With us today, we have Mr. Rupert, Chairman, Mr. Bernard Fornas and Richard Lepeu, Co-CEOs, and Mr. Gary Saage, CFO. Before we start, we'd just like to apologize for the delayed publication emailing of our annual results announcement. Fortunately, at 7:30 A.M., you could read the announcement on the webcast. We should start.
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 U.S.A. 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 for 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 three 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 EUR 10 billion mark. Our turnover nearly doubled in three years. The 4% growth or 9% at constant rates reflected a positive FOREX impact of five 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% 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 operation increased further to EUR 1.9 billion, some EUR 150 million 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 second-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 accounts for 6% of group sales.
Sales grew at 22% on a constant basis with good momentum across countries, locals, and tourists. Most sales arose in Dubai and Abu Dhabi, where we plan to participate to further luxury mall developments. Sales were primarily geared toward 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 two exceptional years in a row. The moderation 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 two outstanding years in a row.
The performance of Richemont in the U.S.A. has been partially distorted by 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. Japan, which represents Richemont's fourth-largest single market, in par 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 has strongly improved since Q4, partially helped by price increases announced for April and May. Let's look at sales by network. The importance of retail continues to grow and now generates 54% of group sales. Retail momentum reflects the impact of 66 net internal stores, primarily in Asia-Pacific, Brazil, and tourist destinations.
The good performance of Net-a-Porter and of the specialist watchmakers directly operated boutiques. Inventory levels of our products in the trade are sound. Wholesale performance reflects cautiousness regarding potential inventory buildup, as well as a further downsizing of the network in Europe, in particular Italy and the U.S.A. Let's also look at sales by product line. The strong momentum enjoyed by jewelry, which is Richemont's fastest-growing product line. 16% at constant rates, well above clothing, +13%, or watches, +8%. A more moderate growth for watches after two consecutive outstanding years, primarily attributable to Cartier lower growth. The importance of watches and jewelry, that together generated over three-quarters of Richemont sales. Finally, the growing importance of clothing, mainly related to The Net-a-Porter Group. It is now our third segment, and together with jewelry, clothing enjoyed double-digit growth in sales at constant rates. Now over to you.
Good morning, everybody. Let's now turn to the Maison highlights. First of all, excellent results generated by the Jewelry Maisons and specialty 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 Maison. Profit at the fashion and accessory Maison were slightly affected by soft sales. Ongoing progress at The Net-a-Porter Group 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, let's move to the Jewelry Maisons.
The Jewelry Maison enjoyed an outstanding performance fueled by strong sales, up 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 & Arpels both generated excellent results. As a result, the operating contribution rose by 20% to over EUR 1.8 billion, and the contribution margin rose to a yearly record of 35% of sales. Both Cartier and Van Cleef & Arpels continue to improve their respective margins. Let's move now to the specialist watchmakers. All specialist watchmakers, with the exception of Baume & Mercier, saw improvements in their results. Strong sales, pricing power, positive currencies, manufacturing efficiencies, and finally, improved channel profitability, both in our stores and with our third-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 Maison. 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 EUR 120 million is in line with last year and reached 16% of sales. Finally, the other business areas. The EUR 11 million increase in losses to EUR 38 million primarily reflects the fashion and accessory Maisons recorded single-digit sales growth, which obviously lowered its operating contribution to EUR 23 million from the EUR 15 million a year ago. It is also explained by the slowdown of Alfred Dunhill in China and a modest growth at Chloé, both in Europe and in Japan, with a respective +8% and +4%.
This, however, was compensated by the improved performance of the Net-a-Porter Group that more than halved its losses to EUR 19 million and continued to generate positive operating cash flow. The group's unbranded watch components 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&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. First, 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 a relatively favorable currency environment. We grew our operating expenses 14%, which was in line with sales, and this led to an operating profit growing by 18% to EUR 2,426,000,000 and an all-time high operating margin of 23.9%. 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 point 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&D and administration, grew by 3%.
S&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&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 total profits, which is on the screen. You can see that our net profit for the year rose 30% to just over EUR 2 billion. Let's move to net finance costs.
The relative stability of the Swiss franc over the year versus the euro meant in the period under review, we recorded non-cash gains on the group's investments and money market funds of EUR 19 million. This compares to a loss last year of EUR 169 million. We also incurred charges of EUR 120 million relating to our hedging program, compared to EUR 98 million in losses last year. Overall, finance costs decreased from EUR 235 million a year ago to EUR 47 million this year. Let's move to cash flow now. We enjoyed a further increase in our operating cash flow to EUR 1,944,000,000. The additional EUR 378 million increase in operating profit was partially absorbed by higher working capital requirements. This absorption was primarily due to an increase in inventories as planned, EUR 582 million. Despite 66 new internal stores and the expected rebuild of watch and jewelry inventories, rotations remained reasonably stable at 17 months.
Other current assets and receivables increased by EUR 151 million. 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 EUR 205 million, relating primarily to the settlement of our hedging contracts. Let's now take a look at capital expenditures. As planned, capital expenditures rose by 27% to EUR 612 million, 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 FY 2013, 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 sq m 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 manufacturing. This is going to be completed this summer. A project was launched for A. Lange & Söhne 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. Chloé 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 & 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 EUR 920 million 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 €3.2 billion, in line with the prior year. Although stable, cash flow generation for the year financed business acquisitions amounting to €474 million. The most notable transactions were the acquisition of a New York real estate property, Varinor, our stamping operation based in Switzerland, and our newest brand, Peter Millar, which is based in North Carolina, U.S.A. Richemont'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 CHF 1.7 billion. Let's now turn to our dividend.
Our dividend proposal for the FY 2013, to be confirmed by the shareholders in September, will be one Swiss franc 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. 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 2014, 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'll 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. We are helping them to internationalize their multi-brand stores, which include competitors. We did it with [Van Pur] in China or with Bucherer in Paris, to whom we are letting the Place Vendôme.
Baume & Mercier has set up a joint venture with Chow Tai Fook in mainland China to leverage on its knowledge of the country and clientele for more accessible price points. Last but not least, we have developed a web interface communication tool with our authorized retailers, which aims to offer a better service by knowing our retailers' 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. 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 fourth-largest U.S. store, and for Montblanc, its second-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 not shop 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 to date are very encouraging.
Let's have a look on the manufacturing developments. Watches and jewelry at Richemont generated close to €8 billion in sales. To support the future growth of what represents close to 80% of our business, our Maison continue to build capabilities and to invest in industrial capacity with ambitious projects. Overall, some €600 million will have been invested over the three years ending March 2014, of which EUR 140 million last year and EUR 200 million this year. In addition to raising our degree of integration, these investments are meant, first, 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. Supplier consolidation, if not supplier restriction, in the case of ETA for movements and Nivarox for regulating organs. Third, to foster high-performance operation, generating efficiencies in production, hence in gross margin. Fourth, to promote innovation in materials and processes. Let me give you a few examples of these investments. Integration in gold stamping with Varinor, Cartier watch movement at Couvet in Switzerland, Vacheron Constantin in Vallée de Joux, Officine Panerai in Neuchâtel, or extension of Piaget at Plan-les-Ouates. Without forgetting Cartier jewelry and Van Cleef & Arpels new jewelry workshops.
Before Richard Lepeu delivers 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 Van Cleef & 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 talents while preserving 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. 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 trend. Please, don't extrapolate future trend on just one month. While comparatives will start to ease this month, bear in mind that it is from a high base until September 2013, and that currencies are no longer as favorable, notably the JPY. April grew at 13% on a constant basis rate and 12% reported. Growth was pretty broad-based geographically. Japan leads 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 monogram stores outperform, yet wholesale grow double digit. Conclusion. Richemont benefits from a premium portfolio of authentic and prestigious Maison with a leading position in high-end jewelry and watches. We believe in sustainable growth 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 commission, and human resources strategies. We will continue to improve our business model through higher integration from production to distribution. 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.
I guess there's a few questions.
Morning. Mario Ortelli of Sanford C. Bernstein. Three questions from me, if I may. The first one is on your market view for the next year. If you think that will be more dynamic, if growing more of the accessible part 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 3.2 billion. 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. 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 than Montblanc and the other fashion and accessory segment. With respect to the cash, our view hasn't really changed. We have increased the dividend this year. It's the 25th year 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. 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. We want to focus on making all of the Maisons better, not just, shall we say, the fashion and accessories in Montblanc. We think overall, there's room to increase the performance in all of our brands. Since Bernard has stepped down from Cartier, that'll probably get a little better as well.
Yes. Good morning. Antoine Belge, 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 probably one of the most gifted in China. Second question also on watches. I think a few months ago, you highlighted that you are 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 are also quite keen to slow the selling to some of your wholesalers, especially in China. Finally, you mentioned the jewelry business being quite unbranded.
Yet, two of your competitors over the last couple of years have done acquisition, LVMH with Bulgari, and then more recently, Swatch with Harry Winston. Is it a bit of a concern to you? I know that Cartier and Van Cleef obviously have very good results. But for instance, if Tiffany was bid by one of your competitors, could you afford Tiffany to be in the hands of one of your competitors?
Are you serious?
Did I hear you say Cartier didn't do well because of lack of innovation? Or was that a serious question?
No, yeah. I was asking for analysis.
No, I'm just asking whether it was a serious question.
It was actually a short term.
It's my last time here. 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 one or two other people. In life, you get people who actually sweat and work and get up like hell in factories. Not glamorous. You get doers. You get people who go to college who are a 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. They're generally smarter than we are. Journalists, they're smarter than we are, trust me.
I get on well with the guys. They're cynical because they say, "What the hell's going on here? We're smarter than these guys." We don't earn as much. You get analysts who don't really take the risks, who come here and who ask us questions. Believe me, you are nothing in comparison to people like ISS, who advise pension funds on how to vote. 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. They rely upon people like you on what to buy. They rely upon people like ISS on how to vote. Everything is just ticked off. Now, there are two 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 businesses are with people like the Hayek's and the Rolex Stiftung, et cetera, who can take long-term views. This morning, I had a joke. I called Nick because they told me that they bought a 25 million CHF stone. I quickly called him. I said to him, "Nick, we stopped bidding at 18 because there's a flaw in the stone." He went, "You're not serious." That's our relationship. Of course, there is no flaw in the stone. 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. Here in Switzerland, I think we created 8,000-
More
no, 8,000 new jobs easily. What we total. I'm not talking about people-
Indirectly
indirectly. We don't have security, et cetera 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 governance on behalf of pension funds. Pension funds outsource this stuff. The people don't actually know the people they're writing about. 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 billions of state funding, which is our money, to bail them out? The banks. 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.
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. Guess what happens? After five 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. I'm not talking about excessive salaries. I'm not. That's not what I've been discussing. I'm talking general corporate ISS-type reports that the institutions that you advise, you folks advise, buy and sell shares of.
About 12 years ago, Jan du Plessis, that some of you will remember, asked me, "Please see this institutional investor. Please, please tell him. Just under 5%, and please see them." So scared that they're going to sell us. Jan said, "If they sell, if they buy, it's their choice." In any case, I decided I would do Jan a favor. He's a valued colleague, I saw them. We had a very nice talk. Very big institutional investor. They more than doubled their holding in Richemont. This was at, I think they bought it about CHF 17, CHF 18, Allan, around about there, right?
Around about.
When it got to about CHF 33, CHF 34, they sold. Okay? That was including VAT and Reinet. I don't know what the combined Swiss franc worth would be. It used to be 50/50, so let's say it's definitely over 130. I would guess it's probably more. I've asked somebody just to look at it today. They gave up from 30, they gave up CHF 100 a share, which I didn't, and my colleagues didn't who kept their shares. 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. I'm not asking you, I'm 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 three or four bottles of wine the night before the board meeting. If you miss 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. And this is why if you look at what it's done in the last five years with its manufacture, it's astonishing, and it cannot satisfy demand in the manufacture. It's not creativity. The other question as to, are we worried about our opponents buying? No. I mean, I just told you, I just had to pull Nick's leg early in the morning. I'm glad that Harry Winston found a good shareholder with Swatch Group.
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. If you really look at our business, you look at Cartier and look at Van Cleef primarily, the two, 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. We're really not in the same business. Tiffany's average sales price is what?
It's three times lower than Cartier.
No.
EUR 400, EUR 500.
No. Tiffany's low, shows you they don't even know it.
That's true.
Tiffany'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. Tiffany does have a poison pill in there, which everybody seems to forget. I think the management of Tiffany have done a pretty good job at managing the company. It's not our style 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 million. I remember coming here to meetings and some of my non-executive directors, it's like a broken old record.
Click, they say, "So what are you going to do about Van Cleef & Arpels?" The answer, "We will nurture it next year." Van Cleef & Arpels, is it performing according to your expectations? I get it in the morning there, then I come the next morning and you guys ask. Same question. 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? 5-7 times the total operating profit of Bulgari. 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.
The key thing for my three colleagues, for me and for-- once you've created free cash flow, which is bloody difficult enough. Once you've created free cash flow, how do you reinvest that free cash flow at the same rate of return in your company? With financial repression today, where savers, the good people in our society, are being raped by governments, because 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 pâté, paper that's supposedly AAA, then they'll create a little bit of inflation. It's the only way, or default. It's that or default.
Savers are being penalized, 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 zero? Do we keep EUR 3 billion when tomorrow somebody may treat Euro land like Cyprus and say, "By the way, you're getting back 80%"? Your clients are not going to like us very much if we took views on their cash. In a sense, by not returning it to shareholders or not putting it into fixed assets, you're taking a view. This is our 25th anniversary. We decided to use the opportunity to return some of the capital. I have no idea whether we're going to have hyperinflation or whether we're going to have a depression. What I do know is it's not going to carry on like this. It's not possible.
When you have central bankers and supra-governmental authorities saying that they don't really have an idea either, you know it's not that comforting. What I do know is that our businesses have withstood really bad governments. We've withstood revolutions. We've withstood world wars, if you look at it over the centuries. 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. We'll withstand it, and hopefully, we'll be able to carry on paying dividends. We've said a few years ago we'd like to grow it at about 15% a year. In order to do that, we need to create brand equity. In order to do the brand equity, we need to do a heck of a lot of small things right.
This is really the culmination of nearly 30,000 people's work across the world. Loyal people who generally stay with us for a very long time, and loyalty from the controlling shareholder to them and vice versa. Collegiality. We've created enormous exports out of Switzerland and a heck of a lot of job creation. I can say the same thing for Rolex or Audemars, for The Swatch Group. I hope that it'll continue. We need you guys to do a better 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. I'm defending Mr. Fornas and his colleagues. I'm asking you, come on, John, you're the next journalist. You guys have also got to do a better work. Hey.
Don't ask me questions on what we see in the future. We don't have an idea. Any idea. Two, go to the watch fair. Sniff around. 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 don't know who I am, and I walk around in the stores. I say, "What do you think of this? What do you think of that? What would you do?" Et cetera. I hear everything. Because the people at sales level tell you everything. I come back. His pre-predecessor had the brilliant idea of taking a picture of me and distributing it to all of the Cartier boutiques. Well, he's no longer with us. Okay.
The problem, you will have more time now.
I've got more time, they say. Do what I do. Hotel groups. I have friends in the hotel business. I read what they say, about blah, blah, occupancy. I call a hotel, and I say, "Listen, have you got a booking for 40? We're looking at" "Yes." "What rate?" "Discount." "Hello, okay." You ask the doorman. Do you know doormen know. You ask the doorman, "How are things going?" "Slow." You read the analyst report. They said, "It's a booming sector." Very interesting, you've just asked the doorman. The doorman said to you there's nobody here. Do what we do, which is ask. If you want to get to the bottom of things, go to the bottom and ask the 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 couch. 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. This is about 15 years ago. Right? It was not a male watch. Do what I do. Go and ask the people at ground level. They tell you everything. John?
Just wait a second.
Sorry.
Just Antoine, to go back to 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 want to use this opportunity to give credit to the IT team under the direction of Desiree Schoeller. We continue to roll out the Gemini system. 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. Europe and America are done. We'll move to Japan next year. 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. Jon 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. 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. I know it's pretty hard for most of my colleagues, too.
Why don't all of you interview our guys?
Yeah.
Yeah.
Anyway, I'm sure we're all in Baselworld, which-
I understand why now. 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 SIX Swiss Exchange calls us and says, "These are forward-looking statements." Okay?
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, that 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. Then a last question for Johann, regarding your sabbatical.
Is this a prelude to a 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. Antoine, sorry, but John, why don't you answer? No, it's not a prelude. John, I just asked how many people have been in the same job for 25 years. Same job. Anybody else here? Albert, yes. You quit, totally. Alan, you have not been in the same job because you live 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 two administrative, the ladies in your office, they are your bosses, by the way, but they give you your schedule for the next year. They've worked it out that every week it's this and this and this and this. You've got friends and they say, "Let's go to the Rugby World Cup." It'll take two weeks.
You say, "Well, they've arranged some meetings for me." This carries on 25 years. After a while, you decide, well, maybe you just want a little bit of free time. I see somebody said it's my heart. It's not my heart. The good news is the share price went up by 8% or 5% today. It seems that the people are very relieved that I'm getting out of here. Okay. 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.
I say, "Well, I'm no longer executive." "Well, okay." I have exactly the same lifestyle without any authority, except for the fact that I've got more shares than they do. It doesn't work like that. 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 three, 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. It was planned. It was announced. There's nothing sinister. I just want to have a bit of free time. 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.
I haven't had the time to go for a four-day course. It sounds stupid, but they're little things like this. Books, I've got about 50 books that I want to read, that you just don't allocate the time. It's nothing sinister, nothing crazy. The share price went up quite dramatically after I announced that I'm no longer involved. I'm happy and I'm relaxed. 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. I'm sorry that you were not invited. I was not aware that you put a ban. You put a ban on him, Sophie. Well, all of them. Okay, because when I last went to the fair, they were there. That's how long ago I went. Yes, 2025. Yes.
We organize events. Exactly. It's like within the framework of events. Okay. The other questions, can you still remember?
Asia.
Okay. You are the worst combination, journalist and then analyst.
Asia. 41% of our sales, just look back at the growth over the last three years, it's clearly a fantastic consolidation going on. It's about demography. My Chairman used to say, "Nothing you can fight but demography.
I'll fight anything, demographics I won't fight. When you've got fewer people.
You know as well that you cannot just look at China mainland, but you have also, especially for the high-price products, look at where the tourism 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 the addiction or the appetite by the Chinese for our handcrafted products will not disappear, has not disappeared. At all. However, this is not only China. There are many other opportunities across the world, including, of course, Brazil, China, Indonesia, Africa.
China.
We're really working and focusing on it as well.
It's-
China is doing well.
Look, it's very unfair.
The 1%, 99% is unfair. Quite frankly, it's unfair what happened. You guys, some of you who are older will remember that I warned it was going to happen. The 1%, they're buying apartments in New York, they're buying houses in London, and you find this thing of a city state reemerging, and they've got money. If you take it across the world, they're not as affected by the economic downturns. 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 ridiculous real estate prices five years ago. Even in 2007. These records are all being shattered.
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 not gonna 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. The inventories are in great shape. It's a big value number, that's fine, but inventories have never been better. I do expect less of a build next year.
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% and 45% typically. We've seen two 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.
Be interested to know what your thoughts are as to how you reduce that Quartz component going forward. 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? It's over EUR 600 million of turnover. It's not that far away from Montblanc. There doesn't seem to be that much disclosure. Maybe talk a little bit about how you see the online pilots that 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%-150% growth. It's not doing that at the moment. 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. Maybe you could just comment on that. Thanks.
Okay. If I could.
Yeah
I can just kick off by saying I'd 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. I think Bernard said it's now the fourth Cartier's online business, the fourth
Fourth
equivalent to the fourth store.
Montblanc.
Montblanc as well. I've discussed it with other CEOs. I can't tell you who they are because maybe they have not even discussed it or disclosed it to their shareholders. I haven't found one traditional business where their online business on a global scale is bigger than their single biggest boutique. If you look at it as a great service to your clients, and it is an online boutique. I don't think you'll be far off for the current time, unless, of course, you started online. If you started online, sooner or later, people want a bricks and mortar as well. We're monitoring it. We're learning an enormous amount. It's a learning experience for us.
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. Gary, I wait with great interest.
Yeah.
As for Quartz watches.
Yeah
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. 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. 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 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. He plays golf with it very violently. He's not a great golfer, so it takes a hell of a lot of blows.
He often hits the big ball before he hits the small ball. With the watch on his arm. 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 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. 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.
Mechanical watches are pains in the butt. However, I wear mechanical. Okay. I love this. Nice and mechanical and discreet. I'm guilty, we're all guilty. Is it a great thing, though, Paul, if you think about it. We're creating air miles. It's the airline industry. We're creating air miles. They're out there. All these things are coming back. It's fantastic for job creation. Think of the logistics. Think of all the spare parts you've got to keep. We get clocks back from Jaeger. 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. We had to take it back to service it because it was a Jaeger movement. Correct? It was Jaeger, wasn't it?
Jaeger-LeCoultre.
Ja, Jaeger-LeCoultre. It's our obligation. Bernard, he has done unbelievable things, creating a bigger headache for me. Mechanical excellence. It's true. Look at that.
It remains mysterious.
It's mysterious. Tell him. It's the truth.
Yeah.
The truth is, it's wonderful for all of us. 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, about four years after we bought Panerai, we still didn't have agents or anything in London. I had this Panerai, and it kept on stopping at 6:00. 6:00 it would stop. I took it in to Cartier in Bond Street and said, "Fix this thing." Sent it back. "No, it's fixed." Okay. The last bow, about four days later, 6:00, it stops again. I'm really annoyed, I go there. I say, "What is the matter with you guys? There's something wrong. The hour hand is getting stuck." He goes, "Can't be. I've worked it out.
The minute hand goes, or the hour hand's stuck." After a while, there are like four of these people, craftsmen. After a while they say to me, "Mr. Rupert, you know this is a manual watch?" I say, "Of course it's a manual." Said, "What does it mean?" He said, "No, it's not automatic, it's manual." Oh my God. I get up at 6:00 in the morning. I wind the watch. It runs for 36 hours. It stops at 6:00. I get furious. I take it to them. The story's well-known throughout the group, I can tell it. I had no idea this was not an automatic watch. It was a manual watch. 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.
I would love to sell more quartz, but the market doesn't want it. Bernard?
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. What you should have said is, after the two phenomenal years that you had, it seemed that it's cooling a little bit down. It's true, because we had to produce, and the capacity and everything. China has cooled down, as for everybody. 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. 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 Rome.
That's what you have to do, is to track if you want the real picture. The real picture is that there is no worry.
There's no worry.
There's no worry. The last element is what our Chairman said, is if you had been to the SIHH, you would've been surprised and amazed.
I'm sorry. Sorry to Sophie. Sophie, I'm sorry. Okay. I will, Sophie, authorize them.
I just wanted to say.
to come to the SIHH. If you give me your words that you will not try to get forward-looking statements from our colleagues. If one of you does it, you'll all be banned again. It's up to you to have a sense of decency. I'd like you Otherwise you don't get a feeling. If Sophie.
I'm going to have to organize it then.
Yes. It's not a problem.
Okay.
You see, I'm in a fortunate position that I see it at the product committee meetings. I really did not want to go to the SIHH, because then journalists and people want to talk to me. I'm supposedly be the boss, but I'm not really. It was Norbert and these guys. I've tried to avoid it, but I can tell you on a continuous basis, and so can Bernard and Alain Perrin, Jo, well, now Franco. The members of the product committee can tell you what it looks like 18 months to three years from now. You don't do a new watch. It's like a new automobile. It's two years. It's even longer, a movement.
If you want to have a good feeling about Asia and creativity in watches at Richemont, you are invited to join us at Watches & Wonders event, the 26th of September in Hong Kong.
Yeah.
Which will be held in Hong Kong, which will be open to.
Yeah
selectively to public invited. For three days, we'll have an event there where we may see.
That's a good idea, because you'll also get a feeling for the Asia. We know creativity and products coming through at the product committee. We know that from, I would say, what do you say?
We see 2015.
We see 2015. We're right now busy with 2015. It's not a science. You know, Berenberg, you would know. It's art as well as science, because you've got to think what's going to happen. We thought in 2005, 2006, 2007, 2008, we thought, "Hmm." We worried about the economy, which meant we were worried about the effects of a bad economy. Unemployment, tensions in society, less show-off, definitely not bling. 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. This, nobody can tell me they know what this is. Okay? This is a thin A. Lange & Söhne. That took them two and a half years with the help of Jérôme Lambert. I love it.
Nobody It's like an Audi. People don't mind if you have it. No, seriously. Antoine, I would expect you to ask me what the Archbishop of Spain commented on Monday or on Sunday. It was reported in the FT on Monday. He was warning that the policies would lead to class warfare. He's right. Social fabric tearing. He was worried. The church has 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. That leads, next thing is antisemitism. French, sorry, you guys don't have a good record. No. I'm serious. I see. The Swiss. It's, he's Swiss, sorry. He's Swiss. No, he's Swiss. You find all of these social tensions building up. It's not only in China.
Remember, there are only about 80 million, 90 million members of the Communist Party in China. That is tiny minority. They run everything. The general masses are saying, "Whoa, what's going on here?" Military number plates on Ferraris. What is this? What do you do? You order a crackdown. Of course you do, because you are seen as the privileged. It's logical. Absolutely logical. 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 man in Italy, you don't really see Ferraris or Lamborghini or hypercars on the autostrada anymore. They're gone. They're in basements. They put in the evening in car, in carriers and brought to other parts of Europe. People don't want to be seen.
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, huh, head of a factory, click, boom, you're on the internet. How can the head of a factory in a rural province in China have that? There are forces at work which will impact on the buying patterns of people. Those are the things we should all be concentrating on. Today you go click, boom, you're public. When you have 8 million, sorry, billions of people and you've got 80 million running the society, you must watch it. What's happening, the austerity in Spain, that archbishop, that statement of his is very telling. I'm more worried about that.
What did we do? We went anti-bling. In a sense, to give you an idea, we went ahead of time. Today, our best sellers are discreet 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 the next moment they're on a website. It will change 10, 15 years from now, maybe. In the meantime, we've positioned ourselves to be discreet. Is that a fair summary?
Discreet luxury with 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.
It was in the jewelry business already.
I guess I have to wade 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. I can't possibly give you a ratio that works. On the disclosure question, the financial team at Richemont 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. As to the best of our knowledge, we're one of the first people to adopt the new standards in IFRS land. I think we're a standard-bearer.
The technical people here in Geneva, they really run my life in terms of disclosure. We say we want to produce the best IFRS technical financial statements that we can. Actually, if you apply strict IFRS rules, we should be disclosing less, not more. Montblanc is of a size at the moment where it doesn't have to be disclosed separately. 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.
That's when you get above the 10% sales.
You will disclose. Thanks.
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 all involved in the mess we're in. We used to have hidden reserves. Banks had hidden reserves, automobile companies had hidden reserves. Any business with any cyclicality 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&L. At Rand Merchant 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. You didn't have to do business. Bad year comes, you don't lend money. Now, automobile companies did the same. Full disclosure. Everything must be put on the balance sheet.
People did not have control of their companies. Of course, from LBOs, I mean, it was different acronyms, but it meant the same thing. Borrow a hell of a lot of money, write the interest off against through the P&L, leverage up and buy. 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 and the M&A and corporate finance divisions, I've got three meters of proposals and reports to me and Richard and Jan du Plessis and Joseph Kanoui 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. 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 raiders. 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 hoped that he would say 40% because he wouldn't have slept. The point is we don't know. We'll do our best, but we just don't know.
Thank you.
Luca 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 that-
Please call me Johann. None of these guys call me chairman. It sounds like Chairman Mao 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. Second question, seeing 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 third-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-
Sorry. Look, I just want to write down. Sorry. It's okay. SBCC. Retail. Retail. Yeah. Yeah.
Thirdly, on how to invest the significant stock of value that you have monetized, if you could let us understand, and remind us M&A criteria and how you see these should be prioritized. Thanks very much.
Firstly, as Bernard pointed out, I think the SBCC, we're in 2015. I told them if they stuff up in a year, then I'm gone. Joking yesterday. We had a colleague with us yesterday who's very creative. 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. We said to him, "Listen, you just" I'm sure you'll manage him, Bernard, you and Alain, et cetera. 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. If it goes the other way, you own a hell of a lot of leases and you kick yourself and you're saying, "Why was I so greedy?" It's a balance.
In major cities, in gateway cities, we think you really have to maintain your own presence. I would say when I started, it was about 1,500 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. 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. You've seen that their standards, some have slipped, some have just shut. There is a natural attrition amongst some of our partners in the wholesale business. It's an art.
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, or AP, the people at the SIHH, it makes sense. You know that the Bucherer store in Lucerne has a turnover over CHF 1 million a day. I'll repeat that. Lucerne. Bucherer has a turnover of over CHF 1 million a day. That's a business. It's their business, Mr. Bucherer's business, but it's a multi-brand watch store. We will certainly carry on working with the Bucherers of the world. They really know how to run a business. The third one, investment in M&A. We talk about Van Cleef and about my baby, Panerai, we don't talk about a load of rubbish that I also had a hand in buying.
Okay, we haven't always been that successful. Maybe we've got to cull our bad investments quicker. That's one thing. Secondly, right now, 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, the problem is when you come of a certain size, you can even buy a little gem, it just doesn't rock the needle.
Your problem is you buy the wrong things for the wrong reasons. The one thing I do not believe in is issuing shares. It's got nothing to do with the control element.
We have a right to, if there's any rights issue, to follow the rights. We have enough cash at the holding company, we can follow it. 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. The second thing you've got 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. I don't really invest in companies that continuously buy new things for shares, because their primary incentive is to overvalue their shares then. 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 had to make that decision, which we discussed here a year or two ago. Do we invest more in Cartier, Piaget, and, terms of jewelry, Cartier, Piaget, and, well, Cartier, Van Cleef & Arpels and Piaget, or do we go and buy a third thing? A return on investment is so much higher by backing our own colleagues. I mean, it's a multiple than buying another thing. We have a saying at home that 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. As soon as you start stepping in all of this stuff, then you wonder, "Why did I climb across the fence?" Whenever we buy something, we find out we never thought of this, but it's there.
It takes the most valuable component of these three guys on the right, it takes their time. 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 more scope than Piaget. He's done brilliantly in watches. 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. Now you expose your balance sheet to a bunch of leases in bad parts of the world. No.
We're not arrogant enough to think we can fix or add value where they're already well-run. The really good companies that you drool about are already well-run. What makes you think you're smart enough to add value? Rather put, say, "Chapeau. Well done." You guys can invest in them. You know what I'm saying? M&A, at this stage, is not going to move the needle. I can say it, nothing on the horizon is going to be of any importance for you folks in the room. Don't worry about it. Is that fair? I'm getting you guys out of all the trouble now, okay? You owe me, okay?
I appreciate it.
Yes, sir.
Morning. Chris Walker from Nomura. 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 rough or polished diamonds, cutting, polishing. Any opportunities there? You talked about M&A there to maybe integrate the supply chain further to secure long-term demand, sorry, 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, event is a lot of [grand man shift] 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 including by turning fast your inventories. It's one way of showing you that we are really focusing on improving the supply chain. As far as diamond's concerned, I think Johann is really an expert.
No, I'm not an expert.
It's a different business. Mining is very far away from us. We know that some opponents have tried to integrate, but I think there's so long chain before
the product come and is really become an opportunity for the high-end jeweler
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, with repetitive. Three gold rings, stuff like that. It's different. It's vertically integrating in terms of diamonds and stones. It's a different business with a totally different supply chain. 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 so this morning when I told him that he had a flaw in that stone that he bought. He thought so for about a half a minute. We have stone experts that can analyze stones, but we don't know how to mine it.
Sorry. I was thinking more, secure the supply from miners. Is there more work to be done there?
They sell it at the highest price. No. They're free marketeers, these guys. They'll sell their mothers. We've known most of these people for a very long time. Funny enough, they're the same bloody guys that are in the real estate business. It's always their second cousin, right? You rent from the guy here. He's got the lease on this store. 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. By the way, they're loyal. We've had friendships with them for decades.
Now they got some Indian cousins as well.
Yeah, they've got some Indian and Chinese cousins as well in the polishing side. With the big stones, it's the same people. Sorry, I saw a hand. Sorry. Can you just hand it back?
Patrik Schwendimann, Zürcher Kantonalbank. I have three questions. Firstly, regarding the lower gold prices. What do you expect in terms of margins? I know consumers are not stupid. Anyway. Secondly, what to 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 and May for Japan. What was the overall price impact in this April sales number? Thirdly, what will be the impact of the IAS 19 for the pension fund 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. If you want.
Why? If I may ask. If he'd asked another question, how many tons of gold do you use in your business, he could have-
Yeah
extrapolated himself.
Yeah.
Is that also a secret?
No, that. Yeah. Yeah. No.
Listen, EUR 100 movement is roughly just below EUR 100 in operating profit. EUR 100 million in operating profit. Under that, but under.
Thanks, boss.
Up and down.
Yeah.
We don't speculate. That's the key.
Okay
you got to understand. The key real thing is we've got to turn it through Varinor, that it doesn't have accounting effects. In the end, don't think, "Oh, this guy's going to make a 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? Next year, it equalizes out. Whether you lose FIFO or LIFO, it doesn't really matter.
It's the cost of doing business.
On the Japan question, we.
I want to put this 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.
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.
Yeah.
The yen dropped by more than the price increases.
We'll have to look at it again.
Yeah
In the fall.
The pension question?
The pension question. Ask that guy behind you there, because I've got it. Page 14.
Okay.
Which page? EUR 5 million gain in this year.
Inventory.
Why are you going like that?
Sorry. EUR 3 million in fiscal 2013.
Sorry, Matthew is going like this, so something went wrong. What?
Something went wrong?
Just because the largest note in the accounts
Yeah.
Section. Oh, yeah.
One of the fantastic things we were laughing about is the biggest item on my balance sheet is inventory, and there is actually only four lines devoted to it. Where if you look at the pension note, it's probably about 110 pages. It's all there.
There's nothing on inventories, which is my level of assets.
Yeah.
Four lines. We are paying for the sins of others because people messed around with their pension funds, et cetera. Whenever they're asking for massive disclosure, it's because somebody somewhere lied to somebody. When Jan du Plessis was still here, that's about 15+ or whatever, definitely over a decade ago. I asked him, "Any defined benefit scheme has got to be Absolutely, this is nonsense. I want to know every liability of every pension fund in the group." I think Switzerland was CHF 18 million, if I recall, and I said, "Close. Shut." 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. Their pension funds are so vastly underfunded that they've got to remain in business.
You saw, I think, was it Kodak? Somebody gave away their business. I can't remember who it was. Gave away their business in the U.K. to the unfunded pension fund. Just gave it away. Who was it, Alan Grieve? Kodak, yeah. Said, "Thank you." Boom, there you are. What I can say to you about the pension funds, we addressed it, many years. Alan Grieve, when did we do that? It's 10-15 years ago, man. 2000.
2000.
2000. No, it was in the year 2000.
Yeah.
2000. Closed the U.K. We closed the U.K. We did.
We paid everybody, just took a hit in that year, then because, I mean, this is I think in the U.K., it's over 1 trillion GBP 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. In the end, it'll affect on all of us. Rest assured here, these things are all funded. 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. If that was really your question, I guess. Correct? Yeah. Okay. Now we don't have hidden hand grenades lying around with liabilities that are not fully disclosed. Yes, sir.
Good morning. Gael Colcombet from Manifest. 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? 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, should it revert to a 9.5% going forward? Yeah, that's it. Thank you.
The communication expense, we've been saying for a couple of years, it'll 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 third quarter, the sales growth was lower. It was better in the fourth. The guys get a little cautious occasionally, but there's no real change afoot in our communication strategy.
Sales in America?
Yeah. Sales in America, as you said, were 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 tens and tens of percent. We believe it should continue at this stage. I mean, the mood is good, and I think that our maison 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. We see the business growing nicely, and we'll see. It should continue. If the mood continues to be like this, it would continue. The jewelers are also doing well.
We're just learning as we go as well. Firstly, on advertising, no. Communication, we don't mess around. We have rules per maison. A 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. It's also a bit of art. In terms of the United States, I just spent a long time there. The cities, they're gateway cities that are disconnected from the general economy. If you take Miami is a gateway city for a lot of South America. You take New York, you take L.A., you take San Francisco. I mean, Chicago's got, obviously. 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 two hours away from London, in comparison to London, it's a different world. I think we're going to learn, and maybe your generation, you're younger than I am, to learn that we shouldn't talk about U.S.A. We should say gateway cities. Hong Kong. Paris is a gateway city. Milan. Traveling. Rome.
Lucerne.
Lucerne. Lucerne is a gateway city for buses, with gentlemen and ladies that climb out of buses. Maybe all of us must start thinking differently about-- I think Richard said it, 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. Remember the Japanese travelers and how that helped our business. Whenever I get really despondent, which is very often, I start thinking about the demographics. John, don't laugh. I start thinking. You know who makes the most money? What we're all idiots, all of us. We should have bought bus companies. Sent. 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. 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. At the right place. Trust me, in some cities, there are mayors that are painting yellow paint and red paint and white paint in the right places now. If you have a place where a bus can stop, that's valuable. They're coming to the U.S. now. We've got to now make sure that we don't have a boutique in a fire lane. This was last week or two weeks ago in New York. They were teaching me, "You can't go there." I said, "Why not?
It's perfectly" "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?" You see, Antoine, that's where with your feet you go and you learn. We follow the clients now. If you say the U.S.A., Miami, New York, is it the U.S.A.? We all are going to have to readjust and think a little bit differently about our clients. 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. 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.
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. 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.