Ladies and gentlemen, good morning. Welcome to the Company's Financier Richemont Fiscal Year 2017 Annual Results Conference Call and Live Webcast. I'm Dino, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. If you would like to ask a question, The conference will not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to the auditorium in Berndu.
I'm wearing the Tarsier pants. Actually, it was a gift to celebrate the creation of Vandauma. I mean, somehow so it's
Yes, it's because it's past 9:30.
Okay. So good morning. Good morning to you and here, and thank you very much for joining the 2017 Richemont Annual Results Presentation. Welcome also to those of you watching the webcast. So here with us today are Richemont Chairman, Johan Rupert Chief Financial Officer, Gary Sage Deputy Financial Officer, Burkhart Group Cartier CEO, Cyrille Vineron Grand Prix and Apern's CEO, Nicolas Boss Head of Watchmaking, Marketing and Digital, Georges Guerne and Head of Operations responsible for Central and Regional Services and all lessons other than jewelry and watches, Jerome Lambert.
The press release and presentation are available on richemont.com. And from 3 pm, you'll be able to look at the replay of the webcast. As usual, this presentation will be followed by a Q and A session. Questions will be taken from the floor and also time permitting from webcast participants who would have registered their queries through the link on bichmois.com. So before we begin, could you kindly make sure that your mobile devices are switched off?
Thank you very much. And we can now start. So I'll hand now Gina over to Mr. Rupert.
Thanks, Sophie, and welcome, everyone. I asked whether I could make a few introductory remarks just to make sure that this meeting will take about half the time that it normally does. And you get the drift very soon. So what happened in the last year,
Last 2 years?
Is that somebody's mobile phone? If you want to take the call, then we'll wait. Any case, a number of years ago, Frank was there when I think second time when I met Talend, the author of The Black Swan, we had a long discussion and some of you are old enough to remember that the Feet nicknamed me Rupert for predicting the problems. So I said to him, there's a problem with the whole premise of the Black Swan. Because if people did predict that how could it be a black swan.
And of course, a huge philosophical debate in Suez, one of the 3 rare truly brilliant individuals. Sense of humor, but a genius. He's just a joy to be with. And he then gave me an A 4 typed, not even printed typed manuscript to read called anti fragility. He said, okay, smart ass, give me your comments.
You remember Frank what he said like 2 years before the launch. And I read it, I didn't comment on it, it was brilliant, but I told Frank this is very, very, it's a serious work. We started looking at fragile economies and non fragile economies, very wise, we amongst us to debate at it, never thinking we would one day be the victims of fragility. In essence, the more you perfect the system, the more your chances if something goes wrong, it's bigger. Same past when we've had downturns in consumer demand, you will recall some of you that have been with us long enough.
We were saved by our basic inefficiency in production. So when the wholesale over over request it, By the time the recession hit, we haven't delivered. You remember I told you a few times, thank God that we haven't delivered in time. But this was also an industry wide phenomenon. But as we moved on, firstly, I think we ended the curve in SAP and a number of the should I say in some of the systems, we also perfected our industrial processes.
So this time, we delivered on time, except there was an over exuberance. And even though our own network was mostly clean, the wholesale network was overstock of all watches, everybody's watches. So in a sense, we're victims of being able to be quicker in our reaction time. But we made the decision to react. And yes, we did buybacks.
You can ask Gary and Liam, but even that's mostly over, you can comment probably over. And today for a major maintenance, our sell in is less than our sell out. So the stock is gradually reducing. I love for you guys to ask our competitors. Were they doing the same thing?
It's no good us doing it on our own. And our retail partners, the big and even the small, still being force fed like these producing foie gras with people who still sell in more than they sell out, it is any bad for the whole industry. I know that we monitor, we're fortunate. We have the tools we can monitor. So our sales team for our major Maisons, the ones that you will that will move the needle is less than the sellout.
And that's a deliberate decision that we made. How long will it take for the watch industry to recover? I think there's still excess stock in parts of the world, America, parts of Asia. So it's going to be a gradual process. Have we been through this before?
Yes. Unfortunately, too many times that I can remember, the 70s with the oil crisis. 87, the tech problem in 2000, 2008. So yes, I've been through it a number of times. Is this as bad or worse than those days?
No. The problem is we were better equipped to supply the market. On the other hand, we're better equipped today to drain the pond, whether it be in whichever way e commerce, etcetera, etcetera. I think from our side, we'll be fine. If the whole watch industry should act it will be quicker for everyone.
But I cannot speak on behalf. I know 1 or 2 of the competitors are doing exactly what we're doing. But I'm not sure whether all the big players are. But that's up for you to ask, you should ask it. Is your cell in smaller than your sellout?
And if they say they don't know, then they've got a real problem. And if they say no, then you know there's a strategy. But that's really the key question to ask for the whole industry. I'm upset about the job losses in Switzerland. Yes.
I don't like it. Maybe I'm too socialistic. But on average, we've asked about 300 colleagues out of, let's say, 8,300 on. I don't like it because we as a society, we take ages to sign a lease. But every time we employ a colleague, that's a lease on that individual's life.
We should be a lot more careful to hire people. And we as a management share that responsibility and you'll see that crudely could we not well, I give my salary to charity. But should I say the successes are not as highly compensated as their predecessors? Because this pain is not just shared at the bottom, it is through the pyramid. On the other hand, there is an interesting thing in the world that the countries that fire the most, hire the most.
On Monday on Bloomberg, I listened to you early in the morning to the Pedagier of Adecco where they asked him how your region is going. He said, well, the U. S, the UK and Germany not that well. I thought that's interesting. I didn't know what he was doing.
I was just listening, didn't know who he was. I didn't focus. But I thought, who is doing worse than those 3 countries? So I switched, rewound, got the he said, because that's where the least unemployment is. He said, hello, President Macron should just listen to this.
The countries with the most flexible labor laws that fire the most, hire the most, they put the lowest unemployment rates. Switzerland is a fantastic country to do business I think we have 28 years, the rule of law, which is not pervasive throughout the world and not pervasive throughout Europe. If you're a non French company, we're going to make sure because the French companies tend to that's what I learned in my days that come out loose with Vivendi. We broke every agreement with treasury's approval. So Switzerland is a civilized country with civilized and highly educated workers.
And I'm embarrassed that we had to do that. Hopefully, we will grow. We won't make that mistake again. The other thing is, and we haven't discussed it recently, But the strong Swiss franc is a myth. It's not strong.
It is the market value of trust. And we've got a good use there. And yes, we're still working it through the system. But the head of the Swiss Reserve Bank had no choice, 0 choice. In fact, the people that set the cap gave a one way bet to my friends on Wall Street.
Remember the cat win those idiots with handbrake and malaria, in fact, not Soros broke the pound. He had a one way debt. And the Swiss economy would have been bankrupted if they hadn't done so. So now we live with a stronger Swiss franc. So Navi, get used to it, organize your lives accordingly.
But by the way, what none of you say, if you're a non Swiss franc investor, it's not that bad to get Swiss francs. To have the effect of a stronger Swiss francs come through, it is a reality. So we've got to live with 2 or a couple of new realities. The one is that there are too many watches in the world. And the other one is it's not a strong Swiss franc, it is a Swiss franc and that is our cost base.
We will adjust accordingly we have over the last 18 months. We believe in a strong balance sheet. The other question I was asked this morning, will people travel again? The answer is yes. Especially in the second machine age, what are we going to do with our free time?
The previous industrial revolution, the English invented sport. In those days, people went to church 3 times a week. But suddenly, people had free time during the day. Before then, what did they do? They went to church.
In the summer, they worked in the field, so they went underground to dig for coal. A horse had utilitarian use horsepower. After that, a horse became an object, a pet. If AI and robotics increase and you believe in singularity, we should watch out that we don't get debt to values because our utilitarian value in 30 years' time may be not as relevant as it is today. We'll have vast societal changes.
Hopefully, the abundance will be shared properly. And for that, I believe in a universal basic income, we will have to find ways to look after people whose skills do not make them employable in a modern economy where people, especially with rigid labor laws. Some people have become unemployable already. The globalization didn't lift all boats. However, a lot of the people that are angry had huge benefits through buying better products made cheaper.
So the real quality of life didn't depreciate by it at all because you suddenly got locked at the end of everything made by highly efficient people who work like crazy. The next step, folks, is going to affect us. It's going to affect white collar workers. It's a terrible thing being a chancellor and captain students like I asked you. And like 1 in 3, when I test them, I know that they're professional, we've done in 5 to 10 years.
Radiologists, I mean, I can give you a swathe of professions. So what are we going to do in our spare time travel? I don't know. Will people also put VR machines on their heads? I don't know.
But this is not in 30 years' time. I started in 'seventy five at the beginning. I'm not working here, but my first contact with Cartier. That's 1975. The change that's going to come in the next 10 years.
And it's exponential change. So when you look at our board, you will see that we're getting skill sets in that hopefully can cope with the pace of change and that it can be explained when I'm tired of just calling my son and when he answers, he answers tech support. And then the second, when I ask him a question, the key word is, well, basically that. That means he's trying to dumb himself down to my level to explain something that a 60 plus year old can understand. And Nikesh, most one because he and Nikesh are close buddies, When we 3 are together, it is like they look at each other and they say, now I will explain to this guy what's really going on.
On? Now the pace of change, you must have seen yesterday what happened to the retail sector, the department stores in the U. S. Shares Kmart, the large,
folks,
we've seen such rapid change and we better be ahead of that curve. So our goal is to position Richemont that we're ahead of curves. Now if anybody here is bold enough to predict to me or my colleagues, The Swiss franc, the euro, the dollar, Brexit, the oil price, how crazy the current U. S. President is going to react?
Is the Silk Road going to work? The One Belt, will all these things work? The French elections in a couple of weeks' time, then will President Macron succeed? Then I'm willing to tell you, okay, given all of those facts, that's what we guess our margins will be. And that's what we guess our European sales will be.
So I don't have I'm protecting my colleagues now Because you're taking one way debt. You say, we say that. So I'll do a thing with you. If you publish, publish your views and your bank views and your funds views on a whole set of parameters, We work that in and then we'll say, if that happens, this is what will happen. But you've got to publish it for everyone to see.
Then we've got a deal. If not, do not put us in a position where we're putting the cart in front of the horse, where safety comes and the market expects and then suddenly this gets to my college at the senior executive committee, oh, we can't plan this thing because it's going to affect etcetera. Those days are gone. Things are moving too fast. We need the flexibility.
Despite the horrible year, the fact that the system works, Gary got the buy in and Gary deserves the credit. Look at our cash flow. In prior years, we would have had a fiasco in prior downturns. So the system works and I want to thank Gary. And that's why Gary is not just leading me, he's still going to be my I wouldn't say my bulldog.
I would say my helper. Okay. He ain't going nowhere as they say. But do not come with every 3rd question was, where do you see this? What are the margins going to be?
Burkhart's new, I'm protecting him. If you have the guts to give the official view of Paribao or PNP or UBS on all of those things, then we can factor it in, but not 6 months, Luca. Give us and then also give us your historical views and our accurate view. Thing. That's also.
Then we have a measurable, then we'll work it in and then we'll be pretty accurate. If not, please do not expect of us to make fools of ourselves. Because the worst thing is, we don't want to look like fools, so we call these heads of the Maisons and we say, you're not allowed to do X, Y or Z. Because we're a family controlled company, we don't have to worry about being taken over. We could say we are going to do the buybacks.
Forget about the market, because it's the right thing to do. We're trying to do what is the right thing to do for the shareholders over a 5, 10, 15 year deal. And that's why I'm you shoot me, but I don't want to put people into positions when the things are moving so fast. That's still okay. But the problem then is in the management because this is a collegial business.
At Board level, it's collegial and at the SEC, the scenario is collegial. But we don't want pressure made by predictions when the factors have changed. The other thing is you'll see our new directors. I'm also asking my son. He's been with us here 9 years because I want continuity between the controlling shareholders and the executives.
He will not be an executive. That's not planned. And if I had to leave now, I see some of you have speculated you'll take over as Chairman. No. But if there's no family representative on the board, he's the first one, and somebody has to come and say, okay, we'll take the advisers come and you say you're crazy, so.
And these people have got a lot of people they've done from the work floor. I know who they are. Trust me, they're nearly unanimous about who they've done for the work pool. Hey, George.
No.
I won't mention names, But it gives them a sense of continuity. And the other thing it does is it gives them the surety that once the strategy has been agreed to by the board, collegially, then they have the freedom to go ahead and execute. We are also getting in other skills. I'm very happy with the individuals we've managed to attract. And those individuals will help us not only as non executive directors, I fully expect of them to come and help the executives because they have skills, specialist skills.
So I'm excited. I want to stay forever. But for the time being, and that's why Gary is also staying, we've just got to tell our 3 new executives or show them because a lot of brilliant people still don't know what they don't know. And you need to have a lot of scars on your back. And a lot of my Jewish friends call it the rebbe gelt.
You've got to pay your rebbe gelt, that rabbi. That's the learning process. And it is the transition of years of not successes, failures. It's the failures that we've all been party to and responsible to or for that we can transmit to them as sounding boards to say, by the way, have you thought of this? Have you thought of that?
By the way, did you know that? I'm 66. I keep on learning things from colleagues that I've never heard of. But not new things, that's the embarrassing things. Old things, I should have known 15 years ago.
I'm excited. I'm happy. I think we've got a great team of executives. And we've got some really good non executives in. So with that, could I hand over to Gary?
Firstly, yes, sorry, Burkhard.
Thank you, Mr. Chairman, and good morning, ladies and gentlemen, and here in the hall and those of you watching behind your screen. Let us now start the review of the numbers. Sales decreased by 4% in both actual and constant rates to €10,647,000,000 after an overall improvement in the second half of the year. Excluding inventory buybacks, the decline was 2% at constant rates.
The retail channel enjoyed growth and continued to outperform the wholesale channel. The country highlights were the strong momentum in Mainland China, Korea and the UK and the return to growth in USA. At €1,764,000,000 operating profit was 14% below the prior year's level. As a result, operating margin declined to 16.6%. Net profit declined to €1,210,000,000 As a reminder, the prior year included a €539,000,000 profit on discontinued operations.
Good working capital management coupled with cost control and the disposal of investment properties increased net cash by €452,000,000 to approximately €5,800,000,000 Let's now move to a review of sales and to the segment results. Let me walk you first through the group sales performance. 1st by region, then by network and finally by product line with the numbers as you know always expressed in constant currencies. I start with Europe, which now accounts for 29% of overall sales. After 10% increase in the prior year, this year sales declined by 8%.
After a difficult start, momentum improved in the second half of the year under review. Overall, France and Switzerland registered double digit sales declines, while the UK enjoyed a double digit increase in sales ever since the sterling devaluation following the EU referendum. All product lines showed positive momentum with the exception of watches, whose sales were impacted by significant buybacks. Let us now review Asia Pacific, our largest region, with 37% approved sales. Sales were broadly in line with last year and up by 4% when accounting for the inventory buyback program mentioned earlier.
Mainland China has grown consistently throughout the year to become the group's 2nd largest country. Macau, now back to growth, and Korea both showed strong growth. Hong Kong, on the other hand, was impacted by buyback and an underlying negative sales trend, although the rate of decline has gradually started to ease. Product wise, closing was down, impacted by the net closure of 90 internal and franchise stores, for the contribution from jewelry, leather goods and writing instruments as well as watches in retail was positive. Let us now turn to the Americas region, which posted a 2% increase in sales.
This performance was driven by jewelry, leather goods and clothing. It was helped by the reopening of the Cartier flagship store on Fifth Avenue in New York in the month of September. The wash category, however, remained challenging. Overall, the region slightly raises contribution to group sales to now 17%. Now to Japan, which represents 9% of group sales.
After a challenging 20% comparative growth in the prior year and exchange rate effects on tourist spending, Japan registered a 12% sales decline with all product categories impacted. The reopening of the Kapti flagship store in Ginza partially mitigated this performance. And finally, let us review the Middle East and Africa region, which generated 8% of group sales. Here, sales declined by 10%, impacted by inventory buybacks and unsupported currencies, which weighed on tourist and local spending. However, we remain confident in the region and are preparing the opening of a subsidiary in Saudi Arabia.
Let us now turn to sales by network. The percentage of sales generated by the Maisons directly operated stores now reaches 60% of overall group sales. This underlines both difficult trading conditions in wholesale, where sales declined by 14% and growth in the retail channel, up by 4% for the full year. At retail, strong sales increases in Mainland China, Korea, Macau, the UK and the U. S.
Compensated for declines in Hong Kong and France. The growth in retail sales reflected positive contribution from jewelry, leather goods and writing instruments. Following the net closing of 38 internal boutiques, the group's internal retail network now stands at 11 17 stores. Wholesale sales were partially impacted by exceptional inventory buybacks, the majority of which took place in the first half of the year under review and the net closure of 45 franchise stores. All regions and most markets declined with the notable exception of the UK, Korea and Macau.
As a reminder, the group's wholesale business includes sales to franchise partners, multi brand retailers and agents. We now move on to sales by product line. Jewelry, leather goods and rifle instruments enjoyed good growth, while the sales of watches were impacted by substantial inventory buybacks during the year. Sales of clothing, particularly in Asia Pacific, were affected by store closing program and 1 fashion and accessories maisons. The continued strength of jewelry was driven by a particularly strong momentum in Asia Pacific and the Americas.
With sales growing by 7%, the contribution of jewelry products to overall group sales has risen from 35% to now 39%. Watch sales declined by 15% versus prior year. Excluding exceptional inventory buybacks, the decline would have been limited to 10%. Leather Goods enjoyed the highest growth of all product lines with sales up 11%, thanks to noteworthy performances at Montblanc and Clouet. Moving now to the segments.
The Julien Maisons segment's profitability remains strong. It was a difficult year for the specialist watchmakers, as we'll see shortly. Within the other segments, performance amongst the various Maisons was contrasted, and the segment was impacted by substantial one time items. Let's now look at the reported sales and operating results by segments in more detail. We'll start with the Jewellery Maisons segment, which accounted for 56% of sales and 83% of group operating profits before corporate costs.
Good growth in jewelry at Cartier and Magnif and Arcos partially offset a double digit reduction in reported watch sales, thereby tempering the jewelry Maisons overall sales decline to 2%. The launches of Cartier Magician, Cactus and Love at Cartier as well as Arches de Noire and bouton d'Or at Aventre van Apples were positive. Retail sales showed growth, in part supported by the reopening of the refurbished Cartier New York and Tokyo flagship stores as well as 10 net openings in the period. Wholesale sales contracted significantly impacted by the initiative to assist multi brand watch retail partners with our excess inventory. Excluding these exceptional buybacks, the segment sales would have been slightly would have increased slightly.
Pressure by lower sales and the €151,000,000 onetime charges associated with the exceptional inventory buybacks and capacity adjustments, the operating results decreased by 11% compared to the prior period. This led to an operating margin of 28%. Let us now review our Specialist Watchmakers segment. The year end review proved to be difficult with sales 11% lower than in the previous period. The environment was particularly difficult for watches in the wholesale channel where excess inventory led to exceptional inventory buybacks.
There were some positives though, with good jewelry sales at Piaget, the only specialist watchmaker to be all say jeweler and good resilience at IWC, as you know, with the successful relaunch of the pilot's line and as well as its Roger Dubuis. The retail channel growth was driven by the net opening of 12 stores. Lower demand for watches costs associated with the above mentioned significant inventory buybacks and charges linked to production capacity adjustments led to a 57% reduction in operating results. All these actions resulted in one time charges of €72,000,000 compared to €24,000,000 in the prior year. Consequently, the operating margin for the period was reduced to 8%.
Excluding one time charges, operating margin would have been 10%. Finally, the other segment. Let me remind you that this segment includes mainly Montblanc, the group's fashion and accessories Maisons and some unbranded watch components manufacturing activities. Overall sales for the segment increased by 2% compared to the prior year. Continued positive performances at Montblanc, Chloe and Tidramila overcompensated for the impact of 105 net internal and franchise store closures and its related inventory buyback effects.
At Montblanc, sales of writing instruments with the new heritage Bougainoir addition and sales of leather goods with the Urban Spirit and Maestro collections were particularly noteworthy. Chloe benefited from the integration of its shoes business, licensed until now and from the continued strength of its leather offering. Overall, the operating result of the segment included one time charges of €64,000,000 stemming from the optimization of certain retail and wholesale locations that were more than offset by the €178,000,000 gain on disposal of investment properties in France. As a result, the operating result rose to €110,000,000 Excluding onetime items, previous year's operating losses have been significantly reduced to a €4,000,000 loss over the period. Now I hand over to Gary.
Thank you, Burkhard. Good morning, everybody, in the hall and behind your screens, and a special welcome to all of our Richemont colleagues. Let's first dive into gross margin, gross profits. Gross profit declined by 4% to €6,799,000,000 in value terms. Gross profit for the year has been influenced by the inventory buyback program, which reduced sales by €278,000,000 Overall charges to gross profits associated with the buyback programs and other capacity adjustments amounted to €253,000,000 If these two effects were neutralized, the gross margin would have been 64.6%.
The gross margin in the year benefited from a favorable currency environment, which added 30 basis points to the previous year. Let's now look at expenses. Growth in operating expenses in total was contained to 3% when the sales of the investment properties are excluded. On a comparable basis at constant exchange rates, the growth in operating expenses was limited to slightly less than 3%. Operating expenses accounted for 47% of sales in the period.
Selling distribution expenses, 60% of total OpEx, increased by 3%, both at actual and constant rates. This reflects continued investments in our retail network, most notably the renovation and reopening of the Cudgy, New York and Ginza flagships. These expenses also partly reflect the net closings of 38 internal stores during the course of the year. Communication costs grew by 2% and represented 10.5% of sales. Administration expenses rose by 2%, reflecting notable increase in IT spending linked to digital and security projects.
On a comparable basis and a constant exchange rate, administration and other expenses grew by 3%. Let's now take a look at operating profits. Our operating profit decreased by 14%, and we achieved an operating margin of 16.6% As one time charges for this year in total amounted to €109,000,000 compared to €97,000,000 last year, On a comparable basis, operating margin declined by 13%. The current year charges, primarily comprising the $287,000,000 in inventory buybacks, distribution channel optimization and capacity adjustments were offset by the €178,000,000 real estate gain that Burkhard mentioned. Let's now look at the P and L items below operating profit.
First, the finance costs and the costs this year amounting to €160,000,000 compared to finance income in the previous year of €2,000,000 The negative €162,000,000 swing principally is a result of the effects of the ongoing group's hedging program. Now let's look at profit for the year. Our lower taxation charge of €360,000,000 is a consequence of lower taxable profits. However, the effective tax rate has increased primarily because of nondeductible losses in certain jurisdictions and a higher effective tax rate on the investment property transaction. Our effective tax rate is anticipated to be in the range of 19% to 21% for the medium term.
Profit for the year contracted by 46 percent to EUR1.210 billion. This reduction reflects the non recurrence of the EUR 539,000,000 profit from discontinuation operations in the prior year and also the lower operating profit and the reversal of the finance costs that we just saw. Let's now focus on cash flow from operations. Cash flow generated from operations amounted to 1.89 €6,000,000 down from approximately €2,400,000,000 in the previous year. This can be explained by the lower operating profits that we've just seen and the one time €268,000,000 contribution to the UK defined benefit plan.
Upon contribution, the UK plan immediately entered into an annuity agreement with a 3rd party insurance company. Under the terms of the agreement, the insurer assumes all financial risks and will meet all benefits due to the members of the plan. An overall decrease in inventory for the year generated €123,000,000 of cash compared to an outflow in the previous year of $139,000,000 Gross inventories represented 22 months of cost of sales, broadly in line with the previous year. This underlines the continued discipline of all of our Maisons in the management
of our inventories.
Receivables were broadly in line with the previous year and the portfolio remains healthy with a current ratio of 97%. Let's now take a look at our capital expenditure. At €599,000,000 gross capital expenditure was below last year, representing 5.6 percent of group sales. 50% of our investments related to our point of sale networks, including internal and franchise boutiques. Openings for the year included a Van Cleef and Arpels store in Sydney, a Chloe store in Milan and a new Mont Blanc store in London.
Substantial investments were allocated to refurbishments, including for the Cartier flagships in Tokyo Ginza and New York's Fifth Avenue. Montblanc continued the rollout of its new concept and 31 locations were renovated in the current year. 21% of the gross expenditures was related to manufacturing investments. The most important investments related to the IWC manufacturing site in Schaffhausen and the new Cartier High Jewelry Center in Paris. Other investments accounting for the remaining 29% included investments in the group's central logistics hub in Switzerland, IT infrastructure and a new automated warehouse for Peter Miller in North Carolina, United States.
Let's now discuss free cash flow. Free cash inflow amounted to €1,027,000,000 a €218,000,000 decrease from fiscal 2016. The decrease relates to the reduced cash flow from operations, which has been mitigated partially by lower tax payments and lower investments in capital expenditures as planned. Let's now move to our balance sheet. Wishon's balance sheet is strong with shareholders' equity representing 77% of total assets.
At March 31, 2017, the group's net cash position amounted to €5,800,000,000 Our cash position comprises highly liquid, highly rated money market funds, short term bank deposits and short duration bond funds. Our overall resources are primarily denominated in Swiss francs, euros and U. S. Dollars. We also hold a 49% stake in the public company, NOOX NET A PORTER Group.
Our carrying value on the balance sheet is €1,100,000,000 This compares to the market value on March 31 of approximately €1,500,000,000 Let us now look at another use of cash, our dividend proposal, our fiscal '17 dividend proposal to be confirmed by shareholders in September is CHF 1.80 per share. This represents an increase of 6% over the prior year in Swiss franc turns. Let me conclude. This has not been an easy year for our Maisons, particularly in watches. We've had to deal with over deliveries and high levels of inventory in the trade, as well as our own overcapacity issues.
We've also addressed certain inefficiencies in our other segments. All of these measures have impacted our profits in the short term, but have placed the group on stronger footing today. The year is seeing a confirmation of the resilience of our retail network, thanks to the good performance of the jewelry category, now accounting for almost 40% of group sales. Richemont's strong balance sheet will allow us to manage the group with the long term value creation and a focus on organic growth. Those principles have not changed.
With this in mind, Wishon has embarked on a transition with the elevation of our best senior managers to new positions. We will continue to adjust our structures to an appropriate growth environment. This implies more efficiency within our operations, consolidation of certain back office functions, and this will promote operating leverage and control across the organization. The ongoing assessment of our internal retail network will continue as always. Resources will be primarily allocated toward research and innovation, digital marketing, online sales platforms and training in all of our Maisons.
We recognize the increasing importance of offering a flexible service to our clients, and we need to further adapt to new consumption patterns in terms of product offer, communication and distribution. Product wise, we will enrich our more accessible lines in parallel with the successful expansion of our high jewelry collections. In a world of design to print, Richemont's view is that there will always be an appreciation for products crafted by the mind, the hot soul and the heart. Let me conclude by reiterating that despite all of our challenges in this year, it's still a great business, Richemont. We have great people who work throughout the organization.
I thank everyone for their efforts over the past year, and I'm very confident that Richemont rests in confident hands. Thank you. And I'm sure I would be surprised if you have
your questions, if you could kindly give your name, company and limit yourself to 2 questions with no questions still. So we'll try to have a bit of turnover on the
Actually, Trondevan, Silicon Valley. Thank you. First, for Mainland China, which had a really nice growth trend recently. How do you see this? I mean, one could argue that that's also true because there were less Chinese maybe buying abroad in Japan whatsoever.
How sustainable do you think is this trend in Mainland and China? And second question, Hong Kong, which was for a couple of years quite horrible. How do you see the current situation here? Patrick, Mainland China has been, and you see the numbers, really quite strong and has been for a number of months, 9 to be exact. Where is it going to go?
We don't know, but the business is healthy there. And thank God we invested all of our capital that we did in Mainland China because we figured the day would come where the consumption would get higher in the country. It has. The operating margin for Mainland China is improving. Hong Kong, I think I wouldn't say there's signs of life there.
I wouldn't call a bottom. It's getting much worse.
It's John Guy from MainFirst. Could you talk a little bit more about the rationale to enter into a supply agreement with Swatch Group from 2019 onwards? Johan, based on some of your earlier comments, is this really due to renewed focus on capping your own investments in production given the increased market volatility that you see while taking a more flexible approach to your operating cost platform and the fixed cost cost base over the long term? My second question is around Cartier watches and thinking about the price positioning for 2017. And it seems as if, I mean, as close as you can get to a like for like basis, which I know is difficult, but there was quite a reasonable change in price mix for Cartiercer.
Is this with a view that consumers are more interested in effectively buying something which is maybe more accessible, more affordable between 10,000 and 20,000 or even below 10,000 relative to the previous price position for Cartier watches? Thank you.
In the past, I've often referred to the analogy between the automobile industry and the watch industry. You don't make Mercedes, Porsche, Ferrari, don't make spark plugs. They don't make in fact, when you go to Mercedes Benz in Sindelfingen, I guess, 40% to 42% of what you see is Mercedes Benz. It is simply not cost efficient. They make the engines, they make the transmissions, they make the key components, but it's simply, if Switzerland wants to survive and to be cost competitive, then Barron will also have to understand that you need to have people like Swatch free to supply.
And for years, we've had overhangs, etcetera, where they've been prohibited. Mr. Ick senior that was a year and a friend of mine saved the watch industry. And they are ask when you buy a
Porsche or an Audi
or You don't ask when you buy Porsche or an Audi or what spark plug is in there or the electronic system that's mainly Bosch, which branded differently. So yes, we have to make some key components ourselves. But there has to be a sharing, otherwise you're not cost efficient. And we've had a long standing and good relationship with the Swatch Group. And I'm lucky that we can that we could extend some of our requirements and be within the law.
Obviously, that was the first hurdle. We had to act within the law. Imagine if Ferrari had to make from the tire to the steering wheel. It's just nonsense. And having been on the advisory board of Mercedes for many years, I can't even know how the industry works.
The tires, the rims, the seats, the electronics, None of these car manufacturers make all these micro rotors when your seat goes forward and back, etcetera. These are different major OEMs. So if you look at the Swiss watch industry, I'm proud to say the best, the one that can make everything and everything is Jeshela Cope. What about all these fancy guys who talk about family owned and we are blah, blah, blah. Jeju is still probably the single company apart from the alligator scraps, obviously, we don't have alligator farms.
But yet, no joking, we're not buying any alligator farms. But it's probably the company. But it would never be cost efficient to do that. Secondly, as for Tocatia, there is nothing new. When I first got involved with Cartier, Cartier Vermeil watches.
It had by far the majority was quartz watches. We stupidly killed the quartz watch as a Swiss watch industry. But it's not it is offering clients what they want. It's not a major change in strategy. It means offering the clients what they want.
I mean, Patek Philippe makes a 24 with a quartz, okay, and a lot of them. Nobody questions Patrick Philippe about quartz and plastic, which remarkably looks a lot like our old watch, one of the Cartier designs. But they're doing it. It's a commercial decision for them. And yet they also make some of the world's finest watches.
So I fully support what my colleagues are doing. It's not a strategy in let's it is having an offering that's contemporaneous. And it's not new in our that I really want to say it's not a new thing for us.
To comment on the pricing strategy or pricing position, there's not a movement of saying that now customers all want to have cheaper products. I'd say when there have been an oversupply, the customer has their choice. So you have to review all categories for all customer base and say what is the fair value of what you offer. But we sell very well HiJEWY and we sell very well the new drives, which will sell at good price, is selling very well. A good product at the right price sounds well.
That's customers have
the choice. So you have
to review everything. But we sell very expensive things very well.
Yes. That's a good question, but it's not new for us. Thank you. Can we only afford one microphone here, Sophie? With cost control gone mad.
Helen Brand from UBS. My first question is just on digitalization and online. I've noticed in Cartier and IWC, we're on Neffa Porter and Mr. Porter, which I think is a bit of a break from the past. Also noticed some of the new Cartier watch things in terms of the influencers on Instagram.
So I just wondered what the plans are around digital and how long do you really have to catch up on digital versus perhaps some of the soft luxury names are doing? Secondly, I'm going to give it a go, but just on I'm not asking specifically on margins, but could you give us an idea around your OpEx plans for the year ahead, particularly around selling and distribution admin and the communication lines at constant currency and your budgeting plans there?
Okay. Do you have anything?
Why who do we have to catch up with? Sorry, who do we have to catch up with?
Look at some of the stock luxury names in terms of perhaps e commerce and just Such as
to name names?
I'd say Futur and Beverley probably have done
a We're very happy to through NATP to help my good friend, Francois Henri, all the time. And in fact, quite often, we suspect that Federico gives him better service than he gives us, which proves that they knew Trump. So I don't think we've got to catch up. Remember, I mean, and I look up, I really have respect for you. But you folks are supposed to be cynical.
A good journalist is cynical. You don't eat what's fed to you guys. We went in to Neta Porter through Natalie's husband, who luckily, we were a bit concerned about the future price of Vivendi stock. So we got Natalie's husband to write us to create a synthetic for us at €68 a share. We sold our shares forward when we exited Canal.
The year later it was 8. We escaped. With that, we bought LMH. But the second thing, we met Arnaud because he was the person who executed the trades. They then came to us to be an investor.
We invested because we wanted to see what they were doing. And it was after our nose request. Then the Belgian lady lost faith and decided to sell. We didn't approach her to sell. They approached us.
In the end, we ended up with 93% of the company and we still did not interfere in their business. With a new round of options after already having personally made close to $200,000,000 some individuals demanded 91% of the new options. With the rest of the 2,500 employees getting 9. That's where I interfered and I said there is a limit to grieve. And the strike price for those options that would have created them another gain of another €300,000,000 was under €1,000,000,000 dollars Their numbers.
So that's where, yes, we had a bit of friction. You say it's a limit to grade. That's when we decided it had to bulk up. We did the deal at a higher price than they thought it would be worth 3 years later with YOOX. Some fictitious potential people were created.
Unfortunately for that fiction, there were people, the potential buyers were enormous friends of mine that I've known for 25, 3 years. So of course, when Gary I called him, I said, you're out of your mind. We want to buy something you want to sell. You out of your mind. You're not buying if you want to sell.
So that was air and stuff and fluff. We've taken nothing out we've just put in. And I'm tired of the narratives that have been created over the last 5 years. And it's time that you folks have got to be a little bit more cynical. So we, back luckily, she did enormously well, much better than the shareholders said.
We're backing Federico without getting involved. There are different business models. These models are evolving. I then make the statement, this is a big boys game. Now for anybody who's read any English, and I'm not English speaking, a big boys game doesn't refer to sex.
It means guys with a lot of money. Okay. And I said it at the Feet Conference, the next moment, the same people tell me I'm a sexist, which every lady in this company will tell you is the opposite. I'm constantly asking for more females. The business models are evolving.
And I really want to make this whole speech, because I think it's important for you to understand. Vistarano has got a business model, Farfetch has got a business model. Everybody's got a business model. We don't say our business model is the best. Others are saying their business models are better.
All I can see, say is let's see. Let us see. But let us just all wait whilst Amazon is building busy, building Amazon basic. There he is a smart individual, Jeff Bezos. He knows the aggregate demand.
Why do you think I want Mikesh and Anton and people who really understand that business. Are they ahead of us? Not a single one of these companies that you know has got an integrated software system. Why don't you ask them how far the SAP has advanced? Why don't you ask them whether what the middleware is like?
I know that you said Buddies are mine. In fact, one of the names that we have mentioned, good friend, I've said it just came back to mistakes that we've made. Do not allow people to mess around and do bespoke SAP, because then you get to fragile situations. We've got to pull our hand brakes. So in a sense, we were ahead of the game, which we've learned some lessons, we've come back.
I don't think we are behind on the contrary. And these soft goods, I think a lot of us lost a dear friend the plug cuts of Tommy last year. She had a very simple, thanks, Luxury and Fashion and Style and Fashion, is there an outlet school? You have an outlet. Public Sunbelt doesn't have an outlet, okay?
So you folks want to make a very clear distinction. She was my hero. And be more cynical in your analysis. Don't just buy what these PR departments, sorry, Sophie, tell you. No, dig a little hey, no, no, dig a little bit and ask reputable questions.
And I can tell you, the world of online retail and especially segmented revenue and luxury is moving so fast. Just have a look at the department stores resulting what happened yesterday. So what happened? We had Walmart who killed Sears and Paymark or I can't say it because they're not killed, but look, whether they're more worn, wounded or not is up for the market to decide. But now Amazon is doing it to Walmart.
Is it a brilliant move to have a whole bunch of fixed leases worldwide? No. Obviously, no. But it's not for us to make that decision. It's for the clients to decide.
We want to help them. And George, that's why I asked George, it's omnichannel. The client, he or she should be able to decide where it's most convenient for them. And I don't think there are people ahead of us. I promise you, if they were, I would have gone to steal the top person.
So trust me, it's so high on our priority list. And then when you ask me costs, as we're busy building that, I have no idea how much we're going to spend. But we have a little box. It's a simple little box. It's important, unimportant and urgent and not urgent.
Something that's not urgent and unimportant, you shouldn't spend time on. But I expect to my colleagues never to get something that's important become urgent, because that gets to a career limiting move. If it's not solved, it becomes a career eliminate move. Or If you
give out margin at the half year and you get abused by certain analysts, rightly so, that becomes a career ending move.
In all seriousness, please understand our philosophy. I'm not sure that in certain commercial activities, not only of our business, but across the world, But the land grab is not going to be very quick and very and that you either going to be the best and the boss. I want to compete against Google. Do you know how many search engines there were? I don't want to compete against Amazon.
So if you say you ask what are we going to spend? These folks have just been in the business for a few months. We're not going to waste. All I can give you my words, we're not going to waste. What we're going to spend will depend on whether we think something is important and urgent.
So and if you trust us, we sell your shares. It's a highly liquid share. You can advise your clients to sell. It's a philosophy that these guys, we all sit and work. And I told them I'll bet for them today.
And George said, please, can you just don't let us answer today we were. But he promised me the next time he and Jerome and Nicolas gave you all the answers, correct?
We're talking
Looking at the website, there's a question about the group's intention regarding the stake in the Ux S. A. PORTER.
The what?
What do we intend to do with the stake we have in Ux S. A. PORTER?
How much cash we got on
the balance sheet? Yes, sir.
Why do we need to raise cash? As we distribute it, somebody else is going to take it over. It will be rated if we bought tomorrow if we distributed our shareholders. Why don't we carry on like we did in fact for the return of very good management team? We know the business.
We know the management. We don't have to pay a takeover. We've already paid a takeover premium there. Why do we have to I think it's a business that can grow. But I cannot comment on a public company.
It's a public company. I can't comment on the on our views of a public company. Is that a fair answer, Sophie?
Thank you very much. Lucas Sorka from Exane BNP Paribas.
Could you tell us
a bit more about your plans in eyewear? You managed to sign a partnership with Kering Eyewear. I seem to recollect that Cartier was losing quite a bit of money in our operations. I see that the factory in France is moving to Kering Iowa. And I'm wondering if those losses are included in the numbers you reported and when they're
going to be out of your P and L. More importantly, on watches, could
you give us more clarity on performance by brand? I seem to understand that different brands within your portfolio are performing
at very different levels. Some of them seem to be stronger than others. You had
a significant reshuffle in CEO positions at some of
the brands. So I wonder if you could get
us a bit more clarity on performance and the steps that you're planning to improve performance by brand?
Some brands are performing better than others. The ones that are not performing that well are getting urgent attention. But those that are performing well are also getting that same urgent potential. We clearly made some mistakes. And I'm not going to talk about individual brand performance or ask George to do so.
But the real issue is what do we think that brand can do in 5 years' time if properly positioned. And those that we believe and masones that we believe maybe will be reshaped. It will they're now only cows.
Look, on the eyewear topic, I'm not sure I would necessarily agree with your assessment that the Karzeg Eyewear topic was loss making, okay? It was a difficult situation. We have said sorry.
If it made losses, it didn't concern me, so it didn't concern you because it wasn't on the radar I was going to call him, say, where the hell did we make losses that didn't come up on my to my level.
So okay, the transaction is going to happen. There's no real items in the P and L, I mean, this year. I mean, so in terms of strategy, do you want to I mean,
the guy is not going to move from the It's just That really is a quick also. I love the caring. I love Mr. Pinot and his son. And it again makes absolute sense to have a combination where we both value quality and we will create efficiencies to scale.
The hardware is becoming very specialist, both in terms of time to market, production, new supply, new technology, what is coming with asset debt in Italy, what's coming to titanium in Japan, and you have to have everything. So you need a critical mass to handle, but also stay luxurious. So we thought on our own, it was difficult, so better find a partner to do it better.
Understood. Thank you very much. You didn't comment about single brands in
the eyewear sorry, in the watches business. I wonder if
I can get the bonus question.
You said in the previous conference that you believe that
you lack critical mass and scale in self luxury. So what are your strategic plans on stock luxury? Do you plan to grow this?
You are correct as usual, and you normally ask the normal, but good, intelligent and tough questions. A, our cost base, CHF, as I said before. The Swiss francs is the Swiss francs. I think the market in the watch market is Swiss franc based, at least ours, not all of our competitors are as Swiss franc based, that you got to ask them. Secondly, we are as a group, we're underrepresented in fashion and leather.
We have a really good and remark is really, really good. He's just appointed Mr. Westman. I'm happy Daniel is in the right way. And I have to say to you, it's the first time that I ever had a hand in appointing the CEO.
The group CEOs under me appointed the previous 4. And this time and they are going to give our HR and Gary finding this individual, I'm happy. Our letter is starting to work. We've got a hub that Jerome is built in Italy. Mont Blanc's doing very well.
Chloe is doing very well. So we're heading in the right direction. We've got specific internal targets for the other. You've got to understand Cartier used to be very present in leather and small leather goods. Well, then, of course, with the watch film and the incentive structures all the way down, the turn out of the square meter on a watch and on jewelry is locked out and on a bag.
So in that sense, Luca, and there I blame myself, Human beings react to incentive structures, whether it's domestic, whether it's socially your own kids. If you give them the right incentive structures to behave in certain ways. Now our incentive structures were biased towards watches and jewelry in terms of retail, especially because that was the high margin stuff. That was the high turnover per square meter. Secondly, multi brand leather stores started declining.
It's like the old stationery stores. So the distribution method changed. We are really focused on it. They are very positive signs. Cyrille gave me a target, which he now regrets.
We had a meeting yesterday afternoon, but he's committed to it. We are focusing on it. And in here, Mayakupa, again, we had watch expertise jewelry expertise, real jewelry expertise. But we didn't have watch expertise before the acquisition of Elemash, the whole Jaeger, IWC and Lulla Group. When we got that, we became watch specialists.
We are now building that in leningrad. We made some really stupid mistakes. Just in terms of the supply chain, for instance, Gerald, look, we've been right a few times. Where we didn't quite we thought we understood, we didn't totally understand who sells the room all the way the feeding chain up to us And how we get 5 and the second cousin would sell 2 of the same product. So I think we've now got a pretty good handle on it and that will help us to create margins, which margins can help us to communicate.
So we are serious about it, very serious about it.
We plan to closing wholesale tons of sales, not every at Carrefree. We try to reduce our volatility in March sales. Or are there any other initiatives that could be done in order to reduce volatility in the watch sales, in particular in the wholesale? Volatility in watch sales, but the analysis comes from the fact that safety part, a lot of purchase also to wholesale. And the question is, therefore, do you plan to reduce the number of wholesale locations you have?
And would it help reduce volatility in what sales?
We don't have wholesale locations. We have wholesale partners or retail partners. And unless they are financially sound, they will go the same way as Sears and Bellards. And we have to ensure that these people are financially viable. Otherwise, we have to assume more retail fixed leases.
So I think it's impossible for 1 group to determine that. Do I think that there'll be less wholesale and more e commerce in 10 years' time? Yes. Because it's omnichannel and the customers will decide where she or he wants to buy. And the key thing, of course, is the after sales service in terms of many of the products as well.
So where you have products where you need servicing, omni channel is slightly different to selling it by or a scarf or a handbag. So you've got to just differentiate as well. But the trend will definitely be omni channel. So, John.
Thanks very much. John Cox, Kepler Cheuvreux. One question really on the cash, What you're going to do with it, €5,800,000,000 I think at one point you talked about increasing the dividend by 15% per year on average.
Well, it's been 15% on average.
Obviously, you still Has it or not? I've not done the calculation.
The 1 year I go and I take a sabbatical and to show you that it was approved for that to call that I didn't get any information. How much did you increase it? 40%. 40%. I said, guys, I'm talking 15% per year for 28, 30 years.
That's when you allow 2 non executive directives to run the place.
But in all seriousness, you have over €6,000,000,000 You're talking about maybe building expertise in leather. Has there been any change in your strategy, maybe looking more for M and A?
John, I'm going to say this for the very last time. Our shareholders expect of us to build brand equity, not to pay other shareholders goodwill where they exit at a huge premium and we have to eat up the brand they quit. We have to eat up the goodwill. Now, are we saying no to all acquisitions? No.
But I, for instance, said no to Breitling, not because I don't think it's a good company, but I said to my colleagues, I'm going to buy Breitling whilst we've laid off 300 people. No way. Maybe I'm to Anglo Saxon protest them. But that's not the way I do business. So and I think it's a very good company.
But we just said, Gary and I looked at each other and said, what kind of a signal is that to send to our own colleagues? So maybe we make irrational decisions based upon more raise at times. But you show me a great company that we can buy that we can run better. Because you've got to be a bloody egotistical guy to assume you're paying a premium for a 3rd party business and you can run it better. Otherwise, why buy it?
You can't extract value out of it. So no paid mergers. They did a study in the U. K. The BAT, Rothmans merger, accreted the most value and was a 0 premium merger.
Normally, when a company buys another company at a huge premium, the exiting shareholders do far better than the acquiring shareholders. And this is empirical. I've read the studies. Remember, I used to be with Lazard and ran my own bank. So do you advise the client to go hostile or not?
If you go hostile, you're better buying shares. If you do that, you're using the most expensive currency on earth if you're honest in your accounts. But if there's one category of shares that I avoid locally, It's an acquisitive company that buys for shares and every 2 or 3 years, they've got to do a massive deal so that the shareholders can't do a 3 or 4 year comparative. Because the incentive is there for management to use every method possible to have the acquisition tool overpriced. So obviously, every accounting tool you can use, you pump your shares and you buy for shares.
I have found and Alan knows, he's been with me since, what, 'eighty five, I'm loathe to pay with shares because it's always proven with us to be the most expensive currency on earth. Because the currency you've got to serve for the rest of your life. Buying cash, dollars 6,000,000,000 is nothing. If I'm Apple, come and talk to me if I'm Apple. Okay, then we can talk.
6,000,000,000 is not a lot of money. Not in our field. Because quite frankly, you folks think all of it's worth resilience. I mean, 20 times operating 25 by blah.
Just an excellent question. I was intrigued a little bit by your outlook statement, which actually seemed quite bullish for yourself saying starting to transition towards a more sustainable growth in Luxury. And then sort of to add on your Q4 sales figures, it looked like double digit growth retail, non single digit wholesale. Has that continued more?
No, no. We've had each other too long for me to jump into that, I mean, please. We are confident that we will deliver proper returns for all of our shareholders in the medium to long term. We've been through these kinds of phases before. I've got very capable colleagues, but we still have great maisons.
And some of them are becoming greater and greater. What we've got to try and do is to do to 2 or 3 more Maisons what they managed to do at Bunkieffe. That's what we've got to do. First point, John, Daniel, because this is becoming a highly embarrassing thing for me on a personal level, because I'm being mocked at my board by a bunch of good friends of mine who are explaining to me that when is this thing going to be fixed. Now we've got the right talking.
And we were bold enough. Gary helped. Gary was partly the architect. Let's just be bold and to say, let's take the pain. We took a lot of pain last year.
We closed a lot. We decimated a lot and we cleaned up really dead. So expect more moves of that nature. Is that the proper way of putting it, Gary?
Yes. That's okay.
No, for other underperforming assets. For that, we need a little bit of a cushion of
I mean, John, the only thing I would add, because I'm sure the question will come is, we did have buybacks in the Q4, mostly around the Specialist Watchmakers. If you excluded that, the trend was exactly the same as the Q3. So don't ask about April.
Mario, Penley, at Bernstein. Two questions, if I may. The first one is on jewelry. This is becoming more and more important in the mix of the sales operation. Which are the trends that you see in jewelry going forward while considering competition and demand and how the new
zone of the group are reacting to this?
The second question is about the distribution of watches. We are seeing always a better performance of your retail shop of watches rather than in the channel. We see the development of online. In 10, 15 years' time, how do you envision the distribution of watches? And will Richemont probably in the future would be able maybe to sell Cartier watches just in Cartier boutique?
Are you thinking that the multi brand concept, you try the Time Valley that is managed by 3rd parties and you
can manage internally? Thank you very much.
Both, all three very good questions.
Boy,
am I glad I'm not going to be answering these things at the next meeting. I'm looking down. I gave them my word. I'll backfill them this time. Jewelry, I think firstly, we've got to look at branded jewelry and non branded jewelry.
The universe of jewelry is much bigger than branded jewelry. And I think branded jewelry will continue to grow at the expense of non branded jewelry. But it will depend upon individuality, on real skills, craftsmanship. And I think the world is going to become more and more bespoke. Nobody drinks Maxwell coffee anymore or Budweiser or Miller.
It's going off, it's going craft. And one of the things that bother me about the future of Europe is if we don't do something about it, we're going to lose the artisanal skills. Therefore, we started, I personally did the Michelangelo Foundation where we are creating a platform, a database for artisans and helping artisans connect with designers. So I would suspect that that will continue to grow and that there'll be more personalization also in watches. We should have the capability to react and to create and to suggest more personalization.
If the clients do not want to buy standard run at the mill, they want their personal taste. Jewelry, we have the expertise and we're the leaders. We intend to remain there. In fact, 2 people here seated next to each other. Niklas, why don't you start talking?
How are you and Suriel going to maintain? I'm now breaking my word to you.
And to answer the question, I think, on jewelry, on top of what Mr. Kurt said about the still the room to grow within the market from non branded to blended, we see really a procedure of growth kind of across the board from very high end high jewelry, extremely expensive pieces, special commissions to really they were identified jewelry. I think that's definitely true for Andre Fonopoulos. I think they can even speak for Cartier, so it's true also. And so there is room to grow geographically.
There is room to grow in a lot of regions and categories in the future.
But how
are you thinking about mass customization and very easily innovation, speed in the new lines?
The commander, there was a press interview of our Italian friends who say they wanted to chase us, invested massively in Vincenzo to try to compete. So they have to run fast because the demand is there and we have production capabilities. We have the design team creating high iconic products and also very exclusive ones. And to do the same thing, to do both in Nun Pacific County is quite difficult on a sustainable base.
You have to do it, to start a question. You have to do it. We know it's the father to do it in
the same way. They try to look at us. They try to copy us.
Yes. I don't know whether you've seen how many fake copies of Alumbra. Of Alumbra. Of the Alumbra have recently appeared from even people that I thought it would be the least their dignity to do that. But Georgi, I've said you, my friend.
Now that I have cracked in the ice, why don't you talk a little bit about omnichannel and distribution?
So of course, the retailers are facing the same difficulties with changing demand, tourists coming into Europe or not anymore. And retailers also have to change to build their own e commerce. And we had very close relationship. We worked together with these retailers. And indeed, to come back on omnichannel, we will have to invest more in digital, not only in social media and marketing and all of these aspects, which is certainly a growing investment point because consumers today get the informations throughout the channels.
But in terms of omnichannel, we need to offer that seamless experience to the consumer. So you have, at the end of the day, a unique customer view, and we have to offer that service that he can buy when and where he wants, be it with our retailers, be it through our own e commerce channels or pure players or retailers. So this is the reality of the markets. We have to be agile, quick to adapt to this demand, and we will do so. Was that fine, Mr.
Rupert?
George, welcome to the club. My father used to say the world looks totally on all that than on foot. So I had to explain to some of my colleagues, they said, why do we have to put up with this nonsense? I said, you want it more authority. So you want it more.
So you go from a free fall when you're at Amazon to suddenly having to deal with what I've had to deal with the last 25 years, which is admin and procedural stuff and good luck to join the club. 1 of the rehearsals is being here, George. So you just had your first initiation. You're welcome to the club.
Call. Thank you
very much, Mr. Rupert.
The first thing, yesterday, you said to me, please do not give any question to me.
That's what our agreement, yes.
Well, like Gary, Gary, Gary was talking to me. George at first.
2 or 3 more questions, folks. Yes, sorry.
Hi, sorry. My name is Jessica Morgan. I have two questions, if I may. The first one is on price and mix. As you rightly said, the watch segment has a tradition of having every price point.
But we have had 5 years of pretty good contribution of price and mix. And then in the last year, there seems to have been a bit of an adjustment back on these two metrics, which was right. What do you expect starting from now? Are we going to get price and mix back in the business in watches and the pricing power and
power. You've got a very good context being JP Morgan. Why don't you call our competitors and ask them whether they are going to live within their means or not? Whether they sell out is bigger than their sell in. If we get that answer, Melanie, I'll gladly we talk to you again about that because quite frankly, when it's at retail and our product is there and another product and this excess stock of the other product, the retailer is going to try to move the other product, which exerts pricing pressure on the whole segment, on the whole industry.
So nothing from your marketing? Sorry? But the price and mix is not
coming down. No, you understand what I'm saying, Melanie.
No, I mean, the bigger point is we still firmly believe in the fair pricing policy. Oh, absolutely. Right. So I mean, currencies have been a bit come, but I mean that's still the key view for us is the now how that affects margin. We don't really know because we don't know the currencies and things, but that's still very much in our thinking.
Melanie,
the clients are very sophisticated. Today, when a Chinese traveler goes, they have a live active web app. That will give them the price per product, per currency, per shop, per region. So for instance, if they fly, let's say Emirates and they land in Dubai, They'll check the prices and they'll decide, do they buy here, do they buy in London, do they buy in Paris, do they buy at home. There is total transparency.
But when you have the fluctuations, we can't predict why are the Chinese traveling to Japan. Well, first, the people are polite, they're civilized. The place is keen, it's not polluted. They travel to Japan for many other reasons than pricing. Trust me.
I love Japan. It's a civilized place. Now don't laugh. I don't want to. No, don't.
Melanie, don't laugh. However, if the yen jumps up and down, it's very, very difficult for us to predict what Karri said is the key thing. We have we believe in fair pricing, which means the client on the tax neutral basis, he or she must be able to buy the product. We need time for adjustment because their leads and lags at times, but that affects everything. In terms of our mix, as I said earlier on, you weren't born yet.
Within the 70s 80s, The watch industry was totally different with far more welcoming products than today. These incredibly expensive watches evolved over the last decade, 15 years. But remember one thing, first year's high jewelry have got lower margins. The higher the because then you start the highest, highest jewelry does really have the margins in the start, Justine. I'm talking.
Exactly. They're unique, but don't assume a higher priced product as a higher margin. Okay. Let's just stop there.
Can I have my second question? Then I'm moving on to my second question. I think we've all understood you're not going to comment on the margin forward.
Good. Good.
So let me look at last year's margin. Can I if I look back at your gross margin, it was 64.6%, excluding one offs, despite the positive impact of currencies and despite the channel mix that should have been meaningfully positive to the gross margin? Could you help me understand what were the negatives? Thank you.
Yes. I mean, I think it's a good question. The way I think about these things, I'm loathed to call anything exceptional charges, right? So the numbers that we gave you is I'm loathed to disclose exceptional charges.
No. To reemphasize, people who tell you things exceptional charges are hiding things. Because in business, Exceptional charges reoccur. It's an exogenous factor that hits you or it is a managerial stuff up. But continuous charges, I agree totally with Gary.
I don't like calling them exceptional and neither does Gary and that's our culture.
Okay. So the numbers An
earthquake something like that's accepted. But
So the only thing that's in the numbers that we gave you is capacity adjustments, I. E. Potential social plans and the buybacks, okay? In the second half, we did have recovery from Cartier from the deconstruction of product. You're not going to ask me that question.
Thank you. I will say the second half of the year margin was affected, okay, I'm going to use Mr. Rupert's word here, management stuff up. I think when a new management team comes in, they maybe have different views than previous management.
I'm still, yes. I'm calling the previous management and the current management. I'm asked to blame
So there's a bit of that in there, Melanie, but I don't I'm not going to hide behind those types of things. Okay. So there was a bit of that, but it was you're looking at me funny. I'm sure I'm I'm sure I'm
The initial charges are becoming unacceptable. It's a cost of doing business. It's like people blaming the Swiss francs. I think Crimea River is my buddy say in America. It's a cost of doing business.
And readjustments, as we said earlier on, we were over optimistic only a bit too efficient in feeding the market. And we paid our price. And we're still paying the price, and we may scold for it for a while. The readjustment phase will depend upon how realistic our competitors are.
Given the time, the last two questions will be taken from Susanna. Yes, Anna Pusch from Berenberg. Two questions, please. First of all, the cost base. So you've done a lot of work on adjusting this with the in terms of the store closures and the capacity.
So how should we think about it going forward? Can we expect some additional adjustments to come as of this year, meaning some additional store closures? And secondly, coming back to the topic of how the industry is changing, how we may see more personalized products. I was just wondering, do you think that related to that, the industry should also change in terms of the lead times, which maybe should become a bit shorter? I appreciate that the product is quite specific.
But do you think there is an additional change coming on that front? And also where do you see yourself versus the competitors addressing that?
We've been discussing omni channel and route to market and giving our clients flexibility of where they purchase, how they purchase, etcetera. There is, of course, the other side, which is the creation of the product. And there, we have enormous opportunities, but also enormous challenges. Anton is on the board of a company that we invested in through another through a net, which is a 3-dimensional digital printer. It breaks the rules of molding totally.
Now the whole industrial process, Panara is working on both metallic glass. The end product of the case, we freeze it, we take it to minus 70. So we take it 70 degrees, 90 degrees humidity. We basically take it to minus 40. We throw it against we drop it, throw it at 5,000 Gs on the lug and it doesn't break.
It's lighter, you don't have to polish it. These various new and it's a combination of very many technologies. So that will also have impact on the capacity to deliver better performance to our clients. I mean, the one partner I watch, we gave a 5th year guarantee. It has no lubrication.
It's got totally new materials that we're using. Since we want to stay ahead of the curve, we're going to have to invest more and more, and we've already announced in R and D. There is superb R and D in Switzerland. But we're in this on this one product with the BMG, we're collaborating with a Japanese family company where they have the technology. This will allow us a different production process.
You can have many factories. This is the future for everybody. What the impact will be on society, I have no idea. So we're not only looking at George and Jerome and the market and the distribution and the omni channel, we also have to look at emerging technologies. Your question is, I'm saying lead times
and individuality.
It's another client. It's a highly educated, far more demanding client based upon not only culture, but information. So we are going to have to and that's one of the reasons why I'm skipping a generation or 2. Anticipate. It's like Wayne Gretzky, you I shock you.
Wayne Gretzky didn't follow the puck. He went to where the puck was coming. There's some footballers and some rugby players and some ice hockey players and Michael Jordan who knew where the ball was going. Now is that instinct? What is it?
We've got to try and figure out where is it going. 1 of my heroes in life was the gentleman who really built Sony. And when he did the walk then, I went and I spent as much time as he would give me with him. And he said, no, no, no, no, no, no. Do not ask the consumer what he or she wants.
They might not always know. Create something that they don't know of that you think they may want. If I had done a consumer survey that was saying to me, and I asked a person, will you buy tape recorder that cannot record? There was sitting out of your mind. Who's going to buy a tape recorder that cannot record?
He said, but if I can give you music. Now you laugh. You probably didn't know what a Walkman looked like. You're too young. But it went from vinyl, SuperAIP, that's Guess, Walkman, CDs, streaming back to vinyl.
We've got to try and figure out where the puck is going. And for that, you need younger people, you need definitely more women and you need to be open to ideas. How we get there, I have no idea. But we know it's going to change. We know both ends are going to change.
We know George is in a very critical role, how we face the consumer. This other side is what do we think in our wildest ideas that consumers may know? But I agree with you, it's going to be lead time and it's going to be uniqueness. Cartier was the art of being unique. Not everybody wants the same thing.
So it's I don't know whether I'm answering your question, but
No, exactly. And just maybe also on the costs.
Cost of what, sorry?
Just whether we can expect any store closures or
Oh, I see. Okay.
I think the Dunhill I mean, there'll be a few
No store closures that we know of that you should worry about in any
Yes. I mean the Dunhill situation is finished. And probably next year, we're probably going to open up, we plan, 20 net stores. And we are opening up a subsidiary in Saudi Arabia, where Cartier will start to take care of their own distribution there.
We've got one more question. Otherwise, I'm going to give all of you the one question you should all ask.
I had another one, but I was just thinking I was being loud.
No, which is 1.
And it's more pronounced, I'll say, on CapEx, given the discussion about omni channel, so on one hand, obviously, you'll see probably less borrowing.
600, 600, 600.
Is the dollar we can expect going forward as absolute? No.
600 is what we're holding our colleagues to next year. Okay.
Thank you.
Do you know there's one question that our colleagues hate them and all people hate? Because in today's world, especially post email, people delegate trouble upwards. Because I have one rule, I want to know the bad news before anybody else. Good news, they can send me a letter. Bad news, I want an email first.
But especially, I have a Belgian colleague who recently retired. We have an order of the monkey. You know the English saying passing a monkey on somebody else's back. So we had an order of monkey that I used to hand up every year for the guy that put more monkeys on other people's backs. But after it won it for 4 years in a row, we retired the order of the monkey.
But if you want to
stop people from passing the buck, which is the biggest corporate game on earth, more yes, I wasn't there. At each end of each meeting, you ask one question. Okay, folks, is there something that you know that's important that we haven't discussed today that you think it's important for me to know? That's all you need to ask. And I told my son when we started for this year as a guy, I said, you watch the guys that will be on the way to the airport and they're going to talk and then say, we never discussed that.
And the other guy or the lady is going to say, it's just not our responsibility, the mobile tunnel guy, we've got 5 minutes. We've got 10 minutes. So as they now know that this is the question, the onus is back to reveal anything. If you are to ask an executive, is there anything that's important and urgent that you think we may not know? If they don't answer you, then it's 1 or 2.
They either don't know, which is very bad, or they're not being truthful, which is worse or as bad. There is nothing that's important and urgent that we know of that's important for you to know. I think that look, if we knew there's something very important and very urgent and we didn't tell you, then you would be sending wrong signals to your clientele. But that's the key question. If you ask somebody that, that is not a nice one.
If you think about it like Iran, you're asking anybody, is there anything? You ask your child. Unfortunately, I didn't know it when they were still living there. Is that slight, you know, with a priest? You've got a problem.
If you don't tell them the truth, a, if you don't know, then you're not on top of your job. If you do know and you don't tell, then it's as big an issue. There's nothing here that I can tell you that Gary, Brook, not any of us know in terms of planned costs, planned in terms of things that will move the needle for your projections.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect the lines. Goodbye.