And with us today, we have Mr. Rupert, Chairman Mr. Bernard Fornas and Richard Lepeau, co CEOs and Mr. Gary Sage, CFO. Before we start, we'd just like to apologize for the delayed publication emailing of our annual results announcement.
Fortunately, at 7:30, you could read the announcement on the webcast. And then we should start.
So
Thank you, Sophie. Good morning, everybody. The business has marginally improved in a continually volatile overall environment. Europe suffered no major crisis but many alerts. Election in the USA and China removed some uncertainties, while the new Chinese government dampened enthusiasm to buy luxury gifts.
Currencies broadly work in our favor, but have been quite volatile. Increase in prices of precious materials moderated and even declined for diamond. Growth remains driven by clientele from new markets, in particular from Asia. Chinese demand was weak at home, but quite strong outside Mainland China, notably in Europe, Macau and to a lesser extent Hong Kong. Demand from the European clientele was mixed, the one from the British, German and Swiss being pretty resilient.
The American clientele showed good momentum. These trends were in line with the Swiss swatch export statistic for the 3 months ended March. If you look at the table on the right, you will also see that over the past 10 years, the premium watch segment where we are particularly strong has registered the highest growth. In this context, sales momentum moderated to reach a low in December. Since then, sales have resumed high single digit growth towards long term underlying growth trend.
Sales for the year passed the 10,000,000,000 euros mark. Our turnover nearly doubled in 3 years. The 4% growth or 9% at constant rates reflected a positive ForEx impact of 5 percentage points and growth across business segments and regions, in particular in Europe and the Americas. Increase of 18% in operating profit led to an operating margin of 23.9 percent of sales. This was achieved thanks to a strong pricing power, improved manufacturing efficiencies, broadly positive currencies overall, Net profit up 30%.
Our main KPIs, I. E, cash flow from operations and return on assets, have continued to remain strong. Cash flow from operations increased further to €1,900,000,000 some €150,000,000 above last year. Return on operating assets amounted to 34% in spite of heavy investments in retail, manufacturing and system as you will see later. First, let's look at our sales at constant rates in Europe.
Europe remains our 2nd largest region with 30% of group sales. Sales in Western Europe rose by 14%. This rate primarily reflects organic growth and strength of tourism, although sales to German, English and Swiss clientele grew. Jewelry, watches and ready to wear did particularly well. Sales in Russia grew at a slower pace than Western Europe, reflecting a very high jewelry sales last year.
Now Middle East and Africa. This region account for 6% of group sales. Sales grew at 22% on a constant basis with good momentum across countries, locals and tourists. Most sales rose in Dubai and Abu Dhabi, where we plan to participate to further luxury mall developments. Sets were primarily geared towards premium watches and jewelry.
Let's turn to Asia Pacific, Richemont's largest region with 41% of group sales. The 5% increase in sales comes after 2 exceptional years in a row. The motivation in growth reflects a contrasted performance among countries. Macau, Korea and Taiwan showed double digit growth, while China was down and Hong Kong grew modestly, regaining momentum. Growth was partly driven by mainland Chinese in other Asian markets, prompted by a strong run over most of the period.
Product wise, jewelry and ready to wear outperformed. Let's now turn to the America region. Its growth rate has moderated to 11% after 2 outstanding years in a row. The performance of Richemont in the USA has been partially distorted by an exceptional high jewelry sales booked in October 2011. Overall, the region benefited from the opening of 24 internal boutiques and from domestic tourism.
Please note that Peter Millar, our last acquisition, has been included since September, but is a small contributor to sales. Now Japan, which represents Richemont's 4th largest single market in part with Mainland China. Japan contributed to 9% of group sales. The 6% sales growth was very much organic and driven by watches and jewelry. Sales momentum have strongly improved in Q4, partially helped by price increases announced for April May.
Let's look at sales by network. The importance of retail continues to grow and now generate 54% of group sales. Retail's momentum reflects the impact of 66 net internal stores, primarily in Asia Pacific, Brazil and tourist destination. The good performance of NET A PORTER and of the Specialist Watchmakers directly operated boutique. Inventory levels of our products in the trade are sound.
Wholesale performance cautiousness regarding potential inventory buildup as well as the further downsizing of the network in Europe, in particular Italy and the USA. Let's also look at sales by product line. The strong momentum enjoyed by jewelry, which is a rich more fast growing product line. 16% are consumption rates, well above closing plus 13% or watches plus 8%. A more moderate growth for watches after 2 consecutive outstanding years, primarily attributable to Cartier lower growth.
The importance of watches and jewelry, that together generated over 3 quarters of Richemont sales. And finally, the growing
small sales.
And finally, the growing
importance of clothing mainly related to the NET
A PORTER Group. It is now our 3rd segment and together with jewelry, enjoyed double digit growth in sales at constant rate. Pierre, now over to you.
Good morning, everybody.
Let's now turn to the Maisons as highlights. And first of all, excellent results generated by the jewelry Maisons and Specialist Watchmakers where nearly all Maisons improved their profitability. Indeed, most of our Maisons generated contribution margins of 25% and above. Results broadly in line with last year at Montblanc Maisons. Profit at the Fashion and Accessory Maisons were slightly affected by soft sales.
Ongoing progress at NET A PORTER Groupe during another year of structural expansion. Those achievements emphasize the coherence of our watch and jewelry Maisons portfolio, where cannibalization is, in fact, very low. It also underlines the efficiency of our business model. Maisons can benefit from the leverage provided by the Richemont Group and contain administration expenses by sharing services. Let's look now a little bit more in detail by segment, and let's move to the Jewellery Maisons.
The Jewellery Maisons enjoyed an outstanding performance, fueled by strong sales, up to 13% at actual rate. Pricing power, favorable currencies as well as improved retail efficiencies. Demand for jewelry was particularly strong. Lower wholesale orders for Cartier steel watches weighted on Cartier's overall watch performance. However, Cartier and Van Cleef and Arpels both generated excellent results.
As a result, the operating contribution rose by 20% to over €1,800,000,000 and the contribution margin rose to a yearly record of 35% of sales. Both Cartier and Van Cleef and Arpels continue to improve their respective margins. Let's now to the Specialist Watchmakers. All Specialist Watchmakers, with the exception of Baume and Mercier, saw improvement in their results. Strong sales, pricing power, positive currencies, manufacturing efficiencies and finally improved channels profitability, both in our stores and with our 3rd party retailers, led to a substantial 36% increase in profits and profitability.
Operating contribution reached an all time high record of 27% of sales. Let's turn now to the Montblanc Maisons. The 6% increase in sales was driven by watches and currencies. Growth was impacted by the importance of domestic Chinese and local Western Europeans, weight of writing instruments and reduced wholesale distribution. Operating contribution at €100 and 20,000,000 is in line with last year and reached 16% of sales.
Finally, the other business areas. The €11,000,000 increase in losses to €38,000,000 primarily reflects the Fashion and Accessory Maisons recorded single digit sales growth, which obviously lowered its operating contribution to 23,000,000 euros from the €50,000,000 a year ago. It is also explained by the slowdown of 8% and plus 4%. This, however, was compensated by the improved performance of the Net A Porter Group that more than halved its losses to €19,000,000 and continue to generate positive operating cash flow. The group's unbranded watch component manufacturing activities results were broadly in line with last year, except for the underperformance of only one location.
May I remind you that these losses consist of R and D costs and subsidies to the Maisons, representing the difference in price between insourced and outsourced. Fiscal 2014 will be the last year that we subsidy the Specialist Watchmakers. Gary for the financial review, please.
Thank you, Bernard and Richard. Good morning, everyone in the hall and good morning to everyone watching on the screens over the Internet. Let's go through the financial details. 1st, operating profit. We enjoyed a 14% increase in reported sales, 9% constant currency as Bernard and Richard detailed previously.
Our gross profit grew by 15%, reflecting our Maisons pricing power and relatively favorable currency environment. We grew our operating expenses 14%, which was in line with sales and this lead led to an operating profit growing by 18% to €2,426,000,000 and an all time high operating margin of 23.9 percent. If you factor out the hedging gains that were reported last year in operating profit, we grew our operating margin by 200 basis points. Let's move now to gross margin. The 15% increase in gross profit and 50 basis points increase in the percentage to 64.2% primarily reflects the following.
Exchange rates benefited the margin by 140 basis points. We had 120 basis point decrease relating to the change in hedge accounting. We continue to benefit from pricing power, higher retail prices and improved channel profitability. This offset a steady increase of higher component costs and the high historical cost of precious materials. Let's now move to operating expenses.
Operating expenses grew by 14% broadly in line with sales on a reported basis and the ratio of expenses to sales remains broadly stable at 40%. Our increases in expenses were primarily related to new boutiques, which added 5% to the cost base, foreign exchange 4%, communication costs 2% and all other expenses which is S and D and administration grew by 3%. S and D costs which were 55% of total expenses rose by 16% on a reported basis, given the sales growth, network developments, staffing of retail departments and the opening of 66 new internal stores. On a constant basis, S and D expenses rose by 11%. Communication costs were up 10%, leading to a ratio of approximately 9%.
Administration and other expenses grew by 13%, primarily reflecting the development of our backbone operations in Asia, Brazil, India, the Ukraine, customer contact centers in Europe and the United States of America, as well as our continued investments in systems. On a constant basis, administration expenses grew by 10%. Let's now move to the profits, total profits, which is on the screen. You can see that our net profit for the year rose 30% to just over EUR 2,000,000,000 Let's move to net finance costs. The relative stability of Swiss franc over the year versus the euro, in the period under review, we recorded non cash gains on the Group's investments and money market funds of €19,000,000 This compares to a loss last year of €169,000,000 We also incurred charges of 120,000,000 euros relating to our hedging program compared to 98,000,000 in losses last year.
Overall, finance costs decreased from €235,000,000 a year ago to €47,000,000 this year. Let's move to cash flow now. We enjoyed a further increase in our operating cash flow to 1.9 €44,000,000 The additional €378,000,000 increase in operating profit was partially absorbed by higher working capital requirements. This absorption was primarily due to an increase in inventories as planned, 582 reasonably stable at 17 months. Other current assets and receivables increased by €151,000,000 The receivables remain healthy and the current portfolio is 94% current.
This compares with the 94% of last year. Further absorption was seen in the amount of $205,000,000 relating primarily the settlement of our hedging contracts. Let's now take a look at capital expenditures. As planned, capital expenditures rose by 27% to €612,000,000 and it now represents 6% of our sales. Increased investments in manufacturing facilities played a large role, more refurbishings and boutique openings for both internal, external stores and point of sale locations in our wholesale network.
And we expanded and improved certain distribution platforms and our IT systems. We will continue our investment program in particular relating to manufacturing in the coming year. The next slide will provide some details for you on the CapEx. Over 40% of the increase in CapEx was dedicated to investments in manufacturing, expansion and capabilities in order to raise the integration and capacity levels. They represented in fiscal 'thirteen half of the CapEx growth and included a new jewelry workshop for Cartier, further expansion of the Cartier watch movement, component and assembly factories in Switzerland.
This project will be completed in 2013 in the fall. Panerai is in the process of opening up a new 10,000 square meter watch manufacturing site in Neuchatel. This is expected to be completed in the autumn of 2013. Vacheron Constantin also expanded their facility for its movement of manufacturing. This is going to be completed this summer.
And a project was launched for Langhansone to expand their facility. This is expected to be completed in the autumn of 2014. Retail and external points of sale still represent the largest chunk of our capital expenditure program, representing 42% of our total investments. The most notable projects were Specialist Watchmaker Boutiques, IWC in Zurich, Lange and Vacheron in Paris, Jaeger in Moscow and Panerai in Taipei. Chloe also opened up a new flagship in Paris and opened up locations in New York in the SoHo District and in Las Vegas.
Several boutique renovations were performed during the year. The most notable projects were the Cartier flagship in Milan, Van Cleef and Arpels in Moscow and Beverly Hills, and Jaeger in Paris and Hong Kong. Investments in other, primarily related to continued investments in systems, Richemont Distribution Platforms and the Net A Porter Group. Let's move to cash flow, free cash flow. Cash flow from operations financed higher taxes and a significant increase in the capital expenditure program as you just saw.
Free cash inflow amounted to $920,000,000 for the year, marginally below the prior year. Let's now take a quick look at our balance sheet. We continue to enjoy a strong balance sheet. Equity represents 70% of the total, broadly in line with a year ago. Our net cash investments position amounted to €3,200,000,000 in line with the prior year.
Although stable, cash flow generation for the year financed business acquisitions amounting to €474,000,000 The most notable transactions were the acquisition of a New York real estate property, Varan Varanor, our stamping operation based in Switzerland and our newest brand Peter Millar, which is based in North Carolina, USA. Respawn's net cash position includes short term bond funds, short term money market funds and a cash position in Swiss francs. In Swiss franc terms, that cash position was $1,700,000,000 Let's now turn to our dividends. Our dividend proposal for the fiscal year 'thirteen to be confirmed by the shareholders in September will be CHF 1 per share. This increase celebrates our group anniversary and reflects both the strong increase in profits and our objectives to grow dividends steadily for shareholders over the long term.
Thank you. And I would like to hand the presentation back to Bernard.
Let's move now to the major commercial developments. Richemont future expansion will continue to apply the multi channel distribution concept, which includes internal and external boutiques, multi brand stores and increasingly e commerce. In fiscal 'fourteen, given the economic environment and maturity and size of our network, just over 1,000 internal boutiques now, we'll continue to extend it, but more moderately, about 50 points of sales. In parallel, we will continue to strengthen our ties with our strongest multi brand retailers who remain essential for watches. We continue to work with fewer but more professional retailers.
Are helping them to internationalize their multi brand stores, which include competitors. We did it with Vampo in China or with Boucher in Paris, to whom we are letting the Palais Kapucine. Baume and Mercier has set up a joint venture with developed a web interface communication tool with our authorized retailers, which aims to offer a better service by knowing our retailer sales and inventories. In parallel, we'll continue to invest in future growth with the opening of Richemont distribution platforms in Brazil, India and Ukraine. We are also further structuring our commercial and administrative teams in Hong Kong and China.
In Hong Kong and China, we opened offices and warehouses to support the development of the NET A PORTER Group. In China, headcount rose to some 2,600, among which about 2,000 are employed in our 183 internal boutiques. Online sales are clearly becoming a standalone distribution channel, the importance of which will grow in the future, even though it is unlikely to become predominant in our industry. In 2014, for example, Cartier and Montblanc Maisons launched online sales in the U. S.
A. With promising results. We anticipate to start in Europe later this year and to extend to the other Maisons progressively. For example, for Cartier, it has become the 4th largest U. S.
Store and for Montblanc, its 2nd largest U. S. Store. It is very encouraging to learn that cannibalization with our traditional network is very low. Effectively, the online channel is attracting a new clientele who did the job previously in our internal stores.
Net A Porter has developed a number of initiatives operational this March to generate future growth. These include the website localization in Mandarin, German and French. Results today are very encouraging.
So let's have a look on the manufacturing developments. Watches and jewelry at Richemont generated close to €8,000,000,000 in sales To support the future growth of what represents close to 80% of our business, our Maisons continue to build capabilities and to invest in industrial capacity with ambitious projects. Overall, some €600,000,000 will have been invested over the 3 years ending March 2014, of which €140,000,000 last year and EUR 200,000,000 this year. In addition to raising our degree of integration, these investments are meant: 1st, to increase capacity, productivity and supply chain flexibility second, to secure sourcing of strategic components in the wave of ailing suppliers, notably for dials and cases suppliers consolidation, if not suppliers' restriction in the case of eta for movements and nivarox for regulating organs. 3rd, to foster high performance operation, generating efficiencies in production, hence in gross margin 4th, to promote innovation in materials and processes.
Let me give you a few examples of these investments. Integration in gold stamping with VARENAAR Cartier Watch Movement at Cuvee in Switzerland Vacheron Constantin de Vallejoux, Opicine Panerai in the Chateller, or extension of Piaget at Planiwate. Without forgetting Cartier Jewelry and Grand Clai Parpens' new jewelry workshops.
Before we start to deliver the conclusion, just give me a few minutes to give you some areas of focus. We are conducting a closer review of our Maisons portfolio comparing development potential and asset performance. The optimization of all our Maisons is a key target. We continue to believe that we can increase our market share in the thriving jewelry market by continuing to invest in Cartier, in Montlet and Arpels and in Piaget. In this respect, differentiation is critical.
This is why we are investing in promoting creativity, innovation and appealing design. We are also reinforcing our European positioning and improving the quality of service and shopping experience in our stores. None of these can be achieved without dedicated and talented teams. This is why we are developing employee loyalty and sense of belonging, attracting and grooming craftsmanship. Last year, we have hired close to 3,200 persons, exactly 3,171,
out of
which 800 in Switzerland where we employ over 8,200 people. Finally, we believe in the growing weight of e commerce and see this new channel as a profitable diversification of our revenue streams, together with our growing presence in new tourist destinations.
Here, you can see some color on current trends, which shows definitively improved sales trends. But please don't extrapolate future trends in just 1 month. While comparatives will start to ease these months, bear in mind that it is from a high base until September 2013 and that currencies are no longer as favorable, notably the yen. April grew at 13% on a constant basis rate and 12% reported. Growth was pretty broad based geographically.
Japan leased partially driven by enhanced price increases followed by the Americas region. Europe shows good growth driven by tourism. Asia Pacific is regaining some momentum. Our directly operated mono brand stores outperformed yet wholesale grew double digit. Conclusion, Richemont benefits from a premium portfolio of authentic and prestigious Maisons, with a leading position in high end jewelry and watches.
We believe in sustainable potential over the long term, driven by the universal appeal of European high quality products. We continue to see major long term growth opportunities in largely untapped markets like Brazil, Middle East, CIS, India, Indonesia and of course China. We continue to focus on sustainability by looking at long term performance and clientele aspiration, cash flow generation and return on assets, responsible sourcing, product and human resources strategies. We will continue to improve our business model through higher integration from production to distribution, and we look to further benefit from the leverage provided by the Richemont distribution platforms and the rollout of the new ERP system. This is building a stronger organization to confront uncertain times.
We will preserve a strong balance sheet, enabling investment in future growth, manufacturing, retail and distribution platforms and continued increase over time of dividends for our shareholders. Thank you.
So I guess there's a few questions.
Mario Ortelli of St. Paul C Bernstein. Three questions for me, if I may. The first one is on your market view for the next year. So if you think that will be more dynamic in growing more the accessible parts of the market of our luxury or the high end?
The second one is about your use of cash. Your cash position is still very rich, EUR 3,200,000,000 and going forward, if you think to perform some acquisitions. The last is about the review of your portfolio of businesses. If we can expect some divestitures of some businesses that are not providing great result and absorbing cash?
Okay. Good morning. I don't know what's going to happen tomorrow. So I can't really give you a long term view on the market. We've given you the April sales.
You see the advancement by the segments. Clearly, we're in the higher end of the market in the jewelry and watches, and that's done better Montblanc and the other fashion and accessories segment. With respect to the cash, our view hasn't really changed. We have increased the dividend this year. It's the 2,050 of Richemont, and we thought it was appropriate to increase the dividend.
We do want to increase over time. I'm not sure that I can tell you what the dividend will be next year. But again, we're committed to increasing over the long term on a sustainable basis. Obviously, dividends relate to a certain extent to our performance. In terms of portfolio review, I think we want to draw on Bernard's expertise, and we want to focus on making all of the Maisons better, not just the, shall we say, the fashion and accessories in Mont Blanc.
We think overall, there is room to increase the performance in all of our brands. And since Bernard has stepped down from Cartier, that'll probably get a little better as well.
Good morning. Antoine Bege, HSBC. Three questions. First of all, I think you highlighted on the softness at Cartier for watches. What's your analysis of that softness?
Is it short term? Is it a bit of a short term lack of innovation? Maybe also that the brand is one of the most gifted in China? 2nd question also on watches. I think a few months ago you highlighted that you were slowing the production, I think it was actually last summer for watches.
In the light of the sort of improving trends, are you back to normal in terms of watch production? Also in terms of how you look at wholesale, I think you were also quite keen to slow the selling to some of your wholesalers, especially in China. And finally, I mean, you mentioned the jewelry business being quite unbranded. Yet 2 of your competitors over the last couple of years have done acquisition LVMH with Bvlgari and then more recently Swatch with Harry Winston. Is it a bit of a concern to you?
I know that Cartier and Van Clef obviously have very good results. But for instance, if Tiffany was bid by one of your competitors, I mean, could you afford Tiffany to be in the hands of one of your competitors?
Are you Or is that a serious question? No, I'm just asking whether it was a serious question. It's my last time here, so I can actually tell you now what I want. Why don't you guys do some work? How many of you have been in the same job for 10 years in the room, right, the same company for 25 years, basically Richemont and 1 or 2 other people.
In life, you get people actually sweat and work and get up like hell in factories, not glamorous. You get doers and then you get people who go to college who are hell of a lot smarter than we are, who become professors, who don't earn quite as much as we in the private sector do because they don't really take that many risks. But they're generally smarter than we are and journalists. They're smarter than we are, trust me. I get on well with the guys, but they're cynical because they say, what the hell is going on here, we're smarter than these guys, but we don't earn as much.
And then you get analysts who don't really take the risks, who come here and who ask us questions. But believe me, you're nothing in comparison to people like ISS who advise pension funds on how to vote. And what happens is the shareholders, the biggest shareholders in major public companies are getting further and further and further and further away from the companies, from their investments. And they rely upon people like you on what to buy And then they rely upon people like ISS on how to vote and everything is just ticked off. Now there are 2 very interesting studies.
The one is that family run or controlled businesses outperform companies that don't have strong shareholders. We're lucky in this business that the majority of the watch business is with people like the Hayek's and the Rolex Chifthung, etcetera, who can take long term views. I mean this morning I had a joke, I called Nick because they told me that they bought a CHF 25,000,000 stone. So I quickly called him and I said, Nick, we stopped bidding at CHF 18 because there's a flaw in the stone. He went, you're not serious.
That's our relationship. Of course, there is no floor in the stone, but I wanted to give him a wake up early morning. That's our relationship. We can think long term. That's why we could create over the last 25 years, thousands of jobs in Switzerland and tens of thousands worldwide.
But here in Switzerland, I think we created 8,000 new jobs easily. What would we in total and I'm not talking about people indirectly. We don't have security, etcetera, here, but these people have got permanent employment, outsourced jobs because of long term thinking. What really bothers me is you have people who now determine corporate covenants on behalf of pension funds, pension funds outsource this stuff. The people don't actually know the people they're writing about.
And the people with the best corporate governance scores, guess who they were, the banks. Guess who took tens and tens and tens and tens of 1,000,000,000 of state funding, which is our money to buy them out, the banks. But they had the best directors because they were totally unassociated with the business. They'd find somebody who's a professor or this or that, bring them in, who knew zippo about the risks that were being taken. So if you want perfect governance score, get somebody you don't know, that you've never met, who knows nothing about your business because he's never been involved, employ him or her, give them a nice bonus for sitting on a committee and you get all the boxes ticked.
And guess what happens? After 5 years, chaos. There's a direct inverse correlation between the best corporate governance tick boxes and medium term performance. Wachtell, Lipton is freely available. The New York law firm go and get it, inverse correlation.
What happens, you've now got activist funds. Supposedly relying upon bad corporate governance, not always true. Now I'm not talking about excessive salaries. That's not what I've been talking general corporate, ISS type reports that the institutions that you advise, you folks advise, buy and sell shares of. Now about 12 years ago, Jan de Plassey that some of you will remember asked me, please see this institutional investor.
Please, please, please, they're just under 5% and please see them. So scared that they're going to sell us. Jan, so if they sell it, they buy it's their choice. Any case, so I decided I would do Jan a favor as valued colleague and I saw them. We had a very nice talk, very big institutional investor.
And they more than doubled their holding in Richemont. And this was at I think they bought it about 17, 18 Alan, round about there, right? When it got to about CHF33, CHF34, they sold. Now that was including PAT and the RINET. I don't know what the combined Swiss franc worth would be.
It used to be fifty-fifty. So let's say it's definitely over $130,000,000 I would guess it's probably more. I've asked somebody just to look at it today. So they gave up from CHF 30, they gave up CHF 100 a share, which I didn't and my colleagues didn't do, kept the shares. And by the way, they were one of the founding shareholders of MSCI that owns ISS, who said they mustn't vote for any of us last year, by the way, the recommendation, no.
And a lot of my other colleagues. Now I'm not asking you or not critical of you. I just wanted to say, folks get a life. This model works. It's been working for 25 years.
It's because we have a collegial way of running the business. The major decisions are made after 3 or 4 bottles of wine the night before the board meeting. If you missed that evening, you basically don't know what the consensus is on major issues. In terms of Cartier, it has probably shown the most creativity in the watches. This is why if you look at what it's done in the last 5 years with its manufacturer, it's astonishing.
And it cannot satisfy demand in the manufacturer. But the whole, should I say, steel watch sector is always affected first. So it's not creativity. The other question as to are we worried about our opponents buying? No.
I mean, not just solely, I just had pulled Nick's leg early in the morning. I'm glad that Harry Winston found a good shareholder with IX. But we're not in the same business. We don't sell stones. There are some businesses who sell high value stones put into jewelry.
So if you really look at our business, look at Katya and look at Van Cleef primarily, the 2 Piaget is starting to do very well. Have a look at the auction sales at Christie's and Sotheby's. The designs, the beauty, the timelessness helps it to maintain value over decades, centuries in fact, if you have a look at some of the works that are being sold and the increases in value. So we're really not in the same business. Tiffany's average sales price is what?
No, Tiffany's low, it shows you, they don't even know. Telfoni's average sales price is under $170 You can go and check, but that was the last time I looked. Doesn't mean it's not a great company. It just means we're not in the same business. Secondly, Tiffany does have a poison pill in there, which everybody seems to forget.
And I think the management of Tiffany have done a pretty good job at managing the company. Now it's not our style to buy to pay too much for well run companies. We're not egotistical enough to think we can buy a company that's well run, sprinkle some angel dust over it and extract value. We do think we know how to create brand equity. If you take Van Cleef, We bought it for around about $300,000,000 and I remember coming here to meetings and some of my non executive directors, it's like a broken old record, click and this, so what are you going to do about Van Cleef and Arpels?
And the answer, we will nurture it next year. Van Cleef and Arpels, is it performing according to your expectations? Now I get it in the morning there and then I come the next morning and you guys ask. Same question. Well, the operating profit is getting pretty close to what we paid for it.
Okay. Cartier's operating profit sorry, the increase in Cartier's operating profit, The increase in Cartier's operating profit last year was what 5 to 7 times the total operating profit of Bvlgari. Now where should we spend our money? By paying other companies or shareholders goodwill, by arrogantly believing we can do it better or by creating goodwill. Our job is to create goodwill by creating brand equity.
And so the key thing for my 3 colleagues, for me and for Alp, once you've created free cash flow, which is bloody difficult enough, but once you've created free cash flow, how do you reinvest that free cash flow at the same rate of return in your company? And with financial repression today, where savers, the good people in our society are being raped by governments is what's happening is unconscionable at the moment. They are basically punishing the people that lived within their means by giving them no returns on their capital in order to bail out the speculators. That's in a sense what's happening at the moment. They force feeding us like some geese with pate, paper that supposedly AAA and then they'll create a little bit of inflation.
It's the only way or default, it's that or default. So savers are being penalized, but it also has an effect on us. How do we redeploy our capital? Are we going to buy things when people can borrow at near to 0? Do we keep €3,000,000,000 when tomorrow somebody may treat Euroland like Cyprus and said, by the way, you're getting back 80%.
You're not going to or your clients are not going to like us very much if we took views on their cash because in a sense by not returning it to shareholders or not putting it into fixed assets, you're taking a view. So this is our 20 depression. What I do know is it's not going to carry on like this. It's not possible. And when you have central bankers and supra governmental authorities saying that they don't really have an idea either, It's not that comforting.
What I do know is that our businesses have withstood really their governments. We've withstood revolutions. We've just withstood world wars, if you look at it over the centuries, and we'll withstand the I don't know how to put it strongly enough, the bad governance that we've seen over the last 15 years and that we're seeing now. So we'll withstand that. And hopefully, we'll be able to carry on paying dividends.
We've said a few years ago, we'd like to grow at about 15% a year. This is really the culmination of nearly 30,000 people's work across the world. Loyal people generally stay with us for a very long time and loyalty from the controlling shareholder to them and vice versa and that really and collegiality. And we've created enormous exports out of Switzerland and a heck of a lot of job creation. And I can say the same thing for Rolex, for Audemars, for the Swatch Group.
And I hope that it will continue. But we need you guys to do a bit of work as well, okay. Just go to the watch fair, have a look at Bernard's colleagues and the innovation and see what they have done. Cartier has done unbelievable innovation in the watches. So I'm defending Mr.
Fornas and his colleagues and I'm asking you, come on John, you're the next journalist, you guys are also going to do a bit of work. So then ask me questions on what we see in the future. We don't have an idea, any idea. And 2, go to the watch fair, sniff around and do what I do. I put on my shoes, I don't shave, I walk around and I ask the people who work for them, what do you think?
They know who I am and I walk around in the stores and I said, what do you think of this? What do you think of that? What would you do? Etcetera, etcetera. And I hear everything because people at sales level tell you everything, then I come back.
So his pre predecessor had the brilliant idea of taking a picture of me and distributing it to all the Cartier boutiques. Well, he's no longer with us. Okay.
We have more time now.
Yeah. Now I've got more time, they say. But do what I do. You know you hotel groups, I have friends in the hotel business. Then I read what they say, but blah, blah, occupancy.
Then I call and I tell them, I say, listen, have you got a booking for 40? We're looking at, yes, what rate? This go. Hello, okay. You ask the doorman.
Do you know doorman? No. You ask the doorman how things going? Slow. Then you read the analyst report, they said, that's booming sector, very interesting, but you've just asked the doorman.
The doorman said to you, there's nobody here. So do what we do, which is ask you if you want to get to the bottom of things, go to the bottom and ask people. You have no idea what the sales ladies told me about these guys. Remember that what was that horrible thing, that Divan watch. That Divan, it looked like a bordello, the count, you had a sofa, a velour, red velour sofa.
Do you know the salespeople put it behind the counter, underneath the counter, they were too embarrassed. They didn't want to show that Cartier made stuff. It's about 15 years ago, right? It was
male watch.
So do what I do. Go and ask the people at ground level. They tell you everything.
John?
Just Antoine to go back to your the one question I don't think we answered. On the production topic, I think I like to say the numbers speak for themselves and I use this opportunity to give credit to the IT team under the head of under the direction of Desiree Schroeder. I mean, we continue to rollout the Gemini system, right? The manufacturing plant is fully integrated for Cartier, jewelry and watches. We extended it to IWC this year, and we're going to be working on Piaget in the current year.
We will have completed the distribution systems in Europe. So Europe and America are done, and we'll move to Japan next year. So I think if you just look at the inventory rotations and the sales and the quarterly sales, I think you have your answer on the production.
Good morning. John Cox with Kepler Cheuvreux. On the first point about going to the January Geneva Watch Fair, I'm sure we'd all love to go. But as you're probably aware, we're not allowed in despite our best efforts to actually get into the Geneva Watch Fair.
Why don't you do what I do and disguise yourself?
Well, I did this year and fortunately I managed to get in. But I know it's pretty hard for most of
my colleagues to Why don't you do the interviewing
our guys. Yes, yes, yes.
I'm sure they're all in Baselworld.
Yes. I understand why now because you go and interview our guys who then say and they give forward looking statements and I get phone calls. Every now and again, there's some public commitment by one of our colleagues. They get a fit of irrational exuberance and blabber away about how great things are. And then the Swiss Stock Exchange calls us and says these are forward looking statements.
It's a
tough job. I have a couple of questions. One of which is the Asia Pacific. You're talking about potentially things are getting a little bit better. I wonder if you can just give us a bit more granularity on that, particularly, obviously, the situation in Mainland China.
Are you seeing anything improve at all? There seems to be anecdotal evidence, notably, the Chinese First Lady wearing a stainless steel Omega. Potentially, this clampdown on gifting could be easing? That's my first question. Second question, just on the inventory, another pretty big build.
I wonder if you can just give a bit of granularity on that, what your thoughts are on inventory? Is there a problem? You seem to be saying no, it's all planned. And then the last question for Johan regarding your sabbatical. Is this a prelude to sort of semi retirement status?
Or is it really 12 months you need a bit of a break, write the memoirs and come back fresh in 12 months' time? Thank you.
Okay. Why don't you Antoine, sorry, but John, why don't you answer? No, it's not a prelude. John, I'll just ask how many people have been in the same job for 25 years, same job. Anybody else here?
I'll bear yes and you quit totally. And Alan, you have not been in the same job because you live in somewhere in Eastern Switzerland, you commute when you want to. Okay. How would you like it when it gets to about October, November and your 2 administrative your 2 the ladies in your office, they are your bosses by the way, but they give you your schedule for the next year. And they worked it out that every week it's this and this and this and this.
And you've got friends and they say, let's go to the Rugby World Cup, it will take 2 weeks. And you say, well, they've arranged some meetings for me. This carries on 25 years. Then after a while, you decide, well, maybe you just want a little bit of free time. And I see somebody said, it's my heart, it's not my heart.
But the good news is the share price went up by 8 percent or 5% today. So it seems that the people are very relieved that I'm getting out of here. Okay. No, it's no, but in all seriousness, you know what it is. I tell you, I'm going non executive.
He tells the Financial Times it doesn't change anything. The people who report to them call me. They say they want to see me here, here, here, here. I said, well, I'm no longer executive. Well, okay.
So I have exactly the same lifestyle without any authority except the fact that I've got more shares than I do. It doesn't work like that. So they have now got to take charge. It's their job. When you've been there 25 years, people call you.
And we need to establish that these 3, the troika, that they're responsible. That's really why there needs to be a break. I'm perfectly healthy. Stopping smoking, which I've done for a year, was far tougher for my family than for me, believe me. So it's not it was planned, it was announced, there's nothing sinister.
I just want to have a bit of free time. I don't laugh. People have invited me fishing, fly fishing, bone fishing. I'm too embarrassed to go because I don't know how to do it. But I haven't had the time to go for a 4 day course.
It sounds stupid, but there are little things like this And books, I've got about 50 books that I want to read that you just don't allocate the time. So there's nothing sinister, nothing crazy. And the share price went up quite dramatically after I announced that I'm no longer involved. So it's I'm happy and I'm relaxed. And you guys are going to start working now because we're not going to spoon feed you.
You guys are smarter. You're more cynical. All you need is a little bit of shoe leather. And I'm sorry that you were not involved to the invite that I was not aware that you put a ban on them, Sophie. Okay, because when I last went to the fair, they were there.
That's how long ago I went. Yes, exactly. Okay. The other questions, can you still Okay. You are the worst combination journalist and then analyst.
Asia, 41% of our sales. Just look back at the growth over the last few years, and it's clearly fantastic consolidation going on. It's about demography. My Chairman used to say, nothing you can fight but demography.
I fight anything but demographics. I won't fight when you've got fewer people.
And you know as well that you cannot just look at China mainland, but you have also especially for the high priced products, look at where the Chinese are buying products, mainly in Europe, but in America as well, in Middle East, actually everywhere. Last but not least, we believe that the mindset and we say that the addiction or the appetite by the Chinese for our product, for handcrafted products for will not disappear, has not disappeared at all. However, it's not only China. There's many other opportunities across the world, including, of course, Brazil, China, Indonesia, Africa. And we're already working and focusing on it as well.
Look, it's very unfair. The 1%, 99% is unfair. Quite frankly, it's unfair what happened. You guys, some of you older will remember that I warned it was But the 1%, they're buying apartments New York, they're buying houses in London and you find this thing of a city state reemerging and they've got money. And if you take it across the world, they're not as affected by the economic downturns.
And remember what we've always believed that people are more affected by the feel good factor and by the stock exchanges and by the general feeling of real estate prices, art prices. You look at the art world, contemporary art, you look at what we would have thought, particular real estate prices, 5 years ago, even in 2 1,007, these records are all being shattered. So when you've got helicopter money and a big percentage of it not going to trickle down And you've got a scarcity factor in terms of artisanal skills plus stones, I think we could have sold a multiple of our high jewelry pieces, but we're restrained by the time it takes for artisans plus high quality stones. It's and it's not going to stop.
John, maybe just some color for you. I'm disappointed because I told you last summer that we would build the inventories up. It's pretty much online where we thought. Remember, we allocated some extra capital to Van Cleef to put into the high jewelry business. That's worked extremely well.
So the inventories are in great shape. I mean, yes, it's a big value number. That's fine. But inventories have never been better. But I do expect less of a build next year.
So John Guy from Berenberg Bank. Just a few questions, please. Gary, first of all, just with regards to the management of the operating expenses, another very solid performance this year. Do you think that 40% OpEx as a percentage of sales going forward is the new norm? If I look over the last 10 years, it's ranged between 43 45 typically, but we've seen 2 consecutive years now of around the 40% level, especially given your ongoing commitment to investing in retail and manufacturing?
That's my first question. Secondly, with regards to Cartier watches, maybe one for Bernard. With regards to the level of quartz that is effectively running through the Cartier watch line, could you maybe talk a little bit about how you're reducing the quartz penetration within the Cartier watches? There seems to be a growing demand for mechanical watches either hand wound or automatics. I'd be interested to know what your thoughts are as to how you reduce that quartz component going forward.
And finally, with regards to Net A Porter, are we going to start to get a little bit more color on the Net A Porter business? I mean, it's over €600,000,000 of turnover. It's not that far away from Mont Blanc. There doesn't seem to be that much disclosure. And maybe talk a little bit about how you see the online pilots you've done in the U.
S? I remember Mr. Rupert you talked about last year not wanting to see Net A Porter run at 100% to 150% growth. Not doing that at the moment. But you talked about your Maisons being your biggest assets and you didn't want net a porter to grow too strongly because then your assets become liabilities.
So maybe you could just comment on that. Thanks.
Okay. If I could just I can just kick off by saying I love Net A Porter to do very well. But if it did, maybe I didn't put it properly last year,
if it
did explode that whole sector, we would have been left with a lot of bricks and mortar. It's the I think Bernard said it's now the 4th Cartier's online business, the 4th equivalent to the 4th store and Mont Blanc's. Well, I've discussed it with other CEOs. I can't tell you who they are because I mean maybe they have not even discussed it or disclosed it to their shareholders. But I haven't found one traditional business where the online business on a global scale is bigger than the single biggest boutique.
So if you look at it as a great service to your clients, and it is an online, it's a boutique, then I don't think you'll be far off for the current time unless of course you started online. But if you started online sooner or later people want bricks and mortar as well. We're monitoring it. We're learning an enormous amount. It's a learning experience for us.
And I like your questions because if he now says it's the new norm, then I can sit back reading a book and checking from afar whether it is the new norm or not, okay. So Gary, I wait with great interest. As for quartz watches, it was the dumbest thing we ever did as a watch industry to explain to customers that mechanical watches, that's the sophisticated thing. We were stupid. A quartz watch, a beautiful quartz watch is not only a nice thing, but it is a fantastic thing for the producer.
You know, soon we're going to be servicing more watches than we're assembling. As an industry, I'm not talking about Richemont, I'm talking everybody. But we made it sophisticated to wear something that if you drop it on a wooden floor, you're creating new jobs for people fixing it. I mean I have a friend and I'll tell you who he is. He's the head of SAP.
He has the most complicated IWC watch in existence And he plays golf with it very violently. And he's not a great golfer, so he takes a hell of a lot of blows. And he often eats the big ball before he eats the small ball with the watch on his arm. And I said to him, please take your watch off. I'm not servicing that thing again.
It's like taking a Ferrari and going into the Sahara Desert and not putting in oil or so we don't also tell the clients often enough that these are precision instruments. A Jaeger LeCoultre has got more moving parts than an Aston Martin. We should tell them this is not to be dropped and the heavier the watch, the more the client thinks this is robust, just drop it on the bathroom, the tiles. Oh, it doesn't work. I wonder why.
Maybe it's had 9 gs of shock. Okay, you sold me a dud. It's like hitting a speed bump at 180 kilometers an hour and blaming the car manufacturer. But so mechanical watches are pains in the butt. However, I wear mechanical, okay.
I love this. Mechanical and discrete. So I'm guilty, we're all guilty. Is it a great thing Paul, if you think about it, we're creating air miles. It's airline industry, we're creating air miles.
They're out All these things are coming back. So it's fantastic for job creation. Think of the logistics. Think of all the spare parts you've got to keep. I mean, we get clocks back from Jeju.
We got one back that let's put it like this, went to England with the Duke of Wellington's family after he had a little skirmish on the continent and we had to take it back to service and it's our obligation. So Bernard has done unbelievable things, creating a bigger headache for me. Mechanical excellence. It's true. Look at that.
It's mysterious, but tell him, but it's the truth. The truth is, it's wonderful for all of us. And I can tell you, if you really look, not a lot of people know the difference between a mechanical, a manual, a quartz, automatic, I mean to my utter embarrassment. But 4 years after we bought Panerai, we still didn't have agents or anything in London And at this Panerai, they kept on stopping at 6 o'clock. 6 o'clock it would stop.
So I took it in to Cartier in Bond Street and said fix this thing, sent it back, now it's fixed, okay. The last burn and then about 4 days later, 6 it stops again. Now I'm really annoyed, so I go there. I said, what is the matter with you guys? There's something wrong.
The hour end is getting stuck because it can't be. I've worked it up. The minute hand goes, the hour hand is stuck. And after a while, they're like 4 of these people, craftsmen. And after a while, they say to him, Mr.
Rupert, you know this is a manual watch. Of course, the manual. So what does it mean? He said, no, it's not automatic, it's manual. Oh my God.
I get up at 6 o'clock in the morning, I wind the watch, it runs for 30 6 hours, it stops at 6 o'clock. I get furious. I take it to them. So the story is well throughout the group, so I can tell it. I had no idea this was not an automatic watch, it was a manual watch.
So if you open the back, then people see. If you close the back, a lot of people don't know the difference between quartz or mechanical watches. So I would love to sell more quartz, but the market doesn't want it. Bernard?
No, I just wanted to say a few words about Cartier being there a couple of months ago. Just to reassure you that there is no worry on the Cartier watches. It's I mean, what you should have said is after the 2 phenomenal years that you had, it seems that it's cooling a little bit down. And it's true because, I mean, we had to produce and the capacity and everything. And China has cooled down as for everybody.
So but also what you should take into account in your analysis is that we are not selling to one country now. We sell to the world. And you have to follow the flow of people moving around the world. Maybe sometime they will buy less in mainland China, less in Hong Kong, more in Paris, more in Florence, more in Roma. And that's what you have to do is to track if you want the real picture.
So the real picture is that there is no worry.
Yes. No worry.
There is no worry. And the last element is what our Chairman said is if you had been to the SIHH, you would have been surprised and amazed.
Sorry to Sophie. Sophie, I'm sorry. Okay. I will Sophie authorize them to send to the SIHH and if you give me your words that you will not try to get forward looking statements from our colleagues because if one of you doesn't, you'll all be banned again. It's up to you to have a sense of decency.
And I'd like you, otherwise you don't get a feeling. If Sophie, yes, it's not a problem. But you won't really get you see, I'm in a fortunate position that I see it at the product committee meetings. And I really did not want to go to the SIHH because then journalists and people want to talk to me, I'm supposed be the boss, but I'm not really with Norbert and these guys. So I've tried to avoid it, but I can tell you on a continuous basis and so can Bernard and Alain Perin, Jo could well now Franco, the members of the product committee can tell you what it looks like 18 months to 3 years from now.
Because you don't do a new watch. It's like a new automobile is 2 years. You've got to make it's even longer, a movement.
If you want to have a good feeling If you want to have a good feeling about Asia and creativity in watches at Richemont, you are invited to join us at Watches and Wonders event, the 26th of September in Hong Kong, which will be held in Hong Kong, which will be open to selectively
to
public invited. And for 3 days, we'll have an event there or you may
see That's a good idea because you'll always you'll also get a feeling for the Asia. It's so we know creativity and products coming through at the product committee. We know that from I would say, what you're saying
We see 2015.
We see 2015. We're right now busy with 2015. But it's not a science. You know, Perenberg, you would know. It's art as well as science, because you've got to think what's going to happen.
So we thought in 2005, 2006, 2,007, 2,008, we thought we the effects of a bad economy, unemployment, tensions in society, less show off, definitely not bling. And so we started and all of our manufacturers, all of the watch people started concentrating on thin white gold, thin steel, you know what it is. The person you give it to will know what it is. But I mean this, nobody can tell me they know what this is. Okay.
But this is a thin lung and joint that took them two and a half years with the help of Jerome Lambert. I love it. But nobody it's like an Audi. People don't mind if you have it. No, seriously.
And I would expect you to ask me what the Archbishop Spain commented on Monday or on Sunday, which reported the FD on Monday. He was warning that the policies would lead to class warfare And he's right, social fabric, tearing and he was worried and the churches stayed out of politics. That was a proper statement to make for the head of a church. He was seeing hatred building up in Spain. Now that leads next thing is anti Semitism.
French, sorry, you guys don't have a good record. I'm serious. And the Swiss, so it's Swiss, sorry, Swiss, no, Swiss. So you find all of these social tensions building up. And it's not only in China.
Remember, they are only of 80,000,000, 90,000,000 members of the Communist Party in China. There is tiny minority. They run everything. So the general masses are saying, well, what's going on here? Military number plates on Ferraris.
What is this? So what do you do? You order a crackdown. Of course you do, because you are seen as the privileged. It's logical.
Logical, absolutely logical. But what worries me is friction if there's a real problem, either hyperinflation or a serious depression. Nobody's going to want to be seen showing wealth. People are going to lie low. You know that apart from the tax ban in Italy, you don't really see Ferraris or Lamborghinis or hypercars on the Autostrade anymore, they're gone, they're in basements.
They put in the evening in car and carriers and brought to other parts of Europe, people don't want to be seen. And that in effect that I'm more worried about as a very big shareholder. I'm more worried about the social friction and what it has, the effect it has on the display of wealth. Social media, you should be aware of, because the people went, it have a factory, click, boom, you're on the Internet. How can the hit of a factory in a rural province in China have that.
So there are forces at work, which will impact on the buying patterns of people. And those are the things we should all be concentrating on. I mean today you go click, boom, you're public. And when you have 8,000,000 sorry, billions of people and you've got 80,000,000 running the society, you must watch it. What's happening, the austerity in Spain, that Archbishop, that statement of this is very telling.
And I'm more worried about that. However, what did we do? We went anti blin. So in a sense, to give you an idea, we went ahead of time. So today, our best sellers are discrete luxury.
I don't think diamond encrusted watches people don't want to be seen people don't want a picture taken of it on their wrist and next moment they're on a website. And so it will change 10, 15 years from now maybe, but in the meantime, we've positioned ourselves to be discrete. Is that a fair summary?
Discrete luxury is a very high level of craftsmanship.
Craftsmanship. Sorry, I forgot. That's what he did. I mean, he introduced craftsmanship at the highest level at Cartier's watch business.
I guess I have to wait into the expense and disclosure question now. One thing is absolutely certain, we're going to spend more than I thought in the Investor Relations area because I hadn't planned an event and I hadn't planned to send SOPHIE to Asia. Expenses, I don't know because I don't know what the sales are. So I can't possibly
give you the give
you a ratio that works. On the disclosure question, the financial team at Richmond is very, very strong, and they're very, very technical. We went to the market with numbers in 15 working days. We're proud of that. The financial statements, full financial statements are available today.
And to the best of our knowledge, we're one of the first people to adopt the new standards in IFRS land. So I think we're a standard bearer. And the technical people here in Geneva, they really run my life in terms of disclosure. And we say we want to produce the best IFRS technical financial statements that we can. And actually, if you apply strict IFRS rules, we should be disclosing less, not more.
Mont Blanc is of a size at the moment where it doesn't have to be disclosed separately. And quite frankly, that would be my preferred option at this stage, but SOPHIE won't let me because you guys will get aggravated, right? We think our disclosure on Net A Porter is appropriate. And at such time where we have to disclose it separately, we will.
I'm going to write something that you guys actually find interesting, finally find something interesting not written by Alan Grieve and corporate governance speak, okay. We're all involved in the mess we're in. We used to have hidden reserves. Banks had in reserves, automobile companies had hidden reserves. We just had a rule, you may not write it forward.
In other words, once you put it away in hidden reserves, you can't pull out of it and bring it through the P and L. But at Rand Merchants Bank, we had a rule. Our income on our hidden reserves, we strived for that to cover the next year's expenses. That was our goal. So you didn't have to do business, bad year comes, you don't lend money.
Now automobile companies did the same. Then full disclosure, everything must be put on the balance sheet. Then people did not have control of their companies. And of course, from LBOs, I mean, it was different acronyms, but it meant the same thing. Borrow a lot of money, write the interest off against through the P and L, leverage up and buy.
And companies that were conservatively managed became targets. Now if I really want to embarrass the great and the good and the geniuses in the investment banks, the M and A and Corporate Finance divisions. I've got like 3 meters of proposals and reports to me and Richard and Jan Du Plaisis and Joe Canouy on how to run our business a hell of a lot better. It mainly involved in returning all the cash to all the shareholders and borrowing like hell. And of course, this famous last word, we'll give it to you when you need it.
I'm perturbed by what's going on with activist shareholders and the raiders because they're wrecking in the end they're wrecking employment because they're not creating value. Certainly not. Now I was listening to Gary very carefully, I'd hope that he would say 40% because he wouldn't have slept. The points we don't know. We'll do our best, but we just don't know.
Lucas Solca from Exane BNP Paribas. Three questions on value creation, if I may. First, stewardship of brand equity value creation. You, Mr. Rupert, have been the Chief Steward
in Please call me Johan. None of these guys call me Chairman. It sounds like Chairman now or something. Okay. We've all known each other long enough.
Okay.
Good. I wonder whether you're going on holiday satisfied with that the product and communication committee are going to be chaired appropriately. I think that is a very important value creation choke point that you've been managing for such a long time? 2nd question, I've seen that your plans on distribution would broadly entail more of the same. I wonder about the logic of building so much value and then sharing in the distribution area a lot of that with third parties in the shape of 3rd party retailers and franchisee partners, wouldn't you be looking to expand further your own retail engagement in the business?
Thirdly, on how to invest value I
just want to write down, sorry. It's okay. SPCC, retail, yes.
Thirdly, on how to invest the significant stock of value that you have monetized, If you could let us understand and remind us M and A criteria and how you see these should be prioritized? Thanks very much.
Firstly, as Bernard pointed out, I think the SPCC were in 2015. I told them if they stuff up in a year then I'm gone. Choking yesterday, we had a colleague with us yesterday who's very creative. And we know who to watch very carefully, okay. The very creative ones, they create the value, but you've got to just be very alert.
And so we said to him, listen, you just but I'm sure you'll manage him, Bernard, you and Alain, etcetera. I'm not worried, they're very good. The people, we've been there for 20 years, same committees. Retail, wholesale, the more margin you capture through your own stores, the more you build up operating leverage. And if it goes the other way, you own a hell of a lot of leases and you kick yourself and you're it's a balance.
Some in major cities, in gateway cities, we think you really have to maintain your own presence. But I would say when I started, it was about 1500 retailers worldwide that you had to be partners with. The problem is for these and we try to regard them as partners, the retailers. The problem is a lot of them were family companies and they were located in areas that became very expensive. Where the mother and father and maybe even grandparents worked and slaved in these stores, some of the children either don't have the same work ethic or the leases have become very expensive for them.
So you've seen that their standards, some have slipped, some have just shut. So there's a natural attrition amongst some of our partners in the wholesale business. It's an art. And certainly in gateway cities, We'll have a combination of own stores and then multi brand stores. We will be partners with others in multi brand stores, whether it be the Swatch Group or Rolex, we will or IP the people in our at the SIHH, it makes sense.
You know that the Bichroer store in Lucerne has a turnover over CHF 1,000,000 a day. I'll repeat that. Lucerne, Bouguereau has a turnover of over CHF1 1,000,000 a day. That's a business. It's their business, Mr.
Bichro's business, but it's a multi brand watch store. So we will certainly carry on working with the Bicherus of the world. They really know how to run a business. The third one, investment in M and A. We talk about Van Cleef and about my baby Panerai, but we don't talk about a load of rubbish that I also had a hand in buying.
Okay, so we haven't always been that successful. Maybe we've got to be we've got to cull our bad investments quicker. That's one thing. Secondly, not maybe, we should. Secondly, right now, there is I don't know of a company that is big enough that it would interest you in terms of changing our earnings or our NAV.
That's either affordable or for sale at this stage. Yes, there are a few small businesses that one can look at. But the problem is when you come of a certain size, you can even buy a little gem, it just doesn't rock the needle. And then your problem is you buy the wrong things for the wrong reasons. And the one thing I do not believe in is issuing shares.
And it's got nothing to do with the control element because we have a right to if there's any rights issue to follow the rights And we have enough cash at the holding company, we can follow it. So it's not that. It's not the control or anything. It's just that in the end, when you pay with shares, it's the most expensive thing you can ever pay with. If you have a look at people who buy for shares And the second thing you're going to watch with people who always buy with shares have got a huge incentive for overvaluing their shares.
Remember, then they pay less because their currency is overvalued. So I don't really invest in companies that continuously buy new things for shares, because they have primary incentives to overvalue their shares then. So if you've got to buy for cash, right now, look, it's not easy, especially not with the markets today. I don't know whether that answers you sufficiently. We've had to make the decision which we discussed a year or 2 ago.
Do we invest more in Cartier, Piaget and terms of jewelry, Cartier, Piaget and well, Cartier Van Cleefen and Piaget or do we go and buy a third thing? Our return on investment is so much higher by backing our own colleagues. I mean, it's a multiple than buying another thing. And we have a saying at home this, but you only find out when you climb over that the reason why it's greener is because of all the cow dung that's hidden in the grass. And as soon as you start stepping in all of this stuff, then you wonder why did I climb across the fence.
So whenever we buy something, we find out we never thought of this, but it's there. And then it takes the most valuable component of these 3 guys on the right, it takes their time and you start wasting time on things that are not going to return, give you the same returns as if you spend more time on Cartier, Van Cleef and Piaget. If PLM is listening, I don't know. Philippe, you're underperforming in jewelry, okay? He's the head of Piaget.
Alain and I are in agreement. We think Piaget has got a lot, lot more scope in Piaget. He's done brilliantly in watches, but I'd rather have Piaget expanding in jewelry than buying another jewelry company. If you look at the capitalized leases of some of these companies that are available, It's horrific. So now you expose your balance sheet to a bunch of leases in bad parts of the world.
No, no. So it's and we're not arrogant enough to think we can fix or add value where they're or look at where they're already well run. So the really good companies that you drool about are already well run. So what makes you think you're smart Rather say Chapo, well done. You guys can invest in them.
You know what I'm saying? It's we so M and A at this stage is not going to move the needle. I can say it, nothing on the horizon is going to move is going to be of any importance for you folks in the room. So don't worry about it. Is that a fair I'm getting you guys out of all the trouble now, okay?
You owe me, okay?
Chris Walker I just wanted to talk about the jewelry supply chain. Clearly that's been the outperforming category. You're investing in the manufacturing capabilities as well. I'm thinking more about sourcing whether ruffle polished diamonds, cutting, polishing. Any opportunities there?
You talked about M and A there to maybe integrate the supply chain further to secure sort of long term demand as a supply in that area?
We just can address the point of integration upside with the acquisition we made with Varinor, which is a gold refiner, because it's clear that when you sell jewelry, even there's a lot of grandmasheek involved. Of course, because of the price of gold, the key element is to be very efficient in terms of the way you produce gold and excluding by turning fast your inventories. So it's one way of showing you that we are already focusing on improving the supply chain. As far as Diamond is concerned, I think Johan is really an expert.
No, I'm not an expert.
What we have it's a different business. Mining is very far away from us. As we know, that some opponents have tried to integrate, but I think they saw long chain before the product come and is really become an opportunity for the Iron Driller that we don't see any opportunity in that respect.
I would say, there is no way in which you can really industrialize high jewelry. It's craft, It's artisanal skills. Bijou, Bernard, yes. More. More, with Bijou.
They are repetitive.
Yes, we're repetitive. 3 gold rings, stuff like that, that's different. In terms of diamonds and stones, it's a different business with a totally different supply chain. It's what all we work on is to make sure that it's ethically sourced. That's it.
It's not really our expertise. Although Nick thought this morning when I told him that he had a flaw in that stone that he bought. He thought so for about half a minute, but it's not we have stone experts that can analyze stones, but we don't know how to mine it.
So I was thinking more to secure the supply from miners. Is there more work to be done there?
Because I
think you said the
They sell at a price. They're free marketeers these guys. I mean they'll sell their mothers. So and we've known most of these people for a very long time. So and funny enough, they're the same bloody guys that are in the real estate business.
It's always the 2nd cousin, right? So you rent from the guy here, he's got the lease on this store. And then you go around the corner and his second cousin that's saying to you, by the way, I'm your diamond supplier. They're all incredibly smart. And by the way, they're loyal.
We had friendships
Patrick Wendtman, Silicon Valley Bank. I have three questions. Firstly, regarding the lower gold prices. What do you expect in terms of margins? I know consumers are not stupid, but anyway.
And secondly, what do you expect in terms of demand for gold, watches and jewelry because of these lower prices? My second question is regarding the price effect. You were mentioning some price increase in April May for Japan. What was the overall price impact in this April sales number? And thirdly, what will be the impact of the IAS 19 for the pension funds for the current year in terms for the EBIT and net results?
Thank you.
Am I allowed to tell that code?
No. Why not? What? I'm sorry.
Why not?
Well, okay, a few months.
But why I mean, if I may ask, if he'd asked another question, how many tons of gold do you use in your business, he could have extrapolated himself. Is that also a secret?
No. Yeah, yeah.
Listen, dollars 100 movement is roughly is just below $100 in operating profit, $100,000,000 in operating profit under that, but under.
Thanks, Boris.
Up and down. But we don't speculate. That's the key
you've
got to understand. So the key real thing is we've got to turn it through Varinor that it doesn't have accounting effects. But in the end, it's not don't think, oh, these guys are going to make hell of a lot of money because the gold price has gone down, because we still have last year's gold in the inventory, okay. So next year, so it equalizes out. And whether you lose FIFO or LIFO, it doesn't really matter.
It's a cost of doing business.
On the Japan question,
we I want to put in the open. So there's pressure on management in the future, you see.
On the what do we always say generally on prices? We try and pass along our cost increases once a year. Mr. Rupert said the gold moves along. So the price increases excluding Japan were low single digits in April.
Japan, we did raise prices, but clearly not enough, if I can say it that way.
Remember the yen dropped. Yes. The yen dropped by more than the price increases.
So we'll have to look at it again in the fall. And the pension question? The pension question, ask that guide behind you there. I've got it, page
14. Okay.
Which page? $5,000,000 gain in this year. Sorry, sorry, dollars 3,000,000 in fiscal 'thirteen. Something went wrong. Something went wrong?
Yes. Yes. Yes. Yes. One of the fantastic things we were laughing about is the biggest item on my balance sheet is inventory and there is actually only 4 lines devoted to it where if you look at the pension note it's probably about 110 pages.
So it's all there. Nothing
on inventories, which is my letters, I said. Yes.
For allowance. Yeah.
But you know, we are paying for the sins of others because people mess around with their pension funds, etcetera. Now, whenever they are asking for massive disclosure, it's because somebody somewhere lied to somebody. We, when Jan was still here, that's 15 plus or whatever, definitely over a decade ago, I asked him any defined benefit scheme has got to be absolutely nonsense. I want to know every liability of every pension fund in the group. And I think Switzerland was CHF18 1,000,000 if I recall and I said, close shut, not basically fund everything.
I don't want to hear anything. Today, there are many corporations that are unfunded pension funds that are making products to fund their pension funds. That are not really businesses, but their pension funds are so vastly underfunded that they've got to remain in business. You saw I think was at Kodak. Somebody gave away their business in I can't remember who it was, gave away their business in the UK to the unfunded pension fund, just gave it away.
Who is it, Alan? Kodak, yes. He said, thank you, boom, there you are. What I can say to you about the pension funds, we addressed it probably many years. Alan, when did we do that?
Number is 10, 15 years ago, man. 2000. No, it was in the year 2000. 2,000. We closed the UK.
We did. We paid everybody and just took a hit in that year and because I mean, I think in the U. K, it's over a GBP 1,000,000,000,000 guesstimate of defined benefit in the private sector. The public sector is a multiple of that, unfunded, it's pay as you go. See, this is what concerns me.
We're mortgaging our children and grandchildren's future. This is what worries me. It's bad accounting by governments. And in the end, it will have an effect on all of us. So rest assured here, these things are all funded.
And when we invest in a company, it's part of the checklist. We look at their pension fund to make sure that it's properly funded. That was really your question, I guess. Correct? Yes.
Okay. Now, we don't have hidden hand grenades lying around with liabilities that are not fully disclosed. Yes.
Good morning. Gael Cockermade from MainFirst. First question on the Americas, you had a pretty good performance there last year. Could you please explain what drove the good sales increase in the Americas? Is it local demand?
Is it tourist? And which Maisons have been performing best there? Secondly, on communication expense, it came slightly below your guidance as a percentage of sales. Why did you decrease the level of communication expense? And should it revert to 9.5% going forward.
And yes, that's it. Thank you.
The communication expense, we've been saying for a couple of years, it will fluctuate between 9% and 9.5% of sales. And we're committed to that in the future, I would say. No real change, I would say. Clearly, the Q3 sales growth was lower. It was better in the 4th.
And the guys get a little cautious occasionally, but there's no real change afoot in our communication strategy. Cision America?
Yes. Sales in America, as you said, we are quite good. I must say the mood in America is good, and that also has influenced our customers and the people who buy our brands. Virtually all brands increased without any exceptions, from single digit to 10% 10% of percent. So we believe it should continue at this stage.
I mean, the mood is good. And I think that our Maisons have got a very good perception in the USA. And especially also the watch specialists are recognized for their craftsmanship and for their brand equity. And we see the business growing nicely and we'll see it should continue. If the mood continues to be like this, it would continue.
And the jewelers are also doing well.
And we're just learning as we go as well. Firstly, on advertising, no communication, we don't mess around. We have rules per Maison. Now smaller one with less brand equity will probably spend a higher percentage of sales than a bigger Maison. Because there is also a level where you start overexposing and you lose your exclusivity.
So it's also a bit of art. In terms of the United States, I just spent a long time there. And the cities, they're gateway cities that are disconnected from the general economy. If you take Miami, Miami is a gateway city for a lot of South America. You take New York, you take LA, you take San Francisco, I mean Chicago has got obviously.
But it's like London. London has got nothing to do with Manchester. Apart from football teams, they could be in different countries. If you look at parts of England, 2 hours away from London, in comparison to London, it's a different world. So I think we're going to learn and maybe your generation, younger than I am, to learn that we shouldn't talk about USA.
We should say gateway cities, Hong Kong. Paris is a gateway city, Milan, traveling, Rome, Lucerne. Lucerne is a gateway city for buses with gentlemen and ladies that climb out of buses. So maybe all of us must start thinking differently about and I think Richard said that follow the clients and where do they go. We've just started seeing a wave of Chinese travelers.
Remember, they're 10 times more than the Japanese. And remember the Japanese travelers and how that helped our business. So whenever I get really despondent, which is very often, I start thinking about the demographics, John, don't laugh. And I start thinking and you start and you know who makes the most money. What we all idiots, all of us, we should have bought bus companies.
They arrange it, they get these folks, they get them at the airport and they want 10% to drop them off at the right stores. So what's really important today is to make sure you've got a bloody bus stop in front of your boutique, at the right place. And trust me, in some cities, there are mayors that are painting yellow paint and red paint and white paint in the right places now. Because if you have a place where a bus can stop, that's valuable. And they're coming to the States now.
So we've got to now make sure that we don't have a boutique in the fire lane. You know, this was last week or 2 weeks ago in New York, they were teaching you can't go there. So why not? It's a fire lane, you idiot. What's a fire lane got to do with?
How are you going to park a bus there and a fire truck's got to go past it? So you see, Antoine, that's where with your feet you learn. We follow the clients now. So if you say the USA, Miami, New York is at the USA. And we all are going to have to readjust and think a little bit differently about our clients.
So it's exciting. They're going to carry on traveling. We've withstood worse governments if it's possible, But I actually think we have withstood worse governments than we've got today, worldwide. So all things being equal, I'm relaxed. I would not have taken a year off with the exposure that I have to this company if I didn't trust my colleagues and the products in the pipeline.
And if there are no questions, that's really how I'd like to kill it. I would not have taken a year off, guys, trust me, if I weren't happy with my colleagues and with what I've seen in the pipeline. And I thank you for your indulgence and it's going to be a real pleasure to sit in the back of the room in the future.