L'Oreal's (LRLCF) CEO Jean-Paul Agon on Q2 2016 Results - Earnings Call Transcript

| About: L'Oreal Co. (LRLCF)

L'Oreal SA (OTCPK:LRLCF) Q2 2016 Earnings Conference Call July 29, 2016 3:00 AM ET

Executives

Françoise Lauvin - Head of Investor Relations

Jean-Paul Agon - Chairman and Chief Executive Officer

Christian Mulliez - Executive Vice President and Chief Financial Officer

Sophie Gasperment - Group General Manager, Financial Communication and Strategic Prospective

Analysts

Hermine de Bentzmann - Raymond James & Associates, Inc.

Celine Pannuti - JPMorgan Chase & Co.

Catherine Rolland - Kepler Cheuvreux

Mark Astrachan - Stifel Financial Corp.

Pierre Tegner - Natixis Securities

Chas Manso - Société Générale

Operator

Welcome to the conference call regarding L’Oreal Half-Year 2016 Results. [Operator Instructions] The conference is about to begin. I’ll now hand over to Madame Françoise Lauvin. Madame Lauvin, please go ahead.

Françoise Lauvin

Thank you, Matilda. Good morning to all, bon jour too. Welcome to L’Oreal Conference Call for the release of the first-half 2016 sales and results. Hosting this conference today are Chairman and Chief Executive Officer, Jean-Paul Agon.

Jean-Paul Agon

Good morning.

Françoise Lauvin

Christian Mulliez, Chief Financial Officer.

Christian Mulliez

Good morning.

Françoise Lauvin

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

Sophie Gasperment

Good morning.

Françoise Lauvin

Our presentation this morning will start with financial highlights, given by Christian Mulliez, after which Jean-Paul will review with you his perspectives on the first-half of the year and also share confidence on the future. This will leave plenty of time for your questions as we aim to end this call by around 10:15.

During the call, the slides commented can be seen live on the web at www.loreal-finance.com, where they can be downloaded. They can be also seen on L’Oreal Finance app. A replay of the call will be accessible this afternoon on the same website and app. The French and English versions of the half-year financial report will be available in the course of the next few days.

For the discussion part of the meeting, please identify yourself and raise one question at a time in order to allow us many of you as possible to participate, and we kindly ask our French journalists joining the call to raise their questions during the latter part of the Q&A session.

I wish you a good conference. Let me now hand over to Christian.

Christian Mulliez

Thank you, Françoise, and good morning, ladies and gentlemen. Presentation of L’Oreal financial result for the first-half of 2016 will include information about sales, profit, cash and the balance sheet situation.

Sales our consolidated sales amounted to €12.895 billion, up by 4.5% at constant exchange rates. Like-for-like sales grew by 4.2%. Changes in scope of consolidation were slightly positive at plus 0.3%. This impact corresponds mainly to the consolidation of full-year of Niely in Brazil. After negative impact of 3.9% from foreign exchange rate sales growth based on recorded figures came out at 0.6%.

Note that, extrapolating the June 30 exchange rates against euro, that is for instance with euro at $1.11 up to December 31, 2016; that would lead to a negative foreign exchange impact on full-year sales of minus 2.9% compared to minus 3.9% a quarter ago.

Currencies, with the notable exception of the U.S. dollar, which account for 27% of our invoicing and has remained stable, the euro have strengthened against most currencies in the first-half of 2016. Amongst our main invoicing currencies, note that the Chinese yuan 8.6% of invoicing declined against the euro by 5%; the pound sterling, 6.1% of our invoicing dropped by 5.9%; and the Brazilian real, 2.5% of our invoicing weakened by some 20% against euro.

We have noticed that the United States has now overtaken the rule of the Eurozone in terms of weight of sales.

By divisions, sales by divisions; Professional Products have recorded like-for-like growth of plus 2.2%. Of course, this division growth in Western Europe and the New Markets was stronger compared with first quarter of 2016; the difficulties were in the United States and should be only temporary.

Consumer Products sales are growth 4.3% and the second quarter at plus-4.7% was an improvement on the first quarter at plus-3.9%. This is the best half-year performance since mid-2013 with good figures in North America, the New Market and Western Europe, excluding France.

L’Oréal Luxe at plus-5.6% is delivering sustained growth in quite a lively market; here too the good performance is in North America and the New Markets. Active Cosmetics at plus-5%, made a modest start to the year in Western Europe following an unfavorable season. This is why growth also quite good, is below the levels of previous years.

Lastly, Body Shop at minus-0.6% recorded a negative second quarter, due especially to significant difficulties in two large market for The Body Shop, Hong Kong and the Middle East.

By regions, all regions achieved growth with Western Europe at plus-1.7% like-for-like with second quarter slightly below the first, penalized by a difficult market in France and Travel Retail in Europe; note, the good performance of the United Kingdom and the four countries of Southern Europe.

North America is at plus-4.6%, with the second quarter slightly above the first quarter. And the New Markets that are still delivering sustained growth at plus-6.8%. Note that the sustained growth is continuing in Eastern Europe and in Africa/Middle East, while sales are accelerating in Latin America, thanks to Brazil.

By segments, leading the way in terms of growth is Make-UP at plus-12.4%. Next come Fragrances at plus-3.6% and Hair Care at plus-3.4%. They are followed by hair coloring products at plus-2.9% and finally Skin Care sales growth was slower at plus-0.6%.

The P&L, let’s begin by analyzing gross profit; gross profit €9,333 million has come out at 72.4% of sales compared with 71.7% in the first-half of 2015, representing a very strong improvement of 70 basis points. The impact of foreign exchange currency translation and transaction come out positive at slightly over 40 basis points. The impact of change in the scope of consolidation was negative by 10 basis points.

This means that gross profit, excluding the impact of foreign exchange and changes in the scope of consolidation, improved by about 40 basis points, thus reflecting once again our disciplined approach to production and distribution costs, the ongoing programs to adapt organization general structures, particularly in procurement and supply chain, and savings on input costs.

R&D expenses have increased by 9.1%, rising as a percentage of sales from 3% to 3.2%. Half of this increase is attributable to currency translation impact as most research is conducted in the Eurozone. Advertising and promotion expenses came out at 29.4% of sales, slightly above the first-half 2015 figure of 29.3%. This slight increase results partly from the increases of unit volume of our marketing expenses and partly from the improvement in our media buying conditions.

This improvement is also a consequence of the continuing development of digital with digital media accounting now for more than 30% of our media spending in the first-half of 2016 compared with 25% in the first-half of 2015.

Selling, general and administrative expenses at 21.4% of sales have come out 10 basis points above first-half of 2015 level. This is the result partly of the acceleration of our digital business. Note that if the impact of currency translation is excluded, selling, general and administrative expenses could have declined by 10 basis points, reflecting the productivity improvement in our organization.

Overall, the operating profit at €2,364 million has grown by 20 basis points and amounts to 18.3% of sales. As announced at the start of the year, we are improving our profitability while actively supporting the development of our brand.

By division, I would remind you that at L’Oreal, half year operating profitability cannot necessarily be extrapolated for the full year. This is shown in the first two columns of the table indicating the figures of 2016. In the first half of 2016, the profitability of Professional Products increased from 19.1% to 19.6% plus 50 basis points. Consumer Products profitability hedged down slightly from 21.3% to 21.2%.

L’Oreal Luxe recorded strongest improvement from 20.5% to 21.3%, a raise of 80 basis points. And Active Cosmetics with a profitability of 27.7% has improved by 20 basis points.

Non-allocated expenses consisting mainly of corporate and fundamental resource expenses have remained stable at 2.5% of sales. As per The Body Shop, I would remind you that each year it makes most of its profit in the second half. The first half is for never significant in profitability debt. It is negative level for this half year is a result of difficulties in some major markets of Body Shop that I already mentioned, such as Hong Kong and Middle East, and of significant investment efforts to reaccelerate the brand.

Although group as a whole, the first half at 18.3% is at the record level, from operating profit to net profit excluding non-recurring items. Overall, finance costs were close to zero. Although, the full year 2016 also overall finance costs close to zero than we anticipated all other things being equal.

Sanofi dividends amounted to €346 million. Income tax amounted to €684 million, representing tax rate of 25.2%, slightly below the rate in the first half of 2015, which was 26.1%. Most of the reduction comes from the abolition in France of an additional tax - was it called - an additional tax.

For the full year of 2016, tax rate in the order of 25.5% to 26% than we anticipated, all other things being equal. Net profit excluding non-recurring items amounted to €2.25 billion, up by 3.5% compared with the first half of 2015.

Finally, EPS amounted to €3.59, up by 3.4% compared with first half of 2016. To help you in your EPS estimate for the full year, I would recommend that you base your calculation on diluted number of shares of 564 million shares.

I’ve indicated in February, I can’t confirm that in 2016 our objective is to build a year with increase in sale profits and profitability that without quantify or qualifying the increase expected, as we wish to hold on the leeway we need to optimize the management of the business.

Let’s now complete the review of the consolidated P&L. After non-recurring items of €546 million, net profit comes out at €1.479 billion. So non-recurring items consists mainly of two things. First, goodwill impairment of the Clarisonic and Magic brands with respective amounts of €233 million and €213 million, as of the recent performances of these two brands since 2015 have not been up to our expectations, resulting in these non-cash accounting report. The strategic relevant of these two brands remain unchanged. Second item is the French tax of 3% on dividend payments, representing a total of €52 million.

Cash flow, gross cash flow amounted to €2.466 billion, up by 4.1% compared with the first half of 2015. The change in working capital has increased significantly, which happens every year in the first-half, particularly as a result of the impact of the seasonality of some of our businesses on trade accounts receivable. The increase is more modest than in the first half of 2015, which was impacted by general items. Over the whole of 2016, the change in working capital should increase by a little over €100 million compared with 2015.

Investments capital expenditure at €596 million represented 4.6% of sales. Over the full year, as we indicated in February, this should be at the same level about 4.5% of sales as they were in 2015. Operating cash flow of €1.325 billion rose at very strong plus 27.2%. Finally after payment of dividend and share buybacks, the residual cash flow amounted to minus €923 million.

The balance sheet, particularly solid, shareholders’ equity of €22 billion reflects, compared with December 31, 2015, the payment of the annual dividend of €1.8 billion. And lastly at June 30, our financial situation is very healthy as net debt amounts to €344 million only.

Thank you for your attention.

Jean-Paul Agon

Thank you, Christian, Jean-Paul Agon speaking now. As you have seen L’Oreal has delivered very solid first half, maintaining it’s healthy pace of growth in Q2 and even accelerating it slightly in the Divisions, despite volatile environment. More than ever, the balanced business model of the group is really all strength.

At the end of June, our consolidated like-for-like sales grew plus 4.2% with all Divisions and geographic zones contributing. Our results are of very good making with strong progression of the gross margin, sustained investment behind the development of our brands, and the acceleration of our digital transformation, as well as an increase of 20 basis point of our operating margin.

Christian commented our results very eloquently. So I will now focus on the performance of all Divisions and regions, and share with you some perspective for the rest of the year. First few words about the market, our estimates at the June show that once again the beauty market demonstrated its resilience with pace of growth between 3.5% and 4%, which is close to last year growth and slightly above the guidance we gave back in February.

By region, North America almost a quarter of the market worldwide remains dynamic which is very good. Whilst, Western Europe is still subdued, but as a result of two diverging trends. Excluding France, Western Europe is in growth, including South Europe which continues to improve, but France as turn negative from plus 1% to minus 1%. We’ve slowdown in all channels and particularly the mass market, where retailers or price continues with no positive impact on consumption.

New markets with huge discrepancies from country to country; maintain a good base of role and continue to drive most of the growth of the market worldwide. The more dynamic are Eastern Europe and Hispanic Latin America, of course, partly boosted by inflation, while the Middle East and Brazil remained difficult. In Asia, the progressive deceleration of China and the decline of Hong Kong are compensated by more favorable market in Japan, Korea and South Asian markets.

By sector, Luxury proves very resilient in beauty and it’s still strengthening the growth of the market. Dermocosmetics are less by and so far, following we have to say a poor weather season in Western Europe, the most important dermocosmetics region. The mass market remains very solid and Professional is gradually improving.

And finally, door-to-door is the only channel still lively. Across the board, e-commerce continues to develop very significantly. I would also like to stress the very visible momentum in term of category in make-up in all geographies and whatever the penetration in given country, boosted by digital communication, propelled by the selfie generation, make-up is really accelerating everywhere. For example, in the U.S., of course, the most mature make-up market in the world, but also in countries like Russia, where make-up is only moderately developed so far. And even in China, a country where make-up was still very minimal and has a huge potential there.

To conclude, beauty market remains dynamic and we believe that it should grow this year again, between 3.5% and 4%. Over the first six months, we have further strengthened our leadership. In the Consumer Products division, our strategy choices are paying up. As anticipated and announced in February, the division is accelerating its growth quarter after quarter and is back now to market share gains.

The first strategy choice: Makeup, today the most dynamic category in mass. The division is forging ahead with its unique brand portfolio of four powerful and complementary brands: Maybelline New York, the leader of Makeup worldwide; L’Oréal Makeup Designer Paris, the global number two brand; Essie, the nail specialist in solid double-digit growth; and now, NYX Professional MakeUp, the digitally activated brand, loved by Millennials, booming everywhere.

NYX Professional MakeUp is a phenomenon, almost doubling year-to-date with exponential following including its own market in the U.S.

Second strategy choice for the consumer division, to seize natural trend in hair-care, through the Universalisation of Ultra Doux; now, running out around the globe with specific sets of natural ingredients by country, capturing those which resonate most powerfully with local consumers; recording strong sellout in all markets starting from the UK to Spain, South Africa, Germany, importantly of course the U.S., and most recently launched in China and India.

Looking ahead, as we build on the strengths of our brands we will continue to leverage NYX Professional MakeUp and Ultra Doux to fuel the momentum of the Consumer Products division. L’Oréal Luxe with sustained growth of plus-5.6%, continues to gain share, despite less dynamic market in Travel Retail and in France, all zones are growing.

L’Oréal Luxe outperforms the market in the two biggest selective markets worldwide, the U.S. and China. L’Oréal Luxe’s healthy growth is driven by the stellar performances of Yves Saint Laurent, Urban Decay, Giorgio Armani as well as the good results of Lancôme and further development of Kiehl’s.

The Makeup category is accelerating in luxury too and L’Oréal Luxe at the sharp end of trends is growing close toward the market. In fragrances, the dynamism of Lancôme La vie est belle and Yves Saint Laurent Black Opium are complemented now by the launch of the new Yves Saint Laurent Mon Paris and more to come with the recent acquisition of Atelier Cologne, a perfect complement to L’Oréal Luxe’s existing exclusive collections on the fast growing segment of alternative perfume.

The Professional Products division continues to take the initiative to stimulate the market, which is currently improving. And at the end of H1, despite a temporary slowdown of SalonCentric in the U.S. we are in line with the market. We continue to invest to energize the market with initiatives such as Salon Emotion, Hair Fashion Night, e-education. More than ever, innovation makes a difference. For example, Sugar Shine at Matrix and High Rise Volume Lifting hair care with strong digital activation.

As with Skin Care, as we are now spanning the whole of professional beauty, Decléor, our aroma therapy essential oil specialist is developing very well.

Active Cosmetics continues to drive the dermo-cosmetic market and to gain share, La Roche-Posay yet again in double-digit growth, thanks to innovation, further reached a deepening of its partnerships with health professionals and innovative services, such as My UV Patch, a ground-breaking device designed in our Connected Beauty lab.

SkinCeuticals promoting integrated skin care is also in fast expansion at plus-12%. The Body Shop minus-0.6% year-to-date has been impacted by the deteriorating environment in the Middle East and tough conditions in Hong Kong, two important markets for the brands. We are investing in both business drivers and talents to boost the growth.

Across all brands in functions we continue also to drive our digital transformation at full-speed. Digital now amounts to 30% of our media. And E-commerce growing at plus-33%, it’s close to 6% of total group sales. By geographic zones, Western Europe is largely penalized by France. We have to say that the French accumulated all possible negatives during this first-half, poor macro-economic situation, bad weather season, low morale of course due to the terrorist attacks, and unrelenting price wars between mass retailers.

Despite this French negative drag we have managed to grow plus-1.7% in Western Europe, and to increase our already high market share with strong performances in many European countries, particularly in the UK, Spain and other countries, and with a very positive outcome of our two strategic consumer product division initiatives Ultra Doux and NYX Professional Makeup.

In North America, growth is nicely accelerating and we are gaining share in the two major sectors, mass and luxury. In mass, growth is bolstered by our launch of Whole Blends, the Ultra Doux of the U.S. and the health of our make-up brands, all increasing their sell-outs with particularly strong number on NYX Professional Makeup and Maybelline.

In luxury, Urban Decay, Kiehl’s, Yves Saint Laurent Beauté and Armani are highly dynamic. Our New Markets are accelerated too.

In Asia-Pacific, Hong Kong continues to have a negative impact. But many countries are in double-digits year to date, for example, Korea, India, Indonesia and Thailand. China is a combination of several factors, a remarkable performance of L’Oréal Luxe, which continues to outperform the dynamic luxury market, including Lancôme, which has become the leading luxury brand; a good development of L’Oreal Paris, the number one beauty brand in China; but disappointing results on Magic in the Consumer Products division.

Excluding Magic, China would have posted a mid-single-digit growth at the end of June, outperforming its market.

In Eastern Europe, we remain well ahead of the market. We are particularly gaining share in Russia, with strong brands and very dynamic e-commerce business. Latin America at plus-10.8% is back to double-digit growth this year and market share gains with even a positive Brazil so far.

Africa/Middle-East is growing very solidly despite a slow-down in the Middle-East. We have just opened our seventh research and innovation center in Johannesburg, to build on our scientific knowledge and develop specific innovation for Sub-Saharan Africa.

So all in all, after the solid first-half we are looking to the remainder of the year with confidence; first, because beauty remains a dynamic market. It should grow this year, as I said again, between 3.5% and 4%, probably close to 4%, which is higher than what we thought at the beginning of the year. Secondly, because of our unique diverse portfolio of brands enables us to tap into segmenting consumer aspirations to connect with a multi-faceted consumer base and seize ascending trends.

Our two most recently announced strategic acquisitions will complement and further strengthen our portfolio: Atelier Cologne, in alternative perfume range; and IT Cosmetics, in high-end problem solving make-up and hybrid skin-care; and third, because of our strong innovation plan with powerful new products initiatives in the second-half across all divisions, such as Yves Saint Laurent Mon Paris [Pason, Peologue Roe,] [ph], Vichy Slow Age, Maybelline Master Strobing, L’Oréal Paris Pure-Clay Mask, or Kiehl’s Apothecary Preparations, many launches.

Finally, our confidence for 2016 is also routed in our digital edge, with our strategically centralized, yet operationally de-centralized agile approach, we are moving forward fast. We now have more than 1,400 digital experts on board, driving our transformation with up-skill teams. More than ever, we can build empathy with consumers and do what we do best, invent the beauty products of tomorrow.

Our digital acumen, once again acknowledged by L2, which has ranked three L’Oreal brands in the Digital ID Top 5 in the U.S., in China and Germany is strengthening day-by-day including on e-commerce, where we are already the leading industrial player with real opportunity to grow further.

As a conclusion, adding to this positive drivers; specialty of our balanced business model, we are confident in our ability to accelerate our organic growth in the second half. To outperform, once again the beauty market in 2016 and to deliver another year of increasing sales and profits.

Thank you very much. And now, we are ready for your questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] The first question is coming from Hermine de Bentzmann, Raymond James. Madam, please go ahead.

Hermine de Bentzmann

Good morning. I have a few questions, please. The first one on Magic and Clarisonic, can you maybe give a bit more detail why the performance of those products been below expectation and what is your strategic plan to improve sales growth of those brands?

My second question is on The Beauty Shop, what is the outlook for the brand for the rest of the year, and how would you extend such a volatility in the performance of the brand?

And last question on the Professional Division, can you come back on the difficulties you’re facing to U.S. and you should expect this to be addressed in H2? Thank you very much.

Jean-Paul Agon

All right, thank you for these three nice questions to want us up [ph]. So Magic and Clarisonic, we have to say our acquisitions that we are not - as you know typical, they were really acquisitions in two new adjacent territories, one was the cosmetic device, which was, of course, very new for us, and I’d say emerging market. And even Magic was also something new for us, the mask in China, and in Chinese brand is always something prettier, not easy.

So - we have some difficulties for a while, and we have preferred to be cautious and rigorous. And we have - as we should - redefined our business plans for the future, and decide this impairment.

At the same time, we strongly believe that this two acquisitions have very strong strategic relevant for us. The cosmetic device is definitely a market - an adjacent market that is interesting, and where we have to continue exploring and innovating that’s what we want to do. And that we’ve learnt a lot, thanks to the two years with Clarisonic. And on Magic, we are in the middle of the transition now, and we are now coming back with strong innovations that we didn’t have, probably, fast enough at the beginning.

And we are launching in China, many new skin care mask, very innovative with innovative technologies. And we really believe that the business will get better. So that in this two cases, the increase of competition was very strong compared to beginning, where - when we above these two businesses.

So this is for Magic and Clarisonic. Christian, you want to add something to this.

Christian Mulliez

Yes, yes, I just would like to say that, in essence, revise the valuation of these two assets based on new business have been calculated cautiously in a prolonged manner.

Jean-Paul Agon

So regarding TBS, TBS has been, honestly, we are of course disappointed and to be honest, a bit frustrated by the performance of TBS. It’s true also to say that, they have been really impacted by Hong Kong, if you - by the way if you read the communication of some other brands in the similar type of activity, they have been very impacted to. And so that Hong Kong and Saudi Arabia difficulties, really didn’t help the performance of TBS. And based on the plans they gave us, we are hopeful that there are second half will be better.

Regarding the Professional Division, I think it’s a mixed message. On one side, the market is really as we said that beginning of the year awakening, which is really good. We see better activity in the hair salon, it’s started in the U.S., but now it seems to be more generalized everywhere, especially coming hair color, maybe we would see on hair color what we have been seen on make-up, because in a way it’s to be claimed.

So the division should really accelerate, and we think the division will accelerate also in the second half, because they have some strong innovations coming - technical innovations are coming right now. And the performance has been a bit disappointing in Q2, especially at SalonCentric, where we at some movements of our partner brands, some went out, some came in, but all-in-all, it was not a positive move in the quarter two. So we believe that it’s really improving the second half.

Hermine de Bentzmann

Thank you. And just can you give us the weight of Hong Kong in total The Body Shop sales, please?

Jean-Paul Agon

The weight of Hong Kong in The Body Shop.

Françoise Lauvin

All right, if we combine the weight of Hong Kong and Saudi Arabia, it is 10%.

Hermine de Bentzmann

Thank you.

Jean-Paul Agon

Okay. Thank you.

Operator

The next question is coming from Celine Pannuti, JPMorgan. Madam, please go ahead.

Celine Pannuti

Yes, good morning.

Jean-Paul Agon

Good morning.

Celine Pannuti

I’d like to come back on some of the few key countries that you’ve mentioned. Look, since we spoke about Magic, let’s start with China. So could you elaborate about the division performance, and different division performance in China the market grows there. And on Magic, you’ll refer that you had pipe of new activity, but is it like - what visibility do you have that Ukraine recover growth there, it category itself under pressure? So that’s my first question on China.

Second on the U.S., can we have a bit of color in terms of the growth rate by channel, so I understand that, Professional was a bit weaker versus the average, is that temporary, but what was as well the growth in Luxury and Mass, please?

And then finally, I mean France, you’ve said at Q1 that there were some issue with retailers and that’s nothing will prove, have you see a sequential improvement in Q2 versus Q1. And anything you can say on the balance of the year in that country?

Jean-Paul Agon

All right. Nice questions do, all right. So China first, China, the market for us in China is, of course, have decelerated compared to what’s told before. I would say that the market, I’m talking about the market now is probably mid-single-digit for Luxury, and low-single-digit for Mass. And we are doing much better than that on Luxury, in fact we keep outgrowing the market in Luxury, which is really good, we are very happy with our performance in China, which is very high-single-digit in Luxury in China.

And I have to say that in Mass also, we are doing pretty well, except that we are penalized by Magic. So as we told you before, other market that is probably between, I’d say what 3% and 4% globally in China without Magic. We would have outgrown the market.

So regarding Magic, it’s not only that we are piping, it’s not question too much of piping, it’s a question of having the innovation, because it’s a market extremely competitive market.

As I told you before, when we launch, when we acquired Magic there were - Magic was the leader and there were probably I don’t know five or 10 competitors, three years after, we are still the leader, but with lower market share, and they are probably 10 times more competitors on the mask market. So we just mean that we have to be extremely innovative, and that’s what we are doing now.

And we are bringing a flow of innovation and we are now at the pipeline of innovation that will come every quarter in order to be the brand that brings innovation to this category in China. So we feel much more comfortable with business even if competition is high, we’re doing now - really what we have to do, which is to bring competition to determinately at the edge of the market.

In the U.S. - to U.S. as you know, is a very positive market for us this year. First, the market I would say Luxury is good, probably mid-single-digit something like that or a bit higher. And we are doing very well in Luxury. We are slightly above the market in terms of market share gains.

In Mass, we are very happy with the results of the business, the team has done a very good job. The Mass - the market itself is not that great, it’s probably a low-single-digit, but the recent panels, that I’m sure that you read too, show that we are growing our business high-single-digit and gaining very strongly market share. As we use to do few years ago and then we did and do for one or two years. So we are back to a very strong dynamism, and market share gains in the U.S. market.

And Professional is weaker, but it’s accelerating. And when we’ll have fixed our issues with partner brands at Clarisonic - at SalonCentric, it will - we will be back to, I think healthy growth.

And finally France, France has been really the problem side of this second quarter. In fact, I would say it explains most of the different between what we expected to do or we wanted to do in the second quarter and what we finally were above to do. We estimate that France as cost as full point of growth in this second quarter, if we exclude France, the growth of the group would be almost one point more. And France, I have to say in the second quarter, I know that you don’t live in France, Celine, but for those of us who live in France, honestly, it’s not a surprise.

The weather season was terrible, it’s raining every day, and it’s still raining this morning by the way. You can see that through the window, so which effects the moral of the people and definitely categories, like, sun care or body care, deodorants and everything, number one; number two, of course. The morale of the French people in the past six months has been pretty poor, because of the odd events. And also this price wars on retailers, but I would say that the market globally is very negative. The Mass market has been negative 3% - in Mass since the beginning of the year, almost the same for Luxury. So France is a very difficult market.

So we hope that the second half would be a bit better in France, we don’t know for the weather, we don’t know for, but at least - it will not be any more season of the sun care and body care, so it will impact less the business, and we hope that things will get a bit better. And regarding the business that we do in Mass, we now have all our brands and SKUs in with our retailer partners. So in terms of comparables, the comparable in Mass should be easier for us in the second half compared to second half 2015.

Christian Mulliez

But if I may the good use is our France it comes only for 25% of total Europe, and the rest of Europe, excluding France always doing better than last year, everywhere.

Jean-Paul Agon

Yes. In fact, it’s a pretty that because Western Europe has done a very good job, we have done a very good in Europe. UK is growing - as a country almost double digit, but very single-high-digit, which is pretty extraordinary; very good growth in Spain too, high-single-digit; good performance in Germany; good performance in Nordics; good performance even in Greece, high-single-digit, which is I have to say performance. So honestly all-in-all, we are doing very well in Western Europe, it’s pretty that it is really penalized by France, but again pretty, but not surprise.

Celine Pannuti

Thank you very much.

Jean-Paul Agon

Thank you, Celine.

Operator

The next question is coming from Catherine Rolland, Kepler Cheuvreux. Madam, please go ahead.

Catherine Rolland

Yes, good morning. I have several questions actually. First of all, I just wanted to come back on the P&L structure, and I wanted to know, if you could give us some color about the evolution of the communication expenses in percentage of sales. Is the increase due to the big product launches that you had in H1 and could we have somewhat easing of the ratio for the second half? Or is it a new trend that we could extrapolate?

My second question was about the organic sales growth for the BRIC countries? And my third question was about the impact of the new feminine fragrance by Saint Laurent. Do you think that the impact is going to accelerate in Q3 or did we have the bulk of the positive impact from sales growth for the Luxury in - Luxury division in Q2? Thank you very much.

Jean-Paul Agon

All right. So I’ll start maybe with Yves Saint Laurent, Françoise will talk about the BRIC results and Christian about the P&L structure.

So regarding Saint Laurent, my first - I have to say thank you for the opportunity, because I want to say that Saint Laurent is on fire. The brand, if I remember well, is at plus-25% at the end of June. And that does not really include yet, the launch of Mon Paris. Honestly, Saint Laurent is really booming, is probably the most successful Luxury brand on the market right now. And the launch of Mon Paris will just come on top of that, and we’ll definitely strengthened business in the third quarter and fourth quarter. And we are very confident about this new initiative. Françoise, the BRIC?

Françoise Lauvin

Yes, good morning, Catherine.

Catherine Rolland

Good morning.

Françoise Lauvin

So in the different countries, China was impacted we said by Magic performance, where China was low- to mid-single-digit overall, but would have been mid-single-digit without Magic. India was double digit. Russia continues on the very strong path and that’s been growing mid to high teens. And Brazil was up 4% in this first half.

Catherine Rolland

Okay.

Jean-Paul Agon

Thank you, Françoise. And Christian, what do you think about P&L structure.

Christian Mulliez

Well, yes, you’re right, Catherine. The A&P went slightly up by 10 basis points, partly because of the additional investments in order to support launch overall of our products, [indiscernible]. And by the way, that’s the reason why the CPD consumer product division profitability went slightly down half-one by 10 basis points.

Another factor that I mentioned - is that I mentioned indeed the additional digital expenses. Then should you extrapolate anything, I would not recommend you to extrapolate anything, even though that our guidance for the full year is first is a qualitative one, but it’s when you read in the [indiscernible], we will improve significantly the gross margin in total year 2016 compared to total year 2015 that’s for the gross margin.

And we will reinvest in order to support the development of our brands. In total, there will be an improvement on profitability. Be careful with [indiscernible] extrapolation.

Catherine Rolland

Okay. But…

Jean-Paul Agon

Okay.

Catherine Rolland

Does that mean that overall communication expenses, marketing expenses should be up in percentage of sales as a whole?

Christian Mulliez

That mean, what I said.

Catherine Rolland

Okay. Thank you.

Jean-Paul Agon

So I think, I think, it means Catherine, that as we always said for us top line is our priority. We want to drive market share gains, accelerated growth. We still - as I said, we will still think that the growth of the second half will be stronger than the growth of the first half, because of many different, because of the initiative that we have taken, the launches that we are doing and support that we will put behind. And that we want to make sure that we will support our brand.

At the same time, that thanks to digital, thanks to the media pictures that we have done et cetera. We are able - so to have a better return on investment of our business drivers. And so all-in-all, we think that it’s virtuous spiral that will drive the growth - organic growth and market share gains.

Catherine Rolland

Okay. Thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question is coming from Mark Astrachan, Stifel. Sir, please go ahead.

Mark Astrachan

Yes, thanks and good morning, everybody.

Jean-Paul Agon

Good morning.

Mark Astrachan

I wanted to ask about the Luxury segment, I thought about maybe specific the impact on the segment growth from Travel Retail and Clarisonic, so what the growth rate was Travel Retail generally? And then that’s [ph] Clarisonic’s whereas you did for Magic and kind of what the growth would have been would be helpful. Thank you.

Jean-Paul Agon

We are not concluding everything, without what doesn’t work well, because it’s a part of the business; what is sure is that the growth of the Luxury division without Clarisonic would have been much higher than that.

And Travel Retail, maybe you can say something, Françoise.

Françoise Lauvin

Yes. So Travel Retail has been actually quite contrasted by region. Overall the sales of Travel Retail were mid-single-digit very slightly below mid-single-digit in terms of trend. And clearly, Asia has continued to be very well oriented and we have double-digit growth in Asia with Travel Retail. However, we spoken about France and due to the impact on the terrorist attacks, obviously there were few - two reasons coming to France and to other European countries.

And we have also seen with what is happening in Brazil and the shop devaluation of the currency there that Brazilian travelers are no longer travelling at much and when they are traveling, they are buying less. So overall in Western Europe, also in the Americas Travel Retail was slightly down.

Jean-Paul Agon

We think that the comparative basis will be a bit easier on Travel Retail at least into third quarter, because you remember that last year’s third quarter was impacted by drop in Travel Retail. But at the same time, we have seen that this business is really unpredictable and volatile, and it’s typical of the Voca [ph] story, so difficult to make predictions.

Mark Astrachan

Great, and then just following up, I realize it’s only few weeks again post-Brexit. Any impact you can sort of quantity on dynamics, folks traveling into UK or impact on just spending in general in that market?

And then lastly, acquisition strategy maybe if you can comment a bit on IT Cosmetics it seems like a clearly big multiples, I guess, we just sort of curious, how do you thinking about from a longer standpoint and sort of what we should expect going forward from an acquisition standpoint?

Jean-Paul Agon

Okay, Brexit will - just talk about maybe consumption and maybe Christian can say few words about…

Christian Mulliez

One or two figures, yes.

Jean-Paul Agon

The impact - of course, for the moment we haven’t seen anything. For us in terms of business, market share gains, growth, we honestly don’t see that there will be any impact. We are doing very well in UK, as I told you before our growth is almost double-digit this year in UK, with market share gains in Luxury, in Mass everywhere. So we are not worried about the top line and market share gains with respective in UK.

Regarding the economic impact, Christian?

Christian Mulliez

Yes, that the sterling pound - pound sterling account for around 6% of our total invoicing that’s point number one. Point number two, transaction, as far as transaction are concerned, we are fully hedged 95% of the total of our flows close to 100%, if you may, for 2016 at a very good rate compared to the market.

And cautiously, we took some advance if I may for our hedging program regarding 2017, and we are now edged on the level of 70% of the flows of 2017 operate, which is much better than the previous one. And the last year, if we extrapolate, when we extrapolate present currency rate pound versus euro, until the end of 2017, okay. The impact on - conversion impact on our total sales, worldwide sales would be minus-0.2%, so it will negligible and manageable.

Jean-Paul Agon

Regarding the acquisition of IT Cosmetics, with - it’s clear opportunity on the make-up category and the reasons are very simple. Number one, as I said before the make-up category worldwide is on fire. Really in 40 years of - in the industry I’ve never seen the make-up category growing so fast, very fast, I think it’s almost double-digit in Luxury and very high also in Mass, number one.

Number two, we have been very successful with our acquisitions in make-up, we talk about the impairment on Magic and Clarisonic, but on the other end, the success that we have, the business that we are doing with NYX and Urban Decay are - several times ahead of the…

Christian Mulliez

Acquisition business plan.

Jean-Paul Agon

The acquisition business plan for these two brands, so make-up is definitely a very strong bet and very good bet for us. And IT Cosmetics is a brand that is very complementary to the portfolio we had, because it’s very different. It’s not the typical professional very visible make-up, but it’s a complementary positioning. And the growth of the brand, it’s very successful brand on a different target, very successful, very fast growing, plus 56% growth so far. And we intend to keep it that way, so it will definitely be very important in our global make-up portfolio.

Mark Astrachan

Okay. Thank you.

Jean-Paul Agon

Thank you.

Operator

[Operator Instructions]

Jean-Paul Agon

Any more questions. Hello?

Operator

Yes, absolutely, sir. The next question is coming from [Astried, Winterland Directive] [ph]. Madame, please go ahead.

Unidentified Analyst

Hello, good morning. I just have a quick question on Atelier Cologne.

Jean-Paul Agon

Yes.

Unidentified Analyst

It’s probably a small acquisition for you, but you call the deal alternative perfume market. We call it the niche perfume market, which has been - some brands have been growing very fast and I was wondering if you could give us a sense of how many times of sales you had paid for this business and whether it was profitable. You don’t have to give us the sales figure, but at least a measure of the valuation to see how that market is, if possible?

Jean-Paul Agon

Christian wants to answer you.

Christian Mulliez

Yes, unfortunately, the only figure that we are prepared to disclose is the sales figure. So it’s slightly below €15 million.

Unidentified Analyst

15?

Christian Mulliez

Yes, 15.

Unidentified Analyst

Okay. And was it profitable.

Christian Mulliez

That’s the only figure that we disclosed.

Jean-Paul Agon

But the intention is that it will be profitable basically. I think you’re right to say that it’s interesting for the moment, niche market. It’s still small but it’s a rapidly evolving market. And we think that very complementary to the fragrance business that we have with Yves Saint Laurent, Lancôme or Armani for example or Ralph Lauren. And we thought that it was very important for us to also present on that market. And we think that Atelier Cologne, which is a perfectly bang on trends, should give great opportunity.

Unidentified Analyst

This is your first niche perfume brand acquisition, isn’t it?

Jean-Paul Agon

Yeah, of course.

Unidentified Analyst

And will you be looking at others in the future?

Jean-Paul Agon

We’re going to start with this one first. By definition in a niche you cannot put too many dots. So I think to have already this niche, this brand is already good for the moment.

Unidentified Analyst

And will you open more shops and develop the brand worldwide.

Jean-Paul Agon

What you do you think?

Unidentified Analyst

Of course, but I mean, could you create pool just sort of niche brands. I mean, this could be the beginning of a series of acquisitions. There are other very interesting…

Jean-Paul Agon

No, the intention is not to create a pool of niche brand. The intention is to - as we have always done, to buy a brand when it’s small and to make it big. In a way, Atelier Cologne is not very - for the moment, in terms of size, it’s not that different from what Kiehl’s, what in 2000 when we bought it. See, Kiehl’s at that time, I think at that time, I think I remember was $25 million, but this one is €15 million, which is not that different.

And Kiehl’s today will be sooner $1 billion. So our strategy is to grow. We don’t like even the idea of niche, because for us a niche brand, a nice niche brand is a brand that becomes big one day. So hope and we believe that this will do what it takes to grow this business, because we think that the concept is clear. There isn’t a growing aspiration for this kind of products. This can be really done everywhere in the world and it’s very complementary to the businesses that we have.

Unidentified Analyst

Okay. Thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question is coming from Pierre Tegner, Natixis. Sir, please go ahead.

Pierre Tegner

Hello, good morning, everyone.

Jean-Paul Agon

Good morning.

Pierre Tegner

Pierre Tegner, here from Natixis. I have just one question on U.S. You are [very into the peak] [ph] and performance there is well and so on we understand fully why. But my question is more referring to the drivers beyond that. You have innovation there and you have great portfolio with make-up. But is there also an improvement of operational efficiency in the way you drive innovation, in the way you drive the diversification of this operational channel? Could you elaborate a bit on the many changes you have probably put in place in the way you are business in U.S.?

Jean-Paul Agon

Okay. You are right that when we are successful, it’s mostly - that’s very importantly due to the operational efficiency. But what is true is that - let’s take it market-by-market. So if we start with luxury, definitely today we have a very good brand portfolio, very well adapted to the American market and by the way very well-adapted to other markets too. But in America very well adapted with a strong brand like Lancôme, emerging brands like alternative luxury brands like Kiehl’s or Urban Decay and now with IT Cosmetics.

And also our luxury brand that are still, but collectively small in the U.S. and that have a big potential, Giorgio Armani and Yves Saint Laurent. So the portfolio is very - I think very, very adapted to the market. And the team is doing a pretty good job. So we are gaining market-share.

On mass, it’s a bit of the same, except that there it’s more a portfolio of innovations and initiatives. As I explained in my presentation, we are really taking full benefit of the boom of make-up, because we are the best portfolio of brands on make-up. It’s been Maybelline, L’Oreal Paris, Essie and now, NYX Professional Makeup, which has multiplied business by two in this first six months.

We have taken good initiative also in hair color, hair color was a big drag and thanks to the new initiative that we have taken it’s positive. We have of course taken strong initiatives in hair with the launch of Ultra Doux, we call there, Whole Blends. So all in all, the portfolio of innovation and initiatives and brand is really helping. And it’s true, so the team is doing a good job. They are very well advanced in terms of digital communication, so they are maximizing also the digital opportunity and it shows that the mix of all that can be extremely powerful.

I was reading the latest Nielsen figures, banner figures yesterday and then the latest four weeks we are growing plus-7% when the market is plus 1 or 2, something like that. So it’s immense. It’s very strong.

Pierre Tegner

Okay. Thank you.

Jean-Paul Agon

Thank you.

Pierre Tegner

Thank you.

Operator

The next question is coming from Chas Manso, Société Générale. Sir, please go ahead.

Chas Manso

Yes, good morning. Three questions for me. One, could you give us an update on Whole Blends, you’ve mentioned it several times and the good reading you’re getting from that? What’s sort of impact has the launches Whole Blends had on your U.S. hair care business market share growth? And whether you’ve had the same level of success with Whole Blends, well, to do in your other key launch markets.

The second question would be a rather vague question really about small brands. If you can, give us an update on competitive intensity, particularly from small brands versus big brands? I think a quarter ago you were talking about reorganizing your business that you capture local trends faster and exactly what that involve and how well into that process are you?

And the third question would be on e-commerce, this whole question about how substituted or incremental it is. Do you feel that e-commerce is becoming more incremental to your overall growth? And also in theory, it should be margin enhancing, but I just wanted to confirm that that is actually the case. Thank you.

Jean-Paul Agon

All right, so let’s start with e-commerce. E-commerce is really now a very important part of the business. As I keep explaining to our teams, e-commerce is not the cherry on the cake. It becomes the new cake. And for example, I think that Sophie will correct me if I’m wrong, but I think that e-commerce in this first-half was more than one-third of the growth of the market. So definitely, the market is growing also thanks to the transformation of it into more and more e-commerce.

So at the same time you cannot say that e-commerce is totally additional to normal market, because at the end the market is still growing between 3.5% and 4%. And it makes sense. If you want to wash your hair, you’re going to - you’re not going to wash twice more your hair if you buy one shampoo in a store and one shampoo in e-commerce. So it’s more transformation of the purchase. It may stimulate a little bit the consumption of make-up for example. But all in all, we have to see it as a new channel in which we want to take the lion’s share. And that’s what we are trying to do.

And have you seen - as you have seen the e-commerce at the end of June is - has grown 33%, when the market was growing only 20%. And it’s now almost 6% of our sales globally, which is very important. So it will keep growing like that year after year. Is it clear?

Chas Manso

Sure, is it margins enhancing?

Jean-Paul Agon

But it’s - Christian, what will you say?

Christian Mulliez

I would say like, Chas, theoretically, yes. But it’s very difficult, if not impossible to know which proportion of our [stated expenses] [ph] should be allocated to traditional as the retail and which proportion should be allocated to e-commerce. In the same time, e-commerce started when five, six, seven years ago and our margins are constantly bit up over the last five or six years. So there may be some correlation.

Jean-Paul Agon

To say it differently, we are pretty happy regarding the margin when we develop e-commerce.

Chas Manso

Okay.

Jean-Paul Agon

Yes, because it’s pretty easy to understand. Now, if you compare - I also give the example of luxury. If you compare, for example, everything we have to do to sell for brand in the traditional channel, for example with counters, with BAs [ph], with samples, with purity [ph] materials, with all that. When you sell it on e-commerce, definitely the cost is much lower. So all in all, if we do it well it should be margin enhancing. So that’s the first question.

Second question, Whole Blends, it’s going pretty well. The Whole Blends as you know is in fact Ultra Doux as we call it in Western Europe is extremely successful, has been extremely successful for many years in countries like France and Italy. I think in France now it has a market share of something like 15%, Italy the same. So it has become - it is the most successful hair care line in the country where it was launched several years ago. So now, it’s the globalization of the brand. And of course, we have high ambitions, because we just believe that it sits perfectly with consumer’s expectation of today.

It’s ingredients, natural, for consumers that aspire to natural products. I mean, it perfectly fits their aspirations. And small brands, we still see everywhere that - not everywhere, but many countries that small brands are still dynamic, but now we know why because they are on this trends. And as I explained before our strategy is just to be also on this trend. And that’s why we are doing so well with NYX - the success NYX is absolutely unprecedented.

Again, in my 40 years at L’Oreal I’ve seen a brand that’s growing that fast, and not because we push it like crazy, but just because there is a huge consumer aspiration for this brand everywhere in the world and why, because NYX is just spot-on what Millennials in term of make-up. We think that Ultra Doux is spot-on what consumers expect in hair care.

We believe IT Cosmetics will also be spot-on what another segment of consumers want, same for Atelier Cologne and same we think also for the little brand that we are planning to acquire of skin care in France that could be also an interesting idea. That is perfectly on track.

Chas Manso

Can I just try and squeeze out of you what’s the impact of Whole Blends on your U.S. hair care market share?

Jean-Paul Agon

But for the moment it’s still limited, because just as you know I think that we started the selling in March-April. So it’s just a beginning. So honestly, we’re going to see the real impact in terms of market share in the second-half and it is in more seriously one year from now, but with the first result that we have seen and show that where it’s launched. Whole Blends already can achieve between 3% and 4% market share in the stores, which is pretty good.

Chas Manso

Okay. Thank you.

Jean-Paul Agon

But hair care is a long battle anyway. So we have to be patient. Ultra Doux, the Whole Blends of France, it took it 20 years to reach 18% market share. But at the same time it fuels the organic growth year after year. So the good thing with Whole Blends I think it’s not just pipe, the Europe to launch, because it fits the aspiration of consumers it should fuel the organic growth of our consumer division business year after year. And by the way, I want also [to point you to] [ph] straight the fact that the consumer division as we said is really accelerating.

We said one year ago and we repeated it in February that our ambition and plan was really to accelerate the growth of the consumer division. That’s exactly what we are doing. It accelerates quarter after quarter. And we still believe that it should be the case until the end of the year.

Chas Manso

Okay. Thanks.

Jean-Paul Agon

And now we are back to market share gains, which mean that we are growing faster than the total market, including the small brands.

Chas Manso

Thank you.

Jean-Paul Agon

Françoise, maybe cut there?

Françoise Lauvin

Yes, that was your last question.

Jean-Paul Agon

So thank you, thank you very much to all. I think that all-in-all this first-half was pretty solid with a nice acceleration, maybe not as big as we expected, but mass acceleration of the growth of the divisions; a very nice of also the consumer division as I just said; nice acceleration also in North America and also rest of the world. And in fact, the only real drag on the business in this second quarter was France. But unfortunately there are many reasons for that.

And as we said also we are confident for the rest of the year, because we have many initiatives. There are some comparative that should be also we think this year. And we keep our objective to accelerate the growth in the remaining half of the year.

Thank you very much and we wish you a great summer.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.

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