Welcome to the third quarter 2015 revenues. I now hand over to Chris Hollis. Sir, please go ahead.
Thank you, Laurent. Hello, I'm Chris Hollis, Director of Financial Communications at LVMH. With me is Jean-Jacques Guiony, our Chief Financial Officer. Thank you for joining us today. We have some brief remarks to make about LVMH's revenue for the third quarter and first nine months of 2015. As in previous periods, these revenue figures are reported in accordance with International Financial Reporting Standards or IFRS. After these remarks, Jean-Jacques and I will be happy to take your questions. Before I begin, I must remind you that certain information to be discussed on today's call is forward-looking, subject to important risks and uncertainties that can cause actual results to differ materially. For these, I refer you to the safe harbor statement included in our press release. Turning now to our third-quarter and nine months revenue announcement.
Hopefully, you've all had the chance to read our release, which was issued yesterday evening in both French and English. As always, the release is available on LVMH's website, www.lvmh.com, as are the slides that we're using to guide today's discussion. With that, let's start with an overview of our performance. Looking at Q3 specifically, and this is slide two, we saw continued progress in line with the first half of the year. This included a positive currency impact, although I would note that it was less significant in the third quarter than during the first half of the year. Overall, we saw solid momentum in the U.S., Europe, and Japan while continuing to navigate a challenging environment elsewhere in Asia.
At the business group level, we saw good performance from wines and spirits, driven principally by the rebound of cognac shipments to China and strong momentum in the U.S. market. In the fashion and leather goods group, I would highlight the major success of Louis Vuitton's new products, Fendi and Givenchy both performing very well, and the repositioning initiatives at Marc Jacobs and DKNY, which I will address a little later in the presentation. We also saw good progress in jewelry fueled by Bulgari's strong performance, which was partly offset by the impact of continued de-stocking at the multi-brand retailers of TAG Heuer. In selective retailing, Sephora continued to deliver strong performance while DFS faced an ongoing challenging monetary and geopolitical environment in Asia. Looking now at the evolution of our revenue performance in 2015.
We generated organic revenue growth of 7% for the third quarter and 6% for both the first half and the nine-month periods. The reported growth figure of 18% for the first nine months reflects a 12% positive currency effect. As I mentioned, the currency impact in the third quarter was smaller than in the first half, contributing 9% and resulting in a 16% reported increase in revenue. Turning to Slide 4, organic revenue growth for the first nine months was up between 11% and 13% across the U.S., Europe, and Japan, and down 6% for the rest of Asia. In the third quarter, revenue rose most significantly in Japan, growing 24%, followed by the U.S. and Europe at 12%, while Asia, ex-Japan, was down 8%. This reflected an increase in Chinese customers purchasing outside of their national territory.
Slide five shows the breakdown of revenue in EUR by region for the first nine months of 2015. We continue to see a well-balanced mix of revenue with a little over a third of our revenue from Asia, including Japan, a little more than a quarter in Europe and the U.S., and 12% in other markets. Compared to last year's nine-month period, the main changes can be attributed to the strengths of the dollar and the consequent growth in the weight of the U.S. in EUR terms compared to Asia and Europe. Taking a closer look now at each business group. I'll start with slide six with the wines and spirits business group. Organic revenue was up 7% for the nine-month period. Total revenue in this group was EUR 3.1 billion compared to EUR 2.6 billion in the same period last year.
Reported revenue in this business was up 19%, boosted by 12% positive currency impact. For the third quarter, revenue was up 16% on an organic basis and benefited from a positive 11% currency effect. This resulted in a published increase of 27% in the quarter compared to last year to reach EUR 1.2 billion. Breaking this down further, for the first nine months of the year, champagne and wines recorded 7% organic revenue growth and benefited from an 8% positive currency impact. This resulted in published revenue of EUR 1.4 billion. In the third quarter for champagne and wines, organic growth reached 9% while currency had a positive impact of 6% in the quarter compared to last year's period. For cognac and spirits, in the first nine months period, we saw 7% organic growth and a positive currency impact of 16%, resulting in reported revenue of EUR 1.8 billion.
For the third quarter, cognac and spirits recorded a 23% organic revenue growth and a positive 15% currency impact compared to last year's period. Turning now to slide seven. Champagne volumes increased 5% in the first nine months, demonstrating sustained growth in Europe, the U.S., and Japan, while estates and wines benefited from an improvement in mix driven by sparkling wines. With respect to cognac, we were pleased to see volumes rise 12%, driven by the continued strong momentum in the U.S. as well as a rebound in shipments to China during the third quarter, given the lower base. We continue to be impacted, however, by de-stocking of high-quality cognacs by Chinese distributors. In terms of our other spirits, the Glenmorangie and Belvedere brands showed strong momentum in the nine months. Now, turning to fashion and leather.
Revenue in this business group was up 5% on an organic basis for the first nine months of the year. Reported revenue was up 16% to EUR 8.9 billion from EUR 7.7 billion in the same period last year, and this includes an 11% positive currency impact. For the third quarter, specifically, revenue was EUR 2.9 billion, reflecting a 3% increase in organic revenue and an 8% positive currency effect over the last year's third quarter. Slide nine. Louis Vuitton with new creations was strong contributors to the brand's performance. This included the solid growth demonstrated by the creativity embodied in the new Monogram models, as well as the craftsmanship shown in its leather products. In addition, during the third quarter, there was some evolution of our store base and the family house in Asnières, where Louis Vuitton's historic workshop is located was reopened.
In terms of the other fashion and leather goods brands, Fendi showed strong momentum, particularly in its leather goods and accessories, and Celine continued the strong performance we have been seeing from its iconic products, as well as with its ready-to-wear collections. Loro Piana, now fully integrated into the group, focused on the qualitative development of its store network, while Kenzo rolled out a new store concept, beginning with its Milan and London boutiques. Also focusing on its store network was Givenchy, which opened flagship locations in both New York and in Milan. As you likely saw, the brand's September ready-to-wear Spring/Summer 2016 fashion show, which took place in New York this year, received an enthusiastic response and generated considerable media attention. In August, Berluti inaugurated its workshop for shoes and leather goods in Ferrara in Northern Italy to accommodate its international expansion.
Finally, Marc Jacobs and Donna Karan are continuing to reposition their collections, merging lines, and refocusing their offer in order to resume growth from a stronger base. With new teams in place at both brands, their first shows under their respective new strategies were successfully presented at the recent New York Fashion Week. Slide 10 for our perfumes and cosmetics business. Revenue rose to EUR 3.3 billion from EUR 2.8 billion in the 9-month period of last year. Excluding a 9% positive currency effect, this represented a 7% increase in organic revenue. Looking at the third quarter, revenue in this business group was EUR 1.1 billion, with organic revenue up 7% over the year-ago period and a 7% positive currency impact.
Looking at the perfumes and cosmetics brands, Parfums Christian Dior delivered strong performance and market share gains driven by the continued progress of its iconic J'adore, Miss Dior, and Dior Homme fragrances. An excellent start for its new male fragrance, Sauvage, which was introduced in the third quarter and features Johnny Depp as its ambassador, and strong development of its makeup lines. This included positive momentum for Rouge Dior and the Diorskin Nude Foundation, as well as the successful launch of Dior Addict Lipstick. Guerlain showed progress with its male perfume, L'Homme Idéal, and continued the rapid development of its skincare line, notably Abeille Royale. Givenchy successfully launched its new fragrance, Live Irrésistible.
Benefit continued to enjoy strong momentum, led by innovative mascaras, They're Real! and Roller Lash, Make Up For Ever launched a foundation developed for film and TV industry called Ultra HD, which has been very well received. Acqua di Parma continued the worldwide expansion of its distribution network. Moving on to Watches and Jewelry business group on Slide 12. Revenue increased to EUR 2.4 billion versus EUR 1.97 billion in the first nine months of last year, including a solid 10% of growth in organic revenue and a 12% positive currency effect. For the third quarter on its own, revenue was EUR 852 million, representing 11% growth in organic revenue and a 10% positive currency impact over the year-ago period. Overall, this business group saw excellent performance in jewelry, while watches continue to be impacted by a cautious purchasing environment among multi-brand watch retailers.
By brand, Bulgari showed strong progress led by its iconic jewelry and ladies watch lines, as well as the successful launch of its new high jewelry collection, Giardini Italiani. At Hublot, we were pleased with the excellent momentum the brand has demonstrated this year. Hublot also opened its second manufacturing facility in Nyon, Switzerland at the end of September, which will support its expansion and create a new space for its after-sales service. Chaumet introduced its new Joséphine collection and opened the ephemeral museum in its Place Vendôme boutique in Paris. At TAG Heuer, the brand has been focusing on its core range and began the selective rollout of new models as retailers continue to de-stock. In addition, the highly anticipated smartwatch the brand is developing is set to be revealed in the U.S. in November.
Turning to the last business group, Selective Retailing, which delivered 5% organic revenue growth, further increased by a 14% positive currency impact for the nine-month period. The third quarter, on a standalone basis, generated revenue of EUR 2.6 billion, reflecting organic growth of 5% and a 12% positive currency impact. To give you some highlights on Slide 15, in this business group for the first nine months, Sephora once again had strong comparable store revenue growth, driven in particular by performance in North America and the Middle East. The brand also attained market share gains across all countries and had a very strong start during its first full year of operation in Australia. Online sales momentum continued to be excellent for Sephora, they've recently announced the acquisition of Luxola, a beauty e-commerce site based in Singapore, with a presence in 11 Southeast Asian countries.
This acquisition will complement the existing store network in the region. Turning to DFS, the business has had to navigate a challenging environment in Asia in the first nine months, linked to monetary and geopolitical conditions in the region. Looking at Japan specifically, a weak JPY impacted Japanese travelers, while the country benefited from the rapid development of Chinese tourism. In terms of new developments, preparations are underway for new locations in Macau, Cambodia, and Italy. In summary, the 7% and 6% organic revenue growth that we delivered in the third quarter and the first nine months of the year respectively, demonstrate a very good performance overall in the context of an ongoing challenging economic environment. In fact, all our business groups contributed to growth in the third quarter, as well as all regions, with the exception of non-Japan, Japanese Asia.
As we move ahead, LVMH continue to focus on offering innovative, high-quality products in stores around the world, while selectively expanding our store network and maintaining a focus on cost management with the objective of reinforcing the group's leadership in the global luxury goods market. Thank you. We will now take your questions. Laurent, can you open the line, please?
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 Thomas Chauvet, Citi. You have the floor, sir.
Thank you. Good afternoon, Jean-Jacques, Chris. A couple of questions, please. Firstly, on cognac, the shipments rebounded strongly into China. It's probably a bit artificial given a lot of de-stocking was taking place in Q3 last year. Can you perhaps comment on, one, the depletions in China in the third quarter and during the Mid-Autumn Festival last week and, two, on the residual level of inventories within your 2 tiers of distributors? That's for cognac. Secondly, a question on Louis Vuitton. I remember, Jean-Jacques, in Q2, you were quite enthusiastic about the sales acceleration from the Chinese clientele on a global basis. Fashion leather was up 3% in Q3. It feels there's been potentially a slowdown from that group of customers. Can you give us a bit more color there and perhaps indicate how the business has performed during the Mid-Autumn Festival last week?
These are my two questions. Thank you.
Thank you, Thomas. I'll start with cognac, and I will try to give you sort of global overview of what happened over the last few months in China, starting with sell-out
Unfortunately, I won't be able to give you the latest numbers as I don't have them. It takes a little bit more time in China to get the numbers than it takes in the U.S., for instance, for the September numbers and particularly the Mid-Autumn Festival, I don't have them. Let's discuss, nevertheless, July and August from a sell-out viewpoint. What we saw in July and August, as expected, is a stabilization and actually an increase in the depletions, better numbers in July and August, which, in my view, are a clear sign of this market bottoming out. It's true for the VSOP and it's also true for XO. In this respect, we are reasonably optimistic that the rest of the year will prove better and probably positive, but better than what we've seen in the first half of the year.
With regards to sell-in, the situation is a little bit more complex to explain. We had, as you've seen or as you've gathered from the numbers that we have reported, very strong numbers in China in Q3 from a sell-in viewpoint, which is not necessarily what you would have expected given the fact that we have still some inventories to wipe out. Actually, what happened is that given the complexity of the wholesale system in China, in order to be sure that all our products would be at the right place, at the right moment for the Mid-Autumn Festival and Golden Week, we had to sell in higher quantities than we thought. We really thought that the existing inventories would allow us to meet the demand from Chinese Mid-Autumn Festival. Actually, we didn't want to take any risk, and we made sure that all the quantities were available.
We had to increase a bit our sell-in numbers, and therefore, in the course of Q3, we had sell-in numbers that were a bit higher than our anticipations, and hence our de-stocking was a bit lower than what we thought. Overall, if you take H2, I think our sell-in numbers will be up and our de-stocking will be up to our expectations. The difference between Q3 and Q4 will be that we have already anticipated a little bit the sell-in numbers in Q3 for the reason I mentioned, and therefore Q4 will be a little bit under pressure. To be more precise, as far as Q4 is concerned, I think we shall be, from a sell-in number, flat or positive, not negative on the basis, obviously, of sell-out being positive as I explained before.
What we said before, that by the end of the year, we should see positive numbers in sell-in, sell-out, and stocks being where we think they should be will be accomplished. We are pretty optimistic. As far as Vuitton is concerned, your second question, I think you were probably more enthusiastic than I was about the Chinese customer base, because you have a tendency to take three months for a trend, which I usually don't do. What happened in Q3 is that the Chinese customer base altogether, so in all the countries, went down to something like flat numbers compared to almost double-digit or close to double-digit for the first six months of the year. This is obviously connected with what happened in China in July and August in the stock market.
We know perfectly well that when asset depreciations of such a magnitude take place, this has an impact on our business, and China was no exception to that. We also know that this doesn't last for very long. It's a matter of months. With regards to Golden Week, where we have the numbers for Vuitton, unlike the wine and spirit business, which is a wholesale business, we saw a pretty strong Golden Week. Our numbers with Chinese people in the Golden Week were low double-digits. We think, I'm not sure everything is over, but we think that the impact of the drop in the stock market has taken its toll. Nevertheless, as we expected, this is not going to last for very long, and we expect the market and the business with Chinese people to normalize pretty soon.
Okay. Thank you. Maybe just a follow-up on Vuitton. You mentioned the evolution of the store network. I know you don't disclose much data on Vuitton store network anymore, but more generally, can you perhaps elaborate on how you see the Vuitton store network evolving going forward considering the obvious shift in demand we're seeing away from Asia into Europe and Japan? Have you been closing stores? Are you thinking differently about the location of your store regionally?
Thomas, you know that we close and open stores all the time. Globally, the store count at Vuitton is stable. We have enlarged some stores, even in China, in Beijing at China World. We may be closing down a couple of stores elsewhere in China where we have two stores in second-tier cities. It may happen, but nothing really dramatic. Overall, you should see a store count being reasonably flat for the years to come.
Thank you.
We have another question from Paul Swinand from Morningstar. Please go ahead, sir.
Good afternoon in Europe and good morning from Chicago. Thanks for the questions as usual. I wanted to ask, in the past I've asked about the wines and spirits and what the color was for who was driving a little bit, I know you've given some comments already. Are you seeing demand from catering pick up as well? I know some of the National Bureau of Statistics numbers showed catering starting to pick up. Then in a similar manner, could you say in the U.S., you said the wines and spirits cognac strong. Can you give a little more color on what segments and what different channels are driving the business?
Well, catering is not really a segment. We get reported numbers, so it's quite difficult for me to answer. What I can say, if your question is about China, is that the offtake numbers were very strong. If there is anything from catering, they belong to that group. That's probably the only answer I can give you. As far as the U.S. is concerned, I'm sorry? I cannot hear you. Can you hear? Hello? Anyway, let's move on. As far as the U.S. is concerned, we had a fairly good Q3. Our numbers are pretty strong double-digit for both VS and VSOP. This is a prolongation of what we've seen over the last few quarters. The business, both from a sell-in and a sell-out viewpoint, shows no signs of slowing down, and our inventory situation is extremely healthy.
Thank you.
We have another question from David Da Maia from Aurel BGC. Please go ahead, sir.
Hi, everyone. Thank you for taking my question. Just a quick follow-up on LV. In the press release this morning, you mentioned that growth was still strong at Fendi, Celine, Givenchy, Kenzo, et cetera. Is it fair to assume that LV actually slightly underperformed the fashion and leather goods division in Q3? On selective retail, can you give us more color on the like-for-like performance in Q3 and maybe the split by region? Thank you.
LV was not really different. It was a bit lower but not really different from the average for the division. As you know, it is never very far away from the average. As far as selective retailing is concerned, particularly Sephora, the like-for-like numbers were a little bit in excess of 10% for Q3, which is not so far from where it was in the preceding quarters. It was a bit higher in the U.S. and a bit lower in Europe and Asia.
Thank you.
We have another question from Mario Ortelli from Bernstein. Please go ahead, sir.
Good afternoon. Two questions about Louis Vuitton. Can you give us an idea of how the performance of the brand among local European customer and American customer? The second question is about the relative performance of Monogram in comparison to the other product lines. If it outperformed or was in line with the rest.
Thank you, Mario. On the local customers, the American customers growth was quite flat throughout the year, with a significant double-digit growth. It has been the same for H1 and Q2, more or less the same figure, so it is significantly in excess to 10%. With regards to European customers, there are some differences, but I would say that South Europe is about in between 2% and 4%. South European customers, I include French, Italian, and Spanish customers, is in between 2% and 4%, while the northern part of Europe with German and British customers being a bit higher. With regards to Monogram outperformed a bit the rest of Vuitton in Q3 as it has been doing for the last few quarters. This comes from the handbag segment, but also from the small leather goods segment, which unlike the preceding quarters, has proven pretty solid.
Obviously when the small leather goods segment is solid, this comes mostly from Monogram.
Thank you very much.
We have another question from Oliver Chen from Cowen and Company. Please go ahead, sir.
Hi. Thanks, Jean-Jacques and Chris. Thanks for the details on China in terms of the flat run rate. When you do talk about normalization soon, what is the magnitude of which you could experience an acceleration? What kind of range? Just, you gave the insight that you thought this was just a matter of months. I just wanted to know if you could elaborate on how we should think about that happening. Then I had a question on Sephora. You've had a really impressive momentum in the United States. Who do you think you're taking share from there? If you could give us an approximation of how the comp store sales trends were, that would be great.
Which I have already given. It's a bit in excess of 10% in the U.S. The average for Sephora is about a little bit more than 10%, and it's a bit higher in the U.S. On your first question, you're talking about what, Vuitton China? I don't know. Could you be more precise, please?
Yes, I am. Yeah, fashion and leather goods and Vuitton.
Leather goods and Vuitton. Well, it's a difficult question. Obviously, improvement in run rate would come from various sources. One is mix, another is volume, and third is pricing. Particularly if you look at pricing this year, pricing was not a big impact due to the fact that we benefited from an improvement in the overall currency situation. We found it extremely hard to pass on price increases. Contribution to growth coming from prices has been the lowest I've seen for many years. This is a way to say that when you look at constant currency growth in period of hardening currencies, there is part of the growth that would have been otherwise within the constant currency growth that you don't see because it's in the currency impact. Apart from that, we've been working at improving the mix for many years, and we do get some improvement there.
Volumes are slightly positive as they should be. This is an ongoing process, I would say.
Okay, thank you. On the Tag smartwatch, we just wanted to know what's your route to market. Is there any distinction in terms of the distribution model there? The multi-brand cautious purchasing habits on the watch side, is that a temporary issue in terms of the inventories you're seeing there? Just your thoughts on some catalysts for that side of the business. Thank you.
On the first question, wait till November. We'll be making some announcement in November, so I cannot really elaborate before that. With regards to what we call soft purchases from third-party retailers, there are a few things in that. First of all, this segment is suffering a bit in some areas like Asia particularly. The purchases from these people are not particularly strong. As we said, they are cautious. On top of that, in other areas, particularly the inventory situation, and particularly from a qualitative viewpoint, not necessarily from a quantitative viewpoint, is not particularly strong for some of our brands and particularly for TAG Heuer. We still have some third-party retailers who are left with a significant amount of slow movers. It takes time. We have bought back some of them, but we cannot buy them all.
It takes time for them to get rid of the slow movers. Obviously as long as they don't get rid of them, their level of purchase is lower than what it was before. This is what we call caution on the side of third-party retailers.
Okay. Jean-Jacques, on the commodity side, as it applies to diamonds and gold and other commodities, we're seeing some benefits in relation to the cost of goods sold declining. I know it depends on the rate of your inventory turnover and your accounting method on the inventory, but is that something we should look forward to? Would it hit the gross margin, or would you reinvest that? I'm just curious about the dynamics as we do see double-digit decreases in certain commodities.
Well, on gold, there is nothing really new. It's been going on for some time. We have already benefited from that in a large extent. The question is not necessarily whether we shall reduce prices to offset, to reflect the lower price of gold, because the question is prior to that, were we able to reflect into our watches the increase in the price of gold, which was not always the case. You should take that with a sort of average view on a number of years, and nothing really dramatic is supposed to take place there.
Okay. Thank you. Just lastly, I meant on Sephora, your mobile app is just pretty amazing and exceptional. Of your comp store sales, is a material percentage driven by the online portion? In the U.S., a lot of the U.S. retailers are seeing some nice drivers in terms of the momentum and traffic they're getting from online materially contributing to comp store sales.
Well, the mobile is a strong contributor. We don't want to disclose any numbers with regards to the share of digital and particularly within digital mobile. It's a strong contributor. We have invested heavily into making mobile purchases available to our customer base, I would say rather early. We are benefiting from that these days.
Thanks. Great results in the U.S. Best regards.
Thank you.
We have another question from Luca Solca from Exane BNP Paribas. Sir, please go ahead.
Yes, good afternoon. One question about Louis Vuitton. There was quite a significant amount of newness coming to the stores in the fourth quarter of last year, especially with the 150th anniversary collections. How confident are you when you look at the newness coming to the stores for Vuitton in the next few quarters, and if you think that those comparables will be in a way addressable by the new products that you have underway? A second question about pockets of improvement. There seem to be a few areas where LVMH could be benefiting significantly from improving its business position. You mentioned a few of them already, like TAG Heuer, for example. We could add Marc Jacobs and DKNY and possibly the payout of the significant investments in Berluti. I realize that it takes time for them to be addressed.
I wonder if you have an idea of what this timeline could be, or at least which ones could potentially bear fruit sooner rather than later. Thank you.
Okay. On the first question on the newness and anniversarizing the group response from the client base last year to our novelties, I would say this is the sort of ongoing challenge. We have to deal with that at all times. The answer to your question is that I'm very confident that we shall be able this year and in the next quarters to anniversarize the success of the preceding quarters. We are investing heavily into new products. The new products that we have launched have been quite successful. We don't feel particularly worried that the comparison base, particularly from a qualitative viewpoint, will be difficult to match. There are easier quarters from a quantitative viewpoint, but from a qualitative viewpoint, there were a fair amount of novelties that worked pretty well last year. I'm pretty confident that Q4 will see exactly the same thing this year.
We are not particularly worried. Well, with regards to what you call the improvements. Well, thank you for calling them improvements to start with. You know my philosophy on this. We don't want to exert undue pressure on our managers by setting time targets that would make their life even more complicated. These businesses are working on fairly important challenges, and they have to, for some of them particularly, to reinvent themselves or to find a different way to operate. This is particularly true for Marc Jacobs and Donna Karan. We have explained that we want to simplify the brands, having one label instead of two, but clearly the surviving label will not be, if you take DKNY, the new DKNY will not be the preceding DKNY. Neither will it be the preceding DKNY Collection. It will be something different. Same thing for Marc Jacobs. It takes time.
It's complicated. We've seen some quite amazing runway shows lately. I'm very confident that from a product viewpoint we are in the right direction. Doing nice runway shows and convincing department stores, buyers to take risks on the new products are two different things. It's going to take a few seasons, I would say. How much is a few season? I really don't know. If we try to segregate a bit, I would say that TAG Heuer, in my view, is the brand among the ones you mentioned, where the improvement is the closest, I would say. We have cleaned up, to a large extent, the distribution network. Maybe there is a little bit more to come, but nothing really significant. The new products and the price at which we introduce those new products seem to be quite well understood and accepted by the retailers.
We are quite optimistic. This being said, if Q4 or Q1 are not exactly up to your expectations, don't blame me for this comment. It's very difficult to figure out with precision how long it is going to take.
I will not. Thank you very much, Jean-Jacques.
We have another question from Antoine Belge, from HSBC. Please go ahead, sir.
Hi, it's Antoine at HSBC. Three questions. First of all, to come back on your comment that Chinese consumption was flat versus up 10% in the first half. Most of the decline, is it coming from local consumption or is it Chinese people spending less when they travel? Actually on that particular aspect, is it more like less traffic or more spending in the store? Second question on Champagne, you saw a nice acceleration in volumes from 3%-5%, which mean that Q3 was probably high single digit, any one-off, or do you think that it's a genuine acceleration? Finally, what's your view in terms of your hedging strategy with the U.S. dollar seeming to stabilize? How are you hedging yourself for 2016? Is it more using options and more like, what's the combination of vanilla versus option tunnels? Thank you.
Well, thank you, Antoine, for your three questions. On Chinese consumption, the drop that we've seen comes from both the locals and the tourists. I would say maybe a bit more from the tourists, although it's not really easy to read because we've seen some huge discrepancies from one month to another. Again, you're asking me to comment on only three months, which, as I said earlier in this conversation, is not a trend in my view. We've seen some volatility in These numbers, the only thing we know is that, as I said, the stock market collapse took its toll. As we said, we expect this to be only impactful for a small number of months. With regards to Champagne, although the numbers have been a bit volatile, Q1 was better than Q2, and then Q3 is better.
I think the business fundamentally is quite healthy from a volume viewpoint. Growth is coming from many directions. It's true in Europe, but also in the U.S., and with Europe and U.S., you have almost 80% of the business. It's really, I would say, healthy business. Growing the business at more than 5% or more than 4% is difficult from an inventory viewpoint. We know that the optimum from a growth viewpoint is more something like 4%. We're a bit higher than that on average since the beginning of the year. It's not a forecast, but we cannot grow 6% or 7% per annum that we know. It will be more something like 4%. Again, it's very balanced and very healthy.
We are particularly pleased with the advances of the business in the U.S., which is a result of the strong marketing strategies that have been implemented there. With regards to hedging, we do what we always do. We hedge about a year in advance. When the currencies are high, we tend to hedge with tunnels. There is something like a 10 points difference in between the put option and the call option. It's impossible with the level of volatility today to buy plain vanilla option. Our average rate for next year is about 111 or 112. It's well-positioned compared to current market spot rates. That's about it. We covered about 75%-76% of our total budget.
It's more or less the same thing with the yen, although we have a little bit more plain vanilla strategies in the yen, due to the fact that the yen is not as strong as the dollar is at this point in time.
Okay. Maybe just one follow, actually two follow-ups. One on Champagne. If 4% is the sustainable volume growth, would you say that the 3% mix on price that you've seen in the first nine months is also what could be sustained? Back on the Chinese, I'm finding it a bit difficult to see that Chinese are adjusting their purchases so quickly. Can you maybe put a bit of anecdotal evidence, or have you seen, again, is it more that people are canceling their trips or more that they are spending less when they are entering your stores?
Well, it's not spending less or canceling trips, it's that the growth rate slows down. We see as many Chinese people as we used to, even in some locations we see more. Maybe they spend a little bit less, but on average, they spend as much as they used to. It's just that the growth rate is not as high as it was in H1. There is difference between the business falling and the growth rate falling, and we are talking about growth rate being lower than what it was, and not the business being lower than what it was. On Champagne, on your first comment about price mix, I would tend to be a little bit more optimistic because this year, if you look at price, it's quite difficult to pass on price increases due to the fact that currencies are pretty high.
I think our potential for raising prices further in a normal, I would say in a more stable currency environment, is probably a bit higher than what we have shown this year. Otherwise, we're talking about, yeah, something in between 3% and 4% in between prices and mix.
Thank you.
We have another question from Catherine Rolland from Cheuvreux. Madame, please go ahead. Madame Catherine Rolland, your microphone is open.
Yes. Can you hear me?
Yes, Catherine.
Good afternoon. I have several questions, actually. First of all, about Asia Pacific, we had some worsening in trend in Q3, despite a very positive impact from cognac, while it was not the case in H1. First of all, could you give us some color about the evolution of Asia Pac sales, stripping out cognac? Second point, could you tell us what happened in the region in Q3? My second question was about the Vuitton sales growth. If we assume that it was more or less around 2% in Q3, could you give us the overall trends by main regions between Europe, the U.S., Asia Pac, Japan, and so on? Thank you.
Okay. On Asia, in Q3, if I'm not mistaken, we were down something like 8% in Q3, including wine and spirit. I think it was a little bit more than -9% or something like that. What is behind that is a slowing down in most businesses, including obviously fashion, for reasons that we have already discussed. Also a little bit perfume and cosmetic. Selective distribution is also suffering a bit, particularly for DFS in Hong Kong and Macau. I would say that all the divisions are participating to this slowdown in the Asian business. For Vuitton, I will not confirm your assumption that on the growth rate of Vuitton. To give you some color around the various geographies, we've seen Europe being double-digit growth, albeit at a slightly lower pace than what it was in H1.
Asia was negative, a little bit worse than what it was. U.S. was mid-single digit growth. It was a bit better in the first half. The main difference between H1 and Q3 for the U.S. at Vuitton is not the American customers. As I said before, they've been growing pretty steadily at the same pace in H1 and in Q3, it was mostly due to South American clients that benefited from the drop in their currencies and from attractive local prices, which doesn't happen very often in South America. There was, for a fairly long period of time in Q3, prices in Brazil, for instance, were lower than what they were in the U.S. We have raised prices, or we are about to raise prices in Brazil, obviously, to correct that. We suffered a little bit from that.
The big difference was also in Japan, where we moved from a few percentage points positive in H1 to a very strong double-digit number in Q3. The Japanese business has really benefited from very favorable touristic trends, but also local trends. We've seen the Japanese customers being positive locally for the first time in many quarters.
Thank you very much.
We have another question from Louise Singlehurst from Morgan Stanley. Please go ahead, madam.
Hi, Jean-Jacques. Hi, Chris. Just a couple of follow-ups from me, please. Can you just remind us of the price increases that have gone through for Louis Vuitton so far this year? I think there was one in April and one in June. Whether you think that that's had any impact on the volumes in Q3. Thank you.
Well, it's quite simple. We had a price increase at Vuitton across the board of 3%. I think it was late February or early March. We had, for leather goods, another price increase late June or early July of another 3%. That's about it. Apart from that, there've been some mild price adjustments here and there, but nothing really significant apart from significant rises of prices in emerging markets such as Russia or Brazil, where we have to correct the drop in the local currencies. Was there any impact on volumes? Frankly, I don't think so. When you do price increases of that magnitude, usually the impact on the customer is fairly limited.
Just on following up from the comments earlier regarding Golden Week and the Mid-Autumn Festival, I think you talked about low double-digit growth in the Chinese consumers globally. Was that a like-for-like period, so Golden Week on Golden Week? Just trying to understand the underlying.
Yes.
It is the underlying. Thank you.
Yes. It was 1st of October to the 7th of October, so it's exactly like-for-like.
Then my last question, just I see Marc Jacobs is closing a store in Harbour City. Obviously small in the context of the group, but are there any other potential, we've been talking about rentals for a long time, but any other areas of cost savings as you look to the budget into 2016, specifically for Asia? Thank you.
Not really.
Great. Thank you.
Thank you, Louise.
We have another question from Ashley Wallace from Bank of America Merrill Lynch. Please go ahead, sir.
Hi, it's Ashley Wallis. I just have a question on your fashion leather margins for the second half and into 2016. Given your European-based production, when should we start to expect a growth margin benefit from a weak euro come through? Can you please give us an indication of how supportive that will be for fashion leather margins? Then just one second question as a follow-up to Louise, just on Golden Week and the Chinese consumer growing low double-digit growth. Can you please break that down, the traveling consumption versus local consumption during that period? Thanks.
No, I can't. It ended up last week, I don't really have the numbers. I'm quite pleased to have the numbers for the Chinese customer base already on a global basis, I don't have the breakdown. It was probably more positive for tourists than it was locally. I cannot be more precise than that. The question on margins, I will not answer in a precise way. This is a revenue conference call, not a results, net income and operating income comment. As we said before, despite the improvement in the global environment for currencies, H1 was a bit under pressure due to the fact that we had to anniversarize significant hedging gains last year, which didn't occur, obviously, this year. Theoretically, this should not take place in H2, we should benefit from. Don't take this as a forecast of rising margins.
There are plenty of factors that could affect margins one way or the other. In an isolated way, currencies should have a better impact in H2 than they had in H1, assuming obviously that the dollar more or less stays where it is. There could be plenty of factors that could affect margins one way or the other.
Okay, thank you.
Thank you.
We have another question from Leopold Authie from Oddo. Please go ahead.
Hi. Three questions on my side. The first one, on Louis Vuitton in Asia, could you elaborate a bit, in terms of differences between countries, trying to understand the dynamics between Hong Kong, Macau, China, Korea, and maybe Japan? Japan has had basically two astonishing quarters. Trying to understand what we should expect going forward. Second question on watches and jewelry. It seems that jewelry has been outperforming watches for a few quarters now. Are we seeing the gap increasing, basically, and what could you expect going forward in the longer run? Third question in terms of cognac, are you seeing a change in mix in terms of VS versus VSOP, XO, notably towards the Chinese clientele? Same thing, what do you expect going forward?
Okay. Well, no surprise on the first question, Leopold, on LV in Asia, and it is true for most businesses. China, Hong Kong, and Macau are suffering for various reasons, but they are suffering. The rest of Asia, particularly Korea, Singapore is doing much better. We have seen really North Asia being under pressure, while south of Asia is doing much better. It has been going on for a while. There is nothing new in this. With regards to Japan, well, the quarter has been extremely solid. Obviously, the price situation benefits the Japanese business. They are at a significant price advantage to the local countries with a fairly limited distance to fly to get there. It is not unique to luxury goods and not unique to our group. What should we expect going forward?
I do not know, but I think there is a good understanding on the Chinese customer base that Japan, for the time being, is a nice place to do shopping. We do not expect this to come to an end soon. With regards to jewelry and watches, jewelry, as you said, has been outperforming watches for quite some while. It was still the case in Q3. Yes, the gap is widening a bit. Although, when you look at this gap, it is a little bit artificial as you compare watches for Bulgari, which are benefiting from the strengths of the brand, but also watches from TAG Heuer, which, as I explained before, are in a sort of repositioning phase. These are two very different situations which are difficult to compare. Jewelry is doing better than watches, no doubt.
Cognac on the mix, particularly in Q3. In the first half of the year, there was a negative impact stemming from mix, but not really in Q3, because we have seen XO in China, but not only in China, in the duty-free and a little bit everywhere, doing okay. The mix impact, if I am not mistaken, was quite neutral or even slightly positive in Q3. Overall, the mix situation, which has been against us in H1, is quite neutral in Q3.
Thanks.
We have a question from Julian Easthope from Barclays. Please go ahead.
Good afternoon, everyone. Just really coming back to the watches and jewelry question, is it possible to sort of give an indication as to what percentage of the business is actually jewelry coming out of that business? Also, to flesh out a little bit, just why jewelry is doing quite so well, and in which possible regions? Thank you.
Jewelry is really across the board. We see strong numbers in Asia, including China. We see strong numbers in the U.S. and strong numbers in Europe as well. It's really throughout the board and true with local customers and tourists. When we talk jewelry, we are mostly talking about Bulgari. Is it a category comment or brand-specific comments? I leave you to draw your own conclusion.
Okay.
The first question, sorry, Chris, what was it?
The weight.
The weight of what?
It's roughly in the division. If you take Bulgari watches into watches, then the jewelry, and jewelry just therefore Bulgari and Chaumet and Fred, it's about a little under a third of the division is jewelry.
Brilliant. Thank you very much.
We have another question from Mélanie Flouquet from JPMorgan. Please go ahead.
Yes. Good afternoon. I was wondering whether you could maybe comment on the price differential across market that created some gray market issues in the past in the sector, and notably within your business. Forex have moved, you've adjusted prices in Europe. Is your feeling that the gray market is starting to be addressed and may actually have explained some of the deceleration in quarter three? In other words, the demand was partially fed by gray market in previous quarters. That's my first question. My second is on the mix in cognac. I concur on my calculation that there was very limited negative mix effect in cognac in Q3. Is this going to continue to be true in H2? In other words, have we finished the worst of the negative mix impact?
I know this is not an earnings call, but could you help us understand what this means in terms of the dynamics on the profitability of the cognac division? Lastly, I'm wondering whether, third point, whether you would consider, when will you consider increasing prices in Japan? My last question is how do you approach, whether you can share with us, how do you approach budgeting period? Thank you.
Approaching what? Budget. Budgeting. Okay. Gray market, your first question, Mélanie. The answer is, I don't know. It's very difficult to monitor. We have no particular evidence that it is neither on the rise nor on the way down, so it's really difficult to know. I don't think we've seen many changes. The gray market is mostly a function of price difference, as we discussed before. I don't think we've seen a lot of changes there in Q3. The mix impact in cognac is a more difficult question, I would say, with regards to the near future. It will depend very much on XO in China in Q4, which we expect. I think sell-in numbers will be a bit under pressure as we intend to do significant de-stocking in Q4.
I would expect the mix impact to be a little bit negative in Q4 as opposed to Q3, which, as you said, was quite neutral. Price increases in Japan, not that I know. We have not decided anything yet, and it's not on the agenda. With regards to budget, I think if you look at the year, it's a little bit like it's been over the past two years. Our growth is not negligible, but we are not in a sort of double-digit growth across the board as we've seen in some years in the past. We'll be asking our people to be realistic. I would say this is probably the most important thing, be realistic about what kind of growth you can get. We also could put in force commensurate means, and particularly investment should be commensurate to type of growth we can reasonably expect.
These are the two things we have in mind with regards to budgeting.
Thank you very much.
Thank you. Thank you for attending this call. We expect to release our full year numbers in late January, early February, I look forward to discussing them with you at this point in time. Thank you, and have a nice day.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.