L'Oreal SA

PAR:OR

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the conference call regarding L'Oréal's sales at September 30, 2021. [Operator Instructions] The conference is about to begin. I will now hand over to Mrs. Françoise Lauvin. Madam Lauvin, please go ahead.

[Françoise Lauvin, Head of Investor Relations]

Thank you, Philippe. Good evening to all. [Foreign Language] Thank you for joining this conference call for the release of L'Oréal's sales at the end of September 2021. On behalf of L'Oréal, I'm pleased to welcome our Chief Executive Officer, Nicolas Hieronimus.

[Nicolas Hieronimus, CEO & Director]

Good afternoon.

[Françoise Lauvin, Head of Investor Relations]

And our Chief Financial Officer, Christophe Babule.

[Christophe Babule, Executive VP & CFO]

Hello.

[Françoise Lauvin, Head of Investor Relations]

We hope you received and read our press release, which was sent out a short while ago. Let me briefly share with you the highlights of this release before we move to the Q&A session. At the end of September, sales increased 15.3% to EUR 23.2 billion. The change in the scope of consolidation was positive by 0.8%. It consists mainly of the first time consolidation in 2020 of Mugler and Azzaro Perfumes, of the U.S. skincare brand, Thayers Natural Remedies, and in 2021 of the Prada beauty license and of the Japanese premium skincare brand, Takami, marginally offset by the termination of Clarisonic brand in 2020. Foreign exchange had a negative minus 3.5% impact, mostly linked with the decline of the U.S. dollar, of the Russian ruble, the Brazilian real and the Japanese yen. Note that extrapolating the end of September currency rates against the euro, i.e., with euro at around USD 16 until year-end would lead to a negative currency impact of minus 1.9% over full year sales. On a like-for-like basis, growth came to a strong 18% at the end of September. Turning to the third quarter figures. Sales advanced 13.6% on a reported basis to EUR 7.996 billion after taking account of a positive 0.3% impact of the changes in the scope of consolidation and of a positive 0.2% currency impact, like-for-like growth came out at plus 13.1% over the third quarter of 2020, which was marked by L'Oréal's return to growth. Hence, over 2 years versus 2019 on a comparable basis, growth accelerated quarter after quarter since the beginning of the year, with plus 5% in the first quarter, plus 8.4% in the second quarter and plus 14.9% in the third quarter, leading to plus 9.3% on over the first 9 months. All divisions recorded like-for-like growth, both in the third quarter and at the end of September. The Professional Products Division posted another quarter of double-digit growth and ended the period at plus 28.7%. The Consumer Products Division recorded 5.2% growth over 9 months. The division is almost back to its pre-pandemic level on a comparable basis after a 2-year comparable growth of plus 4% in the third quarter despite its heavy makeup footprint. L'Oréal Luxe continues to outperform its market with 25.4% like-for-like growth at the end of September and Active Cosmetics remains ahead of the race at plus 34.5%. All regions contributed to growth. Europe grew by 10.3%. North America achieved an excellent third quarter and ended the period at plus 23.1%. North Asia posted strong growth of plus 22.6%. In a challenging public health environment. L'Oréal China continued to post double-digit growth in the third quarter, sustaining a high comparable 42.8% growth over 2 years. SAPMENA – SSA increased 13.6%, with the third quarter affected by COVID resurgence in some Southeast Asian and Pacific countries, while India showed a sharp recovery. Latin America sustained its rapid pace at plus 25.8%. E-commerce posted once again strong growth, up 29.7% like-for-like at the end of September, to 26.6% of total sales, while in-store sales also recovered. Meanwhile, we pursued on our sustainability journey. We are proud to announce that in September, L'Oréal has been confirmed as a United Nations Global Compact lead company for the seventh consecutive year and that L'Oréal USA, our largest subsidiary, has reached carbon neutrality for Scopes 1 and 2 emissions for all its 25 manufacturing, distribution, administrative and research and innovation sites. Thanks to relevant strategic choices, strong investments in our brands, offensive launches of cutting-edge innovation and agility of our teams, L'Oréal continues to significantly outperform a beauty market that is gradually returning to its pre-crisis levels. As you can see, all divisions and all regions contributed to a well-balanced growth and a strengthened dynamic. In an environment that is still marked by some uncertainty, our third quarter performance reinforces our confidence and leads us to confirm that in 2021, we will achieve growth in both sales and profits. I thank you for your attention, and we are now ready for your questions.

[Operator]

[Operator Instructions] We have a first question from Bruno Monteyne.

[Bruno Monteyne, Senior Analyst]

Nicolas, it's very hard to come up with scrutinizing questions after such a release. I'm almost tempted to congratulate on the numbers. Now in terms of trying to ask some questions, first of all, there's been a lot of discussion about the slowdown in beauty in China, particularly online. That is hard to see in the numbers you've published, but there's any element of the exit rate in China starting to slow down, particularly online? And the second one, U.S. growth was clearly exceptional. Do you really think that America can be equal in partnering growth as China has been for the last few years, so you would have two big engines of growth? Or is that too much to aspire to?

[Nicolas Hieronimus, CEO & Director]

Thank you, Bruno, for your question. And your quasi-congratulations, I do take it with great pleasure, and I will obviously answer your questions. Just maybe a quick overall overview, and I'm going to dig into your specific Chinese and Americas questions, but the good thing is that I think we continue to see the recovery of the beauty market. We do not have accurate numbers, but we estimate the beauty market growth to be at plus 10% after 9 months, getting closer and closer to its 2019 results, which we think will happen by year-end. And we are at plus 18%, significantly beating the growth of the market. And as we've said after first half, it's still a grand slam, all divisions, all regions and all category as it relates to overperformance. Considering China, it's clear and it's been said and commented that there has been turbulences over the summer, which are mainly related to COVID cases' resurgence, which have led to the lockdown of over 40 cities, 45 cities in China, store closures, limited travel. And that has slowed the market down, which has not prevented us for -- from achieving a double-digit growth, as Françoise said, and having a Q3 over 2 years at over 40% growth. It's mainly a brick-and-mortar slowdown. E-commerce has remained dynamic in China. It's fair also to say that the beauty market is -- the weight of this Q3 in China is significantly lower than other quarters. And as you know, Chinese consumers tend to more and more wait for the big festival. So there was 618 just before that quarter, and now they're gearing up to Double 11. So it was mainly a brick and mortar slowdown. The market size is now huge, and we continue over 2 years to see growth. So overall, I'm not worried about China, although more as all the long-term fundamentals of that market are extremely positive. As we've discussed before, the projections in terms of middle classes and upper-middle classes are quite spectacular. I was looking at the number. Today, there's around 850 million upper classes -- people in upper -- in the middle classes, sorry, in China. There's going to be another 300 million more by 2030, so that's 1/3 more, and that's spectacular. And if I take the upper classes, which are smaller in numbers, from 5 million to 16 million, they're going to be developing. So it's a huge market potential. Spend per capita will increase. And as we discussed in some of the roadshows that we did over the summer, the vision of the Chinese premier of common prosperity, which aims at making the middle classes wealthier and bigger is very positive for us and for beauty, which is a category that contributes to these consumers well-being. So we remain very confident for China despite the summer turbulences. And as far as the U.S. are concerned, you're right to assume it is the second growth engine. For many years, it was a big growth engine for the group. We had a couple of years where we were not super happy with our results. We did the transformation that needed to be done, which were mainly rebalancing in terms of channels categories. And now we have our 4 divisions really beating the market and growing when -- if we take a year ago or 2 years ago, it was mainly Professional and Active Cosmetics. So -- and the U.S. economy is very dynamic. So our intention is really to have 2 -- these 2 engines, which are about similar in size to really drive the growth of the group for the years to come. So overall, pretty positive and confident for the future of China as well as for the U.S.A.

[Operator]

Our next question is Celine Pannuti from JPMorgan.

[Celine A.H. Pannuti]

Yes. My first question, maybe if we stay in the U.S., the number was really amazing at 22%. Could you say whether there was sell-in, sell-out differences? I remember that in Q1, you had issues with the supply of materials. So has there been a catch-up? Or have you been maybe -- some of your customers eager to build inventory when there is a bit of a supply constraint overall? So that will be helpful. And yes, if you could give us a bit of a steer on that 22%, what -- which categories did better and which did -- well, still very well, but maybe less well than the average. Maybe coming back to China, could you talk about Hainan? What kind of growth have you seen in the quarter? And effectively, you've seen an improvement through the end of the quarter or maybe as well putting that in the context of Travel Retail. And just as to finish on China, I thank you for giving us this middle class number and clearly the opportunity. What is your thought about the impact of the changes that the country is going through in terms of confidence, consumer confidence in the very short term and as well go-to-market and the ability to use celebrity or hand-down culture that seems to have been cracked down?

[Nicolas Hieronimus, CEO & Director]

That's a lot of questions, Celine. I hope I can remember them all.

[Celine A.H. Pannuti]

It's easy. It's U.S. and China. Yes.

[Nicolas Hieronimus, CEO & Director]

Yes. But then those other sub questions are pretty detailed. So let's take them one by one, and I will speak under the control of Christophe. Overall, there is no sell-in, sell-out difference in the U.S.A., in the -- actually, there are several divisions where sellout is superior to sell-in. It's the case of CPD and where there was some destocking plus some -- as you said, some supply shortages, Same for Active Cosmetics, where we have -- we still are trying to -- running after the demand of CeraVe, which is again over plus 70% -- 68%, I think, year-to-date. So there's no restocking. Professional, the market has reopened for a while. There might have been a couple of salons taking some extra inventory, but I don't think so. the only division where traditionally Q3 sees restocking, but it's the same every year, it's Luxury, because most retailers are buying their fragrance inventory to be ready for the holiday season. So there's probably on L'Oréal Luxe, a slight extra sell-in versus sell-out but nothing material and nothing unusual. So it's really the acceleration of the -- of all 4 divisions. They are all gaining shares above 2019 levels for most cases. We keep on having the professional division and ACD, extremely strong Active Cosmetics, extremely strong in the U.S.A. In the U.S., Active Cosmetics is today at more than double the level of 2019, which is which is really spectacular. And what's new this year is that we both have L'Oréal Luxe, which is benefiting from its reorganization, the cutting the long tail of our stores in the U.S.A. and focusing our resources, both on online and on the best performing stores. So that's really productive. You have makeup starting strongly more on CPD side, and we have a fantastic performance in fragrance in the U.S.A. For the fragrance market, overall, is bouncing back pretty strongly, globally. It's a market that's close to plus 20%, and we are growing at a group level of 40%. So that's global and the U.S. is the part of the world where this market share gain and performance in fragrance is the highest. And we have, as I said, CPD is really accelerating, gaining share in skin care, in progressing seriously in haircare. And we have -- we're benefiting on makeup, both from the rebound of the market and the makeup market in mass, in the U.S.A. is above 2019 levels over the last period. And we are gaining share in a very spectacular manner with many innovations from the brands, from Maybelline and NYX. NYX is doing great. If I -- on top of my mind, 3 out of the top 10 launches in the U.S.A. are CPD makeup. And by the way, I just came back from the U.K., and it's out of the 10 new makeup products launched in the U.K. market for CPD. So great innovation plan. So we have all four engines roaring. And it's, of course, boosted by the quality of -- and the dynamism of the U.S. economy. So it's really positive on the U.S. On China. On China, so your question was around the climate that may be generated by a number of decisions that have been taken or enforced on the Chinese market. I'm talking about -- I've mentioned turbulences over the summer. COVID clusters were the main ones, but we can't eliminate the idea that a number of measures that were announced may have created some uncertainty for -- within Chinese consumers. But I think this is going to -- not going to last for the reasons that were mentioned before. And we have absolutely, as far as we are concerned, we see no issue in doing our business. You were mentioning influencers or celebrities being challenged in China. We have many brands. We have Lancôme, L'Oréal Paris, which are Chinese favorite brands. We use influencers like everybody, but we do not rely on the 1 big star that's under contract or that makes or breaks our brands. So we are -- today, we are -- our go-to-market in China is exactly as it is. Our teams are in the presale period of Double 11, which is off to a good start. So we can't predict what's going to happen, but we are carefully optimistic for that. And there's no reason to be worried about the measures of China. And as I said, as I told Bruno, I think the desire of the Chinese authorities to share the wealth and to increase the size of middle classes is something that we -- should benefit us. And finally, as Hainan is concerned, if which -- if I'm correct, it was your last question. Hainan, like China, had a bad Q3 in terms of traffic. Traffic was down. Hotels' occupancy rates were down. So it was not a great summer for Hainan. But since then, we've had the Golden Week. And Golden Week in Hainan was very buoyant. It's slightly outside Q3, but we see that the total duty free sales in Hainan increased by, I think, over 60%, with number of shoppers that more than doubled. So it seems that the appetite as soon as the COVID restrictions are ended, the appetite both for traveling where they can, not only Hainan and to shop beauty remains intact, at least for this part of Travel Retail Asia. I hope I did not forget anything.

[Celine A.H. Pannuti]

I forget -- I forgot to tell you, congrats for this quarter.

[Nicolas Hieronimus, CEO & Director]

Thank you very much.

[Operator]

We have a next question from Guillaume Delmas from UBS.

[Guillaume Gerard Vincent Delmas, Analyst]

So two questions for you, please. But before my two questions, just a housekeeping one. If you provide us with your like-for-like sales growth by product category, that would be very helpful. And then my two questions. So the first one on value growth. Could you give us a feel for what value growth was in Q3? And what I'm more interested in is, have you seen an increasing contribution from pricing and mix since the first quarter of the year? Because I mean, historically, at L'Oréal, my understanding is that mix is the main driver of value growth. But are you also now implementing maybe more proactively some pricing actions as well to mitigate the cost headwinds? And then my second question is on the makeup category. Could you shed some light on where sales are in the makeup category versus 2019? Nicolas, you said that it was ahead in the U.S. But on a global basis, are you ahead as well or slightly below '19 levels still? And I guess the big question, has the recent development of the makeup category make you more confident about an imminent makeup boom?

[Nicolas Hieronimus, CEO & Director]

Okay. So I will -- we'll start with the valorization question, which I'll happily hand over to Christophe Babule. And I may add a little bit of icing on the cake if necessary. But, Christophe, I'll let you...

[Christophe Babule, Executive VP & CFO]

So, as you know, we've been valorizing in fact, thanks to different components, different elements. And first, I want to reassure you that we are using all the levers when it concerns valorization. So end of September, we have both equally valorization, both in terms of mix within divisions but also valorization in terms of by product. So within the division, we have also been selling a more valorized product. And we don't forget also to add price. So close to 1.5% as of today and even a bit more in the third quarter. So we are above 2% on pure pricing regarding the valorization, all the rest is the mix. So as you can see, all elements are going into the right direction.

[Nicolas Hieronimus, CEO & Director]

And maybe as far as offsetting the inflationary pressure that you were referring to, we can say 2 things. First of all, in our -- considering the structure of our P&L with over 73% gross margin and the relatively low weight of this -- of the most inflationary components today such as palm oils or even plastic, we do not see at the global level a material impact. However, it is true that the inflationary cost of some of these materials, plastic, palm oils, et cetera, will impact a bit more our Consumer Products Division, which is the one that has -- is more concerned by these elements. So they will, for 2022 have to compensate these inflationary pressures with a blend of price increases and what we call revenue growth management, which is a blend of formats and promotional strategy. And the sum of all this should allow us to offset these elements, these negative elements. As far as categories are concerned -- so there are 2 questions. Overall, our -- if we take our year-to-date 2021, as I said earlier, on fragrance, we had plus 40% over a market that we estimate at plus 19%. On skincare, we are at plus 20-ish, a bit more on the market that we estimate at plus 9%. On makeup, and then I'll go back to the comparison with 2019, but on makeup, we're close to plus 15%, on a market at plus 9%. And on hair, which is a blend of hair color and haircare, we are at plus -- close to plus 12% in a market that we estimate around plus 7%. So that's the global picture where we'll be seeing the market. And within hair color, if you want to give a little bit of detail, there's a rebalancing between professional and mass market. Last year, we had a great growth in mass market when salons were closed. And as women are going back to hair salons, it's [ penalizing ] our CPD and helping our Professional Division. As far as makeup is concerned, the makeup market remains overall double-digit negative versus 2019. And we remain also negative versus 2019, better than the market, but still we are below the levels of 2019. And there are a few exceptions like as we said, we are getting progressively positive in mass -- in CPD, so in the mass market. But overall, the markets remain negative. What we see is that the eye categories are doing great. And that's still -- as long as the masks are worn, lips and even foundation remain a bit more difficult, even though we had many great launches in that arena. As far as the future is concerned, I remain very confident. We saw in China good numbers. We've seen in mass market in the U.S.A., when we come up with the right innovations, good numbers, too. So -- and in China, the market is significantly positive versus '19. So when people go back to normal life, they go back to makeup and they go back to lipstick, and we'll have, as we always do, to tempt them with new ideas, new initiatives. And we have a few in the bags for the end of the year and for 2022.So I remind, makeup, as I often say, it's a very cyclical category. We were in a down cycle. We had COVID. And now we hope that with the return, which I wish to be as soon as possible to a normal, healthy life, mask-free, I'm confident that makeup will go back to above 2019 level.

[Operator]

Our next question is from Tom Sykes from Deutsche Bank.

[Thomas Richard Sykes]

Firstly, just on North America. You mentioned before the channel reorganization. But I wondered if you could just talk about the importance of online and particularly off-line growth in the recovery. And perhaps the importance of beauty stores, maybe more, say, department stores, and in particular, to the categories, which have rebounded quite strongly in terms of makeup and fragrance. Does that at all limit the operational gearing that we may get out of the North American recovery?And then just a question on China. Given potentially some of the regulatory changes in maybe lending via tech companies, are you able to say how much of your e-commerce business in China involves some sort of short-term credit offered at point of sale, please?

[Nicolas Hieronimus, CEO & Director]

I'm not sure I understand -- I apologize. I'm not sure I understand the last question. Can you maybe elaborate or ...

[Thomas Richard Sykes]

Yes. It's just whether payment via short-term credit is an important factor in your e-commerce sales, particularly in China and where is may be being looked to be a little bit more limited in terms of their growth by the authorities.

[Nicolas Hieronimus, CEO & Director]

No, we haven't seen any of this -- to answer quickly to the last question. We haven't seen any problems around credit on our e-commerce sales in China. I don't know, Christophe, if you want to elaborate.

[Christophe Babule, Executive VP & CFO]

No, I can tell you that first, it's not a practice in China. Contrary to the U.S., usually, when it comes to that kind of purchase, it's mainly cash. And when I see the growth of e-commerce on the Q3, which is in the range of 73 -- 70% over 2 years. So it gives you an idea of the speed at which online is still flying in China, probably a bit slower than Q1 or Q2, but still extremely dynamic.

[Nicolas Hieronimus, CEO & Director]

And as far as the U.S.A. is concerned, our growth is driven by, I would say, 2 phenomenon: the reopening and therefore, the acceleration of brick-and-mortar without any impact, no negative impact on e-commerce sellout. So brick-and-mortar accelerates year-to-date Q3 at plus -- almost plus 27% versus 2020 and positive versus 2019. And our e-commerce sales continue to grow and have not been slowed down. So it's -- and we see, of course, different consumer behaviors, people that tend to work from home are a bit more on e-commerce. It's clear that the brick-and-mortar doors of mass market have accelerated a bit more with the return to work, whereas if we take some department stores and specialty stores, they are recovering a bit slower, although they were close to the good comparative. And as I said in the earlier comments, we also have refocused or sharpened our distribution footprint in the U.S.A. We closed over 1,000 doors of the long tail of our luxury distribution, so many small department stores that were not really productive. So that's also -- that also allows us to invest in, I would say, in a more effective manner to drive our brick and mortar. So we have the 2 channels growing in the U.S.A.

[Operator]

Our next question is from Olivier Nicolai from Goldman Sachs.

[Jean-Olivier Nicolai]

Nicolas, Christophe, Françoise, I've got 2 questions, please. First, a follow-up on China and Hainan. Could you please give us more details on your typical customers in Hainan, if there is a high proportion of daigous among those? And also, if you believe that the Hainan sales are actually mostly incremental to the rest of your Chinese business or if it actually there's a bit of cannibalization? And then secondly, on L'Oréal Luxe, you flagged the exceptional growth of Absolue by Lancôme. I think it's one of the first time that you flagged this. So could you perhaps give us a bit more details on the driver behind the growth of this super premium skincare?

[Nicolas Hieronimus, CEO & Director]

Okay. So on Hainan, I will start with the second part of your question, which is, is it incremental or cannibalizing our business in China. What is clear today is that a lot of the Chinese consumers or daigous sometimes that were traveling outside China, whether to Hong Kong or to Korea or to other parts of the world to buy products at a more affordable price are now all going to Hainan because it's the only place where they want to go. And it's kind of -- Hainan a bit the new Hong Kong as we speak. The good thing is that Hong Kong is accelerating again with progressive lift of measures, but -- of sanitary measures. But -- so Hainan is concentrating the Chinese consumers that are -- that were buying elsewhere. So it's not cannibalizing the domestic sales of L'Oréal China. It's replacing sales that were done outside China, knowing that overall, as the population and the middle classes are increasing and their appetite for beauty is not satisfied, the size of the Chinese cake overall continues to increase to increase regularly. And as far as the proportion of daigous is very hard to tell, and I have -- I would not be able to give you a number. What's important maybe for you to know, I think, it is that we are valorizing strongly our prices in travel retail. It's a strategy that we've embarked upon over the last 2 years to reduce the price, the price gap between our travel retail prices. So we've increased our net prices for Travel Retail to reduce the gap with China. And if I look at our growth, which is pretty strong in Hainan in value, our volumes are flattish because we precisely want to make sure that this is not spilling over in an uncontrolled manner. So I think it's a pretty strong and effective policy, more value, controlled volume. And in the end, consumers that probably would not have bought our products in a traditional department store of China that are looking for more affordable prices. We see there's a bit more people from Tier 3 and 4 cities where our market share is lower than the one we have in Shanghai, Beijing and Tier 1 and 2 cities. So overall, it's a good recruitment place. And it's not cannibalizing or hurting our Chinese business where we continue to grow.

[Christophe Babule, Executive VP & CFO]

And by the way, when we look at the growth YTD of Mainland China on one side, Travel Retail Asia on the other side and Hong Kong, they are all flying between 25% and 35% growth. So there is no negative compensating a very huge growth. They are all growing more or less at the same speed.

[Jean-Olivier Nicolai]

And on L'Oréal Luxe and Absolue by Lancôme?

[Nicolas Hieronimus, CEO & Director]

Sorry. I've forgotten that one. Yes, it's true that skincare is the biggest category in China. It continues to grow, and it's the -- within skincare, the fastest-growing category is and it's been for a while, premium skincare. And in that domain, we have 2 brands that we have animated and in which we have innovated strongly. They are Absolue from Lancôme and Helena Rubinstein, which is a brand that we have discretely, over the years, repositioned as a pure skincare -- premium skincare player, going out of makeup and launching high-value products, and both brands are doing very well in Mainland China. And obviously, also in Hainan because as we all know, in Travel Retail, the higher the price positioning of the product, the more interesting the savings. So these 2 brands are doing well, and we had probably commented in the past on Absolue, but it's true that this year, it's a particularly good performance in the wake of a couple of interesting launches.

[Operator]

Our next question is from Rogerio Fujimori from Stifel.

[Rogerio Fujimori, Director & Analyst]

I have 2 questions. The first one is on Asia. What's the current situation at the start of Q4 in markets like China, Japan, Korea, which were all penalized during the quarter by COVID-related restrictions? What I mean is how the store opening rate in these key Asian markets at the start of the quarter compared to the Q3 average brick-and-mortar opening rate? And then my second question is more generic on the promotional environment for the consumer division. Was there any change in trend in Q3 versus the first half? Or do you see any of your key markets experiencing -- been becoming a bit less promotional to offset industry cost pressures? Or have you seen any of your key Western markets getting a bit more promotion as life gradually normalizes? Just trying to get a sense of competitive spending trends for CPD.

[Nicolas Hieronimus, CEO & Director]

On -- so as far as Asia is concerned, it's a bit early to say much about Q4. What I can say is that Korea and Japan, which were under very strict lockdowns over Q3, are progressively reopening their stores. So we see -- we have -- I mean the news are positive, but I have no numbers to give you. And what we -- the only thing we can say is that in other countries, we've seen that when stores reopen, we don't see a slowdown or a major slowdown of e-commerce. So pretty positive. I think Korea, Japan can only get better in Q4 [ over ] Q3. And as I said earlier in China that China is really in the preparation of Double 11. Presales are okay, and we'll see what's coming. Hong Kong is doing good, too, and I have no news on Taiwan. So the overall Greater China plus North Asia is doing -- seems to be correctly oriented.

[Christophe Babule, Executive VP & CFO]

Yes, if I may, if I may, I think it's very early to say today. As you know, Japan was in the lockdown until October 1. So it's a bit too early to comment on the recovery. And of course, the big, big thing will be the 11/11 operation in China for which we have good confidence on the first elements that we have on hand. So...

[Nicolas Hieronimus, CEO & Director]

And as far as the mass market is concerned, I mean, most of the changes in dynamics between Q3 and first half were more related to the situation of the pandemic in countries -- India reopening, Indonesia and the rest of Southeast Asia are remaining quite difficult. As I mentioned already, the slowdown in China over the summer. So these are the -- and the very good health of the North American market. The European market remains pretty flat, but we are gaining significant shares in Europe. And as far as pricing or valorization is concerned, we see we see valorization of the mass market. We don't see devalorization. We see premium hair care growing faster than the basic products, both because -- I mean, it's the retailers' interest but also because e-commerce, which has taken a bigger share of the market. E-commerce algorithms push up higher value items. And our innovations also are a source of innovation. If I take a product like the Elsève, Dream Length Wonder Water, it's a valorized care product. We've launched a hyaluronic shampoo line in Asia and China is doing great and now it's being replicated in other parts of the world. So overall, both through innovation and through e-commerce impact, we see more valorization than over promotionality, which doesn't change the fact that, as I said, our Consumer Products division will have to increase a little bit its prices to offset inflationary pressure in 2022, but not in a major manner.

[Operator]

We have a next question from Javier Escalante from Evercore.

[Javier T. Escalante Manzo, Research Analyst]

Françoise, Nicolas, Christophe, I do need a clarification from Christophe. If you can come back to the commentary with regards to the build of growth between unit growth, price mix -- and if you -- and actual price increases. I mean, just to give us a sense of what's happening there. And more structurally with Nicolas, I would love to hear your opinion when it comes to the differences in e-commerce in the U.S. and China, which are the largest e-commerce market and to what extent this promotional environment in China is detrimental to pricing and is that a concern? And also, what is the role of places like Amazon in terms of driving valorization in the portfolio?

[Christophe Babule, Executive VP & CFO]

Okay. Maybe I will start with the question regarding valorization. So when you take the growth at 18% YTD, 1/3 is generated by volume, 2/3 is generated by value. So that gives you already a good idea of how much valorization is strong. And within the valorization, we measure 3 components. So one is pure pricing and then the different mix. And I can tell you, as I said before, that all 3 are positive. But for sure, the mix one is the component that is driving the biggest part in terms of growth in the value. So pretty confident that we'll keep with this pattern in the coming months.

[Nicolas Hieronimus, CEO & Director]

And as far as the...

[Javier T. Escalante Manzo, Research Analyst]

And Nicolas, based on -- go ahead. Sorry for that. So in that context of valorization and trade-up, how does e-commerce play?

[Nicolas Hieronimus, CEO & Director]

Well, e-commerce globally has always played favorably for the reasons that I mentioned is that for -- especially when you're dealing with pure players or even new retailers, their shipping costs are the same whether they ship a $10 or $20 or $50 item. So the algorithms tend to push the -- both the best innovation and the most valorized items. And that's what's happening in the U.S.A. as it's happening in Asia. And in China where the weight of e-commerce is the highest for us, over 50%, we have a lot of, obviously, of luxury goods that are selling on e-commerce. So the e-commerce plays globally in favor of valorization. And as far as promotionality, as you mentioned, it's -- well, it's our role to control the way we animate our brands and try, as always, to find the right balance between image, market share and profitability, and that's what we do in China as well as in the U.S.A.

[Christophe Babule, Executive VP & CFO]

And to complement on what I was saying, what is important for you to know as well is that this valorization is positive on all divisions and in all zones. So it's really something that we measure very carefully and it's positive everywhere.

[Operator]

Our next question is from Jeremy Fialko from HSBC.

[Jeremy David Fialko, Head of Consumer Staples Research of Europe]

Just one quick follow-up on China and then a bigger question. Sorry for kind of laboring this point but you've had some amazing growth in China in the last 2 11/11. So I think over 40% growth each year. Is there anything we need to bear in mind in terms of the sort of growth rate we might need to expect in 2021? Any reason for, let's say, moderating our expectations for this year? And then the second question is one of the themes that we've seen in L'Oréal's results really going back over the last several quarters is this remarkable outperformance of the market. So what was historically growing 1%, 2%, 3% better than the market, you're now doing 7%, 8%, 9%, 10% better than the market. And so the question is, are there elements of this huge market outperformance that you would view as being unsustainable? Or is this potentially -- this very, very big outperformance becoming a new aspiration for the company?

[Nicolas Hieronimus, CEO & Director]

So we have 2 questions.

[Christophe Babule, Executive VP & CFO]

Yes. The first one is on the on the 11/11 this year.

[Nicolas Hieronimus, CEO & Director]

Yes, that's the one I can't comment upon. You -- our objectives are objectives and you will see, and I let you do your own extrapolations. But obviously, I will not -- I would not give you guidance on that. That's something I cannot comment upon. And the other question was?

[Jeremy David Fialko, Head of Consumer Staples Research of Europe]

On the growth relative to the market.

[Nicolas Hieronimus, CEO & Director]

Ah, overperformance, yes. Now overperformance, I think there are there are several reasons to our overperformance. First of all, and I think it's important to remind this is, is the fact that in the middle of the crisis, when a lot of our competitors were folding their innovation plan, were reducing their spend, if we accept Q3 of 2020, where obviously we -- because we didn't know what was happening, we cut our -- both our launches, some of our launches in and fuel. But from Q3 and onwards, we've gone full steam, both in terms of launches and in terms of fuel. And that's also what we've done in the first half. I mean when we commented on the first half results, there were a number of comments on the important increase of our A&P. And I think that's one of the things that we are doing and we will continue to do. That's what we call the L'Oréal virtuous circle is we have high gross margin and growth allows us to generate resources that we can invest in fueling the growth of our brands and their desirability. Of course, we continue regularly to improve the level of profitability, but it's really a growth model, and that is a long-term strategic commitment to continue to invest regularly behind our brands, behind our innovations. As you know, innovation has always been one of the drivers of L'Oréal and will continue to fuel all of our brands. Then there are things that are -- it's true that during the crisis, on top of continuing to invest, we have reorganized and rebalanced some of our activities. So I give you 2 examples. We've talked a lot about the distribution in the U.S.A. and the fact that we've refocused in terms of channels and also categories in the U.S.A., but I could also talk about the way we've reshuffled our P&Ls, moving resources from brick-and-mortar to digital. If I take a good example is our Professional Division, which is, as you could see, which is flying at plus 28% year-to-date. It's both a consequence of becoming most -- more online plus offline. So having this double distribution strategy. But also reshuffling the resources within our P&L from, I would say, not dead investment, but not super productive investment to training and recruiting stylists online, engaging consumers on the social networks, and that's really transformed the dynamic of the division, and I think that's here to stay. So as it relates to the overall overperformance, it's -- it doesn't depend only on us. It's -- in any competition, you've got several players, and it depends on the quality of the other players. But I think that we have strong plans, strong teams, could be P&L. And probably one thing that I'd like to insist upon is our balance. We have a very balanced both regional, divisional and category portfolio. And in a world that's very unstable, being very balanced is extremely powerful because we can always compensate, as we discussed, about the fact that there was a bit of a Chinese slowdown over the summer, and we could accelerate in the U.S.A. Makeup has not totally recovered. We are accelerating in skincare. And of course, we are now running on both brick-and-mortar and e-commerce leg. So overall, I remain confident in our ability to overperform the market. The level of overperformance, frankly, I can't neither commit to not extrapolate because I can't predict what my competitors are going to be doing.

[Christophe Babule, Executive VP & CFO]

We have the ambition.

[Nicolas Hieronimus, CEO & Director]

Yes, we want to overperform and we want to overperform as much as possible, but that's not easy to predict.

[Operator]

We have another question from Pinar Ergun from Morgan Stanley.

[Pinar Ergun, Equity Analyst]

How should we think about the different moving parts that feed into your profit margins this year and possibly next? I appreciate input cost inflation is rising, but you have a very strong top line momentum here and high gross margins. Is it not reasonable to expect a very strong year when we think about profitability?

[Nicolas Hieronimus, CEO & Director]

I'll let Christophe answer that one.

[Christophe Babule, Executive VP & CFO]

As you may understand, I -- you are right that it's an option, but it's also our decision to decide on what we want to do with this power that we have in our P&L. And as you have seen recently, we are still over investing in growing for more growth. So of course -- and up to now, the strategy has been a winning one because, as you can see, the overperformance is still there, quarter 1, quarter 2, quarter 3. So if we can maintain and if our investment can still fuel the kind of growth, we'll still keep also investing. So...

[Nicolas Hieronimus, CEO & Director]

As we said, we have returned to, what I would call, our cruising speed, a pre-crisis growth rhythm and strategy. And usually, we've always had a first half profit that was always significantly higher than the second half because the later part of the year, whether it's because of Double 11, Black Friday, Christmas, fragrance is money time and that's where we have to invest behind our brands. And our strategy is always to grow the cake and so that the regular improvements in profitability are in absolute terms, getting bigger and bigger, and that's what we are trying to achieve, and that's what you should expect.

[Pinar Ergun, Equity Analyst]

That's great. Just a quick follow-up. Would you expect the next few quarters to continue on this path of quarter after quarter acceleration on a 2-year view? I appreciate as we get to next year, maybe that will no longer hold. But as you're looking at the next few months, are you optimistic?

[Nicolas Hieronimus, CEO & Director]

Well, it's getting a bit more difficult because last year, our Q4 was already -- the first quarter where we really got back to growth. We are close to plus [ 5% ] last year. So I think we are now more trying to maintain our rhythm than continuing to accelerate it.

[Françoise Lauvin, Head of Investor Relations]

Thank you. We will take the last question, if there is one.

[Operator]

Yes, absolutely. We have a last question from David Hayes from Societe Generale.

[David Hayes, Equity Analyst]

So just 2 questions, please, one on Active and one on the U.S. growth. So on the Active side, you talked about capacity constraints in the past. Is that still something you're struggling with? Is this growth that you're seeing still being limited by the fact you cannot make the product quickly enough to satisfy the demand?And I guess related to that, the second question is on the U.S. growth, which obviously is pretty stellar in the quarter. Can you just give us a sense of how much of that is the Active growth still contributing? And then versus that with luxury? Are they both growing at similar levels and contributing at similar levels to the North American growth? Or is there still a big delta between those 2 divisions within the U.S.?

[Nicolas Hieronimus, CEO & Director]

So as far as Active cosmetics is concerned, it's true that our -- we continue to have a very strong demand on CeraVe. And even though things have increased, the appetite of consumers seem to be increasing, too. Our CeraVe brand did globally -- is year-to-date at plus almost -- over plus 85% and still very, very high growth versus even in Q3. So we are running after it, but we are getting closer and closer. We are -- we have been ramping up using other factories within the group. So we are hopefully getting closer to the -- to being able to fulfill all the desire of CeraVe. But it's true that, as we said earlier, there's -- globally because I'm talking about CeraVe, but I could talk about La Roche-Posay was growing over 20%. And there is this consumer quest and appetite for products that are safe, effective, prescribed by dermatologists. And it's true that the power of this division and the brands, it carries -- seems to be -- to continue to be very strong and will continue to be very strong in the years to come. And Christophe, you want to say a word on the U.S. balance so that we don't comment too much in details, but maybe you want to give a hint.

[Christophe Babule, Executive VP & CFO]

Just to give a hint, both divisions are growing YTD at more than 40%. So it means that, as we said at the very beginning, first, there is no slowdown in the U.S. and what is very visible is that the rebalancing of this country, whether in terms of growth by channel, growth by category and growth by division is really very visible and impacts also the growth of the U.S., very well balanced.

[Nicolas Hieronimus, CEO & Director]

And clearly, Active Cosmetics is the fastest-growing division in the U.S.A. So still well ahead of the others. That's as far as we'll go. All right. Well, thank you very much, everyone, and I'll let you close, Françoise.

[Françoise Lauvin, Head of Investor Relations]

Thank you very much. And we wish you a very good autumn and holiday. And for the next conference call and meeting, it will be in February. Thank you.

[Christophe Babule, Executive VP & CFO]

Thank you very much.

[Nicolas Hieronimus, CEO & Director]

Thank you.

[Christophe Babule, Executive VP & CFO]

Good evening.

[Operator]

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