Good morning, everybody in the hall. Welcome to our half year results presentation and also a warm welcome to all of you out there in the World Wide Web sitting behind your screens. We did experience another strong half year, primarily helping us was foreign exchange. Our sales momentum has consistently moderated yet remains positive in all regions. The overall environment, the weak euro versus the U.
S. Dollar and yen, the relative stability of the Swiss franc versus the euro, more moderate price increases in terms of precious materials and even a certain decline in diamond prices have helped us on the gross margin level. Our channel differential is extremely healthy. Retail is holding its growth pattern month on month and we see a declining wholesale trend at the moment, but we view that as healthy as well. Let's look at some key figures.
Our results for the period were driven by organic revenue growth and foreign exchange. Sales were up 21% or 12% at constant currencies. This reflects a positive foreign exchange impact of 9%. We had growth across all businesses and all segments and all regions. Retail continues to outperform wholesale.
Our operating profit grew by 28% leading to an all time half year record 27% margin on sales. We continue to enjoy strong pricing power, continued positive foreign exchange and improved gross margins. Our net profit rose by 52% and this is primarily related to September 30 exchange rates. We did enjoy healthy cash flow operations of €575,000,000 which was broadly in line with the previous year. Let's get into the details of sales now.
1st in Europe, all of the charts that you see traditionally are in constant currencies. Europe is our 2nd largest region with 28% of group sales. Sales in Western Europe grew by 18%. This rate primarily reflects organic growth. It's driven by tourism now estimated to account for 60% of Western Europe sales.
Although it must be said that sales from local domestic consumers particularly in France, Germany, Benelux and Switzerland continue to grow. Most Maisons improved their performance versus the prior period and jewelry, watches and ready to wear were the top performing categories. Sales in Russia grew at a lower pace than Western Europe, primarily relating to the significant high jewelry sales that we saw last year. Now on to the Middle East and Africa. This region accounts for 6% of group sales.
Most of the sales are done in Dubai, Abu Dhabi, thereafter Kuwait, Saudi Arabia and Qatar. Sales grew by 28% on a constant currency basis, driven primarily by locals, tourism and the product categories were geared toward premium watches and jewelry. The active commodity market has certainly helped us in this region. Let's move to Asia Pacific. This is Richelan's number one region approximating 41% of group sales.
The 9% increase in sales reflects a contrasted performance among countries and a strong incentive for the Chinese customer to travel to Europe given the weakness of the euro. In terms of markets, Macau, Korea, Taiwan and Singapore grew at double digits. In terms of channel, retail was more solid continuing to benefit from our store upgrade and opening program. Product wise, Jewelry and ready to wear outperformed. Mainland China with 9% of group sales is our 3rd largest market now, almost on par with the U.
S. And slightly ahead of Japan. Growth was partly driven by Mainland Chinese at home and in other Asian markets. Let's move to Americas. Its growth rate has significantly moderated to reach 4% for the 1st 6 months.
The performance of Richemont in the United States reflects a challenging environment in a region that does not benefit as much from tourism as Europe. Must be said, however, a pretty tough comparison base for 2 years in a row and there is a bit of timing of high jewelry sales in the first half. And it has to be said that we are seeing a cautious approach from our retail partners. Overall, the region's performance was driven by retail and domestic tourism. Let's move now to Japan.
It's our 4th largest single market with 9% of group sales. The sales results confirmed again its remarkable resilience. The sales growth was driven primarily by Specialist Watchmakers and Alfred Dunhill. The growth was primarily organic as only maintenance CapEx is allocated to this market. Let's now look at sales by network.
Retail continues to lead. Thanks to good performance at the Maisons directly operated boutiques and also the continued growth of Net A Porter, which is above the group average. The growth is pretty much broad based in all regions and we opened 40 new stores in the first half. This outperformance of retail is moderating. Wholesale growth was greater in Europe, Middle East and Africa.
The inventory levels in the trade are sound. Our wholesale receivables are sound and this generally reflects the cautiousness of both us and the retailer. We have given the instruction to our Maisons not to overstock our wholesale partners. The group now generates 51% of its total sales through our internal boutiques. Of our watch and jewelry product categories.
These two categories generate 75% of our business. The dynamic nature of jewelry is clearly shown in the growth rates which is our fastest growing one. Jewelry grew by 18% at constant rates which is well above clothing at 12% or watches at 10%. This also shows the growing importance of our clothing business, which is now our 3rd largest segment. The slowest growing category is without surprise writing instruments, hence the reason for the diversification of the Montblanc Maison into Watches and Leather.
Now before I turn it over to Sophie, I'll just go through the Maison highlights for you. Here are the main points to remember about our performance in the first half. We had substantial profits and profitability at the Jewelry Maisons and Specialist Watchmakers. We had reduced, but still solid profitability at Montblanc. We enjoyed stable profitability at Fashion and Accessory Maisons.
We've shown good progress with our Net A Porter business during another year of structural expansion. And now I'm going to turn it over to Shelby to go through in detail the segmental activities.
Good morning, everyone. So as usual, we start with the Jewellery Maisons. The Jewellery Maisons enjoyed an outstanding performance fueled by strong demand, up 20% sales were up 20% at actual rates, favorable currencies and pricing power. Cartier and Van Cleef and Arpels both generated remarkable results, leading to an operating contribution of €958,000,000 up by 31% over the comparative period. Contribution margin rose to a half year record of 37% of sales, with Cartier and Van Cleef and Arpels both continuing to improve their respective margin.
Let's look at the main product and network development with the jewelry Maisons. Sorry, I went too fast. So first, Cartier. Cartier reported sales grew at double digit rate, driven primarily by Europe, Asia Pacific and the Middle East. High jewelry performed very well with the Sertilege collection as well as iconic bijous with love, Trinity and the new Justeinclu line.
This is also true for gold, high jewelry and high watchmaking watches for men. Francaise, only available in gold and jewelry, had a good start. Retail sales with its 293 Cartier stores continued to outperform wholesale. Cartier carried out a few, but major renovations, extensions such as Milan, Monte Napoleone and Paris Carri La Fayette. The wholesale network was streamlined further in Europe.
Cartier is also making substantial investments in watch movement manufacturing, as Gary will detail later. Cartier's initiative in social media with the Odyssey movie were awarded the Lion D'Or and Cat Festival. This movie generated over 200,000,000 views. Another initiative to raise visibility and sales was the launch of the new Depayzmont high jewelry collection, which consists of 140 pieces at the Biennale des Antiqueurs in Paris, which reasserted Cartier as king of jewelers. 30, the Royal Style, King Dynasty and Winthrop Gold Jewelry exhibition at Taiwan Now Vamplif and Arpels, which enjoyed strong growth driven by jewelry with Perlee and continuously enriched Alhambra collections and watches across segments.
Sales were broad based geographically, with the exception of the U. S. A, which had benefited from major high jewelry sales in H1 of last year. Van Cleef and Arpels further expanded its retail network to 97 boutiques, with openings notably in the new Sao Paulo Iguatemi in Brazil and Abu Dhabi Etihad Towers. There are also ongoing store innovations extensions, the main ones this half year being Moscow Stolechnikoff and Los Angeles in the States.
Vantage and Arpels benefited from high profile launches of the Palais de la Champs high jewelry collections in Paris, initially at the Paris de Tokyo Fallet Tokyo, sorry, for the VIP clients and thereafter at the Lionel des Antiques, both in Paris. Visibility was also enhanced by the prestigious exhibition at the Art Decoratif Museum. The Maisons now showcased its technical expertise as a master in high jewelry with its new jewelry school, Les Coles Vented en Arbeles, Place Vendome in Paris, which is open to the public and actually just recently opened. So now let's look at our Specialist Watchmakers. Most Maisons enjoyed substantial growth in sales.
As a result, all Specialist Watchmakers, with the exception of Baume and Mercier, saw an improvement in their results. Positive currencies, pricing power and improved channels profitability, both in our stores and with our 3rd party retailers, mitigated higher input costs. This led to a 51% increase in profits. In turn, operating contribution reached an all time high of 32% of sales. Let's now look at the main product and network developments of these segments.
So first, TiAJ. TiAJ's performance was driven by Europe but more than compensated for the stabilization of sales in Asia Pacific. The half year saw confirmation of the success of its iconic products, namely the ultrafine Altiplano watches as well as the precision and Rose Bijou collections. The latter benefited from a comprehensive communication concept ranging from digital campaign, PR pictures, events to display materials. For the 2nd time, Piaget participated to the Paris Biennale des Dentigare, where it unveiled 71 pieces of high jewelry and high jewelry watches of its new Couture Preciers collection.
Its new boutique concept that reflect the emphasis on jewelry was successfully inaugurated at the Hong Kong Mandarin Oriental flagship store. Moving on to Vacheron Constantin. The maiden strong growth was constrained by shortages, hence the reason why a major extension of manufacturing capacity is in progress. The period was marked by the increased success of the iconic Patrimony line and special orders of Atelier Cabinotier as well as the introduction of the new Les Universes insignis, which collection which enhances Vacheron Constantin's reputation as a master craftsman. Distribution remains highly selective with further reductions in the number of third party concept sales, in addition of a few boutiques.
The excellent start of the recently opened U. S. Boutique on Madison Avenue in New York bodes well for the new Hong Kong Prince Building boutique. The Paris flagship is expected to open early 2013. Let's have a look at Lung and Sona.
Its significant growth in sales was led by Europe, Asia Pacific and Americas. Its complications and iconic products outperformed, in with openings in Abu Dhabi Etihad Towers and Dubai, with openings in Abu Dhabi Etihad Towers and Dubai Mall. Now Roza TV, which posted solid sales growth, mainly fueled by China, Japan and Americas as well as continued demand for Excali Beurre Double Tourbillon and Lamonegasque. New Excali Beur 42 Velvet Poussillon Watches were met with encouraging response from the market. Market presence continually improved with both a new corporate identity, meaning new logo, new boutique concept and new advertising campaign and an international expansion in Dubai, Abu Dhabi and China.
I would now like to turn to Jaeger LeCoultre. Bismissant enjoyed commendable sales growth, balanced among geographies and channels. Product wise, high complications, Geomet Thera Tourbillon, complications from the Master and Reverso lines and new feminine line Rendezvous were highly successful. While new stores were opened, notably Beijing Park Lights, Hong Kong Print Building, Sao Paulo, Equatemy, the Paris Plaza and Home benefited from a major extension. This new 500 square meter flagship store introduced the new brand retail concept.
Let's now have a look at IWC, whose sharpest interest in sales was led by Europe sorry, was led by Retail across geographies. The Portuguese and Portofino lines remained in strong demand, while the regionally donated Pilot line is enjoying a successful debut. The Specialist Watchmaker further invested in retail. New store include Zurich Van Ostrasse and Paris Rue La Pe. Moving on to Officine Panerai.
It's solid it enjoys solid sales growth, especially in Asia Pacific. This reflects the continuous strength of the manufacturer collection and of the collection with in house movements, notably the Luminor Marina in 1953 Days and the success of the vintage Luminor 1953 days. Our fleet in E Panera's ongoing retail expansion included openings in Sao Paulo, Guatimie, Macau and Dallas. Finally, its new manufacturing site near Neuchatel should be completed in a year from now. Let's turn to Bauma Mercier, which suffered from a challenging trading environment, accentuated by a high exposure to wholesale and caution exerted by retailers.
Sales have also been penalized by high exposure to the domestic Western clientele and low exposure to Chinese demand, both at home and abroad. This was not offset by the success of a new Kaplan 44 millimeter and handsome small, which now ranked in the Maisons' top 5 bestsellers. Boy Mercier will vest for record losses this year. Now Montblanc. Let's look at the main developments of Montblanc over the past 6 months.
The 10% increase in sales was driven by watches and currencies. Retail that account for about 47% of Montblanc sales continued to outperform wholesale. Growth was impacted by the importance of Western clientele, lower contribution of tourism and reduced wholesale distribution. Operating contribution of €53,000,000 is in line with the comparative period and reached 14% of sales. The numbers we just saw from Montblanc reflect a contrasted performance.
On a reported basis, all regions grew at a double digit rate. At concentrates, sales were driven mainly by China and watches, both enjoying double digit growth in sales. The U. S. A.
Posted a good performance, partially helped by the new e commerce platform, which is now Montblanc's number 2 stores in the States and which managed to attract new Klingantelle. Single digit growth in Writing Instruments despite success of limited editions like Pablo Picasso 91 and the new StarWalker Red Gold line underlines the more limited potential of this market, coupled with a reduced wholesale clientele. Double digit growth in watches reflects the success of Montblanc's diversification strategy, supported by the new slimmer Starclairs Feet as well as the Nicolas Veossek and Time Walker Twinfly premium lines with in house movements. Retail wise, focus remains on upgrades with few openings that include in Saint Etienne Beijing and Abu Dhabi Etihad Towers. The beauty of a second digital film celebrating the chronograph invention by Nicolas Riosec received several awards at Cannes Festival.
Finally, the other business area. You remember that this segment comprises the Fashion and Accessories Maisons, the NET A PORTER Group and the facilities involved in the manufacturing of unbranded watch components to 3rd parties and to our Maisons. Fashion and Accessories Maisons recorded double digit growth in sales and an increased operating contribution of 25,000,000 euros The NET A PORTER group reduced its losses and generated positive operating cash flow. Remember that results were affected by the €11,000,000 half year intangible amortization that will disappear after March 2015. It was also affected by investments in U.
S. And Hong Kong platforms. Losses at the group's unbranded watch component manufacturing facilities were in line with last year sorry, with the comparative period, so in other words, H1 of last year. This was due to further investments in vertical integration, partially compensated by high volume and improved know how. These losses consist of R and D costs and subsidies to the Maisons being the differential in price between insourced and outsourced.
Let's now look at the main product and developments of this Maisons of this segment, sorry, over the past 6 months. So we start, as usual, by with Alfred Dunhill. China represented the biggest source of growth versus prior year for Vistash and Accessories Maisons. Healthy growth was also gained in the challenging market of Japan. Product wise, menswear experienced double digit growth in sales.
New stores that included the Las Vegas Caesars Palace and Shenyang from 66 incorporate the new store concept, which is also being rolled out in other existing locations. The new CEO, Eraldo Poletto, took the helm of Alfred Daniel this week. He was previously CEO of Furlar and also worked at Brooks Brothers. Let us move on to Lancel, which saw double digit growth in sales, driven by Retail and European, domestically L'Ansell benefited from the impact of the opening of 2 flagships, 1 in Paris Le Carouselles Le Louvre Paris in Paris and the other one in Shanghai. It enjoyed a positive sell through of a Deligram collection, which has become one of Lancel's pillars as well as from Exotics and French Wear collections.
A new CEO, Fabrizio Cardinale, was appointed last month. Mr. Cardinale has experience in positioning brands and driving global presence. He was previously holding the position of Global Sales and Marketing Director at Dolce Gabbana. Chloe.
Chloe posted double digit growth in sales driven by Europe, Americas, Wholesale and Leather. The new ALICE bag made good response, while ready to wear showing a resume momentum with the widely acclaimed 3rd Clark WayCaller fashion show, in other words, summer 2013. New directly operated stores included U. S. A.
Wynn Las Vegas and China Shenyang Forum 66. This period saw the first exhibition at the Palais de Tokyo in Paris, celebrating 60 years of creation. Finally, the Net A Porter Group. While its growth rate has normalized, it remained well above group's rates. Europe and Americas were equally strong.
Likewise, Net A Porter, Mr. Porter, Via Outnet progressed well. Enroll into Asia Pacific is expected at the end of calendar 2013, with a subsidiary scheduled to open in Hong Kong Q1 of 2013. I will now hand over to Garry.
Before I do the operating profit overview, I think I've made an enormous mistake. When I plowed into the presentation to talk about sales, I forgot to introduce my 2 bosses who are with me. So our Executive Chairman, Mr. Rufford and Mr. Lipfer, the Deputy CEO.
Okay. Now we go. Now let's look at our operating profit. You've seen the sales, 21% increase in reported 12% at constant. Our gross profit grew by 24%, reflecting our Maisons pricing power and a favorable currency environment.
We grew our operating expenses by 21%, in line with reported sales. All this adding up leads to an operating profit increasing by 28% to approximately €1,400,000,000 And we enjoyed an all time half year record operating margin of 27%. Let's get into the details of gross margins and expenses. The 24% increase in gross margin was generated 160 basis point increase in the rate to 64.8. 260 basis points of this increase relates exclusively to ForEx.
This has to be offset by 170 basis point decline due to the lack of hedging gains recorded in the gross margin. We also benefited as Sophie described from pricing power, higher retail prices and lower margins granted to retailers. We did enjoy a higher channel mix in terms of retail as well and we did experience favorable manufacturing variances. These benefits were mitigated by higher component costs. Let me remind you once again and for the last time that hedging gains and our losses are no longer recorded within gross margin and are recorded within financial costs.
Let's have a look at the expenses. Operating expenses grew by 21% or 14% at constant currencies. The ratio remained stable at 38%. What were the increases? And once again we provided the bridge for you on the slide.
7% of the increase relates exclusively to ForEx. Our boutiques generated 8% of the increase Net A Porter 1% primarily the buildup of the Asian operations. Communication costs plus 3% and then all other expenses which are S and D non boutique S and D and administration added 2%. Our S and D cost represented 57% of total OpEx rose by 23% given the sales and network development. As I said before, we opened 40 new retail stores in the first half.
At constant currencies, these expenses grew by 14%. Communication costs were up 23%, slightly above the sales growth. The ratio was maintained at 8% of sales. Administration costs grew by 19%, primarily reflecting the development of our Asian backbone, continued investments in IT and infrastructure. On a constant currency basis, administration costs were also up 14%.
Let's look at the items below operating profits and I'll come to finance cost in a minute. We experienced an effective tax rate of approximately 16%. This slightly lower rate anticipates the crystallization of certain deferred tax assets that we expect at year end specifically relating to inventory. We continue to expect an underlying tax rate of 17% to 19% in the medium term. Due to lower finance costs, which I'll get to in a minute, net profit for the period rose 52% to approximately €1,100,000,000 Now some details on the finance costs.
Thanks to the period ending Swiss franc euro rate, we incurred a slight non cash gain on our mark to market adjustments relating to our cash balances compared to a significant loss in the prior period. Given the positive impact on sales relating to ForEx which you've seen previously, we incurred €108,000,000 charge relating to our hedging program. Overall finance costs in total declined to €99,000,000 for the period. I would like to now focus on our cash flow from operations. At $575,000,000 generation, it was broadly in line with the prior period.
With respect to working capital, the large increase relates primarily to 2 factors. The cash settlement of maturing foreign exchange contracts accounting for 166,000,000 dollars and the timing related to European supplier payments which this year were executed in September last year in October. From an inventory and accounts receivable absorption point of view, the absorption was consistent with the prior period. Our inventory rotations are similar and our accounts receivable portfolio is similar in terms of aging compared to last year at 94% current. Let's move to capital expenditures.
As planned CapEx grew by 51 percent to €256,000,000 or 5% of sales. We had increased investments in manufacturing facilities. We had more refurbishments in terms of our stores and we opened up 40 new stores, mostly in growth markets and tourist destinations. We did expand and improve and automate certain distribution platforms. We will continue our investment program in retail, in manufacturing and infrastructure particularly IT.
We expect to open up 60 retail stores in the second half. I'll move on to the next slide where we can give you some granularity in terms of the CapEx. Close to half of the increase related to retail now 37% of total investments. The most notable project and Sophie mentioned a few of them, a Cartier store in Xinyang, a renovated Cartier Milan boutique and a renovated store in Paris. Panerai opened up a mono brand store in Dallas, Vacheron Constantin in the Prince's building in Hong Kong, Jaeger Lecoultre expanded their Place Vendome location and a number of our brands opened up in Abu Dhabi and Sao Paulo during the period.
Investments in manufacturing capabilities contributed to closely to close to 30% of the CapEx growth. What were the major projects and we've discussed these before? Capacity expansion at our case manufacturer, Donze Baum, an expansion of Cartier's watch component and assembly factory in Switzerland. We've started work on Panerai's new factory in Neuchatel. We're continuing to expand Vacheron Constantin's capacity and capabilities.
And we're also looking at Lang and Sony for an expansion there in Germany. Investments in other primarily relate to IT, Net A Porter Asia and our distribution platforms. Now let's look at free cash flow. Cash flow from operations, financed significant increase in capital expenditures as you just saw and our results required us as normal to pay higher taxes. Free cash inflow was €144,000,000 at the end of September.
Let's turn now to our balance sheet. We continue to have a solid balance sheet. 71% is our equity position broadly in line with a year ago. After a cash payment of €164,000,000 in ordinary dividends before withholding taxes, our net cash and investment position amounted to €3,000,000,000 Of this amount 55% is currently held in Swiss francs. Before we start with the Q and A session, I will conclude with our October trends and a discussion of certain post closing events.
We experienced a continued moderation of the sales trend in October. October sales grew at 7% on a constant basis and 12% percent on a reported basis. Europe leads the pack regionally driven by a continued weak euro and sustained tourism and America was also quite strong. Our directly operated stores continue to outperform wholesale. While our comparatives for the second half are starting to be less challenging, we expect that the foreign exchange gain in terms of the sales will not be as significant in the second half.
Given the slower sales growth that we are experiencing, we did take certain steps during May. Production was slowed to limit a buildup in inventories in house and we instructed all of our Maisons to align their wholesale shipments with their partners' inventories. At the same time, we will continue to invest in future growth. Our plans are unchanged. We will continue with our store renovation programs and openings.
As I said, we'll open 60 stores in the second half and we'll continue our investments in manufacturing and distribution platforms. Let's move to post closing events before we start with the Q and A. I want to give you some background on the 3 acquisitions which we've closed in early October. These acquisitions will be detailed in Note 16 of the interim financial statements. In order to provide future long term options for our Maisons on Fifth Avenue in New York, We acquired the retail space of the St.
Regis Hotel which is located at Fifth Avenue and 55th Street. The acquisition price was €297,000,000 This is what I referred to in May as the breaking news. The property is fully occupied until 2019 and we expect on a full year basis, a full year basis this property to contribute €1,000,000 to operating results operating results. We also acquired VBSA, which is a Swiss group with expertise in gold refining and metal stamping, key processes associated with our watch and jewelry businesses. This business will continue to operate with existing management and assist to further integrate our manufacturing activities particularly with Cartier.
Peter Miller is a North Carolina based sports apparel business. It has superior management, good growth prospects and is nicely profitable already. The consideration for both of these transactions in total was €152,000,000 We expect on an annual basis these entities to contribute €13,000,000 to operating results positively. Although it must be said, we do still have the valuation work ongoing which will firm up at year end. All three of these acquisitions will be reported in the other segment.
Thank you for your time. Now I'm sure we'll be happy to take your questions.
I have 3 questions. Or should I repeat that? Lucas Olka from Exane BNP Paribas. I have 3 questions, if I may. Quite a number of changes in the management ranks.
I wonder how the committee, the senior management committee is going to work and whether you, Mr. Rupert, going to stay involved hands on as you've done in the past or if this is going to indicate that you're going to step back from the business. Quite a number of changes also in the management ranks in the Fashion and Leather Goods division. I wonder about whether this is coming from dissatisfaction with performance or renewed opportunities, especially at Lancel. I was wondering about the appointment of an executive coming from a designer house.
On demand, I seem to understand that you're experiencing weaker dynamics in the lower price points. If you could explain us what is happening at the various price points and whether this is an indication of things to come in your opinion? And lastly, on manufacturing and movements manufacturing in particular, whether you anticipate that continuing investment is going to improve your cost position in this space? Thank you very much.
In terms of management, had it not been that Mr. Platt was diagnosed with a mild form of diabetes as it turned out. And he's in much healthier shape than any of us at the moment because he's been enjoying his retirement. On the other hand, it did go to Germany. So
he's probably going
to spend all of his money bailing out Greeks and Italians and others. But I didn't intend coming back at that stage. I did. But I've said in the past, and I repeat, this company is far too complex and too big for one individual to run. Now some of us like Alain on the Product Committee, Richard and myself been involved directly and indirectly since 'seventy five, late '70s for you, 'seventy eight, 'seventy nine, Gary, same stuff.
'eighty eight. 'eighty eight in the States. But you got to remember when we started, it was 24 years ago, Richemont was 66% Rothmans, and it had a minority position in Cartier, stake in Piaget. That was about it. It was a holding company.
And in essence, it stayed a holding company until we did the changes. Port Herr Van Dom then in a sense moved to Geneva. And it's far too complex. So what we how we've run it is through verticalization. We did it before anybody else.
In fact, Alain coined the phrase DNA of a brand that everybody uses and we called it the Maisons. And in fact, Friedrich registered it because it's not a brand, it's a Maison. Now I see everybody's got Maisons, but it's run by the individuals. George Cairn is in Shafuza and he runs it. He's got his own factory, he's got his own sales staff.
Bernard until the end of December runs Cartier. We have holding company functions. Richard has been in charge and he's going to remain in charge. And these are critical functions. And it's not only the normal back office.
It's where we as Richemont can add value in building goodwill rather than just buying it. So we're talking at the Board yesterday, when we bought Van Cleef and Arpels, I remember the older ones amongst you and some of our board members every bloody meeting. So when is Van Cleef going to turn profitable? When is Van Cleef going to turn profitable? And it was like water dripping.
We knew what we thought at that stage. We knew we're heading in the right direction. Today, I think it's what, 4x or 5x more profitable than Gucci. And when we bought it, it was not making money. But Friedrich Mostert and his intellectual property division cleaned up the whole of the IP, our property division.
We've got people here. So it's a very, very important function or series of disciplines and functions that we provide and which makes it possible to buy, I mean, Panera's turnover is now 240x, 250x what we paid for it 12, 14 years ago. Now that was Angelo Bonatti and his team, but it's also the back office distribution initially Cartier opened doors for them. If we take Gary, he challenged one of our companies and said to them, what would why don't you take some more capital? Why don't you use capital?
Buy more stones. So one of the Maisons, what, €60,000,000 worth of stones? Well, it's going to turn into what €240,000,000 €250,000,000 worth of sales with a healthy margin. So nothing much changes. We have 3 individuals.
This company has always really been run as a troika. We had Zhou Canoe, Richard and Alain Perron. Show finance with Richard and of course, Franco Colonie. Lots of arguments, lots of creative tension, especially when you've got that many French involved and Italians, it's always a casino. So Gary and I just sometimes just sit there and watch and but it's creative tension.
So in terms of the management, nothing much changes in the sense that we've always worked in a collegial sense at head office. The product committees will still carry on. It's the heart and soul of how we try to guide the Maisons. And I would say it's the biggest interference in their lives. In terms of the management committee, this we announced because of stock exchange requirements, but it's always been the case.
If we make a single adjustment, we have to announce it. And people have retired and people have come in. So it's not a radical shift. In terms of the margins, whenever or the lower priced products, I think you asked, it's not the lower price lowest price, but in every time of economic hardship and we've pointed this out in the past, It's the middle market that gets hurt. It is not the bottom right at the bottom, and it's not the top, but it is the middle.
And when you have companies where the brand equity does not translate into desirability, true desirability, then those companies suffer because landlords don't say, Oh, well, we feel a bit sorry for you. You're a bit under pressure. They just say, Pay more. And there's still an enormous scramble for prime real estate. And of course, there's another thing.
You've got people like Abercrombie, who insist upon being next to Katya. The landlords, the very smart landlords are saying, where are you going to be in 10 years' time or 15 years? We all know of rapid growth big box companies and what happened in 10, 15 years later. But on the other hand, they are there. So if you look at Fifth Avenue, yes, Apple, but Apple is a phenomenon.
It's not. But there are more and more nonluxury companies. And it's a tragedy because you don't find the little bookstore. I mean, I lived in New York. I used to enjoy going to it solely.
Today, it's Amazon, but Amazon is not Rizzoli, I'm sorry. And you'd find little stationers and you'd find true luxury. Today, it's lost a bit of its charm. But unfortunately, the landlords insist. And in Asia, if I can use the term Asia because it's not really obviously homogeneous, But wherever you find booming economic conditions, you find this tendency.
And the middle of the road companies find it very, very hard to maintain presence and visibility. And it poses a question as to the sustainability of the business model. And that goes across all companies. It's not only luxury goods, it's virtually any company you can think of. I see my friend Karl Lagerfeld got into trouble by attacking the French President when he but amongst others, he said, who outside of France buys French automobiles?
That's not a very smart thing to say. But if you ask yourself the question, who do buy these cars? Luxury goods, yes. And then he attacks the luxury goods industry or the rich, who is not very smart. But those business models need to be addressed.
So it's not only luxury goods. And the big overriding concern that I have, in normal free markets, when you have excess capacity and prices drop, people disappear, companies disappear, automobile companies disappear, big manufacturers disappear. The central banks now are working together in a combat against deflation and unemployment that they've moved the cost of borrowed capital to 0. So the free market is not working. There are lots of industrialists across the world that are in intensive care.
All their companies in the ICU unit with a drip from the ECB And they're not shutting their plants. So guess what? There's still going to be excess capacity. When you've got a lot of excess capacity that's artificially keeping being kept alive artificially, it's the question of who can keep his breath the longest. We know there will be tears.
Maybe they'll avoid the fiscal cliff. I'm not sure. They're behaving like children again. As I said to my son, the Dow Jones dropped by 300 points and Smith and Wesson went up by 10%, okay? That's what happened after the election.
The gun manufacturers increased by 9% and the Dow dropped. Does not look to me like a country that's finding a middle road in working together in Congress. Europe, I don't need to say anymore. We don't know what's going to happen in China. So you put all of this together then I don't think we're going to have economic spectacular economic growth.
Companies are being kept alive artificially by central banks because they don't want unemployment. Now in that background, one will have to look at companies in your own group that do not have the brand equity, but it's normal. Everybody does it. It's part of your business life. As will I stay involved, it's one of those very curious things.
If you're the controlling shareholder and you built the group, I've got to actually get off the board for a few months in order to give these folks a chance and tell the people they're not allowed to call me, because Norbert will tell you that when he was CEO, I never took telephone calls from people working for him without him being involved. Presided enough when my late father was alive. You'd give somebody an unpleasant decision, not your own decision, but 4 of us would get together and he'd call my father because previous relationships. The problem is if you say yes once, then you undermine the executive's authority. So therefore, we're going to have a difficult one now with Bernard for Nasse getting a senior role.
We're going to have to make sure that Banar keeps his nose out of Cartier. And Banar, if you're listening there, you will remember that I did tell you to leave Stanislaus alone from the first. If you're watching on the screen, then now we'll leave Stanislaus alone. Otherwise Stanislaus cannot run Cartier. But when you've got trust, I mean Richard and Bernard have been friends for what 20 years, It's a complex company.
I'm going to get I don't know whether you've heard of the Bass Brothers in Texas. When their dad late father stepped down as before mobile phones and satellite and e mails and stuff. But none of the executives of the company would listen to Sid and Lee. They're always called Mr. Peribas.
So he said to his wife, Nancy Lee, he said, look, neither you nor I like sailing, but we're going to take a boat and we're going to sail for a year and nobody is going to be able to call us. So they forced to call Sid and Lee and they actually did it. To their absolute astonishment, they quite liked it, But they didn't keep it. But they actually it's got to be at the stage where I say to them, look, guys, they know in the past, I've honored that. When people call, I say, sorry, you want to speak somebody works for Richard.
You want to speak about something? Let's have Richard there. It's amazing how they never call the second time Richard. It's sorry, let me settle that. May I
add something to add some color? I feel that as we said in French, everything changed, but nothing changed. It's clear that we have one bus, one direction. It's a cultural issue. And what is very important for you to understand is that there is a continuity of the management and what we are the most proud of is the succession planning that we have organized.
Look at very important company for us. And 1 year ago, we announced the arrival of Stanislas, who has had, I would say, a strong training within the organization because they are seeing us more than 20 years with us. And his deputy Nicolas who's taking over from him. And for us, he's at the most important that we continue to have our people sharing the same value, sharing the same cultural issues. And of course, at the end of the day, always having one boss and giving us the direction whatever the title.
It's not true. What I can say is you ought to applaud Mr. Sage and his people We managed to borrow next week, I think. It's not now. Nothing has signed.
Why I'm not allowed to say it?
I'd prefer you to.
Why not?
We'll talk about it in May, all right?
Well.
We'll take the applause.
Many, many 100 of 1,000,000 for 12 years at 3.1% dollars Now I'm not going to say I'm not sure that you can tell them in May. Okay, fine. But so when you buy something in New York, Chapo, that's what I call the hedge, okay? You buy something, you borrow in the currency and fixed at 3.1%. I said, please just get as much as you can, Gary.
But that, Gary, just that gives us flexibility beyond and I can tell you it makes my life easy to have colleagues like that. He also does have succession. I think it's more the business model that we've got to look at. It's now the 25th year. And assuming reinvestment of dividends, the IRR is just under 15% in dollars and it's slightly over virtually 15% in Swiss francs over the 24 years.
And since the last 4 years since the split with BAT, it's been twice that. It's been I'll ask him to work it out. It's 34% in dollars and 29% in Swiss francs. So the model works. And I think that is the thing that makes me sleep at night.
We seem to have the right business model. Will we, like everybody else, suffer if there's a real calamity? Yes, we will. But if you look at the centuries that the Maisons have survived. It's not the Maisons, it's the idiots who run it that record.
Our job is not to be one of the idiots that wrecked the Maisons. If you look at Vacheron, you look at Cartier, you look at 1755, right, Cartier. These companies have survived world wars, famines, deep pressures, hyperinflations. It's our job to make sure that they survive us, if I can put it like that. And up till now, we're okay.
In any case, you shouldn't worry about me because Richard has been the one that's been doing all the work in any case. So any other questions? Sorry.
Good morning. John Cox with Kepler. A couple of questions for you. Just on the sort of sales granularity and what's happening more recently, you're talking about October 7% constant currency growth. You seem to be saying the Americas looks a bit better, because obviously if you back out the 5 months to the 6 months, it looks like the Americas was actually negative in September.
Now there's been appears to be a bit of a rebound in October, if you can just go into that. And then obviously on the Asia Pacific region, it looks like it's mid single digit declines local currency in September. I presume that's continuing into October. I just want to get a bit more granularity on that. And your opinion, what may happen next in terms of the election process in China?
Whether you think that could sort of lead to a bit more of a pickup in that Greater China region? So a question on the top line. 2nd question just on examining brand equity. Obviously, you're talking about Baum and Mercier maybe having another record loss this year. I wonder what you think about that particular business' brand equity.
And then third question just on the whole expansion of your industrial base in terms of movements and becoming self sufficient. Just wondering where you are in that process? How much more do you think you need to invest in the industrial backbone to become where you want to be in terms of self sufficiency or relying on some people, but not being overly reliant on them?
Thank you. John, I just want to be specific about one thing regarding Baumann Mercier. And based on Sophie's action, I heard same thing you did, okay? But it's not Baumnersee will have a record loss. They will have a loss.
They will record a loss. So just want to make that clear.
It's French speaking English. Record loss versus record loss. I also was a bit surprised when I heard that. Okay. It's very crude, but when President de Gaulle retired, they asked him and Madame de Gaulle, so what are you most looking forward to in your retirement with Le Generale?
He said, I look she said, I'm most looking forward to a penis. And he turned over and he said, Monterrey, it's called happiness, okay. So record and record, okay. A true story by the way.
Okay.
Listen, 8. No,
no. Go on.
How many times do we have to say the same thing, we do not speculate about the future and we don't know. If we knew, I wouldn't be sitting here. I promise you, I'd be sitting at a trading desk. Nobody knows. Nobody knows.
And what's this new word you're pulling? Yes. Okay. I don't know. What do you mean by granularity?
You mean clarity? Yes. You mean we've got to predict?
No. I think John, I think the most important thing to us and it's been happening throughout the 1st 6 months is the retail remains is performing better than wholesale, okay? And admittedly, on the you look at the wholesale, it's a bit of both, right? Things are moderating, but also we're not trying to stuff the channel. We've been very clear with all the guys.
On America, America is fine. I mean, I think a lot of the ups and the downs is based on timing of high jewelry. But I'm it's all right. What was the other questions? Asia Pacific.
Well, I think the retail wholesale split is the answer.
Asia Pacific. I think you can't say Asia Pacific. Is Asia Pacific Japan? Is it Vietnam? Is it Taiwan?
Is it Singapore? Is it China, is it Hong Kong versus China, Korea, they're all different. Luckily, they all trade with one another because if they had to trade with us, they'd all be bankrupt. I think you've got to look at the intra Asian trade to get a good idea, but luckily that's picking up dramatically. We have no idea.
You can why don't you look at what Goldman Sachs says? They're a bit better than we are. And they say next 2 years 7.5% to 8.5% in China, okay? I'll back that. If that's the case, we're happy.
To come back to manufacturing, we're fine. You know that for several years, we have indicated how we're planning to integrate more manufacturing. It's not only for, of course, having more autonomy in terms of manufacturing movement, but going forward, the brand activity require more in house manufacturing. That's true for jewelry, for example, and you always speak about watches, but we're also investing significant amounts in the jewelry
business. And it's costly, but it's an imperative. You're not going to buy Ferrari from a Fiat factory. Clients are far too intelligent. Both males, females go to the web and they want to know that it's authentic.
And in order to be authentic, you've got to have your the correct designers and you've got to have the right processes and you've got to do it ethically yourself. You can't just outsource and not know where it's done. You've got to respect the environment. Obviously, the manufacturing process and that's costly. I mean, you can turn your eyes and give it to somebody else, but it's not the way we do business and it's not the way our clients expect us to do business.
And as far as we are concerned and our colleagues, it's not a debatable issue. You have to do it. But interestingly, you do get rewarded by the clients who feel that it's a necessity. Necessity, I don't want to record and record on, okay? Sorry.
Good morning. Thomas Horvay, Citigroup. I've got three questions. The first one on pricing. It seems that you've increased prices over the summer in Europe.
What was the magnitude of the increase? Has there been increase in other regions? And what's expected for the rest of the year? We did
not talk about the future prices. Okay. They did that last year and I had a small little tremor here. When clients know what the prices are, they buy just before you increase the prices. So I just want to preempt him from winking or nodding and saying something.
That's the first question. Secondly, could you help us understanding a bit the costs development, Gary, in the second half, in particular A and P and admin costs? You had been quite precise in the first half. And finally, on for you Mr. Rupert and Richard perhaps on the competitive landscape.
There seem to be 2 French luxury conglomerates trying to acquire scale in watches and jewelry. I understand your vision about M and A, about value creation. Nevertheless, you've got a big, big cash pile, a strong balance sheet. Are there opportunities in the Watch and Jewelry segment that are necessary for you to offset perhaps a more competitive landscape with acquisition made by some of your peers in recent years and in coming years?
Harry, do you want to talk about Sure. Let me just say firstly pricing. The problem with pricing, if you don't with the volatility in foreign exchange, we do not want to have a situation where Japan or China or Taiwan, wherever is a lot more expensive than Europe. Firstly, it's not really fair to the clients, but secondly, you get a lot of gray goods moving. On the other hand, when somebody has just bought something, you can drop the prices a week later, they are not overly amused.
So it's a science, but it's also an art to make sure that you've got a fair universal pricing for goods. It's more difficult to move a car, but a watch or a piece of jewelry, if you're out of whack, especially with the visibility of the Internet, you're going to have a movement of goods, high value, small volume. So it's not always that we're going to try and grab margin. It's let's try and keep things fair across the world. Gary, sorry.
Yes.
Thomas, you're quite right. I mean, we did take price increases, but pretty much just in Europe. And it was more of a hard goods thing. So I can't really tell you a number, but you're quite right. On the expenses, you're right, I was clear.
I wasn't necessarily clear for the first half. I was clear for the full year, right? And I said on a constant currency basis, we expect S and D to grow by 14% and admin to grow by 14% and I'm saying the same thing again. On communication, okay, we don't necessarily know where the sales are going to go, but I would so I'd rather be a little less precise and say somewhere between 9% and 9.5% for the full year. So that implies as normal an increased spend in the second half.
And then acquisitions? I think it's the same every year. The companies you really would like to buy will never be sold. And we really do have a very big portfolio. If you look at Van Cleef and how it's grown, Cartier is just an amazing, amazing Maison And Piaget is growing.
So as apropos jewelry, we've got 3 Maisons, watches. We have so many that I would much rather give a colleague $100,000,000 or $200,000,000 for balance sheet purposes, if they want to buy stones or if they want to do it. And I mean, it's proven by Gary's giving them €60,000,000 which turned into 240 Yes, they are coming into our field. But it's called free enterprise. And as we've learned when we've stepped out of our main business, Transferability of genius is a rare concept.
It doesn't happen very often. People who are beautiful, brilliant in banking, who go into insurance suddenly find out the bank assurance model is not that good. So if you're going to go from textiles to leather, suddenly fine, but it's not exactly the same business. Or Watches and Jewelry, it's not the same business at all, not the same distribution. And when you step out of your field, my Jewish friends call it Rebigelt, know, And we have good relationships with our competitors.
Funnily enough, a lot of them fight with one another, but we kind of get on with our Swiss and our French competitors. Yes.
Patrick Schwindeman, Zurich Antennale Bank. Again on China on the new Chinese government. I guess there will be 2 targets with the new government that they want to increase local consumption and that they want to fight corruption. What implications could this have for Richemont?
They want to increase consumption. So for instance, we've spoken to Capitoland in Singapore. In order to increase consumption, they're busy building a mall now in Chongqing at the confluence of the 2 rivers. It's one of their iconic sites like the Bund, 277,000 square meters, a mall, a mall not a company. They tell me they're going to be building well, 200 malls will be built in the next 4 to 5 years in China, because the Chinese government come to the realization that in order to increase consumption, people don't buy washing machines from mom and pop hole in the wall shops where they can't get a car or so they're going to have to build malls.
And I don't think anybody said local consumption. I said it's consumption versus all the capital. But they're busy building 200 airports as we speak. In London, they're fighting about a third runway and they have been fighting for 20 years about a third runway. Do you think I'm really that concerned about where the growth is going to be?
It's going to be in China. In terms of corruption, you find corruption all over the world. I would say less in the Nordic countries and in the Ditza countries, but unfortunately, it's all over the world. And I'm not going to comment on corruption in China at all. The CHF 1,000,000 per day turnover in Bucharest in Lucerne has got nothing to do with corruption in China.
It's now over CHF 1,000,000 a day in one store in Lucerne. Traveling Chinese are coming and they're spending. If you go to Galeries Lafayette and if you see the people, so I don't think I've read anywhere there is local consumption. It is consumption. And I think fighting corruption, it's a worldwide scourge.
It's not only a problem in China.
Would there be a change? With regard to the lottery tax in China, do you think there could be a change?
No idea. We're not involved in the luxury tax. Sorry, I thought you said the lottery.
Patrick.
The luxury, sorry. Patrick.
Who knows?
Who knows? Okay. But who knows? It could go up, but it's already pretty high.
Or maybe even to decrease it to attract local consumption?
I have no idea. That's what I'm saying.
Or what would be the implication for you for the whole group if they would decrease it?
Well, obviously, it's increasing consumption for everybody if there's if the prices should drop in Mainland China. But we have no idea what they plan to do. And I'm not even sure that people are 100% sure who will be on the poly Peru by next Thursday. So but you know what, will they grow over the next 5 years? Yes, they will.
They study. Firstly, they're smart. Secondly, they work. They study.
And they travel.
And they travel. Exactly. And now they travel. And they're going to continue to travel. So when I leave, I'm not going to sell my shares, okay?
I'll be buying more shares as things go on. And I wouldn't be doing that if I thought that the economics of the luxury goods business is bad economics. We the other day I read was at Panasonic, dollars 10,000,000,000 was at Panasonic $10,000,000,000 losses or just a little blip, dollars 10,000,000,000 okay? There are so many industries that I'm so glad that I'm not in. Banking, You can start with A and you can probably get to Z with things that are bad businesses today and we're lucky.
So our margin drops by 2% and John Cox has a nightmare. John, we're just lucky. We're not that smart. We're very lucky. We're very, very lucky.
Our dynamics, we don't owe money. And people travel, as Richard says. And as long as we keep our products desirable, we're going to do very well. Thank you. That's our job.
That's all we can really do. We can't change taxes. We can't change consumption, but we can try to make sure that our prop up from the design right through to the presentation that our products are more desirable than that of our competitors. That's really the goal.
Thank you. Good morning. Thomas Messmann, Credit Agricole Chevreux. I've got a few questions if I may. First one, you mentioned that you have slowed the production recently.
Is it for all of your brands and for both watches and jewelry? The second one, some of your competitors and notably the French one, let's say, mentioned recently one of your competitors, let's say, in France mentioned recently that they are experiencing the end of a destocking effect in Mainland China. Are you seeing the same kind of trend in Mainland China? The third one is for Gary, if you could just come back on the impact of the new methodology on hedging gains in H2? And very quick and last one, could you update us regarding your multi brand store project in Paris?
Thank you.
You opened your big mouth and started looking You can answer that one.
Great question. It is
a brilliant question. I'd like to see how he
to. Because I'm going to get hit over the head after this meeting now.
No, please.
The jewelry production is not slowing at all. Jewelry is booming. What I was specifically referring to is watches. So and I think you can see it in the sales by product line. So I apologize if I've misled.
On the exchange, I really don't know what the effect would be in the second half because I don't know what the rates are, right? I mean, I can't really say. So I mean, the way we do it when I give these two gentlemen numbers is I just take the rate as of today, right? I mean, so I don't know. I can't I not that I don't want to give it.
I just don't know. Capesnes? May
I ask another question to
To be honest, I don't understand that phrase, what that means and I see it all the time.
They're basically saying that the clients stop ordering and now they're running out of inventory, so they're ordering again. Is that what they implied? So would that be the Swatch Group that should it? Now who said that?
Yes.
Of what? Sorry, but what would that be? What? Because they don't wholesale the
Taguiyan. Taguiyan in China.
Taguiyan. Okay. I mean, certainly
Thomas, I think we've made it clear to all the brands not to overstock, okay? Now whether you call that destocking or whatever, but clearly things have slowed. I mean, we're not immune to that. But we don't we're more worried about the receivables and we're more worried about returns, right? So we'd rather take less upfront if I may say it that way.
In the past and certainly when I was America, I could be accused of this myself is if your retail is a bit soft, you get a truck and you open up the wholesale, we specifically told the people not to do the brands not to do that. So that's why we're still pretty comfortable with the retail wholesale split.
We either have a demand pull strategy or a push strategy. The problem with the push strategy with high value, low volume goods, you push it into a market, if it doesn't sell, it naturally finds its way to another market where you do have a demand for the product, where you're suddenly stuck with an overstocking situation. So, it's a global decision you've got to make. It's not just per market.
You know I always say it all the time. My key indicator is the receivable position and it hasn't moved at all. It's still 94% current year on year. And that's wholesale, right? So that's
Very good question, by the way. The multi brand store.
Should open end of March as planned. And I do believe that it will come in time where hopefully we'll have still a significant increase of tourism in Paris, which has become the 2nd city in the world after Hong Kong visiting visited tourism especially from Asia.
It was number 1. Then it got taken over by Hong Kong and now it's growing very fast again. Paris. There were more questions? At the back to you, she had a lady had a Eva
Tjuroga from UBS. Questions, please. Back in May you called China a black tie dinner on a volcano and I was wondering if you have to I
thought you'd forgotten.
If you have to coin that phrase today, would you still coin it the same way? Has the dinner party just moved to Europe? Or has the volcano started to bubble a bit more? And my second question is on Net A Porter. You sound more positive on it this time than 6 12 months ago.
And can you maybe talk a little bit about your learnings from Mr. Porte as well?
Well, the music is still playing. I'm just sitting a bit further away from the band at the moment. It's still going well, but it's probably turning to normality. There's still good growth amongst Chinese. It's moved a little bit in terms of where they're buying.
And I doubt that it's going to stop. Locality is showing well. One of our biggest problems and I fall into that trap all the time, we're very reluctant to predict a discontinuum of any trend. When things go better, we think this is going to be heaven. And when things go worse, very few people actually say, I think we're close to the bottom.
And if you really look, things cannot always grow, get better and things cannot always get worse. The real I guess the real issue is when do you call it. So you cannot if you take the compounding, there's no way in which we could have grown by, let's take firstly the growth rates in Japan. It was staggering 10, 20 years ago. So you know it's going to stop, but when?
And in China, we all knew you couldn't grow. China as an economy couldn't grow 12% to 15% continuously. It's not it's there are too many things that can go wrong. So but I tried to explain to politicians, especially in Africa, The difference between an economic growth rate of 2, 4, 8. 2% takes you 36 years to double the quality of life of your inhabitants.
4%, 8% is 9 years, okay? So are you going to do it sorry, not 8 times 9, yes. Take the law of 72s. You want your per capita income to double and you take a generation, is a generation 20 years? You can work it out.
Now the per capita income in China, they want to have it doubled. You've read about it and in the countryside. Now how they manipulate that or make sure that that happens is they just don't give you work permits for the coastal cities. So companies move inland. They establish factories inland and they create jobs inland.
I think it will carry on. Net A Porter, I'm not really involved because they don't keep my size. It's more for men with waist of 32 that so these 2 gents can buy there, my son and them.
Eva, I admit this time last year I was a bit cranky on Net A Porter. They're doing fine. They're making their plan. Mr. Porter is doing well.
It's really becoming a second engine for them and they're cash flow positive. So no complaints at all.
Good morning. Mario Ortelio San Francisco Bernstein. Your business is generating a lot of cash more than enough to finance organic growth. When you've got special projects you can get loans at a very good rate. You have got a lot of cash.
And for what we understood you are not planning acquisition in the short term. Can we foresee an increase of a dividend or a payback product?
I never said there's there will be no acquisition. I said I can't see anything. And secondly, if I did, I'm not going to tell you, okay, or anybody else. So I never said that. But you know, one day when I really I I should really publish a list of all the most stupid recommendations made by investment bankers and analysts about what we should do.
At top of the list is you have got a lazy balance sheet. Give the cash to the shareholders and we will give it back to you when you need it, really. Okay. We've been we've with little or no debt managed to grow by 15 percent an IRR of 15%. And in the last 4 years, no debt by 30%.
Why the hell if you can have growth rates like that? Why? And we've grown our dividends by 15% per year in euro terms, Swiss franc terms. I don't think there are a lot of other companies. So we're happy with our business model and we do not buy with equity.
We believe that shares should be treated as the scarcest commodity. And in fact, when I was in your business in finance and in banking, I was very suspicious of anybody that bought with shares because there was a serious incentive to overstate the value of my shares if I kept on buying with shares. Then there is an incentive to pump it up because that cheapens the currency you're buying with. So I am when people treat shares as a scarce commodity and they don't play with equity, then I have a good look at their company because they're treating their fellow shareholders. If you believe in your company, the most expensive currency you can buy with these shares, your own shares.
So we try to treat it as a scarce commodity? And secondly, the real question for any investor is can the management reinvest the free cash flow at the rate equal to or better than what they've done in the past or what the market can or their competitors do. And that's our challenge is to try to find ways to redeploy the free cash flow. I mean, if you grow your dividends by 15%, give me a comparable, okay? You've got very big database.
Who's grown their dividends by 15% per year over the last 5 years? Please tell me, because I'd like to buy some of these shares. I can't find them. So I think whilst our model works, we're happy to re deploy the free cash flow inside the business. There must be more.
So we have, what, 3 more questions? Good. Talk to somebody at the back there now. Perfect. Sorry, I never said we'll never buy anything, okay?
What I did say is upon that question is I can't see a watch company or a jewelry company at this stage with the dynamics that's attractive. And if we buy, we'll buy for cash. We think buying for shares. I'd like you to go and have a look at all the big train smashes that you've witnessed. Inevitably, all these conglomerates, it was somebody who bought for shares And the real common denominator is you could never analyze the company properly because just when you started to get your arms around it, they made another acquisition and a little bit of an accounting change and then you try and reconcile it.
Remember, I was in your business before Excel spreadsheets. That's how long we go back, okay? And just when you kind of understand the business, then they make another acquisition. And in the end, I just put a red flag. If somebody does that, don't buy the stock, because if I can't understand the accounts, it's simple and it's normally some convoluted merger accounting.
And you know what? Have you seen how much cash Apple's got? We don't have that much, okay? John? Last question.
John, no forward looking statements. To those people who are watching on the web, it's John Cox again, who is about to ask another forward looking statement.
You're absolutely right, of course. Just Gary, just what you said on the gross margin. I think you said that the favorable currency had what 160 basis points positive impact you think on the gross margin in H1. Just based on spot prices, do you think you can maintain that gross margin in the second half of the year? Because it's the one thing we don't we can't really see.
We can do the what you're going to spend on advertising and all the rest of it. But the gross margin is really the kicker for us. And any sort of best guess for the second half of the year?
Okay. Assuming the currencies are as they were as of September, assuming the mix is the same, maybe a slightly less than the first half, slightly, I would say. I think we did have positive manufacturing variances in the first half. And because we've slowed the production a bit, those won't reoccur, I would say, but very slight.
I'm going to put a bit of a dampener on this, John. As you grow and you open new stores and you increase your manufacturing capabilities. Obviously, you capture margin. The more retail you have, the less wholesale you have. You have good operating leverage or gearing.
Things turn as those of you that have been around a while will know that operating leverage turns negative. And that's what you really have to watch. A 10% growth should in our business equate to a 20% increase at the bottom, but a 10% drop may actually be a 30% decline. May, it depends where and how. So it's not that Gary doesn't want to.
It's top line. As I think Rishar and Gary said, our business is top line driven. We've got to sell. If we don't sell, the costs kill us. And that's what keeps me awake is operating leverage.
And that is why I like cash. The other thing that I caution you to look for and not in today's environment where money falls out of the sky and you open Italians run the European Central Bank. Italians that used to work for Goldman. I mean,
no.
When you have a combination of financial leverage and operating leverage. In good times, you make a fortune. In bad times, you hand your shirt, your jacket, your keys, you've gone. Never combined financial leverage and operating leverage. It's you have either of the 2, but not both in the same company.
We do have operating leverage. If you have a gold mine, please do not finance it with debt, because if the gold price drops, your costs don't drop, you're wiped out mining, commodity pricing. On the other hand, if you have a building or if you have a tanker and you lease the tanker out for 90 or for 50, 20 years for a fixed contract, you can borrow 100% against it if you've got a very good lessee. Our business has got operating leverage. That's why I hate combining financial leverage with it, because if you have interest rates moving and your turnover drops, finito.
That's why we don't like it. Remember, I've been through a few of these things, 87, naturally cautious. My debt by the way, stagflation. Have a look at the companies that did well in the 70s that could withstand stagflation. They're not going to be able to stop inflation.
It's not possible with the quantitative easing that's gone on across the world everywhere. By the time you turn the taps off, it's going to overshoot. We don't know when. You could have something before, but a year or 2 or 3 ago, I didn't know whether we're going to have deflation or inflation. My gut now tells me stagflation.
No real growth with inflation. And it's probably the worst combination only. So what happened with when Lyndon Johnson said goodbye increased the discount rate. So, increased the discount rate and really acted. So if we have stagflation, a lot of people are going to be in trouble.
Those are the big calls we've got to make.
Thank you. Thank you for coming everybody.
Only good thing is it's the last time I have to sit and listen to John.