Ladies and gentlemen, good morning. Welcome to the Corp. Nifinancier Richemont Full Year 15 Indoor Results Presentation. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded.
After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Sophie Canard, Head of Investor Relations and Mr. Gary Sage, Group CFO.
You will now be joining to the conference room.
Good morning, everyone. For your information, the press release and financial presentation are available for you to download at richemont.com the homepage and under the Investor Relations section. The audio archive of this webcast will be available today on our website at 2 p. M. Geneva time.
Before I hand over to Gary, let me remind you that the presentation contains forward looking statements as a term defined in the United States Private Securities Litigation Reform Act of 1995. Words such as may, should, estimate, project, plan, believe, expect, anticipate, intend, potential, goal, strategy, target, will, seek and similar expressions may identify forward looking statements. Such forward looking statements are not guarantees of future performance. Additional forward looking statements are based on management's current expectations and assumptions regarding the company's business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward looking statements are susceptible to uncertainty and changes in circumstances.
Actual results may differ materially from the forward looking statements as a result of a number of risks and uncertainties many of which are outside the group's control. Richemont does not undertake to update nor does it have any obligation to provide updates or to revise any forward looking statements. Gary will first give you some results highlights before reviewing Richmond's operation. I will present the Maisons main developments before handing back to Gary for the financial review and conclusion. This will then be followed by Q and A session.
Over to you Gary.
Thank you, Sophie. Good morning everybody. Thanks for spending some time with us. A particular good morning to all of our Richemont staff members listening on the call as well. Sales have been subdued in a contrasted and volatile business environment.
This volatile environment has been characterized by rising geopolitical risks. Sales overall rose by 4% at constant rates and by 2% on a reported basis given the strength of the euro and the Swiss francs. All segments grew despite difficulties throughout the fashion Maisons. All regions grew except for Asia. The U.
S. And Middle East showed notable growth. In this context, the operating profit declined by 4% leading to an operating margin of 24.1% as expenses grew faster than sales. Cash flow from operations was lower, but maintained above the €1,000,000,000 level, mostly reflecting the higher working capital requirements linked to the focus on the jewelry category. If we now turn to sales in Europe.
As usual, we will use constant rates to comment on the performance of all of the regions. Sales in Europe rose by 3%. This moderation reflects the strength in the euro, which contributed to lower sales to tourists. Our wholesale partners continue to be cautious, particularly at the gold and jewelry watch level. As well, we did have pretty resilient domestic clientele and we saw growth particularly in Northern Europe and Spain.
On a Maison level Van Cleef, Lange, Roger Dubuis, Mont Blanc and Net A Porter did particularly well. And although sales to the Russian consumer dropped in Western Europe, sales in Europe sales in Russia domestically for us grew by 9%. Let's now move to the Middle East and Africa. Sales grew by 21% on a constant rate basis with good momentum across the major countries. Sales growth was strongest in Dubai and Abu Dhabi where we did open up 2 new internal stores.
The sales growth was primarily driven by premium watches and jewelry. Let's now move to Asia Pacific, which accounts for 38% of Richemont sales. Sales were flat for the first time since September 2,009. This can be explained by various factors. Hong Kong and Macau have turned negative due to the volatile environment currently going on.
China continued to be down by 4% China continued to be down by 4% in the first half, but this should be compared to 10% in the first half of the prior year. Taiwan, Korea and Australia continue to enjoy double digit growth. On a channel basis, retail outperformed wholesale and on a Maison basis, Van Cleef, Roger Dubli and Net A Porter enjoyed particularly noteworthy performances. Let's now turn to the Americas region. With 13% growth, the Americas is the fastest growing region on par with the Middle East.
All segments grew. Jewelry grew substantially faster than watches and riding instruments. Overall, the region benefited from the opening of 2 new internal boutiques and a continued strong element of domestic tourism. Finally, from a regional basis, Japan, which saw sales decline by 7% after an exceptional Q4 last year prompted by the April sales tax increase and price increases taken by our brands. In a subdued environment, therefore, the specialist watchmakers and Montblanc and Alfred Dunhill did experience growth in this subdued environment.
Japan in total generated 7% on group sales in total on par with France and China. Let's now look at sales by network. Our retail channel generated 52% of group sales. The 5% growth reflects positive developments at Van Cleef, Panerai, IWC and Net A Porter. It also reflects the impact of 43 net new internal stores, primarily in Korea with the internalization of the Mont Blanc agents.
3rd party partners remain cautious, particularly in Hong Kong and Macau, where inventories of gold and jewelry watches are significant. Let's now look at sales by product line. Watch sales were down by 1% on a constant basis, impacted primarily by the Asian region and Cartier generally. The performance of jewelry at plus 10% in constant rates continues to be outstanding. Writing instruments have been renewed by the new management team at Mont Blanc with new products and has returned to growth.
Let's now look at the main developments or points worth noting for the Maisons, the segments before I turn it over to Sophie to go into some more details. In terms of profitability, there is a slight reduction at the jewelry Maisons. It is more pronounced at the Specialist Watchmakers. However, this can be explained primarily by underperformance at Piaget. As previously flagged, improvements at Montblanc and Net A Porter have offset higher losses at the fashion and accessory Maisons, which are under reconstruction.
Our unbranded watch component manufacturing losses have been significantly reduced. Let's now take a look at the main developments focusing on sales and product launches, which in each of the Maisons, which Sophie will take you through. Sophie, over to you.
Thank you, Gary. We'll start with the Jewelry Maisons. Sales rose by 1%. Jewelry as a product line continued to perform strongly both at Cartier and Grand Prix Pen Arpels. It compensated for the negative performance of Cartier watches.
Overall, operating contribution was fairly resilient, resulting in a nearly stable contribution margin of 36%. Cartier's profitability remained at a high level, while Venti Van Ape's profitability continued to improve. Please note that all the sales commentary that follow on a concentrates basis I. E. What we call organic.
First Cartier. Cartier organic sales were slightly short of last year as a challenging Japan, Hong Kong and Macau partially offset good performances in the Americas, Europe and the Middle East. Organic retail sales expanded even in China, but wholesale was difficult, particularly in Asia Pacific. Demand for jewelry continued to be strong. Organic sales grew at a double digit rate.
The Paravani necklace on the slide from the new Cartier Royal high jewelry collection has been sold for close to €2,500,000 Lower wholesale orders for gold and jewelry watches, in particular from Asian retailers, weighed on Cartier's overall watch performance. However, steel watches grew at a double digit rate, notably the Tank and New Calibre Diver. Cartier Time Art Exhibition in Shanghai attracted over 120,000 visitors and the virtual exhibition developed on WeChat close to 220 visitors. The renovation of the Cartene New York FIFA Avenue and Ginza Tokyo Mansion are due to last until the end of our fiscal 2016, so we maintain our sales presence with temporary stores. Otherwise, the retail network is broadly stable.
As far as manufacturing is concerned, another jewelry workshop is due to be completed by the end of calendar 2015. Now, Van Cleef and Arpels, which had an excellent performance across all regions, except in Japan and across all product segments. The Barely Yellow collection is becoming a new pillar and the new Hi Julie collection Foden started to generate significant sales. Here on the slide is the Rob Colours du Tour necklace sold for over €1,000,000 In watches, the new Gold Champs and Lady Arpels Cadran Extraordinaire performed well. Dubai Mall Boutique was renovated in a fairly stable retail network.
Now our Specialist Watchmakers. The financial performance was impacted by 2 main factors. First, the persisting ForEx headwinds, which accounted for close to 1 third of the operating deterioration and second, local environment in Hong Kong and Macau, which has positively affected Piaget. All in all, the half year operating contribution margin was down to 28% of sales. Let's look at the individual Maisons.
1st Piaget. Worth recording is Piaget's exposure to Asia, which weighed on H1 sales. The good growth achieved in jewelry and high jewelry such as the recently launched Extremely Kierge high jewelry collection did not compensate for the decline in watches, even though its iconic ultra slim Altiplano collection continued to sell very well. The Agios project to increase the capacity of the Geneva manufacturing site is on track to be completed by March 2016. Moving on to Vacheron Constantin, which enjoyed good organic growth driven by wholesale in all regions.
Sales growth was broad based across the collections and included high ticket watches about €300,000 The extension of its manufacturing facility in Geneva is due to be completed next summer. Let's have a look at lung and sonar. Demand for the whole collection and in particular high complications and anniversary models continue to be quite robust. For example, the 18/15 Torbjorn and the Grand Langue 1. The extension of its manufacturing site is expected to be completed next summer.
Non Roger Dubuis, which posted strong organic sales growth led by all regions, excluding Japan. Product wise, growth was broad based, ranging from Excalibur high end complications to ladies watches. I would like to turn to Jaeger Lecoultre. Jaeger continued to post strong organic sales growth across most geographies and across all collections, including the new feminine line Rendezvous. Maisons opened its first boutique in Florida as Aventura Mall bringing its retail network to 68 stores.
Now let's look at WCE, which generated good growth sustained by most regions. The Portuguese and Portofino lines continue to be among IWC's bestsellers and the launch of the new Aqua Timer line also positively impacted sales. Moving on to Office in Epander High, whose organic sales growth continued to be robust, especially in the U. S, Middle East and Japan, led by references with in house movements in the core collection, notably the Luminar 8 days model with a P500 in house caliber. Since this April, Officine Panera is benefiting from a brand new manufacturing site in Neuchatel.
Let's turn to Baume and Mercier, whose organic sales strong in China, France and the Middle East and added up slightly above last year in total. Baume and Mercier's pillars namely the Clifton and Glatima lines did well, while the new Promise coming in line is off to a good start. Worth noting is Baume et Mercier's new celebration ad campaign with photographer Peter Lindbergh. Finally, the other business area where the operating contribution was a €21,000,000 loss. Improving results at Montblanc, Net A Porter and Richemont's unbranded watch component manufacturing have been offset by a deterioration at the other fashion and accessories Maisons as anticipated.
Let's look at the main developments of Montblanc these past 6 months. Montblanc enjoyed a 6% organic sales growth, pretty balanced across channels, primarily supported by writing instruments and leather. All regions grew at constant rates, with Americas and the Middle East being the most dynamic regions. Sales were also positively driven by the new ad campaign Crafted for New Heights featuring Hugh Jackman and by an active retail merchandising action and by the internalization finally of the 24 external stores in Korea. Operating contribution margin was slightly up, driven by mixed factors.
On the positive side, the non recurrence of a €13,000,000 one off booked last year. And on the negative side, the integration costs into the Richemont shared service the internalization of the Korean stores. And next Alfred Dunhill. The missile suffered difficult trading conditions given its large China exposure and the rationalization of wholesale. Japan however showed growth in yen terms.
The new menswear collection was introduced this July while the new leather offering will be arriving by December. Both product lines are supported by the new ad campaign with photographer Annie Lebovitz. Let us move on to Lancel, whose decline in sales derived from its exposure to the French market and from the withdrawal from a number of wholesale points of sale. Worth noting is the successful September launch of the Charlie line supported by multi channel campaigns. The management team is now complete and non sales supply chain is being reorganized to improve time to market.
Turning to Chloe, which generated flat organic sales growth. Retail was strong except in Japan and leather. The successful winter 2014 ready to wear collection offset poor momentum in Leather. However, leather has been positive in retail since the successful launch in June of the Jew bag. Worth noting also is the August launch of the Love Story fragrance.
Finally, NAT A PORTER registered strong growth worldwide with Asia Pacific website now ticking off. I will now hand over to Gary.
Thank you, Sophie. We'll now go through the financials in some detail as normal. First, let's look at our operating profit. Operating profit declined by 4% to EUR 1,311,000,000 This limited decline underlines the fact that operating deleverage starts from lower sales growth than in the past. It also reflects the facts that the Maisons have been quite reactive in curbing expense growth.
Most of the OpEx increases in the first half due to increases in rental expense, depreciation and the timing of communication projects. Having said that, the half year operating margin was down to 24.1%, thanks to expenses rising faster than sales. Let's now look at gross margin and expenses in more detail. Gross profit rose by 3% and enjoyed a 60 basis point improvement to 64.5%. This improvement reflects a combination of the following.
Forex negatively affected the margin by 90 basis points. The brands, the Maisons did enjoy positive pricing power and channel mix. There was an 18 basis point charge relating to Mont Blanc, which did not occur this year as Sophie mentioned. And we did enjoy the positive impact of lower precious material cost as anticipated. Now let's move to our operating expenses.
Operating expenses in total grew by 8% and as a percentage of reported sales grew to 40% from 38%. You see on the chart the increases as normal, 3% related to new boutiques, 3% to increased communication costs relating to timing. All other expenses, which are S and D and admin, 3% and this was offset by 4x of 1%. S and D costs, which represent 56% of total OpEx, rose by 7%, reflecting the sales growth, network developments, staffing and the opening of 43 new internal stores as Sophie mentioned. On a constant rate basis, S and D expenses grew by 9%.
This growth rate is below the 11%, which we had indicated for the full year in May. 12% increase in communication costs can be partly attributed to the Paris September high jewelry event where we now have 4 Maisons exhibiting their high jewelry collections. The communication ratio amounted to 8.9% of sales and reflects our guidance of between 9% and 9.5% for the full year. Administration and other expenses rose by 7% or 6% on a constant rate basis. Let's now look at finance costs.
We incurred net finance cost of €215,000,000 in the first half compared to an income of €69,000,000 a year ago. The €284,000,000 swing can be primarily attributed to 2 factors. First, we incurred $239,000,000 of mark to mark in losses with respect to our ongoing and unchanged hedging program. In the prior period, we experienced net gains on mark to market of 127,000,000 dollars With respect to fair value adjustments, we experienced a loss in the value of our U. S.-based interest rate swap of €8,000,000 in the period versus a gain of €10,000,000 in the prior period.
Let's now move to net profit. Net profit for the period was $907,000,000 or 23% below the prior year. The reasons, a lower operating profit as previously noted and a swing in finance costs that we just discussed. For the full year, we expect the effective tax rate to be approximately 17%, which is similar to the prior year. Let's now move to cash flow.
Richemont's cash flow from operations remained solid at slightly above €1,000,000,000 for the period. The increase in working capital requirements should not come as a surprise. In May, we had indicated our intention to invest in more stones to support our ambitious development of the jewelry category for Cartier, Van Cleef, Piaget and our newest jewelry brand, Jean Pierre Bodino. Inventory grew by €269,000,000 compared to a growth of €56,000,000 in the prior period. Rotation slowed to 18.2 months from 16.6 months a year ago, reflecting this emphasis on stones and high jewelry, but also slower growth in gold and jewelry watch sales.
The receivable portfolio remains healthy at 97% current similar to last year. Receivables grew by €211,000,000 compared to 202,000,000 in the prior period. Finally, the ongoing settlement of derivative contracts generated cash inflows of €13,000,000 for the period compared with €49,000,000 inflows in the prior period. Now let's take a look at our capital expenditures. Capital expenditure was broadly in line with the prior year.
We invested €260,000,000 representing approximately 5% of sales. Generally, the investment program was similar to the previous years with similar investments in manufacturing facilities, continued investments in our boutique internal, external and third party distribution networks and the continued expansion of our e commerce platforms and improved IT systems, which we call Gemini. We will continue our investment program as planned. The next slide will provide you some details on the type of investments we made in the last 6 months. Retail and external point of sale investments continued with the most notable projects being 13 new stores for our specialist watchmakers, including Vacheron Constantin and Roger Dubuis in Korea, Langer in New York and Piaget in Los Angeles Rodeo Drive, who took over the ex Montblanc store.
Montblanc has relocated their store in London to New Bond Street. Van Cleef opened up a new location in Wuhan, China. And as Sophie mentioned, we have a number of major boutique renovations ongoing such as the Cartier Mansions in New York and Tokyo and the Van Cleef and Arpels store in the Dubai Mall. 28% of CapEx was dedicated to investments in manufacturing expansion and capabilities. As Sophie mentioned, the Cartier Jewelry Workshop and expansion of the Cartier watch manufacturing capabilities mostly around movements, the Vacheron Constantin, Lange and Piaget's capacity expansion activities.
Our other category relates primarily to continued investments in our platforms and our ongoing Merritt campus project. Let's now discuss free cash flow. Free cash flow was $397,000,000 for the period, a decrease of $452,000,000 from the prior year. The main reasons for this were lower cash from operations, higher tax payments relating to results from previous years and the high level of capital investments that we've seen. Let's now turn to our balance sheet.
We continue to enjoy a strong balance sheet with equity representing 70% of the total, which is somewhat below last year, but understandable given that the dividend was increased by 40%. Net cash and investments, our position amounted to $4,300,000,000 compared to $3,900,000,000 at the end of September in the prior year. Richemont's net cash position includes short term liquid bond and money market funds as well as cash holdings. Cash holdings amounting to €1,200,000,000 were held in Swiss francs. Let's now head toward the conclusion.
1st, some color on October sales. October sales declined by 1% on a constant rate basis, but grew by 4% on a recorded basis with foreign exchange starting to be favorable. As we've seen in the 6 months, the U. S. And Middle East continued to lead from a growth perspective.
Asia continues to be down, particularly in Hong Kong and Macau. And Asia's underperformance is somewhat reflecting an unfavorable basis of comparison. Remember last year, Cartier experienced quite high jewelry sales in Asia in the month of October. Before we conclude, let's look at a post closing events, which is disclosed in the notes to the financial statements. Since the end of the first half, we've completed a major transaction with the disposal of the St.
Regis retail space. As a reminder, we acquired this retail space, which is located at the corner of Fifth Avenue and 55th Street in New York. As our New York footprint from a retail perspective is now secure and fully developed, it no longer made sense to keep these premises. We sold in October for a sales price of US700 $1,000,000 The property we acquired back in October 2012 for US375 $1,000,000 Hence, we will have an operating gain of approximately €226,000,000 to be reported in the second half of the year. We will disclose this gain as part of operating income and it will be separately disclosed on the face of the income statement.
Net of U. S. Taxes, this transaction will increase net income by approximately €126,000,000 In view of the volatile environment, we have implemented several measures aimed at primarily protecting our cash flow. Let me give you some examples. We've instituted a hiring freeze with replacements of departing staff approved on a very selected basis.
We've slowed the growth of our operating expenses. We expect selling and distribution expenses on a constant rate basis to be between 7% 8% for the full year. We expect administration expenses on a constant rate basis to be between 5% 6% growth for the full year and we expect communication to continue to be in the 9% to 9.5% range. Watch production is being slowed to limit buildup of inventories in house and in wholesale. We continue to monitor the stock levels in each of our wholesale partners.
So far, only the Cartier Maison resorting to shorter working time in one of their watch factories. This is expected to last until spring 2015. At the same time, we continue to invest in efficiencies with our ERP systems, Japan distribution went live on the 1st October and Piaget Manufacturing went live this summer. We've started to work to implement the distribution systems in Hong Kong and the manufacturing systems at Panerai. And now finally, conclusion before we take your questions.
In spite of the likely positive impact of lower cost on precious materials in the second half of the year, we view the coming months as challenging. The environment is extremely volatile, primarily due to geopolitical risks. We believe this is likely to continue. Our visibility on the overall economic outlook worldwide is likely to remain poor. Having said that, we remain focused on the long term and our investment strategy is unchanged.
We want to continue to encourage organic growth at all of our Maisons through target investments. In conclusion, Richemont benefits from a strong robust balance sheet and a portfolio of prestigious Maisons, each with a strong brand equity and heritage. Richemont can waver difficult times to take advantage of we believe is the long term growth prospects of our industry. Thank you for your attention. And now I'm sure you have a few questions for Sophie and I.
We will now begin the question and answer session. The first question comes from Luca Zulka from Exane BNP Paribas. Please go ahead sir.
Yes. Good morning, Gary and Sophie.
Hi, Luca. How are you?
Yes, very well. Thank you, Eileen. A couple of questions on jury. Just to understand the growth dynamics there. Do you see a broad based growth at all price points?
Or is the or are the entry price points or the higher end providing a better growth support? And just to understand the underlying growth trends, how material was the BNL in the growth that you've been posting on jewelry sales?
Okay. Yes, go ahead.
Luca, the jewelry at plus 10%, I would say it's very broad based, okay. But let's remember, if we look at the headline numbers of high jewelry, what you see through October is probably not great because of the big high jewelry sales last year, right, which were really quite exceptional and we talked about. But if you strip that out, and quite robust. I would say the BNL was good. And quite robust.
I would say the BNL was good. All of the brands experienced some growth, but that hasn't really had a huge effect on the numbers through October, right? It comes later, I would say. But the jewelry continues to be robust.
Understood. Thanks a lot. One of the brightest areas is the Middle East. Do you anticipate any change in growth momentum there on the back of oil prices going down? Would this be an issue in your view?
It doesn't appear to be. It's still pretty robust. The people on the ground are pretty positive about the whole region. There's more we can do there in terms of the other countries in the region. But for us, mostly it's an external it's a franchise network for us except for Dubai.
But now the growth has been good the tourism is quite robust in the Middle East.
On the Fashion and Leather Goods side, looking at the fact that at last Luxury Goods players as well as department stores in the U. S. For example, are getting more and more engaged in on digital and in e commerce. Do you believe that Net A Porter that has granted you a significant first mover advantage could be pressured by higher competition as more brands and more retailers finally wake up to the opportunity that online represents?
Well, I think Luca, the and I've said this before, I wouldn't say that the retailers in America are just waking up to e commerce. They've been there, right? Certainly, since we bought Net A Porter in 2010, we have experienced much more competition that continues. I think that competition manifests itself in lower operating margins than we initially thought, which we've said before. I think Net A Porter still has its advantages in terms of being the style guru, in terms of being the same day service in New York and London.
So and the growth for Net A Porter continues to be extremely resilient across all three of the platforms.
And you're experiencing operating leverage on the back of that growth?
Yes. We're now I'm happy to say breakeven, a little profit at the end of the first half. So we're getting there.
Excellent. Thank you very much indeed, Gary and Sofia.
Okay.
The next question comes from Thomas Chauvet from Citigroup. Please go ahead sir.
Good morning, Sophie and Gary. I have three questions, please. The first one on watches. What is the situation at Cartier Watchers and perhaps some key specialist watch brand in your key wholesale markets of Hong Kong, Macau, Europe? Can you comment on the sellouts in October in particular and inventory levels at your wholesale nuclear wholesale partners?
Can you also confirm on watches that only the Cartier watch factory of Villasco Gland is subject to part time work? Or are there other manufacturer subject to Chabas Parcel? Thank you.
Thomas, I think clearly we were quite open that the watch performance for the first half was primarily down to Cartier, primarily at the high end. I would say the inventory levels particularly in Asia for jewelry watches and gold watches are extremely healthy, if I can say that. Cartier did pretty well in the steel watch category. They did very well in what they call the steel diamonds on steel watches, which is a new category for them. So there's some positives, I would say, on a unit basis.
But on a value basis, it continues to be difficult. That's for sure. I think the other watch brands did quite okay. A short time and that's where we are at the moment. But we obviously look at this on an ongoing basis.
But I would rather comment to our employees if we were going to do something rather than you Thomas with the greatest impact.
Of course, understood. Thank you. Secondly, on the operating expenses, the growth in OpEx in H1 was below your cost guidance in May. And as you said, below budget, given the part time work, given the selected cost savings you've talked about and your revised cost guidance, did you feel more positive about margin development in the second half? Also you'll have FX tailwind still some input cost benefits?
Well, I mean Thomas, we never project sales. We never pay project exchange rates. I would say the first half the environment has been difficult. It's been volatile. So all of the brands are reacting to that environment.
Now having said that, I would say October for us could have been worse given what's going on in Hong Kong and Macau. So okay, let's see. But we I can't give you any projections because I just don't know. But we feel it's appropriate to given the volatile environment to just keep the costs under control.
Okay. And finally, a question on Montblanc. So good news that the top line is back to mid single digit growth and probably the best sales performance in nearly 3 years. But margins are once again down 2 50 bps, if I'm correct, when adjusting for the restructuring charge last year. Can you elaborate on the timing of a recovery of Montblanc margins now that the top line seems to be back on track and whether mid to high teens margins, which was the historical margins are achievable in the medium term?
Yes. I mean, Tom, I'm not worried at all about Mont Blanc. I think there's a few things in the numbers now. You do have integration costs. We're starting to move the Montblanc subsidiaries onto the Richemont platforms, right?
Remember they used to be separate, right? So there tends to be one time costs for that, which we're currently experiencing, particularly in America. Remember as well the purchase of the agent, there's some intangibles that we have to amortize there. So I'm not worried about Mont Blanc. In terms of operating margin where it's going to go to, well, it should improve.
That's for sure. But I'm not going to be drawn into a target.
Okay. Very clear. Thank you, Gary.
Okay.
Next question comes from Antoine Bege from HSBC. Please go ahead, sir.
Yes. Good morning. It's Antoine Belge at HSBC. Three questions. First of all, I think you said you didn't expect or you expected the environment to remain poor.
And what's your analysis of what's happening in Hong Kong? I mean, do you see this as a bit of a structural trend? Or do you think that after a sort of bit of uncertainty, Chinese travelers will be resuming travel maybe elsewhere. What's your view on this? And if this is only a temporary thing, then is it really do we really need to be that cautious?
2nd question on the gross margin. You were kind enough to provide 64.5% guidance 6 months ago. Maybe can you update that? And especially even though you I know you don't want to be driving to quantitative comments, but are you is it fair to say that in the second half the gold prices the gold impact will be actually more significant than in the first half. And so that capacity utilization, however, could be a negative factor for you.
And finally, just on Piaget, could you be a bit more precise about the impact? I think you mentioned when you mentioned the EBIT margin development for Specialist Watchmakers that a lot of it was linked to Piaget. So what was the EBIT in euro term, actually the variation versus the last semester? Thank you.
Okay. Anton, on the Hong Kong question, we don't know. It's extremely volatile. Having said that, the difficulty started at the end of September. It wasn't that bad.
October has been difficult. We cannot project if it's going to get better or not because we're not in control of any of that, right? So we don't know. Having said that though, the rest of Southeast Asia is pretty good. And even if you look at Mainland China as a business, we were minus 4% in constant basis in the first half versus minus 10% last year.
So things are getting a little less worse there. So that could be a positive. But I can't really project. That's not us. In terms of the margin, and again, the way I do it, Antoine, I take the average rates for the 1st 6 months, which we've disclosed.
I assume the closing rates at September 30th for the second half of the year, okay. I take an average of that. If you do that, we expect gross margin to be 64.9%. That's our guidance. With respect to Piaget, Tioga, I think most of the negative reaction as Sophie said, she was quite clear.
A third of the drop for the segment was down to exchange. The remaining 2 thirds, most of it was related to Piaget, if I can say it that way.
Okay. Maybe just a clarification on Hong Kong. I mean, if I estimate Hong Kong down around 25% or 30% in October, will that be far from the reality?
I don't honestly, I don't have that, Antoine. I only have it by region.
All right. Thank you.
Next question comes from Helen Brand from Barclays. Please go ahead, madam.
Hi, good morning.
Hi, Helen.
Hi. So a couple of questions from me. I think first of all just coming back to Cartier watches. My estimate and correct me if I'm wrong is sales down high single digit in the first half. What was the difference do you think between wholesale and retail in terms of that number?
And going forward, obviously, we're seeing some mix shifts there. When do you think you expect those mix shifts to stabilize? Then just secondly, in terms of the Specialist Watchmakers margin, obviously, you've kindly given us the FX impact in flagged Hong Kong. Was there any impact
from that manufacturing subsidy from the
group shifting back into the watchmakers? Just ask a question just on the working capital step up, which I think was €269,000,000 in the first half. How much of that was related to jewelry? And are you still expecting the inventory, sorry, up €600,000,000 for the year?
Okay. Helen, I think what I've said on the Cartier watches is what I'm going to say, right? Minus 1, obviously Cartier is the biggest brand, difficult, very difficult, mostly due to the high end, as I said, the jewelry watches and gold watches in Asia. That's for sure. Your point is a good one in terms of the subsidies, which had been shifted over to the Specialist Watchmakers.
I wouldn't off the top of my head, I wouldn't think that that's a huge effect though. I wish I would have thought of that myself actually, but I don't think it's a huge effect. In terms of the inventory, remember in May, we said we wanted to add about $600,000,000 on an annual basis to our inventories, most of it related to jewelry. We now think that the inventory build for the full year will be $450,000,000 and most of it in the jewelry. Now having said that, as I said, the watch rotation is a little higher, but it's manageable and we're not worried.
Perfect. Thank you very much.
Okay.
Next question comes from John Cox from Kepler. Please go ahead, sir.
Yeah. Good morning guys.
Hi Jon.
I have a couple of questions for you. Just some of which are technical and then more than other bit more operational. Just on the negative marking to market, given what's
happening Good for you, John. I'm glad it finally came. I know you're saying, what are you guys up to
in the finance department? But anyway,
this given the currencies today, would you expect that most of
that will unwind in
let's just let's let's just let you it's very unique situation at the moment because remember what's really happening here, right? Through the first half, the income statement is on an average rate, right? And that the exchange rates have been negative, okay? Now they turned positive for us in September and you saw they're positive for us in October. When we have to mark the market the contracts, it's done its spot rate, right?
And it's really pretty simple just from a back of the envelope type of thing. You know we disclose once a year what our notional exposure is more or less. Most of our exposure is dollar blocked, right, dollar based, okay? Well, the movement in the dollar against the Swissy has been 6% since March 31 sorry, in euro and 3% in the month of September. So if you just have all those elements, that's why you have what you get.
I will pass along to my treasurer that he's under a bit of pressure from the market though, but that's what it is. Now in terms of the good news is however the rates are going to go at any one point in time, I reflect the actual situation, right? I mean that's all I can say. I can't predict the exchange rates, which way they're going to go though.
Okay. But taking them as they are today, would it just pretty much be a total reversal in H2?
Well, no. I think if the rate stayed the same as at the closing rate, there wouldn't be any more movement in the mark to markets. But the operating I mean the gross margin should get a little better, right? But I've already given you what the gross margin is going to be assuming that the closing rates are going to be used for the rest of the year.
Okay. And then just on the CapEx side,
I think some
of us anticipated maybe you would reining your horns a little bit in H2. You haven't. Is this really a signal of confidence in the future of the business or taking advantage of the inflow from the property disposal? Because the $900,000,000 was obviously quite is quite a big number.
Yes. I mean, I think well, I don't think we've changed our view on the overall growth prospects for our business. Obviously, what are the big elements in there? The big elements are our factory program, which we're continue to be committed to. We probably have 1 more year after this one to go.
The stores, there's not a lot you can do mid year to rein back the store program. We're at about 90 stores including the Korean integration. The Maren project continues. So no, I would say we take a long term view on these things. Now I will say and it's a good question to point out the gain on the St.
Regis. And this was heartening for us because I have out of the sky gain that everyone will discount because it's one time and they should. I sort of we did some work on well maybe we should look at all of our store base and see if we want to close some mistakes. Well, the fabulous news is we couldn't find a whole lot. The ones that we found would be in the obvious places like Glen Cell and Dunhill and Mont Blanc, okay, we might take a look at some store closures, but it wouldn't be hugely material.
Okay. So you're still on for 90 stores this year?
Yes. Without any closures. If we closed, it might cost about $15,000,000 but I don't have that yet.
But it
includes internalization. Remember the 90 stores includes internalizations as well, John, right?
Yes. Yes.
Okay. And then just in China, obviously, things are improving somewhat for you guys. Can you just give us maybe how you exited the half? Was it you started off you're actually still down 10% in April, May and then you're closer to flat in at the end of the half? And also the split because you said I think retail, your own retail sales are actually being positive in China and it's a wholesale channels that remain pretty weak.
Yes, I think that's right. I think things are gradually improving, but we're still down. But it's getting well, it's getting less work, John, let's be honest, right? We're still minus, right?
Yes. Yes.
Okay. And then just a final one on Dunhill and Lancel. Can you give us any indication of the losses there and when the bleeding will stop?
I'd rather not John. I mean I was clear in saying that we would certainly improve Net A Porter and the manufacturing and Montblanc would get a little better. They have. That's been offset by Lancel, primarily Lancel and Dunhill. We certainly said, Dunhill would get worse before it gets better and we're in that phase right now.
I think Lancell Lancell, the new management team is there. They're probably a little further along in things than Dunhill, but let's see. That's more of a May question than now.
Okay. Sorry, just one follow-up. On the watch, the independent watch or that reported in the manufacturing in others, have the losses been transferred to the watch Maisons now? And that's the reason for the improvement or are you still
Well, I mean, as Helen said, partially, okay, remember last year, so fiscal 2014, we said we had $25,000,000 of subsidies, right? So those subsidies for the full year. So you can make the argument that half of those have been transferred to the specialist watchmakers in the first half. So it's not huge. It's not life changing,
I would
say. Okay, great. Thanks very much guys.
Okay.
Next question comes from Melanie Flouquet from JPMorgan. Please go ahead madam. Hello Melanie. Yes. Good morning.
Hi Melanie.
Hi. I have several questions actually, sorry. The first one is just a clarification on gross margin. You said 64.9% for H2. Is that correct?
64 0.9% for the full year.
For the full year.
Yes.
Okay, perfect. The second The second question is on Cartier watches. So there is pressure still on the gold and the jewelry watches within Cartier, but you did mention inventories were now healthy. Could you give us an idea of how the sellout is standing? Is this can we expect a difficult to sell for some months to come?
Or is it flat going a little bit? The third question is on Japan. Japan was still actually pretty weak into September, and you mentioned it as being weak again in October. When did you think or can you comment when do you think Japan production turned positive for you? And my third question my 4th question, sorry, is on cash flow.
Clearly, you're showing very good cash flow generation even in periods of times of deceleration and of working capital investments. So what can we expect in terms of dividends and cash communication? Can you be a bit more precise than just a significant increase? Thank you.
On Japan, Melanie, I have no idea. Can't forecast when it's going to turn. I wouldn't say that the performance is necessarily surprise to us, but I wouldn't say that I would be able to tell you when it's going to get better. I think on the watch inventories in the retailers, if I get your question right. Clearly, the jewelry watches and the gold, which is a big part of Cartier and Piaget's business, it's certainly clogged in Asia.
That's for sure. Beneath that, there seems to be of activity and you can see that in the other specialist watchmakers as well. In terms of the dividend, I'm going to give the speech that we always give. We want to increase it in good times and in bad. So that's still in our thinking.
Do I think it's going to grow by 40% next year? Probably not. Probably not.
Sorry, can I come back to jewelry and gold watchers? Yes.
Are you
seeing an improvement in the sell out trend or
not? Not particularly, no.
No, not yet.
No.
Thank you very much.
Next question comes from Patrick Schneeman from Societe Generale Bank. Please go ahead.
Hi, Gary. Hi, Sophie.
Hi, Patrick. Hi,
Patrick. Just one question left from my side regarding the October sales. You have mentioned you don't give the figure for Hong Kong. But could you give us an idea for the whole region Asia ex Japan? How it was doing in October?
You were mentioning down, but down how much? And also the same for Japan please? Thank you.
Okay. I got to check my figures here. I would say this Patrick, Japan was down, but it was a little less down. Down. And Asia was worse.
Asia Pacific in total was worse because of Hong Kong and Macau, very different.
But worse means minus?
Just worse, just worse, okay. But again, as I said, to be minus 1+4¢ in total could have been worse. Sure, sure. Yes, could have been worse. Sure.
So Europe so the implications there is Europe and the Middle East and America was pretty good.
So similar to H1 then?
Yes.
All right. Perfect. Thanks, Gary.
Thank you, Patrick.
Next question comes from Mario Tele from Bernstein. Please go ahead, sir.
Good morning, Gary. Good morning, Sophie.
Hi, Mario.
Two questions for me. The first one is about Europe. You highlighted softer touristic flows and you mentioned the Russians. Can I kindly ask you in the first half how was the touristic flows from other nationalities, especially Chinese? And if in October, you have seen a change in the touristic flows in Europe improving or decreasing?
And the second flows in Europe improving or decreasing? And the second question is about the Cartier watches. This is an area of subdued business of the company since many quarters. And we have seen that when you put a new product on the market, you have got immediately good results, for example, the new diver watch. When we can expect a new fully fledged line of Cartier watches for the next Salon de L'Orealiger in January or we have to wait other time?
Thank you.
Okay, Mere. I think on the tourist flows in terms of percentages and things, clearly over 50% are done by people who don't live in Western Europe, right. That's what we've said. Certainly, the domestic part of our clientele was stronger in Northern Europe and Spain. The Russian consumer sales were down in Western Europe, but if I take the country of Russia, it was plus 9.
So that was interesting. I think on the Cartier watches, we all and even me to a certain extent, we all need to have a little perspective. You look at the Cartier business, how it's grown and the Richemont business has grown over the past 5 years. In terms of new products, there is a new product coming in SIHH this January, which Cartier is pretty excited about it. Okay.
But let's see.
Sorry, a clarification about the touristic flows, Gary. About the Chinese touristic flows in Europe, how were they in this semester? They were
They were not as much impacted as actually tourist flow from Americans, Middle Eastern or even top Russian. Yes.
I mean, Mary, I think let's not obsess necessarily over a particular category of consumer. But clearly, because of strength of the euro, it wasn't as attractive to buy in Europe. So that certainly had an effect. But that's all I'm going to say.
Thank you very much.
Okay.
Next question comes from Ray William from Renaissance Capital. Please go ahead sir.
Hi, good morning.
Good morning, Ray.
Just also just a few questions. I just want to have an or maybe you can just help understanding the obviously the ForEx rates have changed substantially. So I'm just thinking in terms of pricing. I mean, obviously, the yen has weakened again. Would you consider raising retail prices in Japan per se?
And then obviously with Europe, I mean the slowdown in the travel market, I mean obviously will that may imply that you will look at price increases in Europe? Or will you basically just allow the price differentials to improve so that the tourist flows can come back to Europe? That's just my first question. And then I just want to know in terms of the one income statement, one balance sheet question, the Biennale, can you maybe just give an indication what was its contribution to the marketing expenses in the first half? And then I just want to have a bit of a clarification on the increase in the equity accounted investments.
I see there was an acquisition of €99,000,000 and the increase in the debtors, I mean, that was up 39%. So if you maybe can just talk about that. Thanks.
Okay. So on price increases, I know some of the brands have done something in Russia. The Japan weakness is a relatively new occurrence, Ray, so I don't have an answer on that. I think the pricing is going to be pretty stable in the second half of the year. The brands typically look at that in the last quarter of the year, but I don't have any detail on that at the moment.
In terms of the B and L marketing spend, 4 brands exhibited, the 2 jewelry Maisons, Piaget and Jean Pierre Bodino. I don't have that detail to hand, but I think the takeaway Ray is for the full year, we expect the communication cost to be between 9% and 9.5% of sales. On the equity question, we did form a joint venture with Oxford Properties to buy a retail property in London on Bond Street. So that's what that is. And on the debtors, you're talking about receivable debt?
Yes. I mean, I think the movement was very similar to the movement between March September of last year roundabout $200,000,000 in both I think it was $211,000,000 this year $202,000,000 last year. That's normal seasonality, I would say. And the portfolio, which is the most important thing for me, remains it actually improved. Last year, it was 96% current.
This year, it's 97%. So no worries there.
Okay. Thanks.
All right.
Thank you.
Next question comes from Omar Saad from Evercore ISI. Please go ahead sir.
Hi. This is Vic in
for Omar. Good morning guys.
Hi. How are you doing?
Good. Just one question from me. Could you talk a little bit about the U. S. Market?
It's been one of your strongest and steadiest markets over the last year or so and some of the initiatives you have there.
Yes. I think the market has just it's just been resilient. The jewelry more led by jewelry than the watches. Although I will say the Cartier watches are recovering a bit in the U. S.
They've sort of changed their approach to focus on sell out of the wholesale partner rather than sell in. We've talked about this new system that we've put in where we monitor the wholesale partners inventory. And that's certainly paid dividends. We will open up some new stores in the fall for most of the brands in Miami. There's a new project called the Miami Design District, which will be beneficial.
But it's fairly broad based, fairly broad based, good domestic what we call domestic tourism. So it's Mrs. Sage going to Chicago for the weekend and buying herself a piece of jewelry, It's that type of thing. So it's very healthy.
All
right. Thank you very much.
Thank you. I think we've got time only for one more question. So I don't know if there's anybody else who would like to raise a question.
Yes. The last question for today comes from William Hutchings from Goldman Sachs. Please go ahead, sir.
Good morning, Gary. Good morning, Sophie. Thanks. Hi, Will. Getting me in right at the end.
I had two questions. First of all, about just bigger picture. Over the last 10 years, your retail share as a group has increased by 15% of the group. And what I suppose is surprising about this sort of tough trading period in this down cycle is that actually the retail and wholesale business is growing quite close to each other, whereas in 2008, 2009, we saw a big negative in wholesale and retail held up much better. I wonder if you combine that with your sort of thinking going forward.
Is this sort of towards getting towards the end of this mix towards more direct retail? Or will we see that shift continue? And I do have one other question as well.
Well, I think hopefully we've on the retail wholesale split, hopefully we've learned some lessons, right? Clearly, there are less wholesale doors than there used to be. Why? Because the online business for particularly Cartier and Montblanc is growing. We tend to monitor the wholesale inventories a bit better than we used to.
As I just said Cartier is really shifting to a sell out model than a sell in model, if you will, in America. And is this the end? No, we've always said that there is 2 well, we've always said there's 2 channels, 3 channels, right? There's retail, franchise boutique and wholesale. We still believe in that.
And then there's a 4th channel, which is e commerce. So I don't think we're very opportunistic as you know, But we would always rather do an owned store ourselves if we can do it properly, right? And as I said, I was heartened to see that we tried to go through and see if we had a lot of mistakes out there and we don't.
Okay. And that links straight into the second question, which is about e commerce. When you I would imagine one of the challenges for you is where you are selling your product wholesale is how do you control your 3rd parties putting that on their own online platform and you sort of lose control of price compared to what's the priority? Is it always going to be the priority for you to grow Cartier.com? Or are you sort of agnostic if third parties want to sell Cartier or other product on their sites?
Will you allow them to do that?
Well, I think we're pretty clear on that. We're somewhat agnostic, I would say, in that if an authorized retailer wants to sell online, he can do so, but under a playbook, if you will, how the site is going to look and what have you. And we call it the bricks and clicks strategy, right? If somebody wants to sell online, he's got to have bricks first. That's why you don't see any of the specialist watchmakers or Cartier on Net A Porter because they don't have bricks.
Yes.
Right. So the reality is and you can see through our Net A Forte experience to do online properly, it's not the cheapest thing in the world, right? So if you're an independent retailer to do it properly, it's pretty expensive from an infrastructure standpoint. Yes. So we don't have I mean, there's probably a handful out there, Will, but it's not very material at all.
No.
Fantastic. I suppose you would tell us what your percentage of sales is on direct e commerce?
Well, I mean, it's small. Well, I mean, it's growing at a very fast rate. In typical Richemont fashion, some of the brands are early adopters and others are not. And in terms of Net A Porter, I mean, the look through is look at the clothing number, right? And you get a sense there for Net A Porter.
Okay. Thank you so much.
All right.
Thank you, Will. I think this is it. So the webcast is over. Thank you for your participation. And if you have any additional questions, please do feel free to call me later.
Have a good day.
Thanks for your attention.
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