LVMH Moët Hennessy - Louis Vuitton, Société Européenne
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Executives:]

Jean-Jacques Guiony - CFO Chris Hollis - Head, IR

[Analysts:]

Paul Swinand - Morningstar Mario Ortelli - Sanford Bernstein Oliver Chen - Cowen and Company Antoine Belge - HSBC Luca Solca - Exane BNP Paribas Louise Singlehurst - Morgan Stanley Hermine de Bentzmann - Raymond James Melanie Flouquet - JP Morgan Thomas Chauvet - Citi

[Operator:]

Welcome to the LVMH First Half Year 2015 Results Conference Call. I will now hand over to Mr. Jean-Jacques Guiony Financial Director of LVMH. Sir, please go ahead.

[Jean-Jacques Guiony:]

So for those of you who don't know me I'm Jean-Jacques Guiony, I'm the Chief Financial Officer of the LVMH Group. And I'm very happy to host this conference call on the first half numbers of 2015. Before I begin, I must remind you that certain information to be discussed on today’s conference call is forward-looking and is subject to important risks and uncertainties that could cause results to differ materially. For this, I refer you to the Safe Harbor Statements included in our press release. Let’s now move to today’s topic first half figures. After a brief discussion of the first half highlights Chris Hollis, Group’s Head of Investor Relations, will cover the main developments of our different business groups. I shall then comment on the main figures. And after this both Chris and I will be available for your questions. The press release is available on our Web site lvmh.com as well as the slides for today’s presentations and the interim financial report. So as you can see on the first slide, our first half of 2015 was quite strong which I'll go into some details, but the main points to bear in mind should be first it's our business in Europe and U.S. and to a lesser extent in Japan. Secondly a positive contribution from currencies, certainly a much improved cash flow and foresee and probably a more importantly key brands showing very strong results which is particularly the case for Louis Vuitton, and these are in Bvlgari, Sephora, Christian Dior and obviously the Wines & Spirits Group if we exclude the specific Chinese situation. After this I'll now turn to Chris who is going to review the main developments within our various business groups.

[Chris Hollis:]

Thank you, Jean-Jacques. I will start by the taking a look at our business groups starting with Wines & Spirits this is Slide 4 and as you have been able to [indiscernible]. Before I get into more detail the group showed a good performance in all regions with the exception of China where the ongoing destocking by distributors impacted both revenues and profitability, but despite this headwind the business group saw a 2% increase in organic revenue growth. And on the reported basis taking into account the 15% positive currency effect revenues were up 15% to €1.93 billion compared to €1.68 billion in the year ago first half. Looking at the two main categories Champagne & Wines, organic revenue grew by 6% and after a positive 9% currency effect reached €830 million from €723 million in the first half of 2014. Organic revenue for Cognac & Spirits decreased by 2% during the period but after a 17% positive currency impact increased to €1.1 billion compared to €954 million in the year ago period. Profit from recurring operations of this group increased 5% to €482 million in the first half of this year breaking it down Champagne & Wines contributed €169 million and Cognac & Spirits contributed the additional €313 million over the first half. In the champagne business volumes rose by 3%, this is on Slide 5 driven mainly by the U.S. and Japan and by the prestige cuvées which continued to make strong progress. We saw strong momentum at Estates & Wines Celine as a result of a positive price mix effect and volumes in Cognac were up 6% and the U.S. continued to demonstrate excellent momentum. The situation in China continued to be challenging as the destocking of higher quality Cognac since the VSOP and XO in the region endured on a comparison basis becoming easier in sell out trends are seeing some improvement. Probably among group saw the spirits both Belvedere and Glenmorangie demonstrate its sustained growth. Looking into the second half of the year we’ll continue to pursue the value creation strategy focused on enhancing the emerging desirability of our growth. We anticipate continued destocking in China but we expect to see some recovery in our selling numbers given the lower comparison base. We are investing marketing and advertising, highlighting image of our brands. We also opportunities in U.S. in new markets as well as new consulting trends Moët & Chandon’s Champagne bottle, Veuve Clicquot’s Rich champagne for mixologists some examples. Finally we will continue to vote our production capacity to support the longer term growth of the brands. Turning now to our Fashion & Leather Goods brands on Slide 7, this Group saw a 5% drive in the organic revenue in the first half of 2015. On a reported basis taking into the 13% positive currency effect revenue rose 18% in the first half of the year reaching €5.9 billion compared to €5 billion in the year ago period. Profit from recurring operations was up 12% for the period year-over-year increasing to €1.66 billion versus €1.49 billion in the first half of 2014. So to give you some of the highlights of the first half, firstly we saw accelerated growth in the second quarter. In fact organic revenue growth in Q2 was 10% for this business group. Even after taking into account the impact of Japan organic revenue growth doubled between Q1 and Q2. Louis Vuitton is benefiting from a strong creative dynamic fueled by the continued success of its iconic monogram models and the development of new leather lines such as the Nicolas Ghesquière. Nicolas Ghesquière shows an emblematic location would be very well received across key markets and it generates great excitement around the world. To touch on some of the notable developments at other fashion group brands. Fendi saw excellent performance in its leather designs such as the Peekaboo with Silvia and in its new concept new stool concept in the market such as Paris, London and New York. Céline continued its strong momentum as the rate increases in all product categories. Loro Piana now sort of integrated the brands have been focused on its growth strategy including the targeted boutique openings that took place in the first half of the year in Macau and Frankfurt. Givenchy, Kenzo and Berluti demonstrated sustained growth and we’re pleased with that positive momentum so far this year. And finally you know that Marc Jacobs and Donna Karan brands are being repositioned on the new management teams and making changes to their effective strategies and collections. As we look ahead, this is Slide 9 across those business groups we see compelling opportunities to build on the momentum achieved in the first-half of the year. And Louis Vuitton work will continue to further the qualitative development of the brand through innovation across all product categories and the selective development of its retail network. We’re also very excited about the opening earlier this month of the Louis Vuitton gallery in Asnières located next to the Moët’s historical workshops, where the most exceptional pieces are created. Fendi continues to generate excitement. Earlier this month as well, the brand presented its first high-end fur collection by Karl Lagerfeld in Paris. We’ll also be renovating Palazzo Fendi store in Rome. At Loro Piana this brand will continue its focus on the highest quality of most precious materials while pursuing its close strategy. Givenchy, Kenzo and Céline will selectively expand their retail networks and as we move forward we’ll continue to invest in and support the creative reinforcement of our other fashion brands. Turning to Perfumes & Cosmetics on Slide 10, for the first-half of the year organic revenue rose 6% including the positive 11% currency effect. This translated to a 17% rise on a reported basis to €2.2 billion. Profit from recurring operations rose 22% in this business group reaching €248 million, to provide some insight into the brand performance behind the numbers, I’ll begin with Parfums Christian Dior which continued gaining market-share in its iconic fragrances as J’Adore, Miss Dior and Eau Sauvage delivered strong growth, while its make-up products Rouge Dior and Diorskin foundations as well as the Capture skincare line also growth performance in the first-half. Guerlain saw strong growth across its skincare and make-up lines in the first six months of the year and La Petite Robe Noire confirmed its success of the brand. And Benefit its latest major innovation Roller Lash tone and mascara reinforced its leading position and with its They're Real lines in mascara and drove the brand’s continued progress and Make Up For Ever also saw some acceleration in growth and celebrated the launch of a new store concept in UK which has been well received. Finally Fresh once again delivered good growth and had several major product launches particularly in its new lotus-based line. Now for the outlook in the Perfumes & Cosmetics Group, overall we’ll continue to strengthen the brand in this group by supporting ongoing innovation and maintaining the investments around both new and exceptional iconic lines. For Parfums Christian Dior the focus is on rolling out a new male perfume that will feature Johnny Depp as its ambassador. And in terms of the other brand Guerlain will build on its iconic lines to support ongoing growth. Kenzo will deploy a recently launched new unisex fragrance called Totem and Benefit and Make Up For Ever will open new boutiques in key markets. Now turning to our Watches & Jewelry business, we saw a strong organic growth in this business in the first-half a rise of 10% including the positive 13% currency impact this was 23% revenue growth on a quarterly basis at which rates are reaching a €1.5 billion and profit from recurring operations rose very strong 91% reaching €205 million. The primary factor driving this performance is jewelry particularly Bvlgari fueled by the success of its highly desired iconic lines as well as its women's watches Lvcea and Serpenti. On the revenue side, the growth in this business have been somewhat offset by continued cautious purchasing by the multi-brand watch retailers. In terms of watch brand performance of TAG Heuer work continues across this organization to refocus a brand on its core range of products which have long driven success. With some buy back of inventories and new brand partnerships, increased brand awareness and boosted social media prevalence a brand that builds a good pace is based upon which to build in the medium term. 2015 is off to an excellent start at Hublot as a brand drives its reputation and desirability with new collaborations with artists and athletes ranging from such well known names as Romero Britto, Lang Lang, to Justin Rose and Kobe Bryant among others. The group’s brands also introduced a number of new styles and new watches at Baselworld fair which were all well received also Baselworld, TAG Heuer, Google and Intel now stands to launch interpretation of a smart watch. Slide 15 just group looks ahead. There will be a focus on further building on the momentum at Bvlgari with both its iconic lines as well as its stunning high-end jewelry. The TAG Heuer the brand will begin store delivery of its new products within its core range which will be supported by a highly compelling digital marking campaign and across the brand the group is taking a highly selective approach with respect to multi-brand retailers with a focus on having the most impactful presence in their stores. Finally we will be optimizing production sites across the business groups Hublot will be opening its second manufacturing facility at Neon. Moving on to our final group selective retailing, organic revenue for this Group was 5% Slide 16 or including the positive 16% currency impact 21% on a reported basis, reaching €5.3 billion. In terms of profit from recurring operations this Group saw a 7% rise to €428 million. To break this out and begin as always as Sephora which continues to perform very strongly, this is being particularly true in the first half in North America, Middle East and France, there the business has seen market share growth in every market where it operates. And Sephora also continues to grow strong online, where it has been digital pioneer elite of its own time due to consistently rolling out new services such as guaranteed delivery in 48 hours in U.S. and Click & Collect service in France. DFS’ business has of course been impacted by the challenging currency and geopolitical environment in Asia which is in the impact of the weakness of the yen on Japanese travelers as well as the weakness of euro on the Chinese tourists in particular in Hong Kong. That said we’re continuing to make DFS and its key area very exciting places to shop with offerings such as the new Wines & Spirits duplex store in Singapore at Changi Airport and new standalone beauty concept at the Galaxy complex in Macau. As we look to the balance of the year for Sephora see Slide 18 its success will continue to be driven by an ongoing stream of innovation in products and services in all regions around the world. This includes new digital and mobile technologies which adored by Sephora France. And Sephora will also continue to renovate and expand its retail network around the world introducing new and exciting new concepts. And the DFS this business is focused on adapting to changing consumption patterns in the markets in which it operates while continuing to grow its presence the new concessions coming in Macau, Cambodia and Italy. The rigorous cost control remains a priority as the team will focus on further developing into royalty programs and digital services. With that I'll turn the call back to Jean-Jacques for the key figures.

[Jean-Jacques Guiony:]

Thank you, Chris. So I should start the key figures review with revenues for the first half of the year as shown on Slide 20, as you may see we ended the semester with all our business groups in positive territory, you will also note that additional utility is significantly higher than organic growth due to a 13% currency impact on our sales for the first half mostly stemming from the dollar the yen being virtually unchanged. Chris has commented on the main business groups in detail but the main points are as follows. On Wine & Spirits it shows a positive organic growth of 2% with the very contrasted performance China being under pressure while the rest of the business shows very strong numbers. Fashion & Leather is 5% in organic terms with very good momentum in Europe and in the U.S. Perfume & Cosmetic is a 6% in organic terms between most if not all markets preferences in its main geographies, Watches & Jewelry is showing very solid 10% growth with watches still separating while jewelry posts remarkable numbers. Selective distribution is showing a strong contrast between TAG Heuer positive in all its geographies and DFS affected by the business trends in Greater China. Let's move to Slide 21, where you can see comparison between first quarter and second quarter in terms of organic growth. You will notice that most divisions experienced a better Q2 than Q1 this is positive and true in Fashion & Leather which reached the 10% growth mark in Q2 Watches & Jewelry and Wine & Spirits. Let’s now move to Slide 22 which shows the geographic breakdown of revenues in euros, you will note a bit of rebalancing with the U.S. growing in percentage of the total due to its strong performance as well as the impact of the strong dollar and Asia coming down a bit. Moving to Slide 23, you all probably remember the rates increased in Japan last year which distorted the comparison days in a major way mostly in Q1 and depressing Q2. The opposite took place in 2015 we’d just like to point out excluding Japan, the Group's organic growth would have been 4% in Q1 and 7% in Q2 so a marked improvement throughout the semester, say compression level which would have been 4% in Q1 and 8% in Q2 excluding Japan otherwise this was pointing out the trends of the European and U.S. businesses while Asia picks up from the global pricing situation. Let's now move to the slide where you may see our certified P&L account for the period. My main comments are the following. We already discussed revenues on gross margin which was quite stable at 64.8% of sales against 65.5% of sales in same period of last year. Operating expenses grew more in line with sales excluding currency impact sending expenses grew 8%, marketing expense is 6% and administration expense is 4%. Profit from recurring operations is at 15% as you can see. Other operating common charges are negative like 64 million reflecting mostly as usual amortization and depreciation of intangible assets. I shall discuss financial charges in a separate slide in a minute. The income tax rate is a bit higher than it was last year mostly due to the reverse shift of business from Asia into more tax countries such as France, Japan and the U.S. and as a result the group share on a profit is up 5%. Let’s now look at the profit from recurring operations which is booked down by business groups on slide 25. I will go quickly as Chris commented most of them. Wine & Spirits had a better first half, although margins were under some pressure particularly due to the mixed impact with a lower proportion of Cognac, XO business in the total. Fashion & Leather ended the semester with a 12% increase in its profit from recurring operations. A number of brands like Louis Vuitton, Fendi had a very strong semester while strategic situations sustained Marc Jacobs, Louis Vuitton or Donna Karan executed some pressure on global margins. Perfume & Cosmetics shows a 2% increase in operating profit it was a slight improvement in margins. Watches & Jewelry recovered sharply mostly due to Bvlgari and Hublot was affected by the softness of the world business and also by the ongoing buyback of its several inventories. Hublot lacked some numbers in safety distribution due to DFS living under very intense pressure mostly in Hong Kong and Macau. Yet had a very-very solid first half with strong top-line and bottom-line advances. The words on Slide 26 on the total change in profit from recurring operations you are familiar with this chart where you can see the bulk of growth comes from currencies, this is I would say quite logical at this point in the cycle and this is quite difficult to implement local price increases in such a hot currency environment hence the bunch of operating profit growth comes from currencies also positive should be considered as a substitution for price increases. Let’s now turn to Slide 27 and the analysis of the net high interest charge. A few points to mention first of all the cost of that is slightly down due to slightly lower interest rates on average. The cost of hedging is essentially higher than last year the cost on [indiscernible] is another cost of hedging while the bulk of the remainder is the cost of buying back core options sold in [indiscernible] hedging strategies with affecting the group’s operating profit this is obviously a one off cost that will not replicate in the second half of the year. Finally in our financial investment portfolio was a bit strong than it was last year. If we go to Slide 28 where you will see the balance sheet structure which reflects as you know the distribution of the [indiscernible] at the end of last year of the [indiscernible] change to the balance sheet structure. Turning to Slide 29, a few words on the cash flow statement, first, our net cash from operations is €228 million mostly over into better level of operating profit. Working capital requirements used about $1 billion in cash about 20% less than last year and finally capital expenditures are in line with last year. Although our free cash flow is strong enough to €678 million rose from level for first half which is always lower than the second half as you know. The free cash flow will be used to pay an interim dividend of €1.35 per share on December 3rd of this year. I’ll finish on the main figures with the comments on the group’s net debt on Slide 30, which reached 6 billion about 1.2 billion higher than at the end of last year. As you all know this increase is quite usual in the first half of the year when the payment of dividends to our shareholders and the minority equity partner exceeds our net cash flow. The strength in the dollar and Swiss franc also had some impact on non-euro denominated countries. Overall the group’s net debt as of June 30, 2015 represents 35% of total shareholders’ equity. I would like to conclude with a detail review of the activity with a few comments on the H1 performance highlighting the most important points. Points for the future, first and foremost I would like to say that we’re considering for the main part of the year mostly due to the fact that our important businesses are enjoying a strong momentum. Secondly most of our markets are also showing a good momentum. This is true for the U.S. and Europe but also for Japan which is strongly benefiting from inbound tourist flows. Finally in confidence doesn’t mean ignoring reality. Currencies are always a difficult thing to predict and we know that we have lot to do to converts brands in investment state into profitable organization. Yes, we have done it in the past in quite complicated circumstances and we trust that the quality of our teams will enable us to reach our goals. This is all we wanted to say. Operator, please could you open the Q&A session.

[Operator:]

[Operator Instructions] So we have the first question from Paul Swinand from Morningstar. Sir, please go ahead.

[Paul Swinand:]

Quickly on the watch segment, did I understand or would you care to comment watch is down ex the jewelry’s strength and could you comment on the trend in second quarter versus first quarter?

[Jean-Jacques Guiony:]

Well it is complicated to answer your question, as I missed one word out of two, so I assume that your question is about the difference between the growths in Watches & Jewelry. Basically watches were quite flat in the first-half and the bulk of the growth comes from jewelry.

[Paul Swinand:]

So ex-jewelry to watches are flat, do you see any -- I understand you're still working on the turnaround at TAG, I now you’ve got a new market and campaign in the U.S. is it starting to or can you comment any on the new products, are you seeing any signs that turn is happening?

[Jean-Jacques Guiony:]

Well it's probably is interesting to say as most of the novelties were introduced at [indiscernible] only a few months ago and they will be launched on the market later on this year. But if you can compare Q1 and Q2 and also if you would take Q2 for the buyback of inventories that took place in Q2 mostly in the U.S. the performance is at it is ideal which is much better in Q2 than it is in Q1. So I would say that we are progressively getting into the turnaround of the brand, but there are still some ways to go.

[Paul Swinand:]

Really quick, you mentioned Monogram again being strong, is that also true in China?

[Jean-Jacques Guiony:]

Well it's true everywhere I mean the Monogram has been very strong obviously there will probably be further questions on that the Chinese business is a little bit under pressure due to the prices there are pretty expensive and people usually chose to buy elsewhere but Monogram is strong there as it is everywhere.

[Paul Swinand:]

And then real quick, you mentioned the missing work would go is that only in the U.S.? I am just kidding. [Multiple Speakers] We will all mix it in Chicago.

[Operator:]

So we have another question from Mario Ortelli from Bernstein. Sir, please go ahead.

[Mario Ortelli:]

Pretty quick and if I may, the first one is about Louis Vuitton and on Chinese customer, in the first quarter you gave all the figure that the increase of sales of Louis Vuitton among Chinese customer is 5%, if you can give us also the figure for the second quarter? The second question is about the performance of Louis Vuitton in China, Macau and Hong Kong, if you can give an idea of what was the performance there relative to the minus 5% the overall the company as a result in Asia? And the last question is about the profitability and the pricing strategy, you showed in this chart that your ability to keep up the prices give you the full benefit from the effects, I want to know if considering about the euro is still will continue with current pricing strategy or you are thinking from price adjustment going forward and probably increase of the prices in Europe? Thanks.

[Jean-Jacques Guiony:]

So to be -- on your first question on Chinese customers, the growth of the business with Chinese customers in Q2 was low double-digit. So we ended the semester with Chinese consumers so altogether in all geographies in local currencies being slightly above 10%. So we had a very strong semester with the Chinese customers. As far as LV in China, Macau and Hong Kong is concerned, obviously we are down in these three geographies. As I hinted before given the situation, the pricing situation there is a shift of business from Greater China into other geographies such as Japan and Europe and these two areas are benefitting from that. But obviously we have some negative numbers in China, Macau and Hong Kong which are more or less in line with numbers we had in Q1 there. So roughly speaking we’re thinking about minus 10%. Profitably and pricing, we don’t intend to make any adjustments to the pricing structure, the novelties in products in most price it's unique to Louis Vuitton and those brands are being introduced at price differences which are more in line with what we used to have in the past. So the price will progressively adjust with Louis Vuitton which we don’t intend at this point in time to implement sort of a global pricing adjustment.

[Operator:]

So we have another question from Oliver Chen from Cowen and Company. Please go ahead sir.

[Oliver Chen:]

On the strengthen the U.S. demand, the momentum there looks impressive, do you expect that run rate to kind of continue in the U.S. and would you say that, that is domestically driven and the U.S. has had a little bit of tougher problem with traffic, I am just curious about what's driving the momentum in that region?

[Jean-Jacques Guiony:]

Your question was a bit difficult to hear but I think what you're asking is about the run rate in the U.S. whether it's sustainable or not. It's been going on for awhile I mean there is sort of 10% growth that we've seen that something we had last year and also the year before. The U.S. has been very strong profit of growth as far as we are concerned and the main reason to fold the first one is the fact that we're not dependent on 36 [floors] in the U.S. We are mostly domestic customers dependent, so the strength of the dollar is not affecting us in anyway. And the second reason is the strength to support our business which is sizable business in the U.S. for us which is really doing extremely well in the U.S. and that's where particularly in the U.S. and which explains also these very strong numbers.

[Oliver Chen:]

And on the handbag side of the business the Marc Jacobs brand and the opportunity there, how much deposition versus modern and luxury competitors such as Kors and Coach, I am just curious about where the ideal kind of price point is for that and what do you see as the opportunity?

[Jean-Jacques Guiony:]

We're not going into the detail of the marketing strategy of Marc Jacobs, what we've said is that we want to unify the various labels and the various brands and the Marc Jacobs umbrella and that we intend to position the bulk of the up for in the contemporary segment which doesn't mean we will not offer products at a very high price specifically the runway product but that's what we intent to do. So we're in the middle of implementing that. We're working on that particularly with Marc and the rest of the creative team and it's a bit early to comment on that obviously.

[Oliver Chen:]

And looking ahead we measured such momentum here in the U.S. with online mobile traffic in general and the fact and Sephora has such as leading global interface, are there other brands in your portfolio which are well positioned to also utilize the kind of technology you're talking about whether as you integrate stores and on liner or think about that?

[Jean-Jacques Guiony:]

I answered this question a few times already, as we usually say, we think that the on line business is as much way to enhance and to improve the customer experience as way to do business and to open a new channel of distribution for our product. So for brand other than Sephora we defiantly try to improve our business but with view also improving the customer experience on our online, this is all about the omni-channel and so on. It will a little too long now and it's really not the purpose of this call to go into some detail but the end that's what we're trying to achieve.

[Oliver Chen:]

Just the last question, Vuitton new leather lines, where the -- and it sounded like your pricing strategy I am just curious about the new leather lines and what kind of here they may achieve and kind of what's the strategic underpinning of those introductions, we do know how weather is resonating with the customer?

[Jean-Jacques Guiony:]

This -- could not really hear your question which is about leather line at Vuitton leather line that we do introduce new products in canvas and in leather. Both are doing quite well and explaining in my view the momentum that you've seen at Vuitton and they have commented a bit already. And I don't have much more to say about that and go to the stores and you will see the difference.

[Operator:]

We have another question from Antoine Belge from HSBC. Please go ahead, sir.

[Antoine Belge:]

Antoine Belge, HSBC, three questions and first of all with regards to the margins in fashion on leather maybe can you elaborate a little bit on the moving parts and maybe separating also FX impact then really to constant currency and maybe the rest of the portfolio notably on things like whether negative deal mix according to you and also if that's the case, what are you doing in terms of you're trying to -- cost of doing business in Hong Kong notably [around]? Second question on cognac and you've mentioned different situation by geographies that is I guess in China between the SOP and next orders of selling versus sellout and do you think that over the full year where the basis comparison is easier that you can achieve flat margin year-on-year I am thinking about the full year. I am sure you guys noticed in Champaign there was a bit of a softness, I think volumes were down were there anything linked on wines the margin was actually down as was.

[Jean-Jacques Guiony:]

On the fashion leather margins I would say that part of it which is between 7.5% is attributable to currencies is where the paradox of getting positive impact in euros in currencies but then it impact on margins and to the fact we have to offset lower -- high hedging gains last year which are obviously not taking place this year. The rest of the margin drop comes from the few situations that I mentioned before Marc Jacobs to a lesser extent on [cognac] and Louis Vuitton, where we are facing a little bit the business which has some impact on the margins. You mentioned Hong Kong to be frank is not a big headache in terms of margins, it's been a very profitable business in the past despite the drop in the business it's a very efficient place for the business and it still is a very, very profitable place for us. On cognac could we achieve flat margins for the full year, probably not I doubt it we explained last year already that excluding the impact from China we still have a situation where possibly in hard currency times and that we find it hard to increase prices and we have a rising cost of cogs it is true for the cognac was also for some payment, that’s the answer to your third question. We have reasonably flat prices and cogs are growing at in between 2% and 3.5% depending on qualities and we find it pretty hard to increase to increase prices. So in organic terms our margins are at the little bit of pressure in cognac and in Champaign it was exactly the same last year. You have to -- and you get mix impact in cognac spending from the Chinese situation as we sell extra volumes as we use to. So all-in-all I don't expect a big improvement in margins for the rest of the year although as far as China is concerned we expect the situation as we said before to normalize in the second half with selling benefiting from an easier compression base and starting to grow again from the second half of this year.

[Antoine Belge:]

Just to make sure on just, so just if you take Louis Vuitton on a constant currency measurements you said that the margin was flattish half.

[Jean-Jacques Guiony:]

There was slightly they were at on the constant currency basis, and plus if you take into account the slightly negative which you are talking about sentence of business point so it's really that I like you and that I want to answer this question but it's really if you done at this point so slightly picking organic terms and flattish in euro terms if you take into account a small negative currency impact in margin terms again.

[Operator:]

We have another question from John [indiscernible]. Please go ahead sir.

[Unidentified Analyst:]

Jean-Jacques and Chris just following on cognac, could you talk little bit about your expectations with regard to the sellout at [XO] I know you talked around initially internal budgets around minus 20 it seems that, that might be conservative enough given your recent comments and in terms of the 390 basis points decline to EBIT margin within cognac and spirits would you say that roughly about 130 basis points of that would be due to the weak [XO] mix excluding the hedging impact?

[Jean-Jacques Guiony:]

To quantify the impact on the cognac margin the initial impact, this impact is about one-third of the growth and in margins for cognac and what it makes on the global division. From extra volumes in China you are right in assuming that, that difference in time we're seeing that 20% drop compared to last year is a bit of [indiscernible] but frankly we learned each and every day and this is not the feasible business that we have. We cannot without negative performance, we cannot rule out either a pleasant surprise, so we shall discuss that lately in the year but it's very difficult to make any focus there.

[Antoine Belge:]

Two follow-ups. Just one on European, you mentioned that you will now effectively looking to roll out the few stores as you mentioned Macau and Frankfurt as two other destinations, how many more do you think that you can roll out over the course of the next year or so within Europe. And just on Bvlgari I think the EBIT margins are now in excess 13.5% to 14%, are we still on track for 20% margin over the long-term and is it possible to maybe narrow that long-term time rates tool.

[Jean-Jacques Guiony:]

Long-term should be on there as we all know. No, it’s always difficult I mean -- full cap that we are track I mean long-term doesn’t mean years I mean it's less than that. Bvlgari is showing very, very strong momentum as I said. This is showing some positive operating -- increasing some positive operating leverage. So we are on track. We are exceeding a little bit our initial forecast on margin improvement. As being said I mean they would point to put too much pressure on the management people who are doing a fantastic job, by taking to ambitions goals. So we are there for the time being. As far as China is concern in the stores, we are talking about in between I’d say five and ten stores per year. We're reasonably cautious in terms of store development. It’s not a brand that could support very, very large network of stores. They are simply seeing as we pointed where the brand is there in some stores expansion because we are not sufficiently represented there. So we are working on that, but also working on some expensive places such as Paris et cetera. So we have to be cautious because when opening larger stores at the beginning it creates some negative pressure on margin. So we are trying to put advance in the second quarter and progressive way there.

[Operator:]

We have another question from Luca Solca from Exane BNP Paribas. Please go ahead.

[Luca Solca:]

A couple questions, Luca Solca from Exane BNP Paribas. There is a lot of uncertainty among investors about the Chinese demand what you seem to point out in the case of Vuitton is back to momentum from Chinese demand when we look at it globally and we should look at it globally because of the very significant price cuts by region. I wonder if you could expand your perspective on Chinese demand to other divisions and maybe give us your view on the drivers beneath Chinese demand and how you say shaping up in the most recent times. Or on Cognac if I may add one point there, again trying to understand a bit better how the destocking and the consumer demand on the other hand is playing out, what kind of actual sell out dynamic you see by category in China. VS and VSOP as far as I understand were positive and that’s being positive for quite a while I wonder what you see in sell out terms on XO? And last but lost least, looking at the second half of the year if you could help us to understand that the interplay of Forex and hedging on operating profit margins.

[Jean-Jacques Guiony:]

So your first question is difficult Luca to be frank, because you’re asking me to sort of give you an idea the Chinese demand trying to outsize what we can really measure which is Vuitton, because Vuitton we have the numbers for Chinese customers in China, outside China and we know exactly what's going on, when it comes to brand selling wholesale particularly let's take one is cosmetic, is very difficult. What I can say today I don’t think I have to come back on Vuitton and on the francs of the global Chinese demand which as I said it’s critical to achieve. It’s true for the rest of the fashion and leather division. Most of our brands are benefiting from the strong momentum from Chinese current basis particularly [proof] fit in. Outside fashion and leather we have also very, very momentum with Bvlgari and the share of Chinese demand in total is growing year after year. So Bvlgari benefiting from that on the watches I see are not qualified to comment on that given our limited market share and as far as perfumes and cosmetics is concerned I also think that the momentum for Chinese demand is pretty good, it’s pretty volatile as well from one months to another the Chinese with overall our numbers in China and outside China were basically in Asia with Chinese customers which are more difficult to measure than Vuitton are pretty positive, but basically all I can say on this pretty complicated question. On the cognac dynamic in China, as I suggested we’re still under some pressure in selling obviously as we intent to reduce inventory and we are actually reducing inventories so the pressure is pretty significant, but the sell out is also a little bit under pressure mostly due to the fact that we have rationalized a little bit in the business of outlets particularly in the [night] business where we ended acquisition but we are particularly non-profitable and we decided to cut them, I mean volume is one thing, the profit is another thing and we decided to get some on that. So we have a little bit of pressure standing from that on sell out numbers, but they are not on fully comparable basis -- on a comparable basis, we are pretty close to the balance in VSOP while in XO we are down, it's difficult to say on comparable basis exactly by how much, but we are significantly down. Sorry there was a question on FX in H2, well I never answer this question. So please don’t really expect me to answer it, is that I usually don’t know the fix for the rest of the year, I am not sure we’d be there, what I can say is that these currencies stay where we are, I mean will be obviously benefitting a little bit less from the difference between currencies last year and currencies this year as an average the dollar was 1.37 in H1 and was last year 1.27 in H2. So obviously if we stay around 1.10 the difference will be lower. But on the other hand, you should remember well we had low hedging gains in the second half of the year, the profit hedging gains were in the first-half of the year. So we will not have to anniversarize this high amount of hedging gains which obviously will not materialize this year. So in all it's difficult to -- it's difficult to say that if currencies were just the where we are, we should register again slightly positive hedging impact, sorry, having positive currency impact, not a hedging impact, it was currency impact for the rest of the year.

[Operator:]

So we have question from Louise Singlehurst from Morgan Stanley. You have the floor.

[Louise Singlehurst:]

Just couple of things which I think as people raise as well, first thing is on the rentals and the cost focus really coming from Hong Kong, I think on fund probably ask if it was missed any answers, but could you just give us any idea of rental renegotiations and what’s happening lately in Hong Kong? And then secondly could you just quantify the price increases has it been for three for Louis Vuitton, I know that we spoke about the 3% increase back at the Q1 stage, but obviously some movement since then and our expectations for the second half and on the pricing scene if there is any update we just to monitoring the gray market has shifted any change that you’ve really seen for yourselves in the period?

[Jean-Jacques Guiony:]

On the Hong Kong rents, lot of talks obviously, last summer completes the report at this point in time. Obviously we only discuss with landlords at lease maturity. So despite the situation changing cost fast in Hong Kong that rental situation is not supposed to adjust in the same way so there are a lot of discussions. When you go to first best places in Hong Kong [Captain] road et cetera you still feel that there is a lot of demand for very expensive spaces or the what usually happens in market is that the top rents are the first to come down and the rest of the markets probably shoot. We don’t see that at this point in time, it's a bit early to say as they were only handful of discussions with landlords, but are not yet concluded, but for the time being it should really I am not in a position to tell you Hong Kong will adjust and that will benefit from lower rents in Hong Kong, it's not the case for the time being. As far as price increases of LV are concern, you remember the 3% price increase in Q1 that you mentioned we also had as far as Europe is concerned 5% upright price increase on handbags in the second quarter of the year to at some point in June, I don’t remember exactly when, so it was on average some products were rate more than others and it was just on handbags.

[Louise Singlehurst:]

Anything on the gray market and the industry discussions around that?

[Jean-Jacques Guiony:]

Well, the gray markets will be there as long as the price difference will be what it is, you know our views on this what currencies have done, currencies cannot do it, but the gray market is also based on the form of tax escapes that the Chinese authorities may or may not tolerate and there is also a high product issue with gray markets, so that makes this business for the time being is quite important but may almost disappear from one day to another, so I think we're monitoring this with great attention and care but it's something that is particular type.

[Operator:]

We have a question from Hermine de Bentzmann from Raymond James. Sir, please go ahead.

[Hermine de Bentzmann:]

Few questions for me please, the first one on the U.S. market can you give bit more details on the growth you had by division in this return? My second question is on Asia, can you give the growth of Asia excluding cognac in Q2 please? And lastly on the Watches and Jewelry strong increasing margin in H1, can you give a bit more explanation on this improvement and be a bit more precise on the margin that you've reached at Bvlgari? And just the final question on the tax rate guidance you expect for the full year?

[Jean-Jacques Guiony:]

U.S. growth without going into full details and then we had wine and spirits and fashion being at the early June. Perfumes & Cosmetics we believe under pressure in Q2, it was up for the quarter the first semester, but little bit under pressure in Q2 because of rising of some big launches that we had particularly benefited in June last year. I am talking again about the U.S. which indeed was a bit down mostly due to inventory repurchase that like how you're -- that I mentioned before and selective distribution was really up, little bit up in the U.S. Asia ex-cognac not so far away from the reported number. The reported number is minus 5%. I think ex-cognac is minus 4% but there is a big difference, cognac is down sharply in China but it is up in a big way in Asia ex-China particularly Malaysia, Vietnam et cetera all these geographies are doing very-very well. So all together the cognac business is down in Asia but it's doesn't have a deep impact on the global situation there. In the margins, I will not answer on the Bvlgari margin. The only thing I can say that, yes, there was a bit surge in profit in H1 in watche and jewelry. This comes mostly from Bvlgari with operating leverage there as I mentioned before also bear in the mind that last year was the 150 in U.S. and three are Bvlgari and there was a big push on marketing at this point in time last year, so the comparison base from profitability point was reasonably favorable. And the types, it's always difficult question but we have 33% tax rate I think it's a good guidance for the rest of the year. It's quite increasing between H1 last year and H1 this year is quite structural. As I said we do more business in Europe in the U.S. and in Japan than we do in Asia where the tax rates are lower so it's fairly structural shift and it really comes with increasing tax rate comes from the changing geographic mix. Maybe one last question, last two questions.

[Operator:]

Yes, we have question from [indiscernible] from Dutch Bank. Please go ahead.

[Unidentified Analyst:]

Question on the DFS please just wondering if you could compare and contrast Q2 versus Q1, I know the overall divisional growth rate was the same, but some was there deceleration in DSF? Could you maybe comment on what in more detail and what actions you're taking to try and protect that business?

[Jean-Jacques Guiony:]

Growth rates, I mean to the decrease actually was the same more or less in Q1 and Q2, there was not a big change, actions we're taking are obviously cost cutting actions. There is not much we can do in terms of where we do business. The big chunk of our business takes place in Macau and Hong Kong which are not ideal places to the business in today and there is not much we can do about that in the full term at least. In the long-term we are expanding in Europe, we're expanding in other geographies such in Asia such as Cambodia which is very promising, but it's pretty difficult short-term to do anything about it. So what we can really do is take actions on costs which we've taken very seriously. Obviously on the rents side, it's quite difficult to achieve any savings in the full term but on the other cost we're taking very drastic actions and restructuring to reduce headcount and to reduce the amount of running cost in the business.

[Operator:]

We have another question from Melanie Flouquet from JP Morgan. Please go ahead.

[Melanie Flouquet:]

My first question is regarding selling and distribution cost 8% organic. I was wondering how you expect evolving over the course of the next semester but more importantly the next two years. That’s my first question. The second question is Donna Karan and Marc Jacobs and where the pressure I think quite bit of provisions were being taken against Marc Jacobs in H2, so should we expect 30% improvement on that pressure underlying that in H1 and H2 and moving forward because we have a bit of relief from there. My third question is can you give us an update on what your strategy is online and whether you have an acceleration on this specific topic. And my last question is just a clarification you said the Mainland Chinese cost for fashion and leather goods were probably up 10% in H1 and that being up 5% in Q1 which is correct as this implies a very big acceleration in Q2, so I wanted to make sure I understood it well.

[Jean-Jacques Guiony:]

It's not exactly the numbers in Q1 is little bit higher than that to start with your last question to do bit higher than that there was a strong acceleration in Q2 but the number in Q1 was a bit higher than 5%. The selling expense starting with your various questions on the selling expenses I would expect to the second half of the year to be bit better but not in a meaningful way. If we put the objective as some distribution network get more comprehensive and come for maturities to increase fiscal meter so the percentage of selling expense in percentage of sales should go down and we should see a lower increase in selling expense than in sales. So we’re working on that. It's not -- seem to work with but progressively the various brands are curving I would say growth in selling expenses. We have still some areas where it's quite complicated to monitor things, such as airports, for instance selling expenses are usually a function of the number of passengers so if passengers grow I mean we grow selling expenses as well. So there was a question on Marc Jacobs and the impact on margin potentially next, but point to bear in mind that Marc Jacobs as that we announced profound changes in the way we will do business on the running side on the product side on pricing side, and this creates in a fairly way I would say some wait and see attitude from the main clients this is a very wholesale business and supposed to some of our businesses which are more retail where we willing to what we want in terms of purchases this is a here and wholesale business and our main wholesale clients are very much in wait and see attitude. So this goes to be shopping down because our clients are waiting to see a little bit more what we have in mind before they would so we’re in I would see in the eye of the hurricane with the business being shopping down and we expect with further collections and particularly with spring summer next year to see some improvement but it will be gradual and our customers will not take for granted the changes that we commenced at Marc Jacobs and obviously it's a very lengthy process, we're highly confident, but it's a lengthy process. So to be more precise you should also weigh on margins in H2 hopefully let’s see next year we should have an improvement but it will be very progressive. Your question on online was if you ask question not you specifically but some of you ask the question each and every quarter we don't changes the strategy as far as the line is concerned every quarter. So it's basically the same answer as one have made here few times, experience enhancements and you and hopefully also a boost to our global business.

[Operator:]

We have a question from Thomas Chauvet from Citi. Please go ahead.

[Thomas Chauvet:]

Two questions please. The first one on selective retailing, can you provide us your deal in the past Jean-Jacques the LFL for U.S., China and Europe and then within selective retailing given continued margin pressure at DFS can you perhaps explain the various drivers between traffic average baskets. Do you experience further rental inflation beyond perhaps Hong Kong airport and other airports. And secondly on the fashion brands, you talked about Marc Jacobs and the plan there in the medium term, how about your other sizable American fashion brand Donna Karan, I think quite a few changes there I think this is current deposit recently there were new designing team DKNY and is there a turnaround time there, with an investment plan like for Marc Jacobs to try to monetize this asset in a few year.

[Jean-Jacques Guiony:]

The like-for-like -- I just really don't break it down by geographies, you may have heard that I don't remember seeing it. So as far as Sephora in first half is concern it’s about 8% like for like on a constant currency basis throughout the business it’s obviously much higher in Middle East than in the U.S. and if you were in Europe that’s very satisfactory number. DFS your question is pretty complex, I would need all the data to answer it and little bit more time. But I can say DFS in terms of profit is that what we see particularly in geographies like Macau and Hong Kong are principally higher profit with the lower quality, i.e. lower average baskets. So we have to deal with that which is definitely a challenge particularly from merchandising new point we’re putting in front of the customers to merchandize I mean, that’s the big thing DFS is currently working on because we think it’s a new situation that we have to adopt. And certainly your question on Donna Karan obviously the changes or the impacts on top-line or bottom line are less dramatic and they are at Marc Jacobs we are taking about small changes in the numbers. We are currently implementing some changes in the creative direction of Donna Karan. We will also simplify that branding. We are also cutting some costs fairly important way particularly to say what the outcome will be, I suggest that we discuss that in the next conference calls because we'll have a better visibility on this, we are only at the beginning.

[Jean-Jacques Guiony:]

Thank you for attending this call, I think we covered most important topics so I don’t have more to add to what has already been said. We simply thank you again and look forward to discussing with you Q3 numbers in the course of October. Thank you and good bye.

[Operator:]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.