LVMH Moët Hennessy - Louis Vuitton, Société Européenne (OTCPK:LVMHF) Q3 2024 Sales Call October 15, 2024 12:00 PM ET

Company Participants

Rodolphe Ozun - Director of Financial Communications
Jean-Jacques Guiony - CFO
Cécile Cabanis - Deputy CFO

Conference Call Participants

Antoine Belge - Exane BNP Paribas
Louise Singlehurst - Goldman Sachs
Piral Dadhania - RBC
Chiara Battistini - J.P. Morgan
Yi Zhong - AlphaValue
Ashley Wallace - Bank of America
Edouard Aubin - Morgan Stanley
Carole Madjo - Barclays
Thomas Chauvet - Citi
Erwan Rambourg - HSBC
Chris Gao - CLSA
Rogerio Fujimori - Stifel
Charles-Louis Scotti - Kepler

Rodolphe Ozun

Good afternoon everyone and welcome to today's conference call. I'm Rodolphe Ozun, Director of Financial Communications at LVMH and with me are Jean-Jacques Guiony, our Chief Financial Officer, and Cécile Cabanis, our Deputy CFO. Cécile will start by taking you through the key highlights of the first-nine months of 2024. I will then comment on performance by business groups, after which Jean-Jacques will conclude, and then we'll be happy to take your questions.

As a reminder, certain information to be discussed on today's call is forward-looking and subject to important risk and uncertainties that could call actual results to defer materially. For these, I refer you to the Safe Harbor statement, including in our press release on Slide 2 of our presentation. Turning now to our announcement, our release was issued a short while ago in both French and English and is available on the LVMH website, lvmh.com, as are the slides for today's call.

Let's now move on to today's topic, our nine-month figures, passing over to Cécile.

Cécile Cabanis

Thank you, Rodolphe, and good afternoon. Let me start directly with Slide 3 and a few broad comments on the sales evolution for the first-nine months of the year. Overall, demand has been characterized by two opposing trends. On the one hand, demand from China clientele remained fairly dynamic in the first half of the year. However, Chinese consumers are facing growing macroeconomic headwinds, which obviously impact their confidence and weighs on their discretionary spend. And on the other hand, demand from Western clientele, shows a sequential improvement, this being very gradual, given that inflation and interest rate remained high.

So in a nutshell, the net effect of these two trends was slightly positive in the first half of the year and became slightly negative in the third quarter, leading to an overall stable organic revenue growth over the first nine months of the year, which reflects a resilience performance given this unfavorable demand context. Moving to Slide 4, on the revenue bridge, revenue for the first nine months of 2024 reached EUR60.8 billion, stable on an organic basis and down 2% on a reported basis after adjusting for a negative 2% currency impact and a negative 1% scope impact, mostly related to the disposal of Starboard last year.

If we move now to Slide 5, details the geographic breakdown of revenues in euros. You are familiar with this chart, so I will only comment on the main evolutions. Europe and the US was 1 point compared to the first nine months of 2023. Japan was up 2 points while Asia fell 3 points in the mix. This reflects what I was commented on the trends.

Slide number 6, shows the quarterly organic revenue change by region and illustrates mostly the impact of Chinese clients' purchases outside mainland China, with a continued very positive impact on Japan, albeit at a lower rate in the third quarter than before, and a continued negative impact on the rest of Asia, which is consistent with the second quarter. Europe and the US are consistent with their year-to-date trends and above group average.

Moving now to Slide 7 that summarizes the quarterly organic revenue evolution by division and shows mixed trends as one would expect in the current environment. Wines and spirit have historically proved to be more cyclical than average and are unsurprisingly more affected by current environment [than the other] (ph) divisions. At the other end of the spectrum, perfumes and cosmetics and selective distribution tend to be more resilient than the rest of the division, but are not totally immune to deteriorating consumer confidence in China.

Fashion and leather goods and watch and jewelry are fairly resilient to macroeconomic inflection due to their exposure to [wealth of consumer] (ph) but are sensitive to significant inflections in consumer confidence leading to lower demand especially from aspirational customer. That's for the main highlight, and I will pass back to Rodolphe that will comment the division performance in more details.

Rodolphe Ozun

Thank you, Cécile. And we'll start as usual, with Wines and Spirits on slide 10, which shows that the Wines and Spirits business group delivered EUR4.2 billion in revenue for the first nine months of 2024. This represents an 8% decrease on an organic basis versus the same period last year and an 11% decrease on a reported basis after taking into account a positive 1% perimeter impact related to the acquisition of Minuty and a negative 4% currency effect.

Broken down, champagne and wines generated EUR2.1 billion in revenue over the nine-month period, down 6% on an organic basis and down 9% on a reported basis after taking into account a positive 3% perimeter impact from Minuty and a negative 6% currency impact. Finally, Cognac and Spirits also delivered EUR2.1 billion in revenue, representing an 11% decrease on an organic basis and a 12% decrease on a reported basis after taking into account a negative 1% currency impact.

On slide 11, Champagne and Wines performance for the first nine months of 2024 improved modestly compared to the first half of the year, as we started lapping easier comps in Q3. Regional patterns are broadly unchanged with soft depletions in Europe and the US, partly compensated by growth in Japan, since Q2 but all regions contributed to the sequential improvement.

Looking ahead, I'd like to highlight the recent inauguration of the Ruinart Pavilion in Champagne created by Japanese architect, Sou Fujimoto, which is defining a new generation of visitor [cells] (ph) and tasting centers and exemplifies our continued commitment to our value strategy which has enabled the division to grow more than 30% in organic terms, since 2019, at end of September. In wines, our rosé wines are continuing to enjoy solid growth at Château d’Esclans, notably, but also Château Minuty, which we acquired last year.

We also recently announced a strategic investment with the acquisition of a minority stake in sparkling non-alcoholic wine producer, French Bloom. In Cognac and Spirits, Hennessy saw another quarter of growth in the US, driven by [VS] (ph) restocking and the gradual realignment of selling with sell-out after excessive destocking from retailers at the beginning of this year. The Chinese market for cognac continues to remain challenging, with ongoing prudence amongst retailers, given the weaker demand related to the current macro environment. Finally, in spirits, we announced the successful launch of SirDavis Whiskey, created by Beyoncé Knowles-Carter in partnership with LVMH, which has already won several prestigious awards.

Now turning to fashion and leather goods on slide 13, revenue reached EUR29.9 billion for the first nine months of 2024, representing a 1% decrease on an organic basis versus the same period last year and a 3% decrease on a reported basis, after taking into account a negative 2% currency impact. Moving on to slide 14, which details performance by brand.

Louis Vuitton continued to display its strong innovative power, with good results in ready-to-wear from the highly desirable collections designed by Nicolas Ghesquière and Pharrell Williams, as well as broad-based innovation in leather goods, including the successful launches of the new Neverfull inside out and Low-Key bags. Louis Vuitton was a key partner to the Paris 2024 Olympic and Paralympic Games alongside several LVMH Maison and also returned as title partner of the Louis Vuitton 37th America's Cup in Barcelona, which is currently underway.

Christian Dior displayed sustained creativity with inspiring fashion shows, designed by Maria Grazia Chiuri who continued to explore the power of femininity in Dior's Spring-Summer 2025 collection, reinterpreting the Amazon dress which was first conceived by Christian Dior in the 1950s, as well as Kim Jones from men's collections. In leather goods, the Maison saw the launch of several new shapes, including the Miss Dior and Groove Bags. And in jewelry, Victoire de Castellane, unveiled the latest chapter of the major jewelry collection, adorned with a graphic lines of the iconic [Ganache] (ph) pattern.

Lastly, Dior honored its enduring ties with China through the theme-of-art with a spectacular gold theme exhibition entitled L’Or de Dior in Beijing. It was also a busy time for our other fashion and the goods brands starting with the appointment of two new artistic directors, Michael Rider at Celine and Sarah Burton at Givenchy. Loewe continued to benefit from the strong desirability of Jonathan Anderson's collections and inaugurated its first flagship in Seoul, located in the vibrant Gangnam district.

Fendi saw the launch of its peekaboo soft which reinterprets the iconic bags designed by Silvia Venturini Fendi, whilst Rimowa unveiled an aluminium crossbody bag called the original. Rimowa also continued to roll out its important recrafted program which focuses on reusing, repairing and recycling suitcases. Finally, Loro Piana enjoyed another solid performance across all product categories and launched a full winter collection celebrating the Maison's 100th anniversary and Berluti received strong visibility during the Paris 2024 Olympic and Paralympic Games designing and producing the Team France outfits for the opening ceremony.

Moving to perfumes and cosmetics, on slide 16, revenue reached EUR6.1 billion for the first nine months of 2024. This represents a 5% increase on an organic basis and a 2% increase on a reported basis after taking into account a negative 3% currency impact. On slide 17, looking at some brand highlights specifically, Parfums Christian Dior continued to enjoy an excellent performance, driven notably by fragrances which benefited from the enduring outperformance of Sauvage and Miss Dior with its new Parfum edition, along with solid growth in makeup thanks to Forever Foundation and the relaunch of Rouge Dior lipstick.

In skincare, growth was driven by Prestige and Capture lines. Finally, Parfums Christian Dior unveiled Rihanna as the new face of perfume J'adore with a film shot in Versailles. Among other brands in this group fragrances also outperform supported at Guerlain by premium fragrance collection L’Art & La Matière and Aqua Allegoria with a new scent called Florabloom, although makeup also benefited from the good performance of lipsticks with the relaunch of Rouge and new launchers in its KissKiss franchise.

Parfums Givenchy saw the successful launch of the absolute variation of its iconic fragrance, L’Interdit Absolu, and continued progress of Prisme Libre in makeup, while Maison Francis

Kurkdjian was buoyed by the continued success of its baccarat rouge fragrance and a new eau de parfum called APOM, an acronym which stands for A Part of Me.

Finally, Parfums Kenzo unveiled new sense in its flower by Kenzo Line, and Acqua di Parma expanded its Blu Mediterraneo and signatures of the [Sun lines] (ph). Turning to watches and jewelry on slide 19, revenue in watches and jewelry reached EUR7.5 billion in the first nine months of 2024. This reflects a 3% decrease on an organic basis and a 5% decrease on a reported basis, after taking into account a negative 2% currency impact and a small positive perimeter impact.

Turning to slide 20, we outlined the various innovations and many exciting events undertaken by our watches and jewelry Maison, starting with Tiffany which further expanded its product range with a second chapter of Tiffany Titan by Pharrell Williams, featuring freshwater pearls and a range of new products, celebrating the 50th anniversary of Elsa Peretti’s designs, including a ring based on the iconic Bone Cuff. On the communication front, the brand continued with the rollout of its With Love Since 1837 marketing campaign, which is pictured on this slide, and renewed its trophy partnership with the US Open, with all US Open trophies handcrafted by Tiffany artisans, since 1987 complimented this year by an immersive pop-up at the tennis tournament.

Tiffany also made further progress on its ambitious store renovation program. Bulgari continued to celebrate its 140-year anniversary and expanded its [tuberglass] (ph) fine jewelry collection, introducing 16 new bold yellow gold pieces to the design first conceived in the 1940s, as well as its Octo Roma range, once again proving its mastery over a large range of watch complications with the release of several unique minor tributaries at the Geneva watch days.

Bulgari also reopened its store on the Champs-Élysées with a new concept. Finally, Chaumet enjoyed strong visibility during the Olympic Games, proudly creating the gold, silver and bronze medals, and further expanded its Bee My Love collection. In watches, TAG Heuer was one of the brands to announce its involvement in LVMH's historic 10-year global partnership with Formula 1, along several of LVMH's Maison, including Louis Vuitton and Moet Hennessy, whilst Hublot celebrated its role as the official timekeeper of the UFA Euro 2024, marking its fifth consecutive partnership with the competition.

Now looking at our final business group, Selective Retailing on slide 22, revenue in the nine month period reached EUR12.6 billion, representing a 6% increase on an organic basis and a 1% increase on a reported basis after taking into account a negative 1% currency impact and a negative 4% perimeter impact related to the disposal of starboard. Moving on to slide 23, Sephora continued to perform well with significant market share gains year-to-date in North America, Europe and the Middle East.

Sephora also saw several exciting store renovations and flagship openings, including its first tour in Oman at the Mall of Oman, and took its immersive beauty event Sephora worldwide. DFS continued to be held back by prevailing international conditions with business activities still below 2019 levels as the good performance in Japan and the US was more than offset by other regions.

DFS also launched the construction of the Galleria in Yalong Bay on the island of Hainan. Finally, Le Bon Marché continued to grow, supported by a rich array of cultural events, including a second exhibition with famed artist, Daniel Buren. This ends the business group presentation and I'll hand over to Jean-Jacques for the conclusion.

Jean-Jacques Guiony

Thank you, Randolph. A few closing remarks on my part before answering your questions. First of all, as Per Cécile comments, most of our markets currently face economic challenges, including mainland China. Against this backdrop, it is not particularly surprising to see softer demand for luxury goods, particularly considering where we were still growing double digit in the second half of last year. Secondly, consumer confidence in mainland China today is back in-line with the all-time low reached during Covid against again we cannot expect discretionary consumption to expand in this context.

However, the strength of Chinese demand in the first half of the year provides recent evidence of the enduring appetite of the Chinese customer for luxury, which makes us very confident that demand will recover when confidence drops. Obviously, we will not stand still. So what can we do in this context? First of all, emphasize product innovation, I know it is not the easiest growth driver for you to model. But it is one of the most impactful. And hopefully, we've demonstrated over the years that we have the skill set to harness the creativity of our talent pool and translate it into commercial success. It also happens to be one of the most cost-effective drivers, which I can only applaud as a CFO.

Secondly, we have consistently invested in our distribution network and in communication in the recent years. And although we need to continue to do so, we don't need to accelerate. So whilst we are reluctant to anticipate on cost control, if only to avoid self-fulfilling processes, we can and we will adjust our cost to what we see, as we have done many times in the past.

Thank you for your attention, and we shall now take your questions.

Question-and-Answer Session

A - Rodolphe Ozun

Thank you, Jean-Jacques. As usual, for those of you who are connected on Zoom and wish to ask a question please use the raise hand function of your application. And the First question comes from Antoine Belge from BNP Paribas Exane.

Antoine Belge

Yes, hi, it’s Antoine Belge, BNP. Good evening. First of all, on the 6% delta deterioration in Fashion and Leather, could you maybe comment about the main changes in terms of clusters? Also maybe give a bit of a brown color. It seems that Dior was not doing well, they down double digit? Second question is on what Jean-Jacques said about the cost. I mean, you already started to spend a bit less, I think, in September last year. So we are going [indiscernible] anniversary this, especially I think you surprised the market by how much you get in only 4 months. So what's the spirit and should we really -- if there could be some kind of figures or way of modeling that?

And thirdly, recently, of course there are talks about increasing tax, corporate tax in France. There have been different numbers floating around in terms of your -- the part of your taxable income in France. It's been hovering between 33% and it's sometimes even like 50% due to transfer pricing. Could you give the exact number in order to avoid volatility? Thank you very much.

Jean-Jacques Guiony

Thank you, Antoine. So I thought you were not asking three questions so I was a bit worried. First of all, your question on Fashion and Leather, the various clusters, by and large most clusters are flat with the exception of Mainlanders. We have a slight improvement in the US, we have a slight improvement in Europe, but nothing to write home about to be frank, and we have a marked deterioration with the mainlanders. I left you in July with mid-to-high single-digit growth with mainlanders in Fashion & Leather, we are mid-single digit down in Q3. So altogether, that's the main impact in this quarter.

As far as brands are concerned, you know how much I love answering this question. I would say just that Louis Vuitton is a little bit above the average. Dior is a little bit below, and that should be sufficient for tonight. Cost control figures, obviously, I won't give you -- this is a sales call, not an earnings call. So you'll get the full set of numbers in January when we release our full year number. Obviously, as I said, cost control is important.

If your question is whether with the declining level of sales, as we've seen in Q3, we can match with lower cost. The answer is certainly not. It doesn't mean that we cannot control the level of cost to avoid margin deterioration to a large extent, but we'll do our best. But needless to say that the current environment and the current numbers we see on making this quite a challenge.

Finally, your question on taxes in France. First of all, roughly speaking, you should consider that France is about 40% of our pretax income more or less – sorry, one-third of our pretax income and 40% of our taxes, it's 7% of sales, one-third of pretax income and 40% of taxes. The impact of additional corporation taxes in France should range in between EUR700 million and EUR800 million. So just to put this in a broad perspective, we contribute to 0.7% of GDP in France. We pay 4.5% of global corporation tax in France, and we shall be paying about 10% of the additional corporation tax, which is contemplated by the current government. Just to make sure that nobody feels that we're not contributing to the budget effort that are currently underway.

Rodolphe Ozun

Thank you. And the next question comes from Louise Singlehurst from Goldman Sachs. Louise.

Louise Singlehurst

Hi, good evening everyone. And thank you for taking my questions, and thank you Jean-Jacques, and Rod and a warm welcome to Cécile as well. It’s great to see you on the screen. So thank you. Two questions from me, I wondered if I could firstly follow up just on China, and if there's any additional feedback maybe from the operations on the ground with regard to the new flow posted China stimulus. Is there any view of any impact on the consumer whether there's a timing event to it, et cetera? That would be very helpful. And then the second question is just relating to some of the management changes that we've had and the different announcements that we've had in the recent weeks. Obviously, from an outside perspective, it would just be helpful to understand how we should really be interpreting the level of change. And obviously, we've seen across the group senior management and obviously, more recently in the creative position, that would be very helpful. Thank you.

Jean-Jacques Guiony

Okay, thank you Louise. Well, the question on Chinese stimulus, it seems to me that even -- I mean the stock market doesn't fully agree or understand what's going on. I mean, we've seen share prices going up on the verge of announcement of stimulus and then going down on the verge of stimulus being not sufficient or not easy to derive into additional revenues or corporation strategies. So I'm flattered that you asked me the question, but I'm sure that there are plenty of people more competent than I am to answer that question. And as far as I'm concerned, I find it a little bit hard to answer on that. Most of the measures are quite technical particularly with regards to the banking regulation and have no idea.

The only thing I would say is that this shows the mainland Chinese authorities have understands extremely well that consumption is a little bit of an issue today in the economy, and they are taking measures to address this issue, whether these measures will be sufficient or not will be completed in the future by further measures, I don't have a clue. But clearly, it shows that they are taking the issue very seriously. As far as management changes are concerned, the only thing that we have announced since the last time we spoke is that Chris de Lapuente will be retiring. So if you want some colors or comment about that, I will just say that the big question is for some people is there life after LVMH. And clearly, for some people, there is a life after LVMH and the only thing I would say that we shall miss Chris a lot.

Rodolphe Ozun

And the next question comes from Piral Dadhania from RBC.

Piral Dadhania

Thank you Rod, good evening everybody. So my main question is just around the strategy changes that you may be implementing. I think, Jean-Jacques, you commented on it in your prepared remarks. But with a lack of traffic and I guess a loss of aspirational consumer perhaps related to the pricing environment and inflationary pressures on disposable income, could you perhaps just give an update as to how you plan on addressing the product range architecture? We've seen some new introductions at Louis Vuitton in relation to the Neverfull reverse bag, for example. But maybe you could just elaborate on that and maybe what you may also be doing at Christian deal?

Jean-Jacques Guiony

Thank you. I think basically, you're implying one or two things in your question. First of all, it raises a little bit the question of price. I know that there have been some price increases in our product range over the years. As I said many times, to reflect the inflationary pressure. And some of you tend to cause the current slowdown in the business with such a price increase. I would like to take this opportunity to make a comment on that by saying that, first of all when you compare prices today and with what we had in 2019, for instance, it is not that easy because there are not that many products that we sell today that were active in 2019. We have changed a lot. The products range, so price comparison are not that easy. And when it comes to increasing prices, actually, it is more a mix impact than a price impact. Secondly, all the players have done the same, all players. And I’d say that with this in mind, the third question is taking this from the other end, do you really think that if we had not increased prices the way we've done, we would be faring double-digit today. I really don't think so.

So having this in mind, the key question, I think -- or the key answer I would provide you is that the current situation is more demand-driven than offer-driven. Therefore, in order to answer your question, you should have that as the background. So we are not necessarily having the view that we should change strategies, we should change offer drastically to address the current situation, we should continue to innovate. We should continue to have strategies that are talking to our existing and potential customers, we should continue to recruit, but not necessarily figure out that we should be addressing short-term issues such as aspirational customers, being less present than they used to be by, for instance, with for instance, introducing a new range of very affordable product. I think it would be a mistake.

We have to stay true to what we are. The offer in Luxury has been the key strengths over the years. I'm not saying that we neglect the pressure that we get from demand, but not necessarily with a view to change entirely the offer with a very short-term view. We still keep on the idea that we should stay faithful to what has been the recipes of our success over the years.

Rodolphe Ozun

And the next question comes from Chiara Battistini from JPMorgan.

Chiara Battistini

Hello, hi. Thank you very much for taking my question. Actually, maybe following up on the mix point. And maybe within the minus 5% of Fashion & Leather goods, can I just ask if it was all volumes declines or was also mix dipping into negative territory? And following up on your comment on the nationalities and the Chinese consumer really slowing down sequentially versus Q2, did you see the same dynamic in Watches & Jewelry as well? Or because in that division instead, you managed to stay more or less, on same trends as last quarter. So I was curious to get more color there, please. Thank you.

Jean-Jacques Guiony

Thank you, Chiara. On your first question on price mix and volumes, it was mostly volumes. Mix was flattish whereas prices were slightly up. So the bulk of the decrease comes from currencies and volumes.

Cécile Cabanis

And on your question regarding Watch & Jewelry demand in China. Overall, if you remember, we had already started with negative performance in Q2. So today, what we observe for Watches & Jewelry is that we have quite the same trend as we saw in H1 for this part.

Rodolphe Ozun

And the next question comes from Yi Zhong from AlphaValue.

Yi Zhong

Hi, good evening. Yi Zhong from AlphaValue. Thank you for taking my question. So firstly, so we saw that the Chinese authorities started to impose anti-dumping deposit for EU brandy last Friday. And Hennessy brand will be imposed a deposit rate of 39%. So could you help us to understand better the impact of this new [dip with it] (ph) or any comment you could give us on this matter? Firstly.

And secondly, so you mentioned the current trading still confirm the appetite of Chinese consumer. And so could you please give us a little color on the trading performance during the Chinese national holiday at the beginning of this month? So I know it's too earlier, but anything you could comment so for this, that will be very helpful. And lastly, so under the current consumption environment in China, spend license, better consumer behavior boosted the secondhand luxury and lottery reselling platform. So for example, DeWu become very popular in China. And so we saw that carrying invested in -- Vested Collective in 2021 for the Western market. So do you think the secondhand Luxury platform will become the new growth driver shortly? And do you think this will impact the pricing structure of the market. And generally, what's your take on this trend? And what LVMH will position or react for this trend, please? Thank you very much.

Cécile Cabanis

Thank you. So I'll take the first one, maybe to frame the question. Let's remember that China is a bit less than 20% of Hennessy business. So we know what we are facing. Obviously, the tariffs is not good news, especially in a market where the demand is weakened. Now we need to remember, as well that we are collateral damages. It's not linked to Hennessy, but it's really a consequence of the electric car trade war. As far as our business and impact is concerned, probably the mitigation factor is that we carry a bit more stock and inventory that we would do usually. So we won't face any concrete impact in the next few months. And as far as the impact overall and on a running basis is concerned, it will obviously depend of different frame and decision we can take, whether it is about the consumer going through substitution in duty free, especially on [EXO] (ph), whether we would be inclined to pass price increase and with which amplitude. And lastly, what would be the competition response, so we are looking at all of this, and we will come back with more detail probably in the next quarter.

Jean-Jacques Guiony

So your second question, Yi, on the national holidays, a bit early to say, as you pointed out. Our feeling is that it was neither a good or a bad surprise. So it is a little bit as expected and we'll be reporting with more details in coming months, but we don't expect this to change the current trend.

Your third question on secondhand platform. Well, I think one should define what secondhand is. Actually, secondhand is actually firsthand which are channeled -- actually parallel products, which are channeled into some platforms. So needless to say that we will never invest into platforms that enable parallel product to be in front, to be put in front of the clients. So we'll never do that as far as the impact of secondhand on the luxury industry is concerned, it depends very much on the distribution strategies of the brand.

When the brands, as we try to do in all our segments, are very strict with limiting as much as we can. We cannot eradicate it, but limit as much as we can at the level of parallel. We are not subject to any disruption from the so-called secondhand platforms. When a brand is less strict on the way their products are being distributed. Obviously, they end up being spread it out all over the world on platforms at a discount and discount being the plague of the some segments of the industry, particularly in Perfume & Cosmetics, we know what this means. But again, on your global question on secondhand platforms, no intention whatsoever to back them in any way.

Rodolphe Ozun

The next question comes from Ashley Wallace from Bank of America.

Ashley Wallace

Thank you very much for the question. I have a follow-up on Chinese demand, please. Can you help us understand the trends between onshore and offshore Chinese spend, I noticed the big deceleration from a regional perspective was Japan. And I was just wondering if you think the weaker yen stimulated or pulled forward some consumption from the Chinese traveling consumer and now that, that price cap has been lowered, the incentive has got to buy has also gone down? Or have you also seen a reasonable deterioration in mainland China as well?

And then the second question is just on Watches & Jewelry. As a follow-up, you could just see a bit more resilient in that category. Can you maybe talk about what you attribute this to? Is it category-driven regional mix, given you're less exposed to China or something brand specifically, especially at Tiffany?

And then finally, on collective retailing. Sorry, I think the line dropped out during Rod's remarks from his section. But can you comment on the trend at Sephora, especially in the US, which, if I remember correctly, was still quite robust in the first half? So what drove the kind of incremental slow down into the third quarter, please?

Jean-Jacques Guiony

Sorry, Ashley, your microphone is quite bad. The second question, I missed it. On Watches & Jewelry, I missed it.

Ashley Wallace

With regards to Watches & Jewelry, I guess that Watches & Jewelry being a little bit more resilient. I think Q3 is slightly less bad than Q2. So what do you attribute this to? Is it category-specific? Or is that regional mix driven by lower exposure to China or something brand specific or maybe antiquity some of the new products or store innovation starting perhaps have an impact here?

Jean-Jacques Guiony

Thank you. I will answer the first one on onshore. Obviously, offshore is doing better than onshore, it's not entirely new. We've seen that for the last five or six quarters, the level of offshore business for most of the brands is in between 40% and 45%. It was in between 30% and 35% for the same period last year. So obviously, there is a dynamic on its own which is connected with Japan, but not only we see an increase all over the world with the exception of maybe Hong Kong and Macau otherwise I mean, all the offshore destinations are capturing a bigger share of the Mainlanders business as they used to.

Cécile Cabanis

And maybe to comment on Watches & Jewelry, we left to with the story of what we were doing on Tiffany. We continue to progress on Tiffany. So now in terms of renovated stores with new concept, we are above 25%. And on those stores, we are growing double digits. So there is a real uplift once we have renovated those stores on sales. And the other pillar of the strategy, if you remember, what Jean-Jacques shared with you is around the icons and really pushing the icons. So as of now, the icons will represent 60% of the jewelry if we leave aside Bridal, Silver and High Jewelry, and they are growing as well.

So overall, in Tiffany also -- and I will repeat what Jean-Jacques told you in H1. You shouldn't expect double-digit growth tomorrow but we are seeing sequential improvement which is really the results of the execution of the strategy delivering. It takes time, it costs money and it takes investment. So you have to be patient. But overall, we are confident that step-by-step, we are gradually improving on that.

Jean-Jacques Guiony

Maybe on your resilience question, Ashley, in Watches & Jewelry. The big difference with Fashion and Leather, is that actually in the first half of the year, the Watches and Jewelry business in China was not so good already. It was down some -- I don't have the numbers in mind, but strong double digit already. There was no further deterioration taking place in Q3. It is actually quite comparable. We have, as Cécile said, some sequential improvement elsewhere. It will take time, but it is quite important. So we didn't have the same deterioration on the Mainlanders trend as we experienced in fashion.

Cécile Cabanis

And then you had a question on the trend of Sephora. So Sephora continues to do very well, gaining market share and growing in all of its markets. Now obviously, given the 24 months exceptional growth at some time, you know that growth normalized, it's to a lesser extent than it used to be, but still going very well in all markets and gaining market share in all markets.

Rodolphe Ozun

The next question comes from Edouard Aubin from Morgan Stanley.

Edouard Aubin

Yeah, good evening. Thanks for taking my question. So two questions for me. Jean-Jacques, just one clarification on the nationalities and the cohort just to make sure I understood correctly. I think you said Mainlanders were down mid-single digits. Are you talking about Chinese nationals worldwide being down kind of in the mid-single digit? And if that's the case, should we assume that European and US nationals were down by more or less in same magnitude because the division is down 5% in Q3. My understanding is that you are trending towards flattish with the Americans in -- with US nationals in Q3. So if you could comment on that.

And my second question is on -- you kind of touched about on it very briefly on the cost to compete. So I guess the cost to compete in the industry has gone up a bit about -- over the past two, three, four years, and that was mainly the fact of LVMH kind of reinvesting the dividend of growth in building up brand desirability. So you guys are kind of have an important impact on the cost to compete in this industry. How do you see the cost to compete evolving in the second half and next year? Any signs from your competitors? And what about your intentions? Thank you.

Jean-Jacques Guiony

Thank you Edouard. Your first question about Mainlanders, I mean the Chinese clusters, maybe it was wrong expression, is down mid-single digit. So the other clusters you have the Japanese. I don't mean Japan, I mean the Japanese as we told you they were down, and they have not improved. You have the Europeans, they have improved a bit, but not in a very meaningful way. And you also have the Americans that have improved a little bit but are still slightly negative. So all in all, I mean, that's what -- if you combine all this, you end up with a minus 5% with a slight sequential improvement in Europe with European and Americas and deterioration for the Chinese and more or less the same trend with Japanese.

So on the cost to compete, I mean, we don't intend to change our strategy. I think we were pretty clear as to what we want to do. We know that we need to invest into distribution to go into communication and into product design, and we do it. And we have enough revenues to spend on these three items. Then it's a question of speeding up or slowing down. Obviously, at this point in time and given the strength or the lack of strength in demand, it's more slowing down than speeding up. But that remains at the forefront of our worries on a day-to-day basis, what we do is design strategies that are aimed at capturing the growth where it is. We know that this requires OpEx and CapEx investment, and we will continue to do so. So it's just a question of magnitude and how we can calibrate that to be in accordance with the strengths of the business overall.

Rodolphe Ozun

The next question comes from Carole Madjo from Barclays.

Carole Madjo

Hello. Hi, good evening. Just a couple of questions for me, back on the Chinese market, if possible. I guess back on what the point you mentioned about the cost base, the cost structure. Are you also able to change a bit more the Chinese cost base to become a bit more variable? I think it was a bit more fixed as you mentioned, in the past quarter. So could you use this as a lever to improve or, I guess, defend the margin in the short term?

And second question on China as well. Do you feel that the Chinese weakness is more than just a cyclical weakness? Is there something also structural happening in China around maybe no [world's] (ph) creation, maturity or this kind of thematics or do you feel like it's just a short-term issue and that the trends would go back to normal, of course in the future? Thank you.

Jean-Jacques Guiony

Thank you, Carole. So the cost base in China, for the time being, we don't necessarily need to do it. We've seen a lower level of business in China as Mainland China, as I explained. But we've seen also an enormous operating leverage over the past few years due to the fixed structure of the cost. And therefore, we can absorb this lower level of business without major difficulties. It will have a little bit of an impact on margins, but not in a tremendous way. Second question, sorry, I missed that. What was it?

Cécile Cabanis

Chinese cyclical versus structural.

Jean-Jacques Guiony

Yes. Things will never be the same again. I mean, it would be the first time that I don't hear that when things are going down. No, I don't believe that a minute. We are still very, very strong believers in the future of luxury, in the future of the emergence of upper middle class in China and elsewhere and we see absolutely no reason why after a cyclical downturn as we are experiencing today, we shall not be in a position to recover. So it's normal that people are asking the question that this is totally structural and will never come back exactly the same way maybe, but we are still very hopeful that the luxury industry will continue to develop and we'll continue to sort of swerve on the wave of the emergence of the upper middle class, as we've been doing over the last 55 years.

Rodolphe Ozun

The next question comes from Thomas Chauvet from Citi.

Thomas Chauvet

Good evening, Jean-Jacques, Cécile and Rodolphe. Thanks for taking my questions. I have three. The first one on duties, Jean-Jacques you said earlier, the Chinese government understands the importance to drive domestic consumption. There's no doubt about this. What's your view on the risk of China imposing higher duties to French, Italian handbags, ready-to-wear, so EU handbags, ready to wear as they did on Cognac, reflecting the broader EU-China trade tension and would you ever consider producing Vuitton, maybe other brands in China in the same way as you established [indiscernible] in California ages ago and in Houston in Texas, I think was just before COVID?

My second question on Hennessy, Diageo, JV. Diageo took the decision to terminate the distribution in France from the JV on first of January next year. They remain committed to distribute together with you in the other historical markets, mainly in Asia. Could you perhaps use this as an opportunity to explain how you see the evolution of your relationship globally with Diageo, particularly in China, Japan, where you have big operation. And I think you expected to receive a settlement in '25 for the France termination. Is that a material amount or not?

And finally, on the outlook. I know you don't have a crystal ball, but you've seen tons of cyclical downturns shorter or longer in the last 20 years, you've enjoyed at the group. With US election out of the way in a few weeks, the significant policy shift in China, hopefully some resolution of tension in the Middle East. Do you think the group's demand at minus 3% and minus 5% for the Fashion Leather division may have reached the sort of bottom in Q3? Thank you.

Jean-Jacques Guiony

Thank you Thomas. Well, your first science fiction question on duties. The short answer, let's make it sure that I have no idea. And obviously, it would be a very bad idea to comment further on that, so I will not. And I will answer the third one before leaving Cécile answering on my [tendency] (ph). The outlook, well, that's my 85^th earnings or sales conference. Each and every time I got the question in each and every time I refuse to answer. So I congratulate you for your persistence in asking it but it won't be more successful this time than it's been the other times. So I have no idea. I mean the visibility of our business is as good as yesterday's sales. We've been through ups and downs.

The only thing we know that when the business is bad, usually, it's good thereafter. It's a cyclical business in some way, not in a big way, but in some way, particularly in some markets. And we have to manage that and to make sure that we are flexible enough to be able to adjust our cost base and our structure to the fluctuations in the cycle. That's all. So our business, as I said many times, is not to forecast our business is to adapt, and this is what we are trying to do.

Cécile Cabanis

On the Diageo relationship going forward, I will not comment. And the only thing that happened is indeed the separation in the JV in France, we got a settlement from that Diageo regarding this breakup. However, there will still be some burden on the cost because we have to get the people from the JV and focus them fully on our brands. So there will be a bit of burden in short term, but we are confident that the global portfolio will absorb it at the end. So this is where we are with the French.

Rodolphe Ozun

The next question comes from Erwan Rambourg from HSBC.

Erwan Rambourg

Yeah, good evening. And welcome again to Cécile. Three questions, if I may. Firstly, do you see reasons to be optimistic about the US? The equity markets are at all-time highs, the election is hopefully soon behind us. Any green shoots that you are picking up in the US? Number two, looking at China, any willingness to reallocate budget from east to west? Again, I think you were clear that Western markets were faring slightly better. Would it be interesting for you to save up a bit in China as it doesn't seem the consumers that engage to reinvest in the West?

And then thirdly, you made a very big investment for the Olympics and your brands were very visible. Now that we're a few weeks or a few months later, what is the -- what are the pros and cons of that investment? And maybe putting that in regard to F1, are you thinking obviously, F1 is a long-term partnership, not just one event. But are there some similarities in how you think about that investment? And can you detail a bit what you're doing for F1? Thank you.

Jean-Jacques Guiony

Thank you, Erwan. So on the US, whether we could be optimistic or not, again, a fairly difficult forward-looking question. The only thing we can say is that we see -- we've been seeing in Cognac at Tiffany in Fashion & Leather, slight improvement over the last few quarters, I mean, slight improvement. I'm not saying anything spectacular which maybe is a sign of situation normalizing and the impact of aspirational customers being less than what it used to be. And therefore, boding reasonably well for an improvement there. But there are a lot of cautious word in my answer, only slight optimism or cautious optimism, if I may.

Second question on reallocating from East to West, frankly, that's not the way we manage the business. I mean, we try to allocate our resources on the various -- I mean we don't really allocate our resources in the various markets. We spend on the market in a way which is commensurate with the returns that we could get. So we will try to measure and to define what is needed on a given market, given its status and invest accordingly. So it's difficult to say that in doing so, we are reallocating, we are spending and we're investing. That's what we do.

Finally, your question on Olympics and F1, very different partnerships. The F1 is 10 years, Olympics, was a matter of three weeks. Obviously, given the fact that we are -- by and large, selling to our clients a lot of France and made in France, et cetera, it was impossible for us not to back the Olympics in Paris, and we did. But it was more a short-term and high visibility investment, whereas F1 is more a long-term effort over a period of 10 years. So you cannot really compare the two, the only thing it shows is that their diverse way to invest behind the brands, short-term, medium-term, and this is what we are doing.

Rodolphe Ozun

We have a question from Chris Gao from CLSA. Chris?

Chris Gao

Hi, good evening. Thank you for taking my questions. I have two. The first one is some follow-up on the Mainland Chinese performance. So Jean-Jacques mentioned that it was declined by mid-single digit year-over-year in Q3. So just wondering about how the exit rate is? And in terms of the breakdown, can you give us more color about how the average ticket size and transaction volume have been doing in Q3? And also by breakdown of consumer groups, do you see actually VIC consumer transactions drop more meaningfully? Or it is still mainly related to aspirational customers' weakness in Q3? Because this is actually a relatively notable gap versus Q1 and Q2. So that's why we are asking.

And the second question is related to tourist spending. So definitely, for next year, we are going to see some high comps, especially from the spending in Japan so to try best to stabilize the Chinese spending. Definitely, we need to also do more in driving home market and also long-haul travelers. So while at the same time, consumer confidence still takes time to recover, which means you still require more over investment especially in the first half of '25 possibly. But so what will be a key priority in doing work in the home market and long haul. And if you are going to save some discretionary expense, what is the easiest to save and what would be the most rigid cost you would need to maintain? Thanks.

Jean-Jacques Guiony

Well, thank you, Chris. A little bit detailed if I may, and we are not used to disclosing that level of details for obvious competitive reasons. What I would say about the mainlanders is not that easy to measure because as I said, I mean about 45% of the business takes place outside China and it's more difficult to measure outside China, whether we are talking about aspirational customers or other types, VIC or other types of customers. So we find it hard. If you take the Japanese or the Americans, for instance, the bulk of their business, i.e., 95% or 90% takes place in their home country, which is not the case with Chinese.

So analyzing the situation with -- I mean, where the drop comes from is a little bit tricky. As far as next year is concerned and the investment behind the brands, we are not giving up. I mean, as far as we -- as I said, we strongly believe in luxury altogether, in Luxury, in Mainland China, and we should continue to invest behind the brands, be it in stores, be it in marketing and marketing, meaning media but also events and will continue. You'll see -- I will not elaborate, but you'll see some initiatives being taken this next year with the main brands. We don't give up, and we'll invest behind the brand. It is a little bit the same question as the one from [indiscernible] whether we allocate from East to West. Certainly not, I mean we spend and we invest what we think we should do given the size and the perspectives of the market going forward.

Rodolphe Ozun

We have one question from Rogerio Fujimori from Stifel.

Rogerio Fujimori

Hi, good evening. Can you hear me?

Cécile Cabanis

Yes.

Rogerio Fujimori

Hi, good evening. Jean-Jacques, Cécile and Rodolphe. I was wondering, I have two questions. First, I was wondering if you could talk a little bit about your retail plans for your key Maisons. I believe you decided on most of the store openings for the first half of next year. So how should we think about the contribution from retail space for Louis Vuitton, Dior, Tiffany and Bulgari in coming quarters?

My second question is on Perfumes & Cosmetics. You called out strength for fragrances. So could you talk a little bit about the regional trends, especially your thoughts on the Chinese beauty market and Asia Travel Retail?

And then my third question on champagne. I was just wondering if you could talk about the Champagne harvest, especially the yield and what could be the impact on profits compared to the harvest last year? Thank you.

Jean-Jacques Guiony

Thank you, Rogerio. So on the retail plans, I'll start with that. I would say that more or less everything is defined as we speak, given the time it takes to finalize stores. The bulk of the increase will be at Tiffany. Cécile mentioned it, I mean, we embarked on a large renovation plan of our retail stores at Tiffany, which will continue to unfold next year and the following years. As Cécile said, I mean, only 25% of the selling surface has been renovated so far, and we need to go much further than that to really create a brand impact, as we expect to do otherwise.

I mean we have more limited plans. We have been adapting to the current environment lately. So there will be some larger or higher square meters next year, but not in a very meaningful way. And this shouldn't have a major impact, positive or negative on sales and productivity.

Cécile Cabanis

On the Perfume & Cosmetics on your question on the trends. Overall, what we see is indeed Perfume brands are going very well. Benefit is going quite well as well. And what we see is that the brands heavily skewed towards China like Guerlain are doing less good. Also, they are really showing strength in all other markets. So the main difficulty around Perfume & Cosmetics, despite the growth that we continue to see quarter after quarter is really what's happening in China with parallel imports and parallel market. I'm sure Jean-Jacques mentioned it many times. And last time we said that for us, it's very important to exit that part, and it's a painful process. So we are done as far as Dior is concerned, we're still in the middle with Guerlain and Givenchy. So it's painful, but we need to do it to make sure that we are not damaging our brand equity. So it's really what is happening in terms of trends. But other than this parallel market and discount issues, the brands are really having a broad-based good performance.

Jean-Jacques Guiony

On champagne, so your question about the harvest, the harvest was not as good, it would have been difficult as last year. But more importantly, given the global situation of the industry the yield that has been approved by the various producers is much, much lower than what it was last year, about one-third lower which means that in terms of -- which is your question, Rogerio, in terms of the profitability we make on our own harvest which is registered in year one as opposed to the profitability being registered normally when we sell the bottle, this will have a fairly negative impact. We are talking about something around EUR40 million to EUR50 million negative impact compared to last year for the profitability of Champagne, so it's quite significant. I've never been able really to understand this accounting rule that force us to register a profit on our own harvest, but that's the way it is, and it will have a negative impact on this year's profit.

Rodolphe Ozun

And we'll take our last question from Charles-Louis Scotti from Kepler.

Charles-Louis Scotti

Yes, good evening. Thank you for taking my questions. I have three. The first one is on A&P that declined 80 basis points year-on-year as a percentage of sales in H1. Do you see room to reduce A&P spending further in H2? And if I'm not mistaken, they are more skewed towards media buying, so probably quicker and easier to adjust.

And my second question, I see consensus at nearly EUR15.5 billion of free cash flow for this year, which implies a quite sizable working capital inflow in H2. I suppose the sell-through deteriorated in H2, have you practically lowered production in H2 which will help control the working capital management during the second semester despite the negative top-line development?

And then my third question is Moncler. Could you give us Moncler on the rationale of the deal and what's your intentions in the medium to long run? And considering the strength of your balance sheet, could you eventually take advantage of the current sector headwinds and lower valuation to potentially accelerate on the M&A front? Thank you.

Jean-Jacques Guiony

Thank you, Charles-Louis. So on A&P, I want to answer precisely. It's obviously the easiest way to monitor our cost base, as we have less time lag adjusting it than we would for other categories of cost, yet we still need to spend in media in events. But the question is how we calibrate that. You all have the outcome of all this when we release full year numbers. But it is obviously a question on a day-to-day basis for our businesses.

Cash flow and working capital, I sympathize with the difficulty on your side to make any forecast on this. Even on our side, it's quite difficult. More seriously, we are trying our best to control the working capital. Yet, you should bear in mind that the second half of the year as you can judge from Q3 is a bit below our anticipations. I mean we are not expecting to be there. We were not expecting wonders but we were not expecting to be where we are today. So we have probably a little bit of excess inventories today given the status of the business. So I wouldn't bet on very, very strong good surprises on the working capital control in the second half of the year for that reason.

Finally, on Moncler, I don't have much to say, which were unsaid in the press release, I mean, we have been long admirers of what [Remo Ruffini] (ph) and his management team have been able to do with the brand, which was a nonexistent brand 15 years ago and what they've been able to do with it. We had the opportunity to invest alongside Remo in a very limited way. I mean, even if we take into account further purchases that we are planning will be below -- I mean, around 3%. So it's a very limited investment. We have no plan whatsoever regarding going further up. It's really -- it's not entirely financial investment, it's really an investment that we make alongside Remo Ruffini and his family, and we intend to stay there for a long period of time and benefit from the strength of the brand and the quality of its management.

On your question about taking advantage of lower valuation to make acquisition, why not, but think about it. I mean, usually, sellers are looking at yesterday's price buyers of tomorrow's price and in a downturn, the bid ask gap tends to widen, which doesn't bode-well for the ability to do acquisition. So I'm not ruling it out, but it's far from being easy. That's it.

Thank you. Thank you for attending the call. We look forward to discussing with you full year's numbers here at the end of January. Have a nice evening. Thank you.

Cécile Cabanis

Thank you.