Executives: Jean-Jacques Guiony - Chief Financial Officer Chris Hollis - Investor

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Analysts: Mario Ortelli - Bernstein John Guy - MainFirst Antoine Belge - HSBC Luca Solca - Exane BNP Paribas Thomas Chauvet - Citi Fred Speirs - UBS David Da Maia - Aurel BGC Paul Swinand - Morningstar Rogerio Fujimori - RBC Capital Markets Catherine Rolland - Kepler Hermine de Bentzmann - Raymond James Flouquet - JP Morgan Louise Singlehurst - Morgan

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Operator: Welcome to the LVMH First Half Year 2016 Results Conference Call. I now hand over to Mr. Jean-Jacques Guiony. Sir, please go ahead. Jean-

Jacques Guiony: Thank you.

Good afternoon, ladies and gentlemen. And welcome to this conference call. I am Jean-Jacques Guiony, the Chief Financial Officer of the LVMH Group. Before I begin I must remind you that certain information to be discussed on today’s call is forward-looking and is subject to important 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, the first-half figures. After a brief discussion on the main half highlights, Chris Hollis, Group’s head of Investor Relations, will cover the main developments of our different business Groups and I shall then comment on the main figures. After this, both Chris and I will be available for your questions. The press release is available on our website as well as the Slides for today’s presentation and the interim financial report. Moving to the first Slide of the presentation I would like to say that despite a fairly challenging environment, the first half of 2016 was solid.

We shall go into some details but the main points to bear in mind that it should be a strong business in the US and a progressively improving situation in Asia, a very positive contributions from Wine & Spirits, a solid performance in the Fashion & Leather business particularly at Louis Vuitton and some very bright performances with businesses like Fendi, TAG or Sephora just to mention a few. I will now turn to Chris who is going to review the main developments within our various business Groups. Chris?
A -

Chris Hollis: Thank you, Jean-Jacques. I will start with the Wines & Spirits on Slide format. As I mentioned it’s been a strong first half, as Jean-Jacques mentioned it’s been a strong first half for this business Group.

It was an impressive, it saw an impressive 9% increase in organic revenue growth on a reported basis. Taking into account the negative 2% currency effect revenue was up 7%, so nearly €2.1 billion in the first half. Looking at the two main categories, champagne and wines, organic revenue grew by 6% in the first half and taking into account a negative 3% currency impact reached €856 million. Organic revenue for cognac and spirits also increased during the period by 11% and after taking into account a negative 2% currency impact reached €1.2 billion in the period. Profit from recurring operations for this Group increased a very strong 17% to €565 million in the first half of the year.

Breaking this down, champagne and wines contributed €178 million in profit and cognac and spirits contributed €387 million for the first half. The two key factors behind the excellent performance in Wine & Spirits was strong progress in the US and better momentum in China beginning to reverse the destocking trends experienced for some time in the Chinese market. In the champagne business, volumes rose 3%. This was driven by numerous innovations and good performance of the prestige vintages, notably Krug and Ruinart and on a geographic basis, the category saw sustained growth both in Europe as well as the US. Moving to cognac, volumes in this business were up a very encouraging 13% and the US continued to demonstrate excellent performance.

This also reflects a rebound of consumer demand in China as I mentioned before in stronger contributions from both Glenmorangie and Ardbeg in the whisky category. So all in all it’s been a very encouraging start for the year for the Wine & Spirits business. Looking to the second half of the year, Slide 6, the goal is, of course, to continue this momentum by ensuring the brands remain best-positioned in their markets. As always this will rely on product innovation, demonstrating the unique quality of our products and offering unique experiences to customers. We will also continue to watch closely and seek to maximize the potential of the improving sales environment in China as well as to focus on growth in the US and new markets.

In light of growth that is anticipated work is underway to expand production facilities at both Hennessy and in champagne. Turning now to our Fashion & Leather goods brands starting on Slide 7, this business Group was flat for the first half on an organic basis. On a reported basis taking into account the negative 1% currency effect revenue is just slightly down 1% in the first half of the year to €5.8 billion. Profit from recurring operations was also slightly down by 2% for the period year over year to €1.63 billion in the 2016 first half. The first half of the year in Fashion & Leather Goods saw continued growth in Europe, although there was a significant decline in tourism in France which has affected companies across the country.

The US was impacted by the repositioning of our American brands but excluding them fared well. And Asia excluding Japan is starting to see improving trends. In terms of the brands there were many bright spots. Louis Vuitton as I mentioned, the combination of the strengths of its iconic lines and the new models speak to the strong creative momentum that continues to drive the brand forward. You have seen a good deal of excitement in the media about the cruise show against the amazing backdrop of the Niteroi Contemporary Art Museum in Rio de Janeiro which was reported around the world and the new Blossom line of watches and jewelry is off to a strong start.

Fendi, too, as I mentioned delivered an excellent performance. And once again Celine was a standout with particular strength in shoes and accessories. In terms of the other brands Loro Piana opened its flagship store right here on Avenue Montaigne in Paris, a magnificent reflection of the brand and worth seeing. Kenzo, Loewe and Berluti sustained their growth. At Marc Jacobs work continues on the repositioning of the collection.

And as you’ve seen we announced yesterday an agreement for the sale of Donna Karan International to G-III Apparel Group, Ltd. Our Group has owned Donna Karan this business for 15 years and based on the work throughout that time particularly good progress made in the last year. It was clear that the platform has been put in place for broader distribution at wholesale. So when G-III approached us we felt the timing was right and given their core capabilities in manufacturing and distribution we believe that they will be a good steward for the brand going forward. The transaction is expected to close later this year or in early 2017.

Looking ahead to the balance of the year, as always a top priority is continuing the creative momentum of Louis Vuitton under the direction of Nicolas Ghesquiere. This includes delivering innovation across categories with notably the new suitcase designed by Marc Newson and the launch of a new Louis Vuitton fragrance in the second half as well as the inauguration of the Louis Vuitton design workshop in Grasse in September. The brand is also focused on continuing to evaluate this retail network with the constant aim of offering customers a unique experience and unparalleled service. Fendi is also, of course, focused on building on the strong appeal of its brands including last week holding an exceptional fashion show in the Trevi Fountain in Rome to celebrate its 90th anniversary. Givenchy, Kenzo and Celine, too, are dedicated to continuing their momentum with strong plans in place centered on ongoing innovation.

And across the rest of the brands in this Group work is being done to support creativity as always and invest for growth. Turning to Perfumes & Cosmetics, beginning on Slide 10 for the first half of the year organic revenue rose a very healthy 8% including a negative 3% currency effect. This translated to a 5% rise on a reported basis to €2.3 billion. Profit from recurring operations rose a solid 9% in this business Group, reaching €272 million in the first half of this year. To provide some insight on behind the numbers I will begin with Parfums Christian Dior with performance defined by strong momentum and market share gains.

This is due to the continued strength of J’Adore and Miss Dior as well as the tremendous success of Sauvage. But it’s not just fragrance. Parfums Christian Dior performance has reinforced its position as an international leader in the makeup category with its new foundation Forever and Dior Addict lipstick. It’s prestige in skincare range also has also continued to perform well, particularly in Asia. At Guerlain, the expansion of La Petite Robe Noire into makeup with new lipsticks and nail polishes has been successful while the Orchidee Imperiale skincare line continues to deliver progress.

Building on the continued success of Roller Lash mascara, Benefit had an exceptional start for its latest creation, the Brow collection. Makeup at Givenchy continues to perform well due to the success of its Prisme Libre line and Make Up For Ever also delivered ongoing growth, driven by innovation most recently including its new makeup bar concept, Go Pro makeup, which was inaugurated at Sephora Champs-Elysees. With respect to the Kenzo brand, both Kat Von D and Marc Jacobs Beauty have been very well received. And finally, Fresh recently launched in Europe with a new point-of-sale at Le Bon Marche and that’s off to a good start. And now for the outlook in the Perfumes & Cosmetics Group, Slide 12 the focus on innovation will indeed continue.

And it will be supported by sustained investment in marketing as well as will the existing iconic products. And there will be, in fact, a number of new products to anticipate with launches from Parfums Christian Dior with its new Rouge Dior lipstick, an icon of the brand, as well as some innovation in fragrances from Guerlain in the La Petite Robe Noire collection. Kenzo will launch Kenzo World for women, the first scent developed in collaboration with very talented Kenzo Mode designers. And finally, Benefit will build on the success of the Brow Collection that I mentioned rolling it out internationally. Now turning to Slide 13, Watches & Jewelry, we saw good momentum in this business Group in the first half with 4% growth on both an organic and reported basis.

The revenue reached just over €1.6 billion for the first half of the year. And profit from recurring operations was flat at €205 million. To touch on some of the highlights for this Group this is now Slide 14, Watches & Jewelry delivered market share gains across brands. And we are starting to see the fruits of the successful refocusing of TAG Heuer poor product range. TAG Heuer introduced new products in the first half for its iconic Formula 1, Aquaracer and Carrera lines and its Connected smartwatch saw continued notable success.

At Hublot, the brand enhanced its signature Classic Fusion and Big Bang lines. And in terms of the jewelry brands, Bulgari delivered a solid performance with the success of its B Zero 1 and Diva jewelry lines and easily outperformed the market which has seen some challenges. The brand has also reopened its London Bond Street store in the first quarter which has been very well received. Finally, Chaumet during the period saw accelerated revenue growth in Asia and the Middle East driven by the success of its Josephine and [indiscernible] lines. Looking ahead, there will be a further focus on driving market share gains in this business as well in the context of a difficult environment, in particular for watches.

TAG Heuer will make continued investments in communication initiatives and double its production capacity for the Connected smartwatch. Hublot will strengthen its visibility at sporting events which are a natural fit for the brand. At Bulgari, the brand will continue to reinforce its iconic Serpenti line and will progressively increase production at its new jewelry workshop in Valenza, Italy to support future growth and innovation. And finally, a new concept store for Chaumet will be launched at the end of the year in Hong Kong. Moving now to the final business Group, Selective Retailing, this is Slide 16, first-half organic revenue growth was 5% or 4% on a reported basis after including the negative 1% currency impact to reach €5.48 billion.

This business Group saw a 5% decline in profit from recurring operations to €410 million. Starting as always with Sephora which continues to perform very strongly, it delivered double-digit revenue and profit growth and gained market share in all regions during the first half. Performance was driven by double-digit comparable-store growth, in particular in North America and the Middle East, and continued rapid growth of online sales where Sephora has maintained its position as a digital leader. Also the first half, Sephora opened flagship stores in Boston and Paris and inaugurated its first point-of-sale in Switzerland. At DFS, this business has been impacted by the challenging tourism environment in Asia.

That said, new marketing and loyalty programs continue to make DFS and its T Gallerias exciting places to shop. Additionally, DFS opened a T Galleria in Cambodia, the country’s first luxury department store. As we look ahead to the balance of 2016 for Sephora, its success will continue to be driven by product innovation and the development of exclusive and personalized services including new mobile initiatives. At the same time, it will further expand its store network with notably the opening of a World Trade Center store in New York in the second half of the year. Turning to the outlook of DFS, this business is focused on continuing to transform its product offering while further developing its loyalty programs and digital services.

It will be opening its first location in Europe, a T Galleria in a historic building by the Grand Canal in Venice and completing the expansion of the T Galleria City of Dreams in Macau. With that, I’ll now turn the call back over to Jean-Jacques for the key figures. A - Jean-

Jacques Guiony: Thank you, Chris. So I shall start the key figures review with revenues for the first half of the year as shown on Slide 20. As you may see we ended the semester with all of our business Groups in positive territory.

You will also note that published growth for once is not very dissimilar to the organic growth with the limited 2% negative currency impact on our revenue and positive 1% perimeter impact. Chris has commented the main business Groups in details but the main points are really one in this period showing a very positive organic growth of 9% with a strong contribution from Asia which had been under pressure for many quarters. Fashion & Leather being flat in organic terms despite many significant negative factors affecting the business. Perfumes & Cosmetics up 8% in organic terms, outperforming most geographies. Watches & Jewelry showing a very solid 4% growth despite a challenging environment, particularly in watches.

And selective distribution was a strong contrast between Sephora positive in all its geographies and DFS affected, as Chris said, by the business trends in greater China. Let’s move to Slide 21 where you can see a comparison between first and second quarters in terms of organic growth. You will notice the strong improvement in Wines & Spirits and a bit of a slowdown in Watches & Jewelry while other business growth was more or less in line with Q1. Let’s now move to Slide 22 which shows a geographic breakdown of revenues in euros. No major change compared to the same period of last year.

Moving to Slide 23, you will notice a strong performance from the US where all main businesses were well-oriented. Europe did well despite France being more negative in Q2 than in Q1, mostly due to Fashion & Leather. Asia showed the most improvement in Q2 due to Wines & Spirits but also to Fashion & Leather, notably in China, while Japan’s growth was severely affected from April onwards by Chinese restrictions to importation of travel retails goods combined with a stronger yen currency. Let’s now move to the next Slide, 24, where you will see it are simplified P&L accounts for the period. The main comments are the following.

So let’s now discuss revenues that we have already seen with 3% growth. Gross margin improved slightly from with 4% from 64.8% of sales to 65.6% of sales. Marketing and selling expenses are up 5% while admin is affected by a number of one-off expenses which we do not expect to have in the second half of the year. Profit from recurring operations is flat at €2.955 billion with a positive €60 million impact from currencies. Other operating income and charges are negative by €40 million, reflecting mostly amortization of intangibles and some depreciations.

Financial charges are less negative than last year and will be commented in a separate Slide in a minute. The Group’s income tax rate is in line with last year at around 32% and as a result the Group’s share of net profit is up 8%. Let’s now look at the profit from recurring operations which is broken down by business Groups on Slide 25. Wines & Spirits had an outstanding first half and enjoyed a significant 250 basis point improvement in operating margin with a 17% increase in its operating profits. Fashion & Leather ended the semester on a slightly decreasing note which if you allow me is actually quite positive in the context of revenues in euro being down 1%.

We managed despite some repositioning situations like Donna Karan and Marc Jacobs to contain our cost base so that we could protect margins. Perfumes & Cosmetics showed a 9% increase in operating profit with a slight improvement in margins. Watches & Jewelry was flat in H1 but anniversarying a very strong H1 last year when profits doubled, if you remember. Finally, lackluster numbers in selective distribution due to DFS being under continued negative pressure, mostly in Hong Kong and Macao. Yet Sephora had a very strong first half with strong top-line and bottom-line advances and margin improvement.

Let’s now turn to Slide 26 and the analysis of the net financial charge. A few points to mention, the cost of debt is down to both lower interest rates and lower average debt. The cost of hedging is substantially lower than last year when we bought back call options sold in call hedging strategies to protect our operating profit, and finally in common financial investment portfolio was lower than last year. Moving on to Slide 27 where you may see the simplified balance sheet structure. I will not comment as there were no major change in the first half of this year.

Turning to Slide 28 a few words on the cash flow statement. First, net cash from operations is up €227 million, in part owing to the cash disbursement last year on the repurchase of the call options I just mentioned. Secondly, working capital requirement used about €1.1 billion in cash, a little bit more than last year and same thing with capital expenditures which are up €55 million compared to last year. Overall our free cash flow is one of the highest we have ever reached in the first half with €761 million. This free cash flow will be used partially to pay an interim dividend of €1.40 per share on December 1.

I will finish with a comment on the Group’s net debt on Slide 29. The Group’s net debt reached €5.3 billion as at June 30, about €1 billion higher than at the end of last year. As you well know, this increase is quite usual in the first half of the year when the payment of our dividends to our shareholders and minor equity partners exceeds our net cash flow. So the Group’s net debt, as of June 30, 2016, represents 20% of total shareholders’ equity. I would like to conclude this brief overview of the activity with a few comments on H1 performance, highlighting the most important points for the future.

I would say that, first and foremost, I do not think I will surprise anyone by saying that the global environment is quite challenging. It is particularly true in terms of currencies where the traditional answer of adjusting prices through fluctuations in currencies is not valid anymore. It doesn’t mean that we have no pricing power. It means that we should take a long-term view on reflecting currency fluctuations and prices. Secondly, I am proud to report some improvement in the condition of some businesses that was a cause for concern in the recent past.

I will mention only the most significant like TAG Heuer where the value repositioning is paying off and the cognac business in China where as expected we see a gradual recovery after the business bottoming out last year. We have seen some business -- we still have some businesses to fix, but it’s highly encouraging that some of them have now been turned around. Finally, I will mention the very solid performance of Louis Vuitton in the first half. No other brand is more exposed to the impact of travel retail shifts than Louis Vuitton. And the resilience of it financial performance is the best proof of the soundness of its product and distribution strategy.

So that’s basically all we wanted to say. Operator, could you please open the Q&A session?

Operator: [Operator Instructions] So, we have our first question coming from the line of Mario Ortelli from Bernstein. Please go ahead.

Mario Ortelli: Good afternoon. Two questions; the first one is about cognac, excellent performance.

Which part of the performance is driven by price increases? And what is your outlook for the second half of the year for sales in cognac in the U.S. and in China? The second one about Louis Vuitton, resilient top line but probably a decline in profitability. Do you expect that this decline of the profitability of Louis Vuitton will continue in the second half of the year or are you putting in place cost cutting measures or any kind of measure to stabilize or increase the profitability of Vuitton?. Jean-

Jacques Guiony: On cognac, there was no significant price increase in the first half of the year. The main impacts are coming from volumes that are in H1 13% as I think Chris mentioned with an acceleration in the second quarter of the year.

But there is also a mix impact, particularly due to the fact that in China as it was a case already in the first quarter of the year, the XO business is faring better than the V.S.O.P. So really the bulk of the growth for the cognac business comes from one, volume and two, mix. The outlook for the second part of the year we are still optimistic, although it’s quite obvious that second-quarter performance cannot be replicated. Part of it was coming from the fact that comparison base in China in particular was extremely favorable. In the Q2 last year in China we really decided to cut inventories in a big way within the distributors which was not doable in Q1.

So Q2 volumes last year in China were extremely low from a selling viewpoint, so the comparison base was extremely easy which enabled us to register a very significant growth in cognac in H1 this year which is obviously not repeatable for the second part of the year. As far as the US which is the other source of growth in the cognac business the market remains extremely strong. We have a little bit of pressure on supplying the bottles to trade and our inventories within the trade are at a fairly low level. But we are quite optimistic that we should be able to have a second part of the year which may not be as strong as the first part of the year but which will be very robust anyway. Your second question on LV, you mentioned the decline of profitability.

You should measure profitability by operating profit to sales. There was no such thing as a decline in profitability in H1. Profitability in H1 this year was extremely close, not to say identical to what it was last year.

Operator: Next question is from John Guy from MainFirst. Please go ahead.

John Guy: Three questions, please. If I could just start with the recent news that you’re selling DKNY to G-III, could you maybe just talk a little bit about the rationale? I know you mentioned around wholesale distribution, but is it just a question of repositioning within your portfolio that you want to stick more to core luxury brands and less premium apparel, appreciating that G-III has a larger premium apparel distribution sort of US-centric brand portfolio is my first question? My second question, with regards to the amount of cash that you have in the free cash flow looks incredibly strong. Could you maybe talk about potential plans given the fact that Guerlain I think last year was only around 16%, what are you thinking around M&A, cash returns, special dividend, share buybacks, etc., and do we have any update there? And finally, with regards to the Louis Vuitton fragrance launch due for the second half of 2016, can you give us an idea as to how big you think Louis Vuitton fragrance could be within the next three years? Thanks very much. Jean-

Jacques Guiony: On the DK rationale, I think you read in the press various comments, particularly from Pierre-Yves Roussel who is in charge of this business on this. What I can say is that in the course of the repositioning of the business we understood that maybe unlike Marc Jacobs, for instance, we would not really be able to concentrate Donna Karan solely on the contemporary segment.

And access is really a very key component to the future of the brand. As you obviously know access is not necessarily one of LVMH priority and when G-III contacted us we thought definitely they could be in this respect a better shareholder then LVMH going forward. So, this is really the logic of the transaction with G-III providing not only what we think is an attractive price but also a good home, I would say, for Donna Karan and maybe a better than LVMH. And that’s probably even more important than the price we sold it for. So that’s the first question.

The second question on free cash flow and M&A and share buyback, etc. So as you know as far as M&A is concerned, M&A is purely opportunistic. So there are no such thing as forcing opportunities, so I can hardly answer on this. As far as share buyback is concerned, what I’ve said over the last months repeatedly is that the decision will be made in the second half of the year when we see. So from September onwards when we get a better understanding of where the net debt of the Group may land at the end of the year, so no decision taken yet.

But we are of the view that we shouldn’t let the net debt go down too much. Absent of acquisitions we expect to keep the level of debt more or less where it was at the end of last year. So no decision taken yet, but we shall review that in September. The third question on LV fragrances, it’s a complicated question at this point in time. Obviously the point I would like to bring to your attention but I am sure you already know is that LV in terms of distribution will not change its strategy with regards to perfumes.

Perfumes we’ll be solely available in Vuitton stores, which means that probably I don’t know how many stores will carry the perfume but probably something like 350 or 400 stores will carry the perfume of Vuitton. When you look at big large brands in this universe, the number of doors is probably 40 or 50 times the number I just mentioned. So you cannot compare the LV launch in fragrance with the big Chanel and the Dior which door count is much, much bigger and who have been in this segment for a long period of time. So it’s quite difficult at this point in time to calibrate our ambitions. We think we have a strong product that could be not only a good expression of the brand but a price point, a fairly accessible price point to the brand.

So we are quite optimistic about the future of it. But I wouldn’t dare calibrating the future success of it in the months of July, two months ahead of the launch.

John Guy: Maybe, just one very brief follow-up just on DKNY; could you confirm whether the losses were above or below 30 million?
Jean-

Jacques Guiony: The only thing I can say about the losses is that they are losses. Not very significant losses but I will not go into detail. G-III did not mention any numbers, although unlike you they know them, so I will not confirm anything.

Operator: Next question is from Antoine Belge from HSBC. Please go ahead.

Antoine Belge: Three questions, first of all regarding Fashion & Leather in the first quarter you had mentioned that there was sort of 1.5% impact from Donna Karan and Marc Jacobs. Was it still the case in the second quarter? Also could you comment on the main regional shifts at Louis Vuitton? Second question is on actually Selective Retailing. We saw a marked acceleration in terms of top line even though the margin was a bit disappointing or at least in line.

So I think you mentioned DFS will not really showing any improvement, so is the improvement in the top line only related to Sephora? And the third question, which is a bit maybe boring, but I see that the other activities in terms of EBIT is actually showing a €50 million deterioration which is quite a big number and explains actually the difference versus my forecast. So can you maybe elaborate little bit on this? Thank you. Jean-

Jacques Guiony: Thank you. and one, if I am not mistaken you have four questions and not three. The Fashion & Leather impact, the impact of Marc Jacobs and Donna Karan is exactly the same as it was in Q1.

So, both businesses are down for different reasons. But both businesses are down in sales terms and exactly the same impact combined it’s a little bit more than 2%. The second question is the regional shifts at Louis Vuitton. Basically I left you Q1 with most geographies being slightly positive with the exception of Asia being slightly negative. If you look at what happened in Q2 it’s a little bit more polarized with the US being much more positive and Asia being now significantly positive for the brand.

But in the other way around, Europe is slightly, I mean almost flat but a bit negative. And Japan for the reasons I mentioned before are connected with border controls and the strength in the yen is mid-single-digit negative. So the shift is really Europe and Japan being a bit worse and Asia and the US being better. Third question on Selective Retailing acceleration which is limited anyway, 4% in H1 in Q1 to 7% in 2Q. Well, it comes from both businesses, I mean Sephora did better at a very high level but they did a bit better.

So it’s very positive. And DFS did a little bit less bad than in Q1. So that explains the slightly improving numbers at selective distribution. And the other activities it’s not a boring question and guess what I thought somebody would ask it. So I reviewed the numbers.

I am only able to answer on half of it. Half of the decrease comes from the activities. We have La Parisienne with some acquisition cost that I explain in part of it. The yacht business is also a bit worse than last year. The way they account for the profit is not regular in the year.

There were not enough installments paid by clients so that we could show a profit on this. But it will be offset in the second half by the other way around will happen in the second half. So it’s not worrying. We had the marketing cost of the [indiscernible] in particular. There are a number of events that explain more or less half of the most of them if not all of them are one-offs which explains half of the decrease.

The rest comes from profit elimination which is one, difficult to predict and even when you know the number difficult to analyze. So I cannot give you a very precise answer on this. It goes up and down. Some quarters are good, some quarters are less good. We have a difficult half in this respect.

But it’s not particularly significant.

Antoine Belge: So, just to make sure I understood correctly, so part of it could be actually a reverse, so maybe over the full year the deterioration…
Jean-

Jacques Guiony: Not reverse, not reverse. It will not affect the profit in the same way in the second half, yes. But again what happens on elimination of profit it’s in inventories and so on is not predictable, so I cannot make the forecast of on this for the second half of the year.

Operator: Next question is from Luca Solca from Exane BNP Paribas.

Please go ahead.

Luca Solca: I was wondering whether you are comfortable with Vuitton price architecture, especially when it comes to handbags. It seems to have moved up quite significantly, and I wonder what you’re envisaging the brand is doing and whether this is enough to satisfy aspirational consumer demand. Fragrances is clearly coming into the picture down the road. My question on that listening to your exclusive distribution logic, if this is a potential opportunity down the road assuming that the launch is successful to extend distribution at least to Sephora or at least to some of the Sephora chain, talking about other accessible product categories, I wonder what you feel about eyewear and your exposure to Safilo.

Safilo has been going through a number of difficulties in recent periods and I wonder what you see the potential strategic development of the LVMH Group in this category going forward, if you see the partnership you have with Safilo is satisfying and will continue to sustain going forward. Lastly, looking at what has been going on in Europe and the attempt by the Chinese government to repatriate some of the Chinese spend to China, I wonder how much, if there’s a quantification possible, this is penalizing your reported revenue growth, the fact that you have fewer tourists coming to Europe from China or that they are spending less in the transition to spending more money in China, of course, but it is there a loss of revenue in that transition? Thanks very much. Jean-

Jacques Guiony: Your first question on LV price architecture, what we usually call price architecture is the difference between the various countries. And I get the feeling that your question was more on the absolute level of price rather than on price architecture…

Luca Solca: Absolutely, you are correct. Yes.

Jean-

Jacques Guiony: So in absolute terms we think it’s more the product portfolio architecture you’re talking about. It’s a question that I have answered many times. I think we are quite pleased with the value content of the various portion of the portfolio. We think we have in terms of access an accessory business and small leather goods business which is extremely strong which actually as far as the small leather goods business particularly is showing a very, very good momentum. So that’s for the access.

When it comes to bags, I also think that when it comes to entry price bags, i.e. more or less around the €1,000, we have a very compelling offer. And this is a segment that is showing good momentum, as well. And for the rest it’s I would say sort of ongoing work in progress, but it’s also strong products with compelling value for the customers, although obviously at higher price points the addressable population diminishes in a great way. So I think that as far as the product architecture is concerned we are extremely pleased with the developments of Vuitton over the last, I would say, three to four years.

And that reinforced in a great way the value content at the various price segments. So that’s the first question. On fragrances extending distribution to Sephora, I don’t think I would say that. The concept of Vuitton distributing 100% of its product and not leaving any third party even as strong and as knowledgeable as Sephora are doing it for them is a dogma as much as a concept. So I don’t think it is likely in the next 150 years that they will do it.

They want to control 100% of the distribution and it has yielded good results so far for Vuitton. So I see no reason why they should change this strategy. Eyewear and Safilo, I mean Safilo is one among other business partners in this business, so I have no particular comment to make. We don’t have a particularly high exposure to Safilo. Eyewear is an important business segment.

We are quite pleased with the relationship, with one or two exceptions, with the relationship we have with our partners they are. So I don’t have a particular comment to make. Fourthly on your question on Chinese spans and the fact that the authorities want to repatriate the consumption at home, it’s obviously quite tricky to quantify. What I said is many times on this question is that last year was a fairly favorable period with due to the price architecture, so product being very expensive in China and less expensive in Europe, it probably boosted a bit the consumption from Chinese because when they could buy in Europe, particularly either directly when they travel or indirectly through the Daegu organization they probably bought more than they would have otherwise. And this year it’s probably with a lot of the Daegu being out of business for various reasons it’s more complicated and the business to a large extent going back at home.

Where prices are more expensive than they are in Europe it’s probably having the opposite effect. If you want to measure that in a fairly simple way, last year as you know the Chinese consumer base was about was up about 5% for Vuitton for the full year. In the first half of the year it’s flat or very slightly decreasing, so they probably measure, it’s a good measure of the impact of this policy among other things, because it’s not the only factor affecting the Chinese customer base. But that’s probably the simplest answer to your question.

Operator: Next question is from Thomas Chauvet from Citi.

Please go ahead.

Thomas Chauvet: I have three questions please. The first one in Watches & Jewelry, or watches actually, I was a bit surprised about the growth in Q2. Even in H1 you have plus 4% for that Group. I remember Mr.

Biver was quoted as saying TAG Heuer sales were up 20% in the first five months of the year. So can you perhaps give us a more accurate view of the selling at TAG Heuer and the other watch brands? Secondly, just to clarify on the admin expenses what was the underlying growth? If it was not up 9% in the first half you said there were some one-offs that [indiscernible]. What was the underlying growth that we should think of for the second half? And finally on Donna Karan, Marc Jacobs and your fashion brands, as Pierre-Yves said this morning suggesting Marc Jacobs was not for sale, I wanted to understand is it because you think you are at the very early stage of the transformation or because you believe in the long-term value creation potential of the contemporary segment? And more broadly have you identified other assets within Fashion & Leather that may require some specific restructuring or positioning similar to what Marc Jacobs and Donna Karan are going through?
Jean-

Jacques Guiony: On watches, so if I’m not mistaken you were surprised to see the numbers that were lower than your expectations, right?

Thomas Chauvet: No, that’s what Jean-Claude Biver was quoted as saying TAG Heuer year to date was up 20%. That was I think at the end of May. Jean-

Jacques Guiony: First, probably I mean TAG Heuer is doing very well, which is thus probably a sort of optimistic rounding I would say.

But don’t take me wrong, I mean TAG Heuer is doing very well and is growing double digits. So the business for watches at TAG is doing very well. It’s less favorable for Bulgari. It was already lackluster at first quarter of the year and it didn’t improve in Q2. As far as admin is concerned, the level without the one-offs is about 5% to 6%.

The growth without the one-offs is about 5% to 6%. So that’s what we should get in maybe a bit lower than that in the second half of the year. As far as Donna Karan and Marc Jacobs are concerned, I mean Pierre-Yves did not suggest that Marc Jacobs was not for sale. It is not for sale. This is an idea that never crossed our mind.

We believe in the positioning of Marc Jacobs. Obviously it doesn’t come easily, but we believe in the long-term value of the brand. And we will stick to it and we will develop it and we will make it a success. It will take some time but we are extremely convinced that we could create value out of Marc Jacobs. And it’s not because we have decided to sell Donna Karan that all of a sudden we will look at all our brands and make them a candidate for disposal.

Be reassured, I mean Marc Jacobs will stay in the portfolio in the same way as Fendi and the other brands including Vuitton. So there is no particular change in strategy in this respect.

Operator: Next question is from Fred Speirs from UBS. Please go ahead.

Fred Speirs: Two questions for me please.

Firstly on Fashion & Leather, on the LV margin, you mentioned it was close to flattish. I just wondered if you could elaborate on how that split out in terms of gross margin versus cost inflation happening there. Then secondly on cognac, some of your competitors are talking about taking price in China. I would be interested if you could comment on whether you have plans to take price in H2 and also whether you can confirm you’re taking share in China. Jean-

Jacques Guiony: Well, you won’t be too lucky with your two questions because I don’t intend to answer them.

I’m really sorry, we don’t give details on LV margins. We had a bit of an improvement in gross margin, that’s all I can say, which allowed us to absorb an increase in operating charges, which was slightly higher than what happened on the revenue front. So that explains why the margins are stable. But I will not go into further detail. And as far as cognac is concerned I never comment ahead of price decisions.

To be frank, I don’t know the answer. Usually price increases if any are taking place in between Chinese New Year and [indiscernible] festival, so for this year it’s too late anyway. So you may imply from my answer that nothing will happen. But I cannot really comment more than this. As far as market share are concerned, it’s difficult to know, we don’t know with precision the numbers from our main competitors.

What I can say is that as far as our sellout is concerned on the two main categories, V.S.O.P. and XO, V.S.O.P. is up single digit but it is up and gathering a little bit of speed toward the end of the semester, whereas throughout the semester, XO has been doing extremely well and is up in a major way. So, we are extremely pleased with XO. Maybe this enables us to gain market share but I will confirm that when I get precise numbers.

Operator: Next question is from David Da Maia from Aurel BGC. Please go ahead. David

Da Maia: Many of my questions have already been answered, but maybe a quick question on LV pricing. Did you implement some price increases in H1 for example in the UK following the collapse of the pound? And on DFS it’s still a profitable business in this very difficult environment that mean in Asia, and do you intend to streamline your stock portfolio in this region? Thank you. Jean-

Jacques Guiony: LV pricing no, no price increase at all in major countries.

So nothing happened. As far as the UK is concerned no decision taken yet. So, we will see. DFS is profitable. And as far as assets in Asia are concerned if I understand well your question we have no particular decision or we have no plans in this respect.

Operator: Next question is from Paul Swinand from Morningstar. Please go ahead.

Paul Swinand: Good evening and thank you for taking the questions. I wanted to just ask a little more color in the prepared Slides that says Hennessy up 13% and then the next bullet is excellent performance in the US. Is Hennessy in particular doing well in the US and can you give us a little more breakdown or color on what’s driving the market?
Jean-

Jacques Guiony: Well, the Hennessy growth in the US I would say is nothing new.

We’ve been doing very well with Hennessy for many quarters and even years now. It’s been three or four years in a row that the Hennessy business is extremely strong in the US and is the driving force behind the global performance of Hennessy. VS volumes particularly have shown very good performance and being very, very resilient. We’ve been up double digits in 2014, 2015 and we are still up double digits in 2016 which made me say before that the key issue we have is not demand, it is more offer and the supply of bottles to our clients. The reasons behind it is that the market in the US both on trade and off trade is pretty strong for Brown spirits, and that we have a strong marketing positioning on this segment.

Paul Swinand: And should I not extrapolate your comments about China with the XO, it’s more the VS in the United States then?
Jean-

Jacques Guiony: The U.S. is by and large a VS market for us. I think we do 80% or 85% of our quantities, don’t quote me if this is slightly wrong, but something like that with VS in the U.S. So that’s by and large a VS market.

Paul Swinand: Is premiumization part of the growth trend, though, is that part of the mix?
Jean-

Jacques Guiony: We didn’t pass massive price increases in the US over the years.

But prices are regularly increased but we are pretty cautious on this. The mix when you have one category which makes 85% or 90% of the total the mix cannot be a real driver for the global business in the US as VS will still be for the foreseeable future the dominant category in our portfolio there.

Operator: Next question is from Rogerio Fujimori from RBC Capital Markets. Please go ahead.

Rogerio Fujimori: I have three questions.

First, on the commercial leases I have noticed that there was a big deceleration, was up only 2% in the first half which is much lower than last year. So should we expect a similar rate of inflation for the second half? And then, what you are doing here to reduce so much the rate of inflation on leases? The second is on advertising which was up I think 7% in the first half. Should we expect a similar rate of inflation -- a similar rate of increase in the second half? And my third question is on CapEx, just an update on the outlook for the full year. Jean-

Jacques Guiony: Difficult to say, because it’s apple and pears. I mean basically you have a lot of different things in these two lines because you are comparing businesses, wholesale and retail businesses, et cetera.

So, I find it extremely hard to predict and to monitor the global number. I can monitor it on a business-by-business basis but on a global basis it’s quite complicated. The outlook for rents which is basically your question is still very difficult to analyze. In some parts of the world, particularly in Asia, the rents are under some pressure for the landlord so we managed to get revisions on favorable terms. But as far as Europe and the US are concerned it’s more or less the other way around.

So all-in-all, this enables us to have a commercial lease charge which is almost flat from one semester to another. But it’s really as I said a combination of many different things. Advertising is a little bit the same. And I find it hard to make a forecast for the second part of the year which as you know you have Christmas season and Christmas season particularly in perfume and cosmetics is a high spending season. So it’s always difficult to know as we may adjust upwards or downwards the ambitions in terms of advertising and promotion in the last part of the year in view of the global environment.

As far as CapEx is concerned, I think more or less what we did last year is a good forecast for this year.

Operator: Next question is from Catherine Rolland from Kepler. Please go ahead.

Catherine Rolland: First of all, I just wanted to know if you could give us some color about sales growth at Vuitton in Mainland China. Second part, about the positive ForEx impact at EBIT level by around €60 million.

Could you give us an idea about the split by division? Is the bulk I guess impacting the Fashion & Leather Goods and the cognac business but could you give us some color about the breakdown by divisions? And just a very quick question about the Donna Karan deal. The enterprise value is around €650 million but could you just precise us what will be the cash inflow for you by the end of the year, please?
Jean-

Jacques Guiony: So, the sales growth for LV in China was I will not give you very precise numbers but in Q2 it was mid-single digit up, roughly speaking. As far as the €60 million ForEx impact is concerned it’s a little bit more than half on the Wines & Spirits business and a little bit less than half on the Fashion & Leather business, the rest being negligible. And as far as the Donna Karan transaction is concerned, the impact actually will be €650 million on the net debt of the Group because there will be an equity value but the debt that we have within the business will be taken over as well by the purchaser. So all in all, the global impact on the net debt of the Group will be the sum of the equity value and the debt which is taken over which is basically the definition of enterprise value.

So the net impact for the Group will be €650 million.

Operator: Next question is from Hermine de Bentzmann from Raymond James. Please go ahead. Hermine

de Bentzmann: I have a very quick question, please. The first one on Louis Vuitton growth you had in Q2 among that the American clientele, if you can communicate on that number.

My second question is on the depletion trend you had in China for cognac on V.S.O.P. and XO in Q2 or H1. And last question on your view about European growth in H2. Considering the deceleration you had in Q2 should we consider growth in H2 closer to H1 or closer to Q2? Thank you. Jean-

Jacques Guiony: On the Q2 growth with American in the US it was close to, I mean it was up in Q2 compared to Q1 and not so far away from, I mean it was high single digit I would say.

This is not the performance for the US business, it is the performance from American citizens in the USA. Obviously, the touristic business which is not a big deal for Vuitton in the USA anyway but was down, so the global performance is not as good. But we had US American clients being up strong single digit in Q2. The depletions for cognac in China, I mentioned briefly V.S.O.P. and XO.

For the first half of the year of V.S.O.P. is up a few percentage points whereas XO is very significantly very, very strong double digit up. Obviously with a fairly easy, even on depletions a fairly easy comparison base for XO last year. The third question on European growth I find it extremely difficult to answer what’s going on more or less as we speak everywhere in Europe. So, obviously, the growth rate in Europe was the domestic client base in most businesses be it Sephora, be it Vuitton, et cetera is okay.

We have no particular problem. The key issue is touristic flows which obviously can make the business very good, average or very bad. And obviously this is totally unpredictable, so I cannot really comment on this for H2.

Operator: Next question is from Melanie Flouquet from J. P.

Morgan. Please go ahead.

Melanie Flouquet: I just had three questions actually because most have been answered. My first question is on Marc Jacobs, Donna Karan and Berluti losses. Could you give us an indication as to whether they remain roughly the same in each one versus H1 last year? Or are the ones explaining some of the slight deterioration in margin or is this that you had one-off investments, for instance in Fendi for its anniversary, and is this a one-off in other words? The other thing is when do you expect this to actually improve? Ex- the deconsolidation of Donna Karan when could we see an improvement in profitability at Marc Jacobs and Berluti? My second question is on your own inventory levels given you’ve seen pretty good selling, etc., I was wondering how you felt about your inventory levels today and whether you felt you needed to increase investments back in inventories by year-end/ and my last question, sorry, is really, very minute, you said €60 million, 6-0, is the impact on EBIT, is that correct on the ForEx?
Jean-

Jacques Guiony: Yes, that is 6-0 on the ForEx.

You have it on the presentation. It’s small print but you have it on the presentation anyway. The losses, the combined losses of MJ, Donna Karan and Berluti were higher in this half than last year. Last year Donna Karan was profit making which was not the case this year. The timing of improvement of the situation at MJ and Berluti is obviously difficult to predict, although as far as Berluti is concerned it’s still loss making but there was an improvement, a marked improvement in the losses in the first half of the year.

Marc Jacobs is more or less at the same level as last year. Your second question on inventory level, is it a global question or you have a specific business in mind?

Melanie Flouquet: I suspect I had in mind Wines & Spirits but in general where should we expect inventories to sit? Wines & Spirits is anyway a big part of your inventories. Jean-

Jacques Guiony: Yes. Wines & Spirits is 10% of the total business and half of the inventory. So your question is particularly relevant as far as Wines & Spirits is concerned.

The answer is yes, as far as cognac is concerned. I mean cognac is growing in terms of volumes at a high level. If we combine sustained growth in the US and a recovery, a gradual recovery in China which is a little bit where we are today we cannot go the way we were for the time being, so we shall have to invest a bit. The beauty of it, I would say, is that the bulk of the volume growth comes from VS which is three years old and which is a more flexible category in terms of inventories than V.S.O.P. We have no particular issues with inventories on V.S.O.P.

given the slowdown in China and we are far off the level we had in the preceding years. We have room to maneuver as far as V.S.O.P. is concerned. And as far as VS is concerned we don’t but we can increase provided there is sufficient to be available on the market and provided that weather is favorable enough to enable us to have a strong 2016 harvest. It should be doable to buy more, to distribute more and to end up with higher inventories.

It will not come in 10 minutes. This is an aging process, so it takes a while but one can be reasonably optimistic about our ability to be flexible enough on the supply sides to meet the growing demand.

Melanie Flouquet: And can I have just one follow-up question, sorry, how did you explain internally or do you even care the growth in the US that some categories are experiencing similarly against others? Although I note that Fashion & Leather did well in the US again in quarter two, but in general it seems like again cognac, champagne and HPC are doing very well in the US. We are hearing from everybody else that the US is weak. So how do you explain this mismatch.

Jean-

Jacques Guiony: As far as we are concerned there is no such thing as a mismatch. A few answers. I think we discussed a bit Wines & Spirits and the strength of the Brown spirit business which is not unique to Hennessy, frankly. If you look at Brown-Forman’s numbers they are pretty strong in the US, as well. Secondly, you mentioned Fashion & Leather, despite the stock of some lines of products, particularly if you take out the discontinuation of some lines of product at Donna Karan, the business is quite strong.

And chiefly Vuitton is throwing a resilient performance in the US. Nothing new, it’s been going on since the recession in 2009. We are not growing 20% per annum but we are growing a solid mid to high single digit on a yearly basis. So Sephora is doing extremely well and Sephora is a big chunk of the US business, about 45% I think of the global US business and is obviously with strong double-digit growth helping the global picture in the US. Fourthly, TAG Heuer is recovering from negative levels in the preceding quarters.

And now it’s positive in the US. And fifthly, the Perfumes & Cosmetics business, which is rather small in the US compared to some of our competitors, is growing and has been growing double-digit for quite a while. So all in all, we keep on having planets reasonably well aligned in the US as we have had for many quarters now.

Operator: Next question is from Louise Singlehurst from Morgan Stanley. Please go ahead.

Louise Singlehurst: I think most of the questions have been very much answered. But just in terms of LV I suppose a bit that hasn’t unless I’ve missed it is the performance in Hong Kong and Macau. Can you just help us understand what’s happening with the consumer across all the retail businesses in terms of traffic as well as ASP? I knew you said there hasn’t been a change, but in terms of appetite for pricing. Jean-

Jacques Guiony: So your question, Louise, is specific to Hong Kong and Macau or…

Louise Singlehurst: Yes please, Hong Kong and Macau. Jean-

Jacques Guiony: So, in Hong Kong and Macau I think somebody asked the question in Q1 and I will make exactly the same answer.

Traffic is up, but average ticket is down. And in all conversion is stable, so in all we end up with a business, global business be it DFS or Vuitton not really improving from its previous trends and really a function of higher traffic with lower purchasing power and it’s been the story in these two areas for the last couple of years now.

Louise Singlehurst: And is there any change in the retail network for Vuitton in greater China in this period?
Jean-

Jacques Guiony: There were a few closures of stores in -- I think we closed a couple of stores in China but nothing to write home about, to be frank. And there were a few openings, but again I mean nothing really significant.

Louise Singlehurst: And obviously, a management change coming up for Celine.

Any comment there on the update from Marco Gobbetti?
Jean-

Jacques Guiony: No, no particular comment. Jean-

Jacques Guiony: One last question if there is one.

Operator: Yes. There is still one and this is the last question from John Guy from MainFirst. Please go ahead.

John Guy: Just one follow-up, just on DKNY just so I’m clear, the EB that you mentioned you mentioned €650 million. Is it €600 million or $650 million? Just wanted to get the FX right if it was…
Jean-

Jacques Guiony: No, it’s dollars. If I said euro, thank you for correcting me. If I said euro it’s wrong, it’s $650 million, sorry about that. It was clear in the press release but that’s a mistake I made.

John Guy: And then, just one on TAG with regards to the repositioning and the fact that in spite of rounding on Mr. Biver’s part you said that the sales are up double-digit. How long did it effectively take to reposition TAG? And in terms of the average selling price that you now see given the fact that you’ve repositioned TAG’s price mix could you just talk about that strategy and where you see it going forward?
Jean-

Jacques Guiony: I would say the whole thing is not over. It’s work in progress. And the TAG people wouldn’t be very happy that they say they’ve done it and there is nothing to be done in the future.

So the repositioning started, I would, say 24 months ago, about two years ago. And obviously when you start doing this it’s pretty painful, particularly in terms of stock buyback and margins. So you have not only to swallow the buying back of stocks from your clients for movers but also on average you end up with better position price, better value but on average prices are lower to make it simple and therefore margins are lower. So, all this takes time to adjust and to follow which is what they’ve been doing. It’s not over but I have to say that they have done a fantastic job over the last two years.

And they are extremely well-positioned in my view for the future and they are a little bit an exception in a business which otherwise is pretty much under pressure. Jean-

Jacques Guiony: Thank you. So, if there are no further questions, I will end this call. Thank you for attending it. And I look forward to discussing Q3 numbers in October.

Bye, bye. And have a nice day.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you all for attending. You may now disconnect.