Securities Litigation Reform Act of 1995.
Coming back to the presentation, first, Jérôme will take you through the year's financial highlights and sales. Then Burkhart will review key developments within our business areas, group's financials, and key achievements within ESG, sorry. He will then hand back to Jérôme for the conclusion, which will be followed by a Q&A session. I will now hand over to Jérôme.
Thank you, Sophie. Good morning, ladies and gentlemen. Thank you for joining us today, and welcome back live in Bellevue. Sales for the year reach a new level at EUR 19.181 billion . This represent a 44% increase versus the previous year and 37% versus two years ago at constant exchange rate. At actual exchange rate, sales grew by 46% and 35% respectively versus one or two years ago. Operating profit more than doubled to EUR 3.4 billion, growing much faster than sales, reflecting significant operating leverage. The operating margin reached 17.7%, a 650 basis points improvement over the prior year. Excluding the one-time item relating to the suspension of our operations in Russia, operating margin would have reached 18.6% of sales.
Profit for the year increased by 61% to EUR 2.079 billion. Cash flow from operating activities rose by EUR 1.4 billion to EUR 4.6 billion, and our net cash position increased by EUR 1.9 billion to EUR 5.3 billion. Our strong financial results reflect a significant increase in sales and profit and provide more resources to invest in the brand equity of our Maisons for a sustained and responsible growth. The double-digit sales growth was broad-based across business areas, demonstrating the strong desirability of our creations based on highly distinctive designs and savoir-faire. Higher gross margin and good cost control led to a much improved operating results, both at group level and across business areas, wit
h a particularly high profitability level for the Jewellery Maisons and a noteworthy margin improvement at the Specialist Watchmakers. This translates into a strong cash flow generation, as just mentioned. We are pleased that our long-term focus on client centricity has led to an increased level of direct client sales, comprising online and retail sales of 76%.
We continue to progress on our sustainability journey and have increased our ESG commitment. Our science-based targets were validated by the SBTi during the year, and our sustainability teams were strengthened by the recent appointment of a chief sustainability officer. The board ESG expertise was also increased with the election of an ESG specialist as non-executive director, now chairing our governance and sustainability committee, and Burkhart will tell you more at the end of his presentation.
I briefly take you now by business through the sales performance by business area at actual exchange rates over the one- and two-year comparison period. We achieve a strong double-digit growth in all business areas, both on a one-year and two-year comparative basis. On a two-year comparative basis, growth rate in all business areas accelerated in the second half compared to the first half of the year. Of particular note is the outstanding growth of the Jewellery Maisons throughout the two years.
Looking in more detail at the quarterly sales performance by business area on a two-year basis at exchange rate, one sees that the growth rate at most business areas accelerated over each quarter during the year. Remember, of course, that the fourth quarter across all business areas benefited from less challenging comparables at the quarter ended March 2020, marked the early stage, as you know, of the pandemic. Growth at the Jewellery Maisons , I said, was particularly strong and reached triple-digit growth in the first quarter.
Let me now walk through the group sales performance, first by region, then by distribution channel. Sales in all regions posted double-digit growth compared with the prior year, with the strongest growth rates in America, Middle East and Africa, and Europe. Europe and the Middle East have both seen strong demand from local clientele. While, as you notice, inbound tourism remains subdued in Europe. Middle East benefited from the opening of Dubai to international travel in July and from the Expo Dubai 2020 between October and March. Asia-Pacific, America, and Europe contributed the most to the sales increase, each growing by more than EUR 1.5 billion. With its sharp growth rate, the share of the group sales in the Americas is nearing now the one of Europe. Also worth noting it is that, Middle East and Africa has now surpassed Japan in terms of sales.
Sales in all regions were above our pre-pandemic level, with a very strong double-digit growth in the Americas, Asia-Pacific, Middle East, Africa. In Asia-Pacific, sales in major markets such as China and South Korea grew by double-digit compared to both prior- year and two-year comparative basis. There were a sequential quarterly acceleration on two-year comparative basis in almost all regions with a particularly good progression in Europe and Japan. In the fourth quarter, Asia-Pacific sales were impacted by pandemic-related lockdown in part of Russia, while the conflict in Ukraine affected sales in Europe towards the end of the quarter. Richemont suspending commercial activity in Russia on 3rd March after stopping Ukraine operation on 24th of February.
Let's now turn to sales by distribution channel. Starting with our largest channel by far, retail, which contributed to 57% of group sales, up from 55% last year. Retail sales grows by 51% and by 53% on two-year comparative basis, an increase that was broad-based across all business areas. Retail definitely benefited from 25 stores opening net in addition to the acquired 48 Delvaux stores, as well from the traffic of the stores resuming after the lockdown of last year.
Online retail generated 19% of group sales compared to 21% in the prior year. Of course, following the easing of pandemic-related store closures the year before. Sales increased by 27% year-over-year and by 38% versus two years ago. If you exclude Online Distributors, online sales rose by 42% compared to the prior year, driven by a continued localization of website and further development of distance sales. While all business areas achieved strong result, it was particularly notable with the Specialist Watchmakers , indeed from a lower base. Direct-to-client sales, including both retail and online retail, represented 76% of group sales.
Finally, wholesale sales increased by 45% compared with the prior year, with strengths across all business areas. Compared to two years ago, they rose by 8%, notwithstanding a 22 net franchise store closures, primarily at Buccellati and dunhill. Both the Jewellery Maisons and Specialist Watchmakers exceeded pre-COVID level with a double-digit increase at the Jewellery Maisons . Wholesale sales made up 24% of group sales in line in proportion with the prior year.
The robust growth in online retail at our maison led to a 6% online penetration rate, when we exclude the online distributors. This was a noteworthy performance during a period, as you noticed, that delivered such a strong sales growth combined with reopening of retail stores and, of course, the restart of international travel. During the year, Fashion & Accessory Maisons had the highest online penetration rate at already 16%, followed by the Jewellery Maisons, 5%, finally Specialist Watchmakers , 3%. Burkhart will now take you through the year's highlights by business area. Burkhart.
Thank you, Jérôme. Let me review our business areas with all the numbers at actual rates and starting with the Jewellery Maisons , which, as we all know, comprise Buccellati, Cartier, Van Cleef & Arpels. Sales were up by 49% versus last year and by 54% versus two years ago. Growth for the year was strong in all regions, led by Asia-Pacific, the Americas, and Middle East and Africa. All channels recorded double-digit growth, with a notable increase in retail. The operating margin reached a robust 34.3%. This excellent performance was primarily the result of three factors, significant sales growth, higher capacity utilization, reflecting the strong growth in demand, and disciplined spending. These factors enabled strong operating leverage that drove the 330 basis point increase in the operating margin.
Now let us look at the main developments at the Maisons during the year. Sales in the jewellery and watch category were excellent, with notable performance on the jewellery side from Love, Clash, and Panthère at Cartier, Alhambra and Perlée at Van Cleef & Arpels, and the Opera Tulle and the Macri collections at Buccellati. For watches, Cartier benefited from the relaunched Santos, Tank Must, including the innovative SolarBeat model, and contributions from Ballon Bleu, as well as from Lady Arpels at Van Cleef & Arpels.
The reach of the Jewellery Maisons digital network further expanded with Van Cleef & Arpels launching its e-commerce activity in China and Saudi Arabia, which contributed to supporting the growth of e-commerce in the regions. The renovation of the Cartier retail network progressed with major reopenings, including Geneva, Rue du Rhône, Milan Montenapoleone, and Riyadh Centria Mall. Buccellati continued to upgrade and expand its retail network, opening nine new directly- operated stores across the world, notably in Seoul at Galleria, Dubai Mall and South Coast Plaza near Los Angeles, among others. Buccellati also integrated its distribution in Japan.
ESG initiatives included the creation of the Watch & Jewellery Initiative 2030 with Kering, which marks the beginning of a collective journey to ensure the industry creates positive outcomes for the planet and its people. Cartier successfully organized the Women's Pavilion at Expo 2020 Dubai, inviting visitors to celebrate the central role women have played throughout history. Van Cleef & Arpels supported numerous educational events worldwide, including From Hands to Hands, an event designed to share jewellery skills and know-how with local schools in Lyon. Buccellati began switching its gold sourcing to Richemont's responsible gold supplier, called Varinor.
Let us now review our Specialist Watchmakers business area, which consolidates the results of eight Maisons. Sales at the Specialist Watchmakers increased by 53% versus last year and by 20% versus two years ago. There was strong growth in direct- to- client sales, which now exceed 50% of sales. There was solid growth in all channels and regions, with notable strength in retail and in the Americas, where sales rose by 118%. Growth was also driven by strong local demand in all regions. The operating margin rose to 17.3%, with an operating result almost double compared to two years ago as a result of higher sales, higher manufacturing capacity utilization, and continued cost control.
Let us now look at some of the key developments over the past year. Many of the Maisons, as well as the business area itself, have reached a new scale, with the Specialist Watchmakers generating sales of EUR 3.4 billion, driven by double-digit growth at all Maisons. Strong performance of iconic collections continued, including the performances of the Lange 1 at A. Lange & Söhne, Riviera at Baume & Mercier, Pilot at IWC, Reverso at Jaeger-LeCoultre, Luminor at Panerai, Polo at Piaget, and Overseas at Vacheron Constantin, just to name a few. The Maisons have been transforming the business model over time to become more agile, engaging with their clients through new event formats, such as the hybrid Watches and Wonders fair, as an example.
The Specialist Watchmakers have been driving forward their ESG initiatives, notably through targeted partnerships. Recently, Panerai entered into a two-year collaboration with UNESCO that focuses on education, citizen science, and industry involvement. The Specialist Watchmakers are studying other areas where eco-design and new material can help creation. One example of this is at IWC. During the recent Watches and Wonders fair, they revealed a new collection of straps developed from 100% bio-based material using a mix of natural rubber, natural fibers, and oils derived from upcycled waste of the agri-food industry. This brings circularity into the field of watch straps.
Let's now move to the Online Distributors. Sales at the Online Distributors grew by 27% year-on- year and by 15% versus two years ago. This solid growth was broad-based with double-digit increases in all regions, driven by the Americas, Asia-Pacific, and Middle East and Africa.
The business model shift that we have initiated is on track. The operating loss for the year was limited to EUR 210 million, included significant one-off costs linked to the adjustment of the operating model post-Brexit. That control of costs and investment led to an operating margin of -7.5% versus a -10.2% a year ago. The EBITDA loss was reduced to EUR 24 million, and YNAP standalone EBITDA reached break- even before the exceptional reward payments to group employees and the contribution of the Chinese joint venture with Alibaba.
Before we look at some key developments over the past year, let me add that discussions with our Luxury New Retail partners continue around exploring opportunities for closer future collaboration. As we've said before, this is quite a complex project, and we hope to conclude in the near future.
Now back to YNAP. The business model shift is progressing well. Several brands at NET-A-PORTER and MR PORTER have launched so-called e-concessions, with some using a combination of 1P and 3P, and others are exclusively 3P. More recently, YOOX successfully launched its marketplace in Europe, onboarding almost 80 sellers and nearly 50,000 new products.
Key localization initiatives have included the development of the Middle East and China, with other markets in preparation. As an example, in March, MR PORTER fully localized its Middle East store, so that now NET-A-PORTER, MR PORTER Middle Eastern customers enjoy a personalized site language and product merchandising addressing local nuances with the support of an expanded local personal shopping team. That's a long sentence.
THE OUTNET is seeing solid growth. It has successfully launched its menswear offer, expanding its assortment into new product categories to attract a wider customer base. The new resale service started with NET-A-PORTER last October has been extended to MR PORTER customers in Germany, Hong Kong, the U.S., and the U.K., enabling them to resell ready-to-wear accessories, bags, jewellery, and shoes.
At Watchfinder, expansion outside the U.K. has contributed significantly to growth momentum and is increasing as a proportion of sales to around 25% of sales from only 6% two years ago. Building on its success, the watch trade-in program with Cartier and the Specialist Watchmakers has continued to be rolled out and is now available in 92 stores. Finally, let us move to the other businesses, which primarily include the Group's Fashion & Accessories businesses and the group's unbranded watch component manufacturers.
Sales in our other businesses increased by 53% compared with last year and by 15% compared to two years ago. This performance was broad-based across channels and regions, led by retail, online retail, and the Americas. Excluding the impact of the consolidation of Delvaux from the 1st of July 2021, sales were 45% higher than in the prior year. On a two-year comparative basis, growth rates accelerated throughout the year, with double-digit growth for the last three quarters. The business area's operating loss was significantly reduced to EUR 47 million. This improvement was largely a result of good operating leverage through higher sales, higher gross margin, strong financial discipline, and stepped-up investments into brand equity.
Let us now look at some highlights of the past year. The Fashion & Accessories Maisons have been strengthening their creative capabilities with the hiring of new creative directors at three Maisons. Building on the well-received first collections from these new creative directors at Chloé and Alaïa in the first half of the year, Montblanc launched in March its first leather collection designed by its new creative director. Both Peter Millar and Delvaux showed notable performance during the year. Peter Millar, including the G/FORE brand, saw excellent growth in footwear and outerwear. Delvaux, which contributed over EUR 100 million in revenues with the robust performance of its Brillant and Tempête collections, has brought exceptional savoir-faire to the group.
Our F&A Maisons further invested in their retail network with targeted store openings, including new boutiques for Peter Millar in Dallas, for Chloé and Montblanc in China, dunhill in Japan at Ginza Six, and Delvaux in South Korea to support their direct to client sales. In parallel, Chloé has continued to optimize its wholesale network. E-commerce investments in digital marketing and creative content across the Maisons have driven digital sales higher, notably at Peter Millar.
The Fashion & Accessories Maisons have further embedded ESG into their operations. You may remember from the first half presentation that Chloé was the first luxury Maison to achieve the very demanding B Corp certification. Montblanc has launched three collections in leather using upcycled nylon to reduce the impact on the environment, while Peter Millar received GRS certificates and transaction certificates to help with supply chain transparency on all fully recycled products.
Let me now walk you through the rest of the P&L, starting with gross profit. Gross profit increased by 53% versus the prior year to EUR 12.079 billion, and the gross margin rose to 62.7%, increasing by 290 basis points compared to the year ended March 2021. This improved margin includes the positive impact from higher manufacturing capacity utilization, particularly at Cartier, a further shift towards retail, a favorable country mix, and targeted price increases. This was partly offset by rising precious metal prices, the impact on costs of a strong Swiss franc, and the phasing out of PVC, as well as a EUR 70 million valuation adjustment on inventories held in Russia.
Let me now look at net OpEx . At EUR 8,637 million, OpEx was 35% higher than the prior year, significantly less than the 46% increase in sales. At constant exchange rates, OpEx grew by 34%. The increase reflects higher sales as well as the non-recurrence of pandemic-related one-off items in the prior year. It also included additional reward payments to group employees to recognize the strong contribution to the Group's exceptional performance during the year.
I will now walk you through the expenses by category. Selling and distribution expenses, which accounted for 48% of total OpEx compared to 51% in the prior year, increased by 29% at actual exchange rates and by 28% at constant exchange rates. The increase was partly due to an increase in store openings, particularly in the second half of the year, and increased variable lease costs, primarily in Asia- Pacific. As a percentage of sales, selling and distribution expenses improved to 22% of sales compared with 25% in the prior year.
Communication expenses were higher by 81% at actual exchange rates and by 79% at constant exchange rates. We increased investment in brand equity and resumed with in-person events, such as High Jewellery events and Watches and Wonders in Geneva, which returned as a physical event for the first time in three years. Communication expense ratio was close to 10% for the year, in line with pre-pandemic levels. Fulfillment expenses rose by 37% at actual exchange rates and by 35% at constant exchange rates. They remained at around 3% of sales in line with prior years.
Administrative expenses were higher by 18% and by 17% at constant exchange rates, reflecting continued investments in IT and an increase in headcount. Good cost control contributed to expenses rising significantly less than the increase in sales. Administrative expenses improved to 9% of sales compared to 11% a year ago. Other expenses of EUR 344 million were 26% higher than the prior year, both at actual and constant exchange rates. The increase can primarily be explained by the EUR 98 million charge related to the uncertainty surrounding future operations in Russia. Other expenses included a EUR 173 million valuation adjustment, which mainly consisted of the amortization of intangible assets recognized on acquisition.
Net operating expenses as a percentage of group sales decreased from 48.6% a year ago to 45%. Operating profit rose significantly versus the prior year, more than doubling to EUR 3.4 billion. As a result, the operating margin increased by 650 basis points to 17.7%, compared with 11.2% in the prior year. As pointed out in Jérôme's introduction, excluding the EUR 168 million charge related to Russia, operating margin stood at 18.6%.
Let us now review the rest of the P&L items below the operating profit line, starting with finance income. Ne t finance costs amounted to EUR 844 million compared to net finance income of EUR 25 million in the prior year. This EUR 869 million negative swing primarily related to two factors. First, a EUR 194 million net foreign exchange loss on monetary items versus a EUR 49 million net gain in the prior year. Secondly, we incurred a EUR 538 million non-cash fair value loss compared to EUR 188 million gain in the prior year.
These fair value adjustments mainly related to investments in Farfetch convertible notes and the option of additional shares in Farfetch China, whose values are driven by the variation of the underlying Farfetch share price. In addition, EUR 188 million fair value adjustments were incurred on short-term bond funds. These were only partly offset by an EUR 8 million gain on hedging activities, which was a positive swing of EUR 88 million compared to the year ago.
Let us now turn to the profit for the year, which increased by 61% to EUR 2.079 billion, with the profit margin rising by 100 basis points to 10.8%. The increase primarily reflected the higher operating profit, partly offset by the negative swing in net finance costs just mentioned and higher taxes. Our effective tax rate for the year amounted to 19.6%, in line with our expected 19%-21% range. There was a significant EUR 1.4 billion increase in cash flow generated from operating activities to EUR 4.6 billion. The 44% increase is mainly explained by the much increased operating profit for the year, coupled with a measured increase in net working capital. Higher inventories to support the sharper growth in sales, as well as the higher trade receivables, were offset by additional liabilities.
Let us now turn to our gross CapEx , which amounted to EUR 871 million, 70% higher than the prior year. CapEx as a percentage of group sales, however, amounted to 4.5%, in line with pre-COVID levels. Forty-six percent of gross CapEx related to point-of-sale investments, including internal and franchise boutiques, as well as external points of sale. Most of the spend was on boutique renovations and relocations at Cartier. These included renovations of Rue de la Paix in Paris, Via Monte Napoleone in Milan, and the Cheongdam in Seoul, and the relocation of the Jeddah Al Khayyat mall store in Saudi Arabia.
Gross CapEx also included the opening of the Van Cleef & Arpels boutique in Taipei Breeze and at Dubai Mall for Panerai, among the overall 25 internal store openings net. Manufacturing accounted for 17% of gross CapEx and related primarily to R&D, increased jewellery capacity and machinery, mostly at the Jewellery Maisons and the Specialist Watchmaker s. Other investments accounted for the remaining 37%, mainly reflecting ongoing investment in information technology at YOOX NET-A-PORTER.
Let us now turn to free cash flow. Free cash inflow amounted to EUR 3 billion. The EUR 1.2 billion increase compared to the prior year is mainly the result of higher cash flow from operating activities, partly offset by higher CapEx .
Now on to our balance sheet, which remains very strong, with shareholders' equity accounting for 50% of the total. Net cash increased to EUR 5.251 billion at the 31st of March 2022, up from EUR 3.393 billion at the end of the prior year as a result of the items discussed previously.
The Board has proposed a total dividend of CHF 3.25 per one A share or 10 B shares, made up of an ordinary dividend of CHF 2.25 per one A share or 10 B shares, up 13% over the prior year, as well as an additional special dividend of CHF 1 per A share or 10 B shares, subject to shareholders' approval at the Annual General Meeting to take place on the 7th of September 2022. This proposed increase of the ordinary dividend, as well as the proposed special dividend, reflect our excellent results, robust net cash position, and the confidence of the board in our long-term growth prospects. Please remember that two years ago, the cash dividend paid was supplemented by the issuance of a shareholder loyalty warrant with a value upon issuance of CHF 0.34 per one A share or 10 B shares.
Before summarizing the past year's performance, let me share how committed Richemont is to ESG matters and how progress looked like during the year under review. Let me share the external recognition we have received for the past 20 years of work devoted to sustainability. First, Richemont was recognized as an industry leader with a AA rating by MSCI, recognizing our low exposure to ESG risks and our management of those risks relative to peers. MSCI noted in particular Richemont's responsible sourcing program and carbon footprint management.
Second, Richemont received a 10.7 risk rating score from the ESG rating agency Sustainalytics, putting the group among the top 2% of nearly 15,000 companies rated worldwide by the agency. As mentioned, Chloé became the first luxury Maison to obtain the demanding B Corp certification, demonstrating the highest social and environmental performance standards.
We have made strong progress on the environmental pillar of ESG. Our science-based targets have been validated by the Science Based Targets initiative and provide us with a defined structure to reduce our carbon footprint while future-proofing our business for greener growth. In this context, Richemont was recognized for its leadership in corporate sustainability by the global environmental nonprofit organization CDP, achieving a place on its A list for tackling climate change, one of only 200 companies out of 12,000 ranked.
Richemont was also recently named among the Financial Times Climate Leaders for 2022. We were recognized among the four net companies across Europe that have achieved the greatest reduction in their greenhouse gas emissions between 2015 and 2020. Last year, we joined the RE100, a global initiative of the world's most influential companies, all committed to 100% renewable power. We're making good progress on our ambition, on our ambitious goal of 100% renewable electricity across all our sites by 2025. Today, we are operating with 92% renewable electricity worldwide, an improvement of 28% since 2020.
During the year, we set a target to eliminate polyvinyl chloride, or PVC, a plastic which is nearly impossible to recycle, from our creations and packaging by the end of calendar year 2022. We are on track to achieve that target. To contribute to a more circular fashion system, a new luxury resale service powered by Reflaunt was originally launched by NET-A-PORTER in the U.K., then expanded to Hong Kong and Germany. The service has since been introduced in those three markets, at MR PORTER RESELL, the first dedicated luxury resale service for menswear, and at THE OUTNET for mens- and womenswear. Moving to social, we are pleased to be ranked by Forbes among the world's top employers, ranking 113th out of 750 companies.
This is a tribute to all the work achieved by the team over the past two years to become a more people-centric organization. We have notably defined our vision for diversity, equity, and inclusion around our belief that diversity is everyone, with a newly appointed group director of DEI, as well as DEI champions within each region. We have partnered with the EQUAL-SALARY Foundation with a goal of 100% equal pay by 2024. Our community investment spending has increased to EUR 42 million, or +17% versus a year ago. Beneficiaries include charities involved in healthcare, social and economic development, education, women's welfare, and children.
Moving now to governance. Each year, we refine our governance processes to ensure we can fuel the level of change we need to become a truly sustainable business. We have strengthened our sustainability governance, both at the executive and board levels. Dr. Bérangère Ruchat is our first-ever chief sustainability officer. She brings an outstanding track record in delivering sustainability performance through setting ambitious ESG goals, building innovative partnerships, and developing strong teams. She will further raise our sustainability ambition and further embed sustainability across the group.
Building on the successful establishment of our Board of Directors's Governance and Sustainability Committee under Clay Brendish in 2021, we were delighted to appoint Jasmine Whitbread as the committee's new chair. Ms. Whitbread is an experienced Non-Executive Director with extensive experience in ESG initiatives.
Moving back to numbers now with a summary of our financial year performance. Sales were significantly above both last year and two years ago, showing a significant step change at group level and at most Maisons. There was good operating leverage leading to a sharp increase in profitability, which in turn led to a strong operating margin. We saw excellent performance from the Jewellery Maisons and the Specialist Watchmakers , and a notable improvement at the Online Distributors and at the Fashion & Accessories Maisons.
We have established a solid ESG foundation that can be built upon, notably with the validation of our science-based targets. We are proud of our external recognition, but look for continuous improvement. To help us on this journey, we strengthened the ESG team with the recent appointment of a chief sustainability officer and increased expertise at board level. Back to you, Jérôme.
Thank you, Burkhart. Just adding a few sets of conclusion to your conclusion. Before closing, let me reiterate the main highlights of our fiscal year 2022 by business area. First starting by Jewellery Maisons, which enjoy a leading position in the jewellery industry, driven by a combination of unparalleled creativity, high savoir-faire, and impeccable execution. Our three Jewellery Maisons are renowned for the highly distinctive, attractive, and timeless design. These factors has led to a solid track record of outperforming the luxury industry in both sales growth and profit margins through cycles. This year is no exception. Sales exceeded EUR 11 billion and operating margin reached 34.3%.
Specialist Watchmakers have continued to transform their business model, investing in Luxury New Retail. Our approach centered on client initiative with expansion flagship or new service with added benefits, such as watch trading service through Watchfinder, as well as experience program to ensure clients beyond their sales transaction. This was the example of this innovative concept include Jaeger-LeCoultre's Atelier d'Antoine, a discovery program on Café Chip, or experiential and unique outdoor adventure program offered to the buyers of certain Panerai watches. As a result of our focus on online and physical retail distribution, direct to client now exceed 50% of sales for Specialist Watchmakers . Strong and enduring demand for many collection previously mentioned has led to reach iconic status for and all creating long-term value for our clients.
All these factors are contributed to the strong 53% sales growth. Our total sales exceeded EUR 3.4 billion, with many of our eight watch Maisons reaching a new scale in sales, a new historical high. This in turn resulted in operating profit almost doubling compared to two years ago and translating into a healthy 17.3% operating margin. With sales over EUR 2.8 billion, our Online Distributors on their side generating gross sales of 27% and 15% compared to two years ago, respectively. Supporting further growth is a shift in business model. The shift in business model is on track at NET-A-PORTER, MR PORTER, YOOX, while separately, Watchfinder continues its development in watch trading program across the group.
When it comes to our Fashion & Accessories Maisons, they renewed and with a robust sales growth of 53% compared with last year and +15% compared to two years ago. We are very pleased that key Maisons have delivered profitable growth with several, while several others now so close, are very close to breakeven. Growth was partly driven by positive contribution from the renewed creativity and leadership both at Chloé and Alaïa. We expect now similar benefit from the new Montblanc creative director.
Finally, let me highlight the proprietary savoir-faire in the high-end leather goods manufacturing that the acquisition of Delvaux has brought to Richemont, notably with two leather workshops in center and east of France and the one sited in Brussels.
Now, just a few more words to conclude before we move to the Q&A.
At Richemont, we are well-positioned for long-term growth and underpinned by the enduring appeal, timelessness, beauty, and quality of our products, which are passed on from generation to the next. We are increasingly multiplying touchpoint with our client. We are developing a closer relationship and are better able than ever to serve them. We are pleased to see that we appeal also to a younger and younger clientele.
We'll continue to invest in long-term brand equity to ensure that our Maisons and businesses have the adequate resources and talent to build on the new scales that they have reached and grow responsibly. Over the past years, we have made significant efforts to gain in agility and adaptability, facing obviously the volatile market condition. We have also helped our retail partners better manage inventory levels and thus protecting our brand equity therefore in the same time. Richemont is in a strong financial position with a robust balance sheet. The current market condition with the conflict in Ukraine, increased health restrictions in China, higher inflation around the world, and higher interest rates create uncertainty and volatility. We remain more than ever focused on the long term while maintaining a close eye on developments in order to adapt our operations as needed.
I would like to close this presentation by thanking all our colleagues throughout the organization for their dedication, ingenuity, and discipline. Together, as the motto of Richemont, we will craft the future. This concludes our presentation. We now open the floor to questions. Thank you.
We start on the left-hand side. Please, if you could give your name and company. I think it's you, Louise, and we'll go. All right. I think all of you. Okay.
Good morning. It's Louise Singlehurst from Goldman Sachs. Thank you very much for taking my questions, and it's great to see everyone again in person. It's been a long time. I wonder if I could start off with the obvious question, with regards to China. Would it be possible to get an update on the operational environment, what you're seeing at the moment? More broadly, I think, Mr. Rupert, you were talking this morning of potentially a slower recovery. Is it possible to give us an indication of how you're thinking about the market in terms of is that more logistics and impediments to traffic returning to stores, or should we all be being a little bit more prudent in terms of how we think about the underlying strength of the Chinese consumer?
My second question was regards to YNAP. Thank you for confirming that the talks are obviously still ongoing with regards to Luxury New Retail. I just wondered if you could talk to us, whether the initiatives that you outlined back in November, that all of those, whether it be distribution, discussions with Farfetch and platform solutions, are still all on the radar, including that minority ownership stake, and, whether in terms of, if there are talks which don't come through to any solution and they come off the table, is YNAP today positioned for strength in online going forward? Thank you.
Sorry, I didn't catch your name at the start.
It's Louise Singlehurst from Goldman Sachs.
Okay.
Thank you.
Okay. Okay, Louise. The view that I expressed on China is anecdotal. It's from reports that I got from friends of mine in China, entrepreneurs and people who are plugged into the society, Chinese friends. They really cautioned me against making the assumption that post the economy opening up or the lockdown stopping, that we'll see the same bounce back as before in China and in the United States and in Europe and in Japan. It's not doom and gloom. It's just, say, don't look for triple- digit growth. Don't think it's going to be like we have in the United States at the moment. They're in a different period of the cycle already.
The problem that we have today is there's so much information out there, and if you focus on luxury goods, you focus on this, on that. One should really have a very broad picture. One of the biggest pictures you can have is to have a look at the number of ships that are lying offshore, not only in China, but in L.A. and all over. I have friends in the shipping business. Well, MSC right here. We have a real supply chain problem. People can't find their containers. The top two and or three, yes, but there's a gridlock. Try and book a container today. You can't. The prices have rocketed dramatically. Now, in commerce, people have to ship goods, and I thought I'd never ever see a thing like, when the hurricane hit our distribution center in Italy.
I thought, you know, that's a once in a lifetime. I'm just glad we're in non-perishable luxury goods. I would hate to be in fast fashion. I would hate to be in a position where this, my fall or my spring or, you know, my seasonal goods are somewhere. We must expect that China's reemergence after lockdown will not be as dramatic, you know, 70%, 80% growth. That's all I said, and that's all I said. Please, folks, because we as humans try to over-extrapolate. If things go down, we think they're going to hell. If things go up, we always overextend the trend. It's humanity. You look at all the various cycles.
We're loathe to predict a discontinuum, and it was in that vein that I said, "Please do not assume it's going to open and it's going to be a boom." Also, China's growth rate has slowed down. As hardworking as they are, as smart as they are, I'm not sure that any society undergoing that lockdown will be able to grow 6%, 7%, or 5%. Yes, it'll be a while before they'll return, but there will be a period where people are fearful of losing their jobs. Not with us, but with big corporations, and I suspect this is anecdotal from what friends are telling me there. I just wanted to caution you not to put in your projections China opening and it goes up again.
You know, I was saying to my colleagues, in July this year, it'll be 46 years that I've been involved with Cartier from when I was 26. I saw 1987. Firstly, I saw the stagflation in America, and whatever anybody— none of you have been through stagflation. You're too young to have been through stagflation. It's a nightmare, a true nightmare for industrialists, for the real economy. I saw 1987. That's when we started Richemont, in the middle of it, October 1987. Then the dot-com, and then for merely being conservative and saying things are getting out of hand in 2007, they called me Rupert the Bear. I don't think that was so bearish. I should've thought Rupert the Realist would have been nice. It happened in 2008, and then, I'm sorry, but the central banks of the world have behaved irresponsibly.
They've created too much liquidity globally, and they penalized the backbone of society, the conservative element of people who actually saved, and they drove their pension funds into equities because you could not earn anything in with negative interest rates. Worse than that, they benefited the people with capital, because one could borrow at 0%, and the people who needed capital, the smaller and medium-sized businesses, did not have that same benefit. As a result of being driven into equities, the share prices rocketed. Of course, we had the whole new economy. With free capital, we make money or free cash flow in 15 years' time. Well, that's being sorted out in a hurry right now. It's all the price. If you get something for free, you abuse it.
In England, where it rains all the time, you're out of water meters, but they have a shortage of water. Because you don't pay for the water you use. Give any human being something that's wrongly priced, and we abuse it. We abused all the natural resources of the world over now centuries. Capital was given for free. Free enterprise can't work without the hurdle rate.
Now things are turning to normality. I think that Europe, the United States, Japan, we all going to have a dose of reality. It's for that we prepared our balance sheet. We went and borrowed eight-, 12-, and 20-year money at what I think in the end will be negative rates if you take what we're paying, and you take the inflation rate. We've prepared ourselves for a period where this growth won't be 30%.
I mean, I recall when we had the wrong incentives, and our watch business was growing in, from 2012, 2013 to 2015 at 35% compound. What did we do? Oh, no. Now we look at the turnover per square meter. We take out the leather goods out of Cartier. We put watches in, so we handed the leather goods business to the other companies. The democracy riot started in Hong Kong, and you can actually take it that date, the watch business dried up. Hong Kong was the biggest watch market in the world. We suddenly found out that we had far too many watches. I think it was in November.
We had to clean the watch market up. Took us four years to get the excess stock out. At the same time we were doing online. I hear these questions about online, online all the time, and the losses. It's not. Our business is doing. We're learning tremendously in our joint venture with Alibaba. These are investment costs. Early this morning, I had a discussion with Cyrille about a lease in America, and I was saying, "Mm, oh," and he had to explain to me. You will never ask me that cost, but if you take the present value of that cost, it's much more than EUR 40 million in building pipelines. What we're doing is we're building pipelines, digital pipelines.
It's just another—i t's not a panacea, i t's not a cure for anything, but it is a route to market, but more importantly, a route to product for the consumer. If you don't do it, you will be left behind. You will be left behind if you don't believe it. For instance now, I'm not too hot on Bitcoin or cryptocurrencies because in the end, it will deprive central governments of taxation, and no government can survive without taxation. It's a utopia to think that you can get free medical services. In the end, there'll be a reaction. The science upon which it's based, we absolutely believed in. For authenticity, we will certainly be using the math, if I can put it. I just worried at times that people focus on the wrong things in our business.
YOOX NAP, Farfetch, we are learning a lot, and I dare say they also learned from some of the work that Cartier, for instance, that they've been doing. We're learning a lot from José, and José is not arrogant, and he admitted that in Luxury New Retail, he's learned a lot from Alibaba and also from Cartier. Yes, we have had discussions with other partners, but it's very, very complex. I would say it's advanced enormously. I'm not claiming any credit for it. Zero. Nothing. I'm not involved in it, but I know it's important that we do it. You worry about it. Do you know what our annual expenditure in leases, annual expenditure is? It's in the accounts.
It's EUR 1.1 billion.
Yes. Compare that to our total investment in online. If we succeed in online, we'll be able to turn quite a big percentage of our fixed costs into variable costs. Now that's the play. I prefer businesses with higher variable costs and lower fixed costs. It's something that I promised you years ago that we'll try and we'll attempt to do it, but that's what we're going to try and continue to do. Don't worry about it. It's not gonna explode. It's not going to increase in costs. We're pretty close to where we want to be. I've in fact yesterday asked the people, I said, "We do it or we drop it now, okay?" That both sides can understand that this is not another three, six months, ra, ra, ra. We all agree that we've got to do it, so now do it.
Don't have author's pride. Remember I ran an investment bank, and I worked at Lazard, and the problem that you get when you get into deals, then both sides have these M&A types who have to prove their worth. In the meantime, the guys who wanna do the business, they just wanna get on. They're like two peacocks. No, no insults to our or their side, but they miss the big picture. It was my biggest problem always running Rand Merchant Bank and even at Lazard. We have a client who just wants to get the deal done. The other bank, they have a client. In the middle, you get two investment bankers and lawyers. Trust me, they can be even worse, who want to score points.
We are not in a position where there's a disagreement between principals, if I can put it like that, okay? There's a buy-in from Cyrille and from Nicolas and from our Maisons. They bought in. That's been tremendous progress. I was a bit surprised by the market reaction today because operating profit miss, was it EUR 200 million or what?
Yeah, about that when you, remove China.
No, whatever the people said.
Didn't miss our expectations, but okay.
No, but China, that we fully provided for, is nearly that miss. Forex, you added, we're not gonna give you. I mean, our sales have exploded. Our costs are under control. I'm happy. Some of the elderly friends here who are sitting in the front will tell. Looking at you, yes.
No, no. I'll tell you I'm not often happy. Don't tell me to give you the future. I can't. If I knew, I'd tell you, but I have no idea. Sure.
I think it's Patrik. We will go that way. It'll be easier because—
Sorry.
You all raised your hands at the same time.
Yeah.
Yes.
No, no.
We go from left to right.
Okay. Don't worry, we'll get to you.
Thank you, Sophie.
It's Sophie. Don't blame Sophie. Blame, yeah.
Patrik Schwendimann, Zürcher Kantonalbank . Thank you, Sophie. Thank you first for the special dividend. Much appreciated. My questions are, do you see already any negative impact due to the wealth effects like stock markets, some real estate effects in China? That's my first question. Second question, what are your cost expansion plans in this more or less uncertain environment? Is there still some catch-up effect for the current year? That's my second question. Thank you.
You know, if you look at the wealth effect, I think those were very concentrated plays. I think the same people were in the same funds and in the same bets, which is a crowded exit that they all experienced. I don't know. We haven't seen that yet.
No, we haven't seen it yet.
No.
If I might add, you know, China, and we had the question this morning, when we were speaking with the press, "Do you see any change in behavior of your, you know, in your clients in China?" The answer was, "Well, we don't see our clients today." Because it's more than a joke. I mean, it's 40% of our network is closed today, and with a large concentration in our, you know, in China's biggest cities, and commercially relevant for us. So we are really today in a lockdown environment in China: 100 stores closed out of 250.
Also online, if you think.
And, and online—
You know.
With the, let's say, the ricochet effects of having distribution centers closed temporarily over the last weeks, you know, online, it has a spillover effect onto those stores now or onto those online stores. What we can say is it's happened before. We've seen effects going into lockdown, coming out of lockdown. Now, can we project them out in the same way, in the same strength, as we've seen the rebound? We're not sure. We're cautious. We don't know. We'll find out, because as the Chairman stated earlier, we are probably in China at a different stage of the cycle, but we all only will know that with hindsight and you as well.
The only thing we can say, we take care of our people in China. We have found alternative routes to actually bring the inventory in, into China, because we cannot depend on a single point of entry in Shanghai. We found alternative routes.
Legal.
All compliant.
Yeah, sorry.
Don't worry about it.
Not, not—
We're not docking.
Fully taxed legally.
We're not docking with ships in the middle of the night now in strange locations. Because obviously on, especially on the hard luxury side, we have additional compliance obligations, et cetera. So that is all set up. The inventory levels we have are fine, meaning no excess inventory and no missing inventory in China. Our stores, our partners are well equipped with that, and we're ready to open back our doors when that is possible. I think that's the best thing we can say today about the China market. Do we see any changes in consumption patterns today? We simply don't know. It's a very recent phenomenon, and we will have to see what happens when we open our distribution again.
Now, we do not see anything. That's why I tried to say it's anecdotal. It's better to err 5%-10% on the downside and not shoot for the stars. Additionally, we actually used inventory that was on its way to China and sent it to Japan because we short of product. You know, we working flat out, but you cannot ask. You know, it takes 20 years to train a proper watchmaker at Lange, Vacheron, these places. You can't just say, "Okay, do 15% more." There's a human capacity element. Waiting lists. There's a shock absorber. We don't have excess stock. Our stock is clean. That's the key to me. We do not have perishable stock, which is just lucky.
We weren't good enough at fast fashion, otherwise we would have had a hell of a lot of excess stock as well.
To the point now, we are still under capacity constraints today, despite the big effort that we have done in recruiting and developing our team.
Yeah. We added 1,500 people in Switzerland alone.
Where we are now 10,5 00 people working.
It's a strange world, huh? Did you think you would get that you'd pay a big premium for a secondhand Range Rover? You look at the motor car industry, there are no more discounts. You wait 20 months because of—so, y ou know, think about other industries. Think about being dependent upon microprocessors. There's a dynamic that has changed. Even if the United States today starts building, it's four years. I'm told you can't do it within four years. Globalization saved the West from inflation because the Chinese were more efficient, and they produced the goods cheaper and better. That's what led to President Trump, because the job losses.
There are many things that are happening. You should read Ray Dalio's book on the changing world, the latest one. I think he's not only a smart investor, it's a very good book. We're in a good shape, okay? Stop asking me about things that are variable costs, that are planned. It's not a negative contribution. It caused an investment loss. We are spending the money not because we have to, but because we're busy building access for our clients to us and us to them. I've learned from Alibaba the value now of really knowing your clients.
Look at our watch business. For years, we only captured 18%-20% of the data because of the wholesale nature of it. We go to an eight-year warranty because our quality is good enough, and guess what? The client data is coming in.
Now, l ook, you will laugh, but in the past, nobody would give you their data. Now, if they're waiting for a Vacheron or a Lange and so on, they give you their dog walker's telephone number just in case you miss them, that you can call day or night or "Please, let us know." It's a crazy world out there. You go when 18-month waiting list, it's not nice. As we spoke about that, you know, a second-hand Range Rover with 30,000 mi on is more expensive than a new one. That won't last ad infinitum, but we've got bottlenecks in the supply chain. Basically, the supply chain is gonna take a year or so to unclog, and that's really what I'm saying.
I don't think—w e're not seeing danger signs of flashes or drops, but don't project 30%, 40% growth per annum for anybody. If anybody tells you that, they don't know what they're doing or they're lying. I don't know what's worse. Sorry.
Okay. Edouard. We'll go that way. Yes, Zuzanna, and afterwards.
Hello. Edouard Aubin, Morgan Stanley. Coming back to the share price reaction today. I think obviously the main thing is the disappointment is the lack of operating leverage for the Jewellery Maisons division. If we step back—
The lack of, excuse me.
Lack of operating leverage.
Okay.
If we step back and we look at the earnings season, right, in the luxury space, the leading luxury brands have posted record high, almost all of them, record- high operating margin. Obviously one of the driver, not the only driver, but one of the driver was operating leverage. If I look at Cartier, Van Cleef & Arpels, you should be posting record high sales density at your stores today. How come you're not getting more operating leverage? I understand you're investing for the future, but so are your peers as well. Is that the best, and related to that, is that the best we can get in terms of operating margin for the division? I know you're extremely reluctant to give guidance, but—
My friend, how many goods will we sell if we give people our true operating margin? If we tell everybody this is what we make on X, Y, Z. We give the truth, but there are lots of costs in these divisions.
No, I'm obviously not asking for any trade secrets, but you know, I guess my first question. Sorry, the second one is on Specialist Watchmakers .
Okay.
You know, I guess a very simple question. What type of top-line growth do you need to post to be able to get some operating leverage? Because, Burkhart, you've talked in the past about, you know, the move to DTC. My understanding that you're cutting a bit the number of POS, number of POS is more or less stable, so again, sales density going up. Could you know, if in a scenario where, you know, you have sales up mid-single-digit, could you have, you know, operating margin expansion, because again of DTC, changes to DTC? Thank you.
Edouard, well, happy to see you in person, but I'm a bit troubled by the question you asked me because I don't understand what you mean, the lack of operating leverage. This, I mean, jewellery businesses are very significant businesses. They've crossed the EUR 11 billion mark in sales today, and they have a 34%, 34.3% to be precise, operating contribution, up from 31% a year ago. Now, where is the lack of operating leverage on that? I just want to understand that. Secondly, same counter question on Watchmakers. 17.3% operating contribution following a 5.9% operating contribution a year ago.
Now, I think there is —and I'll be very clear about that— I think there are overblown expectations that have definitely not been fueled by us, because you remember when we had the first year results out there and the discussion we've had out there, that we said we have a very strong, first half operating contribution. If you look at the seasonality of it was probably overblown, and we have not been arguing for the contrary because we had a cyclicality in the sense that, and you've seen it through the numbers, we had sequential acceleration of our sales base coming out of this pandemic throughout the entire year.
We have seen all our Maisons gradually, step by step, increasing redeployment of capital into their businesses on many fronts, including in communication, and I'll speak to that, including in hirings, including, let's say, retail or boutique projects, meaning CapEx, including into manufacturing and capacity increases that we desperately need for the Jewellery Maisons and to a lesser extent for the watch Maisons.
We have said that in the second half and always and going into the current fiscal year, we will see a step- up of investments into our businesses for the long term, and that this will play out in the second half of this year, and it will play out going into fiscal year 2023. Now, let me give you some additional insight. If you look at the expenses in the first half and in the second half, and you put them in relationship to sales, I'll be very precise. In the first half, full expenses or overall expenses on sales were 41.4%. You can do the math. It's all out there. In the second half, it was 48.2%. How shocking, 6.8 percentage points higher on sales.
Now, if we drill into that, it's a very simple math here: 6.8 percentage points overall, 3.6 percentage points is communication spend. We have increased our communication spend by 81 percentage points this year, so that is a big driver of it. There's another 1.5 percentage points out of those 6.8 percentage points that goes or comes from selling distribution expenses. What's behind it? Projects, meaning depreciation, hirings, meaning staff costs, and additional reward payments because after that we have given to each and every employee in this company to recognize their very significant strong contribution that they have done, not over many years, but especially during those last two years. So that is 1.5 percentage points of those 6.8 percentage points.
Third one, the other, is non-recurring expenses, meaning Russia and the risk adjustment or impairment we did on our Russian assets. That actually has played a part in our expenses. That's one point of those 6.8 percentage points, and has also played an additional part or hasn't had an additional impact of EUR 70 million on our gross margin or gross margin rate. That explains 90% of the worry or the miss or whatever you wanna, however you wanna qualify it. Now, we all know how the game goes, right? I mean, we have reported earnings of EUR 3.4 billion. Okay, we add stuff back in. You know, I can do you the math. I'm very easily at EUR 3.6 billion, EUR 3.7 billion, in that range.
This is what I try to avoid.
I know. I mean, let's not kill ourselves.
Yeah.
We have invested in our business.
You all feel a little bit sore about it.
No, it's fine.
No, you can explain it. The fact of the matter is, I said years ago, to grow dividends by 15%, and we always retain more in the business. We need certain operating profits. In order to get those operating profits, we need to build brand equity. That's my job. We paid EUR 310 million for Van Cleef. They'll have a free cash flow of over EUR 1 billion this year, right? That's our jobs. We could raise prices quite significantly like some of our competitors have done. But if my fears are correct, and there's a slight slowdown in demand, are we gonna drop prices? Or do you treat clients properly and you don't use the A. Lange & Söhne, the first steel, the ODYSSEUS.
I had to push them up a little bit because the market initially, steel ODYSSEUS, I said to them, "It'll sell,r elax." Now, the waiting list is nearly two years. I didn't jump the queue. This thing was made about 20 times before I said, "Okay, you can go." I see every product that's made, unlike what some of the bloggers write, that I play golf. No, no. E very product we see, there's six of us who work with each management. The bracelet wasn't up to standard.
Now, the moment if you get it, you put it, Phillips, the watch auctions, you get 3x more than what you pay us. We could double the price and they'll still go. What happens? Does the client still trust you? Our flexibility, our price elasticity, which to me is the key driver. What you folks should worry about is the price elasticity and the brand equity.
Because when things become ubiquitous, and they're all over and logoed, then clients start looking, and they start seeing logoed people that they don't want to associate with. Guess what? Three, four years later, the brand's in trouble. That's what I look at as an investor. I look at, is the thing ubiquitous? Is it everywhere? When I say we don't like discussing margins, it's gross margins, but you get your net margins. We have operating leverage, trust me, but—
Growing.
Sorry?
And growing for this business.
And growing, but we—y ou know, Russia, we didn't have to write everything off, but we just said that's the write-off. It's a bit conservative. Relax, we have operating leverage. That's why I like, Edouard. That's why I like variable costs. I share your issue.
Just to give some other part what we have to face, you know, in about two years, the price of gold really gone up, the price of diamonds really up. We're Swiss franc based, it really went up. On the market side, U.S. and China are not known to be places with cost of operation are low, and we have been growing super well. To consider margin the way we did with two things, when distribution costs of course grow in countries like that and the cost of operation is, on manufacturing costs, very high, shows we have really considered well. You're very picky on how, what it means overall. Leverage has been huge over the past two years based on these factors which shows brand equity is very strong.
Look—
But—
I would be really concerned if the brand equity didn't allow us pricing power and therefore operating leverage. Your turnover doesn't go up that much and your fixed costs stay down without making money. Look at our free cash flow.
Zuzanna.
You know, it's not that long ago that we spun out BAT, and I kept a lot of cash in the luxury goods business because I said, "Goddammit, are we ever gonna create cash out of luxury goods?" Because the tobacco, we got rid of our liquor and hotels and stuff and stayed with luxury goods, and I was worried about the cash flow, and today the cash flow is superb. We worry about cash flow.
Zuzanna.
Thank you.
Thank you.
Zuzanna Pusz from UBS. I have two questions. Sorry if, I guess there's been already some good questions out there, so probably we'll be entering a dangerous territory as we go to the left. My first question will be on—
Is it for Luca?
I worry about Luca. My first question will be on—w ell, you probably won't like it— but of course you don't want us to ask about the future because it's a bit difficult to predict it, but you can probably tell us a bit about the past, and April is past. Maybe you could give us a hand and give us some idea about the trends you've seen in April.
April is okay.
Are you used to discuss—
April is okay. Okay?
Would you be able maybe to tell specifically if APAC was still positive given the drag from China?
Yes.
Would be my first question.
Yes.
It is. Okay, perfect. My second question will be on pricing. I think Mr. Rupert made some fair points that obviously the consumer doesn't want to feel you take advantage of them, but obviously there's a huge inflation, right? If the cost of bread, milk goes up, I'm pretty sure the consumer can accept the cost of jewellery going up. Would you be able to maybe share with us the level of price increases you've been seeing? I mean, I've read on some blogs online that I think it was roughly double-digit% for Van Cleef, mid-single-digit for Cartier, but knowing you have a global pricing policy, it would be just helpful if you could tell us a bit because we obviously see lots of pricing.
Given that my first question was answered quite quickly, maybe if I could just ask about the costs related to China, was it mainly Jewellery Maisons? Because it would help us get an idea of actually what was the underlying margin for Jewellery Maisons, because I guess if it was all Jewellery Maisons, then the margin was in the mid-30s, which, you know, is a decent margin still. Thank you.
I think that question is a bit too sophisticated for me, but. I just—
This question was asked effectively a number of times on the web. Whether we would provide some color on the segment impact?
It's our cost of doing business in China. It's broader. It's not just Jewellery Maisons, et cetera.
But—
Remember we're paying the salaries, huh? We don't have a business.
When it come to inflation and the rise of the cost, that will create the necessity to increase the price, our chairman spoke on the price elasticity just before, and indeed, building the brand equity over the last years have been making us capable to increase quarter by quarter or semester by semester the price. We have been constantly, I would say, adjusting, not moving up by pressure, by pleasure, but adjusting price over the last three years.
Yeah, sorry. You see why I hate getting into these things? You're technically correct, but it implies a strategy of price taking, of increasing profits through pricing. We have not done that. We've not used pricing in order to increase our profits as a tool. We used efficiency. We used turnover. Because we have a global pricing, it is pretty difficult if you have a boom here and not a boom there and currency fluctuations to try and keep a stable price, a universal price for clients. We've not used pricing as a tool.
No, I know.
This is really, we can offset the costs, but we've not deliberately raised the prices to increase our operating profit.
I guess that's the question, how much were you able to offset the costs this year?
We can easily absorb the costs because if it gets over 7%-8%, we won't have the same governments in place, trust me. We have that price elasticity.
My message was we are not late with p rice composition in this case. We don't have to absorb two years of delayed thing or whatsoever. Prices reflect costs or reality.
Yes.
Well.
That's right.
We have increased our price in May, single digit, to offset the price.
Correct.
Cost of the gold and also to rebalance the worldwide price because the euro is very low, dollar is very high, and it creates some price imbalances. It's single digit, and it's normal.
Single digit for Cartier or for Jewellery Maisons?
For Cartier.
Yeah, single-digit for Van Cleef as well, depending on the countries. I think, you know, it's not because most of our clients don't travel anymore that we should give up with our fair pricing policy.
Exactly.
It demands, it requires discipline, and the increases have been very different. Actually, there were higher increases in Europe than in other markets where the exchange rates were more favorable.
Sorry, I think that, by the way, is what I tried to say less eloquently. Clients can't travel, so it would be unfair to price gouge people who can't travel. If you want your people to keep on loving you like with Van Cleef, treat them fairly.
Okay, Luca. Now I'm fully braced.
Luca Solca from Bernstein. My first question is again on operating leverage, so that I want to check that I understood correctly. Because what I think is potentially mysterious in your accounts today is that you broadly grow the Jewellery Maisons and the Specialist Watchmakers this year by the same amount, approximately 50%. But you increase your EBIT for the Specialist Watchmakers by more than 11 percentage points and, quote unquote, "only by 3- odd percentage points" for Jewellery Maisons. Is the answer in between the lines that SG&A has been leveraged, but you're being more cautious and absorbed a negative effect on gross margin because of the raw material price inflation that you experienced in the Jewellery Maisons connected to gold and precious stones and so on?
Because this is even more mysterious when you take into account that the Jewellery Maisons are much more direct to consumer, so they should have an even higher operating leverage and fixed cost base in your directly operated stores. I think this is my first question. The second question relates to Russia. You were pointing out that you sort of wrote off costs even beyond what you should have done.
Sorry, I didn't—
How far—
Sorry, no, no, I didn't say that.
No, no. Sorry, sorry. I was— I was misinterpreting.
Okay.
Maybe.
Yeah, okay.
You wrote off.
Yes.
You were prudent in writing off costs. How much more is there if by an unfortunate situation you had to stop—
Zero.
Operations altogether?
Zero.
Zero.
Zero.
Yes.
Okay, great. The third question, if I may, relates to YNAP. I would put the discussions you have with third-party partners. To the side. Not too interested in that. You took over this company a while ago. You've been running it for a number of years. How far are you think, from getting this online retail division not to produce a negative contribution to EBIT? Thank you.
Well, I think the last one, Burkhart said, excluding the development costs in China, it's neutral. It's EBITDA neutral.
It's the best EBITDA since the company was created.
EBIT neutral as well or from an EBIT viewpoint?
Well, EBITDA was the word that we used.
Yeah, okay.
Okay, Luca, let me just try to solve the mystery.
I'm gonna be interested in listening to this as well. I've never heard it from the other side.
It's not so mysterious, I would say.
No, I know, but I wanna hear how you explain it to him in contrast to how you explain it to me.
Yeah, I'll try to be aligned with that.
Yes, okay.
Okay. Basically, we're talking about two elements that, let's say, explain the difference. One is the gross margin, which has a significantly different movement between one year and the other. Remember, the last year we have very quickly rebounded on the Jewellery Maisons side, and have actually reverted from, let's say, the first half of the year where we had a negative impact, very strongly negative impact across the board in the manufacturing entities, which actually hit the Specialist Watchmakers very strongly, and actually throughout the entire year.
The significantly negative impact on the last year's results, meaning the base for this year, while Cartier actually on the gross margin side just had a very small remaining loss at the end of the year because they very strongly rebounded in manufacturing capacity utilization starting basically early summer of last year. Their gross margin was basically not strongly impacted last year, which from that basis grew across both Maisons this year, but to a much lesser extent than on the Specialist Watchmakers , who actually ended last year with a significant negative gross margin impact.
Now this year, that has completely reversed. We are no longer—g oing into last fiscal year, we started basically at capacity and capacity utilization, and actually are now short of not capacity per se, but short of the human capacity, as the chairman stated in the beginning, because it is difficult to train these watchmakers up so quickly to the level of quality that we require. There's a significant gross margin swing in there. The cost base has expanded slightly more in percentage compared to last year.
Oh, sorry. If we could just say then "N o more discounts in watches."
Yeah. The cost base has expanded slightly more at the—
Sorry. For instance, Lange has 0.5%? All that is the difference between you pay your deposit and you finally get your watch and the currency fluctuations. Now, that was not the case before.
Vacheron, no.
Vacheron same. No, I'm saying look at the car industry and then think with the watches. You know, if suddenly a 10% discount comes back, that's a huge swing.
Third try. Cost base has expanded slightly more at the Jewellery Maisons than at the Watchmakers than at the Fashion & Accessories Maisons. Why is that? Because we actually have had throughout the entire pandemic this cycle where Cartier, Van Cleef, the Jewellery Maisons rebounded first, meaning started their investment cycle or reinvestment cycle at first, then the Watchmakers, then the other Maisons. This has exactly been the same profile this year. Slightly higher cost expansion at the Jewellery Maisons, followed by the watchmakers, followed by the Fashion & Accessories Maisons. It's that profile. In a nutshell, gross margin swing, much more important.
Watches and Wonders.
Yes, the Watches and Wonders. That actually—
I've got to remember to give him what he told me.
It's gross margin driven. On the level behind, it's a slightly lower reinvestment. Hope the mystery is solved.
Okay, let's move on to Rogerio.
Thank you. This is Rogerio Fujimori from f rom Stifel. I have one question perhaps for Cyrille and Nicolas , and another one for Burkhart . I think you mentioned in the press that millennials now and younger consumers account for 65% of sales of Cartier. I was just wondering, I think after a banner year, how could you talk a little bit about the changes in terms of sale, customer mix profile when you think about the contribution for growth that you saw from new customers buying for the first time versus existing customers. And also basically the contribution from high-net-worth individuals versus the affluent middle class buying a Tank or a bijoux for the first time, and maybe implications for marketing.
For Burkhart, basically just some thoughts in terms of fiscal 2023 outlook, high level. In terms of the key drivers for gross margin that we should think about and your CapEx priorities and levels, given obviously the uncertainty in macros and your priorities, how you're planning CapEx for fiscal 2023. Thank you.
Thank you, Rogerio.
The part of having new customers in luxury, I think it's a constant of all the old industry. The luxury is growing because the wealth of the world is growing for the affluent middle class of the world. Whether in the United States or China or Singapore or now including Australia, Vietnam, and so forth, we see in all countries some affluent customers coming up. This is not new, but we have to grow both to keep loyal to customers and to grow for new ones. So far we, I think, doing that balance quite well. What we see, they are younger because the new affluent customers in countries like China or Middle East are younger compared to Europe, for instance. That's just a fact.
We see even in the United States, very young customers coming to our store. Which doesn't prevent also the mature customers to continue and to enjoy it. Overall, we see that the percentage is growing to something younger because the new markets are dominantly younger and first-generation achievers, so that's just this point. I don't know if there was a concern on your question or not, it's just I think an evolution which we [inaudible] , the contribution from new or existing or you have an [inaudible].
Well, if you see the European trend, you know, where basically there were no Chinese group coming, and what you see was basically local customers on all generation, they have been really happy to buy in our stores. We can say this one as a loyal or kind of a loyal customer base as a whole, and they have come to us quite well. It's not only new customers from new countries, it's new customers from everywhere, and also existing customers coming to us because they feel the long-term value. The balance is quite well, I think, in all price categories and in all generations. Do you want to comment?
Yes. I fully agree. What I might add is on the different categories we mentioned last year that High Jewellery was probably the most hit, you know, with the first year of the pandemic, with the absence of international gatherings and events and launches. This year it managed to come back to pre-pandemic levels, meaning that we had the same type of attractiveness, you know, in very high- net- worth individual, as well as in more, you know, upper middle class buying more day wear pieces. Which was not the case a year ago, so there is a real comeback.
Regarding the new role of clientele, interestingly, if I, you know, take the example of Japan, for instance, which we can consider a more, you know, mature market in terms of the implantation, for instance, of Van Cleef & Arpels, you know, kind of stable network, stable presence for nearly 50 years. We've seen in the last two years a very, very strong growth of younger clientele, which is extremely interesting and reassuring because, you know, it's not about new clienteles in a new country discovering the brand, but it's really, you know, new generation that's really attracted by the codes of the brand. Although we don't necessarily try to be kind of, you know, younger-centric at Van Cleef & Arpels. We don't have celebrities, we don't have, you know, metaverse and stuff.
Yet we have 20-year-olds, 25-year-olds that really are, you know, are ready to spend a couple of hours in line in front of a store to get a piece. That's quite, I think a very, very good factor.
Knowing that in Japan, their wealth distribution and demography is not specifically a young country. We saw, we had a High Jewellery event in Kyoto which has been extremely successful, but having young customers and also a mature one. Japanese age very, very well, it can last quite long.
All right. Carole .
There was another question there on the—
Oh, sorry.
On extracting guidance, right? I mean, CapEx you've seen, we're at 4.5%. We've been for quite a number of years, I would say, leveling off now, with I would say a good state of the network. We've obviously throughout the pandemic have—
I tell you to relax because you are keeping control with my full air cover.
Yeah, but no, I—
It's basically we make sure that the guys don't go crazy, because if you had to allow some of the people on my right and some of the people in the room, and they see free cash flow, they find ways to spend it. Okay?
Well, in their defense, they generate it as well. You know, 4%-5% is where we are, and we're comfortable with that range.
Now, you're going to laugh because this is not kind of normal business. We will look because I see them all the time and I see all the products, and that's the key business, to see the future pipeline hat's the real business. To see what they plan a year from now, two years from now. Then having been in it with Alain, I mean, if you add it up, the people around the table, it's well over 100 years. You kind of know what's going to sell, and you get excited about some of the new products. Then after a while, some of these people don't need to have a T-shirt with Coach or babysitter on the back. Okay. Because at some levels of company's growth, you have babysitter on the back or Coach.
With these people, I learn more from them. For instance, a few years ago, at the end of each meeting, I ask, "Is there anything that you know that I don't know?"
Which is uncomfortable as a question.
Okay. "Is there anything that you know that's very important that I should know?" In the beginning, the guys would drive off, and then somebody in the car would say, "You know, we didn't discuss that." Then they call my PA, and, "Can we quickly come in?" Now there's, it's open. Everybody knows that question may come.
I ask Nicolas, now this is where I would drive Burkhart crazy. I said, "Burk, now they're busy fine-tuning their budgets." Okay? Because we look at the products, we look at the possibility and how they will sell, then we look at the margins, and then we say, "Right, we can't afford more than this in costs." Because that's what we can make. I think that pricing is not me only, it's a group of people. That's proper pricing. You do peer group pricing.
I said to Nicolas, "What would you do if I gave you another EUR 100 million?" Do you remember the question, Nicolas?
Very well. It was okay. Not too tricky.
Okay. What did you say?
No, I said that, you know, we would buy exceptional stones, but—
He said, "Please, could I have it?"
Yeah.
Burkhart went, "What's going on over here? I've set my budget." I said, "You've got it." And he went and bought exceptional stones, and he turned it into 300. Okay?
Yes.
It's not the exact business model. Trust me when I tell you more fiction is written on Microsoft Excel than on Microsoft Word. Let that sink in. The biggest fiction I've ever seen is written on Microsoft Excel. Remember I used to write it by hand when I was doing credit at Chase Manhattan. I knew all these banks were gonna get into trouble because idiots like me were the credit analysts. Trust me, if somebody comes in with a PowerPoint and an Excel, and they have, and especially if they're very good at it. It's the questions that you can't see on the Microsoft Excel. Those are the tricky ones. We can give you all the numbers, et cetera, but the real issue is are we making products?
Are we designing products, and are we making products that in three to four years' time we think will sell at the right price? Right now, few years ago, you will recall I was very concerned. I mean, I bet my finance director EUR 1,000 per million operating profit that he was wrong.
Not me, ja.
No, no. It was Jan du Plessis in the year 2000. We're sitting in September, and they show me the year's profits. I tell him, "You're out of your mind. It's gonna be half that." This is in Luxembourg, and now we're arguing. They say, "Ah, it's that." I say, "You're mad," to him and Alain. So 1,000 per million operating profit. Alain had to pay me in wine because he'd run out of cash. That was not me being smart, it was seeing the pipeline and seeing a calm down in the market. Those, this is why I can't really communicate because we're betting that our taste is going to be in demand. I mean, that's really Nicolas and Cyrille. Cartier, they're both machines. If we have the right product, it goes through the roof.
Because they're both machines that have got the brand anima and the reach globally. I think that's really the issue. There are few brands in the world, I can say 8 or 10, maybe opposition and us, et cetera, that have got the brand equity and the distribution reach and the supply chain sorted out, and that's damn difficult. I don't know whether that answered your question. We should one day let one of them, they can pick one, come to a product committee day.
Ooh.
Eh?
I'm going to have so many requests.
No, we have Wendy Luhabe. I've known her. She's a director. I've known Wendy for, what, since 1983, 1984. She said to me, "Can I attend a product committee meeting?" She came on Tuesday, and she came out and her eyes were like that. She said, "Now I understand the business." Where every product has to you know. She said, "Now I understand the business." Where concepts and products are discussed and then how are we communicating it and that's the real business. What other questions?
Yeah, I think, Carole. Thank you.
Sorry, Carole Madjo.
Hi, good morning. Carole Madjo from Barclays. Two questions from me, please. The first one on watchmaking. You mentioned the fact that, of course, there is a big risk around ubiquity, but—
Sorry?
A big risk on ubiquity i n the watch space. On the other side, do you also see a small risk of losing out consumers because of the lack of supply? Basically, how do you avoid the risk of alienating consumers who may not be able to find a watch as fast as they want to get one, basically?
Sorry? I mean, dealers or—
Number of clients
Of clients.
Yeah. Mm-hmm.
Yeah, do you see risk of losing out consumers because—
Well, you know—
You don't have enough supply in the watch industry?
Our clients, o ur Maisons where they have to watch, ask for deposits, big deposits. With 0% interest rates, these people put the deposits down. We don't reserve a watch without a sizable deposit. Y ou know, it's terrible, but the higher the price, the more the people want it.
When it comes to your point as well, you saw the DTCs, or direct-to-client percentage increasing.
Yes.
Which is as well the best way to maintain relationship with the clients over time. The Chairman mentioned the extension of guarantee, which is also the opportunity to maintain for service, for contact, and it's a change in the business model that you're no longer only somebody that is pushing a door on one single transaction and disappear. You become, I would say, you enter in contact with the Maison as never. It has changed, I would say, thanks to DTC. It's another dimension, definitely.
Do you know what's also very interesting? It's aligned with your question. The clients, especially during COVID, have taken a lot more time to narrow down their choice and studied so that the conversion, and this is a part of Luxury New Retail. They would be very well-informed.
They would understand exactly what they want to buy, and the conversion ratio in the stores picked up. They're just a lot more informed, male, female, everybody. They are pretty clear in their choice before. They don't come and ask for guidance as much as in the past.
Okay. Very clear. Thank you. One last question.
I can comment also on that as well.
Yes. Happy to.
See, the watch industry used to be very inert, meaning having a long time of adjustment, about nine to 12 months. We have managed to make it to three months, and to have a significant adjustment in demand planning, capacity adjustment, and response to make it flexible up to 50%, down to 50%.
Yeah.
Keeping full employment and having stock management in the middle that works. We have come to be super fast compared to other big competitors in that area, and that's why we've been able to adjust reasonably well, having a kind of tension, but nothing when all the stores would be empty and see our stock in our stores, in our dealers, they are pretty okay. On certain reference, we're short, but not that much, not have stores entirely empty as some can face in certain countries. And f or certain brands. Don't underplay our ability to adjust our flexibility model in super high speed, well, super speed for watches. Watches is slower naturally than fashion, but it's fine.
Thank you very much. The second question on jewellery, actually, in the longer term, when you think about the brand Buccellati, which you bought quite a few years ago, what is the potential of this brand, in really, in a few years' time? How big can it become, of course, thank you.
It's growing faster than we—
What are your targets?
It's a year ahead of plan. Is that a good way of saying it, Nicolas?
Exactly. I think there is a, you know, no objective in numbers, I would say. It's definitely here to grow because there are only a handful of brands that really have a very, very specific distinctive style and a real history, and Buccellati is one of these. Still a bit of a secret brand. It's developing quite nicely. We've opened more stores, we've developed communication, but at an organic pace. Yes, as the Chairman said, we're pretty much, you know, a year in advance compared to the plan we had when we acquired the brand. It's going to take years, but it's going to grow quite nicely.
Fortunately, we have a very strong manufacturing base in Italy, on which we invest massively to be also very clean, environmentally friendly, and we can cooperate with Buccellati to bring additional resource in, especially in Milan. We cooperate quite well on that.
Thank you. Well, it's already two hours, so I guess we could. The only thing I was looking at, web, so the areas not covered, some questions are, you know, very short answers. One of them is any guidance on YNAP and explanation of increase in central cost, which is really relating to China. Then there is a question for you, Mr. Rupert, so I'm just going to read it. It's an M&A question.
It's a what question?
M&A, merger and acquisition question.
Okay.
So, uh—
I hope it's not from an M&A lawyer that I just insulted, okay?
No, no. It isn't.
I hope it's not from one of our own. Okay.
You're the top player in jewellery and watches, but you lack critical mass in leather and accessories. Your French competitors lack mass in jewellery and grabbed Tiffany.
Oh, God, here we go.
Should you not do the same to bulk up the soft luxury and perhaps bring in a broader skill set, given your financial capacity?
It's from an M&A lawyer who's asked me this 10 times before. I guess so. The answer is I think we all understand now that we're not for sale, and François, he's not for sale, and neither of us are for sale. The party that wants to buy everybody now knows we're not for sale.
Yeah, I think it's clear.
Okay.
Maybe it was if you were interested in a leather brand, but maybe outside please feel free.
We got Delvaux. They were the originator. They designed the first handbag, and it is a beautiful business. Truly beautiful business. You know, I'd also like to say thank you to my colleagues for really caring for instance, the Ukrainians and for our people in China after the invasion. I mean, there was a lady at Delvaux whose in-laws were stuck in the Eastern Ukraine, 1990 and 1991.
We sent in people, bullet holes through the cars, got all the people out. You know, these are the stories we don't talk about, of the human suffering and the work that the people did. I'm bloody proud of the way they looked after their colleagues, really. I don't know when the madness is gonna end. We've budgeted for it. If I can give you that in assurance. I'm a lot happier than I was five years ago. I mean, five years ago, before we started cleaning up the watch business, and we were starting to invest, and I pleaded with our fellow companies, and my words got twisted, as usual, when I pleaded with our other big luxury goods companies that we should work together.
I said, "This is a big boy's game." It gets twisted into being sexist that I want women out and men to run it, and big men. Now either learn English and understand that when you say "a big boy's game," you mean much bigger than us. You're fighting Amazon. Oh, this was quoted again by The Business of Fashion ladies, et cetera, as proof how sexist. No, no. People who work here will tell you that is not the truth, but that's why I'm loath talking.
It was in an off-the-cuff plea, and that stupid José didn't come up to me because he was in the audien ce. José said to his wife, "If they do it, I don't have a business." Four years later, I meet with him. I said, "José, why didn't you come? I was standing outside smoking with your wife. We went outside. Why didn't you come along? We would have both saved a fortune. I would have gone 3P immediately." "No, no, I was too shy." I said, "Please." Had he come in 2015, we wouldn't have advanced this long down 1P. We wouldn't have been linear that long, and that's the funny coincidences in life.
Now we've met, we like each other, and you can do a blend of 1P and 3P, a hybrid model. But those are the coincidences. When you ask me planning and this and this and that, you bump into somebody in an elevator and the course can change, as long as you've got the flexibility. The other thing, my biggest pleasure is Watches and Wonders. Sorry, is Homo Faber. Homo Faber is my biggest pleasure, and I didn't see any of you there.
That's the future of luxury, true luxury. The craftsmanship of the ladies and the men. Hermès was there. The quality of the work, because that's Europe's advantage. We built our businesses on those people, true artisans and craftsmen, and it's a dying breed, and we want to, in the next two or three years, connect them with clients. To give the craftsmen and women face in front of their children and to create a bridge with the clients. The stuff they make there, it's mind-boggling. The lace work, the true artisanal skills, that is true luxury, going and seeing them.
I would rather, if you want to come here next year, I would suggest that you go to the Homo Faber, because we'll stamp your ticket at Homo Faber, and then you come and talk luxury, because that's where I learn. It's astonishing what these people are doing, and they create jobs.
Well, thank you.
Thank you.
This concludes this session. Thank you very much for coming. Very nice again to see you in person. Thank you all, also those of you watching us. The session is over. Have a good day. Bye-bye.