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Montblanc Summit Review

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Compagnie Financiere Richemont AG ADR (OTCPK:CFRUY) Q4 2018 Earnings Conference Call May 18, 2018 3:30 AM ET

Executives

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Sophie Cagnard - Group Corporate Communications Director

Burkhart Grund - Chief Finance Officer

Jérôme Lambert - Chief Operating Officer

Nicolas Bos - Chief Executive Officer of Van Cleef & Arpels

Cyrille Vigneron - Chief Executive Officer of Cartier

Analysts

Edouard Aubin - Morgan Stanley

Patrik Schwendimann - Zurich Cantonal Bank

Melanie Flouquet - JP Morgan

Helen Brand - UBS

Francesca Di Pasquantonio - Deutsche Bank

John Guy - MainFirst

Luca Solca - Exane BNP Paribas

Jon Cox - Kepler Cheuvreux

Zuzanna Pusz - Berenberg

Hermine de Bentzmann - Raymond James

Sophie Cagnard

Good morning, everyone. Nice to see some familiar faces. Burkhart Grund, Chief Financial Officer, and I would like to thank you for coming to Geneva to attend Richemont’s 2018 Annual Results Presentation.

Welcome also those of you watching the webcast. Joining us today from Richemont, Mr. Cyrille Vigneron, Cartier’s CEO; Mr. Nicolas Bos, Van Cleef & Arpels, CEO; and Mr. Jérôme Lambert, Chief Operating Officer. The presentation and company announcements are already available on richemont.com. An archive of this website – sorry, of this webcast will be available today on Richemont’s website at 3:00 PM Geneva time.

So first, Burkhart will take you through the highlights before reviewing group sales. Then I will present Maisons’ developments, and thereafter, Burkhart will take you through the financials and conclude.

As usual, the presentation will be followed by a Q&A session and questions will be taken from the floor. And also time permitting from those of you watching the webcast, you would have put their questions through the dedicated link on richemont.com.

So before we begin, could you kindly ensure that your mobile devices are switched off. Thank you. Over to you, Burkhart.

Burkhart Grund

Thank you, Sophie, and good morning, ladies and gentlemen, here in the auditorium and those of you watching behind your screens. Thank you for your time today. Today, Richemont is reporting a set of numbers that reflected generally improved macroeconomic environment, mixed currency movements, solid sales in our main product categories and the impact of a number of watch inventory measures negatively affecting the wholesale channel.

In total, sales increased by 8% at constant exchange rates and by 3% at actual exchange rates to finish the year at €10.979 billion. Excluding inventory buybacks in both financial years, 2017 and 2018, group sales rose by 7% at constant exchange rates. The past 12 months have been characterized by soft wholesale sales and strong retail sales, which were driven by solid jewelry and watch sales.

Operating profit reached €1.844 billion, up 5% versus the prior year, reflecting improving – improved gross margin and tight operating expense control. Excluding one-time items totaling €208 million in the year under review and €109 million in the prior year, operating profit increased by 10%. All in, the operating margin was broadly stable versus the prior year at 16.8%. Profit for the year increased by 1% to €1.221 billion, impacted by a higher effective tax rate. Cash flow from operations was strong, rising by €827 million to €2.723 billion.

Let me now walk you through the group sales performance first by region then by network, and finally, by product line with numbers, as always, expressed in constant currencies.

I start with our sales in Europe, which remains our second largest region with 27% of group sales. Full-year sales declined by 2% adversely impacted by the relative strengths of the euro, inventory buybacks in the fourth quarter of the year, tight inventory control within our wholesale network, and the optimization of the wholesale distribution network.

Sales in France, our fourth largest market in the world contracted. And in Switzerland, we’re in line with prior year. The United Kingdom, however, enjoyed continued growth. Sales of our product categories were broadly in line or positive compared to the prior year with exception of watches, which were impacted by the initiatives mentioned before. As a result, wholesale sales declined, while retail sales posted modest growth.

Let us now review Asia Pacific, our largest region accounting for 40% of group sales. Sales in the region increased by 17%, supported by a weaker Hong Kong dollar, easier comparative figures and a reduced level of buybacks in the year under review. The double-digit growth was broad-based led geographically by mainland China, Hong Kong, Korea and Macau and product-wise by jewelry and watches. By channel, sales grew by double digits in both retail and wholesale.

Let us now look at the Americas region, which recorded an 8% progress in sales. Lower wholesale sales impacted by watch inventory management initiatives were offset by strong retail sales. Retail performance was driven by jewelry and clothing with a strong growth of online sales.

Retail sales also benefited from the favorable full-year impact of the reopening of the Cartier New York flagship store in the prior year. All in all, the regions contribution to group sales was in line with the prior year at about 16%. The U.S. remains our largest market before mainland China and Hong Kong.

Let us now turn to Japan, which represents 9% of group sales and posted a 6% increase in sales. Japan benefited from softer comparative figures and a favorable currency environment, which positively impacted tourist spending. Good sales growth in jewelry, watches, as well as the retail channel more than offset the decline in wholesale sales.

The year under review also saw the full-year contribution from the prior year’s reopening of the Cartier flagship store in Ginza, as well as the positive contribution from the newly opened Piaget and Van Cleef & Arpels flagship stores also in Ginza and Tokyo.

And finally, let us review the Middle East and Africa region, which generated 8% of group sales and soft sales rise by 2%. Higher tourist spending more than offset the adverse impacts of inventory buybacks and geopolitical and regional uncertainties. In terms of product categories, jewelry, watches and writing instruments posted moderate growth.

Let us now turn to sales by distribution channel. The contribution of retail sales through the Maisons’ online stores and 1,123 directly operated boutiques has increased to 63%, up from 60% a year ago. The 14% increase in retail sales was fueled primarily by jewelry and watches, with most other product categories enjoying growth. Retail was also supported by a net of six store openings, including the internalization of external points-of-sale.

From a geographical perspective, all regions, excluding Europe recorded double-digit increases. The group’s wholesale business, including sales to franchise partners reported a 1% decline. Increases in most product categories could not offset the decline in watch wholesale sales, which were impacted by a number of watch inventory management initiatives.

Internalization of points-of-sale, notably in Saudi Arabia and the United Arab Emirates, also weighed on the wholesale performance. Sales decline in all regions, except in Asia Pacific.

And finally, let us move to the sales breakdown by product line. All major product categories showed growth. Jewelry, which progressed by 15% enjoyed double-digit growth in most regions. The strong performance was attributable to all Maisons’ selling jewelry, namely Cartier, Van Cleef & Arpels and Piaget.

Jewelry has now become the group’s largest product line and contributes 41% of total sales. Watch sales achieved a mid single-digit increase. A strong retail sales were more than offset – strong retail sales more than offset the weakness in wholesales sales. The 4% increase in leather goods was driven by good growth in Europe and Asia Pacific.

Writing instruments registered a 3% increase in sales, driven by Montblanc, a notable achievement in a mature market. Clothing posted a more measured performance with a good contribution from Dunhill and Peter Miller. The category was impacted by the exit of Shanghai Tang on the 1st of July, and the change of creative directors at Chloé and Dunhill.

Sophie will now take you through the Maisons’ and the segment highlights. Over to you, Sophie?

Sophie Cagnard

So, thank you, Burkhart. Let me start with the jewelry – the segment highlights. So the Jewelry Maisons’ operating margin strengthened to almost 30%. The Specialist Watchmakers managed to improve their profitability, while taking inventory management initiatives and the profitability of our other businesses was impacted by a number of one-time items.

Let’s look now at the reported sales and operating results by segment in more details. So we’ll start with Jewelry Maisons, which segment – which accounted for 59% of group sales. The segment includes the total sales of Cartier and Van Cleef & Arpels Maisons across all product categories.

Sales grew by 9%, driven by high single digit growth in jewelry and double-digit growth in watches, and reflected strength in Asia Pacific, the Americas and in the retail channel. Also, sales partly benefited from the non-recurrence of a prior year watch buybacks at Cartier.

The Jewelry Maisons’ operating results improved by 15% to €1.926 billion. This €244 million increase reflects the robust sales just mentioned, good cost control and the non-recurrence of €151 million one-time charges in the prior year. Consequently, operating margin improved by 150 basis points to 29.9%.

Let us look at the main development over the past 12 months. In terms of product lines, jewelry recorded a growth performance with broad-based growth across unique pieces at the highest price points and more accessible iconic line, such as LOVE at Cartier and Alhambra at Van Cleef & Arpels.

Watches reported growth across price points and material, supported notably by the success of Poetic Complications at Van Cleef & Arpels and the relaunch sponsor collection at Cartier.

Wholesales growth was more measured, reflecting initiatives to tighten sell-in and optimize networks. Strong retail sales benefited, not only from the enduring appeal of Cartier and Van Cleef & Arpels creation, but also from the net opening of two internal boutiques, including in Toronto Yorkdale. There was also a full-year contribution of reopened Cartier flagship stores in New York and Ginza and the new Van Cleef & Arpels Ginza flagship store.

The year saw a number of successful digital initiatives at both Maisons. At Cartier, there was a prelaunch on NET-A-PORTER and Juste un Clou digital campaign. And at Van Cleef & Arpels, there was the award-winning nano-website for Le Secret high jewelry collection and as well as the social media campaign for the Perlee jewelry collection.

Let us now review our Specialist Watchmakers segment, which consolidates the results of eight watch Maisons. The 6% decline in sales reflect €203 million of inventory buybacks in the fourth quarter of a year under review. Excluding buybacks in the year under review and in the prior year, sales would have been broadly in line.

Wholesale sales registered a double-digit decline with Europe and Middle East and Americas, being particularly impacted. Retail sales posted a double-digit increase and sales in Asia Pacific grew overall. A higher manufacturing capacity utilization, combined with a larger share retail, tight cost control and a favorable Swiss franc led to a 16% progression in the operating result to €262 million, notwithstanding the impact of the inventory buybacks. As a result, the operating margin for the year under review rose by 190 basis points to 9.7%.

Let us look at some of the highlights of the past 12 months. Performance was varied among the Maisons, but wholesales sales were impacted across almost all Maisons by inventory management initiatives. These actions included buybacks, a strengthened approach managing sell-in versus sell-out at our multi-brand retail partners and the optimization of the wholesale network.

By contrast, retail sales were strong across most Maisons. The performance was driven by four main factors. First, the focus on attracting new clients by introducing new static and broadening the offer within collections, such as a revisited Overseas at Vacheron Constantin or Luminor Due at Officine Panerai, which with its thinner shape appeal to new clients; second, the strength of a jewelry offer at Piaget, which brought more female customers to the store; third, boutique openings in mainland China and in new markets like Australia and Canada; and fourth, the internalization of external sponsored sales for Jaeger-LeCoultre in the UAE.

We’re under review also, so increased investments in digital be it in advertising, website rejuvenations at Piaget, IWC and Baume & Mercier, all new partnerships with Mr. Potter and NET-A-PORTER.

Finally, let us move to the other segment. And this segment includes Montblanc, the group’s fashion accessory businesses, its watch component manufacturing and real estate activities.

Sales were broadly in line with a prior year, with growth in Europe and Asia Pacific not withstanding the fact that the period under review only included three months sales of Shanghai Tang. The operating result including one-time charges of €37 million, compared to a net gain of €114 million in the prior year. This charges stand from the sale of Shanghai Tang on June 330, 2017 and the write-down of assets at Lancel.

Excluding one-time items in both years, operating losses would have been €28 million in the year under review and €4 million in the prior year. The variance is largely attributable to the costs linked to the retail expansion at several of our Maisons and the cost links to the – sorry, and the cost linked to the deployment of the group ERP.

Let us look at the development of some Maisons. The year so continued positive sales performances at Montblanc and Peter Millar, Montblanc benefited from solid growth in leather, new products, new technology products such as Summit smartwatch and enhancements to its writing instrument pillar with a notable special edition in collaboration with UNICEF. It was a good growth in clothing at Peter Millar and under the new creative director, Dunhill. At Chloé, the first collection under its new creative director received positive reviews and was introduced in stores this February.

Wholesale sales enjoyed growth across most Maisons, driven by a strong partnership with YOOX NET-A-PORTER and new point of sales within the Dufry network. Retail sales were broadly in line with the prior year. The impact of the disposal of Shanghai Tang was mitigated by variety of retail initiatives. Excluding the exit of Shanghai Tang stores, the network benefited from 16 net new store openings, such as in Paris Galeries Lafayette for Dunhill; and in Tokyo, Ginza for Chloé.

Dunhill introduced a new floorset approach to better manage its in-store offer and sales were also helped by the accelerated roll out of new retail concepts at Montblanc, Chloé and Dunhill. E-commerce developments and overall investments in digital have been on the rise. Let me give you two examples. The click & collect features on Montblanc and Chloé’s websites, and at most Maisons, new brand ambassadors with a large reach on social media to recruit and remain relevant to millennials.

This concludes the review of the Maisons. Burkhart, over to you. Thank you.

Burkhart Grund

Thank you, Sophie. Let me now walk you through the rest of the P&L starting with gross profit. Gross profit increased by 5%, leading to a gross margin increase of 120 basis points to now 65.1%. The €351 million year-on-year improvement in gross profit reflected higher manufacturing capacity utilization, larger share of retail and inventory buybacks that are below last year’s level. Altogether, these effects altogether overcompensate a 40 basis points negative currency impact. Charges associated with the watch buyback program, which reduced sales by €203 million, lowered gross profit by €135 million.

Let us now look at our operating expenses. There was tight control of operating expenses, which increased by 5% on a reported basis, partially benefiting from a weaker Swiss franc and U.S. dollar-related currencies. Effectively, when you exclude the €178 million real estate gain in the prior year, operating expenses rose by 2% on a reported basis. All in all, they accounted for 48% of sales with 47% a year ago.

Selling and distribution expenses, which accounted for 58% of total OpEx and 28% of sales increased by 2%. This is largely explained by the strength in retail sales, which led to higher variable rental cost in markets, where rentals tend to be indexed to sales and higher sales commissions. Fixed selling and distribution expenses remained in line with the prior year.

Communication expenses declined by 1% and represented 10% of sales, a ratio in line with prior years and attributable to a large extent to cautiousness and spending from the Specialist Watchmakers. Administrative expenses grew by 3%, reflecting increased IT spending linked to ERP deployment, digital and security initiatives.

Administrative expenses and other expenses combined increased by €56 million, excluding the prior year €178 million real estate gain. This brings us to operating profit. Operating leverage improved. Operating profit progressed by 5% with a reported 3% sales increase. Thanks to a higher gross profit and tight cost control.

The operating margin now stands at 16.8% of sales. Excluding one-time charges of respectively €208 million this year and €109 million last year, operating profit for the year would have increased by 10%. The current year’s one-time charges primarily related to watch inventory buybacks and portfolio transactions.

Let us now turn to the other P&L items below operating profit. We start with net finance costs. At €150 million, they were broadly in line with the prior year with a gain on monetary items and positive movements of the group currency hedging program compared to the prior year, partly – partially offset by fair value adjustments on financial instruments.

Now let us turn to the profit for the year. Profit for the year rose by 1% to €1.221 million. The higher operating profit was impacted by a higher effective tax rate of 25.5%, compared to 22.5% a year ago. This increase can be explained primarily by a one-time non-cash tax charge arising from the recently enacted reduction in the U.S. tax rate.

Excluding one-off items, the effective tax rate would have been around 21%, in line with the normal effective tax rate in Switzerland. We anticipate our effective tax rate to remain in the 19% to 21% range for fiscal year 2019 always excluding exceptional items.

I would now like to focus on our cash flow from operations. Cash flow generated from operations improved by 44% to €2.723 million. The €827 million increase was driven by a higher operating profit and favorable working capital movements. Working capital inflows of €234 million, compared to €29 million absorption in the prior year, partly reflecting lower inventory levels and the issuance of credit notes as part of the watch inventory buyback program. The non-recurrence of the prior year’s €268 million, one-time contribution for the buy-in and transfer of the group’s defined benefit pension plan for UK-based employees also contributed favorably.

Gross inventories of €4.9 billion at year-end was €359 million below last year’s level and represented 20.8 months of cost of sales, an improvement of 1.6 months compared to the prior year. This underlines continued discipline in the management of inventories, as well as increased sales. The receivables portfolio remains healthy at about 90% – 95% current.

Let us now take a look at our capital expenditures. At €487 million, gross capital expenditure was below last year’s, representing 4.4% of group sales against 5.6% a year ago. 53% of the gross expenditure related to points-of-sale investments, including internal and franchise boutiques and corners within multi-brand retail partners.

Investments were focused on store renovations and relocations. Openings included new Van Cleef & Arpels employee stores in Ginza, a new Cartier store in Cannes and a new Dunhill store in Dubai. Equally worth mentioning our store openings for most of the Specialist Watchmakers and Van Cleef & Arpels in Toronto Yorkdale.

Montblanc continued the roll out of the new retail concept with 41 additional locations in the year just ended and Dunhill started the implementation of its new retail concept starting with German Street in London. 18% of the gross expenditure was related to manufacturing investments. This primarily included capitalization of research and development expenses with a sizable investments in manufacturing now behind us.

Notable investments in manufacturing related to Cartier’s stamping facility at Glovelier and the completion of the new IWC manufacturing site at Merishausen, both in Switzerland. Other investments accounting for the remaining 29% included continued investments in IT infrastructure with the deployment of our ERP Gemini project and digital initiatives, as well as the ongoing renovation of Richemont’s central logistics center at Villars-sur-Glane in Switzerland.

Let us now discuss free cash flow. Free cash inflow amounted to €1.90 billion, up by €63 million over the prior year. The 6% improvement can be attributed to the higher cash flow from operations, partly offset by the acquisition of investment properties, as well as a 7.5% investment in Dufry, a leading travel retail specialist listed on the SIX Swiss Exchange.

Let us now turn to our balance sheet. Our balance sheet remained strong with shareholders equity now representing 57% of total equity and liabilities, compared with 77% in the prior year. The shift is due to the €4 billion bond issue completed in March 2018, which represented an opportunity to secure long-term financing in a low interest rate environment.

At 31st of March 2018, the group’s net cash position amounted to €5.269 billion. The €522 million decline in net cash is largely explained by the investment in Dufry, the purchase of the previously mentioned investment properties with €213 million and a high annual dividend payment.

Richemont’s net 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 U.S. dollars.

Let us now look at our dividend proposal. Our fiscal year 2018 dividend proposal to be confirmed by shareholders in September is CHF1.9 per share. This represents an increase of 6% over the prior year in Swiss franc terms. This reflects the cash flow generated, as we just discussed, and our strong cash position.

Before we conclude, let me summarize some of the financial highlights of the year under review. We enjoyed double-digit growth in retail and in Asia Pacific at constant rate, as I said before, led by our main markets of China, Hong Kong, Korea and Macau. Jewelry sales were solid and now represent the group’s largest product line.

We have addressed the oversupply of watches in certain external points-of-sale. These initiatives have weighed on watch wholesale sales, but lay a sound foundation for the Specialist Watchmakers to grow from. In our own boutiques and online, watch sales grew at double digits, demonstrating the relevance of our offer to our customers. We have improved our operating leverage to good cost control and capture a golden rule stating that the operating expenses should increase less than sales increases.

And last but not least, our cash flow from operations was strong, increasing by 44% versus the prior year. This year under renewed Board of Directors and with a larger new Senior Executive Committee saw a number of changes, which will shape the future of our group.

As you may remember from the interim results announcement last November, our Chairman, Mr. Rupert commented that Richemont has embarked on a transformation journey to address the complex demands of luxury consumers in today’s rapidly changing environment.

In order to address these challenges, we must develop a robust omnichannel proposition, planning for both physical and digital channels to ensure a seamless and unique customer experience. This will require a novel approach to communication, customer engagement and distribution.

A tender offer we launched for YOOX NET-A-PORTER, it’s a major milestone in our transformation journey. YOOX NET-A-PORTER operates in an attractive area of the market, where there are high barriers to entry. We believe there is a meaningful opportunity to help them grow the business over the long-term and further strengthen their leading positioning in online luxury retailing with a long-term financial backing of Richemont.

We look forward to helping YOOX NET-A-PORTER’s management execute this strategy. YOOX NET-A-PORTER is the only digital native business in our portfolio or in our future portfolio. And this team and its team is unparalleled in the industry, both in number and in quality. This acquisition strengthened Richemont’s digital capabilities and accelerates our focus on omnichannel and digital marketing, which are key features of the transformation journey we just discussed.

As you may have seen in our recent company announcements, the office is progressing quite smoothly and nearing its completion. We are confident that with the remaining steps of sell-out and squeeze-out, we will complete the transaction by this summer. Success of our recent bond issue underscores investors’ confidence in the quality of our assets, the strength of our balance sheet, the group’s long-term development potential.

Let me now wrap up this presentation with some concluding comments. As we progress on our transformation journey, we remain focused on ensuring that we have the right mix of skills and expertise to meet the demands of our clients and to provide long-term value to our shareholders.

Richemont’s strong balance sheet provides projection throughout the business cycle and allows us both to support and invest into our Maisons and seize long-term growth opportunities as they arise.

We are well-positioned in the industry with the unique portfolio of some of the world’s leading Maisons. We’re particularly well placed to capitalize on the growth opportunities in our relevant product lines first and foremost in jewelry.

Through our combination with YOOX NET-A-PORTER, we believe that we are now strongly positioned to seize the opportunities offered in the digital field. We therefore, approach our 30th anniversary with a certain degree of confidence in the group’s long-term prospects.

I would like to thank everyone at Richemont for their contribution and hard work over this past year.

We will now open the floor to questions. Thank you very much and over to Sophie. I think it started already.

Sophie Cagnard

Yes. So yes, too many…

Burkhart Grund

Thank you.

Sophie Cagnard

…so many hands, I don’t know where to start. But just before you start asking your question, please announce your name and your company’s name. So we’ll go that way and moving up, because otherwise it’s tough.

Question-and-Answer Session

Q - Edouard Aubin

Thank you. Edouard Aubin from Morgan Stanley. Your jewelry Maison, I think, your EBIT margin, if we look at just the second-half of the year, if my calculations are right, your EBIT margin compressed by 140 basis points on a reported measure and 200 basis point on an adjusted basis. So if you could just elaborate as to why the margin pressure and to what extent we can extrapolate that margin pressure in fiscal 2019?

I know you don’t like to talk about guidance. But if we look at consensus for fiscal 2019, I think, consensus around €2.4 billion, which will imply something like 16% growth for the group, while you grew basically less than 10% this year. Is that realistic?

And then just on Specialty Watchmakers, a number of your brands can be found on great market platform today at substantial discount. If you could elaborate on the steps you’re taking to address this and to protect your brand equity?

Sophie Cagnard

Edouard, if I count well, that makes three questions, no? So you – maybe you can pick only two and it’s up to you Burkhart. What do you think, Burkhart?

Burkhart Grund

Yes, those were three questions on my count as well. I mean, the first one, let’s say, the second one I could very easily answer. We don’t guide. So you come up with numbers out of your models or consensus numbers. You must understand we cannot really comment on those.

So that leaves two remaining questions. The Jewelry Maisons, I don’t really share your view. I think, the Jewelry Maisons have had a strong year. The margin is back to close to 30%, as what we’re saying, 29.9 to be exact. And they are in a process or at a level, where with very high operating margins we must worry to protect those margins.

So both Cartier and Van Cleef are investing into the network and they’re investing into communication. And we’re very comfortable with the level at which their operating margin stands today. On the Specialist Watchmakers, Jérôme, you want to take that up?

Jérôme Lambert

Yes, good morning. When it comes to our Specialist Watchmaker Maison and your comments about the product available oops – the product available on the various platform, we know that there are alternative distribution network that exist and tend to develop themselves. We monitor there as well the rate of discount. And what we see is the tendency of this rate of discount are going down. It must be primarily the consequence of our qualitative action when it comes to our distribution network. And for sure, that’s the result of the first steps of our buyback that took place this year.

Burkhart Grund

Yes, let me just add to that. We’ve spoken about it for quite a while now starting when we did buybacks in fiscal year 2017, primarily concentrated on Cartier and some of the Specialist Watchmakers. We were quite clear about it saying that, well, we do not believe that oversupply at our partners points-of-sale is helpful to protect the long-term brand equity, because this over – oversupply is not being dealt with quickly, well, then our retail partners have a balance sheet problem.

And in order to address that, we took the decision to buyback, because otherwise these products will find their way into the gray market and impact – this will impact our long-term brand equity. And we took a view, which is probably different from other players in the market to address that problem by buying back this inventory.

We’ve done it last year at Cartier. We think Cartier is in a very healthy situation and we’ve seen that this year. We’ve addressed the overstock situation with – for our products with our – the retail partners at the specialist watch Maisons this year. And we believe that, that is a sound basis now that they have reached a healthy inventory level with our products. And we believe that on that basis, they have a solid foundation to grow from and we’ve stated that.

Now what is the timing of a rebound? I know you’re waiting for that. Now I must say today, when we look at the retail – on the retail sell-out and that is a very healthy sell-out for our watches, both at Cartier and at the Specialist Watchmakers. So that gives us some hope. And when the inventory equation is right in the wholesale channel, then wholesale sales will grow again.

Patrik Schwendimann

Thank you. Patrik Schwendimann, Zurich Cantonal Bank. First question, overall, on the wholesale channel, what’s your best guess here? I mean, you had a clear outperformance in retail last year, for the current year if you would assume, let’s say, mid single-digit sales growth for the whole group, would you say it’s justified to assume a similar performance of retail and wholesale, or would you still assume that retail would clearly outperform wholesale? That’s my first question.

Secondly, on the EBIT margin, how happy are you with the current EBIT margin? And I don’t have – I don’t want the guidance for the current year, but what’s your long-term view? Would you say, it’s still possible to have mid-term over 20% EBIT margin, as it was the case in the past, or would you see the market has changed?

Burkhart Grund

Yes, good morning, Patrick. Retail is strong. Wholesale was quite strong impacted by a number of initiatives we took. So that’s what standing today. I mean, I can’t guide you on that, you know, that, but I appreciate you’re trying. But let’s put it this way. There’s always a link. Retail sales, which is the true demand we see are strong and with the time gap wholesale follows.

Now is that a formula that will hold true in our case? I simply can’t tell you, because, as I said, we started updating all of you on that. We have introduced KPIs that we very strictly follow. So that we make sure that sell-in does not exceed sell-out. And when you’re in an adjustment period, where you think well, we have excess inventory, okay, we bought back and we monitored and made sure that sell-in was below sell-out.

So that over time brings you to a point, where sell-in and sell-out will normalize, again, and that’s when we should see the pickup in wholesales sales, if the business and the retail sales still are strong. We have a measured degree of hope that the business continues to be strong on the sell-out side, but then again, predictions are entirely difficult to establish, especially when you talk about the future.

But today, the data points we have is, retail sell-out is strong in watches, jewelry and double-digit strong. And also channel we’re working on getting the inventory level right. We did a big step with the buybacks. There’s still work to be done.

Nicolas Bos

I’ll add one comment that we have started this two years ago and what we see is Cartier the long tail. And for markets that have recovered early, like Mainland China, we see the sell-out China in wholesale and retail being the same, I think it’s fine. Other markets were in distressed and not only because of us, but their entire profession are still struggling.

So to see when will the aggregate wholesale demand or the aggregate wholesale figures match the retail, depends on us and others as well. But in markets, we have been down and the market recovered quickly like China, it’s fine, and it’s the same.

Burkhart Grund

Probably to add that, Cartier buybacks were done in the first half of fiscal 2017, we’ve seen good business and healthy business. And the comment that we had a few minutes ago that, you see many of our products on the gray market, I don’t think that holds true anymore for Cartier. So I think, some brave measures that Cyrille and his team took last year, we believe they’re paying off. And once again, this is about the long-term protection of the brand equity.

Now on the EBIT and the EBIT margin, well, I wouldn’t be sitting here or wanting to keep my job, if I would say, well, 16.8% is the level that I’m very happy with. I think, what we have to see is that, the underlying EBIT and understand that we have been talking a lot about one-off effects in fiscal 2016, 2017 and 2018. I can assure you we don’t – would – will not like to continue to do that for the foreseeable future, because it makes the results very hard to read into understand. So just bear with us for the time being, the underlying EBIT margin is obviously stronger than the one we report on, but that is not an excuse.

So we believe that if we apply what we’ve been saying, meaning, we apply sound inventory management principles, as we’re trying to put in place now. If we apply the golden rule I was referring to, saying, well, we have a business evolution that we have a positive growth of the top line. Well, if we get the gross margin equation right and if we get the operating expense growth too below, sales growth well then mechanically will increase.

You must also remember that the high points in the margins were reached before the shockwaves seen on the Swiss franc. So we’ll see how positive about the future, but then again, I would say that, right.

Patrik Schwendimann

Thank you.

Sophie Cagnard

Melanie and Helen will come back.

Melanie Flouquet

Good morning. Melanie Flouquet at JPMorgan. I have two questions, please. The first one is regarding your investments in soft lines that have been pretty, pretty impressive in Dufry and, in particular, in YOOX NET-A-PORTER outlet, so indirectly through the distribution, but certainly in soft luxury buyers. You are stating, frankly, in the press that your ambitions in soft luxury are organic beyond this. So I just wanted to get a confirmation of this. And this is a case, what does sizing long-term investment with your cash balance mean? So that is my first question/

The second one relates to – it’s a question to Burkhart, sorry. It’s regarding operational leverage. Without guiding, clearly you had said in the past that, you wanted to run OpEx at a lower level than sales. If I take out all the one-offs you’ve delivered 7% organic sales growth, 10% EBIT gross. Are you satisfied with that level of leverage? I mean, can you deliver, therefore, lower OpEx than top line? But is this a satisfying level for you, or are you considering that you have two to three years investments that are a bit heavier than the normalized run rate of OpEx? Thank you.

Burkhart Grund

Thanks, Melanie. Yes, okay. To bring a bit of color to what we’re saying to the press this morning. So Dufry, YOOX NET-A-PORTER, you said a way of exposing ourselves to the soft luxury side, it’s not necessarily the first and foremost ambition we have. We believe that both on the travel retail channel or on the full digital channel with YOOX NET-A-PORTER is a meaningful opportunities to – for us to kind of leapfrog into a new age on the distribution side.

Fine mechanically, if you look at it today, we have about 1% of our group sales are in e-commerce. With e-commerce when we combine with YOOX NET-A-PORTER, we jump to 17%. But does that mean now we have made a meaningful venture into soft luxury not necessarily. Yesterday, YOOX NET-A-PORTER is mainly trading on the soft luxury side, but that is not the idea of it.

We see that as a – as – it’s something that is coming from our customer side who want to engage with us where they choose and through which means they choose. And in order to quickly advance into that field, we believe and we still – we said that and we believe that, that is one of the best opportunities to do that much quicker for us and to learn and scale up very quickly.

Dufry, well, if you believe that, there is a long-term travel patterns that will accelerate and we believe that. And if you look at the statistics, that seems to be the case. Well, then it’s probably a good place to be, especially for us who are very strongly present in DFS, which has a different footprint, as you can know, as you know, it’s more Asia-based, and Dufry is more on the western hemisphere and comparatively less exposed to Asia. So we believe it’s a good position to be in to grow business opportunities with them.

Now what we’re saying this morning ambitions to grow more organically, that was referring to an area, where we believe there is significant potential for us, which is in the leather goods side. We have some very successful businesses in leather goods today. I cite only Montblanc and Chloé, as an example, but Dunhill is also there, Lancel is there, which is a different story, as you know. And let’s not forget, Cartier in the past had a very sizable leather business. And as we’ve been saying for the last 18 months, we try to do first our job on the supply chain and development side by scaling up in leather hub, as we call it, which was developed by Montblanc very successfully so.

So – and we’re sizing that up, scaling that up, so that the other group brands can utilize this. It’s a totally different skill set on the supply chain, on the development side than what we usually have on the hard luxury side. So that job is more or less done. And we can now focus on growing the leather goods business organically by putting forward what we know how to do, meaning, developing creative and well-priced products.

So that’s what, what we – what I said this morning when I said that – when I spoke about growing organically. Now, obviously, the question that we’ve heard and had from many sides, well, does that mean you want to now go out and acquire a target in the leather goods side? Well, you know better than I that there are not many targets out there and obviously, that is not our priority.

Our priority is clearly growing it organically. For that, we took a bit of time to build the infrastructure. And Serapian, the small acquisition last year was first and foremost about development and production capacity as well in that area. So that’s what the plan is on the organic side.

Now am I happy with the leverage? Same answer, well, obviously, I would like more leverage, but let’s put it this way. There’s many moving pieces in this transformation phase in which we are and that short-term affects it. So, we’ve – we’re still rolling out the Gemini into Fashion & Accessories Maisons now. We’ve had transaction expenses.

So there’s many one-offs, some of them we spell out, some of them we don’t spell out that are linked to this transformation. Now, once you’re in a fully normalized business, if that still exists, obviously, leverage would be higher, but we’re transitioning to something new here.

Sophie Cagnard

And…

Helen Brand

Hi, Helen Brand from UBS. Two questions from me. The first one, I’d just be interested, Mr. Rupert talked about Chinese demand a few years ago like dining on top of the volcano. I was just wondering how you’re thinking about the sustainability of Chinese demand here and how perhaps that looks compared to a couple of years ago?

And then secondly, I just wanted to follow-up on the M&A side perhaps outside of soft luxury. You’ve clearly raised the €4 billion bond and despite having significant cash on balance sheet. The dividends perhaps a bit shy of market expectations and you’re talking about seizing long-term opportunities. Should we think about M&A outside of the soft luxury side as well?

Nicolas Bos

I will pick the first one for China, Chinese demand and sustainability. The – I think the Chinese wealth growth and their bartered GDP growth is about 6.5%, it continues. And there is kind of a real economic development, not in all regions, but if you see what’s happening in Beijing, Shanghai now in the tech cities, Hangzhou and Shenzhen, it’s really massive. And so for still a middle income country, it’s moving quite rapidly up.

So the number of potential new customers is just enormous. And in a period, where the renminbi is also strengthening, the purchasing power is just enormous, both inside mainland China and outside. So we see same things happened in Japan, other countries 10 times bigger.

So for probably next 10, 15 years, there’s really substantial potential for growth. There might be some hiccup depending on what’s happening there, but beyond that, there is still a need. And we see moving even more massively towards women, who are increasingly independent and spend on their own. So that there is no worry for the next coming 10 years.

Burkhart Grund

Okay. So on the dividend and the M&A side, we’ve always said that the way we view dividend or, let’s say, long-term shareholder return is exactly that long-term. So we want to grow the dividend year-after-year on a sustainable level. So 6% growth this year, 6% last year, we believe that’s a nice and healthy trend going forward. Should we be thinking about M&A’s outside – M&A activity outside of the soft luxury space? I think, that was a question, right, Helen? Could I – would I be able to comment on that here?

Sophie Cagnard

Okay. So Francesca, John, and then we’ll go back to first row please.

Francesca Di Pasquantonio

Good morning. Francesca Di Pasquantonio, Deutsche Bank. I will also ask two questions. The first one is on YOOX NET-A-PORTER. I know it might be premature to make any comments. But I think, not just I, we would all be interested to understand what your plans and expectations are around the integration of YOOX NET-A-PORTER.

I’m not asking for really big details on the strategy, which we – you will be probably brainstorming about. But just to have an idea on whether you are prepared to invest in the business to catch up to make YOOX NET-A-PORTER catch up with peers, which are more advanced today. It seems to me YNAP has lost a bit of its technology lead, maybe a bit of inspiration on the management side as well. So it would be interesting to frame this acquisition with your omnichannel omnistock strategy and whatever you can say at this stage would be helpful?

My second question is around the – it’s a specific question on CapEx. I know you guide for CapEx, so can we have CapEx guidance for next year? And if I may just a clarification on the watch business. It seems to me that you don’t feel you are yet at a point where you’re happy with the balance of inventory outstanding in the trade with the exception of Asia Pacific. But is it correct to assume that when and if the convergence of sell-in and sell-out happens also globally, we could see a similar performance to Asia pacific, you mentioned a double-digit growth in wholesale in Asia Pacific? Many thanks.

Burkhart Grund

Okay. Let me try to tackle – good morning, first of all, Francesca. Let me try to tackle the first two questions and then I’ll let my colleagues speak about the watch side of it even though I have my views on that. The – on the YNAP or YOOX NET-A-PORTER side, okay, you have your views if they’ve lost their edge or the sparkle. Actually, when we looked at YOOX NET-A-PORTER and obviously, we have a view that we have always being a big shareholder almost 50% of it, we’ve almost always treated it a bit at arm’s length for very good reasons, because we always wanted to insist that this is an open platform for, so to say, an industry offer.

So that the other Maisons who want to trade or who see value in trading through YOOX NET-A-PORTER can do so. And we believe that has worked really well in the past. And now as we are – we have reached almost 95%, as you’ve read yesterday, and we’ll go through the next steps to get 200%. We still would like to believe that this is more or less the same proposition, meaning, this is an open neutral platform.

The feedback we’ve had from the carrying side from some of the other bigger brands have gone in that direction, who have quite spontaneously come out and said, well, we believe this is still the case. Fine, it’s Richemont, we will hold the majority, but we still believe it’s a very attractive platform for us to trade through.

Now the world obviously is big and there are other customer or there are other views. There are other business models out there, which are attractive, and we’ll see how this plays out over the long-term. Once again, for us, YOOX NET-A-PORTER, we believe it’s a fantastic opportunity for us, not only to learn about the business, and when I say about the business, this is what the customer engages with.

So we need to learn about more quicker about the customer and we need to meet his expectations. And expectations, obviously, are what we also in this industry called about the omnichannel challenge or promise. And we believe we are strong in retail. We are working to be stronger in wholesale. And obviously, with a strong asset in the digital field, we believe that it’s a fantastic proposal that we can build over time.

So we looked at the asset, obviously, because when you offer 38 share, which is a premium to the market, well, then you better take a view – our view was that it is a very strong management, very strong teams, who are also in size wise one of the best, if not the leading assets in the digital arena. And that’s why we decided to go a step further and try to control the entire company, because we believe with a long-term view, the long-term capital deployment that, that is a very interesting proposal, not only for us, but also for the market.

And as we are in the market space, where you are – well, you need capital and I’ll come to that, and you don’t want to manage your business with a long-term view on the short-term pressure. So that’s why for many reasons, we came to this conclusion that it would be better to take a private.

Capital needs, you know the numbers better than I. YOOX NET-A-PORTER, they’ve been talking about €150 million to €180 million CapEx, which for them is clearly significant, but then again, let’s start thinking about this is a technology-driven business. So what does that mean? What is big? What is a small number? Probably that’s what going forward our businesses will need when we talk about building a business model that the customer expects from us.

So this will be much more and more technology-driven. And it’s not just an ERP deployment, which we’ve been talking about in the past. Yes, it is digital engagement and that means systems, that means CapEx or OpEX towards the technology side of the business. So, as I said, €150 million to €180 million for them, that’s what they guide on. We’ll have a look at it. Once again, once we secure and we expect that to be done by summer, then we’ll have a look at it in much greater detail. Once again, we’ve been arm’s length so far, we have a very good view, but we don’t know the details, so we’ll have a look at that.

If you look – if you bring all that together, the Richemont and the YOOX NET-A-PORTER, CapEx, I would say, we’re still in the same range that we’ve been in the last, let’s say, five years, which has been a range between 5% and 7% of sales, and we’re comfortable with that, but I don’t give guidance.

Hold on, there was another question on the watch business.

Cyrille Vigneron

Yes, good morning. When it comes to our watch business maybe in term of context, there is a word that we like to use, which is sustainable and it’s for us very, very important, given the size and the history and the patrimony of our Maisons. We cannot only consider short-term that we need to project ourself in the mid-term and long-term.

Cartier was a pioneer in establishing a strong monitoring of its sell-in and sell-out, and we’re extending, I would say, that expertise during the last 18 months to the other Maisons of the polo Specialist Watchmaker. You bring – or to be capable to say, as Burkhart was saying before, sell-out is higher than our sell-in

. Now if you combine that to the buyback or is it being, let’s say, announced and presented in our account, yes, we can say that we are globally speaking a global level now reach a good level of stock.

What does it mean geographically to come back as well to a comment of Burkhart, we do not guide our clients when it comes to say, where do you want to buy. And of course, I’d say let’s not to use it, that will teach the volatility of the currency and it has definitely an impact where the client want to buy. And it’s absolutely impossible to know where in September and October will be so global price or positioning because of the currency.

Sophie Cagnard

John, but two questions, please, again. Thank you, and afterwards, we come to Luca and Thank you.

John Guy

Two questions, thank you. My first question is around the launch of Baume, which – it was quite interesting. It’s not a premium product, I think, in sterling terms of ranges around £430 to £850. It’s a little bit more expensive than your Baume & Mercier Classima. It’s designed, I think, in Geneva, but made in the Netherlands, maybe you can correct me, if I’m wrong on that?

So I’m just trying to understand really you launched products the whole time, but this is interesting I get the point around customization around Ocean waste and almost having a sneaker style customization opportunity for younger millennial. I understand all of those points, but it’s not Swiss made. The movement, I think, any cost just over $11 or $12. I’m trying to understand, is this a shift in trying to capture a greater segment of the market and moving more downscale in some area, or is this just a one-off that you’re just trying in a particular market? That’s my first question.

And I guess, linked with that, a question for Cyrille on Cartier. We’ve seen on a like-for-like pricing as much as you can look at it like-for-like pricing. We’ve seen quite a big movement in the last two years on Cartier pricing, minus five to maybe plus five over the course of the last two years from what we can see. I’m just trying to understand today, given the launches that we’ve seen, especially the Santos relaunch, how are you seeing customers gravitate towards the Cartier watch offer? Are we seeing still much more stainless steel, less gold, how are you going to position the Cartier watch element going forward? Thank you.

Cyrille Vigneron

We start with our new baby. Yes, indeed I would say, we’re very happy and glad to see the birth of a new Maisons within our portfolio of Maison when it come to the watches. You described, I would say, a part of our production chain of Baume. Indeed, it is assembled in Netherlands, mainly for logistic reason as personalization is one of the key item and the time to react to deliver – to have the watch delivered, we have to be capable to establish it, I’d say, very close to a place from where we can ship very quickly. And there are – indeed, we found in the Netherland, I’d say, a good base.

So that I want to say that, again, if you go to sustainability, we differently want to be capable to continue to recruit a new client for all the luxury watch segment. And it is very important for us to nurture the desire step by step or – and to continue to get and raise the relevance of watchmaking/fine watchmaking to new and younger generation.

We have done it for a while with our communication, our digital communication in many countries and the style of our communication is being, I’d say, rejuvenating itself constantly during the last year. We go one step further with Baume and I appreciate that you notice that different approach and positioning. We are very much interested in their clients that are interested into shopping digital to B2C to personalization and then so with the number and then consciousness approach.

Nicolas Bos

Can I just said something to that, we – I think today, this morning on the media call, we said, well, Baume, what is Baume? It’s young, it’s eco-conscious, it’s digital. And I think that captures the essence of it. I think, it’s very interesting proposal. We’ll see how – if that is – that view shared by our customers and hopefully, many customers in the future.

For us, it’s almost, I would say, a bit of an edgy proposal, right, against the backdrop of being in a quite a conservative industry. And it was also a project that has been run separately, let’s say, it doesn’t come out of Baume & Mercier. But it was run separately by a team fully engaged in that and it’s a great dynamic that we’ve seen around the development of this project.

And it can probably give us some hints of how we can use the creativity that is existing in the group within our teams and channel that towards something that is very interesting and very quick turnaround. And so that was a very interesting experience in many, many aspects and now we’re putting it to the test of the market.

Burkhart Grund

To comment on the…

Sophie Cagnard

There was a question, Cartier.

Jérôme Lambert

Yes, the question on the – on our pricing and product offer. So I said two years ago and still on the market, there’s bit too much of everything, so many things to bias market. In bias market, you have to get good value proposition on every category. It’s not that you have to sell cheap products or expensive one. In every category, you have to have a good pricing.

So what we’re been doing is, we construct the offer with good pricing on every category from white steel and steel and diamond or gold, and then gold and jewelry and we are going in all categories in there. So as you see for the new Santos, the perceived value for money is really good. And by doing that counterintuitively, you get better value for money. You increase – you encourage customers to trade up.

So our average pricing is increasing. And also with that, you have better capacity utilization. You also consolidate margin. So by having in some way more aggressive price to each category, we encourage more trading up than trading down and encourage margin consolidation. It might look counterintuitive, but our results show.

Sophie Cagnard

First Luca and then John.

Luca Solca

Thank you. Good morning. It’s Luca Solca from Exane BNP Paribas. Looking at watches, specifically, I understand that the inventory buyback is focused on the long-term preservation of the brand equity and is appropriate. I also understand that that is driven primarily by the fact that you had originally too much product, but also probably the wrong product in the market.

When you look at the various brands in the portfolio maybe starting with Cartier, but then going into the Specialist Watchmakers brands as well, where do you think your current product offer is today? Do you have the right watches out there for the demand you have in front of you, or is this process of adjusting the product range still ongoing, at least, in some of the brands?

On Digital more than the YOOX NET-A-PORTER side, I would be very interested in getting your view on what is digital going to do to your business? And how is it going to change the way that Cartier or Van Cleef & Arpels and the other companies within the group operate? Is it that going to be primarily a function of how you communicate to the market? Is that going to have an important function in distributing the product or what else? Thanks very much.

Cyrille Vigneron

So I’ll start with the watches. Thanks for the question. Indeed, I will say the – how Maison are existing through their products. And therefore, the Richemont – the Maisons of Richemont did during the last year has been very meaningful. If you see the last SIHH and the creativity of our Maison, you see the importance of polarized line in GLC or Jaeger, you can see the launch of the – relaunch of the Possession at Piaget. You see that our Maison has – having the heart to reinforce, develop, focus on the iconic expression, while they put a large emphasis on their creativity and factor of differentiation.

Richemont has a chance to have, let’s say, 8 Maison with Baume or we can say 9 Masion Specialty Watchmaker and then to that, you have to add Van Cleef, Cartier and Montblanc. All these Maisons are very much paying attention to their expression and to offer a wide offer and then in somehow and offer different from one Maison to the other.

How are we to the end offer of the evolution? Yes and no, yes, when it comes to say, we have drastic problem to address. No, because the evolution of their project range is what explain why is this Maison have more than centuries of existence. And then like species, we know that this continues to a channel rotation. But creativity differentiation and iconization are definitely at the heart of our strategy.

Burkhart Grund

And probably I might add, the test is always if this is relevant for the customer and which is a given as a principle. But – and if we look at the recent, meaning, the fiscal year 2018 retail numbers and the retail growth of sell-out, this seems to confirm that the offer is relevant. Now it’s a journey as we know with ups and downs. I think, creativity is strong. But there’s a constant renewal process that is ongoing and sometimes they come up with even some surprising offers like Baume today that we’re just referring to.

Jérôme Lambert

To comment on some more specific things, say there had been a major contraction coming from China and it has two origin: one was anticorruption and one was Renminbi devaluation. For anticorruption, it was also, not only corruption, but also corporate gifting, a big part of state-owned companies were offering gifts and a big part were watches. And when you offer something that’s not on your own money, you can spend whatever you want. And so this part is gone.

So there is a market adjustment linked to that that is probably will never come back. So this had to be, in some way, this had become everything for that is a wrong offer, because there is no more demand in there. When it comes to the rest, the market is picking up in different things. And when brands have an offer, which is really linked to their DNA and a strong brands are getting – are not weaker than before.

When we have relaunched the Panthère’ at Cartier, it worked tremendously well. Even there was a kind of consensus you have to do something, a novelty, which is around and automatic, will we relaunch something not new and square and quartz and it’s condensed light. So we will construct our offer and we have a lot of way to go, but we are on good shape to do it on something where there’s basically no demand, we do something we should unnecessarily just for pleasure.

So we have to create that demand and to make customers willing to buy that, meaning, nice things for the brand DNA at the right price and fair value and it works. So we’re on the way to reconstruct that. So there is some part where I have to adjust to market where substantially some demand has changed it – has changed, because it was not there and some reshifting, but basically to what has made the luxury as before, creative offer, matching something, which is not a demand and becomes a demand.

Nicolas Bos

Good morning. If I may add some on the digital part. The – I think the first and foremost, digital is not kind of one-size-fits-all monolithic strategy or reality, and it’s been there for quite a long time for most of our brands. So I think that for some of the brands within the group. It’s alternative commercial network for some of the brands, it’s a way to express their identity. For some of them, it’s a way to engage socially.

When I look at the way it exists at Van Cleef & Arpels, it’s primarily a way to explain what we are about – talk about craftsmanship to tell stories that resonate with our collections. And to go with initiatives like [indiscernible] initiatives around education. So it’s primarily maybe a communication tool, also the communication platforms or engagements through social media, and it’s been the case for more than 10 years.

And then, of course, it’s also a way to provide additional service, that includes online sales. I mean, we have e-commerce that we run ourselves. We have our own online retail in Americas in Europe, in Japan, in China, which still represents a limited percentage on sales, as Burkhart was mentioning, virtually provides for complementary service. And what we say is the reality of a new channel, which is clients are getting information online, coming to the stores, still enjoying a retail experience and kind of immersive approach that can be provided through a physical store environment, but then combine that with the online experience. And so it’s a reality today. It doesn’t mean that e-commerce is replacing traditional retail for a brand like Van Cleef & Arpels, but definitely that combination of digital and physical is a reality and moving forward is going to be more and more the case.

Jon Cox

Yes, good morning. Jon Cox, Kepler Cheuvreux. A couple of group questions should I say. First of all technical questions maybe for Burkhart.

Sophie Cagnard

But only two.

Jon Cox

The one-offs, could you just give us a breakdown exactly where they are, because you mentioned €208 million and then you mentioned 37 for the others. Is the rest just watches, or is there some other stuff in there we should be aware of, just to help us with our modeling? Again, this part of technical very quick question on YNAP. When will you fully consolidate, I guess, from the 1st of April, how much will be the book gain, because I guess, I will be pretty, pretty material?

Operationally, it looks like you’re pretty happy to lose market share in luxury watches, it seems what you’re saying, you’re happy to limit wholesale. You can see Rolex and Swatch Group we mentioned, clearly winning market share where you think this does medium-term. Once you lose share, it’s very hard to get it back maybe just some comment on that? Just on the other segment, should we think of a blank zero this year, given the exit of Shanghai Tang and Lancel.

And one, hey, Nicolas, maybe you can give us a quick comment on bank leaf and the plan for expansion? And finally, just a comment, I think, previously, you said dividend payment mid-teen, I think, that’s too probably misquote Mr. Rupert, I’m sure he’s listening in two years now you’ve had made single-digit dividend increase, I think, is probably not what some investors signed on for as you can see with some of the shareholder reaction this morning, but that’s just a comment? Thank you.

Burkhart Grund

Thanks, Jon. You want me to comment on the comment first? Now these 15% has been floating around for a long time. I personally haven’t found when it started, but we can definitely have another look at that. I still think and we’ve been, I think, very clear about that, that over the long-term, we view our business and we view the long-term and value the long-term relationship with our shareholders.

Now 6% growth in dividend in today’s environment, I think, still is an honest proposal. Okay, there’s a share price reaction, fine, but I think once again, you need to look at the shareholder return over the very long – over the long-term, so that’s our view on that. Now are we happy to lose market share? Would I answer, yes? Probably not. But then again, we don’t really and I say that in a very relaxed fashion, we don’t really, really look at the short-term here.

Now is it one year up, one year down, fine. The Maisons are here for many generations. And if you look back at the history of Vacheron, for example, let me calculate probably more than 10 generations. And I don’t think that they build the Maisons by looking at market share. I think over the long-term, you can only do what is right for you Maisons. In this case, we have taken a view in the last two years that addressing the unhealthy inventory situation next to running or doing a good job on product creativity, network quality, et cetera, is the view that, that prevailed.

And I don’t want to go against a wall, because brand – long-term brand equity is of utmost important for us. So is that means that short-term, we have fluctuations of volatility in our market share, well, that is a consequence of it. But we don’t want to manage it in terms of market share. But it is for the long-term health and the strength of the brand equity.

Cyrille Vigneron

I would give our share – to comments on the comments in this case. First, I don’t think that you build market share by sell-in, my first comment. The second point is, we’re in a cycle industry. Every collection of cycle is most of the time very painful and distract a lot of value. And it is clear for us that the system ability of our business model is a key criteria And it is a discipline now, because our sell-in, sell-out data are – and working hard on long-term with your strategic partner, which are in this case our strategic wholesale partner, demand a lot of energy or a lot of common discipline, but we believe in their – in that strategy.

Nicolas Bos

We want specific don’t take Swiss watch, watch exports are the proxy for the market share, not in short-term. If you take over three years, probably it matters. In the three months, it’s just restocking distribution somewhere. And if you think brands in fashion that have gone extensively in the outlet malls and producing for them are decreasing their value badly in over time and the same for watches.

So we have to be very strict on where we put things and how we make the market can consolidate in a good way. So we’re confident to regain market share, but the market share on true demand.

Burkhart Grund

Okay. And Jon, finally to not forget that come back to the one-offs, €208 million, we said it in the release as well and the results announcement, there is €135 million linked to the buybacks and specialist watchmaker, so you’d find that in that segment, obviously, and then we said the rest is linked to portfolio transactions.

And as you – as you’ve seen or heard or read, we exited Shanghai Tang, where we’re in talks for Lancel. And okay, we’re in the process of securing the 100% majority of YOOX NET-A-PORTER, so that, that you will – for the rest you will find in the other segment. I don’t know nail me down on €5 million here and there, but that’s the general trend of it.

You will find in – you’ll find it in the notes to our financial statements, first off, we have not secured, so to say, a – the offer. You remember the tender period finished at – on May 9. We have put out a press release yesterday saying that we have secured or have exceeded the 90% threshold, which was one of the conditions. And the second condition was the MAC Condition that we had explicitly to waive. which we also did with yesterday’s press release.

So considered effectively done yesterday or today, because today we’re going to want to spend a bit of money by actually putting up the consideration for the shares that have been tendered, which is today, and the rest we expect to finalize by the summer.

Sophie Cagnard

I guess, Suzanne.

Nicolas Bos

That goes quite okay. I think, it’s really the – one of the final registration of what we’re talking about Richemont this long-term view and long-term commitment, I think, it was really to – when you tend to the portfolio nearly 20 years ago now, it was the ambition to take a very, very highly respected history called familiar own brand and to give you the time to develop organically into an international company with a wide reach and still a very, very clear identity. I think, quite a high-level of respect and desirability from customers. And this is what has happened slowly, but surely in the last two decades and the plans are ready to continue.

We operate on this retail. We have about a bit more than 100 stores. We’re surely concentrated on jewelry and jewel watches and we’ve seen a very good response to that specific positioning. So we feel that, that can have a long-term view and organic base have been quite efficient for Van Cleef & Arpels and should continue to be in the future.

Zuzanna Pusz

Thank you so much for taking my questions. Zuzanna Pusz from Berenberg. So I just have two questions, I’ll stick to the rule. First of all on YNAP. Given that there has been, I guess, some deceleration in the performance in Q1, And I know that currently, of course, the market doesn’t only focus on what’s the outlook or for YNAP per se, or not. But when we think of YNAP being consolidated within Richemont group, can we assume that whatever targets the management of YNAP had for the growth, which was, I think, 17% to 20% organic growth and also certain margins on free cash flow considerations.

Is this something we can take for granted, or you will review all of that once it’s been consolidated then perhaps kind of the grand scheme of things will matter more? So it could be a bit of a drag on your profits on your free cash flow, but you see it as, let’s say, wider support of your group’s digital efforts?

And with regard to that as well, given that you have – you also have YNAP onboard, will it prevent you from also working with other platforms? I mean, recently Farfetch has launched high luxury hub, which some of your peers have joined within the watches and jewelry. So can you give us an idea, if – in a way it does – if you see this something preventing you?

And then the second question is, coming back to the comments you’ve made a – well, that was kind of combined. And on the trends observed among the younger generations, you’ve mentioned the fact that the younger people are looking more the environmental factors, et cetera. Now we’ve seen recently a big rise in the discussion around the secondhand luxury market, you have platforms like the real wheel or true facet in the U.S. growing fast. Is this something you see as a threat, or are you willing to cooperate with them? Do you have any of your own plans in the secondhand market like some of your peers have recently announced? If you have any color on that, that would be great? Thank you.

Nicolas Bos

Okay. Thank you for the questions now. I suggest I give you my views on the first question and on the third and I will ask my my colleagues to add some color to that, especially the – your second question. So on YNAP, I cannot really – I don’t want to comment on their results they just put out a few days ago. You have probably heard or read in their announcement and probably listened into the call they did on their annual – on the annual results of last year that they confirmed guidance, which they gave us a range that they confirmed that. That, for us, today is assumption.

As I said, we’ll look into the business model in a sense that the fundamentals, I think, are sound. The management is strong. We expect and we clearly hope that the management will stay on board, because that’s the management that has built a great business, and by the way, a profitable business. And I think we’ll talk about other business models in this space afterwards, it’s a profitable business model. So we’re happy with that. Their guidance is quite strong. They have confirmed their guidance as well after their three months earnings announcement.

So today, we have no reason to believe that, that would be challenged or questioned. Even though I think, I’ve something, right, EBITDA or [indiscernible] was that – punchy line there, Francesca, I like that. So in our honesty, we’re looking into the model after – at the end of the year. We’ve said when we formulated the offer, we know the numbers as you do. We know the – also what they guided on CapEx spend, €150 million, €150 million, we’ll see. If we need to accelerate spend, then we will do that. We will do whatever is healthy for the long-term development of a profitable business together.

Now the – I’ll let my colleagues to the right engage on other business model, so engaging with other players. Do you want to take that up to or…

Nicolas Bos

For – we have not put any clear view on with which players we will play or not, depending on what they really do. So far, we’re not with marketplace, because marketplace are not control, especially in intellectual property. And this is place where you can have counterfeit partial or total, or you can have some transshipping or you can have many things happening there. And so that’s an overall issue.

So there will be, I guess, gradually and that’s why we also have to have a strong point of what can be a clear and neat and selective offer on the online and which parts are just kind of arbitration or placed for wrongdoings. So we are continuously review, because there are new partners or new people or new offer every day and many, many, many hybrids.

So on that, we see and those that can be at some point a serious and can be controlled and can have a high intellectual property control or so on what they do directly or indirectly and can be considered. But we currently, we don’t see any at this stage that’s showing up that quite well. So that’s why it’s probably the – with YOOX NET-A-PORTER we can move forward on something, which would be a clear offer that we can use and can get standard in the market.

Nicolas Bos

Probably another word to that, the way we see it is, it is probably easy, probably I’d say, yes, to – let’s say to start an e-commerce business. But you need to get the basics and the fundamentals right. You need to understand your customer. You need to have the IT capabilities to actually understand the customer demands and you need the quality of execution and that goes with a strong backbone. But that also goes with where the customer perception that actually they can trust you.

You don’t want to be stuck after you have bought something with a transaction that doesn’t work with a product that doesn’t arrive, or if you want to send it back, which in the luxury space or in the – especially on the soft side is given. And you don’t – you want ease and reassurance on the execution side of it. That’s why we believe that there is a very interesting proposition and a great business that has been done and built by the team at YOOX NET-A-PORTER and that’s why we believe in it.

You were asking about the pre-owned space of the business. It is true, there has been a lot of noise around that, let’s say, in the last six months starting at SIHH then followed by another group in the luxury space, we said, well, we’re working on that. Some other brands have been talking about that.

So we still think or we think there is – that’s an interesting part of the market if you look at it from a customer perspective, because you find in that space customers who are entering into the watch luxury market that we’re talking about watch today. And they are building watch expertise on their own or they’re building a collection or they use that as a way to enter into the market and that is, of course, interesting for everybody in the market.

And that’s why I think you hear so much noise around it today. And I mean that in a positive way noise, because I think it is the industry is waking up to a market there or a space in the overall market that has been overlooked in the past and we’re monitoring the situation as well.

Sophie Cagnard

So we’re running out of time. So there will be time only, yes, I mean go ahead and then there’s one question on the web, which has not been answered.

Hermine de Bentzmann

Good morning. Yes, Hermine de Bentzmann, Raymond James. I have two very quick questions related to inventory buybacks. The first one I was wondering, if you expected to make such a large amount of buyback in Q4 when you started to implement into them?

And my second question is, I was wondering as well if you can assume that inventory in buyback have continued literarily in Q1 and fiscal 2019, and if you could help us to quantify the magnitude, if any? Thank you.

Burkhart Grund

Did I expect to do this level of inventory buybacks depends on when. After I was told, I fully expected it. But on a more serious note, how did we run through the process? Clearly, you’ve seen we’ve had some management changes as well on the CEO or the management team levels of some of the watch Maisons, Specialist Watchmakers Maisons.

And their brief was very clear or the brief given to them was very clear from the new managers overseeing the Specialist Watchmakers segment from Jerome Lambert and Emmanuel Perrin. The brief was given it was very clear. You will do what is necessary to bring the inventory to the level that is healthy or that we consider it’s being healthy. And it was done on a Maison-by-Maison basis on a market-by-market basis and on a customer-by-customer basis.

Now I can have my view, which might be right or wrong. In the end, the Maisons came with their proposals and had they’ve run through a very rigorous process of making sure that we come to the right level of buybacks. Frankly speaking, I don’t care if it’s €50 million more or less for the simple reason that we have to get it right. And if we’re – if we come to the right level, well, then that is what it needs to do, or that’s what it takes. So that’s my very simple view on that. Q1, well, it’s still very young, haven’t done anything in Q1.

Sophie Cagnard

Okay. Thank you. So there’s a question, I think, for Jérôme regarding the appointment of Eric Vallat. And whether you can elaborate on what are his new targets? So any key initiatives and also at Fashion & Accessories Maisons? Thank you.

Jérôme Lambert

Thank you. Thank you, Sophie. Indeed, we announced this morning as appointment of Eric as the Head of our Fashion and Accessory Maison. You can see in his appointment, I would say, the very mirror decision in organizations. And so one that we decided to put in place with the Specialist Watchmakers a couple of months ago.

So, I’d say, indeed there is a willingness to work with the Maison Fashion & Accessory in their efficient proactive and professional way. You can read in the resume of – or at least in the presentation of – in the announcement. It’s a short one. It’s a few lines of Eric that he is a great professional coming 100% from this fashion and accessory world with a large experience in terms of Maison and as well in terms of geographic.

Sophie Cagnard

Thank you. So that concludes this presentation. Many thanks for coming. Thank you for watching. And James and I are at your disposal later on if you have more questions. Thank you.

Burkhart Grund

Thank you very much.

Sophie Cagnard

Have a Good day.

Jérôme Lambert

Thank you.

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Source : https://seekingalpha.com/article/4175554-compagnie-financiere-richemont-ag-cfruy-q4-2018-results-earnings-call-transcript

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