L'Oréal's (LRLCY) CEO Jean-Paul Agon on Q2 2018 Results - Earnings Call Transcript

|
About: L'Oreal Co. ADR (LRLCY)
by: SA Transcripts

L'Oréal Co. (OTCPK:LRLCY) Q2 2018 Earnings Conference Call July 27, 2018 10:00 AM ET

Executives

Françoise Lauvin – Head-Investor Relations

Jean-Paul Agon – Chairman and Chief Executive Officer

Christian Mulliez – Executive Vice President and Chief Financial Officer

Sophie Gasperment – General Manager-Financial Communication and Strategic Perspective

Analysts

Fulvio Cazzol – Goldman Sachs

Celine Pannuti – JPMorgan

Rosie Edwards – Berenberg

Marion Boucheron – Raymond James

Mark Astrachan – Stifel

Chas Manso – Société Générale

Eva Quiroga – Deutsche Bank

Robert Ottenstein – Evercore

Françoise Lauvin

Good morning to all. Welcome to L’Oréal’s Conference Call for the Release of the First Half 2018 Sales and Results. Hosting this conference today are Chairman and Chief Executive Officer, Jean-Paul Agon.

Jean-Paul Agon

Good morning.

Françoise Lauvin

CFO, Christian Mulliez.

Christian Mulliez

Good morning.

Françoise Lauvin

And General Manager of Financial Communication & Strategic Prospective, Sophie Gasperment.

Sophie Gasperment

Good morning.

Françoise Lauvin

The press release detailing our results was sent out yesterday at 6:30 PM. So to start the call this morning, Christian Mulliez will present the financial highlights of the first half. After his financial introduction, Jean-Paul will review the main developments of the past semester and share with you his strategic perspectives. After this presentation we will of course be available for your questions.

The presentation materials showing during the call can be found on our website where they can be downloaded. They can be seen also on L’Oréal’s finance app. A replay of the call will be accessible later today on the same website and app. The French and English versions of the half year financial report will be available in the course of the next week. I wish you a good conference.

Let me now hand over to Christian for the presentation of the financial results.

Christian Mulliez

Thank you, Françoise and good morning, ladies and gentlemen. The presentation of the L’Oréal’s financial results for the first half would include information about sales profit and then cash, cash flow. Sales, consolidated sales amounted to €13.4 billion, up by 7% at constant exchange rates, plus 6.6% like-for-like and minus 0.2% reported. Change in the scope of consolidation was positive at plus 0.4%. This comes mainly from the acquisition of CeraVe in the U.S. in March 2017.

Currency impact is negative at minus 7.2%. Note that extrapolating from the end of June currency rates against the euro that is with the euro at around $1.16 until year-end, would lead to a negative currency impact of minus 4.3% on full year sale. Currency is stable shows invoicing currencies of the group's main countries, the euro appreciated against most currencies in the first half of 2018 compared with first half of 2017. Among the main changes, the U.S. dollar weakened minus 10.6%. The Russian ruble declined by 12.8%, also Brazilian real dropped 16.9%.

Like-for-like sales by division, the sales of the Professional Product Divisions are increased by 1.6%, market remained difficult in Western Europe and sales improved in the United States, in Asian and in Latin America. Consumer Products posted growth of plus 2.5% in the first half. The new market accelerated especially Asia, while Western Europe turned out to be more difficult partly because of the clear slowdown in the UK.

L’Oréal Luxe at plus 13.5% is achieving sustained growth in a very a lively market. Year two, there were good performances in the new market especially in Asia and in Travel Retail.

Active Cosmetics at plus 11.4% performed very strongly across all geographies. By regions, Western Europe came out at minus 0.8% like-for-like with the second quarter that was more difficult than the first. North America at plus 3% with the second quarter of slightly above the first quarter and the new market grew very strongly at plus 15.2% with an acceleration compared to the first quarter.

Note the record growth level in Asia plus 22%. This region Asia now represents a proportion of our sale equal to that of America – North America the same size, the P&L. We’ll begin by analyzing gross profit. Gross profit at €9.8 billion has come out at 73.1% of sales compared with 71.8% in the first half of 2017 representing an improvement of 130 basis points.

FX, foreign exchange impact including both translation and transaction came out positive at plus 60 basis points. The impact of changes in the scope consolidation was not significant, overall, therefore gross profit excluding scope and currency impacts improved by 70 basis points. Research and development expenses increased by 5.2%, the relative level increased slightly to 3.3% of sales. Advertising and promotion expenses came out at 30% of sales above the first half 2017 figures of 29.2%. This increase results from the decision to take advantage of the high level of gross profit to invest in supporting our brands, particularly in Asia.

Note that the ongoing digitalization of our media spending is continuing with the digital complementary presenting 42% of the first half 2018 total, compared with 35% last year. SG&A at 20.5% of sales have come out 10 basis points below that over the first half of 2017. At constant exchange rate, it would be down by 30 basis points. This is a result of constant productivity force in organization partly offset by the acceleration of digital and of the boutiques component for some of our brands.

Overall, operating profit at €2,576 million has grown by 1.8% an improvement of 30 basis points and amounted to 19.2% of sales. At constant exchange rate, the operating profit would have increased by 8.1%. Profitability by division, at this stage every year we point out that the L'Oréal Group is managing on an annual basis and that half-year operating profit cannot therefore be extrapolated for the full year.

I would therefore limit my comments to the following. In the first half of 2018, the profitability of Professional Products rose from 18.4% to 19.2%. Consumer Products profitability increased from 19.8% to 20.8%. So profitability of L’Oréal Luxe remained stable at 23.4% reflecting the strong level of our investment in this division particularly in Asia. The same applies to Active Cosmetics with the profitability of 26.5% in the first half slightly below the level of 26.7% of the first half of 2017. Active Cosmetics is continuing to finance the rollout of CeraVe.

Our non-allocated expenses consisting mainly of corporate and fundamental result expenses increased by 20 basis points; from operating profit to net profit, the net financial results was positive at €14 million. For 2018 full year, the net financial result can be anticipated close to zero all other things being equal. Sanofi dividends amounted to €358 million. Income tax amounted to €646 million, representing a tax rate close to 22% below the rate of the first half of 2017, which was 24%.

As announced in February this year, this reduction is mainly the result of the lowering of the tax rate in the U.S. And for the full year of 2018, we can confirm the tax rate slightly above 24% all other things being equal.

Net profit excluding non-recurring items amounted to €2,500 million, up by 5.2% and the corresponding EPS comes out at €4.08, up by 5.3%. For the full year of 2018, I can confirm that our objective is to achieve significant like-for-like sales growth, an increase in our profitability. Lastly, to help you in estimating EPS for the full year, I would recommend that you base your calculation on a diluted number of shares of 563 million.

Change in the currency rates impact significantly on our performance indicator in the first half of 2018. The detailed figures are provided here line by line. At constant exchange rates, our operating profit increased by 8.1% and our EPS by 10.7%. We will now complete the review of the consolidated P&L after taking into account our limited amount of nonrecurring items, €25 million, net profit comes out at €2,275 million, an increase of 11.7%.

Cash flow. Gross cash flow, amounted to €2,800 million up by 5.5%. The change in working capital has increased significantly, which happens every year in the first half, particularly because of the impact of the seasonality of part of our business on trade receivables. Over full year 2018, the change in working capital should increase around €200 million compared with 2017.

CapEx at €780 million, represent 5.8% of sales over the full year that should reach about 5.5% of our sales. Operating cash flow came out at €1,568 million, slightly below the first half of 2017. And finally, after payment of the dividend, share buybacks and the acquisition of Stylenanda in Korea, Pulp Riot in the U.S. and Modiface in Canada. The residual cash flow amounts to minus €1,490 million an improvement of €460 million compared with the first half of 2017.

The balance sheet is particularly solid with shareholder’s equity of €24.3 billion and financial situation is very robust as net cash came out at €363 million after payment of the annual dividend in April amounting to €2 billion.

And I'll now hand over to Jean-Paul.

Jean-Paul Agon

Thank you, Christian. Good morning to all. As you have seen L'Oréal delivered its strong first half like-for-like growth of 6.6%, combined with an improvement of 30 basis points in operating margin, reaching 19.2% and an increase of plus 5.3% in earnings per share, which equates to plus 10.7% at constant currencies. I will now give you some insights on market dynamics under the performance of our divisions and then focus on the strategic making of the results and finally share with you our perspective for the rest of the year.

First a few words about the market in this first half. The beauty market keeps growing at a very healthy pace. Our estimates show a growth of around plus 5% year-to-date slightly higher than last year and at the top end of the projection we shared with you back in February.

The beauty market is also very contrasted between channels, regions, categories and at the same time, clearly Premiumising. Two sectors are accelerating, luxury reaching double-digits and strengthening the growth of the market with particularly high pace in Asia and Travel Retail and Dermo-cosmetics underpinned by the rising aspiration for health and for safety.

Meanwhile, the most market remained subdued and Professional continues to lag. In terms of regions the market in Western Europe has been deteriorating with the marked slowed down in the UK, adding to the ongoing challenges in France. Whereas in Asia, China remains very strong and in Travel Retail the market is accelerating further. The evolution by category confirms what we had anticipated and as you may remember shared with you early on, makeup has decelerated. But Skincare has definitely picked up across all sectors and now contributes to around half of the global market growth. And finally, e-commerce continues to develop very fast above 20% – plus 20% for the third year in a row.

Turning to our H1 performance, we have achieved plus 6.6% in like-for-like. Sales ahead of the beauty market, L'Oréal Luxe at plus 13.5% outperformed luxury market once again. Lancome, Yves Saint Laurent, Armani and Kiehl, the four biggest brands of the divisions are forging ahead. They’re all growing at above mid-teens with iconic successes, such as Génifique breakthrough innovations like YSL Vernis À Lèvres Holographics and Beauté as well as compelling long [indiscernible] and Armani To Go.

L'Oréal Luxe is particularly strong in Luxury’s most dynamic region Asia, where the division has built highly attractive brands. In China, specifically, where Lancome is already the number one Luxury makeup brand, L'Oréal Luxe reaffirms its leadership. On the other side of the planet, our most recent acquisition ECosmetics has now become the number three Luxury makeup brand in the U.S. And the launch in the UK is off to a promising start.

Let me also underline the digital vitality of L'Oréal Luxe, one of the most telling example is China again, where following the spectacular launch of Armani and YSL and Tmall e-commerce now represent close to 20% of our sales. Finally, another highlight of the first half of our Luxury division has been the agreement with Armani last March to renew our license until 2050, as well as the signature in May of the worldwide long-term license agreement with Valentino for fine fragrances and luxury beauty. Active Cosmetics too is growing double-digit, twice the pace of the Dermo-Cosmetics market. All major brands are contributing to this excellent performance and all regions are outperforming the market.

La Roche-Posay number one dermo-cosmetics brand worldwide has continued to innovate with Genifique, SkinCeuticals the premium integrated skincare brand keeps spending very fast and Vichy Mineral 89 capturing the essence of the brand is a worldwide hit.

CeraVe the number one U.S. Dermatologist recommended moisturizer brand has been achieving striking share gains in its whole market and the global rollout is only just starting. Active Cosmetics continues to leverage digital to amplify its legacy business model and is growing plus 50% in e-commerce.

The Consumer Products Divisions delivered mixed growth results in this first half with sharp contrast by region. Very good growth in Asia, particularly in China and India, another performance in Eastern Europe and a notable market share gains in the U.S. were hampered by persistent difficulties in Brazil and challenging Western Europe following the weakening of the UK. Despite these challenges both L'Oréal Paris, the number one beauty brand worldwide and Maybelline, the number one makeup brand worldwide achieved strong growth and outperformed the market.

The divisions global brand bolstered the below franchises with successful innovation, such as L'Oréal Paris Revitalift Laser pad and Micro-Essence, Garnier Micellar Sensitive, Maybelline Super Stay Un-Nude and this was complimented by [indiscernible] such as Garnier Hair Food and Color Herbalia, Elvive Dream Lengths and Colorista Hair Makeup. The division also enriches portfolio with the acquisition of Stylenanda, the complementary high-profile Korean makeup brand yet to be integrated.

To wrap up on the Consumer Division, global e-commerce continued to expand rapidly well ahead of the market. The Professional Products Division had a disappointing first half even if except for Western Europe, which did account for around of third of the division sales, all other regions were in growth. Latin America and Asia accelerated, thanks to the pick up in pace of China, as well as a sustained good performance in India.

In terms of innovation, Redken’s iconic Shades EQ and Kérastase Fusio Dose, the champion of personalized haircare are both growing high teens. The Redken Brews digitally activated professional grooming range at millennials is off to an excellent start.

Globally, the division actively based on e-commerce to boost traffic to salon, in parallel to the programs already in place to enhance the customer experience in salon. And the division made the acquisition of Pulp Riot, an American professional hair color at a cutting edge of social media to inspire stylist across the world.

Spending all divisions, our Travel Retail business continue to excel delivering plus 27% growth. Our know-how on our leadership in this high potential channel accounting already for almost 5% of the global beauty market is a strong competitive advantage strategic for both image and growth of our brand.

Last and major highlight of the performance in H1 our ability across the group to leverage our digital edge brought to live by our 20,000 up scale tenants and our 2,000 digital experts. Digital now announced to 42% of our media spend managed within underwriting focus on ROI. We engage more than 300 million followers on our social sites and crucially, our e-commerce business continues to flourish expanding plus 36% at the end of June and reaching 9.5% of our sales.

All divisions and all zones outperformed their respective market with leading positions in the most digitized market and pioneering [indiscernible] initiative. The acquisition of Modiface in the first half is also a major milestone in transformation of L'Oréal into a digitally augmented beauty company.

Next, I would like to draw your attention to the liquidity of our results, our financial results. We have delivered in H1 a further improvement of our operating margin reaching 19.2%. But I would like to underline strategically is the making of these results. The very strong improvement of 150 basis point gross margin and the reduction of our SG&A of 10 basis point have allowed us to both deliver and increase in profitability and at the same time sustain of significant investment in R&I critical for innovation and trigger additional brand building investment to strengthen our positions, extend our winning streaks, accentuate our leadership and fuel our future top line growth.

All in all, after this dynamic and profitable first half we are looking to do rest of the year with confidence. The beauty market should continue to grow at a good pace probably around 5%. Our H1 innovations will be deployed in full and our H2 launch plan is significant across divisions. Our two driving forces e-commerce and travel retail will continue to accelerate and propel our business. And of course, our proactive enhance brand building investments in H1 will fuel the growth of the group in H2.

To conclude despite the economy concurrency ongoing volatility our strong pace of growth and the quality of the first half results reinforce our confidence in our ability to outperform once again the beauty market in 2018 to achieve significant like-for-like sales growth and to deliver an increase in profitability.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Fulvio Cazzol from Goldman Sachs. Sir, please go ahead.

Fulvio Cazzol

Yes. Good morning, gentlemen and thank you for taking my questions.

Jean-Paul Agon

Good morning.

Fulvio Cazzol

Morning. So my question is on the A&P spend. Clearly it’s increased quite significantly in the first half. Even through the course of 2017, you had that increased. I’m just wondering how do you judge the right level of spend. I mean, clearly your organic growth speaks for itself. How high would you be willing to go if your gross margins continue to expand from these levels? And how do you ensure that you’re getting the right bang for your buck, let’s say, in terms of getting the growth for the investments that you are making. Thank you.

Jean-Paul Agon

Thank you very much. It’s a good question. In fact as you know, first we are really managing our company long-term. And secondly, we are clearly and we are one of the very few clearly also managing the company with a priority on the top line. And so our real priority is to be able to find the right balance between consistently and steadily increase our profitability. But at the same time do what it takes to accelerate our growth.

And I think that by the way the first half of this year shows that it works. We accelerated significantly our top line growth compared to last year. And at the same time, we are able to of course, to increase profitability. So the investment that we did this first half in term of A&T was absolutely deliberate. And we believe that it will be a very good investment that we should see some good proof of acceleration of supply in the next quarters.

Fulvio Cazzol

Thank you for that. And I know that you’ve increased investments and you flagged on the conference call that a lot of these have been directed to Asia-Pacific luxury. I mean, of course, that business is already growing very quickly for you. So what are you hoping to achieve with these investments? Is it more to sustain this high level of growth for longer or is it to even accelerate it even further?

Jean-Paul Agon

First, it’s not only for luxury in Asia. Of course, we're enlisting honestly on luxury in Asia is probably today the best investment you can do in terms of return on investment. The upper-class and the upper middle-class will double in the next 20 years or even less in Asia. And to invest today on this millennials, on these new consumers in China and Asia in general is definitely for our brands really fantastic investment.

But it’s not the only – and that’s why by the way we have become the number one luxury beauty player in China that’s how we have become the number one beauty brand with Lancome. So it’s really working. And again, the RIs is very good. But it’s not only luxury in Asia, first, it’s – of course, luxury everywhere because the luxury markets right now is booming and it’s very important to entertain and to sustain this development and it’s growth.

But it’s also investment in Active Cosmetics and you have seen that this also is a good return on investment, we are investing in our strategic brands like LaRoche Posay, Vichy, like SkinCeuticals we are deploying CeraVe across the world, which will be also I think a very productive investment. But we are also investing on our other divisions like the consumer division because we believe and I believe that there we will see an acceleration of our businesses, of our market share gains and that this investment is critical.

Fulvio Cazzol

Got you.

Jean-Paul Agon

Thank you.

Operator

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

Celine Pannuti

Yes. Good morning, everyone. Sorry, I have several questions, I don’t know whether I should give them one by one. But I just want to rebound on what you have said now and as well early on. You said that your proactive A&P investment to fuel the growth in H2. So how should I read that? Do you mean that the growth will accelerate in the second half given those A&P investment?

Jean-Paul Agon

If we invest like we do in order to get some return. So we hope that we’ll see a nice growth in H2. I don’t know – I don’t want – I’m sure that you would love to get the guidance and of course you know that you will not get it. But if you want to read my hope it’s clear that we are hoping to see some return of this investment.

Celine Pannuti

All right. Then my second question is on the numbers you give on the market and I know your ambition is to grow faster than the market. So in terms of consumer you said the market is growing at 3% to 4% but you are clearly are not growing as fast as the market in your consumer division. I understand that, it seems that France and the UK may have weighed in the equation into Q2. But when shall we see that return to at growing the consumer market coming true. And then I have another question.

Jean-Paul Agon

All right, okay, no problem. Clearly we are not happy with the growth of the consumer division in this first half. We think that we are – everything it takes to outgrow the market and clearly the ambition for the consumer division is to get back progressively but soon to a rhythm of 3% to 4% or even 4%. It’s true that we think that on this first half there were several local reasons for some weaknesses. We are still suffering in Brazil in this first half, but we think that it should improve in the second half. Are you still with us?

Celine Pannuti

Yeah, yeah.

Jean-Paul Agon

Very good. And Western Europe, we are one of two markets where we deliberately did some changes in commercial conditions and that like Italy for example and we think that the growth that we will get in the second half will be a little better. So I think that we will see an improvement of the growth of the consumer division and progressively but surely. This is definitely – we definitely want to get back to the group performing of the division on its market.

Celine Pannuti

All right. So does it changes in Italy or in Western Europe for that Q2 specific or will they be a little over in the next quarter.

Jean-Paul Agon

No, it was – I would say a H1 specific.

Celine Pannuti

All right. And then my last question would be on the overall makeup of the P&L. Gross margin was very strong. If I remember correctly, I think when top line accelerated by 5%, I think the operational leverage should really showing the P&L. Is there any reason to believe that the gross margin progression should not continue in second half and A&P investment? Are you done for the – not done better? Do you think that was an extra investment in the first half or shall we expect H2 to see the some rhythm of investment in A&P. Thank you.

Christian Mulliez

Jean, you want to answer this?

Jean-Paul Agon

Yes. On the gross margin, I can give you some details on H1. It increased by 170 basis points as you have seen 60 of them because all thanks to FX, for the rest, 70 basis points. Three main drivers have contributed. And the positive side improvement of our industrial performance productivity, improvement in the mix, thanks to the premiumization and I can give you figuring that I did, I gave during the presentation. 80% of our sales growth – 80% of over sales growth comes from value, more value-added product, which, of course, had a positive impact on the gross margin.

And on the negative side, one driver – driver if I may, which was deterioration of some raw material costs and logistic costs in the U.S. So for the total year, of course, it’s difficult to extrapolate anything, but it shows that we will have a good gross margin improvement for the total year considering the improvement of the first six months, and we will keep on making progress as far as the industrial performance is concerned and we will keep on adding, of course, positive impact from the premiumization of all brands.

Christian Mulliez

Okay.

Celine Pannuti

And what about the A&P reinvestments in H2 versus H1?

Christian Mulliez

We will see but again, as I just said before it is still valid. Priority for us is to fuel the top line and, of course, at the same time deliver an increase of profitability and we try to manage both every year as well as we can.

Celine Pannuti

Thank you very much.

Jean-Paul Agon

Balanced way in the interest of all brands and all our shareholders.

Christian Mulliez

And in the interest of the long-term, which is very important. We have seen some other cases where short-term interest drives to strong increase of profitability and strong decrease of fuel with very clear results of strong deceleration of growth and destroying the power of the brands. So we don't want that to happen to our brands on the country. Okay?

Celine Pannuti

Thank you.

Jean-Paul Agon

Thank you.

Operator

And the next question is from Rosie Edwards from Berenberg. Madam, please go ahead.

Rosie Edwards

Good morning. So first question on Travel Retail. Clearly, very strong growth driver. Is it too simplified to believe that growth is a big way to Asia? Or is it a global trend to truly you seeing across U.S. and Western Europe as well? And then specifically, with the Asian Travel Retail, which countries do you think you have your strongest position? I’m assuming – sort of global kind of travel hubs. But would you say you are well distributed within China domestically as well?

Jean-Paul Agon

I will not give you all details of our Travel Retail business because I'm sure that some competitors would be very happy. Just to tell you that Travel Retail has become a very strong engine of growth for us. It's going to do very soon €2 billion. It's going to be pretty soon 10% of our sales. It's a major element of business, number one. Number two, it's growing very strongly, plus 27%, as we said. This growth is clearly coming from Travel Retail Asia. Obviously, and it's clearly also coming mostly from Chinese travellers. And these Chinese travellers as you know they travel in many places. They travel to Hong Kong. They travel to Thailand. They travel to Korea. They travel everywhere. And as we are the leader of this channel, we're able to meet them everywhere they are.

And we are also developing all our brands but what is important also is that Travel Retail for us now has been strategized and is not anymore only an opportunity for the Luxury division. As you know we are pushing many of our brands in Travel Retail. L'Oréal Paris, but also [indiscernible] for professional, but also Active Cosmetics. And it has become really for us, recorded six continents. But it's also like another international channel, which is extremely important for the future because we know the perspective of increase of travellers and air travellers for the next 10 or 12 years are very significant.

Rosie Edwards

Okay. And I’ll link it, in Hong Kong, you would say, how much of your business starts from the domestic Hong Kong market?

Jean-Paul Agon

No. But we're very good in Hong Kong, and I can just tell you that the business in Hong Kong is also growing very nicely. In Hong Kong itself, we are at plus 40% of our business – 40% growth in business, which means that clearly, there is a lot of traffic in Hong Kong and we are definitely taking advantage of it. Thank you.

Rosie Edwards

Okay. Sorry, could I have one final question, just out the BRIC's growth?

Jean-Paul Agon

The BRIC's growth.

Rosie Edwards

Yes.

Sophie Gasperment

So the BRIC's growth. So starting with China, which is the most important country for this BRIC growth as you have seen Asia was up 22% in the first half. So China I would say cannot be very different from that. So very high rate of growth. Russia was relatively flattish in this first half. Brazil declined. The situation is very tough in Brazil. And India grew almost mid-teens.

Rosie Edwards

Okay, thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question is from [indiscernible]. Sir, please go ahead.

Unidentified Analyst

Hi, good morning everyone.

Jean-Paul Agon

Good morning.

Unidentified Analyst

I have – how are you? I have two questions. One is understanding the kind of A&P spend in Luxury in and active that you feel that you lay the ground for the second half. If you can help kind of like understand without revealing anything competitive, what are the spending on e-commerce? Is this something that how is this spending going to have this duration into the second half, if you can explain that?

And secondly, if you can give us more color in China. Mostly the contrast between Consumer and Luxury and also geographically, we have heard a lot about consumers from Tier 3 and 4 cities having access to online and whether you can comment whether the consumer division is a stronger in this Tier 3, Tier 4 cities or vice-versa. I just would like to know whether the growth by division within online basically whether online is paving the way for both Luxury and Consumer into these less developed cities in China? And I have a follow up then. Thanks.

Jean-Paul Agon

Yes. Honestly, it's a very, very, very detailed question. So I will just give you some global information. First, China. We are enjoying as Francoise was saying a very strong growth – pretty strong growth in China. And a very good thing is that this growth is really across division, of course, the fastest growth is in Luxury. And that's why by the way as I said before we're investing in A&P on Chinese millennial is very strong and strategic investment that the best investment we could do. But it's also very nicely, I would say for the first time in many years, a very strong growth also in mass.

We are double-digit growth – more than double-digit growth in mass market, which is recent gaining market share, very good growth also in Active Cosmetics, very strong gaining market share again and even finally great growth also in Professional. So really China for us today is best example of success across division, market share gains across divisions and definitely, we are building their very, very bright future because it's very clear that the Chinese market is becoming one of the very, very first market of the world.

And that this preparing new generation of young Chinese for our brands is extremely strategic. And based on my trade there and my discussions with our teams, it's really also across the regions. Now also thanks to e-commerce, this distinction between Tier 1, Tier 2, Tier 3 is less and less relevant. Because the consumers from all over the country can have access to e-commerce and they do. They can order Lancôme product may be – product L'Oréal Paris product. And this is also I think one of the acceleration of the business. So that's what China and for A&P, we are managing the A&P first as well as we can and we are very pragmatic and we want to keep investing of course, in order once again, to fill the future growth of our division, so we will invest in Luxury, Active and also in Consumer.

And this investment will be across the board, of course on the communications of the brand being normal fact, traditional communication or digital communication. We will invest in terms of point of sales, in terms of e-commerce. We are strengthening the – I think the fundamental idea that A&P is not for the short term result. A&P what we want to do is to strengthen our brand in order to be able to build a sustainable acceleration of our top-line.

Unidentified Analyst

An d also in China if you don't mind. Could you tell us basically which categories because you mentioned skincare coming back? So if you can mention either for China and entire company basically roughly whether your growth – not category growth – whether your growth how that stands versus a 6% like-for-like and versus the 20 something in China. Is it makeup as strong as you sense it would be in the first quarter? Is it now all of a sudden skincare. You can help us understand.

Jean-Paul Agon

I will – yeah, I will. So globally for the company as we talked – first the market as we said for the market globally skincare is back. And by the way, it's nice news. I remember one year or two years ago when many were skeptical and were saying makeup is growing strongly, but what will happen when makeup would decelerate and at that time we told you that when makeup would decelerate something as well will accelerate. And in fact, it just happened like that. Makeup has been decelerating. Makeup market it's probably between plus 5% and 6%, but now skincare is accelerating very nicely, probably above makeup.

And for us, it's even stronger. Makeup is our growth and makeup is on average with the market, but we are growing almost twice the speed of the market for skincare, which is really good. And I would say that in China, it's even more clear because as you know China is the number one skincare market in the world. It's the number one priority for Chinese women, skincare is the number one priority, and skincare is clearly strongly accelerating in China. But, of course, other categories are growing too, but skincare has become the priority, which is great because we are very, very strong skincare player worldwide and especially in China.

Unidentified Analyst

And hair care and fragrances remains something you would imagine.

Jean-Paul Agon

Well, they're not too bad. Yes, they are mid – as you said there’s no doubt, low single digit.

Unidentified Analyst

Thank you very much.

Jean-Paul Agon

Thank you.

Unidentified Analyst

Yeah, thank you.

Operator

The next question is from Marion Boucheron from Raymond James. Madam, please go ahead.

Marion Boucheron

Hi, good morning everyone.

Jean-Paul Agon

Good morning.

Marion Boucheron

I have three questions. One, on the Luxury market. You believe the current growth rate is I mean sustainable for the market overall and you expect to remain in this way, the same way and also could you give us some favor on how Chinese consumption have evolved in the past semester? Then on Active Cosmetics, how do you attribute the acceleration we have seen in the past quarter after growth for L'Oréal? And how do you see this year coming? And then may be Christian could command on ForEx for H2 and probably what would be the best guess of an impact for a profitability?

Jean-Paul Agon

Okay, that's very precise. So Luxury markets, as usual, we don't have a crystal ball. So the only thing I can tell you is that for the moment we see absolutely no slowing down of the growth of the Luxury market. And especially in China, the latest – even the latest months or weeks have been still pretty strong. And we know it's also linked to what I said before, I mean, there is, the emergence in China of very strong upper class or upper-middle-class. And the difference is that now millennials from this middle and middle upper class are absolutely not hesitant to buy luxury brands.

A young Chinese 20 years ago, could start with the mass market makeup and now she does not hesitate to start with an Armani or Essenza makeup product. And so that really fuels the growth of the market. So for the moment, we think that this is apparently a very sustainable, but for a while, we will see, difficult to know how long, but for the moment, no reason to worry. Active Cosmetics, I think it's the very good number that we have, the double-digit growth of the division is due to two factors.

First, the market itself is good, let’s not forget that the market itself for this category of product is probably between 5% and 6%, which is good, strong and at the same time, it's true that we have a conjunction of very good successful all our brands, last is flying all cylinders. Vichy is back to growth after several years of difficulties. SkinCeuticals is really accelerating and gaining momentum.

This is a very unique brand. There is no brand like that in the market and is really firing all cylinders. And I think the acquisition of CeraVe was also extremely strategic because it complements extremely well the portfolio of Active Cosmetics. And the success of CeraVe in the U.S. market is amazing and the deployment of CeraVe across the world is just starting. So many good reasons to believe that also this high level growth will be sustained in the future. Christian, ForEx.

Christian Mulliez

Yes, it's very simple Marion if we extrapolate until the end of year the FX rate of 230 for example, with the U.S. dollar at 1.16, the impact on the – for the full year should be minus 4.3%, which means something like minus 1.3% or minus 1.4% only have two. And as far as profit is concerned, it should not be that different, it should be somewhere between minus – portfolio of minus 3% and minus 4%.

Marion Boucheron

Okay.

Christian Mulliez

So the good news here is that…

Jean-Paul Agon

Much better than in the very beginning of the year.

Christian Mulliez

Absolutely the currency stays as we are now the situation in the second half will be much better than it was in the first half.

Christian Mulliez

Dollar profile is better. The Chinese renminbi is good than what it was two or three months ago.

Jean-Paul Agon

Okay, all right.

Marion Boucheron

Thank you.

Jean-Paul Agon

Thank you.

Operator

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

Mark Astrachan

Thank you. Good morning everybody.

Jean-Paul Agon

Good morning.

Mark Astrachan

I wanted to ask about Asia-Pacific. So you saw an acceleration in the second quarter versus first quarter? Is it just curious which category is accounted for the acceleration in the first half?

Jean-Paul Agon

Categories?

Mark Astrachan

Yeah.

Jean-Paul Agon

In Asia? No, no…

Mark Astrachan

Accelerating…

Jean-Paul Agon

We are not the bureau statistics for our cosmetics. So, honestly, I can give you some global information, but not the specific categories in specific region. But I can tell you differently the good news of this first half is that the growth in Asia was really across many countries. Of course, China was very strong. Hong Kong as we said was very strong too, but we have saw some very good numbers in India with double-digit in India, good growth in Malaysia across the board we have some very positive news in a share. So we are – as you saw and honestly, it's milestone in the history of the group for the first time ever Asia-Pacific realized, delivered the same sales than North America, which is already totally new for us and this is really accelerating and clearly very, very strategic because as we all know the future of the world is in Asia. So the strengthening of our positions in Asia is honestly a very important news and across – across categories don’t worry.

Mark Astrachan

Okay, thank you. Just, I’m trying a specific – I’m curious on market investments by you by competitors, how much or how do you think about this aggregating growth, I guess if you can between the incremental spend in the category as well as just general market development meaning is that if you cutback on spend over time if sales gets bigger as far as the segment sales of the category market continue to grow at the same rate or sort of how much investments you need to sustain the level – the current level?

Jean-Paul Agon

It’s very important to understand one point, because I suspect that there is this idea in the mind of some of you that maybe you think that we increased our spending, because we have to or because we – it was necessary, what some called the cost of – the cusp of the growth. We don’t see at all this way. The investment that we make is absolutely our own decision. And by the way at the same time you see some other companies that are cutting their investment and by the way we see few quarters later that their top-line is diving.

So it is not at all the cost of growth, it is a strategic decision that we are making to invest on this consumers in order to strengthen our brands to make our brands top of mind, preferred brands, because this is preparing the future. And I would say that even more in – with the development of e-commerce, because e-commerce is even more Darwinian in term of brands and only the brands that have is strong top of mind with consumers – top of mind presence with consumers will prevail. We have seen that, for example, in China, this year and last year is that in fact the big brands on e-commerce are becoming bigger brands. Our market shares online are usually bigger, lot stronger than offline, because of the process is very Darwinian. So we think that it’s very critical now to strengthen our brands. Okay?

Mark Astrachan

Great, thank you.

Jean-Paul Agon

Thank you.

Operator

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

Chas Manso

Yes. Good morning. I have two questions, one on the margin and one on Western Europe. So on the margin it took to bit about the gross margin dry. So I was wondering about the distinction between skincare and makeup in terms of margin. I suppose the gross margin of skin care is higher than that margin. So with this growth shift from makeup to skincare, how much of that is driving the gross margin improvements and maybe the superior growth in e-commerce and sample retail being to the higher gross margin activities as well. So as the margin question, I know at the beginning of the year you said, you expected a nice margin at a 30 bps on the operating margin count is nice I guess.

And the second question on Western Europe, I know you’ve also you touched on this. But this minus 2% OSG in the second quarter, could you sort of give us more color on the biggest moving cause you mentioned the commercial conditions changing in Italy, how big was that in this decline the UK, France or anything else? And it seems as it maybe the time one is a one-off, which will come back. But what is happening to improve matters in the other sort of weaker markets in Europe?

Jean-Paul Agon

Christian, you would want to take the margin question and then I will answer on the Western Europe?

Christian Mulliez

Yes, I think the question, but won’t answer the question just aware of it. We’d don’t disclose the margins by category. We’re already disclosed a lot of things on margins by channels. So on a yearly basis we disclose the margins by geographies. We don’t disclose margins by category, but remember that when that were the time of the boom. The boom of makeup, let’s say from about 2011 to 2016 margin heel it very margin of the booking improved significantly and it’s still on the way to increase again even if we are no more in a cycle, which is pros skincare, so we don’t.

Chas Manso

Sorry, sorry. It’s 30 bps, does 30 bps qualifies nice?

Jean-Paul Agon

How would you answer this question?

Christian Mulliez

We let you find the right adjective for this 30 bps at least 30 bps. So on Western Europe, it’s true that we – to be very honest and sincere we have been disappointed with this growth in Western Europe in this first half, especially because we had a nice history in the past two or three years of sustained strength and growth in Western Europe. So we are not worried. We think that it’s a combination of weakening of the market in some countries and few one-off for us. The market itself we have to say everybody knows is not very favorable, it’s true that UK was much weaker in this first half than it was last year.

That France is still sluggish. And that Italy is not better. So there is no much improvement on the front of the market. And on outside it’s true that in two or countries we had someone one-off. We think that it will get better. So we are really confident. But of course, we should not expect unfortunately to see within Europe, China, Chinese-tide growth. I’d love that, but probably not. But we think that we should be able in the next few quarters to get back progressively to the type of growth that we enjoyed in previous two years.

Chas Manso

Okay. And back into positive seen.

Christian Mulliez

Yes, yes, absolutely, absolutely, because we have very strong position in Western Europe. We have very good teams. We are very well – again very well-positioned. Our brands are strong, our partnership with retailers are good. So honestly there is no reason we are absolutely not right now weakening anything in Western Europe is more temporary.

Chas Manso

Thank you.

Christian Mulliez

Thank you.

Operator

We had new question from Fulvio Cazzol from Goldman Sachs. Sir please go ahead.

Fulvio Cazzol

Thank you for taking a follow-up. I just wanted to get some more color on the UK, why have you seen a slowdown or what drove this slowdown? Is it a market issue, or is it more a market share issue and what’s the plan to restore growth there? And then another quick one, e-com 9.5% of your sales, can you say how much of that is direct-to-consumer please? Thank you.

Christian Mulliez

You want to know so – for e-com…

Sophie Gasperment

Yes, for e-com globally direct-to-consumer is a little bit below one-third of total.

Fulvio Cazzol

Okay, thank you.

Jean-Paul Agon

And UK is definitively a market issue. We are very strong in UK. So there are highs and lows always in term studying clouds, et cetera. So I was recently in UK and I was very happy to see that we have very strong position in all divisions. We are very strong in consumer division. There is a noise behind you now?

Fulvio Cazzol

I’m sorry – I’ll mute.

Jean-Paul Agon

Okay, thank you. So there was – so we are very strong in consumer division, we are very strong in luxury. We are really growing our positions in Active Cosmetics, and it’s one of our best also countries for professionals. So again no weakening at all in UK go-to-market that is clearly less volume that was one year ago. And I’m sure that the reason, one technical reason is that one year ago the level of the pound was so low that many, many tourists were coming to London and to other places to buy products to global shoppers, and it was not the case this year. So the luxury market has been really down.

But also there is a consumer sentiment in UK probably linked to this great history. That is not anymore what it used to be. So the market is not in a great shape in the UK. And on this one I’m not really confident that it will improve pretty soon, but other countries are. I hope that France will improve.

For example, we know that we have a very hot summer in France right now. And I know that the set out of summer that the use of products are being boosted. Germany is still a good market. Spain is getting better. So that there is no major reason to worry about the global Western Europe, but inside Western Europe, definitively UK has been weakening.

Fulvio Cazzol

Right. thank you for the color.

Jean-Paul Agon

Thank you.

Operator

We have a question from Eva Quiroga from Deutsche Bank. Madam, please go ahead.

Eva Quiroga

Yes. good morning. I was wondering if we could come back to the consumer products division and look at it more from a brand point of view, in fact in the press release that there was a lot of mention about the L’Oréal Paris and Maybelline and a lot less about Garnier and NYX. So, can you maybe talk a little bit about that and especially, how you see the Garnier brand at the moment.

And then secondly, I was quite intrigued by your comment that you’re growing in line with the make-up market and quite as fast as the skin care market. I would have thought you would outgrow the make-up market, given that all of your mass market competitors are seemingly losing the plot. So, I would love if you could give a bit of color on that. thank you.

Jean-Paul Agon

Okay. Good morning, Eva, nice to have a question from you. But when we are talking about make-up, it’s the global category, it was not specific to mass market. So, globally, and it’s – these are statistics at the end of June that we communicate in July. So, it’s pretty early yet, so we will give you what we can. But apparently globally speaking around the world, it seems that we are just a little over performing the make-up market. We are clearly over performing the make up market in mass, because it’s true that you’re right that many of our competitors in mass are in disarray. So that there have been many indie brand in make-up across – especially in the U.S. and so we want to be cautious and we estimate that globally speaking, we are slightly out of form in the market. maybe, it’s more than that, I don’t know. But it’s clear that we are outperforming the market in skin care.

So for consumer products division, I see that you split that and it was not very difficult to be honest that we talk about L’Oréal Paris and Maybelline. Not of interest, but important, because you know L’Oréal Paris had been so-so for a few years. And for the first year in I would say five years, L’Oréal Paris is back to a very nice performance of around 5% growth, which is above the market and it’s the number one duty brand in the world. So, it’s a very, very important brand for us and for the market sales. And it shows also that contrary to what some people say, big brands can really perform very well.

Same thing for Maybelline, Maybelline had been a bit week for few years. Maybelline is back. Also Maybelline is the number one make-up brand in the world. And there again, for those who said, big brands are out, it’s a nice demonstration that not at all. Even if you are the number one make-up brand in the world, you can outperform the market.

and so it’s true that we didn’t speak about NYX. NYX to be clear, it’s flat, but you would remember that NYX probably tripled its business in four years. And so you would expect that there would be a plateau moment in the development of this brand. And this plateau moment is happening this year. So, we are not worried. we think that NYX is a very unique brand that there is no other make-up brand like that in the world in mass. the professional artistry brand in mass market is a complete unique positioning and it’s really interesting, hundreds of millions of consumers around the world.

And a brand, which is still a bit disappointing this year is the Garnier. Well at the same time, we have to also admit that Garnier is not present at all in China and of course it’s not helping. And the country is very over represented in Brazil, which again doesn’t help. So, all in all, that’s why we have – in the consumer division, two brands doing pretty well and two brands for the moment having a stability moment. but we are working on it. And the same way that we were able this year to reaccelerate, made it in L’Oréal Paris. We are confident, right work and right innovation and the right everything to be able to reaccelerate Garnier and to keep growing NYX.

Eva Quiroga

Okay, great. thank you very much.

Françoise Lauvin

Thank you, Eva.

Operator

The next question comes from Robert Ottenstein from Evercore. Sir, please go ahead.

Robert Ottenstein

Great. Thank you very much. A couple of questions, first wondering if you could talk about the trends in the cost of digital media, what you’re seeing with that, and then separate from that, the kind of cost in terms of the overall digital supply chain or ecosystem if you will including fulfilment? thank you.

Françoise Lauvin

What do you think Christian about this question?

Christian Mulliez

It will be worth a special conference call, because – it turned already very, very technical matter, which of course will be of a great interest for the people being, or wanted to be shown guest offerings.

Jean-Paul Agon

Anyway for the cost of digital media for us, what we can tell you is that cost of the digital media is very competitive with the cost of traditional media. We are really obsessed with return on investment research and we keep researching – we’re keep eyes in all the campaigns that we are doing on digital media compared to traditional media. And we knew exactly, which campaigns are the most effective, what we should do to make them even more effective. So, I would say that we have really gained in terms of expertise of productivity of the digital media campaign. and we are – I would say that we are probably the best-in-class in terms of that. So, we think that we can master this thing pretty well.

Christian Mulliez

Okay?

Robert Ottenstein

Great. and then just an additional question I realized that this may be a very, very small part of the business today and is somewhat speculative. But in our research on the Chinese market, we are seeing and it’s hard to know how big it is, which is why I’m asking an increased interest in cosmetics from millennial men in China, young men and that they are seeing that why should make-up, why should skin care just be something used by women. And I’m wondering if you’re seeing that it all, is it something that should be on a radar screen and if you have any strategy around it? Thank you.

Jean-Paul Agon

We have a clear strategy around it, because we are the number one player of skin care for men in China. And you’re right, I mean, it’s – we spotted 10 years ago and it’s a very strong market and I have always said that if, for example, in Western Europe and North America, we are pretty disappointed with the lack of interest of men for skin care. It’s absolutely not the case in China. Chinese men are really taking care of their skin. And we are by far the number one in China, with brand growing very nicely. On one side men expand in mass market, which is the number one men’s skin care in mass market brand, and on the luxury side beard and balm [ph], which is there again, the champion of the men’s skin care. So for skin care, it’s very strong honestly for make-up is zero. But skin care is definitely – men’s skin care is definitely something very significant in China.

Robert Ottenstein

Can you give us a…

Jean-Paul Agon

What? yeah.

Robert Ottenstein

Can you give a sense of what percentage of your business would be men in China?

Jean-Paul Agon

10% probably, 10%.

Christian Mulliez

Globally, not in China, but globally.

Jean-Paul Agon

Yeah, 10% a bit more in China.

Robert Ottenstein

Thank you very much.

Christian Mulliez

Interesting, okay. Thank you very much.

Operator

We have no further questions.

Christian Mulliez

Good. Okay. So, we thank you very much for your questions. And we wish you all a great summer and great vacations. thank you. Bye-bye.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you all for your participation and you may now disconnect.