Ladies and gentlemen, welcome to the LVMH first half results conference call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead.
Thank you. Ladies and gentlemen, good morning 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 numbers, and Chris Hollis, Group 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, 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 revenues for the first half of the year. As you may see, we had a very solid semester with all our business groups showing positive growth. Two points of reference. First, revenue grew organically 12% in the first half of 2012, making the comparison date not so easy. Secondly, the business had an organic growth of 7% in H2 last year, not so far from first half 2013 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 JPY, a 17% drop in the semester. Chris will comment on business groups in more detail, but the main points are as follows. Wine and Spirits had a strong semester with a 5% organic growth, which comes on top of last year's growth of 15%.
Volume rose 3%. Fashion & Leather is at 5% in organic terms with a very strong performance from Celine, Fendi, Givenchy and Berluti. Perfumes & Cosmetics is up 6% in organic terms, beating most, if not all, markets performances in its main geographies. Watches & Jewelry was a bit under pressure in the first half, mostly due to phasing in novelties and to ongoing distribution cleanups, mostly at Bulgari. Selective distribution is showing a very strong performance with plus 19% organic. Seven points of this growth come from the new concession awarded to DFS in Hong Kong at the end of last year. Let's move to slide three, where you can see a comparison between the first and second quarter in terms of organic growth. As you may see, there is a slight improvement in most business groups, particularly in Fashion & Leather.
The slowdown in Wine and Spirit was anticipated and already discussed at our conference call in April. Let's now move to slide four, which shows the geographic breakdown of revenues. Europe and Asia, including Japan, account for roughly one-third each, while the U.S. is one quarter. It is worth noting the reduced share of Japan, mostly due to the drop in the value of its currency. Moving to slide five, 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 digits, while domestic Japan is benefiting from the drop in 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 six, 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% of sales, 80 basis points ahead of last year. Operating expense grew 9% in EUR 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&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 Hong Kong concession, which generated revenues while posting a loss, quite normal in the startup phase.
Excluding Hong Kong, in EUR 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 EUR 40 million, 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 Hermès EUR 5 a share exceptional dividend. The group tax rate is around 31%, a bit higher than last year. As a result, group share net profit is down 6% and up about 1%, excluding Hermès exceptional dividend impact. Let's now look at the current operating income, which is broken down by business groups on slide seven. Wine and Spirit 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 Berluti, Pucci, and Marc Jacobs. Louis Vuitton's margins were slightly up in the first half. Perfume and Cosmetic shows a 2% increase in current operating profit, a bit below sales due to marketing investments. Watches and Jewelry was affected by the softness of some of its main markets and by the cleanup of some wholesale activities. Finally, a very strong semester with Selective Distribution, operating profit being up 9%, excluding Hong Kong concession, sales in EUR for this business group would have been up 10%, and operating profit in EUR as well would have been up 15%. Let's now turn to slide eight and the analysis of the net financial charge. Three important points. The cost of debt is significantly down.
One third of the decrease comes from lower interest rates, two thirds 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 much lower than last year due to the exceptional dividend income of EUR 5 a share from Hermès paid in 2012. Moving on to slide nine, 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 inventory still represents 17% of the total. Turning now to slide 10. A few words on the cash flow statement. First, net cash from operations was up EUR 102 million, i.e., +5% in line with operating profit.
Working capital requirements used about EUR 1 billion 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. Finally, capital expenditures are up with an additional EUR 140 million for the semester. Overall net cash from operations is about EUR 400 million in the first half of 2013, not far from last year's level. I will finish this part of the presentation with a comment on the group's net debt on slide 12, which reached EUR 5 billion at the end of June. About EUR 700 million 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 this period of the year exceeds our net cash flow.
The group's net debt as at 30th June 2013 represented 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. We'll turn to a discussion of our business groups, starting as usual with the Wines and Spirits in the first half of 2013. 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 as last year, as mentioned by Jean-Jacques. A tough comparison, a good outcome. After a -2% currency impact on a reported basis, revenue was up 3% compared to last year's first half and reached EUR 1.8 billion for the first half of this year. Looking at the two main categories, the Champagne and wines organic revenue grew by 3%, but after a -4% currency impact, reported revenue fell just slightly in the first period to EUR 739 million.
Cognac and Spirits organic revenue grew by 7%. After 1% negative currency impact, reported revenue rose 6% to EUR 1.069 billion in the first half of 2013. Profit from recurring operations for this business group was up 9% on top of a strong 20% last year to reach EUR 542 million in the first half of 2013. Compared to last year, Champagne and Wines was down EUR 14 million, while Cognac and Spirits contributed EUR 60 million. 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. 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 2013 compared to the year ago period.
This reflects resilience in Europe despite the difficult economic climate and strong growth in key Asian markets. For Wines, the first half 2013 was a good period, notably for sparkling wines. 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 VS category of Cognac. 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 revenue has also reflect the positive effects of the price increases implemented since last year.
Finally, among the group's other spirits, we saw continued positive momentum at Svedka Vodka and strong growth at Glenmorangie during the first half, in particular with their iconic single malt whiskey, which includes Ardbeg. 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 desirability. 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. We will of course, continue to expand our presence in emerging markets. Turning to our Fashion and Leather Goods brands, slide 16.
This saw a 5% organic revenue rise in the first half of 2013, which comes on top of 10% in top 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 EUR, reported revenue rose to EUR 4.711 billion in this 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 2012. In terms of EUR, it was EUR 1.497 billion in the first half of this year. This deterioration of the operating margin derives 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 and Leather Goods, slide 17.
I'll begin as usual with Louis Vuitton, as the brand continued to focus on those elements that have long made it so iconic. Creativity, innovation, quality, and the excellence of its distribution. Specifically, in the first half, the Louis Vuitton leather products performed very well. Their new models, such as the Mini Icons 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. To give you some highlights on the other brands. Fendi is benefiting from a very strong focus on its brand values, which are reflected clearly in its leather goods, which also bring to life Fendi's Roman roots.
This brand is performing very well, notably 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 Donna Karan, the brand is seeing good results from the integration of the DKNY jeans, a once licensed business that it took back in-house. It's performing particularly well. Among the highlights for the exciting Marc Jacobs brand is taking back control over its operations in China. Berluti continues its momentum with new advertising and marketing and an increased pace of openings. The brand opened stores in Shanghai and London in the first half, closely followed by its location in the Miami 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 strengths, 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. They'll continue to bring exceptional creativity to their communications, including unveiling a new destination to complement their very successful L'invitation au voyage campaign. Fendi is opening new stores in Paris and Milan, bringing its Roman spirit alive in these other magnificent European cities. Berluti has just started construction on a new production site in Ferrara in Italy to support the brand's ongoing growth and will pursue selective store openings, as I mentioned.
As you all know, a couple of weeks ago, LVMH announced the acquisition of 80% of the renowned Italian brand, Loro Piana, known for its craftsmanship, quality, and beautiful design, all values which will be upheld and treasured as part of the group. Sergio and Pierluigi of the Loro Piana family will remain 20% shareholders and keep their roles in the leadership of the brand. We expect clearance from the competition authorities on this acquisition in the fourth quarter of this year. We'll, of course, keep you updated about this. To perfumes and cosmetics. Slide 19. 19. First half reported revenue rose a little over 4% to EUR 1.8 billion in the first half of this year, compared to the last year's first half. After a negative 2% currency impact, organic revenue grew by 6% on top of 9% growth in the year ago period.
Profit from recurring operations increased by 2% to reach EUR 200 million. Looking at the brands specifically, I will start, as always, with Parfums Christian Dior, which strengthened its position around the world in the first half. This was evident across its three product categories. Fragrance was bolstered by the new J'adore Voile de Parfum on the iconic scent, J'adore. There was innovation across the makeup category, like the Diorskin new Divine cream, resulting in good revenue momentum. Skincare saw growth, notably in the prestige line. Guerlain, too, had success with La Petite Robe Noire, as well as in skincare with the rapid growth of Orchidée Impériale , especially in Asia. There was also excitement during the quarter. The Gentlemen Only from Givenchy and Fendi are both off to good starts. Benefit, due to its unique and fun positioning, had strong global momentum.
Finally, Fresh is growing rapidly in the U.S. and is also off to an excellent start in Asia. Now for the outlook for Perfume and Cosmetics, slide 21. Across the brands, they will of course be continuing to focus on strong innovation and supporting exceptional new and traditional products with exciting media campaigns. Looking at some of the brands individually, Parfums Christian Dior will revive its iconic Rouge Dior line of lipsticks and also launch a new advertising campaign for Dior Homme and has adopted a new male ambassador in Robert Pattinson. Guerlain will also relaunch its emblematic beloved perfume Shalimar, and reopen its historic Champs-Élysées boutique. A number of brands will open new stores over the second half of the year, including Fresh, Benefit, and Make Up For Ever.
Finally, this group has just opened a new research and development center in Saint-Jean-de-Braye in north central France to support ongoing exceptional innovation across each of its brands. I now move to Watches & Jewelry, slide 22. In 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, after taking into account a 4% negative currency impact, revenue was down 3% to EUR 1.31 billion 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 it recorded EUR 156 million 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 voluntary closing of certain points of sale. There were a number of highlights during the quarter for the brands, which shared as their goal continuing to upgrade in terms of product quality and distribution. We're on slide 23, by the way. Success in achieving this was evident in the strong reception to the innovations introduced by several brands at the Baselworld watch fair in March, as well as in the great performance of the Bulgari jewelry, including its newly launched Diva collection. While the brands 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 sale. Finally, the TAG Heuer brand opened a new movement manufacturing facility in Chevenez, where it'll be making its own in-house movements, which is an important development. The brand also celebrated the 50th anniversary of its still loved and sought-after Carrera model. As we move into the second half of the year, slide 24, the Watch and Jewelry brands will continue to focus on the continued success of their iconic products, exciting innovation, and unique and captivating communication. They'll also work to strengthen their production processes and operations through industrial investments and taking advantage of synergies across the brands. Bulgari specifically will begin construction on a new jewelry workshop in Italy.
In terms of stores, the brands will continue to selectively enhance and expand their own network, focusing on their best and most exciting locations. This includes TAG Heuer's planned opening on the Champs-Élysées and Bulgari's renovation of its historic boutique in Rome. Finally, the brands will be even more selective in their sales to multi-brand distributors in order to maintain and enhance their image. Moving on to our last business group, the very exciting Selective Retailing business on slide 25. The business group had a very strong first 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 EUR 4.215 billion. Profit from recurring operations in this business group rose 9% to EUR 407 million in the first half of the year.
A 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 businesses in more detail on slide 26. DFS saw strong momentum among Asian T&E, with the exception of the Japanese, who have been hurt by the weakness of the JPY. DFS benefited in particular during the period from the renovation of Hong Kong International Airport concessions, which has been well received, and the outstanding performance of the Hong Kong and Macau galleries. Sephora also had a great start to the year with market share gains in all regions. This fast-growing brand saw very good 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 1,413 Sephora stores worldwide, up 64 stores versus the first half 2012. This includes its new flagship in Shanghai, which opened to great fanfare. The brand also expanded its presence in India during the period, and online, where Sephora is an industry leader, it has seen continued strong growth. My final slide 27. Looking forward, DFS is focused on strengthening its leadership position in Asia, as well as continuing to invest in its Galleria in key markets. It also recently completed the renovation of their location at the Los Angeles Airport as part of the overhaul of the historic Tom Bradley terminal there. DFS will also renovate its location in Terminal 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 assortment and a strong relationship with travelers who trust its merchandise and service. This will all be underscored with an innovative marketing program, including a rebranding for its Gallerias to be introduced later this year. 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. 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 Sephora.
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&A.
Thank you, Chris. I would like to conclude this brief overview of the activity with a few comments highlighting the most significant points of H1. First 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 an equal or better performance in Q2 compared to Q1. It is also worth noting that apart from Europe, where we cannot expect wonders, other geographies are close or above 10% growth mark. Certainly, 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, our balance sheet remains very strong and will enable a smooth funding of the Loro Piana acquisition. Turning to slide 30, what about the rest of the year?
Always difficult to make forecasts, I shall give you some points which we view as important. First, economic and currency environment remains as difficult as ever. We expect economic conditions to improve somewhat until the end of the year, we hope currencies will not wipe this out. Secondly, our margins held well in H1. Despite a less favorable currency hedging portfolio in H2, I trust we should be able to keep on controlling them. Certainly, we feel our product pipeline is strong for the second half and combined with innovative marketing initiatives, they should support the business. That is basically all we wanted to say, we shall now open the Q&A session. Thank you.
Ladies and gentlemen, if you wish to ask a question, please press 01 on the telephone keypad. We have our first question from Warwick Okines from Deutsche Bank. Please go ahead.
Hi. Yeah, 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 digits, either a little bit below or a little bit higher than double digits. We haven't seen much changes in the global trend within geographies.
Thank you. 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 EUR 60 million across the whole group.
It was not very significant. A big chunk of the positive currency impact took place within wine and spirits. As far as fashion and leather, it's positive, but nothing really significant.
Thank you very much. Just finally, how happy are you at 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 on product?
Both price architecture and the ranges that support that. How happy are you with the architecture now, and are you going to accelerate the pace of new product introduction?
On the price architecture, we are, how can I say, more or less happy. We suffered a very severe drop on the JPY, which is causing some disruption in the business with a big drop in the travel retail business with Japanese, and conversely, a 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, I will not go into details. A brand like Louis Vuitton has to and will introduce new products at all times.
They will do it with initiatives that we think, particularly with the Capucines bag, are particularly promising. It's a bit early to say, but we are very hopeful about the outcome of this.
That's great. Thanks very much, Jacques.
The next question is from Mr. Mario Ortelli from Sanford. Sir, please go ahead.
Morning, Jacques. Mario Ortelli. Two questions on Vuitton. The first one is, if you can give us some color about the evolution of the revenues of Louis Vuitton in the first half, and what were the drivers in terms of price mix, volumes, and average selling price. The second one on Vuitton on the margin. If I understood well, Chris mentioned that the margin of Louis Vuitton has slightly improved. I kindly ask you, what is your outlook for the rest of the year from the margin of Vuitton? The last question about the other brands. If the margin of Vuitton has slightly improved, can you give us some more color about the investment that you made on the other brands of Fashion & Leather? Because it seems that the profitability had a contraction. Thank you very much.
Well, might be a bit disappointing on the first question, because we don't necessarily answer in great detail on all of them. Let's start with Vuitton. What I can tell you is that Vuitton, as always, does not differ materially in terms of growth with the average for the division. It's a bit lower. That's all I can say. In terms of price mix, et cetera, 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 Vuitton are a bit up. Nothing tremendously, nothing earth-shaking, but nevertheless, the margins are up.
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 investment. These investments are pretty significant in many brands. We mentioned Fendi, we mentioned Berluti, we mentioned Celine. All these brands are doing extremely well from a top-line viewpoint, but are in a phase of expanding their network, which is always a costly exercise, particularly 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 situation we are in many brands. 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. As far as the first half is concerned, we had the rent of the Fendi store on Avenue Montaigne, which is, as you may imagine, quite costly without any revenues. That's the type of situation we are experiencing more or less in all the fashion brands, at least 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 at HSBC. Three questions. First of all, maybe a word on Cognac. Do you expect further destocking in the second half? 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? On Louis Vuitton, maybe at least qualitatively, the margin increased, even though I think you had mentioned that the transition towards more leather would have at least initially, maybe a bit of a negative impact on the margins. It seems that has not been the case, or maybe was it that, I think last year in the first half there had been strong investment in marketing, et cetera.
Is it more an improvement at the gross margin level, or is it maybe less A&P, et cetera? Finally, I've noticed that you increased your stake in Hermès slightly, I think 0.5%. Is it something that you intend to continue going forward? Thank you.
Okay, thank you, Antoine Belge, for your usual three questions. Start with cognac. We mentioned the destocking in Q2, particularly in China. Actually, we anticipated in Q1 where sell-in was pretty robust and sell-out was showing some signs of softness in China, that obviously Q2 would not be at the same level, which is exactly what happened. 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 in absolute terms is not particularly high, but compared to what it was before, is a little bit on the high side. China is likely to experience further limited destocking in cognac. Yet, the rest of the business is doing extremely well. The American part, the U.S. part of the business, is really moving from strength to strength.
We are very pleased with the outcome of our marketing initiatives for the last 18 months. It's really doing well. The rest of Asia is not affecting China, but compensating part of the drop that we've seen in Q2 in China. Russia is also doing quite well. All in all, 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. 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. We never said that the transition would weigh on margins. Margins were a bit better.
It comes from more or less everything, a little bit better gross margin and a better absorption of operating costs. I will not go into details. Hermès, on the increase in the stake, it was an opportunistic move. It doesn't say anything about our attitude in the future, we cannot extrapolate that for the rest of the year.
Okay. Maybe just one clarification. The impact of the new DFS concessions, if I tell you that it's roughly EUR 400 million on the sales level, a negative contribution of around EUR 20 million, is that some sort 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, Jean-Jacques and Chris. Three question, please. The first one on Vuitton. What was the net store openings in the period? Were there closures offsetting the Venice and Munich openings? What type of space growth are you planning to add this year at Vuitton? Secondly, on wines and spirits. I assume the whole of the 400 basis points improvement in cognac margins was due to FX, or was there any other major impacts to explain the margin progress? 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. Is that what Chris meant by reversing in H2? 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? Thank you.
Okay, the net opening at LV is zero. I think it's +five, -five or something like that. It's not huge numbers or huge changes in the total store count anyway. Maybe +six, -six. It's not very far from that. In terms of space growth for the total year, we expect to be, as always, around 7%-8% for the full year. For Cognac, there was, as you said, some significant margin improvement. The bulk of it, let's say, is coming from currencies, but also from underlying improvement in organic margins. As I said, a very satisfactory performance there. Champagne, it's a little bit more complex. I will try to be clear.
You pointed out rightly that we suffered last year some impact with the harvest being of lower 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 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. You have a volume impact. The assumption we are taking in the first half of the year is lower than the assumption we took last year. 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 will 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. 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. A negative impact in H1 and hopefully a positive impact in H2. Finally, your question on Sephora, Chris, you want me to take this?
Sephora, same-store growth or comparable store growth was similar to that in Europe to the Q1 to low single-digits, and Americas were, in fact, it moved up from high single-digit to just about double-digit in the Americas. In China, it was strong double-digit comparable store growth.
Thank you very much.
The next question is from Louise Singlehurst from Morgan Stanley. Morgan, please go ahead.
Hi, good morning, Jean-Jacques. Morning, Chris. I'm also going to go predictably for the three questions, please. Firstly, just on, you touched on the weakness in Japan. I think you gave a number of -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? Thirdly, I think Chris mentioned a new production facility at Bulgari for Italy. Can you talk about that a bit as well? Thank you.
Okay. The travel retail business with Japanese was down 44% in Q1. That's the figure I mentioned. It's not that far in Q2. Basically, we have the same trend. We have a big drop in the Japanese travel retail business, conversely, we have a significant increase in the domestic business. Just as a reminder, the domestic business is three-quarters of the total business with Japanese, and the travel retail business is one quarter. Despite spectacular, the drop in travel retail is offset by the rise in the domestic business. Overall, the Japanese customer base is more or less flat in H1, but big differences and big distortion in our business. Travel retail, the global trend, our feeling is that things are improving a bit, particularly when it comes to Asia.
If we look at our business at DFS, excluding Hong Kong, obviously, and the parameter impact from Hong Kong, it improved a bit, a few percentage points in between Q1 and Q2. 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 as we are heavily involved in these areas. Certainly, your question on the production facility at Bulgari. Well, the idea is that we are trying to internalize some of the operations that we have been subcontracted out until then in order to improve efficiency and quality. That's the objective. In terms of investment, we are not talking about very significant numbers, and they shouldn't change the picture for the division for the group.
Very clear. Thank you.
The next question is from Stacey Widlitz 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. Obviously, we are not talking about Vuitton, we are talking about the other brands. Retail is doing better than wholesale. Frankly, as far as wholesale is concerned, part of it is self-inflicted. What I mean by that is that some brands, particularly Celine and Fendi, have deliberately decided to progressively reduce the share of their wholesale business in the total. If you look at their numbers for Celine, the wholesale business is hardly growing, and for Fendi, it is down. It is deliberate action. They really want it to be that way. If they would want to sell more, they certainly could. They want to limit the share of the wholesale business.
For the other brands which are using the wholesale channel as a privileged way of distributing their product, like Kenzo, for instance, we are getting very strong advances quarter after quarter, which are very promising for the brand.
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, a follow-up question regarding the wine and spirit business. Could you give us some more color about the performance by regions? Second question is about Vuitton sales trend to Chinese customers. Could you tell us what was the overall trend to Chinese customers in H1? What is your view about the trends in the near future regarding sales to Chinese customers? Third question is about still Vuitton. Would it be fair to assume that Vuitton sales trend maybe could benefit from more product launches in H2 versus H1?
Okay, thank you, Catherine. 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. It was a little bit softer in Europe, virtually flat due to the fact that Champagne is the big chunk of the business in Europe, and Champagne is under pressure everywhere and therefore in Europe. 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 all together, including domestic and travel retail, is up something like mid-single digits. The bulk of the growth takes place with tourists, i.e., outside China. For the future, it's a very difficult question. We have no reason to be pessimistic, but it's future whatnot. I really cannot elaborate and comment further on that.
It's really the same for your question on the product pipeline in H2 for Vuitton. Obviously, when we launch product, we expect them to have a strong impact on the business. We are very hopeful that particularly the leather product and the Capucines that I mentioned before will be great success. We'll see. Let's discuss that in a few months, if you don't mind.
Okay.
Sure.
Just about the sales trends to Chinese customers, is it fair to think that you have some improvement in Q2 versus Q1? You had a slight increased acceleration.
A slight improvement. Very slight improvement, yes.
Okay. Is this improvement fairly equal month-over-month in Q2, or did you see some improvement by the end of the quarter? It seems that some operators in the luxury goods industry could see some improvements in June. Is it the same thing for you?
I will not comment. No, April was a bit soft, but we had May and June were okay. 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 Price from Berenberg. Sir, please go ahead.
Good morning, Jean-Jacques, morning, Chris. A couple of questions from me, please. With regard to LV's price difference between Beijing and Paris, I know that over the recent few quarters, we've seen that delta narrow. I think last year it was around 45%-47%, and then in the Q1 it was about 30%. Just wondering in the second quarter, how the LV pricing compared between, say, Beijing and Paris into the second quarter? That's my first question, please.
It's the same. It's 130%, something like that. We haven't seen a major difference.
Okay, great. With regards to LV space, I know that you had commented earlier saying that you were looking for between 7%-8% space. Within that 7%-8%, how much of that will be effectively new space 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. It's a difficult question because sometimes we are closing a store. I mean, look at what we did 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 offers.
When you're looking at the sales contribution from space and comparing the difference between the sales contribution from new space and extensions and refurbs, do you see a significant change in the sales contribution that you get from one and from the other?
Oh, yes. Definitely so. You're talking about two different things. When you have a store which is one floor and you get the basement or the first floor, or you have an area where you're not involved 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. The latter is much more expensive than the former. The yield in terms of additional sales is not at all the same. You're not talking about the same type of project. That's why the correlation between sales and increase in square meters is far from being perfect, as you know.
Yeah, absolutely. Great. Thanks. Just with regards to the watches and jewelry business, I know you talked about at the distributor level, still seeing a relatively cautious approach to orders. Are you expecting, or have you seen any sign, I know it's very hardly going into the second half of the year, but are your watch brands taking a view that you won't really see any significant pickup in China, in particular, for the first half 2014? 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, it's a bit early to say. July is never a very exciting month, so it's really August onwards that we'll see whether the market will pick up or not.
I've just got two very quick sort of housekeeping ones, just on CapEx for the year and also on your tax rate. Are we to expect a similar tax rate as the first half of the year? Any sort of comments around CapEx guidance for the year please, that would be great.
Tax rate is likely, as you know, there is no such thing as a first half tax rate, as we pay taxation on a full-year basis. 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. Yes, the answer is that we expect 31, 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.
Just finally, are you on track to launch perfume and cosmetics within 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 have the next question from Mr. Matthias Esser from Bank First. Sir, please go ahead.
Yes. Hi, two questions, sir. That's for me. One is on selective retail. You mentioned renovations in Hong Kong, certain margins. When do you plan to finish the renovations, i.e., when can we then expect a bit of an improvement or less of a decline? Secondly, on Bulgari, you mentioned a reduction of third-party wholesale business cleanups and so on. When will you 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. We did a good job and a quick one in liquor and tobacco and cosmetics. The general merchandise concession is still in progress. We would expect this to be done by mid of August, something like that. We should be operating under normal conditions from September onwards. On Bulgari, on the cleanup of basically cosmetic and watches wholesale doors. Cosmetic will, in fact, in doors, the cleanup is likely to be done, to be completed 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, are not productive enough, nevertheless profitable. It's the question for us to decide what to do.
It may unfold, and chances are that it will unfold over 2014 as well.
Thank you very much.
The next question is from Mr. Luca Solca from Exane BNP Paribas. Sir, please go ahead.
Yes, good morning. A while ago, Mr. Arnault 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 talked on this past, if you're 10% of the way, or if you think that you're further ahead, like 50% or 75% of the way. A second question on Hermès. It seems to me that, I guess it's what one can draw from the behavior of the Hermès family and the Hermès 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 Hermès and get that money to work on different acquisitions.
Also considering the court action that Hermès has been mounting against LVMH and the Hermès fine for inadequate disclosure, therefore the legal 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 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&A. If you do, will this M&A would be bolt on, or if you would consider major acquisitions as well in order to strengthen your position in luxury? Thank you very much.
Thank you, Luca. I will find it hard to answer to your first question, frankly. The brand desirability 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 did a tweak last year to improve it. It's been improving for the last 150 years, I would say. It's very difficult to put a mark, a note on this. Frankly, I cannot answer, although the objective has been clearly stated by Mr. Arnault, and we are pursuing this objective relentlessly, I would say. On Hermès. I will not make comments on that.
I think the fact that the Hermès 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. You imply that by selling the stake, we could put the money at work elsewhere. We don't think we are constrained in any way in our ability to spend money, to infuse capital in our businesses, to grow them. We don't need the money, which is currently invested into Hermès to fuel the growth of the other businesses. They do it by themselves, and we have very significant cash cow within the group that allow us to do so. There is no particular need on our side to monetize this shareholding in order to fuel the growth of other businesses. To be frank, we are pretty pleased with the performance of the Hermès business.
There is no particular pressure on our side, I would say. Finally, on watches and jewelry and the question of organic versus M&A. I think the priority is definitely on growing the business organically. We are in the middle of a turnaround and a restructuring of Bulgari, 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. Definitely the focus is on the organic growth.
Thank you very much, Antoine.
The next question is from Mr. Fabio Fazzari 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 young product in terms of maturation could have an impact on your profitability and working capital? 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.
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 three qualities, we have the equivalent of VS, we have the VSOP and we have XO. It's the only market where we have the three qualities. The idea is that it is a very large market, and different products will cater the needs of different customers. Particularly when it comes to the nightlife, the emblematic products such as the VSOP and XO, do not necessarily sell as well as they do in other segments. A younger product is much more suited for the needs of this market.
It will not push the lines and change the metrics of the business overnight. It would need many years. 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 we saw in terms of profitability. There used to be one 10 or 15 years ago, but the profitability in Japan decreased, 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 Bachelier from Oddo. Sir, please go ahead.
Yes, good morning. Two questions from me. The first one, maybe on the smaller brands in fashion leather, particularly Fendi, Celine and Berluti, it seems that you have a lot of self-inflicted pain there in terms of profitability. Is it 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 a point where you're satisfied? This is for the first question. The second one, in Europe, could you give a bit more color in terms of countries, differences between countries and maybe local versus tourist? Okay, thanks.
For the other brands, I would say it's marketing, it's retail, it's a lot of things that explain why. I tried 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. They have reached a level which justifies, in our view, the investments we are making. When you start investing in a brand, you don't invest for three months and you stop thereafter. You really have to do it on an ongoing basis for a certain period of time. I would say the bulk of this year and next year will be devoted to significant investment 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, your second question, is concerned, obviously, north of Europe is doing better than the south of Europe. The analysis on tourist versus domestic is a little bit 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. The domestic business is up 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 there is one.
The last question is from, this is Eva from UBS. Madam, please go ahead.
Yes, good morning. I was wondering if you could talk a little bit about the perfumes and cosmetics division, please. I think in Q1 you had talked about destocking. I was wondering if sell-out is now equal with sell-in. 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 L'Oréal have been talking about a slowdown. 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. As we expected, our business was slightly down in Q1. It's strong double digits in Q2 in the U.S. Definitely, a little bit of excess inventory that we had at the end of last year has been relieved, and the business is really going fast. Well, the question on margins you have is, well, it's a legitimate question, but when you look at one quarter or one half of the semester, it's always difficult to draw conclusions from margins in this type of business because you have the fading of marketing campaign launches, et cetera, which could distort the business one way or the other. As far as the first half is concerned, we have a little bit of pressure on the margin, but really nothing very significant.
We think the business is doing okay and nothing really significant, no particular conclusions should be drawn from this little bit of discrepancy between top-line and bottom-line growth.
In terms of the underlying trend you're seeing?
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 more mixed situation with, again, the north of Europe, i.e., Germany, France, and the U.K. doing well, while the south of Europe is under very severe pressure, particularly as far as Spain is concerned. As far as Italy is concerned, it's getting a little bit better. The comparison base is getting, at long last, but is getting easier. We see numbers which are still a bit negative for the markets, but not as bad as they were previously.
Okay.
Okay. Well, thanks a lot for attending the call. I don't have further comments to make. I just look forward to discussing with you Q3 numbers 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. You may now disconnect.