Ladies and gentlemen, good morning. Welcome to the Compagnie Financière Richemont full-year 2015 interim results presentation. I am Alice, the current 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&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Sophie Cagnard, Head of Investor Relations, and Mr. Gary Saage, Group CFO. You will now be joined into the conference room.
Good morning, everyone. For your information, the press release and financial presentation are available for you to download at richemont.com on the homepage and under the Investor Relations section. The audio archives of this webcast will be available today on our website at 2:00 P.M. Geneva time. Before I hand over to Gary, let me remind you that the presentation contains forward-looking statements as that term is defined in the 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. Richemont 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 Richemont operations. I will present the Maison's main developments before handing back to Gary for the financial review and conclusion. This will then be followed by a Q&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 franc. 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 billion EUR 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. Although sales to the Russian consumer dropped in Western Europe, sales in Russia domestically for us grew by 9%. On a Maison level, Van Cleef, A. Lange & Söhne, Roger Dubuis, Montblanc, and Net-a-Porter did particularly well. 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 2009. 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% in the first half. 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. On a Maison basis, Van Cleef, Roger Dubuis, 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 writing 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 fourth quarter 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 Montblanc agents. Third-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 Montblanc with new products and have 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 start with the jewelry Maisons. Sales rose by 1%. Jewelry as a product line continued to perform strongly both at Cartier and Van Cleef & 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 Van Cleef & Arpels profitability continued to improve. Please note that all the sales commentary that follow on a concentrate 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 Paravane necklace on the slide from a new Cartier Royale high jewelry collection has been sold for close to EUR 2.5 million. 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 a Cartier New York Fifth Avenue and Ginza Tokyo mansion are due to last until the end of our fiscal 2016, 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 2016. Van Cleef & Arpels, which had an excellent performance across all regions except in Japan and across all product segments. The Perlee Yellow collection is becoming a new pillar, and the new high jewelry collection, Peau d'Âne, started to generate significant sales. Here on the slide is a Robe Couleur du Temps necklace sold for over EUR 1 million. In watches, the new Gold Charms and Lady Arpels Cadran Extraordinaire performed well. Dubai Mall boutique was renovated in a fairly stable retail network. Our specialist watchmakers. The financial performance was impacted by two main factors. First, the persisting Forex headwinds, which accounted for close to one-third of the operating deterioration. Second, local environment in Hong Kong and Macau, which has particularly affected Piaget.
The healthier operating contribution margin was down to 28% of sales. Let's look at the individual Maisons. First, Piaget. Worth recalling 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 Piaget high jewelry collection, did not compensate for the decline in watches, even though its iconic ultra-thin Altiplano collection continued to sell very well. Piaget's project to increase the capacity of its 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 above EUR 300,000. The extension of its manufacturing facility in Geneva is due to be completed next summer. Let's have a look at A. Lange & Söhne.
Demand for the whole collection, in particular, high complications and anniversary models continue to be quite robust. For example, the 1815 Tourbillon and the Grand Lange 1. The extension of its manufacturing site is expected to be completed next summer. 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, Rendez-Vous. The Maison opened its first boutique in Florida at Aventura Mall, bringing its retail network to 68 stores. Let's look at IWC, which generated good growth sustained by most regions. The Portugieser and Portofino lines continue to be among IWC's bestsellers, the launch of a new Aquatimer line also positively impacted sales.
Moving on to Officine Panerai, 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 Luminor 8 Days model with a P.500 in-house caliber. Since this April, Officine Panerai is benefiting from a brand-new manufacturing site in Neuchâtel. Let's turn to Baume & Mercier, whose organic sales were strong in China, France, and the Middle East, ended up slightly above last year in total. Baume & Mercier's pillars, namely the Clifton and Classima lines, did well, while the new Promesse feminine line is off to a good start. Worth noting is Baume & Mercier's new celebration ad campaign with photographer Peter Lindbergh. The other business area where the operating contribution was a EUR 21 million loss.
Improving results at Montblanc, Net-à-Porter, Richemont's unbranded watch component manufacturing have been offset by a deterioration at the other fashions and accessories Maisons as anticipated. Let's look at the main developments of Montblanc these past six 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, by an active retail merchandising action, 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 EUR 30 million one-off booked last year, on the negative side, the integration costs into the Richemont shared service platform and impact of the internalization of a Korean store. Next, Alfred Dunhill. The maison suffered difficult trading conditions given its large China exposure and the rationalization of wholesale. Japan, however, showed growth in JPY 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 Leibovitz. Let us move on to Lancel, whose decline in sales derives 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, Lancel supply chain is being reorganized to improve time to market. Turning to Chloé, 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 Drew bag. Worth noting also is the August launch of the Love Story fragrance. Finally, Net-a-Porter registered strong growth worldwide with Asia-Pacific website now taking off. I will now hand over to Gary.
Thank you, Sophie. We will 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 billion. 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 are 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 Montblanc, which did not occur this year, as Sophie mentioned. 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%, as a percentage of reported sale grew to 40% from 38%. You see on the chart the increases as normal, 3% related to new boutiques, 3% to increase communication costs relating to timing. All other expenses, which are S&D and admin, 3%. This was offset by Forex of 1%. S&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&D expenses grew by 9%.
This growth rate is below the 11%, which we had indicated for the full year in May. The 12% increase in communication costs can be partly attributed to the Paris September high jewelry event, where we now have four 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 EUR 215 million in the first half, compared to an income of EUR 69 million a year ago. The EUR 284 million swing can be primarily attributed to two factors. First, we incurred EUR 239 million of mark-to-market in losses with respect to our ongoing and unchanged hedging program. In the prior period, we experienced net gains on mark-to-market of EUR 127 million.
With respect to fair value adjustments, we experienced a loss in the value of our U.S.-based interest rate swap of EUR 8 million in the period versus a gain of EUR 10 million in the prior period. Let's now move to net profit. Net profit for the period was EUR 907 million, 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 EUR 1 billion 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, Giampiero Bodino. Inventory grew by EUR 269 million compared to a growth of EUR 56 million 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 EUR 211 million compared to EUR 202 million in the prior period. Finally, the ongoing settlement of derivative contracts generated cash inflows of EUR 13 million for the period, compared with EUR 49 million inflows in the prior period. Let's take a look at our capital expenditures. Capital expenditure was broadly in line with the prior year.
We invested EUR 260 million, 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 six 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, Lange 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.
As Sophie mentioned, we have a number of major boutique renovations ongoing, such as the Cartier Mansions in N.Y. and Tokyo, and the Van Cleef & 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 Meyrin campus project. Let's now discuss free cash flow. Free cash flow was EUR 397 million for the period, a decrease of EUR 452 million 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 EUR 4.3 billion, compared to EUR 3.9 billion 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 EUR 1.2 billion were held in Swiss francs. Let's now head toward the conclusion, first, some color on October sales. October sales declined by 1% on a constant rate basis, but grew by 4% on a reported basis, with foreign exchange starting to be favorable. As we've seen in the six 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. Asia's underperformance is somewhat reflecting an unfavorable basis of comparison. If you remember last year, Cartier experienced quite high jewelry sales in Asia in the month of October. Before we conclude, let's look at the 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 N.Y. As our N.Y. 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 $700 million. The property we acquired back in October 2012 for $375 million.
We will have an operating gain of approximately EUR 226 million 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 EUR 126 million. 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 selective 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.
We expect communication to continue to be in the 9%-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 is 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 of October, and Piaget manufacturing went live this summer. We've started the work to implement the distribution systems in Hong Kong and the manufacturing systems at Panerai. 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 weather 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. Anyone who wishes to ask a question may press star one on their touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use only one line as well asking a question. Anyone who has a question may press star one at this time. The first question comes from Luca Solca from Exane BNP Paribas. Please go ahead, sir.
Yes. Good morning, Gary and Sophie.
Hi, Luca. How are you?
Yeah, very well. Thank you. How are you?
Yeah.
A couple of questions on jewelry, just to understand the growth dynamics there. Do you see a broad-based growth at all price points, or are the entry price points or the higher end providing a better growth support? Just to understand the underlying growth trends, how material was the Biennale in the growth that you've been posting on jewelry sales?
Okay.
Yeah, go ahead.
Luca, the jewelry at +10%, I would say it's very broad-based, okay? 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. If you strip that out, the jewelry sales are broad-based and quite robust. I would say the Biennale 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. 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. For us, mostly it's a franchise network for us, except for Dubai. No, the growth has been good, and 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 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, 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. The growth for Net-a-Porter continues to be extremely resilient across all three of the platforms.
You're experiencing operating leverage on the back of that growth?
Yeah, we're now, I'm happy to say, break even, a little profit at the end of the first half. We're getting there.
Excellent. Thank you very much indeed, Gary and Sophie.
Okay.
The next question comes from Thomas Chauvet from Citigroup. Please go ahead, sir.
Good morning, Sophie and Gary.
Good morning, Thomas.
I have three question, please. The first one on watches. What is the situation at Cartier Watches and perhaps some key specialist watch brand in your key wholesale markets of Hong Kong, Macau, Europe? Can you comment on the sell-out in October in particular, and inventory levels at your key wholesale partners? Can you also confirm on watches that only the Cartier Watch factory of Villars-sur-Glâne is subject to part-time work, or are there other manufacturer subject to? 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 diamonds on steel watches, which is a new category for them. 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. Piaget is suffering because of its Asian exposure. That's what I would say there. Cartier is the only one to announce short time, and that's where we are at the moment. We obviously look at this on an ongoing basis. I'd rather comment to our employees if we were going to do something rather than you, Thomas, with the greatest respect. 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, do you feel more positive about margin development in the second half? Also, you'll have FX tailwind, still some input cost benefits. Well, Thomas, we never project sales. We never project exchange rates. I would say the first half, the environment has been difficult. It's been volatile. 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. Okay, let's see. I can't give you any projections because I just don't know. We feel it's appropriate to, given the volatile environment, to just keep the costs under control.
Okay. Finally, a question on Montblanc. Good news that the top line is back to mid-single digit growth and probably the best sales performance in nearly three years, but margins are once again down 250 basis points, 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?
Yeah. Thomas, I'm not worried at all about Montblanc. 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. Remember, they used to be separate. There tends to be one-time cost 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. I'm not worried about Montblanc. In terms of operating margin, where it's going to go to, well, it should improve, that's for sure. I'm not going to be drawn into a target.
Okay. Very clear. Thank you, Gary.
Okay.
Next question comes from Antoine Belge 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. What's your analysis of what's happening in Hong Kong? Do you see this as a bit of a structural trend, or do you think that after a period of uncertainty, Chinese travelers will be resuming travel, maybe elsewhere? What's your view on this? If this is only a temporary thing, then do we really need to be that cautious? Second question on the gross margin. You were kind enough to provide a 64.5% guidance six months ago. Maybe can you update that? Especially, even though I know you don't want to be drawn into quantitative comments, but is it fair to say that in the second half, the gold impact will be actually more significant than in the first half?
Also that capacity utilization, however, could be a negative factor for you. Finally, just on Piaget, could you be a bit more precise about the impact? I think when you mentioned the EBIT margin development for specialist watchmaker, that a lot of it was linked to Piaget. So what was the EBIT in EUR term, actually the variation versus the last semester? Thank you.
Okay. Antoine, 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. We don't know. Having said that, though, the rest of Southeast Asia is pretty good. Even if you look at mainland China as a business, we were -4% in constant basis in the first half versus -10% last year. Things are getting a little less worse there. That could be a positive. I can't really project. That's not us. In terms of the margin, and again, you know the way I do it, Antoine, I take the average rates for the first six 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, 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 two-thirds, most of it was related to Piaget, if I can say it that way.
Okay. Maybe just a clarification on Hong Kong. If I estimate Hong Kong down around 25% or 30% in October, will that be far from the reality?
Honestly, I don't have that, Antoine. I only have it by region.
All right. Thank you.
Okay.
Next question comes from Helen Brand from Barclays. Please go ahead, madam.
Hi. Good morning.
Hi, Helen.
Hi. 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? Going forward, obviously, we're seeing some mix shifts there. When do you think you expect those mix shifts to stabilize? Just secondly, in terms of the specialist watchmaker's margin, obviously you've kindly given us the FX impact.
Flagged Hong Kong. Was there any impact from that manufacturing subsidy from the group shifting back into the watchmakers in the first half? Finally, if I could just ask a question just on the working capital step-up, which I think was EUR 269 million in the first half. How much of that was related to jewelry? Are you still expecting the inventory, sorry, up EUR 600 million for the year?
Okay. Helen, I think what I've said on the Cartier watches is what I'm going to say. Minus one. 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 have been shifted over to the specialist watchmakers. 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. I don't think it's a huge effect. In terms of the inventory, remember in May we said we wanted to add about EUR 600 million 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 EUR 450 million, and most of it in the jewelry.
Having said that, as I said, the watch rotations are a little higher, but it's manageable and we're not worried.
Perfect. Thank you very much.
Okay.
Next question comes from Jon Cox from Kepler. Please go ahead, sir.
Yeah, good morning, guys.
Hi, Jon.
Good morning, Jon.
I have a couple of questions for you. Just some of which are technical and then others sort of a bit more operational. Just on the negative marking to market, given what's-
Good for you, Jon. I'm glad it finally came.
As I was saying, what are you guys up to in the finance department? Anyway, given the currencies today, would you expect that most of that will unwind in H2?
Well, Jon, it's a very unique situation at the moment because remember what's really happening here. Through the first half, the income statement's on an average rate. The exchange rates have been negative. Now they turn positive for us in September, and you saw they were positive for us in October. When we have to mark the market, the contracts, it's done at spot rate. 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. Dollar-based. The movement in the dollar against the Swissie has been 6% since March 31st. Sorry, the euro. 3% in the month of September. 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. That's what it is. The good news is, however the rates are gonna go at any one point in time, I reflect the actual situation. That's all I can say. I can't predict the exchange rates, which way they're gonna go, though.
Okay. 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 at the closing rate, there wouldn't be any more movement in the mark-to-markets. The gross margin should get a little better. I've already given you what the gross margin's gonna be, assuming that the closing rates are gonna be used for the rest of the year.
Okay.
Yeah.
Okay. Just on the CapEx side.
Yeah
I think some of us anticipated maybe you would rein in 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? EUR 900 million is quite a big number.
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 continue to be committed to. We probably have one 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 Meyrin project continues. 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. This was heartening for us.
I have a out-of-the-sky gain that everyone will discount because it's one-time, and they should. 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 Lancel and dunhill and Montblanc. Okay, we might take a look at some store closures, but it wouldn't be hugely material.
Okay, you're still on for 90 stores this year?
Yeah.
Yeah.
Yeah, without any closures. If we closed, it might cost about EUR 15 million. I don't have that yet.
It includes internalization, right?
Yeah. Remember, the 90 stores includes internalizations as well, Jon, right?
Yeah.
Yeah.
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 at the end of the half? Also the split, because you said, I think, your own retail sales are actually being positive in China, and it's the wholesale channels that remain pretty weak.
Yeah, I think that's right. I think things are gradually improving. We're still down. It's getting less work, Jon, let's be honest, right? We're still minus, right?
Yeah.
Yeah.
Okay. 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, Jon. I was clear in saying that we would certainly improve Net-a-Porter and the manufacturing, Montblanc would get a little better. They have. That's been offset by primarily Lancel and dunhill. We certainly said dunhill would get worse before it gets better. We're in that phase right now. I think Lancel, the new management team is there. They're probably a little further along in things than dunhill, 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.
Yeah
Have the losses been transferred to the watch Maisons now, and that's the reason for the improvement? Or are you still.
Well, as Helen said, partially. Okay, remember last year, so fiscal 2014, we said we had EUR 25 million of subsidies. Right? Those subsidies for the full year. You can make the argument that half of those have been transferred to the specialist watchmakers in the first half. 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 JP Morgan. 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?
64.9% for the full year.
For the full year?
Yeah.
Okay, perfect. The second question is on Cartier watches. 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 sell-out is panning? Can we expect a difficulty still for some months to come, or is it flattening a little bit? The third question is on Japan. Japan was still actually pretty weak into September, and you mentioned it has been weak again in October. When did you think, or can you actually comment, when do you think Japan could actually turn positive for you? My fourth question is on cash flow. Clearly, you're showing very good cash flow generation, even in periods of times of deceleration and of working capital investment. What can we expect in terms of dividends and cash flow generation?
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 a surprise to us, but I wouldn't 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 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. That's still in our thinking. Do I think it's going to grow by 40% next year? Probably not.
Sorry, can I come back to jewelry and gold watches?
Yeah.
Are you seeing an improvement in the sell-out trend or not at all?
Not particularly, no.
No. Not yet.
No.
Thank you very much.
Sure.
Next question comes from Patrik Schwendimann from Zürcher Kantonalbank. Please go ahead.
Hi Gary. Hi Sophie.
Hi Patrik.
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? Also the same for Japan, please. Thank you.
Okay, I got to check my figures here. I would say this, Patrik: Japan was down, but it was a little less down. Asia was worse. Asia Pacific in total was worse because of Hong Kong and Macau. Very different.
worse means minus?
Just worse. Okay. Again, as I said, to be -1 and +4 in total could have been worse, huh?
Sure.
Yeah. Could have been worse.
Sure.
The implications there is Europe and the Middle East and America was pretty good.
Mm-hmm. Similar to H1 then?
Yeah.
All right. Perfect.
All right.
Thanks, Gary.
Yeah. Thank you, Patrik.
Next question comes from Mario Ortelli from Bernstein. Please go ahead, sir.
Good morning, Gary. Good morning, Sophie.
Hi, Mario.
Good morning.
Two questions from 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? If in October, you have seen a change in the touristic flows in Europe improving or decreasing? The second question is about the Cartier watches. This is an area of subdued business of the company since many quarters. 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 la Haute Horlogerie in January, or we have to wait other time? Thank you.
Okay, Mario. 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 nine. That was interesting. I think on the Cartier watches, 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 five years. In terms of new products, there is a new product coming in SIHH this January, which Cartier is pretty excited about it. Okay, 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 down as.
They were not as much impacted as actually tourist flow from Americans, Middle Eastern, or even top Russians.
Yeah, Mario, I think let's not obsess necessarily over a particular category of consumer. Clearly because of the strength of the euro, it wasn't as attractive to buy in Europe.
Okay.
That certainly had an effect. That's all I'm gonna say, yeah.
Thank you very much.
Okay.
Next question comes from Rey Wium from Investec Capital. Please go ahead, sir.
Hi. Good morning.
Hey, Rey.
Morning, Rey.
Just a few questions. I just want to have an idea, or maybe you can just help understanding. The Forex rates have changed substantially. I'm just thinking in terms of pricing. The yen has weakened again. Would you consider raising retail prices in Japan, per se? With Europe, the slowdown in the travel market. 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. 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?
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 EUR 99 million, and the increase in the debtors, that was up 39%. If you maybe can just talk about that. Thanks.
Okay. On price increases, I know some of the brands have done something in Russia. The Japan weakness is a relatively new occurrence, Rey, 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 Biennale marketing spend, four brands exhibited. The two jewelry Maisons, Piaget and Giampiero Bodino. I don't have that detail to hand, but I think the takeaway, Rey, 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.
That's what that is. On the debtors, you're talking about receivable debtor? I mean-
Yes.
The movement was very similar to the movement between March and September of last year, around about CHF 200 million in both. I think it was CHF 211 million this year and CHF 202 million last year. That's normal seasonality, I would say. The portfolio, which is the most important thing for me, it actually improved. Last year it was 96% current. This year it's 97%. 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.
Yeah, I think the market has just been resilient. 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 partner's inventory. 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. It's fairly broad-based. Good domestic, what we call domestic tourism. It's Mrs. Saage going to Chicago for the weekend and buying herself a piece of jewelry. It's that type of thing. It's very healthy.
All right. Thank you very much.
Sure.
Thank you. I think we've got time only for one more question, 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.
Morning, Gary. Morning, Sophie. Thanks very much.
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. What I suppose is surprising about this sort of tough trading period and 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 thinking going forward. Is this getting towards the end of this mix, towards more direct retail, or will we see that shift continue? I do have one other question as well.
Well, I think, 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 sellout model than a sell-in model, if you will, in America. Is this the end? No, we've always said there's three channels, right? There's retail, franchise boutique and wholesale. We still believe in that. Then there's a fourth channel, which is e-commerce. I don't think we're very opportunistic, as you know.
Yes.
We would always rather do an own store ourselves if we can do it properly. Right? 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. That links straight into the second question, which is about e-commerce. I would imagine one of the challenges for you is where you are selling your product wholesale is how do you control your third 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's going to look and what have you. We call it the bricks and clicks strategy. If somebody wants to sell online, you've 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.
Yeah.
The reality is, and you can see through our Net-a-Porter experience, to do online properly, it's not the cheapest thing in the world. If you're an independent retailer, to do it properly, it's pretty expensive from an infrastructure standpoint.
Yeah.
We don't have, there's probably a handful out there, Will, but it's not very material at all.
Not massive.
No.
Fantastic. I don't suppose you would tell us what your percentage of sales is on direct e-commerce?
Well, it's small, Will. It's growing at a very fast rate, in typical Richemont fashion.
In terms of Net-a-Porter, the look-through is look at the clothing number, 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. The webcast is over. Thank you for your participation. 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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