Good morning. Thank you for coming to Geneva to attend Richemont 2016 annual results presentation. Welcome also to those of you watching the webcast or listening to the conference call. Joining us today from Richemont are Richard Lepeu, Chief Executive Officer, and Gary Saage, Chief Financial Officer. The press release and annual results presentation are already available on richemont.com. The archive of this live webcast will be available today at 3:00 P.M. Geneva time on the Richemont website. As usual, the presentation will be followed by a Q&A session. Questions will be taken from you from the floor, but also, time permitting, from the webcast participants who have also submitted their questions in writing through the dedicated link on richemont.com. Before we start, may I kindly ask you to switch off your mobile devices. Thank you. Over to you, Richard.
Thank you, Christine. Good morning. Hello, you, ladies and gentlemen, nice to see you. The year ended up being disappointing. Sales started on a good note but turned negative in the second half of the year as the environment became adverse. A weak world economic landscape, geopolitical unrest, terrorist attacks, Paris and Brussels, weighed on client sentiment. Currencies, which were initially favorable with a soft EUR and an exceptionally weak JPY, turned negative. This created highly volatile tourism patterns, both in terms of magnitude and destination. The group recorded a 60% increase in sales at actual exchange rates, driven by growth in jewelry, leather goods, and clothing, as well as supporting exchange rates overall. Watch sales remained challenging. Regionally, the picture was mixed, with reported sales growing in all regions but Asia Pacific, as we'll see shortly. As in prior years, retail outperformed wholesale.
At EUR 2,061 million, operating profit was 22% below the prior year's level. During the second half of the year, our Maison adjusted the fixed cost basis, which led to impairing and one-off charges of EUR 97 million. Excluding these charges and the gain realized on the sale of a real estate equity in the prior year, operating profit decreased by 11%. Comparable operating margin was therefore 19.5% versus 23.4% a year ago. Net profit was up by 67% to EUR 2,227 million, reflecting first, a substantial improvement in net finance costs, as Gary will explain later. Second, the EUR 639 million non-cash gain on the Net -A-Porter merger with Yoox. Cash flow from operations remained strong, rising to EUR 2,419 million. Our net cash position amounts to EUR 5.3 billion, reflecting our strong operating cash flow, less our investments and dividends paid. Let's now review each region at constant currencies.
First, let me walk you through the group sales performance by region, network, and product line at constant rates, starting with Europe. The 10% increase in sales over the prior year is made of a very strong first half, up 24%. A weak second half. After the Paris and Brussels events, sales had been supported by frequent tourism driven by a weak EUR. Thereafter, a deteriorated feel-good factor and safety concern disturbed tourists, especially from Asia, from visiting Europe. Consequently, sales were down by 30% in the second half of the year. Let's now review Asia Pacific, which remains our largest region with 36% of group sales. Sales declined by 13% as Hong Kong and Macau continued to suffer, with the watch category and wholesale channel being particularly affected. Strong local currencies and alternative shopping destinations make those two markets less attractive.
Mainland China, however, was up 10%, a marked improvement from the last three years. A qualitative distribution network, price adjustment a year ago, and a soft RMB supported consumption in China. Another indication, Cartier posted a 14% growth in sales at constant currency, driven by good growth in watches and jewelry. China is seeing a rebalancing of the business between purchases at home and abroad. Let's now turn to the Americas region, which accounted for 16% of group sales. Despite 11 store openings, the region was subdued throughout the year, with sales down by 1% at constant currencies. Basic demand for jewelry, clothing, and leather barely offset soft watch sales. The strength of the US dollar, lowering tourist purchases, and driving sales of locals abroad, as well as a lack of visibility during an election year, have not been supportive.
continue to positively drive sales, albeit from a low but fast-growing base. Once again, it would run as Montblanc 1st U.S. store to Cartier 5th U.S. store. Japan, which represents 9% of group sales. Sales rose 20% after a 16% decline last year, and a 23% increase in the year before. This exceptional double-digit growth rate has been driven by an exceptionally weak yen, which has favorably impacted the level of tourism. The high rate of sales growth driven by jewelry and watches in the first half of the year receded during the second half-year period. Finally, let's move on to the Middle East and Africa, whose contribution to sales now approaches those of China or Japan, with 8% of group sales. This growth softened to 2% as unfavorable currencies drove tourism lower.
The region continued, however, to benefit from a resilient domestic clientele, irrespective of lower oil prices. Sales growth was primarily generated by jewelry, premium watches, and ready-to-wear at Chloé. Let's turn to sales by network. Sales through the Maison directly operated and e-commerce accounted for 55% of group sales, above the 52% contribution of last year. Retail sales rose by 5%, partially underpinned by the net opening of 22 internal boutiques, but negatively impacted by the closure for renovation of three major flagship Cartier. Those openings took place mostly in Europe and Americas. The poor performance of our stores in Hong Kong and Macau weighed on the good results of most of other markets.
After a 16% decline in the first half of the year, the 7% decline for the full year in wholesale sales reflects persisting weakness of footfall in Hong Kong, Macau, and Americas, and a negative second half of the year in Europe. Lastly, let's review sales by main product line. All the product lines have higher sales except watches, which are down by 8%. Jewelry, which now represents more than a third of group sales, maintained its strong momentum. Within, jewelry and leather goods enjoyed the strongest performance with sales up 8% and 9%, respectively. Leather goods and clothing delivered good growth, thanks to Chloé, Montblanc, and Peter Millar. Writing instruments sales grew by 1% with renewed activity at Montblanc. Moving now to the Maison highlights. Let's look at the reported sales and operating contribution by segment in more detail.
We start with Jewelry Maison, which are Cartier, Van Cleef & Arpels, which accounts for 55% of sales and 82% of group's contribution before corporate costs. The Jewelry Maison reported a 7% growth in sales, thanks to jewelry and a weak EUR. Jewelry solid momentum as a product line helped Cartier and Van Cleef & Arpels compensate for the high single-digit decline in Cartier's reported watch sales, which can be attributed to weak Pacific and Americas environment. Boutique network reported growth even though a number of Cartier flagship stores were closed for renovation in New York, Tokyo, and Seoul, and the number of openings was limited. Wholesale sales, however, were lower than in comparative period. In this context, the Jewelry Maison delivered profit resilience and a contribution margin of 31%, including one-off charges of EUR 24 million relating to Cartier watches. Now, our Specialist Watchmakers.
Specialist Watchmaker sales rose by 3% overall. This reflects a weak EUR and softer organic sales owing to negative sentiment in Hong Kong, Macau, and the Americas region. Our view is that the watch industry is likely to face tough demands for the coming months. There is therefore no value in producing watches that will pile up in warehouses or on retail and on fellow shelves. At the same time, the strength of the Swiss franc is likely to remain a secular trend. As we manufacture in Switzerland, we have to keep raising our productivity gains. These factors explain why at Parchie Watches and the Specialist Watchmakers, we had to implement a transaction. For the Specialist Watchmakers, these actions resulted in one-off charges of EUR 24 million. Operating contribution decreased by 59%, reflecting this charge and the impact of a strong Swiss franc.
Operating margin for the year was therefore 16%. Finally, the other business area. Let me first remind you that the prior year included a one-time pretax gain of EUR 234 million stemming from the disposal of the St. Regis retail location in New York. Excluding that gain and a one-off charge of EUR 22 million, partly related to the closure of the dial manufacturing unit and the sale to a third party of a stamping manufacturing site, operating losses were broadly in line at EUR 62 million. Improving results at Montblanc, Chloé, Peter Millar, and Alaïa offset deterioration at Alfred Dunhill and Lancel. Let's look at the performance of some of those Maisons. We are happy with the performance of Montblanc, whose restructuring plan is now coming to an end with a review of its distribution network in China.
The product offer has been revised, a new international advertising campaign implemented, and the effective new retail concept has been rolled out in 10 locations. In fiscal 2016, the Maison enjoyed organic sales growth, supported primarily by its new leather offer and e-commerce channel. Watches benefited from a renovated and writing offer and writing instruments from the new Montblanc pen. Chloé showed an excellent performance across channels, product lines, and most geographies. Bags enjoy a particularly strong momentum. The Maison is now concentrated on expanding its digital presence with a mono-brand store powered by Net-a-Porter, deploying a boutique renovation program, and enhancing Chloé leather manufacturing capacities. Alfred Dunhill continued to be affected by its exposure to Asia-Pacific and suffered higher losses. Western markets and Japan, however, enjoyed growth, though not enough to compensate for the difficult situation in Asia-Pacific.
During the year, the internal boutique network was reduced by two, with a further reduction of 10 planned in the coming year. The Maison recently launched a new e-commerce website. At Lancel, with the new management team, the product offer has been completely renewed and is starting to receive media coverage. The new boutique concept has proven to be a key turnaround driver in sales and image. Unfortunately, the difficult duty context in France has affected Lancel's results throughout the year. Over to you, Gary.
Good morning, everybody in the hall. Good morning to everyone behind their screens, good morning to our Richemont colleagues. Let's start with a review of our operating profit. Reported operating profit on a recurring basis is down by 23%. This reduction can be explained by the difficult trading environment, lower gross margins affected by a variety of factors, and two items which affect comparability. If you exclude the EUR 234 million gain on the sale of the St. Regis property in the prior year, and the total one-off effect of charges of EUR 97 million in the current year, our operating profit decreased by 11%. Comparable operating margin decline to 19.5%, should be compared to 23.4% in the previous year. Expenses grew significantly faster than sales on a reported basis. I will explain that in a minute. Let's first go to gross margin.
A 4% increase in gross profit led to a gross margin of 64.3%. The 108 basis points decline against the prior year results from a mix of positive and negative factors. On the positive side, the ongoing increased share of retail certainly helped. This was offset by one-off charges in gross margin of EUR 67 million relating to the various Maison and manufacturing facilities. These were implemented at the end of fiscal 2016. This accounted for a 60 basis point reduction in gross margin for the year. It also should be noted that we experienced a negative effect of foreign exchange on the margin for the year that totaled 113 basis points. Let's now look at operating expenses in detail. Net operating expenses grew by 20% and now account for 46% of sales. Rate of increases reflect primarily the Swiss franc appreciation, boutiques, and one-off charges totaling EUR 30 million.
These EUR 30 million charges relate primarily to impairment. On a comparable basis, operating expenses grew by 6% at constant exchange rates. Selling and Distribution expenses, 58% of total OpEx, rose the fastest, plus 16%. On a constant rate basis, S&D expenses rose by 8%. This increase is primarily to increased depreciation in rentals linked to our investments in our distribution channels, including the opening of net 22 stores this year, and a reminder of the 77 net stores opened in the previous year. Communication costs rose by 8% and continue to represent between 9% and 10% of sales. Administration and other expenses grew by 16% on a reported basis, largely driven by the strong Swiss franc. On a constant rate and comparable basis, and excluding the one-off charges, administration and other expenses grew by 6%. Some detail on finance costs.
We enjoyed substantial increase in net financial income, now positive this year at EUR 2 million. This should be compared to a net cost in the previous year of EUR 953 million. As a reminder, the prior year included non-cash financial charges of EUR 652 million on the mark-to-market translation of our cash holdings, primarily related to the valuation of the Swiss franc. In the year under review, we incurred lower losses of EUR 45 million on our normal hedging program, which is marked to market at the end of each period. Let's now look at the other P&L items on a continuing basis below operating profit. Profit from continuing operations for the year increased by 26% to EUR 1.7 billion, primarily as a result of the reversal in finance costs, as I've just explained.
Our taxation charge was stable at EUR 370 million. We continue to believe that the medium-term range for our effective tax rate will be between 18%-20%. Profit for the year rose by 67% to EUR 2,227 million. This significant increase primarily reflects the profit from continuing operations that we just discussed and the EUR 639 million non-cash accounting gain realized from the combination of Yoox and Net-A-Porter in October of last year. I'd now like to focus on our cash flow from operations. Cash flow from operations slightly rose to EUR 2.42 billion, thanks to a limited increase in working capital, which broadly offsets the increase in operating profit when compared to the previous year. Inventories increased by EUR 139 million, much less than the EUR 506 million increase in the previous year.
The rotation rate remains healthy and actually decreased to 22 months of gross inventories, reflecting disciplined management of inventories by all of our Maisons. Receivables in value terms were broadly in line with last year. The portfolio remains healthy and sound at 96% current. Other items remained broadly in line with last year if the St. Regis retail property is excluded. Let's now look at our capital expenditures. At EUR 710 million, gross capital expenditure was in line with last year and represented 6.1% of group sales, including discontinued operations. Richemont has invested over EUR 3 billion in the past five years. While certain projects in the current year were deferred or not completed as expected, the medium-term trend for CapEx overall, without considering timing issues, is expected to be lower in value terms. Let's look at the nature of our investments made during the past 12 months.
44% of group expenditure relates to points of sale investments, including internal and external boutiques and wholesale installations. 22 net internal stores were opened. Worth mentioning was the relocation of the Cartier store in Seoul, Korea. Van Cleef & Arpels moved to a new location on the Tokyo Ginza, a new Montblanc store in Paris. The year saw the continuation of a number of substantial renovations of the Cartier flagships in Tokyo and New York, as well as the extension of the Van Cleef & Arpels flagship store on Place Vendôme. Five Maisons opened a store in the Shin Kong Place department store in Beijing during the year. Montblanc began the rollout of their new Neo concept, which is a new retail concept with 10 stores coming online in the year just ended. The new format is clearly providing productivity gains.
26% of the project expenditure was related to manufacturing investments. Most important investments included the completed A. Lange & Söhne manufacturing site, the completion of the Vacheron Constantin manufacturing site in Geneva, and a new Cartier jewelry workshop in Le Locle, Switzerland. Other investments accounted for the remaining 30%, and these included the finalization of our Meyrin campus, which will be inaugurated next week and is already fully operational. Other investments include IT and logistics-related projects. Now let's discuss free cash flow. Cash flow from operations financed the significant investment program that we have just reviewed. Free cash flow amounted to EUR 1,245,000,000, a EUR 273 million decrease from fiscal 2015. Last year's cash inflow, however, was boosted by the gain recorded on the St. Regis retail location. Excluding this gain, free cash flow from operations actually grew by 29%. Now let's look at our balance sheets.
The group continued to enjoy a very strong balance sheet. Our financial structure remains solid, with shareholders' equity representing 75% of total assets. Net cash and investments amounted to EUR 5.3 billion compared to EUR 5.4 billion in March 2015. Richemont's cash position includes highly liquid, highly rated money market funds, short-term bank deposits, and medium-duration bond funds, primarily denominated in Swiss francs, euros, and US dollars. Let me update you on the latest developments regarding our stake in the Yoox Net-A-Porter Group. When the merger was completed in October 2015, Richemont ended up with 50% of the combined entity. Remember, we decided to cap our voting rights to 25% to ensure the neutrality and independence of this new platform. We retain two seats on the board of directors.
In April, a new strategic partner, the Emaar Property Group, owner of The Dubai Mall, fully subscribed to a EUR 100 million rights issue. As a result, our ownership stake is diluted to 49%. On the balance sheet, our stake has a carrying value of approximately EUR 1.1 billion. At closing on March 31st, 2016, the book value of our stake was approximately EUR 1.8 billion. Finally, related to the capital increase, Richemont will record a EUR 49 million gain in the first half of fiscal 2017 related to the capital increase. It will be recorded in the income statement in our share of the associated investment. Let's now look at another use of cash, our cash dividend proposal for this year. Our fiscal 2016 dividend proposal to be determined by shareholders in September is CHF 1.70 per share.
This represents an increase of EUR 0.06 over the previous year and is consistent with our strategy to grow dividends for the shareholders in the long term, in good times and in bad. Let's look at our April sales. April sales declined by 15% on a constant rate basis and by 18% on a reported basis. This is to be compared with an 8% decline at constant and 9% reported growth in the prior year. All regions reported sales declines. At constant exchange rates, only Middle East and Africa posted growth. The performance was largely anticipated. Asia-Pacific remained weak due to a lack of recovery in Hong Kong and Macau, only partially offset by a continuing improvement in mainland China, which was up 26% on a constant rate basis during April. Both retail and wholesale remain challenging. We expect the challenging conditions to continue through September.
Thank you for your attention, and I'd like to turn over to Richard for his concluding remarks.
Thank you, Gary. In terms of strategic direction for the year to come, we are focusing on driving sales more than ever in a cost-effective manner and maintain strict cash flow discipline. We are reassessing our internal retail network by Maison in order to increase productivity. This will include closing stores when necessary, moving to less expensive locations, and/or renegotiating new leases. This is specifically really meant for Hong Kong and Macau. We will manage our production levels and optimize rotation of inventories with our partners. In addition, we will continue to be extremely selective in the way we allocate our resources, with a particular emphasis on jewelry, Mainland China, and as Gary said, project-based retail investments. Product-wise, we will further enrich our more accessible lines in parallel with the successful expansion of our high jewelry and Métiers d'Art offer.
On average, over the past five years, Richemont has generated return on operating assets of about 30%, including the 2020 fiscal and the sale of our St. Regis Property in New York last fiscal. We will continue to base our investment strategy on realistic and cautious assumptions to protect this healthy performance. Let me conclude this presentation by saying that we do not expect any meaningful improvement in the trading environment in the short term, while global instability remains. Our sound financial position allows us to foster organic growth through selective investment in all our Maisons, with an increased emphasis on jewelry and Métiers d'Art, while offering our shareholders a regular increase in dividends. Irrespective of the current feedback factor prevailing in many countries, wealth continues to grow around the world.
The longer-term demand trends for prestige quality products remain supported by an ever-increasing number of global high-net-worth individuals, and factors such as gifting, pleasure, and exclusivity. With this in mind, our Maison will continue to conceive, manufacture, and market timeless, yet contemporary, beautiful products of the highest quality. With stable experience and committed staff and management, Richemont, with its worldwide geographic footprint, is well-positioned to continue to benefit from an expanding market in the years to come. Thank you. Gary and I will take your question now, if any.
If any, yeah.
Before we start, if you can clearly state your name and your company's name, it benefits for the audience and the webcast participants. Thank you. Yeah, over.
Thank you. I was hoping you'd choose me first. Jon Cox with Credit Suisse. This question is really, Gary, for you, in terms of the one-off charges, CHF 97 million. Can you just sort of give us a breakdown on what that is? Is that just redundant costs? There were obviously a lot of discussion about maybe doing inventory buybacks from retailers. Is there any of that included? What are your plans for the next financial year in terms of what sort of figure should we expect if that happened? The impact, obviously, on margin, et cetera. Maybe a question for you, Richard, just on the longer-term outlook for the industry. What can you guys do, yourself or Richemont and the industry as a whole, to maybe reinvigorate the space given the problems it's facing currently? Thank you.
You first, me second. Me first? Okay. Jon, I thought we were pretty detailed in our commentary of where the charges were. Clearly, the charges in the gross margin related to the social plans that we've discussed. That happened both in the specialist watch area and in the Jewelry Maisons. That effect had 60 basis points reduction in the margin. I think on the expense side, most of the charges related to asset impairments. They show up in both the other segments as well as our central costs. Why in central costs? Because we impair goodwill for Shanghai Tang, which was EUR 16 million. That showed up in central support services. In terms of the buybacks, I think the buyback question is one where brands do it all the time, frankly. We don't take one-time charges for those. That's not appropriate in our view.
It is done on a one-to-one basis with the partners, which is not new. We've done it before. In terms of the effect on the margin, you know what I like to do. I can't really tell you what the effect on the margin is because I don't know what the sales are, right? I'm comfortable in giving you overall margins guidance, and I expect that to be in the range of 65.2%-65.4%. Calm down, Mélanie. It's all right. Let's say it again, 65.2%-65.4%. You all right? I think Mike is done, John. I think as far as she's going to get, right?
Well, just to answer your question, you have to go back to what has happened over the last five years. On the period between 2011 and 2013, watch sales had really exploded. Growth was very strong, and the inventories grew accordingly. That change of trend that we have experienced, prompted by the gift restrictions decision. Never forget that the strength of the U.S. dollar has led to an accumulation of inventories, especially in Hong Kong, Macau, which used to represent 25%, 30% of the worldwide watch market. As long as this situation hasn't been cleared, it's obvious that it takes some time. The situation will remain difficult. However, we are still confident for the medium term that we are still space for growing for that industry.
I think it was all at the same time. It's difficult. Maybe we'll follow that row and we go.
Hi, Annabel Gleeson from Redburn. Two questions. Firstly, on OpEx. In the short term, what can you do this year to manage OpEx given the obviously top-line trends that you can see coming, that are obviously difficult? The same on CapEx. What are you going to do there? Secondly, just going back to the sort of longer-term outlook. Once inventories cleared through, so if we can actually sell through trends, what are you thinking about the actual longer-term support for the watch industry? How are you thinking about pricing, volume, maybe regional growth, nationality? I don't know how you think about it. Are there any particular areas in watches that are proving more resilient than other areas? Are you maybe moving down into entry-level more and higher-end more, or how should we think about it? Thank you.
Every morning, I'm looking at that. That's the evolution of the main currencies. Starting with the Won, sales are exploding in Korea. Guess why? The yen, the dollar, the Swiss francs, and so on. You cannot imagine the impact of the volatility of currencies. Remember that about 70% of our clients are dollar-denominated. We produce in Europe, we produce in Switzerland. The question is very simple. When the dollar weakens, the purchasing power of clients decrease. Honestly, lately, I would say, and personally, I'm making a prediction, the dollar has significantly weakened, and of course, it has impacted the purchasing power of clients. When it happens, of course, you might be tempted, some people have tended to overprice. Remember the old time for the people of my age, what happened in Japan, when suddenly the office said they no longer can afford a [inaudible]
It's the same, and meaning that we are confident that we have to adapt our offer to the new reality. Coming back to China, even though China is just a part of our business, just remember that the most majority of watches are sold abroad and not to the Chinese. The so-called aspirational middle class, we have to continue to be relevant for them and to have a price we see adapted to them. That's the reason why, in term of price offer, we really have to adapt faster our offer in that respect. That being said, the watch will still keep on to grow. When you look at the hard jewelry sales, you see that it's actually as if it's growing faster. Globally, I think the main driver of our business remains growth of the population.
Of course, the creation of wealth with this population. In term of geography, of course, China is big and 1.6 billion. There is not so many people around of that magnitude. India, of course. It will take some time, but we are now in India. We set up our own company, and Montblanc is pioneer in India. We got a good start. We still have plan in Saudi Arabia. Middle East has been very resilient. Middle East is a growing region, and we believe there's still significant potential, irrespective of the oil price in this region as well.
Well, let's deal with a variety. There are things we can do in terms of expenses. Remember that our first view is always the protection of cash flow, with the medium term and long term in mind. As I said in the presentation, we acknowledge that the large manufacturing cycle is coming to an end. Having said that, the last factory to be upgraded is IWC, and that will certainly go forward. That's an indication that we still believe in the medium-term strategy. On the CapEx question, CapEx, as I said, is reaching peak. There is quite a few timing differences in there this year. It came out a little lower than I would have thought.
There's about EUR 50 million of CapEx that I thought was going to come in this year, is going to come in next year, mostly related to the Cartier projects. I think in total, we will spend about EUR 715 million in CapEx this year, but just recognize that EUR 50 million comes from timing. We still believe in the long term. We still will spend about EUR 200 million in retail, mostly related to renovations. We want to accelerate the Montblanc activity because the stores are clearly showing per square meter gains. I think on the expense side, we expect S&D on a constant rate basis to grow +5%. That's coming down. We expect 10 store openings net. Richard disclosed that we will be closing some more Dunhill stores in the current year. I think what Mr. Rupert said this morning, we want to consolidate.
We're really looking at return on assets. It's an opportunity to grow our return on assets if we look more precisely at certain stores. I think on admin, we expect to be flat to +1%. No?
Mélanie. No, Mélanie, I think Richard answered. Let me go back to Mario.
Here we go.
Mario, we don't want to be the gentleman, but you know the ranking. Sorry. It's only for you, Mélanie. I don't know.
Yes. Good morning. It's Mélanie Flouquet at J.P. Morgan. My first question is actually strategic. I suspect in a way there was a clean up necessary from the bribery crackdown on watches, but Swiss watches seem to be also pretty weak. I wondered whether there is another pressure going on there, and whether you could discuss fundamentally what may be happening to watches beyond the crackdown on bribery, such as the gift restrictions. Linked to that, if the high end is sort of seeing a rebasing, do you believe that the excess personal, you did say that beforehand, has got a lot of future as well? Are you rightly positioned as a group to surf this? Looking in this respect, what are you going to do with your cash balance? In particular, why no share buybacks, no further increasing dividends?
This is a pile of cash in a period of time that is pretty tough. You're still generating cash, why not more distribution? Is there an M&A agenda behind this? I think I'll actually, just one quick question on April. You have retail versus wholesale in April.
Both were down.
Both are down. The magnitude we can't tell.
Both were down. Yeah.
It was anticipated because I'm sure that you looked at the Swiss exports in March, which were down, if I remember well, by 16% in CHF. Coming back to your question to the U.S., I think probably you have the answer than me. I don't know what's going on in the U.S. It is not only about us, we should ask guide. This is not only watches, it's across the board in many categories. Look at the performance of the Richemont stores. We were alluding to the feedback factor. It is really that prevailing. To come back specifically to our industry, remember that for part of the year, the dollar has been very strong. What that means in our industry is firstly, no more tourists buying in the U.S. Tourism is not enormous in the U.S. Significant, however.
Second point, of course, the U.S. citizen buy abroad. Last but not least, especially in wholesale, always difficult to control the flows of goods. You have had a very large offer of watches on the gray market, which means perhaps consumption of watches have been higher than you see in the U.S. Those are the factors that explain the subdued growth in the U.S. and disappointing. Just back over the last five years, the U.S. has been really growing, it's really a lending, which was not expected. Very true. It could come back when the election will be passed. In terms of further cover, we refer to that. That's very clear that in more challenging times, you always got the high-end and the entry price, and it's true in every segment.
We can run the very high-end luxury, especially for watches and jewelry. We will not change our strategy because of that. We have different price points, and definitively, in the entry price, we were not strong enough. This new watch priced below EUR 2,000, USD, whatever, is kind of our answer that we have to give to the market. We are strongly believing that the purchase power is an issue. Coming back to an important clientele, which is Chinese, it's obvious that the growth that we see in China and the real desire of Chinese buying our products, which is confirmed, the psychography of the demand has changed. It's clear that it's more the ascension of middle class, which is, of course, more and more wealthy. Not as wealthy as used to be some corrupted guys. That's the adjustment that we have to make. Cash?
We have cash.
Mélanie, I think we're pretty clear on the cash pile. Buybacks really aren't advantageous to our Swiss investment base. We've sort of taken that off the table for quite a while. I think the dividend strategy is pretty clear. I think you're seeing that we're executing that strategy. Perhaps you say we have quite a cash pile. If I see you in November and sales are continuing to be down 15%, I'm suggesting they will be. You'll probably be very happy, and the rest of us will be happy that we have cash to work with. It allows us to take the long-term view. Just a point on America. First a general comment, then I'll hone in on America. You said about the high-end. That was specifically a watch question. High jewelry grew significantly for us for all three brands, Piaget included.
We were pleased by that because, as you know, most inventory investments that we've been making is going into jewelry. That's great. Specifically to the U.S. and to Luca, to Richard. The U.S., for us, is pretty much a local market. The biggest tourism piece is the South American piece. Clearly, with the strong dollar, particularly in the South, it was difficult. Having said that, Peter Millar, Montblanc leather, and Chloé are fantastic. Growing everywhere.
My name is Mario.
We don't like specifically disclose our commercial strategy secrets brand per brand. As you've seen, Jewelry Maison, Cartier, for which watch is very important as well, perform well. You can guess that jewelry has done very well for Cartier as it has done for Van Cleef & Arpels. It's true for all the categories, including high jewelry, where our two biggest Maison are really becoming prominent in that market. I'm sure that you have looked at the results of the auction sales over the last few days, and you have seen records for Van Cleef & Arpels and Cartier jewelry. We believe that we have potential in this segment. As you know, we are not in the stone business.
We are really in the Jewelry design business, meaning that beyond the value of the stones and the materials, the design, the uniqueness of products, which are cultural products, are fitting very well for people now. No longer don't know what to do with their cash, especially when they are charged when they deposit their cash at the bank. For the rest of the category of jewelry, of course, the impact factor has started to impact all category of products, including jewelry, but not at all at the same level, of course, as watches. Firstly, because we are just retailing jewelry, so we have no impact of the inventory as such. We have really different price points, starting lower than watches for most of our brands and going up to the sky, more or less. We are really flexible to adapt our product offer to that situation.
That being said, that's true. Again, of course, I think with our brands, which are one of the most sought out, we have a pricing power, we should not abuse of your pricing power. Somewhere, people are not stupid. They first look on the internet to see the pricing and the differences of pricing more than ever. As you know, and it doesn't please everybody, we are committed to what's so-called fair pricing, meaning that excluding tax, we are managing to try to have a pricing equivalent around the world to create confidence and trust with our consumer. For prices, it's complex to monitor. For products for CHF 50,000, CHF 60,000, it's a daily pricing, meaning that for high jewelry, you can buy everywhere at the same price, excluding taxes.
If the dollar is going up or going down, okay, I think the client will understand if it's based in Euro and manufactured in France. That's the way we do, and we are almost out.
Mario, let's remind ourselves of how we think. Pricing and currency differential is one thing, right? Let's remind ourselves how we think about base retail price. We have always said that our increases in retail prices will reflect increases in our cost base. You can see that the margin is going up, so you could conclude from that our cost base is flat or going down. Therefore, there's no real price increases this year. That's not a function of the environment, that's a function of a long-term strategy.
I think Luca and Antoine maybe.
Move it down to the front.
Yes. Thank you, Mario.
Morning. Luca Solca from Exane BNP Paribas. I wonder about the watches business and its reliance on wholesale. The inventory overhang in the wholesale channel seems to be creating an amplification of the slowdown and the reversal in the trends that we have perceived. Would you reckon at this stage that you are seeing depletion in your product in the inventory channel overall, and with particular focus on Hong Kong? If not, how are you planning to address this issue down the road? I wonder if the more difficult environment is suggesting a harder look on the other businesses. At some point, you came back saying that for Lancel and Dunhill, you had plans to revive them. With the difficult environment, they don't seem to be working at the moment. I wonder what your plans are there and if you see any change of approach potentially coming.
On the specialist watches, if you could give us a bit more detail on whether there are some businesses that are doing better or worse. At some point, Cartier was singled out as having a less brilliant performance. Anything that you can give on that would be useful. Thank you very much.
To come back to the inventory issue. I explained to you know it works. Care about the partners. They have been supportive in good times, and we have to support them in bad times, and we have to help them to solve the issue. We do it in a normal time when we could normally, we adjust, we say, from time to time, and we really revisit the level of inventories and the credit key on inventories to make sure that they always are good because the worst is to refuse to address this point, to create a bubble, which will just postpone the issue and threaten the image and the reputation of your brand. Case by case, country by country, we have addressed and we continue to address that situation.
I think it is very wealthy and I'm sure that the partners will be very happy, and it will remind them next time that we are always behind them. That being said, we have never abused in terms of selling. We have always been cautious, but that's very true that the abrupt change of brand suddenly creates that excess of inventory. If on top of that you have a change of the consistency of the demand itself in terms of product offer, it creates a great issue in the level of inventory. That we address, and it's very healthy, I think. Even in some other locations, especially in China, where our distribution is very limited because we are mainly retail-oriented, but distribution of watches is kept up.
We really are testing new business model to avoid that up and down, how we say, evolution of inventories to monitor on much more regular basis the level of inventories.
On the specialist watchmaking question, Luca, you know I like to be positive. The stars of the show this year were IWC, and Panerai more difficult with Vacheron and Piaget. In terms of the other category, I think it's a mixed bag. I think [Rolex] on the way to recovery, substantial improvement there. I said in the comments the store concept is much more productive, so that's good news. Peter Millar continues to do well, extremely well. Mostly U.S.-based. Remember, they have three channels of distribution: golf, internet, and department stores. Department stores in the U.S. are suffering at the moment, but the internet business, their retail business, and the golf channels are quite making up for that. I think that Lancel, we're sad about Lancel because we think they have great products. They started to renovate their stores.
The productivity in those stores are growing, but it's France and it's Paris, and that's difficult. We believe in what they're doing there. Dunhill, I think we do have to get a little more precise. We said in our comments that we closed net two stores this year. We will close net 10 next year. It's difficult, and we need to be more precise.
Yeah.
Antoine Belge
Good morning. Antoine Belge at HSBC. Three questions, the first one is actually still on Cartier watches. If you remember that three years ago, I had asked Johann Rupert a question about the underperformance of Cartier in watches, I think he gave me a pretty hard time for asking that question.
That's fine.
You have a new CEO in Cartier that took over your profits. I'm sure that you can share something about his plans to maybe reposition the brands towards putting Cartier back as a generalist brand. I think we've seen certain products expanding to very complicated watches, et cetera. Anything you could share on maybe his view about where the brand should be in the future? My second question on those inventory buyback, I think Richard, it's a one for one. Is it actually true in terms of the mechanics, in terms of timing? My understanding is sometime you take back inventory and then it's a promise from the retailer that, for instance, when you'll be launching this version of, likely the Cartier, that they will order. There is some timing differences to be aware of.
Finally, I'm positively surprised by gross margin guidance, especially with the very difficult development in terms of top line. Maybe, Gary Saage, if you could share with us why you're so confident that margin could be up even with from the one-off.
First I would like to answer on Cartier. True that we have a new CEO. You know that actually Stanislas did a good job. Unfortunately he had the health issue, and had been replaced by a very well-known guy for us, Cyrille. Who's been with us for more than 25 years and had some training in the meantime and came back. There is no repositioning of Cartier. Cartier is at the top, remains at the top, including in watches, where we disclose fairly that they are down. Don't forget that they've been up and significantly up when sales were booming. It's true that being there where. They were very strong in the high-end, very strong with jewelry watches, very strong in Asia Pacific, including Hong Kong, Macau, and China, as they suffer the most.
If you are weak in those regions, you are, of course, less affected. That being said, there's some denial and the risk, it's obvious that a new guy can take much easier decisions. It's like in rugby, I said it. Cartier has a very long history of having a very broad positioning, always luxury, from accessible up to the high-end. It's very true that the focus will be back to the basics and make sure that we remain strong, relevant in this segment, especially for women. It's very true that the competition has been very tough, very crowded. Much less in jewelry, by the way. We suffer from that. At the end of the day, I think that it's not suffering more than the other on the medium term.
Definitively, Cartier is a jeweler and a watchmaker, the number 2 watchmaker in the industry. I know that some people challenge that, but at the end of the day, they will remain the number 2, and we'll do everything to reinforce that position. In term of product, there has been immediate action. It's not a secret that Cartier has been the most active in the pullback, so we have addressed the issue. We have even some repositioning of some key products in term of pricing. As we disclose, just to be, I would say, fair for changing factual, we disclose the figures in China, where Cartier has been growing 14% last year, which is mostly retail watches and jewelry.
The gross margin question, Antoine, you're going to get killed by using the word confident. I'm going to be miserable, you know that, right? What we try and do is, what I try and do is give you a projection of where I think things are going to be in terms of the gross margin. Obviously, there's a lot of moving parts, but as I've said, I'm brave enough, I think, to give you some guidance. Clearly, if you think about it, the margin should go up because the one-time charges aren't there, and we've reduced our cost base. Not much more to say than that. The guidance that I give is based on where we are today. Now things could change. A perfect example of that was when I spoke with you all in November. We hadn't yet considered the impacts of the events in Europe.
When I spoke to you, that wasn't in my thoughts. All I try and do, I'm not confident. I'm never confident. I try and give you the best information that I have.
Oliver.
Thank you. Hi, Oliver Chen, Cowen and Company. Good job on managing cash flow in a tough time. I have a question about the rebalancing of spending in China and domestic versus abroad. Do you see that as a five-year trend in terms of how this timing will work and structurally? Also, as you do draw attention to accessible product, which categories or geographies is this most important for you? Just finally, as we cover U.S. luxury and you think about the next generations of millionaires and millennials, what are your thoughts on online and CRM and omni-channel and online pickup in store? Just because as you want to surprise and delight, the Amazon customer has a fairly wide household income. I'm just curious about what you think in the context of U.S. department stores. There's a real intense focus here as well. Thank you.
As rebalancing momentum growth for Chinese, it's 25/75, I used to see. We bet on it. We are strong in China. We have invested significant money in China. We continue to do so because we went through that in other countries like Japan, and we knew that it would come sometimes. That being said, how fast it will go, I don't know. It's obvious it will be mainly driven by black currencies as well, because they will continue to travel abroad very largely, extensively. Again, people are sensitive to price, and they search on the internet, and if they see that they can have a product 30% or 40% less expensive somewhere else, and on top of that, they're traveling this location, which, by the way, is less expensive because of the currency. Let's take the example of Japan last year. There we go.
The rebalancing will be also related to that. Because that, as some of you know, specifically, there are some measures of checking at the customs now to make sure that the people declare all the VAT or whatever. Of course, I think it may encourage people to buy at home, and the reason why it's very important to be also very strong in mainland China.
I think, just to give you some data. We have been investing in China for a long time, as Richard has said. We now have 226 stores, owned stores in China, and we're happy to have them. In terms of digital, we have digital activity, e-commerce activity. Richard disclosed the American statistics for you. It's a significant part of our activity. We do have an activity in Europe, and we recently went live for some brands in mainland China, in Hong Kong, and we're in the process of rolling out Southeast Asia. We believe in it. I think, if you look at the S&D guidance, we're trying to bring in more experts generally in the digital area because one of our CEOs, who will remain nameless, but he had a comment, and I thought it was a great comment, and it's not necessarily just e-commerce.
He said, "We're becoming a content business as well as a product business," which I thought was an interesting point of view. In terms of millennials, to fall back, if you will, on the wealth creation and demographic story. Millennials buy our products. We believe in that. Next year, we're gonna report a week earlier, around May 12th, because a millennial that I know is getting married, and he bought his fiancée a Cartier ring. Happens to be my son. Desire is still there, and we believe in the long-term story.
Hi, Helen Pan from CLSA. I have a few questions from me. Firstly, around Cartier, what [inaudible] is following up here and the inventory buy-in specifically. Can you talk a little bit more just around the timing of what you've seen there, in terms of when you were doing the inventory buy-in and whether that's impacted any of the kind of gross margin in 2016 or your 2017 guidance on gross margins? Secondly, just to come back on the OpEx line. Firstly, on communication centers, I don't think you said that they would sort of top end of the range last year. How are you thinking about that for 2017? Secondly, within your S&D guidance, have you included any rental negotiations in Hong Kong or any adjusting of the store network in Hong Kong within that?
Finally, it wouldn't be a results presentation if I didn't ask on Net-A-Porter . I was just wondering if you could talk through the 50% stake in Essential Net-A-Porter and your longer-term plans for that.
49, Helen.
49.
Well, no. Okay.
I see we've got other questions coming from the.
Okay.
You can come back on that.
I think the buyback, Helen, we've said what we're gonna say. Again, it's more of an individual commercial relationship with the dealer. That is an ongoing process. What is the effect on a gross margin? As I said, I've been very brave, and you all have to give on the gross margin. In terms of sales, I appreciate the question. As we say, we don't know what sales are going to be, so I can't really give you an anchor point there. In terms of the [Net-A-Porter] investment, in terms of the business and what have you, please pass those comments along to Silvia, Enrico, and Federico. That's not for me to say.
Your plans on your side.
Well, I think, Helen, we've just got involved. We're delighted with the new strategic partner, who happened to have a relationship with us in terms of a landlord relationship. No plans for the stake. Quite happy.
From the communication expenses and the S&D and whether that includes any rental renegotiations.
I think the rental renegotiations is an ongoing process, as Richard said. The S&D guidance includes a variety of things. We're renewing leases every day, almost. In terms of the communication, I think communication will grow by 8% constant currency from this year's level.
Yes, it's John White from [NameFirst] . Two questions, please. First of all, with regards to cash, Gary, you talked about buybacks effectively being off the table. You have mentioned in the past that you would look to use cash to sweat assets a bit harder, while at the same time not trying to drive up your fixed cost base. I've always interpreted that as a sign that you're going to invest more in buying stones and looking to create nice pieces to drive returns in the future. Maybe you could give an update on how you see that strategy going forward.
Secondly, with regards to tracking, thinking about some of the impacts that we've had from a macro perspective, whether it's the impact on terrorism and fears and therefore the impact on tourism, and also Chinese visa bottleneck issues from the change in visa requirements back in October last year and the bottleneck thereafter. Have you got any data to try and disaggregate effectively what is the underlying picture versus some of these shorter-term or, I guess, content issues that you see, especially with regards to demand in Europe? Thank you.
I don't know. Our tone is clear. Don't expect any meaningful improvement in the short term, in weeks, months. I think we have to face the reality of that situation. Many things may change suddenly, including the ForEx, which is key for us. Remember that this year we have the revaluation of the Swiss francs, which has hit us a lot. Nobody is speaking about that, we are still living with that, and it forces us to be more productive and to play much better. Our view is that Europe is suffering significantly, and we see no improvement yet. How long it will last, I don't know. What we know and we believe, it will not last forever. We don't see why Europe will not become back the favorite destination for tourism.
We are very confident that it will come back, and we have to be patient. In the meantime, we have to act responsibly and to address the point and to be better and in other countries, to be better in their own markets, and to adjust our strategy in marketing, pricing, communication to that new situation.
Just on sweating of the assets comment. For me, that's not necessarily spending money, that's getting more money, okay? I think we do want to be a bit more precise in terms of the returns that we get in certain of our retail locations. I think we do have overall a very profitable network. A lot of questions on Cartier this morning, but I think if you look at the return on assets from a Jewelry Maison, still very healthy. From an operating point of view, still well over 30%, and you can look at the financial statements and work out the return on assets, still incredibly healthy. I think from a working capital standpoint, the investment in jewelry, we expect inventories to rise by about EUR 250 million. Again, the guidance, that's where I see today, most of that is in jewelry.
Most of that is in jewelry. That would make sense looking at the watch numbers.
Patrik Schwendimann from Zürcher Kantonalbank
I must have answered all your questions already.
What was the impact of the recent new customs regulations in China? What do you expect in the future? Second question, you gave the best guess guidance in terms of gross margin for the full year, but I guess, I mean, if I'm looking at the April sales number and the basis will get tough in the next couple of months because last year it was like -8%, right? H1 was +3%. I'm actually a little concerned about H1 gross margin. What do you hear? Last question, what is the margin in Mainland China compared to the rest of the group?
Well, Mr. Rupert is not here. I'm sure he's watching. Okay. I hardly think you have one margins or things like that. We don't do that. We don't disclose operating margins in particular countries. What we have said is clearly, overall, our margins are roughly the same because we adjust transfer prices and what have you, region to region. Yes, we have said that China is the lower end of our operating margin, but that is certainly significantly improving. You would expect it were to improve with the significant increase in sales. I think on the customs duty issue, obviously it's there. It's a little too early to tell, frankly. Remember that our Mainland China business started to grow in the early part of last year and continues to grow. We can't split it out at this stage. It's too early to tell.
We've said to Europe will continue to be difficult. That is some comparable challenges to deal with, versus the first half of last year. It's a little too early to tell.
Zuzanna Pusz from Berenberg. I just have three questions, if I may. First of all, to follow up on pricing. Are you overall happy with your current pricing architecture, given last year's changes? Do you think you may need to see some further adjustments up or down in certain regions or brand-to-brand? Secondly, on M&A, very theoretically, if you were to see any opportunities, would it be rather in the jewelry category, not watches given the state of the industry, or you don't really have any specific preference? Just finally, just to clarify, you don't expect any additional one-off charges at this stage in FY 2017?
I think the guidance that I gave you includes everything that I know today. M&A is not really my bag, to discuss, and we wouldn't tell you if it was anything anyway, right? No real comments on M&A. I think in terms of the pricing, again, from a FX point of view, we're okay at the moment, but if something happens tomorrow, we would, as Richard said, we would obviously need to adjust. We did make slight adjustments on an FX point of view in Russia and Brazil, completely currency-related. As I said, we're pretty comfortable at the moment with retail pricing in general.
Yeah. I think on Vincent, we had series of questions. You've answered them mostly, about your prêt-à-porter, about the watch buyback, about pricing, about rental association, particularly in Hong Kong. Two of them relate also to the connected smartwatches and our strategy of them.
The watches?
Connected watches, smartwatches.
Typically, you should never be arrogant and exclude anything. Technology progressing very fast. We never know what might happen. We are carefully monitoring what's going on. We are investing in some research and development, even if we have no specific plan for the time being. As you know, some brands like Montblanc, etc, are experiencing a strap connected. We are in the wait and see position, but we are following carefully what's going on. We do believe that, of course, we are in the very high end, where the emotion is much more important than the function. You are ready to be eyes open and see how it develops, the phenomenon. We are realistic. So far, we don't exclude anything.
We had also, Richard, we had two questions on the new product launches. If you could comment on new product launches and maybe the launch of Drive or whether there were any other products in the pipeline.
I think the new novelties has been revealed at the SIHH. To say quite well received. The Drive, it just been launched this month. Very well received. It's a men's watch. In term of pricing, I think it's quite well-positioned, and completely in the DNA of Cartier, so we're expecting good function on that. We have significant launches in the pipeline that will have been revealed during summer for Piaget, for Vacheron Constantin, and from some other brands. It's too early to talk about it.
Maybe
I would say we got time just for one or two more questions.
Yeah.
Mélanie, you've got another question. Okay.
I have a small follow-up question. Sorry. On Net-A-Porter, did you say you expected to be up 8%? If that's the case, that I suspect implies some reinvestments in Net-A-Porter this year, given the softness we're experiencing at the moment. Where are you going?
Well, variety of brands in a variety of places. Certainly, the watch industry is under stress, as you can see by the numbers, and we think we can make inroads, both in terms of share of voice and also brand equity-type events and what have you.
Hi. Annabel from Redburn. Very quick follow-up. When we're thinking about April and maybe through the quarter, did the two quarters start better and has it got worse? I mean, is April a sort of one-off? Is there any timing thing in April that we should be thinking about? Is April the sort of rough rate that we should really be thinking about for the first half?
Well, that's for you to determine, Annabel. Well, I mean, okay, we don't go by quarters and things, but, I think the trends from the last time we reported sales, if you do your homework, it hasn't really changed, I would say. It's been fairly consistent. We knew we were facing some very high comparables for the first six months. That's all we can say.
It does look like the retail trend has decelerated quarter on quarter.
I don't have that to hand, frankly. I would say what you see is what you get. If you do the analysis, the trend has been clear for the first last six months.
Last one now from John.
Thank you. Thank you both. Jon Cox again with Credit Suisse. Just a last one on this whole inventory issue. Where would you say you are in terms of regards to the program? A third fall in FY 2016, two-thirds is going to fall in FY 2017, or was a bulk done in FY 2016, and there's not much more to come? Have you to give us some sort of indication of where you are in this whole process? I know you've done it over the years, obviously now there's more of an acceleration, the situation is more scary, as it were.
Good question, John. To give a contextual answer, I would have to give you some sales guidance, John, which I'm not going to do. Certainly, there was a dip at year-end. It's not really our style to say, "Oh, we're going to do" You try and let's set a position. Not our style. We think that's completely inappropriate. These things will go on. These things will go on.
Thank you very much.
Thank you. Session is now over. Thank you for coming.