Welcome to the 2012 first half results conference call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead.
Thank you. Ladies and gentlemen, good afternoon and welcome to this conference call. I'm Jean-Jacques Guiony, the Chief Financial Officer of the LVMH group. Before I begin, I must remind you that certain information to be discussed on today's call is forward-looking and is subject to important risks and uncertainties, that could cause results to differ materially. For these, I refer you to the safe harbor statement included in our press release. Let's now move to today's topic, first half figures. I shall cover the first part with the most significant figures, and Chris Hollis, Group's Head of Investor Relations, will cover the main developments of our different business groups. After this, both Chris and I will be available for your questions. Both press release is available on our website, lvmh.com, as well as the slides for today's presentation and the interim financial report.
Let's move to slide two. I shall start with the revenues for the first half of the year, as shown on the slide. As you may see, we had a fairly strong semester with all our businesses growing more or less double-digit in organic terms. Having in mind that revenues grew organically 15% in the first half of 2011, we can be extremely satisfied. You will note that the published growth is much higher than organic growth due to a significant currency impact of 6%, combined with 8% stemming from the first time consolidation of Bulgari and Ile de Beauté. Chris will comment main business groups in more details, but main points are the following. Wines & Spirits had a very strong semester with a 15% organic growth. We enjoyed a 6% rise in volumes over the semester, which was topped by 5% price impact and 4% mix.
Fashion & Leather Goods is up 10% in organic terms, with very strong performance from Celine and Multi Cubes in particular. Worth noting last year's strong comparison base of +14%. Perfumes & Cosmetics is up 9% in organic terms, despite challenging conditions in Europe. Watches & Jewelry had a strong first half with +13%, with a significant slowdown in the Asian part of the business. Selective Distribution is also showing a very good performance with +16% organic. Both travel retail and Sephora have shown a very solid growth with a strong positive impact from like-for-like, but also from store openings. Let's now move to slide three, where you can see comparison between first and second quarters in terms of organic growth.
As you may see, a bit of a slowdown across the board in Q2, although most groups of activities are close or above the 10% mark. Worth noting the very resilient performance of Wines & Spirits after a very strong start in Q1. Let's move to slide four, which shows the geographic breakdown of revenues. Europe and Asia, including Japan, accounts for roughly one-third each, while the U.S. is one quarter. Emerging market taken together account for roughly 38% of the group's total revenues. Moving to slide five, where you may see the evolution of sales in our main geographies. Only Europe is single digit, with a strong performance of the U.S. and Japan, more than recovering from the 6% drop in H1 2011 connected with the consequences of the Sendai earthquake.
Let's now move to the next slide, where you may see our simplified profit and loss account for the period. My main comments are the following. We already discussed revenues. Gross margin suffered a bit, being 65% of sales, mainly explained by mixed changes. Operating expenses grew 11% if we exclude perimeter and currency impact at a slightly lower rate than revenues. Selling expenses were up 12%, marketing 15%, and G&A 3%, again, excluding currency and perimeter impact. Current operating profit is up 20%, with operating margin reaching 20.5%, a slight drop compared to last year, which I shall comment later on. Other operating income and charges are negative by EUR 122 million, reflecting mostly amortization and depreciation of intangible and a EUR 70 million write-off that we took on a real estate property we acquired almost 10 years ago. I shall discuss financial charges in a separate slide in a minute.
The group's tax rate is about 27%, a bit as forecast, as it benefited from the exemption regime on the exceptional Hermès dividend. As a result, group share of net profit is up 28% at EUR 1.681 billion. Let's now go in some details in the current operating income, which is broken down by business groups on slide seven. Wines & Spirits had a very strong first half with plus 20% in current operating profit, despite a currency impact that was less positive than other business groups. Fashion & Leather enjoyed a 10% rise in current operating profit, somewhat below sales growth due to heavy marketing investments during the semester. Perfumes & Cosmetics showed a 9% increase in current operating profit, also a bit below sales due to marketing investment.
Watches & Jewelry had a very strong semester with a rise of 87% of its operating profit, the bulk of which came from the first time consolidation of Bulgari. Finally, very strong progress as well in the Selective Distribution group of businesses with an advance of 30% compared to last year. Both travel retail companies and Sephora had a very strong first half. Let me address the currency and structure impact on current operating profit that you may see on slide eight. We have a positive currency impact of EUR 166 million, while recently acquired businesses brought an additional EUR 66 million, mostly coming from Bulgari.
From an operating margin viewpoint, currencies, albeit positive in absolute terms as we've seen, were neutral, whereas newly acquired businesses had a negative impact on overall operating margins, which explains the largest part of the 110 basis points drop we had in the group's current operating margin. Let's now turn to slide nine and the analysis of the net financial charge. Three important points. The cost of debt was flat in the first half, despite the significant rise in the group's net debt connected with the Bulgari acquisition of last year. We benefited from a 0.4% drop in average interest rates, but more importantly, the Bulgari payment was largely made out of cash balances whose return were quite low due to the level of short-term interest rates. We were therefore able to fund about EUR 2 billion in additional debt without a significant impact on financial charge.
The cost of hedging was much lower than last year, as we anticipated at year-end 2011. Yet such a drop may not be extrapolated for the rest of the year. Finally, income on financial investment portfolio was much higher than last year, mostly due to the exceptional dividend income of EUR 5 share from Hermès. Moving on to slide 10, where you can see the balance sheet structure. The structure of the balance sheet did not evolve much compared to 2011 year-end. Total equity is about 50% of the balance sheet, whilst inventories rose one point to 17% of the total. Turning to slide 11, a few words on the cash flow statement. First, cash from operations was at EUR 662 million, i.e., 20%, a bit more than operating profits. Yet the tax side was quite penalizing.
Due to the rise in profit in 2011, the final payment on taxes in the U.S. and France largely exceeded installment already paid in 2011, causing a big jump in the cash tax charge in H1. Such a rise will not occur in the second part of the year. Working capital requirements were about EUR 400 million unfavorable to last year. This is not particularly surprising given the strength in the activity and the connected inventory build-up in most businesses. The second half of the year should be more favorable. Finally, capital expenditures are significantly up with an additional EUR 80 million for the semester. Overall, net cash from operations is about EUR 530 million for the first half of 2012, close to last year's level.
I will finish this first part of the presentation with the comments on the group's net debt, which reached EUR 5.5 billion, about EUR 1 billion higher than at year-end. This increase is mainly due to the payment of dividends to our shareholders and minority equity partners. The group's net debt as at 30th of June 2012 represented 22% of total shareholders' equity. I will now turn to Chris, who is going to review the main developments within our various business groups. Chris?
Thank you, Jean-Jacques. We'll start with slide 14. Let me begin with the Wines & Spirits. As you can see, reported revenue reached EUR 1.759 billion, up 23% compared to last year's first half. After taking into account a positive 8% currency impact, organic revenue grew 15% in the period compared to 13% in the same period last year. A good progression there. If we look at the two main categories, champagne and wines increased to EUR 748 million, representing a 16% increase over the same period last year. After taking into account a positive 5% currency impact, organic revenue increased 11%. For cognac and spirits, organic revenue growth reached 18%, which together with a 10% positive currency impact, resulted in reported revenue of just over EUR 1 billion for the period.
Profit from recurring operations was up a strong 20% to EUR 496 million for the first half of this year, with champagne and wines up 17% and cognac and spirits up 22%. We noted this time last year that a significant amount of the margin improvement came from currency impact. This year, the margin did not benefit from this impact. Turning now to slide 15, some of the factors behind the numbers. There was a strong demand across all major regions in this group, with Asia up a robust 25%, followed by Japan at 17%, Europe at 10%, and the U.S. at 7%, all driven by continued strong consumer demand. Price increases, which were implemented last year at the beginning of this year, played a role in this growth, notably for cognac.
To give you some more detail, in the champagne business, volume overall was up 6%, reflecting in particular growth of prestige vintages and rosé champagnes. The wines business also saw strong revenue growth due to a mix improvement in Estates & Wines, as well as the successful launch of the exceptional 2009 vintage of Château d'Yquem, which was very highly praised by wine connoisseurs. Cognac volumes rose 8%, reflecting good performance across all qualities. There was particularly strong momentum in Asia, in the U.S., Hennessy reaffirmed its position as market leader. The cognac business is also progressing rapidly in important high-potential markets, including Vietnam and Russia. I should also note that Glenmorangie continues to deliver strong revenue growth.
Looking to the second half of the year, the objective is to maintain and build the momentum underway across the Wines & Spirits business by continuing to execute on the strategies that have been driving its success. These include controlling volume growth through focusing on the best-performing and most profitable markets, reinforcing the desirability of the brands through strong and exciting marketing and communications, developing new and innovative products that drive demand, maintaining a pricing policy that reflects quality, and optimizing supply management to support future growth by ensuring that we have adequate quantities of grapes and eaux-de-vie. Now let's turn to Fashion & Leather Goods, slide 17. Reported revenue reached EUR 4.656 billion or 17% higher than the same period last year, excluding a positive 7% currency effect. Organic revenue for this business group rose 10% in the first six months.
Profit from recurring operations also rose 10% from EUR 1.381 billion in the first half of 2011. These results come on top of a significant growth in the first half of 2011, demonstrating the enduring appeal of our fashion and leather brands. To give you some more detail on slide 18, the main growth regions in this business group in the first half were the United States, up 18% in US dollar terms, followed by Europe local currency. Louis Vuitton continued its double-digit revenue growth, which has been ongoing for some time. This reflects broad-based growth across the brand, with all categories and markets contributing, and strong momentum from both Chinese and American consumers. Tourism in Europe, where the exceptional savoir-faire of the brand's artisans have its roots, continued to make a positive contribution to growth in this region.
The strategic and qualitative expansion of Louis Vuitton store network continued in key markets with, for example, the very successful expansion of Roma Etoile for the brand's first maison in Italy, in a magically restored cinema in the center of Rome. The success of the Empreinte soft leather line, the good performance of Louis Vuitton high-end leather goods, and the strong reception to new colors in the wonderful Epi line all contributed to this good revenue performance. Other brands contributed to the growth in the Fashion and Leather Goods group in the first half as well. Some highlights include Fendi saw strong growth of its iconic Baguette bag, which remains a top seller as it celebrates its 15th anniversary, an event that captured terrific media coverage. The Peekaboo line of Fendi also continues to perform strongly.
Celine has performed remarkably well thanks to the success of its creations designed by Phoebe Philo, with all product lines contributing to this growth. Donna Karan, the DKNY accessories collection made good progress, and the jeans license was brought back in-house. Looking at the second half of the year, slide 19, there are a number of exciting developments to come in the Fashion and Leather. Firstly, Louis Vuitton has recently opened the first high-end jewelry store in Place Vendôme, the world's headquarters for the most impeccable jewelry. It also houses the brand's first high-end jewelry workshop. It'll be a showcase for exceptional pieces created there that will recount and celebrate Louis Vuitton's continued renewed legend of the spirit of travel.
They also just reopened last week, a redesigned and wonderful new maison at Shanghai's Plaza 66, which received major media coverage in the fashion press worldwide, as you may have seen. Finally, as you may have read recently, Louis Vuitton has entered into a collaboration with a famous Japanese artist, Yayoi Kusama, including a fantastic polka dot-covered product line, which is already seeing enormous demand after its launch earlier this month. There's a major exhibition of Kusama's work in the Whitney Museum in New York happening right now, and in general, she and her collaboration with Louis Vuitton are getting exceptional media attention around the world. Moving on to some of the other brands, the Spanish luxury leather goods leader, Loewe, is accelerating the rollout of its new store concept.
Céline, the focus is on continuing to renovate and selectively expand its store network to ensure its boutiques reflect the brand's ambitions in key locations. Berluti has expanded, offering the products in ready-to-wear and leather goods will also be rolled out in the second part of this year. In general, the objective is to further accelerate the profitable growth across the group's other fashion group brands. Turning now to Perfumes and Cosmetics, slide 20. Revenue rose 14% to EUR 1.7 billion in the first half. After a positive 5% currency impact, organic revenue grew by 9% compared to the same period last year. Profit from recurring operations increased by 9% to EUR 197 million in the first half of this year. The primary growth region is on slide 21.
In the first half of this business on a constant currency basis for Asia, excluding Japan, up 16%, the U.S. up 15%, Europe was up 5%, and Japan up 8%. Once again, Parfums Christian Dior's solid performance was driven by the global desirability of the brand and its exceptional products. The clearest example of this is J'adore, its iconic fragrance, which continues its strong momentum. Dior Homme also remains very well-received, with excellent performance in the first half. The brand's high-end skincare, Prestige, remains a top choice for discerning customers. Guerlain also continues to benefit from its wonderful heritage, coupled with its commitment to innovation. Its recently launched La Petite Robe Noire fragrance is off to an excellent start in France, while its Orchidée Impériale line continues to deliver strong performance. There were highlights in the other brands as well.
Parfums Givenchy recently launched Irresistible Electric Rose, which is off to a very strong start. As is Homme Sport at Parfums Kenzo. Benefit continues to grow strongly thanks to its innovations, including most recently, They're Real! Mascara. Make Up For Ever, with its unique link to the artistic world, is now expanding into the Brazilian market, which is one of the world's top markets for beauty. I'll talk about this market with respect to Sephora in just a moment. Turning now to the second half for Perfumes and Cosmetics on slide 22. In this business group as well, the focus will be on continuing to execute the successful strategy of product innovation, coupled with significant media investments, which together drive consumer awareness and excitement. Asia continues to be a region of substantial opportunity, and the group plans to focus on further developing its fragrance offering in this region.
At Parfums Christian Dior, there will be further support for its iconic lines in conjunction with the exceptional Christian Dior Couture business. They also plan for additional progress in their makeup and skincare lines in the second half of the year. Guerlain will expand La Petite Robe Noire, which I just mentioned, is off to a good start in France, to the rest of the world, and will do the same with Super Aqua skincare. International rollouts are also a key part of the strategy at Givenchy with Dahlia Noir and at Parfums Kenzo with Madly Kenzo! The group will also introduce its successful American brand, Fresh, in Asia later this year. At Watches and Jewelry, this is on slide 23, revenue reached EUR 1.343 billion in the first half of this year.
This was boosted, of course, by the addition of Bulgari, which was consolidated as of the end of June last year. Excluding the impact of Bulgari and a positive 7% currency impact, organic revenue was up a healthy 13%. This group also saw a rise in profit-
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-basis. The main growth regions in organic terms in this business on slide 24, were Europe up 24%, the U.S. and Japan are each up 8%, and Asia up 4%. This reflects the favorable consumer demand for our watch brands in all the key regions. The key driver of this was the excellent response to the group's brands at the key watch fairs in the spring, where the innovations across the brands were very well received among retailers and resulted in record orders. Additionally, the stores run by our jewelry brands delivered strong performances. To give you some other highlights, the integration of Bulgari has gone very well, and now as part of LVMH, the brand is focusing on enhancing communications surrounding its iconic lines.
At TAG Heuer, the construction of a new manufacturing plant in Chevenez, Switzerland, has been started to augment the production capacity of the brand and support increasing demand for its quality products. Looking to the balance of the year, slide 25. The objective in this business group is to continue to deliver market share gains across its various brands. The key will be to remain focused on the upmarket positioning of the brands through the strategic and proven combination of industry-leading innovation and targeted communication. An example of this is the upcoming launch of Bulgari's Octo watch, which will strengthen the offering for men in this category. To support anticipated future demand, this watch and jewelry group will accelerate the in-house production of watch components by leveraging expertise across all of the business group's brands and encouraging synergies between them.
This work is, in fact, well underway and going very well. Our brands will continue to selectively expand their store networks, including the new store concepts for both Bulgari and TAG Heuer, in order to even better showcase the unique elements of each brand. Finally, let's take a look at selective retailing, where reported revenue on slide 26 reached EUR 3.59 billion in the first half of this year. This increase of 27% over the first half of 2011 was boosted by a perimeter effect of 4%, relating to the consolidation of Ile de Beauté, the Russian perfumes and cosmetics retail chain. Positive currency impact of 7%. Consequently, organic revenue was up a very solid 16% in the first half of the year. Profit from recurring operations in this business was up 30% to reach EUR 373 million in the first six months of 2012.
On a regional basis, slide 27, organic revenue rose a strong 22% in Asia, 14% in the U.S., and 9% in Europe. To break the results down by business, at DFS, shopping by Asian clientele contributed strongly to the solid momentum in this business. In particular, DFS saw rapid progress in its Hong Kong and Macau gallerias, and also began to see a recovery in Hawaii and the mid-Pacific regions of Guam and Saipan. This growth was also driven by continued up its offering and overall retail experience, as well as a consistent focus on delivering innovation across its merchandise assortments in terms of brands, products carried, and services it offers to customers. Sephora's fine performance reflects its continued leadership in the specialty beauty business on a global basis, with market share gains in all regions.
The success of the concept is reflected in its immediate appeal in the new markets it enters, including Mexico, the Middle East, and South Asia. Sephora also opened its first store in Denmark. As of the end of the first half, Sephora network totals 1,349 stores, an increase of over 120 stores since the same time last year. In this business group too, slide 28, the objective for the remainder of the year is to further market share gains. DFS will open its third galleria in Hong Kong to continue to take advantage of the opportunity in this market. Will also start three new concessions at the airport there at the end of the year. DFS will also renovate and expand its Macau and Singapore gallerias to ensure it is best capitalizing on the potential of these markets as well.
Sephora will continue its successful global expansion in key regions with approximately 70 more openings planned for the balance of the year. An example of this is in Brazil, where it recently opened its first store in this very large beauty market, complementing the online presence it has had there through the 2010 acquisition of Sack's, the top online prestige beauty retailer. It will build on its use of innovative technologies by continuing the development of mobile technologies for clients within its stores. Sephora has also continued to enhance its e-commerce capabilities and should benefit from the recent renewal of its updated U.S. e-commerce site. Finally, Sephora will continue to enhance its existing store network by further refining and improving its signature retail experience through exceptional innovation and the introduction of new services.
With that, I will turn the call back over to Jean-Jacques for a brief wrap-up before we take your questions.
Thanks, Chris. I would like to conclude this brief overview of the activity with a few comments on H1 performance, highlighting the most significant points. First and foremost, I would like to point out that almost all our businesses grew double digits in the semester, showing the strengths of our businesses and of our brands. Likewise, all our geographies are growing high single digits or double digits growth rate. Certainly, our businesses, despite strong marketing and selling investments, were able to fund the strong marketing push through a limitation of selling and admin expenses. Finally, despite significant investment, our balance sheet remains very strong. All in all, a strong performance in the first half of the year. What about the rest of the year? Always difficult to make forecasts to some points which we view as important. First, some markets remain well-oriented.
This is the case for the U.S. and for tourism, which irrigates our stores in Asia and in Europe. This should be a strong support for the growth in the months to come. Secondly, we think our product and marketing pipeline is stronger in the second half of the year than in the first. This is particularly true at LV, where we should benefit from the Kusama initiative and from the impact in mainland China of the reopening of our Plaza 66 store in Shanghai, which now is the largest Vuitton store in the world. We may also mention the Link Lady at TAG Heuer, the global rollout of La Petite Robe Noire at Guerlain, or the opening of DFS third galleria in Hong Kong.
Certainly, finally, we are as convinced as ever that the best way to create value is to invest behind our brands, and we shall carry on doing so in a thoughtful and disciplined way. That is basically all we wanted to say, and we shall now open the Q&A session.
Melissa?
Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. We have a first question from Mr. David Wu from Telsey. Sir, please go ahead.
Thank you. Hi, good evening, everyone. I have three questions. First, can you talk about what you're seeing in China specifically, and if sales there are still trending in more the high single-digit range there in the second quarter, and whether or not you've seen any sort of impact from slower gifting sales? Also perhaps talk about the significant slowdown in watches and jewelry that you're seeing there. Secondly, on selective retailing, it looks like Asia moderated a bit in the second quarter. Could you comment on what you're seeing at DFS, particularly in Hong Kong and Macau? Also, if you could provide the total Sephora comp in the quarter, along with the regional comps in the U.S. and Europe.
Just lastly, Wines & Spirits, obviously, still very strong, and I was wondering if you can update us on how depletion rates there are trending in the quarter. Particularly, if cognac is still up double digits in the U.S. and China, and whether or not you've seen any improvement in champagne in the U.S. just following the price increases that you've implemented back in March. Thank you.
Okay, thanks. Many questions. Starting with China. Raw figures in China in organic terms for Q1 and Q2 are basically exactly the same. We are, for the whole group, around 15% growth for both Q1 and Q2 in China, so no change at all in the global trend. If you look at various businesses, what we saw is that Wines & Spirits did better in Q2 than in Q1. Q1 was already pretty good, but Wines & Spirits did better. Same thing for Perfumes & Cosmetics, slightly better in Q2. We had Fashion & Leather Goods doing a bit lower than in Q1, being positive, but being lower than Q1. Watches & Jewelry being much lower than in Q1. As you know, this doesn't have a lot of impact on us, as this is the smallest division altogether, and particularly when it comes to Asia and China.
You mentioned the impact of gifting. Obviously, there are specific issues in China today which affect particularly brands like Vuitton. We have the gifting business, which more or less came to a stop for a local, specific reason. Very hard to quantify how big it is, but we think it has some impact on Vuitton. We could also mention the fact that price differences between Europe and Asia, and China in particular, due to the drop in the euro and the strength in the dollar, and therefore in the renminbi, are at one of the highest levels we've ever seen. Obviously, this has some impact on the business or our customers, if they can do it, would rather buy outside China than inside China.
Also, I should mention the fact that our biggest tour, Plaza 66, had been closed for one year now, has reopened last week, and we expect this to have some impact on the business. There are specific factors in China today. All in all, the global performance remains more or less what it was in Q1. You mentioned Asia and a specific question on DFS. DFS performance in Asia was pretty strong in Q1 and Q2. A bit lower in Q2 than it was in Q1. You mentioned specifically Hong Kong and Macau. Hong Kong's performance at DFS in our two galerias in Q2 was significantly lower, very positive, but I would say high single digits as compared to excess of 20% in Q1. We saw some slightly lower figures at DFS in Q2 in Hong Kong.
Macau was as strong as it was in Q1. Very strong figures at Macau. A little bit of a difference in between the two areas. Chris, you would want to comment on Sephora's like-for-like?
Yeah. The Sephora like-for-likes for the first half were +3% in Europe and +10% in the U.S. The Sephora like-for-likes in Asia are probably very high double digits or even triple digits, I don't think they're very meaningful.
Lastly, your question on wine and spirits. Depletions in Q2 are more or less in line with Q1, they are pretty strong in China. They are still pretty strong in cognac in the U.S., although single-digit. As far as champagne is concerned, the situation is a bit more complex to read due to the price increases. We've seen regularly since April, pretty strong depletions in champagne in the U.S., which lead us to think that the price increases have been well absorbed by the market. Our volumes of champagne in the U.S. recovered very significantly from the first half. In the first half, they were negative about 10%, and our volumes in the U.S. in champagne are up very strong double-digits in excess of 30%. We recovered sharply from the slight drop that we had in the first quarter.
Excellent. Thank you very much.
We have the next question from Ms. Louise Singlehurst from Morgan Stanley. Madam, please go ahead.
Hello. Good afternoon. Good evening, should I say. Three questions from me too, please if possible. On the fashion and leather division, saw the margin declined about 220 odd basis points. Can you just give us some color on the breakdown for that? On a related question, do you expect the ongoing shift of the spend from Asia to Europe by tourists really having an impact on that margin? Secondly, did you pass on any price increases at Louis Vuitton in the second quarter? Lastly, have you got any comments, just going back to the China and Hong Kong question that you just answered, but we heard that there was slowing traffic in May and June towards the end of the period. I wondered if there was any change throughout the three months. Thank you.
Okay. On fashion and leather, there is a drop of 220 basis points. Part of it, half of it, roughly, is Vuitton. As far as Vuitton is concerned, the main reason for the drop is connected with marketing investments. We had very strong marketing investments, events, and mostly the events actually, in the first half. We had the Plaza 66 event, which was quite a strong investment, which a bulk of it was expensed in the first half, although the event itself took place in the second half. We had the runway show. We had the Musée des Arts Décoratifs initiative. We have prepared for the Kusama initiative as well. We had a big boost in the marketing budget, which explains the bulk of the slight drop that we had in margins. The rest comes from two or three things. One is heavy investment at Berluti.
As you know, we are very keen on developing the brand on a worldwide basis. Secondly, we took over from Liz Claiborne the jeans license at Donna Karan, which is pretty significant with a pretty low contribution to the bottom line. That had a negative impact on margins. Thirdly, margins were negatively affected at Fendi by the fact, as we mentioned before, that we are trying to cut as much as we can the wholesale business in order to concentrate on the retail business. That's, roughly speaking, the breakdown of what happened in fashion and leather. As far as price increase is concerned, no decision taken yet, but I mentioned the fact that our Chinese business is suffering from the price differential between China and Europe, which is at its highest. We have the choice between lowering prices in China or increasing prices in Europe.
We have not taken any decision, but we'll do what is in the best interest of Vuitton and LVMH profits. Maybe I will ask you to repeat your third question because I missed it. Sorry, Louise.
If you could just talk about any changes in the trading during the period. We've been hearing about slowing traffic to Hong Kong, obviously from the mainland Chinese towards the end of the period. Actually, if I could just ask one sneaky next question or my last question, just on the margin again, do you expect an improvement in the second half given what the marketing budget's going to be? Thank you.
On the traffic, it's difficult to know. It's very difficult to make such an analysis because traffic from one month to another can vary without really us knowing exactly why. No, I cannot really answer on this. Margin improvement, we would expect so. The marketing spending I was mentioning are not going to be repeated in the second half of the year. As far as Vuitton is concerned, I think we should be back to previous margins.
Super. Thank you.
The next question is from Thomas Karlovits from Cheuvreux. Sir, please go ahead.
Yes. Good evening, Jean-Jacques and Chris. I've got two questions. First one, on FLG, it's up 10% in H1. Louis Vuitton is double digits. You mentioned Celine and MG were pretty strong. Who are the bad performers? The second one regarding watches and jewelry in Asia and in Q2, could we have a split between Bulgari versus your legacy brands in term of top-line growth? Thank you.
Okay. As far as Q2 is concerned, the growth for the fashion leather division is not double-digit, it's 8%. It was 12% in the first quarter of the year, it's 8% in the second quarter of the year. Louis Vuitton is double-digit in EUR, but not in organic terms. It's pretty complicated for the division and Vuitton's figure to differ materially, and they are pretty close. As far as watches and jewelry Q2 figures are concerned, the watch and jewelry Q2 figure is 9% organic growth. Bulgari is slightly below that. The main reason being that we had less high jewelry sales in Q2 than we had last year and in Q1, but particularly in the U.S. U.S. performance is pretty low. We are just a few points positive.
Apart from that, be it Europe and mostly Asia and China, we are very pleased with the performance of Bulgari in Q2.
Okay. Just a follow-up to be sure. On slide 18, for H1, you mentioned Louis Vuitton is double-digits, it's year-over-year and not at constant currency, correct?
The double-digit figure we mention in our communique is at current exchange rate.
Okay.
Constant exchange rate in Q2 is not double-digit.
Okay, thank you, Jean-Jacques.
You're welcome.
The next question is from Antoine Belge from HSBC. Sir, please go ahead.
Yes. Good evening. Antoine, HSBC. Three questions. First of all, I would like to follow up on the margin decline in fashion and leather. You mentioned that LV wasn't really different from the rest, but you make qualitative comments about some of the other brands doing extremely well. Maybe I would have expected maybe LV outperforming the divisional average, having a negative brand mix impact on the margin. Also, I saw that in the past you had mentioned that actually the transfer from consumption from China to Europe would really not having a big impact on margin. Since in China, if I'm not mistaken, you're paying variable rents whilst you're paying fixed rents in Europe. Could you maybe confirm that actually that was not the case on that front, so is having a negative impact on margins?
The second question is on Louis Vuitton, maybe explaining at least qualitatively the differences of evolution of price, mix, volume, and also what was the net variance in terms of store openings versus maybe some closure. Finally, obviously the change in FX will be a big booster for you in the second half. Can you maybe go through some of the technicalities like your hedging rate and also if probably at the moment you're not exercising the options because you have no interest in doing this. What would be maybe the likely impact of that in the second half?
Okay. Starting with margin, at Vuitton now, there is no such thing as a noticeable significant geographic mix impact on margins. As I said, the bulk of the margin impact comes from the fact that we had a rise in marketing expenses that was higher than the rise in sales and gross margin, and hence we had a slight negative margin impact at Vuitton. There is no such thing as a noticeable geographic mix impact on Vuitton's margins. As far as your second question is concerned, price, mix, volumes, et cetera, you know that we don't really go into details on this. The only thing I can say is that year-on-year selling space was about 7% higher than what it was last year.
As far as price is concerned, the price impact, as we had no price, we didn't implement any price increases in Q2 as opposed to last year. The price impact which we had in Q1 is rapidly fading away. It's still positive in Q2, and if we don't increase prices further, we shall not have any or hardly any in Q3. Price increase impact is less of a factor in Q2 than it was in Q1. Finally, on FX, you're right about the productions. Given the strength in the U.S. dollar, it's quite some time since we've seen that type of exchange rate, it was impossible to put together some hedging at such a favorable rate. All our hedging is at a less favorable rate, but very open as always. We buy options or collars.
We give up the put options, and for the time being, we have not suffered from any call options being sold. As you know, a collar is a purchase of a put option and a sale of a call option. We have not been capped in terms of exchange rates by the rising U.S. dollar. We are still benefiting from the full increase in the value in the U.S. dollar, and that should be the case till 115, more or less.
Okay. Maybe just one follow-up on growth in Asia for fashion and leather as a whole. I think in Q1 you said very close to or slightly below 10%.
Yes.
What would be the indication in Q2?
Mid-single digits.
Okay. Thank you.
The next question is from Mr. Omar Saad from ISI Group. Sir, please go ahead.
Thank you. Good afternoon. I was wondering if you could talk about, across the groups and the segments and the different brands, are you seeing any differential in the performance at the high end of your luxury businesses, as opposed to maybe some of the more middle-end luxury businesses, whether regionally or on a global basis?
Well, it's a very difficult question. The answer is no, it's a question that is very difficult because the high end and the entry price range do not evolve in the same way throughout the year. The high end, for instance, would be something very important at Chinese New Year or at Christmas time, whereas the entry price would sell more or less evenly throughout the year. It's quite difficult to draw conclusion from the observance of a short period of time in terms of differences between high end and entry price. Our feeling is that we don't see major differences.
Okay. That's helpful. Thank you. Could you also maybe talk about, briefly, your thoughts on the U.S. market. It's the wealthiest country in the world. It probably looks under-penetrated in terms of personal luxury goods and your brand's penetrations in terms of what the long-term opportunity could be. It's a market that you're hearing a lot of positive data points from brands as well as other companies in terms of the strength there. Do you have any insight in terms of what's driving that, the sustainability of the U.S. as a large growth opportunity in the personal luxury goods sector? Thanks.
Well, it's exactly as you said. It's an area where repeatedly for quite some time now, we are enjoying double-digit growth in most businesses. I think there are two main reasons for that. One is the strength in the cosmetic market, which is important for us, not only for our perfume and cosmetic business, but also for our Sephora business. We benefited heavily from that. The month of June was a bit tougher than previous months, it seems that the cosmetic market in the U.S. is holding up extremely well. That's a strong supporting factor for our business.
The second point, you mentioned it, is the fact that, by and large, the U.S. market is still under-penetrated in terms of luxury goods as compared to Western Europe, for instance, which enables brands, ourself, and probably also competitors, to make further inroads into the U.S. market and to benefit from that. How sustainable is this? We are very optimistic about the U.S. market, we keep on investing in improving our network in the U.S. at all times, because we think it's one of the driving force behind our growth for the years to come.
Thank you. That's really helpful.
The next question is from Mrs. Caroline Roland from Kepler Market. Madam, please go ahead.
Good evening. I just wanted to come back to Vuitton sales growth. I wanted to know if you could give us some color about Vuitton sales growth to Chinese customers, the overall trend in Q2 versus Q1. Was there any change in trend? Could you give us also some color about what happened to U.S. customers for Vuitton, please? Thank you.
On the Chinese customer base altogether, including mainland China and touristic purchases, it's more or less the same figure as the one we had in Q1. We are around 10%. We haven't seen any changes. What we do in China is more or less the same type of growth as we had in Q1 and Q2. As far as touristic sales are concerned, it's also exactly the same type of growth. The bulk of the growth in the Chinese client base takes place outside China, and the portion of business we do outside China with Chinese people is about a little bit more than one half, about 55% of the total business we do with Chinese customers. As far as the U.S. customer base is concerned, the growth is fairly strong double digits, but the bulk takes place in the U.S.
As you know, the U.S. citizen business takes place in the U.S.
Sure. Was there any change in trend in Q2 versus Q1 for U.S. customers?
Slightly lower, nothing really significant.
Okay. Thank you very much.
We have the next question from Mr. John Guy from Berenberg Bank. Please go ahead.
Yes. Good evening, Jean-Jacques and Chris. Three questions, please, from me. The first one just on Louis Vuitton and the space you talked about, a 7% space growth in the first half of the year. Are you on track to hit, do you think, 7% for the full year? With regards to your space strategy, if you like, in terms of extending stores more recently and reducing the number of net openings, is that something which we will expect to see continue going into 2013? My second question is just around the volume and value splits, please, for cognac and champagne for the first half of the year. My third question is around costs of investment within the Watches & Jewelry business in terms of investing in new manufacturing. Could you quantify that in terms of EBIT margin investment, please? Thank you.
Okay. Yes, 7% growth for the rest of the year on a full year basis is close to what we should achieve. We have very good visibility on that, obviously, given the fact that we engage into projects quite in advance, and that's what we should have. In terms of strategy for space increase, we see no reason to change our strategy. We are trying to expand the footprint of the brand. Obviously, at the same time, we need to have a balance between accessibility and desirability of the brand. The strategy we described quite some time ago now, two or three years ago, of opening less stores but making them more spectacular and more a statement for the brand will not be changed. Cognac and champagne for the first half on top of volume growth that Chris mentioned, I think we have 2% mix and 2% price.
That's for champagne. As far as cognac is concerned, we have almost in between 7% and 9% increase in prices and about 1% in mix. The mix impact for cognac is obviously lower in Q2 than it is in Q1 as we don't have the Chinese New Year impact, which is always very favorable on volume. Very favorable mix, sorry, in Q1. Finally, your question on the cost, the EBIT cost of investment in Watches & Jewelry connected with the industrial capabilities buildup. I think it's quite negligible, I would say. We are planning to make in between EUR 30 million and EUR 40 million a year in capital spend for the next two to three years, as we did in the past, actually, with a depreciation period, which is reasonably long. We don't expect a major impact, if any, on our EBIT margin.
Okay. Thanks, Jean-Jacques. Could I just have one quick follow-up?
Sure.
Thanks. Just with regards to market share in cognac in 2011 on a global basis, Hennessy market share dropped by about 140 basis points. Within the statement today, you called out the U.S. as being particularly stronger. Are we starting to see Hennessy claw back some of the lost share, particularly in the U.S. and in Asia over the past year or so?
Well, I should ask you what type of market share analysis you make, because if you're doing it on the basis of what is being sent by the French companies to the subsidiaries, it's always a bit misleading. As far as we understand, we have a stable market share in China. In the U.S., it's slightly growing. Given the fact that we have in excess of 40% of the worldwide market, you cannot expect huge shifts in market share. We are not particularly worried as far as our market share is concerned in cognac.
Thanks very much.
The next question is from Mr. William Hutchings from Goldman Sachs. Sir, please go ahead.
Good evening, Jean-Jacques. Good evening, Chris. I've just got two questions please. One is on Sephora, just trying to understand a little bit on the margins, because I understand from previous conversations that the margin in China and Asia was quite different from the margins you achieve in the U.S. I was wondering if you could give us an update on the operating margin between the regions. Secondly, on the watches and jewelry business, if we were to think about it just between what's going on with the Bulgari brand and what's going on with your other brands, is there a big differential in the performance of Bulgari versus the other brands? Thanks.
I think I already alluded to your last question on Bulgari. In Q1 and Q2, Bulgari's figures are pretty close to the division's average, although they are not in the figures as they are non-comparable up to end of June. They are pretty close to the division's figures, a bit lower. As far as Q2 is concerned, it's mostly due to high-end sales or high jewelry sales. As far as margins in Sephora are concerned, basically margins in Europe and in the U.S. are a bit in excess of 10%, a bit better in the U.S. than in Europe due to the fact that some European countries are not yet at their full margin potential. We are above 10%. As far as Asia is concerned, we are now positive.
We were positive for the first time in 2011, we should be in between 3% and 5% for the year. It's progressing as expected, it's progressing.
That's great. Thank you very much.
The next question is from Mr. Matthias Egger from MainFirst. Sir, please go ahead. Sir.
Hi, this is Matthias from MainFirst. First of all, quickly, can you clarify your previous comment about the margin development at Louis Vuitton in the second half? When you say it should normalize in the second half, do you mean this second half versus second half last year, or is that a comment based on the full year margin this year compared to last year? Second question would be on your watches and jewelry division. Are the current sell-in in line with the sell-out trends, or you saw already a certain de-stocking happening in the second quarter?
What I said about LV margins is that in the first half of the year, we had marketing expenses growing faster than sales, and we don't expect this to happen in the second half of the year. That's all I wanted to say as a forward statement on the margins of Vuitton. As far as watches and jewelry sell-in and sell-out are concerned, always difficult to monitor, particularly in Asia. Our understanding in Asia is that our sell-in figures are way lower than our sell-out figures. Quite, again, difficult to monitor. As far as the U.S. is concerned, which is your other relevant area where we can do some monitoring, our sell-in figures are also lower to a smaller extent, but they are lower than the sell-out figures.
Excellent. Thank you.
We have a question from Mr. Mark Wilson from Raymond James. Sir, please go ahead.
Yes, good evening. In the fashion and leather goods business, could you specify the gross region for Asia Pacific and for Japan as you've given it in the U.S. and Europe? That would be the first question. Second question, could you confirm what I wasn't really sure, that on a full year basis, we could also expect the selling space to increase by roughly 7%? Could you clarify what's in the other income that you've been mentioning? For Sephora Q2, like-for-like in Europe seems to be flat. Thank you.
I think I already answered on fashion leather in Asia, it's mid-single digits. I also think, Mark, I answered on the 7% space growth at Vuitton, which is the objective for the full year.
Sorry about it because my line wasn't clear for me.
That's quite all right. I'm sorry, your other question was about?
The question was about on the other income, but so maybe if I came back just on the fashion leather goods, Pacific with Japan, could you give us an idea of the magnitude of the trend there?
In Japan?
Yes.
It's same thing. Mid-single digit for fashion leather in Q2.
Okay. Thank you.
Sorry, I probably missed your question. What's your question on other income and charges?
I mean, the other income. You are talking about amortization, exceptional amortization or write-off of some assets kind of thing?
We had a EUR 122 charge for the quarter. The bulk of it comes from a land that we bought 10 years ago, in which we planned to make a development part, including a Vuitton store, which never materialized. We have decided that we should sell this property, the value of the property dropped very significantly in between. Unfortunately, the connected currency rose also very significantly in the period, increasing the value of the depreciation. That's hence the EUR 70 million charge that we took in the first half.
Okay, thank you. Just to follow in Europe, because you've got a Q2, it was almost flat now.
No, I think it's positive or like-for-like you mean?
Yes.
Like-for-like in Europe, no, it's positive. It's not a big figure, but it's positive by 2% or 3%.
Okay. Thank you very much.
We have a question from Mrs. Mélanie Flouquet from JP Morgan. Madam, please go ahead.
Yes, good evening. It's Mélanie Flouquet at JP Morgan. Good evening. I was wondering whether you could tell us what was the growth rate of the consumer base of the mainland Chinese back in full year 2011 compared to the 10% you've given us for quarter one and quarter two. That would be my first question. The second question is, you've mentioned that Louis Vuitton should recover or should be back year-on-year at similar level in H2 or at least that we wouldn't have the marketing expense anymore. With regard to all the other pressure that are going on at the other brands, I suspect this is going to repeat into the second half. I wanted to get confirmation whether we should expect 110 basis points pressure in margin in the second half on the other businesses. My last question, sorry, is on Wines and Spirits.
Given the strength of your business in Q1 and Q2, you repeatedly told us not to extrapolate the strength of Q1 into the full year, what do you expect? When are you going to start either holding off the pedal into the selling? Should we expect that already in quarter three or will you also start to face volume constraints? Thanks a lot.
Okay. The question on margins in fashion and leather, you don't really expect me to answer in a quantitative way on this. You're right in saying that some of the issues that we have faced in the first half of the year will still be there in the second half of the year. I mean, we carry on investing at Berluti. Fendi's margins will still be under pressure if we carry on, and we will carry on stopping or diminishing, at least, the wholesale business. The DKNY Jeans business margins will not improve materially in the second half of the year. It's more a longer-term plan to put them back at par with the rest of the business. There will be some margins pressure in the second half of the year in this respect. On wine spirits, sorry, the question was?
What should we expect for-
Oh, the operation. Sorry. The point to bear in mind is that volume growth in H2, H1 was high but not, I would say, totally unsustainable. 6% volumes for both champagne, cognac, and the rest of the business, which is what we had in H1, is not entirely unsustainable. Chances are that will be a bit lower than that. It's doable. We had some significant mix impacts, which are more difficult to get in the second half of the year, and the impact of strong pricing last year will progressively fade away. I mentioned that for Vuitton. It's exactly the same thing, but again, for cognac, that will progressively fade away. You shouldn't expect on top of a solid volume growth, the same type of boost from mix and prices as we had in H1.
Nevertheless, we're pretty hopeful that we'll do a fairly strong second half of the year, although it should be probably at a lower growth level than it was last year.
Thanks a lot. The Chinese consumer base last year compared to-
If I remember correctly, it was in excess of 20%, the growth for the total.
Thanks a lot.
We have no other questions for the moment.
Okay. That concludes the call for today. Thank you for attending it. Both Chris and I look forward to discussing with you third quarter figures in October. Thank you very much and have a nice evening.
Ladies and gentlemen, this concludes the conference call. Thank you all for attending. You may now disconnect.