Compagnie Financière Richemont's (CFRUY) Management on Fiscal Q4 2017 Results - Earnings Call Transcript

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About: Compagnie Financiere Richemont AG ADR (CFRUY)
by: SA Transcripts

Compagnie Financière Richemont AG ADR (OTCPK:CFRUY) Q4 2017 Results Earnings Conference Call May 12, 2017 3:30 AM ET

Executives

Sophie Cagnard - Group Corporate Communications Director

Johann Rupert - Chairman

Burkhart Grund - Deputy Chief Financial Officer

Gary Saage - Chief Financial Officer

Nicolas Bos - Chief Executive Officer of Van Cleef & Arpels

Cyrille Vigneron - Chief Executive Officer of Cartier

Georges Kern - Head of Watchmaking, Marketing and Digital

Analysts

Patrik Schwendimann - Zürcher Kantonalbank

John Guy - MainFirst Bank

Helen Brand - UBS

Luca Solca - Exane BNP Paribas

Jon Cox - Kepler Cheuvreux

Mario Ortelli - Sanford Bernstein

Melanie Flouquet - JPMorgan

Zuzanna Pusz - Berenberg

Operator

Ladies and gentlemen, good morning. Welcome to the Compagnie Financière Richemont fiscal year 2017 annual results conference call and live webcast. I’m Dino, the Chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. [Operator Instructions]. The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to the auditorium in Bellevue.

Sophie Cagnard

Okay. So, good morning. Good morning to you here and thank you very much for joining the 2017 Richemont annual results presentation. Welcome also to those of you watching the webcast.

So, here with us today are Richemont’s Chairman, Johann Rupert; Chief Financial Officer, Gary Saage; Deputy Financial Officer, Burkhart Grund; Cartier’s CEO, Cyrille Vigneron; Van Cleef & Arpels’ CEO, Nicolas Bos; Head of Watchmaking, Marketing and Digital, Georges Kern; and Head of Operations responsible for central and regional services and all Maisons other than jewelry and watches, Jérôme Lambert.

The press release and presentation are available on richemont.com. And from 3:00 PM, you’ll be able to look at the replay of the webcast.

As usual, this presentation will be followed by a Q&A session. Questions will be taken from the floor and also, time permitting, from webcast participants who would have registered their queries with the link on richemont.com.

So, before we begin, could you kindly make sure that your mobile devices are switched off? Thank you very much.

And we can now start, so I’ll hand you now over to Mr. Rupert.

Johann Rupert

Thanks, Sophie, and welcome, everyone. I asked whether I could make a few introductory remarks just to make sure that this meeting will take about all of the time that it normally does and you’ll get the drift very soon.

So, what happened in the last year? Last two years. Is that somebody’s mobile phone? If you want to take the call, then we’ll wait.

Any case, a number of years ago, Frank was there when, I think, second time when I met Taleb, the author of The Black Swan. We had a long discussion. And some of you are old enough to remember that the FT nicknamed me Rupert the Bear for predicting the problems.

So, I said to him, there is a problem with the whole premise of The Black Swan because, if people did predict it, how could it be a black swan? Well, of course, a huge philosophical debate ensued. He is one of the very rare, truly brilliant individuals. Sense of humor, but a genius. He’s just a joy to be with.

And he then gave me an A4 typed – not even printed, typed – manuscript to read called Antifragility. He said, okay, smart ass, give me your comments. You remember, Frank, what was that? Like two years before the launch.

And I read it. I didn’t comment on it. It was brilliant. But I told Frank, this is very, very – it’s a serious work. We started looking at fragile economies and non-fragile economies very wisely, bounced off, debated it, never thinking we would one day be the victims of fragility.

Because in essence, the more you perfect the system, the more your chances if something goes wrong, it’s bigger. So, in the past, when we’ve had downturns in consumer demand, you will recall, some of you that have been with us long enough, we were saved by our basic inefficiency in production.

So, when the wholesale over-requested, by the time the recession hit, we hadn’t delivered. You remember, I told you a few times, thank God that we hadn’t delivered in time. But this was also an industry-wide phenomenon.

But as we moved on, firstly, I think we are ahead of the curve in SAP and a number of the – should I say, in some of the systems. We also perfected our industrial processes. So, this time, we delivered on time, except there was an over-exuberance. And even our own network was mostly clean. The wholesale network was overstocked of all watches, everybody’s watches.

So, in a sense, we were victims of being able to be quicker in our reaction time. But we made a decision to react. And yes, we did buybacks. You can ask Gary and that team, and that’s mostly over. You can comment. Probably over.

And today, for our major Maisons, our sell-in is less than our sell-out. So, the stock is gradually reducing. I’d love for you guys to ask our competitors whether they’re doing the same things because it’s no good us doing it on our own. And our retail partners, the big and even the small, still being force-fed like geese producing foie gras, with people who still sell-in more than their sell-out because then it’s bad for the whole industry.

I know that we monitor. We’re fortunate. We have the tools we can monitor. So, our sell-in for our major Maisons, the ones that you will – that will move the needle is less than the sellout. And that’s a deliberate decision that we made.

How long will it take for the watch industry to recover? I think there still exist stock in parts of the world – America, parts of Asia – so it’s going to be a gradual process. Have we been through this before? Yes, unfortunately, too many times than I can remember –the 70s with the oil crisis, 1987, the tech problem in 2000, 2008.

So, yes, I’ve been through it a number of times. Is this as bad or worse than those days? No. The problem is we were better equipped to supply the market. On the other hand, we’re better equipped today to drain the pond, whether it be in, whichever way, e-commerce, et cetera, et cetera. I think from our side, we’ll be fine.

If the whole watch industry should act rationally, it will be quicker for everyone. But I cannot speak on behalf – I know one or two of the competitors are doing exactly what we’re doing, but I’m not sure whether all the big players are. But that’s up to you to ask.

You should ask them, is your sell-in smaller than your sellout? And if they say they don’t know, then they’ve got a real problem. And if they say no, then you know there’s a strategy. But that’s really the key question to ask for the whole industry.

Am I upset about the job losses in Switzerland? Yes, I don’t like it. Maybe I’m too socialistic. But, on average, we’ve lost about 300 colleagues out of, let’s say, 8,300 odd. I don’t like it because we, as society, we take ages to sign a lease, but every time we employ a colleague, that’s a lease on that individual’s life. We should be a lot more careful to hire people, and we as a management share that responsibility.

And you’ll see that, crudely put, we’re not – well, you know I give my salary to charity. But should I say the successors are not as highly compensated as their predecessors? Because this pain is not just shared at the bottom, it is through the pyramid.

On the other hand, there is an interesting thing in the world that the countries that fire the most hire the most. On Monday, on Bloomberg, I listened very early in the morning to the PDG of Adecco where they asked him, how are your regions going? And he said, well, the US, the UK and Germany not that well. I thought that’s interesting. I didn’t know what he was doing. I was just listening, didn’t know who he was, didn’t focus. But I thought who is doing worse than those three countries?

So, I switched, rewound, got there. He said because that’s where the least unemployment is. Well, hello. President Macron should just listen to this. The countries with the most flexible labor laws, that fire the most, hire the most, they’ve got the lowest unemployment rates.

Switzerland is a fantastic country to do business in. I’ve been here 28 years. There’s rule of law, which is not pervasive throughout the world and not pervasive throughout Europe. If you’re a non-French company, you’re going to make sure because the French companies tend to – that I learned in my days at Canal+, with Vivendi – broke every agreement with treasury’s approval.

So, Switzerland is a civilized country with civilized and highly educated workers. And I’m embarrassed that we had to do that. Hopefully, we will grow. We won’t make that mistake again.

The other thing is – and we haven’t discussed it recently. But a strong Swiss franc is a must. It’s not strong. It is the market value of trust and we’ve got to get used to it. And, yes, we’re still working it through the system.

But the head of the Swiss reserve bank had no choice, zero choice. In fact, the people that set the cap gave a one-way bet to my friends on Wall Street. Remember the cap when those idiots – when Stan Druckenmiller, in fact, not Soros, broke the belt. He had a one-way bet.

And the Swiss economy would have been bankrupted if they hadn’t done so. So, now, we live with a stronger Swiss franc. C’est la vie. Get used to it. Organize your lives accordingly. But by the way, when none of you say, if you’re a non-Swiss franc investor, it’s not that bad to get Swiss francs to have the effect of a stronger Swiss franc come through.

It is the reality. So, we’ve got to live with two of – or a couple of new realities. The one is that there are too many watches in the world. And the other one is it’s not a strong Swiss franc, it is a Swiss franc. And that is our cost base. We will adjust accordingly. We have over the last 18 months. We believe in a strong balance sheet.

The other question I was asked this morning, will people travel again. The answer is yes, especially in the second machine age. What are we going to do with our free time? The previous industrial revolution, the English invented sport. In those days, people went to church three times a week, but suddenly people had free time during the day. Before then, what did they do? They went to church. In the summer, they worked in the fields or they went underground to dig for coal. A horse had a utilitarian use, horsepower. After that, the horse became an object, a pet.

If AI and robotics increase, and you believe in singularity, we should watch out that we don’t get pet values because our utilitarian value in 30 years’ time may be not as relevant as it is today. It’ll have vast societal changes. Hopefully, the abundance will be shared properly. And for that, I believe in a universal basic income. We will have to find ways to look after people whose skills do not make them employable in a modern economy where people – especially with the rigid labor laws.

Some people have become unemployable already. The globalization didn’t lift all boats. However, a lot of the people that are angry had huge benefits through buying better products made cheaper. So, the real quality of life didn’t depreciate by – if at all because it suddenly got a lot better of everything, made by highly efficient people who work like crazy.

The next cut, folks, is going to affect us. It’s going to affect white collar workers. It’s a terrible thing being a chancellor and capping students like I have to. And like one in three, when I cap them, I know that their profession will be gone in five to ten years’ time. Radiologists – I can give you a swathe of professions.

So, what are we going to do in our spare time? Travel. I don’t know. Will people also put VR machines on their heads? I don’t know. But this is not in 30 years’ time.

I started in 1975, the beginning, not working here, but my first contact with Cartier. That’s 1975. The change that’s going to come in the next ten years – and it’s exponential change.

So, when you look at our board, you will see that we’re getting skill sets in that, hopefully, can cope with the pace of change and that it can be explained when – I’m tired of just calling my son, and when he answers, he answers, tech support. And then the second, when I ask him a question, the key word is, well, basically, dad. That means he’s trying to dumb himself down to my level to explain something that a 60-plus-year-old can understand.

And, Nikesh – because he and Nikesh are close buddies. When we three are together, it is like they look at each other and they say, now, how are we going to explain to this guy what’s really going on.

Now, the pace of change – you must have seen yesterday what happened to the retail sector, the department stores in the US. Sears, Kmart, Dillards.

Folks, we’re seeing such rapid change and we better be ahead of that curve. So, our goal is to position Richemont that we’re ahead of curves.

Now, if anybody here is bold enough to predict to me, or my colleagues, the Swiss franc, the euro, the dollar, Brexit, the oil price, how crazy the current US president is going to react, is the Silk Road going to work, the one belt, one – will all of these things work? The French elections, in a couple of weeks’ time. Then will President Macron succeed? Then I’m willing to tell you, okay, given all of those facts, that’s what we guess our models will be and that’s what we guess our European sales will be.

So, I don’t have – I’m protecting my colleagues now because you’re taking a one-way bet. You say we say that. So, I’ll do a thing with you. If you publish your views and your bank’s views and your fund’s views on a whole set of parameters, we work that in and then we’ll say, if that happens, this is what will happen. But you’ve got publish it for everyone to see. Then we’ve got a deal. If not, do not put us in a position where we’re putting the cart in front of the horse.

When Sophie comes and the market expects and then suddenly this gets to my colleagues at the senior executive committee, oh, we can’t plan this thing because it’s going to affect, et cetera. Those days are gone. Things are moving too fast. We need the flexibility despite the horrible year.

The fact that the system works – Gary got the buy in – Gary deserves the credit. Look at our cash flow. In prior years, we would have had a fiasco. In prior downturns. So, the system works and I want to thank Gary. And that’s why Gary is not just leaving. He is still going to be my – I wouldn’t say my bulldog. I would say my helper. Okay, he ain’t going nowhere as they say.

But do not come with every third question, well, where do you see this, what are the margins going to be. Burkhart’s new. I’m protecting him. If you have the guts to give the official view of Paribas or BNP or UBS on all of those things, then we can factor it in, but not six months, Luca.

Give us – and then also give us your historical views and how accurate you’ve been. That also. Then we have a measurable that we’ll work it in and then we’ll be pretty accurate. If not, please do not expect of us to make fools of ourselves. Because the worst thing is we don’t want to look like fools, so we call these heads of the Maisons and we say, you’re not allowed to do X, Y or Z.

Because we’re a family-controlled company, we don’t have to worry about being taken over, we could say we are going to do the buybacks. Forget about the market because it’s the right thing to do. We’re trying to do what is the right thing to do for the shareholders over a 5, 10, 15-year view.

And that’s why I am – you shoot me, but I don’t want to put people into positions when the things are moving so fast. That’s still okay, but the problem then is in the management because this is a collegial business. At board level, it’s collegial. And at the SEC, the senior, it’s collegial. But we don’t want pressure made by predictions when the factors have changed.

The other thing is you’ll see our new directors. I’m also asking my son. He’s been with us here nine years because I want continuity between the controlling shareholders and the executives. He will not be an executive. That’s not planned.

And if I had to leave now – I see some of you have speculated he’ll take over as Chairman, no. But if there is no family representative on the board – he is the first one. And somebody has to come and say, okay, we’ll take – the advisers come in, you say, you’re crazy, sell.

And these people have got a lot of people they don’t want to work for. I know who they are. Trust me. They’re nearly unanimous about who they don’t want to work for, right, Georges?

Georges Kern

If you say so.

Johann Rupert

No? I won’t mention names. But it gives them a sense of continuity. And the other thing it does is it gives them the surety that, once the strategy has been agreed to by the board collegially, then they have the freedom to go ahead and execute.

We are also getting in other skills. I’m very happy with the individuals we’ve managed to attract. And those individuals will help us not only as non-executive directors, I fully expect of them to come and help the executives because they have skills, special skills.

So, I’m excited. I don’t want to stay forever. But for the time being – and that’s why Gary is also staying – we’ve just got to tell our three new executives or show them because a lot of brilliant people still don’t know what they don’t know. And you need to have a lot of scars on your back. And a lot of – my Jewish friends call it [indiscernible]. You’ve got to pay your [indiscernible], that rabbi. That’s the learning process.

And it is the transition of years of not successes, failures. It’s the failures that we’ve all been party to and responsible to – or for – that we can transmit to them as sounding boards to say – by the way, have you thought of this, have you thought of that; by the way, did you know that.

I’m 66. I keep on learning things from colleagues that I’ve never heard of. But not new things. That’s the embarrassing things, old things that I should have known 15 years ago.

I’m excited. I’m happy. I think we’ve got a great team of executives and we’ve got some really good non-executives in.

So, with that, could I hand over to Gary. Oh, firstly – yes, sorry, Burkhart.

Burkhart Grund

Thank you, Mr. Chairman. And good morning, ladies and gentlemen. And here in the hall and those of you watching down on your screens.

Let us now start the review of the numbers. Sales decreased by 4% in both actual and constant rates to €10.647 billion after an overall improvement in the second half of the year. Excluding inventory buybacks, the decline was 2% at constant rates.

The retail channel enjoyed growth and continued to outperform the wholesale channel.

Country highlights were the strong momentum in Mainland China, Korea and the UK, and the return to growth in USA.

At €1.764 billion, operating profit was 14% below the prior year’s level. As a result, operating margin declined to 16.6%.

Net profit declined to €1.210 billion. As a reminder, the prior year included a €539 million profit on discontinued operations.

Good working capital management, coupled with cost control and the disposal of investment properties, increased net cash by €452 million to approximately €5.8 billion.

Let’s now move to a review of sales and to the segment results. Let me walk you first through the group sales performance – first by region, then by network and, finally, by product line, with the numbers, as you know, as always, expressed in constant currencies.

Let’s start with Europe, which now accounts for 29% of overall sales. After a 10% increase in the prior year, this year’s sales declined by 8%. After a difficult start, momentum improved in the second half of the year under review.

Overall, France and Switzerland registered double-digit sales declines, while the UK enjoyed a double-digit increase in sales ever since the sterling devaluation following the EU referendum.

All product lines showed positive momentum, with the exception of watches whose sales were impacted by significant buybacks.

Let us now review Asia-Pacific, our largest region with 37% of group sales. Sales were broadly in line with the last year and up by 4% when accounting for the inventory buyback program mentioned earlier.

Mainland China has grown consistently throughout the year to become the group’s second largest country. Macau – now back to growth – and Korea both showed strong growth. Hong Kong, on the other hand, was impacted by buybacks and an underlying negative sales trend, although the rate of decline has gradually started to ease.

Product-wise, clothing was down, impacted by the net closure of 90 internal and franchise stores, while the contribution from jewelry, leather goods and writing instruments as well as watches in retail was positive.

Let us now turn to the Americas region, which posted a 2% increase in sales. This performance was driven by jewelry, leather goods and clothing, and was helped by the reopening of the Cartier flagship store in Fifth Avenue in New York in the month of September. The watch category, however, remained challenging. Overall, the region slightly raised its contribution to group sales to now 17%.

Now to Japan, which represents 9% of group sales. After a challenging 20% comparative growth in the prior year and exchange rate effects on tourist spending, Japan registered a 12% sales decline, with all product categories impacted. The reopening of the Cartier flagship store in Ginza partially mitigated this performance.

And, finally, let us review the Middle East and Africa region, which generated 8% of group sales. Here, sales declined by 10%, impacted by inventory buybacks and unsupportive currencies, which weighed on tourist and local spending. However, we remain confident in the region and are preparing the opening of a subsidiary in Saudi Arabia.

Let us now turn to sales by network. The percentage of sales generated by the Maisons’ directly operated stores now reaches 60% of overall group sales. This underlines both difficult trading conditions in wholesale, where sales declined by 14%, and growth in the retail channel, up by 4% for the full year.

At retail, strong sales increases in Mainland China, Korea, Macau, the UK and the US compensated for declines in Hong Kong and France. The growth in retail sales reflected positive contribution from jewelry, leather goods and writing instruments.

Following the net closing of 38 internal boutiques, the group’s internal retail network now stands at 1,117 stores.

Wholesale sales were partially impacted by exceptional inventory buybacks, the majority of which took place in the first half of the year under review, and the net closure of 45 franchise stores. All regions and most markets declined, with the notable exception of the UK, Korea and Macau. As a reminder, the group’s wholesale business includes sales through franchise partners, multi-brand retailers and agents.

We now move on to sales by product line. Jewelry, leather goods and writing instruments enjoyed good growth, while the sales of watches were impacted by substantial inventory buybacks during the year.

Sales of clothing, particular in Asia-Pacific, were affected by a store-closing program and one fashion and accessories Maison.

The continued strength of jewelry was driven by a particularly strong momentum in Asia-Pacific and the Americas. With sales growing by 7%, the contribution of jewelry products to overall group sales has risen from 35% to now 39%.

Watch sales declined by 15% versus prior year. Excluding exceptional inventory buybacks, the decline would have been limited to 10%.

Leather goods enjoyed the highest growth of all product lines, with sales up 11%, thanks to noteworthy performances at Montblanc and Chloé.

Moving now to the segments. The Jewellery Maisons segment’s profitability remained strong. It was a difficult year for the Specialist Watchmakers, as we’ll see shortly.

Within the other segment, performance amongst the various Maisons was contrasted and the segment was impacted by substantial one-time items.

Let’s now look at the reported sales and operating results by segments in more detail. We’ll start with the Jewellery Maisons segment, which accounted for 56% of sales and 83% of group operating profits before corporate costs.

Good growth in jewelry at Cartier and Van Cleef & Arpels partially offset a double-digit reduction in reported watch sales, thereby tempering the Jewellery Maisons overall sales decline to 2%. The launches of Cartier Magicien, Cactus and LOVE at Cartier; as well as L’Arche de Noé and [indiscernible] at Van Cleef & Arpels were positive.

Retail sale showed growth, in part supported by the reopening of the refurbished Cartier New York and Tokyo flagship stores as well as ten net openings in the period.

Wholesale sales contracted, significantly impacted by the initiative to assist multi-brand watch retail partners with their excess inventory. Excluding these exceptional buybacks, the segment sales would have been slightly – would have increased slightly.

Pressured by lower sales and the €151 million one-time charges associated with the exceptional inventory buybacks and capacity adjustments, the operating result decreased by 11% compared to the prior period. This led to an operating margin of 28%.

Let us now review our Specialist Watchmakers segment. The year under review proved to be difficult, with sales 11% lower than in the previous period. The environment was particularly difficult for watches in the wholesale channel, where excess inventory led to exceptional inventory buybacks.

There were some positives, though, with good jewelry sales at Piaget, the only specialist watchmaker to be also a jeweler, and good resilience at IWC, as you know, with the successful relaunch of the Pilots line and as well as at [indiscernible].

In the retail channel, growth was driven by the net opening of 12 stores. Lower demand for watches, costs associated with the abovementioned significant inventory buybacks and charges linked to production capacity adjustments led to a 57% reduction in operating results.

All these actions resulted in one-time charges of €72 million compared to €24 million in the prior year. Consequently, the operating margin for the period was reduced to 8%. Excluding one-time charges, operating margin would have been 10%.

Finally, the other segment. Let me remind you that this segment includes mainly Montblanc, the group’s Fashion and Accessories Maisons, and some unbranded watch component manufacturing activities.

Overall sales for the segment increased by 2% compared to the prior year. Continued positive performances at Montblanc, Chloé and Peter Millar overcompensated for the impact of 105 net internal and franchise store closures and its related inventory buyback effects.

At Montblanc, sales of writing instruments with the new Heritage Rouge et Noir edition and sales of leather goods with the Urban Spirit and Meisterstück collections were particularly noteworthy.

Chloé benefited from the integration of its shoes business, licensed until now, and from the continued strength of its leather offer.

Overall, the operating result of the segment included one-time charges of €64 million, stemming from the optimization of certain retail and wholesale locations that are more than offset by the €178 million gain on disposal of investment properties in France.

As a result, the operating result rose to €110 million. Excluding one-time items, previous year’s operating losses have been significantly reduced to a €4 million loss over the period.

Now, I hand over to Gary.

Gary Saage

Thank you, Burkhart. Good morning everybody in the hall and behind your screens and a special welcome to all of our Richemont colleagues.

Let’s first dive into gross margin/gross profits. Gross profits declined by 4% to €6.799 billion in value terms. Gross profit for the year has been influenced by the inventory buyback program, which reduced sales by €278 million.

Overall charges to gross profits associated with the buyback programs and other capacity adjustments amounted to €253 million. If these two effects were neutralized, the gross margin would have been 64.6%. The gross margin in the year benefited from a favorable currency environment, which added 30 basis points to the previous year.

Let’s now look at expenses. Growth in operating expenses in total was contained to 3% when the sales of the investment properties are excluded. On a comparable basis at constant exchange rates, the growth in operating expenses was limited to slightly less than 3%. Operating expenses accounted for 47% of sales in the period.

Selling and distribution expenses, 60% of total OpEx, increased by 3% both at actual and constant rates. This reflects continued investments in our retail network, most notably the renovation and reopening of the Cartier New York and Ginza flagships. These expenses also partly reflect the net closings of 38 internal stores during the course of the year.

Communication costs grew by 2% and represented 10.5% of sales. Administration expenses rose by 2%, reflecting notable increase in IT spending linked to digital and security projects. On a comparable basis and at constant exchange rates, administration and other expenses grew by 3%.

Let’s now take a look at operating profits. Our operating profit decreased by 14% and we achieved an operating margin of 16.6% as one-time charges to this year in total amounted to €109 million compared to €97 million last year. On a comparable basis, operating margin declined by 13%.

The current year charges, primarily comprising the €287 million in inventory buybacks, distribution channel optimization and capacity adjustments, were offset by the €178 million real estate gain that Burkhart mentioned.

Let’s now look at the P&L items below operating profit. First to finance costs. And there were costs this year amounting to €160 million compared to finance income in the previous year of €2 million. The negative €162 million swing principally is the result of the effects of the ongoing group’s hedging program.

Now, let’s look at profit for the year. Our lower taxation charge of €360 million is a consequence of lower taxable profits. However, the effective tax rate has increased, primarily because of non-deductible losses in certain jurisdictions and a higher effective tax rate on the investment property transaction. Our effective tax rate is anticipated to be in the range of 19% to 21% for the medium term.

Profit for the year contracted by 46% to €1.210 billion. This reduction reflects the non-recurrence of the €539 million profit from discontinuation operations in the prior year and also the lower operating profit and the reversal of the finance costs that we just saw.

Let’s now focus on cash flow from operations. Cash flow generated from operations amounted to €1.896 billion, down from approximately €2.4 billion in the previous year. This can be explained by the lower operating profits that we’ve just seen and a one-time €268 million contribution to the UK defined benefit plan.

Upon contribution, the UK plan immediately entered into an annuity agreement with a third-party insurance company. Under the terms of the agreement, the insurer assumes all financial risks and will meet all benefits due to the members of the plan.

An overall decrease in inventory for the year generated €123 million of cash compared to an outflow in the previous year of €139 million. Gross inventories represented 22 months of cost of sales, broadly in line with the previous year. This underlines the continued discipline of all of our Maisons in the management of our inventories.

Receivables were broadly in line with the previous year, and the portfolio remains healthy with a current ratio of 97%.

Let’s now take a look at our capital expenditure. At €599 million, gross capital expenditure was below last year, representing 5.6% of group sales. 50% of our investments related to our point-of-sale networks, including internal and franchise boutiques. Openings for the year included a Van Cleef & Arpels store in Sydney, a Chloé store in Milan and a new Montblanc store in London.

Substantial investments were allocated to refurbishments, including for the Cartier flagships in Tokyo, Ginza and New York’s Fifth Avenue. Montblanc continued the rollout of its new concept and 31 locations were renovated in the current year.

Twenty-one percent of the gross expenditures was related to manufacturing investments. The most important investments related to the IWC manufacturing site in Schaffhausen and the new Cartier high jewelry center in Paris.

Other investments, accounting for the remaining 29%, included investments in the group central logistics hub in Switzerland, IT infrastructure and a new automated warehouse for Peter Millar in North Carolina, United States.

Let’s now discuss free cash flow. Free cash inflow amounted to €1.027 billion, a €218 million decrease from fiscal 2016. The decrease relates to the reduced cash flow from operations, which has been mitigated partially by lower tax payments and lower investments in capital expenditures as planned.

Let’s now move to our balance sheet. Richemont balance sheet is strong with shareholders’ equity representing 77% of total assets. At March 31, 2017, the group’s net cash position amounted to €5.8 billion. Our cash position comprises highly liquid, highly rated money market funds, short-term bank deposits and short duration bond funds. Our overall resources are primarily denominated in Swiss francs, euros and US dollars.

We also hold a 49% stake in the public company, YOOX NET-A-PORTER Group. Our carrying value on the balance sheet is €1.1 billion. This compares to the market value on March 31 of approximately €1.5 billion.

Let us now look at another use of cash, our dividend proposal. Our fiscal 2017 dividend proposal to be confirmed by shareholders in September is CHF 1.80 per share. This represents an increase of 6% over the prior year in Swiss franc terms.

Let me conclude. This has not been an easy year for our Maisons, particularly in watches. We’ve had to deal with over-deliveries and high levels of inventory in the trade as well as our own overcapacity issues. We have also addressed certain inefficiencies in our other segment. All of these measures have impacted our profits in the short term, but it’s placed the group on stronger footing today. You are seeing a confirmation of the resilience of our retail network, thanks to the good performance of the jewelry category, now accounting for almost 40% of group sales.

Richemont’s strong balance sheet will allow us to manage the group with a long-term value creation and a focus on organic growth. Those principles have not changed.

With this in mind, Richemont has embarked on a transition with the elevation of our best senior managers to new positions. We will continue to adjust our structures to an appropriate growth environment. This implies more efficiency within our operations, consolidation of certain back-office functions. And this will promote operating leverage and control across the organization. The ongoing assessment of our internal retail network will continue as always.

Resources will be primarily allocated toward research and innovation, digital marketing, online sales platforms and training in all of our Maisons. We recognize the increasing importance of offering a flexible service to our clients and we need to further adapt to new consumption patterns in terms of product offer, communication and distribution.

Product-wise, we will enrich our more accessible lines in parallel with the successful extension of our high jewelry collections. In a world of design-to-print, Richemont’s view is that there will always be an appreciation for products crafted by the mind, the soul and the heart.

Let me conclude by reiterating that, despite all of our challenges in this year, it’s still a great business – Richemont. We have great people who work throughout the organization. I thank everyone for their efforts over the past year and I’m very confident that Richemont rests in competent hands. Thank you. And I’m sure – I would be surprised if you have questions, but we can try.

Question-and-Answer Session

A - Sophie Cagnard

Just before you ask your questions, if you could kindly give your name, company and limit yourselves to two questions, with no third question please, so we try to have a bit of time for everyone. So, maybe Patrik first [indiscernible].

Patrik Schwendimann

Patrik Schwendimann, Zürcher Kantonalbank. Thank you. First on Mainland China, which had a really nice growth trend recently. How do you see this? One could argue that that’s also true because there are less Chinese maybe buying abroad in Japan or whatsoever. How sustainable do you think is this trend in Mainland China? And second question, Hong Kong, which was for a couple of your sites, quite horrible. How do you see this in the current situation here? Thank you.

Gary Saage

Hi, Patrik. Mainland China has been – and you see it in the numbers – really quite strong and has been for a number of months, nine to be exact. Where is it going to go? We don’t know. But the business is healthy there. And thank God we invested all of our capital that we did in Mainland China because we figured the day would come where the consumption would get higher in the country. It has. The operating margin for Mainland China is improving.

Hong Kong, I think I wouldn’t say there are signs of life there. I wouldn’t call a bottom. It’s getting less worse.

John Guy

Thank you. It’s John Guy from MainFirst. Two questions, please. Could you talk a little bit more about the rationale to enter into a supply agreement with Swatch Group from 2019 onwards? And, Johann, based on some of your earlier comments, is this really due to a renewed focus on capping your own investments in production given the increased market volatility that you see, while taking a more flexible approach to your operating cost platform and your fixed-cost base over the long term?

My second question is around Cartier watches and thinking about the price positioning for 2017. And it seems as if – as close as you can get to a like-for-like basis, which I know is difficult. But there was quite a reasonable change in price mix for Cartier. So, is this with a view that consumers are more interested in effectively buying something which is maybe more accessible, more affordable between €10,000 and €20,000 or even below €10,000 relative to the previous price position for Cartier watches? Thank you.

Johann Rupert

In the past, I’ve often referred to the analogy between the automobile industry and the watch industry. You don’t make – Mercedes, Porsche, Ferrari don’t make spark plugs. They don’t make – in fact, when you go to Mercedes Benz in Sindelfingen, I guess 40% to 42% of what you see is Mercedes Benz. It is simply not cost-efficient. They make the engines, they make the transmissions, they make the key components, but it’s simply – if Switzerland wants to survive and to be cost competitive, then Berlin [ph] will also have to understand that you need to have people like Swatch free to supply. And for years, we’ve had overhangs, et cetera, where they’ve been prohibited. Mr. Hayek, senior at [indiscernible] and a friend of mine, saved the watch industry.

And they are – they, in many ways, are leaders in technology in many fields. And for us all to be cost competitive, we have to share. You don’t ask when you buy a Porsche or an Audi what spark plug is in there or the electronic system that’s mainly Bosch. It’s branded differently. So, yes, we have to make some key components ourselves, but there has to be a sharing, otherwise you’re not cost efficient.

And we’ve had a long standing and good relationship with the Swatch Group. And I’m lucky that we can – that we could extend some of our requirements and be within the law. Obviously, that was the first hurdle, we had to act within the law.

Imagine if Ferrari had to make from the tire to the steering wheel. It’s just nonsense. And having been on the advisory board of Mercedes for many years, I kind of know how the industry works. The tires, the rims, the seats, the electronics, none of these car manufacturers make all these micro routers when your seat goes forward and back, et cetera. These are different major OEMs.

So, if you look at the Swiss watch industry, I’m proud to say the best – the one that can make anything and everything is Jaeger-LeCoultre. Forget about all these fancy guys who talk about family owned and we are blah, blah, blah. Jaeger is still probably the single company, apart from the alligator straps – obviously, we don’t have alligator farms – but yet – no joking. We’re not buying any alligator farms. It’s probably the company, but it would never be cost-efficient to do that.

Secondly, as to Cartier, this is nothing new. When I first got involved with Cartier, Cartier [indiscernible] watches. It had – by far, the majority was quartz watches. We stupidly killed the quartz watch as a Swiss watch industry. But it’s not – it is offering clients what they want. It’s not a major change in strategy. It is offering the clients what they want.

Patek Philippe makes a 24 with a quartz, okay, and a lot of it. Nobody questions Patek Philippe about quartz and plastic, which remarkably looks a lot like our old watch, one of the Cartier designs. But they’re doing it. It’s a commercial decision for them. And yet, they also make some of the world’s finest watches.

So, I fully support what my colleagues are doing. It’s not a strategy in let’s – it is having an offering that’s contemporaneous. And it’s not new in our – I really just want to say it’s not a new thing for us.

Gary Saage

To comment on the pricing strategy or pricing positioning, there’s not a movement that are saying that customers all want to have stupid products. I’d say – there have been an oversupply, the customers have the choice. So, you have to review all categories for all customer base and say, what is the fair value of what you offer. As we sell very well high jewelry and we sell very well the new drives which were sold at good price, it’s selling very well. A good product at the right price sounds well. But customers have the choice, so you have to review everything. But we sell very expensive things very well.

Johann Rupert

That’s a good question, but it’s not new for us. Thank you. Can we only afford one microphone here, Sophie?

Gary Saage

Cost control.

Johann Rupert

Yeah. Cost control gone mad.

Helen Brand

Hi, good morning. Helen Brand from UBS. My first question is just on utilization and online. I’ve noticed in Cartier and IWC, on NET-A-PORTER and [indiscernible], which I think is a bit of a break from the past.

Also, noticed some of the new Cartier watch being some of the influences on Instagram. So, I just wondered what the plans are around digital and how long do you really have to catch up on digital versus perhaps what some of the top luxury names are doing?

And secondly, I’m going to give it a go. But just on – I’m not asking specifically on margins. But could you give us an idea around your OpEx plans for the year ahead, particularly around selling and distribution, admin and the communication lines at constant currency and your budgeting plans there?

Johann Rupert

Who do we have to catch up with? Sorry, who do I have to catch up with?

Helen Brand

If you look at some of the top luxury names, in terms of perhaps e-commerce…

Johann Rupert

Such as who? Name names.

Helen Brand

I’d say Gucci and [indiscernible] probably have done a…

Johann Rupert

We’re very happy through NAP [ph] to help my good friend, François-Henri all the time. And in fact, quite often, we suspect that Federico [ph] gives him better service than he gives us, which proves that they’re neutral. So, I don’t think we’ve got to catch up.

Remember, look, hey, I really have respect for you, but you folks are supposed to be cynical. A good journalist is cynical. You don’t eat what’s fed to you guys. We went in to NET-A-PORTER through Natalie’s husband. Luckily, we were a bit concerned about the future price of our Vivendi stock. So, we got Natalie’s husband to write us, to create a synthetic for us at €68 a share. We sold our shares forward when we exited Canal. A year later, it was €8. We escaped. With that, we bought LMH.

But the second thing, we met Arnell [ph] because he was the person who executed the trades. They then came to us to be an investor. We invested because we wanted to see what they were doing. And it was after Arnell’s [ph] request.

Then the Belgian lady lost faith and decided to sell. We didn’t approach her to sell. They approached us. In the end, we ended up with 93% of the company and we still did not interfere in their business.

With a new round of options after already having personally close to $200 million, some individuals demanded 91% of the new options with the rest of the 2,500 employees getting in line, that’s where I interfered and I said there is a limit to greed. And the strike price for those options that would have given them a gain of another $300 million was under $1 billion, their numbers. So that’s where, yes, we had a bit of friction. You see, there’s a limit to greed. That’s when we decided it had to bulk up. We did the deal at a higher price than they thought it would be worth three years later with YOOX. Some fictitious potential people were created. Unfortunately, for that fiction, there were people, the potential buyers were enormous friends of mine that I’ve known for 25, 30 years.

So of course, when Gary – I called him and I said, are you out of your mind. We want to buy something you want to sell. Are you out of your mind? We’re not buying if you want to sell. So that was errant stuff and fluff.

We have taken nothing out. We’ve just put in. And I’m tired of the narratives that have been created over the last five years. And it’s time that you folks have got to be a little bit more cynical.

So, we backed Natalie, she did enormously well, much better than the shareholders did. We’re backing Federico without getting involved. There are different business models. These models are evolving. I then make a statement this is a big boys game. Now, for anybody who’s read any English, and I’m not English speaking, a big boys’ game doesn’t refer to sex. It means guys with a lot of money, okay? And I said it at the FT Conference. The next moment, the same people tell me I’m a sexist, which every lady in this company will tell you it’s the opposite. I’m constantly asking for – need more females.

The business models are evolving. And I really want to make this whole speech because I think it’s important for you to understand. Mr. Anlo [ph] has got a business model. Farfetch has got a business model. Everybody has got a business model.

We don’t say our business model is the best. Others are saying, their business models are better. All I can say is let’s see. Let us see. But let us just all wait whilst Amazon is building – busy building AmazonBasics. There is a smart individual, Jeff Bezos. He knows the aggregate demand. Why do you think I want Nikesh and Anton and people who really understand that business?

Are they ahead of us? Not a single one of these companies that you know has got an integrated software system. Why don’t you ask them how far their SAP has advanced? Why don’t you ask them what their middleware is like? I know because they’re buddies of mine.

In fact, one of the names that we have mentioned – he’s a good friend. I’ve seen him just don’t make the mistakes that we made. Do not allow people to mess around and do bespoke SAP because then you get to fragile situations. We’ve got to pull our handbrake.

So, in a sense, we were ahead of the game, which we’ve learned some lessons. We’ve come back. I don’t think we are behind. On the contrary. And these soft goods.

I think a lot of us lost a dear friend, Franca Sozzani, last year. She had a very simple sense. Luxury and fashion and style and fashion. Is there an outlet store? If you have an outlet – have a look somewhere [ph]. Doesn’t have enough, okay?

So, you folks want to make a very clear distinction. She was my hero and friend. And be more cynical in your analysis. Don’t just buy what these PR departments – sorry, Sophie – to tell you.

No. Dig a little – hey, no, no, dig a little bit and ask critical questions. And I can tell you, the world of online retail, and especially segmented, whether it be luxury, is moving so fast. Just have a look at the department stores result and what happened yesterday.

So, what happened? We had Walmart who killed Sears and Kmart. I can’t say it. Because they’ve not killed, but were they mortally wounded or not is up to the market to decide. But now Amazon is doing it to Walmart. Is it a brilliant move to have a whole bunch of fixed leases worldwide? No. Obviously, no. But it’s not for us to make that decision. It’s for the clients to decide. We want to help them. And Georges – that’s why I’ve asked Georges, it’s omni-channel. The client, he or she, should be able to decide where it’s most convenient for them.

And I don’t think that people are ahead of us. I promise you. If they were, I would have gone to steal their top person. So, trust me, it’s so high on our priority list. And then when you ask me costs. As we’re busy building that, I have no idea how much we’re going to spend. But we have a little box, it’s a simple little box. It’s important, unimportant and urgent and not urgent. Something that’s not urgent and unimportant, you shouldn’t spend time on. But I expected my colleagues never to get something that’s important become urgent because that gets to a career-limiting move. If it’s not solved, it becomes a career-eliminating move.

Gary Saage

Or if you give out margin at the half year and it gets used by a certain analyst, rightly so, that becomes a career-ending move.

Johann Rupert

Not career ending. Not career ending, career limiting. No, but in all seriousness, please understand our philosophy. I’m not sure that in certain commercial activities not only of our business, but across the world, but the landgrab is not going to be very quick and very – that you are either going to be the best and the boss. I don’t want to compete against Google. Do you know how many search engines there were? I don’t want to compete against Amazon.

So, if you say – you ask, what are we going to spend? These folks have just been in the business for a few months. We’re not going to waste. All I can give you, my words, we’re not going to waste. What we’re going to spend will depend on whether we think something is important and urgent. And if you trust us, we sell your shares. It’s a highly liquid share. You can advise your clients to sell.

It’s a philosophy that these guys, we all sit and work. And I told them I’ll bat for them today. And Georges said, please, couldn’t you just don’t let us answer today [indiscernible]. But he promised me the next time, he and Jérôme and Nicolas, they’ll do all the answers. Correct?

Unidentified Company Representative

We’ll talk a lot next time.

Sophie Cagnard

[indiscernible] website, there’s a question about the group’s intention regarding the stake in YOOX NET-A-PORTER.

Johann Rupert

The what?

Sophie Cagnard

What do we intend to do with the stake we have in YOOX NET-A-PORTER?

Johann Rupert

How much cash have we got on the balance sheet?

Sophie Cagnard

Net €5.8 billion.

Johann Rupert

Why do we need to raise cash? If we distribute it, somebody else is going to take it home. It will be right if we bought tomorrow, if we distribute to our shareholders. Why don’t we carry on like we do and back Federico and a very good management team? We know the business, we know the management. We don’t have to pay a takeover. We’ve already paid the takeover premium there. Why do we have to – I think it’s a business that can grow. But I cannot comment on a public company. It’s a public company. I can’t comment on our views of a public company. Is that a fair answer, Sophie?

Sophie Cagnard

Yes, I would think so, Mr. Rupert.

Johann Rupert

Luca, is there, is there not [indiscernible].

Luca Solca

Luca Solca from Exane BNP Paribas. Could you tell us a bit more about your plans in eyewear? You managed to sign a partnership with Kering Eyewear. I seem to recollect, but Cartier was moving quite a bit of money in eyewear operations. I see that the factory in France is moving to Kering Eyewear. And I’m wondering if those losses are included in the numbers you reported and when they’re going to be out of your P&L.

More importantly, on watches, could you give us more clarity and performance by brand? I seem to understand that different brands within your portfolio are performing at very different levels, some of them seem to be stronger than others. You had a significant reshuffle into your positions at some of the brands. So, I wonder if you could get us a bit more clarity on performance and the steps that you are planning to improve performance by brand. Thank you.

Johann Rupert

Some brands are performing better than others. The ones that are not performing that well are getting urgent attention. But those that are performing well are also getting that same urgent attention. We clearly made some mistakes and I’m not going to talk about individual brand performance [indiscernible] to do so. But the real issue is what do we think that brand can do in five years’ time if properly positioned. And those that we believe, and Maisons that we believe, are maybe – will be reshaped. It will – they know how it goes in the Maisons.

Gary Saage

Luca, on the eyewear topic, I’m not sure I would necessarily agree with your assessment that the Cartier eyewear topic was loss-making? Okay, it was a difficult situation. We have said...

Johann Rupert

Sorry, if it made losses, it didn’t concern me, so it shouldn’t concern you. Because it wasn’t on the radar. No, I know. I was going to call him and say, where the hell did we make losses that didn’t come up to my level?

Gary Saage

So, okay, the transaction is going to happen. There’s no real items in the P&L this year. So, in terms of strategy, do you want to...?

Johann Rupert

Sorry, Luca, it’s not going to move your needle. That really is the quick answer. I love the Kering. I love Mr. Pinault and his son. And it again makes absolute sense to have a combination where we both value quality and we will create efficiencies of scale.

Gary Saage

[indiscernible] the eyewear is becoming very specialist both in terms of time to market, production, new supply, new technology, what is coming with [indiscernible] in Italy, what’s coming into titanium in Japan, and you have to have everything. So, you need a critical mass to handle, but also stay luxurious. So, we thought, on our own, it’s difficult. So, better to find a partner to do it better.

Luca Solca

Thank you very much. So, you didn’t comment about single brands in the eyewear – sorry, in the watches business. I wonder if I could get to those questions.

Johann Rupert

Luca? Luca, have I ever stopped you? Okay.

Luca Solca

You said in the previous conference that you believe that you lack critical mass and scale in soft luxury. So, what are your strategic plans on soft luxury? Do you plan to grow this...?

Johann Rupert

You are correct as usual and you normally ask the normal, the good, intelligent and tough questions. A, our cost base, Swiss francs, as I said before. This was frankly the Swiss franc. I think the market and the watch market is Swiss franc-based, at least ours, not all of our competitors are Swiss franc-based, but that, you’ve got to ask them.

Secondly, we as a group, Richemont, we’re underrepresented in fashion and leather. We have a really good [indiscernible] is really, really good. It’s just the point of Mr. Weston [ph]. I’m happy Daniel [ph] is in the right play. And I have to say to you, it’s the first time that I ever had a hand in appointing the CEO. The group CEOs under me appointed the previous four. And this time – and they have got to give our HR and Gary – finding this individual, I’m happy.

Our leather is starting to work. We’ve got a hub that Jérôme has built in Italy. Montblanc is doing very well. Chloé is doing very well. So, we’re heading in the right direction. We’ve got specific internal targets for leather.

You’ve got to understand Cartier used to be very present in leather and small leather goods. Well, then, of course, with the watch boom and the incentive structures all the way down, the turnover per square meter on a watch and on jewelry is a lot higher than on a bag.

So, in a sense, Luca, and there I blame myself, human beings react to incentive structures, whether it be politically, whether it be socially. Your own kids, if you give them the right incentive structures, they behave in certain ways.

Now, our incentive structures were biased towards watches and jewelry, in terms of retail especially because that was the high-margin stuff. That was the high turnover per square meter.

Secondly, multi-brand leather stores started declining. It’s like the old stationery stores, so the distribution method changed. We are really focused on it. They are very positive signs. Cyrille gave me a target, which he now regrets. We had a meeting yesterday afternoon, but he’s committed to it. We are focusing on it.

And here, mea culpa again, we had watch expertise – a jewelry expertise, real jewelry expertise. But we didn’t have watch expertise before the acquisition of LMH, the whole Jaeger, IWC and the Lange group. When we got that, we became watch specialists. We are now building that in leather goods. We made some really stupid mistakes. Just in terms of the supply chain, for instance, [indiscernible], look, we’ve been right a few times.

We didn’t quite – we thought we understood it, but we didn’t totally understand who sells to whom all the way the feeding chain up to us and how we’d get 5 and their second cousin would sell 2 of the same product. So, I think we’ve now got a pretty good handle on it and that will help us to create margins, which margins can help us to communicate. So, we are serious about it, very serious about it.

Sophie, you picked.

Sophie Cagnard

No, it’s just [indiscernible]. We have a question on the website regarding our strategy – let me read out to you. Do we plan to close any wholesale contract sales? [indiscernible] who tried to reduce volatility in watch sales for – are there any other initiatives that could be done in order to reduce volatility [indiscernible] watch sales in particular in the wholesale?

Johann Rupert

What? I don’t understand...

Sophie Cagnard

Volatility in watch sales [indiscernible] comes from the fact that there’s a part – a lot of watches are sold through wholesale, and the question is, therefore, do you plan to reduce the number of wholesale locations you have? And would it help reduce volatility in watch sales?

Johann Rupert

We don’t have wholesale locations. We have wholesale partners or retail partners. And unless they are financially sound, they will go the same way as Sears and Dillards. And we have to ensure that these people are financially viable. Otherwise, we have to assume more retail fixed leases. So, I think it’s impossible for one group to determine that. Do I think that there will be less wholesale and more e-commerce in ten years’ time? Yes, because it’s omni-channel and the customers will decide where she or he wants to buy. And the key thing, of course, is the after-sales service in terms of many of the products as well. So, where you have products where you need servicing, omni-channel is slightly different to selling a tie or a scarf or a handbag or – so, you’ve got to just differentiate as well. But the trend will definitely be omni-channel. Sorry, Jon.

Jon Cox

Thanks very much. Jon Cox, Kepler Cheuvreux. One question really on the cash, what are you going to do with the €5.8 billion. I think, at one point, you talked about increasing the dividend by 15% per year on average.

Johann Rupert

Well, it’s been 15% a year on average.

Jon Cox

Obviously, you still…

Johann Rupert

Has it or not?

Jon Cox

I’ve not done the calculation.

Johann Rupert

The one year I go and I take a sabbatical, and to show you that it was a true sabbatical that I didn’t get any information – by how much did you increase it?

Gary Saage

40%.

Johann Rupert

40%. I said, guys, I’m talking 15% per year for 28, 30 years. Now that’s when you allow true non-executive directors to run the place.

Jon Cox

But in all seriousness, you have over €6 billion – you were talking about maybe building expertise in leather. Has there been any change in your strategy maybe looking more for M&A?

Johann Rupert

Jon, I’m going to say this for the very last time. Our shareholders expect of us to build brand equity, not to pay other shareholders goodwill where they accept, at a huge premium, and we have to eat up the brand equity – we have to eat up the goodwill.

Now, are we saying no to all acquisitions? No. But I, for instance, say no Breitling not because I don’t think it’s a good company, but I said to my colleagues, I’m going to buy Breitling, whilst we’ve laid off 300 people? No way. Maybe I’m too Anglo-Saxon Protestant, but that’s not the way I do business. And I think it’s a very good company. But we just said – Gary and I looked at each other and said, what kind of a signal is that to send to your own colleagues?

So, maybe we make irrational decisions based upon morals at times, but you show me a great company that we can buy, that we can run better because you’ve got to be a bloody egotistical guy to assume you’re paying a premium for a third-party business and you can run it better because otherwise why buy it. If you can’t extract value out of it.

So, no paid mergers. They did a study in the UK, the BAT Rothmans merger accreted the most value and was a zero premium merger. Normally, when a company buys another company at a huge premium, the exiting shareholders do far better than the acquiring shareholders, and this is empirical. I’ve read the studies. Remember, I used to be with Lazard and ran my own bank.

So, do you advise the client to go hostile or not? If you go hostile, you’re better buying shares. If you do that, you’re using the most expensive currency on Earth if you’re honest in your accounts.

But if there’s one category of shares that I avoid totally, it’s an acquisitive company that buys for shares and every two or three years, they’ve got to do a massive deal, so that the shareholders can’t do a three or four-year comparative because the incentive is there for management to use every method possible to have the acquisition tool overpriced.

So, obviously, every accounting tool you can use, you bump your shares, then you buy for shares. I have found, and Alan knows – he’s been with me for since, what, 1985? I’m loathe to pay with shares because it’s always proven with us to be the most expensive currency on Earth because it’s currency you’ve got to serve for the rest of your life.

Buying cash – 6 billion is nothing. If I’m Apple – come and talk to me if I’m Apple, okay, then we can talk. 6 billion is not a lot of money, not in our field. Because, quite frankly, you folks think all of it is worth gazillions. 20x operating, 25 times, blah...

Jon Cox

[indiscernible]. And I have a question. I was intrigued a little bit by your outlook statement, which actually seemed quite bullish for yourselves, saying it’s time to transition towards a more sustainable growth in luxury. And then sort of to add on your Q4 sales figures, it looked like double-digit growth retail, low single-digit wholesale. Has that continued...?

Johann Rupert

No, we’ve known each other too long for me to jump into that, please. We are confident that we will deliver proper returns for all of our shareholders in the medium to long-term. We’ve been through these kinds of phases before. I’ve got very capable colleagues and we still have great Maisons. And some of them are becoming greater and greater. What we’ve got to try and do is to do two or three more Maisons, what they managed to do at Van Cleef. That’s what we’ve got to do.

First point, Jon. Daniel [ph], because this is becoming a highly embarrassing thing for me on a personal level because I’m being mocked at my board by a bunch of good friends of mine, who are explaining to me that when is this thing going to be fixed. Now, we’ve got the right jockey. And we were bold enough, Gary helped – Gary was partly the architect, let’s just be bold and to say let’s take the pain. We took a lot of pain last year. We closed a lot. We decimated a lot and we cleaned up. Really did. So, expect more moves of that nature. Is that the proper way of putting it, Gary?

Gary Saage

Yeah, that’s okay.

Johann Rupert

Now for other underperforming assets. For that, we need a little bit of a cushion of...

Gary Saage

Jon, the only thing I would add because I’m sure the question will come is, we did have buybacks in the fourth quarter, mostly around the Specialist Watchmakers. If you excluded that, the trend was exactly the same as the third quarter. So...

Jon Cox

Okay.

Gary Saage

Don’t ask about April, please

Sophie Cagnard

[indiscernible].

Mario Ortelli

Mario Ortelli of Bernstein. Two questions, if I may. The first one is on jewelry that is becoming more and more important in the needs of the sales of Richemont. Which are the trends that you see in jewelry going forward considering competition and demand and how the Maisons or the group are reacting to this?

The second question is about the distribution of watches. We are seeing always a better performance of your retail shop of watches rather than the wholesale channel. We see the development of online. In 10, 16 years’ time, how do you envision the distribution of watches? And will Richemont probably, in the future, will be able maybe to sell Cartier watches just in Cartier boutiques? Are you thinking the multi-brand concept? Have you tried [indiscernible] that is managed by third parties and you can manage internally?

Thank you very much.

Johann Rupert

Those are all three very good questions. Boy, am I glad I’m not going to be answering these things at the next meeting. I’m looking down. I gave them my word I’ll bat for them this time.

Jewelry, I think firstly, we’ve got to look at branded jewelry and non-branded jewelry. The universe of jewelry is much bigger than branded jewelry, and I think branded jewelry will continue to grow at the expense of non-branded jewelry. But it will depend upon individuality, on real skills, craftsmanship and I think the world is going to become more and more bespoke.

Nobody drinks Maxwell Coffee anymore or Budweiser or Miller. It’s going craft. And one of the things that bother me about the future of Europe is if we don’t do something about it, we’re going to lose the artisanal skills. Therefore, we started, I personally did, the Michelangelo Foundation where we are creating a platform, a database for artisans and helping artisans connect with designers.

So, I would suspect that that will continue to grow and that there’ll be more personalization, also in watches. We should have the capability to react and to create and to suggest more personalization because the clients do not want to buy standard, run-of-the-mill. They want their personal taste.

Jewelry, we have the expertise and we are the leaders and we intend to remain there. In fact, two people here seated next to each other – Nicolas, why don’t you start talking? How are you and Cyrille going to maintain? I’m now breaking my word to you.

Nicolas Bos

So, to answer the question, I think, on jewelry, on top of what Mr. Rupert said about the – still the room to grow within the market from non-branded to branded, we see really a positive rate of growth kind of across the board, from very high end, high jewelry, extremely expensive pieces, special commissions to really there were identified jewelry. And I think that’s definitely true for Van Cleef & Arpels. And I can even speak for Cartier. It is true. And so, there is room to grow geographically, there is room to grow in a lot of regions and then categories in the future.

Mario Ortelli

And how are you thinking about mass customization, your use of innovation, speed in the new lines?

Cyrille Vigneron

There was a press interview of our Italian friend who say they wanted to chase us and invest massively in Vincenza to try to compete. So, they have to run fast because the demand is there and we have production capabilities. We have the design team creating high, iconic products and also very exclusive ones, and to do the same thing, to do both within Van Cleef and Cartier is quite difficult on a sustainable basis.

Johann Rupert

Stop. You had to do it. It’s not a question.

Cyrille Vigneron

We have to do it. [indiscernible] do it in the same way. They tried to look at us. They tried to copy us.

Johann Rupert

Yes. I don’t know whether you’ve seen how many fake copies of Van Cleef...

Cyrille Vigneron

Of Alhambra

Johann Rupert

Of the Alhambra recently appeared from even people that I thought it would be beneath their dignity to do that. But, Georges, I’ve spared you my friend. Now that I have broken the ice, why don’t you talk a little bit about omni-channel distribution?

Georges Kern

So, of course, the retailers are facing the same difficulties with changing demand, tourists coming into Europe or not anymore. And retailers also have to change to build their own e-commerce. And we have a very close relationship. We work together with these retailers and indeed to come back on omni-channel. We will have to invest more in digital, not only in social media and marketing in all of these aspects, which is certainly a growing investment point because consumers today get their information throughout the channels.

But in terms of omni-channel, we need to offer a seamless experience to the consumer. So, you have, at the end of the day, a unique customer view, and we have to offer that service that you can buy when and where he wants, be it with our retailers, be it through our own e-commerce channels or pure players or retailers. So, this is the reality of the market. We have to be agile, quick to adapt to this demand, and we will do so. Was that fine, Mr. Rupert?

Johann Rupert

Georges, welcome to the club. My father used to say the world looks totally on horseback than on foot. So, I have to say explain to some of my colleagues, they say why do we have to put up with this nonsense. I said, you wanted more authority. So, you wanted more, so you go from a free soul when you’re at a Maison to suddenly having to deal with what I’ve had to deal with the last 25 years, which is admin and procedural stuff. And good luck, join the club. One of the [indiscernible] is being here, Georges. So, you just had your first initiation. Welcome to the club.

Georges Kern

Thank you very much, Mr. Rupert.

Johann Rupert

The truth is, yesterday, you said to me was, please do not give any questions to me.

Georges Kern

That was our agreement, yes.

Johann Rupert

Well, blame Gary. Gary whispered to me, it’s Georges’ question. Okay. Two, three more questions, folks. Yes, sorry.

Melanie Flouquet

Yes. Hi, sorry. This is Melanie Flouquet from JPMorgan. I have two questions, if I may. The first one is on price and mix. As you rightly said, the watch segment has had a tradition of having every price point, but we have had five years of pretty good combination of price and mix. And then in the last year, there seems to have been a bit of an adjustment back on these two metrics, which was right. What do you expect starting from now? Are you are going to get price and mix back in your business in watches? Pricing power and mix power.

Johann Rupert

You’ve got a very good context being JPMorgan. Why don’t you call our competitors and ask them whether they are going to live within their means or not? Whether their sellout is bigger than their sell-in. If we get that answer, Melanie, I’ll gladly talk to you again about that because, quite frankly, when it’s at retail and our product is there and another product, and there’s excess stock of the other product, the retailer is going to try to move the other product, which exerts pricing pressure on the whole segment, on the whole industry.

Melanie Flouquet

[indiscernible].

Johann Rupert

Sorry?

So, price and mix is not [indiscernible].

Johann Rupert

But do you understand what I’m saying, Melanie?

Gary Saage

Melanie, the bigger point is we still firmly believe in the fair pricing policy.

Johann Rupert

Absolutely.

Gary Saage

Right? So, currencies have been a bit calm, but that’s still the key view for us, is the – now, how that affects margin, we don’t really know because we don’t know the currencies and things, but that’s still very much in our thinking.

Johann Rupert

Melanie, the clients are very sophisticated. Today, when a Chinese traveler goes, they have a live active Web app that will give them better price to a product per currency, per shop, per region. So, for instance, if they fly, let’s say, Emirates and they land in Dubai, they’ll check the prices and they’ll decide, do they buy here, do they buy in London, do they buy in Paris, do they buy at home? There’s total transparency.

But when you have the fluctuations, we can’t predict why are the Chinese traveling to Japan. Well, firstly, the people are polite. They’re civilized. The place is clean. It’s not polluted. They travel to Japan for many other reasons than pricing. Trust me. I love Japan. It’s a civilized place. No, don’t laugh. No. But, Melanie, don’t laugh.

However, if the yen jumps up and down, it’s very, very difficult for us to predict what – Gary said is the key thing. We believe in fair pricing, which means the client on a tax neutral basis, he or she must be able to buy the product. But we need time for adjustment because there are leads and lags at times. But that affects everything.

In terms of our mix, as I said earlier on, you weren’t born yet. But in the 70s and 80s, the watch industry was totally different with far more welcoming products than today. These incredibly expensive watches evolved over the last decade, 15 years.

But remember one thing, Cartier’s high jewelry have got lower margins. The higher the – because then you start – no, the highest, highest jewelry don’t really have the margins.

Gary Saage

It starts…

Johann Rupert

I’m talking. Exactly. They’re unique. But don’t assume a higher priced product as a higher margin. Okay, let’s just stop there.

Melanie Flouquet

And I have my second question. I’m moving on to my second question. I think we’ve all understood you’re not going to comment on the margins forward.

Johann Rupert

Good, good.

Melanie Flouquet

So, let me look at last year’s margin. Can I – if I look back at your gross margin, it was 64.6% excluding one-offs despite the positive impact of currencies and despite the channel mix that would have been meaningfully positive to the gross margin. Could you help me understand what were the negatives? Thank you.

Gary Saage

Yeah. Melanie, I think it’s a good question. You know the way I think about these things. I’m loathe to call anything exceptional charges, right? So, the numbers that we gave you is...

Johann Rupert

Sorry, could you repeat that?

Gary Saage

I’m loathe to disclose exceptional charges...

Johann Rupert

No. No, reemphasize – people who tell you things are exceptional charges are hiding things because, in business, exceptional charges reoccur. It’s an exogenous factor that hits you or it is a managerial stuff-up. But continuous charges – I agree totally with Gary. I don’t like calling them exceptional, and neither does Gary, and that’s our culture.

Gary Saage

Okay. So, the numbers...

Johann Rupert

An earthquake, something like that accepted, but...

Gary Saage

So, the only thing that’s in the numbers that we gave you is capacity adjustments, i.e. potential social plans and the buybacks, okay? In the second half, we did have recovery from Cartier from the deconstruction of product. You’re not going to ask me that question, thank you. I will say the second half of the year margin was affected. Okay, I’m going to use Mr. Rupert’s word here, management stuff-up. I think when a new management team comes in, they maybe have different views than previous management.

Johann Rupert

Except I’m still here, so I’m part of the previous management and the current management and I’m first to blame for the stuff-up.

Gary Saage

So, there’s a bit of that in there, Melanie. But I’m not going to hide behind those types of things, okay? So, there was a bit of that, but it was – you’re looking at me funny. I’m sure…

Johann Rupert

I think external charges are becoming unexceptional. It’s a cost of doing business. Like people blaming the Swiss franc. Cry me a river is what they say in America. It’s a cost of doing business. And the readjustments, as we said earlier on, we were overoptimistic or a bit too efficient in feeding the market. And we paid our price and we are still paying the price and we may still for a while. The readjustment phase will depend upon how realistic our competitors are.

Sophie Cagnard

Given the time, the last two questions will be taken from Zuzanna…

Zuzanna Pusz

Zuzanna Pusz from Berenberg. Two questions, please. First of all on the cost base, so you’ve done some work on adjusting this in terms of the store closures and the capacity. So, how shall we think about it going forward? Can we expect some additional adjustments to come also this year with some additional store closures?

And secondly, going back to the topic of how the industry is changing, how we may see more personalized products. I was just wondering, do you think that, related to that, the industry should also change in terms of the lead times, which maybe should become a bit shorter? I appreciate that the product is quite specific. But do you think there is an additional change coming on that front? And also, where do you see yourself versus the competitors addressing that?

Johann Rupert

You know we’ve been discussing omni-channel and the route to market and giving our clients flexibility of where they purchase, how they purchase, et cetera. There is, of course, the other side, which is the creation of the product. And there, we have enormous opportunities, but also enormous challenges.

Anton is on the board of a company that we invested in through another – through Reinet, which is a three-dimensional digital printer. It breaks the rules of molding totally.

Now, the whole industrial process, Panerai is working on bulk metallic glass. The end product of the case, we freeze it, we take it to minus 70 – sorry, we take it to 70 degrees, 90 degrees humidity. We basically take it to minus 40. We throw it against – we drop it, throw it at 5,000 Gs on the lug and it doesn’t break. It’s lighter. You don’t have to polish it.

These various new – and it’s a combination of very many technologies. So that will also have impacts on the capacity to deliver better performance to our clients. The one Panerai watch, we gave a 50-year guarantee, because it has no lubrication. It’s got totally new materials that we’re using.

So, if we want to stay ahead of the curve, we’re going to have to invest more and more. And we’ve already announced in R&D. There is superb R&D in Switzerland. But on this one product with the BMG, we’re collaborating with a Japanese family company where they have the technology. This will allow us a different production process. You can have mini factories. This is the future for everybody.

What the impact will be on society? I have no idea. So, we’re not only looking at Georges and Jérôme and the market and the distribution and the omni-channel. We also have to look at the emerging technologies and your question is answered. Lead times and individuality.

It’s another client. It’s a highly educated, far more demanding client based upon not only culture, but information. So, we are going to have to – and that’s one of the reasons why we’re skipping a generation or two.

If we don’t anticipate – it’s like Wayne Gretzky, ice hockey. Wayne Gretzky didn’t follow the puck, he went to where the puck was coming. There are some footballers and some rugby players and some ice hockey players, and Michael Jordan who knew where the ball was going.

Now, is that instinct? What is it? We’ve got to try and figure out where is it going. One of my heroes in life was the gentleman who really built Sony. And when he did the Walkman, I went and I spent as much time as he would give me with him. And he said to me, no, no, no, no. Do not ask the consumer what he or she wants. They might not always know. Create something that they don’t know of, that you think they may want.

If I had done a consumer survey, that was him saying to me. And I asked a person, will you buy a tape recorder that cannot record? They would have said, are you out of your mind? Who’s going to buy the tape recorder that cannot record. But he said, ah, but if I can give you music, now you laugh.

You probably didn’t know what a Walkman looked like. You’re too young. But it went from vinyl, Super 8, diskettes, Walkman, CDs, streaming, back to vinyl. We’ve got to try and figure out where the puck is going, and for that you need younger people, you need definitely more women and you need to be open to ideas.

How we get there, I have no idea. But we know it’s going to change. We know both ends are going to change. We know Georges is in a very critical role, how we face the consumer.

This other side is what do we think in our wildest ideas that consumers may know? But I agree with you, it’s going to be lead time and it’s going to be uniqueness. Cartier was the art of being unique. Not everybody wants the same thing. So, it’s – I don’t know whether I’m answering your question. But...

Zuzanna Pusz

No, no, exactly. And just maybe on the cost...

Johann Rupert

Cost of what, sorry?

Zuzanna Pusz

Just whether we can expect any store closures or...

Johann Rupert

Oh, I see, okay.

Gary Saage

I think the Dunhill – there will be a few...

Johann Rupert

Those store closures that we know of that you should worry about in any prediction...

Gary Saage

Yes, with Dunhill...

Johann Rupert

The Dunhill situation is finished. And probably next year – we’re probably going to open up – we plan 20 net stores and we are opening up the subsidiary in Saudi Arabia where Cartier will start to take care of their own distribution there.

Johann Rupert

Have you got one more question? Otherwise, I’m going to give all of you the one question you should all ask.

Zuzanna Pusz

I had another one. [indiscernible] allowed.

Johann Rupert

Which is what?

Zuzanna Pusz

It’s a bit more financial. I would say, on CapEx, given the discussion on omni-channel, [indiscernible], obviously, you’ll see probably less store openings [indiscernible].

Gary Saage

600. 600.

Johann Rupert

600.

Zuzanna Pusz

Is this the level we can expect going forward as absolute or percentage of sales?

Johann Rupert

No. 600 is what we are holding our colleagues to.

Gary Saage

For next year.

Johann Rupert

For next year.

Do you know there’s one question that our colleagues hate and all people hate? Because, in today’s world, especially post-email, people delegate trouble upwards. Because I have one rule, I want to know the bad news before anybody else. Good news, they can send me a letter. Bad news, I want them emailed first.

But especially – I have a Belgian colleague who recently retired. We have an order of the monkey. You know the English saying passing a monkey on to somebody else’s back? So, we had an order of the monkey that I used to hand out every year for the guy that put more monkeys on other people’s backs. But after he won it for four years in a row, we retired the order of the monkey. But if you want to stop people from passing the buck, which is the biggest corporate game on earth – moi? I wasn’t there.

At each end of each meeting, you ask one question. Okay, folks, is there something that you know that’s important that we haven’t discussed today that you think it’s important for me to know. That’s all you need to ask.

And I’ve told my son when we started for this year. I said, you watch, the guys are going to be on their way to the airport and they’re going to talk and they’re going to say, you know, we never discuss that. And the other guy or the lady is going to say, this is not our responsibility. The mobile phone will go, have you got five minutes? Have you got ten minutes?

So, as they now know that this is the question, the onus is back to reveal anything. If you had to ask an executive, is there anything that’s important and urgent that you think we may not know? If they don’t answer you, then it’s one of two. They either don’t know, which is very bad. Or they’re not being truthful, which is worse or as bad. There is nothing that’s important and urgent that we know of that’s important for you to know.

I think that – look, if we knew there’s something very important and very urgent and we didn’t tell you, then you would be sending the wrong signals to your clientele. But that’s the key question. If you ask somebody that, that is not a nice one.

If you think about the [indiscernible], you ask them – anybody, is there anything? You ask your child. Unfortunately, I didn’t know it when they were still living there. That’s like with a priest. You’ve got a problem. You don’t tell them the truth. A, if you don’t know, then you’re not on top of your job. If you do know, you don’t tell, then it’s as big an issue. There’s nothing here that I can tell you that Gary, Burkhart, any of us know in terms of planned costs, planned – in terms of things that would move the needle for your projections.

Sophie Cagnard

So, this concludes our presentation. Thank you for coming. Thank you for watching. And have a good day.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.