Ladies and gentlemen, welcome to the LVMH First Half Results Conference Call. I now hand over to Mr. Jean Jacques Guillen. Sir, please go ahead.
Thank you. Ladies and gentlemen, good morning, and welcome to this conference call. I'm Jorge Guillenie, the Chief Financial Officer of the LGIMAGE 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 most significant numbers, and Chris Hollis, Group's Head of Investor Relations, will cover the main development of our different business groups. After this, both Chris and I will be available for your questions. The press release is available on our website, ldmh.com, as well as the slides for today's presentation and the interim financial report. Let's move to Slide 2, and I shall start with revenues for the first half of the year.
As you may see, we had a fairly solid semester with all our business groups showing positive growth. Two points of reference. First, revenue grew organically 12% in the first half of twenty twelve, making the comparison base not so easy. And secondly, the business had an organic growth of 7% in H2 last year and not so far from first half twenty thirteen performance. You will note that published growth is unlike in 2012, lower than organic growth due to a negative currency impact, mostly stemming from the yen, 17% drop in the semester.
Chris will comment in business groups in more details, but main points are as follows: wine and spirit had a strong semester with a 5% organic growth, which comes on top of last year's growth of 15%, volume growth 3%. Fashion and Leather is up 5% in organic terms, with a very strong performance from Celine, Fendi, Givenchy and Valentin. Perfume and cosmetic is up 6% in organic terms, beating most Equatorial Markets' performances in its main geographies. Watch and jewelry was a bit under pressure in the first half, mostly due to phasing in novelties and to ongoing distribution cleanups, mostly at Bvlgari. Selective distribution is showing a very strong performance with plus 19% organic.
7 points of this growth comes from the new concession awarded to the effect in Hong Kong at the end of last year. Let's move to Slide 3, where you can see comparison between 1st and second quarter in terms of organic growth. As you may see, there is a slight improvement in most business groups, particularly in fashion and leather. The slowdown in wear and tear it was anticipated and already discussed at our conference call in April. Let's now move to Slide 4, which shows a geographic breakdown of revenues.
Europe and Asia, including Japan, account for roughly onethree each, while the U. S. Is onefour. It is worth noting the reduced share of Japan, mostly due to the drop in the value of its currency. Moving to Slide 5.
You may see the organic evolution of sales in our main geographies. Growth rates, although a bit higher than in Q1, show a similar structure. Europe is growing low single digit, while domestic Japan is Japanese tourist business. U. S.
Are close to double digit growth. U. S. And Asia, somewhat boosted by the Hong Kong International Airport concession, show a strong momentum. Let's now move to the next slide, Slide 6, where you may see our simplified profit and loss account for the period.
I would like to make the following comments, not on revenues that we already discussed. Let's start with gross margin, which improved a bit being 65.8 percent of sales, 80 basis points ahead of last year. Operating expense grew 9% in euro terms and 8% if we exclude the impact of Hong Kong International Airport concession and currencies. Selling expenses were up 11%, marketing 5% and G and A 7%, again excluding currency and Hong Kong concessions. The current operating profit is up 2% with operating margins reaching 19.8%, a slight drop compared to last year.
The bulk of the drop comes from the new Blahong compensation, which generated revenues while posting a loss quite normal in start of phase. Excluding Hong Kong, in euro terms, revenue would have risen by 4% and operating profit by 3%, while operating margins would have been essentially flat. Other operating income and charges are negative by $40,000,000 reflecting mostly amortization and depreciation of intangibles. I shall discuss financial charges in a separate slide in a minute, but the main point is a drop in dividend as we benefited last year from Hermes' €5 per share exceptional dividend. The group tax rate is around 31%, a bit higher than last year.
As a result, group share of net profit is down 6% and up about 1%, excluding Hermes' exceptional dividend impact. Let's now look at the current operating income, which is broken down by business groups on Slide 7. Wine and Spirits had a strong first half with 9% growth in its current operating profit. Fashion and Leather ended the semester more or less flat, penalized by significant retail and marketing investment in brands like Belluti, Puccio, and Jacobs. Louis Vuitton's margins were slightly up in the first half.
Perfume and cosmetics shows a 2% increase in current operating profit, a bit below sales due to marketing investments. Worches and Drury was affected by the softness of some of its main markets and by the cleanup of some retail wholesale, sorry, activities. Finally, a very strong semester with Directed Distribution, operating profit being up 9%. Excluding Hong Kong concession, sales in euro for this business group would have been up 10% and operating profit in euro as well would have been up 13 percent. Let's now turn to Slide 8 and the analysis of the net financial charge.
3 important points. The cost of debt is significantly down. Onethree of the decrease comes from lower interest rates twothree from lower average debt. The cost of hedging was higher than last year and probably higher than what it should be for the second half of the year. Finally, income on the financial investment portfolio was mature than last year due to the exceptional dividend income of €5 a share from Hermes paid in 2012.
Moving on to Slide 9, where you may see the balance sheet structure. The structure of the balance sheet did not evolve much compared to 2012 year end. Total equity is in excess of 50% of the balance sheet, while inventories still represent 17% of the total. Turning now to Slide 10. A few words on the cash flow statement.
1st, net cash from operations was at €102,000,000 I. E. Plus 5%, in line with operating profit. Working capital requirements used about €1,000,000,000 in cash, in line with last year. Due to seasonality, we expect the second half of the year to be much better than the first half.
And finally, capital expenditures are up with an additional €140,000,000 for the semester. Overall, net cash from operations is about €400,000,000 in the first half of twenty thirteen, not far from last year's level. I will finish the start of the presentation with a comment on the group's net debt on Slide 12, which reached €5,000,000,000 at the end of June, about €700,000,000 higher than the level at the end of last year. The increase is mainly due to the payment of dividends to our shareholders and minority equity partners, which during the period of the year this period of the year exceeds our net cash flow. The group's net debt as at 30th June 2013, we present 19% of total shareholder equity.
I will now turn to Chris, who is going to review the main developments within our various business groups. Thank you, Jean Jacques. Spirits in the first half of twenty thirteen. As you can see from Slide 13, on an organic basis, revenue in this group was up 5%, which comes on top of 15% in the same period of last year, as mentioned by Jean Jacques. So tough comparison and good outcome.
After a 2% negative currency impact on a reported basis, revenue was up 3% compared to last year's first half and reached €1,800,000,000 for the first half of this year. Looking at the 2 main categories, the champagne and wines organic revenue grew by 3%, but after a negative 4% currency impact, reported revenue fell just slightly in the 1st period to €739,000,000 cognac and spirits organic revenue grew by 7%. And after 1% negative currency impact, reported revenue rose 6% to EUR 1,06,900,000,000 in the first half of twenty thirteen. Profit from recurring operations for this business group was up 9% on top of a strong 20% last year to reach €542,000,000 in the first half of twenty thirteen. Compared last year, champagne and wines was down €14,000,000 while cognac and spirits contributed €60,000,000 In champagne and wines, there was a negative IFRS impact, deriving from the estimated yield of our grape harvest in the first half compared to last year, which should be reversed in the second half of this year.
Now to give you some more context behind the numbers, Slide 14. Looking at the champagne business specifically, volumes were stable in the first half of twenty thirteen compared to the year ago period. This reflects resilience in Europe despite the difficult economic climate and strong growth in key Asian markets. For wine, the first half of twenty thirteen was a good period, notably for sparkling wine. And for cognac, volumes rose 3% in the first half of this year versus the year ago period.
This reflects a number of factors, including good revenue momentum among the younger qualities or the BS category of cognac. And in terms of geography, we saw solid performance in the U. S, good positioning in China, where Hennessy is doing increasingly well in the nightlife activity and rapid development in high potential markets such as South Africa and the Caribbean. Cognac revenues also reflect the positive effect of the price increases implemented since last year. Finally, among the group's other spirits, we saw continued positive momentum at New South Belvedere and strong growth at Glenmorangie during the first half and beginning with our iconic single malt whiskers, which includes Upvote.
As we look to the second half of the year, across all the wines and spirits brands, the group is committed to continuing to strengthen their image and enhance their visibility. This will be achieved through creative marketing and advertising with a notable investment in the digital area. Complementing this will be a focus on achieving high visibility in on trade locations, such as upmarket nightclubs, bars, hotels and restaurants. And we will, of course, continue to expand our presence in emerging markets. Now turning to our Fashion and Leather Goods brand, Slide 16.
This saw a 5% organic revenue rise in the first half of twenty thirteen, which comes on top of 10% in top of the year ago period. On a reported basis, revenue rose 1% in the first half of this year, following a 17% rise in the 2012 first half. In terms of euros, reported revenue rose to EUR 4 point 711,000,000,000 in the first year's first half. Profit from recurring operations was just a bit under flat year over year, which followed a strong 10% rise in the first half of twenty twelve. In terms of euros, it was €1,497,000,000 in the first half of this year.
This deterioration of the operating margin derived essentially from the ongoing restructuring of the distribution and the increased communication linked to the smaller brands, while Louis Vuitton margin actually slightly improved. Turning to the highlights of fashion. To the level of Slide 17, I'll begin with Louis Vuitton. As the brand continues to focus on those elements that I have long made its pearl iconic: creativity, innovation, quality and the excellence of its distribution. Specifically, in the first half, the Louis Vuitton leather products performed very well.
A new model such as the Mini Icon lines had successful launches. The brand also continued to develop the qualitative nature of its store network in the most exciting locations with new Maisons in both Venice and Munich, each of which is off to a promising start. Now to give you some highlights on the other brands. Fendi is benefiting from a very strong focus on its brand values, which are affected clearly in its leather goods, which also brings to life Fendi's Roman roots. Turning now to Celine.
This brand is performing very well, naively its leather goods, which delivered excellent revenues in the first half of the year. To build on its success, the brand is now accelerating the pace of its store expansion. At Stonicheran, the brand is seeing good results from the integration of the DKNY jeans, once a licensed business that it took back in house, performing particularly well. Among the highlights for the exciting Marc Jacobs brand was taking back control over its operations in China. And Vanuti continues its momentum with new advertising and marketing and an increased pace of pulp openings.
Brand opened stores in Shanghai and London in the first half, closely followed by its location in the Miami District Design District in early July, with more to come in the second half, including the opening of a new store in New York City. As we look ahead to the second half of the year, there'll be a great deal of activity across the fashion and leather goods brands. This is Slide 18. Louis Vuitton will continue to capitalize on its historic strength, including new high quality, highly creative products in leather and ongoing innovation in the long loved monogram collection. They will also continue to selectively renovate and expand their store network in high potential locations.
And they'll continue to bring exceptional creativity to the communications, including on building a new destination to offer their very successful Ambitacin Royal voyage campaign. Moving on to Fendi is adding new stores in Paris and Milan, bringing its Roman spirit alive in these other magnificent European cities. Saluti has just started construction on a new production site in Varar in Italy to support the brand's ongoing growth, and we'll pursue selected store openings, as I mentioned. And as you will know, a couple of weeks ago, LVNV announced the acquisition of 80% of the renowned Italian brand, La Raffiera, known for its craftsmanship, quality and beautiful design, all values which will be upheld and treasured as part of the group. Tresier and Pierluigi of the Viana family will remain 20% shouldered and keep their roles for the leadership of the brand.
We expect clearance from the competition Our priorities on this acquisition in the Q4 of this year and, of course, keep you updated about this. Moving on now to perfume cosmetics, Slide 19. Yes, 19. First half reported revenue rose a little over 4% to EUR 1,800,000,000 in the first half of this year compared to the first half year last year's first half. After a negative 2% currency impact, organically revenues grew by 6% on sort of 9% growth in the year ago period.
Profit from recurring operations increased by 2% to reach €200,000,000 Looking at the brand specifically, I will start, as always, with Papa Pensione Euro, which strengthened its position around the world in the first half. This was evident across the 3 product categories. Progress was bolstered by the new Wilde de Parfums on the iconic Saint Gerard D'or. There was innovation across the makeup category, while the deal skin used BB cream, resulting in good revenue momentum. And skin care saw growth, notably in the prestige line.
Guerlain 2 has success with some fragrance with the continued performance of La Petit Tord Noir as well as in skincare with the rapid growth of the L'OCCI Day Imperial, especially in Asia. Was also exciting launches during the quarter, the Gentleman's Owned Unamie fragrance was from Parpar Givenchy and Saint Defendy, are both off to a good start. Benefit due to its unique and fun division has strong global momentum and finally fresh use growing rapidly in the U. S. And is also off to an excellent start in Asia.
Now to the outlook for Pershing's development, Slide 21. Across the brands, there will, of course, be continued to focus on strong innovation and supporting exceptional new traditional products with exciting media campaigns. Looking into some of the brands individually, Parfums' Endure will revive its iconic Ouvure line of lipsticks and also launch a new advertising campaign for Dior Homme and have adopted a new male ambassador ambassador in Robert Pattinson. Guerlain will also re launch its emblematic beloved perfume Charlemagne and reopen its historic Champs Elysees boutique. A number of brands will open new stores over the second half of the year, including Fresh, Benefit and Make Up For Ever.
And finally, this group has just opened a new research and development center in Saint Jean de Bre in North Central France to support ongoing exceptional innovation across each of its brands. I'll now move to Watches and Jewelry, Slide 22. For this group, organic revenue grew by 1% on top of 13% in the year ago period, so a difficult comparison basis. On a reported basis, we're not taking into account a 4% negative currency impact. Revenue is down 3% to €1,310,000,000 in the first half of this year.
Profit from recurring operations was down slightly in the group, about 2% compared to last year's first half, and we recorded €156,000,000 in the first half of this year. This decline in profit was in good measure by design in that the brands took a number of actions to streamline and improve the quality of their distribution, including the voluntary closing of certain points of sale. There are a number of highlights during the quarter for the brand, which shared as a goal, continuing to upgrade in terms of product quality and distribution. So on Slide 23, by the way. Success in achieving this is evident in the strong reception to the innovations introduced by several brands at the Bao Watch Fair in March as well as in the great performance of the VARGARY jewelry, including its newly launched Diva collection.
While the brand saw good revenue performance in their own stores, there was a trend of cautious buying by multi brand retailers given ongoing challenges in the different economies. This was notably the case for Bulgari, who saw double digit growth in its own retail stores. Each of the brands is making investments to enhance the quality of their distribution, including opening boutiques and rationalizing points of sales. And finally, the Tag Heuer brand opened a new movement manufacturing facility in Chevenez, where it will be making its own in house movements, which is an important development. And the brand also celebrated the 50th anniversary that still has been sought after Carrera model.
As we move into the second half of the year, Slide 24, the watch and jewelry brand will continue to focus on the continued success of our iconic product, exciting innovation and unique and captivating communications. They also work to strengthen their production processes and operations through industrial investments and taking advantage of synergies across the brand. Walgreens specifically will begin construction on the new jewelry workshop in Italy. In terms of stores, the brand will continue to effectively enhance and expand their own network, focusing on their best and most exciting locations. This includes Tag Heuer's planned opening on the Champs Elysees and bouldering the renovation of its historic boutique in Rome.
And finally, the brand will be even more selective in their sales and multi brand distributors in order to maintain and enhance their image. Now moving on to our last business group, a very exciting effective retailing business on Slide 25. Business group had a very strong half. Organic revenue was up a very robust 19%, which comes on top of the 16% rise in the year ago period. After taking into account a negative 2% currency impact, reported revenue grew over 17% to 4 point €215,000,000 Profit from recurring operations in this business grew 9% to EUR 407,000,000 in the first half of the year.
The major renovation work at the newly acquired concessions at the Hong Kong International Airport was the principal reason for the decline in the margin for this business group. Looking at the business lines businesses in more detail on Slide 26. DFS saw strong momentum among Asian Tian tower with the exception of the Japanese, but it's been hurt by weakness of the yen. DFS benefited in particular during the period from the renovation of Hong Kong and International Airport Concessions, which has been well received and the outstanding performance of Hong Kong and Macau Galleries. Sephora also had a great start to year with market share gains in all regions.
This fast growing brand saw very spirited momentum in existing stores, especially across North America, the Middle East and Asia. At the end of the first half, there were a total of 1413 stores worldwide, up 64 stores versus the first half of twenty twelve. This includes its new flagship in Shanghai, which opened a great sunfare. That also expanded its presence in India during a period. And online, where Sephora is an industrial industry leader, it has seen continued strong growth.
Finally, my final slide, Slide 27. Looking forward, DFS is focused on strengthening its leadership position in Asia as well as continuing to invest in its galleries in key markets. We also recently completed the renovation of the location at the Los Angeles airport as part of the overall historic Tom Bradley terminal there. DFS also will also renovate its location in Table 1 in JFK, which is always popular with international travelers. These actions are all part of the work that DFS is doing to reinforce its position as a luxury destination, driven by compelling performance and a strong relationship with Travelers who trust its merchandise and service.
This will all be underscored with an innovative marketing program, including a new branding for its Galleria to be introduced later this year. Now finally, for Sephora, they will work to accelerate expansion of their store network on a global basis. At the same time, they will further enhance their digital and mobile offerings, both areas in which they have been on the cutting edge for the benefit of their clients. And they will also continue to introduce new and exciting brands that set them apart in the beauty space, including the new Marc Jacobs cosmetics line, which you may have seen be reported on and will be exclusive to Nucypura. They will also continue to develop the successful Sephora brand.
With that, I will now turn the call back to Jean Jacques for a brief wrap up before the Q and A. Thank you, Chris. Now I would like to conclude this brief overview of the activity with a few comments highlighting the most significant points of H1. 1st and foremost, I would like to point out that despite a tough comparison base, most of our businesses show a good momentum. Likewise, all our geographies have, I will call, a little better performance in Q2 compared to Q1.
It's also worth noting that apart from Europe, where we cannot expect wonders, other geographies are close or above 10% gross margin. Thirdly, our operating margin held pretty well in the context of limited top line growth. Remember that excluding Hong Kong concessions, top line grew 4%, while bottom line was growing 3%. Finally, despite significant capital investment and our balance sheet remains very strong and will enable a smooth funding of the Loro Keana acquisition. Turning to Slide 30.
What about the rest of the year? Always difficult to make forecasts, but I shall give you some points which we view as important. 1st, economic and currency environment remains as difficult as ever. We expect economic conditions to improve somewhat until the end of the year, but we hope currencies will not wipe this out. Secondly, our margins held well in H1.
And despite the less favorable currency hedging portfolio in H2, I trust we should be able to keep controlling them. So we feel our product pipeline is strong for the second half and combined with innovative marketing initiatives, they should support the business. So that is basically all we wanted to say, and we shall now open the Q and A session. Thank you.
We have the first question from Warrick Ocunus from Deutsche Bank. Please go ahead.
Hi, yes. Good morning, Jean Jacques. Good morning, Chris. A couple of questions, please. Firstly, could you give a bit more elaboration on the geographic splits in Fashion and Leather in Q2?
Maybe just talk about the trends by geography, please. I'll start with that one.
Yes. Basically, it's a little bit the same as what we saw in Q1. We have Asia being flattish. We have U. S.
Being mid single digits, while Japan and Europe are about double digit, either a little bit lower or a little bit higher than double digit. So we haven't seen much changes in the global trends within geographies.
Secondly,
could you give us an idea of what the currency boost was to profits in the Fashion and Leather division? I think it was €60,000,000 across the whole group.
Yes. It was not very significant. I mean, a big chunk of the currency impact, positive currency impact took place within wine and spirit. So as far as fashion and leather, it's positive, but nothing really significant.
Thank you very much. And just finally, how happy are you with Vuitton with your existing price architecture in your leather goods ranges? Should we be expecting you to increase the pace of introduction of new products in the second half?
Sorry, I missed the question. The question is on price architecture or products?
Both price architecture and the ranges that support that. How happy are you with your with the architecture now? And are you going to accelerate the
pace of new product production? So on the price architecture, we are I can say, more or less happy. I mean, we suffered a very severe drop on the yen, which is causing some disruption in the business with a big drop in the travel retail business with Japanese and conversely significant increase in the domestic business. The latter is not a problem, but the former is a little bit of an issue. It caused us to increase prices in a very significant way in Japan over the past few months.
The current architecture is quite okay, but the disruptions that we've seen in the business, particularly the one I described, are not entirely over. As far as the product pipeline is concerned, we'll not go into details. I mean, a brand like Vuitton has and will introduce has to and will introduce new products at all times. They will do it with initiatives that we think, particularly with the CapEx in bag, are particularly promising. But it's a bit early to say that we are very hopeful about the outcome of this.
That's great. Thanks very much, Josek.
The next question is from Mr. Mario Ortelli from Stanford. Sir, please go ahead.
Good morning, Jean Jacques, more me
and Chris. Two questions on Vuitton. The first one, if you can give us some color about the evolution of the revenues that we return in the first half and what were the good drivers in terms of price mix, volumes and average selling price. The second one will be some return on the margin. If I understood well, Chris mentioned that the margin of new return has likely improved.
I kindly ask you what is your outlook for the rest of the year from the margin of return? And the last question about the other brands, is the margin of return slightly improved? Can you give us some more color about the investment that you made on the other brands of Fashion and Leather because it seems that the profitability had a contraction? Thank you very much.
Okay. Well, it might be a bit disappointing on the first question because we don't necessarily answer in great details on all of them. Let's start with Victor. What I can tell you is that Victor, as always, does not mature materially in terms of growth with the rest of the average for the division. It's a bit lower.
That's what I can say. In terms of price, mix, etcetera, we never go into details. There was a price impact in a limited way, but there was a price impact, as always, in the first half of the year and obviously contributed to the growth in the business in an organic way. Yes, margins of Itau are a bit it's not nothing tremendously I mean nothing earth shaking, but nevertheless, the margins are up, so which means as the margins of the whole division are a bit down, that the rest of the division is experiencing a slight decrease in margins, which is, as you said, stemming from investments. These investments are pretty significant in many brands.
We mentioned Fendi. We mentioned Gallucci. We mentioned Celine. I mean, all these brands are doing extremely well from a top line viewpoint, but are in the phase of expanding their network, which is always a costly exercise, clearly when you have to sign leases, pay rents and you have not opened your store yet. So you don't benefit from the contribution of the store, but you get most of the cost at the same time.
That's the type of thing we are the type of situation we are in many, many brands. And I look at the Fendi store, which is absolutely fantastic that we opened a couple of weeks ago in Paris. We have been paying the rent for about a year. So as far as the first half is concerned, we have the rent of the Fendi store on Avenue Montaigne, which is, as you may imagine, quite costly without any revenues. So that's the type of situation we are experiencing more or less in all the fashion brands.
I think in some of them, which explains why the margins there are a little bit under pressure.
Thank you very much.
The next question is from Mr. Antoine Belge
from HSBC. Sir, please go ahead. Yes. Hi, it's Antoine Belge of HSBC. Three questions.
First of all, maybe a word on cognac. I think you had flagged that there would be a destocking effect in Q2. So do you expect further destocking in the second half? And what's your view about the end demand for cognac, especially in China but also in the U. S, where it seems to be quite strong?
Then on Revitur, maybe at least qualitatively, the margin increased even though I think you had mentioned that the transition to a more small level would have at least initially maybe a little bit negative impact on the margins. It seems that that's not been the case or maybe was it that I think last year in the first half there were strong investment in marketing, etcetera. So is it more an improvement at the gross margin level? Or is it maybe less A and P, etcetera? And finally, I've noticed that you increased your stake in Airbus slightly, I think 0.5%.
Is it something that you intend to continue going forward? Thank you.
Okay. Thank you, Antoine, for your usual free question. Let's start with cognac. And we mentioned the destocking in Q2 in particularly in China. Actually, we anticipated in Q1 where sell in was pretty robust and sell outs were showing some signs of softness in China that obviously Q2 will not be at the same level, which is exactly what happened.
So we're experiencing some destocking in Q2, which is likely to last for a few months, probably the whole of Q3 as well, the level of inventory, which is not in actual terms particularly high. But compared to what it was before, is a little bit on the high side. So China is likely to experience further limited destocking in cognac. Yet the rest of the business is extremely is doing extremely well. I mean, the American part, the U.
S. Part of the business is really moving from francs to francs. We are very pleased with the outcome of our marketing initiatives for the last 18 months. So it's really doing well. The rest of Asia is not offsetting China, but compensating part of the drop that we've seen in Q2 in China.
And Russia is also doing great well. So all in all, I mean, the cognac performance is extremely strong, and we are very pleased with it. For LV, first of all, we never ever said that the transition to leather would weigh on margins, never. We said that initially margins on leather products are a bit lower than they are on canvas, but it's up to us to find out ways to offset that. And we have done that in the past, and we will do this in the future.
So we never said that the transition would weigh on margins. So margins were a bit better. It comes from more or less everything, a little bit of a little bit better gross margin and a better absorption of operating costs. I will not go into detail. Hermes on the increase of in the stake, I mean, it was an opportunistic move.
It doesn't say anything about our attitude in the future. So we cannot extrapolate that for the rest of the year.
Okay. Maybe just one clarification. So the impact of the new BFS concession, so if I tell you that's roughly like €400,000,000 on the sales level, but a negative contribution of around €20,000,000 is of realistic assumption?
You're a bit on the high side on sales, but you're about right on profit. Okay. Thank you very much.
Next question is from Mr. Thomas Chauvet from Citi. Sir, please go ahead.
Good morning, George, I'll take Chris. Three questions, please. The first one on Vuitton. What was the net store openings in the period? Were there closures offsetting the Venice and Munich openings?
And what type of space growth are you planning to add this year at Vuitton? Secondly, on Wines and Spirits. So I assume that the whole of the 400 bps improvement in cognac margins was due to FX or was there any other major impacts to explain the margin progress? And could you come back on champagne on the accounting treatment of the harvest? I remember in H2 last year, you had actually pressures from that poor harvest.
So is that what Chris meant by reversing in H2? And thirdly, what was the Sephora growth in constant currency in Q2? And could we get perhaps the same store sales growth for U. S. And France?
Okay. So the net opening at LP is 0. I think it's plus 5 minuteus 5 or something like that. So it's not huge numbers or huge changes in the total store count anyway, maybe plus 6, minus 6, because it's not very far from that. In terms of base growth for the total year, we expect to be, as always, around 7%, 8% for the full year.
For cognac, there was some, as you said, some significant margin improvement. Part of it the bulk of it, let's say, is coming from current sales but also from underlying improvement in organic margins. So as I said, very satisfactory performance there. Champagne, it's a little bit more complex. I will try to be clear.
You pointed out rightly that we had we suffered last year some impact with the harvest being of low quantity than anticipated. And therefore, the profit we made on our own harvest was lower than it was in the same period of the preceding year. It's exactly the same year in H1. In H1, we compare in H1 2013, we compare ourselves to 2012 when in the first half, the assumption for the yield for the harvest was as high as 12,500 kilograms per hectare. This year, we are 20%, 25% below.
So you have a volume impact. The assumption we are taking in the first half of the year, in other words, than the assumption we took last year. So we have a negative impact on margins, which is quite significant, more or less 100 basis points for champagne. We are pretty hopeful that we'll get it the other way around in the second half of the year Because last year, in the second half of the year, not only we had a poor yield, which caused us to register lower profits on the harvest for the second half, but we also have had to reverse the excess profit that we took in H1 because our assumption was too high. So we have a fairly favorable comparison base.
And assuming the yield in the harvest is correct, we should get a much higher profit on our own harvest in the second half of the year. So a negative impact in H1 and hopefully a positive impact in H2. Finally, your question on Sevaal. Chris, you want to take this? Yes.
The Sephora same store growth or comparable store growth was similar to that in Europe to Q1 to low single digit. And the Americas were in fact, it moved up from high single digit to just about double digit in the Americas. In China, very strong double digit comparable store growth.
Thank you very
much. The next question is from the Stu Ceballos from Morgan Stanley. Morgan, please go ahead. Hi, good morning Jean Jacques, good morning Chris. I'm actually going to go predictably to the 3 questions please.
Firstly, just on I know you touched on the weakness in Japan. I think you gave a number of minus 40% impact on the European sales for Louis Vuitton in Q1. Is that pretty similar in Q2? Secondly, can you tell us if have there been any changes that you've noticed in the travel retail segment, not just at LV, but anything that you've noticed through DFS as well in the period? And then thirdly, I think Chris mentioned a new production facility at Calgary for Italy.
So can you talk about that in this as well? Thank you.
Okay. So the travel retail business with Japanese was down 44% in Q1. That's the figure I mentioned. It's not that far in Q2. So basically, we have the same trend.
We have a big drop in the Japanese travel retail business. And conversely, we have a significant increase in the domestic business. Just as a reminder, the domestic business is 3 quarters of the total business with Japanese, and the travel retail business is 1 quarter. So despite spectacular, the drop in travel retail is offset by the rise in the domestic business. Overall, the Japanese time base is more or less flat in H1, but big differences and big distortion in our business.
Travel Retail, the trends global trend, our feeling is that things are improving a bit, particularly when it comes to Asia. If we look at our business, yes, DFS, excluding Hong Kong, obviously, and the very natural impact from Hong Kong, it improved a bit a few percentage points in between Q1 and Q2. So it shows some improvement. And we've seen a particularly marked improvement in areas like Hong Kong and Singapore, which is good news for all of our brands we are heavily involved in these areas. Certainly, your question on the production facility at Bvlgari.
Well, the idea is that we are trying to internalize some of the operations that we have been set contracted out until then in order to improve efficiency and quality. That's the objective. In terms of investments, we are not talking about very, very significant numbers, and they shouldn't change the picture for the division and for the group.
Very clear. Thank you. The next question is from Ms. Stacy Rabinovitz from Consumer Edge Research. Madam, please go ahead.
I was just wondering for the Fashion and Leather Goods business, if you could talk a little bit about the trends in wholesale versus retail?
Yes. So obviously, we are not talking about Vuitton. We are talking about the other brands. Retail is doing better than wholesale. But frankly, as far as wholesale is concerned, part of it is self inflicted.
What I mean by that is that some brands, particularly Selin and Fendi, have deliberately decided to progressively reduce the share of their wholesale business in the total. So if you look at their numbers for selling the wholesale business is hardly growing. And for Fendi, it is down. But it is deliberate action. I mean, they really want it to be that way.
If they would want to say more, they certainly could. But they want to remede the share of the wholesale business. For the other brands, which are using the wholesale channel as a privileged way of distributing their products, like Kenzo, for instance, we are getting very, very strong advances quarter after quarter, which is which are very promising for the
We have the next question from Mrs. Catherine Rolland from Cheuvreux. Madam, please go ahead.
Good morning, Chris. Good morning, Jean Jacques. I have three questions actually. First of all, follow-up question regarding the Wine and Spread business. Could you give us some more color about the performance by regions?
2nd question is about Vuitton sales trend to Chinese customers. Could you tell us what was the overall trend to Chinese customers in H1? And what is your view about the trends in the near future regarding sales to Chinese consumers? And third question is about still Driton. Would it be fair to assume that Steljutron sales strength maybe could benefit from more product launches in H2 versus H1?
Okay. Thank you, Catherine. So for the regions in wine and spirit, we had a strong business in if I'm talking just about Q2, as we already discussed, Q1 in April, the business was strong in Japan and strong in the U. S. So it's a little bit more a little bit softer in Europe, especially flat due to the fact that champagne is a big chunk of the business in Europe and champagne is under pressure everywhere and therefore in Europe.
And Asia was very slightly down, mostly due to the Chinese business in cognac being down as we expected and as we anticipated in April.
Okay.
On the Chinese customer for H1, the Chinese customer I think altogether, including domestic and travel retail is something like mid single digit. But the bulk of the growth takes place with tourists, I. E, outside China. For the future, it's a very difficult question. I mean, we have no reason to be pessimistic, but it's future work there.
I mean, I really cannot elaborate and comment further on that. And it's really the same for your question on the pipeline, the product pipeline in H2 for Vitor. Obviously, when we launched products, we expect them to have a strong impact on the business. We are very hopeful that particularly the leather product and the Capucine that I mentioned before will be great success. We'll see.
So let's discuss that in a few months, if you don't mind.
Okay. And just about the sales trends of Chinese customers. Is it fair to do you think that you had some improvement in Q2 versus Q1? You had a slight increase acceleration?
It's a slight improvement, very slight improvement, yes.
Okay. And is this improvement fairly equal in certain months in Q2? Or did you see some improvement by the end of the quarter? Because it seems that some operators in the luxury hood industry could see some improvements in June. Is it the same thing
for you? I will not comment. I no, the 3 months I mean, April was a bit soft, but we had May June were okay. So I couldn't really say that end of June or second half of June, as I've heard somewhere from some competition, was much, much better than the rest of the quarter. Frankly, it's not the case.
Okay. Thank you very much.
We have the next question from Mr. John White from Berenberg. Sir, please go ahead.
Good morning, Jean Jacques. Good morning, Chris. A couple of questions for me, please. With regards to LV's price difference between Beijing and Paris, I know that over the recent few quarters, we've seen that delta now. I think last year it was around 45% to 47%.
And then in the Q1 it was about 30%. Just wondering in the second quarter how will the pricing compare between, say, Beijing and Paris into the second quarter? That's my first question, please.
It's the same. It's 130,000,000 or something like that. So we haven't seen a major difference.
Okay, great. And with regards to LV space, I know that you had commented earlier saying that you're looking for between 7% to 8% space. And within that 7% to 8%, how much of that will be effectively used to base? And how much of that space will come from ongoing extensions and refurbs?
Well, the bulk of it as we are not really opening that many stores. I mean, it's a difficult question because sometimes we are closing the store. I mean, look at what we live in Munich. We had a store which was 200 meters away. We closed it down and we opened a much larger one.
Is it an expansion or an opening? It's difficult. I would say that the bulk of what we do today is really improving and expanding the existing network. From time to time, there could be expansion in new territories, be it towns or countries, but the bulk of what we do is really improving existing offer.
The difference between the sales contribution from new space and extensions in research, do you see a significant change in the sales contribution that you get one and doing the other? Yes.
Definitely, so. I mean, you're talking about 2 different things. I mean, when you have a store, which is 1 floor and you get the basement or the 1st floor or you have an area where you're not enrolled and you open a store, obviously, these are entirely different projects. The cost of them, particularly from a rental viewpoint, is not at all the same. I mean, the former is much more expensive than the latter is much more expensive than the former.
And but the yield in terms of additional sales is not at all the same. So you're not talking about the same type of project. That's why the correlation between sales and increase in square meters is from being purchased, as you know.
Yes, absolutely. Great. Thanks. And just with regards to the watches and jewelry business, I know you talked about at the distributor levels, you're seeing relatively cautious approach to orders. And are you expecting or have you seen any sign going into the second half of the year?
But are your watch brands taking a view that you don't really see any significant pickup in China in particular until the first half 'fourteen? Or do you think that there's some light coming through the tunnel into the second half of the year?
Frankly, too early to say. The short answer is no, and it's a bit early to say. And July is never a very exciting month. So it's really focused onward that we'll see whether the market will pick it or not.
Okay. So I've just got 2 very quick housekeeping ones just on CapEx for the year and also on the tax rate. Are we to expect similar tax rate over the first half of the year? And any sort of
comments around CapEx guidance for the year, please?
Tax rate is CapEx guidance for the year to be great?
Tax rate is likely I mean, there is no as you know, there is no such thing as a first half tax rate as we pay taxation on a full year basis. So we try to have a tax rate in the first half, which is what we expect to get for the full year barring any exceptional impact of specific situations. So yes, the answer is that we expect CET1 something like that for the full year. On CapEx, I think the figure which is a little bit north of what we did last year is certainly the right assumption at this point in time.
Okay. And just finally, are you on track to launch perfume and cosmetics with an LV by the end of this year or
Not by the end of this year.
Not by the end of the year? No. Okay. Many thanks.
Thank you.
We'll have the next question from Mr. Matthias Eferes from MainFirst. Sir, please go ahead.
Yes. Hi. Two questions, last to me. One is on Selective Retail. You mentioned renovations in Hong Kong, margins.
When you plan to finish the renovations, I. E, when can we then expect a bit of improvement or less of a decline? And secondly, on Bvlgari, you mentioned reduction of third party wholesale business, cleanups and so on. When will you finish be finished with that? Thank you.
Okay. Thank you. For Hong Kong, I think it's not over yet, but we are close to that. I mean, we did a good job and a quick one in Liquor and Tobacco and Cosmetics, the general merchandise concession is still in progress. So but we would expect this to be done by mid of August, something like that.
So we should be operating under normal conditions from September onwards. On delivery, on the cleanup of basically cosmetic and watches, wholesale doors, Cosmetic will well, in terms of doors, the cleanup is expected to be done to be competitive by the end of the year. As far as watches is concerned, it's more tricky. We are working on it. Some doors are not qualitative enough, nevertheless profitable.
So it's a big question for us to decide what to do. So it may unfold and just as others, it will unfold over 2014 as well. Thank you very much.
The next question is from Mr. Luca Sonke from Exane BNP Paribas. Sir, please go ahead.
Yes, good morning. A while ago, Mr. Arnaud had set out a goal to increase brand desirability for Louis Vuitton and to keep sustaining it over time. I wonder if you could assess for us where you stand on this goal. If you think that you just opted this on this path if you're 10% of the way?
Or do you think that you're further ahead like 50% to 75% of the way? Second question on Hermes. It seems to me that my guess it's what one control from the behavior of the MET family and the EMS senior management that they don't really want LVMH, and they don't really want to belong to the group. I wonder if you're envisaging a scenario where at one point you find a solution and get out of the capital of MS and get that money to work on different acquisitions. Also considering the court action that LMS has been mounting against LVMH NDA that's fine for in a conflict disclosure on this and therefore the big risk connected to that.
On a third point, I wonder about watches and jewelry. It seems to me that this division is probably today the weakest in your strong portfolio. I wonder if you're envisaging to continue to strengthen the division through organic activity alone or if you have a door open for further M and A. And if you do, well, this M and A would be bolt on or if you would consider major acquisitions as well in order to strengthen your position in Hart Luxury. Thanks very much.
Thank you, Luca. I will find it hard to answer to your first question, frankly. I mean, the brand's durability is something which is essentially qualitative, and you're asking me to put a quantitative measurement on a highly qualitative thing. We're working on it. I think if you look at advertising, if you look at products, if you look at stores, the brand is improving all the time.
We didn't tweak last year to improve it. I mean, it's been improving for the last 150 years, I would say. But it's very difficult to put a mark, a note on this. So I frankly, I cannot answer, although the objective has been clearly stated by Mr. Arnaud, and we are pursuing this objective relentlessly, I would say.
On the Hermes, well, I will not make comments on that. I think the fact now that the Hermes family is not particularly pleased with our stake in the company is not the scoop of the year. What we do from that, time will tell. I mean, we are you imply that by selling the stake, we could put the money to work elsewhere. We don't think we are constrained in any way in our ability to spend money to influence capital in our businesses to grow them.
So we don't need the money which is currently invested into Hermes to fuel the growth of the other businesses. They do it by themselves and we have very significant cash flow between the group within the group that allow us to do so. So there is no particular need on our side to liquid to monetize this strategy in order to fuel the growing loss of other businesses. And to be frank, we are pretty pleased with the performance of the Hermes business. So there is no particular pressure on our side, I would say.
Finally, on watching and Drury and the question of organic versus M and A, I think the priority is definitely on growing the business organically. We are in the middle of a turnaround and a restructuring of Bougain, as you know. The work is far from being over. It's a long term process. And we don't want to divert management's attention from this highly important work just because we would be buying other businesses, particularly if they are of a significant size.
So definitely, the focus is on the organic growth.
Thank you very much, Jose.
The next question is from Mr. Fabrizarry from Equita. Sir, please go ahead.
Yes, good morning. Two quick questions. The first one is about cognac. I was wondering if this switch to more younger product in terms of maturation could be so could have an impact on your profitability and working capital? And the second one on LV, if you can explain how much is the difference in profitability for the products sold in Europe and in Japan?
Thank you. Okay. So on cognac, the intention is not to change the, I would say, the global metrics of the business by shifting the business toward younger qualities and younger customers. Really, what we are trying to achieve in particularly China, which is the only market where basically we have the 3 qualities. I mean, we have the equivalent of VLs, we have the SAP and we have XO.
It's the only market where we have the 3 qualities. The idea is that this is a very large market and different products will gather the needs of different customers. And particularly when it comes to the nightlife, the emblematic products such as the SOP and XO do not necessarily sell as well as they do in other segments. And a younger product is much more suited for the needs of this market. So it will not push the lines and change the metrics of the business overnight.
I mean, it would need many, many years. So in the I would say in the medium term, we don't expect a major impact on both capital needs and margins. Your second question is about margins. There is not a huge difference between Japan and Europe, as you saw, in terms of profitability. There used to be 1 10 or 15 years ago, but the profitability in Japan decreased and the profitability in Europe improved in a very significant way.
As of today, the numbers are pretty close.
Thank you.
The next question is from Mr. Leopold Boutier of ODDO. Sir, please go ahead.
Yes, good morning. Two questions from me. The first one maybe on the smaller brands in Fashion and Leather, particularly Sandy Steady and Belleau Ti,
it seems that you have
a lot of self inflicted paying there in terms of profitability. Is that possible for you to quantify in terms of timing how long it should take for you to keep investing in marketing basically? And how long it will take to rationalize the network to not a point where you're satisfied? This is for the first question. The second one, Europe, could you give a bit more color in terms of countries, differences between countries and maybe local versus tourists?
Thanks.
For the other brands, I would say it's marketing, it's retail. It's a lot of things that explain why. I try to explain a little bit the situation, particularly on the retail side. This will not disappear overnight. We expect sort of 18 months further investment into these brands.
I mean, they have reached a level which justifies, in our view, the investments we are making when you start investing in a brand. I mean, you don't invest for 3 months and you stop thereafter. And you really have to do it on an ongoing basis for a certain period of time. So I would say the bulk of this year and next year will be devoted to significant investments in these brands, which means higher capital and a little bit of pressure on profitability, as you've seen in the first half of this year. As far as Europe, the second question is concerned.
I mean, obviously, North of Europe is doing better than the South of Europe. The analysis on tourists versus domestic really complex due mostly to Japanese, who are a big factor in Europe and whose business has dropped in a significant way over the first half of the year, as I explained before. So the domestic business is a few percentage points and a few percentage points higher than the tourist business for the whole area. All right. Thanks.
Maybe one last question, if you if there is one.
The last question is from Mrs. Eva Krumovka from UBS. Madam, please go ahead.
Yes, good morning. I was wondering if you could talk a little bit about the Pressures and Cosmetics division, please. I think in Q1, you talked about destocking and I was wondering if the allowed is now equal with sell in. And secondly, I was wondering if you can maybe give a bit of color how you see the underlying market develop given that the likes of Lior Al has been talking about a slowdown? And maybe a word on margin, I mean growth has been pretty good.
Why is margin not doing better than it has?
Okay. On the destocking, it was mostly in the U. S. It came to an end. I mean, as we expected, I mean, our business was slightly down in Q1.
It's a strong double digit in Q2 in the U. S. So definitely, I mean, a little bit of excess inventory that we had at the end of last year has been removed. And the business is really going fast. Well, the question on margins you have is it's an legitimate question, but when you look at one quarter or one half of the year, one semester, it's always difficult to draw conclusions from margins in this type of business because you have the phasing of marketing campaign launches, etcetera, which could distort the business one way or the other.
So as far as the first half is concerned, we have a little bit of pressure on the margin, but really nothing very significant. And we think it's the business is doing okay and not significant. It should be no particular conclusions should be drawn from this little bit of discrepancy between top line and bottom line growth.
And in terms of
the underlying trend, do you hear me?
The underlying sorry, I cannot hear you very well.
The underlying trend in terms of demand.
Well, it varies a lot from obviously one country to another. Basically, the areas of strength are the U. S. On the one hand and Asia on the other hand. Where really we see the business growing at a fast pace.
Europe is a mixed more mixed situation with, again, I mean, the North of Europe, I. E. Germany, France and the UK are doing well, while the South of Europe is under a very senior particularly as far as Spain is concerned. As far as Italy is concerned, it's getting a little bit better. I mean, the comparison page is getting at long last, glass, but it's getting easier.
So we see numbers which are still a bit negative for the market, but not as bad as they were previously.
Okay.
Okay. So thanks a lot for attending the call. I don't have further comments to make, and I just look forward to discussing with you Q3 numbers
at in
the course of October. Thank you, and have a good day.
Ladies and gentlemen, this concludes the conference call. Thank you all for attending.