Welcome to the conference call regarding L'Oréal's half year 2019 results. If you need some help, please press star zero on your telephone keypad. The conference is about to begin. I now hand over to Françoise Lauvin. Madame, please go ahead.
Merci, Laurent. [Non-English content] Good morning to all. Welcome to this conference call for the release of L'Oréal's first half 2019 sales and results. Hosting this conference today are Chairman and Chief Executive Officer, Jean-Paul Agon.
Good morning.
Chief Financial Officer, Christophe Babule.
Good morning.
Group General Manager, Financial Communication and Strategic Prospective, Mark Prestwich.
Good morning.
The press release detailing our results was sent out yesterday at 6:00 P.M. To start the call this morning, Christophe Babule will present the financial highlights of the past semester. After this financial introduction, Jean-Paul Agon will review the main developments of the first half and share with you his strategic perspectives. After this presentation, we will of course, be available for your questions. The presentation materials shown during the call can be found on our website, loreal-finance.com, where they can be downloaded. They are also available on L'Oréal's finance app. A replay of this call will be accessible later today on the same website and app. The French and English versions of the half year financial report will be available in the next few days. I wish you a very good conference. Let me now hand over to Christophe for the presentation of the financial results.
Good morning, ladies and gentlemen. The presentation of L'Oréal's financial results for the first half of 2019 will include information about sales, profit, cash flow, and cash situation. Let's start with the sales. Consolidated sales amounted to EUR 14.8 billion, up by 7.3% like-for-like, by 8.4% at constant exchange rate, and by 10.6% reported. Changes in the scope of consolidation were positive at 1.1%. This comes mainly from the acquisition in 2018 of Pulp Riot in the U.S., of Stylenanda in Korea, and of Logocos in Germany. Currencies had a + 2.2% impact. Note that extrapolating from the end of June currency rates against the euro, that is, with the euro at around $1.14 U.S. until year-end, will have a positive currency impact of 1.5% on full year sales. Let's move to the currencies. This table shows the invoicing currencies of the group's main countries.
Most currencies appreciated against the euro in the first half of 2019 compared with the first half of 2018. Among the main changes, the U.S. dollar appreciated by 7.1%, the Chinese yuan ends up +0.5%, and the Sterling pound rose +0.7%. Let's move to the like-for-like sales by division. First, sales of the Professional Products Division have increased by 2.5%. Markets remain difficult in Western Europe, but sales improved in the U.S. and in Asia. The Consumer Products Division posted growth of 3.1% in the first half. New markets accelerated, especially Asia, while North America turned out to be more difficult. Western Europe improved, especially because of the good performance in Germany. L'Oréal Luxe at +13.2% achieved sustained growth in a very lively market. Here, too, the two good performances in the new markets, especially in Asia and in travel retail.
Last, Active Cosmetics at +13.6% posted very dynamic performances across all geographies. By region, Western Europe came out at +1% like-for-like, with the second quarter that was similar to the first one. North America is at zero growth with a difficult second quarter that was down 1.1%. The new markets are maintaining their very strong pace of growth of +16.6%, similar to that of the first quarter. Note once again, the very strong growth in Asia at +24.3%, as well as the Eastern Europe of +7.5%. Let's move to the consolidated profit and loss account. We begin by analyzing the gross profit. Gross profit, at EUR 10.8 billion, was 73% of sales, stable as a percentage compared with the first half of last year. Changes in the scope of consolidation had a - 20 basis points impact.
Foreign exchange impacts, including both translation and transaction, came out negative at 80 basis points. Overall, gross margin, excluding scope and currency effects, improved by 100 basis points. This improvement stems primarily from mixed effects as well as from premiumization. Research and development expenses have increased by 2.8%. Their relative weight has decreased slightly at 3.1% of sales. Advertising and promotion expenses were 13.2% of sales, slightly above last year's figure of 30%. We have continued to invest in supporting our brands, especially in Asia. Note that digital media represented 47% of our total media spending versus 42% in the first half of last year. Selling, general, and admin expenses at 20.3% of sales were 20 basis points below that of the first half of 2018.
The improvement is due for 10 basis points to the application of the IFRS 16 accounting standard and for 10 basis points to the decrease of certain commercial costs, illustrating the constant productivity efforts in our organization. Overall, operating profit has grown 12.1% to EUR 2.9 billion, with a 30 basis points improvement to 19.5% of sales. This profit included a positive EUR 20.8 million impact of the application of IFRS 16. Profitability by division. At this stage, every year, we point out that the L'Oréal Group is managed on an annual basis and that half-year divisions operating profitability cannot therefore be extrapolated for the full year. I shall therefore limit my comments to the following. In the first half of 2019, the profitability of professional products has changed to 19.1% from 19.2% in the first half of 2018. Consumer products posted a profitability of 20.7%, compared with 20.8%.
The profitability of L'Oréal Luxe improved from 23.4% to 23.8%. Lastly, the profitability of Active Cosmetics remained stable at 26.5%. Non-allocated expenses, consisting mainly of corporate and fundamental research expenses, were stable at 2.7% of sales. For the group as a whole, 19.5% in the first half of 2019, an improvement of 30 basis points versus the first half of last year. From operating profits to net profit, excluding non-recurring items. The net financial result was an expense of EUR 30 million. The application of IFRS 16, as from January 1st this year, generated EUR 26.8 million financial expenses. For the full year 2019, the net financial expenses can be anticipated at around EUR 70 million, all other things being equal. Sanofi dividends amounted this year to EUR 363 million.
Income tax amounted to EUR 748 million, representing a tax rate of 23.2% above the rate of the first half of 2018, which was 21.9%, because of an increase in the tax charge in France. For the full year 2019, we can confirm a tax rate slightly above 25%, all other things being equal. Net profit, excluding non-recurring items, amounted to EUR 2.5 billion, and the corresponding earnings per share came out at EUR 4.38, up by 7.2%. For the full year, I can confirm that our objective is to achieve growth in sales, in profit, as well as an increase in profitability. Lastly, to help you in estimating earnings per share for the full year, I will recommend that you base your calculation on a diluted number of shares of 563 million after taking account of the EUR 750 million share buyback program announced yesterday.
We will now complete the review of the profit and loss account. Non-recurring items amounted to a EUR -139 million in the first half of 2019. They include mainly the depreciation of the brand and of the goodwill of Clarisonic for EUR 80 million before tax, and restructuring charges of EUR 90 million related primarily to the reorganization of the distribution of NYX Professional Makeup. After taking into account the non-recurring items, net profit after non-controlling interest came out at EUR 2.3 billion, an increase of 2.3% compared with the first half of 2018. Cash flow statement. The gross cash flow amounted to EUR 3.3 billion, up by 18.9%. It includes this year an amount of EUR 209 million for the rights of use related to leasing contracts in application of IFRS 16. The change in working capital increased significantly, which happens every year in the first half.
Over the full year 2019, the change in working capital should increase by around EUR 200 million compared with 2018. Investments at EUR 569 million represented 3.8% of sales. For the full year, they should reach a bit less than 5% of sales. Net operating cash flow came out at EUR 1.9 billion, up by a strong + 23.2% compared with the first half of last year. Lastly, after payment of the dividend, the residual cash flow amounted to EUR -248 million. Regarding the balance sheet, we can say that the consolidated balance sheet is particularly robust with shareholders' equity of EUR 27.1 billion. The financial situation is also very solid. After payment of the dividend of EUR 2.2 billion in April, net cash came out at EUR 200 million. Excluding the financial lease debt under IFRS 16, net cash amounted to EUR 2.35 billion. Thank you very much for your attention.
Thank you, Christophe. Hello, everyone. As you have heard, L'Oréal has delivered its strongest first half like-for-like growth in more than a decade, at +7.3%, accelerating compared to the first half of 2018, as well as a very good set of financial results, with growth in operating profit of +12.1%, leading to a new record level of operating margin of 19.5%. Earnings per share grew 7.2%. Net cash flow was up by 23.2%. I would like to share some insights on the dynamics of the market, the performance of our divisions and zones, and finally, our perspective on the rest of the year. First, as anticipated, the market continues to grow at a very healthy pace of around +5.5%, the best in 10 years or more, according to our estimates, maintaining the rhythm of 2018, but again, with some very strong contrast.
The main growth driver remained exactly the same. The same two sectors are leading the market. Luxury is growing double digits, with particularly strong demand in Asia and travel retail. Dermocosmetics is dynamic in all zones, fueled by a global trend towards health and wellness. In contrast, mass market is relatively subdued, and the professional sector remains slow. In terms of channel, travel retail is still very dynamic, particularly for luxury brands in Asia. E-commerce is growing double digits in every zone and every sector, accounting for roughly half of the global growth in the beauty market. In emerging countries such as India, Indonesia, Philippines, access to e-commerce is leapfrogging the development of traditional distribution, reaching new consumers, even in the most remote corners. By region, Asia continues to grow very fast. China is, of course, the main contributor and has shown no sign of a slowdown.
The growth of the beauty market even accelerated in the second quarter compared to the first one. Western Europe continues to be flattish, but has recovered slightly in the south since our last call. North America is still growing, but at a slower pace, largely due to the slowdown in makeup, which is now flat in the U.S. at best. By category, skincare is leading in every region of the world and in every sector of the market, balancing the slowdown in makeup, particularly in the U.S. and Western Europe. L'Oréal is once again outperforming this dynamic market globally and on each of its main growth drivers. The new markets are clearly fueling our growth. Our Asia Pacific zone has even accelerated to +25.5% in the second quarter, growing more than twice the speed of the market and maintaining the very high rhythm of 2018.
All divisions posted double-digit growth, gaining share without exception. China is the main contributor, but we are also growing double digits in very strategic markets such as India, Indonesia, Malaysia, Philippines, Vietnam. Elsewhere in the new markets, Eastern Europe delivered another semester substantially ahead of the market. Latin America remains contrasted with a much stronger quarter in Mexico and Chile, but a disappointing first half in Brazil again, where the mass market remains challenging. Africa, Middle East delivered a poor quarter with some good performances in Egypt, Pakistan, and Sub-Saharan Africa, offset by difficulties in the Middle East that should be resolved in the second half. In Western Europe, we are gaining market share despite difficult conditions in France. The U.S. has been more challenging as the market has decelerated in makeup, where we are market leader. Although we are gaining share in skincare, where the market is more dynamic.
We have strong initiatives in the second half, particularly in luxury, but the U.S. will probably remain soft this year. The other key drivers are still boosting our growth. Our luxury division is outperforming a very dynamic selective market with outstanding growth in Asia and travel retail. Our skincare sales are growing 2x faster than the market, double-digit with the Active Cosmetics and Consumer Products Division, and growing very fast with Luxe. Skincare is, of course, a very important driver of our growth, but makeup is also contributing well and growing in line with the market. Hair care has been a bit more difficult, flat on the semester, and a bit slower than the market, particularly in the U.S. and Western Europe. We keep reinforcing our very important leadership in the two booming channels. Our business in travel retail is growing very fast at +21%.
If travel retail were a country today, it would be our third country behind the U.S. and China. Finally, e-commerce for us is on fire. Sales in the first semester accelerated to +49%, twice the speed of the market, and now represents 13.2% of our total turnover. All zones and all divisions are growing strongly in this channel. In China, e-commerce now accounts for more than half of our mass market and dermo-cosmetic sales. We are now clearly a digital-first company, and our digital lead is paying back. Digital is not only about e-commerce. Digital enhances our ROI on media with sharper targeting. 47 of our media is now digital, and three-quarters of that is spent on precision advertising. Digital is also about more relevant content. We produce more than 1 million pieces of content a year. 80% of that is developed for digital platforms.
Digital is connecting us with 1.2 billion consumers every year on our website, opening a more personalized discussion with them. Now with new technologies like AI and AR, digital is creating new services and amazing consumer experiences, such as virtual makeup trials with ModiFace, now deployed by 20 brands in 65 countries. The performance by division reflects these underlying trends and growth drivers. L'Oréal Luxe is a big engine for growth, particularly in Asia and travel retail. The division is gaining share in all of the major categories: makeup, skincare, fragrances. Its four flagship brands, Lancôme, Giorgio Armani, Yves Saint Laurent, and Kiehl's, are growing at a very high combined speed of + 16%, proving once again that big brand, the most loved brands, are winning in this new digital world.
The division has a very strong second half ahead with the launch of three new fragrances, which never happened before: Idôle by Lancôme, Libre by Yves Saint Laurent, and Born In Roma, the first creation from Valentino since we acquired the license. Active Cosmetics recorded another semester of double-digit growth and is gaining share in every region of the world, powered by the relevance of a business model based on recommendation by medical professional and a global aspiration for healthy-looking skin. The big growth driver were La Roche-Posay, which grew double digit, SkinCeuticals, which recorded fantastic growth in all geographic zones, and CeraVe, which continues to capture market shares in the United States, also has been successfully launched in China, and is now being rolled out to many markets.
The Consumer Products Division is accelerating slowly but surely, and winning share in many regions, even if overall growth is slightly below the market. The division performed well in Western Europe with good share gains in makeup and skincare, and growth in all the major markets: France, Germany, U.K., Italy, and Spain. It recorded a strong acceleration in Asia, particularly in China, where L'Oréal Paris was the number one brand during 618, the largest e-commerce festival after 11.11. In North America, performance has been weaker due mainly to the slowdown of makeup. L'Oréal Paris, the world number one beauty brand, grew well ahead with the market. Garnier is back to solid growth, Maybelline New York, the world's number one makeup brand, is gaining share, especially in emerging countries. The division is also spotting and scaling new beauty trends.
Garnier Bio is bringing organic beauty to a wider audience in Western Europe. Stylenanda, a newly acquired Korean beauty brand, is booming in its home market and now starting also very fast in China. The professional product division grew in line with the market, beating the market in the U.S. and growing fast in Asia, especially in India and China. Western Europe and Latin America continue to be difficult. Kérastase confirmed its turnaround and led the growth across the world with double-digit progression in all zones. The brand successfully combined expert in-salon services with powerful innovations like Blond Absolu. Kérastase is more than ever the reference brand in the booming professional luxury haircare market. All in all, after this first good half, we are looking ahead with great confidence.
First of all, the market is in a very good shape. 2018 was a record year for growth, and the first semester of 2019 confirmed the same pace. The same underlying trends and growth driver persist and remain strong. We are confident that Asia, luxury, skincare, travel retail, and e-commerce will continue to drive the growth at a strong pace in the second semester. Secondly, as you've seen, our big brands are very dynamic with the 8 billionaire brands driving growth of + 8% in the first semester. We expect these big brands to remain strong. The launch plans for the second semester are everywhere very solid, and we have some very important initiatives to come. Thirdly, we are confident that our performance in some divisions and some regions should improve in this second half.
The consumer division and the professional division should keep accelerating, as will Western Europe, Latin America and African Middle East should also deliver better growth than in the first semester. Despite the volatile and contrasted environment, we start the second half with optimism and confidence in our ability to once again outperform the beauty market and achieve another year of growth in both sales and profit. Thank you very much, we are now ready for your questions.
Ladies and gentlemen, if you wish to ask a question, please press zero and one on your telephone keypad and state your name and company name, and be so kind as to raise one question at a time. Please lift your handset before asking your question. We have our first question from Celine Pannuti from JP Morgan. Please go ahead.
My first question would be on North America. You had a negative growth in the second quarter. Could you give us a bit more flavor of what has happened in consumer and luxury? I know you mentioned makeup, but could you give us a bit of flavor in terms of the luxury market? It seems that you have underperformed this market. Was that the case? Likewise, in consumer, beyond makeup, could you talk about what has happened from a market standpoint, competitive standpoint? My second question, just to rebound what you said in terms of improvement in the second half, you talk about consumer accelerating in Western Europe. Could you come back to what has happened in Q2 in Western Europe consumer?
I thought that the comparative base was easier in Western Europe and will get, in fact, tougher as a total in the second half. Why is it that we had failed to see an acceleration, and hence why would you believe that there should be one in the second half? Thank you.
Good morning, Celine. I see with pleasure that you are always the first to raise a question. Regarding North America, it's obviously and clearly the weak point of this first semester, which, by the way, on all other regions was very strong as you could see. I want to remind you that compared to the second quarter of 2019 was stronger than the first semester, sorry, of 2019 was stronger than the first semester of 2018. In North America, it was clearly the weak point. The market slowed down first, clearly, globally. We estimate that the market globally was around +3%. We had, in fact, a good performance in two divisions and a weak performance in two other divisions. A good performance in two divisions that were Professional and Active Cosmetics.
Active cosmetics is really on fire in North America, professional is gaining momentum quarter after quarter. We were disappointed with our performance, clearly, in consumer and luxury. On consumer, clearly, the market was down, but we were also below market. That is, I would say, mostly because we are really over-relying on makeup. You know that in the U.S., we have 40% of the market share in makeup. Makeup is more than 50% of our sales. Obviously, when we are in a cycle of weak makeup growth, this is definitely a headwind against us. Honestly, we lost also a little bit of market share globally, so we are definitely not happy with this performance. In term of luxury, the market was a bit also slower.
Here again, we are pretty strong in makeup, the makeup market in luxury got really slow, so that played against us. All in all, also, we were not also over-performing the market. On these two divisions, we perfectly acknowledge that we didn't gain market share as we should have. That's why we are strengthening very clearly our plans for the second half, plans for next year, we really intend to bounce back in the U.S., it may take some time. It probably will not happen before the end of the year. Regarding the improvement in the second half, you talk about Western Europe. In fact, in Western Europe, we see globally a difficult market, flat market, not very different from what we saw before.
Regarding CPD, consumer division in Western Europe, we had, as you said, a good evolution on the second quarter. That was mainly due to good market share gains. In fact, even if the market is not very dynamic, we are gaining market share almost on all categories. This is pretty positive. You know also that, for us, the comparative base of the year before is not that relevant. What is really relevant year after year is the initiative that we have, how good they are, how strong they penetrate the market. This was the case in Western Europe in the second quarter for consumer division, with a good performance of, for example, Garnier Bio and different initiatives that were pretty successful. That's why we are pretty confident also for the year.
Are there any initiative in the second half that would help this region specifically?
Yeah. There are several. There are many initiatives coming on all division. I would say that maybe the most important one are the launches of the three new fragrances. As we said, Idôle from Lancôme, we launch a new Lancôme fragrance every 20 years or 15 years. This will be major. The new launch of Yves Saint Laurent also fragrance, which doesn't happen often, and the launch of the first Valentino initiative called Born In Roma. You know that of all zones, the one that is the most important in term of fragrance is Western Europe. We really believe that for the luxury division, for example, the launch of these three fragrance initiative will definitely be very important.
Thank you.
There will be also initiatives in all divisions. All right. Hello? Other question?
Yes. We have another question from Javier Escalante from Evercore ISI. Please go ahead.
Good morning, Jean-Paul, Christophe.
Good morning, Javier.
How are you guys? My question has to do with e-commerce, incredibly strong, an acceleration given comps. Wondering if you can give us some color, how much of that has to do with the promotional activities in China, this new 618 shopping festival? If you can give us a sense of e-commerce growth by country and division, and category actually, makeup versus fragrances versus skincare.
Why not brands?
No, not brands. Basically the other is the impact on margins. To what extent, what in the investment curve you are, given the very high return on investment that you are getting in digital, in advertising. Your decision of partner up with Amazon, with some of the augmented reality technologies from ModiFace. If you can give us your perspective, why Amazon and what you are expecting from that partnership. Thank you.
That's many questions. First.
Yeah, I'm sorry for that.
No, no problem. It's a pleasure. E-commerce. You're right to ask the question because I think that e-commerce is clearly one of the key booster of the growth of L'Oréal, and very clearly because we have been probably the first to enter in this game and to master it in term of digital and e-commerce activity. This is really paying back now. When you see that we are growing at almost + 50% on e-commerce when the market grows at 25%, it really means that we are going twice the speed of the market and accelerating even from one year to the other. What's interesting, I cannot give you all the details, the numbers, but what I can tell you is that the growth of e-commerce is really completely homogeneous across division and almost across regions.
For example, the growth in e-commerce is almost the same for our four divisions. It's around 35%-40% for professional, 45% for mass, 50% for luxury, 50% for active cosmetics. You see that it's really a completely homogeneous acceleration of the growth for all divisions. Same also, by the way, for regions. It's not only a Chinese game, it's really everywhere where we are seeing this acceleration of the e-commerce business. It's clear also that we are playing pretty well or even very well with this new festival that China is organizing. We all knew about 11.11, and we have been very successful at 11.11. In fact, for the 6.18, we have been very successful, too. L'Oréal Paris was the number one brand, as I said before, in this festival. All our brands are really, I would say, mastering the game.
It's one element among many others in term of the e-commerce growth. In term of profitability, we don't disclose profitability by channel, but we always said that e-commerce for us was more relative than dilutive. The development of the percentage of the business in e-commerce is favorable for the profitability. Regarding ModiFace and Amazon, the idea is pretty simple. We bought ModiFace in order to boost the sales of our brands and our categories with different partners. Amazon is a very important partner, and we thought that it makes sense for them and for us to partner on this. They will have access to our technology. It will be exclusive to our brands for a while, and then will be used for the category of makeup.
It's also good because the more Amazon sells makeup, the more they will sell our brands, because our brands are, by definition, the leaders in the makeup category. We think it's a win-win that we want to play with Amazon as we have played also with many other e-retailers around the world. All right?
Yes. Can I ask, which another one? That's going to be short.
A quick one.
Yeah, a big one because it's also related or was related to online. I do remember when you bought NYX, that one of the reasons why you bought it was the strength online and understanding how they were dealing with social media. If you can explain what is that you are doing in terms of the restructuring of the brand that it has to do with distribution. Does it have to do that the stores that you decided to open? Could you explain a little bit more what you are doing with NYX, please?
Yeah. You're right to say that it's pretty related also to this evolution of e-commerce, because, in fact, what we are seeing is that in many countries, the sales of makeup are really shifting a lot to e-commerce and shifting away from stores. When we started NYX Makeup a few years ago, the store distribution was a critical element for makeup. Definitely, we see that year after year, e-commerce is taking a more important role. We don't want to be late in this transformation. We always, as you know, want to transform the business quickly in order to adapt it to the evolution of the trends and where consumers want to find our products. We have decided to do this restructure of our stores network in order to reduce the number of stores and to maximize the sales on e-commerce.
That's absolutely consistent with what we said before.
Thank you so much.
Thank you, Javier.
We have another question from Guillaume Delmas from Bank of America Merrill Lynch. Please go ahead.
Good morning, Jean-Paul, Christophe.
Thank you, Guillaume.
Two questions for me. The first one is on your mass market haircare business, because we had soft growth in the first half. You also mentioned, Jean-Paul, some share losses in North America and Western Europe. To me, it seemed that mass market haircare has been, for quite some time now, lagging behind some of your other categories in CPD. My question here is, do you think the challenges you're facing are more structural, be it a lack of category growth, deflationary pressures, or do you have a plan in place that could drive a rapid improvement in that part of your business? My second question is on your advertising and promotion spend, that once again grew faster than sales in the first half. Now, if I look at the past couple of years, you've been increasing A&P spend by more than 100 basis points.
That's roughly an incremental EUR 1.1 billion at a time when we're hearing a lot about media efficiency gains with less waste, precision advertising. Maybe could you help us understand the main areas where you've been investing this incremental money and how you make sure that you maintain a strong return on investment?
All right. Regarding hair care, our consumer division operates mostly in four categories: makeup, skincare, hair care, and hair color. Clearly, for a few years, makeup has been a very strongly growing category, and it was clearly the priority because we always want to maximize the growth of the market where it is. By the way, it was good for us because we enjoy a strong growth on makeup, and we also increased our market share very strongly on makeup. With Maybelline, L'Oréal Paris, and NYX, and essie by the way, we reached some very high market shares, for example, in the U.S. where we are close to 40%. We never had that before. That was one. Since two years, or one year and a half, skincare is really the star of the categories.
Skincare is a very important category because it's a category where consumers are loyal. It's a very added value category, less promotional. We think that it's very strategic, and that's why also we are focusing on skincare and, again, gaining market share, accelerating the growth, and on the total, as you could see, we are growing on skincare at twice the speed of the market. Hair care has not been the priority for us in the past five years because of that. Our market share is globally stable, I would say, for hair care around the world. We have a strong market share in Western Europe, where we are number one, and we don't have strong market share in North America. We have some very good brands, and we keep investing on them. We try also to find a good return on investment.
That's not more complicated than that. Regarding the A&P investment, it's very clear that we invest in A&P in order to strengthen our brands and to maximize our growth. By the way, that's pretty well worked in the past two years, where our growth has clearly accelerated. To be also very frank, and you will not be surprised, one region in the world where we increase our spending in A&P is clearly Asia and China. Not only in order to sustain the very strong growth that we have there, which is very important, of course, but also to prepare the future in order to convince and seduce these hundred and millions of consumers that are becoming new consumers for our brands in these countries. This is honestly the best investment we can do.
At the moment where the growth that we had in China or Asia is so strong, it's clearly a very good investment that we can do.
Okay. If I may add, Jean-Paul, we were speaking before about the media that we spend in digital. That's for the purchasing of the space. As you can imagine, we are also investing in other kind of expenses, being the production of digital medias, being all the website costs that are generating our e-commerce sales, as well as the consumer relation marketing and influencer management. There is a shift also in the way we spent in advertising and promotion.
All in all, I think that the pretty reasonable increase that we have made in A&P during these past two years, has proven pretty effective in terms of acceleration of the growth, in terms of strengthening of our brands, in terms of boosting our business, in Asia and China. Honestly, I think it's the best management decision we could take.
Thank you very much.
Thank you. Another question?
Yes, we have another question from Marion Boucheron from MainFirst. Please go ahead.
Hi, good morning, everyone. First question on China, which accelerates in H1 versus last year. What have you seen further accelerating? You were mentioning even Q2. What is behind this? Is it specific categories or your outperformance of the market or in your regions with e-commerce? Second question would be France, because it was the black spot of Western Europe in your commentaries. What we thought we were maybe at the end of the tunnel, what happened there? You were mentioning the innovation pipeline for H2. Are there any phasing between Q3, Q4 we should be aware of all these initiatives?
All right. First, China. It's true that everyone talks to us about slowdown, but for the moment, on this first half, what we have seen is more an acceleration than a slowdown. It's not a huge one for the market, but it's an acceleration. We think that the market accelerated between Q2 and Q1, and on our side, we also accelerated pretty nicely. It doesn't mean that we're going to keep accelerating quarter after quarter, but at least it means that we are very far from a slowdown. Why? In fact, I think there are many factors today in China that drive this growth. Number one, there is a clear strong appetite of consumers. All this growth comes from consumer desire, and this is clearly increasing period after period.
We saw it from consumers who buy our brands on the Chinese market, but we see it also from Chinese consumers buying our brands in travel retail, in other countries. There is a growing appetite of Chinese consumers for beauty products. Number one. Number two, you know that the global economy of China is more and more towards consumption, so probably that helps also. More importantly or most importantly, what we see is a strong increase of the consumption of young consumers in China. I've said that already in different call, but what most amazing in China is that you see very young consumers going directly to a very established brand and big brands like, of course, L'Oréal, but also Lancôme or Yves Saint Laurent, Giorgio Armani, and going directly to these kind of brands.
This is clearly a very good sign, and we see, again, no signs of slowing down. This is good for the four divisions. That's also a very important point. Of course, L'Oréal Luxe is really enjoying a very strong growth on a very strongly growing market. It's also true for mass market, where we are growing in China at twice the speed of the market. It's also true for Active Cosmetics, and it's also beginning to be true also for Professional, where for many years, Professional didn't really start in China, and now it's really starting very strongly. We are very confident and very satisfied with the true performance, which is an amazing one, I have to say, of our teams in China that are really gaining market share. The growth that we have in China is not only because of the growth of the market.
That's 50%. The other 50% is definitely the amazing capacity that our team have right now to gain market share, and this is not over. Regarding France, it's always difficult in France to know exactly when will be the end of the tunnel. The market is still slightly negative, something probably around -1%. We are more or less at this level, with some improvements that make us happy. We are improving in mass market. We are gaining share again in mass market, which is a good performance because you know we have very high market share in France. To gain market share again is a very good sign. We are doing very well in active cosmetic, and we have, I would say, two difficulties in this first half. One is definitely professional because the professional channel in France is really not easy.
We are also in the middle of a restructuring of our sales team, so which is always a turbulence. Also luxury is not very easy. As I said before to another question, we think that the second half in France, like in many countries of Europe, for luxury, will be very strong because of the three fragrance launches that will arrive very soon. Regarding the piping question that you asked, there was absolutely no piping in the first half. These launches are coming now, and they will completely positively impact the second half. All right?
All right. Yep.
Thank you.
We have another question from Stephanie Wissink from Jefferies. Please go ahead.
Thank you. Good morning, everyone.
Morning.
Two questions. The first, Jean, is on the North American business. Can you give us some incremental insights on the channel performance? I know you talked about e-com, but anything else across your key channels of distribution, mass, drug, specialty, and even into department stores for your luxe business. On China, also a point of clarification. If you could just help us think about the unit level consumption versus pricing. When we were together last fall, you talked about the premiumization effect in that market. It'd be helpful just to understand a little bit about the unit growth dynamics versus the pricing that you're seeing in the China market. Thank you.
We don't disclose units per country. This is not something we're going to do. What you're saying is true. What we are seeing in China, but not only in China, is a premiumization of the market. What's interesting is that it's happening in all channels. We are seeing that in China, we are seeing that in Asia, but we are seeing that also in North America, almost everywhere. Definitely, the value component is much bigger than the unit. In North America, if I understand well, your question is about the different channels for luxury. What's happening to us is the same that what's happening to the market in general. Department stores are pretty tough. Specialty retailers like Sephora and Ulta are growing very well. With these retailers, we are a very important partner of Ulta, a very important partner too of Sephora.
It's clear that our footprint, that's maybe another reason of the, let's say, the challenging situation for us, is that compared to other new players that are completely only in the specialty stores or in e-commerce, the fact that we have an important footprint also in department store, is a headwind, clearly. We are trying to manage that pretty well. Okay?
Yes. Thank you, Jean. Could you do the same for consumer in North America? Just reflect on the different channel dynamics.
Well, yeah. The channel dynamics for consumers are a bit more simple. You have the famous retailers, Walmart, Target, CVS, and Walgreens. Depending on the year, some are growing faster than the others. We are very strong partners with each of them. We are developing our partnership also with Amazon. Doing so, we also respecting all the retailers. That's why I said before that ModiFace is an interesting element of the partnership with Amazon. In fact, globally speaking, we are doing pretty well in term of market share. The problem is our footprint, because really the difficulty that we have in the U.S. is our very strong dependence on makeup. When the makeup market is strongly growing, really, it's a tailwind.
When the makeup market is more difficult like it is today after this four or five years of boom of the makeup, it's more a headwind. For example, on the cosmetic category, we are more growing our market share than anything else.
Thank you. Very helpful.
Okay. Thanks.
We have another question from Iain Simpson from Barclays. Please go ahead.
Thank you very much. Two quick questions from me, please. Firstly, you've had a number of launches or acquisitions in Europe of late that are trying to tap into the naturals or organic space. So thinking about things like Logona, La Provençale Bio, Garnier Bio, how are those going, please? What are the sort of learnings for the rest of your portfolio? Secondly, thinking about your two main growth engines at the moment, luxury and active. How do the luxury and active consumers differ from each other, especially in Asia? Are these just the same people buying things in different channels, or are there age or income differences between the consumers? Thank you very much.
All right. First, I'll start with the second question. We think that the consumers of luxury and active are pretty different, because it's not at all the same psychographics or motives for consumption. Active cosmetics brands are definitely doctor-recommended brands for La Roche-Posay, for SkinCeuticals, for CeraVe, even for Vichy. They are purely skincare, and they are really for healthy skin. This is a very precise type of motivation, where luxury consumers are a very different motivation. It's more about buying something premium. It's about skincare, but also makeup or fragrances. It's very clearly different consumers. By the way, it's also different networks. It's true that you can find a few active cosmetic brands in some department stores in China, but mostly it's different.
I would say that luxury is clearly luxury department stores and of course, e-commerce with special sites, like, for example, on Tmall, where our luxury brands have their own sites. For active cosmetics, it's more Watsons pharmacies. Also some different sites for consumers on e-commerce. I think it's very different. It doesn't mean that there can be no move from one to the other, but I would say the motivations of consumers are very different. Regarding the natural initiatives, we are pretty happy with the initiatives that we took. I remind everyone that we took three initiatives on the bio skincare segment. One was the launch of La Provençale Bio in France, and we are pretty happy with the results. It's part of the satisfaction that we have in the consumer division in France. We are also happy with the launch of Garnier Bio in Western Europe.
Apparently, it's totally additional to the sales of Garnier, and apparently starting pretty well. Logona, it's a bit early because we just did the acquisition. We are doing the integration. We are also learning about this special business and brand, and so it will more be something for the second half or for next year. All in all, this allows us to have a good presence on this segment and also a good understanding of what consumer want. We think it's a very positive move.
Thank you.
Thank you.
We have another question from Jeremy Fialko from HSBC. Please go ahead.
Hi, good morning. It is Jeremy Fialko, HSBC here. A couple of questions. The first one is on gross margin. Clearly, you had very strong underlying gross margin expansion, except that was offset by the FX and scope effects. Could you just say, assuming that the June 30th rates were to prevail, what the scope and FX negatives would be on the gross margin in the second half? The second question is on the Asian business, and particularly the e-commerce. Can you talk about the visibility you have in terms of sell-out within some of the channels within the Asian business and your comfort that the sell-in and the sell-out are matching one another pretty closely? Thanks.
Gross margin, Christophe, you want to say something about that?
Yes. As you know, you have the impact of the FX change at the end of June. When you project at the end of 2019, there will not be a big change. We expect that the impact that we are seeing in S1 should not be very different from the one that we will see in S2.
I didn't understand your question regarding the Asian business. What did you say?
Just more about your visibility on the sell-out versus sell-in within your Asian business?
That's very simple. The visibility is pretty good because as more and more of the business is made online, e-commerce. In e-commerce, you don't have inventories. What you sell out is what you sell in. In fact, this is, by the way, pretty healthy because it evacuates completely the issue of building inventories or reducing inventories. We are pretty sure that the numbers of sell-in that we have delivered in this first half in Asia were really matching pretty precisely the numbers in sellout. That we can be pretty sure of that.
Okay, very helpful. Thanks a lot.
Thank you.
We have another question from Mark Astrachan from Stifel. Please go ahead.
Thanks. Morning, everybody. Three quick questions. Wanted to go back to North America and explore a little bit more. In luxury, you've been doing a bit better than at least one of your large U.S. peers. I'm curious what drove more of the weakness that you saw in the second quarter. Is it just that makeup trends noticeably worsened, as you mentioned? Was there some impact to inventories given just continued weakness in department stores, et cetera? What kind of drove that seemingly worsening of trends there? Two quick other questions. One, curious about the change in management in China. Why now, given how dynamic the category growth, country growth is? Are you seeing any impact from any of the social unrest in Hong Kong? Thank you.
That's very different question. North America, honestly, you cannot draw any conclusion from one quarter to the other. I think that's what we are seeing in luxury North America, is what I said before, is that definitely, I'm not surprised that you are seeing the same type of evolution of that of one of our big competitors, because we have the same type of footprint. We are a bit less in department stores and a bit more in specialty or e-commerce, but we have the same type of situation. There is no big change between Q1 and Q2. We are pretty hopeful. It's not a guidance, it's just personal hope that the second half for luxury in the states could be a bit stronger. Also because we have some very strong fragrance launches. Again, you don't launch a fragrance every quarter. It happens not even every year.
The initiative that we have on these brands should help. How much? We will see together at the end of the year. I think it should help. Change of what management in China? That was the question?
Yes.
At L'Oréal, we always give good career evolutions to our top managers. You've seen the recent promotion of Christophe, who was Asia CFO, becoming Group CFO. We keep moving our great talents around the world, and we thought it was a good timing to move Stéphane Rinderknech, who has done an amazing job in China, to a new position, which is not yet disclosed. At the same time, I can tell you that I know very well, and I'm very confident of the new general manager of China, Fabrice Megarbane, who was before the head of Germany, and has done a very good job. I'm pretty confident, and I think it's also for us, it's a great way to prepare our top managers for important responsibilities. No worry on this one. The third one was Hong Kong.
Hong Kong, we read the press, you and us. It's clear that what happens in Hong Kong doesn't facilitate the sell-out of the business. The only, I would say, good news in there is that if there are less Chinese tourists in Hong Kong, they buy our brands on the local market. In a way, it could even be seen positively if you really want to be an optimist, because the market share that we have, I think I'm not mistaken, in China, in luxury, is higher than the market share that we have in Hong Kong. The presence, the visibility, the power of our brands on the China local market is much stronger than the one that we have in Hong Kong.
If there are less Chinese tourists coming to Hong Kong, and if they stay in China and do their purchase in China, I think it will be more a tailwind than a headwind.
Okay. Thank you.
Okay. Thank you.
We have another question from Nico von Stackelberg from Liberum. Please go ahead.
Hi, gentlemen. Good morning. Just a quick question on makeup in North America. I am trying to get a little bit behind the softness. Do you have a feel for whether or not she has too much makeup already in the cupboard? Is it a cupboard issue? Also, I guess another sort of similar question is, if consumers are going online to buy makeup, surely there is a fragmentation issue at play here given the infinite shelf. It is maybe a bit harder to win. Is that fair, or can you get underneath that? Then the second question is on men. Just wondering, out of a pool of, say, 100 men, how many men buy your products each year, out of 100?
If you were to fast-forward 10 years from now, what are your projections in terms of how many men will buy your products each year out of 100? Thanks.
Thank you for this interesting question. If I knew, I would be very happy how many men are buying our products and how many men in 10 years will buy our products. I can tell you it's very difficult to know because as you can imagine, also, men share their products with their family or their wives, et cetera. I don't know what type of shampoo you use personally, but probably, you use a shampoo that you share with someone else. That's true for shower gels, for many categories where it's not specifically for men. The question is more for specific categories. What is it? It's fragrances, it's skincare. The only thing we can tell you is that this market of specific product for men is around, I think, 10% of the total market, and it's more or less the same for us.
As I have said several times, it's not really growing in the Western world. The good news is that it is growing in the Asian world. For example, for men's skincare, is definitely growing very well in Asia, especially in China and India. We are, by the way, the leader of men's skincare. For example, in China, we have a brand called Men Expert, which is extremely strong and growing very fast. It's one of our engines of growth for China. Honestly, I don't know how many men are using and will be using our products. We will do our best to stimulate them, but it's not always easy.
Regarding makeup, I think very simply that after five years of huge makeup boom, everyone expected that at one moment, the market would cool down for different reasons because, as you said, the cupboards are maybe a bit full. Maybe there is a change of type of makeup that people want to use. The makeup looks that were really in fashion four or five years ago have changed. Now it's more a kind of natural makeup, where you still need makeup, but not exactly the same type of product and not the same type of the way you use it. I think it's pretty normal, and it's okay. I think it will bounce back. We have seen that already in the past. There are cycles in this business.
The very good news, as you know, is that when the makeup was softening, the skincare was accelerating, and that's really the magic of this fantastic beauty market, is that when the category is slowing down, another one is rising, which is happening today, and you have seen the amazing growth that we have on skincare. Of course, for us, as I said, it's a little bit a headwind, especially in consumer division, because we are the number one makeup manufacturer in the world. It's okay, and the good thing is that we are also the number one skincare manufacturers in the world. All in all, it's fine.
Thank you.
All right. Thank you.
Yeah, yeah.
Thank you.
We have another question from Fulvio Cazzol from Berenberg. Please go ahead.
Yes, good morning. Thank you for taking my questions. Most of them have been answered. I was just hoping I could get a housekeeping one. Could you give us the price mix versus volume component for your like-for-likes for the half year, please? Thank you.
Yes, good morning, Fulvio. Overall, on the 7.3% like-for-like growth, the unit component was pretty flat, close to zero. Overall, the enhancement was mainly through premiumization across all divisions.
Okay, great. Thank you very much.
Well, it's also just leading to the fact that the mix effect between luxury and mass is really in favor of luxury. There is clearly a mix effect of value for the value and less for units because units is more something generated by the consumer division. I think the positive news there is that the market, again, is premiumizing everywhere, which is very good for the future and for the margins.
Great, thank you.
All right. Any other question?
Yeah, we have another question from Loïc Morvan from Bryan, Garnier & Co. Please go ahead.
Yes, good morning.
Hi.
I have two questions. The first one is concerning the makeup in China. What has been the change in H1? We spoke a lot about makeup in U.S. and Western Europe. What has been the trend in China for makeup and also for fragrance in China? Do you see a kind of wake up of that business? Many thanks.
Thank you, Loïc. No, it's a good question, thank you. It's true that we keep saying that makeup is slowing down, but it's not true everywhere. It's true in the big makeup markets, and you know that the part of the world where makeup is by far the most penetrated is North America. That's why it's important. Asia, and especially China, is a part of the world where makeup is under-penetrated, and what we see is a nice growth of the penetration and of the business and the market. We think that this will definitely, on the middle or long term, have a very positive impact on the evolution of the makeup category. By the way, I think that if you look at the total growth of the category, makeup is still at +5%, which is not bad.
We all say, "Oh, my God, the makeup is slowing." After all, worldwide, it's slowing down more acutely in some part of the world. Globally speaking, for the world, it's not that slow. It's keeping at 5%, also because, again, and it's the most important factor, penetration is still very low in some countries. We have to remember that in China, makeup was not authorized 25 years ago. There is still a rise of penetration year after year, which is going to be very good for our brand, for Maybelline, maybe for NYX one day when NYX will go to China, for Lancôme, Yves Saint Laurent, Giorgio Armani, Shu Uemura, and all this. It's a little bit the same, by the way, for fragrances. We keep saying also, or we know that fragrance is not a big market in Asia and especially in China.
We know that Europe is more the more traditional big market for fragrances, but we are seeing some interesting evolution in China. Recently, the fragrance market has grown by 30% in China. It start from a small base, but it indicates that there is a growing interest and taste and appetite for fragrances on the big Chinese market. The day when Chinese will wake up as we say, to fragrance, it's going to be a very interesting opportunity. That's why we think that reinforcing, strengthening our fragrance portfolio, with the launches that we are making, with the future acquisition of Mugler and Azzaro is pretty strategic, because we could see some good news on this front.
Okay. Thank you.
Thank you, Loïc.
We have another question from Eva Quiroga from Deutsche Bank. Please go ahead.
Yes, good morning. I have two very quick questions, please.
I'm happy that you read the question because I thought that you were not there.
I'm always there, Jean-Paul. Two questions, please. First of all, how do we have to think about the margins from a regional point of view? Obviously, last year we've seen quite a heavy step up in marketing in Western Europe, which hasn't exactly translated into the growth we had been hoping for. Given what we're talking about in terms of new product launches, is this year going to be very similar to last in terms of regional margins? Secondly, on Brazil, you've called that out as one of your weak spots in Latin America. Can you maybe talk a little bit why, and can you contrast how your local brand, Niely, is doing compared to the more global brands?
My dear Eva, I wish I could answer your first question, and I'm really sorry that I cannot because as you know, we don't publish our profitability per region in the middle of the year. You will, unfortunately, have to wait until the beginning of next year to know that. Honestly, we are not worried. We think that things are going okay. It's not a worry for us. Brazil is a very mixed bag or contrasted market, if you want. In total, Brazil is positive. If I remember well, we are growing +2% in Brazil, globally speaking at the end of June. Which on a market that is not much more than that is not bad, but it's very contrasted. It's growing very well on active cosmetic. Active cosmetic, we have a fantastic growth between 20% and 30%. That's pretty good.
We are growing also pretty well on luxury. Unfortunately, luxury is small business in Brazil, but maybe one day, I don't know, with the Mercosur agreement, I hope that this will change. I don't know yet, but we'll see. Professional, we are positive too, and the difficulty that we have is still on CPD. In fact, at the same time, it's a difficulty and a decision that we made because we made, as I said several times, the decision to get out of some dilutive businesses that we had for CPD in Brazil, that were not worth it. We are paying that with a reduction of our business there. I think that at the end, we will finish by turning around the business. I hope that we will see a better performance, but it's true that it's still our weak point.
By the way, if you look at the consumer division performance in total, it's still below market, but it is above market in many parts of the world. It is above market in Western Europe. It is above market in Eastern Europe. It is above market in Asia. Even in Hispanic America, it's on market. The two weak spots that really handicap the consumer division in this first half are only, of course, they are big, only Brazil and the U.S. When the division will be able to fix these two regions of the world, the division will definitely be able to get back on track and overperform the market.
Thank you very much.
Thank you, Eva.
See you.
We have a last question from Nico von Stackelberg from Liberum. Please go ahead.
Very good.
Hi, guys. One more question, please. Just thinking about the Western world, if you could grade your performance on ethnic minority groups, especially Black and mixed race ladies, I suppose. How is your team doing? Do you have any stats around penetration among Black and mixed race and where you see it developing over five years?
That's an interesting last question. You know that we can't do that, for example, in Western Europe, because you are not allowed in Western Europe to do any statistic by ethnicity. It's just impossible. Honestly, we have no idea. What we know is that many of our brands are pretty diverse. In the U.S., for example, a brand like Maybelline is very diverse. A brand like Garnier is very diverse. I know that our American teams are doing everything they can to make their brand accessible and attractive to absolutely all type of ethnicity because they want to be absolutely diverse and inclusive. I don't have any more precise statistic on this.
Okay. All right. Thank you.
I think it was the last question. Thank you very much. We wish you all a great holiday, and we'll see you with pleasure at the publication of the third quarter in a few months. Thank you, and bye-bye.
Thank you. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.