Richemont, the Swiss luxury goods group, announces its results for the year
ended 31 March 2005
-%uF020The recovery in sales seen in the first half of the year continued into the second half year, with sales
for the twelve-month period increasing by 10 per cent to 3 717 million euros.
-%uF020Operating profit from Richemont's luxury goods businesses was 71 per cent above the prior year level at 505 million euros. Higher sales resulted in a significantly higher gross margin contribution, whilst operating expenses grew by only 5 per cent.
-%uF020Free cash flow from operations was 280 million euros for the year. Net cash at 31 March 2005 amounted to 617 million euros.
-%uF020In addition to the 25 per cent increase in the level of ordinary dividend to 0.50 euros per unit, a special dividend of 0.50 euros per unit will also be paid.
-%uF020Richemont's share of the net profit of British American Tobacco, before goodwill amortisation and exceptional items, grew by 11 per cent to 468 million euros. This was despite the Group's reduced effective interest in BAT during the year.
-%uF020Richemont's net profit for the year, before exceptional items and goodwill amortisation in respect of the investment in BAT, amounted to 881 million euros, an increase of 33 per cent. After taking into account goodwill amortisation and exceptional items, net profit for the year on a reported basis in accordance with Swiss generally accepted accounting principles increased to 985 million euros from 320 million euros in the prior year.
Executive Chairman's and Group Chief Executive Officer's Review 3
Business Review 7
Extracts from the audited consolidated financial statements 21
Consolidated income statement 22
Consolidated balance sheet 23
Consolidated cash flow statement 24
Consolidated statement of changes in equity 25
1. Transition to International Financial Reporting Standards 31
2. Exchange rates used in the preparation of this document 32
3. Statutory information 32
This document contains forward-looking statements as that term is defined in the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from the forward-looking statements as a result of a number of risks and uncertainties, many of which are outside the Group's control. Richemont does not undertake to update, nor does it have any obligation to provide updates or to revise, any forward-looking statements.
Executive Chairman's and Group Chief Executive Officer's review
We are happy to report strong financial results for the financial year ended 31 March 2005. After the difficulties that the luxury goods industry has faced in recent years, it is heartening to see such a strong recovery in demand and the very positive impact that this has had on the Group's profitability.
The higher sales and improved gross margin, linked to an overall increase of 5 per cent in net operating expenses for the year, have resulted in an improvement of some 209 million eurosin terms of operating profit, which amounted to 505 million euros for the year. This also reflects the great emphasis that we have continued to place on containing costs, particularly in terms of support services in the regions and at the centre.
Profit after tax increased to 415 million euros, excluding exceptional items, and the contribution from the Group's investment in British American Tobacco increased by 11 per cent to 468 million euros, despite the Group's lower effective interest in the company during the year. Overall, net profit of the Group, on an adjusted basis excluding goodwill amortisation in respect of the investment in British American Tobacco and exceptional items, increased by 33 per cent to 881 million euros.
Richemont's operating companies have worked hard to achieve these results and we thank our colleagues throughout the organisation for the contribution that they have all made to this success.
Richemont's luxury goods businesses
Sales, at 3 717 million euros, are the second highest in the Group's history and operating profit at 505 euros million – whilst not quite at the record levels achieved in 2000 and 2001 – represents a significant recovery from the results seen in the last two years.
Richemont Maisons have enjoyed good growth across all geographic regions and all of our business segments have reported higher sales.
The %u2018Jewellery Maisons', Cartier and Van Cleef & Arpels, saw their combined turnover increasing by 8 per cent to 1 956 million euros. Cartier has performed strongly in all markets with double-digit growth in underlying sales in all regions, with the exception of Japan. New watch models such as the Santos 100, launched in 2004, and jewellery ranges such as the Panthère have all contributed significantly to the strong performance. Cartier remains the acknowledged global leader in its market.
Although small in comparison to Cartier, Van Cleef & Arpels has also posted good growth during the year.
Having established a product range that embodies the values and heritage of the Maison, our goal now is to continue to gradually expand its global distribution.
This was an excellent year for Richemont's watchmakers. The majority were able to post double digit increases in sales and demand was strong in all regions. Particularly strong growth was seen in the Asia-Pacific region and in the Americas. Notably, IWC has benefited from its roll-out into new markets, linked to the introduction of exciting new models such as the Aquatimer. Jaeger-LeCoultre too has continued its global roll-out and is benefiting from the increased awareness of its character as a true %u2018Manufacture' in terms of high watchmaking skills.
Montblanc continues to grow its global business, benefiting from the broadening of its product ranges and the extension of its network of boutiques. Although it remains focused as the world's leading luxury writing instrument producer, Montblanc is also seeing strong demand for its watch and leather goods ranges. The Timewalker range of chronographs has performed extremely well and has helped the brand to further strengthen its position in terms of distribution through high-end watch and jewellery retailers.
We are pleased to report that Alfred Dunhill has reduced its level of operating losses. Sales increased by 5 per cent, with strong growth in Asia-Pacific, including China, and losses were reduced by 20 per cent.
However, this is still an unsatisfactory situation. The focus for the year ahead will be to significantly improve operating efficiency within the Maison, whilst continuing to expand the sales base, particularly in China where the brand already enjoys a very strong position.
Lancel has had a testing year. With its business largely centred on the French domestic market, it has suffered from the depressed local economy and the continued low level of tourism. Sales were broadly in line with the prior year. We expect to see an improved performance in the current financial year, although much will depend on consumer confidence and levels of demand in France.
The year saw the further development of Richemont's retail distribution network. The Group opened 25 new stores, including 13 for Montblanc, and continued the programme of remodelling and refurbishing of existing stores. Cartier opened its 7th store in mainland China at Bund 18 in Shanghai in December 2004 and now has 9 boutiques in the country. The totally renovated Vacheron Constantin boutique at the home of the Maison in the heart of Geneva was reopened in December 2004, in time for the Maison's 250th anniversary year in 2005. Van Cleef & Arpels also opened a flagship boutique in London's Bond Street, whilst September saw the opening of the refurbished Lancel store at its home on the Place de l'Opéra in Paris.
British American Tobacco plc (%u2018BAT')
The past year saw the disposal of the final tranche of BAT preference shares last June, in accordance with the terms of the 1999 merger agreement, and a disposal by the Group to Remgro Limited, our joint venture partners in the investment in BAT, of a 0.6 per cent interest in the ordinary shareholding.
As a result of these factors, mitigated to some extent by BAT's own share buy-back programme, Richemont's effective interest in BAT declined from 19.6 per cent at 31 March 2004 to 18.3 per cent at the end of the current financial year. Nonetheless, the investment in BAT continues to represent over 40 per cent of the Group's balance sheet total and to account for more than 50 per cent of the Group's net income on an adjusted basis, before goodwill amortisation and exceptional items.
BAT contributed 468 million euros to Group profit for the year, an increase of 11 per cent over the prior year, despite the lower effective interest.
Richemont's luxury goods businesses generated a cash flow from operations this year of 481 million euros before net acquisitions of fixed assets and taxation payments. Whilst this is lower than the prior year, the difference is largely due to an increase in raw materials inventories, including gemstones and precious metals. In addition to the cash inflow of 1 007 million euros in respect of the BAT preference shares and the sale of the 0.6 per cent interest in BAT ordinary shares, the Group received dividends of 267 million euros from BAT. Taking into account the Group's own dividend payment, taxation and other investing and financing activities, cash resources increased by a net 1 147 million euros during the year. The Group's net indebtedness has been paid down during the year and at 31 March 2005 the Group had cash on hand, net of structural long-term borrowings, of 617 million euros.
We believe that this cash generative capacity and the resultant sound financial position is one of Richemont's principal strengths. Whilst we are very confident of the prospects for the luxury goods industry, we acknowledge that the business is susceptible to the impact of economic forces and external shocks, together with the swings in consumer confidence that these can cause. The Group's financial strength is, therefore, an insurance against whatever the future may hold.
Recognising the significant upturn in Richemont's luxury goods businesses, the continuing strength of its tobacco interests and the elimination of the Group's debt, the Board has decided to recommend the payment of a total dividend of 1.00 euro per unit this year. This comprises the regular dividend of 0.50 euros per unit, an increase of 25 per cent over the prior year, together with a special dividend, funded from the proceeds of the liquidation of the BAT preference shareholding, of 0.50 euros per unit.
The regular dividend will be paid jointly by Richemont SA, Luxembourg, which will pay 0.46 eurosper unit, and Compagnie Financière Richemont SA – which will pay 0.04 euros per unit. The dividend payable by Compagnie Financière Richemont SA will be subject to Swiss withholding tax of 35 per cent. The special dividend will be payable by Richemont SA, Luxembourg. No withholding tax will be deductible in respect of the dividends payable by Richemont SA, Luxembourg.
Sale of Hackett
The Group has announced the sale of its investment in Hackett, one of the Group's smaller businesses.
Although a well-established part of the Group and a growing business, Hackett is focused on the highly competitive men's tailoring business. This is an area where there are only limited synergies within the Group and, after a detailed review of the options open to Richemont, we felt that a sale to an industry specialist, which could take Hackett to the next stage in its development, was the right thing to do. The transaction will have no material impact on Richemont's balance sheet, cash flow or results for the year ending 31 March 2006.
American Depository Receipt Programme
In 1995, Richemont launched a sponsored American Depository Receipt (%u2018ADR') programme in conjunction with Bank of New York. The ADR's were not listed but were traded %u2018over the counter' in the United States. This was seen as a means to allow US investors access to Richemont and mirrored the South African Depository Receipt programme launched when Richemont was founded in 1988.
Over the years, Richemont has attracted a significant US shareholder base. However, this has largely comprised institutional investors, who have preferred to invest in Richemont %u2018A' units directly, through the Group's principal listing on the SWX Swiss Exchange. As such, the number of ADR's in circulation remains only a small percentage of the %u2018A' unit capital and, after an evaluation of the alternatives, the Board has decided that the ADR programme should be withdrawn. We will work together with Bank of New York to ensure that ADR holdings are converted into %u2018A' units or sold, in accordance with ADR-holders' wishes.
Bank of New York will contact holders with further information in due course.
No changes are planned to the South African Depository Receipt programme, which today accounts for some 30 per cent of the %u2018A' units in issue.
Current trading and outlook for the year
The pattern of steady sales growth seen in the first quarter of calendar 2005 has continued into the months of April and May, when sales for the Group overall have increased by 15 per cent at actual exchange rates.
The Group's watch businesses, in particular, have continued to show strong levels of growth in the first two months of the current financial year.
The Asia-Pacific and Americas regions have been the principal drivers of growth, although Europe has also produced double-digit growth during the period. Notwithstanding the relatively strong euro, we are optimistic that, barring unforeseen developments, the year ahead will be a good one for the Group.
Whilst we cannot control the external market environment, we are hopeful that the positive sales trends seen during the year gone by and in recent months will continue. Equally, the steps we have taken and are still implementing to optimise the Group's operations and improve effectiveness will continue to benefit the Group. We will do our utmost to ensure that the central and regional service functions are optimally structured to service the needs of the Maisons and that they, in turn, are well positioned in terms of creative design, new products and resources to allow Richemont to grow and prosper in the current financial year and in the years ahead.