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Executives

Jean-Jacques Guiony - Chief Financial Officer

Chris Hollis - Head of Investor Relations

Analysts

Thomas Chauvet - Citigroup

Antoine Belge - HSBC

Mario Ortelli - Sanford Bernstein

John Guy - Berenberg

Luca Solca - Exane BNP

Melanie Flouquet - JPMorgan

Rogerio Fujimori - Credit Suisse

LVMH-Moet Hennessy Louis Vuitton (OTCPK:LVMHF) Q2 2014 Earnings Conference Call July 24, 2014 12:00 PM ET

Operator

Ladies and gentlemen, welcome to the First Half 2014 Results Call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead.

Jean-Jacques Guiony

Thank you. Ladies and gentlemen good afternoon and welcome to the conference call. I am Jean-Jacques Guiony, the Chief Financial Officer of the LVMH Group. Before I begin, I must remind you that certain information to be discussed on today’s call is forward looking and is subject to important risk 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. I shall cover the first part with most significant numbers and Chris Hollis, who is 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 Web site as well as the slides for today’s presentations and interim financial report.

So let’s move Slide 2, and I shall start with revenue for the first half. As you may see we ended the semester with most of our business groups in the positive territory. You will note that published growth is lower than organic growth, despite roughly 2% positive perimeter impact, stemming from the first time consolidation of Loro Piana. We suffered an adverse currency impact of about 4% with 4% drop in the dollar and an 11% drop in the year. Chris will comment main business groups in more details but the main points to be reminded are as follows.

First of all, Wine and Spirit had a somewhat difficult semester due to heavy destocking in the cognac business in China and despite a good level of activity in the U.S. Fashion and Leather is up 4% in organic terms with heavy impact from Japan which we shall discuss in a moment. Perfume and Cosmetic is up 6% in organic terms. You see most, if not all market performances in its main geographies. Watch and Jewelry is a bit under pressure in the first half particularly with regards to the watch component of the business. And finally Selective distribution is showing a very strong performance with 9% growth in organic terms.

Let’s move to Slide 3, where you can see comparison between first quarter and second quarter in terms of organic growth. The key points to have in mind is that anticipated purchases ahead of the VAT increase in Japan boosted sales in the first quarter. This added about 2 points to Q1 organic growth as we discussed before. While Q2 was affected by about 1 point by the logical decrease in the Japanese business after the VAT increased implementation in early April. If you take this out, our organic growth despite differences division-by-division was essentially stable in Q1 and Q2.

Let’s now move to Slide 4, which shows the geographic breakdown of revenues. Europe and Asia including Japan account for roughly one-third each while the U.S. is one-quarter, no major change on this chart in the first half of the year. Moving to Slide 5, you may see the organic evolution of sales in our main geographies. You’ll see the impact of the Japanese VAT increase which I mentioned before was plus 32% in Q1 and minus 11% in Q2. Yet overall Japan grew 11% in the first half. Other geographies showed similar growth in between Q1 and Q2. Europe is essentially stable while Asia is impacted by the weakness of the wine and spirit business in this region. U.S. is showing mid single-digit growth with a slight improvement in quarter two.

Let’s now move to the next slide where you may see our simplified profit and loss account for the period. Main comments are as follow; we already discussed revenues which is growing 3%. Gross margin was quite stable at 65.5% of sales against 65.8% of sales in the same period of last year. Operating expenses grew a bit faster than sales, excluding currency impact and the first time consolidation of Loro Piana, selling expenses grew about 9%, marketing 6% and admin expenses 4%.

Profit from recurring operations is down 5% but up 2% excluding currency and perimeter impact which I will discuss in a moment. Other operating income and charges are negative by 49 million, reflecting mostly amortization and depreciation of intangibles at the level which is not entirely different from last year’s. I shall discuss financial charges in a separate slide in a minute but no major difference compared to last year. Same comment for income taxes with tax rate being stable at around 30.5%. As a result, Group’s share of net profit is down 4%. Let’s now look at the profit from recurring operation which is broken down by business groups on slide 7.

Wine and Spirit had a difficult first half as I told you, was minus 15% in profit from recurring operations. This is obviously the consequence of the 7% drop in sales in Euro terms. Chris will discuss in more detail this in a moment. Fashion and Leather ended the semester more at flat, penalized by negative currency impact and the complete strategic reshuffle at Marc Jacobs. To be noted that LV margin was stable in the first half of the year. Perfume and Cosmetic shows a 2% increase in profit from recurring operations in line with sales in Europe.

Watches and Jewelry was affected by softness of the watch business and the production and distribution reorganization currently being implemented at TAG Heuer, otherwise rest of the business was quite strong. Finally, with Selective Distribution, we had a very solid first half at Sephora but DFS margins suffered the significant adverse impact stemming from both product mix and rising occupancy cost in airports.

Let’s move to Slide 8 and a word on the reasons for the change in profit from recurring operations. You are familiar with this chart. What you can see is that the perimeter impact of 47 million on Loro Piana helps the profit by about 2%, while currencies had a negative impact of almost 9%. Excluding both these items, organic growth in profit would have been around plus 2%. Let’s now turn to Slide 9, and the analysis of the net financial chart and few points to mention. The cost of debt is slightly down despite 25% rise in average debt in connection with the Loro Piana acquisition funded at the end of last year. We strongly benefited from lower interest rate obviously. The cost of hedging was a bit lower than last year and should hopefully represent about one-half of the total year’s amount.

Finally, income on the financial investment portfolio was in line with last year. The bulk of this amount as you know is evidenced, received on our Hermès shareholding. Moving onto Slide 10, where you can see the balance sheet structure. The structure of the balance sheet did not evolve much compared to 2013 year-end. Total equity is in excess of 50% of the balance sheet whilst inventories represent about 17% of the total. Turning to Slide 11, a few words on the cash flow statement. First, net cash from operations before changes in working capital was down 68 million i.e. minus 2% compared to last year’s number. Working capital used about 1.27 billion euro in cash, about 250 million more than last year.

This comes mostly from an increase in inventories as well as a decrease in payable which is normal at the end of year with which magnitude was higher than it was last year. Finally, capital expenditures are more or less in line with last year’s number. I will finish this first part of the presentation with the comment on the Group’s net debt which you can see on Slide 12. The level of net debt reached 6.5 billion, about 1.1 million 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 minority equity partners exceeds traditionally our net cash flow. The Group’s net debt at the end of June represents 23% of total shareholder equity.

I will now turn to Chris who is going to review the main developments within our various business groups. Chris?

Chris Hollis

Thank you, Jean-Jacques. I will start the discussion on our business groups beginning with Wines and Spirits on Slide 14. This business as you all know was impacted negatively by both the destocking by distributors in China, following the anti-extravaganza measures being taken there and by the impact of the strong Euro. This group saw a 1% decrease in organic revenue growth on a reported basis taking into account the negative currency impact revenues reported down at 7%, at 1.677 billion euros compared to 1.795 billion euros in the year ago first half. Looking at the two main categories in the first half of 2014, Champagne and Wines organic revenues grew by 6%, but after a negative 6% currency impact reported revenues fell only slightly to 723 million euros compared to the first half of 2013.

For Cognac and Spirits, organic revenue declined 7% and after a 4% negative currency impacted, reported revenue was 954 million euros compared to 1.68 billion euros in the year ago period. Profit from recurring operations for this business group declined 15% to 461 million euros for the first half of this year. Breaking this down champagne and wines contributed 152 million euros in profit while cognac and spirits contributed 309 million euros for the first half. This later reduction was primarily due to the negative mix impact resulting from the current destocking of cognac in China.

So let me discuss the trends we are seeing that were behind this Group’s performance. In the champagne’s business, volumes rose by 3% with pricing mix being very similar. During the first half in particular the Prestige Cuvées continue to have solid development and on a geographic basis, the Group’s good performance both in Asia and in the U.S.

For wines specifically the solid momentum underway, Chandon was offset by the negative effect of the depreciation of the Argentina peso and a more limited contribution of some high-end French wines due to a different phasing of shipments. Moving onto cognac, volumes in this business declined by 1%, as we’ve seen in the third quarter the good momentum continued in the U.S. in particular for the V.S. In China, continued destocking by distributors of the V.S.O.P, XO and super premium cognacs as I mentioned continue to impact the business in the first half.

Finally among the Group’s other spirits, both Belvedere and Glenmorangie are seeing sustained growth. Looking to the second half of the year, the Group is committed to continuing to enhance the image and the desirability of its wines and spirits brands. This will be achieved through delivering ongoing product innovation in order to maintain the loyalty of the existing customers and to attract new ones as well as through developing the brands in new markets and continuing to invest in highly compelling marketing and advertising.

At the same time, the Group is working to further develop production capacity in order to support the longer term growth potential of the brand. Taking together, this work will help the brand to be in a good position when the destocking in China subsides although this is expected to continue through the second half of the year.

Now turning to our fashion and leather goods brand. This group saw a 4% rise in organic revenue in the first half of 2014 but taking into account a 7% structural impact essentially relating to the integration of Loro Piana and a negative 4% currency impact, reported revenue rose 7% to in excess of 5 billion euros. Profit from recurring operations was about flat for the period year-over-year at 1.487 billion euros. It’s clear that the strengths of the Euro has had a significant impact in the period. This also reflects continued investment being made to support the growth of brands with the high potential in the Group’s portfolio.

As Jean-Jacques mentioned, Marc Jacobs is an example of the brand going through a strategic reshuffle. It is also important to note that the operating margin at Louis Vuitton remain stable in the first half of 2014. Turning now to the highlights for the fashion and leather goods group in the first half on Slide 18. I will begin with Louis Vuitton where the brand enhanced focus on ensuring the highest quality in terms of products and the brand experience is achieving the desired results.

In the first half of year, it was clear that the brand is benefitting from a strong creative dynamic with its fantastic new designer Nicolas Ghesquière and a number of new products driving excitement. This includes development in its leather lines, the successful launch of new models in its Monogram collection and a very positive reaction to Nicolas Ghesquière’s first show which was reported in the media with enormous enthusiasm around the world.

I will now speak briefly about some of the developments of other group brands. Fendi saw a significant growth in its leather goods line due to the success of both its new Diavolo bag and its iconic Peekaboo and Selleria lines. Céline continued its wonderful streaks and Phoebe Philo, a rival several years ago with particular strong growth in its leather lines and shoes and the integration of Loro Piana has gone exceptionally smoothly. And we look forward to further building on the strength of this iconic Italian brand.

In Berluti, the positive momentum continues driven by exciting advertising and marketing with the highlight of the extraordinarily crafted products and new flagship stores which opened to great buzz in Milan and New York. As we look ahead please see Slide 19. There are very compelling initiatives underway to continue the momentum across the Group’s fashion and leather goods brands. At Louis Vuitton, work will continue to further the qualitative development of the brand including the introduction of new leather products, enhancing existing stores and opening select new ones. In addition to this, Nicolas Ghesquière’s new collection will be available for purchase in the second half.

At Fendi, a new flagship store with a similar concept to those in Paris and London will open on Madison Avenue in New York City. This is expected to draw very good attention. Loewe will hold the first show of its women’s collection designed by J.W. Anderson which is highly anticipated in the fashion community. She told she will expand its retail network with new store locations in Miami and Asia and I should also mention that beginning in September, Philippe Fortunato will be the CEO of Givenchy, having said most recently is ahead of Louis Vuitton North Asia. At Givenchy he succeeds, Sebastian Suhl who will assume the CEO at Marc Jacobs working to take that business to its next level of success around the world.

Turning back to the slide, Kenzo will continue to enhance its ready to wear collections of bags and accessories and finally Loro Piana will continue its measured pace of targeted boutique openings. Moving on now to Perfumes and Cosmetics, Slide 20. For first half of the year, organic revenue rose 6% after a negative 4% currency impact it’s translated into a 2% rise in reported revenue of 1.839 billion euros. Profit from recurring operations in this business group rose 2% in line with published revenue and reached 204 million euros.

I’ll expand on the brand performance behind the numbers. I’ll begin with Parfums Christian Dior which continues to build on its strength on a global basis. Notably in the first half of this year, the brand has seen further market share gains for its exceptional fragrances J’adore, Miss Dior and Dior Homme. At the same time the Dior added make-up line is performing exceptionally well and the Prestige skincare line is also a strong performer.

Growth at Guerlain over the first six months of the year was driven by the worldwide success of its skincare line Abeille Royale. The first half also saw the launch of its new fragrance L'Homme Idéal. At Kenzo its Flower in the Air delivered good performance in the first half that benefit the innovative eyeliner They’re Real! has been very well received. Finally Fresh continues to deliver strong growth in the U.S. and exceptional growth in Asia where it continues its expansion.

As to the outlook for the second half of the year in the Perfumes and Cosmetics Group, see Slide 22. In short the Group’s goal is to bolster the success of brands and gain greater share in key markets through maintaining investment both in exciting product innovation and attention catching marketing and advertising. At Parfums Christian Dior, the focus is on supporting the continued success of Dior Addict and the launch of the new highly compelling communication program for J'adore.

And in terms of highlights in the second half for the other brands, Guerlain will benefit from the opening of a new production site for skincare and make-up Chartres to support ongoing innovation and growth as well as they will also see the rollout of the fragrance L'Homme Idéal launched in the first half. Givenchy will launch a new women’s fragrance Dahlia Divin and Fresh benefit from Make Up For Ever, will each open new boutiques in key markets.

We now move to Watches and Jewelry, please see Slide 23. In this group, organic revenue grew by 3% on a reported basis and also taking into account a negative 4% currency impact, revenue was down 1% to 1.266 billion euros in the first half of this year. In short, solid progress in the Group’s jewelry brand’s own stores was offset by cautious purchasing from multi-brand watch retailers given the uncertain economic environment.

Profit from recurring operations was down 31% in this group at 107 million euros for the first half of the year. This decline reflects most significantly an impact from the strength of Euro as well as the softness in the watches business. In addition, investments in communication and the production reorganization being implemented at TAG Heuer, should support the near and longer-term growth of the brand.

Now to give some more color on these numbers. The jewelry brand generally achieve solid progress in their own stores which help to offset cautious purchasing among multi-brand watch retailers as I mentioned earlier. In terms of other highlights, the group’s brand saw success with new watches at Baselworld during the spring. Bulgari saw a good momentum in the first half during which the brand celebrated its 130th anniversary with events and media around the world and it delivered particularly strong progress in its jewelry lines. At TAG innovation continues to range supreme which coupled with enhanced communication, reflect the brand’s strategy to further develop its clientele in order to fuel continued growth over the long-term.

And over the first half across the brand, the Group continues to make investments designed to optimize production and enhance communication in order to drive awareness and excitement about innovative new products. As we move into the second half of the year, the focus will continue as the Group works to strengthen the image of its brands and further develop the iconic designs and products for which they’re well known.

Among other exciting initiatives they will include launching numerous new products at Bulgari. In terms of distribution, the Group will continue to expand the own store network of its brands while being increasingly selective about its multi-brand store partners. Now moving on to our last business group, let’s look at the Selective Retailing business on Slide 26. This business group saw a 9% increase in organic revenue which is particularly notable and that it came on top of the very robust rise of 19% in the first half of 2013. After taking into account a negative 5% currency impact, reported revenue rose 4% to 4.382 billion euros in the first six months of 2014.

Profit from recurring operations in this business group declined 3%, 398 million euros while Sephora’s first half was solid, DFS’s margin was impacted by product mix and rising occupancy cost in airports as well as ongoing investment in the marketing, expansion and renovation of several of its airport concessions. Looking at the businesses in more detail on Slide 27, I will start with DFS. During the first half, this business benefited from the continued growth of tourism among Asian clientele although this was somewhat offset by the impact of the weak yen on Japanese travelers and particularly the Galleria in Macao with a strong performance. Profitability at DFS was however impacted by cost associated with the expansion, renovation of the several airport concessions as I mentioned all of which are very well look for our longer term investments.

Finally, DFS I should note that the rollout of the T Galleria brand and visual identity is going very well and continue the pace. Turning out to Sephora, this business continues to be a star delivering market share gains in all key region in particular Sephora showed excellent momentum in North America, Asia and the Middle East. The driver of this performance continues to be Sephora’s proven expertise with respect to mastering new cosmetic trends and offering their clientele highly innovative, exciting brands and products. In the first half of the year, this included global rollout of two exclusive brands Marc Jacobs and Formula X for Nail.

And as in the past, Sephora’s online business continues to deliver rapid growth. I will now discuss the outlook for Selective Retailing. DFS the focus will be on continuing to strengthen its leadership in the Asian market. This will include renovating the Changi Airport concession in Singapore which was recently renewed. DFS will also start to deploy its loyalty program and launch a multimedia, multichannel advertising and marketing program to drive the excitement.

At Sephora ongoing growth is the theme consistent with it Sephora will continue to renovate its existing store network as its exciting store experience is key to highly successful consumer approach. They also work to expand into new markets including Indonesia and others and finally Sephora will continue to focus on innovation in digital and mobile technologies where it is a well established leader in the retail sector.

With of all that I will now turn the call back to Jean-Jacques for a brief wrap-up before we take your questions. Thank you.

Jean-Jacques Guiony

Thank you, Chris. I will finish this first part of the presentation with a brief overview of the activity and few comments on each one performance highlighting the most significant points. First and foremost, I would like to stress the negative impact of currencies which have a negative impact of 9% on our operating profit. Secondly, most of our markets are experiencing modest growth which reinforces the previous point on the currency impact implementing measures to offset negative currencies is not that simple when end demand is showing some sluggishness.

Finally, I would also like to mention some geographies like the Middle East or North America where we see a good momentum. Asia seems to be a bit under pressure but if one eliminates to cognac situation in China, organic growth is in line with last year’s mark. What about the rest of the year, we highlight a few points from the last chart of the presentation, always difficult obviously to make forecast but that’s why I give you some points which we view as important. First and again currencies, what’s going to get add to what I have already said.

Secondly, cognac where we expect the Chinese situation to normalize later this year which will make visible the strong advances of Hennessy throughout the world particularly in the U.S. and the ex-China, Asia. Certainly we feel our product line is strong for the second half and combine with innovative marketing initiatives, they should support the business. So, that is basically all we wanted to say and we shall now open the Q&A session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). We have a first question from Thomas Chauvet from Citigroup. Please go ahead.

Thomas Chauvet - Citigroup

Good evening, Jean-Jacques and Chris. Three questions please. The first one on fashion and leather, if we exclude Japan, the growth was about plus 2 in the second quarter versus something like plus 6 ex-Japan in the first. Can you perhaps comment on what happened in the various region U.S., Europe, Asia and perhaps comment on the second half, I know you have got quite a few product launches? Secondly, on cognac, one of you competitor recently estimated that depletions for the category in China improved to single-digit negative in the second quarter with the modern on trade-up slightly. Can you explain what the situation was in Q2 at Hennessy? When do you expect depletion to recover and ultimately your shipments to China to return to positive growth? And lastly, on the Chinese clientele of Vuitton, in April Jean-Jacques you mentioned that there was an improvement in domestic demand in Mainland China, resilience in Chinese tourist demand elsewhere, can you tell us what trends you have seen at home and abroad in Q2 and also whether the crackdown on gifting is still in year to affecting you? Thank you.

Jean-Jacques Guiony

Okay, thank you, Thomas. So, starting with the question on leather and your question about what happened in the other regions then just us. I would say that the U.S. was a bit better than the first quarter of the year. Europe was more or less in line while Asia as a whole decreased quite significantly its growth level.

Second question cognac depletions, I quite agree with the comment. What we see on depletions is below single digit negative and as we suggested in some segments of the market, particularly the modern on trade, we see some very significant improvement and some strong double digit growth. So a very contrasted situation. But as far as sellouts or depletions are concerned, we see a very marked improvement compared to last year.

One point to bear in mind is that this growth rate depends very much on the assessment of what the depletions were last year. It’s not that easy, we had a few surprises there. It’s not that easy strategy to assess exactly what was repeated last year and the level of inventory in the system. But assuming our analysis is good and we expect to be accurate now, we are in a low single digit decrease in depletions. Obviously, it will take a little bit while for sell-in numbers to coincide with these sell-out numbers.

As you know we exceeded by a fairly large extent the amount of sell-out last year and our sell-in was significantly higher than our sellout numbers last year, hence a buildup in inventories and we have to reduce these inventories. This is currently being implemented explaining why the numbers are what they are in H1 of this year in cognac, but it’s not over yet and we expect it to move to unfold again in the second half of the year and it was not before Q4 and probably the end of Q4 that the situation will fully normalize.

The Chinese clientele, yes we were not optimistic but we saw better numbers for Q1. Unfortunately as far as Louis Vuitton and it’s true for some of the brands as well. We saw a little bit of decline both domestically and with tourists in the second half of the -- in the second quarter of the year. So we haven’t seen the same level of business in the second quarter of the year. Altogether the Chinese clientele is still mid-single digit in the first half of the year. But it’s a lower number than what we had at the end of Q1.

Operator

The next question is from Antoine Belge from HSBC. Please go ahead.

Antoine Belge - HSBC

Yes, hi it’s Antoine Belge at HSBC. Three questions. First of all to follow up on the previous question, I think if you look at fashion and leather alone, the growth went from 9 to 0. And so the question that your town was impacted of around 3%. Can you explain maybe what is the other sort of 3%? I think you mentioned China being softer. Some of your competitor mentioned the subspace in Hong Kong, especially since May. So what’s the situation in Hong Kong for Vuitton on the (indiscernible) for maybe DFS.

Second question is on the margin side within fashion and leather. I think you said Louis Vuitton flat margin. Is it that comes from ForEx or is it through after including the quite significant FX impact? Maybe could say a word on the evolution of the margin of the other products and (indiscernible) leading aside of the CDN duration of Loro Piana?

And finally I was a bit surprised by the big decline in the watch division EBIT. I understand it was the FX impact. But could you quantify what was the FX impact and maybe other factors and overall do you expect this to improve in the second half?

Jean-Jacques Guiony

Thank you, Antoine for your three questions. So on fashion and leather, you pointed out roughly that Hong Kong is a bit difficult. We've seen a very strong first quarter in Hong Kong and since then, particularly after May delivery of business for various reasons, some of them being connected with a little bit of political unrest there and we've seen the level of business slowing down remarkably. So Hong Kong explains also why Asia has been slowing down in Q2 compared to Q1. It’s also a little bit the case for Macau and for the rest of Asia with the notable exception of Korea, which has been quite strong. But Singapore for instance, following the disappearance of the Malaysian Airlines aircraft has proven very soft as we understand some tourists are reluctant to travel to Singapore and to Thailand which was sort of practical route particularly for Malaysia.

So it’s a -- throughout the region, we’ve seen some weakness in fashion and leather. And yes, FX wasn’t an exception to that and we’ve seen some slowdown. The FX that was close to double digit growth in Hong Kong in Q1 and was single-digit points up in Q2. So also a slow down at the FX in Hong Kong in Q2.

As far as margins are concerned with Vuitton, its euro margins. We have the same increase and some change in sales and operating profits. So it’s not excluding ForEx. As far as watches and jewelry decline is concerned, yes you mentioned FX which has a negative impact. I think it’s about 35 million or 40 million impact on the division which is much smaller in terms of profit and the rest of the divisions obviously impact was quite dramatic for watches and jewelry. We also had some one-off restructuring cost at TAG Heuer connected with reorganization of production lines for about €15 million to €20 million. We’re talking about significant adverse impact which explains why the operating profit for the division is down about 30%.

Antoine Belge - HSBC

Okay. I need to -- I just ask about the other fashion and leather brands and maybe just a follow up on the Hong Kong. Obviously you mentioned that the slowdown started only in May. So I guess July was probably on the same vein. And do you expect this to be a short-term phenomenon or that after a while and either the Chinese tourist will be travelling elsewhere or what’s your first analysis of this trend that I understand is quite recent.

Jean-Jacques Guiony

Well the short answer is I don’t know. To give you a little bit more color on this, it’s not that easy to analyze. I mean what we see is actually traffic increasing but the level of business along with one single client being lower than what it was. So basically what we see is a qualitative change in the business. We do so more people in the stores are buying less. It’s exactly the opposite from what we saw last year following the implementation of the new regulations regarding trouble from China. So it’s quite expected we went off. We didn’t think that type of trend would happen. And we need probably some more, a little bit more time to really understand what’s going on.

Is there a next question?

Operator

We have our next question from Mario Ortelli from Bernstein. Please go ahead.

Mario Ortelli - Sanford Bernstein

Two questions from me. The first one is about Marc Jacobs. You told about a strong investment in Marc Jacobs. What are the plans of the Company on that brand and what are the targets that you have in mind? Also because you have approached one of your most experienced manager at another company quite recently. The second one is about Louis Vuitton. You mentioned new models in leather good lines for the next launch. If you can give us a bit more visibility regarding these new product launches and which new partner do you think, they will allow on the face of Vuitton?

Jean-Jacques Guiony

I’ll be pretty short on the second part of the question. Some of developments we've already seen at the end of H1, particularly on advertising. We’ve seen the Lockit being introduced fairly recently. Some other developments will take place in the quarter; which I cannot really elaborate on at this point in time. Importantly you will also see the first results of Nicolas Ghesquière creation that you’ve seen on the runaway shows earlier on this year that will be in the store. So that’s why we feel that our product pipeline should definitely help the business in the second half of the year.

As far as Marc Jacobs is concerned, as you know we have a lot of hopes for this company. We think this is very well positioned brand in the contemporary segment and we expect to develop it much further. This is the reason why Marc decided to devote 100% of his time to this brand. So this is very important move and following this move we have also as you mentioned appointed a new and experienced talented manager at Marc Jacobs. Obviously we need to make some revisions as to retail, wholesale and product policy, which is currently being implement and which is having some impact in the short-term on profit. But definitely we are doing that, with a mind to the medium to long-term development of the brand.

So we shall probably be still little bit under pressure for the second part of the year as we are incurring larger costs on few things and cutting some businesses here and there. So it has some impact on the profitability. But definitely this is -- we keep in mind to really develop in a way this very exciting business.

Mario Ortelli - Sanford Bernstein

Just one clarification, these are proceeds on the contemporary segment. Can be probably used also to re-launch Donna Karan that is since a bit is leading brand in your portfolio?

Jean-Jacques Guiony

It’s also a very exciting brand. We’re not yet -- we're not advanced enough to be able to make any announcements as of today but we are working on these as well.

Operator

We have a question from John Guy from Berenberg. Please go ahead.

John Guy - Berenberg

[indiscernible]. A couple of questions from me please. First of all with regards to pricing at Louis Vuitton during the second quarter, could you maybe talk through any significant or material pricing activity, especially in Japan and also in Hong Kong and Mainland China? Second question is around Loro Piana and the development there that you’ve seen in the first half of the year. If we are looking at the sales and EBIT developments, am I sort of in the ballpark thinking that Loro Piana has generated just over €260 million in turnover and just over €60 million in EBIT? And also finally with regards to the watches and jewelry category. With regards to the inventory position that you are seeing at the moment, I appreciate that and it’s always a little bit tougher for Tag to operate in some of the Asian markets, but regards to inventory, especially in relation to Tag Heuer, in the U.S. and also in Asia, could you just maybe make a few comments there as well? Thanks very much.

Jean-Jacques Guiony

Okay. So on the pricing for LV, thanks for your question for us John. On the pricing for LV, we had regular price increases in Europe and in the U.S. of about 3%. I think it was in March if I am not mistaken. And end of the first quarter we had an 11% increase in Japan -- 8% increase in Japan, sorry, in the same period and a little bit later in April in China of the same magnitude. That were the main price increases that we implemented throughout the first half of Vuitton. On Loro Piana, well the numbers are bit different from the ones you mentioned. It’s about €330 million in sales and the operating profit was €47 million or €48 million. You can get that from the various indications we made in the presentation to all the (indiscernible) impact comes from Loro Piana.

Finally, on the watches and jewelry, the inventory situation, I think the inventory situation is a bit complex. It’s not that in dollar terms, our retailers have too much inventories. The issue that they have is that they have too many slow movers. There are a few expensive products that were sold to them in the last few years that do not really sell and that are absorbing a significant portion of the money they have to – they can devote to the purchase of Tag Heuer’s product. With the consequence of retailers not buying fast movers, not buying products that sell. Well, because they have too many products, too many slow movers. So we definitely have to take some action which we are currently doing and we will continue to in H2 to correct the situation because we are in sort of paradox when some of our products which sell extremely well if the retailers have the money to buy them and in order for them to release the money to buy them, they have to get rid of some of the expensive models that they have on the shelves. So it’s a little bit of a tricky situation that explains why the business has been under real pressure in the first part of the year, not only from a sales viewpoint but obviously from a profitability viewpoint.

John Guy - Berenberg

And do you have any idea or any sort of visibility at the moment as to when you think this is going to start to return? I mean certainly within a broader perspective in Asia, the export comps get a lots softer running into the second half of the year. I was just wondering if you had any sort of visibility or any expectation as to when you think that, that might change. And if I could just add sort of one final one. With regards to I think a comment you made at the back end of last year, the development of some of the other fashion and other brands Fendi, Celine et cetera, with some of the planned extensions in retail. The expectation in 2014 was that they would be effectively margin neutral. Is that what you still expect to see? Thanks.

Jean-Jacques Guiony

Yes. The answer is yes on your last question. We see some developments at Celine, Fendi which are -- those are growing fast and with stable, most likely increasing margins, particularly at Fendi, which is not necessarily very visible due to positive one-offs we had last year but nevertheless the developments are very favorable. Same thing with Kenzo and Givenchy. So we have a few improvements there. Sorry, I need your first question.

John Guy - Berenberg

Turnaround in Asia.

Jean-Jacques Guiony

Turnaround for watches, how long it could take. Well it’s a difficult question obviously. It depends a little bit on the strength -- the underlying strengths in the market. As you well know and the Asian part of the world is in the watch business, showing some sluggishness. So obviously the higher the growth, the quicker it’s going to take. It’s quite stating the obvious, but it will take in my view a few months and probably quarters to normalize the situation. We can be more optimistic in the U.S. where sell-out is proving much stronger in the first half of the year than what it was in the last year.

Operator

The next question is from Luca Solca from Exane BNP. Please go ahead.

Luca Solca - Exane BNP

I wonder if you could step back and then tell us how your ambition for organic growth normalized organic growth over the medium term in fashion and leather goods stacks up against the 4% in the first half. And specifically where do you assess you stand on the Louis Vuitton development. The new product and the new style development momentum has been strong. Is there a similar pick up on the part of consumers? And in what geographies do you see the new approach that Vuitton is working best or working worst according to the first half evidence that you have in hand.

Second, I was wondering, I was sort of reading in between the lines that settling ForEx pressure in an environment where demand is subdued through pricing is not necessarily an option. I wonder if you anticipate in the second half significant cost action to address the other side of the P&L.

And thirdly I saw that were press reports about Sephora, which is developing very well but apparently losing share in some developed markets in Western Europe, most notably France. I wonder if you have any comments on market share trends at Sephora and your future ambitions for this.

Jean-Jacques Guiony

Well you don’t really expect me to answer the first question do you? This is not something we normally share and frankly it’s a quite difficult question. Our business is also function of the end demand and the end demand is what it is today. So it’s quite difficult. One can be optimistic about the end demand improving in the future, particularly in Asia where it is little bit under pressure. And with products and modeling initiatives, we expect to be in a position to benefit from that but the reality for the timing is that we don’t see a major improvement in end demand.

As far as Vuitton is concerned, it’s not a two months process, what we explained last year as to our product strategy and introduction soft leather line and the idea improve the mix at Vuitton is taking some time, it’s underway. We are solving product issues, production issues one after the other. So it’s working according to plan I would say. Again end demand is not helping very much. Definitely these numbers would be better if end demand was stronger. I'm again stating the obvious. But as far as reception to our new product line is concerned, it’s definitely going according to our plans.

Third question on significant cost structure in H2. As you know, we are not great fans of slashing costs half and putting the various brands upside down. We’re progressively curving the growth rate in costs, particularly in selling expenses which is not done in 10 minutes as we take commitments to open stores way in advance of opening them. So I’d say its happening. The only thing I can say that the growth in operating costs in the second half of the year, ex currency will be lower than what it was in the first part of the year.

Finally your comments on Sephora. I've seen the article. I don’t really know what they’re talking about. As far as Prestige Cosmetics is concerned, which is our business, we’re not in the business of mass cosmetics. We’re not in the business of pharmacies. So we don’t know what it is about. As far as Prestige Cosmetics are concerned we’re just definitely gaining market share. We are the first in France with a market share which is higher than 30% excluding exclusive products and the Sephora brands. So it means that our market share overall is higher than that. We’re pretty pleased with this market share, which is growing and has been growing year-after-year for many years now.

Operator

Next question from [indiscernible] from Raymond James. Please go ahead.

Unidentified Analyst

I have three questions please. The first one on fashion and leather good. On the zero percent growth in Q2, can you maybe split between retail and wholesale growth? The second question is on Japan, on the minus 11 that we saw in Q2, can you also split month by month and did you see a recovery in June? And finally can you maybe update us on your exchange rate dollar and the yen? Thank you.

Jean-Jacques Guiony

So first question on retail and wholesale is obviously ex-Vuitton, which is 100% retail. So we -- our figures for wholesale were flattish to a bit negative while our numbers for retail were close to mid-single digit up. So they were not dramatic in other one. Jump on months-by-months, it was minus 11 for the quarter. Definitely -- I don’t have the numbers with me here but it was minus 25% in April, minus 18% in May, something like that a better number in June. Bear in mind nevertheless as far as June is concerned, we have a price increase of a significant amount last year on the July 1st at Vuitton. So the numbers of Vuitton in Japan in July 2013 -- June 2013 were inflated by the announcement of the price increase. So this explains why the recovery in numbers in Japan in June is there but maybe not as strong as it could be if we eliminate this price increase of last year.

Finally hedging. Hedging we have on the dollar, a 50% cover for 2015, which is at 137 and for the yen, it’s about the same percentage, 55%, at 140. For 2014, more or like 100% of the position is hedged now at 132 for the dollar and 127 for the yen.

Operator

Next question from Melanie Flouquet from JPMorgan. Please go ahead.

Melanie Flouquet - JPMorgan

Yes, I have three questions as well. The first is one Louis Vuitton in China. You mentioned that it was sort of down in Q2. I was wondering whether you could shed some light as to why this could be the case in your analysis because I think we're well aware of what's going on in Hong Kong that China has got some familiar impression as (indiscernible) deteriorated for some of your peers.

My second question in on healthy margin and I am pleasantly surprised that they are flat year-on-year including currency. So could you tell us what you have been doing maybe on the cost side that leads to that? And my third question is on the VFX. You had taken on the Hong Kong concession, which had a negative impact with that segment improvement this year. The first half is challenging. What should we expect for the remaining of the year? Thank you very much.

Jean-Jacques Guiony

Well, I wish I knew the answer to the first question. The growth rate of LV in China is lower in Q2 than it was in Q1. Frankly it’s quite difficult to explain. Giving a precise explanations on a few percentage points, lower, higher, quarter-after-quarter is always a very challenging thing for me. I could provide you some sort of micro explanation such as anti-extravaganza measures impact and they’ve got same overall climate for business, the risk of real estate prices and so on and so forth. I don’t think this would convince you 100%. So frankly we see a lower level of business. We understand that we are not the only one, given the numbers that we are. And bear in mind that we are like for like more or less in China. We have not opened that many stores in the first part of the year.

On the LV margin, what have we done? We've done a few things. We have controlled in a very strict way the cost increase through for all the components be it selling, marketing and admin. Margin improved. Our gross margin improved a little bit as well due to hedging gains but also due to mix. We had a very strong first quarter in Japan the bulk of the business Japan is usually monogram. So it helped a little bit. Not to a great extent, don’t take me wrong, but it helped a little bit. So this is basically a combination of all the factors which explains why the margins were flat Vuitton.

Finally, DFS. The airports business in Hong Kong recovered shortly in the first part of the year. We are still losing a bit of money, a few millions of dollars. So it’s quite a good improvement. It’s really the rest of the business where we had two big factors. One is that category growing the fastest is by far watches where margins, gross margins are on average 10 or 15 points lower than the rest of the business. Obviously we have a very negative impact on gross margins stemming from the growth in watches. We have seen that in the past already, but not to the same magnitude.

And second thing, as you know we have renewed a few important concessions in our ports, namely Los Angeles, San Francisco, not to mention Hong Kong, but also Singapore. And obviously at the beginning of the new concessions, the P&L is always a little bit under pressure, it’s not losing money, hardly making any profits and this is impacting the P&L. The second point was definitely budgeted, why the first point is little bit of a negative surprise for us in the first half.

Melanie Flouquet - JPMorgan

As a follow up, did you say that watches were the best performing? Is that what you said?

Jean-Jacques Guiony

Yes.

Melanie Flouquet - JPMorgan

How do you say that in a context of what we’re seeing in general in watches?

Jean-Jacques Guiony

It was particularly true in Q1. We saw a little bit of slowdown in Q2. But definitely watches were the fastest growing category in the business mix of the FX.

Operator

We have a question from Rogerio Fujimori from Credit Suisse. Please go ahead.

Rogerio Fujimori - Credit Suisse

Jean-Jacques, could you comment on demand trends you saw in France in Q2 for LV and your main business and also trends in other key European markets like Italy, UK and Germany?

Jean-Jacques Guiony

The luxury market for France is no exception to what’s happening for France as a whole. It’s basically well under the rest of Europe. We’ve seen stronger numbers for Spain, for Italy and for the South of Europe. Obviously it decreased sharply over the past few years so it’s more recovery than pure growth. Germany and the UK are doing okay and France is little bit under pressure. The domestic base is not showing any growth and we’re also suffering from the fact that the Japanese customers, which used to be doing large forefront of the business, for instance as Vuitton are dropping by again 20% or 25%. So this exerting some pressure on the business. So overall both on the domestic side and on the touristic side we have experienced a little bit of pressure in France, which is overall down a few percentage points for the first half of the year.

Rogerio Fujimori - Credit Suisse

And Jean-Jacques Guiony, is the business of the Chinese and France holding up well in Q2?

Jean-Jacques Guiony

Growth is lower than Q1 but it’s holding out, yes.

Operator

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

Melanie Flouquet - JP Morgan

I was wondering whether you could talk a bit about the Monograms, which certainly have done pretty well in quarter one. Seems to have an impact in margins. What you are expecting the second half, because I was under the impression there was some launches to the Monogram coming up because of the 100 in the industry? So are we going to see the elevation sort of moving into next year just by virtue of the anniversary of the brand?

Jean-Jacques Guiony

Well Monogram did well as you said in Q1 but also in Q2, which was not surprising. It was expected, which is more significant, mind you. We expected the Japanese business to boost Monogram in Q1 but we didn’t have the Japanese business in Q2 and despite that Monogram did well in Q2. This is mainly due to introduction of new products, Maiteez [ph] Palace last year, the Montaigne this year. All these products are doing very well and we are quite hopeful for the rest of the year.

Melanie Flouquet - JP Morgan

And so we should fairly expect a big shift in mix this year, right, given the success of Monogram since the beginning of the year?

Jean-Jacques Guiony

Overall we nevertheless get to faster growth and larger share for leather products than we have for canvas product. So there will be a little bit of mix impact but it is offset a little bit by the success of Monogram which is definitely good news.

Operator

There is no more questions for the moment.

Jean-Jacques Guiony

So this ends this conference call for the first half of the year. Not much closing remarks to make. We already said a little bit what we think about this semester and what type of outlook we may expect. I look forward to discussing with you Q3 numbers in October. Thank you for attending the call.

Operator

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

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