Enter five to pause. Ladies and gentlemen, welcome to the LVMH 2017 half-year results conference call. I will now hand over to Jean-Jacques Guiony. Sir, please go ahead.
Thank you. Ladies and gentlemen, good afternoon, and welcome to this conference call. I'm Jean-Jacques Guiony, the CFO of the LVMH group. Before I begin, I must remind you that certain information to be discussed on today's call is forward-looking and is subject to important risks and uncertainties that could cause results to differ materially. For these, I refer you to the safe harbor statement included in our press release. Let's now move to today's topic, the first half figures. After a brief discussion on the first half highlights, Chris Hollis, group's head of investor relations, will cover the main developments of our different business groups. I shall then comment on the main figures. After this, obviously, 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. Moving to the first slide of the presentation, I would like to say that the first half of 2017 was excellent. We shall go into some details, but in my view, the main points to bear in mind should be, first, a very solid financial performance with sales increasing 15% and current operating income by 23%. Secondly, a very strong contribution to both revenues and profits from our main businesses, Wines and Spirits, and Fashion and Leather. Certainly, all main geographies showing strong advances, with Europe and Asia growing double digits. I will now turn to Chris, who's going to review the main developments within our various business groups. Chris?
Thank you, Jean-Jacques. We will start, as always, with Wines and Spirits on slide five. This business group delivered a 10% increase in organic revenue in the first half. On a reported basis, taking into account a positive 2% currency impact, revenue is up 12% to EUR 2 billion in the first half. Looking at the two main categories, champagne and wines organic revenue grew by 9%, and after taking into account a positive 1% currency impact, reached €942 million. Organic revenue for cognac and spirits also increased during the period, growing 10%, and after taking into account a positive 3% currency impact, reached €1.35 billion. Profit from recurring operations for this group increased by a very strong 21% to €681 million in the first half of this year.
Breaking this down, champagne and wines contributed EUR 211 million in profit, up 19%, with cognac and spirits contributing EUR 470 million, up 21% in the first half. All in all, it's an encouraging start to the year for our wines and spirits business. This is due in good measure to solid progress in the U.S. and the confirmation of the recovery in China. During the period, this group launched Clos des Neuf, or Clos19, a luxury lifestyle website on which you can not only purchase the group's champagne, cognac, and other wines and spirits online but also benefit from sharing exceptional experiences around them. So I encourage you to visit. Turning now to the champagne and wines business, champagne volumes grew 8% in the first half, with several new vintages being released and other innovations, as well as good performance of our prestigious vintages.
Europeans particularly enjoyed champagne in the first half, as did the Americans. In the estates and wines businesses, there's been good progress. The launch of exceptional projects, such as Ao Yun, produced in the foothills of the Himalayas, has been well-received. Now, with respect to cognac, Hennessy had a strong 16% rise in volumes. This increase is due in large measure to excellent performances in the U.S., as well as the confirmed recovery in China for all qualities. On the other spirits side, Glenmorangie volumes were impacted by destocking by distributors in Asia in an effort to clean up the market and get stocks back to reasonable levels. Looking to the second half of the year in this group, the focus is on maintaining momentum by continuing to implement the value creation strategy across the business.
This includes an ongoing focus on product innovation and introducing new ways for customers to consume our products, such as drinking Moët on ice or Sauternes on the rocks. As a reminder, we expect the second half of the year to be more muted in volume growth due to supply constraints. This results from the exceptionally high levels of growth we have seen, in particular in the U.S. over the past two years at Hennessy, and could be accentuated by the hail and frost that we experienced this spring, particularly in the Bordeaux and Charente regions. We continue to focus on the longer term and will be expanding production and storage facilities in both cognac and champagne to support future growth.
Finally, in the second half, we hope to benefit from introducing two new products into Moët Hennessy's distribution network, the new tequila Volcán de mi Tierra, and the recently acquired Woodinville Whiskey, a fine pour brown that hails from Seattle in Washington. Turning now to our fashion and leather goods brands, starting on slide nine. This business group saw organic revenue increase by a very strong 14%. There was a positive 1% currency impact and a 2% structural impact resulting from the net impact of Rimowa's first consolidation and the deconsolidation of Donna Karan, which we sold in December of 2016. After taking these impacts into account, reported revenue increased 17%, reaching nearly EUR 6.9 billion. Profit from recurring operations was up a particularly robust 34%, reaching nearly EUR 2.2 billion.
The first half of the year in the Fashion and Leather Goods groups reflects strong growth across all geographies, in particular in Asia and Europe, where we saw the continuation of the recovery in France that began towards the end of last year. The U.S. also delivered solid progress. As I mentioned, it has been an exceptional period for Louis Vuitton owing to particularly excellent creative momentum. The iconic lines continue to perform well, and the new models have been well-received around the world. In particular, I suspect many of you have seen the artistic collaboration with Jeff Koons, certainly eye-catching. The products developed with Supreme are indeed a phenomenon. You have likely seen photos of them, you'll have more difficulty seeing them in stores due to the planned limited availability and record-breaking sellout.
Moving along, Fendi is performing very well with ongoing growth across all product categories. In the first half, the brand opened a new store in Tokyo in the impressive Ginza Six shopping complex and is off to a good start. Other highlights in this group include Loro Piana's strengthened presence in Asia and ongoing growth at Celine, Kenzo, Loewe, and Berluti. At Marc Jacobs, the move to a single brand is resulting in improved product lines, and the restructuring is starting to bear fruit. Finally, the financial results in the first half of 2017 include Rimowa, which we welcomed to the group in January when the transaction closed, and they also exclude Donna Karan, which we sold in December of 2016, as I mentioned before on a previous slide. Looking ahead to the balance of the year, at Louis Vuitton, the focus will remain on driving creative momentum.
This will manifest itself in continued innovation across categories, which began earlier this month with the launch of the connected watch, the Tambour Horizon. You've likely seen this in the media, it's off to a good start. The new flagship store at Place Vendôme here in Paris is due to open in the second half. For those of you in New York, I recommend you visit the Volez, Voguez, Voyagez exhibit, which was first shown at the Grand Palais in Paris to very large crowds and has taken a worldwide tour. It will arrive in New York from Seoul in the 57th Street store at the end of the year. Fendi recently hosted its first haute couture fashion show in Paris and will open several new stores in the second half, including one in San Francisco.
Kenzo is also expanding its retail network with new stores in Paris, Madrid, and Rome. At Givenchy, the new designer, Clare Waight Keller's debut collection will take place in October. Beyond that, the other brands will continue to focus on selective store expansion, product creativity, digital initiatives, and other targeted investments. Finally, in the second half, Christian Dior Couture will be integrated into the group as of Q3. Turning now to Perfumes and Cosmetics, beginning on slide 13. For the first half of the year, organic revenue rose a very healthy 12%, or a 14% rise on a reported basis, inclusive of a positive 2% currency impact, to reach EUR 2.67 billion. Profit from recurring operations rose 7% in this business group, reaching EUR 292 million in the first half of this year.
To provide some insight behind the numbers, as I mentioned earlier, the first half was strong for Parfums Christian Dior, with good momentum across all product categories. Its new fragrance, J'adore In Joy, is off to a great start. Its men's fragrance, Sauvage, continues to perform well. The successful Rouge Dior and Dior Addict lines continue their rapid development, and the Dreamskin line has had some excellent results. Mon Guerlain is off to a good start with a great campaign featuring Angelina Jolie. Benefit has rolled out its brow collection and launched its new concealer, Boi-ing. Givenchy too had a good first half, with notable performance from its Le Rouge and Perfecto lipsticks. The Kat Von D and Marc Jacobs beauty lines are both strong performers and being expanded. Fresh's growth continues, driven in particular by the success of the black tea line in Asia.
Finally, during the first half, the group acquired the Maison Francis Kurkdjian perfume business. Now looking ahead to the second half for the Perfumes and Cosmetics group, our goal is to continue the strong momentum across our brands by maintaining focus on bringing innovation to customers in a rapidly changing market. At Parfums Christian Dior, this means continuing to invest in communicating about both new products as well as the iconic ones. We will also launch a new fragrance with a new communication campaign in the Miss Dior family, and open new stores that truly reflect the brand's positioning and approach to beauty. At Guerlain, we will continue to build on the success of Mon Guerlain, while at Givenchy, we will relaunch the Gentleman Givenchy fragrance.
Last but not least, a new makeup line, Fenty Beauty by Rihanna, will be introduced in collaboration with the internationally well-known singer and style icon. It will be available in the fall, exclusively in Sephora, in those countries where Sephora is present. Now turning to slide 17, watches and jewelry. We saw good momentum in this business group in the first half, with 13% organic revenue growth, and after taking into account a 1% currency impact, reported revenue was up 14% to EUR 1.83 billion in the first half of the year. Profit from recurring operations was up strongly as well, up 14%, to reach EUR 234 million. To touch on some of the highlights of this group, watches and jewelry delivered solid growth driven by the strength of both iconic lines and new products.
Reflecting this, Bvlgari had a very good first half due to the success of its jewelry lines, Serpenti and B.zero1, and its new high jewelry collection, Serpenti. Its watch business also returned to growth, helped by the successful launch of the Octo Finissimo watch. At TAG, new styles of its iconic lines, Formula 1, Carrera, and Aquaracer, are being very well received, and the second generation of its smart watch was launched. Hublot has seen sustained growth, notably in China, driven by its iconic lines, Classic Fusion and Big Bang. Finally, at Chaumet, the focus is on continuing upgrades to its product lines. The brand received strong media coverage for its exhibition in Beijing, called Splendeur Impériale, recounting its storied history, which dates back to 1780. Looking ahead, the business group's brands will continue to concentrate on driving market share gains.
We are working to achieve this through sustained investment in marketing, digital initiatives, and sponsoring high-profile, luxury-oriented sports and lifestyle events. Other news to come is the reopening of Bvlgari's completely renovated New York store on Fifth Avenue, and the launch of several new models of the Serpenti Skins watch line. TAG Heuer will open a new store in London, Oxford Street. Back to Chaumet, there is more product innovation to come for its iconic line, Liens. Selective Retailing. Moving now to the final business group. Organic revenue growth was 12%, or after taking into account a positive 3% currency impact, reached 15% on a reported basis, or EUR 6.28 billion. This was due to strong growth at Sephora and significant improvement at DFS. This group saw an 8% rise in profit from recurring operations to EUR 441 million.
More specifically as to Sephora, we are pleased to report that the business once again delivered strong comparable store growth, especially in Asia. Sephora, as you'll know, has been a digital pioneer and leader, and they continue to expand their omni-channel capabilities, which of course drive online sales. They have also continued the expansion of their retail presence, renovating two major stores in New York City on Fifth Avenue and on 34th Street. I encourage you to visit. They also renovated a major store in Dubai and returned to Germany, recently opening a new shop in shop in Munich. Turning now to DFS, there has been a significant sales recovery in Hong Kong, Macau, and Japan. The business also benefited from good progress at its newest galerias, which are located in Cambodia and Venice.
To build on this improved performance, DFS has strengthened its marketing efforts and loyalty program, including introducing a new online travel booking service. At Le Bon Marché, we are proud to report that the group launched a new digital platform, 24 Sèvres, which takes its name from Le Bon Marché's historic address. The initial response has been encouraging, while the journey will be long. The store also introduced new workshops in the women's fashion area with personalized services, and these are being well received. As we look ahead to the balance of 2017 for Sephora, its focus will remain on introducing the new and innovative products that its clients rely on it for, and continuing to develop new services that further enhance the unique shopping experience it offers. Sephora will also continue to improve its mobile offerings and expand its retail store network around the world.
DFS will open two new beauty points of sale in Macau, building on its success in that market. It will also continue to modernize its store network, including in Hong Kong, Auckland, and Sydney. The business will benefit at the end of this year from the end of the Hong Kong International Airport concession, which will allow it to improve its profitability going forward. Finally, Le Bon Marché will continue to add attractions and offerings, including an exhibition dedicated to Italy, as well as the opening of La Grande Épicerie Rive Droite in Paris at the end of the year. This will certainly be a draw for Parisians and visitors alike. With that, I will turn the call back to Jean-Jacques to discuss the consolidated key figures for the first half of 2017. Jean-Jacques?
Thank you, Chris. I shall start the key figures review with revenues for the first half of the year, as shown on slide 25. As you may see, we ended the semester with all our business groups in double-digit growth. Published growth was a bit higher than organic due to a 2% positive currency impact and a 1% positive perimeter impact resulting from the consolidation of Rimowa and the deconsolidation of DKNY. Chris has commented on the main business group already in some details, but in my view, the main points are, first of all, that Wine and Spirits showing a very positive organic growth of 10% with a strong contribution from the U.S. and Asia. Fashion and Leather is at 14%, with very strong LV, but also strong contribution from Céline, Fendi, Berluti, Loewe, and Kenzo.
Perfumes and Cosmetics is at 12% in organic terms, outperforming its peers in most geographies. Watches and Jewelry is showing a very solid 13% growth despite an environment which remained quite challenging. Finally, Selective Distribution with both DFS and Sephora growing double digits. Let's move to slide 26, where you can see a comparison between the first and the second quarters in terms of organic growth. You will notice that all our divisions grew double digits in Q1 and Q2, with the exception of Wine and Spirits, where, as Chris explained, the anticipated slowdown in volume growth was aggravated by some market cleanup, notably in Asia. Let's now move to slide 27, which shows the geographic breakdown of revenues in EUR. No major change compared to the same period last year, no further comments.
Moving to slide 28, you will obviously note that the group's performance was strong across the board, worth noting the improvement in Japan based on strong local consumption and easing comparison base in Q2, and very solid growth in the U.S., still impacted by the discontinuation of the Donna Karan distribution contract for about one point. Let's now move to the next slide, 29, where you will see our simplified profit and loss accounts for the period. My main comments are the following. On revenues, we already discussed. Gross margin decreased slightly by 50 basis points to 65.1%, mostly due to the integration of Rimowa. Marketing and selling expenses are up 11%, while admin rose 8%. Profit from recurring operations is at 23% at EUR 3.64 billion. Currencies contribute to positive EUR 19 million, while the net of acquisition and divestitures positively impact current operating profit by EUR 46 million.
Other operating income and charges are negative by EUR 95 million, reflecting mostly amortization of intangible and depreciation, as well as the negative impact of recently disposed businesses. Financial charges are improving dramatically compared to last year and will be commented in a separate slide in a minute. The group's income tax rate is slightly up compared to last year at around 33.5%. Finally, the group's share of net profit is up 24%. Let's now look at the profit from recurring operations, which is broken down by business groups on slide 30. Wine and Spirits had an outstanding first half and enjoyed a significant 220-basis point improvement in operating margin and a 21% advance for last year. Fashion and Leather ended the semester also on a very high note with plus 34% and a 400-basis point improvement in margins.
Perfumes and cosmetics showed a healthy 7% increase in its current operating profit, with a slight decrease in margins stemming from strong marketing investment in some brands, namely Guerlain and Kenzo. Watches and jewelry current operating profit was up 14% in H1, with an outstanding performance from Bvlgari. Finally, still a little bit lackluster numbers in selective distribution with an 8% increase in current operating profit despite a better top line. This comes mostly from the impact of Hong Kong International Airport and one-off G&A increase at both Sephora and DFS. G&A particularly should be better at the old in the second part of the year. Let's now turn to slide 31, the analysis of the net financial charge. A few points to mention. First of all, the cost of debt is down due to both lower interest rates and lower average debt.
The cost of hedging is positive, which, to say the least, is an anomaly. We remember that in the second half of last year, due to specific market conditions, our hedging cost was much higher than it should have been. We now benefit in the first half of this year of the reversal of this, as expected. Second half numbers should be negative and in line, hopefully with normal levels. Moving to slide 32, where you may see the balance sheet structure. I will not comment, as there were no major changes in the first half of the year. Obviously, this financial structure doesn't integrate the impact of the acquisition of Dior Couture. I will come back on that. Turning to slide 33, a few words on the cash flow statement. First, net cash from operations is up EUR 850 million or 23% in line with operating profit improvement.
Secondly, working capital requirements used about EUR 1.1 billion in cash in line with last year. You know that the cash working capital requirements are much higher in the first half than they are overall for the full year. Capital expenditures are up about EUR 100 million compared to last year. Overall, our free cash flow is up to almost EUR 1.3 billion, the first time in the group history that we exceed the EUR 1 billion mark for the first half of the year. I will finish with a comment on the group's net debt, which was about EUR 3.9 billion as at the 30th of June of this year. About EUR 700 million higher than at the end of last year.
This change come mostly from the EUR 1.3 billion free cash flow that I already commented, net of a negative EUR 440 million of net acquisitions and divestitures, and EUR 1.7 billion in the total cost of dividend being paid out both to shareholders and to minority holdings. The group's net debt as at 30th of June 2017 represents 14% of total shareholders' equity. Obviously, the significant impact of Dior Couture acquisition is not included in the June 30th balance sheet, as the acquisition only closed on July 3rd, and therefore Dior will be consolidated in H2. I would like to conclude, I'm on slide 36. I would like to conclude this brief overview of the activity with a few comments, highlighting the most important points for the near future. In a nutshell, I think we need to be both positive and cautious.
Clearly, most of our markets are well-oriented, as H1 numbers show. The U.S. are still doing well. Japan is showing very strong progress. Asia is more than recovering, while Europe continues to benefit from both strong local consumption and rising number of tourists. This said, as we pointed out many times already this year, the comparison base is much more challenging in the second half, both in terms of top line, but also in terms of bottom line. Some geographies like Asia and China saw a marked improvement from July onwards last year, which will have to be anniversarized. For some brands, the top line growth gap between H1 and H2 last year is as high as 10%, which obviously creates a strong challenge for the months ahead. Moreover, it is also worth pointing out the currency situation.
One can only be surprised by the sharp fall in the U.S. dollar that took place in the last couple of weeks, which is a useful reminder that we may not live in a strong dollar environment forever. We never cease to hedge our business portfolio, but we all know that a stronger euro has a negative impact on margins. That's basically what we wanted to say on the slides. Operator, you may now open the line for questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad. We have a question from Oliver Chen from Cowen and Company. Sir, please go ahead.
Hi, Jean-Jacques and Chris. Congrats on really a nice momentum and results. We had a question related to the digitization strategy going forward. What should we think about in terms of the key hurdles and prioritization? Some of the issues in the U.S. that come up are around the margin profile of an online business versus physical retail, CapEx in D.C., and kind of the topic of Amazon, given that 80% of customers in America use Amazon. Just curious about the parameters around digitization at your most significant brands, such as Vuitton, over the long term. Your comment on the United States is encouraging on solid progress. Just curious about the geopolitical environment in relation to solid progress in the U.S. and what you're seeing there. If you're seeing a lot of volatility, if you could help characterize that'd be great. Thank you.
Thank you, Oliver Chen. How long you have? The first question would take about three or four hours to answer in a detailed way. I really cannot go on that type of call in some details. Obviously, we have characterized, and as you know, we recruited Ian Rogers a year and a half ago now, to help us defining our digital strategy, and not all the brands are at the same stage of development in digital. Some are just developing e-commerce and making sure that their research online, purchase offline facilities are up to speed. Some others are more involved in global data. There is a large number of different situations within the group, which I find extremely difficult to characterize in only a few words. What I can say is that obviously digital is at the core of our thinking.
We think the market is evolving fast. It's not necessarily a revolution or a big change for us, but it's pretty clear that progressively, some of our customers want to engage with our brands, be it on the marketing side or purely on the commercial side, trading side, in a digital way with us. We have to get ready for that. We are taking this very seriously, and we are working on it. Obviously, not all the brands have the same challenge. For some of them we are well advanced. I would mention obviously Vuitton and Sephora. For others, it's more recent, and we have still a long way to go. Obviously, that's your second question about the U.S. U.S. is particularly sensitive to that. You mentioned Amazon, with 80% of households being one way or the other in touch with Amazon.
I express many times our views on Amazon, particularly on this call, I don't want to do it again, in order to avoid the headlines on this tomorrow as it happened in the previous times. Anyway, again, digital is extremely important and probably more in the U.S. than anywhere else.
Okay, thanks, congrats on the Supreme collection. It looks great. I wish we could buy some, but it's so oversubscribed.
Thank you.
The next question is from John Guy from MainFirst Bank. Sir, please go ahead.
Yes, sir. Many thanks. Good evening, Jean-Jacques and Chris. A couple of questions, please. First of all, with regards to wines and spirits, you mentioned that there was some cleanup activity in Asia, slightly slower growth into the second quarter. I'm assuming that there's no direct impact at this stage with regards to the weaker weather, and that's something that will probably materialize over the course of the second half and into 2018. Could you comment a little bit more around the cleanup exercise in Asia for some of the brands, probably notably with Hennessy. On Fashion and Leather Goods , very strong margin evolution in the first half of the year. Could you disaggregate for us effectively what the margin would have been excluding Marc Jacobs restructuring impact? That'd be very helpful. Thanks very much.
Okay. Thank you, John. If you look at the table with quarterly numbers and quarterly organic growth, you have 10 numbers for divisions. Only one is single-digit, which is wine and spirits in Q2, so I'm not surprised that your question is on this. There was a little bit of cleanup in some businesses. Chris mentioned Glenmorangie in Asia. We sold a little bit too much to our clients, have a little bit too many inventories, so we took that back. You know that this has a significant impact on the numbers, obviously, because it creates negative sales. This had an impact on our numbers in Q2 for wine and spirits. What I can say that with regards to cognac, which is aggregated with spirits in our reporting.
Cognac, if you exclude the impact from the Glenmorangie in Q2, was still double-digit positive, both in volumes and revenues. There is a slowdown, no doubt. We are not growing as fast as we did in Q1 for cognac. Nonetheless, the performance in Q2 for cognac was pretty strong and basically across the board, be it in the U.S. or in Asia, and particularly in China. Your question about difficult weather conditions in April and the frost that took place, yes, it will impact mostly 2018 and mostly 2019 actually. It creates a little bit of impact already this year as we have the temptation to retain some of the eaux-de-vie and not sell them and assemble them to sell them this year, as we know that we might be a bit short in one or two years' time.
The impact will be felt probably already in a limited way in H2.
Sorry, Jean-Jacques, just before you move on to Fashion and Leather Goods , just on that with regards to the Grand Marnier impact going forward, that pretty much annualizes now as we roll forward into the second half of the year. We should start.
Yes
to see some more normalized, yeah. Okay, great. Thanks.
Yes. From Q3 onwards, you'll have clean numbers. Yes, absolutely.
Great. Thanks.
On Fashion and Leather , the margin impact of the restructuring at Marc Jacobs is extremely limited. We are talking about a few tens of millions of EUR, it's quite limited.
That's very helpful. Many thanks.
The next question is from Luca Solca from Exane BNP Paribas. Sir, please go ahead.
Yes. Good evening, Jean-Jacques and Chris. I would like you to ask about demand trends by nationality. You were helpful in previous updates to give us Chinese demand globally for Vuitton, and I was wondering how this evolved over the course of the second quarter in comparison to the strong double digits that you reported for the first quarter of 2017. You're also mentioning that Marc Jacobs, or I think Chris was mentioning that Marc Jacobs has been showing the first signs of the efforts that you have taken to improve the business, and I wonder how this is playing out. Last but not least, I think you mentioned Berluti as one of the brands producing the most important growth. I seem to understand that this was a source of losses. I wonder if there's anything which is changing in this respect. Thanks very much.
Thank you, Luca. On the demand by nationality and for the Chinese consumers, numbers are still very good, a little bit lower than what they were in the first quarter of the year, but it's very good both in China and outside China with Chinese tourists. I will not elaborate further because at this level, I don't think these numbers will be repeated forever. We are really enjoying very, very nice growth with Chinese customers, but the numbers, although slightly lower than Q1, are still extremely solid in Q2. For Marc Jacobs, the first signs that Chris alluded to are connected with like-for-like business in our own stores. Definitely, we see a big improvement there. We are closing some stores, overall, the retail business at Marc Jacobs is down. In the stores we keep open, the business is significantly up.
That's what would show the first signs of improvement. This being said, this is, as you can judge, quite limited. The wholesale business, which is the bulk of the business, is still going down. We are dependent on department stores, mostly particularly in the U.S., for the recovery of the business, and this, I don't think I have to elaborate further on this. The situation remains quite difficult, at the very least, we see the first signs of the improvement in our product offer in the real business, which is obviously very encouraging in telling us that we are moving into the right direction. Berluti, still loss-making, improving top line, improving fast, and particularly fast also on a like-for-like basis. As I said many times, it's a question of time before we get breakeven, the trajectory is pretty strong, and we are not particularly worried.
We should improve markedly this year, in the following year as well.
Thank you very much.
The next question is from Fred Steele from UBS. Sir, please go ahead.
Good evening, Jean-Jacques and Chris. Three questions from me, please. Firstly, within fashion and leather, I wondered if you could talk about how the margin expansion in Vuitton compared to the rest of the division. Within Vuitton, how would you split up margin improvement between gross margin expansion and operating cost leverage? The second, also on Vuitton, I would be interested to hear your latest thoughts on pricing there. Are you still just thinking about price increases for the Eurozone, or does the recent euro appreciation make a China price increase perhaps also more attractive now? Lastly, just interested if you could share some more details on Hong Kong. You already stated that DFS saw some significant improvements here.
I'm just interested in some more color on some of the other business units there, how they're developing sequentially, and is the improvement coming just from better traffic, or are you also seeing some extra factors helping there, too? Thank you.
Okay. Thank you. Well, on fashion and leather, you know the answer. We don't give you the Vuitton numbers, so I'm not going to give you the margin improvement. Obviously, there was a margin improvement that, as Vuitton, the operating leverage worked there in the same way as it worked elsewhere. It mostly comes from better absorption of operating costs. Although the gross margin was also slightly improving. As always with Vuitton, they are never very far away from the global division. The question on price increases, obviously, I'm always reluctant to communicate this due to the commercial sensitivity of such information. What's going on today is that the dollar and the renminbi are going down against the euro, so what we call the price tunnel, which is difference between the various geographies, Europe being obviously the lowest of them, is narrowing a bit, which is frankly good news.
We said many times that we didn't want to lower prices in Asia and in the U.S. The reason being that what currencies have done, currencies can undo it. It's exactly what's happening. For the time being, we are very much in a wait-and-see attitude, but I do not think we'll take a lot of action with regards to price in the months to come. Certainly, your question on Hong Kong. Hong Kong is doing better. Obviously, you have to bear in mind that the comparison base is not particularly demanding because after last year, we were going down two or three years in a row in a double-digit way. The business is going globally double digit in Hong Kong in the first half of the year. It's true for most of the brands, including DFS and Vuitton.
Traffic is definitely much better, both traffic and average purchase in most stores. Definitely a better situation, but comparing ourselves to a fairly low base last year.
Great. Thank you.
The next question is from Mario Ortelli from Bernstein. Sir, please go ahead.
Good afternoon. In Louis Vuitton, we have seen in the last two years an incredible innovation, continuing launching new models, new style, as the demand was a bit weak. Now that the demand in the market for leather goods is going particularly well, can we expect that Louis Vuitton will launch less new model going forward and try to build up lines on the models that arrived to the market in the last two years? The second question is, while we are waiting for the integration of Dior, the main biggest brand in fashion and leather after Vuitton are Fendi and Loro Piana. Can you give us an update of what is the development plan for the two brands? If it's focused on store openings or what else? Thank you.
Thank you, Mario. I'm afraid I will not answer to the last question. It's a bit early. We just closed the acquisition of Dior. Although we know the company reasonably well at LVMH, and particularly some people within the organization, as far as I'm concerned, I still have to review in some detail. Next call, I'll be more knowledgeable about the brand, and I will answer in a much more precise way your questions on this.
On Dior.
On Dior or Loro Piana? On Dior and Loro Piana, right?
Yeah. I asked about Loro Piana and Fendi.
I missed it. Could you repeat the question? Sorry about that.
Which is your development strategy for Fendi and Loro Piana? Is it focused on increase of store openings? If it's focused on more innovation?
Well, for Fendi, it's really both. We still feel that the store network has some way to go, particularly based on the momentum of product innovation that is fueling the growth for the timing. It's really both. As far as Loro Piana is concerned, we will expand the network but in a fairly cautious way. Obviously, we don't need as many Loro Piana stores as we would need in other brands. The brand, let's put it that way, is probably a little bit less democratic than some other brands we have, and the emphasis is mostly on products. On your first question on LV and the innovation level. I will make two comments on your question, which is obviously difficult to answer. The share of new products in the total business has and will remain quite stable.
As long as I've been reviewing Vuitton, what we do with new products is more or less stable in percentage of total sales. There is, maybe innovations are more visible than they used to be, but in terms of percentage of total business, it's more or less what it's been for quite some time. We have no particular intention to change our strategy there. With regards to demand for handbags being globally much stronger, I will just remind you that the market seems to be quite discerning, and there are brands, not only within LVMH, that are doing extremely well, but some other brands are not doing that well.
The market, in my view, is mostly a function of the quality of product innovation today, and it's no surprise that the brands having done the best job within our group, mostly Fendi and Vuitton, are getting the highest growth.
You mentioned the share of new products on the total sales are stable as Vuitton. Can you give us a number?
No, I can't. Well, if I get the number from the competition, I will give you. As I don't, unfortunately, Mario, I can't answer. Sorry about that.
Thank you.
Thank you.
The next question is from Erwan Rambourg from HSBC. Sir, please go ahead.
Hi. Good afternoon, gentlemen. I'm sorry if I missed this, the eliminations line at the EBIT level has increased quite significantly, I'm just wondering if you could come back on the reasons why that has been the case. Is there any link to the development of Uniqlo, has that something to do with completely different elements? Secondly, I was thinking about the H2 slowdown, because obviously, trees can't grow to the sky, and things have to slow. Is there any particular region where you think things will slow? Here in the U.S., we've heard some of your competitors talking about a Trump bump, a surge in sales in the U.S. from November last year to April, May this year, and a bit of softening since. Can Europe soften on the back of currency, potentially?
With Asia being stronger, how do you think about the margin equation with some regions accelerating, some regions decelerating? Then thirdly, on Sephora and the opening in Germany, which in hindsight might seem like a pretty brave move because you have a pretty big competitor in the market. Does this mean that there are other markets that were theoretically taboo in terms of opening that you could look at opening Sephora, extending Sephora to become a proper global retail banner? Thank you.
Thank you. On your first question, I was wondering whether your question was on, because elimination is more or less the same number if I'm not mistaken. Last year, it was a negative for the operating profit, a negative EUR 25 this year and a negative EUR 27 last year. I don't think there is a big change. Your question is probably to the total of other and elimination. Elimination is stable. Other is down. It's usually negative, but it's more negative than it was last year. Mostly due to some one-off impact. One is at Royal Van Lent, where we took a sort of global provision to account for management changes that are taking place in the way we forecast our profit for the ships we build. There was a significant impact there.
The second thing is that we have taken a reserve for the rent of a store that we kept from DKNY in New York, which is a pretty expensive store that was not part of the transaction with G-III last year. Given the fact that the landlord has indicated that they will renovate entirely the building in five years' time when the lease ends, it will be very difficult to lease this space. We have taken a reserve. That explains these two elements, explain why the other line is more negative than it was last year. The H2 slowdown by regions It's obviously a very complicated question, and the short answer would be, I don't know.
Nevertheless, if you look into some details of last year's, we are a lot talking about difference in comparison base and where we have the highest difference in comparison base between H1 and H2 last year is in Asia. If I'm not mistaken, we had a 10%. It was flat in the first half of the year, if I'm not mistaken, it was 10% up in the second half of the year. This is where we have the highest discrepancy between H1 and H2, and therefore, where we may suffer the most, in my view, from the comparison base in H2. As far as the U.S. is concerned, again, if I'm not mistaken, growth in H1 and H2 were not identical, but were more or less in the same ballpark. In terms of comparison base, we shouldn't suffer too much in the U.S.
There is the market dynamic in the U.S. which as far as we are concerned, you've seen the numbers, which are more or less in line with last year's growth. Q1 and Q2 are more or less the same. We are not particularly worried. Second question you had on Sephora in Germany. We are implemented in Germany the same strategy that we have implemented in Switzerland, which is a market we recently entered, with an association with a local department store chain called Manor. It worked pretty well, and we have decided to do the same in Germany. We know that we have a sizable competitor in this market, which is not something that scares us too much. We expect to replicate in Germany what we have done in a very profitable way in Switzerland.
Thank you. Just a quick follow-up on the second part, looking at the H2 slowdown. Does the regional mix really matter in terms of where your margins can go to?
Yes and no. For a given quarter or given semester, maybe. Not really over a couple of years because we have the ability to adjust prices. That's not really something that worries me too much.
Thank you very much. Thanks a lot.
The next question is from Thomas Chauvet from Citi. Sir, please go ahead.
Good evening. Thank you. I have three questions, please. The first one, on FX, as you highlighted, Jean-Jacques, in your presentation, the euro has appreciated about 10% versus the dollar and the yen, I think more or less since you published Q1. What are your final hedge rates for 2017? How far are you hedged in 2018 and at what rates? Any guidance on how you are planning to offset these potential headwinds? Secondly, can you characterize the sudden acceleration in demand in Japan in Q2? You said it was local demand. We know this market is very volatile, with locals, with tourists. Many of your peers seem not to be in such a good shape in Japan in the second quarter. Do you think that that's sustainable or are there some one-offs in that strong Japanese growth in Q2? Finally, on Dior Couture.
I know M&A at LVMH is not really about cost synergies, but being able to, for the first time, have Dior Parfums and its sister company, Dior Couture under the same roof might offer some opportunities, I guess, to run the Dior umbrella more efficiently. I'm thinking maybe media buying, central functions, rents, maybe even the tax rate. I don't know. I know it's a bit early for you to comment, as you said, but I'm sure it's something that you've looked at when obviously considering the six and a half billion EUR price to pay for this attractive asset. Could you maybe elaborate on where you see easy wins in terms of running the Dior umbrella better, with Couture being part of LVMH now? Thank you.
Thank you, Thomas. On the FX hedging, I would mention the dollar mostly, which is covered for this year at 111. It is the same rate for next year. It's both 111 for this year and next year, 83% of the budget is hedged for this year and about 60 for next year. It's a pretty solid hedging position for how long as the currently prevailing level of the dollar is, I don't know. Japan, your second question. Are there one-offs? No, I don't think so. Apart from the fact that, if I'm not wrong, last year's comparison base in Q2 was minus six or something like that, compared to plus five in Q1. Obviously a big discrepancy between the two quarters last year, which obviously creates some gap in the two quarters this year as well.
When I look at what I can look at, which is mostly return numbers by client base, the Japanese customer has been pretty strong in both Q1 and Q2, and obviously the Japanese customer is not subject to the base effect I just mentioned because as you know, the big difference between Q1 and Q2 last year was the fact that the Chinese tourists disappeared from Japan. The Japanese business was not affected with the Japanese customers, was not affected by that at all. If I look at it in Q1 and Q2 this year, the business we did with Japanese customers in Japan was pretty strong. The business we do offshore is becoming negligible now. The business we do locally was pretty strong, not double-digit, but quite strong. I don't think there are particularly one-off factors.
I'm not saying that it will last forever, but it's a pretty healthy situation in Japan, particularly with the local customers. Céline, on your parfum, I will repeat what I said at the call when we announced the transaction. Obviously, we are not very keen on synergies. As you know, our synergies is a heavy integration of businesses. We don't believe in that too much. This being said, if there are intelligent things to be done, we will do it. The topics you mentioned are particularly relevant. The media purchase, there are a few things like that, global purchases that we'll do together. Don't expect a big impact from this in terms of overall profitability. That's all.
Thank you.
The next question is from Mélanie Flouquet, from JPMorgan. Madame, please go ahead.
Yes, good evening. I have three questions, sorry. The first one is regarding the Perfume, Cosmetics and Watches & Jewelry division. They were actually a bit lower than expected in terms of margin expansion, and I was wondering whether you could explain, you mentioned A&P pressure, but I was wondering whether this is structural or whether you think you will recover some of that in the second half. It sounded like you had more launches in the second half, so I imagine some of this is structural. My second question is whether you could help us understand, maybe quantify the positive impact of the Hong Kong airport concession expiring into the second half of this year, and then more importantly, into next year, given I suspect it's expiring around November.
My last question is, sorry, for Fashion & Leather Goods and notably for Louis Vuitton, you've now commented on quite a few nationalities. Is it fair to say that this sequential deceleration that was actually quite small, but between 15% and 13% growth between Q1 and Q2, that was, I imagine roughly the growth of Louis Vuitton itself. That this sequential deceleration was linked to the Chinese consumer in total? Thank you.
Well, I'm glad to see that you're interested in understanding why we moved down from 15 to 13. It's really a big number, and I understand you will want more details on that. Let's take your questions in order, Mélanie. Perfume, Cosmetics and Watches & Jewelry, lower margin in H1 than anticipated. We mentioned some modeling push alongside some launch of product. It's particularly true for Guerlain and Mon Guerlain. For Kendo, mostly Kat Von and to a lesser extent, Fenty Beauty. As far as Watches & Jewelry are concerned, it's the connected watch for TAG Heuer. The impact is quite significant. I wouldn't call this structural, but there will be some further developments in H2, obviously. There will be a second wave of marketing for Mon Guerlain in the second part of the year.
Kendo will launch Fenty Beauty, as we discussed before, in a fairly large way in H2. For the Watches & Jewelry business and TAG Heuer particularly, I think it should be lower in H2. The marketing push will be lower in H2 than it was in H1. It's not structural, but there will be some further developments to the weight in the second half of the year. As far as Hong Kong is concerned, I will answer the question when I will know the answer for 2017. For the time being, it's a very volatile number, this is why I don't want to answer. Depending on the conditions at the airport, obviously, we have very high costs for rentals.
Depending on whether we do +1% or -1% in spending per tax, it makes a sizable difference to the profitability or the lack of profitability of this business. I cannot give the answer as of today. Finally, the 15 versus 13. Well, there are a number of explanations, some going up, some going down. I will not elaborate. There was a very mild slowdown with the Chinese customers. You may consider that this is part of the answer, but it's only part of the answer.
The next question is from Marion Bouchaud, from Raymond James. Madame, please go ahead.
Hi, good evening. I still have two questions. One on selective retailing, could you explain a bit more the decline in margin except for Hong Kong, which is a bit more better? Was this also one at Sephora with maybe entering Germany or some other impact? I wanted to know, we should think about Hennessy in H2 regarding volumes, because you tended in the past to guide for volume expansion of around 7%-8% and we're already at 16% in H1, how we should think about it going forward. Thank you.
On selective distribution, the drop in margin, as I said, I will not quantify, but is linked with Hong Kong Airport, which had some positive one-off last year. We didn't have them this year, it has a negative impact. There were also some one-offs in Sephora, some various developments, some few acquisition costs, et cetera, that caused the admin costs to rise a bit faster than it should have. There was also a big impact stemming from a bonus accrual at DFS. The DFS business save for the Hong Kong Airport operations is doing better. When the business does better, we have to accrue for larger bonuses for the management team in the year. This has also a negative impact, or at least it's absorbing part of the improvements that we get otherwise. That's the main impact on selective distribution.
That explains why we are a little bit off in terms of bottom-line growth compared to top line. Your second question was about what?
Volumes.
Hennessy volumes. Second half.
Second half volumes.
The volumes on the second half will be, the growth will be limited in my view. It's a bit early to say. We don't really know where we will end, but we do not contemplate a very significant rise in volume. The rise in volumes was very significant in H1. Demand was there, demand is still there, but we will be lacking availability of bottles. We've already seen less. The Q2 business for VS in the U.S. was a little bit under pressure already, and it will continue. You can expect, I would say, low to mid-single digits growth in volumes for the second half of the year at Hennessy. A big difference with H1.
Okay, thank you.
The next question is from Amelia Hamer, from Bank of America, Merrill Lynch. Madame, please go ahead.
Hi, it's Amelia Hamer from Merrill Lynch. I'm just wondering, firstly, just following up on pricing. We've noticed that you're not changing your evergreen pricing really at all, and that's sort of in line with what you've been saying. It does seem like there have been some price changes in terms of your seasonal output in Louis Vuitton and some of your other luxury brands. Can you talk a little bit about that dynamic and maybe whether you're using seasonal product in order to close the pricing differential between geographies? Secondly, just returning to the perfumes and cosmetics division. Obviously, very strong continued momentum in that division. Would you be able to explain just a couple of the drivers of that momentum? The last thing is on the margins in that business.
I understand your point on your extra marketing spend and new product rollout, we do notice that your margins at the operating level are still a bit lower than peers or quite significantly lower than peers. Is there something in particular driving that, or is it just that you're rolling out more product and doing more marketing than peers?
Thank you. On the seasonal products, your question is put in the correct way. We've introduced seasonal product at a price difference. It's not new. We've been implementing that for a few years now at a price difference compared to Europe, which was more in line with the objective that we have rather than what comes from the currency gap that we had. We use the seasonal products to drive down the price gap. That's obvious. The second on the Perfume Cosmetic top-line drivers, the most dynamic category by far was makeup. I don't think it is unique to LVMH Perfume Cosmetic. Most players in the industry report the same. We also benefited from perfume being quite healthy, particularly due to the launch of Mon Guerlain.
Overall, I would say that two-thirds of the growth comes from the makeup, which is a little bit less than half of the total business. Your final question on margins in Perfume Cosmetic, I always answer the same thing. When you look at Benefit or Parfums Christian Dior, their margins are in line with peers. We have a few businesses. Other businesses are more in a development phase or launching new products, and therefore this has a negative impact on global margins or on their margin, and obviously on average on the global margins of the division.
Thank you. That's very helpful.
The next question is from Omar Saad, from Evercore ISI. Sir, please go ahead.
Thank you very much for taking my question. My first question I wanted to ask about the new digital website, multi-brand digital website in fashion and leather goods. I guess it's, what is it?
24S.
24S. Maybe talk about the decision process behind launching this platform. I know you guys have a little bit in the multi-brand space, physical world in multi-brand Fashion and Leather Goods . Maybe talk about your decision to go forward with the digital. I have one follow-up.
The decision process is partly, the answer is in your question. We already have some multi-brand concepts, including Le Bon Marché within the DFS to a large extent within the group. We think quite logical to develop online and particularly for Le Bon Marché, what we are doing offline. The second part of the process was also to acknowledge that we have a unique portfolio of brands. Most of these concepts, the competing concepts, lack the big brands, mainly Vuitton, Dior, Fendi, et cetera. They may have them from time to time when they buy from third-party distributors, but not in a large way and in a big scale.
With 24 Sèvres, we are in a position to offer these brands, or we will be in a position to offer these brands, because we are only starting now. We have not all the products available on a multi-brand website, which is quite a unique proposition. That's basically the familiarity with this environment and the fact that we have a unique brand lineup, which we want to develop as well on the web.
Are you finding it's easy to sign up designer brands to 24 Sèvres, or is there a little bit of reticence on the part of some of the designers? Are you attracting supply quickly?
I will not elaborate because we are talking about a pretty sensitive topic from a commercial viewpoint. When it comes to brands outside the LVMH group, we've been positively surprised by the answers we got from, let's say, most players. That shows us that we are in the right direction. Don't take me wrong. It will not take five minutes. These concepts to be up and running and to be efficient and to offer a seamless, superior client experience, it takes time. We think we are in the right direction.
Thank you very much. Good. Best of luck.
Thank you. One last question, maybe.
The last question is from Rogerio Fujimori from RBC Capital Markets. Sir, go ahead.
Well, hi, Jean-Jacques and Chris. A quick two questions. Could you comment if the regional trends for fashion and leather in Q2 were similar to what you described for total group in slide 28? I was just wondering if you could comment on exit sellout trends for watches and wine and spirits. Thank you.
Sorry, Rogerio, I missed, your first question is about the trends, the organic growth trend for Q1 and Q2 in fashion and leather?
Yeah, you described the regional growth trends for total group, I was just wondering for Fashion and Leather it was similar.
Okay. Well, there are some differences, we see a very slight slowdown in Asia from a very high base. The U.S. is doing okay and is improving slightly. Japan is also improving in a fairly spectacular way, Europe is a bit slowing down also from a very high base. It's not dissimilar to the group trend, although the numbers may differ, it's not dissimilar. Sorry, I missed your second question.
Sellout trends in wines and spirits. Watches.
Watches and jewelry. For wine and spirits, we are pretty close given the inventory situation, which is pretty tight in the U.S. but also now in Asia. Sell in and sell out are pretty close, we are not particularly worried, and sometimes we have inventories within the trade which are at a level which is a bit low. If we have a concern, is that we lack a little bit of inventories within the trade rather than selling in more than selling out. The question on jewelry is, most of what we do is retail, so it doesn't apply to jewelry. It applies more to watches, where the situation, for quite some time it's pretty difficult to push inventories into the trade. The situation is reasonably healthy there. I wouldn't say particularly for our brands that a lot of retailers have excess inventories.
It's not the case at all, sell in and sell out are pretty close.
That's great, Jean-Jacques. May I just ask a follow-up on if you could comment if the shift to digital for Sephora is margin accretive given the strength of the brand in the U.S., at least in qualitative terms. Thank you.
It is margin accretive. The margins on the web are slightly higher than they are in the brick-and-mortar business across the board.
Thank you very much.
Thank you. That ends the call. Thank you for attending it, and I look forward to discussing with you Q3 figures in October. Thank you. Have a nice evening.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.
You have reached the end of the playback.