LVMH Moet Hennessy Louis Vuitton SA (OTCPK:LVMUY) Q2 2014 Earnings Conference Call July 24, 2014 12:00 PM ET
Jean-Jacques Guiony – CFO
Christophe Navarre – CEO
Mario Ortelli – Sanford C. Bernstein
John Guy – Berenberg
Luca Solca – Exane BNP Paribas
Ladies and gentlemen welcome to the First Half 2014 Results Call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead.
Thank you. Ladies and gentlemen good afternoon and welcome to this conference call. I’m Jean-Jacques Guiony, 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 these I refer you to the Safe Harbor Statement included in our press release.
Let’s now move to today’s topic first half figures. I shall cover the first part with more significant numbers and Chris Hollis, Group’s Head of Investor Relations will cover the main developments of our different business groups. After this, both Chris and I will be available for your questions.
The press release is available on our website as well as the slides for today’s presentation and the interim financial report.
So, let’s move to slide two 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 publish growth is lower than the organic growth despite a roughly 2% positive regulatory impact stemming from the first time consolidation of Loro Piana. We suffered an adverse currency impact of about 4% with a 4% drop in the dollar and 11% drop in the yen.
Chris will comment on business groups in more detail, but the main points to be reminded are as follows. First of all, Wines & Spirits had a somewhat difficult semester due to heavy destocking into Cognac business in China and despite good level of activity in the U.S.
Fashion and Leather is up 4% in organic terms with heavy impact from Japan we shall discuss in a moment. Perfumes & Cosmetics is up 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 particularly with regards to watch component of the business. And finally selective distribution is showing a very strong performance with a 9% growth in organic terms.
Let’s move to slide three, where you can see a comparison between the first and second quarter in terms of organic growth. The key point to have in mind is that anticipated purchases ahead of the rate increase in Japan boosted sales in the first quarter. They – about two points to Q1 organic growth as we discussed before, while Q2 was affected about one point – of 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 four, 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 five, you may see the organic evolution of sales in our main geographies. You will see the impact of the Japanese VAT increase which I mentioned before with plus 32% in Q1 and minus 11% in Q1. Yet overall Japan grew 11% in 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 & Spirits 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 follows. We already discussed revenues which is growing 3%. Gross margin was quite stable at 65.5% of sales sorry 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 NIM expenses 4%.
Profit from recurring operations is down 2% excluding currency – impact we shall discuss this in a moment. Other operating income and charges are negative by 49 million reflecting mostly amortization and depreciation of intangibles at a 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 let at the profit from recurring operation which is broken by business groups on slide seven. Wines & Spirits had a difficult first half as I told you with minus 15% in profit from recurring operation. 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 & Leather did – more 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 cosmetics 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 the rest of the business was quite strong.
Finally, with selective distribution, we had very solid first half at Sephora, but DFS margins suffered a significant adverse impact stemming from both product mix and rising occupancy cost in airports.
Let’s move to slide eight and a word on the reasons for the change in the 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 helped the profit by about 2% while currency 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 nine and the analysis of the net financial charges. A few points to mention, the cost of debt is slightly down despite a 25% rise in debt in connection with the Loro Piana acquisition funded at the end of last year, which formally benefited from lower interest rate obviously. The cost of hedging was a bit lower than last year and 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 dividend we received on our – holding.
Moving on to 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 represented 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 in cash, about 250 million more than last year. This comes mostly from an increase in inventory as well as decreasing payable which is normal at the end of the year but its 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 the 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 was usual in the first half of the year while 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 the total shareholder liquidities.
I will now turn to Chris who’s going to review the main developments within our various business groups. Chris?
Thank you Jean-Jacques. I will turn 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 of the destocking by distributors in China, following the anti-extravaganza measures being taken there and by the impact of the strong Euro. Consequently this group saw a 1% decrease in organic revenue growth on a reported basis, taking into account the negative currency impact. Revenues were reported down 7% at €1.677 billion compared to €1.705 billion in the year ago first half.
Looking at the two main categories in the first half of 2014 Champagne and Wine organic revenues grew by 6% but after a negative 6% currency impact, reported revenues fell only slightly to €723 million compared to first half of 2013. For Cognac and Spirits, organic revenue declined 7% and after a 4% negative currency impact, reported revenue was €954 million compared to $1.68 billion in the year ago period.
Profit from recurring operations for this business group declined 15% to €461 million for the first half of this year. Breaking this down, Champagne and Wine stood at €152 million in profit while Cognac and Spirits contributed €309 million for the first half. This 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 price and mix being very similar. During the first half in particular the prestige cuvees continued their solid development and on a geographic basis, the group saw good performance both in Asia and in the U.S.
For wine specifically the solid momentum underway at Chandon was offset by the negative effect of the depreciation of 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 have seen in the first quarter, the good momentum continued in the U.S, in particular for the VS. However china continued destocking by distributors of the VSOP, X.O and Super Premium. Cognacs as I mentioned continued 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 desirability of its Wines & Spirits brands. This will be achieved through delivering ongoing product innovation in order to maintain the loyalty of existing customers and to attract some new ones as well 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. Taken 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 & Leather goods brand, this group saw a 4% rise in organic revenue in the first half of 2014. After 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.
Profit from recurring operations was about flat for the period year-over-year at €1.487 billion. It’s clear that the strength of the Euro has had a significant impact in the period and this also reflects continued investment being made to support the growth of brands of the highest potential in the group’s portfolio. As Jean-Jacques mentioned, Marc Jacobs is an example of a brand going through a strategic reshuffle.
It is also important to note that the operating margin at Louis Vuitton remained stable in the first half of the 2014.
Turning now to the highlights for the Fashion & Leather goods group in the first half at slide 18. I begin with Louis Vuitton where the brand’s enhanced focused on ensuring the highest quality in terms of products and the brand experience is achieving the desired results.
In the first half of the year it was clear that the brand is benefiting 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 beloved Monogram collection and a very positive reaction to Nicolas Ghesquière’s first show which was reported on in the media with enormous enthusiasm around the world.
I will now speak briefly about some of the developments at other group brands. Fendi saw a significant growth in its leather goods lines due to success of both its new digital – and its iconic Peekaboo and Selleria lines.
Céline continued its wonderful streak since Phoebe Philo’s arrival 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 strengths of this iconic Italian brand.
And at Berluti, the positive momentum continued driven by exciting advertising and marketing to highlight the extraordinarily crafted products and new flagship stores which opened to great buzz in Milan and New York.
As you look ahead, please see slide 19. There are very compelling initiatives underway to continue the momentum across the group’s Fashion & Leather goods brands. At Louis Vuitton, work will continue to further the qualitative development to 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 collections 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 a significant attention. Loewe will hold the first show its women’s collection designed by JW Anderson which is highly anticipated in the fashion community.
Givenchy would expand its retail network with new store locations in Miami and Asia and I should also mention, beginning in September Philippe Fortunato will assume the CEO role of Givenchy after having served most recently as the Head of Louis Vuitton in North Asia. At Givenchy he succeeds Sebastian Suhl, who will assume the CEO role 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 collection 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 the first half of the year, organic revenue rose 6% after a negative 4% currency impact which translated into a 2% rise in reported revenue of €1.839 billion. The profit from recurring operations in this business group rose 2% in line with published revenue and reached 204 million.
Now, 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 from its exceptional fragrances J’Adore, Miss Dior and Dior Homme. At the same time, the Dior Addict 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 is delivering good performance in first half. The Benefit’s innovative eyeliner they’re real! Has been very well received 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, the Perfumes & Cosmetics group, see slide 22, in short the group’s goal is to the 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 a 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 makeup at Chartres to support ongoing innovation and growth as well as the roll out of the fragrance [Idylle] launched in the first half.
Givenchy will launch a new women’s fragrance Dahlia Divin and Fresh, Benefit and 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 reported basis and after taking to account the negative 4% currency impact, revenue is down 1% to €1.266 billion 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 in the first half of the year. This decline reflects most significantly an impact from the strength 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 to the brand’s strategy to further develop its clientele in order to fuel continued growth over the long-term. Over the first half, across the brands, 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 brand and further develop the iconic designs of products for which they are well-known known.
Among other exciting initiatives, 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 the negative 5% currency impact, reported revenue rose 4% to €4.382 billion in the first six months of 2014.
Profit from recurring operations in this business group declined 3% to €398 million while Sephora – Sephora’s first half was solid. DFS’s margin was impacted by product mix and rising occupancy costs in airports effort as far 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’ll start with DFS, during the first half, this business benefited from those continued growth of tourism among Asian clientele. Although this was somewhat offset by the impact of the weak Yen on Japanese travelers in particularly the Gallerias in Macao was strong performance.
Profitability at DFS was however impacted by costs associated with the expansion and renovation of several airport concessions as I mentioned, all of which are very well worthwhile longer-term investments. Finally on DFS, I should note that the roll-out of the T Galleria brand and visual entity is going very well and continues the pace.
Turning now to Sephora, this business continues to be a star delivering market share gains in all key regions. In particular Sephora saw 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 offer their clientele highly innovative, exciting brands and products. In the first-half of the year this included the global roll-out of two exclusive brands Marc Jacobs and Formula X. And as in the past Sephora’s online business continues deliver rapid growth.
Finally I will now discuss the outlook for selective retailing. The focus will be on continuing to strengthen its leadership in the Asian market. This will include renovating the Chinese airport concession in Singapore which was recently renewed. DFS will also start to deploy its loyalty program Loyal T and launch a multimedia, multi-channel advertising and marketing program to develop and to drive the excitement.
As 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. We’ll also work to expand, it’s a new market; it is including Indonesia and others. And finally Sephora will continue to focus on innovation in digital and mobile technologies where it’s an established leader in the retail sector.
With all of that I will now turn the call back to Jean-Jacques, for a brief wrap-up before we take your questions. Thank you.
Thank you, Chris. I will finish the first part of the presentation with a brief overview of the activity and a few comments on each one’s performance, highlighting the most significant ones. First and foremost, I would like to stress the negative impact of currencies which has negative impact of 9% on our operating profits.
Secondly most of our markets are experiencing modest growth which reported previous point on the currency impact managing measures to offset negative currency is not 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 is flat and emanates to control a [carniac] situation in China organic growth is in line with last year’s market.
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 gave you some points which we view as important first and again currencies, what can I add to what I have already said.
Secondly [carniac] where we expect the Chinese situation to normalize later this year which we make visible, the stronger advances of tenancies throughout the world particularly in the U.S. and the ex-China, Asia. Certainly you will see our product line is strong for the second half and combined with innovative marketing initiatives this would support the business. So that is basically all we wanted to say and we shall now open the Q&A session. Thank you.
(Operator Instructions) We have a first question from [Tomas] of Citigroup. Please go ahead.
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 6x 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’ve got quite a few product launches.
Secondly on [carniac] one of your competitors recently estimated the depletions for the category in China improved to single-digit negative in the second quarter. With a modern and trade up slightly can you explain what the situation was in Q2 at Tennessee when do you expect depletion to recovery and ultimately your shipments to China to return to positive growth.
And lastly on the Chinese plant Tele Vuitton in April Jean Jacques you mentioned that there was an improvement in domestic demands in mainland China, resilience in Chinese tourist demand elsewhere can you tell us what trends you’ve seen at home and abroad in Q2 and also whether that crack down I’m gifting is still in a year or two affecting you. Thank you.
Okay. Thank you Tomas. So starting with fashion and leather and your question about what happened in all the regions and Japan. I would say the U.S. was a bit better than in the first quarter of the year. Europe was more or less inline while Asia as a whole decreased quite significantly in its growth level. Second question on [carniac] depletions I quite agree with the comment I mean what we see on depletions is low single-digit negative and as you suggested in some segments of the market particularly the modern and trade we some very significant improvement and some strong double-digit growth, it’s a very contracted situation but thus far as sell outs so depletions are concerned we see a very marked improvements compared to last year.
One point to bear in mind is that this growth rate depend very much on the assessment of what the depletions were at last year. It’s not that easy we had a few surprises there it’s not easy to assess exactly what was depleted last year and the level of inventory in the system. Assuming our analysis is good and we expected to be accurate now and low single-digit decreased in depletions. Obviously it will take a little bit of while for selling numbers to coincide with these sell out numbers, we as you know we exceeded by a fairly large extent the amount of sell out last year I mean our selling was significantly higher than our sell out numbers last year hence a buildup in inventories, and we have to reduce this inventories. This is currently being implemented explaining why the numbers are what they are in each one of these [carniac] but it’s not over yet and we expected to move and unfold again in the second half of the year. And it would not be before Q4 and probably at the end of Q4 that the situation will be normalized.
The Chinese clientele yes we were not so optimistic but we saw better numbers for Q1 unfortunately as far as Louis Vuitton and its throughput some other brands as well. We saw a little bit of decline both domestically and with tourist in the second half of the, in 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.
The next question is from [Andre] from HSBC. Please go ahead.
Hi it’s [Andre] from HSBC. Three questions. First to refer out on the previous question. I think you should look at special level loan, the gross fund from 920 so if we assume that Japan was have an impact on suite of [inaudible] can you explain maybe what this deal sort of – I think you mentioned China being softer some of your competitor mentioned that softness in Hong Kong situations since May as what the situation in Hong Kong for Vuitton and also – or maybe DFS.
Second question is on the margin side, on fashion and leather, I think you said Louis Vuitton flat margin is at consent ForEx or is it also after including the quite significant FX impact or maybe acquisition were on the evolution of the margin of the other [inaudible] aside obviously the integration of [inaudible]. And then finally I was a bit surprised by – I think the division EBIT I understand the effect impact [inaudible] quantify what was the FX impact or maybe other factors and moreover do you expect this to improve in the second half? Thank you.
Thank you for your three questions. So on fashion and leather you pointed out rightly that Hong Kong is a bit difficult to exceed it’s very strong first quarter in Hong Kong and since then particularly after May the level of business for various reasons some of them being connected with a little bit of political unrest there, we’ve seen the level of business slowing down markedly. So Hong Kong explains also why Asia has been slowing down in Q2 compared to Q1 is also a little bit the case for Macao 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 tourist are reluctant to travel to Singapore and to Thailand which was sort of classical route particularly for Malaysia.
So it’s throughout the region we have seen some weakness in fashion and leather and with an exception to that and we’ve seen some slowdown I mean DFS was close to double-digit growth in Hong Kong in Q1 and was few single-digit points up in Q2 so also slowdown at DFS in Hong Kong in Q2.
As far as margins are concerned with Vuitton its Euro margins we have the same increases, and some changing in sales and operating profit so it’s not excluding ForEx. As far as watches and jewelry decline is concern yes where you mentioned FX which has a negative impact but 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 other divisions of this impact was quite dramatic for watches and jewelry.
We also had one of restructuring cost that TAG Heuer connected with reorganization of production lines for about exchange EUR15 million to EUR20 million. We are talking about significant adverse impact which explains why the operating profit for the division is down about 30%.
Okay. And maybe just I know just ask about the other and fashion and leather brand or maybe just a follow-up on the Hong Kong obviously I mean you mentioned that the slowdown started only in May, so I guess July was probably on the same side and do you expect this to be a short-term phenomenon or that after a while and either the Chinese tourists will be patrolling elsewhere or what’s your first analysis of this trend that I understand that is quite different?
Well it’s quite – sorry I don’t know to give you a little bit more color on these. It’s not that easy to analyze I mean what we see is actually traffic increasing but the level of business done with one single client being lower than what it was. So basically what we see is a change and according that is changed in the business, we do so more people in the stores with buying less. It’s exactly the opposite, so from what we saw last year following the implementation of the new regulations regarding travel from China. So it’s’ quite expected, we were not – 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.
We have our next question from Mario Ortelli from Bernstein. Please go ahead.
Mario Ortelli – Sanford C. Bernstein
Hello Jean-Jacques. Two questions from me. The first one is about margin cuts. You told about a strong investment in Marc Jacobs, what are the plan of the company on that brand and what are the target of that you have in mind also because you have put one of your most experienced manager at the company quite recently. The second one is about Louis Vuitton, you mentioned new models in leather goods lines for the next month, if you can give us a bit more visibility regarding these new product launches and which you thought or do you think these will work on the face of Vuitton? Thank you.
Well, I’ll be pretty short on the second part of the question I mean this is some of the developments releasing at the end of H1 particularly on advertising you have seen the lockets being introduced fairly recently. Some of the developments will take place in the course of H2 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 have seen on the Runway shows earlier on this year that will be in the stores. So that’s why we feel that our products 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 a very well positioned brand in the contemporary segment and we expect to develop it much further. This is the reason why Marc decided to give out 100% of his time to his brand. So this is very important move and following this move we have also as you mentioned appointed and new experienced and talented manager at Marc Jacobs obviously we need to make some revisions as to retail, wholesale and product policy which is currently being implemented and which is having some impact in the short term on profit but definitely we are doing that with in mind the medium to long-term development of the brand. So we shall probably be a little bit under pressure for the second part of the year as we are incurring larger costs on a few things and getting some businesses here and there, so it has some impact on the profitability. But definitely this is with the – you have to keep in mind to really develop in and out to weigh this very exciting business.
Mario Ortelli – Sanford C. Bernstein
Just some clarification. These are focus on the contemporary segment. Can it be probably used those to relaunch Donna Karan that is the same is leading brand in your portfolio?
Well it’s also a very exciting brand. A brand we are not yet very – we are not advancing off to people to make any announcement as of today but we are working on this as well.
Mario Ortelli – Sanford C. Bernstein
We have a question from John Guy from Berenberg. Please go ahead.
John Guy – Berenberg
Good afternoon Jean-Jacques and Chris. Couple of questions from me. 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?
My second question is around Loro Piana and the development there that you’ve seen in the first half of the year. I mean if we’re looking at the sales and EBIT development my –sort of in the ballpark thinking that Loro Piana has generated just over $360 million in ton of averages over 60 million in EBIT.
And also finally with regards to the watches and jewelry category. With regards to the infantry position that you are seeing at the moment I appreciate that and it’s always a little bit tougher for the TAG to operate in some of the Asian markets but with regards to infantry 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.
Okay. So on the pricing for LV thanks for your questions 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. So that were the main price increases that we implemented throughout the first half at Vuitton. On Loro Piana, well the numbers are a bit different from the ones you mentioned it’s about EUR350 billion.
Sorry, EUR330 million in sales and the operating profit was EUR47 million or EUR48 million. You can get that from the various indications we made in the presentation the old perimeter impact comes from Loro Piana.
Finally on watches and jewelry the inventory situation. I think the inventory situation is a bit complex. I mean 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 and there are 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 purchase of TAG Heuer’s product. With the consequence of retailers not buying fast movers and not buying products that sell when 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 do in H2 to correct the situation because we are in a 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 their shelves. So it’s a little bit of a tricky situation that explains why the business has been under a real pressure in the first part of the year, not only from the sales viewpoint but obviously from a profitability viewpoint.
John Guy – Berenberg
Okay. Great. And do you have any idea or any sort of visibility at the moment as to when you think this going to start to turn I mean certainly within a broader perspective in Asia, the heavy export comscade and loss of the running insurance in the second half of the year. I just wondered 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 fashion and leather brands and Fendi, Celine et cetera and with some of the planned extensions in retail and the expectation in 2014 was that they would be effectively margin mutual is that what you still expect to see? Thanks.
Yeah. The answer is yes on your last question. We see some developments at Celine, Fendi, which are I mean both are growing fast and with stable or slight 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 with Kenzo and Givenchy. So we have a few improvements there. Sorry, I miss your first question – sorry.
Turnaround in Asia.
No, the turnaround for watches is to take. Well it’s a difficult question obviously it deepens a little bit on the strengths, the underlying strengths in the market as you well know in 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, others taking the obvious but it will quite – it would take might 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 it was in the last year.
John Guy – Berenberg
That’s fantastic. Thanks very much.
The next question from Luca Solca from Exane BNP. Please go ahead.
Luca Solca – Exane BNP Paribas
Yes, hello Jean Jacques. Hello Chris. It’s Luca Solca from Exane BNP Paribas. I am wondering if you can 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 to 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 has been – and momentum has been strong, is there a similar pick up on the part of consumers and in what geographies do you see that 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 offsetting ForEx pressure in an environment where demand is viewed 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 there were press reports about say for which is developing very well but apparently losing share in some developed markets in Western Europe most relatively France, I wonder if you have any comments on the market trends that set for us and your future ambitions for this? Thank you.
Okay. Thank you Luca. 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 I mean our business is also a function of demand and demand is what it is today. So, it’s quite difficult, one can be optimistic about the – and demand improving in the future particularly in Asia where it is a little bit under pressure and with product and marketing initiatives we expect to be in the position to benefit from that but the reality for the timing is that we don’t see a major improvement in demand.
As far as Vuitton is concerned I mean it’s not two months process what we explained last year as to what our product strategy and introduction of soft leather line and the need to improve the mix that as 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 and the demand is not helping very much. I mean definitely the numbers will be better if and demand was stronger against reaching the obvious. But thus far and the reception to our new product lines is concerned it’s definitely going according to our plans.
Third, question on significant cost action in H2. As you know we are not great fans of slashing costs hastily and putting the various brand slight down I mean we are progressively curving the growth rate in cost particularly in selling expenses which is not done in 10 minutes so as we take commitments to open stores way in advance of opening them. So, it’s happening, the only thing I can say is that the growth in operating cost in the second half of the year will ex-currency will be lower than what it was in the first part of the year.
Finally your comments on second half. I have seen the article I mean I don’t really know what they are talking about I mean as far as Prestige Cosmetics is concern which is our business we are not in the business of much cosmetics, we are not the business of pharmacies; we don’t know what it is about. As far as Prestige Cosmetics are concerned we are definitely gaining market share. We are the first in France with market share which is higher than 30% excluding exclusive products and [inaudible] brands, so it means that our market share overall is even higher than that. We are pretty pleased with this market share which is growing and has been growing year-after-year for many, many years.
Luca Solca – Exane BNP Paribas
Thank you very much.
A question from [Adamine Dementi] from Raymond James. Please go ahead.
Hi, good evening. I have three questions please. The first one on session and these good on the zero percent growth in Q2 can you may be split between the retail and wholesale growth?
The second question is on Japan, on the minus 11 that we saw in Q2 can you also speak months-by-months and did you see a recovery in June? And finally, can you maybe update us on your hedging rate for the dollar and the yen? Thank you.
Okay. So, first question on the retail wholesale is obviously x Vuitton which is 100% retail. So – we – our figures for wholesale were flattish to a bit negative while our numbers for retails were close to mid-single-digit so, they were not dramatic in other word.
Jump on months-by-months so you see 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 and better number in June. Bear in mind nevertheless as far as June is concerned we had the price increase of the significant amount last year on the 1st of July at Vuitton. So, that numbers for Vuitton in Japan in July 2013 – in 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% up to 140. For 2014, more or less 100 position is hedged now at 132 for the Dollar and 127 for the Yen.
Thank you very much.
A question coming from [inaudible] from JP Morgan. Please go ahead.
Greetings. Yes good evening sorry. Yeah, I have three questions as well as the first one is on Louis Vuitton in China, you mentioned these slowdown in Q2, I was wondering whether you could shed some light as to why this could be the case in your analysis because we are – efforts going on in Hong Kong but China it was some kind of the impression as further deteriorated saw so much obvious.
My second question is on every margin. I am presently surprised that they are flat year-on-year including currencies so, could you tell us what you’ve been doing maybe on the cost side that leads to that? And my third question is on DFS last year you had taken on the Hong Kong concession which had a negative impact we were expecting an improvement this year, the first half is challenging, what should we expect for the remaining of the year? Thank you very much.
Well I wish I knew the answer to the first question. I mean the growth rate of LV in China is lower in Q2 than it was in Q1. Frankly it’s quite difficult to explain I mean giving you a precise explanations on a few percentage points lower, higher quarter-after-quarter always a very challenging thing for me. I could provide you some sort of micro explanations such as [inaudible] some measures impact and the type of things, the 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 have. 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 that margin what that we’ve done, we have done a few things. We have controlled in a very strict way the cost increase through – for all the components we’re selling marketing and admin. Margin improved – 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 in 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 combination of all these factors which explain why the margin square flat at Vuitton.
Finally, DFS. The airport business in Hong Kong recovered sharply in the first part of the year, we are still losing a bit of but a few millions of dollars so it’s got quite a good improvement. It’s really the rest of the business where we had two big factors. One is that the category growing the fastest is by far watches where gross margins are on average 10 to 15 points lower than the rest of the business. So 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 as the same magnitude. And second thing, as you know we have renewed a few important concessions in airport 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 little bit under pressure, is not losing money hardly making any profit and this is impacting the P&L. The second point was definitely budgeted while the first point is a little bit of a negative surprise for us in the first half.
So as a follow-up did you say that watches were the best performing, is that what you said?
How are you saying in the context of what we are seeing in generally in watches?
Well 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 DFS.
Okay, perfect. Thank you very much.
We have a question from [Rogerio] from Credit Suisse. Please go ahead.
Hi, thank you for taking my question. Jean Jacques, could you comment on demand trends you saw in France in Q2 for LV and your main business? And then also trends in other key European markets like Italy, UK and Germany? Will be appreciated. Thank you.
Thank you. Well the luxury market for France is no exception to what’s happening for France as a whole. I mean it’s basically well under the rest of Europe we have seen stronger numbers for Spain, for Italy I mean for the south of Europe obviously we decreased sharply over the past few years so it’s more a recovery than pure growth. Germany and the UK are doing okay and France is a little bit under pressure, the domestic on-base is not showing any growth and we are also suffering from the fact that the Japanese customers, which used to be doing a large portion of the business for instance as Vuitton are dropping by again 20% or 25% so, this is exerting some pressure on the business.
Overall boost 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.
And Jean Jacques the business of the Chinese and France holding up well in Q2?
The growth is lower than Q1 but its holding-up, yes.
Thank you very much.
We have a question from [Melanie Fruke] from JP Morgan. Please go ahead.
Yeah, sorry it’s me again. I was wondering whether you could talk a bit about the monogram clearly have done pretty well in quarter one seems to have an impact in margins. What do you expect in the second half because I was under the impression there were some [inaudible] the monogram coming after because of the 100 on industry. So are we going to see the elevation sort of more moving into next year just by virtue of the anniversary of the brand? Thank you.
Well, monogram did well as we said in Q1 but also in Q2 which was not surprising, it was expected but which is more significant in my view 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 [inaudible] last year, the [Montaine] this year all these products are doing are doing very well and we are quite hopeful for the rest of the year.
And so we shouldn’t really expect a big shift in mix this year, right? Given the success of monogram since beginning of the year?
Overall we nevertheless get to fastest faster growth and the larger share for leather products than we have for the 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.
There are no more questions for the moment.
Okay, so this ends the – this conference call for the first half of the year. I have no particular closing remarks to make. We already sum up 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.
Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect.
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