Ladies and gentlemen, good morning or good afternoon. Welcome to the Compagnie Financière Richemont fiscal year 2018 interim results presentation. I'm Dino, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. Should you need assistance, please press Star and Zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Burkhart Grund, Richemont Chief Financial Officer, and Sophie Cagnard, Group Corporate Communications Director. Please go ahead.
Thank you, Dino. Good morning. Good morning, everyone. Burkhart Grund, Chief Financial Officer, and I would like to thank you for joining the audio webcast today to review Richemont's results for the six months ended 30 September 2017. We would like to remind you that the press release and financial presentation can be downloaded from richemont.com, and that the replay of this audio 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 press release regarding forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. First, Burkhard will take you through the highlights before reviewing group sales. I will then present the key developments at the Maisons. Thereafter, Burkhard will walk you through the financials and conclude. This presentation will be followed by a Q&A session.
I will now hand you over to Burkhart.
Thank you, Sophie. Good morning to everyone listening. Thank you for your time. Today, Richemont is reporting a good set of numbers overall, as pre-announced in October. These figures reflect a generally improved macro environment, as well as easier comparative figures and favorable movements in period and foreign exchange rates. The past six months have been characterized by growth across all segments, regions, and distribution channels, as well as double-digit increases in jewelry and watch sales. In total, sales increased by 10% at actual exchange rates and 12% at constant exchange rates. Excluding the inventory buybacks in the prior year period, group sales rose by 8% at constant exchange rates. Operating profit grew by 46% to EUR 1,166,000,000, reflecting improved sales and gross margin, as well as controlled growth in operating expenses. Excluding one-time items totaling EUR 249 million in the prior year period, operating profit increased by 11%.
The operating margin consequently rose to 21% of sales. Benefiting from a reversal in net finance income and from the strengthening of the euro versus the Swiss franc between September 2016 and September 2017, profit for the period increased by 80% to EUR 974 million. Inventories decreased, and cash flow from operations increased to EUR 1,108,000,000. Net cash after the payment of EUR 918 million of dividends this month of September rose to EUR 4.61 billion. Let me now walk you through the group's sales performance, first by region, then by distribution channel, and then by product line, with numbers as always expressed in constant currencies. I start with our sales in Europe, which remains our second-largest region with 29% of group sales. Sales were up by 3%, partly impacted by the strength of the euro. Performance was varied within the region.
Sales were stable in France, our fourth-largest market in the world, while the U.K. continued to enjoy double-digit growth. Most other major markets posted moderate growth. Let us now move to Asia-Pacific, our largest region with 39% of group sales. Sales in the region increased by 25%, driven by double-digit progression in most markets, led by mainland China, Hong Kong, Korea, and Macau. A weaker Hong Kong dollar and easier comparative figures following the prior year period inventory buybacks in that market supported the return to double-digit growth of Hong Kong. All product categories posted growth, with jewelry and watches recording particularly strong year-on-year increases. Let us now look at the Americas region, which recorded a 10% sales increase, driven by the strong performance of jewelry at Cartier, Van Cleef & Arpels, and Piaget.
Sales benefited from the reopening of the Cartier flagship store in New York in September 2016 and the opening of Van Cleef & Arpels Miami Design District store in March 2017. Peter Millar also recorded good growth. Overall, the region contributed 16% of group sales, with the U.S. remaining our largest market before China, with Hong Kong coming in at number 3. Let us now turn to Japan, where the 7% growth in sales was driven by higher domestic and tourist spending, benefiting from a weaker yen as well as soft year-on-year comparative figures. Jewelry and watches led to growth in sales. This has been supported by the reopening of the Cartier flagship store in September 2016, and by the new Piaget and Van Cleef & Arpels Ginza flagship stores opened in November 2016 and April 2017, respectively. The country generated 8% of group sales.
Finally, let us review the Middle East and Africa region, which represented 8% of group sales. Impacted by geopolitical uncertainties in the region, sales progressed by 3%. The good performance in watches and writing instruments was partly offset by weak sales in the other product categories. Let us now review sales by distribution channel. The contribution of retail sales through the Maisons 1,115 directly operated stores, has increased from 58% of group sales a year ago to 59% now. All regions posted higher retail sales, with Asia-Pacific, Japan, and the Americas recording double-digit growth rates. Overall, retail sales grew by 13%, led by watches and jewelry. Richemont's wholesale business, which includes sales to franchise partners, increased by 11%, with all major product categories showing growth. Watch and clothing sales registered double-digit improvements, benefiting from the non-recurrence of the inventory buybacks of the prior year period.
Excluding these initiatives, wholesale sales would have been broadly in line with the prior year period. Most regions recorded growth, with Asia Pacific enjoying the strongest progression. Let us now move to the sales breakdown by product line. All major product categories showed growth, with double-digit progression in jewelry and watches, which together account for 82% of Richemont sales. The jewelry performance was fueled by Cartier, Van Cleef & Arpels, and Piaget. The strong increase in watches was partly supported by the non-recurrence of the prior year period's inventory buybacks. Clothing posted good growth, and leather a more measured performance, with a good contribution from Montblanc. Over to you, Sophie.
Thank you, Burkhard. The Jewelry Maisons segment, which includes the total sales of Cartier and Van Cleef & Arpels Maisons, including Cartier watches and leather, recorded a strong operating margin at 31%. The Specialist Watchmaker segment, which consolidates the results of eight watch Maisons, saw their operating margin improve to 19%. The other businesses returned to profitability. Let's look at the reported sales and operating results by segment in more detail. We start with the Jewelry Maisons. They represented 56% of group sales and 77% of group contribution before group costs. The Jewelry Maisons reported a 15% improvement in sales, with good performance in jewelry and watches and progression in all regions. The higher sales partly reflected the non-recurrence of a prior year's periods watch inventory buybacks at Cartier, and also the enduring appeal of Cartier's and Van Cleef & Arpels' creations.
Both Maisons enjoyed double-digit sales growth. The Jewelry Maisons saw operating results improve by 30% and operating margin increase by 360 basis points to 31%. This is a return to level broadly in line with the prior year period, excluding the previously mentioned initiative. Let's look at the main developments over the past six months. As usual, we start with Cartier, which reported double-digit growth in sales in most regions. Asia Pacific was particularly strong, partly due to the non-recurrence of a prior period's inventory buybacks. Excluding the impact of such initiatives, Cartier watch sales grew overall, supported by strong retail sales, which benefited from the optimization of existing collections, the introduction of new references, and the six months impact of its renovated flagship stores on New York Fifth Avenue and Tokyo's Ginza district.
A particular good performance of the Tank, Ballon Bleu, and relaunched Panthère collections. The Maison also recorded strong jewelry sales, notably from Juste un Clou and Love collections. Cartier's new high jewelry collection, Résonances, was unveiled this summer. We now turn to Van Cleef & Arpels. The Maison reported double-digit sales growth with strong progression in most regions. The growth in jewelry was broad-based from the highest price points with the newly launched Le Secret collection, to more accessible price points with the Perlée, Alhambra, and relaunched Frivole collections. The retail network saw the opening of new flagship stores in Tokyo Ginza and the addition of internal stores in Toronto Yorkdale and Munich. We now move to our Specialist Watchmakers where sales increased by 6% with improvements in both the retail and wholesale network, and retail outperforming wholesale.
Performance was varied among the Maisons and the regions, led by good growth in Asia Pacific. The performances of Piaget, Roger Dubuis, and Officine Panerai were to be noted. Operating results recovered to EUR 294 million, reflecting an improvement in sales with non-recurrence of inventory buybacks and fixed cost discipline. Consequently, the operating margin for the period increased to 19%. Let us start with Piaget, which delivered strong growth across regions, product lines, and distribution channels. The Limelight Gala and Polo S watches and Possession jewelry performed well. At Vacheron Constantin, growth was driven by Asia-Pacific, as well as by the Patrimony and Overseas collections. A. Lange & Söhne posted varied regional performance. Lange 1, part of A. Lange & Söhne's iconic collection, and Saxonia new references met a good response. Roger Dubuis recorded a strong performance in most regions. The Excalibur collection was successfully enriched with the new Excalibur Aventador.
At Jaeger-LeCoultre, sales were broadly in line with the prior year period, driven by retail and supported notably by the performance of the Rendez-Vous and Master Ultra Thin collections. At IWC, sales growth was led by Asia-Pacific, and the successful relaunch of the Da Vinci collection, including references for women. Now, Officine Panerai, where sales increased in all regions, led by Asia-Pacific. Growth was broad-based across collections, with the Luminor collection performing particularly well. Finally, Baume & Mercier. The Maison experienced growth in the Middle East and challenges elsewhere. The Clifton collection was enriched with the addition of an elegant sport line, the Clifton Club. Now let us move to the other businesses, which posted a modest 3% increase in sales. The good growth recorded by Asia-Pacific and Europe was partly offset by slowdowns in Japan and the Middle East.
In addition, the period under review only included three months sales of Shanghai Tang, which was sold on the 30th of June. The largest contribution in value terms to the sales increase was driven once more by Montblanc. Most Maisons showed higher sales, including Alfred Dunhill and Lancel, which grew. Overall, the other businesses returned to profitability. In the prior year period, the operating results were affected by one-time items of EUR 67 million, stemming from the inventory buybacks, as well as by the optimization of certain retail and wholesale locations. Results among the Maisons were mixed. Let's look in more detail at the development of some of them. So we'll start with Montblanc, which recorded good sales performance with progress in most regions and product lines. Writing instruments showed muted growth after posting strong growth in the prior year period.
Solid momentum in leather goods was maintained with a new Sartorial Jet and 4810 Westside collections. Watches performed well, fueled by the new Summit smartwatch and rejuvenated TimeWalker collection. The acceleration of the deployment of retail concept launched last year, now in 56 internal stores, contributed to higher retail sales. Let us turn to Chloé. Chloé enjoyed good media response to the first show of new artistic director, Natacha Ramsay-Levi, in September. Leather goods, the recently opened stores on New Bond Street in London, and the online flagship store drove the increase in retail sales. The Maison continued to deploy its new retail concept across its 185 internal and franchise stores. Finally, Alfred Dunhill. Sales returned to growth, partly favored by easy comparatives after the inventory buybacks in H1 of last year. The sales progression was driven by Asia-Pacific, clothing, and online sales.
Under new creative director, Mark Weston, the menswear offer was revisited and introduced in stores in September. This concludes a brief review of the Maisons. I now hand you back to Burkhard.
Thank you, Sophie. Let me walk you through the rest of the P&L, starting with gross profit. The 13% progression in gross profit led to a gross margin of 65.4%. The 190 basis points improvement in the gross margin versus the prior year period is largely explained by the non-recurrence of the prior year's inventory buybacks and improved manufacturing capacity absorption, partly offset by negative 20 basis points foreign exchange impact. Let us now look at our operating expenses by category. Selling and distribution expenses, which accounted for 60% of total operating expenses, rose by 3%. On a constant exchange rate basis, S&D expenses rose by 5%. This increase is primarily due to higher variable rental costs, notably in mainland China and other Asian markets, where rentals tend to be indexed to sales. Communication expenses were broadly in line with the prior year period and represented 8.6% of sales.
Administration expenses grew by 5% or 7% on a constant exchange rate basis. This growth mainly reflected investments in ERP deployment and digital initiatives. As a result, the growth in net operating expenses was contained to 3% at historic rates and to 5% at constant exchange rates. Net operating expenses accounted for 45% of group sales, compared to 48% a year ago. This reflects good cost control given the continued investments in IT. Reported operating profit improved by 46% to EUR 1,166,000,000 with an operating margin of 21%. Excluding the EUR 249 million one-time charges relating to inventory buybacks and distribution channels optimization in the prior year period, operating profit for the half year increased by 11%. Let us now review the P&L items below operating profit, starting with finance income. For the period, monetary items generated an EUR 84 million gain, thanks to favorable movements in period end exchange rates.
This compared to zero in the prior year period. Our hedging program recorded an EUR 91 million loss in the prior year period and an EUR 5 million gain for the period under review. This represented an EUR 96 million increase. The combination of these factors led to a positive EUR 181 million swing. Let us now turn to the profit for the period. It increased by 80% to EUR 974 million, as a result mainly of a higher operating profit and the EUR 181 million positive reversal in net finance result. Our taxation charge rose to EUR 248 million, largely reflecting the growth in operating profit. Our effective tax rate amounted to 20%, a level which we anticipate to hold for the full year. I would like now to focus on our cash flow from operations. Cash flow from operations amounted to EUR 1,108,000,000.
The EUR 442 million year-on-year improvement, or 66% increase, reflected the previously mentioned operating profit growth and a lower absorption of cash for working capital as a consequence of decreased inventories. An overall inventory decrease of EUR 110 million generated additional cash, compared to an outflow of EUR 31 million in the prior year period. Gross inventories represented 20 months of cost of sales, an improvement over the 24 months of cost of sales in the prior year period. This underlines the continued discipline of our Maisons in the management of our inventories, as well as increased sales. The receivables portfolio remains healthy at 94% current. The cash settlement of derivative contracts generated an EUR 8 million outflow compared to EUR 60 million outflow in the prior year period, leading to an EUR 52 million improvement.
As a result, working capital needs amounted to EUR 360 million, EUR 58 million below last year. Let us now turn to gross capital expenditure, which amounted to EUR 161 million, representing 3% of group sales against 5% a year ago. Although this amount is down on the prior year period, the cash outflow for the year as a whole is likely to be similar, in the region of EUR 600 million. Half of the gross expenditure related to point of sales investments, including internal and franchise boutiques and corners. Investments were focused primarily on store renovation and relocation. The most notable projects were the Van Cleef & Arpels flagship store in Tokyo, Ginza, Cartier store in Cannes, and Chloé store at the London New Bond Street. Equally worth mentioning are store openings for most of the specialist watchmakers in Toronto, Yorkdale.
Montblanc continued the rollout of its new retail concept with 18 additional locations in the period. 14% of the gross expenditure was related to manufacturing, predominantly reflecting the capitalization of research and development expenses. Other investments accounted for the remaining 29%. They included the purchase of distribution rights in the Middle East, the ongoing renovation of Richemont Central Logistics Center at Villars-sur-Glâne in Switzerland, and continued IT infrastructure investments with the deployment of our ERP Gemini project and digital initiatives. Let us now turn to free cash flow. Free cash inflow amounted to EUR 205 million, a level brought in line with the prior year period, despite the acquisition of a stake in Dufry, a travel retail specialist listed on the SIX Swiss Exchange. This achievement reflects a much higher generation of cash from operations and lower cash tax payments.
Now our balance sheet, which remains very strong, with equity accounting for 76% of the total. Net cash rose to EUR 4.61 billion at the end of September 2017, slightly above the level of EUR 4.55 billion at September 2016. Compared to the 31st of March 2017, the net cash position is EUR 1,181 million lower, reflecting a cash outflow primarily relating to the annual dividend payment. Let me wrap up the financial review with some concluding comments. In this morning's statement, our chairman, Mr. Rupert, commented that Richemont has embarked on a transformation journey to address the rapidly changing needs of luxury consumers and stay relevant to customers in a digital world. We are focusing on customers, ensuring seamless experiences across our stores and digital presence, enhancing product quality, design, and creativity. We will continue to selectively invest, particularly in digital initiatives.
On that front, we're looking forward to welcoming our new CTO, who will join in January. We are also finalizing the integration of certain of our fashion and accessories Maisons into the group shared services. This should improve consistency, efficiency, and leverage over time. For the second half of the financial year, Richemont faces demanding comparative figures and a volatile exchange rate environment. As a reminder, in the second half of last year, operating profit benefited from a EUR 178 million pre-tax real estate gain. The group has a leading position in the branded jewelry market, where there is good demand for the quality craftsmanship of our creative collections. Cartier, Van Cleef & Arpels, and Piaget are well-positioned to capitalize on the growth potential of branded jewelry, which share is still underrepresented within the total fine jewelry market.
The luxury watch market, in general, has shown signs of improvements, though the level of inventory in the wholesale channel is not at the level we would like to see it, with implications on the pace of future growth. This being said, our solid balance sheet gives us a competitive advantage. It provides the necessary flexibility to support our Maisons throughout our transformation journey and allows us to act with the best long-term interest of the group in mind. Once more, we would like to reiterate our confidence in the long-term prospects of our Maisons, which enjoy distinctive heritage and strong brand equity. Thank you. Sophie and I will now take your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may then press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Zuzanna Pusz from Berenberg. Please go ahead, madam.
Good morning. I have three questions, please. First of all, on the general environment, I think it was mentioned in the morning to the press that you think that inventory levels are still relatively high in the system. I was just wondering if you could share with us generally your thoughts on the situation in the market, maybe also specifically by region. Do you feel like other players also continue to work on their inventory levels, or is this something that only Richemont is focusing on? My second question would be about the retail business. Clearly, the environment has substantially improved, and it also looks like in September you had an acceleration and growth in retail. I was just wondering if you could maybe share with us the actual underlying sell-out trend, because I understand there's been a substantial scope effect that we've seen year to date.
I guess just to give us an idea of what we expect in the second half when these store openings annualize. Finally on Europe.
Zuzanna, I think we're going to try to stick to two question maximum, please.
Okay. Sorry. These are my two questions then.
Okay. Thank you for the questions. Let's start with the first question on the watch business. Let me try to give you a bit of a broader perspective on that. We've said in the past that if we look at the two channels, the retail channel for us clearly is always a leading indicator, the time lag might differ depending on the inventory situation in the wholesale channel. We have experienced close to double-digit sell-out growth of watches in our own retail channel, which we take as a positive sign as to the creativity, the quality, and also the competitive price positioning of our watches. The situation in the wholesale channel, in our assessment, is different. We still see inventory levels which are above normal for what we would consider as an adequate level.
We cannot really comment on what our competitors are doing in the market, because we also focus clearly on the relative performance and positioning of our Maisons. The previous year's period has seen inventory buybacks. We've talked about that last year and for the full year as well. If you back those out, we have on the wholesale side, more or less, a business trend which is in line with previous year, broadly in line. I might remind you that we have said that we focus clearly on normalizing the inventory situation in the trade for our brands. In order to be able to do that, we also focus on sell-in, which has to be below sell-out. With that, the inventory situation will normalize over time. We have seen picked up or increased sell-out, also at our wholesale partners. Still the inventory situation is evident in the market.
The second question, you were referring to retail and retail sell-out. We have said that overall, jewelry and watch sales performed strongly. That also translates into high single-digit like-for-like sales increases in our own store network. I think that's once again an indication of the strength of demand, both for watches and jewelry, in our own networks.
Perfect. Thank you very much. Just one clarification as a follow-up, so that we don't count it as my first question. On the inventories, how much long time do you think it will take for the inventories to normalize?
That depends on sell-out, to be clear. That refers, once again, only to the situation of our brands. We cannot comment on the competition.
Okay, perfect. Thank you very much.
Thank you, Zuzanna. Next question, please.
The next question is from Mélanie Flouquet at JP Morgan. Please go ahead.
Mélanie, go ahead.
Hello, Mélanie. Oh.
In that case, we will take the next question from Thomas Chauvet, Citi. Please go ahead.
[Foreign language], Thomas.
Good morning, Burkhart and Sophie. Two questions, please. The first one, on the operating leverage, in the first half, and if we strip out all the one-offs of last year, inventory buyback, Dunhill, et cetera, you didn't seem to have much operating leverage in the first half. That's about 11% EBIT growth. I think that's about 120 basis points margin improvement underlying. Consensus expectations for the rest of the year and next year suggest a strong improvement in operating leverage. Can you perhaps give us some guidance on gross margin, OpEx for the remainder of the year, for next year as well? We understand how you may be able to achieve these trends, which, as I said, is an acceleration in improvement in operating leverage in the second half of the year, next year.
As you said, more volatile demand environment and FX is going against you, at least on the top line. Secondly, with today's appointments of the CEO, Jérôme Lambert, and Head of Specialist Watches, Emmanuel Perrin, Mr. Rupert said you have the right management team to address industry challenges. Can you perhaps define what you think are still these challenges for the group in the next two, three years? What other adjustments to the business models you need to do, be it maybe more buyback of inventory, maybe more downsizing of production capacity or even distribution? It seems back in May, you said there was no need to rationalize distribution. That seems a little bit counterintuitive to me given the subdued demand underlying in watches, excess inventories, et cetera. So any comments on further downsizing of the business model would be appreciated. Thank you.
Okay, Thomas. Thank you for the questions. We don't guide on the full year, and I think we clarified that in the month of May. My Chairman, who is certainly listening in, will certainly disapprove in no uncertain terms if I start doing that now. Let me then jump to the second question, which is relating to the management changes. I think if you look at the appointment, both of Jérôme Lambert as the Chief Operating Officer and the appointment of Emmanuel Perrin, who will join the Senior Executive Committee responsible for the specialist watchmakers distribution strategies. I think you see a bit of a sharpening here of the organization and the general setup. If you look at it, you now have three senior executives, Mr. Lambert, Mr. Vigneron, and Mr. Bos, running or managing the maisons we have.
Mr. Lambert will be supported for the specialist watchmakers in this task by Mr. Perrin, Emmanuel Perrin. Then you have clearly three functions, especially human resources and technology with the new CTO who will join in January. Plus finance supporting and guiding the business. I think that clearly is a more sharpened or focused organization going forward to address the challenges. The challenges, what we've said in the recent past, clearly short-term, even mid-term, are, I would say, twofold. First of all, we are focusing on that, has been made clearer through the appointment of Emmanuel Perrin. We're focusing on the distribution model for our specialist watchmakers, who as you might know, traditionally have been wholesale only, and in the last five years have started to build their own directly operated store network.
Which is starting to disrupt for the watch industry, as a whole, the business model. This is a challenge we are working on right now, and that blends into the greater challenge that the industry is facing, which is the omni-channel challenge. The thinking within Richemont is evolving. If you look at it the way it has been traditionally done, the focus was looking from the inside out. Saying, we have a wholesale channel, we have a retail channel, we have an e-commerce channel. We try to manage those separately, with resource allocation, especially inventory to each of those three channels.
If you step back and think this through, this probably is a model that is a model of the past because the customer of today does not share our point of view on that. He or she, mainly she, wants to acquire a product, when, where, and how she wants. That means that for a customer, the experience and the road to purchase, so to say, counts, and he or she's not thinking about where they're buying this product. For them, wholesale retail, e-commerce does not exist as a separate channel, but for them it's all part of the same experience. It has to be transversal. It has to blend in. That is, I would say, the much bigger challenge that the industry is facing, and we are no exception to that. Let me just comment on one point you mentioned on the distribution side.
We have said in the past, I think you were referring to that we were not managing actively a store closure program in the wholesale channel. What we have stated at the same time is that we believe the traditional wholesale trade, especially in watches, will over time disappear. This, and we add it, this is not a new phenomenon. We have seen that happening in other parts of the luxury goods industry. For example, in the pen business, the pen specialist business, or in the leather goods business, where we had leather goods specialists. We have seen those trends before, and we think this applies as well going forward to the independent retail trade in watches. That just as a matter of clarification.
Thank you. Just maybe rephrasing my first question then. I understand you won't provide the gross margin cost guidance anymore, but are you satisfied with the level of operating leverage you had in the first half? How should we think about cost inflation? 5% constant FX cost inflation for Richemont, is that the new normal from here? Thank you.
What we said in the past, once again, just as a reminder. We have said that if we look at a new normal sales trend, which can be anywhere between mid-single digit sustainable growth in a normal year to high single digit in a good year to probably zero in a bad year. We have said that expense growth has to respect the golden rule, meaning it has to be low sales growth so that we're able to produce leverage. I think that has been the case. Sales at historic rates rose by 10%. Expense growth has been 3% or 12% at constant and 5% for expense growth. I think we have produced leverage out of that. As a result, adding then the exceptional one-offs we had last year, we have an increase of the operating contribution of 46%, underlying 11%.
Thank you, Burkhard.
Thank you, Thomas. Next question please.
The next question from Helen Brand, UBS. Please go ahead.
Hello, Helen.
Hi, good morning. Hi, Sophie.
Hello, good morning Helen.
Hi, morning. Just two questions from me then, I'll stick to two. First of all, on price mix, which we know had been coming down a little bit over the last couple of years. Are you now happy with the pricing architecture of the watch category across your brands? Secondly, it looks like you may have taken some small price increases in some regions in September, after the recent euro strength. Can you confirm that? Should we expect any more price increases going forward? Just on the gross margin, you said you benefited from better
Is that one question?
That's one question, yes. My second question, if I can, was just on gross margin. You said you benefited from better manufacturing absorption there. Where are you now on capacity utilization relative to the lows, and is there more improvement to go here? Thank you.
Thank you, Helen.
Okay, I will respond to your three questions. Well, price mix. We have that question quite often. I think it's let me just repeat what we usually answer, and that applies also for this time around. It does not really make a huge difference for us at which price points we sell, because gross margins, more commercial margins for most of our product categories are more or less aligned. There are some exceptions that we also pointed out. For example, if you look into one segment of the jewelry market, the bridal business. Margins are a tad lower, because you cannot really market the creativity of the brand on a wedding band. A wedding band looks like another wedding band. That tends to be more, I would say, a commodity approach.
Prices are more in line, a bit lower than on the rest of the lines, but it does not really have a significant impact. Price mix between the different price points does not really make a big difference for us. We are quite satisfied with the way, for example, if you look at the jewelry maisons or if you look at Cartier and Van Cleef, the high price points have been selling and the entry price points have been selling on different materials, on different collections. We're quite happy with the overall spread across our price points. For the margin mix, does not make a big difference. The positive effect we have had, especially for the specialist watchmakers and Cartier coming out of the mix, which has shifted more to steel watches now, a bit more.
We have seen that in the manufacturing cost absorption, which actually have had positive impact on the gross margin this year. There's a link between your first and your third question there. The price increases you have seen, they are part of a regular pricing scheme that we have, which is fair pricing for our customers around the world. Now, if exchange rates move with a certain price lag, that time lag, we adjust both ways, be it up, be it down, so that we can assure our customers that around the world, they will be able to buy the same product at the same price around the world. They are tactical increases and decreases that we regularly do. That is nothing new. That is nothing out of the ordinary.
Great. Thank you very much.
The next question is from Mélanie Flouquet at JP Morgan. Please go ahead.
Yes. Sorry, I'm trying again. My apologies. My line broke up.
What happened? You dropped out, Mélanie.
They dropped me. They are probably scared of what I'm going to ask about gross margins. No, I'm kidding.
No, I was not.
I have two questions. They're not on gross margins. The first one is on your store plans. This year, this first half at the net closure of stores, although some of this was Shanghai Tang. I was wondering whether you can share with us whether there are big projects, either in terms of openings or refurbishments over the course of the year ahead, because clearly, for instance, even the Ginza and the New York store flagship at Cartier are the big swing factor on the numbers in the last two years. I was wondering whether there are any projects we should be aware of in the next 18 months, either openings or refurbishments. The other question is on CRM and ERP costs that seem to have ramped up quite meaningfully in the first half.
I was wondering whether we should expect this to continue, notably in the face of you will have very tough comp on this decline in the second half given the real estate gains. I wanted to get a better understanding of how we can model this line. Thank you.
Can you just rephrase the first part of the question? I didn't really get it. It's probably me.
On the stores, there was a.
The store I got that. On the cost side, yeah.
Okay. The second question is on CRM, on the ERP and the digital cost, which you've put in the admin cost line, I believe.
Yeah. Mm-hmm.
I was wondering what we should expect moving forward. There was a big catch-up effect in H1. It was up 5%. We didn't expect that sort of growth, 7% excluding currencies. I was wondering, what is happening? What should we expect out of this line moving forward? Do you have a lot more investments to put through in these projects?
Okay. Listen, on both lines, what you're trying in very elegant way is to have some guidance, but let me try to help you with what I can give you. The store plans. We pointed out in the recent past that especially the Mansion and the Cartier flagship store reopening as well in Ginza and now the Van Cleef store in Ginza, Tokyo as well. Those are, especially the Mansion, have been big projects, multi-year projects, and we thought it important to break that out. Apart from that, if you look what we said, that we still guide on a CapEx number for the full year of around EUR 600 million. I think that's part of the explanation. We had a lower CapEx number in the first half of the year compared to the previous year, 3% on sales, let's say only.
For the entire year, we remain more or less in the range of EUR 600 million. I think that it's more of a timing issue than anything else. I think that is helpful for you. On the cost side, we spoke about ERP and deployment, and digital. There is a big part of that is linked to deployment of Gemini, of our ERP, that we did for two of our fashion accessories maisons in the first half of the year. That is a big project that has come and has gone live over summer. That is an impact you see in there clearly. Now, for the full year, as you know, we will not guide on that.
Just to confirm, there are no big projects we should be aware of in the next 12-18 months of the size of any magnitude like in Fifth Avenue Mansion.
You mean in terms of store network?
Yeah.
Well, we wouldn't tell.
In organization.
You know we wouldn't put that out there brand by brand, huh?
I don't think so.
I don't see anything.
I don't think I can check, Melanie. I don't think so.
Thank you.
Thank you. Next question, please.
The next question is from Mr. Jon Cox of Kepler. Please go ahead.
Hello, Jon.
Good morning, Sophie.
Morning, Jon.
Good morning. A couple of questions from my side. Just on the specialist watchmaking division, there was obviously a big jump in the operating margin improvement there. I'm just trying to get a handle on how much of that was from buybacks last year, and I seem to remember there wasn't very much in the specialist watchmakers, at least in H1. How much is the, as you mentioned, maybe better gross margin gains in terms of capacity for the watchmakers. The second question is actually, I saw you told the press that you guys now own 7.5% of Dufry. I think the original announcement was 5%. I want you to just give us a bit more granularity on that, why you've gone to seven and a half. I think originally you said you weren't going to go above five.
Any sort of cooperation deals you may have with Dufry currently. Any thoughts on do you need a board seat? That sort of stuff. Thanks very much.
Okay.
Thank you.
First question, specialist watchmakers, EBIT improvement or operating contribution improvement. You are right. We've had in the one-off effects of the first half of last year, we've spoken about buybacks, which were concentrated on Cartier, and to a very small part on one of the fashion and accessories maisons. We have had a very small part in one of the specialist watchmakers. That is not materially impacting the contribution of the specialist watchmakers this year. What we have is, as you've seen, it's quite a moderate sales increase, which is clearly retail-led for the specialist watchmakers. That's a positive, obviously, and a positive impact on the commercial margin. We've had inventory provisions, and an unabsorptional manufacturing cost in the first half of last year for the specialist watchmakers, which have not been repeated as such. That's a positive on the gross margin side.
The rest is, I would say, good or adequate cost management for the current environment, which leads to quite a significant increase in the contribution, 57% growth. Dufry, we have disclosed a 5% stake following the regulation of the SIX Swiss Exchange. That stake is at 7.5%. There's not a lot of granularity to give on that one. We increased from five to seven and a half, and that's where we stand. We said that during the roadshow in the month of May and June, that we had no plans to significantly increase the stake. We are at seven and a half now. That's I'd say, the story that is to it. The more interesting part of the story for me is that we have sat with the management of Dufry, and our maisons.
We have worked on the business opportunities that we will now realize over the next few years. I think there's a deployment plan that has been worked out with the management, that is an interesting part attached to that investment.
Just as an add-on to that, would that be mainly in the sort of lower-end price points, like soft luxury, maybe entry-level luxury watches? Is everything on the table there in terms of even potentially high-end jewelry, high-end watches?
No, I would say, if you look at our distribution, we're quite strong with our other partner, DFS. That is predominantly, I would say, in the watch and jewelry segment. It's much more focused on an Asian footprint, which is their footprint, even though they are branching out into other geographies. Dufry has a different regional footprint, we think there are more opportunities to be had on the fashion accessories and leather goods, small leather goods, product categories, that's what we're working on right now with them. That's the predominant part of the expansion that we envision for the future with that partner.
Thank you very much.
Thank you, John. Next question, please.
The next question is from Miss Hermine De Bensmann from Raymond James. Please go ahead.
Good morning. Thank you for taking my question.
Good morning.
Thank you. The first one is on the month of September. It seems that you have an acceleration in Americas and Asia-Pacific and a deceleration in Japan. Can you maybe precise if the reason of this acceleration, and if it's evolving in the same way in October? The next question on the tax rate, can you confirm that you expect 20% tax rate in full-year? Thank you.
We do not provide any specific guidance on a single month. We have done that in the past. We have stopped it, because we don't think it adds anything to the quality of analysis. One month in our business, where we might have from one month to the other significant one-off effects linked to the sale of high-priced items, does distort, I think, the midterm analysis. We don't do that anymore. I'm sorry, I cannot comment on the month of September. As we said in the presentation, 20% effective tax rate for the half year, and that is the rate that we project for the full year.
Okay. Thank you.
Thank you, Hermine. Next question, please.
The next question is from Ray William from Standard Bank. Please go ahead.
Good morning.
Good morning.
Just some clarification. I just want to dive into the other units. If I reverse the losses and write-backs of last year, the profit actually went back from EUR 27 million to EUR 6 million. I was just curious about what has sort of, or where the pain has been, and if you can maybe just elaborate a little bit on that. Just a quick clarification. I mean, obviously the inventory movement has been quite substantial. The way I work it out, we're currently sitting about 460 days. Do you see further scope to reduce the inventory days further? Thank you.
Okay. The first question is quite straightforward to answer. That is what we just said during our comments. We have sold our Shanghai Tang business. If you back that out, that is a one-off that we see in that category. If you back that out, the result is broadly in line with previous year when you back out the exceptional charge of last year. We are roughly on a similar level there. For the second, on the inventory side, we have reduced, as you see, from 24 month cost of sales last year to about 20 months this year. This has been obviously helped by, I would say, the healthy growth in watches and jewelry. We believe it is a good level of inventory around that level. I would not guide on anything different going forward.
Just quickly on the cash flow statement, disposal of subsidiaries, I mean, there was a payment of EUR 14 million. Does that also relate to Shanghai Tang?
Broadly speaking, yes.
Okay. Thank you.
Thank you, Ray. Next question, please.
Next question from Rogério Fujimori of RBC. Please go ahead.
Oh, hello.
Good morning.
Good morning. Could you please let us know or give us an idea of how much retail accounts out of your total watch business? Please, how much it represents out of Cartier watches or specialist watchmakers? It would help us a lot. Given your continued success in jewelry with Cartier and Van Cleef, I was just wondering if you could update us on progress in developing Piaget as your third jewelry pillar. Thank you.
Okay. On the first one, we don't really break that out. What we've seen over the first half year is that the retail share is 59% of group sales, slightly up from 58% last year for the same period. At 60% for the full year of last year. Obviously with the, I'd say, mechanical effect of the inventory buybacks both last year and then the rebound, it's a mechanical rebound this year on wholesale sales, we're broadly more or less at the same range. We wouldn't break that out for Cartier or for the specialist watchmakers individually. Excuse me, what was the second question?
I'm sorry, I didn't write that one down.
Yeah.
Okay. Piaget.
Piaget.
Piaget. Sorry. Piaget has, and we also point out the strength of jewelry comes from Cartier, Van Cleef & Arpels, and Piaget at the same time. Piaget jewelry sales have, for some years now, increased their share in the sales of the overall sales of Piaget and have been growing quite healthily double-digit, for this period. There is strong progress, both on the, I would say, entry price or welcoming jewelry collections, as well as high jewelry collections at Piaget.
Great. Thank you.
Thank you, Roger. Next question, please.
Next question from Luca Solca, Exane BNP Paribas. Please go ahead.
Luca?
Mr. Solca, your line is open.
He might have gone. Problem with connection.
We will take the next question from Elena Mariani, Morgan Stanley. Please go ahead.
Hi, good morning. Two questions from me as well. The first one on your comments to the press with regards to current trading. I think you've mentioned that you've seen strength in jewelry continuing in the recent months. I was wondering whether you could share with us some more details around that, in particular, which product lines within Cartier have performed well if you can, linked to this one, still part of the first question. You have written in your statement a pretty cautious message on the second half of the year. Can you just confirm that this is just related to the fact that on a reported basis, we're obviously going to see a much smaller growth rate, but this is not just reduced, it's not related basically to the underlying trend, but is just making reference to reported growth.
My second question, going back to your comments around distribution earlier in the call. It is very clear what you've mentioned about your wholesale partners and the fact that you don't want to actively manage a store closure program. Can you comment on how your approach to wholesale distribution is changing, in particular, with regards to how you effectively manage your network of third-party partners and your sell-in? If there's anything that you could share on this point, in terms of how your approach is changing, that would be great. Thank you.
Jewelry, we've said jewelry as well, if we look at the bigger picture, jewelry sales, which predominantly are with Cartier, Van Cleef & Arpels and as mentioned, Piaget. They are in the context of a jewelry market which if you look at estimations from industry sources, the market is estimated to grow low single-digit currently. It is difficult to say because it's a market where the unbranded piece is much bigger than the branded piece or the branded share. We would say there is an underlying growth dynamic in the market for the branded part, which, and I formulate that very cautiously, which, over the long term seems to be taking 1% of share per year. I'm saying that cautiously because it's really difficult to come to reliable data on that. There is a fundamental positive dynamic for branded jewelry, taking over share from unbranded jewelry.
We benefit from that, especially when we have some of the best names in the industry in the group, meaning Cartier, Van Cleef. If you look at that, there is an underlying strength or growth strength in jewelry sales, both on the very high end, meaning the high jewelry business, and the mid-price and the entry-price segment today. For the jewelry maisons or for the jewelry part of our sales in the group, which I must remind you are 39% of overall sales. That tends to be overlooked at times, with a strong focus on 41% watch share, in the group sales that we have. I would say, and I would leave it at that, there's an underlying continued growth dynamic across all the jewelry maisons and across the price points. Your second question, yes, we refer to reported growth.
We found it was important to point that out, especially because we have had in the first half of this year, a positive rebound linked to more a mechanical effect, comparing to the buyback impact and the exceptional one-off items of EUR 249 million in the first half of last year. If we look at the second half of the year, last year, we had the sale of the Paris real estate portfolio, with an exceptional one-off gain, pre-tax gain of EUR 178 million. We had a normalizing business which started in the second half of the last year. Just to point out, reported growth in the first half of last year was much lower, exceptional one-offs this year much higher in reference also to exceptional one-off of the previous period.
For the second half of the year, we have started to grow again, previous year. We will be running up into stronger comparables. We have had an exceptional gain as well on real estate sale of the previous year. Yes, that reports to reported growth. On the watch wholesale distribution, some elements of context or referring to your question, what has changed and where is your approach changing? I would say if we look at the watch trade and what is happening in the industry, there are two things that we focus on. The first one is there is a consolidation trend in the industry where we see, as I said before, some of the smaller players exiting the market, because honestly, it's a tough place out there, especially when you're disrupted by the digital side of the business.
We see the bigger players consolidating, sometimes with the help of private equity capital which is coming in. If we look at our major partners, they are consolidating and trying to expand their share of the overall market. As a consequence, we are in a process of shaping up as well, by putting in place, one could say a key account management approach, so that across the brands of the specialist watchmakers, plus Cartier, plus Montblanc, we have a more coordinated approach so that we can better lever the strength of our Maisons with these big wholesale partners. We're focusing on key account management there.
I would say the second point of focus is the inventory situation in the market, where we, as a response, clearly focus on managing sell-in, so that is below sell-out, so that over time, watch inventories should trend downward.
Thank you, Elena.
Thank you very much. Thank you.
Next question, please.
We will try again with Mr. Luca Solca, Exane BNP Paribas. Please go ahead.
Yes. Good morning, Sophie. Good morning, Burkhard.
Hi, Luca. You dropped out there.
He was on mute.
I was on mute. I think you clarified on wholesale distribution. I was just wondering what you see as the priorities for your incoming Chief Digital Officer and how you see the opportunity for e-commerce, considering that some of the brands, especially in the specialist watchmakers area, are currently discounted on the internet. I look at Chrono24, for example, and we see that a number of brands there, including Piaget or Jaeger-LeCoultre, get discounted presumably by multi-brand watch retailers trying to reduce their inventory position. It does seem that the approach to wholesale and the approach to e-commerce have to go hand in hand. I wonder what your thoughts and what your priorities are on this area. Secondly, if you see that your position in Yoox Net-a-Porter-
That's already the-
That's already the question.
They already. Okay. Fair enough.
E-commerce. Thank you.
Yeah. Just a clarification, it's not a CDO coming in, it's a CTO coming in. The Chief Technology Officer, which he will, in his portfolio, have the broader scope of, meaning if you make it simple, the ERP and the digital. These two pieces will be in his portfolio. It's important to stress that because the scope and the function of these two technological arenas are very different. You could say it's the core system and the front end to the customer that he will take over on the technological side here. That goes hand in hand with, well, what are the digital opportunities? I think especially with the focus on the specialist watchmakers that you are mentioning.
I think if you look at We've been doing e-commerce in the group, by building our capabilities first, starting in the Americas and the U.S., then moving into Europe, and then into Asia, and now pushing out into Southeast Asia. We've consistently building that up. One could say that if we look at our brands, one could say that there are some leaders and some laggers, in terms of taking up this digital or e-commerce opportunity. I would say the Maisons which have traditionally a very strong retail focus, meaning the jewelry Maisons and also, for example, Montblanc. They are much closer to understanding the customer needs, and they understood very early that there's an opportunity to connect with their customers also through e-commerce. That's why they're leading in this field.
If you look at, for example, let's say a jewelry brand or Montblanc, and if you take the size of the e-commerce business, for example, in the U.S., that is probably number 4, number 5 in the network if you take that as a freestanding boutique. There's significant potential in there. Montblanc in most of the markets where it is even higher up. Sometimes the e-commerce boutique is the strongest boutique in the network. Obviously, also because the price points for Montblanc are more favorable for an e-commerce distribution. I would say there are some advanced Maisons in there, if you look at the e-commerce side.
The watch brands, historically, let's say in the recent past, have been more of a laggard, which has a very simple reason that in the last 5 years, they have been busy building an internally owned store network, retail boutiques, and which already, if you are more coming from a traditional wholesale-oriented business model, has been a challenge. Basically, you have to learn to work directly with your customers instead of through an intermediary. They only have recently started to seriously look at the e-commerce part of it. I would say the opportunities are clear. They lie in the specialist watchmakers scaling up on e-commerce.
Thank you very much indeed.
Thank you, Luca. Next question, please.
The next question from Antoine Belge of HSBC. Please go ahead.
Go ahead.
Yeah. Hi, good morning. It's Antoine at HSBC.
Good morning, Antoine.
Two questions. Actually, I think you made a very interesting comment about that potential disruption, even more than potential, it seems to be certain now. More focusing on wholesale. I'm going to play a bit the devil's advocate there. Is there a risk that, I don't know, you would end up having to close, I don't know, 5% or 10% of your own store network in the next, I don't know, five or 10 years, if that disruption is not just linked to wholesale? Then I noticed that in the communication expenses were flat in H1. Were there any question of timing of expenses or facing different from previous years?
Okay. Thank you, Antoine, for the questions. Digital disruption and retail, that is the question you're asking, right?
Yeah.
I think it is something that we're following quite closely. Obviously, today, I would say the focus is clearly on managing the wholesale business or the watch wholesale business, specifically through this difficult phase. As I said before, it's not an easy situation for some of our watch partners out there who are being seriously disrupted. The outcome is not, and I'm referring to the wholesale channel here, the outcome is today, quite frankly, not clear who is going to survive, and who is also of the players that start to go today scaling up themselves, their e-commerce capabilities. The picture is quite unclear. There's a lot of initiatives out there. There's the e-commerce pure players, there's the traditional retailers that build e-commerce capabilities, some better than others. The final outcome on that side is not clear yet.
We're trying to also find a way there, knowing that we already have an e-commerce capability on our own. Will that have an impact over time on retail? Possibly. We're monitoring that once again. We don't see it yet. I would say that goes into a generalized monitoring of our retail network. We look at the store profitability, the store productivity. We see also elements of the, let's say, omni-channel sales experience spilling over into boutiques, meaning a customer who buys online comes to a boutique to have it serviced, a watch, for example. That offers also interesting, let's say, customer relationship perspectives, because we might be able to capture this customer that we have not seen before because he bought on e-commerce, not necessarily with our own store.
We might be able to lever on that opportunity when it comes to the boutique to have his watch serviced. It's an open question, I would say. As the build-up of a distribution network of directly operated stores takes time. Takes, as I said, for the specialist watchmakers that have been scaling up for five years now, I think we will probably also see trends in both directions going forward that will play out in the midterm. Short-term, we don't see it. Midterm, who knows? Depends on what the overall impact on the industry will be.
There was a question on A&P. Was this phasing?
A&P, it's phasing. Traditionally, you have a bigger part of spend in the second half of the year. It's phasing, but apart from that, we're quite comfortable with this level.
Just to make sure I understand. When you say you're comfortable, is it with a flat evolution or more with the sort of having a flat ratio as a percentage of sales over the full year compared maybe to last year, taking into consideration that maybe a yearly evolution is more meaningful than just a half year evolution?
Yeah, the yearly evolution would provide guidance, which I'm not going to give. I'm saying I'm quite comfortable with 8.6% as of 30th of September.
All right. Okay.
Okay, Antoine. Thank you. Next question, please.
Next question from Mario Ortelli of Bernstein. Please go ahead.
Good morning, Sophie. Good morning, Burkhard.
Morning, Mario.
The first question, if I may, on online. In the market in which your maison have got a significant critical mass online, I think about, for example, Montblanc and Cartier in the U.S. The profitability of online sale is higher than the one of the retail shop. Do you think that going forward, considering the development of online channel, the profitability of sales online for your brand will be more profitable than in the retail store? The second question is about leather goods. Nowadays, it's just 7% of the total business of the group, but you have invested building up operating facilities in Florence. Some of your brands, like Montblanc, develop leather goods very successfully. Part of the relaunch of Dunhill is focused on leather goods.
Should we think that you will invest more in leather goods and brands like Cartier will try to develop more of a leather goods? Many years ago, it was an important part of the business, then was discontinued or resized down.
Okay. Mario, the first question, the profitability of the online channel. I'm not going to answer that question because I think you can answer the question yourself. If you
Help me.
If you have an operation, let's say an e-commerce operation that you embed in an existing distribution center, you add a call center and the technology behind, and that is scalable. I think that is an answer. Compared to building a retail network store by store with fixed cost commitment in lease, and CapEx depreciation. Does that give enough of elements of context to answer that question?
Let's make in a different way the question. In your forecast, in your three-year plan, do you have a margin expansion of some brands given the shift from a traditional distribution to online? Can you give us an idea of how much can be relevant?
Well, if you have the three-year plan, I would be glad to have it. I don't give guidance for the remainder of the year. How would I give guidance for the three years to come? Let us probably go to the second question, the leather goods. We have not been very good, I would say, on the soft side of business or the soft side of the business model, meaning fashion and accessories, maisons, leather goods in the past. We've come to the realization through a success story that we've had with Montblanc, that there is a supply chain model that is very different from the one, in which we excel, which is jewelry and watches. Jewelry and watches is a relatively small number of units, high-value items that have a specific sourcing and distribution necessity. We manage that very well.
As opposed to that, soft goods, especially leather goods, require a totally different supply chain setup. That is not only sourcing or manufacturing, subcontracting, but that is also demand planning. Talking about several collections a year for fashion. A larger number of SKUs that change more quickly, et cetera, et cetera, et cetera. We have traditionally not been very good in that. Montblanc has made it a success, through a leather hub that they, or leather hub that they built in Florence, where they have integrated all these capabilities and capacities. We have come to the realization that if we scale that up, we can have a good starting point to explore leather goods opportunities that we have for some of the Maisons of the group. Montblanc is strong in leather. Chloé is strong in leather already.
Dunhill used to be strong in leather in the past. Cartier used to have a significant leather and small leather goods business, gifting and all that. Perfect product for that, from which they have walked away, in large part also because the success of jewelry and watches has been so strong over the recent decade. Cartier is looking into going back into that part of the business and that part of the market. For that, we need scalability. We need the development capacities, and that we are actively building right now by extending the Montblanc leather hub into a Richemont operation, where all the other brands can benefit from. Yes, we think there are significant opportunities in leather goods. Before we really lever that up on the product development side, we need to have the supply chain capabilities, and we're building that up now.
Thank you very much. Very kind of you.
Thank you, Mario. Next question.
The next question is from Mr. John Guy of MainFirst. Please go ahead.
Well, thanks very much. Good morning, Burkhart and Sophie.
Good morning, John.
Two questions, please. Thanks. My first one is on jewelry Maisons. When we look at the underlying margin having stripped out the buybacks and so on from last year, it looked like there was an underlying decline of around 70 basis points. All the leverages effectively come through from the watchmakers up around 590 basis points on an underlying basis. Within jewelry, what caused the deleverage? Were there any additional expenses or investments over the half on an underlying basis? That's my first question.
Let me answer that quickly. There is no deleveraging on the jewelry side. If we strip out the exceptional impact or effect of last year, we are broadly in line with this year's level.
Just on that, it looked like there was a 70 basis points change. I think it was 31.7 last year, I guess broadly neutral.
No, I mean, neutral.
Okay, great. Thanks for the clarification on that. My second question just around gross margin, the 190 basis points that we've seen in the first half. The inventory impact, I think, was 150, and you mentioned FX, was down 20 basis points for this first half of the year. Is it fair to assume that the bulk has just been around price mix? You mentioned that steel had clearly had a positive impact at the margin. In terms of the SKU reductions in some areas, I think within Cartier, has there been a meaningful impact there, or is there more to come? Thank you.
No, I would say, once again, on the price mix between different collections, we don't really see. It does not really make a big difference to us. What does make a difference in the short term, apart from what I said, the inventory provisions and the manufacturing cost absorption, which are the major, the bulk of the other 90 basis points there, is the geographical mix of our sales. You have duties and all that, when something shifts from one region to the other, that impacts over the midterm, clearly. That, once again, is a minor effect.
Okay, great. Thank you very much.
Thank you, John.
Thank you.
We've got the time to take maybe a question from two more analysts.
Sure.
Next one, please.
The next question is from Francesca Di Pasquantonio of Deutsche Bank. Please go ahead.
Yes. Hi, good morning.
Francesca, good morning.
Yes, good morning. I have two questions. The first is on Cartier. I have seen in the presentation that a few of the new watches have just been launched in September. I would like clarification. Was it a launch across channels or initially in your own retail network and the wholesale rollout is going to come in the second half? The second question that I have is Piaget. It's a bit more longer term. As you are developing the jewelry offering for Piaget, and quite successfully, are you planning around an increase in the footprint of Piaget and maybe of the average size of the stores? A third, if I may. I have noticed you have Serapian listed in the others. When did that happen? Thank you. Bye.
I have two questions, Francesca.
No, Francesca can have.
Start with Luca.
Francesca can have three without that'll make everybody jealous.
Oh, thank you.
Okay, Cartier, honestly, I'm just a humble finance guy. I don't know about that launch.
Sorry.
Yeah, Francesca, you're referring to which launch of Cartier?
To the watch launches. In your slides, you list the product launches for Cartier and Ballon Bleu, Steel and Diamond, Tank Américaine and Française, and Ronde Solo. They are listed as September launches.
Yeah, that's correct.
Yeah.
They have not really impacted the numbers yet.
Yeah. Okay. That's what I wanted to clarify.
Okay, good. That is settled without me giving an answer.
Good. Thank you.
Piaget. Okay, yeah.
Any stores and-
Well, Piaget, just a bit of context. Piaget has been focusing over the last decade, strongly on building a watch business in Asia. In recent years, they have started focusing on the jewelry side because we've said it for some time now, there are significant growth opportunities for Piaget who has, in the past has been quite strong in jewelry already. There's a heritage there, and people clearly recognize that. I think that in part also explains the recent success and the strong growth of the jewelry business in Piaget. The question arises, well, will there be an increase in footprint or in size of the boutiques?
I would say the first step that we're looking at right now and that the Piaget management is concentrating on is looking at the store concept, which is clearly today probably too watch-oriented and probably male watch-oriented for being able to display properly the jewelry part, which is naturally more female-driven. They're focusing on developing or on upgrading that store concept, which will then be step by step being rolled out over the next few years. Usually we don't really go into brands, and they're also looking at their geographical footprint, to have that a bit more balanced. Because today they're quite focused on Asia. That's as far as I would go in comments. Doesn't necessarily mean to increase the store size, but we will have to look at that on a boutique-by-boutique individual basis.
Okay. Thank you.
Serapian, that has been an acquisition of manufacturing capacity that we have done in the first half of this year. It is not significant. It is not material. As I said, that's a complementary piece to scale up our leather goods development capacity, and so that we can accelerate because we have some brands of the group who are lining up to join this joint capability that we have built up in Florence. Serapian, their development capability helps us to do that much quicker. They have their own product range, which they distribute in a few boutiques, mainly concentrated on Italy and a bit in wholesale, mainly concentrated on Italy as well.
Okay.
What do you think about Serapian, Francesca?
Sorry?
What do you think of Serapian, Francesca?
No, it's good. Yeah, I was actually surprised. It's a very nice brand. Pretty exclusive. I was surprised.
Okay. Thank you.
Thank you.
All right. Next question, please. That I think we'll conclude afterwards.
The next question is from Mr. Julian Easthope of Barclays. Please go ahead.
Yeah. Thank you, and good morning, both.
Good morning, Julian.
Good morning.
Yeah, just two questions on the watch segment, if I may. I think for some time now, your retail watch business has been significantly outperforming the wholesale watch business. Yet if you look at the combined pairing, the watches together, they actually sort of match Swiss watch exports. Isn't it just the fact that your retail business, because you sell things better, and they look much better in store, you're just taking market share from the wholesalers. In that case, that's just going to be a fact of life from this point forward. It's not necessarily destocking. It's just what's happening out there. The second question regards some of the smaller watch companies or watch retailers that are going under.
Are you actually taking stock back from them, or does the stock actually get put into the market, and has the potential to actually disrupt the market when it goes back in? Is that a big issue or is it a small issue? Thank you.
Okay. Well, are we taking market share from watch retailers? That's a difficult question to answer and probably at the same time an easy question to answer. We've been saying that we think the independent watch retailer, as has happened in other segments of the market before, let's say writing instruments or leather distribution. There's the independent retailer who is slowly exiting the market. In response to that, we have opened over the last five years, our own retail store network with the specialist watchmakers or for the specialist watchmakers. Now, what is causing the other? That is difficult to say.
Obviously, I think there are benefits which go over and above just replacing sales, that we lose in one channel because the partners are closing and that we gain in another channel by running it through our own boutiques, and that is customer proximity, customer understanding, because I would say the specialist watchmaker is still on a learning curve for that one. Yeah, there's probably a shift, but that has more natural causes because these partners are slowly exiting the market. We've said it before, we don't have a program where we actively close down a great number of independent watch retailers because we think, for one reason or the other, this is necessary. It is a natural decline, and that will continue for the foreseeable future. Now, you were referring to, let's say, the mechanics of stock buybacks.
If we look at what we did last year, the intention clearly was, and this is why we executed it, to take excess inventory that was weighing heavily on the balance sheet of our trade partners to take that out of the market and to take that out of the market permanently. Meaning we buy back, we deconstruct, or we destroy to take that stock permanently off the market. If you buy it back from one partner and you then ship it to another partner, the risk is that you remain with excess inventory in the market who will find its way into unauthorized distribution channels, where the products, the creations that we have will be discounted, and that will impact brand equity over the long term.
I think we took a brave step there last year, and bought back this inventory and took it permanently out of the market. That is our approach. We cannot comment on what the other competitors in the market are doing or should do.
This is specifically if one of your watch retailers goes bankrupt. The stock that they have in stock can actually go on to also disrupt the market. I just wonder whether you buy that back.
Sure. Yeah, sure.
It's basically on a bankruptcy, you do buy back stock. Are there many of those bankruptcies taking place?
No. Last year, what we clearly did, the biggest part of the EUR 249 million one-off items we put out there for the first half of last year, that was a voluntary inventory buyback, and it was mainly concentrated on Cartier. In the second half of last year was concentrated on the specialist watchmakers. We went partner by partner, sat down with them, looked at their inventory situation, and where there was excess inventory that was not turning, and the concentration of that inventory, more than almost two-thirds of those buybacks happened in Asia, where we had the biggest fallout of, let's say, the overextension of the gifting business in China that spilled over into Hong Kong. When that gifting business ended, we had the biggest overstocks sitting in Asia, sitting in Hong Kong.
We went specifically to the dealers and repurchased inventory that we oversold, that they overbought, admittedly in different circumstances when the market was still booming. That inventory was lying there for two to three years and was not turning, and we helped them repair their balance sheet. That is not that they went bankrupt, that they went out of business. It was clearly designed to help our trade partners get rid of their excess inventory.
Okay. Thank you very much.
Once again, if you don't do that, it goes into unauthorized distribution channels.
Okay. Thank you.
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Thank you very much.
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