Ladies and gentlemen, welcome to the LVMH 2011 Hotel Resort Conference Call. I now hand over to Mr. 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, I'm 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 topics for staff figures. I shall cover the first part with most significant figures, and Chris Hollis, Group's Head of Investor Relations, will cover the main developments of our different business groups. After this, both Chris and I will be available for your questions. The press release is available on our website, lvmh.com, as well as the slides for today's presentation and the interim financial report.
Let's start with slide two, and I shall start with the revenues for the first half of the year. As you may see, we had a fairly strong semester with all our businesses going double-digit in organic terms. Having in mind that revenues grew organically 14% in the first half of 2010, we can be extremely satisfied. You will certainly note that published growth was lower than organic growth due to a slight negative impact of -1.4% stemming from currencies and the disposal of Laborce du Pont and Montaudon in the course of 2010. Chris will comment on the main business groups in more detail, but the main comments are as follows. First, Wines and Spirits had a strong semester with a 13% organic growth. Final demand remained strong in most of our geographies, and we enjoyed a 10% rise in volume over the semester.
Fashion and Leather is up 14% in organic terms with a very strong double-digit performance of Louis Vuitton, despite a very challenging comparison base. We had a fantastic performance from the other brands, with both retail and wholesale operations being on a good track. Perfume and Cosmetics is up 11% in organic terms and 10% in Euro, if we exclude the impact of Laborce du Pont's consolidation. A strong semester with growth in excess of main markets and market share gains. Watches and Jewelry had an outstanding first half with +27% in organic terms, showing the return to a more favorable demand pattern. Selective distribution is also showing a very good performance with +18% organic. Both travel and retail and Sephora have shown very strong, very solid growth, with a very strong positive impact from like-for-like, but also from store openings.
Let's now move to slide three, where you can see a comparison between the first and second quarter in terms of organic growth. As you may see, all groups of business are showing equal or superior growth in the second quarter. Only Wines and Spirits is down as anticipated, as the 17% organic growth from Q1 was hardly sustainable over the course of the year. You will note the particularly strong figures from Selective Retailing and Wines and Spirits in Q2, and the very solid 15% in Fashion and Leather, which comes on top of a nearly 20% rise in Q2 of 2010. Let's now move to slide four, which shows the geographic breakdown of revenues. Europe and Asia, including Japan, account for roughly 1/3 each, while the U.S. is one-quarter. Emerging markets taken together account for roughly 36% of the group's total revenues.
Moving on to slide five, where you may see the evolution of sales in our main geographies. No major change between the first and the second quarter, with in most of our geographies, except in Japan due to the catastrophic events of March. As far as Japan is concerned, revenue change in Q2 was - 3%, which compared to the - 9% of Q1. The June month was up 2%, showing the anticipated return to more normal business conditions. Let's now move to the next slide, where you may see our simplified profit and loss account for the period. The main comments are the following. I think we already discussed revenues, so no need to come back on that. Gross margin is markedly higher, representing 66.5% of revenues compared to 64.9% in the same period of last year.
Operating expenses are growing less than the gross margin, with + 14% for commercial charges and + 11% for admin charges. Within commercial charges, advertising and promotion is growing 22% on a constant currency basis. Current operating profit is up 22%, with operating margin reaching 21.6%, its highest level for the first half of the year. Other operating income and charges are negative by EUR 46 million, reflecting mostly amortization and depreciation of intended costs. I shall discuss financial charges in a separate slide in a minute. The group's tax rate is close to 30%, slightly up from last year. As a result, the group's share in the net profit is up 25% at EUR 1.3 billion. Let's now go into some details on the current operating income, which is broken down by business group on slide seven.
First of all, Wines and Spirits had a very strong first half, with +27% in operating profit, while sales in euro were up 10%. Wines and Spirits enjoyed a strong improvement in operating margin of about 400 basis points, which should nevertheless not be extrapolated to the rest of the year, as a significant portion of it comes from the currency impact. Fashion and Leather did also extremely well, with a 17% rise in its current operating profit, which compares to +13% in sales, and shows a further improvement in operating margins. Perfume and Cosmetics shows a flat current operating profit. The comparison base in 2010 first half was particularly difficult, as the business benefited last year from a strong rebound in sales, which occurred before the necessary reinvestment in advertising and promotion.
Operating margin reached its highest level with 13% in H1 2010, a level that was difficult to match in a more normal business pattern. Watches and Jewelry had a very good semester, with a rise of 73% in its current operating profit and a 380 basis points improvement in operating margins. This comes obviously from higher sales and a strong operating leverage. We were able to increase marketing spend by about 34% to preserve the long-term growth potential of our brands. Finally, very strong progress as well in the Selective Retailing group of businesses, with an advance of 63% compared to last year. Both travel retail companies and Sephora had a very strong first half, and overall operating margins improved by about 280 basis points. Finally, let me address the current impact on current operating profit on slide eight.
As you may see on the slide, we have a slightly negative currency impact of EUR 20 million. We started the year with a positive currency impact, which shrank and reversed as the dollar softened and went away from last year's level. Despite a solid hedging portfolio, the currency impact should be significantly negative for the rest of the year if currencies stay where they are today. Let's now turn to the plan line and the analysis of the net financial charge. Three important points in my view. The cost of debt was flat in the first half, with two antagonistic trends, one being the drop in the net interest rates, which benefited about half of the debt, the other being the higher average debt in the semester that I shall show you in a minute. The cost of hedging was much lower than last year.
As you know, this cost is by and large unpredictable, and the drop may not be extrapolated for the rest of the year. Finally, income on the financial investment portfolio was higher than last year, mostly due to dividend income from Hermès and Bulgari. Moving on to slide 10, where you may see the balance sheet structure. The structure of the balance sheet did not evolve much in the course of the semester. Yes, we registered important changes in absolute figures, with the equity increase to finance part of the Bulgari transaction for about EUR 2 billion, and the first integration of Bulgari's balance sheets. Only Bulgari's balance sheet is consolidated on a line-by-line basis in H1, as the date of change of control is June 30th. We shall fully consolidate Bulgari P&L in H2 and will allocate the acquisition goodwill to its various components in the course of the semester.
Turning to slide 11, a few words on the cash flow statement. First, cash flow operations is up EUR 514 million, more or less in line with current operating profit. Yet the tax side was pointing to analyzing as the installment payment timing was not as favorable as in 2010. We therefore suffered a EUR 400 million swing in the cash tax charge over the first half. Obviously, this will not be the case in the second half. Working capital requirements were also about EUR 500 million unfavorable to last year. It is not particularly surprising as the rebound in the level of activity was sooner or later set to derive into higher inventories and higher receivables. Although we expect to continue to grow inventories and receivables in the second half, we think the impact should be way less significant.
Finally, capital expenditures are significantly up, with an additional EUR 175 million for the semester. Overall, cash from operations is about EUR 550 million for the first half of 2011. I will finish this first part of the presentation with a comment on the group's net debt, which you can see on slide 12. The group's net debt reached EUR 4 billion at the end of the first semester, about EUR 1.4 billion higher than at the end of last year. This increase is mainly due to the payment of dividends to our shareholders and minority equity partners and to the financial investment, chiefly the purchase of Bulgari shares ahead of the contribution of family shares for about EUR 700 million. The group's net debt at the 30th of June 2011 represented about 19% of total shareholders' equity.
This ratio will obviously evolve in the rest of the year as the cash out of about EUR 1.45 billion on the remainder of the Bulgari share will take place in the second half. I will now turn to Chris, who is going to review the main developments within our various business groups.
Thank you, Jean-Jacques. I'll review each of the business groups briefly, starting with the Wines and Spirits, which starts on slide 14. Further to what Jean-Jacques had mentioned, the Wines and Spirits group had a particularly strong first half with published revenue up 10% at EUR 1.4 billion. After a - 1% structural impact and a - 2% currency impact, organic revenue rose 13%. Looking at the different categories, Champagne and Wines, organic revenue growth for the period was 13%, taking into account a two-point impact from last year's disposal of the Montaudon Champagne brand and a slightly negative currency impact. Cognac and Spirits' organic revenue growth for the half was 12% after a - 3% currency impact. Profit from recurring operations was up an impressive 27%, up 33% in Champagne and Wines, and up 23% in Cognac and Spirits.
This is an impressive four-point margin improvement, as Jean-Jacques has already mentioned. A significant portion of this improvement comes from the currency impact. Turning now to the highlights on slide 16, revenue was particularly strong in Asia, up 28% on a local currency basis, demonstrating the ongoing development of that market. In all markets, we saw a continued recovery in consumer demand in the first half, and we were able to achieve price increases in all our key regions, supported by increased marketing while also achieving volume growth. Within Champagne and Wines, Champagne volumes were up 10% on a comparable basis, that is, excluding a Montaudon impact, with particularly good performances from our prestige vintages. Following unsustainable high volume growth in the first quarter, we are seeing volume growth return to more sustainable levels in the second quarter. Consumer demand is clearly still robust, and we're closely monitoring inventory levels.
I should recall that the first two quarters were relatively small for Champagne, and the bulk of Champagne sales take place in the second half of the year. The Sparkling Wines and Distinctive Wines continued their rapid growth, and we announced a joint venture agreement in Ningxia, situated in the northwest of China, to develop premium quality vineyards at a state-run agricultural company there. Cognac volumes increased 8%, driven by continued demand for higher-end cognacs such as VSOP, XO, and above, as the ongoing momentum in our Asian markets continued. Once again, inventory levels are being monitored, especially in the U.S. Finally, our other currents have well-received products, notably again Orangey and Belvedere supported by innovative marketing campaigns. As we look for the remainder of the year, in slide 17, we'll continue to focus on growing volumes in a controlled way.
In Champagne and Cognac, we have high-quality products which have a limited production capacity, especially for the older and more prestigious ranges. As a result, we must ensure the growth today does not impinge on the resources needed for tomorrow. Within this context, we aim to keep pace with expected increases in demand in key countries, including the emerging markets. We'll need to focus on ensuring that we have access to the grades and eau-de-vie supplied that will be necessary to meet future demand. Clearly, we will concentrate on further optimizing our product mix and ensure we have a firm pricing policy. We will also continue to build our Winess and Spirits business by creating innovative new products in response to new customer trends and preferences. Moët Ice Impérial, a Champagne conceived to be served over ice, or Hennessy's Paradis Imperial, marketed exclusively through digital channels, are examples of these.
Of course, we will continue to support this future growth by investing significantly in communications, including new advertising and marketing campaigns. Finally, we will strengthen our sales force, particularly in Asia, in China, Southeast Asia, and Vietnam. Turning now to Fashion and Leather Goods, slide 18. The revenue increased 13% compared to the same period last year to reach nearly EUR 4 billion. A negative currency impact of 1% meant that organic revenue grew 14%. Profits from recurring operations were up 17% to EUR 1.38 billion. These results do come on top of significant growth in the first half of 2010, demonstrating the enduring appeal of our brands and their continued ability to define luxury for prestige consumers throughout the world. The reflect of creativity and craftsmanship of the artisans in our workshops is the backbone of our continued success.
slide 19 demonstrates each of the regions delivered notable growth, with revenues in local currencies in both the U.S. and Asia up in excess of 20% and Europe increasing 12%. Performance was led by the exceptional momentum of Louis Vuitton, which once again delivered double-digit organic revenue growth during the first half. Progress was made across all of its product categories, with particularly outstanding performance from Leather goods, including our own print collection, which we launched in 2010 on our Delhi alliance. Louis Vuitton opened new workshops in the third half of 2011, notably in Marseille in France, to keep pace with the continued success of this iconic brand. This performance is benefiting from two new Leather goods lines and the development of custom-made offerings that Fatoa manages with Future Concepts, while Donna Karan's new casual luxe line is meeting great success.
The other brands posted improved results both at retail and the wholesale level, and we're especially pleased with the progress of Céline under its new Artistic Director, Phoebe Philo, and the accelerating revenue growth we're seeing in that brand. slide 20. During the balance of the year, Louis Vuitton will continue to focus on innovation across all its product categories, supported by creative campaigns. As you will have seen, Angélique Rajoni was photographed in Cambodia as a subject to our current cool value communications campaign. In China, the Louis Vuitton Voyage exhibition at Beijing's National Museum of China celebrates our 20th year in that country. We're also inaugurating new maisons, notably in Milan and Singapore, creating a New Prestige Jewelry workshop at Place Vendôme in Paris with its own dedicated Louis Vuitton Jewelry store at the same location.
Last month, we acquired La Fabrique du Temps, the high-end watchmaking workshop in Geneva, famous for its tourbillons. This company has been a long-time partner of LVMH and its uncompromising standards of quality and innovation, very much in keeping with our own. This acquisition underscores Louis Vuitton's strategy of always choosing the best pools of expertise to manufacture its products. Our plans for the second half include developing new products for Fendi and continuing the selective expansion of its distribution network. We will also continue to build on the creative management momentum, which has been evident this year in our Céline, Givenchy, and Olivier brands. Turning now to perfumes and cosmetics on slide 21.
In a highly competitive market, revenue at LVMH's perfumes and cosmetics rose 5% to more than EUR 1.5 billion after a - 5% structural impact relating to the disposal of Laborce du Pont last year and a - 1% currency impact. Organic revenue grew by 11%. Profits were stable at EUR 181 million. The first half of last year was particularly strong, with a rebound in revenue and a relatively low level of marketing expenses in the aftermath of the economic crisis. Therefore, the 12% profit margin achieved this half year is a great performance. On slide 22, revenue on a local currency basis increased 21% in the U.S., 8% in Europe, excluding LVMH Beauty Division, and 19% in Asia. We saw strong momentum in Parfums Christian Dior's iconic perfumes.
J'adore with Charlize Theron continues to be the face of that brand, and Miss Dior, which was successfully relaunched with Natalie Portman as a new embodiment of that fragrance. We also saw rapid growth in Dior Addict lipstick and the capture of skincare. Guerlain was also extremely successful, as was the excitement generated by the new pop-up store in Paris with its contemporary look, a full taste of the future design of the Maison Guerlain on the Champs-Élysées in Paris. Parfums Givenchy benefited from the good contribution of Play perfume, and Benefit expanded its reach with the opening of an e-commerce website in China. Make Up For Ever continued to demonstrate its ability to be at the forefront of innovation with the development of its HD haute définition and Aqua line.
Looking ahead in perfumes, Christian Dior, by leveraging the relationship with Dior Couture, will be extending the launch of Hypnotic Poison with Mélanie Laurent, the French actress, filmmaker, and singer, becoming its new muse. We'll continue to strengthen visibility at points of sale in order to better express the brand's values. We're focusing on launching profitable product extensions at the other brands. Among these, we'll continue to develop the Orchidée Impériale skincare line at Guerlain and introduce new women's fragrances at Givenchy, Gardénia Noir, and at Kenzo, Made in Kenzo. In addition, we plan to open a Benefit store in New York and a new store in Milan for Acqua di Parma. Now moving on to Watches and Jewelry on slide 24.
Even in its generally outstanding first half performance for the group, Watches and Jewelry was an exceptional performer, achieving revenues of EUR 576 million, up 30% compared to last year's six-month period. After 3% positive currency impact, principally from the Swiss franc, organic revenue growth was 27%. Profit from recurring operations was up 73%, increasing the margin by 380 basis points. As Jean-Jacques mentioned, the impact of the operating leverage from higher sales enabled an increase in AMP to support the long-term growth potential of our Watch and Jewelry brands. The revenue growth, again, by region and local currencies on slide 25 was once again led by Asia at 52%, with the U.S. up 28%, Europe up 29%, and even Japan, despite the catastrophe, was up 8%. The growth resulted from a combination of continued strong demand both in our stores and among multi-brand retailers, as well as market share gains.
This led to a solid improvement in the business group's current operating margin of 15%. The Basel World Fair gave us the ability to demonstrate and promote to global retailers in the marketplace our exceptional innovation and craftsmanship, such as TAG first automatic chronograph, a watch capable of measuring thousandths of a second. The Jewelry brands performed extremely well, particularly by sales growth in their own stores. The first half was marked by a strategic alliance with the Bulgari family, under which they would transfer their majority stake to LVMH. After receiving authorization from the relevant competition authorities, the LVMH board of directors approved the transfer on June 30. This increases the stake held by LVMH in Bulgari to 76.1% prior to the tender offer, which is to be launched soon. We're very excited about this alliance and look forward to welcoming Bulgari into our family of luxury brands.
Our focus for the remainder of the year, slide 26, will be on achieving continued market share gains in a market which is itself growing. One of the first tasks will be the successful integration of Bulgari into the LVMH family. This will double the size of this business and will be done by remaining true to the identity of the brand. We'll also continue to focus on the prestige acquisition of our brand through continued innovation and targeted communication. Examples of this are Hublot's new Unico movement and TAG's relaunch of its iconic Link collection. Further investments will be made to accelerate the development of our watchmaking capabilities, given the prospect of production constraints. Finally, we'll be selectively expanding our network in high-potential countries.
Selective Retailing on slide 27 continued to grow its revenues through ongoing innovation and a focus on providing customers with an exciting and unique experience. Revenue rose to EUR 2.8 billion, up 17% compared to last year's half year. There was a + 2% structural impact from the acquisition of SACS in Brazil last year and the full Ile de Beauté from June 1 of this year. This was offset by a - 3% currency impact, which resulted in an organic revenue growth of 18%. Profit from recurring operations was up 63%. Travel retail and Sephora contributed to these strong performances. slide 28 demonstrates revenue growth of double-digit in all principal regions in local currencies, with a 32% increase in Asia, 19% increase in the U.S., and a 13% increase in Europe.
DFS benefited from sustained growth of its customer base in Asia, as demonstrated by its excellent performance in Hong Kong, Macau, and Singapore, where recent investments are bearing fruit. The business also saw good momentum in North America, in particular at airports. Sephora delivered market share gains in all regions and accelerated its growth in China and the Middle East. It is also off to an excellent start in Malaysia, with the opening of two new stores in this new territory for this retail brand. Sephora continues to focus on expansion of its network and to refresh the client experience with store renovations, as well as innovative new activities and initiatives, such as the opening of its nail studios and selective stores. Through Sephora, LVMH has also increased its stake from 45%- Ile de Beauté, a key retailer in the Russian beauty products market. Finally, slide 29 for me.
DFS's focus for the remainder of the year will be to reinforce its acquisition strategy, both in stores and in products, to expand its reach to a more diversified clientele, continuous renovation programs in Singapore and Hawaii, and to make targeted new investments in high-potential destinations. Sephora will pursue market share growth and selectively expand its store network while remaining at the forefront of innovation in the beauty field. An important area of focus will be the further development of its tool network and product offerings for the Chinese market. Sephora also plans to open its very first store in Mexico and is expanding its presence in the fast-growing Brazilian market, where its controlling stake is in SACS. Finally, it will continue to reinforce its innovation in the offer and services it provides to its clients, the nail art or the makeup school.
With that, I'll turn the call back over to Jean-Jacques Guiony for a brief wrap-up before we take your questions.
Thank you, Chris. I would like to conclude this brief overview of the activity with a few comments on H1 performance, highlighting the most significant points. First and foremost, I would like to point out that all our businesses grew double-digit in the semester, really showing the strength of our businesses and of our brands. Likewise, all our geographies are showing high single or double-digit growth rates. Even Japan, despite a terrible disaster in March, is rapidly returning to normal and posted positive growth in revenues in June. Thirdly, our businesses, despite strong marketing and selling investments, were able to contain operating costs to growth within sales and gross margin growth, enabling a strong rise in operating margin. Finally, despite significant investment, our balance sheet remains very strong. All in all, a very strong performance of the LVMH group in the first half of the year.
What about the rest of the year? It's always difficult to make a forecast, and you know how much we like it. I shall give you some points which we view as relevant. First of all, on a positive note, our main markets are well oriented, and we see no evidence of a slowdown, be it in Asia or in the U.S. The European markets have proven so far this year a bit softer, but we expect both domestic consumption and touristic flows to hold up. Secondly, currencies are as uncertain as ever. Actually, unlike many periods in the past, the question is not simply when the dollar will deteriorate. We currently see both the dollar and the euro as notably weak for very different reasons I will not elaborate on. The outcome could be one way or the other.
This requires a lot of care, particularly through the pricing and hedging policy of the group. Thirdly, we are as convinced as ever that the best way to create value is to invest behind our brands, and we shall carry on doing so in a thoughtful and disciplined way. That is basically all we wanted to say, and we shall now open the Q&A session.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your touchtone keypad. Please give it to your handset before you ask your question. We have a first question from Mr. David Wu from Telsey Advisory Group. Sir, please go ahead. Sir, David Wu, you have the floor. Please go ahead.
Hi. Congratulations on an excellent first half. First question is, can you talk about how, you know, what you're seeing in terms of cost pressures, and whether we could expect another round of selective price increases in the back half? Secondly, in terms of capacity constraints, I just wanted to get an update on whether the new plant in France for Louis Vuitton is progressing as planned and if you're looking to open up any additional production facilities in the back half. Lastly, in terms of the operating margin performance for perfumes and cosmetics, I just wanted to get confirmation that the decline really was due to higher ad spending. Thank you.
Okay. On the cost pressure, which is basically price increase, if I understand correctly your question, obviously, we will look at what we can do on the markets. It's not absolutely obvious. We have passed on a few price increases in the Fashion and Leather Goods brands, in Perfume and Cosmetics, and mostly in Wines and Spirits, unlike preceding years. We have done a lot already this year, and we are reviewing our options for the rest of the year. As always, I never answer very precisely this question as this is part of confidential commercial information that I cannot and will not elaborate on. We will definitely, as always, think about it. Secondly, on capacity constraints, we opened a few ateliers for Louis Vuitton in the first half of this year. These ateliers are coming in full force progressively.
We already had some positive impact from it in the first half of the year. A significant amount of the production capabilities will also be available. A significant increase in production capabilities will be available in the second half of the year. This should enable us to significantly rise our availability of product, and we don't expect to be faced in the second half of the year with the same product shortage and capacity constraints as we had in the second half of the year in 2010. Finally, operating margins in Perfume and Cosmetics, the answer is yes to your question. It's mostly the rise in advertising and promotion that explains the slight drop in operating margin.
This rise should be put in perspective with the fact that last year, as I explained, the advertising and promotion expenses were sort of lagging behind the sales rise that we enjoyed in the first part of the year. We had a sort of exceptional situation where we enjoyed the rise in sales. At the time, we had not yet reinvested into advertising and promotion. That's the comparison basis with such a very favorable period that really causes the margins to slightly drop in the first half of this year.
Excellent. Thank you very much.
We have a question from Mr. Antoine Belge from HSBC. Sir, please go ahead.
Yes. Good evening, Antoine Belge, HSBC. Three questions. First of all, can you perhaps comment on the performance of Louis Vuitton vs other brands? Can you tell us if Louis Vuitton did better than the average of the other division? Also, given the information you had given previously regarding pricing, is it fair to say that out of the 14% growth in organic growth in the first half, there was a price effect of around 10% and that the volume growth was rather limited? The second question is more on Cognac. I think you said volume up 8% in H1. I think you gave us 16% increase in Q1. That would indicate no volume growth in Q2. I noted that there was some relatively limited increase in the US. Is it related to a policy of trying to de-emphasize your exposure to VS in the U.S.?
Finally, in terms of margin, I think you had really an impressive development in Selective Retailing. Could you maybe comment a bit more into DFS vs Sephora and also Sephora in the different regions?
Okay. LV vs other brands, I will not answer, as always, so it's close. I will not tell you in which way it's close. The price effect that your assumption is 10%, you're far from it. I mean, price impact, particularly at Vuitton, where we measure it very precisely, is much, much lower than that. We had a price impact in main geographies progressively in the course of the semester. Overall, the price impact is probably as low as half of these figures. You're pretty far away. The rest is volume and mix impact. Cognac, your cognac assumption for volume is accurate. Our cognac volumes in Q2 were more or less flat. Actually, they were significantly up in China, something like 20%, 22%, if I'm not mistaken. They were fairly sharply down in the U.S. in order to avoid the stocking factor that we started to see in the first quarter of this year ahead of the price increase. It's always the same game. We have discussed that many times together. When ahead of a price increase, there is an inventory buildup within distributors. Despite depletions being fairly stable throughout the semester, we had to reduce our selling in order to avoid a buildup in inventory. We are ending the semester in the U.S. with a very good level of inventory in the U.S. and elsewhere, actually. We shouldn't have any impairment on our ability to grow sales in the rest of the year due to the inventory situation. Final question on selective retailing and the margins. As you noticed, we have an increase of about a little bit less than 300 basis points in margins at selective retailing.
Both Sephora and DFS are contributing to this figure more or less in the same way. The margins were pretty low last year in Q1, both Sephora and DFS, but they have recovered markedly in the first half of this year, and they both contribute to this performance.
Just maybe a follow-up. In terms of Sephora, is it broad-based between Europe, the U.S., and emerging markets, or is there a particular region which saw a dramatic rebound or expansion?
No, it's really broad-based. U.S. and Europe are more or less on the same part. Obviously, we have a larger increase in margins in emerging markets due to the fact that they are starting from a lower point. Nevertheless, it's really broad-based.
Thank you.
We have a question from Mr. Thomas Chauvet from Citig roup. Sir, please go ahead.
Good afternoon, Jean-Jacques, Chris. Two questions for me, three, actually. The first one on Louis Vuitton. Could you elaborate a bit on your retail strategy and the major change you've done over the last 6-9 months? I'm thinking notably about some of the U.S. stores. Have you closed or relocated some of the stores? Are you happy about your European retail network now in terms of embellishing the quality of the network? Can you talk a bit about the big maison that you're planning to open over the next couple of years? More qualitative comments on the retail network would be helpful. We're going to have also the number of stores at the end of June. My second question is on China and the potential reduction in luxury import duties.
I'd be happy to know what you're hearing from your partners in China and your relationships with the authorities. What would be your pricing strategy if luxury duties were reduced? Could we anticipate that you would pass that on to the consumer? Maybe that's a naive assumption. I don't know. Finally, with regards to the investment in Hermès, could you please indicate whether you own any instrument that could give access to Hermès shares or whether you've bought more shares in the market in the first half of the year? Thank you.
Okay. Thank you, Thomas. On the Louis Vuitton retail strategy, you mentioned embellishing the network. Are we pleased with the network from a qualitative viewpoint? I think it's a sort of endless process. We intend to invest in our main asset, which is Vuitton's network, all the time. It's really an ongoing process to invest and to embellish all the stores one- by- one and to have a maison where we think it makes sense, to have larger stores with small categories of products where we think it makes sense. It's really a never-ending process. As far as the U.S. is concerned, you pointed out the fact that it's probably one of the networks where we have quite a lot to do. The average size of stores in the U.S. is smaller than elsewhere. We are working on that. We have closed some stores, opening some new ones.
There will be more to be closed. There will be more to be opened. It's a significant reshuffle of the network that we are on the way of doing. It's going to take some time, and it's really, as I said, an ongoing strategy to invest at all times in our main assets, which is the retail network. On China, it's a very difficult question. Things are particularly, how can I say, foggy about the perspective of decreasing import duties. Given the sensitivity of the topic, I can hardly make any meaningful comment on this. To be frank, the pricing strategy following a potential decrease in import duties remains to be discussed within the group. We'll see first whether this happens or not, and then we'll decide what to do. On Hermès, two questions on other instruments.
No, we have only 200,000 equity swap remaining from last year's transactions, which is still in force. That was well described in our annual report. This equity swap is still there and has not changed. In terms of holding, in the course of the semester, we increased our shareholding in Hermès from 20.2%- 21.4%.
Thank you, Jean-Jacques.
We have a question from Mr. Pierre Lamelin from Cheuvreux. Sir, please go ahead.
Yes. Good evening, Jean-Jacques and Chris. Three questions, if I may. Firstly, what was the performance of Fashion and Leather Goods in Japan over the first half? Secondly, we've discussed China. Can you share with us the organic growth rate over the first half of Q2 this year? Finally, you mentioned in Wines and Spirits, a forex boost on H1 operating profit. Maybe you can quantify the impact. Thank you.
Okay. Fashion and Leather in Japan for the first half is down mid-single digit, with slight double digit in Q1 and - 1% or 2% in Q2. There is a big difference between the two. As I mentioned for Louis Vuitton, but it's true for the entire Fashion and Leather division, the month of June was positive. We really saw two or three months being deeply affected by the disaster, and things coming back to normal thereafter. In China, the growth in Q2, if I'm not mistaken, was 32%, which in yuan terms compares to 30% in the first quarter of the year. There is a slight increase in the growth, which we see in most businesses, but basically the same market conditions as we had in Q1.
As far as Wines and Spirits is concerned, out of the 400 basis points margin growth, a little bit more than 100 basis points is attributable to a fairly complex currency impact.
All right. Thank you very much.
We have a question from Mr. Michael Ridley from Mizuho. Sir, please go ahead.
Yes. Good afternoon, gentlemen. It's Michael Ridley from Mizuho International. I just had one or two questions on your Bulgari acquisition. Obviously, there's a share swap element, but I had a EUR 2.4 billion cash out for Bulgari. I wanted to ask if that figure of EUR 2.4 billion includes buying back the Bulgari convertible bond or not. What is the cost of buying back that bond? Post that bond, what debt is there at Bulgari when you consolidate it onto a balance sheet? A sort of final question on that is I'm a little bit confused about what has gone in the first half and what is still to come in the second half in terms of the full acquisition. Thank you very much.
Okay. I'm not surprised you are confused. It's pretty complex, and accounting is not helping much, I must admit. As far as Bulgari is concerned, let's break down the acquisition price in its various components, starting with the share component, which is, roughly speaking, EUR 2 billion, EUR 2.02 billion or something like that. Then you have about EUR 700 million that were shares that we bought after the announcement of the transaction on March 5, 2011, and before the contribution of the shares by the family group to LVMH on June 30. What remains to be paid, and you'll have the details in the financial documents, is EUR 1.45 billion in cash. That's a total roughly of, sorry, EUR 4.2 billion, which is the amount that we announced at the very beginning of this transaction. This includes as cash the impact of the convertibles.
We make the assumption, which in my view is correct, that all convertibles will be converted into shares and will come to the tender offer that we are likely to launch at the end of August, late August, and that should close in late September.
We have a question from Mr. Warwick Okines from Deutsche Bank. Sir, please go ahead.
Good evening. It's Warwick Okines from Deutsche Bank . Could you please give the Louis Vuitton store numbers at the end of the first half? I think I missed those. Also, the gross increase and the net increase over the period. Could you just confirm that there were no price rises at Vuitton in Q2? Thank you.
LV store number, no, you didn't miss it because we didn't mention it. It's 458 at the end of the first semester. Gross increase, I think the net is flat, and gross, it's maybe, I think it's + 5%, - 5%, something like that.
Thank you. Price increases in Q2?
Price increase. There were mostly price increases of 2%-3 % in the Eurozone. That's about it.
Great, thanks very much.
We have a question from Edouard Crowley from Exane BNP Paribas . Sir, please go ahead.
Yes. Good afternoon. Chris and Jean-Jacques. Two questions. The first one relates to your recent acquisition of La Fabrique du Temps for Louis Vuitton. Could you just come back a bit on what are the kind of key competencies that you will be acquiring in terms of watchmaking know-how and the kind of, basically, mix and initiatives you plan to undertake to basically ramp up your high-end offering at Louis Vuitton Watches? Secondly, a quick question on India. A few weeks or months ago, we heard that L Capital could be looking to the Djibouti Valley. Is there any development there? More generally, what are your views in terms of store openings for the Indian market? Thank you very much.
Okay. Fabrique du Temps, we are getting into some level of details. As the purchase price of this acquisition is less, way less than EUR 10 million, we are getting into a high level of details. The objective for Louis Vuitton is to be able to master the main production techniques surrounding the manufacturing of Watches, including movements and including complications. Fabrique du Temps is very well known for its complications and the ability to really bring value to Watches, and it's exactly what Louis Vuitton is looking for. As far as India is concerned, it's a pretty tricky question. I will not comment on L Capital's investment there. It's a separate entity in which we own a very small percentage. In terms of retail developments in India, things are not particularly easy. The market is changing, but slowly.
There are a few shopping malls in which we can open stores, but we have to be careful to make sure that the promises that we have in terms of overall spending, basically what the landlords are telling us about what they intend to do with the shopping malls, end up being exactly what they have said at the beginning. We tend to have a fairly cautious attitude when it comes to committing ourselves to new retail developments.
Okay, thank you.
We have a question from Mr. Marc Willaume from Raymond James. Sir, please go ahead.
I think now it's a good evening. My first question would be on Sephora. Could you give us the like-for-like sales growth both in the U.S. and Europe? On the overall AMP, which increased by nearly 100 basis points in H1, could we expect the same kind of increase on a four-year basis? The last one regarding Louis Vuitton, I think that at the early stage of this year, taking into account the new production plant ramping up, you were expecting an overall four-year increase in capacity, which then brings 10% growth in volume. Are you still forgetting the same kind of volume increase on a four-year basis? Thank you.
Okay. Sephora like-for-like is 12% in the U.S. and 8% in Europe.
That's for H1?
That's for H1. No, no, that's for, I'm sorry, H1. Yes, you're absolutely right. AMP in the second half, always difficult to say, but I think the reason why the growth is what it is is that the comparison base in H1 last year was reasonably low. I mean, we had the sort of lagging effect of the crisis, and we were not yet in a reinvesting mood in AMP in the first half, or at least at the beginning of the first half. It didn't happen, obviously, in the second half. The comparison base in H2 2010 will be very different from H1. Hence, I don't expect a similar rise in advertising and promotion in the second half.
As far as LV volumes, production volumes are concerned, we still expect a significant increase in our production on average in 2011 compared to 2010, which should enable us to meet growing demand and also replenish inventories, which is, as you know, one of our objectives in this year.
Four questions, just if I may, regarding the other activities on which a lot of elimination, which reach EUR 124 million. Can you give us some color on those?
The main reason for this increase is that, as you know, the profit was fairly solid for the month. For the semester, we had the opportunity to take some provisions that could have been spread out over the full year, and we took them entirely in the first part of the year. That explains the bulk of the rise.
Thank you very much.
We have a question from Mr. John Guy from RBS. Sir, please go ahead.
Yes. Good afternoon, Jean-Jacques and Chris. Just a few questions, please. With regards to the recent investments you've made in Watches, I mean, obviously, there's a relatively small size of the acquisition with La Fabrique du Temps, but obviously, you've taken in Bulgari as well. I'm just curious to know whether or not you're going to need to make further investments on the manufacturing side, given what looks like a sort of steady progression from Concord and Swatch, reducing the amount that they'll have to effectively supply going forward. That's my first question. Second question is with regards to the cost on a square meter basis of operating in China vs Europe for Louis Vuitton. Wondering if you might be able to share anything there. The third question is around any planned price rises you have for Cognac in the second half of the year, especially with an excellent VSOP. Thanks very much.
Okay. Thanks, John. Watches, the answer is obviously yes. I mean, we intend to carry on developing our manufacturing capabilities in movements. You know the various developments we've been on with Unico at Hublot and with the 1887 at TAG Heuer. We intend to increase the capabilities to produce these movements within these two important brands in the future and reduce our dependency to the outside world. We are investing seriously. We didn't start yesterday. This investment phase started in 2006, basically. Our production capabilities are on the way up. The crisis, the recession was not good news for these investments as the recession was particularly hardly felt in Switzerland. Now things are back to normal, and we are resuming our investment there. We are pretty optimistic that within a couple of years, we should have reduced our dependency to the outside world in a great way.
The cost of sq m China vs Europe, for Louis Vuitton, I mean, it's hard to elaborate, but I would say that when it comes to selling expenses, we don't necessarily view a big difference in % of sales in between the eurozone and China. We have some differences in terms of the cost of employees and the cost of the depreciation costs, sorry, but cost of premises tend to be on the way up. The sales density is not necessarily the same in China as in Europe. It's normally a bit lower. All in all, it doesn't make a hell of a difference, although in absolute terms, on a square meter basis, expenses in China are obviously somewhat lower. Price rise in Cognac for the second half of the year, let's hope we can do it, but I'm not sure. It's a difficult decision.
As you know, in Wines and Spirits, the bulk of price rises are being implemented in the first quarter, not even in the first half, in the first quarter of the year, for obvious reasons linked with the year-end season, which is so important in this business. Given the strengths in the demand, particularly, as you mentioned, in VSOP in Asia, we might look at it, but no decision has been taken yet on this. I really cannot answer on this point.
Thanks very much, Jean-Jacques. Can I just follow up with just one very, very quick one on how you feel with regards to stock levels? I know you talked about coming out of the U.S. and the second quarter feeling a lot happier in terms of how clean you were in terms of stock. How does that translate to the other regions? Are you reasonably comfortable after the first half?
The inventory issue is mostly a U.S. one as distributors carry a very, very high level of inventory. Basically, they would carry 90 days of inventory in the U.S., whereas in China, it would be 20 days, and in Europe, more or less the same thing. The inventory issue, I would say, is much more fluid when it comes to Asia and Europe than it is to the U.S. We have very rarely seen any inventory build-up or restocking in this area. It's mostly a U.S. impact. As I mentioned, we have no particular worries when it comes to the inventory impact in the U.S. Inventories are exactly where they should be.
That's great. Thank you very much.
We have a question from Mrs. Catherine Rolland from Kepler . Madam, please go ahead.
Yes. Good evening. Several questions, if I may. First of all, I just wanted to know if you could give us the split of the EUR 20 million negative forex impact by divisions. My second question is about the evolution of the operating margin of the Fashion and Leather Goods business. We have a sales growth of 13%, including price increases, and EBITDA by 17%. Maybe there was some negative forex impact, or was there any one-off cause that could explain that the operating margin was not more up? The third point was about DFS. I just wanted to know if you could tell us what was the DFS sales growth rate in H1, please? Thank you very much.
Okay. You really want me to go into the details of EUR 20 million currency impact? I mean, we used to have EUR 200 million or EUR 250 million currency impact. I mean, this one is as low as EUR 20 million. Anyway, we have something like -EUR 10 million for the Fashion and Leather, and a slight positive figure for Wines and Spirits, and the rest is by and large negligible.
Okay.
Operating margin in Fashion and Leather, you seem to be disappointed. We are pretty pleased. I mean, we had an increase in operating profit, which was 17% compared to a 13% rise in sales. We think this shows some operating leverage in a business where we already have very high margins, particularly at Louis Vuitton, where you know margins tend to be reasonably flat. This shows that there was some good improvement in margins from the other businesses. We are pretty pleased with this. There was no particular negative impact stemming from anything. I mean, we had really business as usual, and we did quite well, in my view, in terms of boosting margin in the Fashion and Leather division. DFS in H1, if I'm not mistaken, in dollars, we are up 24%. It's a bit less in organic terms, but it's up 24%.
Okay. Thank you very much.
We have a question from Mr. Krim Delko from Orange Capital. Sir, please go ahead.
Hi. Yeah, this is Krim Delko . Two questions. One is on the U.S. I'm very impressed with the growth there. I was just wondering if you can maybe give us some more color on what is driving that growth. Do you think that the dollar and tourism could be a main contributor to that, or is this more of sort of the U.S. organic story? That's the first question. The second, just curious, if you look at sort of Q1- Q2 sequentially from Japan, have you seen any reason to be concerned or some sort of slowdown, or would you say that both quarters have been fairly steady, as expected? Obviously, the question comes with the background of the macro uncertainty that we've seen in the markets recently. I don't know if you've seen anything in the business, or you would say that business is fairly steady.
Okay. Thanks. In the U.S., as you may know, tourism is a very small factor in the U.S., unlike in the eurozone, for instance, or in Europe. Tourism in the U.S. is a few % of total sales. It's never a very strong contributor to our business, excluding, obviously, Hawaii, where we do the bulk of our sales with tourists. As far as Hawaii was concerned, we did reasonably well, despite the low arrivals from Japanese. The business did quite well on that side. Coming back to mainland U.S., the business was pretty strong and remained strong Q1 and Q2. It's mostly, as you said, U.S. organic stories. Most of our divisions participated to that, although there were some swings, particularly as far as Watches and Jewelry, sorry, as far as Wines and Spirits is concerned.
The rest of the business did well and grew slightly in Q2 compared to Q1. We had a better growth in Q2 compared to Q1 in the U.S. in most of our activities. I may have missed your question, but Q1-Q2 comparison was about Japan or it was a broader question?
It's a broader question. Actually, I was trying to answer Japan. I know that market can have an impact on your business. I'm just curious if, let's say, the first quarter was a pretty optimistic quarter. Everybody was optimistic on the world economy, and then things kind of changed. Your numbers are very good. I'm just curious to see if you've seen anything in the business that would cause you concern, anything in any parts of the business. This is more of a general question in the first quarter.
Okay. Very clear. If you look at the various figures we discussed, we have a Q2 which is slightly better than Q1, with Wines and Spirits a significant contributor to the business, being significantly down due to, I would say, a normalizing factor. It's clear that Wines and Spirits couldn't stay at 17% organic growth for the rest of the year. It means that other businesses have more than offset the slight decrease from Wines and Spirits. From a business viewpoint, we have no signs of slowing down, and we have no particular concerns. As far as geographies are concerned, you see that US, Europe, and Asia are on par or slightly better in Q2.
What we had in Q1. We mentioned China, 32% vs 30%. Asia is 28% vs 24%. The U.S. is 18% vs 17%. Europe is flat with 8%. No particular source of concern. I would say the answer to your question is no. We have no particular area where we feel concerned about.
Okay, thank you.
We have a question from Mr. Rodolphe Ozun from Bank of America Merrill Lynch. Sir, please go ahead.
Yes. Good evening. You mentioned that, first of all, in terms of Malaysia, the brand is enjoying very strong momentum. Are there other markets you'd consider penetrating in the coming years? A second question on FX. I know your hedging strategy has modestly evolved over the years. You mentioned a particularly difficult environment. Are there any changes there in the way you look at hedging? Thank you.
Okay. First of all, our new country is yes and no. I mean, I cannot really answer such a question. We have plans to develop the brand in many new countries, not necessarily in Europe, but as far as Asia is concerned, we think that the playing field is quite open, and there are many, many countries we could enter in. We've mentioned the fact that we are planning to develop in Mexico and Brazil. Brazil is following the acquisition of SACS, the online retailer, last year. There are many areas, mainly in Asia and Latin America, where we expect to develop. India would also be a place where we would want to develop. As you know, the regulation there doesn't facilitate the access of multi-brand players to the market. It's extremely difficult, and we found it very hard to get into India so far. That's about it.
Clearly, so far, our strategy is broad-based expansion. We are already on three continents, and we intend to carry on developing the brand with entering more countries. As far as the hedging is concerned, the situation is a bit unique, I would say, because the dollar is weak. As I said in my opening comments, the euro is weak as well. It means that it could easily go. I mean, the probability of the dollar going up or down is more or less the same. Normally, the probability of the dollar going down, unless you're proven wrong, the dollar going down is higher than the dollar going up. We are in a moment in time which makes the hedging policy pretty, pretty, pretty tricky. We have not adapted too much to the situation.
Although the Euro being pretty strong, we make sure that when we buy tunnels, the ceiling of the tunnel is not too close to the current level so that we don't block ourselves just in case the dollar would be moving up. That's about it. That's a fairly difficult market to invest in. As always, I mean, our objective is not to speculate, but to cover the group. We have coverage ratios of about 92% for this year, and we are close to 60% for next year. We are, I would say, well covered for the 18 or 24 months to come.
Thanks very much.
We have a question from Mrs. Shamina Bhaidjy from Natixis . Madam, please go ahead.
Yes. Hello, everyone. Most of my questions have been answered, but there are just two small ones. Maybe if you can help us, Sir Jean-Jacques, with the estimates you have for CapEx and the tax rate for the full year?
As you know, half year, there is no such thing as a half-year tax rate. The half-year tax rate is basically the same. It's theoretically the same as the one for the full year. I don't foresee any particular transaction or situations that could cause, in the second half of the year, the full year tax rate to differ materially from what we had registered in the first half. We are close to 30%. I think that's a good proxy for what should be the full year tax rate.
Even considering maybe the integration of Bulgari?
It's going to be only half a year, and it's a fairly low figure compared to the rest of the group. For the year in 2010 and in 2011, it shouldn't have so much of an impact.
Okay. What about the CapEx? You mentioned an increase which was quite significant in H1. What is the plan for the full year and maybe the year to come?
I think I mentioned before that the CapEx program for the year will be somewhere in between EUR 1.2 billion and EUR 1.4 billion. It's always difficult to know exactly where we will land, but that's the order of magnitude for this year.
Okay. Great. Thank you.
Ladies and gentlemen, I remind you that if you wish to ask a question, please press zero-one on your telephone keypad. Thank you.
Okay, I think that's the end. Anything else?
We have no further questions at the moment.
Okay. Thank you very much indeed for listening to us, and we wish you a good summer. Bye-bye.
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