Ladies and gentlemen, good morning. Welcome to the company Financière 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. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Gary Saage, Richemont Chief Financial Officer, Burkhart Grund, Richemont Deputy Chief Financial Officer, and Sophie Cagnard, Richemont Group Corporate Communications Director. Please go ahead.
Thank you, Dino. Good morning, everyone. Mr. Johann Rupert, Chairman, Richard Lepeu, Chief Executive Officer, Gary Saage, Chief Financial Officer, Burkhart Grund, Deputy Chief Financial Officer and I would like to thank you for joining the webcast today to review the past half year results ended 30th of September, 2016. I would like to remind you that the press release and financial presentation can be downloaded from richemont.com. The archive of this audio webcast will be available on our website today at 3:00 P.M. Geneva 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 Saage, Burkhart Grund will give you some sales highlights.
I will present the recent main developments. Gary will then walk you through the financials and conclude. This presentation will be followed by a Q&A session chaired by Mr. Rupert. The presentation will now begin. I hand over to Gary.
Thank you, Sophie. Good morning, everyone listening. Thank you for your time. Richemont 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 the difficult global environment. The past six 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% at constant exchange rates. In total, sales declined by 13% at actual exchange rates and 12% at constant exchange rates. Operating profit declined by 43% to EUR 798 million.
Our operating profit was pressured by the decline in sales and the resulting deleverage on operating expenses, which grew marginally compared to the prior period, and a number of one-time items totaling EUR 249 million. The operating margin ended up at 16% of sales. Excluding the impact of the one-time items, operating profits would have declined by 25%. In the absence of major movements in the closing euro-Swiss franc rates between March and September, profit for the period was reduced by 51% to EUR 540 million. A good control over our inventories and receivables helped contain the reduction in cash flow from operations, which ended up at EUR 666 million. Our net cash position after the payment of EUR 878 million of dividends this September amounted to EUR 4.5 billion. With this, I'd like to turn it over to Burkhart.
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% and 31% of group sales. The Americas region, with 16% of group sales, remains our third largest region. Thereafter come Japan and the Middle East and Africa with 9% each. On a country basis, however, the USA is now our largest market after Hong Kong, which is closely followed by China, now our third largest market. Let's talk about our sales in Europe. Sales were down by 17%, reflecting particularly difficult trading in France, our fifth 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 deterred tourists from visiting 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 referendum. The weakness in watches was mitigated by the positive contribution of accessories and clothing, while jewelry sales were 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 watch category and wholesale channel being particularly affected by the buyback from our retail partners. A strong Hong Kong dollar and the traction of alternative shopping destinations like Korea and Thailand have not been supportive either. There is some good news, 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 digits, including for watches, benefiting amongst others from price alignment implemented a year ago and a softer renminbi. Let's look at the Americas region, where the uncertainty surrounding the election and interest rates has affected the feel-good factor, while the strength of the dollar dropped sales of locals abroad, notably in the U.K. There, the positive momentum in accessories did 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 & Arpels recently reopened their flagship stores in the Ginza area. Let's now review sales by network. The contribution of retail sales to the Maison's 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 5%, 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 one-time items.
Retail was affected by trading in Europe and Japan, while Asia-Pacific and the Americas showed good growth. The Maison's network with 1,154 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 but Japan. Leather posted a high single-digit growth, thanks to Boyer Montblanc. Leather sales were down by 13%, reflecting the impact of store closures in Asia-Pacific. I now hand over to Sophie.
Thank you, Burkhart. The Swiss watchmakers suffered from the largest decline in operating contribution margin to 13% of sales. The Jewelry Maisons were also affected, but their profitability declined less and accounted for 27% of sales. The other business area reported a loss after meaningful one-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 Jewelry Maisons, which accounted for 54% of sales and 84% of group contribution before corporate costs. The Jewelry Maisons reported a 13% decline in sales, largely attributable to watches. Indeed, demand for jewelry at Cartier and Van Cleef & Arpels 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 Jewelry Maisons saw their 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 six months. 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 Amulette 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 rotation of their inventory.
The review of the watch offer has led to the launch of Drive de Cartier in May, a dress watch for elegant men, available straight away in gold and steel, and steel. While the Clé de Cartier watch was introduced in steel in September. Worth noting is a marked sales increase in mainland China across channels and product lines, including Cartier watches. In September, as Burkhart had mentioned, Cartier reopened its Maisons on Fifth Avenue, New York and Ginza, Tokyo after more than two years of renovation. The Maison also opened new internal boutiques in Korea, Malaysia, and Australia. Overall, the retail network benefited from five net openings. Now, Van Cleef & Arpels. The Maison 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 Émeraude Majesté and L'Arche de Noé high jewelry collections, as well as a new Bouton d'or jewelry collection. The retail network saw the addition of an internal store in Shenyang, mainland China and Hong Kong. Now we 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 Piaget, which continued to enjoy good growth in jewelry, driven by the success of the new Sunny Side of Life and Secret de Rêve high jewelry collections, as well as the redesigned Possession jewelry line. Watches, on the other hand, continued to be heavily affected by difficult trading and inventory buybacks.
Of note are the encouraging results of recently launched Polo S, the only model in steel. Next, Vacheron Constantin, which experienced a slowdown in sales worldwide, except in mainland China and the Middle East. The revisited Overseas collection and new Métiers d'Art Contemporain enjoyed a positive start. Let's turn to A. Lange & Söhne , where solid trends in mainland China and Japan could not compensate for weakness elsewhere. Similarly, positive retail sales did not offset negative wholesale sales. Product-wise, the relaunch of the number one , A. Lange & Söhne 's most iconic piece, is now completed. Next, Roger Dubuis, where the overall decline in sales has been cushioned by positive momentum in Asia and retail. Sales in the 19 Roger Dubuis internal boutiques were sustained by continuous demand for the Excalibur and Double Tourbillon collections, as well as two new stores.
At Jaeger-LeCoultre, the strong momentum in mainland China and the U.K. did not overcome a marked decline in sales in tourist destinations like France, Switzerland, and Hong Kong. At IWC, the success of the rejuvenated Pilot collection has helped moderate the reduction in overall sales. Of note is a good performance in mainland China and Korea. Now, Officine Panerai. The lower rate of sales decline in the Maison's 38 stores helped mitigate the decline in total sales. Sales in the Middle East enjoyed good momentum. The launch of Luminor Due was well-received among other novelties. Finally, Baume & Mercier. The Maison experienced difficult trading in most markets, with the exception of Japan and the Middle East. Classima and Promesse are confirmed as the Maison's pillars, respectively for men and women. The latter collection was enriched with Petite Promesse. Now we look at other.
Sales decline of 1% and one-time items of EUR 67 million led to a EUR 40 million loss. Excluding these one-time charges, which related to Alfred Dunhill, the operating contribution was positive, thanks to improving results, primarily at Montblanc and Chloé. At Montblanc, continued improvements in the product offer, gross margin, and cost management are starting to filter through the operating result. Montblanc Leather division, boosted notably by the new Urban Spirit collection, was Montblanc's strongest growth driver, followed by the Writing Instruments category. The latter benefited from the launch of the Montblanc Heritage Rouge et Noir and the Meisterstück Black lines. 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, Montblanc just introduced a new digital device called the Augmented Paper.
This notebook enables users to transfer handwritten notes and sketches. 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 Chloé, which enjoyed a geographically broad-based double-digit growth rate in sales, largely driven by leather. Leather sales were sustained by the Drew bag, but also by the growing success of the Faye and the recently introduced Lexa bag. The Maison is now concentrating on deploying the new retail concept and further developing its digital presence with an online store. Finally, Lancel.
The predominance of the French market, which contributed to 90% of sales, coupled with the temporary closures of 5 major stores, including the Opéra 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 notably Jules and Mathilde. 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&L. Reported operating profit is down by 43% to EUR 798 million. This has been impacted by lower sales, a lower gross profit, one-time charges totaling EUR 249 million. 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 segment 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 represent 6% of the 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 EUR 31 million 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 investment 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 a EUR 130 million gain in the prior period. Remember, Richemont holds roughly a third of its cash in euros, a third in US dollars, and a third in Swiss francs. Under IFRS, these cash investments have to be marked to market at the balance sheet closing rates.
The losses on our hedging program rose from EUR 8 million a year ago to EUR 91 million in the current period. As a result, net finance costs rose to EUR 109 million versus a financial income of EUR 76 million in the previous period. Let's now look at the P&L items at the bottom. Given a lower operating profit and a reversal in finance costs, profits from continuing operations for the year was down by 55% to EUR 540 million. Our taxation charge declined to EUR 139 million, 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 needs, driven by lower wholesale sales and continued good control over our inventory position. At 98% current, receivables remain in a good position.
We incurred EUR 60 million in outflows related to the cash settlement of derivative contracts compared to EUR 40 million in the previous period. Now let's take a look at our capital expenditures. Gross capital expenditure represented 4.9% of group sales and amounted to EUR 251 million. We continued to invest in our point-of-sale networks and notably reopened the Cartier flagships in Tokyo and New York. For years ahead, 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 EUR 640 million for the year. Now let's look at some of the nature of our investments made during the last six months. Half of our gross expenditure related to retail investments and point-of-sale investments. This includes the opening of fewer internal stores, but many more relocations and renovations.
The most notable completed projects were the renovations of the Cartier mansion in New York and Ginza. Equally worth mentioning are the relocations of Van Cleef boutiques in Ginza and the Chloé boutique in Paris, Avenue Montaigne. There are also new Van Cleef and Montblanc boutiques in Shenzhen, China, and a new Chloé boutique in Milan. 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 Schaffhausen. Other investments accounted for the remaining 29%. They notably included the renovation of our main central warehouse in Switzerland and a new warehouse for Peter Millar in Raleigh, North Carolina. CapEx also included ongoing IT investments. Free cash flow amounted to EUR 218 million.
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 notwithstanding the lower profits. Equity accounts for 73% of the total. Net cash amounted to EUR 4.5 billion, compared to EUR 4.8 billion at September last year. Our net cash position includes short-term liquid funds as well as cash equivalents, and bond funds. Liquid funds and cash balances were primarily denominated in euros, Swiss francs, and U.S. dollars, as I previously noted. Let's now turn to the conclusion before we take your questions. Let me say that we previously communicated individual month sales in April and October. As we've stated many times, an individual month can be volatile and potentially misleading. Many of you have agreed with these thoughts.
We've sought to eliminate the practice of disclosing the sales performance of April and October individually. We've stated clearly that we will end disclosure the next time either October or April sales were positive. 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 slower growth, our focus over the near term will be to adapt our structures to the new one. 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 Richemont. We will control costs while also supporting our Maisons 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.
Your company name. Hopefully, the quality of the sound was good. I received one or two messages. If it was not so good, please give me your feedback and then we'll see what can be done with an audio replay. Dino, can you open the lines, please?
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. First question is from Mr. Antoine Belge, HSBC. Please go ahead, sir.
Yes. Good morning, it's Antoine at HSBC. 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 when you were announcing also management changes. Which are those challenges? The main one, I think you mentioned also excess capacities. It seems to me also that there are some pricing issues. We've seen price cuts broadly at Cartier, and it seems that new products are introduced at a lower price. Piaget has been launching its first steel watch. Could you comment on that? Secondly, with regards to the gross margin on the OpEx, the line was pretty bad.
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 year also in terms of OpEx? Finally, with regards to the restructuring of Dunhill, could you maybe elaborate a bit on what has been done and what positive effects you're expecting for Dunhill? Thank you.
Antoine, I'm not sure you left any questions for anybody else, huh?
Yeah, I should have said we should limit the questions to two.
Okay. 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. Foreign 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. That's the gross margin question. If we talk about Dunhill broadly, we incurred a EUR 67 million charge. EUR 31 million of it resided in expenses, and EUR 36 million of it resided in gross margin. We're clear about that. What's actually happening?
You'll see in the tables, we've reduced the store base by 25 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. That's good news. We think we're getting there. All of these charges, we've taken a significant amount of fixed costs out of the business, and we estimate that to be on a recurring basis, about EUR 50 million 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. That's behind us.
I think some of the other watch brands will have buybacks in the second half. Frankly, that's immaterial. In terms of the pricing-
In terms of pricing, Richard Lepeu speaking, Antoine Belge. As you know, 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, which we do. Of course, we have to adapt to volatility of exchange rates. It's not very easy, but we did it when the yen was weak. We increased prices, and we decreased prices in Japan subsequently. Of course, in the U.K., following the Brexit, we have to pass some price increases. More generally speaking, in terms of challenges, as you know, the new normal means that we have to reassess our structure. Of course, we did start early March to address some excess of capacity for the watch production. If necessary, we might take further option, but it doesn't concern only production.
It's a reassessment of all our organization, including central function and regional organization as well.
Yeah, maybe just to understand. 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. Isn't it a need for the industry and including your brands to be lowering prices in general? I'm not talking about price harmonization here.
We won't cut prices.
It's a matter which is dealt at the brand level and not at the group level.
We're not cutting prices.
We're not cutting prices as well.
Okay, thank you.
The next question is from Melanie Flouquet at JP Morgan. 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. 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 was a reference to A&P only. If you can go through the lines and tell us what is happening there. 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. Lambert? Thank you.
Hi, Melanie. It's Gary. A&P for the year, and this is all in constant currency, we think will grow at the same rate plus four. Okay? Admin and other expenses, we think probably flat, and S&D probably three to four.
Plus three to four in S&D?
S&D. Three to four.
Thank you.
For the full year. Margin, it's a little too early to tell. I've been criticized quite a bit. I would say somewhat lower than where we are now, but it's too early to tell.
In terms of the management changes, it's not confusing at all. Richard Lepeu has been with the group for 38 years. He signaled a while ago that he was going to retire. Gary Saage, I've managed to arm wrestle to stay on year after year. As he said, he does love his wife more than he loves us. He is going home to the U.S., and that has been signaled for a while. You've seen Burkhart Grund come on board. Now, Richard Lepeu, it's impossible to replace Richard Lepeu with another person and ask of that person to take care of 35 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.
It's nonsensical to have a CEO above the CEO of one of the world's biggest Maisons. I suspect that the current one, which is in line with the likes of Kering and LVMH. Where you group the watch pole and it just makes much more sense. Now, obviously, Van Cleef & Arpels also directly to the board. Really the board's role is to allocate capital. That also involves finance and human resources. It's the allocation of financial and human resource capital. This is a far more sensible structure and a fairer structure.
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. N-O. I will continue to be involved as I was before, but we will have more involvement by the likes of Georges Kern. Obviously, we have finance, then we have a very capable gentleman who will be in charge of the non-watch business. You know him well. He managed to turn around Montblanc. So maybe it's more nonsensical to the analysts, 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. Anyway, sorry, Gary, another follow-up on the gross margin.
Yeah.
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? 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 a little too early to tell, but I think it's going to be slightly lower. Right. A lot of moving parts.
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 yourself in that hole. Now start digging. I told you what to discuss.
Okay.
Okay, carry on. Dig.
No, Melanie, I think we've reduced our inventories. There's probably some undercapacity there, so I think it's going to be a bit lower. I've probably dug as far as I can at the moment. Now, please help me.
Thank you very much. Melanie.
The next question is from Mr. John Guy, MainFirst. Please go ahead.
Oh, yes. Thanks very much indeed for taking my questions. Gary, the first question, just with regards to October trading. Now, I noticed on the tape that you 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, Johann, that you mentioned earlier with regards to a leaner organization not just 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?
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. 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 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 six months. Our goal that you will remember, Melanie, and my goal is to grow our dividends in EUR 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. 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. 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. 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 six- to eight-year job.
Every year I kept on, and not only you board members would say, "So when?" We said, "When it's fixed." 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. 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. When you ask me what is my role, my role is really just here to smooth over the generation skip because these are younger people Proven executives. Now it's time for us to start looking at another generation. It's October. As Gary Saage said, if you take Hong Kong, mainland China, and Macau put together, it's positive.
Mainland China has been positive for a while. 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. I would say that our job is not, or should I say the board's job and whoever the CEO's job is not to interfere on a daily basis. As I've said, I don't know how Richard Lepeu did it. I joked earlier on that if he'd been based in Paris, he would legally only have been allowed to spend one hour per company. 35 companies, 35-hour workweek. Thank God he lived in Geneva, so he worked a hell of a lot harder. I can't expect anybody to fulfill that role again in that way. It's killing it.
Remember, he had the experience of 38 years in the group. In terms of the management restructuring, it makes an enormous amount of sense internally. Over time, I hope that you'll all see the benefits. I really don't want to comment on quarterly and daily and monthly. I'm talking about fine-tuning and slimming down. 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 three years' time? I try to stay on top, and we've got brilliant young people who understand this. Frankly, we're just trying to stay ahead of the curve.
If you read Taleb's book on antifragility, you'll see the problem that's occurred. In the past downturns, our supply curve was always lagging behind the demand curve. We were, in fact, saved, as I've said before, by our incapacity. We weren't capable. This time, our colleagues in the industrial sections of the company had perfected the production to such an extent that we moved the supply curve very close to demand curve. Guess what? The demand curve moved back. Our dealers are always a bit more optimistic, the wholesale trade, so they order in expectation. It is one of mankind's biggest weaknesses is that we are very loath to predict a discontinuum. Things go better, we all think they're going to go better. If things get worse, we all over extrapolate again. I'm on the second side that I fear the worst.
Hopefully, this is not secular, but we're preparing for it to be a secular change. We've got to address everything. That's why I'm saying not just factories. We've got to address the way we do business. In the new world, you're not just affected. The sales will come back. 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, which will lead to more flexibility. 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 ecstatic. We don't know where they're going to go.
We're just going to make sure that we're there when they get there with products that they wish to have. We've always had welcoming jewelry. Yes. Take IWC. They didn't cut their prices. They launched new products in a new, slightly more welcoming sector. They didn't cut prices on existing products. They launched new products. It's really to be flexible. You're asking very good questions that, quite frankly, we're grappling with as well, but that we don't have all the answers to because things are moving fast. It's not that we wish to be obdurate or 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. There are things developing today, digital printing, new methods, using liquid injection. Are we going to be stamping in 10 years' time and polishing?
I don't know. 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. It's adapting a business model that is flexible and fast enough to meet the changing demands of our consumers. By the way, I'm winging it as I'm talking because it's very difficult to explain.
Thank you very much, Johann, for that. Could I just follow up very briefly with one other question with regards to what we've seen on the watches 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, this is really the last question because there's a few of our analysts who would like to raise questions, I think 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, two, three 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." There's an era of modesty. That when you have structural unemployment, it's also addressing psychographics. It's not just economics and the needs of customers. There'll be more white gold and more platinum. It's the consumer. It's a complex thing. I hope I've answered it. Next question, please.
Thank you.
The next question is from Mr. Jon Cox, Kepler Cheuvreux. Please go ahead.
Good morning, guys. Thank you very much for taking the questions. Let me just say, Richard and Gary, sorry to see you going, and congratulations to Burkhart on that appointment. Johann, 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? There doesn't seem to be an obvious family successor. What do you think about what you may do with your holdings?
My son is sitting here, and he's very interested in your question, by the way. Jon, he is slightly bigger than you, I would say.
I'll take that. 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 four or five years. 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 the M&A, given the industry is under a lot of pressure at the moment? Thank you.
Thanks, Jon. Firstly, the reason why Gary and his team, and I share your views on Richard and Gary. 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. We do not have any major acquisition. We obviously speak regularly 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 go and buy something. Let's say we buy some, doesn't matter what it is, for CHF 5 billion, 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. Our job is to create goodwill.
Our job is to do two investments that we have to replicate the success of a Van Cleef & Arpels. Chloé is very well on its way. If Chloé 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 problems. 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. It's now a discernible trend how well China domestic is doing. It's discernible, and it has been going on for a while. The combined total is up. We know it's a major part of our clientele currently, and ideally, it's our future clientele.
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. We're going to have to be more flexible, if I can put it like that. That may involve totally new, innovative production processes. We've already got it in some of our secret labs where I went two weeks ago, where I saw new production methods that are so innovative. Where in effect, you can build mini factories, enormously flexible. We'll try to keep the design fresh and the brand equity high because we know the market will return. It has done so on countless occasions, and luckily we have enough stability, both in financial and human capital in our group, to back our trademarks.
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. Because you're saying you're going to increase the dividend on average 15% annually forever. I know that's a long-
No. John. Hey, you and I have known each other for a long time. 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? Our goal, our dream, that is what we're trying to do, and we're bringing it back. When interest rates are, in nominal terms, negative, and the Swissy is negative 30 years out, then maybe 5% growth for a number of years will be very nice. If it then reverts to 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, "Right over to you. You've had 25 years of 15%.
Good luck to you, boy." Our goal over the long term is to provide superior returns. Let me put it now to provide superior returns. Right now, I do believe we're in the position where we can.
Thank you very much.
The next question is from Luca Solca, Exane BNP Paribas. Please go ahead.
Yes, good morning. 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, Van Cleef & Arpels is performing significantly better. I wonder what you think about that and if you think that there's a 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, 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 Chloé was doing the right thing, it lost the plot.
I wonder how you see yourself committed to these two categories in the long term. You spoke about the 35 hours a week, I also think that in terms of senior management bandwidth, this could be a challenge, it's a small business. Last but not least, if I may add another one. Profit margin 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. We do not share similar views on Cartier. In terms of leather goods, I agree with you, we are looking at the scale. I do not understand what you're talking about bandwidth and 35 hours, et cetera. None of us want to go onto a board where they work harder than 35 hours, trust me. They've got a very good management team. Maybe because the majority of them are all ladies I'm not sure. I suspect it may be. Young ladies, they are superb at Chloé, 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 hard enough. I was meaning that among the things that you need to look at, this is so small that it's probably going to come at the end of the week.
No. The answer is no, that's why we've allocated and we've put pools together, and they do not come at the end of the week. Growth plans 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 think it's been many a year that you've been putting up with all of our questions. A big thank you to you both. I'll keep it to two questions. That definitely doesn't take up one of my question allocations, Sophie, I'll keep it to two.
First question to Mr. Rupert, please. You make a very interesting observation about the generational skip. I wonder if you think that 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 environmental 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? 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 regions? Thank you.
No. The answer is no in the sense when I talk the generational skip. I've seen it with many companies where a group of people got together and then built a company. Over the years, these people have built mutual trust, mutual respect, and they've grown with the company. Richard and I have now known each other for over 38 years. Gary, through all the years coming from Daniel, from the U.S. We've known one another. Suddenly, you find out that you're roughly all the same age. Luckily, we over the years, have managed to keep and nurture some really, really good managers. Interestingly enough, you can look at it across industry and across companies.
If you look at the next generation, it's normally not people that are 10 years younger than the people they work for, because they realize that they're going to be number two for a heck of a long time. They will move to wait their boss's retirement so they can have 20 years in a job. It's across. I asked Jack Welch when he was preparing for retirement. He had eight geniuses. I said, "Jack, your problem is they're roughly all the same age. When you pick one, you're going to lose four or five." He said, "Yes, that is the problem." It's exactly what happened. Even if you have five or six really good people that can take the job, you pick one, four disappear. 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, Laurie, all of the guys the same age because we're friends. When it came to the next generation, it skipped a generation. It wasn't a planned skip. We were very lucky that we had very good people and that they're a generation younger. It wasn't a deliberate plan. It's just that we're fortunate that we have these. That Jérôme and George and Burkhart, they're ready to take over now. 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. 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's back, some still in the market.
Thank you. 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
Listen-
Going on 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, and we don't intend doing that. 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? Very few of them say retail, wholesale, and then e-commerce. Most of them will say retail and e-tail. Over the years, Richard and his colleagues and Gary, we have started, 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. The problem with retail is we are all out to adding fixed costs.
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's changing. I really thought about why, and it finally struck me that 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. 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 Fifth. It was a backup. We made EUR 234 million. We made EUR 234 million in 18 months. 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. We, and especially now taking railway yards coming online. I think there's going to be an oversupply. Madison Avenue, there are already empty stores. Maybe there's a lead lag in terms of the real estate that's available because the fixed rentals are still very high. They want 10 years.
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 NET-A-PORTER model and other models, we have more visibility of stock, finished goods in stores. I mean, Amazon is not in luxury goods. Look at these business models and then start applying it to your business model. Then you realize you're going to have to live in the future and be very, very fast, nimble, and flexible. We're not looking at the old traditional ways of this and that and this person's too expensive. We're looking at business models. To be flexible and to be nimble.
That's why we're appointing new people, e-commerce, and Richard just appointed somebody from Google to be ahead of that curve. Finally, somebody asked a question about cost-cutting. Trust me, you don't get to prosperity through cost-cutting. You've got to get to prosperity by increased sales. The model is not to get margins through cost-cutting. We need to grow our sales. That's our goal.
To add a precision regarding wholesale. Louise, as you know, we are very fortunate in our watch industry to have very strong multi-brand wholesalers, and they are really partners.
Yes.
That's the reason why, by the way, we thought that it was wise to help them to go through.
Exactly
difficult time and to buy back. 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.
Absolutely
very important for our industry.
We don't look at the likes of MP and Bucherer. We look at them as partners. They're long-term partners. Quite frankly, they are doing a superb job. I'm talking about B cities, C cities where we have franchises, et cetera. We're cleaning that up. 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. If you wouldn't mind, the next question, I said from now on, I'm going to give any question addressed to me to Sophie.
Thank you very much.
Thank you, Louise. The next question.
That kind of went wrong.
Next question is from Mr. Ray William, SBG Securities. Please go ahead.
Good morning, guys. Just a strategic question and maybe just a quick follow-up. Can you talk about the strategy around the monogram watch stores in a slowing growth environment? Do you look probably more at the opportunity to expand into multi-brand stores? I think they have the TimeVallée concept. Just a follow-up. Can you just confirm whether the buybacks, the number in the first half numbers were north of EUR 200 million? Thank you.
As we said, we believe that the watch business is very important to continue to support the multi-brand distribution, and not only us, but of course, with our competitors and what we do. Even we have been supportive of one initiative which has been taken by some people for launching a new distribution model like TimeVallée, where there were an absence of luxury multi-brand distribution, especially in China. That's true that it just confirmation that we believe that that business model is still an asset for our industry, especially because, of course, it led third partner to finance location to have fixed costs and the experience and the local contact with the client and to develop our business, 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, Mr. Rupert gave his comments. There's still projects out there. He mentioned Hudson Yards. On the watch and jewelry side, and Montblanc particularly, the network's performing pretty well from a profitability standpoint, even with the challenging sales. I don't think the strategy has changed in terms of the retail. In terms of the buyback, just to be clear, it was EUR 218 million. You can work that out.
Thank you.
Okay.
Okay, thank you. Maybe the next question, please.
The next question is from Mr. Thomas Chauvet, Citi. Please go ahead.
Good morning. 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 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? Just on the numbers, the EUR 36 million within the EUR 67 million that are gross margin related, is it inventory write-downs or? Thank you.
Thomas, it's Gary. I'm an old Dunhill guy, as you know.
I know that.
I'm excited about Dunhill, I have to say. We had to do this. It's painful. We don't like to do it. We think it was the right thing to do. As I said before, if you take the full-line stores that are remaining, we've had Peter Millar and Scott Mahoney and his team assist on the design topics. The sales are actually showing positive growth. That's good news. 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. We're in a really good place. We've taken EUR 50 million in costs out of the business. 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 already a good performance, we are not concerned at all about the future prospect of jewelry. Knowing as well that, as mentioned, Mr. Rupert, monthly, even 6 months, it's a very short period when you sell the very high-priced products. Even the seasonality of sales from one year to the other may change the view on the performance of the jewelry. No concern.
Just to 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 you have enough with Cartier, Van Cleef, and the small jewelry business at Piaget, enough brands in the portfolio.
Yes.
-meet the growing demand of jewelry?
This is Johann. Yes.
Okay, thank you so much.
Thank you.
Next question, please.
The next question is from Annabel Gleeson from Redburn. Please go ahead.
Hi. Thank you for taking my questions. Just a very quick one. You have reported an exceptional or one-time cost of EUR 249 million. I think you're saying that EUR 31 million of that is in OpEx. Is that the EUR 218? Are you saying that you wrote down all of those buybacks? Just wanted to clarify.
Yeah. I think yes, Annabel, is the answer.
Where do we see that coming back in the cash flow statement?
Where do we see that? It's a reduction of sales.
Yeah.
Okay? The inventory goes back into stock.
Sorry, I can't hear very Hello? Sorry.
Sorry. The sales come back. The sales come back. We write down the inventory. There's no movement in the inventory, right?
Yes. There's no movement. It's not a cash outflow.
Plus and minus. Yeah. Plus and minus.
Don't you get more profit, more cash inflow?
Yeah.
Where I can't see that number in the cash flow.
You have a sales reduction to offset it, right? Your receivables.
Which is incorporated into your profit.
You have a reduction in sales, which is a reduction in operating result.
Yeah. Agreed.
Right. You have a reduction in the receivables, which goes the other way.
Oh, okay. It's through your receivables.
Exactly. Yeah.
Then in terms of altering your business, so changing the flexibility, bringing down your capacity and manufacturing, et cetera, 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. They are a lot more optimistic, and they're young, so when they get onto the May, I'd love you to grill them a little bit.
Okay, I will do.
Thank you, Annabel.
Thank you.
Next question, please.
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 and 2016, we have seen pricing more subdued. What is your outlook for the next year for pricing? Do you think that in hard luxury you will be able to have the same pricing power as it did? Do you think that you will need more product innovation and less continuative product? You made a good example of IWC was able to tap into the new market dynamics, introducing new products rather than decreasing prices. The second question is about the board.
You are making many changes in the board of Richemont. You are securing the collaboration of the experience of many board members, creating this International Advisory Council.
Yeah.
Which kind of competencies and which changes do you expect in the board going forward? If I can ask, is someone else of the Rupert family join the board? The last question is for Mr. Lepeu 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 to 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 Frenchmen, as a subcategory. Richard pointing to his hair is perfect. No gray hair at all. Little bald spot at the back. 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. Those are our markets. It best starts at that product at Maison category. To give you an example, we have the Chloé team come to present. There's one man and seven women, and they bring handbags. Two men, sorry. Point it out. They come and present handbags. Across the table, a bunch of old men. I've been married since 1982, I still don't understand my wife.
How the hell do I understand what handbags my wife and daughters want? I just see that women eat leather. That's a fact I know. If we want to progress, we need to match skills with where our markets are. I mean, crudely put, I read a study the other day amongst college graduates in the U.S. and in Europe, and they were asked a simple question: Do you think you're going to have a better lifestyle than your parents' generation? The majority said no. They asked a similar question in China, Korea, well, Singapore. I would say China-related. The answer was absolutely yes. I'm afraid that for, should I say, Europe and America, that those college grads may be correct. If you want to grow there, you're going to have to gain market share.
You actually have to know who you're talking to and whose needs you need to address. We've progressed very nicely at a Maison level with the people, but we're also going to have to reflect that at board level. 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 said on the CEO. We have an agreement that there will not be any family member who joins any board, will not be operational. It'll be non-exec. I think if you want to know something, I always tell the young people, by the age of 30, you better know something about everything. Otherwise, you're not civilized. By the age of 35, you better know everything about something.
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. We have enough specialists throughout our group who can fulfill the specialist roles. 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. We need a skill set that's flexible but that's also very good local. It's a tough HR position, but we'll get there.
Richard.
Richard.
Yeah. Regarding, of course, our dealers, they were very grateful that we helped them through this difficult period by offering them to buy back and to, how we say, really did level up inventories and to adapt that to the level of sales. That's very clear. 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. After the buybacks, are they reordering from you immediately? You see a lead time in the increase of the orders?
Sorry. 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.
Yes.
They can't use our credit notes with somebody else.
Sure.
Sorry, I may be blunt. Not all of our competitors seem to have the same sense of urgency in clearing the market. Maybe there are things that we don't understand, but I doubt it.
Okay. Thank you, Mario. Excuse me. The question on pricing power, long-term pricing power of the industry, if I may.
We've just seen our high jewelry sales are sensational. We're only restricted by the fact that we only have that many specialists, and we're never going to rush high jewelry. High jewelry is doing very well across the Maisons. Yes, there is no problem with brand equity.
Thank you very much indeed. Gary, Mr. Lepeu, was a real pleasure to work with you. All the best for your new venture. Thank you.
Right.
Thank you, Mario.
Janda, this confirms my belief that you've been feeding them behind my back.
No, I can confirm, no feeding here. Thank you, Mr. Lepeu.
Thank you.
Okay, next question please.
Next question is from Helen Brand, UBS. Please go ahead.
Helen.
Hi, good morning. A few 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? 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, looks like underlying profitability was still pretty weak in H1, even excluding some of the one-offs, maybe down over 500 basis points. Which brands have been 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 four-year stage.
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 and October? 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 EUR 218 million. 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. That's a data point. In terms of the specialist watchmakers, I like to say the numbers are the numbers. It's difficult and high fixed cost base, as I said in my prepared comments, and okay, we'll work through it.
Let's just add here. 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. There's excess of inventory of everybody's product. All the watch brands, and not only our own. Because Cartier is big and Cartier reacted quickly, we have highlighted that a lot of it relates to Cartier. I must highlight to you, don't highlight they're buying back Cartier.
We are buying back. Cartier was big and we took action in Hong Kong first. That's why you're hearing Cartier, but it's across the board. IWC is also buying back. Vacheron, everybody.
Coming to your question regarding Hong Kong. As you know Hong Kong is no longer the favorite destination for mainlanders, for many reasons, and I will not comment on politics, but just pricing. It has become quite expensive place to go in terms of pricing compared to many other places. When last year it was, of course Japan, very competitive. Korea this year or U.K. As you see, of course, the tourist clientele is moving very fast. 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 five years, we will address, of course, a number of stores, especially if the landlord doesn't understand that they have to lower the rent. We will increase the productivity doing so by closing some doors.
Great. Thank you. 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?
Cartier has really always covered from entry, which we call welcoming level, right to jewelry watches. Yes, they have done well with some of their new watches. That was two years ago already. Yes, we are seeing demand in that market. In every big economic shakeout, the middle market hollows out. That's not just for watches, it's for everything. Every industrial product. In boom times, the middle market grows. In bust time, the top end still sells and the bottom end in the pricing range. You can look at automobiles, you can look at everything. It's historically proven.
Thank you, Helen. I think we've got time maybe for one to three more questions because there's still a number of analysts I think who would like to ask questions. Next one, please.
The next question is from Matia Vaida, IVEO Capital Markets. Please go ahead.
Hi, good morning, and thank you for taking my call and my question. I just have a question on the Chinese consumer as a whole. 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.
It's you, And yeah. We love them.
Yeah.
Well, you wanted a general question.
Yes.
We love sophisticated and cultured people with 4,000 years of history that have recently been liberated, that are highly productive, highly educated. It ticks every box that I can have. We love them. They will be back. They're already back domestically.
Okay.
Yeah.
Yeah. Just like a follow-up on that. In terms of, I know for leather goods, they are performing quite well. Just in terms of their demand for luxury and watches. Yeah, just some light on that, please.
It's doing well across the board, depending upon the quality of your distribution. It's clear that there is obviously, it's a discerning customer. They're very well-informed. Today, there are various websites that will give you the price per product, per city, per currency. Obviously, these are highly informed customers and travelers. We have to be flexible and adopt accordingly. 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 customer that bought a EUR 50,000 item and the currency suddenly appreciates and you dropped the price to EUR 40,000 and they go to the store and they see what they paid EUR 50,000 for a month ago is now EUR 40,000? It is very difficult. I was for years and years on the advisory board of an automobile company.
Suddenly the currency appreciates. If they drop the prices, everybody who's bought a car 6 months before, their residual value is affected. Their leases are affected. It's a lot more complex than appears when you just look at it. You can't just stuff loyal customers that have purchased and suddenly the currency changes. A currency appreciates. If the yen, for instance, should move suddenly by 20% up, do you immediately adjust down? What do you do to your customers that bought 1 month ago? It's very difficult.
Okay.
The other one that I noticed that nobody talks about is the strong Swiss franc. I noticed this is now just an accepted, a given. I don't think the governor had any choice but to do what he did. 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, they ask the people, "Should we have more paid holidays?" The people vote no. 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. 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, and a population that actually understands the concept of productivity. You've got to remember, that's now feeding its way through the system, and nobody talks about it.
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&L.
Thank you.
Thank you very much.
Last question now.
Next question is from Rogério Fujimori, RBC Capital Markets. Please go ahead.
Hi. Thanks for taking my question. On the U.S. market, what's your read on this market, and perhaps why the 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? 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 GBP depreciation? Thank you.
Hi, Rogério, 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. Because of the dollar and the GBP movements, we've had significant amount of purchases by Americans in the U.K. The U.K., obviously, because of the GBP, is one of our best-performing markets at the moment. I know how we report, but sometimes you don't draw the right conclusion. The American consumer is actually performing. The opening of the Mansion with 59th Street there, it's doing extremely well, huh? Doing extremely well.
We might add that especially in Europe, across the board, the local clientele is very resilient. As you know, unfortunately, the big issue that we have been going through and experienced has been the consequences of the insecurity in Europe, which has really made the tourists disappear, especially in France and Switzerland, in many countries in Europe, but U.K.
If you look at the department store sales in Paris, it'll 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. 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%.
Yeah.
They're deserted.
Sorry?
They are deserted.
Yeah, deserted.
Okay. I think we have to conclude now. Thank you very much for your participation. I look forward to receiving your questions and reading your papers later on. Have a good day.
Thanks, guys.
Cheers.
Thank you.
Bye-bye.
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