Good morning. Thank you for coming to Geneva to attend Fichmoor's 2016 Annual Results Presentation. And welcome also to those of you watching the webcast or listening to the conference call. Joining us today from Richemont are Richard Lepeau, Chief Executive Officer and Gary Page, Chief Financial Officer. The press release and annual results presentation are already available on lechmo.com.
The archive of this live webcast
will be available today at
3 pm Geneva time on the Richemont website. As usual, the presentation will be followed by Q and A session, and these questions will be taken from you from the floor, but also time permitting from the webcast participants who would have also answered their questions in writing through the
Over to you, Richard.
Thank you, Christy. Good morning. All of you, ladies and gentlemen, nice to take. The year end up being disappointing. Sales started on a good note but turned negative in the second half of the year as the environment came adverse.
Weak, while economic landscape, geopolitical unrest, terrorist attacks, tariffs and Brussels weighed on client sentiment. But so currencies, which were initially favorable with the soft euro and an exceptionally weak yen, turned negative. This creates highly volatile tourism terms, both in terms of magnitude and destination. The group recorded a 6% increase in sales at actual exchange rates, driven by growth in jewelry, better boots 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.
€2,061,000,000
operating profit was 22% below the year prior year's level. During the second half of the year, our Maisons adjusted the fixed cost basis, which led to growing and one off charges of €97,000,000 Excluding these charges and the gains realized on the sale of real estate activity in the prior year, Operating profit decreased by 11%. Comparable operating margin was therefore 19.5% versus 23.4 percent a year ago. Net profit was up by 67% to €2,227,000,000 reflecting, 1st, a substantial improvement in economics cost, as Thierry will explain later and second, the €639,000,000 noncash gain on the net of the merger with YOOX. Cash flow from operations remained strong, rising to EUR 2,419,000,000.
Our net cash position amounts to €5,300,000,000 reflecting our strong operating cash flow less our investments and dividends paid. Let's now review each region at constant currencies. 1st, let me walk you through the group sales performance by region, network and product line for concentrates, Starting with Europe. The 10% increase in sales for the prior year is made of very strong first half, up 24% and a weak second half. And with Paris and customs driven, sales had been supported by equidivism, driven by a weak euro.
Thereafter, we generated feel good factor and safety constant deterred tourists, especially from Asia from visiting Europe. Consequently, sales were down by 50% in the second half of the year. Let's now review Pacific, which remains our largest region with 36% of group sales. Sales declined by 30% as Hotel Macao continued to suffer with watch category and wholesale channel being particularly affected. Strong local currencies and alternative shopping destinations make those 2 markets less attractive.
Mainland China, however, was up 10%, a marked improvement from the last 3 years. Quality 30 distribution network, price adjustment to Yalco and the soft NMB supported consumption in China. As another indication, Cartier posted 14% in growth in sales in constant currency, driven by the growth in watches and jewelry. China is seeing of the business between purchases at home and abroad. Let's now turn to the Americas region, which accounted for 60% of group sales.
Despite 11 store openings, the region was reduced throughout the year with sales down by 1% at constant currencies. Specific demand for jewelry, cosmetics and leather now to offset soft watch sales. The strength of the U. S. Dollar, lowering tourist purchases and driving sales of locals abroad as well as the lack of visibility during an election year have not been supportive.
We continue to positively impact sales, albeit from a low but fast growing base. Once again, it would run as Movilane's first U. S. Store and Cartier Fizz U. S.
Store. Now Japan, which represents 90% of group sales. Sales rose by 20% after the 6% decline last year and a 23% increase in the year before. This exceptional strategic growth rate has been driven by an exceptionally weak yen, which has overwhelmingly impacted the level of tourism. High rate sales growth, driven by jewelry and watches in the first half of the year we see during the second half of the second half year period.
Finally, let's move on to the Middle East and Africa, whose contribution to sales now approaches growth of China of 1.8% of group sales. This growth softened 2% as unfavorable currencies drove tourism lower. The region continued, however, to benefit from a resilient domestic clientele, irrespective of flower oil prices. Sales grows by firmly generated by jewelry, premium watches and ready to wear actuary. Let's turn to sales by network.
Sales through the Maisons Directly Operated and e commerce accounted for 53% of group sales, above the 50 3 percent contribution of last year. Retail sales rose by 5%, partly underpinned by the net opening of 22 internal boutiques, but negatively impacted by the closure for renovation of 3 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 results of most of other markets. After the 6% decline in the first half of the year, the 7% decline for the full year in wholesale sales reflects persisting weakness of trade 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 onethree of group sales, maintained its strong momentum. 2018, jewelry and leather goods enjoyed the strongest performance with sales up 8% 9%, respectively. Leather Goods and Coatings delivered good growth, thanks to Chloe Montin terminal.
Writing instruments sales grew by 1% in renewed activity at Montblanc. Moving now to the business highlights. Let's look at the reported sales and operating contribution by segment in multiyear. We'll start with Jewellery and Bison, which are Cartier Van Cleef and which accounts for 52% of sales and 82% of group's contribution before corporate costs. The Jewellery Maisons reported a 7% growth in sales, thanks to Jewellery and a weak euro.
Jewellery's solid momentum as a product line of Cartier and 1.11 rpels, compared to the high single digit decline in Cartier's reported watch sales, which will be attributed to weak Pacific and Americas environment. 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 opening was limited. Hotel sales, however, were lower than in comparative periods. In this context, Jewellery Maisons delivered profit resilience and a contribution margin of 31%, including one off charges of €24,000,000 relating to Cartier watches. Now our Specialist Watchmakers. Specialist Watchmakers sales rose by 3% overall.
This reflects the weak euro and softer organic sales owing to negative sentiment in Hong Kong, Macao and the Americas region. Our view is that the watch industry is likely to face sub demand for the coming months. There is therefore no value in producing watches that we pilot in warehouses or on retail on the sales. 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.
This was explained why at SK watches and the Specialty Watchmakers, we had to implement the transaction. For the Specialty Swashmakers, these actions resulted in 1 off charges of €24,000,000 Operating motivation declined 59%, reflecting this charge and the impact of a strong Swiss francs. Operating margin for the year was, therefore, 16%. Finally, the other business area. Let me first remind you that the prior year included a onetime pretax gain of €234,000,000 stemming from the disposal of the sandwiches retail division in New York.
Excluding that gain and the one off charge of €52,000,000 partly related to the closure of the tile manufacturing unit and the sale to a third party of a scrumpting manufacturing site. Operating losses were broadly in line at €62,000,000 Improving results at Moulins, Kuwait, Termina and Alanya, and sales deterioration between sulfasenil and Montpell. Let's look at the performance of some of Claude 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 released, a new international advertising campaign implemented and the effective new retail concept, active rollouts in 10 locations.
In fiscal '16, the Maisons enjoyed organic sales growth, supported family by its new leisure of an e commerce channel. Watch is benefited from a renovated and pricing offer and ranking instruments for the new Montblanc pin. Croatia from excellent performance across channels, product lines and most geographies. Bags enjoyed a particularly strong momentum. Maisons is now concentrated in contributing its digital presence with the Motorbrand store powered by YOOX NET A PORTER, displaying a boutique innovation program in enhancing Chloe Leather manufacturing capabilities.
Hudson Hill Western Markets and Japan, however, enjoyed growth, though not enough to compensate for the situation in Asia Pacific. During the year, the internal boutique network was reduced by 2, with a further reduction of change planned in the coming year. Maisons recently launched a new e commerce website. At Lancel, the new management team, the product offer has been consistently renewed and is starting with Creative Media coverage. The new boutique concept has proven
to be a keep in
mind driver of sales and image. Unfortunately, the typical 2 50 contract in France has affected North West without the year.
Good morning, everybody in the hall. Good morning to everyone behind their screens and good morning to our Richmond colleagues. Now 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 typical trading environment, lower gross margins affected by a variety of factors and 2 items which affect comparability.
If you exclude €234,000,000 gain on the sale the St. Regis property in the prior year and the total one off effect of charges of €97,000,000 in the current year, our operating profit decreased by 11%. Comparable operating margin declined 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. 4% increase in gross margin led to a 4% increase in gross profit led to a gross margin of 64.3%. The 100 and 8 basis points decline against the prior year results from a mix of positive and negative factors. On the positive side, the ongoing free share of retail certainly helped. This was offset by one off charges in gross margin of €67,000,000 relating to the various Maisons manufacturing facilities in Switzerland.
These were implemented at the end of fiscal 'sixteen. This led to discounted for a 60 basis point reduction in gross margin here. You also should note that we experienced a negative effect on foreign exchange on the margins here 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 Swiss franc appreciation, e boutiques and one off charges totaling €30,000,000 These €30,000,000 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 fastest at plus 16%. On a constant rate basis, SG and G expenses rose by 8%. This increase primarily decreased 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 continued to represent between 9% 10% of sales. Administration and other expenses grew by 16% on a reported basis, largely driven by the strong Swiss francs. On a constant rate, comparable basis and excluding the one off charges, administration and other expenses by 6%. Now some detail on finance costs. We enjoyed substantial increase in net financial income, now positive this year at €2,000,000 This should be compared to a net cost in the previous year of €953,000,000 As a reminder, the prior year included non cash financial charges of €652,000,000 on the mark to market translation of our cash holdings, primarily related to the valuation of Swiss francs.
In the year under review, we incurred lower losses of €45,000,000 on our normal hedging program, which is mark to mark at the end of each period. Let's now look at the other P and L items on a continuing basis below operating profit. Profit from continuing operations for the year increased by 26% to €1,700,000,000 primarily as a result of the reversal in finance costs as I've just explained. Our taxation charge was stable at €370,000,000 and we continue to believe the medium term range for our effective interest rate will be between 18% 20%. Profit for the year rose by 67% to €2,227,000,000 This significant increase primarily reflects the profit from continuing operations that we just discussed and the €639,000,000 accounting non cash accounting gain realized from the combination of YUPES and NETO Porte in October of last year.
I'd now like to focus on our cash flow from operations. Cash flow from operations slightly rose to €2,420,000,000 thanks to a limited decrease in working capital, which broadly offsets the decrease in operating profit when compared to the previous year. Inventories increased by €139,000,000 much less than the €506,000,000 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 and the portfolio remains healthy and sound at 96% current.
Other items remain broadly in line with last year if the same retail property is excluded. Let's now look at our capital expenditures. At €710,000,000 gross capital expenditure share was in line with last year and represented 6.1% of group sales including discontinued operations. Westmont has invested over €3,000,000,000 in the past 5 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.
Now let's look at the nature of our investments paid during the past 12 months. The 44% of group expenditure pardon me, 44% of group expenditure relates to points of sale investments, internal and external boutiques and wholesale installations. 20% net internal scores were open. Worth mentioning was the relocation of the Cartay store in Seoul, Korea. Ben Cleef and Arpels moved to a new location
on the Tokyo District and
a new Mont Blanc store in Paris. The year saw a 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 and Arpels flagship store for Place Vendome. 5 Bizon opened a store in the Xinkang Police Department Store, Beijing, Dankier. Hong Kong began the rollout of their new Niro 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 growth expenditure was related to manufacturing investments. Most important investments included the completed Langan Sonu manufacturing site, the completion of the Vacheron Constantin manufacturing site in Tsukuba and a new Cartier jewelry workshop in La Locque, Switzerland. Other investments accounted for the remaining 30% and these included the finalization of our Maren Canse 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 a significant investment program that we've just reviewed. Cash flow amounted to €1,245,000,000 a €273,000,000 decrease from fiscal 'fifteen. Last year's cash inflow, however, was boosted by the gain recorded on the same Ricus retail location. Excluding this gain, free cash flow from operations actually grew by 29%. Now let's look at our balance sheet.
The group continued to enjoy very strong balance sheet. Our financial structure remains solid with shareholders' equity representing 75% of total assets. Net cash and investments amounted to €5,300,000,000 compared to €5,400,000,000 at March 2015. Refund's cash position includes highly liquid, highly rated, much market funds, short term bank deposits and medium duration bond funds, primarily denominated in Swiss banks, euros and U. S.
Dollars. Let me update you on the latest developments regarding our stake in the Utraneta Ponte Group. When the merger was completed in October of 2015, Richemont ends up with 50% of the combined entity. Remember, we decided to cap our voting rights to 25% to ensure the neutrality and the dependence of this new platform. We retained 2 seats on the Board of Directors.
In April, a new strategic partner, the Ema Property Group, owner by mall, fully subscribed to €100,000,000 rights issue. As a result, our ownership stake has been polluted to 49%. In our balance sheet, our stake has a carrying value of approximately €1,100,000,000 In closing, on March 31, 2016, the cash value of our stake was approximately €1,800,000,000 Finally, related to capital increase, Richemont will record a €49,000,000 gain in the first half of fiscal 'seventeen related to the capital increase It will be recorded in the income statement in our share of equity associated investments. Let's now look at the cash another use of cash, our cash dividend proposal for this year. Our fiscal 'sixteen dividend proposal determined by shareholders in September is CHF1.7 per share.
This represents an increase of CHF0.06 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. And now let's move to 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. Performance was largely anticipated. Asia Pacific remained weak due to a lack of recovery in Hong Kong and Macau, only partially offset by continuing improvement in Mainland China, which was up 26% on a constant rate basis during April. Both retail and wholesale remain challenging. We expect 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, Guy. 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 a strict cash flow discipline. We are reassessing our internal retail network by Maison in order to increase productivity. This This will include closing stores when necessary, moving to an expensive location and or renegotiating new leases. This is specifically really a bit 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 particularly emphasis on Jewellery Mainland China and, as Gary said, project based retail investments. Likewise, we will further enrich our more accessible lines in parallel with the successful expansion of our high jewelry and Makeda offer. On average, over the past 5 years, Richemont has generated return on operating assets of about 30%, excluding net proceeds and the sale of our retail property in New York last fiscal. We continue to pass 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 the market stability remains. Our slammed financial position allows us to foster organic growth through significant investment in all our Maisons with an increased emphasis on jewelry and metikin, while offering our shareholders a regular increase in fragrance. 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 to be higher, increasing number of global network initiatives and factors such as gifting, pleasure and exclusivity. With this in mind, our Maisons will continue to conceive, manufacture and market timeless yet contemporary beautiful products of the highest quality.
With the experience, immediate staff and management, to 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, yes.
Before we start, if you can clearly state your name and your company's name and if it's for the audience and the webcast participants.
Thank
you. Thank
you, Sophie. Excuse me first. Jon Cox with Kepler Cheuvreux. Carrie, really,
I think this is a
few questions, Carrie. You in terms of the one off charges, €97,000,000 Can you just sort of give us a breakdown on what that is? Is that just redundancy costs? And then there were obviously a lot of discussion about maybe doing inventory buybacks from retailers. Is there any of that included?
What are the plans for the next financial year in terms of what sort of figure should we expect if that happens and the impact obviously on margin, etcetera? And then maybe a question for you, Richard, just on the longer term outlook for the industry. What can you guys do, yourself, for each one and the industry as a whole to maybe reinvigorate the space given the problems it's facing currently?
Thank you. First of me, first. Okay. John, I thought we were pretty detailed for our commentary of where the charges were and what. 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 jewelry Maisons. That effect had 60 basis points reduction in the margin. I think on the expense side, most charges related to asset impairments and they show up in the other segments as well as our central costs. Why in central costs? Because we compare, goodwill for Shanghai Tang, which was €16,000,000 And 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. That's not appropriate in our view. It's 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, 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? But I'm comfortable in the overall margin guidance. And I expect that to be in the range of 62 point 2 to 60 sorry, 65.2 to 65.4. Calm down, Noah, it's all right.
Let's say 10, 65.2 to 65.4. You're right? So I think my piece is done, John. Thanks. As far as you're going to get, right?
Just to answer your question, you have to go back to what has happened over the last 5 years on the prior 2016, 'thirteen, what shares have really exploded, growth was very strong and and the inventories grew accordingly. Perhaps change of trend that we have experienced prompted by the anti grafting decision. And never forget that the strength of the dollar has led to an accumulation of inventories, especially in Hong Kong Macao, which used to represent 55%, 30% of the worldwide watch market. So as long as this situation has not been clear, it's our view that it takes some time. The situation will remain difficult.
However, we are still confident for the medium term that we are still safe for growing for that industry.
Annabel Gleeson from Macquarie. Two questions. Firstly, on OpEx. So in the short term, what can you do this year to kind of manage OpEx given the obviously top line trends that you can see coming that are obviously difficult? And then the same on Papex, what are you going to do there?
And secondly, just going back to the sort of longer term outlook. I mean, once the inventory is cleared through, so if you think about 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. I mean, 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.
Good morning. I'm looking at that, that the evolution of the main currencies starting with the run, sales are exploding in Korea, that's why. The T, solar, the fixed fronds and so on. You cannot imagine the impact of the volatility of currencies. Remember that about 70% of our plans are dollar nominated.
We produce in Europe with 36¢. The question is very simple. When the dollar weakened, the purchase for our clients decrease. And And of course, it has impacted the purchase for our plants. When it happens, of course, you might be thinking something to have put a silver price.
Remember, we all plan for the people of my age, what happened in Japan when suddenly the office state is not going to afford a hotel. So it's the same and meaning that we are confident that we have to adapt our offer to the new reality. And coming back to Ivan though, China is just a part of what you mentioned, that the most majority of watches are for Broad and not to the Chinese. The so called aspirational middle class, We have to deliver them for them and to have price we see to them. And that's the reason why in terms of price offer, we really have to have faster our finance in that respect.
That being said, that being said, that we'll try to keep on to grow. And when you look at the hydro reserve, you see that it's actually going faster. And globally, I think the main driver of our business to remain because of the inflation and of course, the inflation of wealth to reduce population. In terms of geography, of course, China is cheap at 1 point 3 trillion. There is not so many people around of that magnitude.
Yes, of course. It can take some time. We are now in India. We set up our own company and Montblanc is turning in India It's a very well good start. We still have plan in Saudi Arabia.
Middle East has been very resilient, and Middle East is a growing region, and we believe there's still significant potential irrespective of the oil price in Israel as well.
I think well, let's deal with a variety of things we can do in terms of expenses. But 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 is coming to an end. Now having said that, the last factory to be upgraded is IWC and that will certainly go forward. So that's an indication that we still believe in the medium term strategy.
I think on the CapEx question, CapEx, as I said, has reached a peak. Now there is quite a few timing differences in there this year. It's a little low it came out a little lower than I would have thought. There's about 50,000,000 dollars of CapEx that I thought was going to come in this year, that's going to come in next year, mostly related to the Cartier projects. So I think in total, we will spend about $715,000,000 in CapEx this year, but just recognized $50,000,000 comes from timing.
So we believe in the long term, we still will spend about $300,000,000 in retail, mostly related to renovations. We want to accelerate the Mont Blanc activity because the stores are clearly showing per square meter gains. I think on the expense side, we expect S and G on a constant rate basis to grow by 5. So that's coming down. We expect 10 store openings at Richard disclosed that we will be closing some more untold 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. And 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 plus 1.
It's Melanie Flouquet at JPMorgan.
My first question is,
it should be strategic. I said in a way, there has been a bit of a there was
a cleanup necessary from the bribery down on watches, but the press watches seem
to be also pretty weak. So I wondered whether there is enough pressure going on there and whether you could discuss fundamentally what may be happening to
what's just beyond lockdown on bribery
that you have addressed? And linked to that, if the high end is sort of seeing rebasing, do you believe that the excess pricing, you alluded to that beforehand, has quite a lot of future as well. And are you rightly positioned as a group to start this? And notably, in this respect, what are you going to do with your cash balance? In particular, why not share buybacks and also the increase in 2% to 6% to 6% of cash in a period of time that is pretty tough, you're still generating cash.
So why not more distribution? And is now an M and A agenda behind this? And I think I'll actually just one quick question on
the April. Has retail versus wholesale in April? No, but it was down.
It was down, but magnitude, we canceled it down.
Yes. And it was anticipated because I'm sure that you look at the 3 fixed ports in March, which we are down, if I remember well, by 16% in Swiss francs. Going back to your question to the U. S, I think probably you have turned to me. I don't know what's going on in the U.
S. And this is only not only about what we should have behind. This is not only watches. It's across the board in many categories. Look at the performance of the different stores.
I was we were alluding to the field crack factor. It's really that prevailing. To come back specifically to our industry, remember that for part of the year, the dollar has been very strong. And what that means in our industry, firstly, no more service buying in the U. S.
Tourism is not enormous in U. S. Significant, however. 2nd point, of course, the U. S.
Citizen buy abroad. And last but not least, especially in our sales, always difficult control the flows of output. 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. So that's probably the factors that explain the distributor growth in the U.
S. And is operating. But just back over the last over the last 5 years, the U. S. Has been really growing.
So it's really landing, which was not very true. But it could come back when the election will be passed. In terms of credit offer, we refer to that. That's very clear that it's in more challenging times, you always got the high end and change reprice. And it's true in every segment.
We don't we run very high end luxury, especially for horses and in jewelry, and we will not change our strategy because of that. But we have different price points. And definitively, in the entry price, we were not strong enough to see this new one price, so euros 6,000, dollars, whatever. It's kind of our answer that we have to give to the market. We are strongly believing that the purchase price is an issue.
And coming back to an important point on time, which is Chinese, it's a view that the growth that we see in China and the early desire of Chinese buying our products, which reconfirm the psychographic of the demand has changed. And it's clear that it's more the subscription on middle class, which is, of course, more MO wealthy, but not as wealthy as used to be some corrupt design. So that's the adjustment that we have to make.
Yes. Melanie, I think we're pretty clear on the cash pile. Buybacks really aren't advantageous to our Swiss investment base. So we've sort of taken that off the table for quite a while. I think the dividend strategy is pretty clear and I think you're seeing that we're keeping that strategy.
Perhaps you say we have quite a cash pile. I see you in November and sales are continuing to be down 50%, I'm suggesting it will be, but you'll probably be very happy and investors will be happy that we have cash to work with allows us to take the long term view. That's just a point on America and I think first a general comment and then health component on America. You said that's at the high end. I mean that was simply a watch question.
I mean high jewelry significantly for us for all 3 brands, PGA included. And we were pleased by that because as you know, most inventory investments that we've been making is going into jewelry. So that's great. That's great. I think specifically to the U.
S. And to allude to Richard, the U. S. For us is pretty much a local market. I think it's tourism piece is the South American piece.
And clearly with the strong dollar particularly in the South, it was difficult. Having said that, Peter Miller, Montblanc Leather and Chloe are fantastic growing everywhere.
So Good morning from Mario Palo, Bernstein. 3 questions from me. The first one is about jewelry. It seems that branded jewelry is growing at this lower pace than before. Can you please tell us, especially among which nationalities of client and in which price point and which is your forecast in the near term of the growth of branded tutoring as a market?
Second, about pricing. That is very tricky when demand is not buoyant and when FX are moving as you show us? Which action is done in April on prices and which is your pricing strategy for the year? And so what do you expect, a price increase for the full year for the group? And the last thing about Cartier, you changed recently the CEO.
For sure, he's a new CEO that arrived with many ideas, as discussed. He's a plan to faster move the growth of Cartier because you mentioned that one of the priority of group is driving sales as never before. Can you give us a brief disclosure or what is the actions that Cartier is putting his planes this year to drive this sales
in both waters and Europe? Thank you. I would like to specifically disclose how much for the success brand per brand. As you've seen, jewelry Maisons, for which watches the same partner well, different brands. So you can tell that you will be as it has done very, very well for Cartier as it has done for 1st and half years.
And it's true for all the categories, including high jewelry, where 2 biggest Maisons are already becoming independent in that market. And I'm sure that you have looked at the results of the production sales over the last few days, and you have seen record from Creve Nantes and Cartagena. So we believe that we have potential in this segment. As you know, we are not in the stone business. We are really in the truly design business, meaning that beyond the value of the stones and the materials, the design, the uniqueness of products, which are structural products, are sitting very well for people who are no longer don't know what to do with their cash, especially when they are charged when they put it for cash at the bank.
For the rest of the category of jewelry, of course, the feedback sector has started to impact all category of projects, including jewelry, but not at the same level, of course, as watches, firstly, because we are just retaining jewelry. So we have no impact of the inventory. And we have really different price points and starting lower than what it is is from most of our brands and going up to the size, more or less. So we are very flexible to adapt to that situation. That being said, that's true.
And again, we have I think with our brands, which are one of the most sought out, we have a pricing power. But we have it should not have use of your pricing power in some way in people and the first look on Ethernet to see the pricing and the differences of pricing more than ever. And as you know, and it doesn't exist to everybody, but we are committed to a 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 price. So it's complex to monitor.
But for products for 50,000, 60,000, it's a daily pricing, meaning that for proactively, you can buy it everywhere at the same price. It's going up or going down. Okay. I think the brands will understood if it's the case in your own manufacturing front. So that's the way we do and do that ourselves.
Mario, I just let's remind ourselves of how we think pricing and currency differential
is one thing, right? But let's remind ourselves how we think about space retail price. We have always said that our increases in retail prices would reflect increases in our cost base. You can see that the margin is going up. So you could conclude from that 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.
Lucas Sonka 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 different trends that you have perceived. Would you reckon at this date 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 uptickancies. At one point, you came back saying that for Lancel and Dunhill had plans to revive them. Difficult environment, they don't seem to be working at the moment. So I wonder what your plans are there and if you see any change of approach potentially coming? And on the specialist, if you could give us a bit more detail on whether there are some businesses that are doing better or worse at some point.
I think SBA and Peugeot was in the cloud having a less brilliant performance. Anything that you can do on that could be useful? Thank you very much. To
come back to the inventory watch inventory issue, I explained to you, you know how it works. We 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. And we do it in a normal time when we crude normally, we adjust we said, from time to time and we really revisit the developing countries and the credit key inventories to make sure that they always are. I think what you do, the worst is to refuse at this point to create a bubble, which will just postpone the issue and threaten the image and the reputation of your brand.
So case by case, country by country, we have addressed and we continue to address that situation. And I think it's very wealthy, and I'm sure that the partners will be very happy and we'll remind them next time that we're always behind them. That being said, we have never had used in terms of sell in. We have always been cautious, but that's very true that the abrupt change of trend suddenly creates that excess of inventory. If on top of that, you have a change of the consistent of the demand itself in terms of product offer, It's great, good tissue in the level of inventory.
So that we address and it's very I think, for the even in some other location, especially in China, where distribution is very limited because we are mainly retail oriented. But distribution of watches is keep up. We really are testing new business model to avoid that up and down, we say, evolution of inventories to monitor on much more regular basis level of inventories.
On the Specialist Watchmakers question, Luca, 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 it's 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 Miller continues to do well, extremely well, mostly U. S.-based. Remember, they have 3 channels of distribution, golf, Internet and department stores in the U. S.
Are suffering at the moment. But the Internet business, the retail business, 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.
But we believe and what's he doing there. Dunhill, I think we do have to get a little more precise. We said in our comments that we closed net 2 stores this year. We will close net 10 next year. It's difficult and we need to be more precise.
Antoine Bergman, CLBC. Three questions. The first one is actually still on Cartier watches. You probably remember that 3 years ago, I asked Johan Rupert a question about the underperformance of Cartier in Watches, and I think you gave me a pretty hard time for asking that question. And I you have a new CEO in Cartier to support your profits.
I'm sure that you can share something about these plans to maybe reposition the plans towards putting Cartier back as a general start, I think we've seen certain products expanding to very complicated ones, etcetera. So anything you could share on Bilo's view about where the brand should be in the future? My second question on those inventory buyback, think Richard, it's a one for 1. Is it actually true in terms of the mechanics, in terms of timing? My understanding is sometime, you'll
take back in
the country and it's a promise from the retailer that, for instance, when you'll be launching this new version of likely the Cartier that they will order. So there is some timing differences
to be aware of.
And finally, I'm positively surprised by the gross margin guidance. I mean, especially with the very difficult development in terms of top line. So maybe, Thierry, could you share with us why you're confident that margin could be even restricted from the one offs.
First, I would like to answer Chartier. True that we have a new CEO. You know that actually, Stade started to do a good job, but unfortunately, he has the health issue and has been replaced by a very well known guy for us, Cyril, No repositioning of Cartier. Cartier is at the top, remains at the top, including in watches where we disclosed fairly that they are down. But don't forget that they have been significantly helped when sales were booming.
And it's true that being there were because they were very strong in the high end, very strong with jewelry, which is very strong in Asia Pacific, including Hong Kong, Macau and China. That's the most. If you are weak in terms of region, you, of course, are less affected. That being said, there's in some UK, the realty and it's obvious that UK can take much easier decision. And it's like in roughly Pacific and Cartier has a very long history of having a very broad positioning, always luxury from accessible up to the high end.
And 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. But it's very true that the competition has been there, very crowded, much less in Italy by the way and we suffer from that. But at the end of the day, I think that it's not something more than the other on the medium term. But definitively, Cartier is a jeweler tender in the watchmaker, the number 2 watchmaker in the industry. I know that people challenge that.
But at the end of the day, they will remain the number 2, and we'll do everything to reinforce that condition. And in terms of product, there has been immediate action. It's not a secret that Cartier has been the most active in the contract. So we have addressed the issue. We have even some repositioning of some key products in terms of pricing.
And as we disclosed, just to be, we say, fair for the factoring, which is for the figures in China, where Cartier has been growing 14% last year, which is mostly retail, watches and jewelry.
The gross margin question, Anton, you're going to get killed by using the word confident. I'm trying to be miserable, you know that, right? What we try and do is what I'm trying to do is give you a projection of where I think SINK is 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.
So not much more to say than that. The guidance that I give is based on where we are today, how things could change. And 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. So when I spoke to you that wasn't in my thoughts. So all I try and do, I'm not confident, I'm not confident.
I try and give you the best information that I have.
Oliver. Oliver Chen from 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 5 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 most important for you? And 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 is not has a fairly wide household income. So I'm just curious about what you think in the context of U. S. Department stores is a real intense focus here as well.
The rebalancing for men's growth for Chinese, 25%, 75%, I mean, we hit on it. We are strong in China. We have invested significant money in China, and we continue to do so because we went through that in other countries like Japan, and we knew that it's not some sense. That being said, how fast it will go, I don't know. It's not just it will be mainly driven by currencies as well because they will continue to travel abroad very largely extensively.
And again, less than 50% price and the net. And if they see that they can have a product 30% or 40% less than this year, somewhere else, And on top of that, that's early in his location, which, by the way, is less risky because of the currency. Let's take the example of Japan last year. There we go. So the refinancing will be also related to that.
About that, as you some of you know, there is some measures of checking as you press them now to make sure that the people decline or pay VAT or whatever. So of course, I think it may encourage people to buy at home and the reason why it's very important to be so very strong in Mainland China.
I think just to give you some data, I mean we have been investing in China for a long time as Rishad just said. We now have 226 stores in China and we're happy to have them. In terms of the in terms of potential, we have selected the e commerce activity, Prashant, disclosed the American statistics for you. It continues to be a big part of our activity. We do have an activity in Europe and we recently went live for some brands in mainland China, Hong Kong and we're in the process of rolling out Southeast Asia.
So we believe in it. I think if you look at the S and P guidance, we're trying to bring in more experts generally in the digital area because one of our CEOs who is nameless, but he has a comment and I thought it was a great comment and it's not necessarily e commerce. He said we're becoming a content business as well as a product business, which I will check with an interesting point of view. In terms of millennials, we still fall back, if you will, on the wealth creation and demographic story. Millennials buy our products.
We believe in that. Next year, we're going to report a week earlier around day 12 because a millennial that I know is getting married and he bought his fiancee a Cartier ring. Happens to be my son. So, his desire is still there And we believe in the long term story.
Helen Brack from CBS. A few questions from me. Firstly, around Cartier, what you're just following up here and 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 kind of impacted any of the kind of gross margin in 'sixteen or your 'seventeen guidance on gross margins? Secondly, just a comment on the OpEx line.
Firstly, on Communication expenses, I don't think you touched that. They were sort of comp into the range last year. How are you thinking about that for 'eighteen? And secondly, within your F and G guidance, have you included any transaction negotiations in Hong Kong or any adjustment of the school network in Hong Kong within that? And finally, it would be a results presentation taken out of the Mediciote.
I was just wondering if you could talk through the 50% stake in Medici quarter and your long term plan? 49,
Helen.
Okay.
So I think the buybacks, Alan, we said what we're going to say. Again, it's more of an individual commercial relationship with the dealer. So that it's an ongoing process. What is the effect on the gross margin? As I said, I've been very brave and I 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 YOOX NET A PORTER investment, business and what have you. Please pass those comments along to Sylvia Enrico and Federico.
Well, I think, Helen, we've just got involved. Obviously, we're delighted with the new strategic partner who happened to have a relationship with us in terms of a landlord relationship. So no plans for the stake. We're quite happy.
From the communication expenses and the SED and whether that includes the rental, any rental negotiations?
I think the rental renegotiations is an ongoing process as Richard said. So the S and P guidance includes the price of things, but we're renewing leases every day almost. In terms of communication, I think communication will grow by 8% in constant currency from this year's level.
It's John Gray from MainFirst. Two questions, please. First of all, with regards to cash, Gary, you talked about buybacks effectively being off to your table. You have mentioned in the past that you would look to use cash to sell assets a little bit harder, while
at the same time not trying
to drive up your 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 woodstones in the future. Maybe you could give us an update on how you see that strategy going forward. Secondly, with regards to trending, 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 segregate effectively what is the underlying future versus some of these short term or, I guess, constant issues that you see, especially with regards to demand in Europe?
Thank you.
I don't know. And our tone is clear. Don't expect any meaningful improvement in the short term in wins month, I think we have to face the reality of that situation. Many things may change, 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, but we are still living with that. And it forces to be more positive and integrate much, much better. Our view that Europe is suffering significantly and we see no improvement today. How long it will last? I don't know.
I don't know. What do we know and we believe it will not last forever. And we can see why Europe will not be on track and such a destination for tourism. So we are very confident that it will come back. And we have to be patient.
And but in the meantime, we have to act responsibly and to address the point and to be better in other countries, to be better in the home market and to adjust our strategy in marketing, pricing, communication to that situation.
And that's just on sweating at the assets comment. For me, that's not necessarily spending money. That's getting more money, okay. So and 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 mean, we do have overall a very profitable quarter.
A lot of questions on Cartier this morning, but I think if you look at the return on assets from the jewelry place on, it's still very, 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 this asset still incredibly healthy. I think from a working capital standpoint, the investment in CCC Jewelry, We expect inventories to rise by about €250,000,000 Now 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. I must have answered all your questions already.
What was the impact of the recent new customs inflation in China?
And what did you expect to see in
the future? And second question, best guess in terms of growth margin for the full year. But I guess, when you look at the April sales number and the basis will get tough in the next couple of months, because last year, it was minus 8%, right? H1 was about 3%. So I'm actually a little concerned about H1 gross margin.
What you do here? And last question, what is the margin in Mainland China compared to the FQ2?
Patrick, well, Mr. Rupert is not here. I'm sure he's watching. Okay. So I hardly think if you have 1 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 just 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. And you would expect it to improve with the significant increase in sales. I think on the customs GP issue, obviously, it's fair.
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. So we can't split it out at the stage. It's too early to tell. And we've said to Europe, we'll continue to be difficult.
That is some comparable challenges to deal with versus the first half of last year, but it's a little too early to tell.
It's Anna Apu from Berenberg. I just had three questions, if I may. First of all, to follow-up on pricing. So are you overall happy with your current pricing architecture
given last year's changes? Or do
you think you may need to see some further adjustments up or down in certain regions or brand to brand? Secondly, on M and A, very theoretically, if you were to see any opportunities, would it be rather in the jewelry category and not watches given the state of the industry? Or would you have any specific preference? And then just finally, just to clarify, so you don't expect any additional one off charges at this stage in FY 'seventeen?
I think the guidance that I'll take here includes everything that I know today. I mean, not really in my bag to discuss and we wouldn't tell you if we were doing anything anyway, right? So no real comment on M and A. I think in terms of the pricing, again, from an FX point of view, we're okay at the moment. But if something happens tomorrow, we would, as Richard said, we would obviously 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.
Yes. As in Vincent, we had series of questions. You answered them mostly about your petaporte, about the watch buybacks, about pricing, about the rentalization, particularly in Hong Kong. But one, do you think related to sectors connected
we should never be arrogant and exclude the many things. Technology progress, they went very fast, And we never know what might happen. So we are currently for carefully monitoring what's going on. We're investing in some research and development. Even if we have no specific plan for the time being.
As you know, some brands like Montane, UPC are experiencing
scrap connected.
So we are in the wait and see position, but we are following carefully what's going on. We believe that, of course, we are in the very high end, where the emotion is much more important than the function. But you are really to be eyes open and see how to develop the phenomenon. But we are realistic. So far, we can't exclude anything.
We had a question from the new product launches. If you could comment on new product launches and maybe the launch of dry Or were there any other products in the pipeline?
I think the new novelties have been reaching at the ACHH, I have to say, quite well received. The drive is just launched this month. They will receive in terms of it's a men's wash. In terms of pricing, I think it's quite well positioned and completely in the DNA of Cartier. So we're expecting a conclusion on that.
We have significant launches in that time that will have been revealed during summer for Piaget, for Vacheron Constantin and from some other brands, but it's too early to talk about it.
I would say one we've got time just for 1 or 2 more questions. Melanie, you've got another question.
I had a small follow-up question, sorry.
On A and P, did you say you expect it to be
up 8 percent? And is that
the case that I suspect implies from reinvestments in A and P this year, where given the soft spend we're experiencing at the moment, where is it going?
Well, variety of brands in a variety of places. And certainly the watch industry is under stress as you can see by the numbers and we think we can come in rows both in terms of share of voice and also brand equity type events and what have you.
Abadu from Wedbush. Very quick follow-up. When we're thinking about April and maybe through this quarter, did 3 quarters start better? And has it got worse? I mean, April is sort of one off.
Is there any timing thing in April that we should be thinking about? Or is April the sort of right that we should really be thinking about for the first half?
That's for you to determine that. But I mean, I think, okay, we don't go by quarters and things. But I think the trend 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. And we knew we were facing some very high comparables for the 1st 6 months.
That's all we can say.
It does look like the retail trend has accelerated quarter on quarter.
I don't have that to hand, frankly. I would say what you see is what you can't. If you see analysis, it's the trend has been clear for the 1st to the last 6 months.
John Cox again with Kepler Cheuvreux. Just the 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 'sixteen and then 2 thirds is going to fall in FY 'seventeen? Or was it bolt down in FY '16 and there's not
much more to come? Or
to give us some sort
of indication of where you are in the sulfide? I know you've kind of over the years, but obviously now there's more accelerated and the situation is
more scary as it were.
Good question, John. Again, to
give a
contextual answer, I would have to give you some sales guidance on what you're going to do. Certainly, there was a pit at year end. I think it's not really our style to say, oh, we're going to do use dry and let's say supervision, not our style. We think that's completely inappropriate. So these things will go on.