Annual results presentation. It's good to see you here. Thank you for those of you who are here at Richemont's headquarters in Bellevue, and thank you also for those of you joining the webcast and conference call. Presenting today we have Bernard Fornas and Richard Lepeu, Co-Chief Executive of Richemont, as well as Gary Saage, Richemont CFO. Before we start, may I kindly remind you to switch off your mobile devices. Thank you.
Good morning, everybody. It's a good set of results overall that we are presenting today when we take into account, first, the business environment that has continued to be subdued and contrasted by regions with, however, improvement in Asia-Pacific, the U.S.A., and Japan. Second, we recorded a substantial negative forex impact of five percentage points on sales. Third, Montblanc and Fashion & Accessories Maison underperformed. All in all, this led to a moderate growth in sales of 5% or 10% at constant currencies. The operating profit remained in line with last year at EUR 2.419 billion, generating an operating margin of 23% of sales. The 100 basis point reduction over the prior year is primarily attributable to forex and provision. Net profit is up 3% above the EUR 2 billion mark.
Net cash position was robust at EUR 4.7 billion. Free cash flow increased by EUR 900 million to an all-time high of EUR 1.8 billion, mostly fueled by increase in cash flow from operations and hedging gains. Let's look at our sales at constant rates in Europe. Please note that we will use constant rates to comment on the performance of the other regions as well. Sales rose by 9%. This rate reflects the following factors. Organic growth, as only nine stores were opened, primarily for our specialist watchmakers. We also benefited from renewed strength in domestic clientele. The impact of tourism continued to be positive, albeit at a lower rate. Van Cleef & Arpels and the specialist watchmakers performed particularly well. As to Russia, sales grew in line with the rest of Europe. Let's look at the Middle East and Africa.
Sales grew at 18% on a constant rate basis with a good momentum across the major countries. The region enjoyed the strongest growth rate with Japan. Most sales arose in Dubai and Abu Dhabi, where we opened six stores over the period. Sales growth was primarily generated by jewelry and premium watches. Let's turn to Asia-Pacific, our largest region with 40% of group sales. Growth rate improved to 6%, yet with persisting regional contrast. China was down 7.5%, with wholesale particularly affected while retail was stable. Markets like Korea, Malaysia, and Australia grew by strong double digits, while Hong Kong was close to group average. Growth was partly driven by mainland Chinese traveling to other Asian markets, prompted by price differentials. Van Cleef & Arpels, Jaeger-LeCoultre, IWC, and Net-a-Porter did particularly well. Let's now turn to the Americas region.
Growth accelerated from 11% - 14%. The Jewelry Maison, Specialist Watchmakers, and Net-a-Porter were the top performers. Overall, the region benefited from the opening of three internal boutique and from domestic tourism. Finally, Japan, which represents 8% of group sales. The 23% sales growth was fairly broad-based across most Maison and primarily organic. Growth was driven by an attractive price positioning after the 25% depreciation of the yen versus the euro, which was only partially offset by price increases. March benefited from high purchases ahead of the VAT increase that became effective on April 1, 2014. At actual exchange rates, sales were 1% down for the period. Let's move on to our sales by network. Retail generates 55% of group sales. Its 14% growth reflects the impact of, first, the good performance of our Maison boutique network.
Second, the opening of 42 net new internal stores. Finally, the continued strong momentum of The Net-A-Porter Group. The 6% growth in wholesale reflects continued cautiousness from our third-party partners. As you can see on this slide, jewelry continued to enjoy a strong momentum, + 18% at constant rates, the highest rate of all product categories. Watches grew more moderately at 8% after three consecutive outstanding years, primarily attributable to Cartier. Clothing is gaining traction, mainly thanks to The Net-A-Porter Group and integration of Peter Millar. Clothing is now our third-largest product category. Over to you, Bernard. Perhaps you can have this there.
Thank you. Thank you, Richard, and good morning, everybody. Here in the slide are the main points to remember about our Maison's performance. Profitability is nearly stable at extremely high levels at the Jewelry Maisons and specialist watchmakers. Results at Montblanc Maison were down on last year as a result of lower sales and one-off items, which reflect the restructuring taking place at that Maison. Results of other Maisons have been affected by soft sales and reorganization. The Net-A-Porter Group continues to show further improvement in sales, development, and operating results. Let's look at the main development, focusing on sales and product launches with each business segment. We'll start with the Jewelry Maisons. Jewelry as a product line enjoyed a stellar performance at Cartier and Van Cleef & Arpels.
It compensated for the moderate decline of Cartier watches on a reported basis, yet up on a constant currency basis. Cartier's profitability remained at a very high level, and Van Cleef & Arpels profitability continued to regularly improve. Overall, operating contribution remains broadly stable, leading to a contribution margin of 35%. Let's look at our specialist watchmakers. This segment, which accounts for 28% of sales and 32% of group profits, saw a mid-single digit to high double-digit increase in sales across its Maisons. A 6% increase in operating contribution was achieved thanks to pricing power, distribution, and product mix, improved retail network performance, which largely mitigated major Forex headwinds. All specialist watchmakers improved their results, including Baume & Mercier. Operating contribution margin was broadly maintained at 26% of sales. Let's look now at the main developments of Montblanc these past 12 months.
It has been a difficult year with sales down by 5% and with softness across product categories and geographies, in particular in China. Sales were negatively impacted by a number of factors. First, the weight of domestic Chinese and Western European clientele. Second, the closure of some point of sale to upgrade the Maison's positioning. Third, the acquisition of Montblanc's South Korean business completed April 1, 2014. This implied lower sales, but this acquisition should eventually help business take off in this very important Asian market. Worth mentioning is the promising development of e-commerce. In terms of profit, operating margin was reduced to 6% of sales. Remember that the lower operating contribution partially reflects the EUR 25 million of non-recurring item related to the Montblanc reorganization. Finally, the other business area where the operating contribution was an EUR 80 million loss.
The underperformance of Alfred Dunhill, Chloé, and Lancel impacted on the fashion results, which generated a loss of EUR 31 million after a EUR 23 million profit a year ago. This masked improving results at the Net-A-Porter Group and a positive contribution from Peter Millar on a full-year basis. Manufacturing entities losses were broadly in line with the prior year. Subsidiaries to the Maisons amounted to EUR 26 million for the year. As a reminder, our Maisons will no longer receive any manufacturing subsidies beginning in fiscal 2015. I would like now to give the speech to my friend, Gary. Gary, please.
Good morning, everybody in the hall. Thank you for coming. Thanks to everyone watching over the Internet, particularly our Richemont colleagues. Let's first look at our operating profits. It is roughly in line with last year at EUR 2.419 billion. Expenses grew as planned, with most of the increase coming from higher rental costs, depreciation, and increased IT spending. Operating margin was down to 22.7%, due primarily to the currency environment. Let's move on now to gross margin and expenses in more detail. The 4% increase in value terms in gross profit led to an overall margin of 63.4%. This 80 basis point reduction can be explained by a combination of positive and negative factors. On the positive side, our brands continued to enjoy sustained pricing power.
Obviously, the increased share of our retail business helped, and we enjoyed some favorable manufacturing variances. On the negative side, 110 basis points reduction relates exclusively to foreign exchange. In addition, as Bernard said, there were certain one-time items related to Montblanc, and that reduced the overall gross margin by 15 basis points. Let's now look at our operating expenses in detail. Net operating expenses grew moderately by 6% to 41% of sales. This rate of increase is broadly in line with sales on a reported basis. The increase reflects new boutiques, which added 4% to the overall cost base, communication costs +2%, and all other expenses, which are S&D and admin, added 4% to the cost base. This was offset by foreign exchange, also 4%.
S&D costs, which represent 55% of the total OpEx, rose by 6%, reflecting sales growth, higher rental costs, the opening of 42 internal stores, and network development on the wholesale side. On a constant rate basis, selling and distribution expenses rose by 11%. We maintained the communication ratio at 9.1% of sales. Communication costs rose by 4% in value terms. Administration and other expenses grew by 8% or 11% on a constant rate basis. This underlying growth reflects the continued strengthening of the Richemont shared service centers, our e-commerce initiatives, and ongoing rollout of our IT Gemini program. Now let's go for some detail on finance costs. Net financial expense rose primarily to our long-term U.S. dollar debt.
We benefited from a EUR 214 million gain from our hedging program. This compares to a EUR 120 million loss in the previous year. The moderate depreciation of the Swiss franc versus the euro meant in the period under review, we recorded non-cash gains in respect of our group investments and money market funds in the amount of EUR 2 million. As a reminder, last year, the gain was EUR 19 million. In summary, net financial income amounted to EUR 64 million versus an expense of EUR 47 million a year ago. Let's now look at the P&L items below operating profits. Net profit for the year rose by 3% to EUR 2.1 billion.
It benefited from significant gains on hedging activities, which I just discussed. The hedging gains offsets a little bit of the impact on sales and operating profit. Our tax rate for the year was 16.6%. This compares to 15.6% last year. The increase primarily relates to the geographical mix of our business this year. I would like to now focus on cash flow from operations. Richemont enjoyed a strong increase in cash flow from operations to EUR 2.875 billion. Given the stability of operating profit, the meaningful EUR 931 million increase in cash flow from operations results from a disciplined working capital management reflected in a limited 3% increase in inventory values. Rotations remain broadly in line with last year at 17 months.
Receivables continue to remain healthy at 95% current on the portfolio. This is similar to last year and actually increased by 1%. Finally, the settlement of our derivative contracts generated cash inflows in the period of EUR 118 million, compared with cash outflows of EUR 175 million in the previous period. Let's now look at our capital expenditures. Capital expenditures rose by 10% to approximately 6% of sales. Our investment program during the year was highlighted by the completion of certain manufacturing facilities, continued investments in our distribution networks, and the ongoing group project in Meyrin. When acquisitions such as the Montblanc agent in Korea that Bernard spoke of and the internalization of certain franchise locations are included, our cash outflow for the year was EUR 719 million.
We will continue our investment program in fiscal 2015 with increases in retail, with notable renovation and relocation projects. In addition, we continue our manufacturing investment in capabilities and efficiencies. We are fortunate as a group to continue to find investment opportunities in our existing portfolio, which generated solid returns on invested capital. We are further fortunate to have an experienced team of managers in all of our Maisons who allocate capital efficiently. Our outflows for the year that we expect in fiscal 2015 will be in the range of EUR 900 million. Now let's look at the nature of our investments made during the past 12 months. Our increase in capital expenditures was dedicated to expanding and improving Richemont's distribution platforms, our continued e-commerce initiatives, and our ERP system rollout called Gemini. In addition, we strengthened the Net-a-Porter Group. Manufacturing continued to benefit from investments to raise capabilities.
The big projects included a Cartier watch movement factory, which was opened in the fall. Initial costs related to the Cartier jewelry workshops in Switzerland, which is a long-term project. The Panerai manufacturing facility, a new facility which has been operational since February. We've had a number of projects with Vacheron Constantin, mostly expansion in multiple sites in Switzerland. The Lange capacity expansion in Germany continues, and we expect it to be completed in the spring of 2015. Finally, our Campus Moirans project for high watchmaking movement components research and development is in its initial phases, and we expect the initial phase to be completed in January 2016. Point-of-sale retail investments continued with the opening respectively of 42 internal boutiques and 26 external boutiques.
The most notable projects worth mentioning for fiscal 2014 were 17 new internal stores for our specialist watchmakers, most notably IWC and Panerai. Cartier and Van Cleef opened new locations in Abu Dhabi, and several boutique renovations occurred, most notably the Van Cleef flagship in New York City and the Cartier flagships in Geneva and Moscow. Let's now move on to free cash flow. Cash flow from operations, as we've just seen, financed our significant investment program. Free cash flow amounted to EUR 1.818 billion, a substantial increase of EUR 898 million over the prior period, primarily due to working capital discipline, as I've said, and satisfactory profitability during the year. Let's now move to our balance sheet. We continue to enjoy a strong balance sheet with equity representing 75% of the total, up from 70% last year.
Our net cash and investments position amounted to EUR 4.7 billion compared to EUR 3.2 billion in the prior year. Richemont's net cash position includes short-term liquid bond and money market funds as well as cash holdings. The cash holdings, which were held in Swiss francs, amounted to EUR 1.4 billion at the end of March. Let's move to dividend. Our dividend proposal to be confirmed by the shareholders in September is CHF 1.40 per share. This represents an increase of 40% over the prior year and reflects both our strong cash flow generation and our strategy of organic growth and our objective to grow the dividend steadily and consistently over the long term in good times and in bad. Some color on April sales.
April sales grew by 1% on a reported basis and by 6% on a constant basis. This is to be compared with a 13% increase in April of last year. The growth was driven again by jewelry and on a regional basis, America and the Middle East. All regions experienced growth in reported terms except for Japan, which continues to be primarily affected by adverse foreign exchange effects. Excluding Japan, sales grew by 8% at constant currency and 4% at historical rates. The retail channel continues to outperform wholesale in all regions except for Japan. Thank you. I would like to now hand the presentation back to Richard and Bernard.
Thank you, Gary. Thank you, Gary. Let's move now to the strategic directions, then we'll conclude. Our main objective is to achieve long-term organic growth, building goodwill rather than acquiring goodwill. We benefit from a very coherent portfolio of historic and authentic Maisons, each one with an important organic growth potential. We intend to achieve this objective by having, on the one hand, full control of our production, supply chain, and distribution. On the other hand, profitable growth will be achieved by having a consistent deployment of our business model across all the Maisons of the group. We invest in our Maisons to develop managerial competences, production capabilities, and product diversification within the Maison's DNA and their areas of competence. Let me give you a few examples. We'll develop the watch offer for Van Cleef & Arpels. We'll strengthen the jewelry segment for Piaget.
We'll accelerate the development of watches and leather for Montblanc. We'll focus on leather for Chloé now that the ready-to-wear is on track and growing well. Obviously, tailoring and leather for Alfred Dunhill. Last but not least, we'll develop perfume for Alaïa. For our fashion and accessory Maisons, both Richard and me will give full support to all our newly appointed managers by investing in product development, supply chain, communication, and distribution. This program will continue to impact on results for a while. Our products, as you know, have to be attractive and desirable. We need to be creative and innovative in relation to designs, but also materials and functionalities. We set up the Creative Academy to develop and nurture a pool of young, talented designers.
We invested, as you know, substantially in research and development for our new components and material, and recently sponsored the Microtechnique Chair at l'École Polytechnique Fédérale de Lausanne. No prestige product would last without craftsmanship to meet the needs of a demanding, traveling international clientele in quest for authenticity. This is why over the last five years, we have spent some EUR 800 million to increase innovation and control over the quality and authenticity of our products, as well as raise flexibility and sustainability. A good example is the integration of metallurgy production capacities for the manufacturing of watch cases and jewelry. Another example is the Campus Haute Horlogerie in Geneva that will house a watchmaking and Métiers d'art school, research and development center, and production workshop for high watchmaking movement components, dials, and cases.
Very soon, you will hear about the opening of La Ferme des Métiers d'art de Cartier, gathering under the same roof the key Cartier savoir-faire in a very genuine Swiss farm in La Chaux-de-Fonds. Richemont also invests in markets with promising growth potential. In the Middle East, we invested significantly in people, in distribution platform, and in retail. We now have 91 stores in Dubai and Abu Dhabi, and more in the future for the whole zone. In Africa, we are gaining insight into Nigeria, Angola, Kenya, in addition to the already very well-developed Moroccan business and to the directly operated South African market. In India, Richemont opened a distribution subsidiary and set up a joint venture with Tata for Montblanc's retail activity. In Korea, Montblanc acquired its agent, while in Thailand, Richemont has put in place local operations in view of the potential of this country.
For the growing Latin American market and clientele, we opened stores in Brazil and in the famous Miami Design District. To address the needs of a Chinese clientele, Richemont, as you know, organizes the Watches & Wonders fair in Hong Kong. Opened 45 stores in China in fiscal 2014 and set up a joint venture between Baume & Mercier and Total Watch for the distribution of Baume & Mercier in China. Richemont continues to invest in all its distribution networks. We selectively opened 42 net new stores, while a number of major relocation, extensions, and renovations took place, such as the enlarged Van Cleef & Arpels New York and relocated Cartier Moscow flagship from Stoleshnikov to Berlin House. We deployed state-of-the-art e-commerce platform across the world to enable our jewelry Maisons, the specialist watchmakers, and Montblanc to sell online. U.S.A. and Europe are already operational.
Japan and China will follow the fiscal year, this fiscal year, with Asia-Pacific the following year. We are finalizing an innovative distribution and supply chain concept to improve the productivity of our multi-brand watch retailers by helping them better manage their inventory and penetrate new territories where operating our own retail would not be profitable enough. Finally, we aim to ensure a first-class experience to our customers through strong and efficient service platforms worldwide. Experienced and qualified sales staff, state-of-the-art websites with concierge and e-commerce capabilities. We continue to improve our after-sales platform all over the world. Through our e-commerce and concierge services platform, we offer our customers a true omni-channel experience across multi-touch points, including telephone, mobile devices, and social media applications. We already operate now concierge service in the U.S., Europe, and Japan. This year, we launch in China, followed next year by Asia-Pacific.
Our customer call center ambassadors are multicultural and multilingual. For instance, on our Amsterdam center service, we service European customers in six languages, in English, in French, in German, in Italian, in Spanish, and in Russian. This across more than 100 countries. Our e-commerce and concierge services also aim to fully support the growing overseas luxury travel market. We have moved a lot on that direction. Now, Richard.
Thank you, Bernard. Now some insight on the Richemont business model. Richemont business model combines autonomy of Maison in terms of creation, marketing, and production, with leveraged consistency of services and control through Richemont operating companies and shared services, meaning support functions, platforms, and ERP. The Maison autonomy side of Richemont business model enable us to attract and retain management with entrepreneurial profiles. We are now applying the same philosophy to our leather and fashion accessories Maison. For Montblanc, since last July, we have in place a strong entrepreneurial team with high creativity, led by Jérôme Lambert that most of you know. For Alfred Dunhill, we have now an experienced management in apparel and leather with an entrepreneurial spirit led by Fabrizio Cardinali. They are focusing on products, distribution, and customer experience, building on the existing high awareness of Alfred Dunhill.
For Lancel, Marianne Romestain, a former Cartier executive who has subsequently acquired a strong experience in leather and retail, is now in charge. Sharing Richemont business model and aligning processes across all Maison is a critical success factor. Our industry is characterized by few major luxury groups with the means to develop retail and in-house manufacturing. Today, the higher barriers to entry make it difficult for small independent brands to develop profitably. We have, Bernard and I, therefore, definitively opted for full integration of Montblanc and the other leather and fashion accessories Maison into the Richemont operation platform. We believe that it is the only way to bring the underperforming Maison to a level of profitability that is appropriate.
The sustainability of the Cartier performance over the years, the significant improvement of the contribution of Van Cleef & Arpels and Watch Maison, including our last acquisition, Roger Dubuis illustrates the efficiency of the business model. Let's now conclude by summarizing the main strategic objectives. We want to achieve long-term organic growth. We want to increase our Maison equity, thereby building goodwill.
This goal will be achieved through control over production, product development, and distribution. Ability to attract and retain entrepreneurial and creative management, as well as skilled craftsmen. High product quality and outstanding customer service. World-class group shared services offering leverage, control, and consistency. We remain committed to doing business responsibly. We intend to increase our undisputable leadership in the high-end hard luxury sector, which covers watches and jewelry. In other words, what we call prestige products. We are committed to generate value over the long term, steady cash flows, and sustainable dividend growth over the long term. Thank you. Now Bernard , Gary, and I will take your questions.
Before we start, if you kindly announce your name and your company's name for benefit of everybody here in the room and also the webcast viewers. Thank you.[inaudible]
Good morning, Antoine Belge, HSBC. Three questions. First of all, on Cartier, I think you mentioned that Cartier had a slight increase in watches at constant currency versus 10% for the group. It seems that more recently there's been some a bit of a pickup on at least in terms of maybe not yet in sales, but in terms of the product that you've been showcasing in your most recent watch fair. Maybe can you elaborate a little bit on how you see that part of the business picking up in the current fiscal year? Second question relates to the gross margins. Obviously you're going to have quite a substantial tailwind from gold prices.
I remember that last year, I think Johann Rupert indicated that a $100 valuation at the price of gold would have a $100 million impact, or slightly less to be pre-precise. I think that you always indicated that it would take time for that to impact your P&L. Any quantification of that will be helpful, and especially since this will be probably partly offset by some FX impacts. Finally, I think in your strategic presentation, you highlighted that you were really standing by all your brands, and that would also have an impact on probably SG&A.
I think SG&A was around 10% or 11% last year, less than the 14% that we saw in fiscal March 2013. In fiscal March 2015, should we expect more than 10%? Any indication on that would be helpful. Thank you.
Sure.
As far as your question on Cartier. Is this it? The question on Cartier, as I told you, the sales at constant currency have been up versus last year. I think now there are quite a number of new products coming on the market which have been very well appreciated by the trade and by the journalists, by the way. I like the new diver watch and a number of other products which will come on the market very quickly.
I think there is no, because you mentioned that, in the past that there is not major issues on stock now, in Cartier watch, especially on the Far East, where for some time the Maison was cruising at +40%, +50% at retail and maybe the retail wholesale partners were a bit too optimistic and then continued to order at a very high level. Obviously, when the market was a bit slower, then they had to absorb the stock. I mean, this is life of the Maison, obviously. What is important, I must say, is when you see, for example, that in China, the last Hurun study shows a phenomenal desirability for Cartier.
As you have seen, Cartier is again the most desirable brand for jewelry, the most desirable brand for jewelry watches, the most desirable brand for business watches. I think, and knowing the importance of Chinese, of the Chinese clientele, I think that Cartier is more on the right track now.
Antoine, are we starting a new tradition here where you get yelled at out of the blocks for all these questions, you know? No, I'm not. I'm not gonna comment on Mr. Rupert and what he said, but clearly there's gonna be a positive impact on the gold. I traditionally give you a targeted margin assuming all of the exchange rates that were evident in fiscal 2013 continue into fiscal 2014, so no change. I'm prepared to do that again, and it's 64.5%. On the S&D, I think S&D will probably rise 11% on a constant basis.
Good morning. Luca Solca from Exane BNP Paribas. You mentioned China, I wonder what is the status of high-end watches demand in China, considering the change of atmosphere, the anti-gifting drive, possibly rich Chinese taking a lower profile there? You mentioned growth drivers for the long term. I wonder what you see as far as your space growth and direct retail development potential going forward, what you feel is the appropriate like-for-like price inflation that your brands can sustain in the medium term. On another point, the networking capital approach that you have with multi-brand retailers, if you could tell us more. You mentioned that as one of the distinctive features of your approach to the channel.
Last but not least, where you see the fashion and leather goods brands development at the moment, and what are the most promising in that space? Thank you very much.
Okay. Thank you for your question. I will start first. Knowing that we will give you no indication for the sales growth for this fiscal, clearly. Coming back to China, we have to be clear on China. As you explained that sales were down by 7.5, you know that this famous gifting issue has impacted our business in China, especially for most of our brands, because most of our brands were the most regarded and offered as a gift. We assess that the business lost is between 20% and 30% depending brands. Actually, when you look at the decline of China, only 7.5, we may say that business in China was not so bad if you take into consideration so it is one-off.
Actually, we have experienced over the last six months a significant improvement in China. For the future, we don't know. What we know is that China continue to grow, even though some analysts said that it's not enough, but 7%-8% not so bad. We see that some other high-end consumer products like cars are still sold well. We of course, we take into consideration the purchases made by the Chinese globally and especially overseas. That the answer regarding China. Second question?
The working capital management with respect to the retailers.
Actually, our strategy remain the same. Of course, we develop our retail exposure, including for watch brands. However, we continue to rely on our development with wholesale by having perhaps less partner, but more partnership. That's the reason why we are concerned, and we are trying to help them to be more efficient, more productive, to be better partner. That, for example, we illustrated by the fact that we put in place, for example, a system of call in our organization Booster, but it's for boosting the sellout, which actually include within the management of a supply chain, the sellout of our retailers, helping them to manage better their inventories.
Don't forget that there are still a lot of potential for boutique, for retail in the world for most of our brands. I mean, there are basically 40 key cities in the world where we should be very well represented. Obviously, in all the emerging markets, there is still a lot of room for improvement, for development, and for penetration of our brands. I mean, the future on that retail is promising. As Richard said, it's vital to know now exactly what's going on with our partners on the wholesale side with this tool, Booster.
I mean, we really catch the market very closely and avoid that, you know, overstock of things like this be done, which obviously always create a little bit of a problem in the coming months after you have got too many products. This way of handling the wholesale is a very strong improvement compared to what it used to be five, 10 years ago.
Thoughts on fashion and leather?
Well, the fashion and leather, I mean, basically, has the same problem. Maybe a bit more, in fact, because, the potential for openings is enormous for covering the world better. Maybe you'll have a few question on the fashion and accessory brands. To come back to Gary's word, I mean, it's even more potential than we have on that respect. We go slow, for the development of this distribution for accessory brands. We want to go slow to be sure that we select the right targets in terms of cities, the right location, the right size, the right space, to really put in place a worldwide efficient distribution system for these brands.
Luca, to be precise on your store question, you know, we only sort of look out one year, right? We estimate that we'll open up 39 new stores this year across the portfolio. Okay?
On a net basis.
On a net basis. That number, however, is new locations, right? Bernard and Richard talked about the acquisition of the Montblanc agent in Korea, and we talked about the internalization of certain franchises, mostly for Cartier, right?
That will probably add about 50 additional stores into the portfolio. Right, it's just a shift from wholesale to retail. On the pricing question, you know, our pricing strategy remains unchanged. We generally try and pass along cost increases. We tend to do that early in the year. And if there are any exchange difficulties, we try and react, and I think the brands have done a good job doing that, particularly in Japan. Across the portfolio, I think this year's increases are about 3%.
We hope that the highest point for euro is behind us. That's very clear. We have been suffered a lot from the strength of the euro, and hopefully, we'll have some relief this year, but we don't know.
I-
Good morning. Chris Walker from Nomura. I appreciate there's lots of initiatives going on at Montblanc, but you talked about moving one or two stores across to Piaget. I was just wondering how the Piaget development is coming in terms of developing that jewelry business there. Secondly, on e-commerce, lots of initiatives going on across the group there, I think. What learnings are you taking away from both the European and the U.S. platform in terms of which brands, products, and price points are really selling well? Is that developing new customers or the existing customers for the brands? Thank you.
On the question on Montblanc, I mean, it's clear that the new CEO, as you know him, Jérôme Lambert, has done a phenomenal job at Montblanc during this last year with a great team. A lot of changes have happened because we have reorganized all of the Montblanc maison, I think with success. They are working very hard now on new products, product development, and on distribution, closing a number of doors around the world, you know, trying to sort out and come with the right distribution. They have about 500 retail stores now, both internal and external. I think at Montblanc today, we're cautiously optimistic, but we are optimistic because everything has been done.
Now, you know, there's always a lag time effect to get to the result, you might have good surprises on Montblanc. I think you were talking about.
In terms of season platform, actually, we know that we are in a growth industry, growth margin industry, and not focused primarily on cost. What we expect from Montblanc and other brands joining completely the operating platforms is less on the cost issue advantage than on the leverage. It's obvious that the development of Montblanc, for example, in Americas or in other regions, is related of the leverage of the group vis-à-vis the retailers, vis-à-vis the mall, even vis-à-vis the information of other brands get through by those brands. That's what we are benefiting now by having people who have been part of the core business like Jérôme Lambert. That's giving them immediately a fantastic leverage and much more rapidity, I would say, and can do things much faster.
On the ecommerce question, okay, where are we? We have our facility in Dallas, call center, concierge center. We've had that for a few years. We now have one in Europe as well. We are currently installing capabilities in Japan. That will be up in the fall of this year. We are starting a test in China with Montblanc, and that'll be later this year as well. Chris, you know how our place works. The brands, we don't necessarily dictate. The brands have to come to their own conclusion, whether or not they participate in the ecommerce. Me personally, I think they all should.
Certainly, the growth rate is higher for the watch brands than it is for Net-a-Porter, it's coming from a fairly small base. The two brands that have embraced it the most is Cartier and Montblanc. I think the watch brands are coming. Even I saw statistics the other day, if you take Baume & Mercier in the U.S., and you look at how much sales they did online this year, I think if you equated that to a independent retailer, it would probably be in the top 10 of sales performance.
[Guillaume], I think it would be wrong to isolate, I would say, the ecommerce sales, to judge the impact of having online sales. It's obvious that our clients, like most of you probably, when you want to buy something, you go on the site, and you want to know everything, including the price. Afterward, the shopping experience you want could be online or offline. There is a clear, I would say, relationship between the e-commerce impact facilities put in place in the region and the evolution of the business, including our own retail stores.
Self-service. I mean, don't forget, for a lot of you who know China, that most of the Chinese when they come to Europe, they know in advance exactly the product they will buy, and they know the price. It's why they do this quick purchase because everything has been prepared before. They go to all brand sites and, you know, go around their shopping. Not their shopping, but at least information in their country. They've got everything in their pocket when they come to Europe. They know what they want to buy, and they know what price.
Good morning. It's Francesca Di Pasquantonio from Deutsche Bank. I have a couple of questions. First, your CapEx. If I remember correctly, you mentioned CHF 900 million expected to be spent in next year. What are your projects? Where are you going to spend the CapEx? More specifically, how much of the CapEx will be allocated to the fashion and leather maison? Second question is about Japan and price increases. You mentioned you raised prices, you know, significantly to offset or try to offset the yen devaluation. It's just a curiosity, why would Japanese be bringing forward so much spending just for a 3% VAT increase when your prices must have been going up significantly more ahead of that? Have you announced more price increases for the next year?
As a third question on fashion and leather Maisons, I am interested in understanding timeframe and what your roadmap is for the brands in terms of achieving what you are saying your strategic goal is, which is value creation for the group, for the shareholders. As you mentioned, it is a very competitive industry and barriers to entry may be a little bit lower compared to your jewelry and specialist watchmaking Maisons. I'm curious to understand better what you think has changed now relative to one year ago when you were evaluating potential streamlining in the operations and what your timeframe to create better value is. Thank you.
Many questions.
Japan-
Yeah, just Japan. It's interesting question. It's obvious that you remember that we said we can fight everything but demographics, and that trend remains the same. What happened in Japan, you saw that new policy put in place. We don't know if it will be successful or not, but it won't change the long-term trend of demographic. That being said, the devaluation of the yen, of course, when you look at the dramatic increase of prices for the poor employees earning even more 2% or 3%, will be an issue for them buying our products. However, we know that in the meantime, the stock market in Japan has increased dramatically, and you should know that some Japanese made a lot of money.
We see in our business, especially in the high-end, the impact of this transfer of wealth in favor of Japanese, wealthy Japanese. The second point is Japanese is and will remain a destination for tourism for Chinese. Beyond the tension that appears from time to time, it's a very close destination. I have many friends, including family in China, they always consider Japan as a reference. We believe that a big part of the future of the business of Japan could be for tourism, which was absolutely close to zero, five years ago.
The interesting to see, the situation of Japan that you just mentioned. What is interesting is that we are in a country where the desirability of the brand is the most important thing because you know the cercle vertueux, as we would say in French. I mean, if you get the strong desirability, you will get the pricing power. If you get the pricing power, you will get the margin. If you get the margin, you get the profit. In Japan especially, because as Richard said, the prices, I mean, we're gonna increase the prices because of the pricing power of our brands. Obviously, for some of these Japanese guys, I mean, the products become expensive. If at the same time they are very desirable, they will buy, and this is what they did, and that they will continue to do.
In all these countries, I was quoting the Hurun study before, desirability is the name of the game. Brand equity is the name of the game. We check with all our brands that we are sure that everything they do in terms of products, in terms of communication, in terms of PR events, in terms of promotion, in terms of everything, that it will contribute to the brand equity. It will contribute to improve further the desirability of their brands. This is becoming crucial even more than before because we are living in such a volatile environment. Look at what has happened in China. It's a little bit the same.
If you are desirable, maybe the Chinese, they were hurt or the Chinese market was hurt by this corruption thing. They continue to buy because they will buy elsewhere because your brand is desirable. It was a chance that on one side that we are desirable because it shows that we did the job properly in China. Some other brands were less hurt because they were not desirable. Again, this is crucial today and we have to be very careful to build that on a long term for all our brands without any exception.
Fashion. Fashion and leather probably.
Well, fashion and fashion and leather. First of all, I mean, we've got a lot of fashion brands doing very well. Let's put it that way. Alaïa is a gold nugget. I mean, you get Peter Millar, another gold nugget. Chloé is making money. We come to the two others that I'm sure you've got behind your brain is Alfred Dunhill and Lancel. Alfred Dunhill, I think we've, we have got a phenomenal team now. Those people, they know what they are talking about. They were in the fashion business with the fashion cycles, which we were not before, to be frank with you. I think that they've put in place quite a war machine.
It will take time because obviously by the time you get with the right products and, you know, there are so many product categories like tailoring, like the leather, like the tie business, like all these phenomenal objects that they used to do in the past, the shoe business, takes time to develop all these, all these new products. They will come on the market in next winter, the winter season. Plus, you know, all the issues we were discussing before about distribution. There are some location to be closed. There are no location to be opened. There are new communication campaigns to be done and all this marketing analysis through the whole company being done takes some time. The same more or less applies to Lancel, what I just tell you about Alfred Dunhill.
Let's give them some time. At least Richard and myself are giving full support to these new teams put in place. It will obviously impact a little bit our result for a while. I mean, don't forget, we are talking small figures compared to the real business of Richemont with the watch and jewelry. Let's put it where it should be. Just to be reassuring you, we're working hard on that.
You forget mentioning Net-a-Porter, which is creating promising value for shareholders.
Francesca.
Francesco on the CapEx question, following on from Bernard's point. I think the CapEx in the fashion group is more or less gonna be the same as this year. Okay. There's not a big increase in spend there because, as Bernard rightly said, we have to get the product right. Let's get all the building blocks at the appropriate level before we start to think about distribution. I think the increase in the CapEx relative to this year will be in retail mostly. As I already said, we're only opening up 39 new stores. A lot of renovations, some big renovations. Cartier has started to renovate its Fifth Avenue mansion, which just started. They are also renovating one of the Ginza stores.
There's a lot of renovations. Certainly, to Bernard's point about Montblanc, I don't think there's many new stores there, but it's if I can say scrap and build, we use that phrase, right? Maybe they're moving from one location on Bond Street to another, you know. That's where the increases in CapEx are gonna be. Manufacturing, more or less the same, I would say, as this year as the projects roll through. There are a couple of new projects that we're thinking about. One is the replacement of our distribution center in Switzerland, which is as old as I am. We probably need to do something there. That's pretty old, as you know.
Patrik Schwendimann, Zürcher Kantonalbank. I was surprised by the good numbers for April because of this high basis you had and the VAT increase in Japan, and especially for Hong Kong, where you also had a very high baseline last year and also the year before. What's the current situation in Hong Kong that you are growing so good at, I expect, jewelry? Second question regarding the price differences. I mean, for Chinese travelers, it's obviously quite important to have cheaper prices outside of mainland China. Could you give-
Please.
I'm sorry. Could you give us an indication what the current price differences are, for example, for a typical Cartier watch, if you take the prices in mainland China compared to Hong Kong, compared to Japan and to Europe? Third question for Gary, you were mentioning the SG&A costs will increase approximately 11% in local currencies. Could you give us here a further split in terms of selling distribution costs, admin costs, and communication? Thank you.
I will answer just the question I've understood, which is the second one, price differences. Nothing new. Actually, what we try to do for across all our Maison is to be consistent in pricing for our customers. When they buy, for example, in Hong Kong, it's tax-free because there is no taxes in Hong Kong. Of course, when they come back in their country, they should pay the VAT and other taxes, importing taxes, and so on. They, they know that, they manage that. It's up to them to declare or not. That's their problem, but nothing new.
That's very clear that for the Chinese, it's one, and not the only one, but one of the factor explaining why they buy abroad because of course, it's less expensive buying in Hong Kong or in Europe for them. Nothing new for us. Remember Japanese tourism or Russian or most of the countries are of same behavior.
We follow the retail prices of all our brands worldwide. You know, for example, I've got that on the sheet. Every country, all brands, versus a worldwide price. Today it's clear that compared to 20 years ago, now the world is our market, is one market almost. You have to be very careful where you, I mean, the type of retail price you have there or there, because that will definitely influence the sales. This is something we track every month. Obviously, the brands don't increase every month, but most of the time once or twice a year, except in very specific cases like Japan, where, I mean, we're running after because the price, the currency fell down very sharply.
But you cannot put a +15% just like this one morning when you wake up. Obviously you have to do it in several times. I mean, this is something we track very carefully, because now, I mean, all these people are traveling around the world to get their price. What is the price of that? What is the price of this? They call on, you know, live when they're in the store. This is part of our job now really more than ever, because this is one market and not several markets.
Japan compared to China?
Currently compared to Japan, I'll keep that for me. China obviously is more expensive than Japan for two reason. One, because obviously the Japanese yen, you know, went down, and also because in China you have all these cumulative taxes, which even under normal conditions, we're putting the Chinese market something like 15%-20% more than Japan. Maybe in some cases it's more because of the Japanese yen. This is the interest of tracking on a regular basis so that you avoid big discrepancies, which we can see somewhere sometimes on other brands, because it would have very important consequences on your sales.
The important point as well is to apply a fair pricing policy vis-à-vis our consumers, and not to take advantage of currency. They know, and they should know that our pricing across the board is fair.
In the past it has happened, for example, to lower the prices in Japan when the Japanese yen was very strong. I mean, we thought it was fair to decrease the price, although in marketing terms, I mean, it's not really the best thing you think of. I mean, at the end of the day, you have to do it to be fair, and again, because you have got one market, which is the world. Every time we did that, it was a huge success because the consumer found immediately that we were respecting them because the Japanese yen, okay, was going sky high and they were worth nothing. Therefore, we decided to decrease the prices.
They should understand now why we increasing prices.
That helps. That helps.
The question on Hong Kong. The question on Hong Kong and getting in Hong Kong.
We said close to the average. Hong Kong has been clearly a little more difficult in the Asian region compared to South market where we are very booming. Macao also was very highly resilient, double-digit. Okay, Hong Kong was also related to mainlanders, and Hong Kong is more or less part of China. They close the border, okay, they buy at a lower price because of the taxes. That's all. We believe as well that most of the Chinese have already visited Hong Kong and after having visited once or twice Hong Kong, they want to visit other places.
It's a moving clientele and target and they go more in other countries like Thailand or Australia, and of course Europe. Of course, Hong Kong remain the biggest place for retailing with Chinese and will remain there.
Patrik, I thought I was gonna escape your questions, but I guess not, huh? Let's be precise, okay? Obviously the guidance I give is on constant currencies as if the same this year. I said selling and distribution expenses would rise by 11%. Administration and other expenses we expect to rise by 7%. In terms of communication, we think again this year between 9% and 9.5% of sales.
Good morning. It's John Guy from Berenberg. Three questions, please. First of all, with regards to Net-a-Porter, I think within the statement, you've said that Net-a-Porter is growing well above the group average. Is that double or maybe can we be a little bit more granular? You probably won't answer that, shaking head. In terms of the comments around that Net-a-Porter is also providing good value for shareholders, when you think about the evolution and the investment that you've put into further distribution, especially into the Asian markets, could you talk about maybe the underlying profitability excluding some of the distribution costs that you've already put into Net-a-Porter over the course of the last few years? That's my first question.
Second question, with regards to fashion and leather goods, with regards to the size and scale of the operation, you've acquired some smaller brands, Peter Millar recently. Are you going to look at very small acquisitions with a view of driving up the organic growth but not necessarily taking on any sort of big acquisitions? It's still a size and scale issue for you in terms of fashion and leather goods, is that something where you could effectively deploy some of the net cash that you have without any making any significant acquisitions? I think it's an area that you need to grow. Finally, with regards to Cartier, in terms of the EBIT margin, the standalone jewelry, EBIT margin for Cartier looks well above 40%.
In terms of the investment that you've put into that business over the course of the last few years, it's been pretty significant. How much more vertically integrated do you think you can take Cartier going forward? Thanks.
I mean, John, we don't, as you know, nice try. We don't disclose, we're not even gonna be drawn into a conversation about Cartier's EBIT margins. We look at the segment. With respect to Net-a-Porter, it is growing significantly higher in terms of sales as it has been. I think all three of the sites performed extremely well this year, so the Net-a-Porter, the MR PORTER, and Outnet. You know, I always like to I won't necessarily get into the level of detail that you're asking for, what do I always say? I always say, well, I, you know, we're looking for them to be breakeven. For the past couple of years, I've excluded the amortization, which is still there, one more year to go.
I've excluded the incentives. Basically this year they were more or less breakeven, everything included. Even a slight loss. A very good year for them.
Regarding acquisition.
Your second question, I would say that, we are busy today in building goodwill with the existing fashion and accessory brands that we have.
Cartier in terms of further vertical integration, can you comment around what more can you do with Cartier?
The max is 100%. What we know and has been proven over the years that highly selective brand, because of the creation of the wealth in the world, especially the wealth for the very wealthy, could continue to grow. The objective of Cartier is to continue to have organic growth at quite a decent number, which of course create leverage. The most important is to make the business sustainable and going forward, growing without damaging the equity of the brand. What we have not done over the years, and we continue to do.
Don't forget that there are more and more rich people. There are all these new emerging markets coming, like we were quoting Africa during this previous presentation, plus the number of rich people coming. I think there's another part of the iceberg where is in front of us.
In terms of category of products, you can mention what you have done actually when you added Cartier and for high jewelry, and you see the high jewelry segment.
Becoming bigger and bigger.
Just look at sales yesterday at the auction houses, the prices where have been reaching for Cartier products. Amazing.
John, I think, I think that, you know, we have been massively investing across all the brands, Cartier included. I think you would agree we're generating a fairly high return on invested capital, and there's we always look to do that. There's plenty of projects that we're pretty excited about. We wouldn't be investing CHF 900 million next year if we weren't excited about it.
I think Jamie.
Hi, good morning. It's [Jamie Badwal] from Goldman Sachs. A couple of questions from me. First one, just on your wholesale business. You've noted some caution there. I wonder if you could just give us a bit more color on the difference between your traditional, or what you'd be considered your traditional, distributors and then your kind of controlled wholesale space, to give us more color there. Secondly, you've noted the increase in expenditure towards distribution, particularly retail. I wondered if you could share with us your thoughts on the potential share of retail for Cartier, but also your other watch brands, especially in the context of them increasing their online share. Then thirdly, this point on building goodwill, instead of acquiring goodwill.
Given your the strength of your balance sheet at the moment, do you think we should be expecting continued high and elevated CapEx? Or would you prefer to return cash to shareholders, if not through acquisitions as kind of already been implied?
As we said, Gary, I think we are fortunate to have opportunities to invest our cash in our own business with highly and good return, as you have seen over the years. We are continuing to look at opportunities which not only increase our return financially, but also increase the authenticity, because by controlling more your production and going more upstream, like we do, for example, with the metallurgy today, is creating really better control of what you are doing with other benefits. That we will continue and we are really very open with all our the brands that they come with ideas and opportunities. Of course, we carefully, and especially Gary, look at every business plan. That remain our main objective.
Our priority remains clearly the organic growth. We never rule out that we would make no acquisition, but it's really a secondary objective and our objective really continue to invest in our own business.
Jamie, I think on the controlled distribution versus third-party distribution, we don't really have that data, but I mean, you know the way it works, right? I mean, the inventories in the franchise partners are controlled, you know, or managed, if you will, by us. That tends to perform like the retail business, you know, our retail business. In terms of CapEx, it's for fiscal 2016, obviously it's early days, a lot of multi-year projects, but we're thinking CHF 825 million at this stage.
Share of retail for watches.
Share Huh?
Share of retail for watches.
Share of retail for watches?
Yeah.
No, thanks.
Rogerio Fujimori from Credit Suisse. I have a question about Europe. In the presentation you flagged a bit of a lower activity from tourists. Just wondering if you could elaborate on that. Thank you.
Well, that's true that we have experienced a very good growth over the last two years in Europe, mainly driven by tourism. As you know, if you live in Europe, especially in the banks, the European clientele has been hit in most of our countries by the crisis. What we have seen last year actually is quite a good resilient, good growth with local clientele, which is very important and good for our brands because they have to remain relevant for the European clientele and less attraction for tourism. The answer is obvious. It is a Euro factor. Remember that tourists move according also to prices of trips and it's obvious that Europe has become less attractive in that respect, and especially for Chinese.
That's the reason why we have seen also booming businesses in South Asia, because of course the tourism has been redirected. That's more or less the situation as of today. We believe that Europe will remain a very important tourist destination.
The shopping experience has become more important than ever. I mean, in the past, people were less exposed to all these temptations of buying. Now when they travel for, you know, just for pleasure, for holidays, they also take into account the type of shopping they'll find. Obviously, the currencies will influence the whole choice. Take Dubai for example. I mean, you've seen Dubai recently, maybe. Dubai is booming because, I mean, it is now the hub for all the Chinese. There's not much to see in Dubai, as you know, apart from Dubai Mall, the tower and the shopping experience. Nevertheless, I mean, it is one of the most phenomenal hubs today from people coming from Asia.
Again, we cannot miss the trains, and we have to be everywhere at the same time to take into account all these Forex effects and changes and obviously the volatility of the world in which we operate today has forced us to be more reactive than ever.
That these people go where the airlines go. That may become an issue for Europe, going forward, when you see, of course, the Middle East carriers, doing so well and creating more and more connection. While, for example, Italy, which is a fabulous experience for shopping, is limited by its travel capacity in term of aircraft.
You know, the good example is I was in Dubai three weeks ago or four weeks ago, and the whole of Dubai was full. I was asking the question, and the answer was quite easy. In fact, one of the big company in China called Kans, it's a skincare company, the bonus of the 16 employees was given, and it was a trip to Dubai for three days. That was their bonus. They made an agreement with Emirates Airlines, and you had a, you know, round trip, you know, number of Airbus A380 going from one, you know, to the other and that during several days to move all these people to Dubai and back to China.
I mean, those events are really changing also our business because you can imagine when you have got all these people coming at the same time, almost in one spot, which is Dubai Mall, how do you handle that? If you want to continue to have the proper service, I mean, the service of excellence that we like to have in our boutiques, then you have to be organized. These new events have really changed the way of running the business if you want to remain at, you know, at that high level.
We may take a final question. [inaudible]
Mario Ortelli of Sanford C. Bernstein. Two questions, if I may. The first one is about Chinese consumer. We have, which percentage of the sales in your retail shops are done to Chinese consumer? The first one.
Hurry up. The second one.
The second one, if you think that China bottomed down finally, considering that in the comps going forward that we have for China, gifting has already disappeared more or less. Which kind of acceleration do you expect in the demand? The second one is about; you spent six months without Mr. Rupert. Maybe, I don't know if you're enjoying more or less working without him. I was wondering if he is confirmed that he would come back in September and if he will come back with the same role as before. Thank you.
Well, I mean, Mario, we've Mr. Istel disclosed in the press release this morning that he would be coming back as chairman. In terms of whether we enjoyed it more or less, if I answered that would be a career-ending move. Okay?
Depends on your answer.
Right.
Seeing us smile, we are delighted.
in terms of Chinese demand.
China, you know that sales in Asia represent roughly 40% of our business. Of course, in Asia, we sell to other clients that only Chinese. You can guess more or less that China and people from Greater China, I would say, represent 40+ of clientele. You know, coming back to math or demography, Chinese are 1.35 billion people. It's obvious given the creation of wealth in China that they represent a significant portion of our business. However, you don't have to minimize, of course, let's say the 60% parts of our business and many other regions like, of course, Europe, and we mentioned resilience of our business with local clientele. Americas, we're growing the faster over the last five years. Very important.
South America, which shopping more and more, especially in America.
Venezuela. Australia
Venezuela. We mentioned Australia doing fantastically well. Middle East, and local people in Middle East, absolutely booming. Of course, Chinese are very important people because there are very many. At the end of the day, it's just about math.
Thank you. I think, the session is finished.
Thank you.
Thank you very much.
Thank you, everybody.
Thank you for coming there.