Compagnie Financière Richemont SA (SWX:CFR)

Earnings Call: H2 2015

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May 22, 2015

Good morning, everyone. It's good to see you again, and thank you for coming to Geneva to attend the full year 2015 results presentation. Welcome also to those of you joining the webcast. Joining us today from Richemont are Johann Rupert, Chairman, Bernard Fornas and Richard Lepeu, Co-Chief Executive Officers, and Gary Saage, Chief Financial Officer. For your information, the press release and the financial presentation are available for you to download at richemont.com from the homepage and from the investor relations section. A replay or an archive of the webcast will be available today at, I think it's 3:00 P.M. Geneva time, on richemont.com. As usual, the presentation will be followed by a Q&A session. We'll be taking questions from the floor and, this time we'll be also taking, time allowing, questions from the website. Basically, if you submit questions in writing, we'll try to answer them. Before we start, may I kindly remind you to switch off your mobile devices? Thank you. Richard, over to you. Thank you, Sophie. Good morning, ladies and gentlemen. The whole year was marked by a particularly volatile currency environment. In H1, the euro was strong, but pegged to the Swiss francs. In H2, the euro depreciated, but we had to face, in January 2015, the sharp and sudden appreciation of the Swiss francs versus the euro. Group sales, excluding the Net-a-Porter group, grew by 4% or by 1% at constant currencies. Growth was solid in Europe, the Americas, and the Middle East, but remained subdued in most Asian markets, as we'll see in a minute. Operating profit grew by 10% to EUR 2.67 billion. When we exclude the profit made on the disposal of St. Regis retail space in New York, underlying profit remains stable with last year at EUR 2.436 billion. This is a good performance given the modest sales growth and the Swiss franc impact. Net profit is down by 35%. As you have all understood, this is due to an accounting impact following the brutal unpeg the Swiss francs on our euro-denominated cash investments. Gary will give you more details later on. I can reassure you our net cash position has further improved and amounts to EUR 5.4 billion. Let's now review each region at constant currencies. Please note that fiscal 2014 and fiscal 2015 sales exclude the Net-a-Porter group. First, let's look at our sales in Europe. Sales rose by 7% as Europe benefited from various factors. Continued strength in domestic clientele, an increased number of tourists, mainly from Asia, starting September with the lower euro, and from organic growth as only one store was opened. In this context, the Specialist Watchmakers Montblanc and the Jewelry Maison performed particularly well, helped notably by jewelry and high jewelry sales at La Biennale des Antiquaires in Paris, in spite of the temporary closure during renovation of the Cartier Champs-Élysées flagship. Let's move on to the Middle East and Africa, whose contribution to sales now equals that of Japan at 8% of group sales. Sales there grew the strongest at 13% on a constant rate basis, albeit at a slower rate than last year. The region was impacted by lower tourism. It 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 now look at Asia Pacific, our largest region with 39% of group sales. Sales declined by 6%, predominantly impacted by Hong Kong and Macau, which together account for around 48% of the region's sales. In those two markets, the decline was particularly acute in the second half, most notably affecting the watch category and the wholesale channel. China was down 3%, a gradual improvement from the 7.5% decline of last year, partially reflecting the internalization of eight Cartier stores. Markets like Taiwan, Thailand, and Australia grew by a strong double digits, benefiting from purchases by mainland Chinese prompted by price differentials. In Asia Pacific, the jewelry category was resilient, achieving stable sales at constant exchange rates. Sales at Van Cleef & Arpels, IWC, and Chloé were also satisfactory. Let's now turn to the Americas region. Growth softened to 8% at constant currencies. Given the strength of the U.S. dollar, the region experienced fewer tourists from Europe and Asia. The U.S., which is primarily driven by domestic tourism, benefited from strong domestic sales and the net opening of 10 internal boutiques. Van Cleef & Arpels, Jaeger-LeCoultre, Chloé, and Peter Millar enjoyed double-digit growth. Cartier sales were partially impacted by the closure of its Fifth Avenue flagship up to March 2016. E-tailing is starting to positively impact sales, albeit from a low base. This would rank as Montblanc's second store and Cartier's fifth store in the U.S. Japan, which represents 8% of group sales. Sales declined 6% after a 23% increase in the prior financial year. Sales performance was largely due to anticipation of retail price increases and a sales tax increase in April 2014. Cartier sales were also partially impacted by the closure of the Ginza flagship for renovation, due to reopen by October 2015. The decline is progressively compensated by a new tourism from China. In this context, the Specialist Watchmakers and Montblanc enjoyed a good momentum. Let's turn to sales by network. Retail generates 52% of group sales, in line with last year. The 1% growth in retail reflects a combination of negative and positive factors. The temporary closures of Cartier flagships and the very difficult situation in Hong Kong and Macau, as well as a tough comparative in Japan, weighed on retail sales. Remember that those three markets tend to be retail-driven. Retail benefited from the net opening of 42 new internal stores and 35 internalizations, mainly in Korea for Montblanc. From the good performances from Van Cleef & Arpels, Officine Panerai, IWC, Chloé, and Montblanc. The 1% growth in wholesale reflects continued cautiousness from our third-party watch partners in Asia Pacific. The sales breakdown by main product line. Jewelry, and particularly high jewelry and clothing, enjoyed good growth. Clothing, even without Net-a-Porter, gained traction thanks to the successful integration of Peter Millar and good results at Chloé. Watches continue to be negatively impacted by lower consumption from Chinese in Hong Kong and Macau, primarily. Leather suffered from a negative momentum at all Maisons, excluding Montblanc, where writing instruments also performed positively thanks to renewed creativity. Over to you, Bernard. Thank you, Richard. Good morning, everybody. First, overall, Richemont's Maisons responded well. Their performance reflected their creativity, strength, and agility, but also their geographic exposure. Profitability remained broadly stable at a high level in the jewelry segment. At the Specialist Watchmakers, a mid-single increase in sales led to a lower operating contribution margin. Other Maisons, that include Montblanc and the fashion Maisons, but now exclude the Net-a-Porter Group, reported a 2% sales growth. Results of Alfred Dunhill and Lancel weighed on Other Maisons results, which ended with higher losses than last year, as we shall see shortly. Let's look now at the sales and operating contribution by segment in more detail. We'll start with the jewelry Maisons. Jewelry solid momentum as a product line at Cartier and Van Cleef & Arpels compensated for the mid-single-digit decline of Cartier watches due to a weak Asia Pacific environment. Demand in Western markets remained robust. The Maisons boutique networks benefited from further openings, mitigated by a number of major flagship closures for renovation. As Richard mentioned, the Cartier flagship in New York, Tokyo, and Paris are closed for renovations. They had a number of successful launches. Let me just give you a few examples. Cartier Royale High Jewelry Collection, Juste un Clou jewelry, and Calibre diver watch at Cartier. Peau d'Âne jewelry collection and Perlée couleurs jewelry at Van Cleef & Arpels. Lower precious metal prices, price increases, and cost-contain measures help mitigate an overall subdued environment. In this context, however, Cartier managed to maintain its profitability at a very high level, while Van Cleef & Arpels continued to improve its profitability. Operating contribution of the jewelry Maisons rose by 4%, leading to a stable contribution margin of 35%. Now, our specialist watchmakers. This segment accounts for 27% of sales and 25% of group contribution before the head quarter costs. It saw a robust increase in sales across its Maisons, except for Piaget, which suffers from a large presence in Hong Kong and Macau. IWC and Lange & Söhne performances were particularly notable with increased operating margins. Operating contribution decreased by 6% as a result of a challenging situation in Hong Kong and Macau, and substantial ForEx headwind, notably the impact of a strong Swiss franc in Q4 on the cost of goods sold. As a result, operating contribution margin declined to 23% of sales. Now, finally, the other business area, where the operating contribution was a €64 million loss, excluding the €234 million pre-tax investment property disposal gain. The losses of Alfred Dunhill and Lancel weighed heavily on the fashion results. At Lancel, the new management now is in place and fully operational. New products receive positive media coverage with the new Charlie bag, as an example, launched in September 2014, which has clearly become a bestseller. We need more of these, and we need to drive clients back to the stores. We also need, obviously, a better mood in France. A new retail concept and future advertising campaign should help achieve this goal. At Alfred Dunhill, the new management team is in place. A fully revised marketing campaign and new range of products across ready-to-wear and leather have been rolled out and received a very good reaction from customers and from the press. A new retail concept has also been developed and will be piloted at the Pacific Place boutique in Hong Kong towards the end of the year. Chloé has enjoyed moderate sales growth with positive momentum in all major regions, excluding Japan. Its ready-to-wear is doing particularly well, and leather, with the new Drew bag, starts to improve. Montblanc reported sales grew by 6% to EUR 775 million, despite China being its largest market. The new products, supported by a new advertising campaign, are coming through. Leather and writing instruments enjoyed a good momentum. Operating contribution has started to improve. The integration of Montblanc and the fashion maisons into Richemont distribution platforms worldwide is on track. This should lead to better control and operating leverage. Over to you, Gary. Thank you, Bernard. Good morning to everybody in the hall. Good morning to everybody looking over behind their screens, particularly our Richemont colleagues. Let's start with our operating profits. Reported operating profit is up by 10%, thanks to the gain previously mentioned on the St. Regis property. The underlying operating profit is roughly stable at EUR 2.436 billion. Expenses in total are flattered by the gain. They were contained nevertheless, bearing in mind that the sharp and sudden appreciation of the Swiss franc versus the euro in Q4. Reported operating margin was up to 25.6%, with the underlying margin reduced to 23.4%. Let's look at gross margin and expenses in more detail. The 6% increase in gross profit led to a gross margin of 66.1%. The 130 basis point appreciation of gross margin results from three positive factors. First, our sustained pricing power, second, our ongoing increased share of retail, and third, lower precious material prices. These positives offset negative effect related to foreign exchange. Foreign exchange had a positive impact on sales, but a negative impact on cost of sales. Overall, the net impact on margin was 20 basis points negative. Let's now look at our operating expenses in detail. Net operating expenses grew by 9% to 43% of sales. The rate of increase above the 4% sales growth reflects primarily the Swiss franc appreciation and new boutiques. This accounted for six percentage points. All other expenses, which are S&D and admin, accounted for three percentage points of growth. Selling and distribution expenses, 58% of total operating expenses, rose the fastest. On a constant rate basis, S&D expenses rose by 8%. This increase is due to increased depreciation and rentals linked to our investments in our distribution channels, including new boutique locations. Communication costs rose by 9% and continues to represent between 9% and 10% of sales. Administration expenses grew by 6% or 3% on a constant rate basis. This growth reflects the continuing strengthening of our Richemont shared service in e-commerce platforms, while also reflecting the curtailing of corporate overhead costs where appropriate. Some details on finance costs, which I'm sure you're all looking forward to. We incurred non-cash losses of EUR 652 million on our mark-to-market adjustments related to our cash and cash investments. These cash and cash investments are in our holding companies. Although Richemont reports in euro and holds the bulk of its cash in euros, these euros are held in Swiss franc-denominated companies. Therefore, the companies recorded non-cash losses in Swiss franc terms when the euro was effectively devalued against the Swiss franc this January. We incurred losses of EUR 217 million on our normal and recurring hedging program, which are mark-to-market each period. Of the total amount, only EUR 23 million was cash outflows. Net finance costs amounted to EUR 953 million versus net income of EUR 72 million a year ago. Let's look at the P&L items below operating profit now. Profit from continuing operations for the year declined by 36% to EUR 1.3 billion, primarily as a result of the non-cash losses that we have just seen. Our taxation charge declined by 11% to EUR 369 million. This largely reflects the performance for the year in low-tax jurisdictions such as Hong Kong and Macau. We continue to believe that our underlying tax rate going forward will be in the range of 18%-20%. I would like to now focus on our cash flow from operations. Cash flow from operations declined to EUR 2.4 billion. The reduction in cash flow derives from a EUR 578 million increase in working capital needs, driven by planned increases in jewelry inventories. We also incurred a EUR 23 million outflow related to the settlement of our derivative program, as I said in the last slide. This compares with a EUR 118 million inflow in the previous year. The decrease in other items relates primarily to the EUR 234 million gain recorded in operating profit relating to the St. Regis transaction. Our receivables remain healthy at 95% current, which is consistent with the prior year. Let's now look at capital expenditures. Gross capital expenditures rose in line with sales to EUR 708 million, approximating 6.3% of sales. Fiscal year 2015 saw our major manufacturing programs continue. It saw the completion of certain manufacturing facilities, most notably Panerai and Lange. Investments continued in our distribution networks. In fiscal 2016, we will continue our investment program. We are close to the end of our elevated manufacturing spend. We expect cash outflow for fiscal 2016 to approximate EUR 850 million. Let's look at the nature of our investments made during the past 12 months. 46% of the gross expenditure relates to retail and point-of-sale investments. 77 net new internal stores were opened. The most notable projects in the year included 28 new stores for our specialist watchmakers, most notably Jaeger, IWC, and Vacheron. Cartier opened up a brand-new flagship in Chengdu, China, and Van Cleef in Hangzhou, China. Several boutiques relocations occurred, such as Cartier in the Miami Design District in the United States and the Van Cleef flagship in Milan. We are going through the process of substantial renovations for Cartier, most notably the flagships in Ginza and New York, Fifth Avenue. 24% of our spend related to manufacturing investments and included a new Cartier jewelry workshop in Switzerland that's expected to be completed this autumn, the Lange and Vacheron expansions that have just completed this spring, and the new Panerai greenfield location in Neuchâtel, which also opened this spring. Other investments accounting for the remaining 30% included the Maren project for movement components, dials, and cases. This should be completed in early calendar 2016. Also included substantial IT investments and logistics-related projects. Let's discuss free cash flow. Cash flow from operations financed our significant investment program, as we just saw. We also enjoyed increased tax payments for the year. Free cash flow amounted to EUR 1,518,000,000, a EUR 300 million decrease over the prior years. This primarily relates to increased tax payments, one of the items being the taxes due on the St. Regis transaction in New York, and the other substantial reason was the settlement of prior year APA agreements in certain jurisdictions. Let's now turn to our balance sheet. The group continues to enjoy a very strong balance sheet. Equity accounted for 71% of the total. Net cash and investments amounted to EUR 5.4 billion compared to EUR 4.7 billion at March 2014. Our cash position includes short-term liquid funds as well as cash and cash equivalents and all borrowings. Liquid funds and cash balances were primarily denominated in euros and Swiss francs. As you can see, Richemont's overall financial position and cash reserves were not negatively affected by the devaluation of the euro against the Swiss franc. Let's now look at another use of cash, our dividend proposal. Our fiscal 2015 dividend proposal to be confirmed by shareholders in September is CHF 1.60 per share. This represents an increase of 14% over the previous year, in Swiss franc terms, some 33% in euro terms. This reflects both the increase in our net cash, our strategy of organic growth, and our objective to grow dividends steadily for shareholders over the long term. Now some color on April sales. April sales grew by 9% on a reported basis, but declined by 8% on a constant basis. This is to be compared with a +1% reported growth and a +6% growth in constant rates in April of last year. While momentum in jewelry and Europe continues to be good, Asia-Pacific suffered from poor trading conditions in Hong Kong and Macau. America and the Middle East primarily turned negative due to the wholesale channel. Japan passed a difficult comparative base, strongly recovered. Sales in the retail channel grew by 4% on a constant currency basis, while wholesale sales declined by 17%, suffering in regions with strong currencies, Asia, America, and the Middle East. The weakness in wholesale was primarily due to anticipation of adjustments linked to our worldwide pricing policy. These adjustments have now taken place. I would say that through, Mr. Rupert mentioned it in his commentary, generally speaking, through the first two weeks of May, our sales are flat on a constant rate basis. Thank you, and I'd like to turn it over to Richard and Bernard. Thank you, Gary. The significant appreciation of the Swiss francs versus the euro created an uneasy situation at first because it was unexpected and was happening in an already challenging environment. Such a move is not new. The Swiss franc was worth CHF 1.68 in 2007, and early August 2011, the Swiss franc appreciated to EUR 1 until the peg to EUR 1.20 was introduced in September 2011. Our sales and profit have nonetheless increased significantly since 2007. In any case, luxury watches are Swiss, or they are not. All fine watchmakers face the same constraints. At Richemont, what did we do? First, depending on the Maison, we raised prices in Europe in order of 5%-9%, and we'll pass further increases if necessary. Second, we control our Swiss franc-denominated OpEx, implementing a temporary hiring and salary freeze in Switzerland, renegotiating our outsourcing services within the Euro base, and reviewing all processes to increase productivity. Third, we renegotiated our Swiss franc-denominated CapEx and postponed some non-critical projects. Having said that, I would like to underline how positive and beneficial it is to operate in and out of Switzerland. First, it offers political and social stability and economic flexibility. Second, professionalism, education, and adaptability of staff are high. There is no better place in the world where you can find such a savoir-faire for a specific industry. Third, administrative environment is amongst the most business-friendly in the Western world in a reliable manner. These advantages should continue to mitigate the negative of a secular appreciation of the Swiss francs. In this slide, I would like to share with you how we are managing Richemont in a slow-growth but fast-moving environment. To grow, you have to be highly innovative, reactive, and agile to generate sales. It starts with the product. Product development and innovation are key factors, especially in times of moderation, our products have to show creativity, newness, and impeccable quality to spark desire. To have the right products available in a fast-changing environment, you have to be flexible and reactive. Aside from authenticity, production integration at every Maison is an objective and contrary to a common belief, subcontracting, especially for big players like some of our Maison, is not synonym for flexibility. Having said that, sales generation can only happen if our clientele considers that pricing is fair. In that respect, a significant disturbing factor in the current environment is, of course, the volatility of currencies. On that front, our philosophy is clear and not new. We want our Maison to have a transparent worldwide pricing policy, which ensures a fair pricing for all our clients around the globe, excluding local duties and taxes. This implies prices adjustments based on currency midterm trends, bearing in mind, of course, the production cost in the country of origin. On that point, remember that Richemont only operates in the high-end segment and sells products, which by definition, can only be produced in Europe or Switzerland. The world is changing fast. To drive sales, you also have to adapt your distribution as rapidly. We have mentioned prices, we are proactively helping our best retailers in the context of less partners and more partnership to improve the shopping experience at their stores, develop new locations, and better manage their inventory. You should be aware that following dramatic changes in the clientele, distribution has to evolve fast as well. We have many recent examples of adaptation of the distribution supported or sponsored by Richemont with key trade partners. You know Bucherer in Paris, Capucines, who are doing very well in attracting an increasing tourist clientele, complementing the enlarged stores at Galeries Lafayette and Printemps in Paris. We can also mention new similar stores like Orome on Regent Street in London, Pisa in Milan, Rabat in Barcelona, or Wempe in Munich. In the U.S., there is Tourneau as well. In China, Cartier and several of our watch Maison are starting to work with the new CDF mall in Sanya, which is a kind of local duty-free. We have just launched another distribution initiative for the industry called TimeValley. This is an innovative multi-brand watch store open to all high-end watchmakers and retailers, which redefine luxury standard for growth markets and new tourist destinations, including Japan, for example. The first TimeValley has been opened in Nanjing and is operated by the watch division of Chow Tai Fook. In addition to the innovative initiatives just mentioned, we have deployed with our dealers a web interface called Booster worldwide to obtain real-time sellout. This is improving visibility of inventories and enable us to focus on raising our retailers' productivity by easing many administrative tasks, including product assortment management, automatic replenishment, standard orders, and activity review. Adapting distribution means e-commerce as well. At large, the e-tailing backbone is already in place for all our jewelry and watch Maison, including Montblanc. State-of-the-art e-commerce platform have been deployed to sell online. U.S., Europe, Japan are operational. China went live recently, Asia-Pacific is due in fiscal 2016. Concierge services are operated in the U.S., Europe, Japan, and China, to be followed by Asia-Pacific in fiscal 2016. One of the major benefits of e-tailing is that it attracts new clients and is offering a multi-channel shopping experience for existing clientele. E-tailing reviews are still low, in the order of 1% of retail sales, but growing much faster than traditional channels and will represent a meaningful contribution in the next five years. All those measures should contribute to drive sales while increasing productivity gains. Furthermore, the moderation in OpEx growth will also benefit from the deconsolidation of Net-a-Porter. Let me now describe two transactions that we have recently completed and that illustrate how we think about capital allocation. In October 2012, we acquired the St. Regis retail space in N.Y. as a hedge for our Cartier mansion, whose rent was under renegotiation. In October 2014, having negotiated a long lease, we sold this retail space for nearly twice the price we paid. The sale generated an operating gain of EUR 234 million and contributed EUR 136 million to net income. In March, we announced the merger of Net-a-Porter with YOOX, having increased the value of Net-a-Porter by about four times in five years based on our initial investment. This 50/50 transaction on a fully diluted basis is expected to be completed this September. The gain will not contribute to the fiscal 2016 operating income. It will be recorded as gain on sale of business. As this is an exchange of share, there are no tax implications other than stamp duty. Over to you, Bernard. Let's now conclude by summarizing our presentation and give you the main strategy objectives. We want to achieve long-term organic growth, increasing our maisons' equity, thereby building their goodwill. This implies control over production, product development, and distribution. Ability to attract and retain entrepreneurial and creative management, as well as skilled craftsmen. High product quality and outstanding customer service. World-class group shared services offering leverage, control, and consistency. Prestige products rely on continuous creativity and innovation, which does not undermine the enduring value and timelessness of our products. As such, skilled craftsmanship is the key to authentic luxury. Perfection makes really the difference. Preserving and developing skills that help create and sell exceptional products is imperative. Richemont has therefore set up the Creative Academy in Milan dedicated to the development of design capabilities, while the Retail Academy in Shanghai ensures the purchasing experience matches the prestige of our maisons. The Campus Genevois de l'Horlogerie will offer recognized diploma-based training courses. We carry on developing the much-neglected fine craft which we need. Our motto is unchanged. We remain committed to generate value, steady cash flows, and sustainable dividend growth over the long term. As a final note to our presentation, I would like to share with you the cover page of the catalog of the Cartier exhibition currently organized by the Sichuan Museum in Chengdu, China. We expect more than half a million visitors. For those of you who read Mandarin, maybe there are some in this room, you can see the quote, "Craftsmanship elevated to art." This is the perfect illustration of our philosophy. I think we're going to start the Q&A session. We're going to start with question from the floor. Please, just for the benefits of the people in the audience and also the webcast viewers, if you can clearly announce your name and your company's name before raising questions. Luka, you may go ahead, and I think after there will be John and Melanie, sorry. Thank you. Good morning. Luca Solca from Exane BNP Paribas. At one point last year, you were talking about continuing normalization of watch sales and sales in general in China and Asia. I wonder where you stand on that. Having spent a couple of weeks in Hong Kong and mainland China, I have the impression that the hard luxury business is still on the back foot. There's talks of sales being down 25% year to date in Hong Kong, and major retailers like Emperor Watch closing stores or planning to close stores. Real estate brokers report attempts by Richemont to close some of the Causeway Bay stores. I was wondering how you see the situation there. It seems that the bad trading conditions are probably going to endure, at least from the surface. I wonder, as a second question, what budget scenarios you are planning for. Quite simply, what kind of constant currency growth you would need in order to maintain flat operating margin? I see that you've been implementing a number of initiatives to proactively tackle the cost base in Switzerland. If you could tell us more about that would be great. Thank you very much indeed. I take the first one on. Look, I said this morning, I think it was Reuters. We really have totally conflicting goals in this room. I have great empathy for analysts who have to persuade people what to do today or tomorrow, either to buy or to sell, and everybody can do as he or she wishes. I've never asked anybody to buy a single share. I'm in it for the long term. We've seen this before on a number of occasions. Yes, we have problems in China. Everybody's got problems in China. How long it's going to last, I don't know. I do know that our stock is of a lot better quality than it would've been five years ago. We don't have a lot of stock floating around that's unsellable. Certainly not internally. Even our dealers, the stock that they have is current, we'll help them move it even if it takes time. That's our partnership with them. We'll find Seoul or Japan or Dubai or Europe. It doesn't matter what. It's a workout situation. People who deny it's silly. We've seen it before. I've been in it since with Cartier since 1975. I've seen it before. Our goal is to keep the brand equity so that in two or three or four or five years, and the loyalty of our customers, by not expecting them to pay a lot more than in other economic zones. The price was not in reaction to stock. We've done it before. The price is that we can have fairness with clients worldwide. Especially today, you have WeChat, hundreds of millions of people on it. People are intelligent, there's transparency in pricing. The tour operators will tell their clients where to buy and where not to buy. Do we adapt our strategies because Hong Kong and Macau is suffering and will probably suffer for a while now? Luckily, we have five engines on this plane. Japan is doing well. The States. Europe, not Europe as an economic zone, but Europe as a selling place. We tend to still look at countries. That's per se, it's city-states today. London, inside the M25, has nothing to do with the rest of the United Kingdom. New York City, if you go to upstate New York, it's rust belt. It really is a tale of two cities. You leave major metropolitan areas, it's worrisome. We are fortunate that we have Maisons and products that transcend boundaries and cultures, that have the brand equity in various countries. Will we have a weakness? Yes. Will we be weaker than our competitors? I doubt it. We live according to that. Maybe some of the real estate proprietors will become a little bit more realistic in their extortion of Maisons. Because in Hong Kong and in New York, it's no longer rent, it's extortion. No, seriously. I have a friend who's in the casino business. A year or two ago, he was ordering me around. Big lessor of ours. I said to my colleagues yesterday, "I really want to see him now, seeing that they're planning some new openings." Things equal out. Look, I'm not going to say that things are great in Macau and in Hong Kong. They're not. Will it affect us? In single digits, maybe. I'm guessing. I'm totally guessing as the group. I don't go and project now. I said this morning, "Okay, April was down." I was not too amused that some of my colleagues had kind of indicated to people, "Don't buy now because we may have a little price increase in May." It's natural. Do you want people to buy? Obviously, some people held back. I had that a lot in the cigarette industry, where people would announce a price increase in April, everybody bought in March. The dealers took our price increase. Stock moved across. Now in this, if you indicate to people, they do know our general policy. Remember, people know that we have done it in Japan, I think twice already, where we dropped prices. The dealers are not stupid. They're highly intelligent. They think, "Hang on, we'll just wait a week or two." To extrapolate it, you may come to the wrong conclusion. Even looking now to extrapolate two months, you may draw the wrong conclusion. Let's just remind you, our game is not quarter by quarter or year by year. It's longer. I took a sabbatical last year and came back and found out that they'd increased the dividend by 40%. I was not overly amused by that. Okay. We have said to you that we endeavor to drive this business, that we have, over a long term, a free cash flow, that we can sustain around and about 15% increase in dividends per share in EUR terms, in reporting currency terms. This is a medium to long-term business. It's still a great business because the moats around it, the barriers to entry are so enormous. I'm not going to mention the name, but on Sunday, I had a meeting and a lunch with somebody that you'll all know, who is in the tech business, one of the biggest, really big. He was saying, "Oh, geez, if I'd only been in the luxury goods business." He says, "I never sleep. Every week, every day, I read about a new product coming out, and our CapEx, what we've got to spend just to stay ahead. Every week, every month. If we slack a year, our business is gone." There are not too many businesses that have got the dynamics. I would urge you, Luca, not to extrapolate too much from going to one region. Those people are shopping in Paris today. By the way, in Dubai again, after we-- Dubai was flyover country. They'd land there and keep their money, mostly their credit cards in their pocket, come to Europe, buy, go home. Suddenly, with a slight adjustment, Dubai Mall is full again. The people are smart. The same people that don't buy in Hong Kong are buying in Europe. There's a slight price adjustment. There are websites today that will track the differentiation like that. I wouldn't extrapolate too much in a single region. What would worry the heck out of me is if the Chinese had to say Cartier is not cool or Van Cleef's not cool, then I'd be worried, really worried. The brand equity. I wouldn't be overly concerned. Your job is to tell guys what to do now, in the next year, to either buy or sell. Mine is to make sure, because I'm the only chap that can't sell. I keep my exposure, stays and gets bigger. My job is not to stuff up the five-year job, okay, or 10-year job. These guys also, they sit here and smile, but they cash their options. Okay. See that coming. Okay. Luca, maybe to answer the real estate question. I'm going to not answer that last comment there. Remember in November, when we last saw you, we were quite clear that we were going to use the opportunity of the St. Regis gain to see if we could make our store network more efficient. We're always very focused on having all of our stores be profitable. The good news is that we only closed 17 stores. Didn't cost us anything. Most of those stores were in Asia, and they weren't really watch stores. Maybe that's where that come from. I think from a budget standpoint, we don't project sales. We continue on with the CapEx program. We've given you that already. The dividend is growing in line with the normal growth. I think you can draw reasonable conclusions from that, I think. I think there was Jon and also Mélanie. Okay. Maybe, Jon, do you want to be a gentleman or not? Thank you. That's a loaded one. Okay, good. Good morning. It's Mélanie Flouquet at JPMorgan. My first question is for Gary. In the past, you used to give us some guidance on your gross margin expectations, and OpEx guidance excluding Forex. If you could give this to us for this year, which is something you control unlike sales. That's tough. No, that's okay. Remember "The Terminator? That's okay. I will be back." That nonsense stops now. I told them. Guidance. I'll bet their salaries against the guidance. It stops immediately. Well, Johann Rupert, let's be fair. I've done this in the past. Now, I want to be absolutely clear. The guidance that I'm going to give you is based on the average exchange rates for the full year fiscal 2015, the year just concluded. We have no idea where exchange rates are going to go, and we have no idea where sales are going to go. Okay? If everybody gets that, I think the gross margin will be in the range of 65%. I think the S&D growth will be in the 7% range. I think admin will grow between four and a half and five and a half percent. It'll probably grow less because after this, I'll probably get fired by my chairman. Okay, that's fine. After that derivative announcement, before I could get hold of him, his mother got hold of him and asked him whether he still has a job. That is a true story. With regard to April trading, I think we understand wholesale got delayed, et cetera, and also the Hong Kong pressure. I was more surprised to hear that Middle East and Americas that turned negative because of wholesale orders. To my knowledge, there were no big price movements in Americas in particular. Could you explain this a little bit more to us and what you're seeing in Americas? We've actually seen very mixed numbers out Americas for the whole of the luxury sector. Well, Mélanie, we adjusted dollars on pricing. You did adjust Americas, too? Sure. It was $. Yeah. You had pre-announced that you would do that as well? Well, okay. No. I mean. Please. Yes. Please ask him that in public, okay? No, Mélanie, Cartier tends to adjust in the middle of a month. Okay? Things take time. The word probably gets out. Probably. Clearly with Cartier moving, everybody moves, right? I think it was well understood in the market, given our fair pricing, that we would do something. I think we've done that through May 1st. We've completed. I would say we're content with the pricing in terms of the differentials. We're back to a more normalized situation, I would say. The inventory pressure, that's my last question, sorry, that we saw this year, which was an investment in jewelry that you had told us would happen. Where are we going to be moving forward? Are you going to continue to invest in the actual raw materials for the jewelry push? You mean The working capital in inventory. Yeah. We expect the working capital to grow by about EUR 150 million for the year. Mélanie, we gave, was it three years ago? I asked the people at Van Cleef specifically. We're sitting with the EUR billions, earning zilch at the moment. I said, "If I give you another EUR 100 million that you haven't asked for, and you go and buy stones, can you turn that into jewelry that you can sell?" Of course, they all said yes. Who wouldn't? The results have been phenomenal. What bothers me about these analyst meetings is you ask us to predict the next year. I sit with the head of the Maisons. Yesterday, Roger Dubuis asked me, they said, "We can speed this up, but we're going to need X." I said, "Who's stopping you?" He looked to the side, and I said, "Just tell them I said you can go ahead. It's a brilliant plan." It's EUR 200,000. If we start running this company to fulfill expectations created in this room, then we're doing it the wrong way around. We've got some of the best colleagues in the world. By the way, interestingly, our inbox in our HR department is filling up. We've got really good people. My job with Bernard, Richard, and Gary is to listen to their ideas. If they're logical, to give them the oxygen to go ahead and build. That's why we have product committee meetings. If they can persuade us with Alain and Franco and the others on the committees, then I want to give them the capital. They the people who are creating the wealth. If you're not part of design, making or selling, you're part of the overheads. Okay. If the designers and the people who are actually making the wonderful products have to live on constant, "Oh, you can't do it. You can't get an extra this, can't get an extra that because the budget." Forget it. When you look at our inventory, there's a heck of a difference between giving Cartier and giving Van Cleef the oxygen to go out and buy gold. Not gold, but diamonds and rubies and precious materials, and to innovate with new materials. If you want to have your brand equity, you don't start with a promise to the analysts, which then works through a budget and then end up with us telling the head of Roger Dubuis, "Hang on, just don't spend the EUR 250,000 or XYZ." It's the wrong way around. This, I know you've got to do your jobs, what I worry about is that we twist it around. An incredible letter from the head of BlackRock. I shared it with my colleagues. There is somebody in a company and a trillion-plus fund manager who actually understands how business works. Do you know the pressure we've had share buybacks? Share buybacks. When do you buy back shares? When you've got cash. Mining companies, "Oh, we've got the cash." You go and buy back the shares. When do you have the cash? At the height of the cycle. Okay, your options, your prices, everybody, you cash your options. Fine. The cycle turns. Your share price falls out of bed and you ain't got no cash left. If you look at the corporate, the activists, buyback. I mean, the performance at Apple is not good enough for the activists. Are they mad? Look at the value that these people have created. What I loathe to predict, I can't tell you the margins. All I can tell you is that we're not going to waste money. If you look at the inventory, is it finished goods? I can tell you we have a lot more visibility today. We look at hundreds of millions of imprints to look at the gray market. Trust me, that's where you find out whether you've got too much stock in the market or not. The really important thing is that the heads of our maisons know that we're looking. They know that we have quicker access to information than three years ago and five years ago. We're the only company that's allowed in the back end of some of the biggest search engine companies in the world because we work with them. We'll see if somebody has a lot of watches that's suddenly available in the gray market. The CEO has got to come and explain how the heck this occurred. Because after a push strategy, if there's not the demand, you're going to get it in the gray market. The tools at our disposal, if you look at inventory, because that's what you're talking about. Five years ago, we didn't have the visibility. Now we do. Trust me, our CEOs are very smart. Now they at least know that we are smart, we can also find out what they're doing. I really want to come today just to say to you that what I don't like is we create expectations here, that starts driving the company. That's not going to carry on. If we had not asked out of the blue, asked Piaget at that time. I said, "If I give you another" Was it EUR 100 million at that stage or EUR 150 million? EUR 100 million. What was it, EUR 100 million? EUR 100 million. Wait. Piaget. What was it? Vacheron. No, no. Piaget. It was Piaget. Piaget was EUR 150 million. I said, "Yeah, I want to give you another EUR 150 million." They didn't ask for it. Jewelry. For jewelry. Yeah. I'm challenging you. Can you turn that into proper You're doing so well. It took us 10 years of endless questions. When is Piaget going to turn around? When is Piaget going to turn around? Don't worry, Melanie, our directors, it's like a broken record. Every non-executive, every six months, some non-executive directors, "When's Piaget going to turn around?" We kept the board minutes, Alain, Graeme. When they were ready and we could see that they were really ready with a great team, we said, "Okay, here's EUR 150 million." Do you know what they turned that into? Everything sold. If we'd stuck to the budget, they wouldn't have gotten the money. Please leave us the flexibility that when we see something and we can see that the company is hot, give them oxygen. We're in the position where we can. We constantly ask, "Why don't you go and buy? Why don't you go and buy? Why don't you go and buy?" If we make an acquisition, all we're doing is we're giving the goodwill to the shareholders of the acquired company. Our job is to create goodwill. What we've been paid for is to create that goodwill, not to pay it to third parties. That's not overnight. That takes, at times, decades, Melanie. I know you get it. Please don't box us in by asking intelligent questions, which you do, to which we answer, Luca. You say, "I remember you said 18 months ago that X." We are adversarial in a way because your job is to get to your people the best information that you can. Please don't, in that, handcuff us. Because all it does is it creates friction between this corner and the guys on my right. It's true. It's been nice knowing you, Melanie. Take care. We're going to take a question maybe from Jon. Yeah. Right here. Jon. Yeah. Good morning. Jon Cox with Kepler Cheuvreux. Johann, while you're here, I'm just wondering what you actually thought of the central bank's actions in January and the abandonment of the peg. There's been quite a few in the watch industry who have been complaining about that. Obviously, now you seem to be coming out and saying, "We will adjust prices very quickly," or maybe more quicker than you have in the past as a result of currency. It's obviously part of that Swiss franc question because if the Swiss franc keeps going up, then you have to make adjustments all over the place. What does that mean for the integrity of the high-end brands? If a customer knows that you may cut prices by 10% in some part of the world. What are your thoughts on that? John, it's a very good question. I said this morning that in South Africa, inexplicably, the rand volatility was worse than the Swiss franc. It moved by 45%, 50%. I've been involved in Mercedes-Benz or Daimler for very many years on the advisory board, et cetera. I saw their pain because when it appreciated, they and BMW and others were under pressure, also by the Competition Commission in South Africa, to drop prices, but by 30%, 40%. Imagine you just bought an S-Class Mercedes or a BMW 7 Series, and your residual value is just wiped out overnight. No, you're not very happy. In pleasing customers, you also have to be very careful. It's not a question about the image. If you go to Christie's and Sotheby's and you have a look at the prices, I'm confident that the clients can get the reassurance that our products last. In terms of the central bank, I was very close to Nicolas Hayek, his wife and daughter and son, and I like them, and I respect them. I was a bit concerned when the peg was set because as a reformed prostitute, I used to be an investment banker for 10 years. I saw what happened when Stanley Druckenmiller and George Soros had a go at the pound. The market is always bigger. Although recently with the four feds all acting in unison to suppress interest rates. When they work in unison, they can be pretty powerful. This is our next disaster. When they set the peg, I was a bit worried. I thought, "Harkin is lost." When the European Central Bank announced that they were going to have another round of QE, it became inevitable. I mean, it was a one-way put option. I must say that I admired Christopher Jordan for doing it in the middle of trading hours Because the one thing a speculator doesn't want is uncertainty. I was on Wall Street when Mr. Volcker became the chairman of The Fed, and it was chaos, 25%. Remember the inflation during the Carter era, 20%, 25% inflation. They made Paul Volcker their head. It was the first billion-dollar issue. I was working at Lazard. It was launched that day. That evening, he raised the discount rate by a percent. The people said, "What's going on over here? Doesn't he understand?" My boss at the time said, "No, he fully understands. He just wanted to point out to people there's a new sheriff in town." You remember what he did. I actually half admire that he did it during trading hours because the uncertainty with the speculators, they must have been shocked. I don't think he had any option, John. I mean, it was just inevitable. We still believe Switzerland is a great place to do business. We've got to get on with life. Okay. People trust the Swiss. They trust the system, they trust the currency, and it's a safe haven. It's not the first time we've had negative interest rates in Switzerland. I recall when it happened earlier on. Get on with life. Yes, it is affecting us, and yes, it will affect us. We've survived it before, I think we'll survive it again. I don't think Christopher Jordan had any options. He had no option but to do it. I understand that it's hurting the Swiss industry. We've got to get used to it. Your other question about price adjustments. The adjustments that we made, that was really not in relation to the Swiss franc USD. It was Swiss franc EUR. It was third currency. You remember you could fly. The pricing differential between Europe. Europe was too cheap in comparison. We did an adjustment, should I say, between third currencies, if I can put it like that. Do yourselves a favor, you can go and look or get your children to do it. They'll find it for you. At the WeChats and so forth and how the people have price comparison. They'll tell you exactly where you can buy what and at what prices. The people travel. Ultimately, we don't want to treat our clients like idiots. Give them respect and face. Don't treat them like they don't know that there's a pricing differential. That really was the purpose. Is that fair? Is that an answer? I think you actually may have added more volatility to your business because I remember reading this morning the coaches were like, "This figure to hold off." You saw that minus 10% was pretty shocking this morning. As I said to you, no, we did not add more volatility to our business, trust me. It smooths it out, I think you may find that by the time you get to the end of the first quarter, it's smoothed out. I can't tell you may, but let's just indicate that it's smoothing out. These people are smart, Jon. I'll take you into negotiations with watch dealers. Hey, they're smart. Treat them as smart. I think Patrik. Patrik, 20 months, Zürcher Kantonalbank. The Chinese government is planning to push local consumption, they are trying to increase the customs control. They are maybe decrease luxury taxes. What impact do you expect on a global level for Richemont in terms of sales? Because maybe there's less tourism and because of different margins in China compared with maybe Hong Kong, et cetera. That's my first question. Secondly, again, on pricing, what price decrease have you done in May in the U.S., in Hong Kong, and in the Middle East? Thank you. I have absolutely no idea what the politburo's got in mind. What I can assure you, whatever they have in mind, and they do, they normally do very well. It's efficient. If you look at the anti-corruption campaign, if you have less than 100 million members of the Communist Party in a country, it's substantially less than 10%. Within that, it's a hugely democratic institution. If the general population starts seeing corruption. This is just a It's not a Richemont view, okay? It's just a personal observation. You'd better act against it. Even if it's not true, you'd better act against the perception. I don't think it's going to stop. I think they are efficient. I don't know what their plans are in terms of local consumption. I do believe that their economy will still have superior growth. I've said it before, when you have an inherently smart group of people, and now with six adults looking over the back of one kid, and they study, and they save, they're going to get more wealthy than a place where you have a 35-hour workweek. Are you kidding me? Of course. There will be a shift in wealth. It's inevitable. If you look at the United States, you can take a company in and out of chapter 11 in 10, 11 months. In France, it's four years. Where do you think countries restructure themselves quickly? I kid these French friends of mine. I know it's a couple of centuries old, but the French motto is still, "I think, therefore I am." In America, it is, "I do, therefore I am." Who do you think is going to recover quicker? China will continue to grow. They're highly sophisticated. We already have to take big signs off. It's discretion. Within the consumption patterns, there'll be more discretion, less over-bling. It's a very, very quick-moving society. Will we have a good market there? Yes. We see it with the travelers. I like the demographics of too few women, and too many men. The guys are going to have to buy more presents. It's as simple as that. I'm happy about China. In terms of the pricing, Gary, he asked you the dollar pricing. We generally took dollar pricing- Yeah versus EUR pricing and tried to adjust it. Patrik, just to keep it simple, we have 20 brands, multiple countries. If I started to go through that, we'd be here till 5:30, right? More or less, we went down in the dollar zone. We went up in Europe, neutral, generally speaking. The JPY as well. JPY. Yen up as well. More or less, if you run that all through the system, we're in line, and there shouldn't be a lot of effect though. Most of it was in May. Yeah. We don't anticipate any more. Yeah. The way we are today, we're content with the differentials. With the currencies as they are at the moment. Yeah. That's all we can do. We can't judge. If you guys give me an idea of the currencies, we're off to the casino and forget Richemont, okay? The thing is, we have no idea what the volatility. The goal is to have a price equilibrium before VAT, taxes, et cetera. In other words, before tax. That is a medium-term goal. That's all we can say. Yeah. At the moment, as Gary said, we're content. Sorry? Yeah, we might add that for high-end PCs, for jewelry, and high-end watches, more or less above EUR 100,000, we are adjusting prices on a more or less daily basis. No, that's daily. Yeah. The high-ticket items is daily, that's been for years. You go in, we'll give you the price. That's a worldwide price. You can't for every single line item do it. It's a nightmare. My Chinese question was also more regarding what would happen to your margin if you would have more local Chinese consumption and less Chinese tourism. Would this change anything? Unfortunately, I have no idea what's going to happen. Obviously, the tourism is growing faster. It's growing faster. Tourism is growing in China. Listen, if local consumption had to grow at the same rate, we would be ecstatic. Good. Could you give it to Oliver? I think there is Allison, Jamie, and Mario now. Okay. We also have to look maybe at the website. Hi, Oliver Chen from Cowen and Company. I was curious about your longer-term views on the U.S. in terms of the profile between distribution, retail, and wholesale, as well as the demand profile you see there between domestic and Tourism. Just on a very long-term basis, as you think about luxury goods and communicating the story, how do you see mobile in terms of awareness build, even at places like Sotheby's? We're seeing the growth of contemporary and an evolution of wealth creation in terms of demographics. It's a very deep question you've got there because contemporary art is outperforming the old masters, et cetera. Personally, I think it's easier for the newfound wealth to understand contemporary art. If you look at the new buyers. Crudely put, you need a heck of a lot more culture to appreciate. Secondly, the lifestyles have changed. The people's lifestyles, where they live, and their homes have changed. That is a three-hour debate in which I continuously ask the experts at Christie's and Sotheby's about the trends. You're 100% right. How that will affect us, I don't know. I can tell you, I've got a number of friends in Palo Alto, and believe me, they're buying our products very interestingly. One of my friends, his wife's expecting a baby. I had to have a hurried Sandy. Where's Sandy? Sandy had to arrange a very hurried Cartier watch for the wife before the baby. There is a demand, and timeless style will not fade away. It's got to be timeless and it's got to be style, not fashion. As for the U.S., as I've said to you, I think the U.S. allows immigration. Problem that I have with Japan in the long term is the population decline. The most sophisticated people on Earth, the most wondrous place to visit. Unfortunately, they've got a problem with demographics. Europe, wherever the Pope goes, there's a decline in local population. Italians, no birth control, fewer people. If you look at the Italians and the French. You need demographic versus the U.S. I would bet on the U.S. Thinking 10 years out, 10 to 20 years out, what kind of relationship do you think you'll have with customers in terms of how customers will build awareness of your brands and also customer relationship management? Luckily, the customers are a lot more sophisticated. They will look at the websites. They will see the true pedigree. They'll visit the factories. A lovely story where a gentleman came to me, and he has five or six Lange & Söhne, and he went to the factory. He got back and he inquired, and he saw the watches made, taken apart, put together again. He asked the man hours, and he called me about a week later. He said, "Your watches are too cheap." I said, "Why do you say that? I like hearing that," I said, "Why do you say it?" He said, "I've just taken my Range Rover in for a service, and it cost me more per hour to change the bloody oil than this watchmaker charged me per hour. I worked it out." He was an engineer. Worked it out very quickly. If you get to that level of sophistication, you get people who appreciate the craftsmanship. I think there's more visibility for savoir-faire, for craftsmanship, for métier d'art. The French have told me I'm not allowed to use artisanal skills because it's déclassé. It's a pipe. Métier d'art. I look at these people, and they are genuine craftsmen, master craftsmen, and people appreciate that. One of the problems in today's world, I always give the guys a plug because it's one of the better books I've read. "The Second Machine Age." Everybody ought to read that book. The second book is "Abundance." Our problem is not going to be we're going to have enough things. Artificial intelligence, robotics, it's going to change. Remember the Luddites, how they broke down the weaving mills? Some countries do not understand yet what's about to hit us, and our people will simply be replaced. You cannot replace hand skills, style. Europe is very well-positioned. Can true luxury be ubiquitous? I don't think so. There will be a total change where a big percentage of the population, as we know today, will become unemployable. Given the social turmoil we already have because of the repression of interest rates, I see more social turmoil. What country do I see will do better? The U.S. is a young society, and it can reform itself quicker. They're also wired. China, the mobiles, they know exactly what we're doing. I welcome it. I welcome we verticalized what was it? 10, 15 years ago. The accountants and you guys went nuts. You wanted one factory, that one door Cartier, one door Piaget, one door. We said, "Yeah, no, every maison has its own culture. Every maison has its own factory, their own culture." When you guys want to, you can go to Lange, you can go, it's quite a way to Dresden, but you can actually see the skills. Our relationship with our clients must be as if they have a factory visit. The moment people see that, they realize the skills. In terms of CRM, it's a constantly moving target. Although Richard and them say, capital allocation, et cetera, YOOX and even though we had 90% plus of Net-a-Porter, we never ran it like one of our own companies. It was always encouraged to be neutral. In fact, quite often they treated opposition, Kering, they treated Kering better than Richemont. I didn't mind because I wanted our own brands to fight for themselves. Even YOOX and Kering, YOOX and NAP together, it will be totally a neutral platform. I mean, whether it's Mr. Armani or whether it's any of the Kering or any of the other Maisons that wish to use them, it will be run neutrally. Because I suspect that this game is too big for even the whole of the luxury goods business put together. If you start looking at the cost of big data. I mean, I've spoken to SAP. Have a look at SAP and have a look at IBM. It's staggering the numbers. Then look at Amazon. Look at their CapEx. It's a huge service for me as an Amazon customer, but they're not really producing cash. For any Maison to think they can do proper e-commerce, forget our group on its own, or LVMH or Kering or anybody. This is a big boys game, and that's why I've reached out to the other big companies to say, "Look, here, let's build a neutral platform so that we can still maintain a luxury experience." We've had positive responses. CRM will be interpersonal, obviously. Human touch, which is the ultimate thing. After that, it's going to get more and more sophisticated. We are loathe to have a Richemont, even a Cartier CRM. Because frankly speaking, I don't want to know who buys jewelry. I don't know who it is for. It may not be for the wife. I certainly do not want it to be in the public domain. We run it in cells. The head of London, he has access, but Paris, Geneva. How do you do CRM if you really value the privacy of that individual? To us, you have a bond with a client and you don't release their details. It's contradictory. I've had clients who said, friends who said, "I buy from Cartier. I want them to know me when I walk into Daniel if" I said, "Really? You really want them to know?" Maybe no. It's difficult. It's complex. I hope that answers your question. Thank you for the long-term views. Okay. I think Alison and after James. Now it's on. Right on. Alison. Hello. Hi, Annabel Gleeson from Redburn. Annabel, sorry. Gary, just three quick questions. First of all, you just guided to gross margin down about 100 basis points. Could you just talk about what the pressures are there and why you're guiding down? The second point is on price cuts. I know it's very early days, but have you seen any volume reaction or any ASP trading up? I know Hermès is talking about average selling price actually going up, but maybe volume's still negative. If you could comment on that. The third question is, on Q4 organic growth, could you give us a number for that in retail and in wholesale? Finally, if I can do a fourth, your CapEx guidance, you're guiding to CHF 850 million this year. You're saying manufacturing down. Do we therefore assume that you've got more CapEx going into retail? Maybe you could talk about the store opening plans for next year. Thank you. Annabel, I think I've been brave enough already to say 65%. That's all I'm going to say on the topic. In terms of the CapEx, I wouldn't say the manufacturing is going down next year. It's the year after. Right? These things take time, and we sort of reviewed and renegotiated contracts, as Richard said. I would say, to be fair, there's a little slippage maybe from last year into this year. We're still at a highly elevated situation. Q4, I can't really tell you. We don't look at it that way. You can work it out. We've given you the full year numbers, and you have the nine-month numbers, so you can work it out, right? Yeah, that's why I was saying. Okay. Okay. As we said. Sorry. No. It's not price cuts. Yeah. We also- Adjustments increased prices. Yeah. Okay. Yeah. On- We've got to get away from this price cut that we created. We obviously talk more about the price cut, how nice we are for our customers, than we did about the price increases. We normalized, we tried to balance the prices. Have we seen major changes? No. We've gone back to normal trading, if I can say that. It's back to normality where people don't fly across areas and buy in different regions. In fact, you know what? Dubai Mall ought to thank you greatly. Yeah. Right? Yes. I think there was James, he's been waiting for quite some time. Hi there. Jaina Bajwa from Goldman Sachs. I just had one to do with e-commerce, and you talked about brand building. I just wanted to get your views in terms of how is it resonating with younger consumers and the new consumers that are coming to Cartier and your other brands. Is that helping to increase brand value there and getting younger consumers coming into the brands? Secondly, just in terms of the comments on May, I just wanted to get an indication. Is it that retail is still outperforming wholesale? Actually, sellout demand is still trading quite well at the moment. Let me just E-commerce. What makes you think it's only younger people that use e-commerce? When did you start using e-commerce? Probably 10 years after me. No, I just- I'm pulling your leg, but I don't know. Peter Millar, you corrected me, but I don't know of a Maison where their e-commerce website is better, or should I say bigger, than their largest single bricks and mortar building. It's growing fast, but it's still not. It's 1% for us, frankly, it's not gigantic for any luxury goods company. Will it grow fast? Yes. Will younger customers? It's the ease then. The great thing about places like Net-a-Porter, the women, sorry, ladies, they all order jeans that are slightly too small for them. I can give you the statistics. They'll buy five sizes, they'll order five sizes and send four back for free. It's wonderful. People don't order four watches and send three back. Within e-commerce, it's very difficult to say e-commerce and luxury goods. We look at it as a service to our clients. If they want to buy online, we've got to make it seamless. If they want to walk into a store, it's got to be a pleasant experience. The trust factor in e-commerce is still a bit of a problem. You've got to know where you're buying from. There are a lot of fakes around. People don't just buy from every person or off every site. Will it grow? Yes. Will it help us to keep our clients happy? Absolutely. You know, in the past, it used to be a special thing. Today, it's a given. I mean, you've got to do it. Clients want it. They're working during the week. They don't have time. They want it, and they want it now. Obviously, I would love more e-commerce because then I don't get ripped on Fifth Avenue and New Bond Street and the Ginza and every shopping mall owner. Obviously, it has attractions, Richard. Huh. Okay. Is that it, Jamie? Yes. I think Mario next to you, and after there was Francesca. Thank you very much. Mario Ortelli of Bernstein Research. Two questions, if I may. One on the long-term retail strategy. What exposure to retail do you aim for your group in the long term? First one. In this question, I want also to develop. Very good question. If possible, two elements. TimeValley is an experiment at the moment. In the future, can become a chain with hundreds of stores all around the world, become a successful concept in which all the luxury brands that do not have a critical mass to open in certain location, a mono-brand store can use that format. Can you manage some of the store directly? Because the other brands will be reassured if you've got hundreds of stores around the world, some of them are managed by franchisee, some are managed directly by Richemont. You can easily compare the performances, and you see there. Another thing about. You're asking too many very good questions in one breath. Okay. I try to continue. Let's see if I'm able to put down the expectation with better question going forward. Talking about also the weakness that we see in the market. Also in established market. Richemont is a strong company, plenty of cash with a long-term positive view on the luxury goods market. Otherwise, you don't put some of your personal billions in this business. Sorry, I didn't put billions into the business. Oh. It grew into billions, which I can't get out. Fantastic. It's a big difference. Now you have got billions in this business because you were able to grow it up, and I think you would like to continue. Why don't you take tactical opportunities to buy some franchisee or some? Okay wholesalers? Okay. First question, very good question. The more you build your own retail network, the more you get margin for yourself. The problem is, the more leases you sign, and when you start capitalizing the leases, me being conservative, then I start saying, "Wow. Hey, these are real cost structures that we're building in." The advantage is we should not really only look at the margin capture but at the client experience, which you alluded to in your third question. Bernard just traveled through how many cities? 19. 19 cities in China. He took the heads of the Maisons, of a number of Maisons with him. He showed them the difference in the client experience per Maison. A couple of our colleagues got big wake-up calls to see the level of client service and display in our own and with franchisees. When you walk into something where Montblanc or Cartier, whatever is written, that service had better be the same, the quality had better be the same. It must be proper. When you go into developing countries, you train the people, and as soon as you got them trained, another company will steal them. It's difficult to grow. I do not believe in competing with your clients. Our clients are, depending upon the watch Maison, maybe 1,500, roughly, good watch retailers worldwide. I don't think it's Cartier's always been there. In the end, you should not compete with your clients. We have the ultimate client, but then we also have the watch retailers, who are clients. Why should they be loyal to us? I would prefer to cooperate with good watch retailers. As for the multi-brand stores, Richard, you can answer that. Are we going to build thousands? I'll answer it beforehand. That's where I say no. Okay. No. I think our chairman make the point. It's very important that you understand that the uniqueness of our business model in the watch industry rely on the third-party distribution- Yeah which is fabulous, including for a brand like Cartier- Yes who got 300 stores. They still rely for distributing the watches to third-party dealers. It's true that we took an initiative. By the way, it isn't owned by Richemont, but by TimeValley. As such, we created a company for that with other partners. The idea was for China, where we believe there's a big potential, either by creation of wealth or by less traveling. Sometimes, we never know, we have to be strong in China. The problem in China that, okay, you can open one or two flagships in the prime location, in the first tier cities, second tier perhaps, and have some good productivity, good exposure. But what about the third tier cities and many cities that Bernard knows, that are 10 million, 15 million? How to serve those people and give them a good shopping experience? In many other countries, we have established retailers. In China, we don't have. Us at the industry level, with some friends like Rolex, like Kering, like that, we took the initiative to say, "Guys, how we can build something which gives a clear shopping luxury experience with good productivity for our partners?" But we don't want to operate ourselves. We want to be operated by third party. The first one has been taken by the division, watch division of Taikoo. Next one could be by Ingeli or could be by Armani or even a financier wants to invest because he knows the mall or he owns the mall. That the no way that we will manage ourselves or own, because at the end of the day, it's no longer a multi-brand. Of course, the other brands will not like it. That's the concept that we want to develop. The second and last question is about patience. You were able to build up an incredible good brand, starting from a limited base, leveraging just on the heritage. Like for example, in Van Cleef, it took a bit of time to arrive to the right formula, and now is providing excellent result. In other cases, like the relaunch of Montblanc, you are arriving in result in a shorter timeframe. Talking about Lancel and Dunhill, you will be for sure patient, and you will invest a lot- Your answer is yes. Let's see. My question is a bit different. No, the answer is we had a long discussion about it. We have not been serious enough about it. But- We have not been serious enough. You want to know why? Because we're hard goods people. We are watches and jewelry people that have run Richemont for the last 20 years. You need differing skills. Lancel today has got seven women, six women. Sorry, six women and a token male running. Now, you know how male companies normally give a token job to a woman and make her the head of HR? Well, here, they put a token male as the head of HR. I'm joking. It's not the case. We pull their legs. In doing it, they gonna fix Lancel. Trust me. The same thing at Dunhill. I saw the products yesterday. We had a product committee meeting. They will fix that company. I've said to the board, we will have to allocate capital to fix these companies properly. Because in the past, it was the same thing that I alluded to earlier on. How much. Take Peter Millar. We bought it for EUR 120 million or what have you. They're growing at 50% per year. I joke it's because they're in North Carolina, they're far enough away from the head office that nobody interferes. Their e-commerce, by the way, is growing faster than Net-a-Porter or YOOX. They're in the U.S. Why did I buy them? I wanted to buy them so they could help us and show us how to run a textile business. They're growing. We won't merge the companies, but their skills in buying, skills in supply chain, and, oh, by the way, I did tell him without telling my colleagues here, "Don't send us cash. We've got enough cash." When it got to KPIs, I said, "Why isn't he getting more?" They said, "Well, he didn't give us any cash." I said, "Whoa, I told him not to give us cash." Change his bonus, because I said to him, "We don't need more cash." Sorry, Gary. Scott, I haven't told you that, so good news for you in North Carolina. The point is, You're 100% right. We've never been serious Now you are serious. We are now very serious. What can go wrong that, if you say that in time results will not arrive, what can make you decide in the future, "Okay, this is not a business for us. We have to focus our attention elsewhere." That results will not arrive, that the brand is fading further, that these new products that you think are really successful do not have a grip in the market. I just wanted to understand, because so far you showed us that you were able, with your patience and your perseverance, to build up fantastic brands. Let's go in a bit more. It's not for public discussion because I would have to get into individuals and strategies, et cetera. Let me say the one really good thing about me being on sabbatical is that Bernard Fornas put a whole bunch of new people into key positions. I've praised him privately and I'll praise him publicly because it was a pleasant surprise to see the caliber of people that he found. By the way, I apologize to the gentleman from HR if he's listening at Lancel. I'm joking, okay? Mario, we got to move on. Yeah. No, the questions are correct. Francesca. I don't know whether Ashley is still. Hi, good morning. Francesca Di Pasquantonio, Deutsche Bank. I have a couple of quick remaining questions. The first is about store rationalization, store closures in Asia. You mentioned a few closures and buybacks. Are you planning more this year? How are you positioned with respect to your less partners, more partnership in Asia? Is it reflecting in the numbers that we are seeing in wholesale? In other words, are you closing some of your partnerships there? The second question is about the new watch at Cartier, if you can update us on the launch, and the reception so far, where it's been launched, what models, what are your expectations? Thank you. Regarding the closure in Asia, actually, we have not so many partners in Asia. What we may see in the coming months is that some of our retailers close some stores, for example, in Hong Kong, because you know that in Asia, the renewal of leases are quite quick. If the landlord asks for too much and they are no longer making money, those guys are quick. They say, "Okay, guys, we close." That might happen, but we don't anticipate to stop relationship with our partners. They will close some stores. By the way, they may open stores elsewhere, in other parts of the region. Remember that Hong Kong and Macau is a specific case in a region where you have other growing places like Taiwan, for example, or Thailand. To add up to what Richard says, it's always something we do. We've done that all the time to try per region, per city, to have the best possible qualitative retail environment. Things are moving all the time. You open a new boutique for X brand, then what you do is the third party who is there. It's a constant equilibrium that we have to do. On the Cartier new watch, you've seen the watch. It's reflecting all the Cartier DNA as you've seen. So far the comments are very good. Again, it's premature. It's like talking about the April sales. That watch has been launched commercially, delivered into the stores mid-April. It's really the beginning. So far so good, if I make long story short. We expect the watch to be what it is. The Clé you're talking about. The Clé, yeah. The Clé. It was a good We're content with it. Okay. Yeah. If I can put it like that. Yeah. Also, when you look at store closures, just look in the places where you live, in the cities you live. It changes. Sloane Street did not exist 20 years ago. Unless you go to Sloane Street and Sloane Square, you're not represented. Bond Street will always be there. Within cities, people shop in different areas. There's an urban renewal in a certain part, and people start going there. You've got to open there, and then you've got to look at maybe in the same city, closing another store. This is particularly true in emerging countries. Yes. Look, Shanghai doesn't look the same as 10 years ago, we had to adjust a number of stores and openings and closures, that's the thing we do all the time. At least there, the leases are not as long. Oh, yeah. Francesca, the network is good, huh? We're happy with the network, huh? Yeah. I think we've answered most of the questions, actually. From the web, yeah. From the web. There's only one question. We have time only for one more question from Ashley. Ashley Wallace from Bank of America Merrill Lynch. I just have one quick follow-up question from Annabelle's question on gross margins earlier. Your current guidance indicates that gross margins will be down 110 basis points at 2015 exchange rates. Obviously, the US dollar and Swiss franc are significantly higher today, than those average rates, and it's a big proportion of your COGS. Can you maybe give us some indication of what that gross margin guidance would be if you assume current exchange rates for the remainder of the year? We don't assume rates, Ash. I don't get into that. As I said, I think I'm being brave enough up here, so the guidance is the guidance. Okay. Okay. I think the presentation is over. Many thanks for your presentation. Thank you all for coming. Appreciate it. Were there any questions via the internet? No, we covered most of them. We covered, yeah. There were no questions. Well, there were. No, there were, but they were covered. They were from Antoine Vallet. Yeah. Okay. Alfred von Uellen Lancel. Yeah. J.P. Schiff. Yeah. Okay. So Folks if I can tell you what the gross margin is, then I shouldn't be here. I should be running The Fed or something. There is no way, I am not going to be beholden to the gross margin that Gary says. If things, opportunities arise. Sure We're going to grab them. If the gross margin goes down for a while, I'll never forget we were seated here. Some of you were here. When somebody asked Jan du Plessis in 2000, having, John, you were here, I remember. We've just had the banner year of all banner years ever. Everything, all the stars were aligned, and he said, "We will keep on with 20%." Allan and I looked at each other, we said, "What's he doing? We don't know what it's going to be. How is he going to do?" Now he's promised it. We go to ExCo meetings, we want to do this. We're launching a new product. We want to move the ad cam. We want to spend more because here we have it. You want to know the gross margin. He wants to know how the hell am I going to fix Dunhill and Lancel. You know what? It's called communication. You're going to have to spend more communicating new products. They tell me, "Hey, whoa, we've given the gross margins." I tell them, "Stuff you. We'd better give these people oxygen, otherwise nobody will see their new good products." The gross margin will be a result. It's not an objective. It's an objective to build value over 10 years, to grow our free cash flow based upon the desirability. In the result, you will have enough cash to return to shareholders. 15% a year, every five years, less than five years, your dividends double. I think that is fine. If you don't like it, to all the shareholders, find something else that can give you that surety. I'm serious because we've done it for 25 years now. We have done something right in terms of the formula. The formula doesn't start with margins. The formula starts in building something that is unique, that clients love, where they don't get ripped in terms of pricing, that lasts. Hopefully, if we carry on doing that, we'll have enough free cash flow for the dividends. That continues to grow. Why it's also important now for me is I have a lot of friends who are, because of my demographic, I'm in my 60s, who are reaching retirement. Their pension funds are getting bust. Look at Swiss Re. How are they going to pay? How are they going to meet their obligations with the repression of the financial markets? I've got people who saved all their lives who are earning zilch today. I personally am offended by the fact that the middle class is getting raped because we've bailed out speculators, and we've socialized debt. In the socialization of debt, we've wiped out yields. People are being forced into riskier and riskier investments. If we can look after the people that trusted us and give them a 15% increase per year, then I'm doing my job to the small shareholders that have trusted us. That's my job. If the big funds want to come in and come out, well, good luck. My job is not that. My job is to try. I can't promise it ad infinitum, but we've done it for a number of years now. Folks, we in the room, we're privileged, huh? We're all privileged. We really live in two societies today. I don't know how people survive when they've saved all of their lives, and they have zero return on their capital. We're going to be more and more, we're going to see social fabric being torn. When the pension funds are with us, at least we will give them a yield that they can pass on to their pensioners. Increasingly, what do you do if you run a pension fund? The demographics is going wrong. When I look at who are our shareholders, I have a moral obligation. They trusted you said to me. They entrusted me with their capital 25 years ago. If we can give them a consistent return that they can beat inflation, that they send kids to university and now grandchildren to university, that's my moral obligation. That's where I forget about gross margins. We need gross margin in order to have the free cash flow and in order to pay the dividends. Ultimately, now and again, we have to earn when we have to launch new products. I don't want them to launch Le Clerc and take money out of another thing because the model says that. If we know it's a winner, we give them the cash. When we come back, I'll take the blame, not Gary. Okay? Mélanie, you see what you started? Jeez. It's going to be a long day. I have said I will take the blame if it makes sense to spend more. What do we do as human beings? When times are bad, everybody cuts the easiest thing. That's why I'm surprised that none of you ever focus on that. What is your % of advertising? You all ask about things of April, what happened in April. If you want to watch people, you watch what they do with their advertising. Things are bad, they cut their advertising. The easiest thing to do. What happens 3 years later, your customers don't even know you've launched a new product. The things that you really ought to watch are people supporting their brands? Are they really giving the brands the oxygen they need? Logically, one should spend more in bad times because you have a bigger share of voice. If you look at the fashion magazines, you look at everything, the time when it's easiest to gain share of voice is when all of your competitors stop advertising. It's counterintuitive. That's what one ought to do. You know sooner or later, things are going to come back and you'll have top-of-the-mind awareness. That's why I'm loathe that my colleagues make predictions. Sorry, Gary. I'll take the rap if we do things that may seem irrational. If we maintain advertising spend when the turnover goes down, you're going to think we're lunatics until I explain to you that in 2 or 3 years' time, people are going to remember. I'll give you 1 thought. The year before they banned alcohol advertising in France, and I'm not going to mention the name. There was 1 company, a Scotch whiskey company, that spent like blazers. Everybody remembers that whiskey today. They quadrupled their budget. They said, "We don't have to spend for the next 3 years. Let us now make sure that the last thing that people remember is us." You can see what happened to their sales after that. I don't know who the guy is who made that decision, chapeau. He had brains. He probably had somebody who supported him at head office. Okay. Thanks.

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