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Edited Transcript of CFR.VX earnings conference call or presentation 8-Nov-19 8:30am GMT

Half Year 2020 Compagnie Financiere Richemont SA Earnings Call

Zug Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Compagnie Financiere Richemont SA earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Burkhart Grund

Compagnie Financière Richemont SA - CFO & Executive Director

* Jérôme Lambert

Compagnie Financière Richemont SA - Group CEO & Executive Director

* Sophie Cagnard

Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Charmaine Yap

Redburn (Europe) Limited, Research Division - Analyst

* Edouard Aubin

Morgan Stanley, Research Division - Head of Luxury Goods

* Francesca Di Pasquantonio

Deutsche Bank AG, Research Division - Research Analyst

* Jon Cox

Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities

* Louise Susan Singlehurst

Goldman Sachs Group Inc., Research Division - MD

* Luca Giuseppe Solca

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Melanie Anne Flouquet

JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail

* Patrik Schwendimann

Zürcher Kantonalbank, Research Division - Analyst

* Rey L. Wium

SBG Securities (Proprietary) Limited, Research Division - Head of Consumer Research

* Rogerio Fujimori

RBC Capital Markets, Research Division - Analyst

* Thierry Cota

Societe Generale Cross Asset Research - Equity Analyst

* Thomas Vincent Chauvet

Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director

* Zuzanna Pusz

UBS Investment Bank, Research Division - Head of European Luxury Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the fiscal year 2020 interim results presentation conference call and live webcast for Compagnie Financière Richemont. I'm Dino, your call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Sophie Cagnard, Group Corporate Communications Director. Please go ahead.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [2]

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Thank you, Dino. Good morning. Good morning, everyone. Jérôme Lambert, CEO; Burkhart Grund, CFO; James Fraser, IR Executive; and I would like to thank you for joining the audio webcast today to review Richemont's results for the 6 months ended 30 September 2019.

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 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 company announcement regarding forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995.

First, Burkhart will take you through the highlights before reviewing group sales. I will then present some key developments at the Maisons and Online Distributors. Thereafter, Burkhart 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.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [3]

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Thank you, Sophie. Good morning to everyone listening. Thank you for your time. Before looking at the numbers, let me remind you that Online Distributors' results for the prior year period included 5 months of YOOX NET-A-PORTER group and 4 months for Watchfinder & Co.

With this now clarified, let us look at the numbers. Sales for the first half of the current fiscal year increased by 9% at actual exchange rates and by 6% at constant exchange rates. Excluding Online Distributors, sales for the period increased by 5% at actual exchange rates and by 2% at constant exchange rates. Overall, we achieved growth across all regions, distribution channels and business areas at actual exchange rates, led by the Jewellery Maisons and Online Distributors. We will comment on each of those in more detail later in the presentation.

Operating profit increased by 3% to EUR 1.17 billion. The increase versus the first half of last year reflected higher sales and gross profit partly offset by higher costs. There was a positive impact from the adoption of IFRS 16 when taking into account the same parameter of leases in each period. Excluding Online Distributors, operating margin increased by 70 basis points to 21.8%.

Profit for the period at EUR 869 million was broadly stable when excluding the prior year period's post-tax noncash gain of EUR 1.378 billion with the revaluation of the YOOX NET-A-PORTER shares held prior to buyout. The net cash position was EUR 186 million higher than at September 2018 and now stands at EUR 1.77 billion.

Let me now walk you through the group sales performance, first by region, then by distribution channel and finally, by product line with changes versus last year, as always, expressed in constant currency. Let us start with Europe, our second largest region, with 30% of group sales. First half sales increased by 7% overall. Excluding Online Distributors, sales were in line with the prior period. Growth was led by Online Distributors and the Jewellery Maisons. Performances by market were mixed, with notable strength in the United Kingdom, our largest market in the region.

Retail sales increased by mid-single digits on strength from the Jewellery Maisons and Watchfinder's retail stores. Online retail was strong partly due to the comparison with last year when YOOX NET-A-PORTER and Watchfinder were consolidated for 5 and 4 months, respectively. The decline in wholesale sales reflected our continued efforts in channel inventory management and optimization of the wholesale network.

Let us now move to Asia Pacific, where sales increased by 5% overall and accounted for 37% of the group's total. If we exclude Online Distributors, sales growth was 4%. China and Korea both had strong double-digit increases partially offsetting declines in China's special administrative regions of Macau and Hong Kong. The latter, with strong double-digit sales decline, represented 8% of group sales, down from 11% a year ago.

All distribution channels enjoyed growth with online retail being particularly notable, albeit from a low base, while retail and wholesale posted single-digit growth. By business area, Online Distributors and Jewellery Maisons outperformed, showing strong growth.

Let us now look at the Americas region, where sales overall increased by 6%, supported by strong double-digit growth at Online Distributors and high single-digit growth at the Fashion & Accessories Maisons. When excluding Online Distributors, sales were stable versus the prior year period.

From a distribution channel perspective, online retail posted strong growth and retail sales were in line with the prior year period. The decline in wholesale sales reflected our continued initiatives mentioned earlier. The region contributed 18% to group sales.

Let us now turn to Japan, which represented 9% of group sales and increased by 13%, both including and excluding Online Distributors. Sales were positively impacted by advanced purchases ahead of the October increase in Japan's VAT. There was double-digit growth at the Jewellery Maisons, Specialist Watchmakers and Online Distributors and across all distribution channels.

And finally, Middle East and Africa, representing 6% of group sales in the period. Overall sales were 1% lower than the prior year period and 5% lower when excluding Online Distributors. Double-digit growth at Online Distributors was more than offset by declines in other business areas. Unfavorable currency movements compared to the prior year period and wholesale network optimization as well as continued regional and geopolitical uncertainties weighed on sales.

Let us now turn to sales by distribution channel. First, the retail channel. Sales in our directly operated boutiques were up by 4% compared with the prior year period. There was growth in almost all regions, led by double-digit growth in Japan. Other regions had softer rates of progression while sales in the Americas were broadly stable. The positive performance was driven by growth at the Jewellery Maisons and Specialist Watchmakers as well as solid growth from Watchfinder's retail network.

Retail sales benefited from 30 store net -- 37 net store openings in the period, many concentrated in the Asia Pacific region. The contribution of our directly operated boutiques to group sales was 52% overall, in line with the prior year period.

Second, online retail, which represents sales from YOOX NET-A-PORTER and the online sales portion of both Watchfinder and the group's Maisons. The current period benefited from a prior year comparison base that included only 5 months of sales for YOOX NET-A-PORTER and 4 months of sales for Watchfinder. All regions posted significant growth, in particular, in Europe and the Americas. This distribution channel increased its contribution from 14% of group sales a year ago to 17%.

Third, wholesale. This channel includes sales to franchise partners and to multi-brand retail partners. Wholesale sales were 1% below the prior year period as increases in Japan and Asia Pacific were more than offset by declines in the other regions. As we said during our results presentation in May, our watch wholesale network optimization continued in the first half of this financial year. Wholesale sales stood at 31% of group sales compared to 33% a year ago.

And finally, let us move to sales breakdown by product line. Almost all product lines showed growth. Jewelry and watches remained the group's largest product lines, contributing 36% of group sales each, broadly in line with a year ago. Jewelry sales rose by 4% with growth at both Cartier and Van Cleef & Arpels and in almost all regions. Watch sales equally increased by 4% overall with increases in most regions and mixed performance by Maisons. Clothing and leather goods benefited from the impact of the Online Distributors.

Over to you, Sophie.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [4]

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Thank you, Burkhart. Let me start with the Jewellery Maisons, which include Cartier and Van Cleef & Arpels and, since 30 September 2019, Buccellati. They reported an 8% increase in sales against strong year-on-year comparatives. Growth was broad-based across channels and regions with particular strength in Asia Pacific and Japan. Strong increases in China and Korea helped to offset the decline in Hong Kong SAR.

Offline and online retail growth was spread across all regions while wholesale growth was less balanced.

The Jewellery Maisons operating results were 4% up to EUR 1.2 billion. Increased investments, in-store [innovations] and communication partially offset higher sales and a stable gross margin, resulting in an operating margin of 32.6%, 120 basis points lower than in the first half of last year.

Let us look at the main development over the past 6 months. The successful launch of Clash in April 2019 as well as positive developments of iconic collections such as LOVE and Juste un Clou at Cartier and Perlée and Alhambra at Van Cleef & Arpels supported a high single-digit jewelry sales growth. The low double-digit increase in watch sales reflected the appeal of Cartier's existing collections, notably Panthère and Santos; and of new references for Baignoire.

Retail growth across regions benefited from newly renovated stores under the latest retail concept at Cartier as well as from 4 net new stores openings. Online retail sales were strong across most markets, most notably in the Americas, albeit from a [lower] base. Wholesale sales showed good growth driven by Asia Pacific and Japan.

At the end of the period, we completed the acquisition of Buccellati. EUR 7 million of acquisition-related costs were expensed. Due to the timing of acquisition, Buccellati has not contributed to group sales or results during the first half.

Let us now review our Specialist Watchmakers business area, which consolidates the results of 8 watch Maisons. Sales rose by 1% with varied performance by region, supported by growth in Japan and, to a lesser degree, in Asia Pacific, where sales were negatively impacted by a double-digit decline in the Hong Kong SAR, which was affected by street protests and a relatively strong currency versus the renminbi. Retail sales increased mid-single digits, more than offsetting slightly lower wholesale sales.

The decrease in operating results was contained to 1%, reflecting good cost control and improved gross margin from efficiency gains and a larger share of return. Operating margin as a result was 40 basis points lower at 18.1%.

Most Maisons grew with notable performances by Lange & Söhne, Panerai and Vacheron Constantin. New references within existing collections such as IWC's Pilot's watches, Panerai's Submersible and Overseas at Vacheron Constantin have been well received.

Retail sales increased across almost all regions, with particularly strong growth in Japan. There was good momentum in online retail, benefiting from sales through our Maisons' own websites and through the MR PORTER and NET-A-PORTER websites. Lower wholesale sales were partly a result of the ongoing prudent channel inventory management and discontinuation of wholesale points of sale.

Now let us talk about Online Distributors, which regroup YOOX NET-A-PORTER and Watchfinder. Sales of Richemont's Maisons products recorded by YOOX NET-A-PORTER are shown under both Maisons' respective business areas and Online Distributors. They are subsequently eliminated under intersegment eliminations. As Burkhart mentioned, the prior year's 6-month period included 5 months of results for YOOX NET-A-PORTER and 4 months for Watchfinder.

Sales increased 32% to EUR 1.2 billion. On a fully comparable period base, sales increased low double digits with growth being broad-based across regions. The operating loss increased to EUR 194 million, reflecting a combination of lower gross margin and higher operating expenses.

In line with plans, the lower gross margin reflected increased promotion and shipping costs. The higher expenses related to investments in technology and logistics, mostly for MR PORTER's technology and logistics platform migration; in marketing and commercial structures; and in the international expansion of Watchfinder. In addition, the full 6 months of amortization of intangible assets resulted in an additional EUR 15 million charge compared with the prior year period.

Let us look at some developments during the 6-month period under review. At YOOX NET-A-PORTER, over 200 new brands were introduced. In addition, 90 exclusive capsules were launched across all sites and included Saint Laurent on NET-A-PORTER and Brunello Cucinelli on MR PORTER. The quality of the personal shopping service was strengthened with the addition of more than 100 personal shoppers and client relations manager at NET-A-PORTER and MR PORTER and with the creation of 2 more personal shopping and client relation hubs in the U.S.

The net [sustain] platform was created to support innovative sustainable fashion and already features 26 brands. On 30 September 2019, the NET-A-PORTER flagship stores was launched on Alibaba's Tmall Luxury Pavilion in China by FENG MAO, the joint venture between Alibaba and YOOX NET-A-PORTER. At launch, the carefully curated selection amounted to more than 130 designer brands for women and men and 12 Richemont Maisons. Watchfinder's growth has benefited from international expansion with new operations in France, Germany and Hong Kong SAR.

Finally, let us move to the other businesses, which primarily include the group's Fashion & Accessories businesses and its watch component manufacturing activities. Sales were 1% up with a moderate increase in Japan and double-digit growth in the Americas. The increase was broad-based in online retail, and most markets grew in offline retail. The operating results were positive and the improvement was primarily related to the non-recurrence of onetime items in the prior year period.

Let us look at the developments of some of the Maisons. There was mixed performance across Maisons with notable growth at Peter Millar. At Montblanc, leather goods sales increased with good performance of large and medium leather goods, notably the luggage #MY4810 collection displayed here in this slide. Higher retail sales were supported by Montblanc and Dunhill, which benefited from new store openings, mainly in Asia Pacific.

Online retail sales showed a solid increase across regions, most notably in the Americas and in Europe as our Maisons seek to increase their digital presence. While wholesale sales declined overall, there was double-digit growth in the Americas driven primarily by Peter Millar.

I will now hand you back to Burkhart. Burkhart, over to you.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [5]

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Thank you, Sophie. Let me walk you through the rest of the P&L, starting with gross profit. Gross profit increased by 8% overall with currencies being broadly neutral. Gross margin was relatively stable at 62.3%, 20 basis points lower than the prior year period, reflecting the dilutive impact of Online Distributors. Excluding YOOX NET-A-PORTER and Watchfinder, gross margins improved to 67.6%, an increase of 100 basis points compared with the prior year period.

Let us now look at our net operating expenses, which rose by 10% at actual rates to EUR 3.44 billion. They included EUR 95 million of amortization of intangible assets on acquisitions, most of which relating to YOOX NET-A-PORTER. Excluding Online Distributors, net operating expenses rose by 6% at actual exchange rates.

I will now walk you through the expenses by category. Selling and distribution expenses, which accounted for 50% of total operating expenses, rose by 6% at actual exchange rates and by 3% at constant exchange rates, slightly positively impacted by the adoption of IFRS 16. The increase was primarily due to higher depreciation linked to continuing upgrades to distribution networks and to further enhancement of retail and marketing capabilities.

Communication expenses rose by 20% at actual exchange rates or by 17% at constant exchange rates, mainly due to planned initiatives at the Jewellery Maisons, Specialist Watchmakers and Online Distributors as well as the full 6-month period effect for Online Distributors. Administration expenses grew by 15% or 13% at constant exchange rates. This growth principally reflected investments in IT, digital initiatives and the inclusion of Online Distributors for the full 6-month period.

Fulfillment expenses increased by 78%, primarily driven by an acceleration of online retail and the full period effect just mentioned. Other expenses amounted to EUR 102 million and included the acquisition-related amortization of intangible assets previously mentioned. Net operating expenses as a percentage of group sales increased from 45.9% a year ago to 46.6%.

This leads us to operating profit. The 3% increase in operating profit reflected higher sales and gross profit partially offset by increases in operating expenses, as just discussed. The operating margin at 15.7% is down by 90 basis points compared to the prior year period. Excluding Online Distributors, operating profit increased by 9% and operating margin by 70 basis points to 21.8%.

Let us now review the P&L items below operating profit, starting with finance costs. Net finance costs for the period amounted to EUR 110 million compared to EUR 47 million in the prior year period. The EUR 63 million increase can be mostly explained by 2 items. First, the first-time adoption of IFRS 16 resulted in a lease liability interest expense of EUR 36 million. Second, a EUR 62 million loss was recorded on monetary items, an increase of EUR 24 million compared with the prior year period, mainly due to unfavorable movements in period-end exchange rates on our cash position. As a reminder, cash investments are translated at balance sheet closing rates.

Let us now turn to the profit for the period, which decreased to EUR 869 million, reflecting the EUR 1.378 billion post-tax noncash accounting gain on the revaluation of YOOX NET-A-PORTER shares held prior to buyout. Excluding this gain, profit for the period was broadly in line with the prior year period. Following the Swiss tax reform, our effective tax rate amounted to 19%, reflecting the projected rate for the full year.

Cash flow generated from operations increased by EUR 455 million to EUR 1.188 billion. The increase reflects an increased operating profit, the effect of the adoption of IFRS 16 and the positive impact on working capital relating to the non-recurrence of prior year inventory buybacks.

Let us now turn to our gross capital expenditure, which amounted to EUR 280 million, in line with the prior year period. As a percentage of group sales, it decreased slightly to 3.8% compared with 4.1% in the prior year period.

Looking at CapEx by [nature]. 44% of the gross expenditure was related to points-of-sale investments, including internal and franchise boutiques. Investments were focused primarily on store openings, renovations and relocations. Notable projects included the new Van Cleef & Arpels store in Dubai Opera; Panerai at the Dubai Mall of the Emirates; 8 stores at China World in Beijing, including Cartier, Panerai and Chloé; Lange & Söhne at Deji Plaza in Nanjing; the Dunhill store at Lee Gardens in Hong Kong SAR; and the Roger Dubuis store in London's New Bond Street.

Manufacturing investments increased from 7% of the gross capital expenditure to 12%, this being primarily related to research and development activities. Other investments accounted for the remaining 44%. They primarily reflected investments in information technology at YOOX NET-A-PORTER.

Let us now turn to free cash flow. Free cash inflow amounted to EUR 341 million, an increase of EUR 33 million compared to the prior year period. The increase mainly reflected higher cash generated from operations, which was partly offset by higher taxes paid.

And now on to our balance sheet, which remained very strong, with shareholders' equity accounting for 55% of the total, in line with the prior year period. Net cash decreased to EUR 1.77 billion at 30 September 2019 from EUR 2.53 billion at 31st of March 2019. The reduction mainly reflected the annual dividend payment, which amounted to EUR 1.02 billion; and the acquisition of Buccellati.

It is now time to wrap up the presentation by reiterating the highlights of the first 6 months of our 2020 financial year. The first half of our 2020 financial year was characterized by growth at actual rates across all regions, distribution channels and business areas during these uncertain times, led by Jewellery Maisons and Online Distributors. More specifically, there was strong growth in China, Korea, Japan and the United Kingdom.

The Jewellery Maisons delivered a high level of profitability, bearing in mind: first, the significant decrease in Hong Kong SAR, a market heavily exposed to jewelry and watches; and second, investments in marketing and communication to consolidate their leadership positions. The Specialist Watchmakers, equally impacted by the events in Hong Kong SAR, showed good cost control and limited reduction in operating margin to 40 basis points. They have transitioned from being supply-led to demand-led and will soon complete their program of discontinuing relationships with unhealthy multi-brand retailers.

Our Fashion & Accessories Maisons, grouped under other, registered limited growth and profitability and strengthened their organizations. The Online Distributors continued to invest in IT and communication in order to succeed in their migration to a new technology platform, finance the international expansion and reinforce market leadership. These investments led to increased operating losses but will support future growth. Overall, our operating profit grew to EUR 1.16 billion, reflecting higher sales and gross profit. Growth in expenses was contained, although slightly exceeded sales growth as a result of the investments just mentioned. Excluding Online Distributors, operating margin progressed from 21.1% of sales to 21.8%.

We have continued to transform our business model as our organization adapts to an increasingly connected world. We have progressed well in our new direct approach to communication and client engagement and are now focused on developing our omnichannel [proposition]. The long-term strategic approach we take in everything we do has led us to strengthen our portfolio and expand our reach.

First, we acquired Buccellati, a renowned Italian jeweler, to benefit from the major potential of the largely unbranded jewelry market, capitalizing on the group's strength. Second, we signed a partnership with a talented and acclaimed designer, Alber Elbaz, to form a start-up named AZfashion. It is too early to share more at this stage, but we are looking forward to seeing this partnership go live.

Watchfinder is another long-term investment with a gradual expansion both in the territories it covers and the services offers. It now operates in 4 markets. We aim for it to become the world's easiest and most trusted place to sell or buy preowned luxury watches. At Richemont, as our Chairman, Mr. Rupert, commented, the agility, creativity and skills of our teams and our strong balance sheet position us well to meet our long-term ambitions.

This concludes our presentation. I would like to thank everyone at Richemont for their hard work. We will now open the floor to questions. Thank you.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [6]

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Thank you, Burkhart. We will start the Q&A session shortly. Before raising your questions, please announce your name and your company name and also do restrict yourself to 2 questions and not too much follow-up questions please. Thank you. So the floor is now yours.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Jon Cox of Kepler.

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [2]

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Two questions for you, yes. Just on the online operating loss in H1, should we be expecting a similar loss in the second half of the year? I think previously, you said you want to breakeven there over the next few years. I'm just wondering if you can give us an update on that and whether there's anything one-off of nature in H1.

And then question on the jewelry products, which seemed to slow down quite materially in Q2. Are you worried about market share losses there in jewelry? Or would you say it's really a reflection of what was happening in Hong Kong? Or was there anything else going on in that jewelry product in the second part of your first half, in the second quarter.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [3]

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Yes. Jon, Burkhart here. Let me try to address your 2 questions or concerns. First one, Online Distributors, there's nothing one-off in there. What we're doing, and we've said it many times, is they're in the middle of several quite significant projects. They are, first and foremost, focused on the replatforming, and that requires investment. And that's what has happened in the first half of this year.

Second, you have seen that we have opened the joint venture with Alibaba, FENG MAO, and we have started trading by the end of the first half of this year. So -- and the third project they're working on is actually preparing the omnichannel [proposition] which will enable the Richemont Maisons to transition their operations over to YOOX NET-A-PORTER. So these 3 are ongoing. This is investment that is ongoing and that will continue for the foreseeable future until we're through with that period of intense projects. In addition, they have invested in communication, and in addition, there is also the full period effect of these 2 businesses that are now in our 6 months numbers. On the full year, no guidance, but this is where we stand.

On the Jewellery Maisons, there's 2 things that you must bear in mind. One, yes, Q2 actually was a strong negative impact from Hong Kong, stronger than in Q1, very clearly, and you know why. We all read the news. The second element, and that's why we're, I'd say, not too worried about the jewelry business, is that there's 2 elements in the jewelry business. There's the jewelry and then there's the high jewelry business. The jewelry business has continued to motor on as strongly as we've seen in previous years, whereas the seasonal or -- the seasonal effect of high jewelry will play out more in the second half of this fiscal year. It goes from one year to the other. It materializes earlier or later in the year. So we're not worried about that. The projections there are quite good as well.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [4]

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Thank you, Jon.

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Operator [5]

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Next question from Antoine Belge, HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [6]

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It's Antoine at HSBC. Two questions. First of all, on Tiffany, I think it was 6 years ago Rupert gave me a hard time when I asked if Richemont could afford seeing Tiffany being acquired by competitors. So you've been focusing more on smaller acquisitions like Buccellati. So can you just say a few words about the potential emergence of a stronger competitor in your key category?

My second question relates to the cost. I think you explained the pockets of investment. Is it possible to say if those investments -- I mean, there seems to be a structural -- like not much just H1, but maybe the communications spend could be, I don't know, more weighted towards H1 this year. Any comments -- so a bit more comments about the timing of the renovation of stores? Do you think that the bulk of it was done in H1? It seems to be more like a multiyear renovation plan to me, but any insight there?

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [7]

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Thank you, Antoine.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [8]

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Listen, Antoine, if our Chairman has given you a hard time on Tiffany, I could refer you back to him and ask you to ask him that question. Joke aside, what we focus on, clearly, is our Maisons, the names we have in that space. And I think we have 3 of the best assets in -- or Maisons brands in the jewelry space we have very strong leadership positions there. And just look at what we did with Van Cleef over the last 15 years. I think they have -- we have shown with Van Cleef that we're able to turn a very small Maison into an industry leader.

And I think, Cartier -- the evolution of Cartier over the last 10, 15 years also speaks to that. Buccellati is another very strong asset, by the way. It's something that -- or a Maison which is -- with its distinctive style and heritage is very complementary to the portfolio we have. So we clearly focus on the Maisons that are part of Richemont. That make absolute sense for us because they are luxury Maisons, and we [don't] want to entertain these thoughts.

Second, you were talking about the timing of expenses. Nothing really to call out here. Online Distributors, the investments we're calling out here is continued effort. We've always said that midterm, we want to progress to EBITDA- or to EBIT-neutral position. We are on track for that. These investments were planned. These investments were executed as planned, and we're on track to deliver on the technological side, if we talk about the Online Distributors, what we had planned for. Marketing spend, yes, but that is okay. This was strong in the first half of the year, but nothing special to call out around that. It depends on the plans of the Maisons and the way they have structured their fiscal year. So nothing I would call out here. This is as planned.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [9]

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Okay. I mean just maybe on communication, just to make sure I understand, so it was planned. But does it mean that, over the full year, we could see a similar increase in the communications-to-sales ratio?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [10]

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Well, if you talk from 9.1 to 9.2 that's a massive increase of the ratio on sales, I would not agree with that. But you know, Antoine, that we don't guide on the full year. So it is what it is.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [11]

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Thank you, Antoine.

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Operator [12]

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The next question is from Rogerio Fujimori of RBC.

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Rogerio Fujimori, RBC Capital Markets, Research Division - Analyst [13]

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Two questions, please. First, on Specialist Watchmakers, the division has gone through 2 years of transition. So how should we think about, I think, wholesale rationalization, trade stock levels and sell-in versus sell-out in the second half? This is my first question.

And the second question on the YNAP/Alibaba JV that just went live. Should we expect a material incremental sales contribution in the second half? And what are the next steps for your JV and potential investments required?

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [14]

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Thank you, Rogerio.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [15]

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Jérôme Lambert speaking. So when it comes to the Specialist Watchmakers, you indeed mentioned that the category has been focusing a lot on [true demand] . You will remember that we [proceeded with two] important buyback a few years ago, [previously] with Cartier and then with (inaudible). Since when and that's -- since the start of the year, we have been monitoring very closely our sell-in and sell-out. We can say again today that our sell-out is comparable to our sell-in, which is showing the commitment and the disciplines that the category has in developing that new business model. It's also proven by the growth in retail that the category has been registering during that period. When it comes to that -- the distribution and the quality of the distribution, the category has been reducing the number of wholesale [door] quite significantly over the period in certain markets. Surely, we came slowly to the end of that reduction.

When it comes to FENG MAO, thank you for your question, indeed, a very important part of the agenda. I'm sure you notice that it was only 12 months ago that Alibaba and YOOX NET-A-PORTER/Richemont launched the project, and you know that we are trading now for 1 good month. The results are very promising. And then I cannot disclose, as you can imagine, any direct number. I can just refer to the quality of the service. It's already reached 4.9 out of 5 rating -- service rating ratio. Now the team is fully working on their 11/11 Singles Day, and it will become more and more a real active part of our business.

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Operator [16]

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The next question is from Edouard Aubin of Morgan Stanley.

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Edouard Aubin, Morgan Stanley, Research Division - Head of Luxury Goods [17]

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Edouard Aubin, Morgan Stanley. So just 2 questions for me as well. Just to follow up, sorry, on Specialty Watchmaker. So we talked about the top line, but just to come back on the bottom line. So I guess if we exclude the impact of the inventory provision you had last year, your profits are down about 10%, 11%, I think, year-over-year in the first half. So there's been some talks on the blogs about some cost-cutting activity initiatives launched by Richemont in the second half. So I know, Burkhart, you don't give guidance, but just theoretical sensitivity. If sales were to more or less remain the same in the second half versus the first half, would the deleverage be relatively similar in percentage terms? Or would that be offset by some of the proactive initiatives you're taking on cost?

And my second question relates to IFRS 16. Is it fair to assume that the impact on EBIT in the first half was around -- a positive around EUR 50 million to EUR 60 million? And if so, how -- if you could give us a rough split by division in terms of impact, that would be quite helpful.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [18]

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Thank you, Edouard.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [19]

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Edouard, so Specialist Watchmakers, listen, very simple. We don't -- we wouldn't comment on blogs or media speculation because what we do running our businesses, what is internal remains internal, and I won't put that out in the public space. What I can say, and I refer to what we have been saying, what I have been saying for quite a while now, is that the Specialist Watchmakers, the operating contribution, as you know, the numbers has dipped below 8% -- or below 9% and we said we are on a midterm trend to rebuild operating contribution, to rebuild profitability. This is the plan for this year once again. And no, I would not read too much into H1. H1 is a snapshot we take after 6 months. We don't manage the business for half year results or full year result, okay? And investments are spread out through the year the way they are spread out through the year.

We've [touched] on communication expenses for the first half for the group. This has also played out like this at the Specialist Watchmakers. So I would not read too much into it. What I have said before, what I have said in May is that Specialist Watchmakers' retail sales are expanding. The wholesale sales are still consolidating because we make them consolidate because, as Jérôme mentioned, we are still in the process, and we're winding down, of closing distribution. In the background, we have a focus on margins, on retail margins. We have a focus on tight cost control, and that is the plan that has played out very well last year. This is the plan that still is in place for this current fiscal year.

IFRS 16, yes, I think you're right with your numbers. I won't comment on the divisions. But if you just look at the -- and I think it's very clear. If you look at the spread out of the assets or the right-of-use assets, obviously, the Jewellery Maisons followed by Montblanc followed by YOOX NET-A-PORTER have the biggest portion of the right-of-use assets and thus, the remaining slightly positive impact on the operating contribution. And then it's followed by Specialist Watchmakers, F&A Maisons and then the Richemont assets -- or Richemont structure-related assets and leases. So it goes pretty much in line with where we have deployed the capital. It's, on a division-by-division level, not really material if you look at the overall numbers.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [20]

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Thank you, Edouard.

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Operator [21]

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The next question is from Melanie Flouquet of JPMorgan.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [22]

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Yes. So the first one is regarding the jewelry product category, not Jewellery Maisons by division but by product category. If I look back, it sounds like product category has actually decelerated for 12 months. I know that there is volatility in the high end of jewelry on a quarterly basis and on a monthly basis. But for 12 months, we are now on mid-single digits against strong double-digit previously. Can you tell us what is happening to the division in comparison to other winning -- sorry, product category in comparison to other winning product categories in luxury? For instance, we are not seeing this kind of deceleration in trend in leather goods. So I was wondering whether you could share with us what you think is happening there in the last 12 months.

And actually, as a backup to that, we've also seen in leather goods the big gain in market share of the leading brands. This doesn't seem to be the case in jewelry. So what is that attributed to as well in your view? So that's my first question. The second is...

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [23]

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That's the first question? That was already 2 questions, Melanie.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [24]

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But it's all about jewelry. The second is a lot shorter. It's about -- your release says that your gross margin expanded at the group level because of a product mix positive impact. I am not seeing this in the gross margin of Jewellery Maisons, which is actually flat. So I was wondering whether you meant divisional positive impact. Or what did you mean by product mix impact?

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [25]

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Thanks, Melanie.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [26]

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So let me walk through your 3 or 4 questions here. Well, a, I'm not going to compare jewelry development to leather goods because I don't really see the bridge here. If you look at our numbers, if you look at the Maisons side, meaning excluding the Online Distributors, right, the jewelry growth is at 7% at actual rates and the leather goods at 2% at actual rates. So I'd say jewelry is still taking a lead here. If you look at the total group, the picture is slightly different because you have the trading through the Online Distributors.

Now the jewelry category, it's a simple one here. The jewelry has continued to expand very strongly, and the high jewelry invoicing will happen in the second half of the year. So that's where we see the difference or the -- what you take as a slowdown in the growth rate. So that is, in a nutshell, the way we view the world. We're pretty happy about the jewelry expansion, and we're pretty positive about the high jewelry expansion coming in the second year of the -- second half of the year. And on top of that, yes, we have had in Q2, clearly, much stronger than in Q1, the impact of Hong Kong. Hong Kong is a market for us which is very strongly exposed to jewelry and to watches. And that obviously has hit us in Q2 much stronger than in Q1. I think Q1 we flagged out that the market was down by about 10 percentage points, something like that. And then in Q2, the drop was quite severe in a very short period of time.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [27]

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The gross margin?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [28]

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What was the question on the gross margin?

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [29]

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The product mix impact, given that the gross margin is relatively flat at Jewellery Maisons.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [30]

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Well, I can't go into those details because it's between -- that would mean I would call out the development at Cartier and the development at Van Cleef. So I can't really go into that level of detail.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [31]

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Well, I'm sorry, I'm trying to understand the release. You talked about the product mix positive impact in your gross margin, which is, on an underlying basis, expanding, yet I didn't see it in the Jewellery Maisons front. So you don't need to [expand] , it's not visible in the Jewellery Maisons. Is it something else other than product mix? Would that be divisional mix?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [32]

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Then it might come from a different division; in this case, from Specialist Watchmakers.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [33]

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But is it the product mix or it's rather a divisional mix impact? Because, indeed, Jewellery Maisons is higher gross margin and expanded faster. So is this just the wording that wasn't quite right or specialist watches had a huge expansion?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [34]

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Well, Specialist Watchmakers, by definition, is watches. So that is where the expansion of the gross margin has come from. So you might call it a product mix, so you might call it a business area mix. But in this case, it's the same. The Specialist Watchmakers business area, obviously, coming from watches. If that was the confusion, then I hope it's cleared up now.

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Operator [35]

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The next question is from Thomas Chauvet of Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [36]

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Two questions for me, please. The first one for Burkhart. Were you surprised by the 120 bps margin pressure in the Jewellery Maisons? How much do you attribute to the rising cost of doing business in branded jewelry, it's a competitive segment, versus maybe some exceptional factor this half that the revenue slowed down in the high-margin markets like Hong Kong? You mentioned the step-up in store renovation, the shop increasing events within marketing.

And secondly, a question for Jérôme Lambert on the Fashion & Accessories Maisons, many changes there. At the same time, you took over the division recently, following the departure of the Eric Vallat, the JV with Alber Elbaz. You reorganized manufacturing last year in Italy, relaunched handbags at Cartier, changed the CEO of Chloé, et cetera, et cetera. I know it's been the same question for the last 15 years, but do you really believe in your ability to succeed in fashion? What is different this time? Can you generate strong returns with that portfolio of brands in what is undoubtedly an attractive segment of the luxury market?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [37]

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Okay. Tom, let me start with the Jewellery Maisons. Are we surprised? Yes and no. We're surprised, obviously, by the Hong Kong development. I think as the rest of the industry and even across other industries, of course, we are surprised about that. And as you know, this is one of our most profitable markets because demand is very concentrated. We have a good network of boutiques there, but we don't have a huge territory to cover. So I mean from a cost/benefit relationship, that's very positive and structurally, a strongly profitable market. And that demand is now -- or has shifted partly to mainland China, to Korea, to other tourist destinations. So yes, that fall and that severity -- [probably the] fall has surprised us to a certain degree.

The rest, I'd say, of the activities in the jewelry segment is not surprising for us because it was planned as such. We've referred to that in the past. The Jewellery Maisons generated a very high level of profitability, of operating contribution and a high level of cash contribution, and these are very big businesses, as you know. They are leading brands in their space, and we've added what we believe can be -- against the background of its heritage, et cetera, and its strong designs, can be, in the future, one of the leading brands. We've added on that front Buccellati. So -- and we've almost always said, well, these are businesses in which we continue to invest so that we can keep the leadership position.

Cartier, as we said, is in a multi-year investment phase into the retail network. So they're in the middle of that. They have what we have on the Jewellery Maisons that also invested in communication in the first half of the year. So none of that comes as a surprise to us.

Just another word on that. We don't manage for quarters or half year results or even full year results. We try to focus on the long-term across business years or business periods. So this is a snapshot at 30th of September. We don't manage for 30th of September. So investments have been deployed into the Maisons in the jewelry space in the first half of the year, and over the years, we'll continue to do so because the contribution is still very high, as you can see.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [38]

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Yes. Thank you for your question for Fashion & Accessories activity, which is embedded into the other category. Just -- and as it is embedded in the other category, sometimes, it doesn't give, all the time, the capability to reach completely the numbers. But if I would take the last 5 years of that category evolution for the Maisons that are still in the portfolio, the growth rate will be at least at the rhythm of the rest of the group. So in terms of absolute performance, maybe not enough, but at least they're not being a source of decreasing the top line performance of the group there. A Maison like Chloé is being -- more than doubling its turnover in less than 5 years. A Maison like Peter Millar in the U.S. has been very significantly growing over the period and having a very high growth rate during the first semester. So there are some very interesting success in that category, as mentioned during the presentation.

The changes that you mentioned are indeed -- on top of that are very -- are source of positive evolution of our business and was also meant to be necessary. We have appointed a new CEO for ALAÏA with Myriam Serrano. We have a new CEO at Chloé, who's Riccardo Bellini, Riccardo being a strong professional of the brands, been working at Margiela and in Diesel during the last part of the period. And we know that having professional in this Maison is a key element of success.

What changed on top of that is that also 1 good year ago, the link between YNAP and the rest of our activity has been further reinforced, and we believe that working closer with YNAP would further help particularly in the perspective of China, where with the launch of our JV [or] FENG MAO, we can build a strong bridge into -- or strong points of success for the future in luxury digital distribution.

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Operator [39]

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Next question is from Luca Solca of Bernstein.

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Luca Giuseppe Solca, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [40]

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A question on strategy. Could you help us understand the strategic goals you have in the secondhand business and how you see this develop over the next 3 to 5 years? Your investment in Watchfinder seems to indicate that you have a toe in the water there. And I wonder what the landscape is and how you would expect to scale this business at the group level?

I have a similar question on the acquisition of Buccellati. I'm not sure whether you stated and sized your ambitions in this case. If the answer is no, I would like to answer -- to ask a reserve question, if I may.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [41]

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Okay. So when -- yes. Thank you for your question on the circular economy. Indeed, we do believe that the circular economy is important in the luxury landscape. For Watchfinder itself, you know Watchfinder being the leader, the -- of secondhand watches in the U.K., are excellent in its organization, excellent in its development and it's very already omnichannel organization with a superb combination between the website, the shows and the boutique. Since June, we started the internationalization of Watchfinder. So we took the company first to France. And then here we see a real success, so that's largely overall expectation. Then we have opened Hong Kong in August, Germany in October, Switzerland is about to open now in the month of November and then we'll go to another continent over next year. And then our proof of concept was France. And here, we see it's so far only digital activity. We have not yet launched the other frame of activity meaning showrooms and boutiques to complete that. But already, the localized digital activity is very strong. We saw a very interesting development of the business of [other] business itself because that's how it developed through the internationalization. And we don't see how or why if it has been so successful in the U.K., it cannot be repeated elsewhere. And then we see as well a very interesting combination with our core watch business,] [has or] it extend our new services or new potential of services for our Maison. And there as well, we are launching a proof of concept to check and to see how it can combine with our retail activities. But that's indeed very promising. And then we do believe that it is part of -- in the future, the so-called watch business.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [42]

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Yes. Question on Buccellati. Listen, let me just put it like this. If you look at the -- at Cartier, if you look at Van Cleef and Arpels, the and then if you look at Buccellati, you would -- I hope you would agree that it's a very natural addition to the other 2 jewelry maisons because they have very strong heritage, very strong patrimony and very distinctive style. And it's also positioned at the high end of the jewelry business. So this is something that is very close to our core competence, I would say. And it is something where we see a very clearly delineated playing field in jewelry -- in this jewelry space. And we're very happy with that acquisition. Now we have not spelled out any ambitions. Internally, we do, but we have not put that to the market. So that means you have a follow-up question.

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Luca Giuseppe Solca, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [43]

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Wonderful.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [44]

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What was the follow-up question, Luca?

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Luca Giuseppe Solca, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [45]

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Yes. Thank you very much for the bonus question. I was curious to get a bit more color on some of the brands that you haven't mentioned within the Specialty Watchmakers, Jaeger-LeCoultre and the impact of the Polaris new products, Baume & Mercier. And I also noticed that you had 1 winner in the compagnie de la Haute Horlogerie in Geneva that was carried out this week, out of 18 awards that were given and Vacheron Constantin's [been beat] on that. Are you happy with the profile you're having in the watches business? Or would you want to have a more prominent role in this area in terms of innovation and ability to capture the field?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [46]

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That's a good follow-up question to Buccellati.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [47]

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Yes. Thank you, Luca. We'd say, indeed, if you want to extend your collection in terms of watches, there still, obviously, a lot of very interesting watches to see right now. You probably saw that Lange & Söhne just introduced its first steel watch, which is very, very interesting in terms of offer. You know that in Grand Prix de Genève, Richemont is [now] present with all the Maisons and that in the Grand Prix, if I'm not wrong, neither Rolex or Patek are present, for example. So I guess, you can draw somehow some conclusion out of that.

No, no. If you see the models that are being launched with the Spitfire or (inaudible). If you see the newer in the series at Lange & Söhne. If you see the newer diving watches and (inaudible), they are all showing that the success of these Maisons are being very connected to recent new lines launch or extension. All that done in a very reasonable way because you have also noticed that the assortments are more focused than before. And that the Maisons are very consistent in managing their rhythm of innovation and their carryover collection. The success of the global -- of the watch maisons if you see -- if you read it in, I would say, again, the trend of Hong Kong is, in fact, quite strong because you know well the importance of Hong Kong in terms of absolute business for the watch business. So achieving that kind of performance with that strong headwind means you have very strong success. And one of the territories where the watch maisons has a huge success these days is China, Mainland China. In Mainland China, the growth rate has been -- is quicker and is accelerating. So here, we are more than happy with this -- with the development of the watch business. Burkhart was mentioning earlier in the talk, the improvement of the bottom line. That is done in the same time. And I can repeat what I was saying how sellout continue to be quicker than our sell in. So for all the elements or the whole building of the category to achieve as well [or] the stronger and stronger performance is continuous -- is continuing in a very strong way.

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Operator [48]

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The next question is from Francesca Di Pasquantonio of Deutsche Bank.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [49]

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Sophie and Burkhart. I have a couple of remaining questions. The first is about the renovation process of the store footprint at Cartier, it's a multiyear journey. But what I wanted to understand is more qualitatively, how you are seeing the process of renovating -- the process impacting the performance of Cartier on the positive or on the negative side and your expectations going forward?

The second question is going back to the online. And although we were, I would say, quite prepared to see that this business would continue to require significant investments and step-up in costs, I was a bit surprised by the magnitude. And what I wanted to understand is whether you were surprised as well or whether this was something that you had already envisaged? And how you believe -- and how we should be thinking about expectations for the future, i.e., is this going to normalize over the next 12, 18 months?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [50]

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Okay. Thank you. Listen, Cartier -- I guess you're referring to Cartier, right, because we've been discussing this for -- yes, I'd say, a number of years ever since Cyrille Vigneron with his team launched this program. I mean basically, we're talking about a project a week, right, throughout the year. This is what we're talking about. I'd say, in general terms, obviously, CapEx and depreciation are negative and sales uplift out of renovated stores are positive, right? Listen, this is -- we have to do this. Cartier management is convinced that they have to do this for the simple reason that if you want to be a leading brand, or the leading brand in the jewelry space, you have to fulfill your customer expectations. And I've said it before that when Cyrille Vigneron came in to -- as CEO of Cartier, he made a very simple but structured assessment with his teams. And one of the points that came up were that the Cartier boutique network needed a bit of refocusing, which he's done quite quickly in terms of closing some of the stores because the number has come down, step-by-step over the last two years. And then upgrading the customer experience in some of the stores -- in most of the stores, through new boutique concept, but also focusing on the flagship footprint across the different regions. And I'd say this has continued as planned, so nothing is surprising for us in this. The -- when you renovate a boutique, what you want to have coming out of that, and that's what we have been doing over many decades now, is an uplift in sales because you readapt, you readjust to what your current customer expectations are. So there is a clear link. We just don't do this for the -- having nicer stores, but they also have to produce the results that justifies these investments. And then obviously, we have -- [but] for Cartier, and that is more limited. We open new stores whenever there is a new opportunity, for example, now the timing might be off, right, but Hong Kong, there's a new development there, K 11, where several of our brands have opened with great success. You have Hudson Yards in New York. It's a new development. And we had to shift our distribution. If we stay with Hudson Yards -- Cartier has closed the store on 59th Street, Madison and it's now focusing on the Maison on 5th Avenue and Hudson Yards. So there's a constant shift in order to adapt. So -- and we've had that in other places of the world as well. We're focusing also not only on the flagship stores, but these are of prime importance, but also on renovating the rest of the network. And as I said, it's about one project per week. So that's quite a significant and heavy charge also for the teams.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [51]

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And you wouldn't say that this has created disruptions and negative repercussions on overall top line? There hasn't been anything which has gone differently from your expectations?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [52]

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No.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [53]

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In terms of the execution? Okay.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [54]

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No, no, no. Okay. I mean, it is -- when we renovated the mansion, okay, that's a big store. And then you have the effect of closing the mansion and then reopening the mansion, but these are really, I would say, more technical effects. What would be more worrying and that I cannot confirm at all is that once you close down a major store for 3 to 6 months to renovate it, and then when you reopen, the traffic doesn't come back. You have an increase in traffic, that's what we see in our businesses when you renovate a store, not the other way around.

On the online distributors. Was it surprising for us? No, it was not surprising for us. It was planned as such. They're going through the 3 projects, or major projects that we called out: the replatforming. That is progressing; the online -- the JV with Alibaba that has opened; and then the preparation for the -- to receive the operations from the reformed Maisons so that requires investment. We're not worried. We're not surprised because it was planned as such, and that is the nature of the game. When you're in a business that -- or in a distribution space of the market that is dominated by technology, you have to invest into technology, and not only technology, but also logistics and fulfillment capabilities behind to be able to preserve your leading edge, and that's what's happening there.

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Operator [55]

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The next question is from Louise Singlehurst of Goldman Sachs.

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Louise Susan Singlehurst, Goldman Sachs Group Inc., Research Division - MD [56]

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Jerome, Burkhart and Sophie. Just to think about the progress, I know you've touched on a couple of these comments already. But in the context of the reminder about the long-term objective for the group and not really focused on the quarterly numbers. Can you just help us think about how you're balancing the delivery of the top line in the online distributors with the operating profit question? We've obviously had quite a promotional environment in the last few months. And I suppose just circling back on the gross margin comments, can you give us any color between the gross profit and the OpEx component within the online distributors?

And then my second question, just following up from that. I'm not after any longer-term guidance. I know we're not going to get it. But in terms of color on the progress at YNAP in terms of that EBIT evolution, and this obviously follows on from comments on the prior question, but is this year -- the trough that we should expect, given the fact you've got the benefits of China coming through, but you've obviously also got a little bit more IT spend going to the OpEx line. If you can help us understand the shape of the EBIT profile over the medium term, that would be incredibly helpful.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [57]

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Thank you for the questions. Here they are describing [a big time] the agenda of the Maison. First, that's about having YNAP being more global. So -- and that's an important part of the agenda. You remember a long time ago, we said the announcement of the JV for Middle East, this one is to come. Last year, we announced the JV in China, and this one is happening just now. And we see there very promising success. And what we can see already that a strong level of operation excellence, in execution, excellence in service. So that's where we see one big part of the agenda. A second part of the agenda is enhancing the quality of the service. The technical platforms that we were using before were not, I would say, making possible localization. That's why, for example, in Japan, today, you still have only Yoox being operating in Japan. With the new technical platform, we'll be capable to have our major Digital Maison to operate in Japan next to the other territories. The new technical platform will also allow a larger spectrum of payment possibilities and much more capability to serve our clients at large and our VIP, in particular. So all that triggers [are] new conditions of trading or so-called cost of trading, cost of doing business. And that's what our margin evolution is producing than any other particular aspects [of it or most] . And on top of that, that's in YNAP, you have the combination of NAP, and MR P, [ZR Net] and Yoox -- and 2 of them being active in full price, the other one in -- not only in full price. So you have to read these numbers as well as a combination as the 4 factor, more than being the tradition of a more promotional rhythm of activity. Do we believe in the business? Yes. And what is indeed to be noticed in 12 months. If you remember 12 months ago, the question was, is that business model relevant or not. Could the other format of business meaning platform be in the future [and] acquiring goods, managing inventory, creation being part of the future. The last 12 months has showed that creation, acquiring goods, managing inventory, offering rare products in a qualitative way has a strong future and has been winning over the last 12 months, which is very important if we speak strategy and further development.

And finally, what it is also for is very important and then YOOX NET-A-PORTER have been working a lot as well with most of their brand partners developing omnichannel capacities and capabilities. Already one major brand, not Richemont, is experiencing a new format called -- a new highlight, which are advanced omnichannel capacities and possibilities. And we see in this combination of digital and brick and mortar, a very strong source of business development. We do believe that with the evolution that we see of the world of fashion, and we've experienced it over the past within the watch business, it's very important to reinvent the relation with the clients. That relation is very digital, is very one client-focused. And then in that constellation of what were channels are disappearing and that's more direct relationship between client and Maisons that we see a bright and very strong source of value between the traditional Maison of Richemont and the historical partner of YNAP and YNAP itself.

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Operator [58]

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The next question is from Zuzanna Pusz of UBS.

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Zuzanna Pusz, UBS Investment Bank, Research Division - Head of European Luxury Equity Research [59]

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So first of all, on online distribution. I was just wondering if you could share with us your thinking regarding the whole, I guess, luxury online business going forward because I presume it's not only my impression, it has become incredibly promotional. And it feels a little bit like it's getting worse and worse because one retailer does 10% off, the next one does 15% and the next one does 20%. So do you have any plans to respond to that? Are you planning to focus more on the top line so we can expect to see more discounting or -- which will come at, obviously, at the expense of your profits? Or are you planning to maybe prioritize the profitability of the business going forward? Just [even] high-level thinking would be interesting because it does feel a little bit like a race to the bottom.

Secondly, on the outlook. Now I do understand you don't really give guidance. But I think it has been commented before that you were expecting OpEx to grow slower than sales. Now I was wondering if this is still your expectation going forward? And especially when it comes to Jewelry Maisons because the reality is that margins have been really impressive, resilient, staying above 30% in the next -- in the last couple of years. But we are seeing more inflation in the market. Your peers are -- and competitors are spending more on A&P? And should one of your big competitors become part of a rather large group, I think we could see also bigger A&P spend in jewelry. So I was just trying -- I'm trying to understand if you have any specific targets, meaning you want the profitability in Jewelry Maisons to stay at at least 30% or will you be willing to give that up as this is needed to defend your position in the category.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [60]

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Yes, Zuzanna, this is Burkhart here. Let me just answer the second question first because at my age, you start to forget questions. So the Jewelry Maisons have a very high level of profitability. It's our area of expertise. We have leading brands. Two things to that: one, we have always said, and we will continue to say that and do that, is that we will continue to invest into these Maisons. They have, as they're retail businesses, as they're worldwide businesses, they have a strong need of capital investment and they have a very high level of capital return. So as you can see, that equation really works out very well for us. But it means that we will have done that over decades. Now we will continue to invest into these Maisons. And we have built them into the industry-leading assets, if I can say it in financial terms. And we will continue to do that in the future irrespective of what the competitive environment is. We believe that with Buccellati and now, it's not really significant today, but when you reflect back on Van Cleef, it was not really significant when it was acquired by the group, and it's one of the references in the industry now. And we intend to give all the means for these Buccellati Maisons, all the means to Buccellati to be able to grow. And so we will continue to invest also in that space. So we're not too worried about that. And because we're leading that space with Maisons, which are clearly positioned on the luxury side, on the high-end side of that market.

So second point I wanted to mention, don't read too much into 3 months, 6 months, half year results or whatever because we don't manage like that. We don't manage for Q1, Q2. We don't manage for this first semester, second semester. We've always spelled out that the view of Richemont is that we want to create long-term value for shareholders through the creation of -- and the continued investment to create brand equity because brand equity will then translate into long-term value for the shareholders. So semester 1, semester 2, Q1, Q2, these are all valid questions. I understand that [there are] models behind, but we don't manage the business like that. I don't want to lecture you, I'm just saying this is not the way we manage the business.

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Zuzanna Pusz, UBS Investment Bank, Research Division - Head of European Luxury Equity Research [61]

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Sorry, just to follow up, because I also tend to forget questions at my age. So I mean maybe to put it differently, would you say that the margins at Jewelry Maisons are probably at their peak? And it means that if the environment gets a bit more competitive and is the cycle -- I mean we are probably going to see some sequential slowdown generally globally. So would you say the margins have peaked at Jewelry Maisons? Or -- and you are willing to invest so we could expect a bit more pressure going forward? Or can they still go higher, I guess, maybe that's a different way of asking the same question.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [62]

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I would not -- to be honest, I would not qualify that at all because I simply do not know. I simply don't know and we simply do not know how the competitive environment is going to play out. I mean if you would have asked that question 10 years ago, we probably would have said, "Yes, yes, they probably have peaked." and then the boom with the Chinese customers came so -- and it has brought not only our Maisons but I'd say the entire industry to a different size. So I will not be able to answer that question.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [63]

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If I may on the digital distribution. You point to something which is very interesting, which is a relationship between digital distributors and the different -- and their products and their clients. So at YNAP, we see a point of differentiation in 3 key dimensions: first, YNAP and even more now, we say in [Mau] has the largest number of clients. So we are the best in introducing new Maisons and new capsules. As it was mentioned now, we introduced 200 new brands since April within the environment of YOOX NET-A-PORTER, and we launched 90 exclusive capsules. So all that are bringing the opportunity to have exclusive and specific offers.

The second one, which is also linked to our position of leader in that dimension is that we have very strong relationships with our brand partners. And we are working with the key players to offer the best product, and I would say, at the right time. We buy the inventory, and thanks to that, we can offer the best inventory in the best time when it comes to that.

And that -- along that, we already have a big chance to have a chance to have very competitive value creation and not to fall into an only promotional business approach, which is for today and for tomorrow, we do believe that -- and that's what we experiment with new highlight. We do believe that the one stock omnichannel solution will create a further competitive advantage. So today, we have a competitive advantage because we have more clients. So we can introduce better and a more efficient way or as a Maisons.

The team is good in [position], so we can help the Maisons to create and to have the best capsule offers that can meet the best success. Tomorrow, further in the journey of technology with the omnichannel, we'll be capable to offer one stop -- as a one-stop solution. And that one-stop solution will offer, I would say, a very strong optimization of [which talk] to which client in which geographic dimension. So that's -- all these combinations are making us very confident in the capability of the business to have a strong parent.

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Zuzanna Pusz, UBS Investment Bank, Research Division - Head of European Luxury Equity Research [64]

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But sorry, just to follow up because I don't think I understood. So this has a positive impact on your ability not to discount more, or it means your profitability will be higher from operational perspective? Because I mean, I think I agree, you're one of the stronger players that you are still discounting. So is it that you're going to be discounting less because you think your position will be getting better? Or you think that operation, you will be more efficient, and that will be able to offset probably some pressure on gross margin level?

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [65]

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I think that the answer is not only into the question in sense because again, being a multibillion company in that field gives you the opportunity to have more and more categories and more and more specific offer. And I do believe that the more we expand the categories -- carryover categories that are new high-luxury goods are one of them, and you have the chance to have product with very, very low discount rate. And on the other side, the more specific products you have, the better you create then the less you have to the less you have to discount. So it takes energy and probably even more intelligence here into the business game but I don't consider discounting and reduction of commercial margin as a fatality for that activity.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [66]

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Can I just add one thought to that. There's 2 ways of looking at the online distributors: one is, well, it's a distribution platform and you focus on -- operational results and margin and discount, and that was the sense of, I think, the discussion you just had with Jérôme. The other point is if you step back and you think about what the future of the luxury distribution will be or could be, if you come to the conclusion as we have that we at Richemont have that the future is all about new retail, meaning the online and offline retail, which will first be linked and then will blend, then you need assets in that space. We have the -- our very strong and very focused offline retail distribution network around the world, about 1,100 stores.

And we have a very, very strong, if not the strongest assets, in the luxury online distribution, which is called YOOX NET-A-PORTER. If you believe -- and then we have started a joint venture or a partnership in -- with Alibaba in the online space in one of the biggest, if not the biggest, luxury markets in -- around the world. Now if you take all these together, we believe that we have the building blocks to actually create new retail going forward, along with partners -- with the assets we have. And then the discussion shifts to 2 different areas that could then mean that while having an asset like YOOX NET-A-PORTER is part of doing business is the cost of doing the business because it will enable us to build the new retail infrastructure around the world.

Now if you tend to believe that, well, online is just an additional channel and it will remain meaningless or not so relevant for our customers, then you will focus more on the physical distribution network. We tend to have a belief that new retail is the future. And we have backed these beliefs with an acquisition or with several acquisitions. And by the way, you have to look at it also that we are financing the investments not only to our Maisons, but also into YOOX NET-A-PORTER through free cash flow that we generate. So in that aspect, we are actually quite relaxed. We know it's a business because it's technology-driven, where we will have to continue to invest in technology and fulfillment capabilities and we have the unique opportunity to leverage these investments to hook it up with our physical retail network because that's where our [belief] lies.

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Operator [67]

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The next question is from Patrik Schwendimann of ZKB.

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Patrik Schwendimann, Zürcher Kantonalbank, Research Division - Analyst [68]

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Sophie, Jerome, Burkhart. What is the situation in Europe? Do you see an improved environment because there is more tourism? That's my first question.

Second question, maybe for Jerome. What is your strategy regarding the watch and mechanical movements? Will you still order from Swatch Group next year?

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [69]

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Okay. Thank you for the questions. I will answer to the second part of the question and then I leave Burkhart to comment on the development in Europe. So -- and you know that Richemont and Swatch Group has been historical partner in terms of industrial or supply. Richemont is buying to Swatch Group numerous products. You spoke [from] the movement, but we also buy spiral. So other components are for our watches. And we'll continue to buy from Swatch Group various elements when it comes to specifically the movement or I cannot comment where our Swatch Group ends or (inaudible) . So there I leave you to ask them where they are with that [dimension.]

But I like your question as well to give me the opportunity to comment where we are globally with the supply chain for our watches. You know that Richemont has been building its industrial base, it means its own capacity to develop movements. First, within the Maisons it historically has been always building and producing movement. It's a case with (inaudible), for example, it's also the case with (inaudible) that are internally or integrated at producing for themselves a movement. But so true now for components and kits of spare parts that are used by various [of] various Maisons of the group. So today, when it comes to movement, the first supplier of movement [is Richemont] .

So it diversifies -- it has a way to project ourselves into the future with a lot of [serenity] in that context and environment. And then like all the industry, we have to see and to hear how our Swatch Group will add up its strategy for the future -- for the future, given the new regulatory environment. But I said, we have the tools to adapt ourselves to whatever will be the situation next year.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [70]

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Patrik, on Europe. Listen, I've been -- I think I've been saying this for a while. After -- with all the things that are being thrown at our industry, but also other industries in Europe, actually, we're quite happy with the business. I mean you have Brexit, but it's not only that. Remember what was happening in France. I'd say, on the political environment in many of the major markets for us in Europe are difficult. And just a trip down memory lane, in the past, we've had a big part of Chinese business or tourist business, which was very volatile. Now we have, since 2 to 3 years, focused very strongly on building, redeveloping our business with local clientele and local clients, and that year after year after year is increasing, that sales portion. So I think that gives more stability to us or to our business in Europe.

If you look a bit more into the trends, obviously -- and probably counterintuitively, the business in the U.K. has been very strong. It's become our biggest market in Europe now. Other markets have been either slightly up, slightly down. There's a bit of tourism going on. We know part of it is -- or most of it is linked to exchange rates or exchange rate-driven buying be it in the U.K. from Asians, be it also from Americans. In general terms, jewelry and retail are up across the region. In general terms, watches [and] wholesale are down across the region because there's a link because we continue to work on all the elements that we already discussed. Sell-in lower than sell-out. We're at the end of closing down of wholesale relationships, but it's still visible in the first half of this year. So I'd say in general terms, we are satisfied with the business given the circumstances, put it that way.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [71]

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But to complete as well the landscape with a strategic view as well here, for us, an investment in YOOX NET-A-PORTER, in Watchfinder, in Buccellati or having even, I would say, the newer [fashionette], all these dimensions are also to make Richemont into developing its anti-fragile strategy for the future. Maybe 4, 5 years ago, the importance of tourism was so high in our business in Europe that where we were building our -- and developing our business with a high rate of agility. The development of the locals now with this new initiative give us the opportunity to be more and more local driven and to have a direct product offer, marketing initiative that are driven by the -- by the local needs. And that very specifically in the different markets.

And again, Richemont has been investing for a long time in Service Center. Richemont has more than 26 service centers around the world to take care of the product. Remember that we launched an extension of guarantee earlier this year. Extension of guarantee means that (inaudible) has been offering 6 years of extension of guarantees. This month, we'll have further news of Maisons at Richemont that will offer extension of guarantee. We do believe that offering these additional services, offering new initiatives in marketing, new point of contact with the digital is anchoring Richemont very deeper with the local clientele and is embedding anti-fragile element for the future development of the group and [for me].

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Operator [72]

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Next question is from Rey Wium of SBG Securities.

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Rey L. Wium, SBG Securities (Proprietary) Limited, Research Division - Head of Consumer Research [73]

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Just 2 quick questions. I'm just curious about the general trend in Chinese spending where you can measure them around the world? Because if I look at your organic numbers in Europe and America, it was basically flat. And China or Asia, overall, just up 4%. So is it fair to assume that the spending trends have weakened over the past year? And also considering that the renminbi has weakened in recent times? So that's my first question.

And then the second one, just on the online distributors side, I mean you did mention about the gross margin pressure due to promotional spending as well as free delivery. So is it fair for us to assume that these lower margins will remain in place for the foreseeable future?

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [74]

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Okay, Rey, I'll take the first question. If you look at our business, or if you look at Chinese spend, put it that way, it was -- for a long time, it was about 1/4 of the roughly EUR 80 billion market with Chinese customers. About 1/4 of that was in Mainland China and 2 -- 3/4 of it outside of Mainland China, meaning with the traveling Chinese. So these numbers are changing because there is, since about 2 years, a very strong trend to onshore Chinese purchases onto Mainland China. So we said that for quite a while.

And that's why we see not only us, but many other of our peers, we see the strong and consistent growth of sales in Mainland China. The rest of, let's say, the tourism business very much depends on exchange rates or exchange rate-driven purchases. The renminbi has weakened, so that clearly has an impact on the tourist business. And we've always called that out because we just don't know how the exchange [worlds] are going to move. So a very strong business in China and continued very strong business in China.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [75]

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On the margin element, I can say again what I said -- I said before, we do believe for the online distributor since there is mid to long term, a very strong capability to maintain or to develop margin, thanks to a very specific offer. So -- and here, again, it's linked to the number of Maisons we can host within YOOX NET-A-PORTER. If you see what is happening with the JV in China is a good example. We have, for example, 15 new brands joining (inaudible) just in this month of November, and that trend will continue. At the [summary], we recruited 200 new Maisons on YOOX NET-A-PORTER since the start of the year. That's one aspect.

The second aspect is definitely the dynamic of the categories. Some categories are less exposed than others to discount because they have a higher rate of carryover. So the higher rate -- with a higher rate of carryover within our [offer], we'll have a good way and a good solution to approach this potential erosion of margin resulting from the pressures that brick-and-mortar will [sell primarily on its] today's business.

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Operator [76]

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The next question is from Charmaine Yap of Redburn.

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Charmaine Yap, Redburn (Europe) Limited, Research Division - Analyst [77]

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I have a question on the retail network, please, if I look at the increase, especially in the franchise stores. There's been a lot of increase in Specialist Watchmakers. I know some of these were in the Middle East, but what is the rationale? Or is there a strategy behind these franchise openings?

And the second question is on Cartier and jewelry, in general. Do you think there is enough innovation in the brand? I know you spoke about a lot of communication spend, but can you maybe please explain a little bit if there's any changes in your marketing strategy? How much is on digital? Any color there would be helpful.

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [78]

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I will leave to Burkhart to comment the second part on jewelry. I will tackle the subject of external boutique. First, to be clear, we had a little bit of reclassification and putting, as you say, in good [Swiss German] of our classification of external boutique, so that it was a margin between -- it could be margin between the different brands. Nevertheless, it's true, and it's part of our strategy to extend the external boutique. Why do we think that it is important for Maisons? We think that there is still a future for brick-and-mortar and there is still a future for wholesale and therefore, traditional distributor of watches, in relation with our original Maisons, along with the capability to offer superior stock, superior experience.

For the stock inventory here, we have been working along around the concept of (inaudible). We monitor the sell-out of more than 90% or 95% of our distribution for all our Maisons not only to, I would say, to manage the risk of a stock, but also to have the right stock at the right place because we are not only monitoring how many -- what is the [total] and then we are done. We're monitoring with our partner, which watches so that we can ensure a better assortment in better place. Better place means for most of the time capability to have more service to -- and when it comes to more service, that's -- it can be along with an offering, more prominent location to go shopping to having direct aftersales service activity in the boutique itself. So that superior service, it's superior stock availability, that superior advice capabilities on site.

We do believe that it is with external boutiques that we can do it the best. So it has been expanding for sure in Europe. It's now moving as well quickly in the U.S. And then and the rest -- and it will further follow in the rest of Asia. And we do believe that's a big and better way to work together in the future. At the end of the day, it's about aggregation of clients. So here with this external boutique in the brick-and-mortar way we can create with our partner a very efficient way to aggregate the clients.

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Burkhart Grund, Compagnie Financière Richemont SA - CFO & Executive Director [79]

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On the -- if I might step in on the jewelry side, so there were -- if I understand, there were 2 questions: one is about product innovation and my feeling about it; and second, on the nature of marketing spend. Let me just try to qualify what I think about the inventory -- excuse me, about the product innovation. This has -- I mean, it's a jewelry business, and the nature of the jewelry business is that the -- I'd say the evolution of the collections, meaning the creativity that you're touching upon, is very much linked to a mid- to long-term cycle. If you launch a jewelry collection today and if you look at what our brands: Cartier, Van Cleef, what they have today on offer, these are collections that, in many instances, have been built over 10, 20 years.

So -- and some even much longer because they are of constant appeal to our customers. Why are there of constant appeal to our customers? Because they are being animated constantly each and every year. Why is it different from fashion? Because the inventory investment is significantly higher. And you won't go into markdown or discount cycles as you do in -- with fashion products. So the nature of it is very much different. Now if you look at what has happened at Cartier under the new management, they, first and foremost, focused both on the watch end, on the jewelry side, on the existing collections of -- what I'm saying the new management meaning when Cyrille Vigneron came into -- back into the group and took over Cartier as a CEO.

They focused on relaunching the watch offer. They focused on extending the existing jewelry lines. Now this year, they have come out with a new collection Clash. Sophie mentioned it a little bit earlier in the presentation. That actually has gained very quickly a lot of traction with, and it's very, very relevant as are many of the other collections for today's customers. So yes, we believe there is innovation. There is enough innovation. It's just the cycle is so much longer. This is not a fashion business. This is a business which is mid- to long term, also because the jewelry items you acquire or watch items you acquire have the promise of long-term value preservation or long-term value appreciation. So once again, this very much influences my answer to your question.

For the marketing side, the marketing spend, it's been a trend since 5 years that obviously, marketing spend has more and more shifted from the traditional to the more digital media. The mix is somewhere between 30% and 40% digital. We've said it before, it's a trend that is ongoing between the Maisons.

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Operator [80]

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The final question for the day is from Thierry Cota of Societe Generale.

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Thierry Cota, Societe Generale Cross Asset Research - Equity Analyst [81]

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What it's going to be actually 2 very short questions regarding watches. The first question was would you say, when you look at H1, the sellout of your retail partners in terms of growth was similar to what you've seen in your own retail stores? Number one. And number two, in terms of sell-in versus sell-out, my understanding was that as of the summer, the strategic selling below sellout would be finishing. Would you expect now in the second semester, one would be more or less equal the other? Or given what's happening in the market and monitoring sell-in versus sell-out, on a more technical basis, still sell-in is likely to remain below sell-out until the end of the year?

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [82]

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Thank you for the 2 questions. The first element about sell-in, sell-out retail, and I had a very interesting question about external retail. So external retail -- internal retail is growing with the Specialty Watchmaker, which is good news. When it comes to external boutique, it's also growing. It's even growing quicker than our internal retail because that's new opportunities that create on the market. The traditional wholesale is below the trend of retail [being] internal [and] external. And it's still a little bit at the end of the long tail of qualitative adjustment of our distribution. You know that. It's not a thing when you have been working a long time [that you learn].

When it comes to stock management for the months or the months to come. We adjust monthly. So every month, we adjust our volume of production in total. And more than anything, we are just where we put our inventory because that's -- indeed, they're not only very important to have the right level of production in front of the right level of demand, but also to have it in the right location. Today, it's not a big wonder a big surprise if I tell you that we are focusing a lot on China -- Mainland China. And if we are not only focusing a lot on Mainland China but also in our digital activation product. And here, that's a very quick learning phase.

There are 12 Maisons of Richemont that are active on Feng Mao on the joint venture. So it's excellent also in terms of learning and developing best practice when it comes to our supply chain and agile supply chain system to be aligned with demand and the standard of e-commerce where Alibaba, organize it and make it happen. But that -- these elements make us being very confident in the capability of our Maisons to engage very much in the digital dimension. And after reconstructing, which has been part of what we did during 2 years, we are now tackling more business development approach. External boutique is definitely one. Digital is definitely the second one in our product.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [83]

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And then when will you align?

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [84]

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The alignment between sell-in, sell-out, as I said, is constant. So today, we are not -- we are happy with our level of stock. So I would say, we reduce the level of stock because we have less doors. So basically -- and when we have less doors, we anyhow have less stock in the market. So it tends to go down in absolute term because there are less doors. And for the partners that we have in the doors where we are. We are now -- we have stabilized now the level of stock. (inaudible) is the offshoot of Maisons, of which we have spoken to have a quick growth this year.

This one anyhow not answering the demand of today. So this Maisons even reducing [your] stock toward the -- because they cannot meet exactly the demand [of today]. Of today. So I would say globally speaking, we have still a reduction of stock, but that's more a collateral effect of success of Maisons and then of closure of doors then a deal decision to have a quicker and stronger rotation even.

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Thierry Cota, Societe Generale Cross Asset Research - Equity Analyst [85]

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And the closure of doors, a big step was done until this summer. And if I understand well, it carries on until Christmas, but on the lesser scale, is that correct?

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Jérôme Lambert, Compagnie Financière Richemont SA - Group CEO & Executive Director [86]

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Yes. So that's very much -- we are very much at the end of this long tail of activity very true. Correct.

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Sophie Cagnard, Compagnie Financière Richemont SA - Head of IR & Group Corporate Communications Director [87]

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So this concludes today's call. Many thanks for your participation and all the many questions you raised. If there's some more James or myself, happy to answer them later on today. And in the meantime, we look forward to reading your papers. Have a good day.