U.S. Markets closed

Edited Transcript of KER.PA earnings conference call or presentation 12-Feb-19 8:00am GMT

Full Year 2018 Kering SA Earnings Call

Paris Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Kering SA earnings conference call or presentation Tuesday, February 12, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* François-Henri Pinault

Kering SA - Chairman & CEO

* Jean-François Palus

Kering SA - Group MD & Director

* Jean-Marc Duplaix

Kering SA - CFO

================================================================================

Conference Call Participants

================================================================================

* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Aurélie Husson-Dumoutier

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Louise Susan Singlehurst

Goldman Sachs Group Inc., Research Division - MD

* Luca Solca

Sanford C. Bernstein & Co., L.L.C. - Senior Research Analyst, Luxury Goods

* Rogerio Fujimori

RBC Capital Markets, LLC, Research Division - Analyst

* Edouard Aubin

Morgan Stanley - Research Analyst

* Zuzanna Pusz

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Thierry Cota

Societe Generale - Head of Luxury Goods

================================================================================

Presentation

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [1]

--------------------------------------------------------------------------------

Good morning. Welcome to Kering's presentation of full year results, along with Jean-François Palus, Group Managing Director; and Jean-Marc Duplaix, Chief Executive Officer. It's a pleasure to welcome you again this year.

2018 was an excellent year for Kering and all of our houses. Last year, we evolved in a context that was fairly buoyant, though the difficult -- the situation became a little more difficult to interpret during the year. In that type of environment, last year, we were able to generate EUR 2.8 billion in additional revenue versus 2017. This is up by 29% on a comparable basis. In terms of EBIT, we were able to generate EUR 1,300,000,000 additional EBIT versus the previous year, that's also exceptional growth, 47% on a comparable basis.

Now, of course, this level of performance enabled us to generate exceptional cash flow last year. And then a very important point we need to observe, this growth was sound, very balanced, which now constitutes a very sound foundation for future growth in this group. This success, these results, we owe them to the achievement of the vision we have, I mean, modern luxury group, multi brand luxury group offered to the implementation of our strategy in each of our houses throughout the group. And of course, we also owe this to the exceptional execution by talented teams who have been with Kering for many years now. And of course, of course, this is thanks to a very strong financial discipline. Jean-Marc is a guarantor of that.

I'd like to use this opportunity to emphasize the contribution by the 35,000 employees of the Kering group worldwide. We all share this soft same ambition. The ambition is we intend to make Kering the most influential group worldwide in terms of creativity, environmental responsibility, social responsibility, also in terms of innovation and of course, in terms of financial performance. To that end, we share the same group corporate culture. 2018, therefore, was a year of strong value creation. The group share price went up substantially last year, which, of course, is the reflection of structural growth in our profitability. This happened in an overall stock market, which was down. Our shareholders, last year, also benefited from a onetime payout of Puma shares, which took place last May as well as an increase in the dividend.

Now I'd like to give the floor to Jean-Marc who's going to present to you in detail our financial statements for 2018. Afterwards, I'll come back to talk to you about our ambitions, looking at every house and also the group as a whole. Then, Jean-François will wrap up the presentation, talking to you about the many cross-business projects we're working on, particularly in the digital realm. These are true platforms for growth in our various houses. Jean-François will talk to you about this. Jean-Marc, you have the floor.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [2]

--------------------------------------------------------------------------------

Ladies and gentlemen, good morning. As you all have understand, my task is to present to you in detail the figures for the years. So with your permission, I'll remain at this [rust] room so as not to forget any figures in this long, litany.

2018, in every respect, has been an outstanding year in terms of operating and financial performance. Revenue comes in at close on EUR 13.7 billion, up 25% on a reported basis. Let me remind you that the 2017 figures are restated to provide a vision at comparable scope, excluding activities disposed or are currently disposed following IFRS. So far, we restated the figures, excluding Puma, Volcom, Stella McCartney and Christopher Kane. The ForEx impact is unfavorable of the order of EUR 258 million, and we'd -- exclusively on the first half. Organic growth at comparable scope, and ForEx, therefore, reaches over 29%.

The group revenue remains well-balanced geographically. Western Europe and Asia Pacific each account for better further revenue, and in 2018, recorded high-growth levels, respectively, of 24% and 34% comparable.

Japan is at around 8% of the total with here again, very good momentum. Growth reaching 24% comparable.

North America, that contributes 20% of the total, is up 38%.

Lastly, the other countries that include, notably the Middle East, account for 7% of our sales, up 23% on the year.

Recurring operating income stands at close to EUR 4 billion, up 47% over 2 years. The group's operating income has more than doubled. This is a quite outstanding performance for a group of our size.

The operating margin reaches 26 -- 28.9%, up 400 basis points over 2017. This improvement demonstrates the impact of operating leverage in our business, allowing us to reach a profitability that places us amongst the best in our sector.

Free cash flow is close to EUR 3 billion. We wanted to maintain a significant level of investment at around 6% of group revenue. We've devoted the bulk of this free cash flow to reducing our net debt that has been halved by taking as opening debt, the pro forma debt, that is to say excluding the net cash of Puma. The debt ratio, thereby, reaches 0.4x EBITDA.

This year, I believe we've been able to combine, in an exemplary manner, organic growth and profitability. Group revenue recorded sustained growth throughout the year on basis of comparison that were high and this -- since the second half of 2016.

For Luxury, the annual growth rate is 29% comparable. As you can see in the center chart, we've been achieving for 2 years, growth rates way above the industry. And for eighth consecutive quarters, growth above 20%. The growth in revenue went hand in hand with even higher growth of return operating income, and therefore, profitability.

Our Luxury activities in 2018 have reached record levels. Revenue reaches EUR 13.2 billion, that's an increase of 26% on the reported basis. ForEx accounting for over 3 points in the growth. So directly on stores that account for 77% of revenues. So the sales increased by 31% on the year growth were sustained across regions, notably North America and Asia Pacific. Online sales are up 71%. Sales to third parties are up to 24% on the year.

On the basis of high levels of comparison, Q4 trends are continuous directly on stores, up 25%. Strong momentum in APAC confirming a return of Chinese demand. All in all, in Q4, Luxury is up 23%.

Full year 2018 growth was driven both by local and tourist customers, although we see a slight downturn in tourist spending towards the end of the year, notably Europe on the aggregated scope of our 3 main brands, all nationalities are up on the year. And in Q4, with the exception in the latter months of Russian and Middle Eastern customers, in particular, the spending of the 3 major nationalities, that is to say European, Chinese and U.S. customers are up 20% to 40% in 2018. For Chinese customers specifically, the trends remained buoyant in Q4, essentially in Continental China and the rest of Asia. Recurring operating income of Luxury activity is up 45%, that's EUR 4.2 billion. This performance is due to an improvement in the gross margin, very strong leverage at Gucci, Saint Laurent, Balenciaga, By leverage effect, we mean the level of absorption of operating expenses related to sales increases.

Bottega Veneta is in a repositioning phase, and we continue to invest in order to develop our growth drivers. Operating profitability stands at 31.6%, up 410 basis points. The same increase that achieved last year. Investments stand at EUR 610 million, up 30%, representing 4.6% of revenues, stable revenue that reflects our determination to continue our policy of targeted and selected store openings.

Let's now turn to the key figures of our Luxury brands. For the most curious amongst you, you will find additional items at Annex. Let's begin with Gucci, who's revenue after topping EUR 6 billion in 2017. That comes in above EUR 8 billion in 2018. Growth level at 33% on a reported basis and 37% comparable on basis of comparison that are very high was the case in Q4 that records an increase of 28% comparable. This performance is continuous over time. Thanks to the continuous success of the creative offer in all product categories, in all regions, with all customers by nationality and age, directly owned distribution is up 38% full year, 29% Q4 with very sustained trends across regions, notably APAC and North America. This growth is very healthy. It's performed at comparable store basis and at full price. The focus on digital results in online sales up 70% full year. Sales to third parties, up 31% with the level of number of distributors that is globally stable. This revenue increase impacts fully recurring operating income that is up 54% and largely exceeds the EUR 3 billion.

The impact, very positive impact of the gross margin and the very favorable leverage effect allows the operating margin to continue to grow strongly whereas the brand continues to invest that reaches 39% on the year, an increase of 530 basis points over 2017. Once again, this is new profitability record. Contained operating investments that related to revenue represents 3.8%. Once again, this year reflects the priority given to the continued rollout of the new store concept.

For Saint Laurent now. 2018 is another year of sustained growth. Revenue up, close 19% comparable after 7 consecutive years of growth. Above 20% the brand thereby reaches EUR 1.7 billion of revenue with an increase of 19% of its directly owned stores and 21% of sales to distributors. The power of the Saint Laurent esthetic and Ready-to-Wear continues to drive the desirability of all product categories, notably that of Accessories. In Q4, the momentum remains very consistent with comparable growth of 19%, driven by directly owned stores. In e-commerce, operating income is up, close to 22% to reach EUR 459 million and the margin is up 120 basis points. The critical mass of the brand allows it to benefit from very strong operational leverage, while continuing the investments necessary to its growth in terms of distribution and advertising. The operating margin tops the 26% threshold. And as we've already indicated on several occasion, its increase is henceforth more gradual. Operating investments are maintained at around 5% of revenue.

In 2018, Bottega Veneta has reached a new milestone in its repositioning with the appointment in June of Daniel Lee as Creative Director. In this context of transition, the brand delivered a mixed year with revenues that is down 3% comparable. The downturn was focused on -- directly on distributions where the brand is penalized in Europe by the decrease in tourist spending in Europe without offsetting another region. On the quarter, the trend is improving sequentially, but remains negative. However, after 2 years of reorganization aimed at working with the most qualitative partners, sales to third-party distributors, it's slightly up on the year in Q4. Recurring operating income stands at EUR 242 million. Profitability at 21.8%, down 320 basis points over the previous year. This dilution stems primarily from the contained increase of certain operating expenses. They relate to the leverage and operations of store as well as advertising and marketing expenses as part of initiatives, putting the brand back on a growth track investments with devoted to renovations, selective store openings, notably flagships in key locations to improve both the brand visibility as well as the customer experience. But François-Henri will return in greater detail on the key items of the brand's repositioning.

The growth of other houses is very sustained in 2018. Revenue exceeding for the first time, EUR 2 billion, up 32% comparable. Directly owned sales growth with an increase of 44%, becoming the first distribution channel. Wholesale business is up 24%. Balenciaga and Alexander McQueen are the main drivers of this growth. Our jewelry brands delivered a solid performance, and watchmaking production signed second consecutive year of increase, thanks to the substantive effort on their offering allowing them once again to present very innovative offerings at the last SIHH. Recurring operating income of the other houses comes in at EUR 215 million, more than doubled. Operating margins stands at 10% -- in excess of 10%, thanks to the size effect of Balenciaga whereas we're continuing major efforts.

At Boucheron, Alexander McQueen, CapEx up 42%, primarily devoted to growing the distribution network in order to fully tap the potential of these brands.

As you know, the corporate and other segments incorporates the activity of Kering Eyewear that has delivered a remarkable performance in 2018. The contribution of Kering Eyewear to consolidated revenue stands at EUR 391 million, up 46% comparable on the year. This figure represents a total volume of sales of EUR 495 million. The year was marked by many successes, in particular, the launch of Cartier, the very significant growth of Gucci as well as the presentation of the first collections of Balenciaga and Montblanc available since the beginning of 2019.

Cost of Corporates & Others [concerned] the cost of long-term incentive plans who's increase is purely and simply indexed on the absolute and relative performance of the Kering share price. Excluding this item of compensation, there contained increase of 7.5%, thanks to the increasingly positive contribution of Kering Eyewear as well as the financial discipline that we've set ourselves while implementing the ambitious transformation projects that Jean-François will present in a moment.

Investments by corporate linked to this transformation plan stand at EUR 218 million. They comprised the payment of the last installment of the compensation due to Safilo, an increase under the impact of the modernization of IT, increased logistic capabilities of the group, including the new Kering Eyewear hub in Italy.

I'll now continue with a few comments on the other items. Net income, other non-Kering operating income and expense amount to a net expense of EUR 222 million, essentially asset impairments without impact on treasury for EUR 140 million, EUR 88 million pertaining to the impairment of intangible assets. Other nonrecurring products and income also comprised restructuring charge. Net financial expense, EUR 207 million as against EUR 220 million in 2017. Net financial debt, EUR 77 million, a decrease of 30%. This improvement is due to the reduction of the average bond rate and the associated rate without the reimbursements and the readjustments over 2 years. Other products and financial charges represent a net expense of EUR 130 million, and the ineffectual product currency hedges and as well as the partial buyback of the bond coupons.

The tax expense comes in at EUR 868 million, up 58%. The effective tax rate, 24.7% related to recurring income as against 24.2%, 22.6% in 2017. The increase in the effective tax rate on the recurring income applies impacted evolution of the country mix or so to the program revamping of the past years, reorganization of the supply chain. This transformation is aimed at applying the operational model of brands to the group, and so we've indicated this operational reorganization leads to a gradual increase in the tax rate. Our best estimate is that this effective tax rate on recurring income will trend short term to reach about 25%.

In this respect, I'd like to remind you as part of the tax investigation opened in Milan in 2017, an audit team of the Italian Tax Authorities finalized the report at the end of January. This pertains to the results of one of our subsidiaries for the years 2011 to 2017 with an estimated amount of taxes that might be claimed of the order of EUR 1.4 billion. We contest the conclusions of this report both on the grounds as well as on the amounts. We're confident, but we will continue to cooperate fully with the Italian Tax Authorities, and we will communicate in a very transparent way on the progress of this procedure. At this stage, we do not have the necessary information to record a specific accounting provision based on the reliable estimate of the tax exposure. Of course, we continue to implement a strict monitoring of our tax positions, and we've adopted a prudent approach in the assessment of our tax exposures, notably those related to the transfer pricing policy.

All in all, net income group shares stands at EUR 3.7 billion. It's more than doubled over 2017. It, of course, includes the net income of discontinued activities for close on EUR 1.1 billion, essentially comprising the accounting disposal capital gains linked to the distribution of Puma shares. We, of course, look at net income of continued activities, excluding nonrecurring income, that reaches EUR 2.8 billion, up 49%.

Let's now move to operating free cash flow that stands at close on EUR 3 billion, up 34%. This increase was on cash flow from operations of EUR 4.4 billion, up 40%. That's over EUR 1.2 billion. Incrementally, a change that is, of course, linked to the significant increase in earnings and of course, good containment of working capital requirements in respect of increased activity. Taxes disposed are sharply up, and as mentioned, group investments were also up. All in all, the group has devoted EUR 1.4 billion on these 2 items. That's an additional EUR 500 million over 2017. Operating free cash flow related to EBITDA stands at 67%, one of the best ratios in the industry.

Turning now to net financial debt that comes in just above EUR 1.7 billion. At the end of 2018, that's a reduction of half over the 2017 basis restated. This deleveraging has been made possible through strong cash flow generation where the group has continued constantly its policy of return to shareholder, which is the dividends paid up 30% as well as the share buyback program. The net debt-to-EBITDA ratio stands at 0.4x.

On this page, you will find more detailed information on our balance sheet and financial structure. As expected, the total amount of invested equity is down following the exit of Puma, also good management of working capital requirement. Operating WCR stands at around 18% of revenue.

A final word, I think you were expecting this on IFRS 16 that stands that comes into effect as of the 1st of January of this year and will impact our financial statement as of June 30. This standard complex in its drafting onerous in its implementation will considerably amend the predictability of our accounts in numerous performance indications. Some application will only concern some 45% of our leasing contracts, making more difficult, the comparability of one store with another one region. That's why we'll be publishing next year in 2019, alternative performance indicators in order to ensure for all continuity and following our results. For information, the estimated impact on debt on the 1st of January 2019 is in the order of EUR 3.7 billion, but this figure will be further refined and utilization right will be booked on the asset side. For those of you who require further information, you will find that in -- our financial report published this morning.

Thank you for your attention, and now back to François-Henri

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [3]

--------------------------------------------------------------------------------

You're already familiar with our strategy, so I won't go over in greater detail. I've already presented it to you several times. But I would like to emphasize our vision under this model. It center -- it's a creative universe, it's very, strong, comprehensive in all of our houses. That's our vision, which is enabling us to generate our own organic growth going beyond general market trends. This is the vision, which is the basis for the financial performance that Jean-Marc just talked you through.

Each of our houses has potential for organic growth, which is quite substantial, specifically thanks to the creativity that I just mentioned. The creativity is often fairly edgy, but it's always unique and enables us to create trends in the Luxury market. Furthermore, we're talking about the expression of this creativity, which is our narrative. It's consistent throughout our houses. It's a consistent narrative. It is sustainable over time as well. It's this continuity of expression, this way of expressing our creativity, which substantially strengthens our customer loyalty to all of our brands, enabling us to generate this extra growth above and beyond general market growth.

Another very important factor in our performance is our corporate culture, which is very strong and genuine. This is one of the foundations of our performance, especially the sustainability of this performance. Our performance model is a development model based on platforms to support growth. This gives us the competitive advantage, advantage for all of our brands. I won't go to further details. Jean-François will run you through the details later.

Now let's give an update on potential for growth of some of our major houses. Let's start with the biggest one, of course, Gucci. You saw this during Jean-Marc's presentation. Gucci saw at 2018 with yet another exceptional year in terms of growth, and the very important thing is that this is very sound growth and very balanced growth. Let's begin by talking about products. In merchandising. we're refocusing on 2 very important things. Firstly, the balance between what we call the carryover lines and the new lines, the novelties that we provide every single season. Here, we've reached about 70%, 70% carryover lines compared to the novelty lines. This balance will continue over time. We find this is a perfect equilibrium, these 2 product categories, enabling us to really make sure we've got sustainability, long-lasting performance. When we say carryover, it doesn't mean they just remain unchanged. These are lines that, of course, build on confirmed successes, novelties that are launched every season. Now this is a balance. We've got a balance in carryovers and novelties. We've also got overarching balance between the various categories of products. Here, as well, we've reached a balance. Here, you see the percentages. We feel this is optimal and this will be long lasting. And here, as well, will enable us to further strengthen our overall performance.

I'd also specify under products, this benefit growth at Gucci for more than 3 years, the group potential for growth in all product categories, there's no exception here. I'd add to that point, we've got product categories that we want to boost that we feel our positioning isn't strong enough. And there are also new categories, I'd mentioned just 2 examples where we have illustration because the category is to boost their perfumes in beauty. In this area, perfume and cosmetics were going to achieve further performance gains. We won't just keep current levels of activity in this area.

Now in terms of new categories. Next June, we'll be launching the category of haute-joaillerie, high jewelry of Gucci. This is another category, which is above and beyond extra growth. It will provide us with -- well, even more importantly be further strengthening the very high-end positioning of the house of Gucci.

Now let's talk about commercial effectiveness. Here, we see our retail metrics in our (inaudible). We've got very substantial growth drivers here, which we fully understand that over the past 2 to 3 years, most of the houses' growth has come through increased traffic in other stores that enabled us to really build a huge customer base, which has grown quite significantly. This is the customer base and there are 2 other elements where we've seen substantial improvements. Retention rates and conversion rates having a traffic actually generate sales, and we're working on that on all the Gucci stores. These are the items, retention and conversion that are very important. We've already made progress. In 2018, we reached a commercial effectiveness. We measured this in terms of sales per square meter reaching -- slightly going beyond EUR 40,000 per square meter last year in 2018. And our ambition here is to go well beyond this threshold in every metrics, in this performance.

Now I'll talk to you about our store network to Gucci. As you know, we've got a mature network of stores. Our priority isn't to extend network in terms of number of stores. There should be a fair stability in the number of stores as in the case for the last few years. However, our priority will be to further enhance the quality of the stores network. We're working on this in terms of store size and also improvement of store location. I'd also like to specify, at the end of last year in terms of renovating stores and bringing the new concept, we're having it just under 50% of our stores. It should take another 2 to 3 years to refurbish all of the stores in our network, and I'm really underscoring this point because the new store concept is enabling us, first of all, to display more products compared to the previous concept to present them better, display them better. There's also boost category of cross-selling and can significantly enhance the performance of Gucci. The renovations constitutes a further potential for growth that we can tap into.

Two points under distribution that I wanted to emphasize here. We've got special potential here as well. I'm thinking of travel retail specifically, Duty Free travel retail broadly. Gucci is still underrepresented. We made products this year and last year and our intention, of course, is to make further significant progress in travel retail. First of all, the in-sourcing existing points of sale to manage them ourselves, thereby enhancing efficiency, but also to open new points of sale, particularly in airport locations.

Last point, e-commerce. Jean-Marc alluded to this earlier. As you saw, the year was an exceptional one, 2018, growth of 70% in e-commerce. We're Very much on track to meet the objective of Gucci to go beyond EUR 1 billion in e-commerce, I'd say, also in the medium term.

Now let's look at our customers. We can say that all ages of customers contributed to Gucci's performance last year. And of course, there's extra performance from the millennials under 35 years of age. This is very important in a short and medium term for Gucci. Also regarding the millennials, I've read a lot of things about the millennials. There are 2 very important points to remember, retention rates and average ticket. This age category, Millenials, has the same average retention rate and average ticket as other Gucci clients. We're also making substantial progress in terms of enhancing customer experience, improving customer relationship at all points of contact. Next in the tools that we're rolling out to our entire network, you may have seen it in the stores already, furthermore, by using new technology, specifically artificial intelligence. I won't go to this in greater detail because Jean-François will be giving you more information on this.

I'd also like to tell you the proportion of Chinese customers, you know that for several years now. They've been the biggest customer segment at Gucci. The proportion of Chinese customers remained stable last year at Gucci. And more broadly, more generally speaking, proportion of various nationalities in our revenue is quite balanced at Gucci, representing all nationalities that are attributing to growth in Gucci business.

I'd like to correct the 2 points quickly that we talked to you about last June when, with Marco, we did the Investors Day. Marco brought up 2 very important subjects. Firstly, our digital presence. And on that point, I would like to say to you, we've continued making progress, in line with the objectives Marco outlined for us, particularly running Gucci's penetration rate on social networks, indeed impressive for the last year. The proportion of digital in Gucci communication spend will continue increasing this year. This is the core of communication strategy today in Gucci.

Marco also brought up an important point regarding the houses strategy, i.e., greater internalization, in-sourcing of the supply chain. Here's why we're very much in step with our targets. This makes sense, makes it possible for us to better adapt to volume growth, as you've seen substantial volume growth at Gucci. Furthermore, this enables us to significantly cut lead times, time to market for our products. Now of course, all of this is being done by further increasing our quality requirements, which we have in every product category. Now in terms of Gucci, we can say that we're very confident in Gucci's ability to continue outpacing market performance. We, of course, confirmed the objectives that we outlined for you before the summer time.

To talk about Saint Laurent now. Well, we're in a very good position to meet our objectives that were also presented to you not in June of '18, but in June of 2017 during the Investors Day.

Now to talk about Saint Laurent products. Here, we really reap the benefits of the unique stylistic -- style positioning, which shows the very exceptional power of the House of heritage all the while with uncompromising modernity by their new Artistic Director there for 3 years now. Of course, Saint Laurent has a vast creative universe. And the expression, the communication of this creativity has been entirely consistent over time as you've been able to see for yourself. Thanks to this, Saint Laurent has maintained extremely strong desirability of this very creative category of products and also bring all categories forward, which is Accessories. At Saint Laurent, we can say for 7 years running now, their performance has been more than 20% growth per year. Now commercial effectiveness performance at Saint Laurent now in terms of revenue per square meter is fairly high, and we can say, here, as well, we're benefiting from work that we're doing group-wide for our brands, i.e., developing tools to further improve customer experience, and as I said earlier, to further use new technology, once again, to further improve in-store experience.

At Saint Laurent, however, we've got a priority to extend the network. So the saint Laurent network is far from having reach maturity yet. We're ahead of our roadmap in terms of store openings, we'll continue stepping up the pace per store openings. This, of course, as well will ensure future growth and performance at Saint Laurent.

Communication here as well at Saint Laurent has increased its presence and effectiveness with digital footprint. We can say that this is now our key point in its communication strategy. Among other things, it's made it possible for Saint Laurent to really substantially increase the impact of many of these events, increase the impact of these events online. For instance, think of the spectacular fashion shows at the foot of the Eiffel Tower twice a year. This year as well, just as at Gucci, the proportion of budget earmarked for digital spend, Saint Laurent will be increasing substantially.

Now let's talk about Bottega Veneta. Jean-Marc said to you earlier, this is a House that we are transforming radically and end up to change development model. It's a house that we're currently changing into a comprehensive couture leather House. It's not a separate thing as previously, and we're doing this using the very substantial creativity. We've already talked to you about this. We're developing it further especially in the Ready-to-Wear category. It's a creative wager with the arrival last year of Daniel Lee to head their artistic department at the house. Daniel's creative power will enable us to further increase visibility and especially desirability, Bottega Veneta, which, of course, will boost our product categories further into development and growth figures. Specifically, customers, BV is fortunate to have a very loyal customer base. Now the challenge for us today will be to maintain those customers carefully ,care for them every actively. And then even more importantly, further develop a customer base for this House in terms of demographics and also in terms of geography. Specifically, we'll achieve this by using this exceptional creativity of Daniel, of course, in Ready-to-Wear categories, but also in the Accessories categories.

Now to talk to you about their retail network. Bottega Veneta is a real plus point. Its network is at a good level of maturity. We've had experienced in the group, when you have this sized network of distribution and you got to transform and relaunch a house, it's a real asset to have this sized network. The priority here at Gucci will be to address quality of network into the store size. Our stores will be intending in the longer run to display all product candidates. Also, we're focusing on quality of store location. I've mentioned a new store concept will be developed starting this year by the Bottega teams. This concept in the future then will be rolled out to all the stores in the network. Of course, we have to wait for the arrival of products in the stores. End of last year and beginning of this year, we already made substantial investments in the new communication plan for the house, especially here using digital media -- all the digital media you may have seen, the first campaign done by Daniel and his teams that came out about 2 weeks ago now, very different campaign, high-impact campaign.

I'd also like to specify the Fall/Winter pre-collection presented in the showroom in December and January. It was very well received by the fashion professionals. It's an important sign. They appreciate the collection, and there was very good order intake. All these efforts, of course, should mean that 2019 will be a great year for Bottega Veneta. I'd specify those products that are in the showroom, we will still deliver to the stores starting in the beginning of May. So the actual reflection of the repositioning in the figures will only be clearly perceived through the end of first half and especially in the second half of '19.

Now let's talk about our other houses. I'd like to begin by talking about houses operating in Couture & Leather Goods. Of course, we're thinking of Balenciaga and Alexander McQueen. Here, as well, you can see that we're stepping up development and growth for these houses, turn them into global houses. First of all, I'd like to talk about Balenciaga. Last year, Jean-Marc said this to you in his presentation, Balenciaga's performance was truly exceptional in terms of development. It's a house that will go beyond -- substantially beyond the EUR 1 billion mark this year. Its potential is quite substantial indeed. For instance, last 2 years, we put a priority, first of all, on the most creative Ready-to-Wear products in Footwear to raising momentum into the brand. This year, our priority will be Leather Goods. We're expecting new lines now to be launch in the market. So this is a very important point for future growth. Men's products were launched and repositioned 2 years ago and the offering has a great deal of potential for further development.

Store productivity, of course, the house is starting from a fairly modest level of productivity. There's a great deal of growth in productivity last year, and we can say that there's still a lot emerging for further productivity increases in the future. And the size of the network is an important point here as well, of course, this is a brand that's very much developing 156 stores currently. This is going to be added, too, quite substantially. We're increasing our fleets to open new stores of Balenciaga.

To move on to Alexander McQueen. Here, as well, we're making investments to step up and amplify the momentum for growth, which had a beautiful 2018. We've developed a new store concept to be rolled out to the network. It's a concept that you can see at the Bond Street store, the first store to open last December in London. And this is a concept to be rolled out to all the other stores as well. Here you can see size of the network is fairly smallish so, of course, we'll be increasing the number of stores fairly substantially in the future, and we're stepping up the store openings program at Alexander McQueen.

To move on to jewelry, we already talked about it briefly. We've been investing in Boucheron for some time now. Last year, you saw a great example. Among other things, the reopening of our flagship at the Place Vendôme, spectacular reopening, the Hôtel de Nocé. I invite you to go visit it. In jewelry, I can say that this is certainly a unique experience. It's a tremendous exceptional showcase to display our products, especially our haute-joaillerie products, but also its high image, high-impact for international image at Boucheron.

And you can see just a few examples here, I'm not going to mention all of them, but you see the great potential of our houses. Now, of course, the vision for each house is very important. You're all aware of this, but it's not the only way to understand our group. As I said to you earlier, the performance we achieved is also very substantially dependent on the quality and complementarity of our portfolio and brands. This is a portfolio, very important point, which has a strong backbone, which is Gucci. You need a backbone on major groups that perform well in Luxury have a backbone. This is the case at Kering with Gucci. This is a backbone, which further more getting stronger and stronger all the time, surrounding the background in all of our houses that are going to continue in growing and providing growth in future years.

Now, of course, we have our major names, Gucci and Saint Laurent, that still have significant potential for growth. In addition, they'll be generating substantial cash flow. Currently, we've reached basically a normative level of CapEx and OpEx, and we can say this is going to substantial source for resources group-wide. And as you've seen, we've got substantial growth drivers, major ones. I mentioned earlier Bottega, Balenciaga, Alexander McQueen and Boucheron. I could also mention Pomellato and Qeelin in jewelry. Last year, they had a beautiful year of growth. Here, as well, we're making further investments and boosting development at these houses.

I'd also like to make a special mention for Kering Eyewear, you saw it in Jean-Marc's figures. Performance at Kering Eyewear has been exceptional, especially last year. This further demonstrates the ability we have at Kering to bring to the floor new concepts, innovative concepts, and then roll them out worldwide. We've also got special knowhow when it comes to transforming and relaunching houses. I mentioned a moment ago BV. It's also the case of Brioni. We're currently evolving Brioni's growth model, substantial changes there to bring that Maison back to sustainable medium and long-term growth. Now in the area of Haute-Horlogerie , we have 2 prestigious fine watchmaking production sites, Girard-Perregaux and Ulysse Nardin. This gives us an exceptional positioning in fine watchmaking. So we can really tap into meeting the long-term potential in this industry, which has very much been the trust of change in recent years.

It's a great way of absorbing the industry from this position. And in the medium, we're working -- addressing both the medium and the short term, whereas increasing manufacturing synergy between these 2 houses. And of course, all the while, we're paying careful attention to maintain the unique market positioning.

On the other houses, I briefly alluded to this during my introduction. My view is that our group's culture is essential in its performance, and is based on a belief that I have that we all share at Kering that is, the companies that can sustainably perform at top of the performance are also the companies that have a very strong culture. And this is the case at Kering, and we're very proud of that fact. Our group culture is a long side the culture of our houses. They're mutually beneficial. And this culture is based on a deeply held belief of ours regardless of company size. The company -- any company has a reason for its existence that goes beyond simple economics. And that's why over 10 years ago now, well over 10 years ago, we've placed great emphasis on corporate social and environmental responsibility. They're at the very core of our strategy. This is why we don't hesitate to act such in our founding -- Kering foundation to counter violence perpetrator against women. And we often take positions on major societal questions that are very important for us. Our culture is based on managerial values, boldness, being steadfast and vigilant. Also, innovation is very much at the core of our corporate culture. We've been able to be proactive, look ahead to upheavals in the industry and turn these upheavals into pure opportunities for houses. So you all understood, ours is a culture that makes us more nimble, stronger and more innovative. We all believe in it. It's also a culture that's being recognized in the outside world. We saw this recently with the publication of the new Corporate Knights' report ranking Kering second company across all industries in terms of being most responsible in the world.

I'm going to hand over to Jean-François now, who will be talking to us about the progress we've made in transforming this group. He'll be talking to us about some cross-business initiatives, which he's implementing with his team. Thank you.

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [4]

--------------------------------------------------------------------------------

Ladies and gentlemen, good morning. Thank you, François-Henri. As you said, the attractiveness of our brands and the desirability of their products is more vital than ever, but that's no longer enough, indeed. In an environment that is perpetually changing in order to continue to gain market share, we must offer our customers an exceptional experience with omni-channel services, with ever greater product availability, with a constant brand dialogue and constantly evolving the product offering. We must also improve our processes, our systems, our tools in order to boost operations' efficiency and profitability by helping our sales forces to increase transformation rates by boosting loyalty, by improving sell-through, by maximizing inventory turnover and by optimizing operating costs. That's why since 2017, we've launched a number of major transfers or transformation initiatives. They will complete in 2021, and I'll present the 5 major projects.

The first eagle is at the heart of our customer focus, digital strategy. We want our brands to have full control of the e-commerce activity. We also want them to put in place a fully fledged omni-channel approach to strengthen the relevance of the merchandising for online sales to become more self-reliant and flexible in developing functionalities in order to facilitate on the one hand, the alignment of sites with the full digital ecosystem and retail integration. We're also implementing key synergies by developing an e-commerce tech platform. And in this respect, you'll note that some of the tech solutions are similar to those used by Gucci to develop its own platform in parallel. We're also building a bespoke B2C logistics organization. We're also improving the customer relationship management scheme, and we're extending the area of responsibility of our e-commerce expertise centers to assist the houses and also to pull best practices and tools, all this will improve our online sales. We'll boost our operational efficiency and consequently improve the financial contribution of e-commerce.

Houses will be able to extend the product assortment and offer an exceptional experience as well as better availability and superior service. They will have a 360-degree vision of the customer, consolidated and realtime, and we'll be able to establish a special continuous quality relationship with customers. Furthermore, pooling and maximizing inventories will boost sales opportunities, but will also swiftly reduce WCR.

Lastly, our gross margins will increase and our cost base will be optimized. Consequently, the contribution of e-commerce for Eagle will be neutral as of 2021 and accretive subsequently.

Second initiative aims at improving the relevance, the quality and the commercial effectiveness of the interaction that our houses have with customers in and outside the store. In store, Luce is an application that we developed in conjunction with Apple. It improves the in-store conversion rate whilst facilitating the work of sales staff. It boosts the effectiveness of our clienteling initiatives and generates an increase in the average ticket. Lumière is a sales force tool that uses more relevantly and effectively all our customer data in order to better orchestrate CRM campaigns. This tool generates higher contact grades and heightened conversion rates. Furthermore, the enrichment of our customer data allows us to increase our precision in our advertising campaigns. Lastly, Kering Signature is aimed at internalizing, professionalizing and moving up range, upscale our customer service by offering a unique entry point to all our houses. All our brands are implementing an effort in this direction with varying degrees of pooling depending on the regions.

This third initiative is aimed at providing us with additional expertise in pioneer areas, firstly, as François-Henri indicated, in artificial intelligent where we can make progress on a few use cases that we have identified last year such as targeting high-potential customers, product recommendations or forecasting re-assorts. So last year, we developed a number of proof of concepts to check that this potential progress was achievable. I'll present to you now the POC identifying high-potential customers.

One of our houses wish to establish an opportunity to meet customers who'd only made one purchase with that house over the past few months, and this to begin to build with these customers known as explorers a long-term relationship. For this, they decided to invite these customers to the store to offer them a gift and allow them to discover the collection. A meeting is viewed as successful if it gives rise to a purchase in the next 3 months. In order to target the customers with whom this additional investment was most likely to succeed, our team led by Grégory crafted an algorithm making it possible to gauge the potential for each client based on transactional data. Then we selected 14 stores from our 3 main regions. So regarding [7 stores with these -- for 70 stores], the customers were identified using the algorithm. For the 7 other stores, the customers were identified by the sales staff. Then next, we measured the percentage of explorer customers who did make a purchase in house within the next 3 months. The rate of repurchase of customers identified by the algorithm is almost twice as high as the repurchase rate of customers selected by sales associates; and 3x greater than the customer explorers who had not been called, contacted. So we can well imagine this project was accepted, and as other projects, it's now being rolled out. Next we're also developing other projects with the Houses to look at the potential forward use of artificial intelligence.

A second area where we're doing a great deal of work is in CRM. We want to really perfect our customer's omnichannel experience and especially improve the targeting of our customer relations operations. We're assisting the houses to fine-tune the CRM strategy and optimize implementation of their campaigns.

In a third area and the area of innovation as such, we are focusing our efforts on developing and perfecting new materials and manufacturing processes. We're testing innovative models like leasing, [rending], subscription, previously owned items or home services. Furthermore, we're also looking at using technology to really change and transform our processes such as that Kering Eyewear that intends to use blockchain to certify its lenses and frames.

The fourth initiative is designed to adapt our logistic capacities, first of all, to be proactive and anticipate growth in volumes; and also to improve the meeting of our needs in terms of omnichannel availability as well as collections management. We're going to make a quantum leap in our logistics, first of all, and this is a priority, by tackling some operational difficulties; secondly, by reconfiguring, fully revamping the logistics system; and also modernizing our tools. More broadly, we're revamping our processes and our operational models, taking onboard best practices from Luxury but from other industries as well. And the financial considerations are quite substantial and our ambitions are quite substantial as well. In the longer run, unit logistics costs will go down significantly. Inventory levels will go down significantly, and lead times, B2B and B2C lead times, will be cut.

The last initiative, modernization of information systems, is not only making possible all the other initiatives but also will make it possible for all of our business area to make progress and further improve their operational efficiency by adapting to strong volume growth; by using more performing technology; by increasing efficiency; by using realtime, better-quality reconciled data; and also all the while enhancing cybersecurity. Value for money of our IT is going to improve. Our tools will be less complex, better adapted, more scalable. Our services will be more responsive, more efficient. This will reduce risk of business discontinuity and risk of systems obsolescence. In the end, this will help reduce costs.

As François-Henri illustrated for us, all of our houses have a great deal of leverage for further growth. Our platform for progress, as I just explained it to you, will help us further improve efficiency. It's going to help us to step up growth during times of expansion and also make it easier to quickly adapt during less-favorable times. This model, along with our financial discipline, makes it possible for us to have a sustainable, high level of profitability. We continue adhering to a balanced policy in terms of capital allocation ensuring we have a good tradeoff and sound balancing among houses. We'll make a constant effort to deleverage, and we also have a straightforward shareholder return policy.

On that point, yesterday, the Board of Directors gave the go-ahead to a proposed dividend of EUR 10.50, which is up 75% compared to the previous year. You'll remember, in 2018, we saw the nonrecurring payout of Puma shares, so now we are coming back to a normalized payout rate of around 50%. Lastly, we have a current share buyback program which is underway. At the end of last week, we'd acquired 532,000 Kering shares at an average price of EUR 396.

As you can see, we are very much able to adapt to our environment and our markets. We invest appropriately with a long-term view. Therefore, we will be in a good position to move on possible opportunities for external growth that would create value [if there are].

Just as for operational strategy, our financial targets remain unchanged: growth in revenue above, outpacing the industry; and improvement in operating margin.

Thank you.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [5]

--------------------------------------------------------------------------------

Before we begin, the Q&A session, just a few rules. When you ask your question, kindly state your name and your affiliation. And as a courtesy to all those who wish to ask questions, I would ask you to limit your number of questions so that we can answer as many questions as possible. Thank you.(technical difficulty)

From MainFirst. 3 questions, please. First of all, with regards to Gucci, you've talked about managing a soft landing in 2019. You've seen some very strong leverage in the 2018 year. If you're happy with consensus at around 10% growth, it looks like the implied leverage is quite low for 2019. Why is that the case? Is it a question of stepping up the investments? Or do you think that there's room to exceed the 40% margin as early as 2019? And my second question is around M&A. You've talked about focusing on organic growth, but you've also talked about not waiting for the market to consolidate itself. You won't look for a brand that will cannibalize your existing portfolio, but you'll also want something potentially more of a reasonable size. Could you talk a little bit more about what the parameters on size may actually mean in terms of category, in terms of revenue? That would be very helpful. And then my final question is with regards to the Puma holding that you still have in Kering. That's roughly 15.8% still. That's probably noncore now. The lockup expired in November 2018. How long will you hold onto that?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [1]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [2]

--------------------------------------------------------------------------------

We'll answer in French. Our English is very poor, mine in particular. My English is very poor. I'll start with the first question before handing over to Jean-François and François-Henri. So on the question of the growth of Gucci and the operating leverage, as Marco has indicated for a long time, during the Capital Market Day back in '16 but once again more recently, given the basis of comparison, there's an ambition that remains unchanged to outpace the market and to grow twice as fast as the market. And I think the growth drivers that were mentioned by François-Henri both in terms of product category; as well as initiatives around the merchandising, marketing and advertising; and the use of tools mentioned by Jean-François to deliver better productivity lead us to believe that we have this ability at Gucci to outperform the market's, twice as fast as the market. Today, there's an assumption that the market is going to grow. If I believe the experts who can assess things, there would be around 5% to 6% growth rate, so we can assume that expected growth for Gucci going forward is perfectly realistic at this stage. Now we've been -- may need to mention that we're in an environment that it's more challenging today, more complex. We have to see if the market is going to respond as is expected this year. In that context, as you've seen, we did better than expected on profitability, I believe, significantly better, 39.5%. So if market conditions were those we expected and that Gucci delivered that growth as mentioned, then it's highly likely that in 2019 Gucci will be in a position of reaching this threshold of 40% profit margin or even better if we remain in that growth trajectory that we expect.

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [3]

--------------------------------------------------------------------------------

As you've seen for 2 or 3 years last, the pleasure to surprise you pleasantly each and every time. That's for the 10%. On -- M&A, as you've seen today, we have the significant financial wherewithal increasing steadily, so we're in a position, of course, to seize opportunities. Let me remind you that the priority of the group, and I said this in my presentation, is organic growth at -- of our houses. It's very significant. We're far from having -- maturity levels including Gucci, so it's first and foremost on that, that we're focusing. Now of course, if opportunities were to arise and once again consistent with our portfolio in terms of positioning the stylistic code of the houses, we'll of course seize the opportunities that arise. Not only do we have the financial resources, Jean-François. We have platforms that can receive houses and to seize the potential quite rapidly. So once again, we don't need M&A to grow, far from it. You've seen very strong years of growth without M&A. We have the means. We have the resources. If the opportunity meets the portfolio criteria, we'll be able to seize them at a realistic price, obviously. We're not going to indulge in a price race as we've never done up till now. Jean-François, on Puma perhaps?

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [4]

--------------------------------------------------------------------------------

Puma. Puma is a brand that works very well. As you know, they will be presenting the results in 2 days time. We're very confident in the brand trajectory. And so there again, as we've said, we're very pleased to be a Puma shareholder. Nevertheless, we'll be flexible and we'll be -- and agile too. We'll be able to respond to opportunities that might arise.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [5]

--------------------------------------------------------------------------------

(foreign language) The next question, please.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. My -- Belge, HSBC. 3 questions. First of all, you talked about market growth. Currently there are 2 markets, at least in the area of soft luxury, [getting the impression of] Gucci and Louis Vuitton and then the others. How do you explain that, in spite of size, these brands managed to grow much stronger than overall market growth? Is it because of what Jean-François was saying, developing CRM, data scientists and so forth? On Gucci short-term consideration to achieve 10%,reached over 35%, 36%. How is the landing -- could you tell us what are the trends at the beginning of the year. Has it begun? Have you seen big changes in certain regions or among certain nationalities? And then my third point, on Veneta encouraging signs, yes. Can we take it that revenue may grow this year and then maybe further -- but maybe further investments this year, so then margin of 22% in 2018 maybe down further? Or do you feel that's a floor to some degree?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [7]

--------------------------------------------------------------------------------

Thank you, Antoine. Now yes, there is a market difference, asymmetry in terms of growth. Groups such as multibrand groups tend to be growing faster. I think it's the multibrand model that's reaping the benefits. We've got a very balanced portfolio. We must not forget size, as I see, isn't the main point. Also, there's creative risk-taking that's important, as you saw at Kering, Saint Laurent, Gucci, Balenciaga. Now we've taken creative risks, measured risks but substantial risks, which are reaping benefits now, being rewarded by the customers. That's what Luxury is all about as well. And with Luxury, sometimes forgot that component. Luxury is, first and foremost, about creativity before being about marketing. Now of course, as Jean-François has explained, in addition, our contribution is group-wide platforms. As I said, these are growth drivers for the houses that are more important. As Jean-François was explaining, we are now gaining ground or ahead of the loop setting up the platform. We talked about customer experience. We're also working on supply chain improvements, so we can say that we've got this expertise when it comes to execution. And we're growing this expertise quite substantially in all the houses. That's why I mentioned earlier the backbone idea is essential to have a major brand. All these groups that are major ones always have a major brand. That's where you can creative the experience. You can create your best practices, test them out, have them tried and true and then send them out to the other houses. That's the key part of being a multibrand group such as Kering. On to expectations for 2019: In Gucci, we always have cautious budgets. We always like to beat our own targets. The beginning of the year has been good, in line with Q4 -- and well above. We're actually cautious, of course. We know the Chinese New Year is 2 weeks early this year, as -- this year compared to last year. And as always, the run-up to new year -- January reaps the benefits of that run-up to the Chinese New Year. So it's difficult to draw full year conclusions on this basis. Anyway, the beginning of the year is good, very good.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [8]

--------------------------------------------------------------------------------

Bottega Veneta. François-Henri remind us of this. The first collection presented at a fashion show will be during the Milan Fashion Week, on February 22. Products will then arrive later in the year, so we can say we're still in a period of transition. Turning-around revenues and putting revenues should actually start happening once we've continued making progress in our in-store work, continued investing in marketing and communication; and the products have arrived. So we're talking about a phasing toward the second part of the year. And you're absolutely right. There's an investments phase that's slated. We've already said so. We said we'll be able to bring that back on track. We're organizing structural changes to underpin the relaunch. We must not expect profitability for the brand to improve in 2019. Possibly, if we view it's necessary to further support this, there could be a dilution. Just for the support of the relaunch, there might be further slight dilution in profitability. Next person, please, wearing red.

--------------------------------------------------------------------------------

Zuzanna Pusz, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Zuzanna Pusz from Berenberg...

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [10]

--------------------------------------------------------------------------------

Can you speak louder, please?

--------------------------------------------------------------------------------

Zuzanna Pusz, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Yes. Is it louder now?

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [12]

--------------------------------------------------------------------------------

Perfect.

--------------------------------------------------------------------------------

Zuzanna Pusz, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

--------------------------------------------------------------------------------

It's Zuzanna Pusz from Berenberg. I have 3 questions, please. The first one, on Gucci, sort of a bigger picture. I think it's very interesting. You mentioned plans to launch the high jewelry category. And I was wondering if you could share with us a little bit more detail on the development on that sort of high-end business at Gucci, so exotic skins, because one of your bigger, slightly bigger, competitors has actually managed to build up over the last couple of years almost like a 1 billion business from that business that we actually don't see on an everyday basis. It sort of happens behind closed doors. So can you share with us a little bit more on your plans and high-end business for Gucci, high jewelry; and how this could contribute to growth in the near and the long term? Secondly, on e-commerce, I was quite impressed with 6% of sales. And you also have further plans how to develop that, but can you tell us also, how big is the e-commerce business with third-party platforms? And also if you plan to change the way you work with some of them, meaning you would maybe have a preference for shop-in-shops rather than actual wholesale accounts online. And finally, question on M&A but slightly, I will say, asked differently: Is there any specific category where you feel you're underpenetrated as a group but would be quite difficult to develop by one of your brands, meaning you would have to actually acquire something?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [14]

--------------------------------------------------------------------------------

Well, as I said earlier, we have new categories that are arriving. We have one high jewelry, you need to bear this in mind, that is following the success at fashion jewelry at Gucci that has progressed hugely over the past 3 years and supplements the setup with a very high-end, high jewelry offer with the same creative spirit that of Alessandro Michele; will of course contribute to the high-end jewelry to boost performance and -- of Gucci but in terms of image will be a key contributor. As always, we're very vigilant, making sure that the average price is steadily increasing, which is the case at Gucci even if, as I said earlier, the bulk of the growth was driven by traffic increases which is just the result of the attractiveness of the house at global level. And we now have work to do. We have potential there to generate growth through improving the value component of the house. So in all categories we're working the high-end items. You have the example with jewelry, but you mentioned the special precious skins. It's worked on in each category to increase the average price in each category and have a growth model that is balanced between growth through volume and growth through value. It's key for luxury brands. And we're working flat out at Gucci, and we still have a lot of potential to tap at Gucci. Jean-Marc (sic) [Jean-François], a word on e-commerce perhaps?

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [15]

--------------------------------------------------------------------------------

Well, several points on your question about e-commerce on penetration in our sales. In fact, it needs to be assessed brand by brand, and here we have a very marked diversity. The strongest penetration is at Balenciaga. And Boucheron has barely begun, so I mean it's really practically nothing. However, all our brands are rolling out very significant efforts to grow their online sales, with the Eagle project for brands Saint Laurent, Bottega, McQueen and Balenciaga. And Gucci has its own initiative. So this is something that we're pushing a great deal. To the second part and in connection with that, it's an ecosystem, so both sales on our own sites; but also sales on the sites of our distributors; and the specialized sites; and the verticals, in particular in China. And so we have approaches that are tailored to each of these situations with one constant concern, which is brand protection. It's absolutely key for us to protect our brands, be it in terms of exclusivity or in terms of pricing. And so we adapt, depending on the region, depending on the distributor, we try as much as possible to have the greatest control over distribution on certain sites where -- and the concession bases. So really the priority is that: exclusivity and brand protection.

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [16]

--------------------------------------------------------------------------------

On the third part of your question, other categories that would require M&A, if the question is on categories [outside of the universe we're in today: couture, leather goods, jewelry] (corrected by company after the call); no, it's not on the cards for Kering today, we have high potential today by brand. If the question regards the universe that we're involved in today, we consider that we have the necessary know-how. That was the case - we didn't do it through M&A but through creation - it was the case of the Eyewear category 4 years ago, where we considered that the internalization became necessary if we wanted to continue to grow that category, that it's a very important category in terms of accessing the brands. What I said earlier, that we're set to do far better in the perfume and beauty universe. We're working with our partners L'Oréal for Saint Laurent; Coty for Gucci, BV, Balenciaga in order to do a lot better, notably at Gucci where this license remains extremely modest.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [17]

--------------------------------------------------------------------------------

Question number three. Go ahead, sir.

--------------------------------------------------------------------------------

Luca Solca, Sanford C. Bernstein & Co., L.L.C. - Senior Research Analyst, Luxury Goods [18]

--------------------------------------------------------------------------------

Luca Solca from Bernstein. (foreign Language] I, we've heard a lot of great ideas on development and growth at Gucci; opportunities in cosmetics and fragrances, distribution through travel retail, so jewelry. I was wondering, though. There are opportunities. Have you already factored them in? Are they included in performance metrics regarding Gucci's leadership? I think the targets we heard in Florence are being met beautifully. I suspect new objectives need to be found for Marco's teams. I was wondering about the (inaudible) effect. Now Bottega Veneta, let me just say that I'm getting tremendous feedback on their pre collection. Now you did say that, on the one hand, there was the focus on the positive points, but then Jean-Marc, seems to me, was more cautious in talking about Bottega's opportunities. Do you have an eye to taking WCR risk to support Bottega's growth in H2? Apparently, it would appear to me, there's a major opportunity for a rebound. Then thirdly, it's fascinating to see all these developments, basically sort of scientific developments that you're using to craft a platform and a method at Kering, which I'll hope stand above the competition. With the challenge center versus houses to come up with new ways of doing things, reinvent the way you're doing things, I'm -- for instance would like the idea of Kering conducting these experiments and demonstrating to the teams there's a better way of doing things. Are you considering inventing new ways of doing business this way and moving in that direction?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [19]

--------------------------------------------------------------------------------

Thank you, Luca. Opportunities at Gucci. [You'll have understood] at Gucci the medium-term, sometimes short-term-ish, targets are often reached before the medium term. That's the surprise effect. We'd like to have those withing the group and outside. So yes, we're ahead of our road map, more opportunity bringing in revenue last year. Of course, we're resetting objectives. We do this regularly very precise -- in a very precise fashion. Of course, we're not going to leave it at that once we've met an objective. So absolutely, yes, Marco and his teams have internal targets that have been adjusted taking to account achievements at the house. Now yes on Bottega. You're right. Feedback on their pre collection both from professionals in the industry, their perception but also in terms of ordering take, feedback has been great. Yes, there's a market segment that's very interested in this style of creativity. There's strong demand for this which isn't yet met by the brands. Bottega has a true market opportunity, and it's moving on that. And you've seen that. Furthermore, Daniel isn't just going to leave it at ready-to-wear lines, but he's also -- you saw the showroom. You saw this. He's also working on accessories lines that are being changed in a big way. We've got great expectations of this work that's repositioning and expecting major medium-term effects. Now here as well this house has great potential. We're not just doing this for the current year or for next year. We're doing this for the next 10 years. It's a house which will grow substantially. So yes, we're not just -- we're not doing this to hold back growth at the house and holding back -- we're not reducing open to buy. We will establish requisite resources to make sure there's product availability throughout the store network. This is part of the OpEx and CapEx to be done on a type of relaunch. We've also said this during the communication. Henceforth, we've stepped up investments in the house, we said this, again because the potential is quite substantial indeed. So we're earmarking the requisite resources that are in line with that potential at Bottega. Jean-François will comment.

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [20]

--------------------------------------------------------------------------------

Yes. On this point, it's a subject that is very similar to what we do in all other areas. In other words, at the corporate level within the group, we've got a center of expertise which provides services to the houses. It's provided for them on their behalf and together with them. And just to add a point to what François-Henri said about group culture: We've also got a culture of winning. When we show something, demonstrate it to brands and we persuade that they'll win out, they do take our word right away. It's a winning situation, as opposed to, if we show them something that they're not sure it will be a winner, then they're -- they drag their feet. And that can happen too. So that's what it's all about. It's an ongoing dialogue, a to and fro. It's a question of collaboration, working together; and it works very well indeed. As François-Henri said, Gucci very often is the spearhead. They've got teams. They've got time to work on certain projects that McQueen might not have the time or Brioni might not have the time to do so. But once the brands are absolutely persuaded that's it's in their interest and it's good for them, then things really move ahead full steam.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [21]

--------------------------------------------------------------------------------

Next question from over there.

--------------------------------------------------------------------------------

Edouard Aubin, Morgan Stanley - Research Analyst [22]

--------------------------------------------------------------------------------

Yes. Morgan Stanley. Just -- François-Henri, just to pick up on BV. In your introduction, you said you wanted to grow the brand from leather and couture, to couture and maroquinerieI think the mix is 95-5. Without giving me the figure, maybe a time line for the transition. Back to Boucheron: You've externalized [loss] in 2018 given the investments that you made. The delta that you'll have in 2019, will it be significant in terms of the group or negligible between '18 and '19?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [23]

--------------------------------------------------------------------------------

As regards BV, our model is a model that we've applied at Saint Laurent, at Gucci, at Balenciaga. It's this creative model, as I said in my -- in the terms I used earlier. The most creative categories in our business are the Ready-to-Wear categories. That's where we create the brand desirability. It's not measured through the weight of Ready-to-Wear on revenue that's pretty modest at Gucci. It's far from being the prime category. However, in terms of desirability, it's the great category. It really is that, that drives the house, the storytelling; and builds customer loyalty. That's why BV won't remain at 5%. I can guarantee you that. It's going to grow spectacularly because the base is very modest, but it won't represent 50% of the brand either. A threshold of around 15% at BV is quite realistic to have this desirability that will drive all categories. As I said, Daniel doesn't just deal with ready-to-wear in our creative model. The creative director oversees all product categories. It's a model that we apply to all our houses. And that creativity will also be rolled out, as Alessandro did in the Accessories categories. He's already begun to work on the accessory lines. So through this creativity, with its overall setup, that we'll push the house to new heights. No doubt about it.

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [24]

--------------------------------------------------------------------------------

On -- for Boucheron. We have a plan, a strategic operational plan, that provides for a considerable investment phase. And this plan also set to deliver an improvement next year. This improvement will be very significant for Boucheron but not at group level, not yet.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [25]

--------------------------------------------------------------------------------

Madam?

--------------------------------------------------------------------------------

Louise Susan Singlehurst, Goldman Sachs Group Inc., Research Division - MD [26]

--------------------------------------------------------------------------------

It's Louise Singlehurst from Morgan -- from Goldman Sachs. Apologies, a Freudian slip. Another question in English. So I apologize for my lack of French this morning, but Jean-François, could you talk to us a little bit more about the digital side? And I know Marco was talking about virtual concessions or e-concessions last summer at the Capital Markets Day but what that means in practice. Is that converting the existing wholesale accounts into more retail structured deals? And can you also talk about the use of third parties and how they may also help with you in terms of CRM and data collection for the broader [ether] of the group?

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [27]

--------------------------------------------------------------------------------

First of all, on e-commerce, as I mentioned earlier, the guiding thread, the leitmotif, in the entire ecosystem is the brand, preserving absolute exclusivity of the brand. Now versus -- in terms of our online distributors partners, this is a major concern we bear in mind, which means that we must control various components such as purchasing, pricing and, of course, end-of-season prices, but there are other qualitative elements we must control, site aesthetics and so forth. Therefore, yes, as we said, we have models, the conventional wholesaling models, concessions and so forth, but we are inventing and preparing alternative models, sort of hybrid kind of models, which would include a way of operating that would be better suited to e-commerce, which is a quick -- very interactive, enabling us therefore to maintain exclusivity, protect the brand and be better suited to the overall environment. And we're very much working on this. Also, I mentioned it's not a customized approach, but let's say it's tailored to each of the partners. We don't work with JD.com in the same way as with work with Yoox-Net-A-Porter. So we adapt and tailor. All of it's adapted.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [28]

--------------------------------------------------------------------------------

Next question from over there, please.

--------------------------------------------------------------------------------

Aurélie Husson-Dumoutier, Kepler Cheuvreux, Research Division - Equity Research Analyst [29]

--------------------------------------------------------------------------------

(foreign language) Kepler Cheuvreux. I've got 2 questions. The first one, Saint Laurent. Do you see a particular reason why you might not be able to reach your long-term margin target of 27% as of 2019 given the changes that we've seen in 2018? And on Gucci, so the very good start to the year. Of course, you're urging caution given the timing of the Chinese New Year. Could you nevertheless say if you've seen the same dynamism in January, into early February for U.S. and European customers?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [30]

--------------------------------------------------------------------------------

(foreign language)

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [31]

--------------------------------------------------------------------------------

And just a week into February.

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [32]

--------------------------------------------------------------------------------

For Saint Laurent, yes. I mean I see no particular obstacle that would prevent us from reach the margin targets that we have for the house. I even consider them somewhat prudent, but targets are there to be reached. No, quite frankly, I am very confident in the ability of the house and its teams to deliver the profitability target short, medium, long term, for Saint Laurent in particular. We're going to have threshold effects in terms of size. You've seen Gucci, the impact of threshold effects on profitability of houses. And of course, we'll have that with Saint Laurent. For Gucci, as I said earlier, the very good start to the year, in line with Q4 trends. In terms of customers, very strong momentum from the Chinese customers, American customers, trending, well, Jean-Marc, do you want to comment on -- Jean-Marc is always the moderating influence on the discussion here.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [33]

--------------------------------------------------------------------------------

No, I'll officiate in that capacity. I think that what we've seen at the end of Q4 is indeed greater moderation in terms of consumption of European customers that remain positive but more modest growth that was also linked to very high basis of comparison. It's European customers that were the first to adopt the new Gucci aesthetics, so very much in the lead, the European customers. And what we've said is this persistent weakness that we have mentioned previously from Middle Eastern customers but start to the Chinese customers, leaving aside the base-of-comparison effect. If we look proportionally over 2, 3 years, Chinese customers trending very well, as well as Asia; and trends with U.S. customers sustained, that's true for Gucci or for all brands. Just back for a moment to Saint Laurent: So the Capital Market Day target was 27%. François-Henri repeated rightly that the brand clearly has the potential to reach that level. The question mark that you put concern, 2019, the development model of Saint Laurent today is the following. In-store productivity is already high. And so the -- we have like-for-like growth that's very robust, and it is important to say. And that was in François-Henri's presentation. We need to consolidate the brands in certain regions, certain distribution channels where the brand isn't sufficiently developed. François-Henri mentioned travel retail for Gucci. It's even truer for Saint Laurent. So we have a combination where we have very profitable stores that will continue to grow with very robust growth but not double digit for the existing stores; and store openings that -- by definition, initially slightly dilutive. That's why this combination is such. We've always been very upfront, transparent, stating that growth would be far more gradual in terms of profitability. We maintain the growth track, and the target of 27% remains fully valid. Midterm, is it as of '19 that it will be reached? It's a little too soon to say. (foreign language)

--------------------------------------------------------------------------------

Rogerio Fujimori, RBC Capital Markets, LLC, Research Division - Analyst [34]

--------------------------------------------------------------------------------

Rogerio Fujimori from RBC. I have 3 questions on Gucci. I was just wondering if you could comment on the level of marketing spending on Gucci in the second half, in particular the Q4. It was more or less in line with sales growth. The second is that you opened, I think, a net number of 11 stores for Gucci in 2018. Should we expect a similar number in '19? And my last question is on Chinese e-commerce growth for Gucci. Should it be a material contributor in the Asia Pacific story in the next, say, 2 years, Chinese e-commerce for Gucci?

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [35]

--------------------------------------------------------------------------------

As you know, yes -- well, if we look at the brand trajectory, there was a target to support growth by reinvesting part of gross margin gains in marketing and communications, now not only reallocating budgets toward digital, as François-Henri said. And we see the return on investment here considering digital penetration that Gucci now has, but in addition, we've continued to invest in 360-degree spending. So we continue with the investments and these efforts, but the brand can't spend more than it's able to do so through its teams. So we're in a conventional situation whereby, after a stage when communication and the marketing spent were fairly variable, they're a lot less variable now. And this is why our view currently is that we have an arrangement that's up and running, a system that's there that's hardly structured enabling us to support communication efforts. In 2019, we'll continue investing in this line item of spending. However, it's like many other spending line items and costs. At Gucci we've reached a level of maturity, a normative level, so yes, we'll continue investing in a relevant fashion, appropriately as we always have. In a year, depending on how sales develop, we may invest possibly a little bit more to support sales, but at any rate, it's no longer the same situation as we saw especially in 2017. We all have observed operational leverage that was a little different from what you were expecting. And in 2018, it was more significant leverage, but it's because we're reaching a given level of organizational maturity and maturity in terms of spend. Now store openings, a net number of 11 openings, if you take in account closings and openings, net of 11 openings, yes. Plus, there were some conversions of doors, points of sale that previously had been operated in a wholesale fashion. Actual real store openings, slightly under 11 actually, if you look at the overall geography coverage by Gucci stores; next year, pretty much in line with what was presented by Marco Bizzarri, basically an idea of refurbishing existing stores. I'm surprised you didn't ask a question about this, asked how many stores have the new concept. Let me tell you 43% of the stores now have the new concept. So you don't need to ask a question for that one. We'll continue with refurbishments. Now -- and store enlargements will continue as well, also relocations. Actual percentage of growth in stores, you mustn't expect significant growth in the number of stores. It'll be same order of magnitude when it comes to store openings.

Your last question, I think, if I understood it, was on presence and penetration in China, [in that], yes, e-commerce. Well, 2 points. Firstly, and it's important to make this point, the store network in China has not been increased, hasn't grown. And we're actually reducing it. It's been the case in recent years. So we can say that we're stabilizing in terms of network of stores in China. So there we don't have any plan either to significantly open a large number of stores in China. Or we'll be opening, since it's part of our discussions with owners and mall developers, in China and Hong Kong, Greater China. Geography coverage, though, should remain basically the same. However, we'll continue investing in the e-commerce platform, certainly Gucci which just developed beautifully in 2018. We haven't yet reached maturity similar to level of maturity in some other countries. Currently, we're below average in terms of online penetration. I'll remind you, for a brand such as Gucci, it's around 6% to 7% retail sales conducted online; well, below that in China, though, because we're still developing this activity. (inaudible) are such that quickly things will be developing in our various plans; and together with Jean-François with also work that's going to be done on logistics, make it possible to cut lead times -- product availability in China. Because sometimes what can impede development of online when brands develop and organize this directly, okay, is a question of logistics. That can be an impediment. [So if I'm going to be a] step forward [and moving with the program] with a Chinese partner, particularly on fulfilling, so prep and shipping of packages. But we also need to send out more inventory to the regions, have them flow through more present. Because it will be one of the prerequisites for a step up of online presence. But in terms of platforms, platform efficiency in China for Gucci, we're very satisfied already with the developments in '18.

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [36]

--------------------------------------------------------------------------------

I'd like to specify in Jean-Marc's answer. When we talk about Gucci penetration in Chinese e-commerce, which is below the 7% we have worldwide, there's a market situation. It's not a special weakness at Gucci, all brands. Currently, the Chinese market when it comes to luxury products is fairly modest. This will catch up. There'll be catch-up effect, in all likelihood, in the medium, long term. Penetration rates will be similar to what we have elsewhere, 7% globally, 15% in the U.S. We're not there yet, as the case for everybody else as well. We're preparing, though. We're getting ready for this so we can reap the efforts of that catch-up effect in e-commerce for Chinese customers and luxury products.

--------------------------------------------------------------------------------

Jean-Marc Duplaix, Kering SA - CFO [37]

--------------------------------------------------------------------------------

Next question, please.

--------------------------------------------------------------------------------

Thierry Cota, Societe Generale - Head of Luxury Goods [38]

--------------------------------------------------------------------------------

SocGen. Can we just return to the KPIs that will allow the -- Gucci to reach EUR 10 billion in revenue? There were 2 that you mentioned in June. e-commerce, you mentioned earlier over EUR 1 billion objective revenues, seems to me, with around EUR 800 million. And secondly, for the conversion rate, you mentioned 4 points to reach EUR 10 billion in revenue. Are we still with that target? And how much has been achieved versus 2017? You said that each point brought in about 8% to retail sales. Is the -- has the ratio been verified and confirmed? Another question: During the press, you discussed at length inventory controls could be down. We're at 10% WCR revenue, lower than previous years. Is that set to decrease further?

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [39]

--------------------------------------------------------------------------------

As regards e-commerce, I mean, it's part of the reset of the targets of -- you saw the performance in '18, 70% growth. Given the outlook that we have, particular what I just said about China, indeed we're setting this midterm target of topping the EUR 1 billion on e-commerce, the Gucci platform, slightly above what was presented. On the conversion rates, we don't publish our conversion rates in a detailed manner. We've progressed last year quite significantly. What's important once again is to clearly realize the bulk of growth over the past 3 years is through volume, through traffic and volumes, far more than through improved conversion rates; or through retaining customer retention, that is customers who bought in 2 consecutive years, how much in 2017 or 2018 versus '17. We're making strides there. We consider it's part of 2 KPIs, where there are room for maneuver in terms of improvements, very significant at Gucci. But in a first phase of development, as we've just seen, it's all about meeting this influx of traffic, to process the traffic. All the conversion rate will -- the conversion work will follow, so we're expecting significant improvements in conversion rates that have increased. We'll continue to grow also customer retention rates

(technical difficulty)

cross-selling, of course, between products is also a key factor where there's potential. There was a third point in your question, on inventories, -- yes, Jean-Marc (sic) [Jean-François] perhaps.

--------------------------------------------------------------------------------

Jean-François Palus, Kering SA - Group MD & Director [40]

--------------------------------------------------------------------------------

Well, just on inventories, you take a ratio, the end -- a year-end ratio. That obviously is that we derive from looking at the balance sheet and the P&L, but what we're interested in is average inventory over the years, so relevance of inventories. Today, what we're aiming for is to accelerate the lead times, as Jean-Marc pointed out, so that products arrive at the beginning of the season and as soon, as early as possible in the season so that the inventory is of good quality and as long as possible so that not only it's optimized but that it's sold at full price. So all that will reduce the inventory turnover ratio through better forecast, better sales forecast and through optimized supply chain and increased conversion rate. So there'll be a decrease in inventories.

--------------------------------------------------------------------------------

François-Henri Pinault, Kering SA - Chairman & CEO [41]

--------------------------------------------------------------------------------

Thank you. We're -- it's getting on, so we're going to end the Q&A session. I'd like to thank you for your presence, those of you who traveled from afar to be with us. Tomorrow -- I hope you've seen our confidence in the group's future performance, and we'd like to surprise you throughout the year. And we will continue, with the teams of Claire, to keep you informed of the group's performance every quarter.

Thank you. Have a good day.

2