L'Oreal Co Eur Ord

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 calls, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 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 Francois Louvard, Head of Ambassador Relations, to begin today's conference. Thank you.

Thank you, Molly. Ladies and gentlemen, good morning. Bonjour à tous. And 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 Babulle.

Hello, good morning.

And Mark Preswich, Group General Manager, Financial Communication and Strategic Perspective.

Good morning.

To start our discussion today, Christophe Babulle will present the financial highlights of the past semester. After this financial review, Jean Polagon 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, l'oreal-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, Francoise. Ladies and gentlemen, good morning. The presentation of L'Oréal First House 2020 financial results will include information about sales, profits, cash flow, and balance sheet. Consolidated sales amounted to 13.1 billion euros, down 11.7%, both like-for-like and reported, and 11.4% at constant exchange rates. The change in the scope of consolidation is positive at plus 0.3%. It is mainly due to the acquisition of the Mugler brand and of Adzaro perfumes at the end of March, partly offset by the disposal of the Roger Gallet brand. The currency impact was slightly negative at minus 0.3%. Note that extrapolating the recent exchange rate of July 22nd, or 1 euro at $1.16 until year-end, will have a negative impact on full-year sales of around minus 2.2%. Exchange rates. On this table, the group's main invoicing currencies. Over the first half, the dollar appreciated by 2.6%, and the yen was up 4.3%. The pound sterling and the Canadian dollar were stable. The Chinese yuan edged down 1.1%, the Russian ruble dipped 3.4%, and the Brazilian real 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 product division sales were down 21.3% and those of L'Oréal Luxe declined by 16.8%. The consumer product 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 15.2%, and in the new markets, Asia-Pacific showed good resilience at minus 3.9%, thanks in particular to mainland China growing by a strong 17.5%. Eastern Europe and Latin America are at minus 12.1 and minus 13.9 respectively. And Africa Middle East is at minus 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 closings of stores, both at around minus 28%. Hair care comes at minus 10.5%. The closing of salons penalized the professional product division in particular. Hair care also declined in the consumer product division, but to a lesser extent. And finally, hair coloring at minus 3% was also heavily impacted by the closing of salons, whereas at-home hair coloring was up double digits for the consumer product division. Let's move to the profit and loss account. Gross profit amounted to 9.5 billion euros, 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 headcount freeze at group level and the international travel ban. SG&A increased 80 basis points to 21.1% of sales. Overall operating profit amounted to 2,357,000,000 euros 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 Laurel 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 product division has changed from 19.1 to 10.4%, the profitability of consumer product division improved by 60 basis points to 21.3%. L'Oréal Luxe posted a profitability of 20.4%, compared with 23.8% in H1-19. And that of the Active Cosmetic 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 minus 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 36 million euros, For the full year 2020, net financial expenses of around 80 million euros can be anticipated, all other things being equal. Sanofi dividends amounted to 372 million euros. Income tax amounted to 547 million euros, 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 2 billion 144 million euros and the corresponding earnings per share came out at 3.82 euros showing a limited decline of 12.7 percent. To help you in estimating your EPS number for the full year, I will recommend that you base your calculation on a diluted number of shares of 561.5 million shares. We will now complete the review of the profit and loss account. Non-recurring items amounted to a negative €322 million in the first half of 2020 net of tax, of which €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 90 million euros. Second, restructuring charges of 133 million euros related to the continued reorganization of the distribution of the brand NYX Professional Makeup, the ongoing reorganizations in Western Europe, the repositioning of Declare and Carita brands, and the termination of the Clarisonic brand. And third, costs generated by the sanitary crisis for 140 million euros, 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 1,822,000,000 euros. Cash flow. Gross cash flow amounted to 2.6 billion euros 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 504,000,000 euros represented 3.8% of sales. and for the full year, they should reach around 4% of sales. Net operating cash flow was 1 billion 274 million euros. Lastly, after payment of the acquisitions, the residual cash flow amounted to minus 290 million euros. Note that, as the AGM was postponed to 13th of June, the dividend of 3.85 euros 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 euros. And last, the financial situation remains very robust. Net cash amounted to 2.1 billion and to 4 billion, excluding the financial lease debt. 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 and we have taken every possible measure to ensure their safety. So far, we have had a very limited number of cases and we have guaranteed the jobs and salaries of all our employees. Secondly, we have been supporting caregivers in every way possible with the 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. And 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 minus 13 and minus 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, etc., making consumers unable to buy products 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. And 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 and 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. And France is coming back. The UK, Spain and Italy have been more heavily affected. In North America, the US 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. Lawyers' 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 loyal looks. The consumer product division was in line with the market in sell-out. 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 product division has been resilient despite the complete closure of Salon and rebounded as lockdowns were lifted. The division has outperformed the market in all zones. Its e-commerce business grew very fast by plus 80%, confirming the success of its new multi-channel strategy. Kerastase 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 performs 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 Lancome, Kiehl's, and Helena Rubinstein in particular. For the consumer product division, sell-out was in line with the market, despite a very unfavorable footprint on makeup. Sell-in was weaker than sell-out due to destocking of retailers, mostly in the US 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 and, 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 skin care and hair color. Garnier continues to gain share, driven by hair care. And, of course, the division's makeup brand, Maybelline and NYX Professional Makeup wear 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 continued 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 UK, France, Italy, and Spain. In the US, 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 plus 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. And 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 plus 65% in H1, and 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 US 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 relationships between our brands and consumers. In China, for example, five of the top six brands in L2 Digital IQ ranking are now L'Oreal 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, etc. Then, 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 minus 12.7%. We have preserved our P&L with a high gross 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. and ANP 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 spending 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. But we are 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. And 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 month 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. And as you've seen, our commitment to the future in terms 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 of 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, and now we are ready for your questions.

As a reminder, if you would like to ask a question, please press star 1 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 questions. The first question comes from the line of Celine Panuti calling from JP Morgan. Please go ahead. Yes, good morning.

So 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, you know, what is D2C versus your usage of third-party platforms, and as well if we can understand a bit the profitability, and does it mean that as you ramp up the businesses in developed markets, the profitability is a bit lower? Thank you.

Good morning, Céline. I'm glad to see that you are, again, the first one to ask questions, so... Welcome back. So e-commerce, you're right, is the most important topic of this first half. You know, e-commerce has seen an acceleration as never before. And in terms of penetration of e-commerce in our business, we have progressed in these last 10 weeks as much as we did in the previous three or four years. And as I said, I think what's very important is that we don't see a slowing down of e-commerce as stores reopen. So the capacity of a company to excel in e-commerce is more vital and strategic than ever. And 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. So I believe that also the 25% average percentage of sales will be, for the last month of the period, higher than that. So e-commerce is the new name of the game. So to answer your questions... As usual, we have a good split between the different types of players. Let me find again my slide. It's split between the e-retailers, the online pure players, and the direct e-commerce and the weight is pretty well split e-retailers represent 30% online pure players 27% and D2C 43% and as you know direct e-commerce is made of two parts one part is Tmall and the other part is all our own sites And 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. And if I remember well, they grew by something like 80% or something. So it was a real tipping point in terms of acceleration of our own sites. And finally, your question about profitability, you know that we don't... disclose profitability per channel. And 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. And so it's completely embedded in our business. But what is sure is that it has clearly a relutive role impact on our different businesses. And 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 would be handsome. I just wanted to understand if you could maybe quantify or help us qualify a bit more H2 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?

You know, I was sure yesterday giving the article that handsome would create and trigger some interesting interrogations. You know, of course, we don't give guidance. So, but I know that you try every time, but we don't give guidance. But, you know, I'm sure that you're smart enough, all of you, to guess what handsome could mean. But it means also, when I say that, it means also that we are not worried about profitability for second half. We are not worried for different reasons. 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, so 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, so 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. But this, because the top line will increase, and because also, globally speaking, the cost of ANP, I would say, is lower today, will be lower in the second half than it had been in previous years, this will not put pressure on the margins. There are also some other factors that are interesting to know. For example, there are many, many Things that we are cutting, one example is the testers for the makeup display around the world. You know that we spend a lot of money, we used to spend a lot of money on testers for makeup display, but now consumers don't use these testers. So we have completely stopped any delivery of testers and we are replacing that with our virtual testers with Modiface. And many, many things that we are doing like this are, in fact, very significant reduction of ANP cost, mostly in stores. So 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.

Thank you so much.

Thank you, Céline.

The next question comes from the line of Guillaume Dalmas calling from UBS. Please go ahead.

Good morning, everyone. Good morning, Guillaume. One question for me. It's about when you talk in the press release about an aggressive plan of new product launches and 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. And if I remember well, back in 2009, when we experienced that demand-led 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?

Okay, that's a good question. You're right. We think that we will not see anymore 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. So I think that stores will... People will find a way to keep stores open. And also, as I said, e-commerce is becoming more and more an alternative. So I don't think that we will see any more supply crisis. But you're right, the danger, the risk now is that it transforms into a demand crisis. For the moment, we haven't seen it. So maybe we'll see in the fall. But I think we are well prepared. Number one, we have seen in the past that beauty products, cosmetics 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. But generally, it has been proven that they want to indulge themselves with non-expensive products like beauty. And beauty is an important part of your daily, I would say, quality of life, number one. And so I'm not worried about the impact on the beauty market, on the consumption of this potential demand crisis. And two... Of course, we will see. I don't have a crystal ball, but I'm not really worried. But it's also why we are fueling the growth, and that's also because the beauty market needs to be fueled and needs to be stimulated, and we think that it's our job and our best interest to stimulate the market with new innovations, new products, activations. And 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 stores, the return of consumption, and 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 going. over summer and in September, October. And 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 terms of beauty, consumers are always interested by quality, efficacy, innovation, valorization, and it's not the type of products on which they are interested by value for money offering. Or another way to make value for money is more to offer sizes that are more affordable And we are doing that too. So I have to say that we are pretty confident about that. And it's true also that, you know, on the first half, because the crisis just happened, we were a little bit in the expectation, not knowing exactly what would happen. Now we have a much better visibility, even if, of course, the sanitary situation is not Resolved unfortunately, but still we have a much more visibility and and 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 Good morning, everybody.

I'd like to I'd like to ask a question about North America and 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. And it looks like in the first half this year, there's, let's call it, a giant digital leap going on in terms of the e-commerce development, maybe 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, you obviously have a lot of experience from China, especially in digital.

Yeah, I think you're right. It's a good question. You know, of course, as I said before, I mean, our team previously in America was a very good team. And this new team is also very good. It's a fresh crew, as I said. But 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. And by the way, now our business in China is more than 50% in e-commerce. So 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 Rydor-Neige, to accelerate the transformation and the penetration of e-commerce in our business. And, by the way, they are pretty successful at it. You know, in this, if I remember well, I mean, the growth in e-commerce for our business in the U.S. was more than 100%. You know, it's the first time that we have a triple-digit growth in e-commerce generally and especially in the U.S. So the U.S. is really following the Chinese trend. way in a way nothing political there of course and so I'm pretty confident we have also to acknowledge the fact that in this first half the US 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 you know when you consumers are confined when they wear masks when there are less interactions when they are working from home definitely it doesn't really help consumption of makeup and so it's not going to last forever but for a while it has been a handicap for for us and 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. So that's why we have definitely an unfavorable footprint on makeup, at least in this first half in the USA. 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 Salon Centric, you know, thanks to Salon Centric, we have been able to really provide all the stylists in America and to start again their businesses. And this is also the place in the world where we have been the most successful with active cosmetics, with amazing results on CeraVe. So, all in all, without this headwind on makeup, the US is doing a good job and we are pretty confident for the second half and for the future.

And then 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 very good news in this first half. As you know, Chinese consumers are not traveling abroad since the beginning of the pandemic. So obviously, it has created some disruptions in the type of business. You know, it has some negative but also some positive effects. The negative effect is maybe that they are buying less in countries like Korea, Japan, etc., which for us, by the way, is not such a problem because when they were shopping there, they were shopping mostly local brands. So for us, it's not a problem. And 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%. market share in China, which is the highest ever in the world. And the fact that when consumers stay in China, the probability that they buy one of our brands is higher than when they go abroad. And 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 and the Chinese authorities have really encouraged that by creating a huge and amazing shopping experience in Hainan with a huge number of flights, and also they have recently increased the cut, sorry, they have increased the cut from 30,000 RMB to 100,000, so they have tripled the possibility. As Christophe explained, they have tripled the possibility for Chinese consumers to buy DTACs in Hainan, and they are really obviously want to create another destination for Chinese shoppers and we were from the very beginning working in this direction so we are very well established in Hainan with all the key contacts and the key partners so this has been a very important relief of the travel retail business, and 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. All right? Okay.

The next question comes from the line of Marion Boucheron, calling from Maine first. Please go ahead.

Hi, good morning, everyone. Good morning. Three questions for me, please. The first one, on the consumer division and the trend you've been seeing between sell-in and sell-out, how would you say that could evolve in H2? Do you think there could be restocking or at least sell-in aligns with sell-out? The second question would be on China. Would you mind giving us the e-commerce growth rate in the second quarter there? And third one on travel retail, how did it evolve in the second quarter?

Okay, so many questions. So the first one was consumer division. Yeah, I think that, you know, 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 make-up. And we can estimate that globally the mass market without make-up was probably around flat. And 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 make-up. And so, in terms of sell-out, we estimate that the sell-out of our division was in line with the sell-out of the market at minus 5, 5.5, something like that, with make-up, because the fact that the make-up is so negative on this first half makes the market go from flat to minus 5. And then the dip, minus 5, minus 6. And then the difference is also due to makeup again, because with the reduction of the sell-out of makeup, obviously many retailers, especially in America, have been obliged in a way to reduce their inventories. And 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. And so the first half of every year is also really made of a pipe of new launches, which didn't happen this year. So in fact, we are comparing this first half where we didn't, where the makeup sell-outs were down, where there was a distal came, and there were also much less launches, not even less, there were no launches in makeup, And this creates this discrepancy between the two periods. So, 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. But, number one, we think that makeup will get better. Number two, in terms of consumption, number one. Number two, we should not see again this stocking effect. And number three, we are now launching products and make-up products that we stopped in the first half. So there should not be this discrepancy again on the second half. So all in all, I just wanted to make this point clear. I think our consumer division did a good job but really they were really handicapped by their very heavy weight on makeup and 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. All right, so there was a second question about e-commerce in China. So e-commerce in China has been strong. You know, for example, on the total semester, we have been at plus 58%. Do you want to comment on the numbers, if you have them, Christophe?

Yes, we ended up the first half with the growth in China at a little bit more than 58%. And 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. So 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 6.18, like 11.11. So it also indicates that the evolution will not be steady, because what's very important is to be successful during this festival that concentrates a lot of the business and also obviously because consumers are waiting for this festival because there are special offers that are made during this festival and Chinese consumers are smart and of course they wait some time for the festival before buying their products So it's a new element of doing business in China. But 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 because they are shared now with every business. country in the world, and this first half has demonstrated that now every division in every country is maximizing this opportunity. And you had a third question that I don't remember.

It was travel retail.

Ah, travel retail. So travel retail has been obviously tough, but to be honest, a bit less challenging a bit less terrible than we thought, also because I think our teams did a very good job. We are at minus 22 at the end of the first half, which is a bit, as we say in French, inesperé.

How did you do that?

That's a good question. But 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. And 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 operations on e-commerce that are made between Korea and China. So, in fact, the business is now almost only in travel retail Asia. Travel retail Asia now represents more than 80% of travel retail. So the name of the game, at least for the next... 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 Cazal calling from Barenburg. Please go ahead.

Yeah, good morning and thank you for taking my question. It is on gross margins and I know that you highlighted on an underlying basis gross margins were higher only 25 basis points lower year on year, which I thought was actually quite impressive given the volatility to the top line. So 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, skin care proving more resilient and also your DTC sites doing quite well, I guess there's probably quite a significant mixed contribution there to the gross margin, maybe some productivity, lower imports. So just trying to understand what the moving parts are on that if you're able to provide those. Thank you.

We are able, absolutely. But 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, but still at the same level. And you're right that it's a bit... pretty good result. But I think you said the right thing. Number one, the one thing that you didn't say is that we are still valorizing. And I think that it's a pretty strong indication of what we are doing. You know, even in this pandemic, even with all the constraints, even with the 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. So it's super important, number one. Number two, you're right, there is a mixed effect, which is positive. In a way, it's more skincare. Skincare is the best category in terms of gross margin. More e-commerce, and especially D2C. D2C is also very relative for gross margin. Number three, more China, which is also relative. So, and on top of that, I think that our teams were able to implement also in the factories, in the warehouses, in terms of distribution, some very strong cost discipline measures. And thanks to all that, gross margin has stayed high. You want to compliment maybe Christophe?

Yes, on the upside, just to give a little bit more flavor, we have, as Jean-Paul said, a plus in both valorization and mixed effect and a negative impact coming mainly from distribution costs because, as you know, with the huge digital leap, we have higher distribution costs in most of our countries.

So that's why we... 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. So we'll move to the next person, which is Ian Simpson. Please go ahead.

Morning, all, and 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. Because when I look back to the global financial crisis... it took you five years for margins to recover to pre-crisis levels. And now looking at your commentary, who knows what Hansen means, but perhaps margins recover a bit quicker this time around. So 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. And 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? And also, 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?

Okay. Thank you very much for these good questions. First, Margin, you're right, it's an important topic. Number one, 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, so I can compare. And 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. It changes everything. And also, it changes, I think, the the resilience of the margin. So 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, you know, for many years it happened that we had a higher margin in the previous year than the second year. in the first half and in the second half, but it's not written in the model. So it means that the margin for the second half, as I say, can be handsome as Céline 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 margins. I'm not talking about this year, of course, because this year is a completely abnormal year. But, you know, if we are back next year into a 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 the difficulty to get back to the level of margin that we had. Number one. Number two, Francoise? No? Sorry? Yeah, you're right. Very true. Francoise is telling me something very important. As I mentioned it also, I think, in another question, is that, you know, 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 Boutique. And that's This is one of the key reasons 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 this Saint-Laurent beauté. So we are absolutely not in this situation right now. On the contrary, you know, we have... We have sold or stopped some businesses that were not making money. The only one that we have acquired is making money. So we have absolutely no dilution effect. So again, I think that we can all be very confident about the margins. Number two, post-COVID, we will see. We will see. We will adapt. We will be creative. I don't know how long we will be wearing masks. I hope that it won't be too long. But 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 or and they don't wear masks 24 hours seven and and also there are also other makeup opportunities for example obviously when when you can't see the lips eyes are super important and and so we we want to develop very strongly the makeup for eye or foundation or, you know, stay on foundations. And there will be opportunities. I'm not worried. And I can tell you that thousands of marketers are working actively on very creative ideas to adapt to this post-COVID world. Okay?

Thank you very much.

Okay. Thank you.

The next question comes from the line of Jeremy Fialkow calling from HSBC. Please go ahead.

Hi. Good morning, Jeremy Fialkow. 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, very big boost to e-commerce when all of the stores are closed. So could you talk a little bit more about when you look at the data behind it, to what extent is commerce boost just through let's say replenishment and people buying the the products and the brands which they know and to what extent is it actually being able to stimulate new consumption and new sort of purchase occasions and then perhaps also linked to that whether you can contrast the situation in china and outside china in that sort of perspective thanks

Yes. You know, I think that this COVID crisis, again, as I said, was a tipping point because consumers don't, 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 and... But now it has changed, you know, because they have been using this channel for one, two, three, four months now. And 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. And 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. And that's also what we have seen in China. So I think that what happened in China is progressively happening everywhere. Of course, it starts from very different levels. You know, in the UK, for example, I think that we are doing today more than... How much are we doing in the UK? 15%? 30%. We are at 30% of sales in... In e-commerce and in some different countries, it starts to be pretty amazing. It's 23% in the United States. It's, of course, 40% in Korea. It's 25% in Japan. But 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. And in a way, I think it's good for us because we know that... Why is it good? Number one, because we know that contrary to what people think, e-commerce favors big brands and hero products. So because we... 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 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 Modiphase, like a virtual try-on on makeup, on hair color, on skin care, on skin care diagnosis, etc. And third, because of course also there is this relative aspect of e-commerce, which is very positive. So 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, but we are going to become e-commerce, not e-commerce first, but almost e-commerce first in our business because this is the, as we say in French, c'est le sens de l'histoire. 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? And is it possible to determine the sort of sales contribution from Modiface? And how is this changing your relationship with retailers? You mentioned earlier that retailers look to you to drive footfall, but with the increased rise of e-commerce in your business and an increasingly significant alternative challenge, is it increasing your negotiating partners' 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. But 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. You know, when we acquired it, that was the goal. The goal was to be able, instead of having them working with some clients, we told them, you know, come with us and you will be able to work with all our brands in all the countries of the world. And that's what's happening now, including China, by the way, number one. Number two, we have expanded the number of services. So as I said, we started with a virtual try-on for makeup, but expanded it to hair color, haircut, skin care diagnosis, acne diagnosis, and I'm forgetting others. And the possibilities are infinite because, you know, virtual reality – also help with artificial intelligence, open new horizons that are absolutely infinite. Third, we have a partner, we have offered Modiface to, I would say, progressively all our e-commerce partners. Of course, the e-retailers or the e-commerce branch of our retailers, like Boots.com, Sephora.com, Macy's.com, you name it, but also with Ulta.com, but also with Amazon, and of course, on our brands, of course, on our makeup brands, mass market makeup brands, we don't sell luxury on Amazon, and And as you said very rightly, it has created a completely different type of partnership between them and us. Because 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. So it helps also in our negotiations with them. It helps in the way that we are considered as privileged partners and it helps also the increase of penetration of e-commerce. I'm pretty certain that one of the reasons 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. So, and when I said, by the way, that we are partnering with our retailer partners to create these back-to-beauty operations, it's not only brick and mortar. It's back-to-beauty everywhere. It's back-to-beauty in store. It's back-to-beauty in every area. every possibility, back to beauty in salons, back to beauty in perfumeries, back to beauty in mass markets, back to beauty in pharmacies for active cosmetics and of course back to beauty or I'd say more even to beauty for e-commerce players. So 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%. And 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. So, 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 October. Okay. Thanks a lot. Bye-bye. Thank you.

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