transcript 19 may

8/3/2019 Transcript 19 May

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Richemont

Annual Results FY11

19 May 2011 / 9am


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Annual Results FY11 / 19 May 2011 / 9am

PRESENTATION : Mr Johann Rupert, Executive Chairman........................................................ 3

PRESENTATION : Mr Richard Lepeu, Deputy CEO .................................................................. 3

PRESENTATION : Mr Gary Saage, Group CFO .......................................................................... 6

SUMMARY : Mr Johann Rupert, Executive Chairman................................................................. 8

QUESTIONS AND ANSWERS................................................................................................... 10


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PRESENTATION : Mr Johann Rupert, Executive Chairman

Good morning, everyone. Ill do the introduction and highlights. Then well hand over to

Richard and Gary, and then I will summarise at the end. I think weve seen sales increase by

33% to 892m, 24% at constant exchange rate. Excluding the impact of NET-A-PORTER, sales

increased by 19% at constant rates. Operating profit increased by 63% to 1.355bn. The

operating margin increased by 370 basis points to 19.7% of sales. Excluding the impact of NET-

A-PORTER, which well discuss again later on in more detail, the operating margin would have

been just under 21% of sales. Net cash improved. Sorry, maybe you have to do it. (Laughter).

Net cash position improved by 707m to 2.589bn. The increase included a record level of cash

flow from operations of 1.696bn, just under 1.7bn.

Right, if we go to sales and profit by segment, you will see that trading conditions were more

favourable than the comparative period, which also included the destocking impact on wholesale

sales. A positive exchange rate contributed, and acquisitions contributed to 14% each points on

the sales growth. The operating margins of the jewellery and watchmaker segments were 31%

and 21% respectively. At least three percentage points above last year. Sales were broadly in

line with the forecast and additional profits stemmed from the higher reported sales

improvements in the gross margin percentage and continued cost control. On we go to the sales

analysis. At constant exchange rates, and excluding acquisitions, Group sales were 19%. Where

are we now? I thought so. Sorry. In my section, I changed some things last night in my section.They forgot to put the tabs in. I wrote three pages, which youll see at the end. The rest, they

write for me.

PRESENTATION : Mr Richard Lepeu, Deputy CEO

Now lets come to the analysis of sales for this fiscal year. First Europe, that contributes to 38%

of sales. Salesin Western Europe+21% at constant rate. Sales to local clientele progressing in

France, Germany and Switzerland thanks to timely initiatives, such as the re-launch of the

Trinity and Love collections at Cartier. Non-locals continue to account for more than 50% of

sales in Europe. Middle East andRussia back to growth, albeit at a slower rate, respectively

+10% and +5%. Excluding high jewellery sales, the underlying trend in both markets is

stronger. Inflation in commodity prices bodes well for the future for these two markets.

Now Asia-Pacific. With 37% of Group sales, its close to being our largest region. In terms of

retail sales, the city of Hong Kong has become number one, ahead of Paris. Growth twice that of

other regions, when discounting the positive impact of the NET-A-PORTER acquisition. Year

on year, up 36% reflecting an excellent performance across the region and successful openings


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of 55 stores, including internalisation of franchised stores in Mainland China. Given the

economic momentum and demographic base of the region, we expect an increase from Asia-

Pacific to Group sales and to profits in the coming years.

Lets turn to the Americas region. 14% of Group sales, the United States of America, 11%.

+30% to be compared to -20% last year, so comparatives are flattering. Strong retail up 25%,

excluding NET-A-PORTER, +51% including NET-A-PORTER. Wholesale did very well, up

15%, given the substantial reduction of the network. As a result, the efficient distribution

strategy will be pursued. The very high end has fared particularly well, reflecting a positive feel

good factor among our clients. We are confident in the US ability to generate new wealth.

Longer term, increased purchases from South American visitors should be a further contributor

to growth for that region.

Now Japan, our third largest single market, after Hong Kong and the USA. Contributing 11% of

sales. More when accounting for Japanese tourists, who are travelling again with the strong Yen.

Sales up by 1% in Yen, +18% in Euro benefitting from a strong Yen. We have gained market

share in a shrinking pie by launching attractive products such as the Cartier rejuvenated Trinity

Bijoux or the VCA Charms Mini watches. Recent dramatic events are making outlook difficult

to assess but prospects likely to be brighter than most anticipated. March sales, which are

included in our results, dropped by 21% in Yen. In April sales rose by 3% in Yen. I would like

to add that Richemont management and staff are very supportive and full of admiration for our

Japanese colleagues and the Japanese people, and the way they are coping with these traumatic

events.

Finally, sales to our directly operated stores and NET-A-PORTER, i.e.retail sales, which

represent 50% of Group sales. They grew by 35%, or 24% without NET-A-PORTER, showing

excellent momentum, benefitting from impactful store openings, and from superior growth in

Asia-Pacific and with watches. The wholesaleperformance at +15% reflects a continuously

strong replenishment from watch retailers, however limited by shortages. Despite a smaller

distribution network, underlying an improvement in productivity for this network.

Lets look at the performance per segment now. Lets start with the Jewellery Maisons. Record

sales and profits for both Cartier and Van Cleef & Arpels leading to a record profitability for the

segment. Cartiers growth was again broad based in terms of geography and product line. The

performance was particularly remarkable in retail. Beyond its excellent performance, Cartier has

proven its ability to increase its leadership amid extreme volatility thanks to a very reactive

organisation. Likewise, Van Cleef & Arpels recorded a double-digit growth in sales in all

product lines and regions. Operating contribution for the jewellery segment increased by 43% to

1.062bn, giving a record contribution margin of 31%.

Now our Specialist Watchmakers. They all enjoyed very strong growth rates in sales except for

Baume & Mercier due to the announced ongoing restructuring. The negative impact of the


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stronger Swiss Franc, higher precious materials prices and product returns on the cost of sales

were partially absorbed by price increases and higher production levels. As a result, operating

contribution rose to 379m, and the contribution margin to 21%. All Specialist Watchmakerssaw an improvement in their results to reach an all-time high, with a special mention for the

exceptional performance of Piaget, and excellent management of transition year at Baume &

Mercier, where the re-launch sounds promising. We are benefitting from a coherent portfolio,

focused on the premium segments of the watch industry, which has been growing the fastest, and

with little cannibalisation among Maisons.

Montblanc Maison: all regions and channels enjoyed a double-digit growth rate in sales.

Watches, leather goods and writing instruments showed very good growth in sales. As a

consequence and thanks to a better utilisation of manufacturing capacity and a more efficient

retail network, the operating contribution rose by 38%. The contribution margin furtherprogressed to reach 16% of sales.

Finally, the Other business area. This segment comprises the Fashion & Accessories Maisons,

NET-A-PORTER, and the facilities involved in the manufacturing of watch componentsto third

parties and to our Maisons. The Fashion & Accessoriesbusiness generated a 29m profit against

an 8m profit last year. Alfred Dunhill, Lancel, Chlo, Azzdine Alaaand Shanghai Tangwere

all profitable. In manufacturing, losses were reduced from 44m to 35m thanks to improving

order flows, albeit still down, and improved productivity gains. As a reminder, this segment also

includes intra group subsidies, which compensate for the incremental costs of components linked

to integration. Ill deal with NET-A-PORTER in the next slide.

NET-A-PORTER enjoyed a superior growth in sales of +108%, of 281m in March 2011.

Remember that NET-A-PORTER, compared to our other businesses, has a specific business

model, distributing third parties products over the Internet. It enjoys retailer gross margin,

maximum 50%. On the other hand, it had lower A&P ratio in mid to high-single digit. The

business is running ahead of plan, with a positive EBITDA generation, and already significantly

cash positive. We believe there is significant potential ahead, with further geographic expansion

at NET-A-PORTER.COM and OUTNET.COM, and the launch of Mr Porter.

Organisational highlights. We are constantly working on improving the efficiency of our

business model. First, we are upgrading our backbone, systems and processes to adapt to a

bigger and more volatile world. Optimisation of supply chain will increase our competitive

advantage. In Asia-Pacific, in particular in China, we will be investing in people and

infrastructure to meet the challenges ahead of us. We will have close to 2,500 employees by the

end of March 2012, against 1,700 now in China. Ongoing deployment of SAP within the

distribution platforms for the Jewellery Maisons and Specialist Watchmakers, to be completed in

Europe end of 2013. In production, Cartier is fully integrated and we are continuing the rollout

with the Specialist Watchmakers starting with IWC this year. New ERP system at the Fashion &

Accessories Maisons Headquarters is now operational and regional rollouts underway.


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Second, we maintain a regional focus on growth markets where we see superior growth. In Asia-

Pacific, where we opened 55 internal stores. In the Middle East we also opened stores notably in

Abu Dhabi, Dubai and Qatar. Finally, we opened a few flagship stores discriminately in main

locations of established markets for our Specialist Watchmakers, like, for example, Piaget in

London and, to come, IWC in Paris.

Third, we exercise greater control over distribution to enhance the shopping experience and grow

productivity. Opening more mono-brand stores, either fully owned or franchised. In new

markets, where there is no historical watch wholesale network and where costs of stores are

lower, it makes sense to favour the opening of internal stores. These stores also act as an

effective communication tool. However, we shall continue to work with franchised partners and

multi-brand retailers, even in new markets. We will nevertheless continue with our strategy of

having fewer partners, and more partnership. For instance Baume & Mercier has halved the

number of doors it services. It plans to maintain this number constant while opening new

relationships in growth markets.

Fourth, support such growth with further investments in production in terms of increased

integration levels, increased efficiency and increased capacity. For the next three years, we are

continuing our integration plan and still subsidising the incremental cost of integration, linked to

volume. By so doing, we are enabling our Maisons to adapt, to improve our productivity and

develop more upscale in-house movements. Over to you, Gary, for the figures.

PRESENTATION : Mr Gary Saage, Group CFO

Thank you, Richard. Good morning to everyone in the hall, and also watching on the web. First,

well start with gross profit. Gross profit rose by 38% to 4.4bn. This represents 63.7% of sales,

a 210 basis point improvement on the previous year. Excluding NET-A-PORTER, which as

Richard said, enjoys only a retail margin, overall margins increased to 64.3% of sales. This

improvement reflects pricing power of our Maisons, higher production levels and capacity

utilisation, the outperformance of retail versus wholesale channel. This performance is in spiteof a strengthening Swiss Franc, particularly in the second half of the year. Lets not forget as

well, we did restructure Baume & Mercier in the second half. This had impacts both on the sales

and margin line, and provisioning of inventories. Nearly all of the Maisons increased their gross

margins. Particular increases were noted in Jaeger-LeCoultre, Alfred Dunhill and Lange &

Shne.

Lets turn to the operating expenses. Operating expenses grew by 29%, or 13% at constant

currency, excluding NET-A-PORTER, which was well below the sales growth. Our overall ratio

has been reduced to 44% of sales from 46%. If I can draw your attention to the bridge in the


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upper right-hand corner of the slide, whats the bridge from year on year? We had a weaker

Euro. That impacted 9% on the expenses. At the half-year, it was 8%. The integration of NET-

A-PORTER added 7% to the expense base. It was 7% in the first half. We increased ourcommunication spend. That added 6% on the total expense base. I will remind you at the half

year, it was 3%. We communicated a significant increase in the second half, which came true.

All other costs are the S&D and Admin, which rose by 7%. In the first half of the year, those

costs rose by 8% on the expense base.

S&D costs, 54% of the total Opex rose by 30%. These increases obviously relate to new stores.

We opened up 59 new stores for the year, mostly in the Asia-Pacific region. Our underlying

growth of Selling & Distribution costs was 14% for the year. Communication costs, as I

mentioned, were up 38%. Were back to a more normalised level of 10% of sales, versus 7.9%

in the previous year. Administration costswere up 20%, but on an underlying basis, excludingNET-A-PORTER and excluding constant currencies, they rose by 3%.

Lets move now to the operating profit overview, snapshot of the P&L. As Richard and Johann

said, sales rose by 33%, or 19% at constant currencies and excluding NET-A-PORTER. We had

much improved gross margin, 63.7% or 64.3% without NET-A-PORTER. We have contained

underlying growth in expenses. This all leads to an operating profit rising by 63% to 1.355bn,

and the leverage there is almost two to one. Our overall operating margin was 19.7%. However,

if you exclude the impact of NET-A-PORTER, our operating margin arrived at 20.9%, which

equalled our record margins that we achieved in 2008.

Lets look at the items below the operating line. Net finance costsamounted to 181m. 150m

of this relates to the mark-to-market losses on our cash balances, which we discussed at the half-

year. As a reminder, this has no effect on the equity position of the Group after consolidation.

We recorded a one-time accounting gain of 101m after our acquisition of NET-A-PORTER,

because we had to re-value our initial 33% stake that happened in the first half. Our tax rate

came in at 16.7%. If you remember last year, we did enjoy significant benefits on deferred tax

assets that we had to record, related to our stock option plan. That was about 220 basis points. If

you exclude that, the normalised rate is about the same. We do continue to expect the tax rate to

be around 18% in the medium-term. As a result, net profit for theyear rose 80% to 1.079bn,

passing the 1bn mark for the first time. This represented 15.7% of sales.

Lets now focus on the cash flow. We enjoyed 232m improvement for the year, obviously a

result of the higher operating profit, and a quite limited swing in the working capital usage,

despite the rebound in sales. The main elements of the working capital movements were

increases in inventory, our raw materials and work in process year on year rose by 44%. Our

finished goods rose by 13%. We have enjoyed a faster inventory rotation this year, 16.5 months

versus 18.7 a year ago. Account receivables continue to be managed well and collected timely.

This, I think, is more a function of the desirability of our products in the wholesale channel, and

the turn that they enjoy. We had some timing issues over year-end in terms of trade payments


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and accruals as well. That had a positive impact. We did manage to grow and we did manage

our inventories around the constraints that we had. We do expect an increase in the coming year

in terms of finished goods inventories, because the current levels, we believe, are lower than wewould like.

Lets now take a look at our fixed asset investments. Gross fixed assets were up 89% to 4.1% of

sales. We increased investments in our retail network, our manufacturing facilities, and we

expanded our distribution platforms for NET-A-PORTER. A 285m gross spend, this is still

above our depreciation level of 213m for the year. For the next year, we anticipate fixed asset

investments to approximate 6% to 7% of sales, and we expect 7% to 8% of sales in FY13.

Lets go through some details of the fixed asset spend. By category, nearly half of our

investments relate to our retail and point of sale networks. Themost notable projects of the year,

the Singapore Marina Bay Sand project, where we have eight boutiques, eight brands. Piaget

Bond Street in London, and Panerai in Paris, on rue de la Paix. Cartier renovated its flagship in

Hong Kong, the Princes Building, and also opened up locations in Shanghai Hong Kong Plaza,

and Macau the Wynn project. Close to 30% of our spend were in our manufacturing capabilities.

Most of this spend relates to tools. We didnt really have any spend on space this year. The

remaining 23% includes the new distribution platforms, as we suggested, associated with NET-

A-PORTER and ERP systems.

Lets go to the final operational element, free cash flow. Free cash flow for the year amounted to

915m, approximately 1.2bn if you exclude the acquisition of NET-A-PORTER. This

obviously reflects the higher operating results, reasonable retention of working capital, and

higher tax payments.

Lets take a quick look at the balance sheet. We continue to enjoy a solid balance sheet. Equity

rose to 72% of the total from 70% last year. After a dividend payment this year of 141m and

our investment in NET-A-PORTER, our net cash and investments position rose from 1.9bn to

2.6bn at the end of the year. Id like to now turn it over to Mr Johann Rupert for our summary.

Thank you.

SUMMARY : Mr Johann Rupert, Executive Chairman

Lets see, now that I have the right document. Right, I actually wanted this to slide up, but I re-

did it and I sent them the slide, so it must have been reformatted. What youve seen up till now

is really the last year but Id like to just step back to what the underlying goals and strategy will

entail for the future. The results that weve seen up till now have been as a result of

concentrating on a few basic principles. Obviously, wed like to grow the value of our company.

Yours, ours, the shareholders, in a sustainable way. That will be valued by the markets, because


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of the sustainable flow of dividends. Weve said in the past that wed like to keep it growing at

about 15% over a medium to long term. Dont hold me to that. Well probably, as in the past,

have a higher payout ratio in bad times, and a lower payout ratio in good times. Obviously thisdepends upon the growth in free cash flow. We do not tie ourselves to payout ratios. Next,

please.

Now, obviously were not going to have any sales if our products dont appeal to clients on a

worldwide basis. Weve been fortunate in going to what we call growth markets today at an

early stage. The key to desirability really lies in integrity of the brand, of the Maisons and the

esteem. Therefore we started verticalising our watch production. I would say in the late 90s

and it accelerated with the acquisition of LMH. So today, we have some 21 factories, employing

nearly 7,000 people in Switzerland. Clients are too intelligent. They dont want to buy a Ferrari

made in a Fiat factory. That was our leitmotiv, and why we accentuated verticalisation and, Iwould say, before a great number of our competitors. Obviously, you need awareness as well.

Its no good if you have a hidden gem and nobody knows about it.

So we have to spend on communication. Youll see that in bad times, well tend to spend more

as a percentage of sales, because we intend to keep our share of voice. Then our products must

also be relevant. You can have the best automobile in the world. If its not relevant to the

consumer, they wont buy it. And the brands need vitality. So we need creativity, we need

younger people. This goes right through to the HR policies throughout the different Maisons.

We try to build brand equity, desirability, which leads to pricing power. You know whats

happened to the Swiss Franc and to the Euro, versus the Dollar, for instance, where a greatnumber of our clients live, in Dollar-related currencies. Unless youve got pricing power, youre

also not going to be able to sell. Its a matrix. We think we understand the matrix, and thats the

Holy Grail. Next, please.

Why did I tell you all of that, because Gary has already referred to Capex, obviously expenditure

on boutiques. We intend to further expand networks in growth areas, and to consistently and

continuously keep the quality of our boutiques at the premium, super premium level. We will

further spend on our industrial capacity and on our research and development. We are again in

the fortunate position that we cannot supply the demand, and thats across the board. We will

not be tempted to pick low hanging fruit. We will make sure that we will have the necessarypeople or the necessary skills in the necessary manufacturing sites, in order not to produce

products that were not proud of. Ive already discussed the boutiques. Gary has referred to it.

Our overall preference, folks, is to build goodwill and brand equity, rather than to buy it. Weve

also been offered a lot of the companies that have been sold. In fact, prior to other people having

bought them. The call that weve got to make, is do we pay somebody else billions of Euros, of

which billions of Euros is represented in goodwill, or do we take 1bn for instance and expand

the boutiques of Cartier, Van Cleef and Piaget? We made the call that we will serve our

shareholders better by doing the latter. Next one, please.


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Now, youve seen that by network, this is April, weve done well. At constant currencies, its

35% up. Retail was up 45%, wholesale 27%. Japan was single-digit, and Asia-Pacific and

Europe up double-digits. Thank you.

Now, the conclusion. Weve got a unique portfolio of high quality Maisons. Weve got

leadership in prestige jewellery and watches. I never thought, when we started here in 1988, that

we would be called an emerging market player. Not in my wildest dreams did I ever think that

wed be making watches. I dont think you would say making jewellery, I would say creating

jewellery. And that an American fund manager would tell me: You are our key emerging

market player. What are you talking about? Emerging market player? Dont you actually

understand what I mean? We are, in effect, as I think it was Coco Chanel that said, Money is

money is money, its only the pockets that change. Were very fortunate that the work thats

been done by our predecessors, by our current colleagues, I would say by the people in the room,the heads of the Maisons, its led to, as Bernard Fornas says, A plane with five engines. If the

one engine starts stuttering because of economic problems, lets say the United States or Europe,

or you know, parts of Europe, then luckily we have Asian engines. And they came to balance

themselves, because most of our Maisons have universal appeal. Which is this broad exposure to

local clientele, from traditional established markets, and the clientele from the growth markets.

We have a strong balance sheet. As said, firstly you can discount us ever using equity for

acquisition. Equity is always the most expensive way to pay. Our cash, we feel, is better

deployed in supporting Maisons that we know, and that we see growing faster in target areas

than the companies that are available for sale. Thank you very much. We are ready to take somequestions now.

Gary SAAGE: The hands are up and ready.

QUESTIONS AND ANSWERS

Jon Cox Kepler Capital Markets

Yes, good morning. Jon Cox, with Kepler Capital Markets. A couple of questions for you. The

first question, just on the profitability of the watch division in the second half of the year,

appeared to halve. I wondered if you could just give us some more detail on that, even adding

back the one-off restructuring, it still looks pretty disappointing compared to what you had in the

first half of the year. Second question for you, just on the net cash pile you have. The dividends

seemed relatively light, given the big net cash pile you had. Just wondering, obviously youve

talked about an expansion of Capex. Even that wont get rid of that huge cash pile you have.

You're clearly ruling out any big M&A. Im just wondering if youve thought about maybe a

buyback to return cash to shareholders, or a special dividend? Thank you.


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Johann RUPERT: Ill answer the second, but Jon, youre English speaking. I thought Id

explained. Ive known you for so many years. I thought Id explained it again and again and

again and again that a payout ratio is different in good years to bad years. Im not sure were outof the woods yet. In fact, not talking about Richemont, Im talking about the world economy. If

you look at the debt restructuring in Europe, and you look at the debt ceilings in the United

States, its as if were dancing on clouds. You see the VIX is universal optimism. Ive said it to

the shareholders years ago, we will try to grow by 15% per year, and well carry on doing that.

In fact, its really because of lack of regulatory supervision, and because of activist shareholders

prodded on by market commentators. Part of the problem, that were in excess today. When I

started, banks and automobile companies were allowed to have hidden reserves. Same fact here

guess what happened? The banks created hidden reserves. So did the automobile companies.

Been involved, I was on an advisory board of automobile companies, they put away billions of,

lets say, it used to be Deutschmarks, in the lean years. Guess what happened? Variousaccounting standards changed, they had to bring it onto the balance sheet. Activists,

shareholders said, Youve got lazy balance sheets. Give us the cash. Management folded, they

gave the cash. The famous line: Ill give it back to you when you need it. Of course, we all

know thats a total fallacy. So the companies gave back. Ridiculously low interest rates

prevailed, and there was some opiate in the air about leverage. Everybody assumed leverage:

the banks, the shadow banks. Guess what happened? The tax payers, we, bailed them out. That

payback has to come sometime. The debt has not disappeared, its just morphed into a social

obligation. So, Im afraid to some extent, profits got privatised and losses got socialised. That

bill will have to be paid sometime. In the end, Im afraid the saver will suffer, whether it be

through inflation or default. If you look at share buybacks, and at the prices where the

companies bought their shares back, they inevitably bought their shares back very close to the

top of the market, because thats when they had a lot of cash. Boy, do they regret it when two

years later, all hell breaks loose! Weve had this policy since we went public. I think it stood

our shareholders in good stead. To describe the 29%, nearly 30% increase in dividends as, how

did you put it? Poor? Sorry, I missed your word.

Jon COX: Light.

Johann RUPERT: Light. You're clearly not as big a shareholder as I am, because I was very,very glad when the board voted to increase it by 30%. As for the first one, they can explain it to

you. Please, just explain to them the watch division.

Gary SAAGE: Hi Jon, how are you doing? Factors that we tried to highlight in the first half,

basically I think came true. We had a slight reduction relating to foreign exchange. On the

Group, we were positive in the first half, and we were negative in the second half. Thats one

factor. I would say in the watch division generally, the margin usually, in the best of days, is

lower in the second half, normally. We said we were going to spend more in communication.


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We spent about 8% Group-wide in the first half, and we spent 12% in the second half. We tried

to communicate the Baume & Mercier situation. What did I say at the half-year? B&M was

profitable in the first half, and we said we were going to invest, so that the losses of RogerDubuis and B&M together would be equal last year. That implies a significant profit reduction

in the second half.

Johann RUPERT: We, not they, we repositioned the whole of both. It was a conscious

decision to reposition Baume & Mercier. Unfortunately, Gary and them had to record the effect

charge. This was by design, not by accident.

Gary SAAGE: If I would say, Jon, I think the Baume & Mercier management team, led by

Alain Zimmermann, they did a great job of this. They got the products ready. We reduced the

doors by over 50%. We took back all the product from the doors that we were going forwardwith, and we destroyed it. So, starting April 1st, its an extremely clean situation. Were pretty

positive about it. I think that ones going to be a quick turnaround.

Johann RUPERT: I think its a good question, Jon, because unless you understand that we

deliberately decided to clean it up, we took the stock back, it was really a turnaround situation.

Im personally very excited about what I see, and especially by the response of the dealers and

the people who came to SIHH. It would look funny if you didnt understand.

Rey Wium Renaissance Capital

Just two questions. The first one just revolves around the Americas. Obviously weve seen

some quite strong growth out of that market, up 30%. Im just curious to hear your views about

the sustainability of that, given that the American economy is not out of the woods yet. The

second question is just regarding Montblanc. Your margins are about 16% now, and if I look at

the product profile, you have leather in there, watches. My gut feeling is that, I just want to

know, is it possible for the margins to get closer to the likes of your Jewellery and Watch

Maisons over the longer term?

Richard LEPEU: First, remember that comparison basis is flattering. You drew up last year inAmerica, but thats very true that especially for the higher end range, the recovery has been quite

strong. The feel good factor is completely back. We are experiencing very good sales. Im not

an expert in predicting how the economy is going. What we are seeing for the time being,

concerning April, that business is back and the clients are already buying. Remember that during

the crisis, we didnt try to push the sell-in. We cleaned our distribution, so we have a very clean

situation. Of course, for Baume & Mercier, but for the other brands as well. We continue to

reduce the network to have really first seeking to the shopping experience for the client, to really

be well treated. I guess you saw the interview with Mr Hayek, regarding the American


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distribution. Thats very clear, that we tried to do our best to sell our products in good

conditions. That leads to another side benefit, which is increase of productivity of the network.

Less doors, less cost, and much nicer distribution.

Johann RUPERT: Also Richard, I might add, the dealers that-, the doors that remain open

obviously do better, which leads to cleaner inventory in their possession. So its all in all a sane

thing to do. As for America or Europe, I have absolutely no idea. Theres a remarkable

correlation between some of our Maisons and various stock exchanges, and a negative

correlation to the VIX. People feel good, the fear factor is down. Then they spend, thats been

the case, since time immemorial. I guess my big fear is stagflation. You guys are too young to

remember the 70s, but stagflation is a horrible thing. So all in all, I am more pessimistic than I

should be, considering the results. Thats for Europe and for United States particularly. Mainly

Anglo-Saxon exuberance.

Then of course, the savers in Northern Europe having to pay for the people with a higher quality

of life in Southern Europe, how long that is containable, I am not sure. You know, you live in

Hamburg, you pay high taxes and you work your backside off. You look on television, you see

this wonderful lifestyle next to the Mediterranean. Im not sure. So I couldnt give you a view

on the States. I wouldnt short the United States, and I would certainly not short their ingenuity

and capacity to work themselves out of situations. As weve said, were very fortunate in that

the sales are now more balanced. As for Montblanc, you can understand that the sales mix is

totally different. I think Gary and Richard can expand on that.

Richard LEPEU: Montblanc, for the first time, we no longer call it the segment Writing

Instruments, its Montblanc Maison. Its a transformation process. It has already become a

luxury Maison, not only selling pens, but watches, leather goods and jewellery. So when, in the

process of building brand equity, it is actually what is expressed by -,

Johann RUPERT: The other thing is, obviously if youre more wholesale than retail, it affects

your business. Theyve invested heavily into watches, and theyre doing very well. Theyve

built a very good watch business. In the year 2000, 2001, I nearly had a heart attack when Jan

Duplessis, when we had a perfect storm. A strong Yen, a weak Euro, the millennium fervour.He made a statement, he thinks we can maintain 20%. I said, We wont. I said, Jan, please.

You guys all took notes. As he sat down, I said, Youre out of your mind. How are we going to

keep on having, operate-, you remember the conversation? So I dont know. We will try and

help them from the head office, but youve got to remember theyre in Hamburg. Theyre run

autonomously. It will depend on the product mix, and it will depend upon the geographic

footprint, to a very large extent. Have you got, Gary, anything?


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Gary SAAGE: The bean counter from this end of the table will always say, We want to

increase our margins, right, thats a stated goal that we have.

Johann RUPERT: They also want to increase their margins, but you cant go, I want to

increase margins. It takes a while.

Gary SAAGE: Sure, but can we give you a target? Not really, because of the factors that the

chairman discussed.

Johann RUPERT: Look at the footprint, America, (inaudible). Piaget, one boutique in the one

casino in Macau. Guys make money, they walk out. Theyre happy. Where do you think you

get margins? Theyve done a very good job. Their watches today are superb, and theyre

beginning to do well. They are doing well.

Thomas Chauvet Citigroup

Good morning. Three questions. The first one on your April current trading, youve had a

strong sales acceleration, especially against a high comparative. I was wondering the reason

behind it, if there was any one-off in the high jewellery sales, for instance. In the release, you

seemed to suggest that you expect this trend to continue in coming months. I was wondering if

you could talk a bit about the outlook in coming months. Secondly, on Fashion & Leather,

youve achieved a big turnaround there, a big swing in profits. I was wondering whats changed

fundamentally at those businesses. From a strategic point of view, would you be tempted to use

some of your high cash pile to maybe strengthen your presence in Fashion & Leather, or you're

pretty happy with the current brand portfolio? Thirdly on vertical integration, do you think

Swatch Groups intention to stop delivering movements to third parties are realistic threats, and

if so, how quickly could you get more independent in terms of movement production? Thank

you.

Johann RUPERT: You guys really are starting to ask very good questions. When we started

here with Sophie about ten years ago, they asked about 50 questions. Each question was, How

much are you going to sell next year? Do you remember the original questions? I think the firstquestion, were only three weeks into May. Sorry? No, I know, but were only three weeks into

May. I cant talk and extrapolate April for too far, but no, we did not have a huge high jewellery

sale somewhere. Its across the board. And you're correct, it was against strong comparables

already. So we dont know whether the trend is going to continue, but we have no reason to

think its not going to continue. It depends upon what the markets do. Im talking the feel good

markets. We have no reason not to extrapolate it. On the other hand, we cant extrapolate it

because we cant predict what the general market conditions will be. No, there were no one-off

sales, big ticket items. Is that fair?


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Richard LEPEU: Mainly driven by retail.

Johann RUPERT: Yes, the retail sales. Which is always good, because wholesale tends to lag.

Richard LEPEU: All divisions did well. Excluding Japan, just slightly positive.

Johann RUPERT: Yes. The second question?

Richard LEPEU: Fashion & Accessories.

Johann RUPERT: Fashion & Accessories, well Id like to say we brought a lady into run -

Marty Wikstrom, but I have to give credit to people like Chris Colfer at Dunhill and others thathave done, and I dare say at Lancel. They have done very good jobs over the last few years.

Will we be tempted? I wouldnt call it tempted. I would say yes, as a strategic move, with the

right people in place and with the right strategy, we will deploy more capital.

Thomas CHAUVET: Organic growth or acquisitions?

Johann RUPERT: No, organic growth. You know, its difficult. Im not going to bore you

with the stages of acquisition, which is euphoria, then disillusionment. The next thing is looking

for somebody to blame for buying the place. Its not that easy when. - the companies you want

to buy, you cant buy. Let me put it to you like that. The last question is actually a very good

question, and Im glad you asked it. I wouldnt say its a threat by the Swatch Group. Theyve

been put in an invidious position. The problem with lawmakers is that they-, and were all like

that. Its the law of unintended consequences. When we do things and we think about things,

there are sometimes, quite often, unintended consequences. So here we have a situation where

yes, the Swatch Group did end up in, lets say, oligopolistic, maybe even monopolistic positions.

Thats because they bailed out the Swiss watch industry. If it hadnt been for Mr Hayek senior, I

dont think the Swiss mechanical watch making industry would have been in the position that it

is today. I absolutely agree with the late Mr Hayek and with Nicks irritation at being used as a

supermarket. I have said earlier on, weve got 21 factories, close to 7,000 people.

Our watches, apart from obviously the gold and steel, Lange & Shne being the exception, our

watches are 100% Swiss. 100% Swiss casing, movements. Now you get people, and here Im

not talking about the great creativity of some of the truly small entrepreneurial people, we need

them, brilliant young watchmakers who set up on their own. Im talking about people who

come, go to Mr Hayek, have no capital investment. He has to sell movements to them, and then

they appear as Swiss Made, with very little Swiss components in it. I would have been highly

irritated if Id been him. My real problem, and this is the real problem, Im not sure whether


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people have worked out whats going to happen to the costs if we all have to duplicate

everything. Can you imagine if BMW, Mercedes, the Volkswagen Porsche Group, Jaguar,

Peugeot, the wider Fiat Group, if they all had to make their own spark plugs, or their own tyres?The whole motorcar manufacturing business is an assembly business. If you go to BMW or

Porsche or Volkswagen or Mercedes-Benz, and you go to their factory, only about 40% of what

you see is actually the company. The other 60% are OEMs that have actually moved there. So

you make a core part yourself, and the rest, you dont go and buy Michelin or Continental or

Pirelli.

The watch industry is also an assembly business. We are all going to have to make our own

hairsprings. We are all going to have to make certain components, and you know what? Its

going to price some people out. Were fortunate. Weve invested over very many years. We

can do it. Itll cost us more, but we can do it. The problem is, its going to put Swisswatchmaking, with a strong Swiss Franc already, at a position where some people are going to

say, Hang on, we cant sell in Dollar zones with these prices. Like what happened in the

States, you're going to have some people moving. Weve got to watch, and please here I am

100% Swiss, that all the capital weve invested and the jobs weve created here will not be at risk

because of people actually moving and creating enough brand equity at the lower cost base

geographic zone. You may not even know it, but all C-Class Mercedes-Benzes are made in

South Africa. The BMW 3 Series, they get higher J.D. Power, you know J.D. Power in the

United States, ratings. The consumers are buying Mercedes-Benz, theyre buying BMW.

Theyre not necessarily buying made in Germany.

Weve got to watch, because Ive got to look five, ten years forward, that the pressure thats

being brought to bear on Mr Hayek to supply everyone. Firstly I think is unfair that people come

here with little capital investment, and hes got to supply them. If Id been in his position, which

I always try to put myself, I would have been upset. Secondly, if were all forced to do it, it

could have cost implications for the Swiss watch industry. If you look at we, and Im not going

to mention names, but we do dials for some of the most prominent independent opponents. Are

they going to have to put up their dials? Everybodys going to have to make watches, you know,

intricate. These are small manufactures. Are they all going to be replicated? Its the law of

unintended consequences, and I think we will have to revisit this some time, if we wish to keepjobs in Switzerland and keep the Swiss watchmaking industry competitive. Im sorry I went on

for longer than, but I really think it is a danger that we should look at now. Im not blaming the

lawmakers, because they have the best intentions. The problem is the law of unintended

consequences. Is that satisfactory?


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Patrik Schwendimann Zrcher Kantonalbank

Again on your outstanding April sales, what do you think was really behind it? Was it really acorrection of the market, or would you say that you have really increased even more your market

shares? Thats my first question. Secondly, regarding your selling and distribution costs, which

were up 30% last year, probably a little bit higher than expected, at least by the analyst, what

would you say would be a good guess estimate for the current financial year, bearing in mind

your shop opening plans for the current year? Thirdly, you're mentioning the operating leverage,

which was for the whole Group almost 2% coming from sales to EBIT growth, but for Cartier it

was roughly 1.5%. Would you say we should also assume this for the future that Cartier is

below the Group average, or was there anything special behind it? Thank you.

Richard LEPEU: Trees dont go up to the sky. When you are cruising at more than 30%, itsobvious that the operating leverage is less. To come back to April, once again it was a very good

start to the year. You see April sales driven by retail. Okay, it means thats very good. Of

course, it emphasises improved by for example the Baume & Mercier situation, because the

situation where Baume & Mercier has launched its new products, so we have a positive impact

of Baume & Mercier. Its not enough to explain that, but okay, its one of the explanations. You

know also, so that we are closing our year end at the end of March. We tried to contain our guys

to not to limit the sales in March. But they play some KPIs sometimes, and they keep some

goods for every account.

Johann RUPERT: Once theyve reached the KPIs, they kind of-, three or four years ago, there

was one particular culprit that Id watched for a while, three years ago. At the last minute I said,

Ive reintroduced a KPI, which is March sales. I sent it through the Group. The squealing we

heard from two of these characters, Why do you mind so much? No, but its unfair. I said,

Do you think I dont know what you're doing? Holding back and pushing it across the line.

Please dont deliver.

Richard LEPEU: Thats a story, and of course a very good start that the underlying trend is

good, and always same factor, recovery in Europe and in the US as far as the business is

concerned, and continuing strong momentum in Asia-Pacific.

Johann RUPERT: If you could persuade the auditors, the audit profession to allow us to create

hidden reserves, then I can put Sophie on a holiday, her whole department away and Ill give you

the figures for the next three years, okay?

Gary SAAGE: Mr Chairman? Our auditor is sitting back.


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Johann RUPERT: I know, I saw him. Then Ill say, Okay, what do you want to grow by?

20% is fine, the rest, hidden reserves. 20% is fine, the rest hidden reserves. I have no idea, and

I actually told my son, You watch today. Half the conversation is going to try to be to get us tosay what does 35% mean? We have no idea, and when we say it, we mean it. The comparable is

now in April. Its now getting-, we actually compare ourselves to 2008. Internally, we look at

the high point, and thats what we look at. I think thats a fairer assessment internally than to

compare, because weve got to look at three, five-year trends, ten-year trends. So I wouldnt

focus too much. I know youve got tough jobs. I know youve got to try and predict our profits.

You should tell your clients and the market that you cant, because we have no idea. (Laughter).

I promise if I had an idea, I would be in the market. I would be playing the VIX and Id be

playing the various indices. Because its all dependent upon the general economy. We can

outperform, but in the end-, here its not only that. Ill give you an idea.

Two or three years ago when we saw that things were going to get bad, we discussed with our

colleagues not to go for bling-bling, but to go for more discreet watches. Its still big where you

didnt have-, yes, but thats one. To go for more discreet, that would be white gold, platinum,

flat watches. So when the crisis hit, we were ready and you could see a move towards more

discretion. From a feel good factor to a feel guilty factor. So you can actually, by making the

right decisions in time, do better than the general economy. Thats your job, thats what you get

paid for, but I wouldnt bet on it all the time. So its very, very hard to extrapolate. Im trying to

say what I said to Jon, which is we have no reason to believe that it cannot continue. On the

other hand, I cannot say to you it will either.

Gary SAAGE: On the expense side, we opened up 59 stores. Even though we opened up 59

stores, our underlying sales growth was 14% for the year. On sales growth of 19%, constant

currency. As I said at half-year, a good ratio to use is whatever you think your sales growth is

going to be, I would project the same type of sales growth on the S&D. We are investing in

stores next year. Last year, we said we would increase by about 5%. We ended up at 7%. As

always, theres timing. Some things come quicker than you would expect. Some things go a

little slower than you would expect. We will open up, probably the store count will be higher

next year. Square footage-wise, probably about 7%.

Johann RUPERT: Plus, in prime retail locations, the prices are going crazy. Its as if theres

never been a recession, ever. If you go to Hong Kong, you go to New York, you go to prime real

estate, its pricey. The lady there, yes.


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Szilvia Bo r Goldman SachsGood morning, gentlemen. Three questions for me, please. Firstly, could you give us some

colour on what level of price increases did you manage to put through in the second half of the

year, and whether these price increases were implemented across the whole price architecture?

Secondly, you mentioned that you are going to spend a significant proportion of Capex on

manufacturing capacity. Could you help us understand what level of capacity increase you

expect from these investments in terms of volume? Thirdly, if you could run us through your

store opening plans for the next financial year in terms of geographies, that would be great.

Thank you.

Johann RUPERT: First one was pricing. I hit the roof twice in the last week when theydiscussed pricing, because I come from an environment where three people decided when thered

be a price increase. Rothmans. The moment people know theres a price increase, trade loading

takes place. They buy in like crazy. Which basically means you're giving the profit away. Im

surprised that in the luxury goods industry, price increases are widely discussed at various levels:

On such and such a date, we do a price increase. Now of course, the person whos in charge of

that sales region whispers to somebody else, Youd better buy now because were going to have

a price increase next month. The retailer tells the client, Youd better buy now because we

have a price increase next month. So I basically put people talking about price increases into

the freezer, because all you're doing is you're giving your profits away. We do have pricing

power, and if the currencies stay as they are, yes we will have to take a price increase. When? I

cant tell you. It may be sooner than they broadcast it to the market, it may be a bit later. We

dont know. Ive said to them theyve got to stop that. We do have the pricing power. The

second question was?

Richard LEPEU: The breakdown of Capex for the industry.

Johann RUPERT: Yes.

Richard LEPEU: So they mainly focus on watches and jewellery, because we are still facingand coping with high demand in jewellery. Especially Bijoux jewellery and medium jewellery.

In Capex, youve got R&D, so theres a development cost that you have to capitalise. Weve got

toolings, machines and weve got also, of course, an increase of space. I would say this fiscal it

will be more focused on R&D, machinery to improve as fast as possible the productivity and the

capacity. While increased space will take some more time. The biggest part will happen next

year, even though this year, for example, well be more or less doubling the capacity of space for

our Group, manufacturing of cases, Donz Baume. We have other plans for the next year to

increase the space as well.


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Gary SAAGE: On the boutique question, more or less a similar strategy next year than the past

year. Mostly the growth markets, but we continue to see opportunities in the West, where thereare high traffic locations.

Johann RUPERT: You know, the whole thing can be skewed by the negotiation or

renegotiation of one very large temple. It falls in that year, (laughter), price to pay. Sorry,

another question?

Matthias Eifert MainFirst

I would like to know how much sales do you know are generated in Greater China, including

also Macau? Then to the best of your knowledge, how much of total sales is now dependent onthe Chinese consumer? Then I would like to know from Mr Ruperts opinion about where do we

stand now with the Chinese clientele? Have we just started to scratch the surface, or are we in

the middle stage, or is it already very developed in your view?

Johann RUPERT: We prefer not to-, how can I put it? I can, if I want to, find out exactly

whos bought what and where, but its a little bit like an old style Swiss bank. We dont know

who buys. Provided that all the money laundering rules are observed, which were very tight on,

its not for Richard, Gary or me to know who buys. Quite frankly, we dont know whether the

guy buys for himself, for his wife, for his mistress, for his daughter, for his uncle. Not his uncle,

but you know. As such, youll notice that the majority of jewellery companies and others send

invoices to offices, not to homes. Yes, we have a general observation that Chinese, ethnic

Chinese have increased dramatically as total clients. It was interesting seeing Nick Hayeks

interview in WatchTime, where he spoke about the American market. He said, What is the

American market? Watches sold in America to Americans? If thats the case, its not that big.

His words. Or South Americans, or travellers from Asia onto the West coast, East coast. So,

in a sense, we can observe that in total, the Chinese have become very important to us and to the

whole of the luxury world. Whether they buy in China, which to me I would include obviously

Hong Kong, Singapore, Macau, Taiwan, ethnic Chinese, yes, very, very important. I think Hong

Kong is today our second largest city.

Richard LEPEU: First city, first retail city.

Johann RUPERT: First retail city. Its overtaken Paris.

Richard LEPEU: May I add that you often used to say, We can do everything but fight

demographics. Thats clear.


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Johann RUPERT: Yes, we can fight everything. Thats why we will see Chinese being more

important than the Japanese, because of the demography. In the end, were going to have to look

at India. If you look at the demographics of India, it is better than, dare I say, China. Talkingafter weve retired, but weve got to start thinking now. You would have retired, but weve got

to think about it now, because in fifteen, twenty years time, they could have an ageing problem.

Has China come to its end? I would not say so. Its a very bold person. Have we plateaued?

Every day, I hear of second and third tier cities that have got the demographics and spending

power to open a boutique that Id never heard of in my life. Then Ive got to Google the place,

find it. When people work hard, first (inaudible), then they study, then they work hard, they

generally tend to take a bigger share of the economic pile than people who do science-, sorry, a

political science and sit and debate about the meaning of life for 30 years. Unfortunately, the

ageing societies will find that places like Vietnam, weve barely scratched the surface of. There

are parts of Southeast Asia where were not represented, where we and all of our opponents havenot yet touched the surface.

A few years ago, when I was rather despondent, I met with two people. One is probably the

leader in media worldwide, and the other one the founder of the modern Singapore, on separate

occasions. They said, Youve got to remember two things. Firstly, the increases in

productivity from the former Soviet Union. People that have been liberated in the last fifteen,

twenty years. We forget that its already twenty years ago from the fall of the wall. Really, if

you extrapolate twenty years forward, its pretty sad, Im 81. It felt like yesterday when I saw

the wall. If you look at the vast economic changes, thats going to carry on to produce high

productivity. Secondly, whether you call it Chindia or whether you call it the BRIC countries,

there are improvements in productivity plus, in a number of the countries still, a growth in the

population. I would say that we can comfortably rely on more clients in-, to use the word

emerging market is pejorative. Its wrong. In countries that are beginning to get the fruits of

their studies and labours. People that have studied and that are working, that are getting

wealthier. Fortunately, we are in their aspirational world. The task is to stay there. Im going to

step on toes now, but I said it to my son. I said, My task really is to make sure.

When I grew up, I couldnt afford a Ferrari or a car. To me, an Alfa Romeo in the late 60s was

the dream, a Giulia Super. A BMW you couldnt pick a girl up in. They wouldnt look at you ifyou drove a BMW. Yet in 40 years time, BMW is aspirational, and the Alfa has gone a long

way back. They use the same steel, they use the same glass, leather, plastic, composites. This

was when I was involved in Mercedes-Benz and Chrysler. If you take the rule of, what are you

willing to pay more for? If you use the same steel and leather, thats where were talking about

the brand equity and the previous question from the lady there about pricing power. If you want

to get fired in this Group, Im not talking about ethics, then you start picking low hanging fruit.

You start selling things that are easy to sell, which in ten years time will wreck the brand.

Maurizio Gucci was never given enough credit for cleaning Gucci up. He did, with the help of


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Dawn Mello, before Tom Ford and others got there. Gucci had lost it by picking low hanging

fruit. They tightened it up, they cleaned it up, they made it aspirational.

So when I listen to poor Gary and poor Richard who have the difficult task-, theyve done great,

unbelievable jobs, but who have the difficult task of trying to explain margins to you, its

nottheir call. Their call starts at the product committee, where we have executives that have

retired, us, the current executives and the future executives. The previous people there, when

some youngster comes up with an idea, can say, Look, by the way, it was tried in 1993. Go and

have a look in that file, youll see what happened. The youngsters can say to the current

management, Aspetta. You're not going to do that, because you're going to make a hell of a lot

of money two years before your retirement. Then Im stuck with a thing that I cant sell. So

theres a break on the one hand for picking low hanging fruit, but thats really where the future

growth is determined. Its where all the products, all the communication, and its Maison byMaison. Theres no co-mingling. Thats where we try to create the products with the integrity

that we can sell in the emerging, or should I say in the new successes of the world.

The fascinating thing is that this is no longer geographic, this is psychographic. If you have a

highly successful 28-year-old lady, whether she is in Shanghai or San Francisco or New York, or

Paris or London, you take top of the mind awareness. Its not geographically confined, its

transversal. Today, its psychographic. If you look at NET-A-PORTER, they dont buy

different things all over the world. If you're in the sweet spot where youve managed to remain

true to your DNA, and where you are aspirational, you should be able to withstand regional

mishaps in terms of the economy. Id like to be more precise in my answer, but Im afraid thats

the reality. Are there any more questions? Yes, Jon. Come on now, Jon. Give me a break. Ive

had a long week, okay?

Jon Cox Kepler Capital Markets

I just have a couple of questions. So the watch Baume & Mercier was a H2 event, and as we

move forward into April, we should expect the margins to come back to where they were in H1

last year. Thats my first question. Then just come back to the jewellery, I know you mentioned

the leverage, but again H2, the jewellery margin was off five points. I know therescommunication et cetera, but that also seems a bit of a decline in the H2. Im wondering what

you think will happen as we go forward. Im starting to put everything together. You're talking

about increasing your selling and distribution expenses in line with sales. You can see maybe a

little bit of gross margin improvement this year. Im just trying to sort of build a picture of

where we should be thinking about the margin for this year.

Johann RUPERT: Anton, did I win my bet or not? I said to my son, There are three or four

guys, I hate to admit this, who are very smart, who ask these bloody probing questions. Then


23/24


weve got to shadow box and fence, and duck and dive. We dont know. Its the honest truth.

Please dont think were incompetent by saying that, but you should not look at a quarter. If

three or four big players decide that their wives, and second, third and fourth wives are notbuying high jewellery this month-, I was with somebody recently who proudly told me that he

buys $50m worth of Cartier every year. I dont know, its not for me to know. Now if he

decides to buy, thats-, or not. So you have high ticket items that jump across lines that can tend

on a short-term basis to distort numbers.

Gary SAAGE: Obviously the huge charge for B&M will not reoccur in the first half. Were

confident thats on the right track, so I think were hopefully finished with all of that.

Johann RUPERT: Sorry, Im responsible for B&M. I asked George Kern, Lets be blunt. I

asked George Kern, I said, What would you do if you had to make the calls? So he came upwith three ideas. The only input I had was there was a friend of mine at home that-, South

Africans and the big Schalk Burger. Always when we sit and weve taken some crayfish out and

we drink a glass of wine, he says, Folks, life is about moments. Thats the only contribution I

made to the campaign. Life is about moments, its hit the sweet spot. The products we saw last

Friday are going to hit the sweet spot. How long its going to take, three years, I dont know.

Im happy that its hit the sweet spot. Dont say this year the points are going to move by two

basis points, I dont know. I genuinely dont know. We did clean it up, so theres a technical-,

the buy-back, yes. Again, I made the call. If we dont buy it back, its going to land up in the

grey market. So I said, Take the stuff back and destroy it. That had an impact.

Gary SAAGE: Then Jon, just, you know, okay, were in-,

Johann RUPERT: Let me. They have to understand why. (Laughter). Im serious, because

otherwise its part of brand equity. If you go and you find watches that retailers cant sell on the

grey market, because we produced the wrong stuff, its not the retailers fault or the consumers

fault. We produce the wrong stuff, and then when it didnt sell, we did deals to get it into the

trade. We now have far greater visibility, because weve got a number of search tools. Im not

going to go into the details, but believe me, Dr Mostert and his team-, we actually are in the

backend of servers of some of the biggest search engine companies in the world. So we actuallyfind the grey marketeers and the contrabbandieri and the fakes. So we can see whether theres

proper sell through or not. You can pick it up.

As much as it hurts me, theres something worse than being copied and being faked. Its not

being copied and not being faked. That means theres no market for it. So its a disaster when

you walk in and you see this launch, this product is faked, but theres something worse. Its

when nobody wants to fake it because its so bad. So we took a bunch of this old stock, we

cleaned the market up. I said to Gary, We could have sold it on a website somewhere, I


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suppose. In the end you're basically not doing your consumers a service that actually are buying

the product. So I guess the good news that Gary can say, we took a charge, we cleaned the

market. Is that-,

Gary SAAGE: Thats accurate. Then Jon, I think, sales, youve heard us talk about sales.

Currencies are an issue at the moment. If you have a view on that, I think you have to take a

view. On the communication side, we tend to look at that on an annual basis. We think 10.5 for

this year.

Johann RUPERT: You folks are very influential. Cant you get a bit of quantitative easing

here in Switzerland? Cant you get the Swiss Franc a little bit exposed to this concept of

quantitative easing? If you work out just the Swiss (inaudible) and the effects.

Gary SAAGE: Okay, thank you everyone for coming.

Johann RUPERT: Thanks a lot.

Gary SAAGE: Appreciate it.

*** End of presentation and Q&A session ***

transcript 19 may

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