LVMH Moët Hennessy - Louis Vuitton, Société Européenne (MC) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to today's conference call. I am Jean-Jacques Guiony, the CFO of the LVMH Group. Before I begin, I must remind you that certain information to be discussed on today's call is forward-looking and, therefore, is subject to important risks and uncertainties that could cause results to differ materially. For these, I refer you to the safe harbor statement included in our press release. Let's now move to today's topic, first half figures. And after a brief discussion on the first half highlights, Chris Hollis, the group's Head of Investor Relations, will cover the main developments of different business groups. I will then comment on the main figures. And after this, obviously, Chris and I will be available for your questions. The press release is available as always on our website, lvmh.com, as well as the slides for today's presentation and the interim financial report. So moving to the first slide of the presentation. I would say that the first half of 2022 has seen an excellent performance despite the difficult environment and clearly reflects the strength of LVMH's strategy of having a diverse and balanced portfolio of brands sold all around the world. Organic revenue, up 21%. Profit from recurring operations up 34% and improved operating margin and more than EUR 4 billion in free cash flow and a respectable gearing of 21%. We will go into some details, but the main points, in my view, to bear in mind should be: one, on the negative side, the impact of the health restrictions in China in the second quarter significantly impacted in certain businesses, notably DFS, although the signs, the situation is improving. And on the positive side, I would mention the double-digit revenue growth in all business groups and in all geographies, except obviously Asia, despite the very high comparison basis; excellent performances of our main brands and some smaller brands, all of which demonstrates the overall strengths and the underlying demand by local clientele. I will now turn to Chris, who is going to review the main developments within our various business groups. Chris?

Thanks, Jean-Jacques. I will now go into a bit more detail on the performance by business group, beginning with the Wines & Spirits. First, the figures on Slide 7. In the first half of 2022 revenue in the Wines & Spirits business group reached EUR 3.3 billion. On an organic basis, revenue increased 14% on top of a very strong 44% rise in the year ago period. There is a 2% structural impact relating to the acquisition of Armand de Brignac last year and a 7% positive currency effect. Together, this resulted in a 23% increase on a reported basis compared to the EUR 2.7 billion in the first half of 2021. Looking at just Champagne and Wines revenue of over EUR 1.5 billion. Organic revenue grew 24% and with a 5% structural effect related to Armand de Brignac as well as a 4% currency effect. This resulted in a 33% reported increase in revenue compared to last year's first half. In Cognac and Spirits, reported revenue of EUR 1.8 billion was up 16% compared to the first half of 2021, including organic revenue of 7% and a 9% positive currency impact, reflecting a significantly stronger second quarter than the year ago period. Profit from recurring operations reached EUR 1.15 billion, a 25% increase compared to the year ago first half. Operating margin was 34.7%, a slight increase compared to 34.2% in the first 6 months of 2021. On the next slide, you'll see the Champagnes and Wines business performed very well in the first half, confirming a strong recovery in key markets. Champagne volume rose 16% in the period. The strong demand can largely be attributed to the reopening of restaurants and the renewed influx of tourists in the U.S. and Europe as well as price increases, which have also contributed to revenue gains. In addition to the positive impact of the consolidation of Armand de Brignac into the group's results, as I mentioned, the segment's performance also reflects further international growth of Château d’Esclans and good success in the launches of Château Galoupet's Cru Classé and Galoupet Nomade wines. In other developments, LVMH continued to expand its fine wines business with the recent acquisition to acquire the revered Joseph Phelps Vineyards in Napa Valley. Moving on to Cognac and Spirits, Hennessy volume was down slightly, 2% compared to the prior year's first half. This reflects ongoing health restrictions in China throughout the period and logistical disruptions in the U.S. in Q1. But the impact of these factors was largely offset through price increases. Importantly, in Q2, Hennessy was able to catch up on delivery of inventory in the U.S. And lastly, with respect to Hennessy, the Hennessy and NBA collaboration continued this year with an expansion of the partnership across markets. And finally, for this business group in Glenmorangie and Ardbeg successfully launched the Glenmorangie extremely rare 18-year-old Azuma Makoto Limited Edition and Ardbeg Fermutation, respectively, and Belvedere vodka continued to deliver excellent performance. Now we'll take a look at the very strong first half all Fashion & Leather Goods. The figures on Slide 10, revenue in this business group rose 31% to EUR 18.1 billion compared to EUR 13.9 billion in the year ago first half. On an organic basis, this marked a 24% increase, which comes on top of the stunning 81% increase in the year ago first half. This was a positive currency impact. There was a positive currency impact of 10%. Profit from recurring operations rose 33% in the period, reaching EUR 7.5 billion, up from EUR 5.66 billion in the year ago first half. Operating margin was 41.4% in this group up slightly from 40.8% in the same period last year. It's no surprise that the stellar performance has been driven by some of our most emblematic brands, including Louis Vuitton, Christian Dior, Fendi, Celine, Loro Piana, and Loewe. Louis Vuitton had an excellent first half with extraordinary shows of women's fashions designed by Nicolas Ghesquière and also presented Virgil Abloh's final collection, which shows in Paris and Bangkok and honors his legacy with an exhibition at the Louis Vuitton Foundation. In France, Louis Vuitton opened up 2 new atelier workshops, including one in Vendôme, dedicated to precious leathers. Louis Vuitton's ongoing focus on creativity and culture is also reflected in the qualitative expansion of its network of Maisons and the experience they offer a destinations in the world's most iconic locations. And after, Louis Vuitton unveiled this 200 trunks, 200 visionaries exhibition in Singapore to celebrate the founders 200th birthday with unique designs of the renowned Louis Vuitton trunk. Christian Dior Couture saw outstanding growth across all product categories. Highlights of activity at the Maison over the first half includes the magnificent in-store experience that is historic 30 Montaigne location, which has now reopened [indiscernible] after 3 years of renovation. Maria Grazia Chiuri and Kim Jones Born to Life well-received shows with magnificent new fashions and products, while the Maison's icons also remain in high demand, including the Lady Dior bag. In jewelry, Christian Dior launched a new collection, La Rose Dior, to celebrate Monsieur Dior's love of flowers. Moving on now to the other brands. Fendi has had a continued success of this iconic Peekaboo and Baguette handbags. Indeed, you may have seen that the Baguette will soon celebrate its 25th birthday with a dedicated show during New York Fashion Week in September. Fendi also announced plans to open 2 new workshops in Italy in the second half of 2022. In Céline, the ready-to-wear collection designed by Hedi Slimane continues to be very well received, and the Maison's new high-end leather versions of Triomphe and 16 bags are performing well. At Loro Piana, the Maison is honoring the excellence in vicuña wool in its collection, showcasing its approach to protecting the longevity of the species. Jonathan Anderson's creative excellence was most recently exhibited in the latest Loewe fashion shows, and Marc Jacobs has delivered strong online sales growth and launched a new offering within its Monogram collection. And lastly, Nigo’s first collection as our artistic Director of Kenzo has been well received. We'll now move to Perfumes & Cosmetics. Revenue in this business rose 20% to EUR 3.6 billion from just over EUR 3 billion in the same period last year. On an organic basis, revenue rose 13% on top of a 37% increase in the year ago period. That was a positive 7% currency impact in the period. And profit from recurring operations was down very slightly, EUR 388 million compared to EUR 393 million in the year ago first half. Operating margin was 10.7% down from 13% in the first half of 2021. This performance reflects a great momentum overall in fragrances and recovery in makeup driven by rebound in store traffic as well as the launch of new coveted products, slightly impacted by the ongoing health restrictions in China, our highly selective distribution and the limiting of promotions across brands. To provide some detail on Slide 14, Parfums Christian Dior delivered outstanding performance across all key markets with particularly strong momentum in Europe and the U.S. This was driven by the ongoing success of iconic offering, including Savage and Miss Dior perfumes and continued strong demand in makeup for Dior Addict and Forever foundation. In terms of innovation, the launch of a new La Mousse Off/On face cleanser was well received. And as always, Parfums Christian Dior's success continues to be supported by entirely selective distribution strategy. Before I move on, I should note -- I should also note that in the first half, Parfums Christian Dior unveiled its 2030 strategy for responsible beauty focused on leaving only beauty as a legacy. Turning now to Guerlain. Guerlain's iconic skin care line, Abeille Royale, continues to perform very well as it is perfume business with L’Art et la Matière and the Aqua Allegoria collections showing particularly stellar growth. Guerlain, too focused on sustainability of its business launching Cryptobees, which are NFTs created to support its permaculture garden in the Vallée de la Millière nature reserve in France. Each Cryptobee is associated with 1,828 pockets of land within the nature reserve. In Parfums Givenchy, the success of L’Interdit was further cemented in the first half of this year. And new excitement continues with the launch of new Parfums Givenchy's Eau de Toilette Fraîche Irresistible. Across other brands, Benefit's services businesses has rebounded with a return of store traffic. Maison Francis Kurkdjian also announced the creation of the Jardin du parfumeur in collaboration with the Château de Versailles, the garden which will feature hundreds of beautiful smelling flowers species -- flower species will open to the public in spring 2023. Make Up For Ever, the undetectable foundation in HD Skin care also performed very well. And finally, Officine Universelle Buly continued to expand its store network in Europe with locations in Milan and Munich as well as in Japan. Turning now to Watches & Jewelry. Revenue in this business group rose 22% to reach EUR 4.9 billion compared to just over EUR 4 billion in the year ago first half. On an organic basis, revenue rose 16% on top of a very strong 71% increase in the first 6 months of 2021. There was a positive currency impact of 6%. Profit from recurring operations rose 26% to EUR 987 million compared to the EUR 783 million in the first half of 2021. Operating margin was 20.1%, up slightly from the 19.5% in the same period last year. This group's performance in the first half of the year confirmed the very strong recovery of the Watches & Jewelry business. Breaking this down, Tiffany delivered excellent performance in the first half of the year fueled by the changes that have been made to revitalize the brand and merchandise offering since the acquisition closed 18 months ago. To share some highlights, the international rollout of the Knot collection has been very successful, confirming it as a new icon in Tiffany's offering and the High Jewelry collection Blue Book set a new sales record in the first half. The new pop-up store on avenue Montaigne has been enormously popular destination. It has a special vision on virtuosity exhibit in the Saatchi Gallery in London, which celebrates Tiffany’s 185th anniversary. I encourage you to see it before it closes in mid-August. Moving on to Bulgari. The Maison continues to deliver strong growth despite the impact of the ongoing health restrictions in China. The Serpenti and B.zero1 lines were important growth drivers with the latter introducing a new diamond embellished collection in the first half. And Bulgari's new Eden: The Garden of Wonders collection of high watches and high jewelry on display in Bulgari's new flagship store and platform and set new records. Also unveiled in collection with new collection was beyond the wonder of Bulgari's first-ever NFT jewel. Finally, for Bulgari, its Watches business continues to deliver good performance due to the innovation in its time pieces, including its Octo Finissimo Ultra Watch, which set a new record ultra-thin watchmaking. To provide some highlights of creativity and excitement of the other brands, TAG Heuer launched the newest solution to its Carrera line, the Carrera Plasma, a magnificent watch embellished with lab-grown diamonds. At Hublot, several new products came to market as the 2 NFT digital work inspired by the Hublot Classic Fusion, Takashi Murakami watches. Zenith introduced a new Master of Chronographs campaign as well as the dedicated CSR program called Zenith Horizon. While Chaumet launched a new collection of high jewelry called Déferlante. Chaumet is also hosting an exhibition with the Beaux-Arts de Paris called Végétal focused on viewing nature through the prism of art and beauty. And lastly Fred launched its new Force 10 bracelet with this one with a beautiful extra-large buckle. Moving now to the final business group, Selective Retailing. Revenue rose 30% to EUR 6.6 billion up from EUR 5.1 billion in the year ago first half. On an organic basis, revenue rose 22% on top of a 12% increase in the same year ago period. There was a positive 8% currency impact. Profit from recurring operations was EUR 367 million in this business group in the first half, nearly triple the EUR 131 million delivered in the first half of 2021. Operating margin in this business were 5.5% compared to 2.6% in the year ago first half. Turning to the drivers behind this performance. I'll start with the excellent execution in Sephora. We saw strong increases in store traffic and delivered market share gains across all key regions. Sephora's continued success is driven by the unique experience it offers across all channels, which it keeps fresh and exciting for customers through ongoing investments in omnichannel, innovation as well as logistics advancements to support operations. Sephora's partnership with Kohl's is working well with more than 250 new stores opened in the first half. Sephora also opened a major new flagship in Qatar, which has been very well received. Finally, for this business group, Sephora exited the Russian market with the signing of an agreement to sell its business there. Sephora's stores in Russia have been closed since early March. At DFS business continues to be impacted by the health restrictions in China with top destinations, including Hong Kong and Macao, essentially closed in the first half of the year. DFS has, however, seen the start, albeit slow, of business in highland and it is benefited from reopenings across Australia, the Middle East and the U.S. as travel increases across these regions. As for here in Paris, La Samaritaine on Pont-Neuf is off to a successful start, attracting Parisians and tourists alike. The same is true at Le Bon Marché in terms of being a destination for locals and visitors alike with sales returning there to the same level they saw in the first half of 2019. Among the attractions drawing them in are wonderful art exhibitions, including 2 from the artist, Mehmet Ali Uysal, concerts and other events. The store also launched a digital platform to bring online customers many services and experiences unique to Le Bon Marché. This ends the business group presentation. And I'll hand you back to Jean-Jacques, who will go through the figures. Jean-Jacques?

Thank you, Chris. So let's now discuss H1 2022 figures in a little bit more detail, starting with Slide 22. Revenue increased by 21% on an organic basis in the first half of the year, a commendable performance considering that we were already up 11% versus 2019. In the first half of last year, currency impact amounted to 7% as most currencies appreciated against the euro, while perimeter impact, namely Armand de Brignac and [indiscernible] it was negligible. So on a reported basis, revenue increased by 28% to EUR 36.7 million. Slide 23 details the geographic breakdown of revenues in euro. Compared to the first half of 2021, Asia declined by 6 points in the mix due to health restrictions in the region, while France and the U.S. both rose, and the rest of Europe rose 1 point. Our regional exposure remains very balanced with Europe at 22%; Asia, 32%; the U.S., 27%, while Japan and the rest of the world make up 7% and 12%, respectively. Moving on to Slide 24, which summarizes organic growth by region on a quarterly basis. U.S. growth, as you can see, remained consistently strong throughout the first half despite the demanding comparison basis. In Japan, emergency measures were lifted at the end of March, which largely explains revenue growth acceleration from plus 30% in Q1 to 37% in Q2. And in Asia, trends are softer. Growth was impacted in Q1 by the earlier timing of Chinese New Year and, as of March, obviously, with the return of health restrictions. Despite these headwinds, we were able to grow very slightly in the first half of the year. Finally, Europe delivered the strongest performance driven by an easier comparison base in other regions, but also by strong demand from both locals and tourists. Slide 25 summarizes organic revenue growth by business group. I won't elaborate since we've already discussed business group performance, but it is worth pointing out that, despite a complex environment, all divisions were able to deliver double-digit revenue growth. Breaking down this performance by quarter on Slide 26. It is interesting to note that despite quarterly fluctuations at the business group level, we ended up with relatively homogeneous performance throughout the first half at group level, a tangible example of the merits of our geographically diversified portfolio. The performance of Wine & Spirits is particularly contrasted owing to the earlier timing of Chinese New Year, the maturation of our Cognac [ Courvoisier ] which officially become eligible for bottling on April 1 for the V.S. quality and some logistical issues, notably in the U.S., that we commented already. Let's now comment the first half earnings per se on Slide 27, starting with gross margin at 68.9% of sales. It reached a new all-time high plus 70 bps above H1 last year. Operating expenses increased by 26% on a reported basis and 20% on an organic basis, slightly below revenue growth. This reflects an increase in marketing expenses as a percentage of revenues to about 11%, which was more than offset by slower growth in selling and all expenses. Against this backdrop, profit from recurring operations grew 34%, exceeding the EUR 10 billion mark for the second time. The first time was 2018, although it was for the full year. Operating margin reached 27.9%, 130 bps above last year. Other operating expenses and income was an expense of EUR 108 million, reflect tangible and intangible depreciation and, in particular, those related to our decision to sell Sephora's operations in Russia. Financial charges expanded significantly. We will discuss it in a specific slide in a minute. Income taxes amounted to 25.6% of taxable income, slightly below last year, owing to lower applicable taxes -- tax rate in France. After a 40% increase in minority interest, which reflects essentially the improved performance at Moët Hennessy, the bottom line is a 23% increase in group share of net profit. A few words on operating income by business group. As you can see on Slide 28, the 34% increase in profit from recurring operations at group level is underpinned by a broad-based improvement. For, Wine & Spirits, EBIT increased by 25%, slightly above revenue growth of 23%. Fashion and Leather grew 33% on a year-on-year basis. That is 130% versus first half of 2019. Perfume & Cosmetics operation profit declined by 1%. As you know, we used to have a significant to travel retail, which we have more or less offset with local demand, but the profitability of the 2 channels is not the same. And unlike some of our competitors, we are reluctant to compromise on the quality of our distribution to compensate for this headwind. So it's a bit painful, but we believe that this is the right strategy to support the desirability of our brands for the long term. In Watches & Jewelry operations, profit increased by 26%, a good performance to which both watches and jewelry brands contributed. And finally, Selective Distribution delivered a very significant increase, more than entirely driven by Selective Distribution and in particular, Sephora, while DFS was penalized by lower traffic in Hong Kong and Macao. Let's now discuss briefly EBIT growth constituents. Out of the 34% increase in currency -- in current operating income, 27% came from organic growth perimeter, and perimeter impact was negligible. The balance of 6% came from currencies. Although currencies did contribute to the EBIT growth. They were slightly detrimental to EBIT margins due to the anniversary of last year's hedging gains. The next slide on Page 30 details our net financial results. Most of the line are consistent with last year. The only significant swing factor is the fair value adjustment of our financial investment portfolio, which reflect the lackluster performance of financial markets year-to-date, a factor of which I'm sure you are all acutely aware. Essentially, the gains we recorded last year have been reversed this year. It was worth mentioning that this charge has no cash impact unless -- until we sell the underlying assets. Moving on to Slide 31, where you can see the balance sheet structure. The main comments are related to the increase in total equity, which reflects our increased net results and the impact of currency changes and the increase in inventories and current liabilities, which reflects progress in the business activity. Turning on to Slide 32. The main highlight here is a contrast between increasing cash from operations and declining operating cash flow. Two main reasons for this: firstly, tax. Unlike the income statement, cash taxes mostly reflect previous year's performance. Last year, taxes were based on 2020. This year, taxes reflect the strong rebound we have experienced in 2021. And secondly, working capital and operating investment, CapEx. Both have increased to reflect the return to a more normal business environment. In a nutshell, we benefited from one-off elements last year, while this year is more consistent with the usual pattern. A comment on the group's net debt, which reached EUR 11.1 billion as at June 30, about 4.3% -- EUR 4.3 billion below last year. And I will finish my comments on the figures with the interim dividend, which has been fixed at EUR 5 a share to be paid on December 5 of this year. This reflects a good result as well as an intention to restore a more equitable balance between interim and final dividend. So I would like to conclude this brief overview of the activity with a few comments highlighting the most important points of this semester. As always, it's not easy to look forward given business and political uncertainties. This said, we can mention a few important points. One, we entered the second half with a strong momentum, particularly demand momentum. Two, our geographic balance and diversification has proven to be a key asset over the last couple of years. Three, our financial strength provides an unparalleled ability to invest in marketing and selling strategies behind our brands. All this does not mean that we are immune to any external shocks, but it just means that we have the ability to face more adverse conditions and to emerge from them stronger than ever. With this, let's turn to Q&A. Operator, could you open the line for questions, please?

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

Yes. You were just saying that we entered the second half through strong demand momentum. I think there's quite a significant amount of questions. When it comes to the speed of the Chinese demand rebound once the COVID-19 restrictions are lifted, and my understanding, talking to some of your peers is that the speed is faster than otherwise feared. I wonder if you can comment on that. And the other nationality on which I think there are questions is the Americans. They've been driving a very significant growth starting in the second quarter of last year and whether you see any sign of normalization that size spend, which is appearing at this point on both sides of the Atlantic ocean in America itself, in Europe in the shape of tourists. My second question is on Russia. We saw that you decided to bite the bullet as far as Sephora is concerned. Would this be the shape of things to come for other parts of your business? And is there a prospect of resuming activity? Or are you planning to maintain the activity frozen, which means paying salaries and rents going forward for the foreseeable future, I guess? And then last but not least, your cash generation remains very significant. I'm not sure about M&A ambitions and opportunities. I wonder if we could count on more share buybacks going forward as a consequence of this strong cash performance.

Thank you, Luca. Let's start with Chinese demand. First of all, we were not among the pessimistic with regards to the recovery of Chinese demand 3 months ago when we discussed that. So you will probably credit us for that. It's, frankly, too early to say. I mean only a couple 3 weeks ago, there were still some heavy restrictions in some Chinese countries -- some Chinese cities. We understand it is still the case sporadic basis. So we've seen some form of improvement toward the end of the quarter but nothing very significant and nothing worth really reporting. So we are very much in a wait-and-see attitude. As I said, with Q1 numbers, we are not worried at all. We don't -- this is painful. Needless to say, the business in China in the second quarter of the year was down heavy double digit. So it's painful, but it shouldn't last or it will last as long as restrictions are being enforced. And when it is over, we are fully confident that the strength of demand will kick back and will enable us to recover fully. So my comment is not any different from the one I made in April, and nothing in the environment shows us that there would be anything different this time around. With regards to the U.S., I mean, my fear is that all these comments about recession and drop in demand would become a self-fulfilling prophecy otherwise. I mean you've seen our numbers for Q2. They're pretty close to Q1, which were very good. If you look at the comparison basis in 2021 compared to 2011, obviously, the comparison basis in Q2 was horrible. Frankly, I think the business was up 30% or something like that in Q2 last year compared to 2019. Despite that, we are able to show very solid double-digit numbers close to 20% in the U.S. in Q2. So we are still, I mean, again, wait-and-see attitude. I mean, we see no signs of -- no tangible signs of slowing down. We've seen a recovery in the business in Wines and Spirits. Maybe a little bit for technical reasons, we may comment that later on, but the business is doing well. So for the time being, I mean, we enjoy a good ride in the U.S. as well. As far as Russia is concerned, which is your second question, is there more to come, no comment to be made. I think as far as Sephora is concerned, we had to do something. I mean the business was a complicated business had been a complicated business for a long period of time. So crisis in Ukraine and Russia sort of speeded up, decisions that we were contemplating -- that we had been contemplating for a while. Otherwise, all other businesses, I've no specific comment to be made. And we keep our business in a frozen state in -- yes, everything is frozen, as you've said, for the rest of the activity in a wait-and-see attitude. Your third question on cash generation, I don't have a particular comment to make on M&A. I mean even if I have something in mind, as you know, we wouldn't share that easily at this point in time. With regards to share buyback, I think we have opened the tap a little bit this year. If you take into account last year's -- at the end of last year's program, share buyback that we implemented and the EUR 1 billion in March, April and the EUR 1 billion program altogether, we should be buying back in excess of EUR 1.5 billion in shares this year, which is a significant amount, much larger than we have done in the past. Absent significant acquisition opportunities, this is something that we intend to replicate in the coming years so that the net debt doesn't go down to a level that wouldn't make sense for us.

The next question comes from Edouard Aubin from Morgan Stanley.

Yes. So just two questions for me. The first one is on the operating margin. So last year, you had a record high operating margin in the first half of Fashion & Leather Goods division, and you improved further 80 basis points this year. So if you could please come back from kind of the tailwind and headwinds you've experienced in H1, am I right in believing that it was mostly a function of operating leverage rather than gross margin expansion? And what do you expect in terms of, again, tailwinds and headwinds for the second half of this year? So that's question number one. And then the second question is on FX and pricing. So clearly, you've experienced very significant FX movements in the recent months, and that has created some pricing distortion in terms of your pricing architecture with obviously prices in Europe and Japan, from an index standpoint, going down quite a bit. To what extent is that an issue for you? To what extent you need to address this? Because one could argue that it creates in a way a dilemma in the sense that it's fueling your pricing -- sorry, the gray market on the negative side. And if you were to address that to -- significantly by raising prices in Europe and Japan to have a more pricing architecture, it would maybe prevent the increase in local spending from Europeans, which you are trying to drive, as your stated strategy.

Thank you, Edouard. So operating margins in Fashion & Leather, well, there were not so many tailwind. I must say, as you can guess, I mean, the semester went on reasonably well. There's so many headwinds, sorry. It went on reasonably well. Tailwind was mostly connected with price increases. We have implemented significant price increases earlier on this year with a view that inflation was kicking in, and therefore, it was wise at the beginning of H2 and taking advantage of the strong demand to pass on price increases. So it had some benefits to our margins. At the same time, when you look at the global numbers, it's not just price increases. It's also volumes and it's also mix. And all this creates some operating leverage, better absorption of fixed costs. We have opened some stores and we have increased our marketing budget but not necessarily in the commensurate way to the increase in revenues. So all this created some impact on the operating margins. We also benefited from the fact that some non Vuitton, Dior brands expanded their margins as well. I will not go into specific names, but the whole division and particularly the fashion division, did extremely well in the first half of the year. So taking all this together. I mean we ended up with this improvement in operating margins. With regards to FX and pricing, we tend to be -- to have a little bit of a sort of helicopter view on this. I mean FX goes up and down. I mean, we know that. We've seen good times, we've seen bad times. You're right that in some cases, excessive price differences would create some gray market. It's not something that we see a lot these days. So we are not particularly worried. The index in the U.S. is a little bit higher than we have seen in the past. It creates a little bit of activity with U.S. clients in Europe, which is something that we haven't seen in a very long period of time. All in all, I mean, for the time being, it's not a big issue, and it doesn't call for urgent action. We'll see what happens. But again, I mean, what currency -- currencies create, currencies can undo fairly quickly. So we tend to look at it very much in a wait-and-see attitude.

The next question comes from Louise Singlehurst from Goldman Sachs.

Two for me also, please. If I could come back to the earlier point on the regions. Jean-Jacques, if we think about the business more broadly across the divisions, to put the U.S. in a different way. Can we think about the way that you're planning for that business over the next kind of 6, 12 months? Are there any differences across categories or your way of thinking about the budgeting versus 3 months ago how you might -- just to give us some context or not after an exit rate or any kind of trading color. I know we're not going to get that today, It would be very helpful to hear how you're managing the teams, and if there's any difference across categories. Presumably, inventory is in very good shape given the growth rates that we've seen in the first half and again in the Q2, both Hennessy across LV. Any context would be very helpful. And then secondly, just following up on China. Can you just give us some operational feedback, how it is today in terms of the logistics or the distribution, how easy it is to move product around the country and if there's been any increase or appetite for purchasing online, presumably there's lots of sales and orders being taken on the telephone as well?

Thank you, Louise. Well, with regards to U.S. planning or budgeting, bear in mind, look at the last 3 months. We've been doing plus 22% on top of 30% last year. So needless to say that we are not particularly gloomy and pessimistic as to the outlook. Obviously, we hear what a lot of people are saying about the coming recession, the impact of a lot of things on the U.S. economy. Why not? I mean we are not economists, we are managing a business. Managing a business means taking advantage of the strength in the demand. We know that from time to time, the demand may be not as strong as it used to be and react quickly when it happens. That's exactly what we do in the U.S. and elsewhere, I would say. So again, we are not making an economic forecast. That's not our job. We are trying to manage the business for the growth that it can generate, and frankly, it's been generating a lot of growth over the last years and almost a decade, I would say. And we are planning the business for growth. If things happen to be not as good as we anticipated, we will react and we'll cut cost, openings, et cetera, as we always do. The key of this is to react swiftly. So that's your first question. With regards to China and operating conditions in China, I would say that on the supply chain side, things, if not back to normal, have normalized in a great way. So we are not suffering any warehouse close -- closures or anything that would really be detrimental to the business. So in this respect, it's a little bit business as usual. With regards to clients, we see obviously a lot of traffic online. It doesn't mean that conversion rate online goes to the roof and that we are selling a much bigger part of the business online and much bigger than what we used to do. It's not really the case. The traffic in stores is not back to what it was last year. It's still way below. As always, in such circumstances, I mean conversion rates of clients goes up. But all in all, I mean we see a progressive normalization of the business. But on average, in a quarter, we are very far from where we were last year. So I expect to give you more -- to give you better and more favorable news in Q3.

The next question comes from Dana Telsey from Telsey Advisory Group.

Can you hear me okay?

Yes.

Great. Okay. Just wanted to follow up on the Watches & Jewelry business, the progress on Tiffany what you're seeing there in terms of the progress that you're making and how you compare to wondering in the same time period in terms of what you're seeing globally? And then just on the operating margin that you saw in Perfumes & Cosmetics, which is lower than last year, anything to note there in terms of that business and what you're currently seeing?

Thank you, Dana. Well, frankly, the comparison between Tiffany and Bulgari is a bit unfair for Bulgari these days. Tiffany has a particular bias toward the U.S. market, which is booming, whereas Bulgari has a particular bias towards the Chinese market, which is undergoing some severe disruptions. So obviously, Tiffany is doing much better than Bulgari in Q2, but it's mostly a function of their geographic exposures, not really a function of the quality of their underlying business. So with regards to Tiffany, I mean, we have enjoyed a very, very strong quarter and first half of the year with strong double-digit advances in terms of revenues. Chris mentioned that, but we are putting progressively all the pieces of the business in place. And we're working on stores. Obviously, the revamping of the store network is an immense task to perform because there are many stores, and we are just starting. In terms of product, we have introduced new lines of products that complement existing collections nor is a particular success in this respect. And in terms of marketing, we keep on innovating and doing a lot of things. Chris mentioned the Blue Book event that took place in Miami in the first half of the year, which was a tremendous success. Although in terms of numbers, it's neither very significant nor insignificant. It's more significant in terms of appetite of the top end clientele for the brand, which really now ranks in the top brands in the world for high jewelry, and it's obviously a very encouraging factor for the future. So a very, very good first half for Tiffany. With regards to Perfume & Cosmetics, I would say that I mentioned that briefly in my comment on the main numbers, it's mostly a mix impact. What happens in this business is that the regular tax-free business disappears. There is nobody in airports, and particularly in Asia, less so in other geographies, but it's part the case in Asia, Asians are not traveling as much as they used to and they were the main customers in this business. So we have a big drop in the duty-free business, which when you look at the revenue numbers, it's not the end of the world because we compensate that with local business. The only issue is that the margins of the 2 businesses are not at all the same. There are minimal costs entailed in the local business than they are in the duty-free business. The duty-free business, as we all know, is very profitable. So it's really a fact of life. We have this good revenue momentum, which doesn't convert into additional profit because of a mix impact. We could decide to continue to allocate product to duty-free channels. We don't think it is wise because most of these products would end up in Mainland China with discounts, and we don't think it is a good thing to do to promote and to ensure the desirability of our brands long term. So it's painful. But long term, we think this is the price we pay to keep on with the desirability and the strength of our brands.

The next question comes from [indiscernible] from Bank of America.

I have three questions. The first one, you mentioned it a little bit, Jean-Jacques, a little bit earlier about the worries about recession and inflation and the impact it can have on the consumer. Clearly is a concern for investors because we don't really have a track record of what happened in the past for luxury goods company in that type of environment. So I was wondering if you could share your views on how luxury goods company can be better protected against this and other consumer discretionary companies and what you are doing at LVMH specifically to address this. The second question is about pricing. I was wondering if you could give us a sense of what price increases you've implemented in the first half and this fitted in Q1 and Q2 for Fashion & Leather, if you want to do it more in H2 and also if you've seen any push back from consumers when you decrease the prices, particularly on volume. And last point on Fashion & Leather, if you could help us get a sense of the growth and indication on nationality and the growth by nationality for Fashion & Leather in Q2.

Thank you. So your first question is far from being easy. Let me try to give you a few comments on that. First of all, if you look at our cost base over -- and the cost base changes over the past few years, a couple of years, I would say. My comment would be that, first of all, selling expenses are much more variable than what they used to be, which plays against us in good times but in our favor in bad times. So that's the first comment. The second comment is that we are -- as I said, we are not managing for recessions. I mean we are managing for good years. And when a recession comes, we adjust, and we adapt ourselves. And this is an important point because assuming that most selling expenses, which are about 20-something percent of total sales on a group-wide basis, are more variable than what they used to do and that marketing, which is as high as 11% of sales, which is not variable but discretionary, so can be adjusted with a little bit of time lag, that can be adjusted in recession times. This is some form of protection against revenues being affected by tougher times and lower demand. Don't take me wrong. I mean if we end up with a sort of worldwide recession with everybody staying at home and shopping in luxury as it happened in 2008 will be affected. We were affected in 2008. What we've seen from previous recessions is that they don't last and we have a very strong rebound capacity. And in terms of management, what we are trying to achieve is to make sure that, yes, we react to changing conditions, but we also put ourselves in a position to rebound strongly when things get better. And it's exactly what happened in the past. Over the past 20 years, it happened a few times. And we ended up tough times, probably in a relatively better position than we -- than before the recession. So that's, in a nutshell, what we are trying to achieve. It's not a precise question to answer to your question, but that's what we are trying to do. Pricing, I cannot really -- even for the Fashion & Leather division, I cannot really give you precise numbers in Q1, Q2. Overall, most brands have increased prices across the board, not necessarily all products, but across the board in between 3% and 7%, 8% maximum. So we've seen some increases, as I said, mostly in Q1, not so much in Q2. There were some exceptions but between 3% and 7%. With regards to second half, I have no particular comment to make. I don't think we'd be very active on pricing because we did most of the action in H1, but we'll see. With regards to pushback from customers, I think the numbers that we've been showing you are speaking by themselves. I mean, no, we haven't seen any pushback from customers.

Nationalities?

Yes, the various nationalities, well, it's a professional leader. It's also a complex question. The only thing I would say that the U.S. numbers are -- I mean most of the business is local. So Europeans are shopping in Europe. Asians are shopping in Asia. And U.S. customers are shopping in the U.S. The only thing that we've seen was probably this is connected with the strength in the U.S. dollar is that towards the end of Q2, we've seen a little bit of shift, particularly in Fashion & Leather from the U.S. into Europe. So the U.S. customers numbers remain extremely strong, but we see -- we've seen a lot of activity with U.S. customers in Europe as tourists. So that's the only noticeable point. Otherwise, I mean, most client base numbers are pretty close to geographic numbers.

The next question comes from Antoine Belge from BNP P Exane.

Yes. It's Antoine. Three questions, please. First of all, I know, Jean-Jacques usually, you said that the LV brand is quite close to the divisional average. But from your comments maybe about the non-LV brands, is it fair to say that this time? Maybe the LV would be around 4 points below. And so maybe you're starting to moderate wise brands like Loewe, Celine, or line and even Marc Jacobs would have done fantastically well. The second point is about Cognac. We saw this fantastic -- quite remarkable catch-up. So what should we expect for the remainder of the year after a strong Q2? Was it purely a catch-up on Q1? Or should we expect maybe some kind of moderation. I don't know, sometime in H2? And also maybe more comments about the sellout. And finally, I think you mentioned the FX headwind because the impact on sales was plus 7% on EBIT around 5%. So I calculated maybe around 70 basis points of negative impact. So is that, we say, ballpark, right? And then is it fair to assume that with hedging fading, we should have a reversal in the second half and quite substantial impact maybe above 100 basis points for 2023.

Thank you, Antoine, for your traditional 3 questions. LV, Dior and others, as always, LV is not very far from the division's average. It's a little bit below. Dior is a little bit above. And the other brands, as you can guess, are more or less in line with the division's average, so I will not go into further details. Otherwise, we will give you the real numbers, but these are the main trends. Cognac, don't get carried away by the good numbers in Q2. I mean they are good. They are very good but they are mostly a function of what happened in Q1. You remember that in Q1, not only we had a very tough comparison basis, but we had very severe disruptions in the U.S., disruptions in shipping bottles into the U.S. and once they arrived in the U.S., severe disruption in harbors and with transportation companies. So we did, frankly, miserable Q1. As you would remember, it was not linked with demand. It was linked with offer and supply. This lasted until the end of April, more or less. And from April onwards, we have been able to get additional V.S. bottles that we have shipped into the U.S. in a much smoother way from a logistic viewpoint. And therefore, May and June have been very, very strong months in terms of loading bottles to the distributors. So from a selling viewpoint, it was a very good -- it was a very good 2 months. Sellout is more complicated to analyze because sellout started the year being very poor not for lack of demand but for lack of bottles available. So we started the year with miserable numbers on sellout too, but there were nothing to be sold compared to last year. So progressively, but it takes a little bit of time. From 1st of May onwards, we are making bottles available and the sellout numbers are recovering. They are still negative, but they are recovering. So as you've seen from Chris' presentation, volumes for the global business in Cognac, volumes were at minus 2%. So they were not particularly strong in the U.S. So we are recovering progressively from this very complex supply chain situation. But the good news is that demand immediately when we get bottles available, they are being sold to the end customer. So demand remains as strong as it's been. So we are pretty hopeful that H2, we'll see normalization and positive growth overall for the full year. So that's our hope. With regards to China, the situation is quite uncertain. We are down both in selling and sell out single digit, but down for both. The situation is normalizing progressively in China. A bit early to say whether this will benefit or affect Mid-Autumn Festival which is a second important moment in the year, particularly with regards to gifting. So I think Q3 will give us a little bit more highlights as to what will happen in China for the full year. So we are very optimistic with regards to the U.S., a little bit wait and see with regards to Mainland China. Third question on FX. You're not very far in your assessment of the impact on operating margin. Will this reverse in the second part of the year? Probably it will diminish the headwind from currencies on margins, will diminish in a significant way. Bear in mind that we hedge currencies with tunnels and that the other part of the tunnel means that we don't sell all the currencies at the prevailing market rate. We sell at a little bit worse level. So we'll have negative, not in a tremendous way but if you have tens of millions of negative hedging gains hedging losses, therefore. And probably in the second half of the year, that will beeps the impact of normalizing hedging situation, as you alluded to in your question. As always, I mean, currencies are very complicated, particularly if you look at them from a margin viewpoint. Look at them from an absolute level viewpoint, and it's much easier. I mean being here more or less at parity with the dollar is obviously having some positive impact on our business, and it will be the case as long as it lasts.

The next question comes from Shawn from [indiscernible].

Coming back to the gross margin point in Fashion & Leather. I mean I think raised prices meaningfully. I think gross margin have benefited quite a lot despite the negative geographic mix impact. I'm just wondering what are the input cost pressures you are seeing. How much is the buffer in terms of absorbing these pressures, in terms of should we expect some normalization in gross margin already in the second half? Or is it more about next year question? And also in terms of the customer demographics in Fashion & Leather, can you comment a little bit about the Europeans? I know you mentioned it's nothing much here in terms of any age -- any difference in age group within the European or Americans and also in terms of performance by price points, if there's any difference or anything to comment in terms of entry price points versus the higher price point items in Fashion & Leather too.

Thank you. So your question on gross margin in Fashion & Leather. I would say when you pass on price increases like we did, assuming that inflation would kick in for the rest of the year, and therefore, it was a little bit of a precautionary move. With regards to gross margin, it is obviously having some impact, some positive impact as we only have raw materials and cost of labor in -- within the gross margin. All other costs that gross margins are supposed to be covered as well from an inflation viewpoint by the price increase. So I think it's more fair to look at it on a global basis. The impact of price increase in the first half was significant, but not on a global basis and on operating margins, but not as strong as it was for gross margins. Your question on European customers. So we did pretty well in Fashion & Leather with European customers in Q2 as we did in the preceding quarters. Most of the client base and the most important ones are German, French, Brits and Italians. We're growing double digit with most of our brands. So we cannot complain about European customers, and we got on top a significant touristic activities in Europe, which explains some pretty strong numbers that we have reported. With regards to your question about entry price top and more expensive items, we had a very good ride with the top end of the portfolio, but it was probably a function of making such product available and voluntarily restricting the enterprise product at this point in time. So we have particularly rebalancing between canvas and leather goods, which is ongoing, which has been making some progress, which means that the top end of the portfolio has done better than the entry price. But it's on purpose because we intend to rebalance the 2. And due to that, we benefited from a very strong mix impact on top of price and volumes, as I said before. So it's hard really to comment on whether demand is stronger on entry and top end because it's -- demand is also a function of what we make available. And as I said, I mean, with the rebalancing of the portfolio. We try to favor the availability of reasonably expensive leather products to the expense of the entry part of the product range.

The next question comes from Omar Saad from Evercore, and we'll take an additional last question after that.

Two questions. Given the recent new Christian Dior flagship in Paris, which is a fabulous store, in the 3 years, I think it was the renovation talk. Maybe you could give us an update on the Tiffany flagship. Could we expect such an exceptional remodel as well for the store on Fifth Avenue? And then also a question for some of your wholesale businesses, maybe some of the beauty businesses and Wines & Spirits. Are you still in a restocking period with some of your retailers? Do you find that they're still at the retail level, restocking their inventories? And is that something that could last in this recovery and maybe even accelerate in certain markets like China?

Thank you, Omar. Your first question, I will make a brief -- a very brief answer. You won't to be disappointed. So I don't know exactly when, but you won't be disappointed. On the wholesale businesses, I mentioned a little bit on Wine & Spirits, yes, definitely, we are in a restocking phase. Stock went down very, very severely, and we've been on a negative volume performance in the second half of last year and in the first quarter of this year. And we have more bottles available. We also have some reasonably good news as we speak on this year's harvest, which could also alleviate the pressure. So we are very much on an inventory replenishment phase that could last a number of quarters that we expect to enable us to benefit -- to allow us to benefit from the very strong demand, particularly in the U.S. In Perfume & Cosmetics, we have seen less disruptions. There have been some disruptions, particularly in the supply of glass bottles, but we've seen less disruptions together than we've seen in perfume -- and in Wines & Spirits. And on top of that, the average level of inventories at retailers is lower than what it is in Spirits. So it's less the case. And if it is the case, we can deal with the issue pretty quickly compared to what we do with Wines & Spirits where it takes longer to really do the full replenishment exercise.

The last question comes from Thomas Chauvet over from Citi.

I have three, one follow-up on Cognac. Remy was talking this morning about depletions in June in China, up double digit after difficult April and May, obviously, why the U.S., if I understand well, where also depletions are for double digit in June and July. So you're not seeing these trends but you're seeing an improvement. Do you attribute the difference in part to the logistics issues you've had in -- with the poor availability in the first quarter? Secondly, in Champagne, your business has gone from strength to strength. Your premiumization strategy is definitely working. How do you feel about the environment? We know swings in demand in Champagne can be quite abrupt when the feel good factor goes away. Do you see any structural difference in the champagne market or at your own brands that would prevent the business from suffering from a prolonged downturn as it did in the past, not just in Moët Hennessy but some of your competitors. And finally, a broader longer-term questions on the Fashion & Leather division margins, where you think it's going to settle in the future in the past 20 years, that division had EBIT margin ballpark between 30% and 35% depending on we were in the demand cycle. FX, at some time, had an impact. Some brands, Jean-Jacques, you mentioned in the past also did provided swings in margin up or down. Last year, the EBIT margin was close to 42%. So well above the top end of the range I mentioned, thanks to industrial scale, thanks to OpEx leverage. Can you elaborate why you think or at least you thought 6, 12 months ago? That this is now the new bar for that division, so 40%, 42% EBIT margin being perhaps a sustainable level with I guess Vuitton above that and then other brands are improving as you fly.

Thank you, Thomas. With due respect, I mean, monthly depletions in the context very, very low inventories and all of a sudden, bottles being made available is totally meaningless. I mean we can boast ourselves with fantastic numbers in June in China and in the U.S., they mean nothing. I mean there was nothing in the system. I mean, distributors were not carrying any bottles. All of a sudden, we make them available to them, therefore to make them, they do their job, they make them available to their own clients. We are talking about it's not end demand, depletions, bear in mind, it's not in demand. It's actually the amount of being made available by the distributors or wholesalers basically to their end clients. So commenting on 1 month's number in the context of scarcity of inventories means absolutely nothing in my view. And it's always the difficulty with wholesale businesses, as you need -- and particularly in Wines & Spirits, where the trends are pretty complex. We have very bad, as I said, I mean, the numbers for depletions in the U.S., if you look at them over 6 months this year are still heavily negative, but it's not a function of demand. It's a function of being -- of making bottles available. The minute we get the bottles, I mean these numbers will improve. So I will not go into the game of comparing ourselves with competitors, particularly on numbers. That means nothing in my view. As far as Champagne is concerned, as you said, I mean it could be a cyclical business. Champagne is connected with celebration. And there are times when there are things to celebrate and times when there are less things to celebrate. We are trying to develop the business on many geographies. I mean that's the only answer to this volatility or cyclical question. And we are pretty happy to see that all cylinders are firing as we speak. I mean, the Japanese business is showing very good progress. The U.S. business is good and the European business are good. So we expect these various client bases to continue to fuel the demand and enable us to grow the business significantly. This being said, there are constraints to the level of bottles we can sell. We benefited from the fact that 2019, 2020 and, to a lesser extent, 2021 were not fabulous years in terms of demand. So we had a little bit of excess inventories, particularly at the end of 2020. So we benefited from that, and we can serve a pretty booming demand. This won't last forever. So we'll see how we manage in between offer and demand as always. It's a question of managing equilibrium between the 2. And as we cannot serve all the demand, I mean we try to promote the top qualities and to substitute mix impact to volume impact, that's been the strategy of the division for decades, and we will not change that for obvious reasons. Fashion & Leather margins and whether the 40% plus is a new normal. I think the answer is yes. And the big difference with the past. As a name, it's Christian Dior. I mean, was not part of the portfolio when you mentioned the 30%, 35% range in the past. Christian Dior now is a very significant brand, and its contribution not only to revenues but to operating and therefore to margins is extremely significant, and we enjoy very high margins or very substantial margins not as high as Vuitton, unfortunately, but they are doing well. Believe me, and this helped very much increase the overall margins for the division. On top of that, businesses like Loewe, Fendi, or Celine are also improving the margins very significantly. So I'm not commenting on the impact of a potential recession on the margins. I'm commenting on the fact that most brands within the divisions are now reaching a level of margins which is satisfactory and commensurate to their global size, which was not necessarily the case in the past. And therefore, I think the 40% plus that you commented is there to stay.

I think there's one last question from Erwan Rambourg from HSBC.

Sure. Maybe follow-ups on Wines & Spirits. Just trying to gauge what part of the growth was linked to pricing. And given the strength in demand, are you rethinking the algorithm of growth maybe for the long term? Secondly, on Wines & Spirits, I'm wondering -- I think you commented, Jean-Jacques, on the fact that Rose was the next Champagne. You just acquired Phelps in Napa, where else can you look at M&A? And with people being nervous, and a lot of businesses being nervous and a lot of people talking about recessionary risk in the U.S., are you seeing more potential to aggregate smaller independent family-owned businesses? And then thirdly, maybe on working capital. a big increase on working capital in H1 this year versus last. Is a lot of that linked to Wines & Spirits actually? Or is there something else that we need to bear in mind?

Okay. So thank you, Erwan. I mean, your last question was your last four questions. So we'll try to answer to them. Wines & Spirits impact of pricing, it was obviously quite significant in the first half around, I would say, 5 -- 5%, 5-ish, I mean, they increased prices in Champagne and Cognac in a significant way. But bear in mind that we only that in the first part of the year, and we don't intend to do that each and every year. So it has some impact both on revenues and on margins in different context. I mean the context of Champagne was booming in volumes, which was not the case for Cognac. We'll see all this normalizing, in my view, in the second half of the year. So the second half of the year for Wines & Spirits should be more easy to read compared to the first half of the year, which is not particularly easy. Your question about Rose being the next Champagne and what are the categories opportunity. I mean Rose is strategically the same pattern of Champagne. There is some way to go. So I'd love Rose to be as big as Champagne and as profitable as campaign, but there is some way to go. So maybe there will be opportunities there. For the time being, we have made a fantastic acquisition with Château d’Esclans, and we intend to integrate it as we do it to grow it as there are ample opportunities to scale up this business. Will there be acquisition opportunities? I think we discussed that many times in the past. Maybe. But in tougher times, I'm not saying that time are tough, I'm saying that they could become tougher. That's the hypothesis of a lot of people. That creates some willingness of sellers to put their business on the block but usually at yesterday's price. So it's not that easy to find out some agreement between buyers and sellers. So I have not seen a lot of activity. And if you look most M&A activity, not necessarily LVMH, but most businesses, it's not in -- at peak times and potentially in downturns that you see the most activities taking place. So maybe, but I'm not too sure, it will depend very much on whether the markets hold up or whether we enter in more complicated times, particularly. In the U.S., frankly, it's -- as we speak, it's a little bit water under the bridge. Working capital, sorry, your last question. Well, the increase was across the board. I mean there was a great need for replenishing our own inventories. So the increase was across the board, mostly linked to inventories. As you know, we have an increase in working capital in the first half of the year and usually a decrease in the second half of the year. So obviously, the global number for the full year shouldn't be as negative as what we've seen, EUR 2 billion-something in the first half of the year.

And there are no more questions. Thank you.

Thank you all, and I look forward to discussing with you Q3 in October. Thank you.

Thank you.