Ladies and gentlemen, good morning. Welcome to the Company Financier Richemont Fiscal Year 2017 Interim Results Presentation. I'm Dino, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and that the conference is being recorded. To hand over to Gary Sage, Richemont Chief Financial Officer Burkhart Grund, Richemont Deputy Chief Financial Officer and Sophie Kanyard, Richemont Group Corporate Communications Director.
Please go ahead.
Thank you, Dinault. Good morning, everyone. Mr. Johan Rupert Chahren, Michel Le Peu, Chief Executive Officer Gary Sage, Chief Financial Officer We'd like to thank you for joining your webcast today to review 1st half year results ended 30th September 2016. Would like to remind you that the press release and financial presentation can be downloaded from glishmail.com.
The archive of this audio webcast will be available on our Web site today at 3 pm. If you need that time. Before we begin, I would like to draw your attention to the disclaimer on our presentation and press release regarding forward looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. After a brief introduction by Gary Sage, Burkhard Gunt will give you some sales highlights. I will present the Maisons main developments and Gary will then walk you through the financials and conclude.
This presentation will be followed by a Q and A session chaired by Mr. Rupert. The presentation will now begin and I hand over to Gary.
Thank you, Sophie. Good morning everyone listening. Thank you for your time. Richmond is reporting today disappointing but not unexpected results. These figures should come as no surprise after the announcement in September given the challenging comparables in the prior period and a difficult global environment.
The past 6 months have been characterized by the resilience of our retail network and jewelry sales and the poor performance of our watches which were particularly impacted by our buyback program. Excluding the exceptional inventory buybacks, group sales declined by 8% in total, sales declined by 13% at actual exchange rates and 12% at constant exchange rates. Operating profit declined by 43% to €798,000,000 Our operating profit was pressured by the decline in sales and resulting deleverage on operating expenses which grew marginally compared to the prior period and a number of one time items totaling €249,000,000 The operating margin ended up at 16% of sales. Excluding the impact of the one time items, operating profit would have declined by 25%. In the absence of major movements in the closing of euro Swiss franc rates between March September, profit for the period was reduced by 51 percent to €540,000,000 A good control over our inventories and receivables helped contain the reduction in cash flow from operations which ended up at EUR 666,000,000 Our net cash position after the payment of €878,000,000 of dividends this September amounted to €4,500,000,000 With this, I'd like to turn it over to Burkhard.
Thank you. Thank you, Gary, and good morning to everybody. Let's start with the review of sales performance in our various regions at constant currencies. First, in terms of broad geographical mix, there are no meaningful changes compared to September 2015. Asia Pacific and Europe remain our largest regions with respectively 35% 31% of group sales.
The Americas region was 16% of group sales, remained the 3rd largest region, thereafter from Japan and the Middle East and Africa with 9% each. On a country basis, however, the U. S. A. Is now our largest market after Hong Kong, which is closely followed by China, now our 3rd largest market.
Let's look at our sales in Europe. Sales were down by 17%, reflecting particularly difficult trading in France, our 5th largest market, due to a significantly lower level of tourist activity and the challenging comparative figures in 2015. A deteriorated feel good factor and safety concerns deter tourists who visit Europe, especially from Asia. Indeed, the Paris, Nice and Brussels events reverberated across other European countries with the notable exception of the U. K, which enjoyed double digit growth rates in sales following the EU and U.
S. Ramp up. The weakness in washes was mitigated by the positive contribution of accessories and clothing, while jewelry sales was broadly stable. Let's now turn to the Middle East and Africa, where sales declined by 10%, impacted by lower sales to residents and tourists, mainly as a result of strong currencies. Let's now move to Asia Pacific.
Hong Kong was weak with those category and wholesale channel being particularly affected by the buyback from our retail partners. The strong Hong Kong dollar and the traction of alternative shopping destinations like Korea and Thailand have not been supportive either. There are some windows though. The rate of sales decline has continued to improve. It amounts to minus 8% compared to minus 17% in September 2015 and minus 13% for the full year ended March 2016.
In Mainland China, sales grew by low double digit, including for watches, benefiting amongst others from price alignment implemented a year ago in a softer than windy. Let's look at the Americas region where the uncertainty surrounding the election and interest rates have affected the pivot factor while the strength of the dollar dropped sales of locals abroad, notably in the UK. There is a positive momentum in accessories that does not fully compensate for weaker performance in watches and a relatively stable performance in jewelry. Overall, sales in the region were down by 5%. Of note is the Cartier Mansion in New York, which has reopened in September.
Finally, Japan. The strength of the yen, which depressed tourist spending in the country and the very high comparative figures of 40% growth in the first half of last year, led to a 22% decline in sales. All product categories were impacted. Here again, it should be noted that Cartier and Van Cleef and Harpers recently reopened their flagship stores in the Ginza area. Let's now review sales by network.
The contribution of retail sales to the Maisons directly operated boutiques and e commerce has increased from 54% of group sales a year ago to 58% given the relative strength of jewelry and accessories that are primarily sold through this channel. Although down by 85%, retail sales proved to be more resilient than wholesale sales, which declined by 20%, dragged down in particular by the Asia Pacific, Europe and Japan regions and the already mentioned onetime items. Retail was affected by trading in Europe and Japan, while Asia Pacific and the Americas showed new growth. The Men's Own network with 11 54 boutiques was broadly stable over the period. Lastly, the breakdown by main product line.
Watch sales declined by 24%. However, jewelry sales showed resilience in all markets such as that. Leather posted a high single digit growth, thanks to OEM Mont Blanc. Jewelry sales were down by 13%, reflecting the impact of store closures in Asia Pacific. I now hand over to Sophie.
Thank you, Perka. The Swedish Watchmakers suffered from the largest decline in operating contribution margin to 13% of sales. The Jewellery Maisons were also affected, but their profitability declined less and accounted for 27% of sales. The other business area reported a loss after meaningful run time items. Excluding these, the other business area would have shown a positive contribution.
Let's look at the reported sales and operating contribution by segment in more detail. We will start with the Jewellery Maisons, which accounted for 54% of sales and 84% of group contribution before corporate costs. The Jewellery Maisons reported a 15% decline in sales largely attributable to watches. Indeed demand for jewelry at Cartier and Vonthees and Naples mitigated double digit declines in watch sales, partially impacted by exceptional inventory buybacks. Wholesale sales were significantly lower than in the comparative period.
However, the boutique networks showed resilience. Overall, the Jewellery Maisons saw the operating contribution decrease by 31% and contribution margin reduced to 27.4% of sales. Excluding one time items relating to Cartier watches, contribution margin would have reached 31.7% of sales. Let's look at the main developments over the past 6 months. So we start with Cartier.
Thanks to the introduction of a number of new references and collections across price points, jewelry as well as new retail opportunities limited the decline in retail sales to a single digit number. Launches included the Cactus jewelry collection and the Cartier Magician high jewelry collection while Annoulette de Cartier was enriched with new references. Wholesale sales were affected by the global environment and the exceptional inventory buybacks to assist multi brand retail partners improve the efficiency, hence rotation of the inventory. The review of the watch offer has led to the launch of the Royal de Cartier in May, a dress watch for elegant men available straightaway in gold and steel and steel, while the Prix de Cartier watch was introduced in steel in September. Worth noting is a marked sales increase in MENCHINA across channels and product lines including Cartier watches.
In September, as Burkhard mentioned, Cartier reopened its mention, some C5 New York and Kings at Tokyo after more than 2 years of renovation. Maisons also opened new retail boutiques in Korea, Malaysia and Australia. Overall, the retail network benefited from 5 net openings. Now, one quick and our friends. Remesen reported muted sales growth as good jewelry sales more than compensated for watch sales.
Jewelry sales benefited from a number of impactful launches notably the Enrode and large denouement high jewelry collections as well as a new book on dour jewelry collection. The retail network, so the addition of an internal store in Shenyang, Mainland China. So now we will now move to our Specialist Watchmakers, which suffered from significant operating deleverage with sales down by 17%, particularly impacted by Hong Kong and Switzerland and profit down by 53%. Operating margin decreased to 13% of sales reflecting the decline in sales and a relatively fixed cost base. Let's start with Caerger, which continued to enjoy good growth in jewelry, driven by the success of the new Sunnyside outline and Sacre de Venues high jewelry collections as well as the redesigned precision jewelry line.
Watches on the other hand continue to be heavily affected by difficult trading and inventory buybacks. Of note are the encouraging results of recently launched Hulu S, the only model in steel. Next, fashion constructant which experienced a slowdown in sales worldwide except in China and the Middle East. The revisited overseas collection and new Mete D'Aire in Sao Paulo enjoyed a positive start. Let's turn to Long and Sonae, where solid trends in Mainland China and Japan could not compensate for weakness elsewhere.
Similarly, positive retail sales did not affect negative wholesale sales. Product wise, the relaunch of the longer one model, longer front piece is now completed. Next, where the overall decline in sales has been cushioned by positive momentum in Asia and return. Sales in the 2019 internal boutiques were sustained by continuous demand for the Excalibur and Doublet collections as well as 2 new stores. At Jeju Lecoultre, the strong momentum in China and the UK did not overcome a marked decline in sales and tourist destinations like France, Switzerland and Hong Kong.
At IWC, the success of the rejuvenated filer collection has helped to moderate the reduction in overall sales. Of note is a good performance in Mainland China and Korea. Now to Fucine Panerais. The lower rate of sales decline in the Maisons 38 stores helped mitigate the decline in total sales. Sales in the Middle East enjoyed good momentum.
The launch of Roche and Stiato was well received among other novelties. Finally, Baumei Mercier, Maison experienced difficult trading in most markets with the exception of Japan and the Middle East. Plasimine formats are confirmed as the Maisons pillars respectively for men and women. The latter collection was enriched with pretty promise. So now we look at other, sales decline of 1% and one time items of €67,000,000 led to €40,000,000 loss.
Excluding these one time charges which related to our product mix, the operating contribution was positive, thanks to improving results primarily at Montblanc and Clouries. At Montblanc continued improvements in the product of gross margin and cost management are starting to filter through the operating results. Montblanc Lever division boosted notably by the new Urban Spirit Life collection was Montblanc's strongest growth driver followed by the writing instruments category. The latter benefited from the launch of the Mouveline Editas Rouge Genoa and the Mustache Coutac line. Fine Watchmaking is still suffering from the challenging business environment worldwide, which led to fewer Chinese customers in Europe.
In order to set a footprint in the digital environment, Moulin just introduced a new digital device called the augmented data. This notebook enables users to transfer to connect. The wholesale business recorded a modest growth overall, while retail outperformed at constant currencies supported by the net opening of 6 internal stores and the strong performance of e commerce. The effective new retail concept continues to be rolled out and is now in 17 locations. Let's move on to Chloe, which enjoyed a geographically broad based down the growth rate in sales, largely driven by leather.
Leather sales were sustained by the Jewel bag, but also by the growing success of FAIL and the recently introduced Nexa bag. The Maisons is now concentrating on deploying the new retail concept and further developing its digital presence with an online store. Finally, Lancelle, the predominant for the French market which contributed to 90% of sales coupled with the temporary closures of 5 major stores including the Opera flagship in Paris weighed on sales. The stores are being updated to the new boutique concept which has been a key driver for sales and image. The product offer has been completely renewed and the latest launches at more accessible price points are having a good start.
These launches include Mathele, Jules and Max. This concludes the review of the Maison. Gary, over to you.
Thank you, Sophie. Let's now walk through the financials first starting with the P and L. Reported operating profit is down by 43 percent to €798,000,000 This has been impacted by lower sales, a lower gross profit, one time charges totaling €240,000,000 Operating margins declined by 820 basis points and represented 16% of group sales at the end of September. Excluding these one time charges relating to exceptional inventory buybacks from our retail partners and optimization of certain retail and wholesale locations, operating profit for the half year would have declined by 25%. Let's now look at gross margin and expenses in more detail.
The 15% decrease in gross profit led to a gross margin of 63.5%. This 150 basis point reduction results from a mix of positive and negative factors. On the positive side, the increased share of retail certainly helped. In addition, we enjoyed a positive foreign exchange effect and that amounted to 40 basis points. On the negative, inventory buybacks and the optimization of certain wholesale locations relating specifically to the other segments reduced current gross margin by approximately 150 basis points.
Let's now look at our operating expenses in more detail. Net operating expenses in total grew by 2% and now account for 48% of group sales. At constant currencies, net operating expenses grew by 3%. Selling and distribution expenses which represents 6% to total OpEx rose by 1%. On a constant rate basis selling and distribution expenses rose by 2%.
This limited increase is primarily due to increased depreciation and rentals linked to last year's investments in the net opening of 22 stores. Communication costs rose by 4% and represented 9.6% of sales. Given the environment, we expect the cost for the year as a whole to grow at the same rate. Administration and other expenses grew by 1% or 4% on a constant rate basis. This growth includes one time charges of €31,000,000 relating to the other segment.
Excluding these charges, administration and other expenses decreased by 3% on a constant rate basis. This reflects good cost control generally given the continued investments in IT. Now let's look at finance costs. For the period, the movement on monetary items amounted to no gain or loss compared to €130,000,000 gain in the prior period. Remember, Richemont holds roughly a third of its cash in euros, a third in U.
S. Dollars and a third in Swiss The losses on our hedging program rose from €8,000,000 year over year ago to €91,000,000 in the current period. As a result, net finance costs rose to €109,000,000 versus a financial income of €76,000,000 in the previous period. So let's now look at the P and L items at the bottom. Given a lower operating profit and a reversal in finance cost, profits from continuing operations for the year where debt was down by 55 percent to €540,000,000 Our taxation charge declined to €139,000,000 largely reflecting the decline in our operating profit.
Let's now focus on our cash flow from operations. Cash flow from operations was affected by the operating profit decline. However, the decline in cash flow from operations was cushioned by a containment of working capital lease driven by lower wholesale sales and continued good control over our inventory position. At 98% current, receivables remain in good position. We incurred €60,000,000 in outflows €60,000,000 in outflows relating to the cash settlement of derivative contracts compared to €40,000,000 in the previous period.
Now let's take a look at our capital expenditures. Gross capital expenditure represented 4.9 percent of group sales and amounted to €251,000,000 We continue to invest in our formicile network and notably reopened the Cartier flagship in Tokyo and New York. For the year as a whole, we will continue to be extremely selective in the way we allocate our resources. Overall, we expect the cash outflow related to capital expenditures to be approximately €640,000,000 for the year. Now let's look at some of the nature of our investments made during the last 6 months.
Half of our gross expenditure related to retail investors and point of sale investors. This includes the opening of fewer internal stores, but many more relocations and renovations. The most notable completed projects were the renovations with the Cartier Mansion in New York and Dinca. Equally worth mentioning are the relocation of Banque Boutique in Ginza and the Chloe Boutique in Paris at Montaigne. There are also new Van Cleef and Mont Blanc boutiques in Shenzhen, China and a new Chloe boutique in the line.
20% of the spend related to manufacturing. The most important investments included the new Cartier jewelry workshop and operations center in Paris and the construction of a more efficient IWC manufacturing facility on the outskirts of Shoppe. Other investments accounted for the remaining 29%. They notably included the renovation of our main central warehouse in Switzerland and a new warehouse with Peter Millar in Raleigh, North Carolina. CapEx also included ongoing investments.
Free cash flow amounted to €218,000,000 This level reflects a much lower generation of cash from operations only partially mitigated by lower tax payments. Let's now turn to our balance sheet. The group continues to enjoy a very strong balance sheet not withstanding the lower profits. Equity accounts for 73% of total. Net cash amounted to €4,500,000,000 compared to €4,800,000,000 at September last year.
Our net cash position includes short term liquid funds as well as cash, cash equivalents and bond funds. Liquid funds and cash balances were primarily denominated in euros, interest rates and dollars as I previously noted. Let's now turn to the conclusion before we take your questions. Let me say that we've previously communicated individual month sales in April October. As we've stated many times, an individual month will be volatile and potentially misleading.
Many of you have agreed with these thoughts. We stated clearly that we need any disclosure the next time either October or April sales I can confirm that October sales for the month were in fact modestly positive. In conclusion, in an environment where industries are affected by excess capacities and the beginning of what we believe is a secular trend towards a slower growth. Our focus over the near term will be to adapt our structures to the new ones. We will notably work to adapt our thinking, our processes and all aspects of our businesses to meet this new one.
Let me conclude the presentation by reiterating our confidence in the long term, our prospects for our high quality products and our enduring approach at Reach Home. We will control costs while also supporting our main focus in marketing and digital initiatives. As always, our strong balance sheet allows us to think and act long term with the best interest of the group in mind.
And your company name? Hopefully, the quality of the plant was good. I received 1 or 3 methyl good to give me your feedback and then we'll see what can be done with the Nordea replay. So Dino, can you open the lines, please?
We will now begin the question and answer session. First question is from Mr. Antoine Belge, HSBC. Please go ahead, sir.
Yes, good morning. It's Antoine at HSBC. I mean, the line seems to be slightly better now. My first question relates to the challenges that you mentioned in your press release and explaining also that's when you were announcing also management changes. So which are those challenges?
The main one, I think you mentioned also excess capacities. It seems just to me also that there are some pricing issues that we've seen price cuts broadly Cartier and it seems that new products are introduced at a lower price and also Piaget has been launching his first steel watch. Could you comment on that? Secondly, with regards to the gross margin on the OpEx, I mean, the line was pretty bad. So could you maybe, first of all, re mention the FX impact on the positive retail channel impact as well?
And what would be a sort of gross margin target for the full Danil, could you maybe elaborate a bit on what has been done and what positive effects you're expecting for Dan Hill? Thank you.
Antoine, I'm not sure you left any questions for anybody else.
Yes. I should have said we should have answered the question to 2 by
Okay. I'll do you want to deal with the no? Okay. On the gross margin, Antoine, let me go back to that
page.
I'll read it again just so everyone has it. The gross profit declined by 15% and the margin was 63.5%. The 150 basis point reduction results from both positive and negative factors. Positively, we had an increased share of retail. Exchange was also positive on the margin.
The impact was 40 basis points versus the previous year. On the negative side, the inventory buybacks and the optimization of certain wholesale locations amounted to 150 basis points. So that's the gross margin question. If we talk about Dunhill broadly, we incurred a €67,000,000 charge. Now €31,000,000 of it resided in expenses and $36,000,000 of it resided in gross margin.
So we're clear about that. Now what's actually happening? You'll see in the tables, we've reduced the store base by 5 through September and we will reduce probably another 25 by the end of the year. Most of those stores were underperforming stores. I would say that the new product is coming and actually if you take the stores that are remaining, the full line stores, the sales are actually positive year on year.
So that's good news. So we think we're getting there. All of these charges, we've taken a significant amount of fixed cost out of the business and we estimate that to be on a recurring basis of 15.9 per year. Antoine, I think in terms of the challenges, we said the inventory was overstocked in Asia, particularly for Cartier. We've dealt with that now and we've clearly disclosed what the numbers are.
So that's behind us. I think some of the other watch brands will have buybacks in the second half, but frankly that's immaterial. In terms of the pricing?
In terms of pricing, Richard speaking, Antoine. As you know, we are really adapting and we have adapted a fair pricing policy, meaning that excluding VAT and local taxes and duties, we should be in a position to offer to our clients the same price worldwide, what we do. And of course, we have to adapt to volatility of the exchange rates, which is not very easy, but we did it when the yen was weak. We increased prices and we decreased prices in Japan subsequently and of course in the UK following the Brexit, we have to pass some price increases. And more generally speaking, in terms of challenges, as you know, the new normal means that we have to reassess our structure.
And of course, we did start early March to address some excess of capacity for the watch production. And if we decide, we might take further option, but it doesn't concern only production. It's a reassessment of our organization, including central function and regional organization as well.
Maybe just to understand, so I understand your strategy of fair pricing, but I was more referring to some price cuts more on what I think you referred as psychological prices in certain countries versus competitors or so isn't it a need for the industry and including your brands to be lowering prices in general? And I'm not talking about price harmonization here.
It's a matter which is dealt at the brand level and not at a good level. We're not cutting prices as well.
The next question is from Melanie Floche, JPMorgan. Please go ahead.
Yes. Good morning. I was wondering whether you could share with us your gross margin target for the full year, now that you've gone through a lot of the one offs behind you, what we should expect on a full year basis? And also on the OpEx growth, sorry, I did get that it was going to continue on the same pace, but I wasn't sure whether this included this was a reference to A and P only or whether so if you can go through the lines and tell us what is happening there? And then a more strategic question.
I was a bit confused by the management changes taking place at both the Board of Directors and the senior management. I was wondering whether you could share with us why there is such a change and notably no need for a new CEO and what the new roles that are who are these people going to report to, notably Mr. Lund there? Thank you.
Hi, Melanie, it's Gary. So A and P for the year, and this is all in constant currency, we think it will grow at the same rate plus 4, okay? Admin and other expenses, we think probably flat and S and D probably 3 to 4.
It's plus 3 to 4 in S and D?
S and D, 3% to 4% for the full year. Margin, it's a little too early to tell. And I've been criticized quite a bit. So I would say somewhat lower than where we are now, but it's too early to tell.
In terms of the management wrestle to stay on year after year. As he said to me, he does love his wife more than he loves us. And you know, he is going back to the United States. And that has been signaled for a while. You've seen Burkhard come on board.
Now Richard, it's impossible to replace Richard with another person and ask of that person to take care of 30 5 direct reports. It's already difficult for somebody who spent 38 years getting to know the inside of the group. Secondly, we already signaled that the structure would change when we put Cyrille Vigneron on the main board. I mean, it's nonsensical to have a CEO above the CEO of 1 of the world's biggest Maisons. So I suspect that the current one, which is in line with the likes of Kering and LVMH, where you have where you group the watch pole and you group it just makes much more sense.
Now obviously, Van Cleef and NAPEL also directed to the Board. So really the Board's role is to allocate capital. Finance and human resources. So the allocation of financial and human resource capital. So this is a far more sensible structure and a fairer structure.
Can I sorry, does this mean you're going to be more involved, Mr? Rupert, back in the business?
Melanie, this is this old thing when there's a crisis I'm involved. No, no, I will continue to be involved as I was before, but we will have more involvement of by the likes of George Canne and obviously we have finance And then we have a very capable gentleman who will be in charge of the non watch business, you name well, he managed to turn around Mont Blanc. And so it's a far well, maybe it's more nonsensical to the analyst, but it's a lot more sensical to the people within the group. And those are really the people that I care about.
Thank you for that. Sorry, Gary. And a follow-up on the gross margin.
Did you
say it was going to be lower than you are currently tracking, therefore, the second half under more pressure than the first half? And why is this there were some one offs in the second half last year? So I'm a bit surprised by this statement.
As I said, Melanie, it's going to be it's a little too early to tell, but I think it's going to be slightly lower, right? A lot of moving parts.
And why would second half be under more pressure, sorry, since there were quite a lot of one offs in the first half in the gross margin?
There are some more buybacks to come.
Well, Gary, you got your shelf in that hole and I'll start digging. I told you not to discuss it. Okay, carry on. Dig.
No, I mean, Melanie, I think the we've reduced we've reduced our inventories. There's probably some under capacity there. So I think it's going to be a bit lower. And I've probably dug as far as I can at the moment. No, please help me.
Thank you very much.
The next question is from Mr. John Guy, MainFirst. Please go ahead.
Yes, thanks very much indeed for taking my questions. Gary, the first question just with regards to October trading. I noticed on the table said that October was positive for you. Could you give us a bit more indication as to how positive and what the impact has been from the new flagships at Ginza and New York within that October number? Secondly, with regards to the comments, Johan, that you mentioned earlier with regards to a leaner organization, not just across well, across effectively all lines.
Could you maybe talk a little bit about where we could see the biggest opportunities and what the size of the fixed cost base could look like going forward? And then with regards to Mainland China, could you comment with regards to jewelry ex Cartier watches in terms of how that performance has been over the course of the half year? That would be great. Thank you.
John, on the sales, I think we've said as much as we want to say. We said we don't want to disclose. Okay. Having said that, I will say one of the bit of good news in October was if you take Mainland China, Hong Kong and Macau together, that was positive. But I don't want to comment anymore on sales.
The reason why Melanie, I probably didn't finish the sentence. I wanted to say why it makes what I care about. My job is not is to make sense inside the company. Yes, obviously, I care about what you people think. But my job is not to sit here with you and give you indications on operating margin for 6 months or you know, our goal that you will remember Melanie and my goal is to grow our dividends in euro term by about 15% per year for as long as we can.
Now that means we need brand equity. It means an enormous number of things to create the demand, to have the cash flow, to have a proper balance sheet, so we can carry on paying proper dividends. And that's an internal discipline, but that is a medium to long term goal and we've managed to achieve that up till now. Hopefully, we'll carry on with that in the future. Not every year is going to be that good, but if you average out over the years, we should be able to reward shareholders properly whilst actually reinvesting the capital properly.
And it's the role of the Board really is to sit with the executives to allocate capital so that we get higher returns on the capital. That's our job. Our free cash flow must be reinvested properly. And that is not a quarterly or monthly job. That is not even an annual job.
You've got to think, take Van Cleef. It was a 6 to 8 year job. And every year I kept on and not only you board members would say, so when, so when, so when. We said when it's fixed. Now obviously, they are underperforming situations and we're going to either fix them or sell them.
Because I'd rather take that cash and put it behind Maisons that are growing. And with the structure we've just put in, we had our first meeting last night and there's a real excitement. The people know what we've got to do. And it's a generation skip as well, which is very important. So when you ask me what is my role, my role is really just here to smooth over the generation skin, because these are younger people, proven executives and now it's time for us to stop looking at another generation.
So it's October, as Gary said, if you take Hong Kong, Mainland China, Macau put together is positive. Mainland China has been positive for a while. So it seems that the Chinese government's intent on promoting growth through consumption rather than just investment is bearing fruit. By the way, if you check the luxury automobile companies, it's exactly the same. Now, I would say that our job is not or should I say the Board's job and whoever the CEO's job is, is not to interfere on a daily basis.
As I've said, I don't know how Richard did it. I joked earlier on that if he'd been based in Paris, he would legally only have been allowed to spend 1 hour per company, hour work week. Thank God he lived in Geneva, so he worked a hell of a lot harder. But I can't expect anybody to fulfill that role again in that way. It's killing it.
And remember, you had the experience of 38 years in the group. So in terms of the management restructuring, it makes an enormous amount of sense internally. Over time, I hope that you all see the benefits. But I really don't want to comment on quarterly and daily and monthly. When you talk about, I'm talking about fine tuning and slimming down, but I'm also talking about a massive change in the way business is being done by going digital.
A massive change in e commerce. We are seeing the advent of the machine age. How do I know what the results will be on our whole process from design through manufacturing in 3 years' time. And if people could and I tried to stay on top and we've got brilliant young people who understand this. But frankly, we're just trying to stay ahead of the curve.
If you read the book, Taleb's book on anti fragility, then you'll see the problem that's occurred. In the past downturns, our supply curve was always lagging behind the demand curve. So we were in fact saved, as I've said before, sections of the company have perfected the production to such an extent that we moved the demand supply curve very close to demand curve. So guess what, the demand curve moved back. And our dealers are always a bit more optimistic.
They'll sell trade, so they order in expectation. Kind's biggest weaknesses is that we are very loath to predict the discontinue. Things go better, we all think they're going to go better. If things get worse, we all over extrapolate worst. Hopefully, this is not secular, but we're preparing for it to be a secular change, in which case we've got to address everything.
And that's why I'm saying not just factories, we've got to address the way we do business. Because in the new world, you're not just affected. I mean, the sales will come back. But how will they come back? Will they come back in the same way where people walk to retail stores?
I doubt it. I think everything is changing and we want to be ahead of that curve, will lead to more flexibility. And as for gross margins, I don't know what they're going to be. If you can tell me where all the currency rates are going to be, where the tourists are going to go, well, I'd be with products that they wish to have. We've always had welcoming jewelry.
So yes, take IWC, they didn't cut their prices. They launched new products in a new slightly more welcoming sector. So they didn't cut prices on existing product. They launched new products. It's really to be flexible.
You're asking very, very good questions moving fast. And it's not that we wish to be up to it and to obfuscate. It's just that things are moving very fast and it's not just in the luxury goods market. We're getting into a sharing economy. We're getting there are things developing today, digital printing, new methods using liquid injection.
I mean, it's are we going to be stamping in 10 years' time and polishing? I don't know. So when we say cost cutting, don't assume we're talking about the human element. If you suddenly have more e commerce, then you don't need your own internal boutiques. So it's adapting a business model that is flexible and fast enough to meet the changing demands of our consumers.
And by the way, I'm winging it as I'm talking because it's very difficult to explain.
Thank you very much, Johan, for that. Could I just follow-up very briefly with one other question with regards to what we've seen on the eWatches side? We've seen quite a big change position wise more into stainless steel. Is that something which will continue given the trading down that we're seeing in the current environment?
John, sorry, but this is really the last question because the queue of analysts would like to raise questions. And I think it's we have to be fair to the others who've been waiting like you.
Absolutely. Sorry about that.
Sorry, John, just very quickly. It's not only price. In today's world, a few 2, 3 years ago, I said to my colleagues, you've got to understand that people, even those with money, do not wish to show they have money. So there's an era of modesty that when you have structural unemployment, it's also addressing psychographic. It's not just economics and the needs of customers.
So it's a multi there'll be more white gold and more platinum. And it's the consumer. So it's a complex thing. I hope I've answered that. Next question, please.
Thank you.
The next question is from Mr. John Cox, Kepler Cheuvreux. Please go ahead.
Yes, good morning guys. Thank you very much for taking the questions. And Johan, you're on the call. So if you don't mind, I'll ask you a couple of longer term questions in terms of the luxury goods industry and your position in it. First question, what about yourself, sir?
What is your plan for the stake in Richemont? It doesn't seem to be an obvious sort of family successor. What do you think about what you may do with your holding?
My son is sitting here and he is very interested in your question by the way. And Johnny is slightly bigger than you I would say.
Yes. Okay. I'll take that. And then second question, just in terms of the medium term outlook, what do you think for luxury goods, watches and jewelry specifically? I'm talking over the next 4 or 5 years.
And as an add on, you have that huge cash pile. Is there anything out there you'd like to own? Graff Diamonds is one for example. There are plenty of others out there. What are your thoughts on that on the M and A given the industry is under a lot of pressure at the moment?
Thank you.
Thanks, John. Firstly, the reason why Gary and his team and I share your views on Richard and Gary, I mean, it's not going to be the same. The reason why we have acted prudently is because we knew sooner or later there'd be problems again. No, we do not have any major acquisition. We obviously speak regular to many people, but we have no acquisition, definitely not a sale in mind.
Add ons, we'll always look at, but it will be more of an industrial nature than it will be of a brand nature. If we don't buy something, let's say we buy some, doesn't matter what it is for $5,000,000,000 then all of you guys are going to applaud it. We're going to be writing off goodwill and discovering problems that we never knew existed, which caused the seller to sell. So our job is to create goodwill. Our job is to do the success of Avangleaf and Nutbell.
Chloe is very well on its way. So if Chloe should need more capital to grow than would have been normal, then we'll support it. I'd rather invest in our own Maisons than go and buy somebody else's products. As for the future of luxury in watches and jewelry, I'm very positive. If you look at China and you look at our sales, the combined sales Macau, Mainland China and Hong Kong, and it's now discernible trend how well China domestic is doing.
It's discernible and it has been going on for a while. And now the combined total is up. Now we know it's a major part of clientele currently and ideas to our future clientele. So as long as we can keep our brand equity up and we don't start picking low hanging fruit, I'm very confident in that sector. However, we're going to have to address the way from design through production right into how we distribute.
And we're going to have to be more flexible, if I can put it like that. And that may involve totally new innovative production processes. We've already got it in one of some of our secret labs where I went 2 weeks ago where I saw new production methods that is so innovative, where in effect you can build many factories, enormously flexible. So we'll try to keep the design fresh and the brand equity high because we realize that we know the market will return. It has done so on countless occasions and luckily we have stability both in financial and human capital in our group to back our trademark.
So I'm not selling. I can't say that I will be buying because I'm not supposed to, but I'm not a seller, okay?
Okay. Then because you're saying you're going to increase the dividend on average 15%
I'm not falling for that one. I've said we have managed to do that. If you look at it over the last 20, 25 years, that's my dream. My dream is also to go and play rugby for South Africa, but I'm 66, okay. So our goal, our dream, that is what we're trying to do and we're bringing it back.
But when interest rates are in nominal terms negative and the Swissy is negative 30 years up, then maybe 5% growth for a number of years will be very, very nice. But it could then reverse the mean and it gets higher, so that the day I go, I can say to the guy that's sitting here staring at me, say right over to you, you've had 25 years of 15%. Good luck to you boys. Our goal over the long term is to provide superior returns. Let me put it now to provide superior returns.
And right now, I do believe we're in the position where we can.
Thank you very much.
The next question is from Luca Sarkar, Exane BNP Paribas.
Question on Cartier. I wonder where you see that the brand stands as far as the competitive position in the market and as far as the challenges that it's facing from it. My impression is that on jewelry, frankly for NAPEL is performing significantly better. And I wonder what you think about that and if you think that there's challenge there for Cartier that it needs to adjust to. Talking about capital allocation, I wonder what you think about the scale that you have in leather goods and fashion.
The trend this time is positive, but I ask myself if you have enough scale to manage the complexity in the market to attract and retain the relevant talent. It happened before that Chloe was doing the right thing, but then it lost the plot. So I wonder how you see yourself committed to these two categories in the long term. You spoke about the 35 hours a week. And I also think that in terms of senior management bandwidth, this could be a challenge, and it's a small business.
Last but not least, if I may add another one. Recovery, do you see it coming mostly from the measures that you're implementing in terms of cost efficiencies and restructuring or from sales pickup further down the road? Thank you.
Firstly, let me assure you, I'm very glad that I don't have your view on Cartier. Otherwise, I wouldn't sleep too well at night. So we do not share similar views on Cartier. In terms of leather goods, I agree with you and we are looking at the scale. I did not understand what you're talking about bandwidth and 35 hours etcetera, because none of us want to go on to a board where they don't, you know, they work harder than 35 hours, trust me.
And I've got a very, very good management team, maybe because the majority them are all ladies. I'm not sure, I suspect it may be. Young ladies, they are superb at Flowey and it's showing in their sales. Are we underrepresented in the leather goods sector? Yes, I agree.
What I meant by 35 hours, just so that we don't have a misunderstanding, I wasn't meaning at all that they don't work out enough. I was meaning that among the things that you need to look at, this is still small that it's probably going to come at the end
of the week. No. The answer is no. And that's why we've allocated and we've put poles together and they do not come at the end of the week. Growth brands do not come at the end of the week.
Good to know.
Thanks. Thank you, Luca. Next question please.
Next question is from Louise Singlehurst, Morgan Stanley. Please go ahead.
Hi, good morning to you all. Firstly, a very big thank you to Richard and Gary. I it's been many a year that you've been putting up with all of our questions. So a big thank you to both. I'll keep it to 2 questions.
That definitely doesn't take up one of my question allocation, Sophie. So I'll keep it to 2. First question to Mr. Rupert, please. You make a very interesting observation about the generational skit.
I wonder if you think that the clearly with the new structure you feel as though there's an internal improvement in terms of being able to get the data you need to react to a changing consumer environment or behavior. Should we read into this that you're going to take more of an aggressive view of wholesale going forward so you have more control through retail? And then my second question for Gary, please. Just on watches, in terms of the inventory buyback,
could you just tell us
where the inventory actually sits? Is it back in Switzerland or does it sit in the region? Thank you.
Well, no. The answer is no in the sense when I talk to generational skimp. You know, I've seen it with many companies where a group of people got together and then built a company. And over the years, these people have built mutual trust, respect and they've grown with the company. I mean, Richard and I have now known each other for over 38 years.
Gary, through all the years coming from Daniel, from the States, we've known one another. And then suddenly you find out that you're roughly all the same age. And then, unfortunately, it's luckily, we over the years have managed to keep and nurture some really, really good managers. And as it and interestingly enough, if you can look at it across industry and across companies, If you look at the next generation, it's normally people that are 10 years younger than the people they work for because they realize that they're going to be number 2 for a heck of a long time. So they will move to wait their boss' retirement so they could have 20 years in the job.
And it's across. I mean, I asked Jack Welch when he was preparing for retirement. He had 8 geniuses. I assume Jack, your problem is that after all the same age, when you pick 1, you're going to lose 4 or 5. And he said, yes, that is the problem.
So it's exactly what happened. So even if you have 5 or 6 really good people that can take the job, You pick 1, 4 disappear. So people do not tend you don't it's a natural gap of a generation when a certain management group all get to the same age. I saw that for those South Africans on the line, I saw it at Rand Merchant Bank, GT, Paul, Remoits, all of the guys the same age because we're friends. And then when it came to the next generation, it skipped a generation.
So it wasn't a planned skip. It was that just very, very we were very lucky that we had very good people and that they are a generation younger. It wasn't a deliberate plan. It's just that we're fortunate that we have these that Jerome and George and Lucas, they're ready to take over now. And I'm absolutely confident that they're going to do much better than we did because they're itching.
They've been quite vocal about let's put it like this, they're all ambitious and they've made their ambitions clear to me and Richard and Gary. So let's see how it goes. I'm very, very hopeful that they're going to do better than we did.
Louise, on the inventory question, it's a mix, right? It's a bit of both. These things take time. Some is back, some is still in the market.
Thank you. And just on
the wholesale question, are we to read any difference there in terms of prioritizing more retail going forward? I know there's a gradual shift
which has been going for
a long time.
Louise, it's a very perceptive question. And I think it depends per industry and may I even say so and per Maison. You know, we've never wholesale Cartier Jewelry but we don't intend doing that. But if you had to start a business today and I've asked all my colleagues, if you had to start today, what would your model be? And very few of them say retail, wholesale and then e commerce.
Most of them will say retail and e tail. If I can put it like that, discontinuing sales to some of the less productive wholesale partners. Obviously, the ones remaining are then more profitable. And the problem with retail is we are all low to adding fixed costs. And there are still some places in the world like for instance, New York and amazingly Hong Kong, where the real estate owners do not realize that the world is changing.
And I really thought about why and it finally struck me that in unlike in parts of China where you deal with individuals and where you can do a low fixed and profit share because they're entrepreneurs, A lot of the real estate in the, let's say, New York or London, Paris, it's gone to funds and it's gone to people who then securitize a bundle of real estate assets and then they promise yields to investors. And quite frankly, if I look at some of the promised yields in for instance, New York, then I find it very hard to see how they're going to maintain those yields. When we bought and sold the St. Regis on Fifth Avenue, it was really as a backup in case we couldn't secure a proper deal on our mansion on 52nd and 5th. It was a backup.
What if we make we make $234,000,000 in 18 months and we looked at the lease and none of our Maisons that have very high turnover per square meter could get close to breaking even. We would have had a 1% I mean, it was So we and especially not taking railway yards coming online, I think there's going to be an oversupply Madison Avenue is already, they're already empty stores. So maybe there's a lead lag in terms of the real estate that's available because the rent the fixed rentals are still very high. They want 10 years. I am not going to that's where it comes to capital allocation and I'm speaking, the board is unanimous on this.
We do not want to add more fixed costs. Now if you look at the new business models that are coming available, the YOOX NAP model and other models, where you have more visibility of stock, finished goods in stores. I mean, Amazon is not in luxury goods. But look at these business models and then start applying it to your business model. And then you realize you're going to have to live in the future and be very, very fast, nimble and flexible.
So we're not looking at the old traditional ways of this and that and this person is too expensive. We're looking at business models and to be flexible and to be nimble. And that's why we're appointing new people, e commerce, Richard just appointed somebody from Google to be ahead of that curve. And finally, somebody asked a question about cost cutting. Trust me, you don't grow, you don't get to prosperity through cost cutting.
You've got to get to prosperity by increased sales. So this is the model is not to get margins and to through cost cutting. We need to grow our sales. That's our goal.
To add a precision regarding wholesale, as you know, we are very fortunate in our watch industry to have very strong multi brand wholesaler, and they are really partners. And that's the reason why, by the way, we thought that it was wise to help them to go through that Exactly. And to buy back. And I do believe that, especially if you are looking to more flexibility, tourism going from one place to the other, I think to have very strong partnership with those wholesalers who have been there for decades. That's very important for
our industry. But we don't look at the likes of MP and Bufeira. We look at them as partners. They're long term partners. And quite frankly, they're doing a superb job.
But I'm talking about B cities, C cities where we have franchises, etcetera. We're cleaning it up. And by the way, Sophie is in so much trouble in this room because I told her, don't tell anybody I'm in the room because I don't want a few questions. So if you wouldn't mind, the next question, I said from now and I'm going to give any questions addressed to me to Sophie.
Thank you very much.
The next
question is from Mr. Ray William, SPG Securities. Please go ahead.
Good morning, guys. Just a strategic question and maybe just a
quick follow-up. I just want
to know in terms of the can you talk about the strategy around the mono brand watch stores in a slowing growth environment? And do you look probably more at the opportunity to expand into multi brand stores? And I think they have the Time Valley concept. And then just a follow-up, can you just confirm whether these buybacks, the number in the first half numbers were north of €200,000,000 Thank you.
As we said, we believe that the wealth business is very important support the multi brand distribution, not only us, but of course with our competitors and what we do. And even we have been supportive of one initiative, which has been taken by some people for launching a new distribution model like Time Valley, where there were an absence of luxury multi brand distribution, especially in China. And that's true that we just confirmation that we believe that business model is still an asset for our industry, especially of course, he led 1st partner to finance location to have fixed costs and the experience and the local contact with the client and to develop our business and that doing so in the multi brand environment to be highly productive and to be able to pay rents and to make profit.
Ray, it's Gary. I think the approach on retail, Hudson Yards. On the watch and jewelry side and Mont Blanc particularly, the network is performing pretty well from a profitability standpoint even with the challenging sales. So I don't think the strategy has changed in terms of the retail. In terms of the buyback, just to be clear, it was €218,000,000 But you can mark that.
The next question is from Mr. Thomas Chauvet, Citi.
I have two questions, please. The first one on jewelry. Your jewelry business has been flattish for the past 12 months or so as opposed to multi years of double strong double digit growth. What is happening there? Are you confident that the growth drivers over the past few years are still well in place?
Secondly, on Dunhill, the difficulties of Dunhill have been going on for, I don't know, a decade or so. What is changing this time in the restructuring plan that you've announced? Is it sufficient to help Dunhill return to profitability on a sustainable basis? And just on the numbers, the 36,000,000 within the 67,000,000 that are gross margin
Thomas, it's Gary. I'm an old I have to say. We had to do this. It's painful. We don't like to do it, but we think it was the right thing to do.
As I said before, if you take the full line stores to the remaining, we've had Peter Miller and Scott Mahoney and his team assist on the design topics. The sales are actually showing positive growth. So that's good news. I mean we closed the underperforming stores and structures associated with that. There was some inventory write downs.
There was some inventory buybacks. You'll see when you go through the material that we actually closed the franchise operations in China, 42 stores. So we're in a really good place. I mean we've taken $50,000,000 in costs out of the business. So I'm kind of cautiously optimistic on this one now, I would say.
For jewelry, we may say that being flat in the very difficult environment of the first half is really a good performance and we are not concerned at all by the future prospects of jewelry, doing as well that, as mentioned, Mr. Monthly, even 6 months, it's very short period when you sell the very high priced products. And even the seasonality of sales from 1 year to the other may change the view on the performance of the jewelry. But no question.
And just a follow-up on jewelry. Maybe you seem to be for the past couple of years quite confident that jewelry will longer term outperform watches. Do you feel do you have enough with Cartier Van Cleef and a small jewelry business at Thierge, enough brands in the portfolio to meet the demand the growing demand of jewelry?
This is Johan, yes.
The next question is from Annabel Gleeson from Redburn.
Just a very quick one. You have reported an exceptional of a one time cost of €249,000,000 I think you're saying that €31,000,000 of that is in OpEx. Is that the $218,000,000 are you saying that you wrote down all of those buybacks? Just wanted to clarify.
Yes. I think yes, Annabel, is the answer.
And so where do we see that coming back in the cash flow statement?
Where do we see that? Well, it's a reduction of sales.
Yes.
Okay. The inventory goes back into stock, but there's a
Sorry, I can't hear you, Gary. Hello?
Sorry, So the sales come back, right? We write down the inventory. So there's no movement in the inventory, right?
Yes. So at no moment, it's not a cash outflow.
Flush in mind, yes, flush in mind.
So don't you get more profit, more cash inflow?
Yes.
So I can't see that number in the cash flow.
No, but you have a sales reduction to offset it, right? And your receivable
is incorporated into your profit?
No, you have a reduction in sales, which is a reduction in operating results.
Yes, agreed.
Right. And then you have a reduction in the receivables, which goes the other way.
Okay. So it's through receivables?
Exactly. Yes.
Okay, perfect. And then in terms of altering your business, so changing the flexibility for bringing down your capacity in manufacturing, etcetera, maybe resizing your store base, what sort of time period are you thinking about to get the business sort of fit for purpose for this new more flexible environment?
That question you can ask from our new directors in May, because they are a lot more optimistic and they're young. So when they get onto the May, I'd love you to grow them a little bit.
Okay. I will do.
Do. Next question
from Mr. Mario Ortelli from Sanford Bernstein. Please go ahead.
Good morning, all. The first question is about pricing. Mr. Rupert, you always said that you have a fascination for the luxury industry because of the pricing power of the strong brands. We have seen that from 2010 to 2014, the luxury industry take a lot of this pricing power and increase the prices a lot, especially in watches and jewelry.
In 2015 2016, we have seen pricing more subdued. What is your outlook for the next year for pricing? Do you think that in hard luck, actually, you will be able to have the same pricing power of 8 days. Do you think that you will need more product innovation and less quantitative product? You made a good example of I would see I was able to tap into the new market dynamics, introducing new products rather than decreasing prices.
The second question is about the Board. You're making a good many changes in the Board of Richmond. You are securing the collaboration of the experience of many Board members creating these international advisory council. Which kind of competencies and which changes do you expect in the Board going forward? And if I can ask, is someone else of the Rupert family joins the Board?
And the last question is for Mr. LePout and Gary about the reaction of the wholesaler to the watch buybacks. Have you seen an improvement immediately of the reordering? Do you think that will be more progressive during the year? Thank you.
I've lost count of the questions. In terms of the Board, I'm on record as telling all the Maisons that I want to see less gray men, less gray Frenchman as a sub category. Richard pointing to his hair is perfect, no gray hair at all, little bald spot at the back. But no, seriously, we have too few women. We don't have enough diversity.
We do not have enough Asians and we do not have enough Americans. That's those are our markets. It's best started that product at Maison category. To give you an example, we have the Chloe team come to present and there's 1 man and 7 women and they bring handbags, 2 men, sorry, pointed out. But they come and present handbags and across the table a bunch of old men.
And I've been married since 1982. I still don't understand my wife. I'll help you understand what handbags my wife and daughters want. I just see that women eat lettuce. That fact I know.
Now if we want to progress, we need to match skills with where our markets are. I mean crudely put, if you read a study the other day amongst college graduates in the United States and in Europe, they will ask the simple question. Do you think you're going to have a better lifestyle than your parents' generation? And the majority said no. Now asked a similar question in China, Korea, Singapore, would say China related.
And the answer was absolutely yes. So and I'm afraid that for should I say Europe and America that those college grads may be correct. So if you want to gain market if you want to grow there, you're going to have to gain market share. But you actually have to know who you're talking to and whose needs you need to address. So we've managed, we progressed very nicely at the Maison level with the people, but we're also going to have to reflect that at Board level.
And although a few of my co directors have asked me about my son, we haven't discussed it yet and it's a bit embarrassing as he's sitting in the room. Now very much the same thing that I'd said on the CEO, we have an agreement that that there will not be any family member who joins any board will not be operational. It will be non exec. Because I think if you want to know something, I always tell the young people, you know, by the age of 30, you better know something about everything, otherwise you're not civilized. But by the age of 30 5, you better know everything about something.
And I don't believe in transferability of skills. It's not necessary that a banker can be good at insurance or vice versa. You need specialists and we have enough specialists throughout our group who can fulfill the specialist roles. And that's not only industry specific, it's also specific in terms of geography. You can be the best at something in New York.
And if you go to Tokyo or Paris or anywhere in China, you are going to find out that you're lost. So we need a skill set that's flexible, but that's also very good local. And it's a tough HR position, but we'll get there.
Regarding, of course, our dealers, they were very grateful that we helped them through the difficult period by offering them to buyback and to, I would say, really did the level of inventories and to adapt that to the level of sales. That's very clear, but it's just a reflection of our partnership with them and our long term commitment to support them as well.
Excuse me, if I may, but the buy after the buybacks, are they reordering for you from you immediately? You see a little time in the increase of the orders?
We sorry, I'll be let's cut through this. We're helping their cash flows. They over ordered, we're helping their cash flows. They've still got to clear the inventory. But they can't use our credit notes with somebody else.
Sorry, and I may be blunt. Not all of our competitors seem to have the same sense of urgency in clearing the market. So maybe there are things that we don't understand, but I doubt it.
Excuse me, the question on pricing power, long term pricing power of the industry, if I may.
We've just seen our eye jewelry sales are sensational. We only restricted by the fact that we only have that many specialists and we're never going to rush high jewelry and high jewelry is doing very, very well across the Maisons. So yes, there is no problem with brand equity.
Thank you very much indeed. Gary, Mr. Lapu, it was a real pleasure to work with you. All the best for Vineyard Venture. Thank you.
Thank you, Mario. Yes. This confirms my belief that you've been feeding them behind my back.
No, I can confirm no feelings.
Thank you, Mr. Cooper.
Thank you, Igor.
Okay. Next question, please.
Next question is from Helen Brandt, UBS. Please go ahead.
Helen?
Hi, good morning. A few questions three questions from me. Just firstly on Cartier watches. It looks like it was down over 30% in the first half. How much of that was due to the inventory buybacks?
And looking forward, I think we've seen comments in the press about working further on the entry luxury level product. How much further developed are your plans here? And how long will it take us to see that new pipeline? Secondly, Specialist Watchmakers. I'm trying to do a little bit of backing out, but looks like underlying profitability was still pretty weak in H1 even excluding some of the one offs, maybe down over 500 bps.
Which brands have been sort of poor performers there in terms of profitability and what actions are being taken there? I know you're a little bit grumpy about that division at the full year stage. And then finally, I think if we could just talk a little bit about the Hong Kong market. Are you seeing any sequential improvement, I would assume, across September October? And what's your store base and wholesale distribution in the market?
Are you seeing any movements in terms of rent renegotiations as well? Thank you.
Helen, on the buybacks, as I said, we gave you the number. It was $218,000,000 Most of it relates to Cartier. We've said that. In terms of the sales, we've said and we'll say it again, if you look at the month of October and you look at mainland China and Hong Kong, Macau together we're up. So that's a data point.
In terms of the specialist watchmakers, I like to say the numbers are the numbers. And it was it's difficult and high fixed cost base as I said in my prepared comments and okay we'll work through it. We'll work through it.
Let's just add, we shouldn't think that Cartier is unique and Cartier had to buy the most back. The most over ordered products were Cartier and Cartier reacted the quickest. But there's excess of inventory of everybody's product. All the watch brands and not only our own, but because Cartier is big and Cartier reacted quickly, we have highlighted that a lot of it relates to Cartier. It doesn't mean that Cartier is suffering more or less than any other Maison.
And when I say any other Maison, I mean everybody in the watch industry. It's just that they reacted quickly. We backed them obviously, but we have also bought watches back from other Maisons and will continue to do so, but they're not as meaningful in the numbers term because Cartier is bigger. So I just I must highlight to you, don't highlight that buying back Cartier, we are buying back. But Cartier was big and we took action in Hong Kong first.
And that's why you're getting why you're hearing Cartier, but it's across the board. IWC is also buying back, you know, Vassrol, everybody.
Coming to your question regarding Hong Kong, as you know, Hong Kong is not longer the favorite destination for mainlanders for many reasons, and I will not comment on politics, but just pricing, it's become quite expensive place to go in terms of pricing compared to many other places. When last year, it was, of course, Japan is very competitive, Korea this year or U. K. So as you see, of course, the tariff clientele is moving very fast, so the competitive price. The second point, of course, is the fact that facing that drop of sales in Hong Kong, where we have experienced a huge boom over the last 5 years, we will address, of course, the number of stores, especially if the landlord doesn't understand that they have to lower the rents.
And we will increase the productivity doing so by closing some doors.
Great. Thank you. And just to follow-up in terms of Cartier watches and the price positioning of the offer there. How are you looking at that? And how long does it take in terms of getting new products perhaps into your retail partners?
Well, Cartier has had Cartier is really always covered from entry, which we call welcoming level right to the jewelry watches. So, and yes, they have done well with some of the new watches. But that was 2 years ago already. And yes, we are seeing demand in that market. In every big economic shakeout, the middle market hollows out.
And that's not just for watches, it's for everything, every industrial product. In boom times, the middle market grows. In bus time, the top end still sells and the bottom end in the pricing range. So you can look at automobiles, you can look at everything. It's historically proven.
Thank you, Helen. We will start maybe for 1 to 3 more questions because there's still a number of analysts, I think, who would like to take questions. So next one, please.
The next question is from Matija Vaidha, IVR Capital Markets. Please go ahead.
Hi, good morning. Thank you for taking my call and my question. I just have a question on the Chinese consumer as a whole. So yes, we know that sales are up in China, but the entire cluster that's including tourist spends. Can you give us some light on the Chinese consumer as a whole, please?
Thank you.
If you are on here, we love them. You wanted a general question. Yes. We love sophisticated and cultured people with 4000 years of history that have recently been liberated that are highly productive, highly educated. It ticks every box that I can have.
So we love them. And they will be back. They're already back domestically.
Yes. Yes. So just like a follow-up on that. So in terms of I know like for leather goods, they are performing quite well. So just in terms of the demand for luxury and watches, you are just some light on that, please?
It's going it's doing well across the board depending upon the quality of your distribution. And it's clear that there is obviously a discerning customer. They're very well informed. And today, there are various websites that will give you the price per product per city per currency. So obviously these are highly informed customers and travelers.
And we have to be flexible and adopt accordingly. But people think it's that easy. I have to also tell you the problem that you have when a currency suddenly depreciates. What do you say to a you drop the price to €40,000 and they go to the store and they see what they paid €50,000 for a month ago is now €40,000 it is very difficult. I was for years years on the advisory board of an automobile company.
And suddenly the currency appreciates. If they drop the prices, residual value is affected. Their leases are affected. So it's a lot more complex than appears when you just look at it. So you can't just stop loyal customers that have purchased and suddenly the currency changes.
Currency appreciates currency. If the yen for instance should move suddenly by 20% up, do you immediately down what do you do to your customers that bought a month ago? It's very, very difficult. The other one that I noticed that nobody talks about is the strong Swiss franc. I noticed this is now just an accepted given.
Well, I don't think the governor had any choice but to do what he did. And he did the rational thing and it's the new norm and we have to live with it. The positives are they have a vote here in Switzerland and they ask the people, should we have more paid holidays? And the people vote no. Now do you want to do business here?
Yes, I want to do business here. I don't have many countries in the world where the popular vote would have been no, where people are rational and intelligent enough to know that productivity will suffer. So there are very, very many benefits to working in a highly educated, sophisticated democracy. Especially when you look at what's happening in some countries of the world, I'm willing to live with a stronger currency in comparison to all the other benefits, rule of law, I mean and a population that actually understands the concept of productivity. Now you've got to remember, that's now feeding its way through the system and nobody talks about it.
But we've grown to be comfortable with it And we didn't moan about it initially. We won't moan about it in the future. It's a given in our lives. It's obviously had an effect on our P and L.
The next question is from Rogerio Fujimori, RBC Capital
Markets. On the U. S. Market, what's your read on this market? And why do wealthy U.
S. Clientele is not spending on high end watches as before? Do you think it's more cyclical? Or you are dealing with a structural shift from millennials perhaps away from high end watches to things like experiential luxury? And then on your local European clientele, could you comment on the state of your local clientele and perhaps some color on your U.
K. Local consumer after your recent price adjustments on the back of sterling depreciation? Thank you.
Hi, Roger, it's Gary. It's interesting on U. S. Market because the numbers are somewhat unflattering, I would say, and you would say that things aren't so great. But because of the dollar we've had and the sterling movements, we've had significant amount of purchases by Americans in the U.
K. The U. K. Obviously because of the sterling is one of our best performing markets at the moment. So I know how we report, but it's sometimes you don't draw the right conclusion.
The American consumer is actually performing. And the opening of the Mansion with 59th Street there, it's doing extremely well.
We might add that especially in Europe, across the board, the local clientele is very resilient. And as you know, unfortunately, the big issue that we have been going through and experience has been the consequences of the unsecurity in Europe, which has really made the tourist disappear, especially in France, in many countries in Europe, but UK.
If you look at the department store sales in Paris, it will give you a very good indication of the lack of tourism. We could have blamed 50 different things for the performance, but it's life. One has to get used to it. Tourism just evaporated in Paris, south of France. And I'm not going to say anything other than try and find out what happened to the department stores in Paris.
I think it's still down 40%. Sorry?
Yes, it's deserted. Yes,
it's not.
Okay. So I think we've got nothing to do now. And thank you very much for your participation. And I look forward to receiving your questions and reading your papers later on. Have a good day.
Thanks, guys. Thank you.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus