LVMH Moet Hennessy Louis Vuitton SE

PAR:MC

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the LVMH 2019 Third Quarter Revenue Conference Call. I will now hand over to Mr. Chris Hollis. Sir, please go ahead.

[Chris Hollis, Director of Financial Communications]

Hello. I'm Chris Hollis, Director of Financial Communications at LVMH. And with me is Jean-Jacques Guiony, our Chief Financial Officer. Thank you for joining us. We have some remarks to make about LVMH's revenue for the third quarter and first 9 months of 2019. As in previous periods, these revenue figures are reported in accordance with International Financial Reporting Standards or IFRS. And these remarks -- and after these remarks, Jean-Jacques and I will be happy to take your questions. Before I begin, as always, I must remind you that certain information to be discussed on today's call is forward-looking, 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 and on Slide 2 of our presentation.Turning now to our announcement. Hopefully, you all had the chance to read our release which was issued yesterday in both French and English. As always, the release is available on LVMH's website, www.lvmh.com, as are the slides that we are using to guide today's call.So starting on Slide 3, I will kick off as always with the highlights for this period. In the third quarter, we once again delivered solid performance with every business group and region contributing to our growth. On a regional basis, this included strong growth in the U.S. and Europe as well as Asia despite the situation in Hong Kong. In terms of the business groups, Wines & Spirits had a good performance as did Perfumes & Cosmetics, particularly in its iconic brands. Within Fashion & Leather Goods, it's worth highlighting remarkable momentum we are seeing, notably at Louis Vuitton and Christian Dior Couture. On the Watches & Jewelry fronts, we continue to see good progress in jewelry with Bvlgari standing out in this quarter as well as continued improvements at Hublot. Finally, Sephora performed well and DFS reported positive growth for the 9 months despite the challenges in Hong Kong that I mentioned.I also want to point out that the third quarter represents the first period in which Belmond Group, the hotel group, was consolidated into revenue following the completion of its acquisition in April of this year. Finally, at the end of September, we held an important event at our head offices with the participation of our senior management team highlighting the progress we have made on our sustainability road map towards our 2020 goals and announced new commitments for environment and biodiversity. While not related to the Q3 figures, this is an increasingly important topic for our stakeholders, and more details of this event can be found on our website.Looking now at the evolution of the group's revenue performance on the next slide, Slide 4. We generated organic revenue growth of 11% for both the quarter and the 9-month period. The reported growth figure of 17% for the third quarter reflects a 3% structure impact which is resulting from the acquisition of Belmond as well as a 3% positive currency effect. The 9-months revenue increased 16% on a reported basis. Revenue mix continues to be well-balanced across geographies. Slide 5 shows that Asia excluding Japan represents -- which represents 31% of revenue as measured in euros, continued to represent the largest region. This was followed by Europe at 27% of which France represents 8%. And the U.S. including Hawaii at 23%. And Japan at 7%. Other markets again for 12% of revenue.As you can see on Slide 6, organic revenue growth for the first 9 months was up across all regions compared to the prior year period. Revenue rose most significantly in Asia excluding Japan growing 16%, followed by Japan at 13%. Revenue from Europe and the U.S. grew 10% and 8%, respectively, demonstrating the group's continued execution globally despite macro uncertainty. Looking quickly at the third quarter figures. We saw some acceleration in Japan in part linked to the anticipated rise in sales tax that took place on the 1st of October and a slight slowdown in Asia outside of Japan reflecting the situation in Hong Kong. Performances in Europe, 11%; and U.S., 8%, remains consistent with the first half.At the business group level for the 9-month period, Fashion & Leather Goods was up a strong 18% on an organic basis versus 2018, driven by exceptional performances at Louis Vuitton and Christian Dior Couture, notably. Wines & Spirits was up 7% for the period; Perfumes & Cosmetics up 8%; and Watches & Jewelry 4%; and finally, Selective Retailing, 6%. We're pleased that for both the 9 months and the quarter, every business group contributed to the 11% organic growth we delivered overall.Now let's take a deeper dive into each business, starting with the Wines & Spirits on Slide 8. As I noted, organic revenue was up 7% for the 9-month period. Total revenue for this group was EUR 3.9 billion, up from EUR 3.6 billion in the same period last year inclusive of a 3% positive currency effect. Putting the third quarter into the context of this year, reported revenue rose 11% to EUR 1.4 billion compared to the same period last year. And excluding the 3% positive currency impact, organic revenue grew 8% for the quarter compared to last year. To further break down this activity. For the first 9 months of the year, Champagne and Wines organic revenue grew 5%, and including a 1% positive currency impact, reached EUR 1.56 billion compared to EUR 1.47 billion in 2018. In the third quarter, organic revenue for Champagne and Wines grew by 4%, and including a 2% currency impact, reached EUR 598 million. Cognac and Spirits reported EUR 2.4 billion in revenue for the first 9 months compared to EUR 2.1 billion in the year-ago period. This represented 8% organic revenue growth and a 5% positive currency impact. In the third quarter, organic revenue for Cognac and Spirits grew by 11%, and including a 3% positive currency impact, reached EUR 835 million. Champagne volumes were down slightly in the 9 months. While all regions grew in the 9-month period, the main contributors were Japan and Europe across Champagne and Wines category. Prestige cuvées performed particularly well, including the successful launch of the Dom Perignon 2019. And pricing actions on Estates & Wines also contributed to performance for the period.In Cognac and Spirits, Hennessy volumes were up 10% in the 9 months driven by VS qualities. For the third quarter, we saw accelerated growth in the U.S. due to strong demand and continued normalization of inventory levels at distributors. And in China, we delivered sustained growth. And at the same time, the Glenmorangie and Belvedere brands continued to make progress particularly in the high-end products. Moving to Fashion & Leather Goods. Revenue in this business was up a robust 18% on an organic basis for the first 9 months of 2018. Reported revenue was up 22% to EUR 15.9 billion from EUR 13.1 billion in the same period last year. This includes a 4% positive currency impact. In the third quarter on its own, organic revenue grew by 19%, and including a 3% positive currency impact, reached EUR 5.5 billion. This business group saw strong growth in all regions through the first 9 months of the year. Louis Vuitton demonstrated excellent momentum across the board with the success of both its iconic lines and new creations. The brand also continued its store network enhancements while expanding its production capacity with the recent opening of a new environmentally friendly workshop in the Maine-et-Loire region in France. And the Louis Vuitton X Exhibition, which opened in Los Angeles in June and is ongoing through mid-November, has been very successful. Christian Dior Couture saw very good growth in all categories and an excellent reaction to the new store opened on Avenue des Champs-Elysées in July. Meanwhile, the renovation of the historic Avenue Montaigne store is ongoing. You could also mention the great success of its V&A exhibition, and more recently, its haute couture [ des filles ].In terms of the other Fashion & Leather Goods brands, Fendi relaunched new partnerships with several artists and musicians. Celine introduced its first Haute Parfumerie collection and launched a new Triomphe bag -- canvas handbag collection. Loro Piana, Loewe, Rimowa and Berluti all performed well.Turning now to Perfumes & Cosmetics. Revenue increased to EUR 4.9 billion from EUR 4.4 billion in the 9-month period of last year. This represented an increase of 8% in organic revenue and a 3% positive currency effect or a 11% rise in reported revenue. For the third quarter specifically and compared to the last -- same period last year, organic revenue grew by 7%, and including a 2% positive currency impact, reached EUR 1.7 billion. Overall, the Perfumes & Cosmetics business grew -- generated excellent growth across the flagship brands and saw strong progress in Asia. Specifically, Parfums Christian Dior had good momentum with continued vitality from Miss Dior, J'adore and Sauvage. It launched its new Eau de Parfum Joy fragrance. And on the makeup side, the brand saw continued growth of Rouge Dior lipstick as well as the Ultra-Rouge version. Guerlain performance was very strong, driven by its lipstick line, Rouge G; and its skincare line, Abeille Royale. The brand also launched a new Eau de Parfum Intense Mon Guerlain. Parfums Givenchy's makeup line saw rapid growth in Asia, especially in China, with its new -- with its Prisme Libre line, continued to be a real success. The brand also continued a new version of its fragrance, L’Interdit. Benefit continued the successful development of its eyebrow collection with Precisely My Brow and Gimme Brow. And finally, we saw good performance at Fresh, Fenty Beauty by Rihanna and Acqua di Parma.In the Watches & Jewelry businesses, now on Slide 14. Reported revenue was up 8% to EUR 3.3 billion compared to EUR 3 billion in the first 9 months of last year. This included a 4% organic revenue growth and a 4% positive currency effect. For the third quarter on a stand-alone basis, organic revenue grew by 5% and there was a 3% positive currency impact compared to the year-ago period for a reported revenue of EUR 1.13 billion. To give you some highlights from this business group for the first 9 months. Jewelry delivered strong performance, especially in directly operated stores. Bvlgari demonstrated good momentum and market share gains driven by the continued success of its iconic Serpenti, Diva and B.Zero1 lines as well as its new Serpenti Seduttori watch collection. And during the period, it also rolled out a new high jewelry line called Cinemagia. TAG Heuer continued to make progress on its repositioning and streamlining and announced a new partnership with Porsche to be the title and timing partner of the Formula E Team. Hublot saw solid growth driven by its Classic Fusion, Big Bang and Spirit of Big Bang lines. And finally, Chaumet showed continued success with its iconic lines, including Liens and Josephine as well as its Bee My Love collection. The brand hosted a successful new exhibition in Monaco this summer called Chaumet in Majesty. Jewels of Sovereigns since 1780.Last but not least, our Selective Retailing business, Slide 16. This group delivered 6% organic revenue growth or 11% on a reported basis, incorporating the impact of a 5% positive currency effect for the 9-month period. Revenue reached EUR 10.5 billion, up from EUR 9.5 billion in the same period last year. For the third quarter on its own, organic revenue grew by 4% and included a 3% positive currency impact to reach EUR 3.5 billion. Looking at this business group in more detail. I'll start with Sephora which continues its strong growth trajectory, especially in Asia and the Middle East as well as online. During the quarter, the brand opened its first stores in Hong Kong and in Auckland and is expected to open its South Korean location soon. In terms of categories, Sephora saw solid growth in skincare across all regions. Also I would highlight that the brand rolled out new campaigns in U.S. and in China which have been very well received in these markets.DFS continued to demonstrate growth over the first 9 months of the year despite a decline in Hong Kong during the summer due to the situation in the region. The brand saw excellent performance at its Galleria in Venice, Italy and inaugurated a new beauty store in Macau. In addition, it's preparing for the opening of a Galleria at La Samaritaine in Paris which is scheduled for 2020. And finally, Le Bon Marché continued its animations and the transformation of the main store's ground floor. So in summary, our continued solid performance, delivering 11% organic revenue growth in both the third quarter and the first 9 months of the year in the context of some ongoing economic uncertainty in key regions demonstrates the strength and resilience of our portfolio. In fact, all business groups and regions contributed to growth in Q3. As we look ahead, we are cautiously confident for the rest of the year. As a group, we will continue to focus on offering innovative, high-quality products and selectively expanding our store network while thoughtfully managing costs with the goal of reinforcing LVMH's leadership position in the global luxury goods market. Thank you. And with that, we'll now take any questions you might have. Gregoire, could you please open the line?

[Operator]

[Operator Instructions] The first question comes from Luca Solca from Bernstein.

[Luca Giuseppe Solca, Research Analyst]

Could you give us some perspective on how demand has been evolving by nationality? Especially if we track Chinese consumer demand and how this has shifted across geographies. As I imagine, you have recaptured a lot of that demand that didn't surface in Hong Kong elsewhere. You were also, in some points of the presentation, mentioning market share gains. And I wonder how important that portion is in the growth you are producing today. If you could give us any understanding, especially in the categories where you seem to be gaining the most, you mentioned jewelry, for example, but across the board. I think it could be quite interesting for us to appreciate. And thirdly, when it comes to, well, of course, best positive performance across all product categories, but you're spoiling us with these high-quality results. So I was wondering, if in Perfumes & Cosmetics, does any specific reason, or related to product launches or anything else, that has been leading to growth being just a touch below what we had in the first half in the third quarter.

[Jean-Jacques Guiony]

Thank you, Luca. Yes, I know that 7% growth in Perfume & Cosmetic is very bad. I'm sorry about that. Your questions on nationalities, so the different by nationality way we can measure it -- and as you know, it's not a comprehensive view that we have particularly in the wholesale business, where we have no information. But in the retail business, where we have information, we had 2 types of trends: I mean either stable or growing. Stable growth was for the Chinese and the American. I mean definitely, the growth we had globally with the Chinese customers in Q3 was in line with what we have had so far this year. Same thing with the American clients. And as far as Japanese, we had higher growth. Chris mentioned probably some impact from consumption tax changes. As always, there is anticipation in the business shortly before and usually the offsetting movement there -- shortly thereafter. But anyway. So we had growing trends with Japanese probably to a large extent attributable to these. Although I remind you that the context with Japanese was pretty good and had been pretty good since the beginning of the year.You mentioned Hong Kong and compensation. It's a very tough question. We can give you facts and figures on Hong Kong. The drop in the business in Q3 was roughly 25%. But the 25% drop in Hong Kong in Q3 was a combination of flattish months in July and around 40% drop in August and September. So definitely, the trend has been worsening throughout the quarter. The situation is a little bit better for the wholesale business and a little bit worse for the retail business, namely fashion, leather, jewelry and DFS. And we don't have the numbers for last week's yet. But given the fact that there were closures of stores and the situation was not getting any better, I would be surprised if we were turning out better numbers for the fashion week.So the global situation there is what it is. We haven't seen many, many countries booming as a consequence for this situation. I mean it's very difficult to draw any correlation between the various geographies, particularly in Asia. The business for DFS in Macau is much higher than it used to be, but is it a compensation for that? I really don't know. And so it's very difficult to figure out whether there are really offsetting factors in between Asian geographies due to the situation in Hong Kong.Your second question was on market share gains. I mean it's a simple observation that in some of our businesses, we grow faster than the numbers that are reported by the competition. So that's all. So you know the competition numbers as well as we do because we take them from the same sources. And so you understand what I say. I have no global observation to make on this, but it's not the first time that we comment on market shares.And lastly, on Perfume & Cosmetic. Although very bad, the numbers are not that bad in my view. 7% growth in Q3. If you compare with the 9-months numbers with last year's and you if look at them on a geographic basis, you have no change in Asia, the growth is exactly the same. Hardly any change in Europe or in Japan. The big drop is definitely the U.S., where the whole industry in my view has been caught by surprise with the drop in the makeup business which used to be flying for the last 10 years and suddenly became negative in 2019. So that's a big difference. And given our exposure to the makeup business, this has some implications on our global numbers.

[Luca Giuseppe Solca, Research Analyst]

Understood. Did you mention trends for Europe -- for the European nationality? That I didn't catch your answer.

[Jean-Jacques Guiony]

No, I didn't. But they are good. They are good and no particular change there. So where we can measure them, they're good as they have been since the beginning of the year.

[Operator]

Our next question from Edouard Aubin from Morgan Stanley.

[Edouard Aubin, Head of Luxury Goods]

So 3 questions for me. First of all, on Vuitton. So I guess the biggest luxury brands in the world is growing at least twice faster than the industry average. And you've talked, Jean-Jacques, in the past few calls about some of the drivers of this strong performance. But you -- could you just please comment again on the -- if you are seeing the share of new launches increasing in the mix? And comment as well in terms of the ASP evolution over the past 2 years for Vuitton. That's number one. Number two on Sephora. Could you please provide some color on how the retail banner performed in the main geographies? And including the U.S., you just mentioned that the Perfume & Cosmetics division was impacted there. So I was just curious to see how Sephora performed in its main markets. And lastly, I know it's a call about sales, but just on profitability big picture. I guess the biggest beat in terms of sales in Q3 came from your 2 highest-margin divisions. So why would that -- it be a positive, I guess, in terms of the mix for the second half profits? And what are the offsets we need to keep in mind for this good mix performance?

[Jean-Jacques Guiony]

Thank you, Edouard. So that would be on the drivers of -- nothing new to report. The recipe works and we do not change the recipe. The recipe is a combination of image investments, distribution investments, product investment. All this at the same time and is fueled by the very good momentum for the brand. No particular impact on new -- from new products. I'm not saying that the new products are not successful, they are. But the share of new products doesn't change a lot. It's quite a constant share for the last many, many years, I would say. So you cannot say that this is a particular product that is responsible for the growth of such a large brand. It is not the case. It's really all the product, all the divisions, all the categories contributing to the growth. So it's a winning formula, and I don't have much to add. I mean the same strategies that we've been implementing for the last 5, 6 years are still being implemented. As far as Sephora is concerned, the main geographic trends, nothing really new there as well. Clearly, Asia and Middle East are leading the -- are the fastest-growing areas. It's been the case since the beginning of the year and it was also the case last year, but we are going -- growing very fast in these 2 areas. Europe and the U.S. are pretty close with low- to mid-single-digit same-store growth, which compares to double-digit growth for Middle East and Asia. So a clear growth pattern difference between these 2 areas. As far as Europe is concerned, it's not a new thing. I mean Europe has been -- the cosmetic business has been under some pressure for a while. And the type of growth rates that we have is not very different from what we had in the past. As far as the U.S., I already mentioned that 2019 witnessed a very brutal drop in the makeup business, which to some extent has been offset by the hair care and skin care business. But our market share in hair care and skin care is lower for Sephora than what it is for makeup. So in all, this has an impact on the overall like-for-like growth of Sephora. But we remain positive both in like-for-like and in global growth and organic growth. So the situation is far from being a catastrophe. And roughly speaking, in Q3, the same-store growth was not far from the first half of the year. Overall, we grow for the first 9 months of the year on the same-store basis at 6%, which is not very different from the, if I remember well, the 7% we had at the end of June.And finally, your question on profitability. So you mentioned that the 2 most profitable divisions are growing faster than the rest, so this should have a positive impact on profits. You're probably right. This being said, I mean there are many other factors that we don't know, that we don't take into account. Just to mention a few: currency, the fact that Hong Kong will probably pay a price for the current situation, not only in terms of volume of business, but also in terms of profitability. This is a profitable area and we will suffer badly due to the fact that most of the businesses are having fixed costs there and will experience much lower revenues. So there are a number of factors that will have an impact in it. Obviously I will not guide you into year-end margins as we never do.

[Operator]

Next question from Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge at HSBC. Three questions. The first of all, I'd like to come back to the Hong Kong situation and especially what you mentioned about your fixed cost structure there. I remember that in 2014, when you -- we already had the situation in Hong Kong, there are no [ I think ] stages that Hong Kong that was cyclical. Is it -- is the analysis of the management of the group the same this time? And how do you think you could adapt and when we could see maybe a bit of [ fund ] relief in Hong Kong? My second question relates to the Vuitton performance. I think you highlighted the driver. You didn't mention additional capacity. And then we've noted that there have been several new atelier being opened. And also I think you actually are more flexible and are now sometimes working in 2 shifts. So is there also an impact of a bit more supply? Or that -- is that not the case? And thirdly regarding margins. I took notes also of what you mentioned about the divisional mix and the impact from Hong Kong. But one, you mentioned FX. In my opinion, I mean shouldn't FX should be -- clearly be a tailwind now that you're not facing the same gain of hedging compared to what you had in the first half? And also, could you comment a bit also on the willingness of the group to continue to invest significantly in H1? The consensus margin were a bit high in terms of -- in other words, are you continuing to invest as much as you invested in H1?

[Jean-Jacques Guiony]

Thank you, Antoine, for your 3 questions. I will not comment on Hong Kong and whether this is cyclical or not. I mean I cannot qualify the current situation. I'm not an expert. The fact that Hong Kong is cyclical is a fact of life. I mean we have seen many periods in the last 20 or 25 years in which Hong Kong was under some pressure, so this is not the first one. But I cannot qualify this in any way. Obviously, we will try to react to the situation by lowering our cost base. And chiefly the rental costs, which are amongst the highest in the world. So there will be -- there are currently discussion with our landlords. But obviously, it's way too early to say whether these conversations will bear fruits or not.On LV, your question on the business being driven by supply. Frankly, I don't think so. I mean what we've been doing and you've been to the atelier and you know in details what we've done, is actually release the business from production constraints, although these constraints have not been so evident in the past. In other words, Vuitton was doing miracles in the last few years. Now they are more in a sort of industrial organization that enabled them to manage in a very efficient way the peaks in demand. So I wouldn't say that the good numbers are driven by supply. They are driven definitely by demand. Although what we have done in supply is proving extremely useful to smooth the production and to adapt production to the growing demand.Finally, your question -- your fairly complex question on margins which is basically the second attempt in this call to ask me for guidance for the second half of the year. So you know the answer. I won't give it to you. You mentioned FX which is supposed to be a tailwind as opposed to a headwind. It's true only if you can sign with your blood that the FX will be what it is today till the end of the year, which I doubt very much you will do. So obviously as far as FX is concerned, I mean you never know until the end of the year what the global impact is going to be.

[Antoine Belge, Global of Consumer and Retail Research]

Maybe just a clarification. So in terms of the Louis Vuitton and maybe Dior ability to mitigate the impact in Hong Kong in Q3. Was it that those tourists who wanted to go Hong Kong bought elsewhere? Or is it more that you -- when you saw the situation maybe deteriorating in August, you shifted more merchandise in other markets and then that was met by demand? And so basically, it's other people who have benefited from that LV and Dior merchandise?

[Jean-Jacques Guiony]

Listen, when you look at the various geographies or the various countries at Vuitton and the way they've been evolving in the last months, the answer to your question is not evident. In Asia, as I said, I made a global answer for the group, but it's true for Vuitton and Dior as well. There were not many, many changes in between H1 and Q3 for the non-Hong Kong geographies in terms of growth. Everything is going fine, but it's not going any better due to the difficulties in Hong Kong. So the correlation, I cannot really describe it. What we've seen is that Europe, it's particularly true for Vuitton in Europe, was better and particularly with Chinese tourists. But in my view, it's a farfetched correlation. I mean the business with tourists in France particularly, but it's true in the U.K. and Italy as well, is doing better. For France, maybe an explanation is [Foreign Language] maybe, I'm saying. I can tell you that the business is better, but I -- is there a correlation with Hong Kong or any other specific situation within the group? It's very hard to say.

[Operator]

Next question from Oliver Chen from Cowen and Company.

[Jungwon Kim, Research Associate]

This is Jonna on for Oliver. Just in the context of the slowdown in the cosmetics category in the U.S. Could you just talk about the timing of the slowdown? When it started? And do you see the trend getting better as we look towards the holiday season?

[Jean-Jacques Guiony]

On which -- sorry, Jonna. On which category?

[Jungwon Kim, Research Associate]

On the cosmetics category, like what kind of impacts you foresee -- yes, yes.

[Jean-Jacques Guiony]

On the cosmetics. If you look at NPD, I mean it's been going down since the beginning of the year, roughly. Last year -- end of last year was not too good, but it's really in negative territory since the beginning of the year.

[Jungwon Kim, Research Associate]

And what is driving down the slowdown in your view? And do you see that recovering near term? Have you seen better trends?

[Jean-Jacques Guiony]

No. We haven't seen better trends. I mean the whole industry is undergoing a phase of slowing down. Reasons are difficult to analyze. We lack a little bit of hindsight to really analyze that. We know that offer has been driving demand in this particular segment unlike previous answer I made on the -- on Vuitton. But in this particular segment, offer was the main driver for demand. Maybe the new offer -- and I'm not particularly talking about LVMH, I'm talking globally for the market, maybe the new offer is not as compelling as what was brought on the market some years ago. So that's probably -- that may be one explanation. But frankly at this point in time, it's very difficult to go into details about why the market is down. On top of that, we don't know whether it's only a cyclical downturn, some inventories have to be absorbed and so on? Or is it something more structural that may last for some years? We don't know.

[Operator]

Next question from Melanie Flouquet from JPMorgan.

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

I'll try my luck on the first question. Could we have the Watches & Jewelry and the Fashion & Leather Goods growth without Japan, given the acceleration that is front-loading [ in the afcos ]. So I was wondering whether it could help us understand the [ best ] answers. And then just confirmation. You provided the trend by nationalities for the total group. Usually, you give it to us for LV's I understood the Chinese stayed roughly the same with better sales into Europe to the Chinese tourist. But could we have a comment, please, on the other nationalities? And my last question is on La Samaritaine. When is that opening? And could you help us at all to maybe better understand the impact this may have on your financial -- analyze 2020 that I'm already preparing.

[Jean-Jacques Guiony]

Okay. Thank you, Melanie. On Watches & Jewelry and Fashion ex Japan, well, I won't give you the number obviously. But you can do some calculations on your own. Roughly speaking, it's 10%, 12%, close to 12% of the business. And if you look at the global numbers for Japan, we moved from 10% growth in H1 to 20% growth in Q3. Probably this additional 10% was to some extent related to the VAT impact. So I would say that the boost from Japan in both divisions was probably around 12% of this 10%. So you do the calculation as well as we will do. So it's not insignificant but it's not major as well. And as it is probably related to the consumption tax, it will reverse in Q4, to be clear about that. But it's neither a major positive nor it will be a major negative in Q4.

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

Yes. I was precisely trying to understand that. Because you mentioned also I think in your release that Champagne had, had a pretty good Japan. So I was just trying to understand whether [ it had stock at the vineyard ] that bent up, but it didn't. So it's 10 points that we should apply to both division roughly.

[Jean-Jacques Guiony]

I think so. I mean it's not -- we don't ask people when they come to stores whether they shop because they anticipate...

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

No, but the degree of acceleration, right, which we don't ask by division.

[Jean-Jacques Guiony]

There is certainly correlation in retail businesses, way less so in wholesale businesses. Because in wholesale businesses, I mean the distributors could absorb it or it smooths into time, so the correlation doesn't exist. This is why I just answered on Watches & Jewelry and Fashion & Leather.

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

Okay. And just something, sorry, Watches & Jewelry usually has a way bigger impact of this [ year ] and to increase that wasn't the case this time around. You're citing 10% acceleration in both. So they -- so do you think it's high-ticket items that are the most impacted?

[Jean-Jacques Guiony]

It was -- I mean, it was more or less the same for all the -- for the 2 divisions. Your questions on the Chinese for -- the Chinese business for VS, it was in line. I answered for the group, and -- actually not, it was not for the group. It was for the brands within the group where we can measure it, and including obviously Vuitton. So the trends were stable, as I said, for the Americans, for the Chinese and for the Europeans at Vuitton and at Dior as well in Q2 -- in Q3 compared to H1. And the opening of Samaritaine, the impact of the opening of Samaritaine will not be tremendous. I mean, obviously, the capital costs are -- or will -- most of them will be already booked by the end of 2019, say 95% of them. Some of them may come in 2020, but not much. And the opening expenses will be limited. Obviously, the first months of business will be loss-making as it is obviously the case for each large openings. But that's something that we'll -- we shall be budgeting within the DFS numbers, and we don't expect something particularly meaningful there.

[Operator]

We'll go to the next question. Next question from Thomas Chauvet from Citi.

[Thomas Vincent Chauvet]

Three question, please. The first one, Chinese New Year will be 10 days earlier versus last year. I think it starts from the 21st of January 2020. I guess that should benefit shipments of cognac, watches, perfumes, we know that. But as far as Vuitton and Dior are concerned, are you capable but also keen to meet that strong demand you are having at the moment and deliver enough products to the store? Will you be tempted to hold back maybe in Q4, inventories, to hold back till January, Feb? As you did I think in Q4 '17, if I remember.Secondly on pricing, a general question. My understanding is your position is you don't want to play with the price gap anymore. Nevertheless, the situation we're having now. I mean, is that sustainable, whereby China prices only marginally higher than in Hong Kong or Korea? Would you be able, willing, to increase prices in China? Obviously, that's come down after cuts in import duties and VAT, so it might be not acceptable for the local consumer base. And just finally on your comments about Hong Kong. You said that, Jean-Jacques, you're not a specialist, but I think you've seen that business evolving a lot over the last decade with a diminishing share of sales and profit and second round of protests now after 2014. If we become a little bit more negative, as Antoine was saying about the structural pressure in this market, are you able to plan something to offset the tourism-led business of Hong Kong in other parts of the world? Perhaps Macau, obviously a direct neighbor. Maybe Singapore with -- you've done a great job at Marina Bay and Sentosa with some of your brands. So do you have a strategy within Asia to offset perhaps what could be a more structural weakness of the Chinese consumer in Hong Kong?

[Jean-Jacques Guiony]

Thank you, Thomas. So on Chinese New Year, you mentioned the cognac impact which is usually the case. This year, we might have a little bit of impact as, if I'm not mistaken, Chinese New Year is a bit earlier. Yet we are also a bit overstocked. So I'm not so sure this will have a major impact in 2019 numbers. Your main question was on LV and whether we would spare some volumes from the end of the year and devote it to next year. But that's the answer I made to Antoine's question on offer and demand. I mean with the flexibility, the improved flexibility and higher capacity that we have today, I don't think we need to do that. So we can really have a strong year-end season and hopefully a strong Chinese New Year.Pricing, your question on the Hong Kong and China. If you allow me, I would answer with a question. Do you really think that if we were lowering prices in Hong Kong today, this would help the business? I don't think so. So...

[Thomas Vincent Chauvet]

No, I was thinking increasing prices in China.

[Jean-Jacques Guiony]

Well that's exactly the same thing. I mean so widening the gap, I don't think would help in any way because the origin of the situation is obviously very different from a pure price gap situation. So no, we don't intend to play with prices in any way. And also the question on sort of offsetting, wiping out or writing off Hong Kong and doing the businesses elsewhere. I mean I think each time we have such a situation in Hong Kong, I get the same question, that 2 years after, usually people have forgotten that they asked the question when the business recovers. I mean it's out of the question that we consider Hong Kong as something that may not be a strong business center in the years to come. So they are undergoing some difficulties for the time being, but we are fully confident that at some point, they will recover.

[Operator]

Next question from Thierry Cota from Societe Generale.

[Thierry Cota, Equity Analyst]

Three questions, please. First on cognac. Can you tell us where stand the inventory days of your distributors at this point and whether you find the level to be satisfactory? And I was wondering if you could help us think on Q4 volume trends and potentially next year. Secondly, on champagne, we've had a pattern of low volumes and high mix/price effect for a while now. I think it reflects your stricter distribution policy and focus on higher-price brands. Is that going to end at the end of the year or will it continue into next year? And what kind of impact do you think that -- structurally that could have on the profitability of champagne? And lastly on Celine. If you can update us on what's the situation in terms of revenue profile over the first 9 months of the year. What is the scenario currently unfolding for the brand? Is there sales acceleration or not? And is it in line with your plans?

[Jean-Jacques Guiony]

Thank you, Thierry. So cognac in the U.S., not a very easy question. Well actually it's not a very simple answer. The situation in -- from an inventory viewpoint in cognac is satisfactory. We moved consciously inventories in the first 9 months of the year from a very low point in early 2019 to something like 60 days, which is quite okay. In doing so, we had sell-in that was higher, not in a big way, but particularly in Q3, that was a bit higher than sell-out.In the fourth quarter of the year, we will monitor the number of days of inventory so that it keeps flat. But the problem is in the calculation of such an indicator. Bear in mind that days of sale is forward-looking, forward-looking. And since you have 60 days at the end -- ahead of the festive season as we have today and 60 days in January are the low season, it's not the same number of cases. In other words, the number of days will not go down, but the number of cases we have in inventories within the trade will go down. Therefore, it is quite likely that in Q4, sell-in will be lower than sell-out. Sorry, it's a bit technical, but I wanted to make this clear. And magnitude of it in overall for Hennessy should be around 3%. So we should have a growth in sell-in that will be 3% lower than the growth in sell-out. What is the growth in sellout? I don't know. So you cannot derive from that our anticipation for Q4. But anyway, we are reasonably confident about demand in Q4, but we should have a little bit not of destocking in days of sales, but a little bit of destocking in number of cases.As far as champagne is concerned, you're right. I mean the pattern of the growth is mostly based on price/mix and not on volumes. It's very difficult to know how long it will last. We truly expect that next year, we'll see volume rise not by 10%. I mean you know the type of growth we can achieve in champagne. I mean it's not -- it's a few percentage points, but compared to the low level, the stable level that we have had this year so far, I think we can do a bit better next year without changing anything. That's the most important to our value creation strategy, as you said, based on price and mix.Finally on Celine. I suspect you or your colleagues will be asking the same question each and every quarter for a while. So you know that we do not comment -- we do not like to comment in details on brands undergoing some form of repositioning, particularly after artistic direction changes. So the only thing I can tell you at this point in time is that the initial signs of clients' response for the year are positive and particularly in terms of traffic. But yet it will take some quarters, and I don't know how many, before the branding and the new products plan bear full fruits. So I will probably make the same answer for a number of quarters. But anyway, you -- I'm sure you will keep asking the question.

[Operator]

Next question from Zuzanna Pusz from UBS.

[Zuzanna Pusz, Head of European Luxury Equity Research]

I have 3 questions, please. I'll give you a break on Hong Kong but ask one on Japan, if that's okay. So first of all, I guess we all understand that there could have been a bit of a pull-forward in consumption ahead of the tax increase. But have you also seen an increase in tourism in Japan specifically that would also maybe explain part of the increase in the rate of growth? And second question also on Japan. Would you be able to provide growth -- provide us with the growth -- rate of growth for Japan by division? So specifically if -- I don't know, let's say Watches & Jewelry given the exposure to high-ticket items, could it be that Japan, in that case, will -- even more than 20%? Would be quite helpful to know that. And finally on Selective Retailing. In case I missed this, can you provide us some color on the rate of growth of Sephora versus DFS? Because I think in your remarks, you mentioned that DFS was positive for 9 months. And that makes me think that maybe it wasn't the case in Q3. So any, [ please ], color on -- mid-single-digit, high single digit? Anything like that would be very helpful.

[Jean-Jacques Guiony]

Thank you for your very precise question. So on Japan, tourism was not a -- I mean, if you look -- I mean it was not the driving force behind the increase in the growth rate. If we look at Vuitton, Dior where we monitor that pretty, pretty closely, the Chinese clients, for instance, or the Korean were not particularly up in Q3. So that's not a valid explanation for the change in the growth rate. We don't provide the growth by division on a geographic basis. The only thing I can say is that the main -- and it won't be a surprise to you, the main changes compared to H1 were in Fashion & Leather and Watches & Jewelry, where we had the highest peak in the growth rate, particularly in Watches & Jewelry. We were not at 20%, but not very far. Third question on Sephora versus DFS. Your guesstimate on DFS in Q3 is correct. I mean it's slightly negative after being positive in the first 2 quarters and it's still positive on a 9-months basis, whereas Sephora is almost double-digits for the first 9 months of the year.

[Operator]

Next question from [ Rudy ] from [ Aspect Group ].

[Unknown Analyst]

I have a question for you regarding the Wine and Spirits segment, please. The U.S. are to impose tariff on French wine. I would like to know how you plan on overcoming this tariff. And how is that going to impact your sales?

[Jean-Jacques Guiony]

Well the question on tariffs is always a difficult one. I mean there is no one single answer. It depends on the category of product and how the competition reacts. So it's very difficult to say what we would do. One thing could be to increase prices and to offset tariffs increase into local prices. But obviously, as I said, it depends on competition reactions. So we don't want to be pushed out from being competitive from a pricing viewpoint by such action, so obviously we'll think twice before doing it. So for the time being, we have no precise answer to -- or global answer to this situation.

[Operator]

Next question from Charmaine Yap from Redburn.

[Charmaine Yap, Analyst]

I have 2 questions, please. The first one in terms of online. Is there any color you can give in terms of maybe in Hong Kong and China, physical store closures that you have seen, maybe a pickup in traffic in online? And the second question relates to Watches & Jewelry. Can you please give a bit more color between jewelry or Bvlgari versus watches? I think in last quarter you mentioned Bvlgari was growing high single digit and there's a 200 bps impact from wholesale rationalization. Any comments underlying, if you can, excluding Japan would be helpful, please.

[Jean-Jacques Guiony]

Thank you. So online basically, your question is related to the impact of the situation in Hong Kong on online. I mean as far as Hong Kong per se is concerned, I mean the online business is not particularly significant. It's obviously much more significant in China. But the trends in online in China, across the board, I would say are not materially different from what they were before. So we haven't seen any -- again, any correlation between Hong Kong situation and any other factor within the business, and not particularly in the online business in China.As far as Bvlgari is concerned, the trend in this quarter has been, I would say, exactly the same as it was in the first 2 quarters of the year. So the business is still doing good. Obviously, the situation in Hong Kong is where we had a fairly large share of the business and where the drop is as high as it is in other businesses is closely monitored. But we also have a very strong Chinese business. So for the time being, the situation doesn't show any change in terms of growth rate.

[Charmaine Yap, Analyst]

Okay. And just as a quick follow-up in terms TAG Heuer within Watches & Jewelry. Can you remind us on where you are on your restructuring? What you're doing? And if there's anything, the timeline to note, please.

[Jean-Jacques Guiony]

No. There is nothing new there. I mean it's -- we are working on distribution and product. We have nothing particularly new to report there. But when we do, believe me, you'll hear about it.

[Operator]

Next question from Stéphane Destraz from Bank J. Safra Sarasin.

[Stéphane Destraz, Equity Research Analyst]

Actually, I have 2 question on Perfume & Cosmetics and Selective Retailing. You spoke about the U.S. and the weakness in makeup. I wonder whether you're seeing the same thing in skin care. Or if skin care is still doing well in Perfumes & Cosmetics? And the second question is relating to Sephora, whether some other have commented that they're seeing some weakness in prestige beauty, consumer down-trading and traffic still being impacted. Basically, consumer down-trading into masstige. Whether you're also seeing this at the level of Sephora.

[Jean-Jacques Guiony]

Thank you. No, skin care in the U.S. is doing very well. I mean we are growing -- the skin care business is growing double digit and Sephora is growing a very strong double-digit as well. So it's a very positive segment in the same way as hair care. But it's really the makeup segment that is undergoing some difficulty. As far as down-trading is concerned in the U.S., it's difficult to say. The global prestige market is what I described, i.e., negative for makeup and positive for the other categories. When you look at the other categories, particularly it's on -- you see no signs of down-trading. And on makeup, it's the whole category, I would say both prestige and other categories, that is suffering. So down-trading is not something that we have really seen.

[Operator]

We don't have any more question for the moment. [Operator Instructions]We have one new question from Paola Carboni from Equita.

[Paola Carboni, Analyst]

I have a few questions. First of all, maybe just a qualitative comment on your wording. In the press release, you have referred to good growth at Dior versus remarkable or excellent for LV. I was just wondering whether we should think still about Dior as the most -- as the fastest-growing brand within the division or there has been a bit more similar performance in your latest quarter for the 2 flagship brands. Another question, please, is on the situation of Hong Kong. As far as the chances of recovering as well are concerned, I appreciate that you say for the time being, we have not seen any change in the growth trends as well in the Asian region. But I was simply wondering, I mean without any crystal ball clearly, but do you -- would you simply consider this as a reasonable behavior by Chinese? So do you think we might expect some recovery as well in the next few months? Or maybe you see this is not happening -- has not been happening until now, it means that, that won't be the case? So just to understand your view on that. And a very final question, please, still on Hong Kong but in terms of cost. Am I right in saying that, at least for your retail business there, the biggest part of your rents are variable, in any case?

[Jean-Jacques Guiony]

Thank you. Well, let's not try to get into the details of the wording on Dior and LV. I mean both are growing fast and we're very happy about that. And I will not comment on whether Dior is growing faster than LV or the other way around. So we are very happy with both businesses. On the Hong Kong business being -- drop being offset as well in the future. Frankly, I don't know. I mean if I could -- as I said, I mean we find it hard to analyze what to really -- get a good understanding of whether the business in Hong Kong takes place elsewhere, it's not obvious as I said before. So even current numbers are difficult to analyze, so really forecasting what will happen in the future is even more complicated. So the short answer is that I really don't know. And as far as rents are concerned, most of the rents in Hong Kong are fixed and short term. I mean it's 3 years -- 3 or 4 years lease. They are fixed with obviously indexation clauses.

[Operator]

Thank you. We don't have any more question. Back to you for the conclusion.

[Jean-Jacques Guiony]

Thank you, ladies and gentlemen, for attending this conference call. We look forward to discussing our full year numbers in late January. Thank you, and good afternoon.

[Operator]

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