LVMH-Moet Hennessy Louis Vuitton's (LVMHF) Management on Q3 2016 Results - Earnings Call Transcript

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LVMH-Moet Hennessy Louis Vuitton (OTCPK:LVMHF) Q3 2016 Earnings Conference Call October 11, 2016 9:00 AM ET

Executives

Chris Hollis - IR

Jean-Jacques Guiony - CFO

Analysts

Louise Singlehurst - Morgan Stanley

Luca Solca - Exane BNP Paribas

Thomas Chauvet - Citi

John Guy - MainFirst

Hermine de Bentzmann - Raymond James

Mario Ortelli - Bernstein

Warwick Okines - Deutsche Bank

Antoine Belge - HSBC

Rogerio Fujimori - RBC Capital Markets

Melanie Flouquet - JPMorgan

Oliver Chen - Cowen and Company

Operator

Welcome to the LVMH Third Quarter Revenue Conference Call. I will now hand over to Mr. Chris Hollis. Sir, please go ahead.

Chris Hollis

Hello, thank you, Julie. I am Chris Hollis, Director of Financial Communications at LVMH and with me Jean-Jacques Guiony, our Chief Financial Officer. Thank you for joining us today.

We have some brief remarks to make about LVMH's revenue for the third quarter and our first nine months of 2016. As in previous periods, these revenue figures have reported in accordance with International Financial Reporting Standards, IFRS. After these remarks Jean-Jacques and I will be happy to take your questions.

Now before I begin, I'll remind you that certain information to be discussed on today’s call is forward-looking and is subject to important risks and uncertainties that could cause actual results to differ materially. For these I refer you to the safe harbor statement included in our press release.

Turning now to our third quarter and nine months revenue announcement, hopefully you all had the chance to read our release, which was issued yesterday evening in both French and English and as always, the release is available on LVMH's website www.lvmh.com as are the slides that we're using to guide today's conversation. So turning -- with that, let's move on to the review of the business.

We're pleased with the Group's performance for the third quarter, which was quite solid with organic revenue growth exceeding the first half of the year. This can be attributed to range of factors in terms of both geographies and brand strength.

Specifically we saw accelerated growth in Asia with the exception of Japan and continued good momentum in the U.S. and Europe outside of France. Both Japan and France were impacted by lower tourism or be it for different reasons or rather lower tourist spend.

Regarding the business for its wines and spirits, continued it's good momentum with strong performance in the U.S. and improvements in China. In fashion and other goods, Louis Vuitton turned in a very good performance, thanks to the appeal of both its iconic lines as well as new products. This includes the Louis Vuitton fragrances, which were off to a promising start.

While the repositioning of Marc Jacobs brand is moving along with the first collections being received now in the stores.

On the Perfumes & Cosmetics front, Parfums Christian Dior continued its strong performance driven by its ongoing innovation, hugely embraced by custom consumers and continued to gain market share and other highlights include market share gains at Bulgari and the successful refocusing of the cool iconic TAG Heuer alliance. Once again Sephora delivered an excellent performance, while DFS continues to be impacted by the tourism trends in Asia.

Looking now at the evolution of our revenue in 2016, this is Slide 3 as I mentioned, we've seen an improvement versus earlier this year as our first half saw organic sales growth of 4%, while our third quarter was up 6%. This is an encouraging performance, which reflects the resilience of the group's brands and their ability to adapt to the headwinds impacting the overall industry.

For the third quarter, after taking into account a negative but reduced impact from currency of around 1% as well as the positive 1% perimeter impact relating to the Parisien integration published sales were equally up 6% compared to the same period last year. And for the nine months, organic revenue was up 5% and reported revenue were up 4%.

Turning now to Slide 4, which shows the group's revenue in Euros by region over the last months, Asia including Japan represented 34% of our business. Europe including France represented 28%, the U.S. 26% and the balance of 12% from other markets. The healthy geographic balance, which allows us to adapt to the more volatile touristic flows we have experienced recently.

As you'll see on Slide 5, Asia outside of Japan, strongly rebounded in the third quarter driven by all business groups. The U.S. excluding Hawaii remained strong up 6% in the quarter and 7% over the nine months. Europe outside of France improved slightly over the period to 6% in the quarter versus 5% for the nine months and Japan was very challenging industry-wide.

The month's tourist numbers are growing. They're spending much less due to the strengths of the Yen and the stricter importation controls in China. Breaking down our organic revenue growth in the nine month period, you will see the most improved business groups in the third quarter were fashion and leather goods up 5%, selective retailing up 8% and Perfumes & Cosmetics up an impressive 10%.

Both Wines & Spirits and Watches & Jewelry remained positive at 4% and 2% respectively and now let's go and look at the business groups in more detail, so with this Slide 7.

Starting with Wines & Spirits, organic revenue was up 7% for the nine month period. Reported revenue in this group was €3.3 billion compared to €3.1 billion in the same period last year or up 5% after taking into account a negative 2% currency impact.

For the third quarter, Wines & Spirits' organic revenue grew by 4% compared to the year ago period and after taking into account a negative 2% currency impact, reported revenue rose to €1.2 billion.

Breaking this down now for the first nine months of the year, champagne and wines delivered 6% organic revenue growth compared to the same period last year. After taking into account I think it is 3% currency impact, reported revenue reached €1.4 billion or up 3% compared to last year. In the third quarter, champagne and wines organic revenue grew by 5% compared to the same period last year.

Now moving to Cognac & Spirits, organic revenue for the nine months grew by 8% compared to the nine month period in 2015. And after taking into account a 2% negative currency impact reported revenue reached 1.9 billion in revenue. For the third quarter Cognac & Spirits organic revenue grew by 2% compared to the same period last year.

Now I'd like to spend on these numbers by turning to Slide 8. Champagne volumes increased 3% in the first nine months going to solid growth in the U.S. and Japan and the good performance of the prestige cuvees. Hennessy had a positive performance from Estates & Wines.

With respect to cognac, we are pleased to see volumes rise by 9% in the first nine months driven by solid performance in the U.S. and an ongoing rebound of consumer demand in China. Organic growth in the third quarter was however impacted by the termination of our contracts to the distribution of Glenmorangie in June which had an impact of about five points on the Cognac & Spirits' organic revenue growth in the third quarter. Glenmorangie and Belvedere continued to perform well.

Turning now to Fashion & Leather Goods, revenue was up 2% on an organic basis for the first nine months of the year. Reported revenue was up 1% almost €9 billion from €8.9 million in the same period last year. This includes a 1% negative currency impact. For the third quarter specifically reported revenue was €3.1 billion reflecting a 5% increase in organic revenue and a 1% positive currency impact.

Slide 10, as always Louis Vuitton contributed to this strong momentum and acceleration in Q3. The success of both its iconic lines and new models continued and as you may know, in September in a limited number of stores, the brand introduced its new collection of seven perfumes which were off to a promising start.

Louis Vuitton also introduced in the third quarter new horizon Rolling Luggage designed by Marc Newson. Looking at the other fashion and other goods brands, Fendi delivered excellent performance driven by the creativity behind its new product and the fashion show hosted at the historic Trevi Fountain was exceptionally well received.

Céline continued to make good progress in its shoes and accessories lines and the brand reopened its renovated Milan flagship location on the Montaigne in July showcasing a new store concept.

Loro Piana also unveiled the new store at the Paris flagship last months on Avenue Montaigne and the brand also became the official supply of the European team for the two upcoming world cup matches.

Kenzo, Loewe and Berluti saw solid growth so far this year, while Marc Jacobs continued its brand repositioning initiative. Finally as you know, LVMH agreed in July to sell Donna Karan international to U.S. based G-III Apparel Group and that transaction is expected to be completed by the year-end.

On the acquisitions front I should note that last week the group agreed to acquire a majority stake in Germany as a global leader in high quality luggage. The transaction is an exciting one and expect it to close in January of next year once it's been reviewed by competition authorities.

Moving on to Perfumes & Cosmetics, Slide 11. Organic revenue grew 8% in the nine months taking into account the negative 2% currency impact, published revenue rose to €3.6 billion from €3.4 billion.

The 2015 figures have been adjusted to take into account the reclassification of Kendo Cosmetics Company from the Selective Retailing to the Perfumes & Cosmetics business group. For the third quarter, revenue in this business group was €1.2 billion with organic revenue up 10% over the year ago period and the negative 1% currency impact.

The Perfumes & Cosmetics business group clearly gained market share delivering the highest organic growth of all business groups with strong growth in perfume and makeup driven by Asia and the U.S. Louis Vuitton group inaugurated a new site dedicated to the creation and production of perfume at Les Fontaines Parfumees in Grasse, the heart of world's perfume capital situated on the French Riviera.

Looking at the specific brand, Parfums Christian Dior showed strong momentum and market share gains driven by the continued progress of J’Adore and Sauvage as well as the successful launch of Miss Dior absolutely blooming. As makeup lines also continued to make progress with the introduction of a new version of the iconic Rouge Dior lipstick, the brand also launched its skincare cushion named Dreamskin.

Guerlain launched a new fragrance La Petite Robe Noire intense and continued to see strong momentum in La Petite Noire makeup line. Benefit showed strong growth in its new Brow Collection. Givenchy turned in strong performance in makeup and Kenzo successfully launched a new women's fragrance Kenzo World. And lastly Make Up For Ever, Fresh and Kat Von D are all achieving rapid growth.

Moving on to Watches & Jewelry, Slide 13 organic revenue in the first nine months grew 4% for this business group after taking into account a negative 1% currency impact, revenue increased to €2.5 billion versus €2.4 billion in last year's period.

For the third quarter, organic revenue for this business group grew 2% of the year ago period with a positive 1% currency impact and this reached €877 million. This business group delivered market share gains across this Watches & Jewelry brands. In Watches, the refocus on TAG's core product range has been a success. The brand saw continued success of its new products in both its iconic lines and of the connected smartwatch.

Looking at the other brand, Bulgari also outperformed its peers driven by successful launch of the new Serpenti Seduttori line and the continued strong growth in jewelry, especially in China. At Hublot, the Classic Fusion collection performed well and at Chaumet we saw continued momentum particularly in Asia with its new Joséphine and Lien collections. Venice is undergoing some repositioning and Fred introduced a bracelet [indiscernible] in celebration of the brand's eight years anniversary.

Turning to the last business group, effective retaining organic revenue grew 6% taking into account a negative 1%. Currency impact published revenue increased to €8.3 billion in the first nine months of the year.

On the comments I made earlier about the reclassification of Kendo applies to the two 2015 figures here as well. For the third quarter, organic revenue grew 8% compared to the year ago period and taking into account a negligible currency impact, reported revenue also increased 8% compared to the same period last year and reached €2.8 billion.

Once again it's a tale of two different stories in this business group for the first nine months. Sephora delivered double-digit revenue growth as well as market share gains across all regions. In terms of online sales, the brand continued to see strong momentum in existing countries and expanded into new countries.

At the same time, the brand continued to expand its store network with notably the opening of the World Trade Center flagship location in New York in August.

Turning to DFS, the business continued to face challenging tourism environment in Asia in the first nine months. Despite this DFS opened, it's new T Galleria, on the Grand Canal in Venice to the major tourist destination in Europe and completed the expansion of T Galleria City of Dreams in Macau.

So to summarize, organic revenue growth that the LVMHF Group delivered in the third quarter of the first nine months of the year are up 6% and 5% respectively, demonstrate good overall performance in an unstable environment. In the context, we're very pleased that our business groups in all regions, all other groups and all regions, the exception of Japan, contributed to growth in the third quarter.

Looking forward, LVMH continue to focus on reinforcing its leadership position in the global luxury markets and globally in luxury goods markets. In doing so, we will continue to provide innovative high quality products to our global customers across stores around the world, but selectively expanding our store network and maintaining our focus on cost management.

Thanks and we'll now take your questions. Julie, do you want to open the line please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from [Joseph] from Morgan Stanley. Please go ahead.

Louise Singlehurst

Oh, hi that's Louise here from Morgan Stanley. Can you hear me?

Jean-Jacques Guiony

Yes we can, Louise.

Louise Singlehurst

Perfect. Good afternoon to you all. Couple of questions for me please. Just in terms of the Asian performance like Japan, can you give us a bit of color in terms of Hong Kong? I know you talked about that being down double-digits and Mainland China we know was beginning to improve with growth in the second quarter and I think you said that this improvement was broadly felt across all the divisions.

And my second question relates to U.S., can you just update us on the U.S. performance for Cognac? I think in July you indicated that inventory was at a fairly low level and what that means going to the second half and Louis Vuitton I think you said that U.S. we saw outstanding performance in Q2 where domestic consumption was up high single digits. Can you just comment on the performance in Q3, thank you?

Jean-Jacques Guiony

Thank you, Louise. With regard to Hong Kong and Mainland China, there was some improvement there, particularly in Mainland China. The global business for the Group improved markedly from mid single digits in H1 to mid teen in Q3. So about as I said a marked improvement.

More or less all businesses contributed to this improvement. More specifically on Hong Kong, there was also some improvement but Hong Kong is still staying in the negative territory. We were mid teen negative and we are mid single digit negative now. Also improvement across the Board, particularly as Louis Vuitton and DFS, but both businesses in Hong Kong are still negative.

U.S. Cognac is quite complex story. The business in cognac went down from being at about 20%. So a very strong growth in the first half of the year to being flat in the second part of the year -- in third quarter of the year and big part of the explanation is that we had the termination as Chris mentioned, we had the termination of the Glenmorangie contract, distribution contract in the U.S., which had very big impact on the business.

Chris mentioned a 5% impact altogether on the Cognac and Spirit business, for the cognac business in the U.S. alone where all the impact was felt, it was about 12% to 13%. So it was a pretty significant number.

So if you take this out, obviously the business in Cognac in the U.S. slows down, which is quite normal bearing in mind that last year our comparison base was extremely strong in Q3 in the U.S. I think the business was up something like 30%. We built inventories for the yearend, which is not the case this year.

We have pretty low levels of entries within the distribution system, more or less half of what we had in the same period last year. So comparison base first half and if you take out the Glenmorangie impact, you end up with the business growing about low double-digit, which is quite nice. We carry on with the strong momentum in the U.S. Depletions run in July and August at steady high levels. So nothing really to worry as far as the cognac business in the U.S. is concerned.

Finally you had a question on the LV in the U.S. As the growth was a bit higher in Q3 that it was in H1 single digit but very solid business in the U.S.

Louise Singlehurst

That’s clear perfectly. Thank you.

Operator

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

Luca Solca

Okay. Good afternoon. I was wondering whether you could give us some information about the Chinese nationals spending trends and if we have to interrupt this acceleration that we’re seeing in the third quarter, as a sign about the spend from this very important consumer group is improving. I remember that you said that as far as Vuitton is concerned, in the first six months of the year Chinese national spend was flat.

Second question on Sephora, which is continuing to be a strong value creation driver in your business, I’m wondering if on the back of consolidation in France and in the U.S. as competitors are growing stronger, if you're perceiving any sign of inflection in your space productivity trends and if you are perceiving that these two key markets getting any more difficult for you and conversely, if you are anticipating to address some of the blind spots that you had identified in the past, namely the U.K., Germany and Japan.

And last but not least, a question on your very recent acquisition Rimowa, I wonder if you are anticipating moving away from wholesale business model and developing more of a directly operated retail business model in order to create better value perception in the mind for consumers. Thank you very much.

Jean-Jacques Guiony

Thank you, Luca. So, first question on Chinese nationals, you remember well it was flattish in the first half of the year, in the first half of the year, Q3 was much better. It was low double digit. So we had -- we had good ground with the Chinese both at home and outside China.

So the question you‘re asking is actually the right one, but I may return it to you, the answer to whether this is a start of a new trend, I absolutely don’t know. We’ve seen in the past already some quarters in which the Chinese nationals were doing much better than in the preceding quarters and it was short lived.

I’m not saying it will be the case, but I’m not saying it won’t be the case and we really don’t know. So we are just experiencing much better numbers with Chinese nationals in Q3 that’s what I can say at this point in time.

Your question on space productivity in the U.S. and France, frankly no, we don’t see any declining productivity in both the U.S. and France despite the fact that we have a large number of stores in both geographies.

With regards to the untapped geographies, that you mentioned, U.K., Germany and Japan, we will think about it. Obviously we’re not commenting to details what we may have in mind because the competition would certainly want to know about this. So we're not going to comment on this particular point, but it’s something we are always looking at.

Finally your question on Rimowa in retail versus wholesale, the Rimowa business is already having some little bit of retail business. Its predominately as you said a wholesale business, but there is a little bit of retail operations in the main capitals of the world.

We think we can intensify this a little bit, but it will remain predominately a wholesale business with a few retail stores in order to enhance the major of the brand. So nothing really different from what has been gone so far by the current management team.

Luca Solca

Thank you very much Jean-Jacques.

Operator

And your next question is from Thomas Chauvet from Citi. Sir, please go ahead.

Thomas Chauvet

Good afternoon, Jean-Jacque. I have three questions please. The first one on Watches & Jewelry, could you provide a bit more color on this relatively soft performance by splitting watches versus jewelry? Is the Bulgari jewelry business still okay and if you strip out whole year what are you seeing in the -- in your traditional Bulgari and Hublot and other brands for the watch business.

Secondly, a follow-up on the Rimowa acquisition, what is the current operating margin? What are you targeting for that business in the medium to long term? Are you planning to -- do you see this brand as potentially having room to expand into new categories well beyond luggage and more generally on your M&A strategy, obviously your last sizable acquisition was Loro Piano in 2013, that was very high end brand.

Should we see the Rimowa acquisition as the opposite effectively as a way to gain more exposure to affordable price points as we're seeing trading down shopping behavior across many luxury categories and finally on the balance sheet, after the Rimowa acquisition would share buyback of €0.5 billion to €1 billion be a fair assumption that investors should keep in mind for the rest of the year, thank you.

Jean-Jacques Guiony

Thank you, Thomas. So on the Watches & Jewelry a little bit of softness you're right. We look at it watches versus jewelry. It's a bit of a product that our watch business does better than the jewelry business not in a big way, but that's a bit better. This is mainly due to the fact that TAG Heuer is doing quite well, has been doing quite well since the beginning of the year.

With regards to Jewelry, definitely Bulgari is slowing down of its proceeding extremely strong growth particularly in the first three quarters of 2015. This being said, you should look specifically at Q3, you have different trends at play in Bulgari. Watches are not doing well. This is not unique to Bulgari obviously in this industry with watches and into some form of pressure.

With regards to the jewelry business, we have really two different situations. The high jewelry business had to anniversarize some pretty high -- some big sales of last year.

So we have a business of high jewelry which is now in a big way in something like 40% to 45% in Q3. Obviously this is not a smooth business and you have some -- the road is always bumpy when you have to anniversarize some significant business of the preceding year, but traditional jewelry business is up double digits.

So we've seen the traditional jewelry business of Bulgari being better than in the first half of the year. Again I'm not sure it's a trend, but I'm just giving you the rough facts so that you can analyze them and draw your own conclusions.

As far as the operating margin of Rimowa is concerned, we think we have an objective of moving them out to something like 20%. It's not something that we will achieve in a couple of years. It's more a long-term objective, but from what we've seen and what we analyzed prior to the acquisition, we think this is achievable.

Obviously we are not there yet. We are quite far from that particularly having in mind that the company has embarked any recently on retail operations, which is obviously taking some toll on margins in the quarter and also that the company Rimowa expanded its production set up in Germany in the course of this year, which is not fully absorbed yet, in terms of volume. So the margins are quite far away from the 20% objective I mentioned.

In terms of M&A strategy, as you know we are opportunistic people. So when we see an exciting brand and we definitely feel that Rimowa is an exciting brand. We can buy it. Usually we try to do it on reasonably large acquisitions, but this one could become -- it's not a big acquisition these days, but it could become one in some years.

We think the brand is extremely promising. So that's the reason why we decided to make it, but this is not significant of any future trend of more or less M&A. It's purely an opportunity that we decide to take.

Final question on share buyback, obviously Rimowa acquisition makes things a little bit different from what we had anticipated. So we are currently reviewing our options from this. Nothing has been decided yet.

Thomas Chauvet

Thank you.

Operator

And the next question is from John Guy from MainFirst. Sir, please go ahead.

John Guy

Yes, good afternoon Jean-Jacques. I am asking Chris three questions please. Maybe if we just start with the Bulgari, Jean-Jacques you mentioned that you had a very tough comp base for high end jewelry for Bulgari down 40%, 45% for the third quarter. Could you just talk about the Bulgari comps in general during the third quarter, what type of comp base Bulgari was up against?

My second question with regards to Louis Vuitton, seeing the acceleration in the third quarter I remember recently you talked around price mix or pricing power of anywhere between 1% may 2% across a range of different categories.

So, less than to say the 3% to 5% traditional pricing power, could you break out may be the volume or value split within the growth that we've seen within Louis Vuitton in the third quarter?

And with regards to fragrance business, can you may be give us some idea as to what the contribution was? I’m assuming it was very small in the third quarter, but what the opportunity is given that you're going to roll fragrance out in selective stores across the direct in store network only. Is this going to be a potential 2% or 5% of sales type of business. Thank you very much.

Chris Hollis

Thank you. John. So your question on Bulgari if I remember correctly, the first three quarters of last year, the growth at Bulgari was in excess of 20%. So the comparison base was extremely demanding. It was not the case in Q4, where we had a much lower number, but the first three quarters of last year were extremely strong. We are -- and we slightly in this pretty tough comp base and its obviously particularly tough in Jewelry.

Hence we're pretty happy with the basic Jewelry numbers that we think we have to work a lot on the high jewelry business, which is really suffering probably for reasons connected with the Middle East situation where the break off of the business takes place.

LV price impact and modern region breakdown of LV growth, as we don’t communicate, LV growth is always difficult to communicate on the components of the growth. The question is as probably each time and each time I say the same thing.

What I can say about price is price was a very, very low contributed as the growth of Louis Vuitton has been a low contributor as a gross of Louis Vuitton since the beginning of the year and particularly in Q3. It was almost negligible. We did not pass in the recent months or quarters any price increase anywhere or hardly anywhere. A little bit in the U.K. to offset the drop in the Sterling Pound, but that’s about it. So, price impact on Vuitton's growth was quite negligible.

Finally on the fragrance business well, you got it right. It’s not -- it’s a strong contributor to the global business. It’s a small business and Vuitton is pretty big business. So obviously it doesn’t contribute much particularly having launched the business fairly recently, but as far as image and traffic generation is concerned, we think the fragrance business is exactly what we had in March. So we are very pleased with the first numbers and impact of the fragrance business at Vuitton.

John Guy

That’s great. Many thanks.

Operator

The next question is from Hermine de Bentzmann from Raymond James. Sir, please go ahead. Madam, please go ahead, sorry.

Hermine de Bentzmann

Good afternoon. I have a few questions please. The first one on the fashion and that's a good business, could you may be quantify the impact from the discontinuation of lines at the Donna Karan and Marc Jacobs in Q3 if there is any?

And my second question is on the scent growth from the American consumer, you’ve commented about Chinese that a comment about American would be nice. And lastly, could you give us a bit of color as well on the depletions you have in cognac in China in Q3, thank you.

Jean-Jacques Guiony

Okay. Thank you, Hermine. So the impact of Donna Karan, we will not communicate on Marc Jacobs as if you remember well, only Donna Karan is being sold not Jacobs. We intend to keep it as I said a few times.

So the impact from Donna Karan, which had -- which is suffering the impact of discontinuation of some lines of business as you remember was pretty significant. It's about limiting excess of 2% of the growth in the Fashion & Leather division altogether, not in the U.S. altogether for the third quarter of the year. So it would have been 7% a little bit in excess of 7% if Donna Karan had not been consolidated.

The second question you had on American customer, the American customer is in line for Vuitton obviously as we don’t measure it for other brands, but for Vuitton is in line with business of Vuitton in the U.S. We moved from mid-single digit to high single digit between H1 and Q3, so a pretty strong performance there.

And finally the depletions for cognac in China as far as V.S.O.P. is concerned, we were slightly positive same trend as we had since the beginning of the year and for V.S.O.P., it was less when I say stellar than in the first half of the year, but still positive in a very significant way. So overall, we still have a pretty good performance of both V.S.O.P. and XO in the first nine months of the year.

Hermine de Bentzmann

Okay. Thank you.

Operator

The next question is from [indiscernible] from Sociéte Generale. Sir, please go ahead.

Unidentified Analyst

Yes good afternoon Jean-Jacques and Chris. My questions have mostly been asked, but I have two remaining. To follow-up on Louis Vuitton, if we could have an idea of the European cluster, how it's behaved in Q3, European population? And secondly on beauty, I was wondering if you could elaborate on the factors of the revenue growth acceleration and what implications that could have on margin potential for the segment, thank you.

Jean-Jacques Guiony

Thank you, Jay. On the European customers which is across the Board, we've seen pretty strong numbers. In some markets like France for instance, as you know, the French customer is small compared to the impact of tourists, but anyway the French customer was pretty strong in Q3. Had been strong since the beginning of the year, which was particularly strong in Q3, high single digit. It's more as the same everywhere in Europe. Italy it is the same, in the U.K. it's exactly the same, in Germany as well.

So the volatility we may have or the change we may have from one quarter to another, usually comes from a change in the tourists impact as opposed to the local customers, who are growing steadily at a pretty high level and have been growing steadily at a pretty high level for quite some time.

As far as beauty is concerned, well we moved the business from -- it was I think 7% in H1 to 10% in H2. Yes this is better. It's quite difficult to comment on 3% acceleration where the ups and downs maybe Russian market is doing well, the French market is doing okay.

It's quite complicated to launches could have some impact as well and anniversary of some launches could also prove disturbing part Vuitton in all and the business particularly at Parfums Christian Dior is doing very well. Across the Board, I would say and it's really difficult to comment on any acceleration in Q3, the business has been reasonably healthy since the beginning of the year.

Unidentified Analyst

And on the margin maybe, some implications that high growth could have?

Jean-Jacques Guiony

Obviously it could help but I will not comment further on this. You'll see the outcome at the end of the year, I would say.

Unidentified Analyst

Okay. Thank you.

Operator

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

Mario Ortelli

Hello three questions for me and thank you for taking them. The first one is about the Chinese consumer, is the Chinese consumer sentiment is improving, the retail field businesses are growing the most in Chinese in Q3.

The second question is about the watch mark, do you see any improvement in the sellout of watches and the softening in the destocking policy of the wholesaler. And the last thing is about budgeting and how you guys are starting the budgeting process. Which are the guidance that you are giving to your business especially concerning cost controls, thank you?

Jean-Jacques Guiony

Could you possibly repeat the first question, the line was pretty bad I didn’t catch it, it was on Chinese consumer, what I catched?

Mario Ortelli

Yeah, don’t worry, it’s about Chinese consumer, you said that the consumer sentiment of Chinese is improving, which of your business has benefited the most, which of your businesses grew the most there with the Chinese consumer. Thank you.

Jean-Jacques Guiony

Okay. Well, the most exposed business with Chinese customer is the Jewelry business. So definitely Bulgari is the business, I’m not obviously mentioning DFS which does the Bulgari business with Chinese consumer, but it's the distribution business. So it's of a different nature and I assume that your question is mostly on brands as opposed to distribution activities. So its Bulgari and this respect, the Chinese consumer is doing very well with Bulgari.

So we’ve strong numbers in Mainland China and also obviously in Europe as the Chinese customers are down in Europe across the Board, but particularly in France, but even Hong Kong for Bulgari is showing some signs of improvement.

So all in all, we are quite exposed to that and then obviously the other big business is Vuitton, we do about small share of our business with Chinese customers and as I said before the Chinese customers well oriented for -- since the beginning of the year and particularly in Q3.

On the watch business and the sell-out improvement, it’s difficult to answer in a simply way. As far as TAG Heuer is concerned, we have no particular concerns with sell in and sell out. I would say sell out is commensurate to sell in and we didn't have any issue with inventory deal but it's more difficult to analyze in Europe, but we think we are -- we are a case.

All in all we don’t expect any issue coming from any discrepancy between sell in and sell out. So, the business is reasonably healthy from this view point. For other brands, it's more difficult to measure and as far as Bulgari is concerned, obviously a big chunk of the watch business has gone inside Bulgari. So the difference between sell in and sell out is not meaningful.

As far as marketing is concerned ahead of the budget season, obviously we are always cautious when it comes to budgeting and particularly of marketing, but bear in mind that marketing is something that is -- that we can adjust in an easier way then we could adjust setting expenses if we have decided to embark on a big store opening program. So, marketing is something with three months not as you can, you can cut or diminish in a fairly significant way.

So we are not particularly worried with marketing plans going ahead of us. If the business ends up not being as good as we expected at the budget time, it won’t be so complicated to adjust marketing budget, the level of the business. This is what we have been doing over the last two to three years and it's reasonably flexible.

Mario Ortelli

Thank you.

Operator

The next question is from [indiscernible]. Sir, please go ahead.

Unidentified Analyst

Hello, thank you very much for taking my question. I was wondering if you could give us a bit of clarity on the growth of Louis Vuitton in the third quarter in Europe and generally can we associate the level of growth of the fashion and leather to be roughly equal to that of Louis Vuitton? What was the growth of Louis Vuitton in Europe. Thanks very much.

Jean-Jacques Guiony

Well, I just said the growth of LV is usually close to the growth in the fashion leather division. This is true for Q3. If you obviously take out the impact, the negative impact of Donna Karan so, Vuitton is close to the extra Donna Karan number I mentioned before. I’m sorry….

Unidentified Analyst

You said 7% at Donna Karan right?

Jean-Jacques Guiony

Yes, that's 7% I mentioned yes. As far as Europe is concerned, Vuitton did a bit better in Europe than it did on average. We had a strong recovery of Vuitton Europe particularly in Italy and in the U.K. and in Germany as well. So Q3 was very strong for Vuitton in Europe with around double-digit growth, around 10-ish growth I would say in Europe in Q3.

Unidentified Analyst

But France was negative right?

Jean-Jacques Guiony

France was still negative, not as negative as it was in H1 but was still negative yes.

Unidentified Analyst

And what single digits?

Jean-Jacques Guiony

Yes it was single digit, and even we had our first positive months probably in the year in September, but it remains to be confirmed because obviously they are seasonal impact with Chinese travelers and Golden Week etcetera that are always complicated to measure. We did a little bit of analysis to really understand what's going on, but definitely it's getting a bit better in Europe -- in France although the numbers are still complicated.

Unidentified Analyst

Thanks very much.

Operator

The next question is from Warwick Okines from Deutsche Bank. Sir, please go ahead.

Warwick Okines

Yes hi Jean-Jacques and Chris. I've got three quick questions please. Fashion & Leather in Japan, I think in Q2 you said that it was mid single digit negative. I wasn’t quite clear whether that trend had persisted or maybe just got a bit worse in Q3, maybe you could clarify please.

And secondly at Vuitton when you look across the year-to-date, is there anything notable in the mix between soft leather and canvas moving one way or another or the two sides of the business growing at a similar rate?

And thirdly, you mentioned the first new collections are coming in at Marc Jacobs, could you just maybe update us where you are in the progress of the change in that brand? I am assuming that there is a continuation of the drag in Q4 and into next year, but just maybe some more clarification please. Thank you.

Jean-Jacques Guiony

Thank you, Warwick. So on Fashion & Leather in Japan obviously the situation did not improve from Q2. So we're negative mid-to-high single digit. Nothing really surprising there following the rise in the Yen and the difficulty for the Chinese clients in particular to bring back home some of the goods there both in Japan.

So definitely we have an impact on the Japanese market and it's subject to Fashion & Leather. I would say that the whole business you've seen the numbers for Japan. They are getting -- Q1 was okay. Q2 was starting to be pretty difficult and Q3 is obviously confirmation. It's the confirmation of the difficulty of the situation there.

On Vuitton soft leather versus canvas, nothing new there. As I told you, the canvas business is doing better than the soft leather, but it reflects also where we have good impacts in terms of novelties and creation and creativity. There is some big portion of the soft leather business of not being under -- not benefited from a big impact of novelties, it's particularly the case for [indiscernible].

So we have some negative numbers there, but I don’t think one should view, one should compare really a soft leather and canvas. It's really a global business and the business of accessories, small leather goods and leather goods at Vuitton is really doing very well and where we put the emphasis on new product and creativity, immediately we see a strong response from the client base and that's by far the most important one.

As far as Marc Jacobs is concerned, nothing really new to report. We are working in the plan we discussed and the strategy we discussed before. So nothing really different from what has been said. It's a slow process. We have to convince our customers that they should trust us again and that we have a strong value proposition. It won't take six months. It's a long-term effort and the business was down again in Q3 and it will be down again probably in Q4.

Warwick Okines

And thank you very much and Donna Karan, the drag in Q4, would that also be around 200 basis points would you expect?

Jean-Jacques Guiony

I don’t know.

Warwick Okines

Okay. Thanks very much.

Operator

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

Antoine Belge

Yes hi it's Antoine Belge at HSBC. Three questions, first of all on Rimowa, I would like to follow-up on what you said. So is it fair to say that the EBIT margin is actually in the low double-digits. And also what do you think that LVMH can bring to that company?

Is it just about acquiring a very first fast acquiring company or is it business which you think you can something that the company couldn’t do on its own.

Second question is on Fashion & Leather, I am not so sure I understand the 2% impact on Donna Karan because I think in the previous quarter it was 2% included and so Marc Jacobs something I understood as being like Donna Karan on 30% and Marc Jacobs may be down 10%. So now it seems that certainly Donna Karan accounting for the 2%. So could you clarify that?

And finally on the Koniac, that impact from the Glenmorangie contract, is it one-off for one quarter or is it something that will actually impact the next three, four quarters until you analyze that next year? Thank you.

Jean-Jacques Guiony

Thank you, Antoine. We have three questions, on Rimowa the question of what we will bring to the business I think it’s a fantastic business and the heritage of this brand is extremely strong. When you look at the business the way this is done in terms of product, in terms of distribution, I think the global group like ours could certainly bring a lot to the business.

So we’ve analyzed this. Obviously this is a competitive business and I don’t intend to disclose in details what we intend to do, but we’ve indentified with the existing owner and the existing management a few things, which are quite important that we will do together. So, it’s obviously continuation of the existing strategy, but it is also a few things that the strengths of LVMH not only from a financial viewpoint but also from a marketing and distribution viewpoint will help. So that’s what we have in mind but you will understand that there cannot be too specific on this.

On Fashion & Leather, the answer is that the 2% impact, it’s a bit more than 2% actually is Donna Karan. So just to be clear on this and as far as Glenmorangie is concerned, its not one-off, it will unfold over the next three quarters, probably at a lower level.

The Q3 numbers that we discontinued, the comparison base last year was quite high. If I look at the sequence of the various numbers, it was the highest of them, but nevertheless you can expect some further impact may be at a lower level, but some further impact in Q4, Q1 and Q2 of next year.

Antoine Belge

Okay. May be then just one follow-up on Rimowa, was -- can you indicate what is the amount of that within the company if any?

Jean-Jacques Guiony

It’s about €20 million.

Antoine Belge

Okay. Thank you.

Operator

The next question is from Rogerio Fujimori from RBC Capital. Sir, please go ahead.

Rogerio Fujimori

Hello, hi good afternoon. Jean-Jacques and Chris, I have just some question about Fashion & Leather and the shape of the quarter. Was September maturely different to the organic growth of 7% also Donna Karan and within the other non-Louis brands within Fashion & Leather, could you talk a little bit about the retail performance in the quarter?

And my third question is about eCommerce, should we expect eCommerce to be a mature driver for wholesale for some of your non-Louis Vuitton brands within the division? Thank you.

Jean-Jacques Guiony

Well, you are not too lucky with your question honestly Rogerio because it’s really a few things that we don’t really comment and answer. So I will not answer on September, giving three months numbers is already sufficient in our view, so that you can get a sense of what’s going on. It’s not that I don’t want to say, but there are always some specific events such as mid-autumn festival being at a different date or our Golden Week etcetera, etcetera taking place at a different date as well. So, it’s always very difficult to compare one month to another. So I will not comment on September.

On the retail performance non-LV which is the same thing, we don’t comment on LV. So we don’t comment really on the LV particularly having in mind that some brands there are some discrepancies between some brands. We mentioned some brands doing very well like Fendi, like Kenzo, or Loewe, some others are doing less well and some are being restructured as you know.

So the average of all this doesn’t make a lot of sense, but I can say that the trends that we've seen over the past quarters are still the same with the winners being the same and the ones under more pressure are being also the same.

Finally on eCommerce you know our feeling on eCommerce, which we don’t view in itself as a big opportunity. We believe very much in the digital content of the selling experience having in mind that more or less all our clients before shopping within our stores grow on the website of the brand before.

So basically we have to make a breach between the website and the store in a stronger way. So that's what we have in mind and we also believe a lot in e-marketing particularly on the full network. It was -- two years ago, it was not clear what we could do there, but now it becomes much clear.

eCommerce is obviously something we need to have. We need to offer the feature to our clients, but in itself we don’t expect these to become a big, big channel otherwise it would have be the case already I would say.

Rogerio Fujimori

Understood. Thank you.

Operator

We have a question from Melanie Flouquet from JPMorgan. Madam, please go ahead.

Melanie Flouquet

Yes good afternoon. I have three questions if I may. The first one, sorry again on Louis Vuitton weather could actually; China as well there an acceleration across national pretty much in quarter three. So what did you think you may have done that trigger these?

So you think it's just market conditions are better than expected then you highlighted a few initiatives that may have played in your favor in this quarter and how sustainable are they?

The other question is regarding the U.K. size and correct you've increased prices twice in the U.K. this year and once pre-Brexit, once after Brexit. What was the impact of these price increases on your underlying business?

And the last question is on cost control, the cost control at Louis Vuitton in general in Fashion & Leather was actually pretty good in the first half, certainly lower OpEx growth in the top -- actually before you were subjecting. Should we expect cost to go back up in the second half and to come back again basically not a big leverage up or can we be hopeful on margin, thank you?

Jean-Jacques Guiony

Thank you, Melanie. Well the first question is not something I would like to answer in the direct way. The answer is basically I don’t know. We always take initiatives, we always do things be it on the marketing side on the project side or on the distribution side at Louis Vuitton.

Some quarters are doing better than others. It's very difficult to make a trend from one quarter and it's very difficult to analyze. So definitely it's better that's pretty obvious, but the reasons for this cannot be attributed to one or two single initiatives that we have taken.

It is a full large number of initiatives that we have taken that explain this and I don’t know. The market is not all of a sudden getting very buoyant. It's still a very contrasted market from one country to another and from one week to another or from one month to another. So it's very difficult to say at this point in time.

As far as the U.K. is concerned, the impact of price increases was not felt I would say at this point before and after we get the same type of growth. So the impact was negligible.

So I think it's quite encouraging although we did not increase prices in a big, big way. The price increases were 5% if I'm not mistaken, 5% each. So it doesn’t affect too much the behavior of customers.

And cost control, you would be surprised if I was telling you that cost control is over and that we will increase cost, like margin in the second part of the year. So we keep on controlling costs. We will see at the end of the year where we stand in terms of margins. It's always very difficult in our business to make any forecast of this kind.

The only thing I can tell you is that we don’t intend to give up on controlling the cost of the business and it's maybe they will come a time when it will be important to invest some of the excess -- the excess in the business be it in marketing or in the distribution network, but not for the time being. So we don’t intend to change our -- the way we manage the business in the short term.

Melanie Flouquet

And just to follow up on the situation of the overall market, are you saying that if you look at the total of your portfolio because you have the best of portfolio of brands. So have you seen an acceleration in quarter three in the brands that are already doing well or pretty much for everyone?

Jean-Jacques Guiony

It’s mostly for the brands that are already doing well, Donna doesn’t mean that are not doing well, but nevertheless for the brands that are already doing well, we saw definitely an improvement which is not really surprising. Usually when a brand struggles they -- it does not benefit immediately from an improvement in the global conditions. It takes a little bit of time.

Melanie Flouquet

Thank you very much.

Jean-Jacques Guiony

May be one last question?

Operator

So the last question is from Oliver Chen from Cowen. Sir, please go ahead.

Oliver Chen

Hi, thank you. We had a question related to the United States' domestic customer. There has been a lot of anxiety around election fears as well as the market volatility. It sounds like you’ve been pretty happy with the U.S. customer, but if you could elaborate there.

And then congrats on the Rimowa deal and the success you’ve had with the four-wheel luggage. Do you see a lot of the Rimowa technology, their pioneers and the four wheel innovation, do you see that being implemented in some of your existing brands?

And I also wanted to ask you just generally about Amazon and your future. Would you ever see a reason or a rational for working with Amazon just because as we view it in the United States as emerging department store channel in its own right, given their broad reach at a relatively high household income of the Amazon Prime product.

And our final question is just about the U.S. department store channel, as we look at it here, there has been a fair bit of cautiousness as Department stores have been over-inventoried, but they look forward to the weather comparisons more favorable, how do you see Marc Jacobs manifesting in the U.S. Department store channel. Thank you.

Jean-Jacques Guiony

Okay. On the U.S. customer, I will repeat what I've said a number of times that the U.S. customer is fairly favorable for us. Many reasons for these, first of all that we're not subject to any tourists impact in the U.S. unlike some other brands, we had a little bit of negative impact into 2015 with Latin America customer disappearing, but it was not a big deal and the bulk of the business we do in the U.S. is with U.S. local customers.

And the second thing is also that we benefit in a major way from the strengths of Sephora which is big chunk of our total business in the U.S. about let's say around #40% roughly speaking and Sephora is really moving from strengths to strengths particularly in the U.S. So that helps the picture in a big way, but as I commented before, as you've seen that the numbers for Vuitton.

So are pretty strong and for wine and spirit and particularly cognac, they are very strong as well. So that's the situation and it's nothing new. It's been the case for quite some years now more than quarters really years and we expect this to continue.

Your question on Rimowa, yes it was a pioneer for four wheels etcetera. If they are intelligent product synergies to be made with other brands why not, you've noticed that the new Horizon suitcase for Vuitton is like the big ads in the past, also benefiting from the four wheel technology and it was obviously designed before Rimowa joined the LVMH Group, but if they are intelligent synergies to be made, why not.

Third question on Amazon, I would say that no, not really the existing business model of Amazon, we believe that the existing business of Amazon doesn’t fit with our -- doesn’t fit our luxury full stop, but also doesn’t fit with our brands. If they change the business model, I don’t know, but with the existing business model, there is no way we can do business with them for the time being.

And as far as Marc Jacobs and department stores I will not elaborate. I mentioned the fact that Marc Jacobs is still under a reinvention phase and so suffering a bit. Obviously this is a case with department stores in the same way as in its own retail network.

Oliver Chen

All right. Thank you and great job at Sephora. It looks outstanding. Congrats.

Jean-Jacques Guiony

Thank you. So thank you, I have nothing more to add. I just look forward to discussing with you full year performance in the -- not the conference call but the meeting that we will organize at the Group's headquarter in late January. Thank you so much, bye.

Operator

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

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