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Executives

Chris Hollis – Head, IR

Jean-Jacques Guiony – CFO

Analysts

Warwick Okines – Deutsche Bank Research

Mario Ortelli – Sanford C. Bernstein & Co., Llc

Antoine Belge – HSBC Global Research

Thomas Chauvet – Citi

Louise Singlehurst – Morgan Stanley

Stacie Rabinowitz – Consumer Edge Research

Catherine Rolland – Kepler Cheuvreux

John Guy – Berenberg

Matthias Eifert – MainFirst Bank AG

Luca Solca – Exane BNP Paribas

Fabio Fazzari – Equita

Leopold Authie – Oddo Securities

Eva Quiroga – UBS

LVMH Moet Hennessy Louis Vuitton SA (OTC:MAGOF) Q2 2013 Earnings Call July 25, 2013 3:30 AM ET

Operator

Ladies and gentlemen welcome to LVMH First Half Results Conference Call. I'll now hand over to Mr. Jean-Jacques Guiony, sir please go ahead.

Jean-Jacques Guiony

Thank you. Ladies and gentlemen good morning and welcome to this conference call. I'm Jean-Jacques Guiony, the Chief Financial Officer of the LVMH Group. And before I begin I must remind you that certain information to be discussed on today’s call is forward-looking and subject to important risk and uncertainties that could cause actual results to differ materially. For these I refer you to the Safe Harbor Statements included in our press release.

Let’s now move to today’s topic, first half figures. I shall cover the first part with most significant numbers and Chris Hollis, Group 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 at lvmh.com as well as the slides for today’s presentation and the interim financial report.

Let’s move to slide two and I start with revenues for the first half of the year. As you may see, we have a fairly solid semester with all our business groups showing positive growth.

Two points of reference. First revenue grew organically 12% in the first half of 2012 making the comparison base not so easy and secondly, our net operating growth of 7% in H2 last year, not so far from first half 2013 performance. We all know that published growth is unlike in 2012 lower than organic growth due to a negative currency impact mostly stemming from the Yen, 17% drop in the semester.

Chris will comment business groups in more detail, but main points are as follows; Wines & Spirits had a strong semester with a 5% of organic growth, which comes on top of last year growth of 15%, volume rose 3%. Fashion and Leather is a 5% in organic terms with a very strong performance from Celine, Fendi, Emilio Pucci and Berluti.

Perfumes & Cosmetics is a 6% in organic terms beating most if not all markets performances in its main geographies. Watches & Jewelry was a bit under pressure in the first half, mostly due to phasing in novelties and to ongoing distribution cleanups mostly at BVLGARI.

The Selected Distribution is showing a very strong performance with plus 19% organic. Seven points of this growth come from the new concession awarded to DFS in Hong Kong at the end of last year.

Let’s move to slide 3, where we can see comparisons between first and second quarter in terms of organic growth. As you may see, there is a slight improvement in most business groups, particularly in Fashion & Leather. The slowdown in Wine and Spirit was anticipated and already discussed at our conference call in April.

Let’s now move to slide four, which shows the geographic breakdown of revenues. Europe and Asia including Japan, account for roughly one-third each while the US is one quarter. It is worth noting that reduced share of Japan mostly due to the drop in the value of its currency.

Moving to slide five, you may see the organic evolution of sales in our main geographies. Growth rate was although a bit higher than in Q1, show a similar structure. Europe is growing low single-digits, while domestic Japan is benefiting from the drop in Japanese tourists business. US are close to the relative growth and Asia somewhat boosted by the Hong Kong International Airport concession show its strong momentum.

Let’s now move to the next slide, slide six where you may see our simplified profit and loss account for the periods. I would like to make the following comments not on revenues that we already declared. Let’s start with gross margin which improved to be being 65.8% of sales, 80 basis points ahead of last year.

Operating expense grew 9% in euro terms and 8% if we exclude the impact of Hong Kong International Airport’s concession and currencies. Selling expenses were 11%, marketing 5% and G&A 7%, again excluding currency and Hong Kong concessions. The current operating profit is up 2% with operating margins reaching 19.8% a slight drop compared to last year.

The bulk of the drop comes from the new Hong Kong concession which generated revenues while posting a loss quite normal in part of it. Excluding Hong Kong, in euro terms, revenue would have risen by 4% and operating profit by 3% while operating margins would have been essentially flat.

Other operating income and charges are negative by €14 million reflecting mostly amortization and depreciation of intangibles. I shall discuss financial charges in a different slide a minute, but the main point is a drop in dividend as we benefited last year from Hermes €5 per share exceptional dividend. The Group tax rate is around 31%, a bit higher than last year.

As a result, Group share of net profit is down 6% and that’s about 1% excluding Hermes exceptional dividend impact.

Let’s now look at the current operating income which is broken down by business groups on slide seven. Wines & Spirits had a strong first half with 9% growth in its current operating profits. Fashion & Leather ended the semester more or less flat, penalized by significant retail and marketing investments in brands like the Emilio Pucci and Marc Jacobs. The Louis Vuitton's margins were slightly up in the first half.

Perfumes & Cosmetics shows a 2% in current operating profit, a bit below sales due to marketing investments. Watches & Jewelry was affected by the softness of some its main markets and by the cleanup of some retail or wholesale activities.

Finally a virtual semester with Selective Distribution, operating profit being up 9%, excluding Hong Kong Concessions, sales in Europe for this business group has been at 10% and operating profit in euro as well would have been up 14%.

Let’s now turn to slide eight and the analysis of the net financial charge, some important points. The cost of debt is significantly down; one-third of the decrease comes from lower interest rates, two-thirds from lower average debt. The cost of hedging was higher than last year and probably higher than what it should be for the second half of the year.

Finally, income on the financial investment portfolio was mature than last year due to exceptional dividend income of €5 from Hermes paid in 2012.

Moving on to slide nine, where you may see the balance sheet structure. The structure of the balance sheet did not evolve much compared to 2012 year-end. Total equity is in excess of 50% of the balance sheet, while inventories still represent 17% of the total.

Turning now to slide 10, few words on the cash flow statements. First, net cash from operations was at €102 million, i.e. 5% in line with operating profits. Working capital requirements used about €1 billion in cash, in line with last year due to seasonality we expect the second half of the year to be much better than the first half. And finally capital expenditures are up with an additional €140 million for the semester.

Overall net cash from operations is about €400 million in the first half of 2013, not far from last year’s level.

I will finish this part of the presentation with the comments of the Group’s net debt on slide 12, which reached €5 million at the end of June, about €700 million higher than the level at the end of last year.

The increase is mainly due to payments of dividends to our shareholders and minority equity partners which during the period of the year, this period of the year exceeds our net cash flow. The Group’s net debt, as at 30th of June 2013 represents 19% of total shareholder’s equity. I will now turn to Chris who is going to review the main developments within our various business groups.

Chris Hollis

Thank you Jean-Jacques. Now let’s turn to a discussion of our business groups starting as usual with the Wines & Spirits in the first half of 2013. If you can see from the slide 13, on an organic basis, revenue in this group was up 5%, which comes on top of 15% in the same period of last year as mentioned by Jean-Jacques. So a tough comparison, good outcome.

After a 2% negative currency impact on a reported basis, revenue is up 3% compared to last year’s first half and reached €1.8 billion in the first half of this year. Then looking at the two main categories, the Champagne and Wines organic revenue grew by 3% that’s after a negative 4% currency impact reported revenue fell just slightly in the first period to €739 million.

Cognac and Spirits, organic revenue grew by 7% and after 1% negative currency impact reported revenue rose 6% to €1.069 billion in the first half of 2013. Profits from recurring operations in this business group was up 9% on top of a strong 20% in half year to reach €542 million in the first half of 2013 compared to last year Champagne and Wines was down €14 million while Cognac and Spirits contributed €60 million.

In Champagne and Wines, there was a negative rate impact deriving from the estimated yield of our great harvest in the first half compared to last year which should be reversed in the second half of this year.

Now to give you some more contexts behind the numbers slide 14. Looking at the Champagne business specifically volumes was stable in the first half of 2013 compared to year ago period. This reflects resilience in Europe despite the difficult climate and strong growth in key Asian markets.

Wines first half 2013 was a good period notably for sparkling wines and to Cognac, volumes rose 3% in the first half of this year versus the year ago period. This reflects a number of factors including good revenue momentum among the younger qualities or the VS Spirit Cognac.

And in terms of geography we saw solid performance in US, good positioning in China where energy has been increasing in nightlife activity. And rapid development in high potential markets such as South Africa and the Caribbean.

Cognac revenues also were at the positive effect to the price increases implemented since last year.

Finally among the Group’s other spirit, we saw continued positive momentum at Belvedere and strong growth at Glenmorangie during the first half and particularly with the iconic single malt whiskies which increased our profit.

Heading into the second half of the year across all the lines of spirit brands, the Group is estimating to continue to strengthen their image and enhance their desirability. This ability through creative marketing and advertising with a notable investment in the areas.

Complementing this will be a focus on achieving visibility in all trade locations such as up market nightclubs, spas and shows and we would of course continue to expand our presence in the adjacent markets.

Now turning to our fashion and leather goods brands like Sixteen, this is still a 5% organic revenue rise in the first half of 2013, which comes on top of 10% in the year ago period. On a reported basis, revenue rose 1% in the first half of this year following a 17% rise in the 2012 first half. In terms of euros, reported revenue rose to €4.711 billion in this year’s first half.

Profit from recurring operations was just a bit under flat year-over-year which followed a strong 10% rise in the first half of 2012 in terms of euros, it was €1.497 billion in the first half of this year. This deterioration in the operating margin drove essentially from the ongoing restructuring of the distribution and increased communication linked to smaller ground while the Louis Vuitton margin has slightly improved.

Turning to the Fashion and Leather on slide 17, again leading by Louis Vuitton as the brand continued to focus on most elements of our make that has long major sales iconic, creativity, innovation, quality in the excellence of its distribution.

Specifically, in the first half Louis Vuitton leather products performed very well and you know a little better than me icons lines has successful launches. The brands also continued to develop the qualitative nature of its store network in the most exciting locations with new Maisons in both Venice and Munich each of which is also progressing start.

Now to give you some highlights on the other brands, Fendi is eliciting from a very strong focus on its brand value which are affected clearly in its leather goods, with sharper lights.

Turning now to Celine, this brand is performing very well, notably it’s value goods which contributed excellent revenues in the first half of the year. To build on its success the brand is now accelerating the pace of its store expansion.

At Donna Karan, the brand is seeing good results from the integration of the DKNY Jeans, once to life of business that should it battle out and it’s performing particularly well.

Among the highlights of the Marc Jacobs brand, it was taking back control over its operations in China and Berluti continued its momentum with new advertising and marketing and have increased pace of openings. The brand opened stores in Shanghai and London in the first half following by its location in the Miami Design district in early July with more to come in the second half the opening of a new store in New York City.

And as we look ahead to the second half of the year, there will be a great deal of activity across the fashion and leather goods brands, this is slide 18. Louis Vuitton will continue to capitalize on its historic strength including new high-quality, highly creative products in leather and ongoing innovation in the long loved Monogram collection.

They would also continue to select and renovate and expand their store network in high potential locations and they will continue bring exceptional creativity to the communications using on beating a new destination to the very successful Invitation au voyage campaign.

Moving on to Fendi, it’s opening new stores in Paris in Milan bringing its room and spirit alive in these other magnificent European cities. Berluti has started construction on the new production sites in Ferrara in Italy to support the brand’s ongoing trade and the few selected store openings.

As I mentioned and as you will know, a couple of weeks ago we announced the acquisition of 80% of the renowned Italian brand Loro Piana and entering profit and quality and design Loro Piana should be upheld and traded by the group.

But our Louis Vuitton will remain 25% and feed that role with the leadership of the brand. We expect territory competition on operations of this acquisition in the fourth quarter of this year and we will report to keep you updated about this.

Moving on now to perfumes and cosmetics, slide 19. First half reported revenue rose a little over 4% to€1.8 billion in the first half of this year compared to the last year’s first half. After a negative 2% currency impact, organic revenues grew by 6% out of 9% growth in the year ago period.

Profit from the Guerlain operations increased by 2% have reached €200 million. In the brand, specifically as always the first with patent in Europe which strengthened its position around the world in the first half.

This was evidenced across the street for those categories, fragrances is bolstered by the new w Voile de Parfum on the iconic J’Adore that was innovation across the make-up category, like the skin cream, we have seen good revenue momentum and skin care saw growth notably in the Prestige line.

Guerlain too had success with fragrance, but the continued good performance of La Petite Robe Noire as well as in skincare with the rapid growth of Orchidée Impériale especially.

The results are exciting to the quarter, the Gentlemen Only fragrance from Parfums Givenchy and Fan di Fendi Homme both off to a good start.

Benefit (inaudible) in fine position. We had a strong global momentum and fine stretching brand rapidly in US and it’s also off to an excellent start in Asia.

Now to the outlook for fragrances and cosmetics slide 21, across the brands that will of course continue to focus on strong innovation and support the exceptional new and traditional products for the exciting media campaign. Looking at some of the brands individually Parfums Christian Dior revived its iconic Rouge Dio line of lipstick and also launched a new advertising campaign Dior Homme and the new male ambassador is Robert Pattinson.

Guerlain will also relaunch its emblematic perfume Shalimar and re-opening its historic Champs-Elysées boutique. A number of brands will open new stores over the second half of the year including Fresh, Benefit and Make Up For Ever and finally this group has just opened the new research and development center in Saint Jean de Braye in North Central France to support ongoing exceptional innovation across each of its brands.

I’ll now move to Watches & Jewelry, slide 22. significant organic revenue grew by 1% on top of the 13% in the year ago period. So difficult comparison basis. On a reported basis and after taking into account a 4% negative currency impact, the revenue was down 3% to €1.31 billion in the first half of this year.

Profit from recurring operation was down slightly about 2% compared to last year’s first half and recorded a €156 million in the first half of this year. This decline in profit was in good measure by design and that the brands took a number of actions to streamline and improve the quality of their distribution including voluntary closings of sales.

There are a number of highlights during the quarter for the brand, which had as a goal continuing to upgrade in terms of product quality in distribution.

We are on slide 23 by the way. Success and the key in this is evidence in the strong reception to innovations instituted by several brands at the watch very much as well as in the great performance of the Bulgari jewelry excluding its newly launched diva collection.

While the brand is still good revenue performance, in their own stores there was a trend of buying by multi brand retailers given ongoing challenges in the different economies. This is not going to be the case of Bulgari which showed double-digit growth in its own retail stores. Each of the brands are making investments to enhance the quality and reaching including opening boutiques and rationalizing points of sales.

And finally, the TAG Heuer brand making the new movement manufacturing facility in the Champs Elysées where it will be making these renovations which is important development. The brand also celebrated the 50th Anniversary of its Carrera model.

Moving to the second half, slide 24 the watch and jewelry brand will continue to focus on the continued success of their iconic products and its exciting innovation and unique and fascinating communications. They will also work to strengthen their processes and operations through industrial investments and taking advantage of the synergies across the brands.

Bulgari specifically began constructing on a new jewelry workshop in Italy. In terms of stores, the brands are relatively enhanced and expand their own network focusing on best and most striking locations, which includes the grand opening on the Champs Elysées and Bulgari’s renovation of its historic boutiques in Rome.

And finally the brand will be in the more selective in themselves, some of the brands distributed in order to maintain and enhance the image.

Now moving on to our last business group, the very exciting Selective Retailing business on slide 25. The business group had a very strong first half; organic revenue was up a very robust 19% which comes on top of the 16% rise the year ago period. So after taking into account a negative 2% currency impact, reported revenue grew 17%, €4.215 billion.

Profits from recurring operations in this business grew 9% a €407 million in the first half of the year. A major renovation work at the newly acquired concessions at the Hong Kong International Airport was a truthful reason for the declines in the margin for this business group.

Looking at the business lines, businesses in more detail on slide 26, DFS with a strong momentum among Asian clientele, except for the Japanese. They’ve been hurt by the weakness of the Yen. DFS committed in particular during the period from the renovation of Hong Kong International Airport concession which is being well received and the outstanding performance in the Hong Kong and Macau Gallerias.

Sephora also had a great start to the year with market gains in all regions. It’s fast growing brands saw very good momentum in existing stores especially across North America, the Middle East and Asia.

At the end of the first half, there were a total 1413 Sephora stores worldwide, up 64 stores invested in the first half of 2012. It has improved its structures in Shanghai which opened to great comfort and also expanded its presence in India during the period and outlined where Sephora is an industry leader and it continued strong growth.

And finally, my final slide, slide 27, that for DFS is focused on strengthening its leadership position in Asia as well as continuing to invest in Gallerias in key markets. It also recently completed the renovation of the location of the Los Angeles Airport as part of the overall of its product. DFS will also renovate its location in Delaware and JFK to the very popular international shoppers.

These actions are part of the work that DFS is doing to reinforce its position as a luxury destination driven by compelling products and strong relationships with travel retail, its merchandise and service. It’s all be underscored with an innovative marketing program into the new brand in Gallerias.

Now finally, to Sephora. They will work to accelerate expansions of that network on a global basis. At the same time, they will further enhance their digital and mobile offerings both areas in which they are helping on the cutting-edge for the benefit of their clients.

And they will also continue to institute new and exciting brands that gain a part in this space including the new Marc Jacobs, cosmetics line which you may us seeing will be reported on and will consist at Sephora. They will also continue to be a great success for Sephora brands.

With that, I will now turn the call back to Jean-Jacques for a brief wrap up before we the Q&A.

Jean-Jacques Guiony

Thank you Chris. Now I would like to conclude this brief overview with a few comments, highlighting the most significant importance of H1. First and foremost, I would like to point out that despite the tough operation, most of our businesses show a good momentum likewise all our – had an equal or better performance in Q2 compared to Q1. It’s also worth noting that apart from Europe.

Where we cannot expect – other geographies are close or above 10% growth mark. So our approaching margin held pretty well in the context of significant top-line growth, remember that excluding Hong Kong concessions, top-line grew 4% while bottom-line was growing 3%.

Finally despite significant technical investments, our balance sheet remains very strong and will enable a smooth trending of the Loro Piana acquisition.

Turning to slide 30, what about the rest of the year? Always difficult to make forecasts, but I’ll slightly use some points which we view as important. First, economic and currency environment remains as difficult as ever. We expect economic conditions to improve somewhat in the end of the year but we hope currently it will not work this out.

Secondly our margins held well in each one and despite the recoverable currency hedging portfolio in H2, I trust we should be able to keep on controlling that which is our product pipeline for the second half and combined with the evolving initiatives, they should support the business. So that is basically all we wanted to say and we will now open to any questions. Thank you.

Question-and-Answer-Session

Operator

(Operator Instructions) We have the first question from Warwick Okines from Deutsche Bank. Please go ahead.

Warwick Okines – Deutsche Bank

Yes good morning, Jean-Jacques, good morning, Chris. Couple of questions please. Firstly, could you give a bit more elaboration on the geographic splits in Fashion & Leather in Q2 maybe just talk about the trends by geography, please? I'll start with that one.

Jean-Jacques Guiony

Yes, well basically, it's a little bit the same as what we saw in Q1. We have Asia being flattish. We have US being mid-single-digits, while Japan and Europe are about double-digit, either little below or little bit higher than double-digits. So we haven't seen many changes in the global trends within geographies.

Warwick Okines – Deutsche Bank

Thank you. And secondly, could you give us an idea of what the currency impacts was to fashion and leather division. I think it was €60 million and perhaps the whole group?

Jean-Jacques Guiony

Yes, it is not very significant. I mean a big chunk of the currency impacts, positive currency impact to place within wine and spirits. So as far as Fashion & Leather, it's positive, but not seeing really significant.

Warwick Okines – Deutsche Bank

Thank you very much and just finally, how happy are you at Vuitton with your existing price architecture in your leather goods ranges? Should we be expecting you to increase the pace of introduction of new products in the second half?

Jean-Jacques Guiony

The question is on prices and architecture of products.

Warwick Okines – Deutsche Bank

Both price architecture and the ranges that support that, how happy are you with your architecture now and are you going to accelerate the pace of the new product introductions?

Jean-Jacques Guiony

So the price architecture, we are more than happy in the – we suffered a very severe drop and again, which is causing some disruption in the business with a big drop in the retail business which needs and conversely significant increase in the domestic business. The latter is not the problem, but the former is a little bit of an issue.

It causes to increase prices in a very significant way in Japan over the past few months. The current architecture is quite okay, but the disruptions that was seen in the business, particularly in – are not entirely over. As far as the product icon is concerned, I will not go into detail. I mean brands like Vuitton has and will introduce – has to and will introduce new products at all times.

They will do it with the initiatives that we think particularly with the Capucine bag, are particularly promising. But it's a bit early to say, but we are very hopeful about the outcome of this.

Warwick Okines – Deutsche Bank

That's great. Thanks very much, Jean-Jacques.

Operator

The next question is from Mr. Mario Ortelli from Sanford. Sir please go ahead.

Mario Ortelli – Sanford C. Bernstein & Co.

Good morning, Jean-Jacques, good morning, Chris. Two questions on Vuitton. The first one if you can give us some color about the evolution of the revenues of Louis Vuitton in the first half and what were the drivers in terms of price mix, volumes and average selling price? The second one always on Vuitton, on the margin, if I've understood well, Chris mentioned that the margin of Louis Vuitton has slightly improved. I kindly ask you what is your outlook for the rest of the year from the margin of Vuitton.

And the last question about the other brands, if the margin of Vuitton slightly improves, can you give us some more color about the investment that you made on the other brands of Fashion & Leather, because it seems that the profitability has a contraction? Thank you very much.

Jean-Jacques Guiony

Well, it might be a bit disappointing on the various questions as we don't necessarily answer in great details on all of them. Let's start with Vuitton. What I can tell you is that Vuitton, as always, does not differ materially in terms of growth with the rest of the – with the average for the division, it's a bit lower.

That's all I can say. In terms of price mix, et cetera, we never go into details. There was a price impact in a limited way, but there was a price impact, as always, in the first half of the year and, obviously, it contributed to the growth in the business in an organic way.

Yes, margins of Vuitton are a bit up, but nothing tremendously – nothing earth shaking. But nevertheless, the margins are up, so which means as that the margins of the whole division are a bit down that the rest of the division is experiencing a slight decrease in margins, which is, as you said, stemming from investments.

These investments are pretty significant in many brands. We mentioned Fendi. We mentioned Berluti. We mentioned Celine. All these brands are doing extremely well from a top-line viewpoint, but are in a phase of expanding the network, which is always a costly exercise, particularly when you have to sign leases, pay rents and you have not opened your store yet.

So you don't benefit from the contribution of the store, but you get most of the cost at the same time. That's the type of thing we are – that's the type of situation we are in many, many brands. Look at the Fendi store, which is absolutely fantastic that we opened a couple of weeks ago in Paris. We have been paying the rent for about a year.

So as far as the first half is concerned, we had the rent of the Fendi store on Avenue Montaigne which is, as you may imagine, quite costly, without any revenues. So that's the type of situation we are experiencing more or less in all the fashion brands, at least in some of them, which explains why the margins there are a little bit under pressure.

Mario Ortelli – Sanford C. Bernstein & Co.

Thank you very much.

Operator

The next question is from Mr. Antoine Belge from HSBC. Sir please go ahead.

Antoine Belge – HSBC

Hi, it’s Antoine Belge with HSBC. Three questions. First of all, maybe a word on Cognac; I think you had flagged that there would be a destocking effect in Q2. So do you expect further destocking in the second half? And what's your view for the end-demand for cognac, especially in China, but also in the US where it seems to be quite strong?

Then on Louis Vuitton, maybe at least qualitatively, that the margin increased even though I think you had mentioned that the transition to a lot more leather would have, at least initially, maybe have a bit of a negative impact on the margins. It seems that has not been the case or maybe was it that, I think last year in the first half there had been strong investment in marketing, et cetera. So is it more an improvement at the gross margin level, or is it may be less A&P, et cetera?

And finally, I've noticed that you increased your stake in Hermes slightly, I think a 0.5%. Is it something that you intend to continue going forward? Thank you.

Jean-Jacques Guiony

Okay, thank you, Antoine, for your usual three questions. Let's start with Cognac, and we mentioned the destocking in Q2, particularly in China. Actually, we anticipated in Q1 where sell-in was pretty robust and sell-out was showing some signs of softness in China that obviously Q2 will not be at the same level, which is exactly what happened.

So we're experiencing some destocking in Q2, which is likely to last for a few months, probably the whole of Q3 as well, the level of inventory which is not in absolute terms particularly high, but compared to what it was before is a little bit on the high side. So China is likely to experience further limited destocking in Cognac.

Yes, the rest of the business is extremely – doing extremely well. The American part, the US part of the business is really moving from strength-to-strength. We are very pleased with the outcome of our marketing initiatives for the last 18 months. So it's really doing well. The rest of Asia is not offsetting China, but compensating part of the drop that we've seen in Q2 in China. And Russia is also doing quite well. So all in all, the Cognac performance is extremely strong and we are very pleased with it.

For LV, first of all, we never ever said that the transition to leather would weigh on margins, never. We said that initially, margins on leather products are a bit lower than they are on canvas, but it's up to us to find out ways to offset that. And we have done that in the past and we will do this in the future.

So we never said that the transition would weigh on margins. So margins were a bit better. It comes from more or less everything; a little bit better gross margin and a better absorption of operating costs. I will not go into details. Hermes on the increase in the stake, it was an opportunistic move. It doesn't say anything about our attitude in the future. So we cannot extrapolate that for the rest of the year.

Antoine Belge – HSBC

Okay. Maybe just one clarification. So the impact of the new DFS concessions, you said it was roughly like €400 million at the sales level, but a negative contribution to cover on €20 million. Is that something sort of realistic assumption?

Jean-Jacques Guiony

You’re already been on the right side on sales that you are about right on profits.

Antoine Belge – HSBC

Okay. Thank you very much.

Operator

The next question is from Mr. Thomas Chauvet from Citi. Sir please go ahead.

Thomas Chauvet – Citi

Good morning, Jean-Jacques and Chris. Three questions please. The first one on Vuitton. What was the net store openings in the period? Were there closures offsetting the Venice and Munich openings? And what type of space growth are you planning to add this year at Vuitton?

Secondly, on Wines & Spirits, so I assume that the whole of the 400 bps improvement in Cognac margins was due to FX or was there any other major impacts to explain the margin progress and could you come back on Champagne on the accounting treatment of the harvest?

I remember in H2 last year, you had actually pressures from that poor harvest. So is that what Chris means by reversing in H2? And thirdly, what was the Sephora growth in constant currency in Q2? And could we get perhaps the same-store sales growth for US and France? Thank you.

Jean-Jacques Guiony

Okay. So the net opening at LV is zero. I think it's perhaps 5, minus 5, or something like that. So it's not huge numbers or huge changes in the total store count, anyway, maybe it's plus 6, minus 6, but it's not very far from that. In terms of space growth for the total year, we expect to be, as always, around 7%/8% for the full year.

For Cognac, there was some, as you say, significant margin improvement. Part of it – the bulk of it, let's say, is coming from currencies, but also from underlying improvement in organic margins. So as I said very satisfactory performance there.

Champagne, it's a little bit more complex. I will try to be clear. You pointed out rightly that we suffered last year some impact with the harvest being of lower quantity than anticipated and, therefore the profit we made on our own harvest was lower than it was in the same period after the preceding year.

It's exactly the same here in H1. In H1, 2013, we compare ourselves to 2012 when – where – when in the first half, the assumption for the yield for the harvests was as high as 12,500 kilograms per hectare.

This year, we are 20%, 25% below. So you have a volume impact. The assumption we are taking in the first half of the year is lower than the assumption we took last year. So we have a negative impact on margins, which is quite significant; more or less 100 basis points for Champagne.

We are pretty hopeful that we will get it the other way around in the second half of the year, because last year in the second half of the year, not only we had a poor yield, which caused us to register a lower profit on the harvest for the second half, but we also had to reverse the excess profit that we took in H1, because our assumption was too high.

So we have a fairly favorable comparison base, and assuming the yield in the harvest is correct, we should be at a much higher profit on our own harvest in the second half of the year. So a negative impact in H1, and hopefully a positive impact in H2. Finally, your question on Sephora’s question. Chris, do you want to take this?

Chris Hollis

Yes, the Sephora same-store growth or comparable store growth was similar to that in Europe to Q1 low single-digits and the Americas were in fact, it moved up from high single-digit to just about double-digits in the Americas and China very strong double-digit comparable store growth.

Thomas Chauvet – Citi

Thank you very much.

Operator

The next question is from Mr. Louise Singlehurst from Morgan Stanley. Madam, please go ahead.

Louise Singlehurst – Morgan Stanley

Good morning, Jean-Jacques. Good morning Chris. I'm also going to go predictably for the three questions, please. Firstly, just on, I know you touched on the weakness in Japan. I think you gave the number of minus 40% impact on the European sales for Louis Vuitton in Q1. Is that pretty similar in Q2?

Secondly, can you tell us have there been any changes that you've noticed in the travel retail segment, not just at LV, but anything that you've noticed through DFS as well in the period? And then, thirdly, I think Chris mentioned a new production facility at Bulgari for Italy. So can you talk about that as well? Thank you.

Jean-Jacques Guiony

Okay. So the travel retail business with Japanese was down 44% in Q1. That's the figure I mentioned. It's not that far in Q2. So basically we have the same trend. We have a big drop in the Japanese travel retail business. And conversely, we have a significant increase in the domestic business.

Just as a reminder, the domestic business is three-quarters of the total business with Japanese and the travel retail business is one-quarter. So despite spectacular, the drop in travel retail is offset by the rise in the domestic business.

Overall, the Japanese client base is more or less flat in H1. But big differences and big distortion in our business. Travel retail, the trend, global trend – our feeling is that things are improving a bit, particularly when it comes to Asia.

If we look at our business at DFS, excluding Hong Kong obviously and the parameter impact from Hong Kong, it improved a bit a few percentage points in between Q1 and Q2, so it shows some improvement. And we've seen a particularly marked improvement in areas like Hong Kong and Singapore, which is good news for all of our brands as we are heavily involved in these areas.

So to your question on the production facility at Bulgari, well, the idea is that we are trying to internalize some of the operations that we have been sub-contracted out until then in order to improve efficiency and quality. That's the objective in terms of investments we are not talking about very, very significant numbers and they shouldn't change the picture for the division and for the Group.

Louise Singlehurst – Morgan Stanley

Okay, thank you.

Operator

The next question is from Mr. Stacie Rabinowitz from Consumer Edge Research. Madam, please go ahead.

Stacie Rabinowitz – Consumer Edge Research

I was just wondering for the Fashion & Leather goods business, if you could talk a little bit about the trends in wholesale versus retail

Jean-Jacques Guiony

Yes. So obviously, we are not talking about Vuitton. We are talking about the other brands. Retail is doing better than wholesale, but, frankly, as far as wholesale is concerned, part of it is self-inflicted. What I mean by that is that some brands, particularly Celine and Fendi have deliberately decided to progressively reduce the share of their wholesale business in the total.

So, if you look at their numbers, for Celine, the wholesale business is hardly growing; and for Fendi it is down. But it is deliberate action. They really want it to be that way. If they would want to sell more, they certainly could. But they want to limit the share of the wholesale business.

But the other brands which are using the wholesale channel as a privileged way of distributing their products, like Kenzo for instance, we are getting very strong advances quarter-after-quarter which are very promising for the brands.

Stacie Rabinowitz – Consumer Edge Research

Operator

We have a next question from Mrs. Catherine Rolland from Kepler Cheuvreux. Madam, please go ahead.

Catherine Rolland – Kepler Cheuvreux

Good morning, Chris. Good morning Jean-Jacques. I have three questions, actually. First of all a follow-up question regarding the Wines & Spirits business. Could you give us some more color about the performance by regions? Second question is about Vuitton sales trend to Chinese customers.

Could you tell us what was the overall trend to Chinese customers in H1? And what is your view about the trends in the near future regarding sales to Chinese customers? And the third question is about still Vuitton. Would it be fair to assume that Vuitton sales trend maybe could benefit from more product launches in H2 versus H1?

Jean-Jacques Guiony

Okay and thank you, Catherine. So for the regions in Wines & Spirits, we had strong business in – if I'm talking just about Q2 as we already discussed Q1 in April, the business was strong in Japan and strong in the US.

It was a little bit softer in Europe, virtually flat, due to the fact that Champagne is a big chunk of the business in Europe and Champagne is under pressure everywhere and therefore in Europe. And Asia was also very slightly down, mostly due to the Chinese business in Cognac being down, as we expected and as we anticipated in April.

Catherine Rolland – Kepler Cheuvreux

Okay.

Jean-Jacques Guiony

The Chinese customer, H1, Chinese customer, I think also better including domestic and travel retail is something like mid-single-digits. But the bulk of the growth speaks to – with storage, i.e. outside China.

For the future, it’s a very bigger question that way. I mean, we have no reason to give this in history, but its future will be up and we cannot say that we can and commend further on that.

And it’s as little bit same for your question on the pipeline, the probably pipeline in H2 for Vuitton, obviously when we own products we expect them to have a strong impact on the business. We are very hopeful that watch and jewelry, the leather products and the Capucine that I mentioned before will be great success. We’ll see, so let’s see that in few months.

Catherine Rolland – Kepler Cheuvreux

Okay. And just about the sales trends to Chinese customers. Is it fair to think that you had some improvement in Q2 versus Q1? You had a slight increased acceleration?

Jean-Jacques Guiony

A slight improvement, very slight improvement, yes.

Catherine Rolland – Kepler Cheuvreux

Okay. And is this improvement fairly equal months-after-months in Q2? Or did you see some improvement by the end of the quarter, because it seems that some operators in the luxury industry could see some improvements in June. Is it the same thing for you?

Jean-Jacques Guiony

I will not comment. No, this is three months, April was a bit soft, but we had May and June were okay. So I couldn’t really say that end of June or second half of June as that hurts somewhere from competition. It was much, much better than the rest of the quarter. Certainly it’s not the case.

Catherine Rolland – Kepler Cheuvreux

Okay, thank you very much.

Operator

We have a next question from Mr. John Guy from Berenberg. Sir, please go ahead.

John Guy – Berenberg

Good morning Jean-Jacque, good morning Chris. A couple of questions for me please. With regards to LV price difference between Beijing and Paris, I know that over the recent few quarters, we've seen that delta narrow. I think last year, it was around 45% to 47%, and then in the Q1, it was 30%. Just wondering in the second quarter how the LV pricing compared between, say, Beijing and Paris into the second quarter. That's my first question, please.

Jean-Jacques Guiony

It's the same, it's €130, something like. So we haven't seen a major difference.

John Guy – Berenberg

Okay great. And with regards to LV’s question I think you had commented earlier, so that you are looking for the 7% to 8% stake. Within that 7% to 8% how much of that will be effected in pricing how much of that price will come from ongoing expansions and research?

Jean-Jacques Guiony

Well, the bulk of it. As we are not really opening as many stores, it’s a difficult question because sometimes we are closing store and then look at we did in Munich. We had a store which was 200 meters away. We closed it down and we opened a much larger one is it an expansion or reopening.

It’s difficult. I would say that the bulk of what we do today is really improving and expanding the existing network from time-to-time it could be an expansion in new territories, be it towns or countries, but the bulk of what we do is really improving our existing offers.

John Guy – Berenberg

Okay. And when you're looking at the sales contribution from space, I am comparing the difference between the sales contribution from new space and extensions and refurbs. Do you see a significant change in the sales contribution that you get from one and the other?

Jean-Jacques Guiony

Oh, yes, definitely so. You are talking about two different things. When you have a store which is ground floor and you get the basement or the first floor or you have an area where you're not involved and you open a store, obviously, these are entirely different projects.

The cost of them, particularly from a rental viewpoint is not at all the same. Having the former is much more expensive than the – the latter is much more expensive than the former, but the yield in terms of additional sales is not at all the same. So you're not talking about the same type of projects. That's why the correlation between sales and increase in square meters is far from being perfect, as you know.

John Guy – Berenberg

Yes, that’s really. Great, thanks. And just with regards to the – what your Jewelry business, I know you talked about at the distributor levels being relatively cautious approach toward this. I don’t know, are you expecting whether there has been any signs?

I know it’s very early going into the second half of the year, but are your watch brands taking it – you are going to really see any significant pick up in China in particular and for the first half 2014 or just think that there is some light is coming through the tunnel into the second half of the year?

Jean-Jacques Guiony

It’s too early to say. The short answer is no and it’s a bit early to say and July is never a very exciting month. It’s really August onwards that we’ll see whether the market will pick up or not.

John Guy – Berenberg

Okay. So I just got two very quick housekeeping ones. Just on CapEx for the year and also on the tax rate. Are we to expect a similar tax rate as to the first half of the year and any further comments around CapEx guidance for the year, please? That would be great.

Jean-Jacques Guiony

Tax rate is likely I mean, as you know, there is no such thing as a first-half tax rate as we pay taxation on the full-year basis. So, we try to have a tax rate in the first half, which is what we expect to get for the full year, barring any exceptional impact of specific situations.

So, yes, the answer is that we expect 31%, something like that, for the full year. On CapEx, I think a figure which is a little bit north of what we did last year is certainly the right assumption at this point in time.

John Guy – Berenberg

Okay and just finally, are you on track to launch perfumes and cosmetics with LV by the end of this year or?

Jean-Jacques Guiony

Not by the end of this year.

John Guy – Berenberg

Not, by the end of the year? Okay, many thanks.

Jean-Jacques Guiony

Thank you.

Operator

The next question is from Mr. Matthias Eifert from MainFirst. Sir, please go ahead.

Matthias Eifert – MainFirst Bank AG

Yes, hi two questions left for me. One was on Selective Retail. You mentioned renovations in Hong Kong, burdened margins. When you plan to finish the renovations, i.e., when can we then expect a bit of an improvement or less of a decline? And secondly, on Bulgari, you mentioned a reduction of a third-party wholesale business, cleanups and so on. When will you finish that – be finished with that? Thank you.

Jean-Jacques Guiony

Thank you. For Hong Kong, I think it's not over yet, but we are close to that. We did a good job and a quick one in Liquor and Tobacco and Cosmetics. The general merchandise concession is still in progress. But we would expect this to be done by mid of August, something like that. So we should be operating under normal conditions from September onwards.

On Bulgari, on the cleanup of basically Cosmetics and Watches, wholesale doors, Cosmetics, perfume, whereas the cleanup is likely to be done, to be completed by the end of the year. As far as Watches is concerned, it's more tricky. We are working on it. Some doors are not qualitative enough, or not productive enough, nevertheless profitable. So it's the question for us to decide what to do. So it may unfold and chances are that it will unfold over 2014 as well.

Matthias Eifert – MainFirst Bank AG

Thank you very much.

Operator

The next question is from Mr. Luca Solca from Exane BNP Paribas. Sir, please go ahead.

Luca Solca – Exane BNP Paribas

Yes good morning. A while ago, Mr. Arnault had set out a goal to increase brand desirability for Louis Vuitton and to keep sustaining it over time. I wonder if you could assess for us where you stand on this goal, if you think that you just started this on this path if you are 10% of the way or if you think that you're further ahead, like 50% or 75% of the way.

A second question on Hermes. It seems to me and I guess, it's what one can draw from the behavior of the Hermes family and the Hermes senior management, that they don't really want LVMH and they don't really want to belong to the Group.

I wonder if you're envisaging a scenario where at one point you find a solution and get out of the capital of Hermes and get that money to work on different acquisitions also, considering the court actions that Hermes has been mounting against LVMH and the AMF fine for inappropriate disclosure on this and therefore the legal risk connected to that.

On the third point, I wonder about Watches & Jewelry. It seems to me that this division is probably today the weakest in your strong portfolio. I wonder if you're envisaging to continue to strengthen the division through organic activity alone? Or if you have a door open for further M&A and if you do, where this M&A would be bolt-on or if you would consider major acquisitions as well in order to strengthen your position in high luxury? Thank you very much.

Jean-Jacques Guiony

Thank you, Luca. I will find it hard to answer to your first question, frankly. The brand desirability is something which is essentially qualitative and you are asking me to put a quantitative measurement on a highly qualitative thing. We are working on it. I think, if you look at advertising, if you look at products, if you look at stores, our stores, the brand is improving all the time.

We didn't wait last year to improve it. It's been improving for the last 150 years, I would say. But it's very difficult to put a mark, a note on this. So frankly, I cannot answer, although the objective has been clearly stated by Mr. Arnault and we are pursuing this objective relentlessly, I would say.

On Hermes, I will not make comments on that. I think the fact that the Hermes family is not particularly pleased with our stake in the company is not the scoop of the year. What we do from that, time will tell. You imply that by selling the stake we could put the money at work elsewhere.

We don't think we are constrained in any way in our ability to spend money to infuse capital in our businesses to grow them. So we don't need the money, which is currently invested into Hermes to fuel the growth of the other businesses. They do it by themselves and we have a very significant cash cow between the Group – within the Group that allow us to do so.

So, there is no particular need on our side to monetize this shareholding in order to fuel the growth of other businesses. And to be frank, we are pretty pleased with the performance of the Hermes business. So there is no particular pressure on our side, I would say.

Finally, on Watches & Jewelry and the question of organic versus M&A, I think the priority is definitely growing the business organically. We are in the middle of a turnaround and a restructuring of Bulgari.

As you know the work is far from being over. It's a long-term process and we don't want to divert management's attention from this highly important work, just because we would be buying other businesses, particularly if they are of a significant size. So definitely, the focus is on the organic growth.

Luca Solca – Exane BNP Paribas

Thank you very much, Jean-Jacque.

Operator

The next question is from Mr. Fabio Fazzari from Equita. Sir, please go ahead.

Fabio Fazzari – Equita

Yes, good morning. Two quick questions. The first one is about Cognac. I was wondering if this switch to more younger products in terms of maturation could be have an impact on your profitability and working capital? And the second one on LV, if you can explain how much is the difference in profitability for the products sold in Europe and Japan. Thank you.

Jean-Jacques Guiony

On Cognac, well the intention is not to change the, I would say the global metrics of the business by shifting the business toward younger quality and younger customers. Really, what we are trying to achieve in, particularly in China, which is the only market where basically we have the three qualities and then we have the equivalent of VS.

We have V.S.O.P and we have X.O. it's the only market where we have the three qualities. The idea is that this is a very large market and different products will cater the needs of different customers.

And particularly when it comes to the nightlife, the emblematic products, such V.S.O.P and X.O, do not necessarily sell as well as they do in other segments, and a younger product is much more suited for the needs of this market. So it will not push the lines and change the metrics of the business overnight. It should need many, many years. So I would say in the medium term, we don't expect a major impact on both capital mix and margins.

Your second question was about margins. There is not a huge difference between Japan and Europe at Vuitton in terms of profitability. There used to be one 10 or 15 years ago, but the profitability in Japan decreased and the profitability in Europe improved in a very significant way. As of today, the numbers are pretty close.

Fabio Fazzari – Equita

Thank you.

Operator

The next question is from Mr. Leopold Authie from Oddo. Sir, please go ahead.

Leopold Authie from Oddo Securities

Okay, good morning. Two questions from me. The first one maybe on the smaller brands in Fashion & Leather particularly, Fendi, Celine and Berluti. It seems that you have a lot of self-inflicted pain there in terms of profitability. And is that possible for you to quantify in terms of timing how long it should take for you to invest in marketing basically and how long it will take to rationalize the network to a point where you are satisfied?

This is for the first question. The second question one, in Europe, could you give a bit more color in terms of countries, differences between countries, and maybe local versus tourists, please? Thanks.

Jean-Jacques Guiony

For the other brands, I would say it's marketing, it's retail, it's a lot of things that explain why I tried to explain a little bit the situation, particularly on the retail side. This will not disappear overnight. We expect a sort of 18 months further investment into these brands. They have reached a level, which justifies in our view, the investments we are making.

When you start investing in a brand, you don't invest for three months and you stop thereafter. You really have to do it on an ongoing basis for a certain period of time. So I would say the bulk of this year and next year will be devoted to significant investments in these brands, which means higher capital and a little bit of pressure on profitability, as you've seen in the first half of this year.

As far as Europe, your second question is concerned obviously, North of Europe is doing better than the South of Europe. The analysis on tourist versus domestic, it’s a little bit complex due mostly to the Japanese who are a big factor in Europe and whose business has dropped in a significant way over the first half of the year, as I explained before.

So the domestic business is up a few percentage points and a few percentage points higher than the tourist business for the whole area.

Leopold Authie from Oddo Securities

Okay, thanks.

Jean-Jacques Guiony

Maybe one last question if there is one.

Operator

The last question is from Mrs. Eva Quiroga from UBS. Madam, please go ahead.

Eva Quiroga – UBS

Yes, good morning I was wondering if you could talk a little bit about the Perfumes & Cosmetics division, please. I think in Q1, you had talked about destocking and I was wondering it’s not equal with sell-in. And secondly, if you can maybe give a bit of color how you see the underlying market develops given the lack of supply I have been talking about. And maybe on margin, I mean cost has been pretty good, why is margin not doing better than it has been?

Jean-Jacques Guiony

Okay that you talking it was mostly in the US. It came to an end. As we expected, our business was slightly down in Q1. It’s up strong double-digits in Q2 and in the US. So definitely, a little bit of excess inventories that we had at the end of last year has been removed and the business is really growing fast.

For the question on margins, you ask is, it’s a very difficult question, but when you look at one quarter or one half of the semester, it’s always difficult to draw conclusions from margins in this type of business, because you have fading of massive marketing campaign, launches, et cetera, which could distort the business one way or the other.

So as far as the first half is concerned, we have a little bit of pressure on the margin, but really nothing very significant and we think the business is doing okay and nothing very significant with the – no – much conclusions would be drawn from this detail for the strategy between top-line and bottom-line growth.

Eva Quiroga – UBS

And in terms of the underlying trend you're seeing?

Jean-Jacques Guiony

The underlying, sorry, I cannot hear you very well.

Eva Quiroga – UBS

The underlying trends in terms of demand?

Jean-Jacques Guiony

Well, it varies a lot from obviously one country to another basically the areas of France or the US on one hand and Asia on the other hand where really which is a business growing at a fast rate. Europe is a mix, a more mix iteration, which again, in the North of Europe, i.e. Germany, France and the UK doing well, while the South of Europe is under a very severe pressure particularly as far as Spain in concerned.

As far as Italy is concerned, it’s getting a little bit better, the comparison base is getting as long as – that it’s getting easier. So we see numbers which are a – still are a bit negative for the market, but not that bad as they were previously.

Eva Quiroga – UBS

Okay, thank you.

Jean-Jacques Guiony

Okay. So thanks a lot for attending the call. I don’t have further comments to make and I just look forward to discussing with you our Q3 numbers in the course of October. Thank you and have a good day.

Operator

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

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Source: LVMH Moet Hennessy Louis Vuitton SA (ADR) (MAGOF.PK) Management Discusses Q2 2013 Results - Earnings Call Transcript
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