| Thu 5 Jun 2003, 9:32 | | Richemont Securities AG - Results For The Year End |
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Richemont Securities AG
(Incorporated in Zug, Switzerland)
Share code: RCH
ISIN: CH0001609723
RESULTS FOR THE YEAR ENDED 31 MARCH 2003
Richemont, the Swiss luxury goods group, announces its results for the year to
31 March 2003
March 2003 March 2002
Sales euro 3 651 m euro 3 860 m -5%
Operating profit euro 259 m euro 482 m - 46%
Net profit
- parent and subsidiaries euro 156 m euro 331 m - 53%
- share of associated company euro 486 m euro 495 m - 2%
- the Group euro 642 m euro 826 m - 22%
Earnings per unit - fully euro 1.141 euro 1.463 - 22%
diluted basis
Dividend per unit euro 0.32 euro 0.32
In accordance with the style of presentation used in previous years and for ease
of comparability, these results are presented on an adjusted basis, excluding
the effects of goodwill amortisation and exceptional items from both years.
* Sales in constant currency terms were in line with the previous year,
reflecting the continuing difficult trading environment. Largely as a result of
the strength of the euro during the year, however, sales at actual exchange
rates declined by 5 per cent.
* Operating profit declined by 46 per cent, after allowing for restructuring and
impairment charges of euro 91 million. Excluding restructuring charges from both
years" results, operating profit declined by 32 per cent.
* Cash flow from operating activities increased significantly from euro 286
million to euro 556 million.
* The Group"s share of the results of British American Tobacco amounted to euro
486 million.
* The Group has changed its accounting policy in respect of goodwill. As a
result, goodwill amounting to euro 3.4 billion in respect of subsidiary
companies has been offset against reserves. The only goodwill remaining on the
balance sheet relates to the Group"s equity accounted interest in British
American Tobacco.
* Net profit of the Group on a reported basis, including the impact of
exceptional items and goodwill amortisation in respect of the investment in
British American Tobacco, was euro 728 million (2002: euro 608 million).
* The proposed dividend of euro 0.32 per unit is unchanged from the prior year"s
level.
Certain comparative figures in this document have been restated to reflect the
change in accounting policy in respect of goodwill, as detailed in Appendix 2.
Executive Chairman"s Review
Commenting on the results, Mr. Johann Rupert, Executive Chairman, said: Over the
last three years I have repeatedly cautioned against over optimism. Fears about
currency fluctuations, deflation and a probable drop in the overall equity
markets were expressed. Now it is happening.
Trading performance
This has proved to be a very difficult year for Richemont. The fall-out from the
heady days seen in the run up to 2000 has been long and severe. Richemont has
invested heavily in recent years in manufacturing capacity and in its retail and
wholesale distribution infrastructure. These factors, combined with the
significant tailing off of growth in demand, have resulted in pressure on both
the gross margin and operating results.
Any recovery in demand over the past year would inevitably have been dependent
upon an improvement in economic conditions. Rather, we have seen a year in which
the Dow Jones fell by a further 23 per cent, compounding the decline of 11 per
cent already seen from its peak in January 2000, whilst the MSCI World Index
fell by 40 per cent in euro terms over the course of the year.
Richemont"s sales during the financial year have declined by some 5 per cent
overall and operating profit has slumped to euro 259 million, albeit after a
number of specific provisions for the restructuring of the Group"s activities in
certain areas. Excluding provisions of euro 91 million in respect of the
restructuring of specific brands and the discontinuation of some activities,
operating profit would have been euro 350 million. These results are not
heartening.
The Group"s jewellery maisons - Cartier and Van Cleef & Arpels - showed a
decline in turnover of some euro 185 million or 8 per cent in the year under
review. However, a large part of this decline, some 5 per cent, was attributable
to the strengthening of the euro against both the yen and the dollar during the
period. The decline in tourism and the poor economic climate, particularly in
Europe, have had a significant impact on these businesses, notwithstanding the
fact that sales of products at the top end of the market have held up well.
Sales of the Group"s specialist watchmaking companies for the year as a whole
were in line with the prior year"s levels. Panerai, one of our smaller brands,
continues to show very strong growth, justifying the faith that we have put in
it, whilst the brands acquired in December 2000, Jaeger-LeCoultre, IWC and A.
Lange & Sohne, have now been fully integrated into the Group"s distribution
structures and virtually all of the third-party distributorships terminated. All
three companies showed growth in sales during the year.
Our writing instrument businesses, Montblanc and Montegrappa, saw sales grow by
some 4 per cent during the year. This reflected the further development of
Montblanc"s own retail operations as well as the benefit derived from new
product launches and the further expansion of the maison"s activities in terms
of leather goods, watches and accessories.
Alfred Dunhill has had a difficult year, with sales some 7 percent below the
prior year"s level. Although the brand is currently the Group"s largest business
in Mainland China, its business in certain other markets, most notably the
United States, has been in decline in recent years. The Alfred Dunhill name is
widely recognised as one of the leading luxury goods brands for men and Alfred
Dunhill"s management are committed to growing the business in those product
areas and geographic regions where it already has strong brand recognition. In
the United States, the decision has been taken to focus on the wholesale
business, working with strong partners. As previously announced, the flagship
store on Fifth Avenue in New York will continue to showcase Alfred Dunhill
products but the other stores in the United States will be closed.
It has been a year of transition at Lancel, with steps being taken to close down
loss-making boutiques in both the United States and Belgium. Attention has
focused on improving the product offering and reinforcing Lancel"s traditional
French business. Further overseas expansion has, for the time being, been
postponed and the company"s operating structures streamlined. Reflecting this,
the brand has reduced its overall headcount by more than 100 during the year.
For Alfred Dunhill and Lancel, the provisions for store closures and other
restructuring measures of some euro 52 million have significantly increased the
level of operating losses. The combined losses of both brands for the year under
review amounted to some euro 107 million, a substantial cost to the Group.
In addition to the action already taken in respect of Alfred Dunhill and Lancel,
the Group must take additional steps to optimise its manufacturing capacity as a
consequence of changing market conditions. Achieving this will involve
concentrating manufacturing at fewer sites and I regret to say that a number of
redundancies will be unavoidable. In accordance with Richemont"s manufacturing
philosophy, this programme will be achieved without compromising the Group"s
principles of verticalisation and brand autonomy.
In respect of those measures that have already been taken to restructure the
Group"s manufacturing operations, together with the termination of certain lease
commitments, we have identified the need for restructuring and impairment
provisions of some euro 39 million. These provisions have been taken into
account in arriving at the results for the year ended 31 March 2003.
Additionally, the Group has now decided to cease watch assembly at the Cartier
factory at Villeret in the canton of Bern. The assembly activity will be
transferred to the Cartier factory at La Chaux de Fonds and some staff will be
relocated there. This decision, together with other measures to be communicated
today to the staff involved, will result in the loss of some 200 positions in
Geneva, La Chaux de Fonds and Villeret. This represents some 5 per cent of the
Group"s workforce employed in the watch-manufacturing sector in Switzerland. We
are in discussion with the trade unions concerned to finalise a social plan for
the employees involved. Given the timing of the decision and in accordance with
International Financial Reporting Standards, the costs of these restructuring
measures will only be reflected in the Group"s results for the six-month period
ending 30 September 2003.
British American Tobacco
During the year, steps were taken to lock-in the value of the Group"s preference
shareholding in British American Tobacco through the issue of call warrants
secured over the shares. In consequence, Richemont now accounts for the BAT
preference shares as a long-term receivable and equity accounts a smaller
percentage interest of 18.6 per cent (2002: 21.0 per cent) in the ordinary
equity of BAT. The Group"s share of BAT"s adjusted results for the current year
are marginally lower at euro 486 million (2002: euro 495 million), reflecting
the lower equity interest and the impact of the strength of the euro against
sterling during the year. This significant contribution to profit from the
interest in BAT is a timely reminder of the benefit of the investment in this
relatively stable business. In cash terms, the Group received dividend income of
euro 258 million from BAT during the year.
Cash flow and investments
The Group"s working capital has been brought under control and cash flow from
operating activities increased from euro 286 million to euro 556 million. This
improvement has resulted in a significant reduction in the Group"s net debt to
euro 1 177 million by the end of the year. Indeed, Richemont"s overall net debt
position is minimal when the proceeds of the BAT preference shares of some euro
828 million receivable in June 2004 are taken into account.
I am pleased to report that Richemont has been able to acquire the remaining 20
per cent of Van Cleef & Arpels that it did not previously own, bringing that
company into full ownership by the Group, as well as the final 10 per cent of A.
Lange & Sohne that was previously held by members of the Lange family. I am
delighted to say that, in both cases, members of the families will continue to
be closely associated with the businesses in the future.
Accounting for goodwill
We have adopted a revised accounting policy in this year"s financial statements
in terms of goodwill, which merits comment. All goodwill in respect of the
Group"s luxury goods subsidiary companies has been set off against unitholders"
equity in the consolidated balance sheet. After offsetting the aggregate
goodwill of euro 3.4 billion in respect of the luxury businesses, unitholders"
equity still amounts to some euro 5 billion. Goodwill in respect of the Group"s
listed associated company, British American Tobacco, will continue to be carried
in the balance sheet as an element of the carrying value of the investment.
Although the elimination of goodwill in this way is not permitted under
International Financial Reporting Standards, it is nonetheless an approach that
we consider to be fully justified.
The goodwill reflected in the balance sheet at the end of the previous financial
year in no way represented the value of the Group"s trademarks, brands or other
intellectual property. Rather it was an aggregation of goodwill arising on
various acquisitions since 1993, when Vendome Luxury Group was formed, net of
amortisation booked over the period. Although it reflected goodwill arising on
the buy-out of the minority shareholders in Vendome in 1998, the figure did not
include any specific goodwill in respect of brands such as Cartier and
Montblanc. The acquisition of Les Manufactures Horlogeres in December 2000 gave
rise to the single largest element of the total goodwill carried on the balance
sheet, which also included goodwill arising on the acquisition of Van Cleef &
Arpels and Lancel.
Given the current trading environment, we must recognise that the goodwill
carried in the Group"s balance sheet has been impaired. However the integration
of the LMH businesses into Richemont"s watchmaking group is such that it would
become impossible to quantify what, if any, amount should be expensed. Equally,
in determining the profitability of Richemont"s individual business areas, any
allocation of goodwill and the related annual amortisation charge would result
in arbitrary results, given that there is no specific goodwill to amortise in
respect of Cartier and Montblanc.
The Board has therefore decided that, in order to be able to present a segmental
analysis of results, the most straightforward approach was to eliminate the
goodwill in respect of all of the luxury goods businesses. This also avoids the
necessity, in future, of having to engage in an essentially useless and costly
exercise at each reporting date of attempting to evaluate the carrying value of
goodwill on a business-by-business basis. That could lead to short-term thinking
in an attempt to support an arbitrary goodwill figure rather than the creation
of long-term brand equity.
Current trading and outlook for the year
Trading in the first two months of the current year has been poor, with
aggregate sales in constant currency terms down by 19 per cent for the period.
This reflected the impact of the war in Iraq and the more dramatic effects of
the SARS epidemic. Taking into account the adverse currency impact of some 8 per
cent as a result of the further rise of the euro against both the dollar and the
yen, sales at actual exchange rates were some 27 per cent below the prior year"s
level. Consumer confidence is very weak and, combined with a significant
reduction in international travel as a consequence of the war and concerns about
the spread of SARS, most of our maisons have suffered a downturn in demand
compared to the same two-month period last year. We can hope that the worst
consequences of these external factors are behind us but I find it very hard to
predict what the outlook for the remainder of the year will be.
Clearly, Richemont must adapt to the environment in which we live. It is
unlikely that we will see a rapid turnaround in the economic climate and the
challenge for this year is to reduce the Group"s cost base both within each of
the maisons and, equally, in our central and regional structures. These
structures were established at a time when growth expectations far exceeded what
we are currently experiencing. Customer-oriented areas, for example after-sales
service, are of course key to the long-term growth of our business and will not
be compromised. We must, however, cut costs and reduce bureaucracy and overheads
in the Group as a whole.
In addition to the steps that have already been taken, I will be encouraging my
colleagues across the Group to implement further cost reduction programmes
during the coming year. Cost cutting alone, however, will not build the
business. Rather, we must focus on the Group"s core strengths in terms of
authenticity, creativity, design and quality, as these will be the true drivers
of future growth.
In summary, my fears about the effects that currency movements, deflation and
dropping equity values have had on the demand for luxury goods are being
realised. The combination of global economic uncertainty and geopolitical
instability is unprecedented, and could last for some time.
However, it is disingenuous to blame all our woes on external factors, and I
will not do so. The "good years" led to contentment, and, when contentment sets
in, progress ceases. Therefore, to my embarrassment, Richemont was not as
prepared as it should have been for these changed circumstances. We were too
slow. We are therefore addressing a number of key issues.
Richemont has remarkable "maisons", a strong balance sheet and a good cash flow.
We will endeavour to be a much stronger and leaner company when the recession
ends.
Business Review
Sales and operating profit
March March
2003 2002
euro m euro m
Sales 3 651 3 860 -5%
Cost of sales (1 367) (1 382)
Gross margin 2 284 2 478 -8%
Net operating expenses (1 934) (1 966) -2%
Operating profit before restructuring and impairment 350 512 -
charges 32%
Restructuring and impairment charges (91) (30)
Operating profit 259 482 -
46%
The Group"s sales declined by 5 per cent to euro 3 651 million. This reflects
underlying sales in line with the prior year, the decline being wholly
attributable to the impact of the strengthening of the euro, in particular
against the dollar and the yen.
The gross margin percentage declined from 64.2 per cent to 62.6 per cent,
reflecting the higher costs of production, as capacity utilisation fell below
optimum levels, together with the adverse currency impact, given the
predominantly euro and Swiss franc cost base of the Group.
Notwithstanding a reduction in net operating expenses of 2 per cent, operating
profit before restructuring and impairment charges declined by 32 per cent to
euro 350 million for the year under review.
During the year, Alfred Dunhill reappraised its sales strategy in the United
States and the decision has been taken to focus on the wholesale business in
that market, working with strong local partners. The Fifth Avenue store in New
York will continue to act as a flagship for the brand in North America but all
other stores in the United States will be closed. Lancel also took steps during
the year to close down loss-making activities within the United States and
Belgium and to streamline its operations and eliminate overheads. Provisions for
the restructuring of these two businesses" activities amounting to euro 52
million have been made during the year under review. Further provisions of euro
39 million have been made in respect of measures to restructure the Group"s
manufacturing operations and the termination of certain lease commitments.
Analysis of sales and profitability by business area
The following table analyses the sales and operating contribution of the Group"s
four main areas of activity.
March 2003 March 2002
euro m euro m
Sales
Jewellery maisons 1 994 2 179 -8%
Specialist watchmakers 808 806
Writing instrument manufacturers 394 380 +4%
Textile, leather and other businesses 455 495 -8%
3 651 3 860 -5%
Operating result before restructuring
and impairment charges
Jewellery maisons 439 551 -20%
Specialist watchmakers 82 127 -35%
Writing instrument manufacturers 68 71 -4%
Textile, leather and other businesses (71) (67) +6%
518 682 -24%
Unallocated costs (168) (170) -1%
Operating profit before restructuring 350 512 -32%
and impairment charges
This analysis presents the results of the Group"s operations in four business
segments. In each case, those maisons which are principally engaged in a
specific business area have been grouped together.
Accordingly, those businesses which have a heritage as producers of high
jewellery and jewellery watches - Cartier and Van Cleef & Arpels - are grouped
together as jewellery maisons. All their product ranges, including watches,
writing instruments and leather goods, are reflected in the sales and operating
results for that segment.
In terms of the jewellery maisons, sales declined by 8 per cent, mirroring the
decrease in sales at Cartier, the Group"s largest business. This was largely due
to the weakness of the dollar and yen against the euro during the year under
review. Whereas Van Cleef & Arpels" sales for the year grew, in part as a
consequence of the acquisition of its Japanese distributor. During the year
Cartier launched relatively few new jewellery products, although its Le Baiser
du Dragon jewellery collection has been well received. Cartier watch sales
include the launch of Divan and a full year effect of the launch of the Roadster
at the end of the previous financial year. Generally, sales of precious metal
and jewellery watches were more resilient than steel & gold ranges.
The Group"s specialist watchmakers, Jaeger-LeCoultre, Piaget, Baume & Mercier,
IWC, Vacheron Constantin, A. Lange & Sohne and Officine Panerai have, equally,
been grouped together for the purposes of this analysis. This business segment
reported sales in line with the prior year. Sales for the year benefited from
the further integration of Jaeger-LeCoultre, IWC and A. Lange & Sohne, where
virtually all of the third-party distributorships have now been terminated and
wholesale distribution brought in-house.
Richemont"s writing instrument manufacturers, represented by Montblanc and
Montegrappa, reported growth of 4 per cent in sales for the year. This was
largely attributable to the further expansion of Montblanc"s retail distribution
network combined with the success of its leather goods and watch ranges, which
now account for 25 per cent of the brand"s sales.
Richemont"s other businesses, which include Alfred Dunhill, Lancel, Chloe and
Hackett, are grouped under the heading of textile, leather and other businesses.
Sales in this business area declined by 8 per cent. Although Chloe and Hackett
showed good growth in sales during the year, their performances were
overshadowed by losses at Alfred Dunhill and Lancel. Both brands suffered from
the very difficult trading environment seen during the year.
The operating result before unallocated costs and restructuring charges totalled
euro 518 million, a decline of 24 per cent compared to the prior year.
Unallocated costs represent the costs of general management, marketing support
and related central marketing initiatives as well as all central services.
Central services include, for example, the IT, legal, intellectual property and
finance functions of the Group.
Sales by product line
The following table analyses sales by product line rather than by business area,
as set out above. Accordingly, the figure in respect of watch sales includes the
figures reported not only by the Group"s specialist watchmaking businesses but
also the two jewellery maisons - Cartier and Van Cleef & Arpels - as well as
Alfred Dunhill and Montblanc. Similarly, sales of writing instruments in the
table below reflects sales of those product lines by Cartier and Alfred Dunhill
as well as Montblanc and Montegrappa.
March 2003 March 2002
euro m euro m
Jewellery 815 860 -5%
Watches 1 705 1 794 -5%
Leather goods 270 303 -11%
Writing instruments 277 285 -3%
Clothing and other 584 618 -6%
3 651 3 860 -5%
Sales by region
March 2003 March 2002
euro m euro m
Europe 1 558 1 710 -9%
Asia 1 400 1 454 -4%
Japan 705 744 -5%
Asia Pacific 695 710 -2%
Americas 693 696
3 651 3 860 -5%
Europe, the Group"s most important geographic region showed a decline in sales
of 9 per cent for the year, reflecting the depressed economic environment and a
marked reduction in tourism. Sales in France and Italy declined by 5 per cent
and 6 per cent respectively, whilst the German market suffered a decline of 16
per cent.
Sales in Japan increased by 4 per cent in constant currency terms but were 5 per
cent lower on conversion into euros at actual exchange rates. Reported sales in
Asia Pacific declined by 2 per cent, whilst sales in Hong Kong were 5 per cent
higher in constant currency terms but 7 per cent lower at actual rates.
The Americas region showed good underlying sales growth of 12 per cent in
constant currency terms. In euro terms, sales were essentially flat.
Sales by distribution channel
March 2003 March 2002
euro m euro m
Retail sales 1 496 1 590 -6%
Wholesale sales 2 155 2 270 -5%
3 651 3 860 -5%
Retail sales remained constant at 41 per cent of total sales for the year, the 6
per cent reduction mirroring the overall percentage decline in sales.
The Group"s network of owned stores grew by 18 during the year to 538 outlets.
Van Cleef & Arpels opened 5 new stores during the year. Montblanc opened 7 new
boutiques and Alfred Dunhill"s owned network grew by 2 stores, after allowing
for the closure of its stores in the United States. Lancel, in contrast, closed
16 of its own stores, mainly in the United States and Belgium.
Montblanc opened 5 new boutiques in conjunction with franchise partners and
Lancel"s partners opened 22 new boutiques worldwide. Overall the number of
boutiques operated together with franchise partners increased to 363 stores by
year-end.
Consolidated profit and loss account
The summary profit and loss account as well as the earnings per unit information
set out below are presented on an adjusted basis, excluding the effects of
goodwill amortisation and exceptional items from the results of both years. A
reconciliation of the profit and loss account on this basis to the result on a
reported basis is presented as an appendix to this announcement.
March 2003 March 2002
euro m euro m
Operating profit 259 482
Net investment expense (56) (46)
Profit before taxation 203 436
Taxation (50) (107)
Profit after taxation 153 329
Minority interests 3 2
Net profit of the parent and its 156 331
subsidiaries
Share of net profit of associated company 486 495
Net profit of the Group 642 826
Earnings per unit - basic euro1.479
euro1.155
Earnings per unit - fully diluted euro1.141 euro1.463
Net investment expense includes provisions of some euro 20 million to write down
unlisted investments to the prevailing valuation as at 31 March 2003. Following
the reclassification of the BAT preference shares, as detailed below, income of
euro 9 million has been included within the net investment expense caption in
terms of the adjustment to the present value of the shares.
Associated undertakings and exceptional items
R&R Holdings SA, which is owned as to 66.7 per cent by Richemont and 33.3 per
cent by Remgro Limited, is the holding vehicle for both companies" investments
in British American Tobacco p.l.c. In January 2003, R&R Holdings SA issued
secured call warrants exercisable into ordinary shares of BAT in 2004. This
transaction effectively locked in the value of the convertible redeemable
preference shares which the Group has in BAT and which it was obliged to either
sell or tender for redemption in June 2004 at a redemption price of GBP6.75 per
share.
As a consequence of the warrant issue and in accordance with International
Financial Reporting Standards, the preference shares now fall to be treated as a
debt instrument in the consolidated accounts of the Group and may no longer be
equity accounted. For the nine months ended 31 December 2002, Richemont"s
effective interest in BAT, reflecting the holding of both ordinary and
preference shares, was 21.0 per cent. For the three-month period ended 31 March
2003, Richemont has accounted for its 18.6 per cent effective interest in BAT
ordinary shares under the equity method and, in terms of the preference shares,
has recorded the movement in the present value of the shares as investment
income.
Linked to the realisation of the value of the preference shares and their
reclassification, Richemont recorded an exceptional gain during the year under
review, which amounted to euro 301 million.
The exceptional gain attributable to Richemont as a consequence of the issue of
the warrants has been reduced by an exceptional provision of euro 29 million in
respect of the shares which the Group held in Hanover Direct Inc, a former
associated company. Richemont has sold its entire remaining interest in Hanover
Direct to an independent investor group in May 2003 for US$40 million. The
carrying value of the preference shares has accordingly been written down to
this figure in the financial statements as at 31 March 2003.
Taking both the exceptional gain on the BAT preference shares and the write down
in the value of the Hanover Direct preference shares into account, the Group has
recorded a net exceptional gain of euro 272 million in its consolidated profit
and loss account on a reported basis.
British American Tobacco
For the year under review the Group"s share of the results of British American
Tobacco decreased by 2 per cent to euro 486 million.
Whereas the results for the comparative period reflected the Group"s 21.0 per
cent share of British American Tobacco for the full year, in the current year
the results include a 21.0 per cent share for the nine months to 31 December
2002 and three months at 18.6 per cent, following the issuance of warrants by
Richemont"s subsidiary R&R Holdings SA.
British American Tobacco had shipments of 777 billion cigarettes in 2002,
representing a global market share of 14.6 per cent. It has a robust position in
all regions worldwide which, together with the broad based portfolio of
international, regional and local brands, provides the platform for achieving
global leadership of the tobacco business. Growth in profit is achieved by a
continuous focus on increasing its share in the key growth consumer segments of
international and premium priced brands.
For British American Tobacco the most encouraging aspect of the results for the
year was the impressive growth in their global drive brands. Dunhill, Kent,
Lucky Strike and Pall Mall grew by 8 per cent between them. Dunhill in
particular performed well with sales exceeding 30 billion cigarettes for the
first time. Although Lucky Strike declined in 2002 as a result of the planned
reduction in duty free sales, the brand should return to growth in 2003 whilst
Dunhill, Kent and Pall Mall should maintain their progress.
Within British American Tobacco"s regions, America-Pacific"s operating profit
was in line with the prior year, reflecting the net effect of a good performance
from all its regional markets offset by adverse exchange rate movements. Asia-
Pacific, along with the Africa and Middle East regions suffered from the planned
reduction in duty-free sales with profits down GBP46 million and GBP50 million,
respectively. Latin America performed well given the exceptionally difficult
economic circumstances and political uncertainty in many countries during the
year with profits down GBP35 million, reflecting lower volumes and a significant
weakening of the regions major currencies against sterling. Europe"s operating
profit was GBP42 million higher as a result of solid market performances in
Russia, Ukraine, Poland, Hungary, France and Switzerland. This was despite a
significant loss of profit from the dissolution of the U.K. partnership, a price
war in Romania and excise tax increases in Germany.
In the year to 31 December 2002, British American Tobacco"s adjusted earnings
per share, arguably the best measure of the company"s underlying performance,
grew by 8 per cent as a result of lower net interest expense, an improved tax
position and lower minority charges. These results were achieved despite a 3 per
cent decline in operating profit caused by the impact of weak currencies and the
planned decline in duty-free sales, but at comparable rates of exchange
operating profits were up by 3 per cent.
Richemont has received dividends totalling euro 258 million from British
American Tobacco in the year under review.
Consolidated cash flow statement
March 2003 March 2002
euro m euro m
Operating profit 259 482
Depreciation and other non-cash items 228 179
Decrease/(increase) in working capital 69 (375)
Net cash inflow from operating activities 556 286
Dividends received from BAT 258 228
Returns on investments and servicing of (37) (54)
finance
Taxation paid (125) (180)
Net acquisitions of fixed assets (180) (308)
Proceeds from the sale of BAT call 31 -
warrants
Proceeds from disposal of other long-term 16 14
assets
Acquisition of subsidiary undertakings (106) (151)
and minority interests
Other acquisitions and investments (30) (30)
Net cash inflow/(outflow) before 383 (195)
financing activities
Buy-back of Richemont units (31) (52)
Dividends paid to unitholders (178) (168)
Increase/(decrease) in long-term (303) 54
borrowings
Other financing activities 14 19
Exchange rate effects 94 (6)
Decrease in cash, cash equivalents and (21) (348)
short-term borrowings
Cash and cash equivalents at beginning of (723) (375)
year
Cash and cash equivalents at end of year (744) (723)
Working capital decreased by euro 69 million during the year under review. This
reflected management"s commitment to improve cash flow, notwithstanding the very
difficult trading environment. As a result, despite a significant decline in
operating profit, cash inflow from operating activities increased by euro 270
million to euro 556 million.
Dividends received from BAT comprise the final dividend in respect of BAT"s
financial year ended 31 December 2001 and the interim dividend in respect of the
2002 financial year.
Net acquisitions of fixed assets include the acquisition of certain intangible
assets, including the purchase of distribution rights in respect of the Russian
market for some euro 20 million. The reduction in fixed asset expenditure
overall reflects the planned slowdown in the programme together with specific
cutbacks in capital expenditure.
The figure in respect of the acquisition of subsidiary undertakings and minority
interests principally comprises the acquisition of the remaining 20 per cent
interest in Van Cleef & Arpels together with the 10 per cent interest in A.
Lange & Sohne previously held by members of the Lange family.
Consolidated balance sheet
31 March 2003 31 March 2002
Restated
euro m euro m
Long-term assets
Property, plant and equipment 801 903
Investment in associated 2 590 3 198
undertaking - BAT
Carrying value excluding goodwill 581 638
Goodwill 2 009 2 560
Other long-term assets 1 165 470
BAT preference shares 810 -
Hanover Direct preference shares 37 64
Other 318 406
4 556 4 571
Net working capital 1 814 1 956
Net operating assets 6 370 6 527
Net borrowings (1 177) (1 456)
Cash, cash equivalents and short- (744) (723)
term borrowings
Long-term borrowings (433) (733)
Other long-term liabilities (195) (176)
4 998 4 895
Equity
Unitholders" funds 4 992 4 845
Minority interests 6 50
4 998 4 895
The Group has changed its accounting policy in respect of goodwill. Previously,
goodwill was recognised as an intangible asset and amortised through the
consolidated profit and loss account on the straight-line basis over its
estimated useful life, up to a maximum of 20 years. The Group has decided to
change this policy and to offset goodwill arising on the acquisition of
subsidiary undertakings against unitholders" funds at the time of acquisition.
Goodwill carried in respect of the Group"s investment in its associated company,
British American Tobacco, has not been affected by this change but is now
presented together with the carrying value of the Group"s share of the net
assets of BAT to arrive at the aggregate value of the investment reflected in
the consolidated balance sheet. Further details of the change in policy and the
effect of the change on the financial statements are presented in Appendix 2 to
this document. The consolidated balance sheet above has been prepared to reflect
the new accounting policy for goodwill in both the year under review and in the
comparative period.
As noted above, the Group has ceased to equity account for its investment in the
preference shares of BAT. The preference shareholding is now classified as a
long-term asset, the valuation being determined by reference to the discounted
present value of the redemption proceeds and the anticipated future dividend
flows in the period to maturity in June 2004.
Changes in unitholders" funds
The table below illustrates the movement in unitholders" funds during the year.
31 March 2003 31 March 2002
Restated
euro m euro m
Unitholders" net profit on an 642 826
adjusted basis
Amortisation of goodwill - (186) (200)
associated undertaking
Exceptional items:
- as reported by the parent and 272 -
subsidiaries
- as reported by associated - (18)
undertaking
Unitholders" net profit on a 728 608
reported basis
Dividends declared and paid (178) (168)
Net movement in respect of reserve (137) (7)
for unit buy-backs
Goodwill set-off against (39) (34)
unitholders" funds
Translation and other adjustments (227) 7
Net increase in unitholders" funds 147 406
Unitholders" funds at the beginning 4 845 4 439
of the year restated
Unitholders" funds at the 4 845 7 731
beginning of the year
Effect of change in accounting - (3 292)
policy
Unitholders" funds at the end of 4 992 4 845
the year
Unitholders" funds increased by euro 147 million during the year from euro 4 845
million to euro 4 992 million, the net profit for the year being offset by the
dividend declared and certain other accounting adjustments.
At the annual meeting of shareholders held in September 2002, a dividend of euro
0.32 per unit was approved, a total of euro 178 million having been paid to
unitholders on 30 September 2002.
The net movement for the year in respect of the reserve for unit buy-backs
amounted to euro 137 million. A total of 1.5 million units were acquired through
the market during the year under review. In addition, the Group consolidated its
three unit-based long-term executive compensation plans into one global stock
option plan. This involved, inter alia, the cancellation of the stock purchase
plan previously introduced for Swiss-resident executives and resulted in the
repurchase by the Group of the units held by those executives.
Proposed dividend
The Board of Directors has proposed a dividend of euro 0.32 per unit. This is
unchanged from the dividend paid in the previous year. The dividend will be
payable on 29 September 2003.
Annual General Meeting
The Annual General Meeting of shareholders of Compagnie Financiere Richemont SA
will be held at 10.00 am in the `Grande Salle" of the Hotel des Bergues, 33 Quai
des Bergues, Geneva on Wednesday, 17 September 2003.
Johann Rupert Jan du Plessis
Executive Chairman Group Finance Director
Compagnie Financiere Richemont SA Geneva, 5 June 2003
Consolidated profit and loss account-on a reported basis:Appendix 1
Notes March 2003 March 2002
Restated
euro m euro m
Operating profit 259 482
Exceptional items 1 272 -
Profit before net investment 531 482
expense and taxation
Net investment expense (56) (46)
Profit before taxation 475 436
Taxation (50) (107)
Profit after taxation 425 329
Minority interests 3 2
Net profit of the parent and 428 331
its subsidiaries
Share of net profit of 300 277
associate
Share of net profit on an 486 495
adjusted basis
Goodwill amortisation (186) (200)
Share of exceptional items - (18)
reported by associate
Net profit of the Group on a 2 728 608
reported basis
A summary of the effects of
goodwill amortisation and
exceptional items on
unitholders" net profit is
shown below:
Net profit of the Group on a 728 608
reported basis
Elimination of goodwill 186 200
charge - associate
Elimination of exceptional 1 (272) 18
items
Gain on disposal of BAT 301 -
preference shares
Write down of Hanover (29) -
Direct preference shares
Share of exceptional items - 18
reported by BAT
Net profit of the Group on an 3 642 826
adjusted basis
Note 1 - Exceptional items
Gain on BAT preference shares
The exceptional gain of euro 301 million (2002: nil) represents the gain arising
from the revised accounting treatment in respect of the Group"s holding of
preference shares in BAT following the issue of call warrants which have had the
effect of locking in the consideration to be received in June 2004 in respect of
the shares at GBP6.75 per share. Under the terms of the merger agreement between
Richemont, Remgro Limited and British American Tobacco, the redeemable
convertible preference shares fall to be redeemed for cash at a fixed price of
GBP6.75 per share on 7 June 2004 unless sold through the market prior to that
date, in which case the preference shares would automatically convert to
ordinary shares in BAT.
In January 2003 Richemont"s subsidiary, R&R Holdings SA, issued call warrants,
listed on the Luxembourg Stock Exchange, that give the holder of each warrant
the right to receive from R&R Holdings one ordinary share in BAT on 28 May 2004,
upon payment of GBP6.75. The issue of the call warrants therefore irrevocably
commits R&R Holdings to dispose of the balance of the BAT preference shares,
either as a consequence of the exercise of the warrants or through the
redemption of the shares by BAT.
Reflecting the finite life of the BAT preference share interest the Group has,
with effect from January 2003, accounted for the shares as a debt rather than an
equity interest, carrying the shares at the discounted present value of the
GBP6.75 receivable in June 2004, together with the present value of estimated
dividends receivable thereon. Accordingly the carrying value of these shares has
been reclassified to other long-term assets. Within this category the Group has
also recognised the valuation of the conversion rights embedded within these
preference shares. The Group"s liability under these call warrants, which is
equal to the conversion rights embedded in the preference shares and is based on
the price at which these warrants were quoted on the Luxembourg Stock Exchange
at the balance sheet date, is included in long-term liabilities. The current
estimated value of the right to receive future dividends within 12 months after
the balance sheet date has been included in debtors and the right to receive
future dividends more than 12 months after the balance sheet date is included in
long-term debtors.
Write down of Hanover Direct preference shares
Richemont has sold its remaining interest in Hanover Direct, Inc. to an
independent investor group in May 2003 for US$40 million. The carrying value of
the preference shares has accordingly been written down to this figure in the
financial statements as at 31 March 2003.
Note 2 - Earnings per unit on a reported basis
March 2003 March 2002
Restated
Earnings per unit on a reported basis - euro 1.309 euro 1.089
basic
Earnings per unit on a reported basis - euro 1.290 euro 1.083
fully diluted
Basic earnings per unit is calculated by reference to the weighted average
number of units outstanding during the year of 556.0 million units (2002: 558.3
million units) and the net profit of the Group of euro 728 million for the year
(2002: euro 608 million). The number of units outstanding takes into account the
effects of the Group"s buy-back programme.
Fully diluted earnings per unit is calculated by reference to 574.2 million
units outstanding (2002: 574.2 million units) and net profit for the year of
euro 741 million (2002: euro 622 million) which reflects the notional additional
interest of euro 13 million (2002: euro 14 million) which would have accrued to
the company had the full number of shares been outstanding during the period.
Note 3 - Earnings per unit on an adjusted basis
March 2003 March 2002
Restated
Earnings per unit on an adjusted basis - euro 1.155 euro 1.479
basic
Earnings per unit on an adjusted bases - euro 1.141 euro 1.463
fully diluted
Basic earnings per unit is calculated by reference to the weighted average
number of units outstanding during the period of 556.0 million units (2002:
558.3 million units), together with the net profit of the Group on an adjusted
basis of euro 642 million for the year (2002: euro 826 million). The number of
units outstanding takes into account the effects of the Group"s buy-back
programme.
Fully diluted earnings per unit is calculated by reference to the 574.2 million
units outstanding (2002: 574.2 million units) and net profit on an adjusted
basis for the year of euro 655 million (2002: euro 840 million) which reflects
the notional additional interest of euro 13 million (2002: euro 14 million)
which would have accrued to the Group had the full number of units been
outstanding during the period.
Appendix 2
Change in accounting policy
The Group has changed its accounting policy with respect to goodwill arising on
the acquisition of subsidiary undertakings. Previously, goodwill was recognised
as an intangible asset and amortised through the consolidated profit and loss
account on the straight-line basis over its estimated useful life, up to a
maximum of 20 years. The Group has now decided to change this policy and to
deduct goodwill arising on the acquisition of subsidiary undertakings
immediately from unitholders" funds at the time of acquisition. This policy has
been applied retrospectively with effect from 1 April 2001. The revised policy
is permitted under Swiss generally accepted accounting principles as issued by
the Foundation for Accounting and Reporting Recommendations in Switzerland which
is the Group"s financial reporting framework. This change in accounting policy
has not been extended to investment in associated undertakings, which represents
the Group"s investment in British American Tobacco.
Restatement of the prior year profit and loss account
The impact of this change in accounting policy on the profit and loss account,
earnings per unit, retained earnings and other reserves and goodwill is shown
below:
Year ended Impact of Year ended
31 March 2002 change in 31 March 2002
as previously accounting as restated
reported policy
euro m euro m euro m
Operating profit 482 - 482
Goodwill amortisation (182) 182 -
Profit before net 300 182 482
investment expense and
taxation
Net investment expense (46) - (46)
Profit before taxation 254 182 436
Taxation (107) - (107)
Profit after taxation 147 182 329
Minority interests 4 (2) 2
Share of results of 277 - 277
associated undertakings
Net profit 428 180 608
Impact of restating
earnings per unit
Earnings per unit on a euro 0.767 euro 0.322 euro 1.089
reported basis - basic
Earnings per unit on a 0.770 0.313 1.083
reported basis - fully
diluted
Impact of restating Euro m Euro m Euro m
retained earnings and
other reserves
