L'Oreal's (LRLCY) CEO Jean-Paul Agon on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: L'Oreal Co. (LRLCY)

L’Oreal Co. ADR (OTCPK:LRLCY) Q2 2014 Earnings Conference Call July 31, 2014 3:00 AM ET

Executives

Françoise Lauvin – Head, IR

Jean-Paul Agon – Chairman, Chief Executive Officer and Chairman of Strategy & Sustainable Development Committee

Christian Mulliez – Executive Vice President of Administration and Finance

Sophie Gasperment – Group General Manager, Financial Communications and Strategic Prospective

Analysts

Celine Pannuti – JP Morgan

Hermine de Bentzmann – Raymond James

Eva Quiroga – UBS

Rosie Edwards – Goldman Sachs

Catherine Rolland – Kepler Cheuvreux

Loic Morvan – Bryan Garnier

Astrid Wendlandt – Reuters

Harold Thompson – Deutsche Bank

Operator

Welcome to L’Oréal’s 2014 Half Year Results Conference Call. (Operator Instructions) The conference is about to begin. I’ll now hand over to Ms. Françoise Lauvin. Ms. Lauvin, please go ahead.

Françoise Lauvin

Thank you, Susanna. Good morning to all. Bonjour. Welcome to L’Oréal’s Half Year Sales and Results Presentation. Together with me this morning are Jean-Paul Agon, Chairman and CEO.

Jean-Paul Agon

Good morning.

Françoise Lauvin

Christian Mulliez, CFO.

Christian Mulliez

Good morning.

Françoise Lauvin

And Sophie Gasperment, Group General Manager, Financial Communications and Strategic Prospective.

Sophie Gasperment

Good morning.

Françoise Lauvin

I am sure that you have noticed that it is the first time that we combined the publication of both our sales and earnings at the interim stage. Hence a new format for the financial information meeting that will unfold as follows.

Christian Mulliez will kick off with a presentation of the financial highlights of the past semester. Jean-Paul Agon will share his perspective on L’Oréal’s development. And we will then move to a Q&A session, which is planned for around 45 minutes, so that we should wrap up at around 10:15 A.M. Paris Time.

During the call, slides that will be shown can be seen live on the web at www.loreal-finance.com. They can also be downloaded under the PDF format. A replay of the call, as well as the French and English versions of the Half Year Financial Report will be available this afternoon on the same website.

You are quite a crowd of both financial experts and journalists on the call, so please raise one question at the time in order to allow your fellows to participate. And as usual during our financial information meeting is increasing, we kindly ask our journalist friends to raise their questions during the second part of the Q&A session.

I wish you a good meeting, and I hand over to Christian.

Christian Mulliez

Thank you, Françoise. Good morning, ladies and gentlemen. The presentation of L’Oréal’s financial results for the first half of 2014 will include information about sales, profit, cash flow and cash situation.

Consolidated sales amounted to EUR 11.170 billion, up by 3.6% at constant exchange rates. Like-for-like sales grew by 3.8%. The perimeter effect was slightly negative at minus 0.2%. It corresponds to the net effect on the negative side mainly the closing down of Club des Créateurs de Beauté and on the positive side was the first time consolidation of the Decléor, Carita and Magic brands. After taking into account the following exchange effect at minus 5.1%, sales based on the reported figures came out at minus 1.5%.

The euro strengthened further against most currencies in the first half of 2014. The changes in the rate of our main invoicing currencies were as follows: U.S. dollar, which represents 22.8% of our invoicing weakened by 4.2% against the euro. The Chinese yuan, 7.9% of our invoicing, declined by minus 3.8%. Brazilian real, 3.2% of our invoicing, dropped by minus 15.3% against the euro and the pound sterling, 6% of our invoicing, strengthened by plus 3.6% against the euro.

Note that the euro represented 29% of consolidated sales compared with 28.6% in the first half of 2013. This slight increase in the relative weight of the Eurozone in our invoicing results from the mix effect linked to the strengthening of the euro.

Now like-for-like sales figures by division. Professional Products recorded growth of plus 3% confirming that they are gradually picking up. Consumer Product sales have grown by 2%. The first half 2014 was not a very great intake for the division, especially because of a sluggish American market. L’Oréal Luxe at plus 7.4% achieved strong growth in the market that was quite dynamic. And once again this time, it is Active Cosmetics that is the leading the way at plus 8.1%. The Body Shop had disappointing first half at minus 1.7%.

By regions. All regions achieved growth with Western Europe at plus 2.8% like-for-like, confirming its upturn. This is the strongest growth achieved since 2007. North America at plus 0.9%, a development that is not in line with our expectations because of the mass-market. Note that the second quarter of plus 2.4% is significantly better than the first quarter. And the new markets, which are still recording sustained growth at plus 7.3% despite markets that have slowed down slightly, particularly in Asia and Eastern Europe.

By segments. All segments recorded growth with Fragrances leading the way at plus 6.5% reflecting the continuing success of La Vie est Belle at Lancôme and Sì at Armani. Next comes dynamic trio with Skin Care, Make-Up and Hair Care at plus 4% and more. And one segment, Hair Coloring Products, which was more difficult in the first half at plus 1.1%.

We now turn to the consolidated profit and loss account with the figures for 2013, for the first half and the full-year, restated without Galderma and with Innéov consolidated by the equity method. To start with a further significant increase in operating profitability, plus 30 basis points at 18.2% of sales.

Let us begin by analyzing gross profit. Gross profit up EUR 8.23 billion has come out at 71.8% of sales, compared with 71.7% in the first half of 2013, representing an improvement of 10 basis points. This improvement is the result of the closing down of dilutive activities at the Club des Créateurs de Beauté and Garnier China. Note on the other hand, a slight negative effect because of currencies.

R&D expenses have increased as a percentage of sales from 3.2% to 3.3%. This increase illustrates the Group’s constant determination to support its R&I effort. Although the full-year 2014, this item should increase very slightly as a percentage of sales compared with 2013.

Advertising and Promotion expenses came out at 29.3% of sales, which is 70 basis points below the first half 2013 level. Mention had been of this relative decrease in 2013 and this was confirmed at the start of this year 2014. It results partly from the positive effect linked to the closing down of the activities mentioned earlier and partly from the April month in our media buying conditions combined with a positive impact of the development of digital. For the whole of 2014, we can confirm that the A&P expenses maybe lower as a percentage of sales than in 2013.

SG&A at 21.1% of sales have come out at higher level by 50 basis points, compared to the first half of 2013. This is mainly the result of currency conversion effect, representing approximately 30 basis points, and decisions to strengthen our sales particularly in China, Brazil and Russia. For the same reasons, over the whole of 2014, this item should increase slightly as a percentage of sales compared with 2013.

Overall, the operating profit at EUR 2.29 billion has grown by 0.2% and amounts to 18.2% of sales. Note that at constant exchange rates, operating profit growth would have been plus 4.5%. And so in the first half of 2014, currency fluctuations have wiped out almost all of our profit growth, reducing it from plus 1% – plus 4.5% to plus 0.2%.

Now let’s move to profitability figures by divisions. With the exception of Professional Products, whose profitability has declined from 20.1% to 19.6% because of the dilutive effect of the acquisition of Decléor, Carita and larger marketing investments in the first half of this year, the profitability of each of the divisions has increased during the first half.

Consumer Products from 20.8% to 29.1% representing a rise of 30 basis points. L’Oréal Luxe from 20% to 20.3% representing plus 30 basis points, and Active Cosmetics from 27.7% to 28.2%, that is plus 50 basis points. Non-allocated expenses have declined from 2.7% to 2.6% of sales. And The Body Shop made most of the profits in the second half as it does every year. The first half trend is therefore not significant. In total, the first half is at 18.2%. L’Oréal is on track for further year of increased profitability.

Now we move on from operating profit to net profit excluding non-recurring items. The finance expense amounted to EUR 8.1 million, compared with EUR 12.9 million in the first half of 2013. This decline reflects a continuing strengthening of our financial structure in the first half. For the full-year 2014, after the closing on July 8 of the strategic transaction with Nestlé, which saw L’Oréal buyback 48.5 million of its own shares and dispose of the 50% stake in Galderma with total finance expense in the order of EUR 25 million can be anticipated. A little later on, I will give you details of the effects of this strategic transaction on our net EPS and on balance sheet.

The Sanofi dividends amounted to EUR 331 million. Income tax amounted to EUR 575 million, representing a tax rate of 24.5%, slightly above the tax rate in the first half of 2013, which came out at 24.1%. For the full-year 2014, the tax rate in the rate of 26% maybe anticipated, all other things being equal.

Net profit excluding non-recurring items amounts to EUR 1.773 billion, flat versus that of the first half of 2013.

Finally, net earnings per share calculated at this stage before the cancellation of L’Oréal shares resulting from the strategic transaction with Nestlé, amounted to EUR 2.92. It is flat versus that of the first half of 2013.

To help you in your simulation for the full-year, we have calculated our profit and our earnings per share taking into account the effect of the strategic transaction with Nestlé. That is, first, with the comparison based for the first half of 2013 and the full-year 2013 as reported including the contribution of Galderma of profit; and secondly, the first half of 2014 with the average diluted number of shares with the cancellation on January 1, 2014 of the 48.5 million shares bought from Nestlé, even though technically they were cancelled on July 8.

On this basis, net earnings per share, EPS, came out at EUR 3.17, an increase of 7.5%. To help you in your estimates of net earnings per share with regard to the average diluted number of shares for the whole of 2014, you can anticipate a number in the order of EUR 560 million on the basis of the cancellation of the L’Oréal shares on January 1, or if you prefer to apply the official cancellation date of July 8, 585 million shares.

Final chart with regard to our earnings with the net profit which takes into account non-recurring items of EUR 79 million, and the profit of the discount in Innéov, Galderma business, altogether net profit comes out at EUR 1.734 billion, up by 1.5%.

Cash flow. Gross cash flow amounted to EUR 2.108 million, up by 2.2% compared with the first half of 2013. As is the case each year in the first half, the change in working capital has increased significantly. In this half, the increase is very close to that of the first half of 2013 at EUR 598 million. And as happened each year, this increase is mainly the result of trade accounts receivable, because of the seasonality of some of our businesses.

As indicated in February 2014, over the whole of 2014 the change in working capital should increase by about EUR 100 million to EUR 150 million compared with 2013.

CapEx at EUR 484 million represents 4.3% of sales, although the full-year as already indicated in February, this should represent around 4.5% of sales just as they did in 2013.

Operating cash flow has come out at EUR 1.025 billion, up by 5.9%. And finally, after payment of the dividend and acquisitions, which I remind you consists mainly of the acquisitions of Magic, Decléor and Carita, the residual cash flow amounts to EUR 1,346 million.

Balance sheet. The balance sheet is particularly solid. Shareholders’ equity at EUR 22.9 billion has been strengthened compared with December 31, 2013.

And net cash position. At June 30, 2014, our financial situation is very healthy. Our net cash is positive and amounts to EUR 922 million. It has declined compared with December 31, 2013, because of the annual dividend payment made during the first half, but it has increased compared with the EUR 707 million at end-June 2013.

And finally, I will end this presentation with the impact on the balance sheet as June 30, so the strategic transaction with Nestlé carried out on July 8. On the asset side, the exit of Galderma’s net asset. On the liability side, the net capital gains on the Galderma disposal of EUR 2.1 billion. The reduction in shareholders’ equity of EUR 6 billion, resulting from the cancellation of the 48.5 million shares that we have bought back and an increase in the net debt of EUR 3.5 billion.

At December 31, 2014, our net debt should amount to approximately EUR 1 billion, all other things being equal. And finally, I would like to remind you that as announced at the start of February this year, the accretive impact of an earnings per share of this transaction calculated on the basis of 2013 figures comes out plus 5.7% on a full-year basis.

Thank you for your attention.

Jean-Paul Agon

Thank you, Christian. Hello everyone. As you could see, despite the particularly adverse monetary environment, we managed to improve further our profitability. And this confirms once again the strength and robustness of L’Oréal’s business model, strongly creating value and generating cash flow.

I will not add any other comments about our results, which Christian presented very comprehensive. I will concentrate my presentation on the major strategic progress that we made during this first half.

First a few words about the cosmetic markets. We estimate that the market grew between 3.5% and 4% during this first six months, which is similar to last year.

In term of regions. In Western Europe, the growth of the market improved slightly at plus 0.5% with Southern European countries recovering slightly but still negative, and a small increase in Northern countries. In North America, the market continue to slowdown at plus 2.2%, especially due to the mass-market that has been really sluggish since the middle of last year, and even flat since the beginning of this year, which is the first time in many, many years.

We are seeing strong polarization with the luxury channel that is pretty dynamic and the hair salon market that is getting a little better. Emerging markets still drive of course the worldwide cosmetic consumption at around plus 5.9%. However, that pace of growth is somehow disappointing. This of course is because of the devaluation that occur in some countries and need to be digested, and also because of some specific local problems that you know very well in different countries such as Thailand, Ukraine, Russia and others.

In terms of channel. The safety and beauty market has grown nicely by an estimated plus 4.5% with slowdown of the Chinese market and in some of retail, offset by an improvement in Western Europe, while the United States remained pretty dynamic. The mass-market is still globally healthy with a growth again between 3.5% and 4% as it was last year. The growth had slowed down in the U.S. but had slightly accelerated in Western Europe.

The worldwide dermo-cosmetic market has remained very dynamic around plus 5.5%. The hair salon markets remained difficult with a growth estimated at plus 1%, 1.5%. And finally, even if we are not involved in the door-to-door channel, this channel is still slowing down all over the world. Thus the cosmetic market has remained globally dynamic at the same pace as last year.

We believe that this space will be maintained in the second half of the year, and therefore the market growth should again be situated between 3.5% and 4% this year.

During this first half, our sales growth has been globally in line with the market growth at plus 3.8%. Our growth slightly accelerated in the second quarter at plus 4.1%, compared to the first quarter at 3.5%, but this growth was very contrasted between divisions.

L’Oréal Luxe had a great first half at plus 7.4%, gaining market shares in all regions, in Western and Eastern Europe, in Northern Latin America and especially Asia Pacific, with an outstanding over performance in China.

Our American brands are the changes of our growth, with for example: Urban Decay, at almost double in sales in this first half; Kiehl’s at plus 22%; and Clarisonic at plus 16%. But our European brands in the same time; Lancôme, Yves Saint Laurent, Giorgio Armani are also conquering winning position, in particular the success of La Vie est Belle, which has become the number one fragrance in France and Western Europe since the beginning of the year, while Armani Sì is also enjoying a great success.

The Active Cosmetic division is also growing very fast at plus 8.1%, strengthening its position in every part of the world. The growth of the division is fueled by the remarkable continuing success of La Roche-Posay growing double-digit year-after-year; the turnaround of Vichy with powerful launches such as Neovadiol Magistral Elixir and a successful roll-out to the new brand, SkinCeuticals and Roger&Gallet.

The growth of the Professional Products division was at plus 3% during this first half, compared to the first half of last year where it was at plus 1.4%. This is due to significant improvement in Western Europe and North America, where the division is now growing again despite very weak markets. All brands are making progress and growing. Our European brands; Kérastase and L’Oréal Professionnel, but also our American brands; Matrix and Redken.

With the acquisition of Decléor and Carita, that was carried out during this first half, our Professional division is entering into a new market, the professional skincare market, that should bring additional growth perspective.

The growth of the Consumer Product division at plus 2% was obviously disappointing, even if it improved between the first and the second quarter. This is due to several simultaneous factors: a clear slowdown of the U.S. mass-market in this first half, and some markets in emerging countries; a strong historic base in the U.S. last year with the launch of L’Oréal Advanced Haircare and insufficient market share gains in the U.S. in general.

We believe that the growth of the division will be stronger in the second half of the year for several reasons. We are seeing a slight improvement in the market in the U.S. in the last few weeks, and also a further strengthening of the European market and we are confident that the recent and upcoming launches of our three bands; L’Oréal Paris, Garnier and Maybelline will gain traction and will contribute to accelerating the growth of the division until the end of the year.

To note, alongside our successful hair care and hair color initiatives in Europe, in the U.S. and in Asia, some significant launches to come, L’Oréal Revitalift Laser Night, Garnier Fructis Densify and Maybelline Dream Matte Foundation.

Finally, I am very pleased to confirm that we signed two days ago, the acquisition of NYX, a professional make-up artistry mass-market brand based in Log Angeles. Our vision and ambition is to grow this brand into mass-market, exactly as we have been able to grow Urban Decay in the luxury market.

As for The Body Shop after a difficult first quarter, we believe that the growth will accelerate quarter-after-quarter, thanks to new product launches and different improvements that the new team is implementing.

As for the geographic zones, the first half confirms the improvement of the growth in Western Europe at plus 2.8%, which is very important for us considering it still represents 37% of our sales. The key factor was a turnaround in the southern countries; Spain, Italy, Portugal and Greece that returned to growth for the first time in five years. We also enjoy healthy growth in some strategic countries in the north, like the U.K., plus 4%; Germany, plus 5% and even France, plus 2%.

In North America after a difficult first quarter, we are back to growth in the second quarter at plus 2.4%, with strong performances in Luxury and Active Cosmetic divisions. We are confident that our consumer division will also progressively reaccelerate its growth, thanks to a better market and to the return to the kind of market share gains that we have enjoyed over the past few years.

In Asia Pacific, outside Japan, the markets are somewhat slowed down, but the Group continues to gain market share. In a very fast changing region, we’re also making sure that we are adapting to these changes and preparing the future. For example, with a very strong acceleration of our Consumer division e-commerce sales in China, that will already represent 10% of the division sales at the end of the year, and with our recent acquisition, Magic Holdings, the number one skincare mask brand in China, that will be our second platform beside L’Oréal Paris in the conquest of the Chinese mass skincare market.

In Latin America, we are strengthening our businesses and we are confident that our initiative will enable us to significantly accelerate in the second half.

In the Eastern Europe zone, we are back to market share gains and solid growth with some notable performances in some countries such as Turkey and Kazakhstan at plus 30%.

And lastly in Africa, Middle East, we are continuing to grow rapidly and we are laying the foundation of our future development in countries like Pakistan, Egypt, Nigeria and Kenya.

All-in-all during this first half, we continued also to transform and modernize the company in order to adapt to a fast changing world. We continue more than ever to invest in research and innovation, both in France and in our different research and innovation hubs in the U.S., Brazil, Japan, China and India. We will also continue to improve the efficiency and the productivity of our different factories and supply chain installations around the world.

We significantly accelerated our digital transformation and created a function of Digital Officer where we appointed Mrs. Lubomira Rochet, the Member of the Executive Committee. And of course very importantly, as Christian reminded you, we made a very important step in the evolution of our capital structure with the strategic transaction with Nestlé announced in February and executed on July 8, 2014.

To conclude and as the summary of this first half, L’Oréal has continued to strengthen itself by modernizing its organization, by reinforcing its worldwide position in three divisions out of four, by improving its profitability despite an adverse economic environment and by transforming its capital structure.

Looking ahead to the second half, we think that despite global economic uncertainty, the market will keep its growth pace at 3.5%, 4% and that we will be able to deliver a slightly better growth with an acceleration in the fourth quarter.

We are therefore confident that we will be able in 2014 once again to outperform the markets, to improve our profitability in percentage and increase our earnings per share. Thank you very much.

Françoise Lauvin

We are now ready for your questions. Operator, can you open up the line for questions please?

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for the first question.

Jean-Paul Agon

Hello?

Operator

The first question comes from Celine Pannuti from JP Morgan. Please go ahead.

Celine Pannuti – JP Morgan

Yes, good morning. I have a few questions. The first one is on North America. I wanted to understand whether the mass-market – I think you had negative growth in the first quarter, if you were still negative in the second quarter? And looking at your outlook for the second half of the year, why would you think that there is a comeback of market share gain that were strong in 2013, and also whether – I think you had an inventory issue in the second half of last year, so I’m just thinking, should we use that as quite a positive comparative base or was just – is that a new kind of inventory level that you are facing? That’s my first question. My second question is on gross margin. Can you give a bit more background or details on the moving parts in the gross margin? Would there still be with some positive mix benefit, and as well what would have been the FX impact in gross margin? Thank you.

Jean-Paul Agon

Thank you, Celine. So I’m pleased to see that you’re always the first for the questions. So I will answer the first question and Christian will answer the second question regarding the gross margin.

So in the U.S., as you have seen, in total, we are back to growth in the second quarter, and we are confident that the second half will be better than the first one, mostly due to the fact that we believe that we see an acceleration in the mass-market business. So why are we confident that we’re going to see this acceleration? As you said for two reasons; one reason is that we hope that the first sign that we have seen of improvement of the mass-market will be confirmed. We have a seen a recent period – the latest period that has become positive for the first time in many, many months. So we are hopeful that this improvement will be confirmed.

And by the way we think so, because all the news as you know, what does mean that all the news coming from the U.S. are positive in terms of the bounce back of the economy, and this should translate also eventually in increased consumption of our type of products.

And the second reason is that we are absolutely decided to get back to market share gains. You know that we have been used to gaining market share very strongly in the U.S. This was the case in 2011, 2012 and 2013. And honestly this first half was an exception in a long period of market share gains, probably due to launches that were not as successful as they should have been, but now we have a new series of launches, we have improved we think our personal efficacy, and we should get back to market share gains because we are not – at the same time we are not seeing any strengthening of the competition. So we are pretty confident that this second half should see us coming back to market share gain in the U.S.

Christian, on the gross margin?

Christian Mulliez

Yes. Gross margin as I said, Celine, the improvement is about – it’s a slight improvement. It’s a 10 basis points improvement. It comes from the plotting down of the dilutive activity, as I used to say, Club des Créateurs de Beauté and Garnier China as a positive side of it. And the negative is comes from currencies. And to give you more details as far as currencies is concerned; it splits into, if I may, two branches, two effects. One of them is positive and one of them is negative.

Production [ph] is negative and conversion is positive. And it may regarded as a bit paradox, but it’s positive conversion because of the geographic mix of our regional gross margin which are above the average in Western Europe and below the average in North America and in new markets, compared to euro, both North America and new markets, as you remember after devaluated significantly last year. That’s the reason why it’s down. The net balance of this positive and negative impact is slightly negative impact.

Celine Pannuti – JP Morgan

You tend to give some information or guidance for each P&L item, not for gross margin. Do you want to give us something?

Christian Mulliez

No. But I can explain you why. We told you – we have given you precise run up, I would say rather precise guidance by item. You remember that R&D we say that it should very slightly increase as a percentage of sales; A&P should decrease as a percentage of sales, and SG&A should slightly increase as a percentage of sales. So gross margin, we don’t give guidance. Why? Because it’s more than complicated. It’s more than complicated because of the vast number of drivers impacted this item. And the most important of them being currencies. And it’s difficult, it’s frankly impossible to predict what will be the currency rate for the next five months. That’s why we don’t want to give guidance on the gross margin, but in total, you will remember that we have said that the EBIT as a percentage of sales will once again this year increase compared to last year.

Celine Pannuti – JP Morgan

And will we see as well as rebalancing of the margin, H1 versus H2?

Christian Mulliez

You mean next year?

Celine Pannuti – JP Morgan

No, I mean for this year. Will you weigh [ph] at retail margin in the second half?

Christian Mulliez

Well, Celine, I remember – yes, of course. Of course it’s not a question of rebalancing. There are no – you see we have – on several occasions we have mentioned the concept of rebalancing the margin from one house to the other and this year the half one EBIT is 18.2% and clearly last year in total, it was 17%. So we would increase the profitability compared to 17% for the full-year, not compared to 18.2%.

Celine Pannuti – JP Morgan

Thank you.

Jean-Paul Agon

Thank you, Celine. Next question?

Operator

The next question comes from Ms. Hermine de Bentzmann from Raymond James. Please go ahead.

Hermine de Bentzmann – Raymond James

Hi, good morning. My first question is on the hair salon market, which is growing between 1% and 1.5% in H1. Can you may be split that growth between the regions? And you mentioned in your press release for Professional Products that the growth was weaker in Asia. Can you please precise that point? Thank you.

Jean-Paul Agon

Yes, good morning. Yes, the hair salon market in fact is too pretty slow. We estimate that as you have seen in total, it’s around 1.5%. It’s probably – we don’t have panels for hair salon, so it’s the channel for which is the most difficult to really estimate the market, but we think that it’s probably negative in Western Europe. Probably slightly positive in the U.S., but not very, very positive in the new markets which means probably around 3% to 5% which makes it in total plus 1.5% approximately.

So this is obviously for the division challenge because to grow – to get back to a nice growth that they really have to do market share gains, and that’s what they are doing by the way. And we hope that in the second half, they should also improve their market share gain. They have many, many initiatives coming on the four divisions – on the four brands, sorry, major brands, on gap styles as you’ve seen on L’Oreal Professionnel, on Matrix, on Redken.

So they are really fighting on all brands, and we think – we don’t – on this market obviously, we are pretty much the only one to really innovate and build the market growth. And so we think that is going to pay off.

Hermine de Bentzmann – Raymond James

And concerning the weaker growth in Asia?

Jean-Paul Agon

Yes, it’s difficult to – in Asia what we see across the region is a very slow growth of this market. Thus it’s very different from one country to the other. Obviously, it’s still a small business in many emerging countries, so the weight for example of Japan or even Australia is pretty heavy and these markets are definitely not increasing fast.

In China, it is still a business that has not yet taken off compared to the other businesses. At the same time in some countries like in India, it’s doing pretty well. So it’s very contrasted by countries in this region.

Hermine de Bentzmann – Raymond James

Okay, thank you.

Jean-Paul Agon

Thank you.

Operator

The next question comes from Ms. Eva Quiroga from UBS. Please go ahead madam.

Eva Quiroga – UBS

Yes, good morning. I have two questions please. First, I was wondering if you could talk a little bit about Yves Saint Laurent. You mentioned it was one of the drivers in luxury products, yet Caroline said that royalty incomes were up only 2%. So I’m trying to understand what trends you’re seeing at the brands? And secondly, I was wondering, if Christian could give a little bit of flavor on margins by region. I know you’re not announcing them, but we’ve now seen eight quarters of pretty improving growth in Western Europe. Is that a region in which you’re going to spend more money again to push the market and the products, or what kind of trends are we expecting?

Jean-Paul Agon

All right, thank you. Good morning, Eva. So first on Yves Saint Laurent. We are pretty happy with the evolution of the brand. It’s growing around plus 6% in this first half of the year which is an acceleration. And you know that on one side, the Yves Saint Laurent is fashion brand, it is enjoying a good success and that’s good. And at the same time, I think the repositioning that we have done to Yves Saint Laurent, positioning Yves Saint Laurent, as you know the most, maybe most young, modern trendy, daring look, French luxury fashion brand is paying off.

We are seeing some improvements in the make-up category. Our fragrances series Lancôme [ph] are doing pretty well, and we have a new perfume coming right now that should be also pretty good. So Yves Saint Laurent is on a good track. We are pretty confident for the rest of the year. We hope that even the rest of the year could be even stronger, and that we have high ambition for this brand and we are on the right track.

Eva Quiroga – UBS

Can I just ask, you’ve talked a lot about make-up and perfumes doing well. Do I have to read anything into the implied performance in skincare or what’s happening with the skincare side?

Jean-Paul Agon

No, there is no problem with the skincare, except that the skincare is pretty small for this kind of brands in Western Europe or North America. Skincare is especially useful instrumental and precious in Asia, the launch of the skincare line was – and we explained at the very beginning, especially a necessary and instrumental for the launch of the Yves Saint Laurent brand in Asia. When we bought Yves Saint Laurent a few years ago, there was almost no business in Asia. And definitely for a luxury brand today to achieve strong growth without Asia, it’s pretty, pretty impossible. So thanks to the skincare launch that has been successful.

We have been able to really put skincare or Yves Saint Laurent on the map. We are now able to launch Yves Saint Laurent everywhere in Asia, and especially in China. I have to say that the first beginnings of Yves Saint Laurent in China are extremely good. So skincare is playing its role, which is not a major contribution in term of sales. It’s still a small business in total, but like it’s exactly the same for our competitors, but it is the necessary base of the business for the Asian development.

Eva Quiroga – UBS

Thank you.

Jean-Paul Agon

Christian?

Christian Mulliez

Yes. And as far as YSL is concerned, don’t forget that when Caroline makes a financial communication, they communicate on reporting that are YSL is concerned, whereas we communicate on the like-for-like. And it’s logical that with currency impact of something like minus 5%, they communicate on plus 2% and we communicate on something which is between plus 6% and plus 7%.

And your question was about regional margins. As you know, we don’t communicate on regional margins on our shares, so we won’t. And unfortunately these type of conference you cannot free my lips, but be sure that we’ll be disciplined for every of our region this year once again.

Eva Quiroga – UBS

Thank you.

Jean-Paul Agon

Thank you, Eva.

Operator

The next question comes from Ms. Rosie Edwards from Goldman Sachs. Please go ahead.

Rosie Edwards – Goldman Sachs

Good morning. Yes, I have a question on the mass-market. You’ve obviously talked a little bit about the U.S., but you also highlight some slower growth in the end, just wondering if these are sort of obvious ones in case like Asia and Eastern Europe or there any other ones if you want to highlight. There is also common about less effective launches in facial skincare. I wondered if you could perhaps give some detail on that. And then secondly, just wondered if you could give price/volume split for the like-for-like growth? Thank you.

Jean-Paul Agon

All right. So, good morning, I will answer your question about mass-market, and Françoise Lauvin will give you the numbers for value and volume. So the global mass-markets has evolved pretty similarly to last year, it’s what we said. It’s between 3.5% and 4% for the mass. The distribution of this growth is a bit different. Definitely lower growth in the U.S. that you know very well. A bit better in Western Europe, which is good and good for us. And across the regions, there are some evolutions. Probably a bit slower in China but still good, still probably around 7%, 8%, but which is less than before, but still very good. And definitely slower in Russia. A bit slower in India. So it’s a mixed bag, but all-in-all globally, we think that the total mass-market evolves pretty much the same way. Françoise Lauvin?

Françoise Lauvin

Yes, hello Rosie. As far as the volume and value component are concerned. For the first half, we had 4% like-for-like growth for the total divisions and this will split between 2.3% volume and 1.7% in value terms. So it’s around 60% volume and 40% value. And what I can add is that the value component is positive for each of our divisions and for each of our regions over this first past.

Rosie Edwards – Goldman Sachs

Okay. And sorry, just on – there was a comment about less effective launches in facial skincare in the mass-market. I just wondered if you could kind of give any details, I’m assuming that’s in L’Oréal Paris?

Françoise Lauvin

Yes, every year by definitely the launches are different, and some of them are more successful than others. So for example, last year we had two very, very successful launches. One in L’Oréal Paris which was Revitalift Laser, and one on Garnier which was the BB Cream, or the roll-out of the BB Cream. So this year it’s a bit slower, but I continue that we are coming up with new launches for L’Oréal Paris skincare first time with a re-launch, a new push on Revitalift Laser, thanks to Revitalift Laser Night, but also we are coming with a new innovation on L’Oréal Paris Revitalift that will be I believe as strong, as innovative, as powerful and as strong as Revitalift Laser. And so I am pretty confident that we should get back to market share growth on this category again.

Rosie Edwards – Goldman Sachs

Thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question comes from Ms. Catherine Rolland from Kepler Cheuvreux. Please go ahead.

Catherine Rolland – Kepler Cheuvreux

Yes, good morning. Could you tell us please what was the growth in BRIMC countries in the first half? And also could you share with us a bit more details about what could be your product initiatives in Latin America, because you said that in the second half you were saying that sales growth is going to accelerate. So could you share with us some information about that? And could you make a focus also maybe about the Russian and the Chinese markets please? Thank you very much.

Jean-Paul Agon

Okay, good morning. So Françoise, what about the BRIC?

Françoise Lauvin

Good morning, Catherine. I have the BRIC countries here which accounted for 15.7% of our total sales and they were up 7.4% on a like-for-like basis, slightly up on a reported basis because some countries were impacted by currency devaluation, particularly Brazil. And to give you more precise indication, Brazil was up high-single-digit, Russia low to mid single-digit, India continued the strong double-digit base and China was up about 7%.

Jean-Paul Agon

Thank you, Françoise. So regarding Latin America, we have the normal and usual series of launches that are coming to this region like they are coming everywhere in the world, but I personally believe that the second half will be stronger, because these launches are especially strong in the categories that are relevant to the Latin American market, which is mostly as you know, hair care and hair color and make-up, that skincare is a small category in Latin America.

I can tell you also that I was there a few weeks ago, and I am very confident that the second half of the year will be significantly stronger than the first one. Of course if the economic environment stays what it was, because in this part of the world, you never know with the news from Argentina or Venezuela or Brazil or whatever. So you never know, but if things stay the way they are, we should see a much stronger second half.

You had question regarding Russia I think. Well in Russia, the market has been slowing down. To be honest, this slowdown came before the difficulties in Ukraine. On our side, we say that we are improving our business there, so that all-in-all I think that we are able to offset with our own performance, part of the slowdown of the Russian market, but definitely you don’t see in Russia the type of growth that you can see in China.

And in China, the market as I said is evolving very fast. We are having great performance in the Luxury where we are really – we are number one, but we are increasing and improving our leadership. We are really doing an outstanding performance there with strong market share gains. And the market is still continuing to grow, not as fast as it was growing before of course, because there was a kind of bubble for a few years in the luxury market in China that didn’t exist anymore, but it’s still a growing market that will be fueled by the creation of new department stores in tier two, three and maybe tier four cities.

We are also on a healthy path with our Active Cosmetic division, and also with the Consumer division. You know that in China things are changing very fast. The market is shifting from where it started, in fact 10 years ago, in department stores to new channels like cosmetic stores or drug stores, but also moving very fast to the latest evolution, which is e-commerce. And definitely, China is the country in the world where e-commerce for cosmetic product has grown the fastest.

And as I told you, we think that already at the end of the year, e-commerce will be at 10% of our Consumer division sales, which is a huge acceleration, and our brands are very well positioned in this battle, L’Oréal Paris, Magic, Maybelline are really very well positioned in this very, very fast battle.

Catherine Rolland – Kepler Cheuvreux

Okay, thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question comes from Loic Morvan from Bryan Garnier. Please go ahead.

Loic Morvan – Bryan Garnier

Yes, good morning. Could you explain a bit more on the Travel Retail business and also on the Lancôme brands [ph] during H1? Thanks.

Jean-Paul Agon

Hello, good morning. First on Lancôme, and Françoise will give you some news on the Travel Retail. Lancôme is growing. It’s not growing as fast as the division in total, but it is growing I would say low-single-digit, but it’s growing in China, it’s a good evolution. And it’s so especially – Lancôme is especially happy I would say with the amazing success of La Vie est Belle.

This fragrance has been launched now two year, three years ago and it has become in a record time, the number one fragrance in Western Europe. I think it’s going to be this year among the top three or four worldwide fragrances, which is an amazing performance. And we do everything we can it takes to make it become a classic which means that we won’t – we have the secret but not any more secret ambition why not to make La Vie est Belle, the number one fragrance of the worldwide market. And that would be a fantastic performance for Lancôme.

And by the way, sign of the modernity of the brand, because the modernity and trendiness of the brand. So we are pretty confident.

Travel Retail, Françoise?

Françoise Lauvin

Good morning, Loic. So in terms of Travel Retail, the sales rose 6.5% on a like-for-like basis during the first half. And all regions were contributing to this growth with Americas and Asia up high-single-digit and Europe rising between 3% and 4%. So Travel Retail as a whole continues to grow quite in a dynamic manner, and it accounted for a bit more 5% of our sales. And of course it’s mostly for the Luxury division where it’s now close to 20% of the sales.

Loic Morvan – Bryan Garnier

Okay, thank you very much.

Jean-Paul Agon

Travel Retail in fact was a bit slower this first half for very obvious reason is that with the devaluation of some currencies, definitely consumer today find it more interesting to buy that products in the local market than in the Travel Retail market. But this will rebalance itself, and we are pretty confident that as a channel the Travel Retail will get back to probably double-digit growth very, very soon.

Loic Morvan – Bryan Garnier

Many thanks.

Jean-Paul Agon

Thank you.

Operator

(Operator Instructions).

Jean-Paul Agon

Do you have any more questions?

Operator

We do have further questions. The next question comes from Astrid Wendlandt from Reuters. Please go ahead.

Astrid Wendlandt – Reuters

Hello, good morning. My question is about the sanctions that are progressively being imposed on Russia. If Russian banks that are controlled by the state can no longer raise capital in Western Europe, this would create further problems for cash in Russia as you know, which is already quite scarce and very expensive resource. Are you been concerned about what is going on in Russia? And what impact could those sanctions have on your business there? Thank you very much.

Christian Mulliez

Thank you for your question. It’s too early to tell, because we don’t know. Today it’s more people who are targeted in Russia than organizations etcetera, so we’ll see the good news is that we are a very good citizen in Russia. We have a very big factory, 60 kilometers from Moscow which manufactures mostly all of our CPD products, and so we are very connected and we see today no reason to think that we would be impacted, but then we’ll see.

Astrid Wendlandt – Reuters

Okay, thank you.

Jean-Paul Agon

Thank you. Other question?

Operator

The next question comes from Harold Thompson from Deutsche Bank. Please go ahead sir.

Harold Thompson – Deutsche Bank

Yes, good morning everyone. Just got one question. Slide 10, Jean-Paul you show the performance of your recently acquired brands and they’re all doing very well including Kiehl’s. If I think about Magic, it’s clearly kind of a bigger business, slightly more established. Do you think the performance of that acquired asset could be as impressive as some of your recently acquired ones? Thank you.

Jean-Paul Agon

Okay. Good morning, Harold. So we just acquired Magic. And if I remember, the growth in the last quarter was plus 17% which is not bad at all. It’s going to be difficult to do as well as Urban Decay, plus 93% in the first half, is a bit exceptional. I’m not even sure that we will be able repeat that in the second half even if the growth is very, very solid.

But we are pretty confident that Magic will keep the fast pace. And just to add some thing is that we are really excited about NYX, because this new acquisition just signed, so we haven’t even really started to work together, but we’re just starting but NYX is very exciting. Why? Because it’s exactly Urban Decay format. Of course, it’s not going to be a copy of Urban Decay at all. It’s not the way we do. Each brand at L’Oréal has its own identity, plan, pipeline of launches, etcetera, etcetera but what we think is that there will be in the mass-market now the same opportunity of professional make-up artistry that has existed in the luxury, and that mix will become the worldwide. It’s not to the U.S. only. In the mass-market now, the sales opportunity of professional make-up artistry that has existed in the luxury, and that mix will become the worldwide, it’s not to the U.S. only, it’s going to eventually become the worldwide champion of this segment that could really grow very much. And that with the three brands now; Maybelline number one worldwide, L’Oréal Paris number two and NYX on top, we will definitely conquer the make-up market worldwide.

Harold Thompson – Deutsche Bank

Good news. If I could do one further for Christian. Clearly you’re A&P is down 70 basis point in the first half. Is there any mix – I mean you say that’s because you’re getting more for your buck and the move digital, but could there also be some regional or category mix explaining that, given the contrasted great performances by divisions and categories?

Christian Mulliez

Yes, clearly I did not want to be precise, but there is a mixed impacts which comes from the brand, as Jean-Paul said, and gave examples of brands like Kiehl’s, Clarisonic, even Urban Decay. These very fast growing brands require, if I may, less A&P and more SG&A – not A but S&G. So that explains partly the evolutions in our P&L. Yes.

Harold Thompson – Deutsche Bank

Okay, excellent. Thank you very much.

Jean-Paul Agon

Thank you, Harold. Other question?

Operator

Thank you. There are no further questions.

Jean-Paul Agon

All right. So thank you very much to all for coming this morning. And again we are pretty confident, as I said for the second half despite the global economic uncertainty that we will strengthen our positions and strengthen our growth, and that we will be able to once again outperform the market and improve our profitability. So thanks again and see you after the summer. Thank you. Bye.

Operator

Ladies and gentlemen, thank you for your attendance. This conference is being concluded. You may now disconnect.

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