L'Oréal S.A. (OR) Earnings Call Transcript & Summary

Welcome to the conference call regarding L'Oréal's First Quarter 2022 Sales. [Operator Instructions] The conference is about to begin. I now hand over to Françoise Lauvin. Please go ahead.

Thank you, Laurent. Good evening to all. [Foreign Language] The L'Oréal team is pleased to welcome you to this conference call for the release of the first quarter 2022 sales. Together with me today are CEO, Nicolas Hieronimus.

Hello.

And CFO, Christophe Babule.

Hello.

I hope you received our press release which was issued earlier today and which can be found on our website, loreal-finance.com. The first quarter of 2022 was overshadowed by the invasion of Ukraine and by renewed sanitary constraints in some parts of China. Against this unstable backdrop, L'Oréal achieved a strong first quarter in the beauty market that follows its recovery path. First quarter sales increased a very strong 19% on a reported basis to exceed EUR 9 billion. ForEx impact was quite positive at plus 5.1% as the euro weakened against most currencies. And the net impact of changes in the scope of consolidation was positive by 0.4%. Like-for-like growth came to a sustained plus 13.5%. By division, on a like-for-like basis, L'Oréal Luxe posted a strong 17.5% increase in sales and outperformed the luxury duty market. The division reinforced its lead in a dynamic fragrance market and achieved a solid performance in skincare, both with Lancôme Absolue and Helena Rubinstein, its ultra-premium franchisees, and with the contribution of newly acquired brands Takami and Youth to the People. The Consumer Products division accelerated over the second half of last year and ended the quarter with a solid 6.9% despite some supply chain challenges. The Professional Products and Active Cosmetics divisions continued to build on their strong momentum with first quarter growth of plus 17.6% and plus 18%, respectively. Growth was also well balanced by region. Europe posted a strong plus 16.4% recovery over first quarter last year, which was still affected by the closure of point of sales in several countries. North America continued its sustained growth path of 12.6%. North Asia ended the quarter up 9.4% with double-digit growth in Mainland China, thanks to successful campaigns for the Chinese New Year, Valentine's Day and Women's Day. SAPMENA - SSA achieved a strong 15.8% performance with broad-based growth across India and Southeast Asia as well as in the Gulf countries. And Latin America increased a remarkable 22.2%. By channel, there was a clear revival in off-line sales, which showed a 15% like-for-like increase, while e-commerce, which continued to grow at plus 8%, represented 25.8% of quarterly sales. Travel Retail sales increased by 19%, boosted by an extremely sharp rebound in Europe on a low basis and by continued double-digit growth in Asia. In short, 2022 has gotten off to a good start. Looking ahead, even though the current and stable context requires some caution, we remain optimistic over the prospects of the beauty market. Short term, the currency environment remains a tailwind, extrapolating end of March currency rates against the euro or EUR 1 at around USD 1.11 for the remainder of the year would lead to a positive currency impact of 4.4% on 2022 full year sales. We are confident in our ability to outperform the beauty market once again in 2022 and to achieve another year of growth in both sales and profits. I thank you for your attention, and I now hand over to Nicolas.

Yes. Good afternoon to everyone. Before taking your questions, maybe a short preliminary comment. I just want to say that I'm very proud of this quarter's performance from L'Oréal, considering the context. We're all reading the same news, listening to the same thing, the lockdowns in China, inflation, the Ukraine invasion, which we solemnly condemn. In this very unstable context, L'Oréal manages to grow by 13.5%. So keeping a very strong growth rhythm, plus 19% in published with the benefit of favorable exchange rates. And that's a great performance on the market which continues to demonstrate its resilience. The beauty market, our estimation of the beauty market growth for the first quarter with all the reservation due to the fact that we had little time to compute everything, but we estimate the market growth to be at plus 8%, which is consistent with last year's rhythm. So there has not been any negative impact of the current context on the overall growth of the market, neither on L'Oréal's ability to overperform. I commented in previous call on the grand slam of L'Oréal. Well, this quarter, again, we can say that we are beating the market growth in every division and in every region. And that's thanks to many different things: strong innovations; conscious valorization policy; an omnichannel strategy that allows us to benefit from the bounce back of brick-and-mortar after the closures of last year; our geographical balance, which allows us to either benefit or offset whatever changes there might be in the world; and of course, the very strong L'Oréal teams who are fully dedicated. So even though the -- as Françoise said, the context is quite volatile and unstable. I confirm our optimism for -- both for the growth of the market because this market is a market that continues to grow and -- but also, and more importantly, in our ability to overperform it and to deliver a year of improvement in top line and profits. Of course, it will require work, but the L'Oréal teams are ready and more motivated than ever to achieve it. So I'm ready to take your questions. And of course, with the assistance of Christophe, we'll share the answers.

[Operator Instructions] And we have our first question from Celine Pannuti from JPMorgan.

First, I wanted to rebound on your commentary on market growth. So thank you for sharing Q1 estimates. I think that full year stage, we're talking about growth rate of the market around mid-single digits, 4% to 5%. Is this still something you're looking for the year? And does that mean that we should see some form of normalization? So I just wanted to understand like this normally slower growth in the market, is it because you are expecting at some point to have an impact on consumption? Or it's just a question of comparative because, effectively, the commentary you made that the consumption has been impacted by inflation is quite surprising. So if you could comment on that, that will be great. And my second question is on the U.S. It seems that the Consumer division had some supply challenges in the U.S. Is that material, that's something that you could quantify? And I just would like to understand what are the supply chain challenges that are meant to continue in the second quarter and whether there is any relationship with the fact that it seems that the Nielsen data will be [ weakish ] in the quarter.

Okay. So first, on the market growth, we maintain our estimate that the market should grow between 4% and 5% this year. It's indeed lower than the 8% that we have in the first quarter. But we have to remember that the first quarter 2021 was still impacted by a few lockdowns, particularly in Western Europe where significant countries such as the U.K., Germany, even some -- there was a little bit in France. So we have a favorable comparative in the first quarter of 2021. And there are a few other countries, emerging countries, that were in the same situation. So we think that, to use your terminology, that there will be some normalization even though 4% to 5% remains for me a pretty decent growth, all the more if we manage to continue to outperform it. So that's for the market. As far as CPD U.S.A. is concerned. Globally, first of all, the supply issue is a shared problem with many companies, many industries, in many parts of the world. And it's true that in the U.S., we are more affected. And in mass market, we are more affected than in other parts of the world. First of all, because as you know, the U.S., we import a number of raw materials or components in the U.S. from either Europe or Asia, and you know the situation of the U.S. ports. And it's true also that the U.S. market has been pretty dynamic with a few strong accelerations which have impacted also Active Cosmetics, but we have reacted and improved to a certain extent the situation on CeraVe, for example, with the opening of a manufacturing line in Mexico. As far as CPD is concerned, the division is penalized on makeup, but also on skincare. So is it material? Yes. It is material for CPD. And I think, overall, the performance of CPD would have been even better and because the performance of the division, which differs by category in the U.S.A. but remains very, very good in makeup, very good in hair, very good also overall in omnichannel. And it's been less strong on skincare, but that's precisely where we have had our biggest out of stock. So we hope it's going to be normalizing over the next couple of months, but I do not think it will be totally solved by Q2.

Just to come back on my first question on the market growth. You are saying that demand has been unimpacted by inflation. As you look forward for the next quarters and your innovation, what are you planning for? What kind of consumer are you expecting to find, [ I mean seeing ]?

Well, there are -- the one thing we have to say about [ not the magic ] with the construction of the L'Oréal portfolio is that we have a very large price bracket from, as you know, from the most expensive luxury creams, which appeal to the upper classes of the world that are very successful in China, to a very affordable mascaras or shampoos sold by CPD. And even within each division, we scale our prices. If I take CPD, for example. They are very reasonable in terms of price increases and using a lot of RGM, Revenue Growth Management, to manage their promotions, their formats, not to deter consumers from buying their products, but they come with innovation that are systematically, and that's been really the strategy this year, systematically accretive in terms of gross margin. So you are in a situation where, theoretically, and that's our objective, we will be seducing and targeting all consumers from the wealthiest to the more traditional middle classes of the world.

So we have another question from Guillaume Delmas from UBS.

A couple of questions for me, please. The first one is on China, and it seems that there's a couple of obvious headwinds you are facing there. So you mentioned the sanitary measures. But in the press release, you also talked about the slowdown of some e-commerce players. So wondering if you can shed a bit more light on this. And I guess, more importantly, despite this, do you remain optimistic on China and your ability to maintain double-digit, like-for-like there over the next quarters? Or have you seen some gradual deterioration in China through the course of Q1, and as a result, maybe you would expect a softer second quarter? And then my second question is, could you give us the Q1 like-for-like sales growth by product category? And I noticed in the press release, it is mentioned that makeup was particularly strong in both Europe and North America. So wondering if this is only down to an easy basis of comparison, some recovery or whether you are witnessing the early signs of a makeup boom.

Okay. So first on China. I have to say it's true that, I have to say, there are a few headwinds right now in China as the biggest city in the country is under a very strict lockdown since mid-March. And of course, that has an impact on consumers' behaviors and purchases. But I remain very confident, and I'll tell you one. First of all, when we look at the total Chinese ecosystem, which includes Mainland China, Hong Kong and Hainan, which is the only other destination where a Chinese shopper can shop, if we take the quarter, we estimate the market to be around mid-single digits, which is the growth we had estimated. We said mid- to high single digits, so it's mid-single digit. And we very significantly outpaced that growth. We estimate that our performance on that perimeter is in mid-teens. So it's a pretty decent overperformance. And it's true that the year, January, February started very strong. We had a great Chinese New Year, a pretty good Women's Day. We had lots of traffic in Hainan in February. March was -- clearly showed a different atmosphere, and we'll have to see looking ahead how long these very strict lockdown imposed by the Zero COVID policy will last. But I remain confident because, first of all, every time we've seen this in China, and I will appeal to my sidekick, Christophe, who will tell you about his experience in the ups and downs of the Chinese market. But if I look at January, February, they were on a higher growth rhythm than the end of the year, which was, I think, a very good sign. It shows that every time that the Chinese consumers start with leaving again, normally, they are back into the beauty market. And if we look ahead, we think that the same will happen. And of course, if we look midterm, as we've often said, the Chinese market is going to continue to grow until it becomes the #1 beauty market in the world. There are 37 million people that will enter the middle classes by 2030. We, today, ourselves only sell to about 100 million out of the 600 million, which is our, I would say, addressable target. So all this, plus the brands, we are bringing new brands in China. We've launched Valentino. We're bringing Prada. We have a few other cards on our sleeves. So we will do everything to continue to grow that market. Obviously, short term, we are just, like everybody, waiting to see whether the lockdowns are going to be lightened up in the weeks to come. And maybe you can add to this -- add a little bit of flavor to this, Christophe.

Yes, I will complement with -- a bit because it's true that the situation is not easy to understand, so I will give you some more precise situation. First on the lockdowns because everything started, as you know, in March with some cities in the north of Jilin, but then it was Shenzhen. And more recently, we have since March 15 more or less 45 cities that went to a total or partial lockdown. That's quite important. It's affecting like 25% of the population. And as you know, since first of April, we have a total lockdown right now in China. So when we see what's the impact on the city-by-city basis, I can tell you that as of today, for example, Beijing is in a normal situation, achieving 100% of the target, but Guangzhou is probably at 50%. And as you can imagine, right now, today, Shanghai is closed. But just to remind what was the situation, for example, 2 years ago because we had the same situation. So it's true that today, when you look at the retail sales in China, the Chinese government just mentioned that they were down 3.5% in March. Just as a reminder, 2 years ago, in March 2020, retail sales were down 16%. And you remember how fast then the recovery came out, so that's why we're still quite confident. We don't know, of course, how long it will last, but we are still confident on the capacity of Chinese markets to rebound very quickly. We started very good. The market was at plus 7% at the end of February. So -- and then it impacted since March. So we will see. But at the end of the day, we've been able to mitigate those impacts with a growth that is nearly 3x the one of the market at the end of Q1.

So -- and regarding makeup, if we take the overall market, the growth is kind of the same as last year's. In 2021, the market grew by around 8%. Again, these are estimates. And we are about in the same type of numbers for the first quarter with, of course, clearly differences by region. And I think what's very interesting is the U.S. market because the makeup market is accelerating at -- going above plus 8%, and it's accelerating both in mass and luxury. And I think that's very interesting because last year, if you remember, the mass market in makeup had bounced back while selective had remained a bit slow. And we have made the analysis, which I think was very interesting, that this was very related to the working policy where blue collars that shop more at Walmart and also on Amazon had basically gone back to their social life and work when the COVID was slowing down, whereas most of the white collars were home working and therefore less into social interactions. And as the U.S. is progressively getting out of COVID, we see the selective market now accelerating at double digit higher than the mass market. Of course, this is fueled by innovations that are proposed by our brands, be it Maybelline; NYX Professional Makeup, which is really doing great; or even our luxury brands, YSL launched a new mascara. So we have, of course, to stimulate the demand. But we see that there is clearly, even though it's not purely mathematical, a correlation between going back out and going back to work in the offices and going back to a certain level of social life and the acceleration of makeup, which, of course, has to be excited or stimulated by innovations. And I must say that as we are talking about social life-boosted categories, we continue to see a very dynamic fragrance market all over the world, above 20% growth, and we are doing much better than that. We're close to 40% growth in fragrance. And that's also another sign that, in this tough world, people want also to -- they want color, they want to socially interact. So we see how far the makeup market goes. But as we are leading it and doing everything it takes to stimulate the consumers' appetite, we hope it's going to be a good year for makeup.

So we have another question from Bruno Monteyne from Bernstein.

My first question is coming back on something we discussed before. I mean you've made it very clear that even if there's an economic recession or a slowdown, you have all the price points. And so even if people trade down, the volumes should be quite strong at L'Oréal given that you cover all price points. However, even if the volumes are stable and people are trading down, you've had years of pretty material valorization, so big price-mix benefits, wouldn't you expect that to go into negative territory when economic times get tougher? So stable volumes but still a material impact on organic growth. Would it be fair that could swing from a few hundred basis points positive to a negative few hundred basis points or not has impact on your organic growth. The second one is, I think at the guidance of full year, you made it clear that margin environment will be tougher in the first half as what's happening with commodities. Things have gotten worse since the full year results. Is there any change to your outlook of how you think about margin for the year given what's happened to commodities and Ukraine and Russia? Or is all of that unchanged?

Thank you, Bruno. So first of all, just on growth, if we look at our first half results, the plus 13.5%, once again, it's a pretty balanced growth as it relates to volume and value as it's -- we have a plus 5% in volume and the difference, 8.5%, in value, which is a blend of mix and price points or we compare to last year, less mix and more price valorization because we've taken a few price increases to offset cost of goods. So as you can see, we do not see, at this point, a slowdown in volume. And I don't think we have worn out our pricing power because a lot of our price increases or valorization comes from innovation. If I take an example, if I take out the Consumer Products division, which is having a pretty good run in haircare right now, thanks to their new products like Elseve, Hyaluronic, or a few other on Fructis, I think the average net price per ml of CPD has increased by 8%. Am I correct?

That's...

Yes.

So 8%. So we are bringing to the market more desirable products at higher prices. And then, of course, it's up to us to offer the formats that allow every type of consumer to enter the game and to buy our products, all the more as some of our catalog products are less increased. So I -- of course, we have always to be cautious and to be very attentive to what's happening in the market. But this is an offer market, and we will continue to offer innovative, differentiated product that hopefully can valorize. So I do not foresee the gloomy, negative scenario you mentioned. And of course, we'll work hard to make sure it doesn't happen. You want to add something, Christophe?

Yes. I want to strengthen this message because it's very important. When you look at the figures at the end of the first quarter, we have all divisions growing by at least 3.5% in volume, and all divisions have a positive impact in terms of price increase but also in terms of mix. So as Nicolas was mentioning, we've been working a lot last year, and I think we shared that with you, new strategies in terms of revenue growth management. And that's, of course, helping us in driving the growth in a very balanced way.

And as far as your second question is concerned, you're right to say that the bad news have gotten worse overall on the raw material and component prices over the weeks and months, and it's true that it's an impact that's going to be a year-long, an all-year-round impact rather than just focused on the first half. But it doesn't change our vision and our -- the capacity to deliver, of course, growth in top line and growth in profit. Why? Well, as we -- as you know, first of all, we are -- even with this cost of good impacts, which we are partially offsetting by revenue growth management, innovations that are more accretive, but even with these negative impacts, we still are a high gross margin business, which means that growth generates both fuel for our brands, and we explained that we'll be a tiny bit more frugal on our A&P spend without reducing it in absolute terms but in percentage. There is leeway there. But also this top line growth will also allow us to deliver an improvement in percentage margin. So it's tougher. The market, as we said, is more volatile. But seen from today, we remain confident and optimistic on both items.

So we have another question from Jeremy Fialko from HSBC.

A couple of questions from me. Just following up on this question of kind of consumer confidence and inflation. I think it's pretty clear that, globally, the demand for your categories and products is very, very robust. Are there any particular geographies or segments where you have seen some sort of an erosion of consumer confidence or the inflation is having more of an effect on consumers' buying decisions? Or genuinely, is there nothing that you would single out from what you've seen so far? And then secondly, a small clarification on Russia. Can you tell us what percentage of your, I don't know, say, a start of 2022 sales you are currently running at within the Russian market, given you're just focusing on essential items?

Okay. So first of all, on the impact of inflation and the erosion of consumer confidence, today, as of today, and we haven't seen any downturn or negative reaction in different countries even though the numbers, the market growth or the market dynamics by month are super difficult to estimate, but there is no drop if we accept the impact of the lockdown in China. So we do not see that. Actually, it's a small anecdote. But I come back from Mexico where I was visiting our subsidiary 10 days ago. And I was very impressed by the -- both the dynamism of our -- of the consumption there of our business, which is true, by the way, all of Latin America and many emerging. It seems that at least in these countries, people are coming back to life, to a normal life, a bit less COVID-centered. And I see more appetite than gloom for our beauty products. As far as other parts of the world, too soon to see anything, in particular in Europe, all the more as we have the comparative down last year. So we'll have to see. And as I said, the U.S. market remains globally pretty dynamic with slight variations between channels, but it's -- but I have not seen this. So...

When we look at the cross figures of categories and geographies, they are all positive so far. So for the time being, we don't see signs of loss of confidence in any of our categories for the time being.

And as far as Russia is concerned, first of all, a reminder because I think we -- because that in the previous call, but it's important to remind that Russia is less than 2% of our global business, it's close to 1.5%. And over there, we have, as we said, we've closed all our own stores, directly managed counters and directly operated e-commerce. And in line with the European and U.S. sanctions, we stopped basically selling all our luxury items and kept essential daily products, which means mass market products or skincare, dermatological skincare products that are very important for consumers' everyday life. And by the way, we've very recently started to ship again a few of these same essential daily products to some of our Ukraine customers, again, upon request of their own clients who wanted and needed this product for their everyday life. So that's for the situation in Russia.

So we have the last question -- the next question, sorry, from Tom Sykes from Deutsche Bank.

I haven't heard that one, I must say, name before. But yes, Tom Sykes from Deutsche Bank. Firstly, just on the mix impact at gross margin. Are you able to say whether the mix impacts are positive to gross margin, perhaps pre the COGS increases that you've seen? You didn't really flesh out the growth of sort of -- well, you fleshed out, without numbers, the growth of skin, makeup, et cetera. But is that overall net positive gross margin as you see it? Then as you seem to lead to about 4.5 -- or at least 4.5% growth in value coming from price. Is that enough to offset all of the COGS inflation that you're seeing at the moment? And then just in terms of the growth of skincare and whether people are shifting budget away from skincare towards other areas of beauty. Do you see that at the moment? Or do you just think that reopening is additive? And you've obviously said that people are coping with inflation from your point of view at the moment. Or do you see some people switching from skincare into other categories, please?

Okay. So I'll ask Christophe to answer questions on gross margin, valorization and mix impact, and I'll take the skincare question.

Okay. So on gross margin, as you can imagine, there are many different effects. So first, overall, despite the price increase and the valorization, we won't be able to offset 100% of the inflation. There will be an impact in H1, a bit softer in H2, but there will be an impact. Second, there are some positive mix effect because as you can see, we have growth that is much stronger on both Luxury division and IT Cosmetics compared to our mass market division, and this is driving a positive mix. So of course, it's difficult to say right now because I'm still quite prudent because of this volatility to know what will be the right mix of sales by division in the Q2. But for the time being, it's a positive mix. And then by category, despite the growth in makeup that is rebounding. But when you see other categories, namely fragrances, this is also benefiting from the mix. So both in terms of divisions and categories, for the time being, it's favorable.

And as far as the skincare category is concerned, there is no shifting away from this category, which remains globally very dynamic. Of course, there are geographical impacts. The skincare is by far the #1 category in North Asia, which is a market that has slowed down because of lockdowns. But overall, there is absolutely no consumer shifting away from skincare. I would say, on the contrary, both because skin issues are growing in the world, where there is the impact of UV, of all the external stress factors, consumers -- people are living longer. This is a category that you use the longest. And what's been new over the 3 or 4 past years is the entrance of younger consumers in this market, and they are continuing to use products. What is -- what has shifted in the skincare market is truly the acceleration of, I would say, 2 subcategories of skincare. One is the ultra-premium skincare, which grows all over the world and including in Asia, where we have brands like Absolue from Lancôme or Helena Rubinstein that are really doing great, and the what we call dermatological skincare or medical skincare, which is skincare prescribed or guaranteed by dermatologists, which coincides to an era where people are looking for safety, for trust, for quality and brands like La Roche-Posay or CeraVe continues to fly. I think that La Roche-Posay, which is the #1 dermatological skincare brand in the world has become the #7 skincare brand all over the world, all categories, all channels included. And that's very illustrative of a deep trend, which, of course, with [indiscernible] being the only group that has this dermatological beauty division. So that's good because we have, I would say, brands and products on both of the ascending currents of skincare right now.

So we have another question from Olivier Nicolai from Goldman Sachs.

I've got a couple of questions, please. First of all, Nicolas, following up on your recent trip to Mexico. Latin America had a very strong sales growth this quarter. How should we think about extrapolating this strong double-digit growth going forward? Should we expect this to continue? Or are you seeing any signs of pressure on consumers impacting demand yet? And also, could you give us an idea of the split by division within that region? And then second question. You've given us FX guidance expecting a positive 4.4% impact on sales in full year '22. Now considering that many of your premium products are produced in France and sold abroad, can you give us an indication of the positive transactional FX impact you would expect on your operating profit this year?

Okay. So yes, Latin America, it's true that the market is very dynamic. We estimate that the market itself was at around slightly above plus 10 or plus 10 approximately in Q1 over a very difficult quarter or a difficult quarter last year, which was minus 2 because of the COVID lockdowns. So we see a rebound of the market. And more importantly, we are really outperforming this market. So just to answer on the market growth, I guess the market growth will continue to be positive but probably will not have in the second or third quarter the same favorable comparative. So there might be a little bit of a slowdown. But what really matters and what impressed me in my trip over there, it's always good to read the numbers, it's better when you see it in real life, is to see the way L'Oréal is overperforming the market. We are almost 2x the market over there. It's true in Mexico, it's true in Brazil, it's true in Chile, which are our 3 biggest markets with a great performance of the Consumer Products division, which I really want to stress with great successes in haircare with Elvive or Elseve that has become #1 in Brazil, which is really gaining traction and bouncing back alongside Fructis in Mexico. Lots of good innovations, valorized innovations next to CPD. We have a good performance of Active Cosmetics, but also of Luxury. So I think we are going to have a good year in Latin America. It's also, as in all emerging markets, a part of the world where we are really making strides in e-commerce. As we have often explained, we see the e-commerce acceleration in emerging markets as a big opportunity for L'Oréal. And it allows us to, I would say, leapfrog the deep trade conquest that was never our forte, and we see the great dynamic. I think we are above plus 40 in e-commerce in Latin America. So that's a strong acceleration, and we see that also very good performances in Southeast Asia. So we'll see how the market evolves, but I think we -- based on what I've seen, I'm confident that it's going to be a good year for L'Oréal in Latin America.

Maybe to complement on Nicolas. Because of the growth of last year, we may see a stronger growth in first semester and a slower growth in second semester. But overall, we are very confident on this continent.

And on FX as well.

Yes, on FX, that's a good question. FX, I will tell you, we did the calculation at the end of March. And in fact, we see a positive effect of 4.4%. We completed again this calculation on Friday, and it was up by more than 6%. So frankly speaking, for the time being with the current volatility, I will not give any guidance on what will be the impact on a -- at L'Oréal level. It's too complex.

So we have another question from Javier Escalante from Evercore.

I would like to go back to China, if I may. And you probably -- I probably have missed it, but it may be helpful if you comment -- if you split the growth between online and off-line, how you see the market growing, Hainan versus mainland. And going forward, do you have any read of what's happening between these off-line and online given the lockdowns? And I have a follow-up on China, if I may.

Well, as far as the market is still concerned, we see in terms of Hainan versus the domestic market, clearly, Hainan is the strongest growth for the market and for L'Oréal because it's really a destination that's being encouraged by the Chinese government. But overall, we look at it globally, and we don't like to split it too much because you've got people that used to go to Hong Kong that go to Hainan. You've got -- right now, Hong Kong is in lockdown so it benefits Hainan even more. What's important is that the local market in China remains dynamic, positive and was very -- had a very good start, and that we are overperforming it. And we are playing our cards in the region strategically to make sure that we capture consumers wherever they shop and that we loyalize them if they are recruited through Travel Retail. And that's what our teams are doing and managing, by the way, in a very close cooperation between our Travel Retail team and our domestic China team. As far as e-commerce is concerned, or brick-and-mortar in China, the -- if I take North Asia globally, we see that e-commerce continues to grow. It's double-digit growth, whereas off-line has been flattish impacted because off-line has been the most impacted by the lockdowns. And within e-commerce, which is a question I think I did not totally answer earlier on, within e-commerce, there are lots of shift in China as we speak. We see that Tmall in terms of traffic is a bit plateauing and in some events can be negative. Whereas you see a strong acceleration of other retailers, JD, which you know. And I think the big phenomenon is the first steps which are now beginning to be big steps in e-commerce of Douyin, so the company that owns TikTok, where we are also beginning to sell our brands with pretty good results and beating the market. So it's the beginning of the year, but with very complex situations and comparatives. It's more a flattish brick-and-mortar and a double-digit growth on e-commerce in North Asia.

And just to follow up on China, 2 things. What percentage of roughly -- I mean it used to be 50%, but I would believe that it's higher. What percentage of business is in e-commerce? And again, this commentary that you made that China somehow accelerated versus Q4, at least in January and February, that was great news. What would you attribute that? Is it that it's just simply that the innovation and the activity around the Lunar New Year and Valentine's Day and all that was very strong? Or there is something else that happened in January and February that somehow got derailed in March because of the lockdown.

Well, the weight of e-commerce in China is over 50%, close to 55-ish. So it continues to increase in its weight of our business. And it's -- I would say that what's important is that it's more diversified today than it was a couple of years ago because we have more players that we are working with. And as far as the beginning of the year is concerned, frankly, it's hard to, for me, to really give you a good reason. It's true that our teams really worked at great activations both for Chinese New Year, Women's Day and the beginning of the year with very good results. It's true that we are, by far, the leader of this market. Actually, even in Luxury, we hit our highest record share in China at 30%. So we probably did contribute with our innovations and activations to the dynamism of this market. Now I cannot totally exclude, like in many parts of the world, Chinese consumers also want to indulge themselves with beauty products.

Maybe because I've been checking the figures since Q3. And honestly speaking, when I look at the market, when I look at the market in terms of sellout, when I look at the performance of L'Oréal in terms of sellout or in terms of sell-in, we see the figure is quite consistent quarter after quarter for the time being until Q1 and the same in terms of split between off-line and online. We see an off-line that is still negative for the time being. But online, above double-digit growth. So...

So we have another question from Emma Letheren from RBC.

You mentioned that you're still selling essential products in Russia, and I was wondering how you think about reputational risk in the context of this considering the backlash other consumer companies have faced in recent months for continuing to operate there. And then my second question is, you mentioned some huge outperformance in China and Latin America and global fragrance as well. Just wondering if you could talk a bit about your weak spots, the categories and regions where you are maybe underperforming or outperforming to a smaller extent in Q1.

Well, regarding Russia, as I said, we are monitoring the situation extremely closely both in terms of consumer sentiment, in terms of our team sentiment, and we are taking all the appropriate measures to offset any reputational risk. And so far, I think that L'Oréal's position has been very well understood and very well accepted. So of course, should the situation warrant it, we will make new adjustments as we've done in the past. It's a very complex topic, and I think people understand it. So that's for Russia. And as far as weak spots, of course, we have a lot of opportunities rather than weak spots. If I have to choose one week spot for this quarter rather than pointing a category or a country, it's our supply that has been both penalized by the global context, by the fact that what we sold, the acceleration we've had on some products was not exactly always what we had forecasted. So in yesterday's world, it was very easy to adapt and react quickly. Today with the constraints weighing on transportation or availability of components and raw material, it is harder. So we have worked hard at fixing CeraVe and we have a few other products that are now penalized in makeup or even in mass market skincare. So this is our #1 weakness. This being said, we have plenty of opportunities. As we often say, our market share is only 14%. It's probably closer to 10% or below 10% in Southeast Asia. It's -- and when we see we can reach 20% in Western Europe, that gives us a lot of room for growth. And then each country or each region has different opportunities in terms of categories and divisions. And that's -- I think that's the -- if I may take the opportunity of this question to insist on the point, it's the magic of the L'Oréal model because we have these 32 or 35 brands now that play on different types of consumer psyche and different price points and different categories. And in our culture, in our organization where we are centrally -- strategically centralized and operationally decentralized that it leaves each country manager the possibility to play its cards differently according to what's happening. So I think, China, which we've discussed extensively, very clearly, we are dominant in skincare. We are pretty good in makeup. And these 2 categories will continue to grow. But we are quite early in our fragrance story, and the fragrance market is beginning to boom in China as we've commented. And we're also quite early in our haircare business. We've really restrategized our haircare in China, like in most countries, by the way, around more premium haircare. So more valorized, more profitable also, whether it's for Kérastase or for some of the valorized CPD innovations. And in each country, each region, these cards will be played according to the local opportunity. So rather than weaknesses, I see a lot of opportunities.

So we have another question from Rogerio Fujimori from Stifel.

I just have a follow-up question on e-commerce. I was just wondering if you could give us some color on your e-commerce performance in direct-to-consumer versus retailers like Sephora and pure online players like Amazon? What I mean is, which segments outperformed the 8% like-for-like global average e-commerce growth in Q1? Was it higher margin DTC or the other channels? Just to think about any potential margin implications, if any. I think back in '19, you disclosed the mix being more or less a little over 40% DTC. So how different is it in Q1 versus '19?

Well, if I look at the beginning of the year, as always, you have to be very cautious with extrapolations on one quarter, particularly when we are facing comparatives when you had lockdowns of brick-and-mortar. So if I look today at the e-commerce performance, pure players are driving the growth. D2C is doing okay. And what's most difficult are the e-retailers because all their stores are reopening. So if you take the customers you've mentioned, they were in many countries with store closed, now they are reopening. So there is the same rebalancing that we've seen even in our own business with a brick-and-mortar growth that is higher than e-commerce. When you have stores, there is a rebalancing there. So -- but that's really a Q1 phenomenon. Our policy remains to continue to serve consumers wherever they want to shop, whether it's D2C, which continues to be strategic for us; pure players, which have massive reach; and e-retailers who are themselves pushing their e-commerce as a way to serve all consumers. So looking ahead, we'll continue to try to push all 3 channels as it relates to e-commerce.

So we have another question from Eva Quiroga from Bank of America.

I was wondering, Nicolas, if you can go back to digital and the comment you just made about the rebalancing between brick-and-mortar and e-commerce. Is that something that's just a comp issue? Or is the strong growth in categories like fragrances, which I presume are more brick-and-mortar, also [ netting ]? And then my second question on digital is when I think back of the financial crisis, your sales growth, especially in luxury, did come under a lot of pressure. But at the same time, you launched a product [indiscernible] really, really well. Is it fair to assume that now that you have so much more access to data, you will be able to manage the volume price component in a way that the volatility is going to be less pronounced if we go into a tougher consumer environment? And then lastly, I was just wondering if you can talk a little bit about China retail outside Hainan, if you see any pickup there.

Okay. So just to be quick on digital, I think it's a comp effect. I think it's nothing more. Of course, we know consumers enjoy going back to some experiential shopping with the stores reopening. But overall, they've taken the online shopping habits, its convenience. And it's always going to be, which is why we often talk about a world when it will be 50-50, like it is today in China, is that you have, on one hand, the convenience and also the ability to find the right price online and you have the experience, the ability to smell a fragrance in a store. But I don't think there is more than in this beginning of the year, more than a comp effect in this slightly balancing because in the end, the growth numbers are quite close between the 2 channels. Regarding your second question, I apologize because we had some sound or line issues. Your question was not super audible. So if you don't mind repeating it, that would be great.

Yes. I was just wondering if you can talk a little bit about you not having so much more access to data, if that is going to help you maneuver through any retail consumer environment more effectively than you did back in the financial crisis. How important is it in your ability to balance volume versus price and mix?

Well, I think, first of all, what allows us to mitigate risks even before data, which, of course, adds our ability to forecast more accurately and to tailor make our answers to consumers' expectations is our balance. It's the balance we have between geographies, divisions, the number of brands we have. We have many more brands than we have back in the -- during the financial crisis. And again, some are regional, some are global. And that allows us to cater to the needs of consumers wherever they want to shop. And I think, going back to one of the questions because I think I heard in your -- the first version of your question that you mentioned the luxury downturn that happened during the financial crisis, I think we are not even close to experiencing a luxury downturn. We see many people that are affluent and even the middle classes want to indulge. And by the way, it's not by mere chance that our Luxury division continues to grow at such a high pace, at plus 17.5% this quarter. It's because, of course, they're doing a fantastic job, and they are beating their market, but the overall demand for luxury products and premiumized products is very high. The market is premiumizing, overall. Christophe, you want to add something?

Yes, and Eva, don't forget that when we speak about luxury, it's important to address, of course, Asia and in particular, China. And it's in this country where we have a considerable amount of data, first-party data to start with, and we know very well how to leverage better the pocket of growth that we want to look for. In terms of market share, we know that in Tier 3 to 5, we are probably at 1/3 of the market share that we have on Tier 1. In terms of penetration, we know that in Tier 3 to 5, we are at half the penetration that we have in the first 2 tiers. And everything I'm mentioning right now is thanks to the data that we get from China. So I have to say that, for sure, compared to 5 years ago, data would be a strong lever to compete with a potential slowdown in the market. Because, again, we see many more opportunities than risks today in China.

And regarding Travel Retail, Q1 was a very strong quarter for Travel Retail overall with high double-digit growth. What was the -- probably the event of the quarter, even though we remain far from the 2019 numbers is the very strong rebound of international traffic in the Western world in particular. Even in the context of the Ukrainian invasion in March, we've seen the traffic and the business bounce back strongly in Western Europe, in Europe in general, by the way. And we've done a good performance in Europe. And as far as Hainan is concerned, as I said, there was a strong growth in Q1, particularly around Chinese New Year, where we did gain significant market share during this period with great animations. I wish you could see the pictures of Lancôme, YSL or Armani. And we are now #1 in Haitang Bay, which is the #1 mall in Hainan, which is the high-quality mall. And just looking ahead because this is not going to be stopping, there's another gigantic mall project, which is underway in the north of the island, so on the other side, and that should be opened at the end of the year with 29,000 square meter of beauty space. So it's 2.5x the size of Haitang Bay. So this is also quite promising because this is definitely a place where Chinese consumers will go. So hopefully, again, with all the due precautions considering the volatile context we live in, we see a continuous rebound of the traffic and consumption in the Western world. And Hainan remaining with, of course, the Korean duty free stores, a destination for North Asian shoppers.

So we have our last question from Iain Simpson from Barclays.

So a couple of questions from me, if I may. Firstly, you talked about headwinds from U.S. supply chain issues in the first quarter. Are you able to give any indication as to how big that might be? And how much of that headwind might drop out in Q2? You indicated that there would still be some headwind in Q2. Secondly, if we could just think a little bit about the margin bridge for this year. You've said A&P will be down as a percentage of sales, albeit up in absolute terms and, obviously, reiterated margin expansion. Would it be reasonable then to assume perhaps gross margins slightly down this year from the very strong gross margin performance you had last year? And then just finally, I wondered if you could give any comment on India. At the start of this year, you talked about Lat Am and India as 2 potential growth engines going forward. It's clear from your earlier commentary that Lat Am is going very well, indeed. I just wondered if you could give any commentary on how India is at start of the year.

Yes, yes. As far as the industrial headwinds in North America, frankly, I have nothing much to add to what was already said. It is -- it has been material for our mass market division and, to a lesser extent, for ACD, which is getting closer to resolution. So there will be, I guess, an impact on Q2, but hopefully, lesser than on Q1. There's not much more I can elaborate on at this point. It's very hard to measure. The on-shelf availability was okay in some categories, but not good enough in makeup and CPD skincare. So we are working very hard to make things better, but everything is unfortunately not in our hands, but that should improve as the year progresses. Regarding your second question on the P&L, I think your assumptions are right. We should see a reduction in the gross margin and other lines of the P&L, allowing to continue to deliver growth. I insist on that because when we talk about our A&Ps, we talk about fuel, and fuel is what it takes for a plane to fly high and fast. So of course, we will always do what it takes to overperform the market and to continue to conquer market share and to boost our brands short-term and long-term desirability. But as you said, last year was a year where we could afford to increase very significantly a percentage of A&P, and I think we should be able this year to find the right balance between percentages and absolute value of continuing to support our brands. Christophe, you want to add something?

So Iain, and don't forget also that we are still working on the SG&A that they should still decrease this year. So we are pretty confident regarding the bottom line, and we will still increase the bottom line in a nice way like we did in the past years.

And as far as India is concerned, it's been a good quarter, with India up 20%. It's been mainly driven by our professional business but also by our CPD skincare. And as in all emerging, a good acceleration in e-commerce. But what I want to say about India is that we are too small there. It's still one of the markets in the world where we have one of our lowest market shares. So one of the key missions of our team in India and of our Consumer division because it's really a mass market business is to continue to accelerate to bring our market share to where it should be, and it will take maybe some time. But what we see is that considering the fact that our market share in e-commerce is superior to our market share in brick-and-mortar and that the market is really accelerating in e-commerce, I think we are in a good position to improve our score in this very beautiful and huge country.

So we have no further questions.

Thank you very much. We have no further questions.

Thank you very much to everybody for listening.

Thank you.

Thank you.

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