Kering Sa Ord

Good evening to all of you and welcome to Kering's 2024 first half results call. Before I go over our operational and financial highlights, a few housekeeping comments. The call tonight will end at 7 p.m. sharp, so we can hand over to Moncler. After my presentation, I will be joined by Francesca Bellettini and Jean-Marc Duplex, our deputy CEOs, for the Q&A session. We kindly ask that you limit the number of your questions so anyone who wants can have an opportunity. Starting on slide four, during the first half, we focus on the execution of our strategy, pursuing our investments in the long-term desirability, visibility, and exclusivity of our houses. They reach new milestones along their creative journey with fashion shows, that splendidly displayed modern interpretations of their codes and identities. Our houses capitalize on both innovation and legacy. At Balenciaga, for instance, this was evidenced by the success of its new rodeo bag, together with a revival of the iconic city line. Boucheron celebrated the 20th anniversary of the Quatre Rings and introduced a stunning new high jewelry collection. The continuous enhancement of our distribution and client service was exemplified by Bottega Veneta's opening of its first residence in a Venetian palazzo, a beautiful location hosting a new program of VIC experience, services, and cultural encounters. Tightening control over our supply chain, internalizing production capacity, craftsmanship, and know-how is all part of our long-term strategy. This is true in our soft luxury and eyewear businesses, as it is in jewelry. Bottega Veneta recently advanced its leather-goat capabilities through the acquisition of a strategic supplier, and Pomellato did the same with a renowned stone-setting laboratory in Italy. Botte is forging ahead. For Bottega Veneta, anticipating the launch of her first ultra-iron fragrance in the second half, it unveiled our first in-house products in the form of an exclusive candle collection. We are also making progress with the integration of Creed, whose recently introduced feminine scents are well received. And we continue to make headways in our sustainability and talents roadmap, notably with the development of new collaborations and graduate programs alongside leading schools and institutions. On slide six. Our revenue in the first half exceeded 9 billion euros, down 11% both reported and comparable. The one-point positive scope impact from CRED offset the negative FX impact. The Q2 revenue trend is very much aligned with H1, both in reported and comparable terms. Our first half revenue breakdown by region changed quite substantially from 2023. Asia Pacific accounted for 32% of the total, done five points. Western Europe, North America, and Japan each gained one point respectively at 28, 23, and 8% of revenue. And the rest of the world at 9% of revenue was up two points. I will review the dynamics driving the geographic mix. On slide seven, you have revenue by segment for Q2 and H1. No great surprise there, comparable growth ended up quite similar in Q1 and Q2, apart from some minor acceleration or deceleration, depending on the segments. On slide 8, let's move to H1 top line by channel and region. Retail, accounting for 74% of revenue, was done 12% comparable in both Q2 and H1. In Q2, traffic was weak again across most regions, bar Japan. Online performance is closer to that of physical stores and its penetration to the 12% of retail revenue. Our footprint at 1,800 stores shows a net increase of 30 units compared to year-end. While expanding that reach, our brands also optimize our networks, concentrating on fewer but higher quality locations. this strategy until gradually downsizing their presence in outlet as Gucci did with two closings in the first half. Wholesale and other revenue accounting for 26% of revenue was done 7% comparable in the first half and 6% in Q2 alone. This covers two very different situations. Wholesale was done 18% at our luxury houses in the first half as we continue executing on our plan to scale down this channel on top of order reduction. This was partly offset by a strong performance at Kering Eyewear, up 6%, and a sharp 16% increase in royalties and other revenue. On slide 9, we take a closer look at retail performance by region. Here again, trends were similar in Q1 and Q2, especially in Western Europe and North America, done respectively 8% and 11% comparable in the first half. In Western Europe, local demand was rather subdued, while tourism spending was more or less supportive, with some contrast across brands and nationalities. Overall, there was no major inflection either on local or on tourism spending in Q2 versus Q1. North America remained in negative territory, but polarization based on brand positioning persisted, and Bottega Veneta in the higher-end segment continued to outperform, with Q2 retail up 18% comparable in the region. Japan was up 22% comparable, with Q2 accelerating up 27%. The market is fueled by strong tourism spending, notably from China and other Asian countries. Most of our houses implemented tactical price increases to account for the weak yen, but the price gap remains attractive. Asia-Pacific declined 22% comparable in the first half, of which 25% in Q2. This drop is mainly driven by greater China, with most of the Q2 sequential deceleration stemming from Hong Kong and Macau on a very high com base. Performance in the rest of Asia also deteriorated. In the quarter, 30% of spending by the Chinese cluster took place outside of its home markets. Close to 80% of their overseas spending remained in Asia, including Japan. All in all, revenue from the cluster was down 25%, with significant discrepancies across France. And finally, the rest of the world was up 2% comparable in the first half, driven by the Middle East. On slide 10, an overview of recurring operating income, capex, free cash flow from operations, and net debt. Recurring operating income was 1.6 billion euros, down 42% year on year, within the guidance range we provided earlier this year. Looking at the moving parts, gross margin was down a bit below 200 basis points, a higher drop than anticipated, reflecting different dynamics across brands. For most of them, regional and product mix was a headwind, as were some cleaning actions partly mitigated by positive channel mix, except at Gucci. At 3%, OPEX growth was well controlled. We are intensifying efforts to prioritize costs that directly support our brand strategies notably ANP, store expenses, and clienteling. EBIT margin was down more than 9 percentage points at 17.5%, tighter control over distribution and supply chain, and the increasingly fixed cost structure it implies translate into significant but not unexpected operating deliverage. EBITDA decline was more moderate, down 28% year-on-year, as was EBITDA margin, down around 7 percentage points. CapEx 2 sales stood at 5.5%, roughly in line with H1 2023. CapEx, excluding real estate, was down slightly in absolute terms. Including the acquisition of a prestigious building to secure prime locations for our houses on New York's 5th Avenue, CapEx was 1.4 billion euros. Our free cash flow, excluding this acquisition, amounted to 1.9 billion euros. Operating working capital stood at 18.3% of last 12 months revenue. I want to underscore our efficient management of inventories in the first half. Our houses combined cleaning actions of past seasonal collections, lower coverage of existing carryovers, more accurate open to buy, and more stringent sales through targets. Inventories were down 4.5% compared to year end. The decline is even more significant in volume terms down double digits. This effort will be continued. They are an essential part not just of our financial performance, but of our entire elevation strategy. Net debt, excluding lease liabilities, was 9.9 billion euros at June 30, after a steady dividend payment and the New York real estate acquisitions. We completed the purchase of the Monte Napoleone building in Milan a few days ago. As announced, we are working on a refinancing plan for the recently acquired properties. Let's now move to our houses, starting with Gucci. On slide 12, H1 revenue stood at 4.1 billion euros, down 20% reported and 80% comparable. Q2 revenue was down 19% comparable, roughly similar to Q1, with retail down 20%. Trends by region were also broadly aligned. The full detail is in the appendix. On average, the new offer represented about 25% of revenue as we executed, in line with plan, the ramp-up in stores during the quarter. In terms of category, ready-to-wear outperformed, thanks to the higher penetration of the new styles, with the men's offer gradually becoming available in stores at the end of the quarter. This is encouraging, but not enough to offset the performance of carryovers, especially in handbags, that continued to suffer. The exciting lineup of handbag introductions coming on stream from September should contribute to improving this trend. Wholesale was done 12% in the quarter, royalties and other revenue up 4%. Recurring operating income came at 1 billion euros, a 24.7% margin. Gross margin was done on adverse product and regional mix on top of reinvestment in quality. Gucci pursued its investment in communications, highlighting its fashion authority and timeless luxury, as well as in client and store experience elevation. To counter the impact of a lower top line in the short term, Gucci is reallocating its resources to enhance efficiency and maximize their impact. Apex 2 sales stood at 3%, a year-on-year decrease on a high-com base, as phasing last year was skewed towards the first half. Our strategy continues to focus on network enhancements. The stock count decreased by two net units. Saint Laurent delivered a contrasted first half. Turning to slide 15, revenue in H1 was over 1.4 billion euros, down 9% reported and 7% comparable. Wholesale, remained a substantial drag, down 25%, as the brand did not compromise on its strategy to raise control over its distribution. Retail, representing 81% of revenue, was down 6% comparable in the first half and down 8% in Q2, as Asia-Pacific trends worsened, notably in China. In these environments, Saint Laurent maintained its focus on local clients deploying a range of tailored activations. Product-wise, the recent collections were very well received, and the house prepared a strong lineup of launches for the second half, including releasing new generation of key lines and injecting pure newness. Saint Laurent is refining its product strategy to enhance its relevance across market and customer segments, leveraging the creativity and DNA of the house. At €316 million, recurring operating income yielded a 22% margin. Gross margin was impacted by unfavorable regional mix. Recent store openings, which have not yet reached normative sales density levels, accentuated negative operating leverage during the period. CapEx was also up with 12 net store additions in the first half. Bottega Veneta is reaping the fruits of the desirability it has built in the ultra high-end segment. As you see on slide 18, reported sales were stable and up 3% comparable in each one, with revenue at 836 million euros. This is the first half record for Bottega Veneta. Retail was the main growth driver, up 8% comparable in the six months and 7% in the second quarter. EUR increases on the back of a positive mixed impact and the success of its higher-end offer are driving this healthy performance. By region, the house grew double digits in Western Europe and North America and posted an impressive performance in the Middle East. Japan grew nicely, the brand being less skewed toward tourism spending. In Asia-Pacific, a region where it still enjoys plenty of room to grow and improve its visibility, the brand delivered a resilient performance. Ongoing rationalization of third-party distribution resulted in a 13% decline in wholesale in Q2. Recurring operating income was 121 million euros, an EBIT margin close to the 15% level. Both margins were higher, bolstered by the retail performance and favorable channel mix. Bottega Veneta continued to invest in stores, communications, brand ambassadors, and clienteling initiatives to amplify desirability across markets. CapEx was up on store network upgrade. I would highlight the reopening of the flagship in Dubai's Mall of Emirates, a tribute to the brand's craftsmanship. Our other houses had a resilient first half in retail with overall strong performances at our jewelry houses. On slide 21, you see that revenue of the other houses was down 7% reported and 6% comparable in the first half at 1.7 billion euros. In Q2, revenue was down 5% comparable, a touch better than Q1. Both quarters were substantially impacted by wholesale, done over 20% in the first half, on rationalization and challenging market conditions. Retail ended up unchanged in Q2. Balenciaga pursued its recovery with a positive performance in North America on undemanding comps, improving trends in Western Europe, good resilience in Asia Pacific, and high growth in Japan. The house continued to build momentum and gain share with top-hand customers. Once again, Brioni was up nicely across most markets. Alexander McQueen, in the process of evolving its aesthetic, had a challenging quarter. Its new collection will start eating the stores from Q3 onwards. Our jewelry houses kept performing particularly well. with both Boucheron and Pomelato up double digits in retail in Q2. They successfully launch animations of their best-selling lines and unveil new high jewelry collections, a testament to their creativity and know-how. We are extremely pleased with the development of our jewelry houses, including Kilin, impacted by its exposure to China, they reach revenue of nearly half a billion in the first half. At 44 million euros, recurring operating income of our other houses was done substantially. Balenciaga stepped up its communication plans, amplifying its fashion shows and product launches after a very quiet first half last year. The contribution of Alexander McQueen was impacted by the ongoing transition. An wholesale rationalization, while definitely the right move for the long term, does entail some short-term pain. We will keep fueling the long-term growth of our other houses while remaining vigilant and demanding on the return on investment. CapEx is allocated to selective store openings, which led to an increase of 7 net units in the first half. Kering Eyewear and Corporate now on slide 24. Revenue of the segment was close to 1.1 billion euros, of which 914 million euros from caring eyewear alone. The balance mostly includes caring beauté, namely Creed for now. In the first half, caring eyewear delivered another strong performance, up 6% comparable, reaching a new record. Q2 was up 3%, with growth across regions and steady development of the portfolio, both in sunglasses and optical frames. The segment's EBIT increased to slightly more than €100 million. Kering Eyewear's EBIT improved, yielding a sustained 21.4% margin. It's worth keeping in mind that there is a seasonality in eyewear, with revenue and profitability more skewed towards the first half. The contribution of Kering Beauté was positive, thanks to Creed. Kering corporate costs were well under control. CAPEX was 113 million euros, now including CRIT's operation. The year-on-year increase was limited, as we have reached a normative level to support our houses in IT and logistics. This number does not include the building acquisition discussed earlier. Now, looking at the remaining lines of the PNL on slide 25. Net financial charges amounted to 288 million euros, or 199 excluding interest on these liabilities. Cost of net debt stood at 151 million euros on higher debt level and interest rates. Other financial expenses were 49 million compared to 94 million last year. Corporate income tax was 345 million euros, a 26.9% rate on recurring income. Group net income from continuing operations adjusted for non-recurring items reached 888 million euros. Free cash flow and net financial debt are on slide 26 and 27. In the first half, and excluding real estate, we generated close to 1.9 billion euros in free cash flow. Change in working cap was negligible. This is a material improvement compared to last year, due to our stringent inventory management actions. We provide the presentation excluding and including real estate impacts as we did last year. At route 13, net financial debt was 9.9 billion euros, a net debt to EBITDA ratio of 1.8 times. In the first half, we paid 1.7 billion euros in dividend in line with last year. Before Francesca, Jean-Marc and I get to your questions, I want to underline that we are applying all our energy on the implementation of caring strategy and transformation of our business model. Like you and many others in the industry, we are frustrated by the current environment, which slows down our execution. Our priority is to rekindle healthy revenue growth And the operative word here is healthy. To achieve that, we are tightening the product strategy of our houses, Gucci, first and foremost. We are working on the interaction between newness and iconic lines, optimizing pricing and availability, and making sure quality is flawless. We are also better assessing the efficiency of our outreach efforts to maximize returns. And we are making a big push on enhancing distribution, improving time to market, and the management of sales flow. We are also becoming even more demanding when it comes to OPEX and CAPEX control. We have activated new processes to assess store projects and consult or postpone all openings that were not immediately essential. And because we are fully aware of the operational deleveraging that comes with our top-line contraction, we have enhanced cost control across the board. All this will not become visible in our bottom line in the short term. This is why, considering the current uncertainty regarding consumer confidence and demand for luxury in particular, we have issued new guidance. As you have seen in our release, securing operating income could be done approximately 30% in the second half of the year compared to the same period last year. We will continue to work on every factor within our control to return to healthy growth and profitability as soon as possible. We are now ready to take your questions. Operator?

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the star 2 key. Please ask your questions as directly as possible and put on mute all devices apart from the phone you are using to ask your questions. The first question is from Anne-Laure Bismuth from HSBC. Please go ahead.

Yes, hi, it's Anne-Laure Bismuth from HSBC. So I have two questions. The first one is about what organic growth do you expect for H2 that leads to a decline of 30% in H2 group habits? Will the decline be broadly consistent across the branch? And the second question is more specific about Gucci. What is the implication in terms of organic sales growth for Gucci in H2? Consensus is currently expecting a single decline in Q3 and a return to a positive organic growth in Q4. Assuming that the macro conditions stay the same and considering all Sabato de Sarno's products are welcomed by consumers, do you believe that what consensus expects is achievable? Thank you very much.

Thank you very much. And now for your two questions. So on the first question, of course, we need to remain very cautious in the current environment. As you know, there are a lot of uncertainties regarding the consumer confidence and how it translates into the demand for luxury products in the sector. At the same time, as I mentioned, Our houses have a strong lineup of launches and activations in H2. So I'm not going to provide precise top line indications, but maybe to mention that our H2 EBIT outlook is based on a gradual improvement in revenue trends at group level, mostly back-end loaded, especially at Gucci. As novelties, we'll start to eat the shelves from September. your second question was about I think the sales at Gucci so I'm not going to give you detail brand by brand okay thank you very much the next question is from Melania Grippo with BNP Paribas please go ahead

Good evening, everyone. This is from BNP Paribas. I have two questions. First, on Bottega Beta, if you could please elaborate on the strong decline in profitability in the company on the back of a flattish top line. Is it just due to higher communication? And if that's the case, could you please tell us In percentage of sales, what does it represent? And the other one is on price changes. I understood during the call that you did some price changes. If you could please give us some granularity on that. Thank you.

Thank you very much, Melanie. So on the first question, your first question is on the gross margin of Bottega Veneta. On the margin of Bottega Veneta, the EBIT margin, sorry. Yeah, yeah. So the dynamic of the margin, the gross margin was up on favorable product and Chanel mixed, with also a nice boost of the AUR. It's true that we have increased the OPEX to sustain the development of the brand, with a strong push on communication and stock network enhancement, which explains the impact on the EBIT margins.

For sure. Hi, it's Francesca speaking. If I can add some flavor behind the numbers, like Armelle was saying in her presentation, we have invested a lot also in client activations and client engagement at Bottega Veneta. The investment in a Palazzo Bottega Veneta Palazzo in Venice goes hand in hand with all of the operations that you have been doing in communication, fashion shows. and also the improvement of the store network and the opening of the stores with the enrollment of the new store concept. So all of these had an impact on the profitability on the short term, but for sure is sustaining the brand value in the medium to long term. If I can comment also on the second question on the price increases of our houses. At our houses, all of the merchandising teams every season is looking at pricing the collections in the proper way, starting from the carryover and the newness. All of the brands have been working on their positioning and all of them have the opportunity to introduce into the collection higher price point and all of the product categories. And in terms of increasing the prices, of course, they all look at it in a way that makes the collection very balanced at entry, middle and high price point and considering also the geo pricing situation. So if I can talk about For example, about a market like Japan, where there is still a price gap vis-à-vis the rest of Asia, all of the brands have been increasing selectively in the product prices in the range of a single digit, but very, very selectively and product by product. So in terms of a general price increase driven by the mix is around a single digit for all the brands.

Thank you. And if I can do a follow-up, could you say what is the price gap in Europe, Japan, and Europe, China? Thank you.

So the price gap is around, so Japan is apart with Europe, taking into consideration the weakening of the yen, and China is around 120 to Europe. Thank you very much.

The next question is from Edward Aubin with Morgan Stanley. Please go ahead.

Yeah, good afternoon, everyone. So two questions for me. One on inventory. I think, Armel, correct me if I'm wrong, but I think your inventory days have continued to go up sequentially. So if you could please provide a little bit of color in terms of the structure of the inventory, number one, in your books, but also the amount of inventory in the trade. In previous calls, we talked about how some of your third-party retailers might be discounting some of your product and how it might be damaging to the brand. So to the extent you can assess how much excess inventory there is in the trade, that would be helpful. And just related to that, what kind of initiatives you're putting in place on the supply chain to to avoid having excess inventory in the future. So that's question number one. And then question number two is on the net debt. So I think 9.9, as you said, as of end of June, what are you, given the real estate investment you're going to make, among others in Italy, in H2, what's your forecast for the net debt by the end of the year? And to what extent leverage is going to start to be or could start to be an issue in terms of your ability to invest behind the brand or not. You know, the journey towards brand elevation. Thank you.

Thank you, Edouard. So I'm going to answer on your first question on inventory. I must say we are quite pleased with the level of inventory at the end of this semester. Also, if you take into account the deceleration of the top line, because we end the semester with an inventory that is at a lower level than the one of December. It's true in value. It's even more true in number of units. And this is a result of many actions that have been taken during the semester.

Yes, if I may, Edouard, on the inventory side, beyond the figures, and you have asked about what are the actions in place. First of all, based on my calculation at group level, I see rather a decrease in terms of DOI. And of course, in terms of units, it's even more relevant. Then when it comes to the quality of the inventories, we can say that our brands have worked quite hard to improve the average quality of our inventories in terms of edging, in terms of proportion of carryover on evergreen products, plus also the launch of newness. So that today, I think that in terms of quality of inventories, there was a shift which is clearly more favorable, but as hinted in the speech of Armel, there was also a work done during the semester to clean inventories. Now, if we think a little bit forward, the actions that have been implemented, and it has been pushed by Francesca and myself, was to be more disciplined in terms of open to buy, so that today we have a discipline, a sort of routine, which is installed with the brands to discuss and to review the open to buy, so that gradually, Also, we have adapted the orders quantity so that we are more able to curb down the days of inventories. And it's one of the action plans we have in mind with Francesca and with the brands to target some additional, let's say, reduction in terms of inventory. So as a conclusion, our inventories are quite sound in terms of quality and in terms of amount. your question about what are the inventories in the market that's not um something easy to quantify but what we can say and that and we have started already end of 19 with the rationalization of wholesale and even more recently with all the initiatives we have taken with francesca in terms of rationalization of the distribution be it in terms of retailers in terms of additional rationalization of wholesale is aiming clearly at reducing the exposure of our brands on all the different markets. And we will continue to do so. We know that the wholesale channel is apparently quite profitable channel, but we are not afraid to impose to the group some short pain by continuing the rationalization of wholesale and also to rationalize our distribution more globally speaking. It could be also true when it comes to the store network where we are assessing what should be done further in terms of exposure of our brands on some markets, meaning in terms of number of stores or quality of our stores. Now, regarding the net debt, I won't give you any sort of forecast for the rest of the year, but let's make it simple. We have taken advantage, as you know, of changing market conditions to secure prime locations, but as we already said, we are not aiming at becoming a landlord. These investments raise questions because of the current cash generation. That's the reason why we are first determined to improve the cash generation, and we demonstrated that we did it already in H1. If you look at the cash conversion besides the CapEx, we had a very strong achievement in H1 if you compare to the EBITDA. You know also that we are working to set up vehicles to co-invest with financial partners in these real estate assets so that it will lead to a delivery. We are working on And hopefully, by the end of the year, we will be able to give you some more news on that front. Overall, we will continue to be very disciplined and selective as regards the CAPEX. It's not a question of cutting the CAPEX, but just to be very disciplined in terms of allocation of resources and be sure that we are opening in the right places. We have said that we had been quite active in terms of M&A. So today, we won't increase the debt because of some transactions. We remain vigilant about what we could do in terms of supply chain, as we did, by the way, in H1. And Armin mentioned something we did for Pomelato. But besides this, Second half, evolution of the debt should be, on one hand, improvement in terms of cash generation. On the other hand, the investment in the Montenay-Polonnais asset. And we will see how we will make some progress in terms of the leverage thanks to the real estate refinancing.

Okay. Thanks very much. And Armel.

The next question is from Luca Solka with Bernstein. Please go ahead.

Yes, good evening, Armel and Jean-Marc and Francesca. I was wondering about your priorities because you clearly stated that priority number one is to re-energize growth, but we are seeing quite a difficult demand environment, and this is true across Europe, the luxury companies that have reported so far, is there a milestone, is there a fork in the road where you would potentially decide to safeguard the bottom line and to postpone the sort of cost commitments that could potentially boost growth? So is there a sort of, let's say, a red traffic light at which point you would say, well, from this point onwards, we would be cutting costs instead in order to defend the bottom line and the free cash flow generation. The second question I have is more connected to how the dynamic of the Gucci relaunch could potentially work in the second half. You said that this is going to be back-end loaded. I think you announced an unprecedented number of new handbag families to hit stores. for new families, if I remember correctly. Is that the stratagem to potentially re-energize consumer interest for the Gucci brand? And is that going to work the same way as in the past with, for example, high-profile fashion launches that were typically driving traffic or collaborations for that matter. So I wonder how you see sort of the dynamic of this relaunch in terms of traffic slash average selling price on the back of introducing new handbags and conversion. Thank you very much indeed.

Hello. Hi, Luca. It's Francesca. I'll start from the second question because the two are absolutely correlated. Regarding the launch on the second half of the four-line of AMBEX of Gucci is absolutely a mix because when we talk about elevation strategy, the elevation strategy has to happen with always an eye to all of the segments of the consumer, high-end and aspirational consumers. So the four lines are a mix in between new, purely new, or addition to existing line, hitting a different price point, entry, medium, and high price point with a specific focus also to the needs of specific market and client segment. Each launch is going to be planned consistently with a communication strategy that speaks to the right consumer segment. So a much more disciplined approach of communication tied very, very closely to the launch of the bags. So starting with communication, the bags delivered in the store at the right time, bags present in all of the network, is something that they're going to see for all of the four new lines, notwithstanding their price point. But of course, the typology of the communication is going to combine the launch of so-called more volume driver with the launch of so-called higher price point and more fashionable bags. This goes hand in hand with your first question regarding the priority. Of course, we are all focused on the growth and of a healthy growth. So we are not going to compromise the long term for short term easy delivery. shortcuts. So, like you said, we are going to look at it. We have the plan of all of the launches at Gucci, as in all of the other brands, and we have a portfolio of actions with clear KPIs that have to hit short, medium, and long term, and we will adapt the execution of our strategy depending on the return that we have, knowing that we are doing all of this in a challenging market situation.

Luca, I would add a few comments. If you look just at the cost base for first half, if you look without depreciation and amortization, you will be below the gross margin. And Armel made a comment about the evolution of the gross margin. But below the gross margin, OPEX before depreciation and amortization are flat. It means that we have already made a work to optimize the cost. to reallocate some resources because you can imagine that we didn't start the year with this vision for the year in terms of top line trends. So compared to the initial budget, we have been already able to make some choices and strong choices. We have made a lot of changes in the organization with Francesca of the group in the brands, but also in the corporate functions, I think notably to the logistic organization. And we have asked to all the executives to work to see where we have savings, where we have efficiency. And I think that some of the initiatives that we have launched will bear fruits already a little bit in H2, but even more in 25. So we are, of course, very vigilant about the evolution of the cost. And we are choosing every type of efficiency, but without compromising what has to be done for our brands, and we knew that 2024 would be a year where there would be still some investment, and clearly the example of Bottega Veneta is a good one.

Thank you very much, Marc and Francesca.

The next question is from Charles-Louis Scotti with Kepler Shutter. Please go ahead.

Yes, good evening. Two questions from my side, please. The first one, just coming back on your H2 profit outlook, you did not disclose any sales guidance, but based on consensus sales estimate, it kind of implies 500 to 600 sales. basis point margin contraction in H2, while it seems that you were guiding for a 100 to 100 sequential improvement H2 versus H1 initially. I'm just curious to hear what has changed from your previous guidance. Is it your level of confidence on the back-end loaded top-line recovery, or is it actually the cost base that will end up higher than expected? And then the second question, a little bit technical and specific, but one of your competitors said yesterday that in China, they have swapped valuable rents into fixed rents during the pandemic to limit the inflation coming from the repatriation of spendings. And I guess now it's driving some operating debt averaging in the country. I'm just curious to hear if you have done the same as well, and if you could also do a quick update on the rent structure in the key Asian market, including Japan, please. Thank you very much.

Thank you very much. I'm going to answer to your first question. Regarding the indication that we gave for H2, it's true that we indicated in the call in the Q1 that we were expecting margin to improve in H2 versus H1. Considering the current market situation and the situation, we are not expecting any more H2 margin to improve versus H1. That's maybe going to help you in your calculation. A second point maybe I would say is that, yes, we are expecting a gradual improvement in the revenue trends in the second half of the year. And of course, everything I tell you is very uncertain because we are still far away from the end of the year and there are a lot of uncertainty. But in our calculation, it may be that we won't see revenue to turn positive as soon as H2.

It's true that what has changed in our views is that probably we have a more conservative view on the top line of H2, considering the trends we observed in Q2 and especially at the end of Q2. And I think it was a comment shared by some other peers that the exit rate was not very strong in Q2. On top of that, I think one of our competitors has stressed also the mix, which is not helping because it's true that the mix is not exactly the one we were expecting with an overweight of Japan and a weakness in China and the rest of Asia. I think an impact both on the gross margin, and it's true that the shortfall in terms of gross margin is above our initial expectation, and also with an impact on the OPEX, considering that the bulk of the business in Japan is made in department stores with variable rent. While in China, maybe Francesca, you want to comment on the structure of the rent.

It's a structural situation in China since ever that to do business in the department store, you have a higher component of fixed rent and then a variable rent that kicks in later on. So it's a market that becomes accrued when you have a strong growth and instead is a market that becomes diluted when it slows down. During the pandemic, with the stores completely closed, every group has been able to do their own renegotiation with the department stores. Now we are back at a normal situation. So, of course, with China slowing down in favor of Japan, you have a bigger component of fixed rent as opposed to variable rent. And a market like Japan growing with variable rent, it is delivering no economy of scale.

When you say department stores in China, you mean the mall?

All of the malls, yeah, yeah. Multi-brand outlets.

Okay, thank you very much. When you said no revenue growth recovery before H2, you were referring before Q4, I guess?

I was commenting to semester.

Semester, okay. Okay, thank you very much.

The next question is from Louise Singlehurst with Goldman Sachs.

Please go ahead. Hi, good afternoon, Jean-Marc, Francesca, and Amel. Thank you for taking my questions, just two from me as well. I wondered if we could just talk a little bit more holistically about, firstly, the indicators that you're looking for in terms of assessing the success of Gucci and the turnaround. It's obviously like-for-like in terms of the output, but what we need, obviously, there are building blocks to get there, and I wondered if you can share with us how you're reviewing responses to advertising, store traffic, conversion, you know, the level of interest in the new product. I do understand that it's obviously building from a low level, but if you can help us with the metrics and how you're thinking about that. And then secondly, I wonder if you can share with us any view about the expectation of the timing and how that might be changing internally. I've got no doubt that Jean-Francois will also be getting very much into the weeds of Gucci along with Francesca, but you're using words such as transform and and the business model. It sounds as though it's deeper work than anticipated, and I wondered if you could share with us where you are in that process, because it's very hard to gauge from the outside. I don't know if that's personnel, supply chain, design, et cetera. Thank you.

In terms of assessing the successes, you mentioned the word traffic. That is absolutely key in this moment, because with the uncertainty that is going on in the world, of course, there is a lack of Propansion to consumption in all the markets including and above all China and this is affecting a lot the traffic in the stores When you have when you are a brand that has been growing very fast in the last 10 years We said many times that most of our growth was driven by the aspirational consumer and by new consumer buying into the brand so the first consequence of lower traffic is a lower business with the aspirational consumer so this is why A brand like Gucci has been affected a lot because of the weight of aspirational consumer into their own network. Positive signs, a very good resilience of the new collections, in particular with existing customers, that is a very, very good sign. And absolutely recognized improvement in the quality of the products that have been launched in all of the product categories, not only leather goods or what everybody's focused on, but all of the product categories, ready to wear shoes, all of them. very good resilience of the staff of the Gucci stores in terms of conversion rate. Gucci is the brand of the group with the highest conversion rate and they're kind of stable and notwithstanding the reduction, again, in the consumer confidence, that means that even the traffic that you have in the store is done of people that have less intention to buy. So all of those are quite good indicators. Another very good indicator is for sure the time to market that has been reduced. We have been able to anticipate by One month already, the ability to deliver product in store. Still, we are in a seasonal business. I mean, in business done with seasons. And when you're in a business done with seasons, it takes a ramp up before you are able to change completely the outlook of the product that you have in the store. And Merle told you that so far, the newness represents 25% of the product in store. Just to give you an idea, the new products of the men's collection is just being delivered. So it's a process that takes a little bit of time. So those are the good signs that we can share, notwithstanding a very difficult market situation. In terms of expectation of timing, this goes hand in hand with the general market situation. So we look at what we can control and the things that we can control, like I told you, conversion rate, better time to market, better ability to control the time and the correspondence in between marketing activity and product in the store. are all going in the right direction, then in terms of consumer confidence, it's a little bit not in our control.

If I may, I would add also, Francesca, that you have pushed a lot of changes in the organization, and now we have a lot of strong profiles on board at Gucci. You mentioned the magnitude, in a way, of the transformation The fact is all the newcomers are quite impressed by, in fact, the setup of Gucci, the quality of the people, also all the tools in which we have invested in the past few years, be it in terms of product development with art labs that you have visited. a few years ago the logistic organization that you know as well and i think the point is more just to have all these people the different organizations working better together and and the keywords that we have already mentioned several times with francesca it's about efficiency efficiency of the cost efficiency of the opex efficiency of the capex and efficiency of the organization but i think now we have more or less all the right people on board at least among the key executives The setup is strong. Now we have to make it work. And it's exactly what we are doing with the team of Gucci every day.

The next question is from Thomas Chauvet with Citi. Please go ahead.

Good evening, everyone. Thank you for taking my questions. The first one on Gucci second half EBIT outlook, you guided the group at minus 30. I mean, obviously, Gucci is not going to be far off that, as was the case in H1. Are you expecting perhaps less gross margin headwinds than in the first half, but perhaps more OPEX deleverage than in H1, given the need to make all these incremental newness, I guess, more visible as you ramp up Sabato's collection? And is there in this H2 guidance some meaningful one-off items or provision to take into account maybe accelerated clearance of inventories? And secondly, on the other houses, particularly Balenciaga, obviously numbers seem to be improving. There seem also to be quite obvious changes in the brand's aesthetics Would you say that now the organization, the Balenciaga company is on track to return to the great success of the past with that new aesthetic, but also obviously organizational changes that took place after the incidents of a couple of years ago? Thank you.

Hi Thomas, I will answer to the first question. So as you mentioned, the GUCCI is never very far from the average. I would say that in terms of growth margin, there are a lot of uncertainties, because as we experience in H1, it's mostly driven by the, sorry. It's driven a lot by the regional and product mix. So for the moment, it's very difficult for us to forecast, but there are no elements that for the moment we identify as making it very much different in H2 versus H1. Regarding the OPEX, it's a bit the same comment. The way we are controlling the OPEX, as Jean-Marc explained, is going to continue over H2. So the philosophy in terms of OPEX control and reinvesting behind the brand will stay the same in the second half. We don't anticipate any one-off in H2.

Commenting on Balenciaga, for sure the performance of Balenciaga now is quite resilient. They have been doing very successful launches of new products, like, for example, the Rodeo handbag or the relaunch of the city bag. They have very good traction with their VICs and loyal clientele that is growing strongly and fast. They are back into being perceived as a trendsetter, thanks to the creativity of Demna. Their show of Haute Couture was one of the most viewed shows of all time, and the same success was reported for the show in Shanghai. The team is absolutely in place. We have full confidence in Demna, Cedric, and all of the Balenciaga team that has already delivered an incredible success in the past to continue to deliver the success in the future.

Thank you.

The next question is from Peral Dadania with RBC. Please go ahead.

Thank you. Good evening, everybody. So first on Gucci and the handbag strategy, if I may, Thank you for providing the initial context around the new product launches coming in Q3. But I think, Armel, you made a comment on a media interview before this call that some of the carryover handbag lines like the Marmot and the Ophidia are under a little bit of pressure. So could you just help us to understand how you will be approaching that weakness in the current portfolio and what the transition plans for the existing handbag lines may look like? And just whether you've taken any inventory provisions on some of the carryover handbag lines, either in the first half or expected in the second half. And then my second question just relates to the pricing strategy and price positioning for, I guess, the broader portfolio. I think, Francesca, you made comments around, you know, the ability for brands like YSL to price upwards based on the range for the forward-looking season and But I think it's clear, and some of your competitors are talking about the move upwards in pricing over the last few years, which has perhaps left a gap in the entry price points for the aspirational consumer. Could you just give us an indication or remind us of what the strategy is for those entry price points which may have been vacated for some of the brands in the portfolio, such as YSL? That would be very helpful. Thank you.

Sure. First of all, let's go to the Gucci handbag strategy and the situation with the carryover. Like I said, most of the decrease of the business of Gucci is coming from a decrease in traffic and on decrease coming from new clients. When you have a decrease in traffic and coming from new clients, typically the new clients buy the carryover. So it's most and out and foremost on the carryover lines. So the introduction of the new lines that are going to happen in the fourth quarter are complementary to this and shouldn't go into complete substitution of the carryover. But at the same time, we're going to work on an animation of the key carryover line. We have already gone through this year into a process of streaming line, the distribution, reducing the SKUs that are present in the stores, working also on VM to rationalize the SKUs that are present in the stores to make it more focused both for the clients but also for the sales associates. This work on streaming line in the offer has been done. The new introduction are going to be complementary. Our goal is to create through the new introduction, new carryover, but also work on the key skews that were best seller in the past to reanimate them. And of course, this strategy is not going to compromise the work and the success of our icons. So it's a mix of the two. I have to say that in Gucci, we also have another strategy that is performing quite well, that is a strategy of testing. And the first test we have done on a couple of those new launches are giving to us the feedback that what I'm telling you is working perfectly well. So these are lines that are not going to go in cannibalization of the existing, and they're going to be good for new and for existing customers. Regarding the pricing strategy, of course, I always say that when we talk about elevation, I'm not talking about increasing the prices of the carryover. It is true that probably some brands in the market have increased a lot the prices of their carryover. None of our brands has done that. We have increased the prices of our carryover at a reasonable level and according to what could be taken by the carryover themselves and most of the time also working, like in the case of Gucci, on improving the quality of the product. But when we talk about elevation, we talk about introducing new products that are more expensive. And typically, you were asking the question about Saint Laurent, handbags like the Iker, lines like the Sac du Jour, reanimation goes in this direction. We always have to have an eye on the entry prices. The entry prices are fundamental for recruitment. So even if there is an upgrade and a price increase in the entry price point, is the job of all of the merchandising team to make sure that you keep feeding entry, middle, and high price point. And we will continue to do this.

Regarding your question related to inventory provision, as I mentioned, the level of inventory at Gucci decreased between June and December last year in terms of value, also in terms of units. In terms of units, just to give you some color, it's a reduction of 1.3 million of units which did not trigger any increase of the provision, more the reverse. We are always keeping the same rules in terms of inventory provisions, and the quality of the inventory is better now than it was at the end of last year.

The next question is from Niccolo Ferra with Bank of America. Please go ahead.

Good evening. Thank you for taking my questions. I have two. Firstly, could you share the revenue growth of the Jackie Bag in 2Q24 year-on-year, even in the U.S. or any markets where engagement has changed would be useful? And secondly, could you provide more color on the ready-to-wear performance across regions in light of the higher weight of the newness? Thank you.

I'm sorry, but I'm not going to give you the answer on the Jackie bag. This is quite a precise question. The ready-to-wear performance, what I can tell you is that ready-to-wear had a good performance. As I mentioned, it has outperformed other categories. It was the first newness that was introduced after the first show, and I'm not going to give you details by regions.

add on this, thanks to the good performance of the ready-to-wear, Gucci, in addition to working on the handbag line, is also working on building an essential line that is absolutely building on the best performing new SKUs of the ready-to-wear.

The next question is from Fujimori Rogerio with Stifo. Please go ahead.

Hi, good evening. I'm Francesca and Jean-Marc. Thanks for taking my question. I have two. The first one on YSL. I was wondering if I was hoping Francesca could elaborate on the 8% retail decline in Q2, any color by nationality, volume versus price and mix, and recent trends in e-commerce. And my second question is a follow-up on the second half outlook, which assumes a gradual improvement in retail with Q2, Q4. But how should we think about the wholesale assumptions for H2, for Gucci, YSL, BV, and Balenciaga? Thank you.

I'm going to answer to your first question regarding YSL and the performance in retail. The performance in retail trends in Asia-Pacific, starting with Greater China, were impacted by depressed traffic and the changing business environment. In North America, the pressure on aspirational customers continues to weigh on the performance, while retail sales were sharply up in Japan on booming demand from tourists. So basically, what I want to tell you is that the trend for YSL was quite equivalent of the one I told you for the group. region by region with a trend in Europe and in the U.S. in North America that was in line with Q1 and a more challenging environment in Asia Pacific with a small deceleration in Q2 versus Q1. In terms of wholesale, your question about the wholesale for H2, we are trying All cell will remain headwind in H2, a similar drag versus H1 for all our luxury houses combined.

Thank you.

The next question is from Chiara Battistini with JP Morgan.

Please go ahead. Hello. Hi. Thank you very much for taking my question. Can you hear me? Yes, perfectly. Fantastic. Thank you very much. First question on YSL and following up on Rogerio's question. I was wondering if you could also give us a bit more color on the margin decline in H1 and also how are you thinking about the current profitability versus your medium term profitability? targets for the profitability of YSL. And the second question on the Gucci store network and whether you have an update on how you're thinking about the current store network, both from a numbers perspective of the stores as well as possibly the need of remodeling and investments for that piece. Thank you very much.

I will answer to your first question on Saint Laurent margin. Saint Laurent faced also the same headwind for gross margin on unfavorable product and regional mixed. On the OPEX, we are still investing behind the brands, especially with an increased share of retail and some recent store network expansion. which are not yet at normative cells density, and that is also triggering some higher DNA. So if you combine higher DNA that was important this semester and sustained communication and so events, the OPEX were showing an increase this semester. same sort of pressure on the gross margin. And then in addition, if you consider the top line decline that prompted some operating deliverage, that explains most of the decline of the margin of Saint Laurent over the semester.

In terms of Gucci and the DOS, more or less in terms of number of stores, Gucci has a quite good store network. Of course, the team is working also on a new sort of concept that are going to be deployed in the coming months or years. But for the moment, our focus is to make our current stores perform better.

Thank you very much. If I could follow up on the YSL margin today and the bridge versus your medium-term targets, how are you thinking about profitability in the longer term for some of them specifically? Thank you.

We won't provide any sort of long-term guidance on the EBIT margin of Saint-Romain, maybe to complement the comments provided by Armel. It's true that you had something like, just to help you to understand something like 2% of impact of gross margin variance on the profitability. Then you have the increase of the expenses, which is principally driven by DNA, depreciation and amortization, which is another two points, in fact, in terms of EBIT margin. Here again, we had quite good control over the OPEX besides the DNA, which is the outcome of all the investments we made in the past and that will bear fruits also for the long run if we think about typically the Champs-Élysées store, which is absolutely outstanding and which is a good example of what the brand can deliver in terms of experience. And the rest is really a question of fixed cost absorption, so the leverage. So it means that you have something like four points of the leverage. So it means that the full potential of Saint Laurent is still around the 30% margin and even Above, if we think about the capital market there, where we had set a target around 33%, and this ambition is still the same once, let's say, the current environment will improve.

And in the context of retailization, I mean, now Saint Laurent is a brand that is 81% retail. So in the context of retailization, and as you saw also in this first half, no compromise on that.

That's very helpful. Thank you very much.

I think we have time for just one last question.

The last question is from James Gritsnitch with Jefferies International. Please go ahead.

Thank you so much, and good evening, everybody. I just had a quick follow-up for Jean-Marc, really. You seem to have called out worsening trends in Q2, especially towards the end of Q2, and this seems to have triggered a much more aggressive review of costs. Can you perhaps labor at that point a little bit more? What trends have you seen in terms of deterioration in recent weeks, please?

No, I think that we mentioned that if we look at the quarter, June, was not improving. Conversely, there was a deterioration of the trends in June that so far are persisting in July. But in this very volatile environment, it's very difficult to predict what will happen in August and September. So I won't predict anything when it comes to the trends for the rest of the quarter. We didn't mean that it would amplify or accelerate or change our views when it comes to the cost. We are determined to review the cost, to make OPEC savings when we can by renegotiating contracts, by seeking for more efficiency, by reengineering our process. And we cannot go faster than what is happening on the top line. We do what we have to do in terms of cost savings because we know that we will start this way, 25, on a better cost basis and exactly what we are targeting.

Thank you, Jean-Marc. Can I just perhaps press you to ask whether some of these incremental pressures are concentrated in specific destinations like Paris, for example? Or is it more broader than that?

You mean you were focusing on the traffic on Paris typically?

Yeah, yeah, whether, you know, those deterioration of trends you called out for June and July.

Maybe we need to rush a little bit because we want to time to Montclair, but just in a nutshell, what we can say is that it's true that Europe, compared to last year, is suffering from probably a lack of traffic. Paris is not, the situation in France is not helping, while in Italy it's okay, but not outstanding in terms of trends. So, so far, Europe is a little bit weakened by, let's say, traffic of tourists, which is not as good as expected.

Thank you very much. Yes, thank you. I think it's time to conclude. So, thank you very much for your interest and for your questions. We have reached the cut of time we have promised to Montclair. I am certain you have more questions for us, and Claire and her team will still be available in the coming days to discuss directly with you. With my colleagues around the table, we wish you a beautiful and restful summer. We will see you and talk to you soon. Please note that we will report our Q3 revenue on October 23rd, Wednesday, after market close. Have a good evening and thank you again.