Hello, and welcome to the L'Oréal half-year results. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If you require assistance at any point, please press star zero and you will be connected to an operator. I would now like to hand you over to Françoise Lauvin, Head of Investor Relations, to begin today's conference. Thank you.
Thank you, Molly. Ladies and gentlemen, good morning. [Non-English content ] .Welcome to this conference call for the release of L'Oréal's half-year 2020 figures. Let me briefly introduce the participants to the call and the agenda. We are together today with Chairman and CEO, Jean-Paul Agon.
Good morning.
Chief Financial Officer, Christophe Babule.
Hello. Good morning.
Mark Prestwich, Group General Manager, Financial Communication and Strategic Perspective.
Good morning.
To start our discussion today, Christophe Babule will present the financial highlights of the past semester. After this financial review, Jean-Paul Agon will cover the main developments of our business and share with you his views and strategic perspectives. After these presentations, you will be able to raise your questions. We expect to finish this call at around 10:15. The press release, as well as the slides shown this morning, are available on our website loreal-finance.com and L'Oréal Finance app. A replay of the call will be available later today on the same website and app. The French and English versions of the half-year financial report will be available in the course of next week. I wish you a good conference. Let me now hand over to Christophe for the review of the financial highlights.
Thank you, Françoise. Ladies and gentlemen, good morning. The presentation of L'Oréal's first half 2020 financial results will include information about sales, profits, cash flow, and balance sheet. Consolidated sales amounted to EUR 13.1 billion, down 11.7%, both like-for-like and reported, 11.4% at constant exchange rates. The change in the scope of consolidation is positive at +0.3%. It is mainly due to the acquisition of the Mugler brand and of Azzaro fragrances at the end of March, partly offset by the disposal of the Roger & Gallet brand. The currency impact was slightly negative at -0.3%. Note that extrapolating the recent exchange rate of July 22nd, or 1 EUR at $1.16 until year-end, will have a negative impact on full year sales of around -2.2%. Exchange rates. On this table, the group's main invoicing currencies.
Over the first half, the USD appreciated by 2.6% and the JPY was up 4.3%. The GBP and the CAD were stable. The CNY edged down 1.1%, the RUB dipped 3.4%, and the BRL dropped 18.9%. Sales by division. The spread from east to west of the COVID-19 pandemic led to the compulsory closing of a very large number of retail outlets and almost all of the hairdressing salons around the world for a few weeks. In this extraordinary context, our divisions had a contrasted performance. At the end of June, on a like-for-like basis, the Professional Products Division sales were down 21.3%, and those of L'Oréal Luxe declined by 16.8%. The Consumer Products Division sales decreased by 9.5%, but Active Cosmetics grew a very dynamic 9%. Note that every division started the year with a very strong January.
April marked the low point from which business recovered progressively month after month. Sales by region. All regions felt the impact of the sanitary crisis. Western Europe declined by 16.1%. France, Germany, and the northern countries resisted well, whereas Italy and Spain were more strongly impacted. North America was down 16.2%. In the new markets, Asia-Pacific showed good resilience at -3.9%, thanks in particular to Mainland China growing by a strong 17.5%. Eastern Europe and Latin America are at -12.1 and -13.9 respectively. Africa, Middle East is at -17.4%. Now, here is the breakdown of H1 2020 sales by region. Asia-Pacific strengthened its position as the group's leading geographic zone with 34.2% of total sales up three points versus its weight in the first half of 2019. The weight of the other region is broadly unchanged as compared with the first half of last year or the full year.
This is true for Western Europe, which represents 27.2%, and North America at 25.3%. The weight of Latin America, at 5% of total sales, has slightly diminished, and that of Eastern Europe and Africa, Middle East to a lesser extent. By category, sales are also contrasted. First, note that skincare, our leading category, which accounts for over 40% of the total, posted growth of 1.1%. The perfume and makeup categories were the most impacted by the closing of stores, both at around -28%. Hair care comes at -10.5%. The closing of salons penalized the Professional Products division, in particular. Hair care also declined in the Consumer Products division, but to a lesser extent. Finally, hair coloring at -3% was also heavily impacted by the closing of salons, whereas at-home hair coloring was up double digits for the Consumer Products division. Let's move to the profit and loss account.
Gross profit amounted to EUR 9.5 billion, representing 73.1% of sales, a level unchanged from that of the first half and the full year 2019. Changes in the scope of consolidation were negative by 20 basis points, and currency impacts, both conversion and transactions, were positive by 45 basis points. Therefore, on a comparable basis, the gross margin was 25 basis points below that of the first half of 2019 due to a lower production in units and upward pressure on transportation and distribution costs. Research and innovation costs decreased by 1% but increased by 40 basis points to 3.5% of sales. Advertising and promotional costs increased by 30 basis points to 30.5% of sales. We have continued to reinforce our growth drivers to support our brands, especially in China, with agility to maintain the closest possible bond with our consumers.
Digitalization is continuing at full speed as digital media now represents nearly 60% of total media versus 47% in the first half of last year. Selling general and administrative costs were 8% lower in absolute value, illustrating the rapid implementation of significant savings as soon as February, such as the head countries at group level and the international travel ban. SG&A increased 80 basis points to 21.1% of sales. Overall, operating profit amounted to EUR 2.357 billions and declined by 150 basis points to 18% of sales as compared with the first half of last year. Profitability by division. At this stage, every year, we point out that the L'Oréal Group is managed on an annual basis and the half-year division's profitability cannot therefore be extrapolated for the full year. I shall therefore limit my comments on the following.
In the first half of 2020, the profitability of the Professional Products Division has changed from 19.1% to 10.4%. The profitability of Consumer Products Division improved by 60 basis points to 21.3%. L'Oréal Luxe posted a profitability of 20.4% compared with 23.8% in H1 2019, and that of the Active Cosmetics division posted a further strong improvement to reach the high level of 28.9%. Non-allocated expenses, consisting mainly of corporate and fundamental research costs, were stable at -2.7% of sales. For the group as a whole, in the first half of 2020, profitability remains at the high level of 18%. From operating profit to net profit, excluding non-recurring items. The net financial result was negative by EUR 36 million. For the full year 2020, net financial expenses of around EUR 80 million can be anticipated, all other things being equal. Sanofi dividends amounted to EUR 372 million.
Income tax amounted to EUR 547 million, representing a tax rate of 20.3% below the rate of the first half of 2019, which was 23.2%, because of a decrease in the profit before tax and, to a lesser extent, a reduction of tax in France. For the full year 2020, we can anticipate a rate slightly below 25%, all other things being equal. Net profit, excluding non-recurring items, amounted to EUR 2.144 billion, and the corresponding earnings per share came out at EUR 3.82, showing a limited decline of 12.7%. To help you in estimating your EPS number for the full year, I would recommend that you base your calculation on a diluted number of shares of 561.5 million shares. We'll now complete the review of the profit and loss account.
Non-recurring items amounted to a negative EUR 322 million in the first half of 2020, net of tax, of which EUR 407 million of other income and expenses, principally made of, first, the depreciation of the goodwill and of the brand Clarisonic for an amount of EUR 90 million. Second, restructuring charges of EUR 133 million related to the continued reorganization of the distribution of the brand NYX Professional Makeup, the ongoing reorganizations in Western Europe, the repositioning of Decléor and Carita brands, and the termination of the Clarisonic brand. Third, costs generated by the sanitary crisis for EUR 140 million, including health protection measures for employees and expenses derived from the decisions made by the different government authorities to impose a sudden and total closing of some of our businesses due to lockdown measures over a defined period of time.
After taking into account the non-recurring items, net profit after non-controlling interests came out at €1.822 billion. Cash flow. Gross cash flow amounted to €2.6 billion, with a change in line with that of the net profit. The change in working capital increased significantly, which happens every year in the first half. CapEx at €504 million represented 3.8% of sales, and for the full year, they should reach around 4% of sales. Net operating cash flow was €1.274 billion. Lastly, after payment of the acquisitions, the residual cash flow amounted to minus €290 million. Note that as the AGM was postponed to 13th of June, the dividend of €3.85 per share, a level unchanged versus that of the prior year, was paid early July. Balance sheet. The balance sheet remains particularly solid, with shareholders' equity to the tune of €29 billion. Last, the financial situation remains very robust.
Net cash amounted to EUR 2.1 billion and to EUR 4 billion excluding the financial lease debt. I thank you very much for your attention.
Thank you, Christophe. As you have seen, L'Oréal has demonstrated a pretty good resilience and solidity through the crisis. First and foremost, our absolute priority has been to protect our employees. We have taken every possible measure to ensure their safety. So far, we have had a very limited number of cases. We have guaranteed the jobs and salaries of all our employees. Secondly, we have been supporting caregivers in every way possible with a donation of more than 15 million units of hydroalcoholic gels and hand care products to healthcare professionals, clients, suppliers, and NGOs in more than 40 countries, mobilizing more than 70% of our factories in the process. Lastly, we have supported our most fragile partners, freezing receivables from more than 100,000 small clients and perfumeries and shortening the lead time of payments to 9,000 most vulnerable suppliers.
Secondly, the beauty market has been quite resilient. We estimate that the beauty market declined between -13% and -14% over the first semester. This COVID-19 crisis has been a crisis of supply rather than demand. The lockdowns around the world closed millions of salons, perfumeries, department stores, airport stores, et cetera, making consumers unable to buy product and services. The impact has been very contrasted by sector and channel. The professional sector was the most heavily affected, with salons totally closed at the beginning of the second quarter. Luxury was also severely impacted by the closure of most perfumeries, department stores, and airport stores. The market was less negative in the mass and dermocosmetic sectors, where stores remained open.
By channel, we have seen a fantastic acceleration in e-commerce with millions of consumers, or tens of millions or hundreds of millions of consumers, discovering this channel for the first time. E-commerce remains strong even when brick-and-mortar stores reopen. At the other extreme, the travel retail channel experienced a brutal drop in the number of international travelers. The impact was also very contrasted by category. That's for the market. Makeup and fragrances were heavily impacted due to mask-wearing and consumer confinement. Skincare has resisted better. Haircare was less impacted but still negative over the semester. By zone, the crisis has hit all regions. Western Europe was the most severely impacted one. We see positive signs of recovery in northern countries like Germany, the Netherlands, and the Nordics, where lockdowns have been less severe and e-commerce is well-developed. France is coming back.
The U.K., Spain, and Italy have been more heavily affected. In North America, the U.S. remains very challenging with the sanitary situation and lockdowns varying from state to state. In the new markets, the semester was very contrasted, with some countries like India and Brazil heavily impacted and others recovering more quickly, of course, China. In China, especially, the market rebounded very quickly and was back to double-digit growth in Q2, confirming consumers' strong appetite for beauty. In China, beauty is leading the recovery and growing much faster than total retail sales. Online growth remains very strong and offline traffic is returning to normal progressively. L'Oréal's activity has shown great resilience during this crisis. Globally, we have been able once again to outperform the market. Three divisions outperform, Active Cosmetics, Professional Products, and L'Oréal Luxe. The Consumer Products division was in line with the market in sellout.
The crisis began in February and reached the low point in April. Since then, as you see on the slide, the group's activity has recovered month after month and is progressively returning to growth. July, that we are closing today, will be the first positive month in terms of growth again since January. After a very promising start to the year, the Professional Products division has been resilient despite the complete closure of salons and rebounded as lockdowns were lifted. The division has outperformed the market in all zones. Its e-commerce business grew very fast by +80%, confirming the success of its new multi-channel strategy. Kérastase is leading the category and the recovery. Support for hairdressers during this crisis has strengthened the division's very strong relationship and its leadership position in the industry.
L'Oréal Luxe performed significantly better than a very negative market, gaining share in all three categories, skincare, makeup, and fragrance. The main drivers for the divisions were, its acceleration in e-commerce, the rebound of consumption in China, where the division grew by more than 30% in Q2, and finally, a strong outperformance in skincare, thanks to Lancôme, Kiehl's, and Helena Rubinstein in particular. For the Consumer Product division, sellout was in line with the market despite a very unfavorable footprint on makeup. Sell-in was weaker than sellout due to destocking of retailers, mostly in the U.S. and mostly on makeup. Excluding makeup, sell-in for the Consumer division was flat over the semester. E-commerce for the Consumer division accelerated all over the world, particularly in the United States, where its online turnover more than doubled over the period.
The division had an outstanding semester in China and is also gaining market share in most major European countries. Good news, is back to growth in Brazil despite a difficult market. In terms of brands, L'Oréal Paris is resisting better than the market, thanks to a strong performance on skincare and hair color. Garnier continues to gain share, driven by haircare. Of course, the division's makeup brand, Maybelline and NYX Professional Makeup, were heavily impacted by the slowdown of the category. Active Cosmetics is remarkably gaining market share globally, particularly in North America and Asia-Pacific, in a market that is still slightly negative. E-commerce was, for Active Cosmetics, up more than 80% in the semester, growing at almost twice the speed of the market. Three brands lead the growth. CeraVe was up 62%, which is amazing.
SkinCeuticals continue to grow fast everywhere, and La Roche-Posay is also positive in every zone. The division's excellence in digital has allowed it to build closer relationships with consumers and the medical community. By region, we are gaining share in Western Europe and new markets. In Western Europe, where we see the first signs of recovery, we are gaining market share, especially in the U.K., France, Italy, and Spain. In the U.S., where the crisis is still ongoing, we are slightly behind market due to the strong headwind on makeup. However, we are outperforming in skincare, and our sales in e-commerce are accelerating. The new market zone was the least affected, thanks to the outperformance in Asia-Pacific, driven by mainland China. L'Oréal is leading the rebound in this country.
We are gaining share with growth of 17% over the semester in a negative market and with a Q2 at +30%. We are extending our lead thanks to online sales that are powering ahead, driven by our expertise in digital activation and the big online shopping festival such as 618, in which L'Oréal Paris and Lancôme brands ranked number one and number two. Finally, we are gaining share in all strategic categories, particularly skincare. There are four main reasons for this global exceptional resilience. First, thanks to our lead in e-commerce, which has grown even stronger during the crisis. E-commerce sales jumped by +65% in H1. Now represent on the semester, 25% of our total turnover, growing almost twice the speed of the market and accelerating every month, even as stores are reopening.
For the first time, online sales are growing faster in countries outside China, like, for example, the U.S. or Western Europe. Second reason, we have capitalized on our excellence in digital. Our brands are creating more personalized and engaging consumer experiences with amazing digital services like virtual try-ons, diagnostic, teleconsultations, and shoppable live streaming. All this is building stronger relationship between our brands and consumers. In China, for example, five of the top six brands in L2 Digital IQ ranking are now L'Oréal brands. Digital also enhances our return on investment on media with sharper targeting. 60% of our media was on this first half digital. Third reason, the power of our brands and hero products. In times of turmoil like now, consumers turn to quality, to strong, aspirational brands they can trust. Our brands offer exceptional quality, safety, efficacy, and a clear sense of purpose.
Big brands were already winning before the pandemic and continue to outperform during the crisis. Fourth reason, very important also, the fantastic dedication and agility of our teams. Their extraordinary mobilization, energy, and talent have been crucial in navigating extremely violent shifts in categories, channels, et cetera. As you heard from Christophe, L'Oréal has also delivered very solid results. The profitability at 18% remains very high and is close to the annual level of 2019. We have limited the impact on net earnings per share at only -12.7%. We have preserved our P&L with a high growth margin, unchanged compared to last year, and lower SG&A, thanks to strong cost discipline. We acted with anticipation, immediately implementing strict measures to control expenses. We were one of the first companies in the world to impose a travel ban and freeze headcount among many other actions taken.
We have protected our business drivers. Research and innovation expenses were sustained in absolute value to secure our innovation stream and fuel future growth. A&P investments were maintained in relative value. Country by country, we smartly adapted our plans to maximize return on investment as the situation evolved. We increased spend in highly efficient drivers such as digital, but cut where it was less relevant, for example, in-store. Lastly, our operating cash flow has shown resilience despite the financial support we have given to our most fragile partners, and our financial situation has remained very solid. Finally, we are entering the second half with lucidity, confidence, and resolve. Lucidity first, because, of course, the sanitary crisis is not over, unfortunately. It is still ongoing in many countries, especially in the Americas, with some risks of rebounds around the world.
We're also entering the second half with confidence because we think that the market will be stronger. The good news is that consumers' appetite for beauty is absolutely intact, and moreover, stores should remain open as the world will probably not experience the same lockdown phenomena as in H1, and e-commerce is still gaining power everywhere. The beauty market has always been resilient on the long term, and growth will resume. Lastly, we are also entering this semester with resolve to re-dynamize our business. We are working actively with our retail partners to stimulate consumption and create opportunities everywhere. We have strong launch plans and product initiatives for the months to come in every division and every zone, and we are increasing our media investment everywhere to grow our market shares and drive our sales.
As you've seen, our commitment to the future in term of responsibility and sustainability is stronger than ever. As you have probably seen, we have set very ambitious new sustainability goals for 2030 with the launch of our L'Oréal for the Future program. To conclude, we are determined for the second half 2020 to outperform the market, find again the path to growth if the sanitary conditions allow it, and deliver solid profitability. Thank you very much. Now we are ready for your questions.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Please be advised you will be able to ask one question per participant. Please ensure that your line is unmuted locally. You'll then be advised when to go ahead with your question. The first question comes from the line of Celine Pannuti calling from JP Morgan. Please go ahead.
Yes, good morning. I was preparing for a few questions, but I shall start with my first one then. e-commerce, could you give us a bit of more details behind what is D2C versus your usage of third-party platforms? As well, if we can understand a bit the profitability, and does it mean that as you ramp up the businesses in developed market, the profitability is a bit lower? Thank you.
Good morning, Celine. I'm glad to see that you are again the first one to ask questions. Welcome back. E-commerce, you're right, is the most important topic of this first half. E-commerce has seen an acceleration as never before, and in terms of penetration of e-commerce in our business, we have progress in this last 10 weeks as much as we did in the previous three or four years. As I said, I think what's very important is that we don't see a slowing down of e-commerce as stores reopen. The capacity of a company to excel in e-commerce is more vital and strategic than ever. By the way, when I said that we grew by 66% on the first half, it's an average growth.
When you look month by month, in fact, at the end of the period, we are growing even more than that. For example, it grew by 75% in May or 82% in June. I believe that also the 25% average percentage of sales will be, for the last month of the period, higher than that. E-commerce is the new name of the game. To answer your questions, as usual, we have a good split between the different type of players. Let me find again my slide. It's split between the e-retailers, the online pure players, and the direct e-commerce.
The weight.
The weight is pretty well split. E-retailers represent 30%, online pure players 27%, and D2C 43%. As you know, direct e-commerce is made of two parts. One part is Tmall and the other part is all our own sites. The very good thing in this first half is that for the first time we have seen a very strong acceleration of our own sites. If I remember well, they grew by something like 80% or something. It was a real tipping point in terms of acceleration of our own sites. Finally, your question about profitability. You know that we don't disclose profitability per channel. Also it's becoming more and more difficult to do it because clearly e-commerce is embedded today in all our businesses. It's true for all divisions. It's true now for all countries. It's completely embedded in our business.
What is sure is that it has clearly a accretive impact on our different businesses. Again, this is true for our four divisions. Okay.
Thank you. Can I have a follow-up question?
Exceptionally for you, yes.
Thank you. Since we are on profitability, yesterday you gave an interview and you said that H2 margin will be handsome. I just wanted to understand, if you could maybe quantify or help us qualify a bit more what that means, and does it mean that we should expect, since top line is recovering, that the margin will be up year-on-year in the second half?
I was sure yesterday giving the article that handsome would create and trigger some interesting interrogations. Of course, we don't give guidance. I know that you try every time, but we don't give guidance. I'm sure that you're smart enough, all of you, to guess what handsome could mean. When I say that, it means also that we are not worried about profitability for second half. We are not worried for different reason. Number one, we believe that top line will be better because again, as I explained, the market will be better. We will probably not experience the same lockdowns. E-commerce is still getting traction and will accelerate. We think that the top line will be significantly better, of course, number one.
Number two, all the measures that we have taken in terms of cost discipline, in terms of cost reductions in this first half will be maintained in this second half. It's super important for the margin. Third, it's true that we want to invest. As you have seen, I've also said that we want to go on the offensive again in terms of launches, media, activation plan in the stores with our partners. Because the top line will increase and because also globally speaking, the cost of A&P, I would say, is lower today, will be lower in the second half than it had been in the previous years. This will not put pressure on the margins. There are also some other factors that are interesting to know. There are many things that we are cutting.
One example is the testers for the makeup display around the world. You know that we used to spend a lot of money on testers for makeup display, but now consumers don't use these testers. We have completely stopped any delivery of testers, and we are replacing that with our virtual testers with ModiFace. Many things that we are doing like this are, in fact, very significant reduction of A&P cost, mostly in stores. We are absolutely not worried. We think that we can really reinvest and fuel the growth again without any pressure on the margin for the second half.
Super. Thank you so much.
Thank you, Celine.
The next question comes from the line of Guillaume Delmas calling from UBS. Please go ahead.
Good morning, everyone.
Good morning to you.
One question from me. It's about when you talk in the press release about an aggressive plan of new product launches and the business drivers to stimulate consumption for the second half. Does this mean that at least at this stage, you do not expect a crisis shift from being supply-led in H1 to being demand-led in the second half? If I remember well back in 2009 when we experienced that demand and crisis, you came up with some essential range to make sure consumers would not trade out of your portfolio. Do you have anything in your pipeline similar to this, just in case we were to see a meaningful deterioration in demand?
That's a good question. You're right. We think that we will not see any more the same type of supply crisis because I think that everyone has understood that making lockdowns everywhere in the world is too destructive, devastating for the economy. I think that people will find a way to keep stores open, and also, as I said, e-commerce is becoming more and more an alternative. I don't think that we will see any more supply crisis. You're right, the danger, the risk now is that it transform into a demand crisis. For the moment, we haven't seen it. Maybe we'll see in the fall. I think we are well prepared.
Number one, we have seen in the past that beauty products, cosmetic in general, are very resilient to this kind of demand crisis because if there is an economic crisis, consumers will more hesitate before buying some expensive items. Generally, it has been proven that they want to indulge themselves with non-expensive products like beauty. Beauty is an important part of your daily, I would say, quality of life, number one. I'm not worried about the impact on the beauty market, on the consumption of this potential demand crisis. Two, of course, we will see. I don't have a crystal ball, but I'm not really worried. It's also why we are fueling the growth, and that's also because the beauty market needs to be fueled and need to be stimulated.
We think that it's our job and our best interest to stimulate the market with new innovations, new products, activations. I have to say, by the way, that all our retailer partners are super happy that we are following this route because they need also us to stimulate the return of consumers into their store, the return of consumption. We have called these operations around the world Back to Beauty operations, and apparently they are working very well. We started in summer, and they are starting very well, and we will continue them over summer and in September, October. To finish with your question, in fact, to be honest, we were not that successful with our basic essential product in 2008 and 2009. At that time, we thought that it was what consumers would like, but in fact, it was not really successful.
In fact, in terms of beauty, consumers are always interested by quality, efficacy, innovation, valorization, it's not the type of products on which they are interested by value for money offering. Another way to make value for money is more to offer sizes that are more affordable, and we are doing that, too. I have to say that we are pretty confident about that. It's true also that on the first half because the crisis just happened, we were a little bit in the expectative, not knowing exactly what would happen. Now we have a much better visibility, even if, of course, the sanitary situation is not resolved, unfortunately. Still, we have a much more visibility, and we want to really go on the offensive now.
Thank you very much.
Thank you.
The next question comes from the line of Richard Taylor, calling from Morgan Stanley. Please go ahead.
Hi. Good morning, everybody.
Good morning.
I'd like to ask a question about North America. A little while ago, you made what looked like a very significant change in the management team there after a few years of, let's say, disappointing growth. It looks like, in the first half of this year, there's, let's call it, a giant digital leap going on, in terms of the e-commerce development, maybe sort of three years' worth of growth in just a few months. Can you give us some insight in terms of what this means for your business, combined with the change in management, who obviously have a lot of experience from China, especially in digital?
Yeah. No, I think you're right. It's a good question. Of course, as I said before, our team previously in the U.S. was a very good team, and this new team is also very good. It's a fresh crew, as I said. You're right to say that it's a fresh crew with a very strong acumen on digital and e-commerce. In fact, the real revolution in e-commerce that we undertook first was in China. By the way, now our business in China is more than 50%.
In e-commerce.
In e-commerce. E-commerce has completely transformed the way we market products in China, and we were a bit late in the U.S., and you're right to say that it is the mandate of the team now, and especially of the new CEO of L'Oréal USA, Stéphane Rinderknech, to accelerate the transformation and the penetration of e-commerce in our business. By the way, they are pretty successful at it. If I remember well, the growth in e-commerce for our business in the U.S. was more than 100%. It's the first time that we have a triple-digit growth in e-commerce generally, and especially in the U.S. U.S. is really following the Chinese way, in a way. Nothing political there, of course. I'm pretty confident.
We have also to acknowledge the fact that, in this first half, the U.S. was really handicapped by the very strong footprint in makeup. For obvious reason, makeup has been the most difficult category in this first half, and it's very obvious because when your consumers are confined, when they wear a mask, when there are less interactions, when they are working from home, definitely it doesn't really help consumption of makeup. It's not going to last forever, but for a while, it has been a handicap for us. Definitely, the part of the world where makeup is the most important is definitely North America. For example, in mass in North America, it's 47% of our business this year in S1, and historically, it was even more than that. It was more than 50% of our total sales.
That's why we have definitely unfavorable footprint on makeup, at least in this first half in the U.S. On other, I would say, channels and categories, the U.S. did very well. They were the most successful in professional, by the way, thanks to SalonCentric. Thanks to SalonCentric, we have been able to really provide all the stylists in America and to start again their businesses. This is also the place in the world we have been the most successful with Active Cosmetics, with amazing results on CeraVe. All in all, without this headwind on makeup, the U.S. is doing a good job, and we are pretty confident for the second half and for the future.
Maybe just as a very quick follow-up, it looks like there's been some significant changes in China in terms of the evolution of duty-free with the reshoring and the creation of these duty-free zones. Maybe you could just give us a very quick perspective on this and what it means for your business.
Yeah, absolutely. This has been also a very good news in this first half. As you know, Chinese consumers are not traveling abroad since the beginning of the pandemic. Obviously it has created some disruptions in terms of business. It has some negative but also some positive effects. The negative effect is maybe that they are buying less in countries like Korea, Japan, et cetera, which for us, by the way, is not such a problem because they were shopping mostly local brands. For us, it is not a problem. On the opposite, the fact that Chinese consumers stay in China is a very positive thing because, as I said several times, China is the country where we have the highest market share in the luxury market. I think we are 27%.
Yes
Market share in China, which is the highest ever and in the world. The fact that when consumers stay in China, the probability that they buy one of our brands is higher than when they go abroad. Regarding travel retail, you're right to say that Hainan has become the alternative solution for all Chinese consumers who want to go somewhere, to go to the sun and go shopping. The Chinese authorities have really encouraged that by creating a huge and amazing shopping experience in Hainan with a huge number of flights. Also they have recently increased the.
The cap. Sorry. They have increased their cap from 30,000 RMB to RMB 100,000.
Yeah.
The possibility.
As Christophe explained, they have tripled the possibility for Chinese consumers to buy de tax in Hainan, and they obviously want to create another destination for Chinese shoppers. We were from the very beginning, working in this direction. We are very well established in Hainan, with all the key contacts and the key partners. This has been a very important relief of the travel retail business. If I remember well also, I think that Hainan has represented something like 40% alone of the total travel retail market in the past few months. Of course, market that has been reduced, but still, it's a fantastic new opportunity.
Thank you.
All right. Okay.
The next question comes from the line of Marion Bouchony, calling from Mainfirst. Please go ahead.
Hi. Good morning, everyone.
Good morning.
Two questions from me, please. The first one on the consumer division and the trends you've been seeing between sell-in and sellout. How would you say that could evolve in H2? Do you think there could be restocking or at least sell-in lines with sellout? The second question would be on China. Would you mind giving us the e-commerce growth rate in the second quarter there? Third one on travel retail. How did it evolve in the second quarter?
Okay. Many questions. The first one was consumer division.
The sellout, yeah.
I think that I've seen in some notes that some comments have been pretty severe with our consumer division, and I think it's a bit unfair because I would like to explain two things. First, in fact, as you have seen in the categories, the category that has really suffered for the mass market has been makeup. We can estimate that globally, the mass market without makeup was probably around flat. It was the same for our division, by the way. The sales of the consumer division of L'Oréal in this first half was flat without makeup.
In terms of sellout, we estimate that the sellout of our division was in line with the sellout of the market at minus 5.5, something like that, with makeup, because the fact that the makeup is so negative on this first half, makes the market go from flat to minus 5. The dip minus 5, minus 6. The difference is also due to makeup again, because with the reduction of the sellout of makeup, obviously, many retailers, and especially in the U.S., have been obliged in a way to reduce their inventories. Also you have another factor, which is the pipe of the launches. You know that in makeup, every year, makeup is a category where you have to launch many products every year.
The first half of every year is also really made of pipe of new launches, which didn't happen this year. In fact, we are comparing this first half where the makeup sellout were down, where there was a destocking, and there were also much less launch. Not even less, there were no launches in makeup. This creates this discrepancy between the two periods. For the same reason, we are confident that the second part of the year should be better. It's difficult to know exactly yet how much. Number one, we think that makeup will get better. Number two, in term of consumption. Number two, we should not see again this destocking effect. Number three, we are now launching products and makeup products that we stopped in the first half. There should not be this discrepancy again on the second half.
All in all, I just wanted to make this point clear. I think our consumer division did a good job, but they were really handicapped by their very heavy weight on makeup. This is clearly one of the reasons when you compare with some of our competitors that don't have makeup or that got rid of makeup. For some years, it didn't help them. It happens that it helps them now, but I'm pretty sure personally, that makeup will come back, and it will again be a tailwind. There was a second question about e-commerce in China. E-commerce in China has been strong. For example, on the total semester, we have been at +58%. You want to comment the numbers if you have them, Christophe?
Yes. We end up the first half with the growth in China at a little bit more than 58%. Between Q1 and Q2, I think it was also your question, we are more or less at the same pace of growth, a little bit higher than 60% in Q1 and over 50% in Q2. Very strong, 618 in China as you know, where our brands took most of the top positions in the ranking in Tmall.
Yeah, that's pretty amazing. It's true that China is becoming more and more e-commerce, and e-commerce is becoming more and more animated through these special festivals, like 618, like 11.11. It also indicates that the evolution will not be steady because what's very important is to be successful during these festivals that concentrate a lot of the business. Also, obviously, because consumers are waiting for these festivals because there are special offers that are made during these festivals. Chinese consumers are smart, and of course, they wait some time for the festival before buying their products. It's a new element of doing business in China.
I have to say that, as it was said in a question before, the learnings that we are taking from our super performance in China are extremely strategic and vital for us, and because they are shared now with every country in the world. This first half has demonstrated that now every division in every country is maximizing this opportunity. You had a third question that I don't remember.
It was travel retail.
Travel retail. Travel retail has been obviously tough. To be honest, a bit less terrible than we thought. Because I think our teams did a very good job. We are at -22 at the end of first half, which is a bit, as we say in French, [Non-English content ].
How did you do that?
That's a good question. Number one, we had a very good beginning of the year. We started the year with a very strong performance on travel retail, number one. Number two, as I explained, we were really able to maximize every opportunity, including the special opportunities created by the Chinese travelers in Hainan. There are also some specific operation on e-commerce that are made between Korea and China. In fact, the business is now almost only in travel retail Asia. Travel retail Asia now represent.
More than 80%.
More than 80% of travel retail. The name of the game, at least for the next one or two years, until the air traffic gets back to a normal stage, the name of the game is clearly travel retail Asia, where we are pretty well equipped. We have a great team and a great collaboration with the operators there. Okay?
Okay. Thank you very much, and have a good day.
Thank you very much.
The next question comes from the line of Fulvio Cazzol calling from Berenberg. Please go ahead.
Yeah, good morning.
Good morning.
Good morning. Thank you for taking my question. It is on gross margins. I know that you highlighted on an underlying basis were only 25 basis points lower year on year, which I thought was actually quite impressive given the volatility to the top line. I was just wondering if you can maybe give us a bit more detail on some of the drivers to that gross margin development, because I'm guessing that with makeup underperforming, skincare proving more resilient, and also your DTC sites doing quite well, I guess there's probably quite a significant mix contribution there to the gross margin, maybe some productivity, lower inputs. Just trying to understand what the moving parts are on that, if you're able to provide those. Thank you.
We are able, absolutely. In a way, I think you answered very well your own question. Gross margin has been preserved 100%, because we were at 73.1% last year, first half, and we are still at 73.1% with a little help from the currencies.
Absolutely.
Still at the same level, and you're right, that it's a pretty good result. I think you said the right thing. Number one thing that you didn't say is that we are still valorizing. I think that it's a pretty strong indication of what we are doing. Even in this pandemic, even with all the constraints, even with the disruption caused by this situation, we were able still to valorize in this first half of 2020. We were able to valorize by 2.4% on the four divisions. It's super important, number one. Number two, you're right. There is a mix effect, which is positive. In a way, it's more skin care. Skin care is the best category in term of gross margin. More e-commerce, and especially D2C. D2C is also very relevant for gross margin. Number three, more China, which is also relevant.
On top of that, I think that our teams were able to implement also in the factories, in the warehouses, in term of distribution, some very strong cost discipline measures. Thanks to all that, gross margin has stayed high. You want to complement maybe, Christophe?
On the upside, just to give a little bit more flavor. We have, as Jean-Paul said, a plus in both valorization and mix effect, and a negative impact coming mainly from distribution cost because, as you know, with the huge digital leap, we have higher distribution cost in most of our countries.
That's why we are also pretty optimistic about the rest of the year, for the gross margin that should stay at a good level.
Great. Thank you very much.
Thank you.
The next question comes from the line of Javier Escalante, calling from Evercore. Please go ahead.
Good morning, Javier. He's not here.
He's just removed his questions. Apologies. We'll move to the next person, which is Iain Simpson.
Okay. Bye, Javier.
Calling from Barclays. Please go ahead.
Morning, all, congratulations for protecting profitability against such a challenging backdrop.
Thank you.
Speaking of which, I just wondered if we could dig into a little bit how you've managed that. When I look back to the global financial crisis, it took you five years for margins to recover to pre-crisis levels. Now looking at your commentary, who knows what handsome means, but perhaps margins recover a bit quicker this time around. Perhaps anything on how this crisis is different to 2008, or perhaps how you're different to how you were in 2008, that means you seem to be finding it a bit easier to protect your profitability. If I could, as well, as a sort of follow-up on something you said earlier, in terms of potential structural legacy of COVID-19, shift to e-commerce is clearly very good news. It looks like we might be wearing masks for a while.
Could that mean that makeup is perhaps subdued for a bit longer than we would have thought? Are you seeing consumers move back into the professional color category now things have reopened, or have they discovered that actually home color is a better product than it was?
Thank you very much for your good questions. First, margin, you're right, it's an important topic. Number 1, it's true that this crisis is very different from the previous one or from the previous ones, because as you know, I have been experiencing many crises in my career, I can compare. This one was totally different. As I said, the fact that it's a supply crisis and not a demand crisis changes everything. It changes everything. It changes the way we have to react. It changes the mix, changes everything. Also it changes the, I think the resilience of the margin. We delivered this margin at 18%. I think the right way to look at it is more to compare it with the total margin of last year. Last year margin was 18.6%. We are at 18%.
I say that also because, for many years it happened that we had a higher margin in the first half than in the second half. It's not written in the model. It means that the margin for the second half, as I say, can be handsome as Celine mentioned it. Also because the conditions of the activity this year are pretty different. To get back quickly to your question, definitely, I don't see any reason why it would take us longer to get back to the pre-COVID-19 margin. I'm not talking about this year, of course, because this year is a completely abnormal year. If we are back next year into a situation where kind of normal activity can happen, and of course, that will depend on the sanitary conditions.
I think that there is no structural reasons to anticipate a difficulty to get back to the level of margin that we had. Number one. Number two. Françoise? No. Sorry?
Yves Saint Laurent.
Yeah. You're right. Very true. Françoise is telling me something very important. As I mentioned it also, I think in another question, is that one of the reasons also why we had a dilution of the margin in 2008 and 2009 was not only the crisis, but it was also the moment of the acquisition of Yves Saint Laurent Beauté. This is one of the key reason why it took us a few years to get back to the pre-crisis profitability because of the progressive ramp up of the profitability of Yves Saint Laurent Beauté. We are absolutely not in this situation right now. On the contrary we have sold or stopped some businesses that were not making money. The only one that we have acquired is making money. We have absolutely no dilution effect.
Again, I think that we can all be very confident about the margin. Number 2, post-COVID, we will see. We will adapt. We will be creative. I don't know how long we will be wearing mask. I hope that it won't be too long. I'm sure also that, for example, for makeup, I'm sure also that consumers will be happy to wear makeup when they don't wear a mask, and they don't wear a mask 24/7. There are also other makeup opportunities. For example, obviously, when you can't see the lips, eyes are super important. We want to develop very strongly the makeup for eye or foundation, or stay on foundations. There will be opportunities. I'm not worried and I can tell you that our thousands of marketers are working actively on very creative ideas to adapt to this post-COVID world. Okay? Hello?
Thank you very much.
Okay. Thank you.
The next question comes from the line of Jeremy Fialko calling from HSBC. Please go ahead.
Hi. Good morning. Jeremy Fialko, HSBC.
Good morning, Jeremy.
Thank you. One question for you on e-commerce. I guess it's obvious that you're going to get a very big boost to e-commerce when all of the stores are closed. Could you talk a little bit more about when you look at the data behind it, to what extent is the e-commerce boost just through, let's say, replenishments and people buying the products and the brands which they know? To what extent is it actually being able to stimulate new consumption and new sort of purchase occasions? Perhaps also linked to that, whether you can contrast the situation in China and sort of outside China in that sort of perspective. Thanks.
Yes. I think that this COVID crisis, again, as I said, was a tipping point because in all countries except China, where it was already the case, consumers don't see e-commerce anymore as they used to see it. It's true that before maybe they used to see it as a replenishment, now it has changed because they have been using this channel for one, two, three, four months now. They have been experiencing the service, the quality, the choice, and also the services that we are offering ourselves, like ModiFace everywhere. In fact, e-commerce is now seen by all consumers as a real alternative in terms of shopping and not only as an option for replenishment. That's why I think that what we are seeing right now is that in the different countries where, when stores reopen, e-commerce keeps growing.
It is not stopping or the growth is still there. That's what also what we have seen in China. I think that what happened in China is progressively happening everywhere. Of course, it start from very different levels. In the U.K., for example, I think that we are doing today more than, how much are we doing in U.K., 15%? Huh?
30.
30%. We are at 30% of sales in e-commerce. In some different countries, it starts to be pretty amazing. It's 23% in the U.S. It's of course, 40% in Korea. It's 25% in Japan. Even in countries where we were very, very low, like Brazil, it's now 10%, Chile 14%. Even in Spain, it's at 10% now, Greece 13%. E-commerce has really taken its own share of the business and its own share of the choice of consumers. I think it's here to stay or even here to grow. In a way, I think it's good for us because we know that why is it good? Number 1, because we know that contrary to what people think, e-commerce favors big brands and hero products.
I think we discussed that several times, because of the algorithm, e-commerce, even if it offers unlimited choice and hyper choice in terms of products and brands, in fact favors big brands and hero products because of the algorithm, number one. Number two, because of our, I would say, expertise and proven excellence in e-commerce. This is for us, clearly a competitive advantage. Also thanks to, as I said, all the services that we are now offering on e-commerce with ModiFace, like virtual try-on on makeup, on hair color, on skincare, on skincare diagnosis, et cetera. Third, because of course also there is this relutive aspect of e-commerce, which is very positive. It's clear that for us also, it's a tipping point. We were already very e-commerce.
We are probably one of the most advanced companies in terms of e-commerce, we are going to become e-commerce, not e-commerce first, but almost e-commerce first in our business because, as we say in French, that's where the history is taking us.
Okay. Thank you very much.
Thank you.
The final question comes from the line of Chris Pitcher calling from Redburn. Please go ahead.
Thank you very much. Obviously, there's been a lot of talk today around beauty tech and your Modiface acquisition. Could you give us a bit more color on how the Modiface model has evolved? What sort of penetration and share does it have with third-party online retailers? How early is it in terms of the in-store application, and how much of it is generating your own sales? Is it possible to determine the sort of sales contribution from Modiface? How is this changing your relationship with retailers? You mentioned earlier that retailers look to you to drive footfall. With the increased rise of e-commerce in your business and an increasingly significant alternative challenge, is it increasing your negotiating power with your retail partners? Thanks.
Yeah, thank you very much. It's a very good question. I won't be able to give you the contribution of ModiFace exactly to business. By the way, it's an interesting element, but I don't even have the information. What I know is that it has been super instrumental. First, because, since the acquisition of ModiFace, what, three years ago now?
We have really been able to expand it to all our divisions and all our brands. When we acquired, that was the goal. The goal was to be able, instead of having them working with some clients, we told them, "Come with us, and you will be able to work with all our brands in all the countries of the world." That's what's happening now, including China, by the way, number one. Number two, we have expanded the number of services. As I said, we started with a virtual try-on for makeup, but expanded it to hair color, haircut, skincare diagnosis, acne diagnosis, and I'm forgetting others. The possibilities are infinite because virtual reality also help with artificial intelligence, open new horizons that are absolutely infinite. Third, we have offered ModiFace to, I would say progressively all our e-commerce partners.
Of course, the e-retailers, all the e-commerce branch of our retailers like boots.com, sephora.com, macys.com, you name it. Also with ulta.com, also with Amazon. Of course, on our brands, of course, on our makeup brands, mass market makeup brands. We don't sell luxury on Amazon. As you said very rightly, it has created a completely different type of partnership between them and us. For them also, it's a great competitive advantage as a platform or as an e-commerce player to be able to offer this service to consumers. It's super important. It helps also in our negotiations with them. It helps in the way that we are considered as privileged partners. It helps also the increase of penetration of e-commerce.
I'm pretty certain, and one of the reason of the acceleration of our strong acceleration in e-commerce in the past 12 months, and especially the recent month, is of course due to the COVID crisis, but also due to these services that we are offering. When I said, by the way, that we are partnering with our retailer partners to create this Back to Beauty operations, it's not only brick and mortar, it's Back to Beauty everywhere. It's Back to Beauty in store, and in every possibility. It's Back to Beauty in salon, Back to Beauty in perfumeries, Back to Beauty in mass market, Back to Beauty in pharmacies for Active Cosmetics, and of course, Back to Beauty or let's say more even to Beauty for e-commerce players. This is super important, and we see that as super critical.
I think that this acquisition has been one of the best that we did in the past 10 years, as it has given us a smart weapon, a super competitive advantage that we are using 100%. We are working on new developments that are still confidential, but that will give us even more edge in this direction. Okay. Thank you very much. Thank you very much for all your questions. We wish you a great summer. Stay safe and healthy, and we'll be happy to see you again in, what? In October?
Yeah.
Now. Okay. Thanks a lot. Bye-bye.
Thank you.
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