Welcome to the LVMH first half year 2015 results conference call. I will now hand over to Mr. Jean-Jacques Guiony, Finance Director of LVMH. Sir, please go ahead.
For those of you who don't know me, I'm Jean-Jacques Guiony. I'm the Chief Financial Officer of the LVMH group, and I'm very happy to host this conference call on the first half numbers of 2015. Before I begin, I must remind you that certain information to be discussed on today's conference 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, including in our press release. Let's now move to today's topic, first half figures. After a brief discussion of the first half highlights, Chris Hollis, Group's Head of Investors Relations, will cover the main developments 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. As you can see on the first slide, our first half of 2015 was quite strong, which I'll go into some details. But the main points to bear in mind should be, first, a strong business in Europe, in the U.S., and to a lesser extent, in Japan. Secondly, a positive contribution from currencies. Thirdly, a much improved cash flow. Fourthly, and probably more importantly, key brands showing very strong results. This is particularly the case for Louis Vuitton, Fendi, Celine, Bulgari, Sephora, Christian Dior, and obviously the Wines & Spirits group, if we exclude the specific Chinese situation. After this, I will now turn to Chris, who is going to review the main developments within our various business groups.
Thank you, Jean-Jacques. I'll start by taking a look at our business groups, starting with Wines & Spirits. This is slide four, if you've been able to get the presentation up. Before I get into more detail, this business group showed a good performance in all regions, with the exception of China, where the ongoing destocking by distributors impacted both revenue and profitability. Despite this headwind, the business group saw a 2% increase in organic revenue growth. On a reported basis, taking into account the 13% positive currency effect, revenues were up 15% to EUR 1.93 billion, compared to EUR 1.68 billion in year ago first half. Looking at the two main categories, Champagne and Wines, organic revenue grew by 6% and after a positive 9% currency effect, reached EUR 830 million from EUR 723 million in the first half of 2014.
Organic revenue for Cognac and Spirits decreased by 2% during the period, but after a 17% positive currency impact, increased to EUR 1.1 billion, compared to EUR 954 million in the year-ago period. Profit from recurring operations for this group increased 5% to EUR 482 million in the first half of this year. Breaking this down, Champagne and Wines contributed EUR 169 million in profit, and Cognac and Spirits contributed the additional EUR 313 million over the first half. In the Champagne business, volumes rose by 3%. This is on slide five, driven mainly by the U.S. and Japan, and by the prestige Cuvées, which continued to make strong progress. We saw strong momentum at Estates & Wines, the result of a positive price mix effect. And volumes in Cognac were up 6%. The U.S. continued to demonstrate excellent momentum.
The situation in China continued to be challenging as the destocking of higher quality cognacs, that's the VSOP and XO, in the region endures. However, the comparison base is becoming easier, and the sell-out trends are seeing some improvement. Finally, among the groups, other spirits, both Belvedere and Glenmorangie demonstrated sustained growth. Looking to the second half of the year, we will continue to pursue the value creation strategy focused on enhancing the image and desirability of our brands. We anticipate continued destocking in China, but we expect to see some recovery in our sell-in numbers given the lower comparison base. We will invest in marketing and advertising that highlight the uniqueness of our brands. We also see opportunities in the U.S., in new markets, as well as new consumption trends. Moët's luminous champagne bottle or Veuve Clicquot's rich champagne for mixing are some examples.
Finally, we will continue to develop our production capacity to support the longer term growth of the brands. Turning now to our Fashion and Leather Goods brands, slide seven. This group saw a 5% rise in organic revenue in the first half of 2015. On a reported basis, taking into account the 13% positive currency effect, revenue rose 18% in the first half of the year, reaching EUR 5.9 billion compared to EUR 5 billion in the year-ago period. Profit from recurring operations was up 12% for the period year-over-year, increasing to EUR 1.66 billion versus EUR 1.49 billion in the first half of 2014. To give you some of the highlights of the first half, firstly, we saw accelerated growth in the second quarter. In fact, organic revenue growth in Q2 was 10% for this business group.
Even after taking into account the impact of Japan, organic revenue growth doubled between Q1 and Q2. Louis Vuitton is benefiting from a strong creative dynamic, fueled by the continued success of its iconic Monogram models and the development of new leather lines, such as the Pallas. Nicolas Ghesquière shows in emblematic locations have been very well received across key markets and have generated great excitement around the world. To touch on some of the notable developments at other fashion group brands, Fendi saw excellent performance in its leather goods lines, such as the Peekaboo or Selleria, and in its new store concept rolled out in markets such as Paris, London, and New York. Celine continued its strong momentum, delivering increases in all product categories.
With Loro Piana now fully integrated, the brand has been focused on its growth strategy, including the targeted boutique openings that took place in the first half of the year in Macau and Frankfurt. Givenchy, Kenzo, and Berluti demonstrated sustained growth, and we're pleased with their positive momentum so far this year. Finally, as you likely know, the Marc Jacobs and Donna Karan brands are being repositioned under new management teams and making changes to their respective strategies and collections. As we look ahead, this is slide nine, across this business group, we see compelling opportunities to build on the momentum achieved in the first half of the year. At Louis Vuitton, work will continue to further the qualitative development of the brand through innovation across all product categories and the selective development of its retail network.
We're also very excited about the opening earlier this month of the Louis Vuitton Gallery in Asnières, located next to the Maison's historical workshops, where the most exceptional pieces are created. Fendi continues to generate excitement. Earlier this month as well, the brand presented its first high-end fur collection by Karl Lagerfeld in Paris. We'll also be renovating the Palazzo Fendi store in Rome. At Loro Piana, this brand will continue its focus on the highest quality and most precious materials while pursuing its growth strategy. Givenchy, Kenzo, and Celine will selectively expand their retail networks, as we move forward, we'll continue to invest in and support the creative development of our other fashion brands. Turning to perfumes and cosmetics on slide 10. For the first half of the year, organic revenue rose 6%, including the positive 11% currency effect.
This translated to a 17% rise on a reported basis to EUR 2.2 billion. Profit from recurring operations rose 22% in this business group, reaching EUR 248 million. To provide some insight into the brand performance behind the numbers, I'll begin with Parfums Christian Dior, which continued gaining market share. Its iconic fragrances, J'Adore, Miss Dior, and Eau Sauvage, delivered strong growth, while its makeup products, Rouge Dior and Diorskin foundations, as well as its Capture skincare line, also drove performance in the first half. Guerlain saw strong growth across its skincare and makeup lines in the first six months of the year, La Petite Robe Noire confirmed its success for the brand. At Benefit, its latest major innovation, Roller Lash curling mascara, reinforced its leading position earned with its They're Real lengthening mascara and drove the brand's continued progress.
At Make Up For Ever, also saw some acceleration in growth and celebrated the launch of a new store concept in the U.K., which has been well received. Finally, Fresh once again delivered good growth and had several major product launches, particularly in its new lotus-based line. Now for the outlook in the perfumes and cosmetics group. Overall, we will continue to strengthen the brands in this group by supporting ongoing innovation and maintaining media investments around both new and exceptional iconic lines. At Parfums Christian Dior, the focus is on rolling out a new male perfume that will feature Johnny Depp as its ambassador. In terms of the other brands, Guerlain will build on its iconic lines to support ongoing growth. Kenzo will deploy a recently launched new unisex fragrance called Totem, Benefit and Make Up For Ever will open new boutiques in key markets.
Now turning to our watches and jewelry business. We saw strong organic growth in this business in the first half, a rise of 10%, including the positive 13% currency impact, this was 23% revenue growth on a reported basis, which reaching EUR 1.5 billion. Profit from recurring operations rose very strong, 91% reaching EUR 205 million. The primary factor driving this performance is jewelry, particularly Bulgari, fueled by the success of its highly desired iconic lines, as well as its women's watches, Lucea and Serpenti. On the revenue side, the growth in this business has been somewhat offset by continued cautious purchasing by the multi-brand watch retailers. In terms of watch brand performance at TAG Heuer, work continues across its organization to refocus the brand on its core range of products, which have long driven its success.
With some buyback of inventory, some new brand partnerships, increased brand awareness, and boosted social media presence, the brand has built a good base upon which to build in the medium term. 2015 is off to an excellent start at Hublot, as the brand drives its reputation and desirability with new collaborations with artists and athletes, ranging from such well-known names as Romero Britto, Lang Lang, to Justin Rose and Kobe Bryant, among others. The group's brands also introduced a number of new watches at Baselworld this year, which were all well-received. Also at Baselworld, TAG Heuer, Google, and Intel announced plans to launch its interpretation of a smartwatch. Slide 15. As this group looks ahead, there will be a focus on further building on the momentum at Bulgari with both its iconic lines as well as its stunning high-end jewelry.
At TAG Heuer, the brand will begin store delivery of its new products within its core range, which will be supported by a highly compelling digital marketing campaign. Across the brands, the group is taking a highly selective approach with respect to multi-brand retailers with a focus on having the most impactful presence in their stores. Finally, while we'll be optimizing production sites across the business group, Hublot will be opening its second manufacturing facility at Nyon. Moving on to our final group, Selective Retailing. Organic revenue for this group was 5%, this is slide 16. Including the positive 16% currency impact, 21% on a reported basis, reaching EUR 5.3 billion. In terms of profit from recurring operations, this group saw a 7% rise to EUR 428 million. To break this down a bit, I'll begin as always with Sephora, which continues to perform very strongly.
This has been particularly true in the first half in North America, the Middle East, and France, although the business has seen market share growth in every market where it operates. Sephora also continues to grow strongly online, where it has been a digital pioneer and leader for some time due to consistently rolling out new services such as guaranteed delivery in 48 hours in the U.S., and click and collect service in France. At DFS, its business has, of course, been impacted by the challenging monetary currency and geopolitical environment in Asia, including the impact of the weakness of the JPY on Japanese travelers as well as the weakness of the EUR on the Chinese tourists, in particular in Hong Kong.
That said, work continues to make DFS and its T Galleria very exciting places to shop with offerings such as the new Wines & Spirits duplex store in Singapore, Changi Airport, and a new standalone beauty concept of the Galaxy complex in Macau. As we look to the balance of the year for Sephora, this is slide 18, its success will continue to be driven by an ongoing stream of innovation in products and services in all regions around the world. This includes new digital and mobile technologies, which were adored by Sephora France. Sephora will also continue to renovate and expand its retail network around the world, introducing an exciting new concept. At DFS, this business is focused on adapting to changing consumption patterns in the markets in which it operates, while continuing to grow its presence with new concessions coming in Macau, Cambodia, and Italy.
Rigorous cross-control remains a priority as the team will focus on further developing its loyalty programs and digital services. With that, I will turn the call back to Jean-Jacques for the key figures.
Thank you, Chris. I shall start the key figures review with revenues for the first half of the year, as shown on slide 20. As you may see, we ended the semester with all our business groups in positive territory. You will also note that published growth is significantly higher than organic growth due to a 13% currency impact on our sales for the first half, mostly stemming from the U.S. dollar, the yen being virtually unchanged. Chris has commented on the main business groups in detail, but the main points are as follows. On Wines & Spirits, it shows a positive organic growth of 2% with a very contrasted performance, China being under pressure while the rest of the business shows very strong numbers. Fashion and Leather Goods is up 5% in organic terms with a very good momentum in Europe and the U.S.
Perfumes & Cosmetics is at 6% in organic terms between if not all market performances in its main geographies. Watches & Jewelry is showing a very solid 10% growth, with watches still suffering, while jewelry posts remarkable numbers. Selective Retailing is showing a strong contrast between Sephora, positive in all its geographies, and DFS, affected by the business trends in Greater China. Let's move to slide 21, where you can see a comparison between first and second quarter in terms of organic growth. You will notice that most divisions experienced a better Q2 than Q1. This is particularly true in Fashion and Leather Goods, which reached the 10% growth mark in Q2, Watches & Jewelry, and Wines & Spirits. Let us now move to slide 22, which shows the geographic breakdown of revenues in euros.
You will note a bit of rebalancing, with the U.S. growing in percentage of the total due to its strong performance, as well as the impact of the strong dollar, and Asia coming down a bit. Moving to slide 23. You will probably remember the VAT increase in Japan last year, which distorted the comparison base in a major way, boosting Q1 and depressing Q2. The opposite took place in 2015. I would just like to point out that excluding Japan, the group's organic growth would have been 4% in Q1 and 7% in Q2, so a marked improvement throughout the semester. Same for Fashion and Leather, which would have been at 4% in Q1 and 8% in Q2, excluding Japan. Otherwise, it's worth pointing out the strength of the European and U.S. businesses, while Asia still suffers from the global pricing situation.
Let's now move to the next slide, where you may see our simplified P&L account for the period. My main comments are the following. We already discussed revenues, so on gross margin, which was quite stable at 64.8% of sales against 65.5% of sales in the same period of last year. Operating expenses grew more or less in line with sales. Excluding currency impact, selling expenses grew 8%, marketing expenses, 6%, and administration expenses, 4%. Profit from recurring operations is up 15%, as you can see. Other operating income and charges are negative by EUR 64 million, reflecting mostly, as usual, amortization and depreciation of intangible assets. I shall discuss financial charges in a separate slide in a minute.
The income tax rate is a bit higher than it was last year, mostly due to the global shift of business from Asia into more taxed countries such as France, Japan, and the U.S. As a result, the group's share of net profit is up 5%. Let's now look at the profit from recurring operations, which is broken down by business groups on slide 25. I will go quickly, as Chris commented, most of them. Wines and Spirits had a better first half, although margins were still under some pressure, particularly due to the mix impact with the lower proportion of Cognac XO business in the total. Fashion and Leather ended the semester with a 12% increase in its profit from recurring operations.
A number of brands like Louis Vuitton or Fendi had a very strong semester, while specific situations such as Marc Jacobs, Loewe, or Donna Karan exerted some pressure on global margins. Perfumes and Cosmetics shows a 22% increase in operating profit with a slight improvement in margins. Watches and Jewelry recovered sharply, mostly due to Bulgari. TAG Heuer was affected by the softness of the watch business and also by the ongoing buyback of its slow-moving inventories. Finally, lackluster numbers in Selective Distribution due to DFS being under very intense pressure, mostly in Hong Kong and Macau. Yet Sephora had a very solid first half with strong top-line and bottom-line advances. A word on slide 26 on the source of change in profit from recurring operations. You are familiar with this chart, you can see that the bulk of the growth comes from currencies.
This is, I would say, quite logical at this point in the cycle, as it is quite difficult to implement local price increases in such a hard currency environment. The bulk of operating profit growth comes from currencies, although part of it should be considered as a substitution for price increases. Let's now turn to slide 27 and the analysis of the net financial charge. A few points to mention. First of all, the cost of debt is slightly down due to slightly lower interest rates on average. The cost of hedging is substantially higher than last year. About one third of it is a normal cost of hedging, while the bulk of the remainder is the cost of buying back call options sold in collar hedging strategies with a view of protecting the group's operating profit.
This is obviously a one-off cost that will not replicate in the second half of the year. Finally, income on financial investment portfolio was a bit stronger than it was last year. Moving on to slide 28, where you may see the balance sheet structure, which reflects, as you know, the distribution of the Hermès shares at the end of last year. Otherwise, no major change to the balance sheet structure. Turning to slide 29, a few words on the cash flow statement. First, net cash from operations is at EUR 238 million, mostly owing to a better level of operating profit. Working capital requirements used about EUR 1 billion in cash, about 20% less than last year. Finally, capital expenditures are in line with last year.
Overall, our free cash flow is strongly up to EUR 678 million, a very strong level for a first half, which is always lower than the second half, as you know. The free cash flow will be used to pay an interim dividend of EUR 1.35 per share on December 3rd of this year. I will finish on the main figures with the comments on the group net debt on slide 30, which reached EUR 6 billion, about EUR 1.2 billion higher than at the end of last year. As you well know, this increase is quite usual in the first half of the year when the payment of dividends to our shareholders and minority equity partners exceeds our net cash flow. The strength in the dollar and the Swiss franc also had some impact on non-euro-denominated currencies.
Overall, the group's net debt as at the 30th of June 2015 represents 25% of total shareholders' equity. I would like to conclude this brief overview of the activity with a few comments on H1 performance, highlighting the most important points for the future. First and foremost, I would like to say that we are confident for the remaining part of the year, mostly due to the fact that our important businesses are enjoying a strong momentum. Secondly, most of our markets are also showing a good momentum. This is true for the U.S. and Europe, but also for Japan, which is strongly benefited from inbound tourist flows. Finally, being confident doesn't mean ignoring reality. Currencies are always a difficult thing to predict, we know that we have a lot to do to convert brands in investment phase into profitable organizations.
Yes, we have done it in the past in quite complicated circumstances, and we trust that the quality of our teams will enable us to reach our goals. This is all we wanted to say. Operator, please could you open the Q&A session?
Yes, sir. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have the first question from Paul Swinand from Morningstar. Sir, please go ahead.
Good afternoon, and thanks for taking the question. Quickly on the watch segment, did I understand, or would you care to comment, are watches down x the jewelry strength? Could you comment on the trend in second quarter versus first quarter?
Well, it's complicated to answer your question as I missed one word out of two. I understand that your question is about the difference between the growth in watches and jewelry. Basically, watches were quite flat in the first half, and the bulk of the growth comes from jewelry.
Okay, got it. Ex-jewelry watches were flat. I understand you're still working on the turnaround at TAG Heuer. I know you've got a new marketing campaign in the U.S. Is it starting to, or can you comment on the new products? Are you seeing any signs that the turn is happening?
Well, it's probably a bit early to say, as most of the novelties were introduced at Baselworld, only a month ago, and they will be launched on the market later on this year. If you compare Q1 and Q2, and also if you restate Q2 for the buyback of inventories that took place in Q2 mostly in the U.S., the performance is better. It's not ideal, but it's much better in Q2 than it is in Q1. I would say that we are progressively getting into the turnaround of the brand, but there are still some way to go.
Okay, great. Thank you. Really quick, you mentioned Monogram again being strong. Is that also true in China?
Well, it's true everywhere. Monogram has been very strong. Obviously, there will probably be further questions on that. The Chinese business is a little bit under pressure due to the fact that prices there are pretty expensive, and people usually choose to buy elsewhere. Monogram is strong there as it is everywhere.
Okay, great. Thank you. Then real quick, you mentioned they're mixing Veuve Clicquot. Is that only in the U.S.? I'm just kidding.
No, Veuve Clicquot have a strong presence.
I should understand that correctly.
throughout the world. Missed. Sorry, I missed that.
We won't mix it in Chicago.
Okay, thank you.
We have another question from Mario Ortelli from Bernstein. Sir, please go ahead.
Good morning, Chris. Good morning, Jean-Jacques. Three question, if I may. The first one is about Louis Vuitton among Chinese customer. In the first quarter, you gave us a figure that the increase of sales of Louis Vuitton among Chinese customer of 5%, if you can give us also the figure for the second quarter. The second question is about the performance of Louis Vuitton in China, Macau, and Hong Kong. If you can give us an idea of what was the performance there relative to the minus 5% the overall the company had as a result in Asia. The last question is about The profitability and the pricing strategy. You showed in this chart that your ability to keep the prices gives you the full benefit from the FX.
I want to know if, considering that the euro is still weak, you will continue with the current pricing strategy or you are thinking some price adjustment going forward and probably increase the prices in Europe. Thank you.
Okay. On your first question on Chinese customers, the growth of the business with Chinese customers in Q2 was low double digits. We ended the semester with the Chinese customers, all together in all geographies, in local currencies being up slightly above 10%. We had a very strong semester with the Chinese customers. As far as LV in China, Macau, and Hong Kong is concerned, obviously, we are down in these three geographies, as I hinted before. Given the pricing situation, there is a shift of business from Greater China into other geographies such as Japan and Europe. These two areas are benefiting from that. Obviously, we have some negative numbers in China, Macau, and Hong Kong, which are more or less in line with the numbers we had in Q1 there. Roughly speaking, we are talking about minus 10%.
Profitability and pricing, we don't intend to make any adjustments to the pricing structure. The novelties, the new products in most brands, it's not unique to Vuitton. In most brands are being introduced at price differences, which are more in line with what we used to have in the past. The price will progressively adjust with novelties, but we don't intend at this point in time to implement a sort of global pricing adjustment.
Thank you very much.
We have another question from Oliver Chen from Cowen and Company. Please go ahead, sir.
Thanks. Congrats on solid results. Thanks, Jean-Jacques and Chris. On the strength in the U.S. demand, the momentum there looks impressive. Do you expect that run rate to continue in the U.S., and would you say that that is domestically driven? The U.S. has had a little bit of a tougher problem with traffic, so I'm just curious about what's driving the momentum in that region.
Okay. Your questions was a bit difficult to hear, but, I think what you were asking is about the run rate in the U.S., whether it's sustainable or not. Well, it's been going on for a while. I mean, the sort of 10% growth that we've seen in H1 is something we had last year and also the years before. The U.S. has been a very strong pocket of growth as far as we are concerned. The main reasons are twofold. The first one is the fact that we are not dependent on touristic flows in the U.S. We are mostly domestic customers dependent. The strength of the dollar is not affecting us in any way.
The second reason is the strength of the Sephora business, which is a sizable business in the U.S. for us, which is really doing extremely well, in the U.S. and elsewhere, but particularly, in the U.S., and which explains also these very strong numbers.
Okay. On the handbag side of the business, the Marc Jacobs brand and the opportunity there, how might that be positioned versus modern luxury competitors such as Kors and Coach? I was just curious about where the ideal price point is for that and what you see as the opportunity.
Well, I will not go into the details of the marketing strategy of Marc Jacobs. What we've said is that we want to unify the various labels and the various brands under the Marc Jacobs umbrella, and that we intend to position the bulk of the offer in the contemporary segment, which doesn't mean we will not offer products at a fairly high price, particularly the runway products. That's what we intend to do. We're in the middle of implementing that, working on that particularly with Marc and the rest of the creative team, and it's a bit early to comment on that, obviously.
Okay. Looking ahead, we measure such momentum here in the U.S. with online mobile traffic, in general in the sector, and Sephora has such a leading mobile interface. Are there other brands in your portfolio which are well-positioned to also utilize the kind of technology you're talking about, as you integrate stores and online or think about that?
Well, I answered this question a few times already. As we usually say, we think that the online business is as much a way to enhance and to improve the customer's experience as a way to do business and to open a new channel of distribution for our product. For brands other than Sephora, we definitely try to improve our business, but with a view also of improving the customer's experience online. This is all about the omni-channel and so on. It would be a little bit too long now, and it's really not the purpose of this call to go into some details.
Yeah.
In a nutshell, that's what we are trying to achieve.
Okay. Just the last question. Vuitton new leather lines. It sounded like your pricing strategy, I'm just curious about the new leather lines and what tier they may achieve and what's the strategic underpinning of those introductions. We do know how leather is resonating with the customer.
I have to admit that I could not really hear your question, which is about leather line at Vuitton.
New leather lines.
New leather lines. There are new leather lines, and we do introduce new product in canvas and in leather. Both are doing quite well and explaining, in my view, the new momentum that you've seen at Vuitton that I have commented a bit already.
I don't have much more to say about that. Go to the stores and you will see the difference.
Okay, thank you. Best regards and good luck for holiday.
Thank you.
We have another question from Antoine Belge from HSBC. Please go ahead, sir.
Yes, hi, it's Antoine at HSBC. Three questions. First of all, with regards to the margins in fashion and leather, maybe can you elaborate a little bit on the moving parts, maybe separating first of all FX impacts, then the Louis Vuitton at constant currency and maybe the rest of the portfolio, notably, was there a negative geo mix according to you? If that's the case, what are you doing in terms of trying to lower the cost of doing business in Hong Kong, notably rents. Second question on cognac. You mentioned different situation by geographies, I guess in China between VSOP and XO and also sell-in versus sell out. Do you think that over the full year, when the base comparison is easier that you can achieve a flat margin year-on-year? I'm talking about the full year.
Finally, I've noticed that in Champagne there was a bit of a softness. I think volumes were down. Was there anything linked, I don't know, to wines or the margin was actually down half on half. Thank you.
Well, thank you, Antoine, for your three questions. On the fashion leather margins, I would say that part of it, I would say in between a third and a half is attributable to currencies. It's always the paradox of getting positive impact in million of EUR in currencies, a negative impact on margins due to the fact that we have to offset high hedging gains last year, which are obviously not taking place this year. The rest of the margin drop comes from the few situations that I've mentioned before, Marc Jacobs, to a lesser extent, Donna Karan and Loewe, where we are fixing a little bit the business, which has some impact on the margins. You mentioned Hong Kong. Hong Kong, to be frank, is not a big headache in terms of margins. It's been a very profitable business in the past, despite the drop in the business.
It's a very efficient place to do business, and it still is a very, very profitable place for us. On cognac, could we achieve flat margins for the full year? Probably not. I doubt it. We explained last year already that excluding the impact from China, we still have a situation where, particularly in hot currency times, we find it hard to increase prices and we have rising cost of COGS. It is true for cognac, but also for champagne, and that's the answer to your third question. We have reasonably flat prices and COGS growing at in between 2% and 3.5% depending on qualities, and we find it pretty hard to increase prices. In organic terms, our margins are under a little bit of pressure in cognac and in champagne. It was exactly the same last year.
You have to add a negative mix impact in cognac stemming from the Chinese situation as we sell less XO volumes as we used to. All in all, I don't expect a big improvement in margins for the rest of the year. Although, as far as China is concerned, we expect the situation, as we said before, to normalize in the second half with selling benefiting from an easier comparison base and starting to grow again from the second half of this year.
Okay. Just to make sure I understood well. Just if you take Louis Vuitton on a constant currency measurement, is it fair to say that the margins were sort of flattish half on half?
No, they were up on a constant currency basis and flat if you take into account a slightly negative, but you're talking about a few tens of basis points. It's really that I like you and that I want to answer this question, but it's really a few tens of basis points. Slightly up in organic terms and flattish in Euro terms if you take into account a small negative currency impact. In margin terms again.
Okay, thank you very much.
Thank you.
We have another question from John Dee from MainFirst. Please go ahead, sir.
Yes. Good afternoon, Jean-Jacques and Chris. Just following on Cognac, could you talk a little bit about your expectations with regards to the sell-out at XO? I know you talked around initially internal budgets around -20%, it seems that that might not be conservative enough given your recent comments. In terms of the 390 basis point decline at EBIT margin within Cognac and Spirits, would you say that roughly about 130 basis points of that would be due to the weaker XO mix, excluding the hedging impact? Thanks very much.
Your second question is a bit tricky because you're asking question global margins on one product, which is XO in Cognac. I find it quite hard to quantify the impact on the Cognac margin. The XO impact, the mix impact is about, I would say, one third of the drop in margins, roughly speaking, for Cognac. I have no idea what it makes on the global division. For the XO volumes in China, you're right in assuming that at this point in time, we're seeing that a 20% drop compared to last year is a bit optimistic. Frankly, we learn each and every day, and this is not the most visible business that we have. We cannot rule out a negative performance, but we cannot rule out either a pleasant surprise.
We shall discuss that later on in the year, but it's very difficult to make any forecast there.
Okay, great. Thanks, Jean-Jacques. I've just got two follow-ups. Just one on Loro Piana. You mentioned that you're now effectively looking to roll out a few more stores, and I think you mentioned Macau and Frankfurt as two other destinations. How many more boutiques do you think that you can roll out over the course of the next year or so within Loro Piana? Just on Bulgari, I think the EBIT margins are now in excess of 13.5%-14%. Are we still on track for a 20% margin over the long term, and is it possible to maybe narrow that long-term time range at all? Thanks.
In the long term, we should be all dead as we all know. No, it's always difficult. I don't make forecasts, but we are on track. Long term, that doesn't mean 10 years. It's less than that. Bulgari is showing very strong momentum, as I said. This is creating some positive operating leverage. We are on track. We are even exceeding a little bit our initial forecast on margin improvement. This being said, I wouldn't want to put too much pressure on the management, people who are doing a fantastic job by setting too ambitious goals. We'll stay there for the time being. As far as Loro Piana is concerned and the stores, we are talking about in between, I would say, five and 10 stores per year. We are reasonably cautious in terms of store development.
It's not a brand that could support a very large network of stores, but there are still places, as you pointed out, where the brand deserves some store expansion because they are not sufficiently represented there. We are working on that. We're also working on some expensive places such as Paris, et cetera. We have to be cautious because when opening larger stores at the beginning, it creates some negative pressure on margins. We are trying to advance in a fairly cautious and progressive way there.
Thanks very much. That's very clear. Thank you.
Thanks, John.
We have another question from Luca Solca from Exane BNP Paribas. Please go ahead.
Yes, good evening. A couple of questions, Luca Solca from Exane BNP Paribas. There's a lot of uncertainty among investors about the Chinese demand. What you seem to point out in the case of Vuitton is better momentum from Chinese demand. When we look at it globally, we should look at it globally because of the very significant price gaps by region, I wonder if you could expand your perspective on Chinese demand to other divisions and maybe give us your view on the drivers beneath Chinese demand and how you see it shaping up in the most recent times. On Cognac, if I may add one point there. Again, trying to understand a bit better how the destocking and the consumer demand, on the other hand, is playing out. What kind of actual sell-out dynamic you see by category in China?
VS and VSOP, as far as I understand, were positive and have been positive for quite a while. I wonder what you see in sell-out terms on XO. Last but not least, looking at the second half of the year, if you could help us understand the interplay of Forex and hedging on operating profit margins. Thank you.
All right. Your first question is awfully difficult, Luca, to be frank, because you're asking me to sort of give you an idea of the Chinese demand trends outside what we can really measure, which is Vuitton. Because Vuitton, we have the numbers for Chinese customers in China, outside China, and we know exactly what's going on. When it comes to brands selling wholesale, particularly, let's take Wines & Spirits or perfume and cosmetic, it's awfully difficult. What I can say today, I don't think I have to come back on Vuitton and on the strengths of the global Chinese demand, which, as I said, is pretty positive. It's true for the rest of the Fashion and Leather Goods division. Most of our brands are benefiting from a strong momentum from Chinese client base. It's particularly true for Fendi and Celine.
Outside Fashion and Leather Goods, we have also very strong momentum with Bulgari, the share of the Chinese demand in total is growing year after year. Bulgari and definitely jewelry is benefiting from that. On the watches, I feel not qualified to comment on that, given our limited market share. As far as perfume and cosmetic is concerned, I also think that the momentum for Chinese demand is pretty good. It's pretty volatile as well. From one month to another, there could be big changes, but overall, our numbers in China and outside China, basically in Asia, with Chinese customers, which are more difficult to measure than Vuitton, are pretty positive. That's basically all I can say on this pretty complicated question.
On the cognac dynamic in China, as I suggested, we are still under some pressure in selling, obviously, as we intend to reduce inventory, and we are actually reducing inventories. The pressure is pretty significant, but the sellout is also a little bit under pressure, mostly due to the fact that we have rationalized a little bit in the business of outlets, particularly in the night business, where we ended up with a few big accounts that were particularly non-profitable, and we decided to cut them. Volume is one thing, but profit is another thing, and we decided to cut some of them. We have a little bit of pressure stemming from that on sellout numbers, but they are not on a fully comparable basis. On a comparable basis, we are pretty close to a balance in the VSOP, while in XO, we are down.
It's difficult to say on a comparable basis exactly by how much, but we are significantly down.
Understood.
Oh, sorry, there was a question on FX in H2. I never answer this question, you don't really expect me to answer it. The reason I don't answer it is that I usually don't know the FX for the rest of the year.
No.
Otherwise, I'm not sure I would be there. What I can say is that if currencies stay where we are, we'll be obviously benefiting a little bit less from the difference between currencies last year and currencies this year, as on average, the dollar was 137 in H1 and was last year 127 in H2. Obviously, if we stay around 110, let's say, the difference will be lower. On the other hand, if you remember well, we had low hedging gains in the second half of the year. The bulk of the hedging gains were in the first half of the year. We will not have to anniversarize this high amount of hedging gains, which obviously will not materialize this year. All in all, it's difficult to say, but if currencies were to stay where we are, we should register again a fairly positive hedging impact.
Sorry, a fairly positive currency impact, not a hedging impact, but a currency impact for the rest of the year.
Thank you very much indeed, Jean-Jacques.
Thank you, Luca.
We have a question from Louise Singlehurst from Morgan Stanley. You have the floor.
Hi. Good afternoon, gentlemen. Thank you very much. Just a couple of things which I think other people have raised as well. Firstly, on the rentals and the cost focus really coming from Hong Kong. I think Antoine Belge probably asked this. I'm not sure if it was missed in the answers. If you could just give us any idea of rental renegotiations and what's happening locally in Hong Kong. Secondly, could you just quantify the price increases that have been put through for Louis Vuitton? I know that we spoke about the 3% increase back at the Q1 stage. Obviously some movement since then and expectations for the second half. On the pricing theme, if there's any update or you're still monitoring the gray market issue, if there's any change that you've really seen for yourselves in the period. Thank you.
Thank you, Louise Singlehurst. On the Hong Kong rents, a lot of talks, obviously. Not so much concrete to report at this point in time. Obviously, we only discuss with landlords at lease maturity. Despite the situation changing fast in Hong Kong, the rental situation is not supposed to adjust in the same way. There are a lot of discussions. When you go to the best places in Hong Kong, Canton Road, et cetera, you still feel that there is a lot of demand for very expensive spaces. What usually happens in market is that the top rents are the first to come down and the rest of the market will suit. We don't see that at this point in time. It's a bit early to say, as there were only a handful of discussions with landlords that have not yet concluded.
For the time being, I'm not in a position to tell you that Hong Kong will adjust, and that will benefit strongly from lower rents in Hong Kong. It's not the case for the time being. As far as price increases at LV are concerned, you remember the 3% price increase in Q1 that you mentioned. We also had, as far as Europe is concerned, a 5% average price increase on handbags in the second quarter of the year at some point in June. I don't remember exactly when. It was on average. Some products were raised more than others, and it was just on handbags.
Super. Thank you. Anything on the gray market and the industry discussions around that?
No, the gray market will be there as long as the price difference will be what it is. You know our views on this. What currencies have done, currencies can undo it. The gray market is also based on a form of tax escape that the Chinese authorities may or may not tolerate, and there is also a fake product issue with gray market. That makes this business, for the time being, is quite important, but may almost disappear from one day to another. I think we are monitoring this with great attention and care, but it's something that is pretty volatile.
Thank you very much.
We have a question from Hermine de Clermont-Tonnerre from Raymond James. Please go ahead.
Good evening. A few questions from me, please. The first one on the U.S. market, can you give a bit more details on the growth you had by division in this region? My second question is on Asia. Can you give the growth of Asia excluding Cognac in Q2, please? Lastly, on the watch on jewelry, strong increase in margin in H1. Can you give a bit more explanation on this improvement and be a bit more precise on the margin that you reached at Bulgari? Just a final question on the tax rate guidance you expect for the full year. Many thanks.
I missed your last question, sorry, Hermine.
Sorry. Tax rate.
Tax rate, okay. U.S. growth, without going into full details, we had Wines & Spirits and Fashion being up double digits. Perfumes and Cosmetics was a little bit under pressure in Q2. It was up for the first semester, but a little bit under pressure in Q2 because of the anniversarizing of some big launches that we had, particularly at Benefit and Dior last year. I am talking again about the U.S. Watches and Jewelry was a bit down, mostly due to the inventory repurchase at TAG Heuer that I mentioned before. Selective Retailing was strongly up, double digits up in the U.S. Asia ex-Cognac is not so far away from the reported number. The reported number is -5%. I think ex-Cognac is -4%, There is a big difference.
Cognac is down sharply in China, but is up in a big way in Asia ex-China, particularly Malaysia, Vietnam, et cetera. All these geographies are doing very well. Altogether, the Cognac business is down in Asia, but it does not have a big impact on the global situation there. Watches and Jewelry margins, I will not answer on the Bulgari margin. The only thing I can say is that, yes, there was a big surge in profit in H1 in Watches and Jewelry. This comes mostly from Bulgari with operating leverage there, as I mentioned before. Also bear in mind that last year was the 130th anniversary of Bulgari, and there was a big push on marketing at this point in time last year. The comparison base from a profit viewpoint was reasonably favorable.
The tax, well, it's always a difficult question. We have this 33% tax rate. I think it's a good guidance for the rest of the year. The increase in between H1 last year and H1 this year is quite structural. As I said, we do more business in Europe, in the U.S., and in Japan than we do in Asia, where the tax rates are lower. It's a very structural shift, and this increase in tax rate comes from the changing geographic mix.
Thank you.
Maybe one last question. The last two questions.
Yeah. We have a question from Warwick Okines from Deutsche Bank. Please go ahead.
Yeah, good afternoon. Question on DFS, please. Just wondering if you could compare and contrast Q2 versus Q1. I know the overall divisional growth rate was the same, was there a deceleration at DFS? Could you maybe comment in more detail on what actions you're taking to try and protect that business?
Well, the growth rate, it was a decrease actually, was the same more or less in Q1 and Q2. There was not a big change. Actions we are taking are obviously cost-cutting actions. There is not much we can do in terms of where we do business. A big chunk of our business takes place in Macau and Hong Kong, which are not ideal places to do business in today, there is not much we can do about that in the short term, at least. In the long term, we are expanding in Europe. We are expanding in other geographies in Asia, such as Cambodia, which is very promising, it's pretty difficult short term to do anything about it. What we can really do is take actions on costs, which we have taken very seriously.
Obviously, on the rent side, it's quite difficult to achieve any big savings in the short term. On the other costs, we are taking fairly drastic actions and restructuring to reduce headcount and to reduce the amount of running costs in the business.
Thank you very much.
Okay. Next question, please.
Yeah, we have another question from Mélanie Flouquet from JP Morgan. Please go ahead.
Yes. Good evening, thank you for taking my question. First of all, my first question is regarding selling and distribution costs are 8% organic. I was wondering how you expect this evolving over the course of the next semester, but more importantly, the next two years. That's my first question. The second question is on Donna Karan, Marc Jacobs, and Loewe pressure. I think quite a lot of provisions have been taken against Marc Jacobs in H2. Should we expect a bit of an improvement on that pressure underlying that came in H1, in H2, and moving forward? Could we have a bit of relief from there? My third question is, can you give us an update on what your strategy is online, and whether you have an acceleration on this specific topic? My last question is just a clarification.
You said the mainland Chinese customer for Fashion and Leather Goods for Louis Vuitton was up 10% in H1 and had been up 5% in Q1. Is this correct? This implies a very big acceleration in Q2. I wanted to make sure I understood it well. Thank you.
It's not exactly the numbers in Q1. It was a little bit higher than that to start with your last question. It was a bit higher than that. There was a strong acceleration in Q2. The base number in Q1 was a bit higher than 5%.
Thank you.
On the selling expense, starting with your various questions. On the selling expenses, I would expect the second half of the year to be a bit better, but not in a meaningful way. Obviously, the objective as some distribution networks get more comprehensive and come to maturity is to increase sales per square meter. The selling expense in % of sales should go down, and we should see a lower increase in selling expense than in sales. We are working on that. It's not the easiest thing to work with, but progressively, the various brands are curbing, I would say, the growth in selling expenses. We have still some areas where it's quite complicated to monitor things, such as airports, for instance, where selling expenses are usually a function of the number of passengers. If passengers grow, we tend to grow selling expenses as well.
There was a question on Marc Jacobs and the impact on margin potentially in H2. The point to bear in mind at Marc Jacobs is that we announced fairly profound changes in the way we will do business on the branding side, on the product side, on pricing side. This creates, in a fairly normal way, I would say, some wait-and-see attitude from the main clients. This is a very wholesale business, as opposed to some of our businesses, which are more retail, where we usually do what we want in terms of purchases. This is here a very wholesale business, and our main wholesale clients are very much in wait-and-see attitude. This caused orders to be sharply down because our clients are waiting to see a little bit more what we have in mind before they reorder.
We are in, I would say, in the eye of the hurricane with the business being sharply down. We expect with further collections, particularly with spring/summer next year, to see some improvement. It will be gradual as our customers will not take for granted the changes that we intend to implement at Marc Jacobs. Obviously, it's a fairly lengthy process. We are highly confident, but it's a lengthy process. To be more precise, it should also weigh on margins in H2, hopefully less so next year. We should have an improvement, but it will be very progressive. Your question on online. Well, you asked the question, not you specifically, but some of you asked the question each and every quarter. We don't change the strategy as far as online is concerned every quarter.
It's basically the same answer as the one I've made a few times. Experience enhancement and hopefully also a boost to our global business.
Thank you very much.
Maybe the last question.
Yeah, we have a question from Thomas Chauvet from Citi. Please go ahead.
Good evening. Two question, please. The first one on Selective Retailing. Can you provide, as you did in the past, Jean-Jacques, the LFL for Sephora U.S., China, and Europe? Then still within Selective Retailing, given continued margin pressure at DFS, can you perhaps explain the various drivers between the traffic, average baskets? Do you experience further rental inflation beyond perhaps Hong Kong Airport in other airports? Secondly, on the fashion brands, you've talked about Marc Jacobs and the plan there in the medium term. How about your other sizable American fashion brand, Donna Karan? I think quite a few changes there. I think Mrs. Karan departed recently. I heard there were a new designing team at DKNY. Is there a turnaround plan there with an investment plan like for Marc Jacobs to try to monetize this asset in a few year? Thank you.
Okay. The like-for-like on Sephora, I usually don't break it down by geographies. You may have heard that, but I don't remember saying it. As far as Sephora in the first half is concerned, it's about 8% like-for-like on a constant currency basis throughout the business. It's obviously much higher in the Middle East and in the U.S., and a bit lower in Europe, but a very satisfactory number. For DFS, your question is pretty complex. I would, one, need all the data to answer it and a little bit more time. What I can say about DFS in terms of traffic and average basket is that what we see, particularly in geographies like Macau and Hong Kong, is first of all, a higher traffic with a lower quality, i.e., lower average baskets.
We have to deal with that, which is definitely a challenge, particularly from a merchandising viewpoint. Are we putting in front of the customers the right merchandise? That's a big thing DFS is currently working on because we think it's a new situation that we have to adapt to. Certainly, your question on Donna Karan, obviously the changes or the impact, be they on top line or on bottom line, are less dramatic than they are at Marc Jacobs, where we are talking about smaller changes in the numbers. We are currently implementing some changes in the creative direction of Donna Karan. We will also simplify the branding. We are also cutting some costs there in a fairly important way. A bit early to say what the outcome will be.
I suggest that we discuss that in the next conference calls because we'll have a better visibility on this. We are only at the beginning.
Thank you, Jean-Jacques.
Well, thank you for attending this call. I think we covered most important topics, so I don't have more to add to what has already been said. I would simply thank you again and look forward to discussing with you Q3 numbers in the course of October. Thank you and goodbye.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.