L'Oreal SA's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Oct.16.11 | About: L'Oreal Co. (LRLCY)

L'Oreal SA (OTCPK:LRLCY) Q2 2011 Earnings Conference Call August 31, 2011 3:00 AM ET


Jean-Paul Agon – Chairman and Chief Executive Officer

Christian Mulliez – Executive Vice President, Administration & Finance


Simon Marshall-Lockyer – Jefferies

Astrid Wendlandt – Reuters

Jean-Paul Agon – Chairman and Chief Executive Officer

Thank you, Christian. I would now like to comment on the points which seem to me to be the most important and significant in the first half and share with you our vision and prospects for the rest of 2011 for the second half and for the coming years. First of all the market, I think you are interested that. As we had estimated in February, the growth of the cosmetics markets in the first half was at the same level as in 2010, which is approximately 4.1%, but the numbers may not be quite specific, but while 2010 was the year of the rebound, 2011 has been a year of very strong differentiation.

First of all, with regard to distribution channels, the luxury channel is continuing its post crisis rebound with a substantial growth rate of 6.4%. Mass-market has grown by 3.7% in line with the 2010 trend. The dermo-cosmetics trend in pharmacies is at plus 3%. It has accelerated slightly driven by Latin America and Asia. The real disappointment has come from hair salons, which contrary to the luxury segment have not yet experienced a rebound and whose importance is still limited in the emerging countries as their growth remains very weak at plus 1.1%.

Differentiation is also very strong between geographic zones. The growth rate was weak, but it was nevertheless positive in Western Europe, which accounts for 25% of the worldwide market at plus 0.9% reflecting contrasting situations encouraging growth in some northern countries – Great Britain and northern countries and in the United Kingdom and as well as clear difficulties in some southern countries such as Portugal and Greece. Encouraging acceleration in North America 20% of the worldwide market at 3.9%. The latest news we got on North America for the July panel was very encouraging at 3.9%. Thanks to the rebound of the luxury segment and a positive trend in mass market.

The Japanese market is negative at 3.8%, which was only to be expected into the series events, which have affected the country. And finally in the new markets, which now represent 43% of the worldwide market, we see very strong dynamism at plus 8.8% with very strong growth in particular in Asia-Pacific and also Latin America around 10.5% or 11%, a more moderate growth at plus 6.5% in the Africa-Middle East zone and a weaker growth around 3.9% in Eastern Europe. Overall, therefore, one can say for the first half and as we had expected the cosmetics market remained favorable and three quarters of its growth comes from the new markets.

In this context of a positive but contrasting market, L’Oreal has continued to strengthen its positions with like-for-like growth at 5.2%. The growth is outperforming the market more or less at the same rate as in 2010. Consumer Products have gained market share particularly in the United States, where our brands have grown twice as fast as the market, but also in Asia and Latin America, where the division is conquering strategic positions for the future. The Luxury Products division has also strengthened its worldwide positions, particularly in Asia, where it is growing very quickly and strongly. This division is undergoing a real makeover. Its brand portfolio enables it to occupy all the luxury segments and to make 95% of its sales with its 10 main brands. So, it’s very focused, very concentrated. The division is thus ideally equipped to take full advantage of the strong worldwide demand for Luxury Products.

The Professional Products division, despite a difficult market, has steadfastly maintained its efforts and it too has strengthened its global market penetration. It has conquered more than 34,000 hair salons since the start of the year and made market share gains in almost all the regions of the world. The division is continuing to apply its technical focus strategy making it the privileged partner of hairdressers all over the world and it will benefit from the development of salons in new countries. Active Cosmetics has advanced worldwide in line with its market, thanks to the dynamism of La Roche-Posay and the gradual rise in activity of new brands, Roger & Gallet, which is in Europe and SkinCeuticals, which are becoming more international.

The Body Shop has regained its growth momentum at plus 4.4% in the second quarter. Thanks to new product launches and its growth in new markets and also in new channels such as travel, retail, and e-commerce.

Lastly, as Christian indicated Galderma saw its first half growth was slowed to 5.3% reflecting the impact in the United States and Western Europe of the arrival of generics for two of its products, Differin and Loceryl, but we are very confident about the future particularly because the Q-Med acquisition is enabling Galderma to complement its range of esthetic and corrective procedure products and thus to have a very comprehensive portfolio in this field.

In geographic terms to sum up, weak but positive growth at plus 0.8% in line with the market in Western Europe thanks to the good performance of our two most important countries, France and Germany, but we saw difficulties in other countries, in particular, the Southern countries. A fine performance in North America of 5.8% mainly reflecting market share gains in the Consumer Products Division and Luxury Division.

Strong growth in Asia, excluding Japan at 16.1% with good growth figures in all the key countries, where the Group is gaining market share in a region, which will be the priority strategic region for the future with nice growth in all the key countries, China, India, South Korea, Taiwan, Indonesia, Thailand, and the Philippines in all the Asian countries. Growth was strong also in Latin America at plus 17.3% in Brazil, Mexico, Chile and Argentina. Good growth in Africa, Middle East at plus 10.1%. Conversely, the performance in Eastern Europe is disappointing.

After many years of strong growth in large market share gain, including in Russia, in all the Eastern European countries, including Russia, the positive growth is the result of a combination of factors, greater competitive pressure, the marketing mix, which is not always optimum and which we need to work on and the unfavorable phasing of launches. That is the reason why we are confident in our ability to pull all these points right and to gradually return to growth in these countries concerned, where we have very good positions. Overall, in the first half the Group not only continued to outperform its market, but above all has reinforced its positions in the strategic markets of the future in Asia, Latin America and North America.

As for the results and without wishing to repeat what Christian Mulliez said in his very clear presentation, I think it is fair to say that we have been indeed solid and of good quality. You saw the net profit excluding non-recurred items at €1.506 billion. It is at a historically high level and has advanced by 6.7%. As a result of a reduction in non-recurrent expenses, the net profit after minority interest has grown by 11.6%. This is all the result of the efforts and the progress we have made in a number of areas, in particular in a new area, which is the introduction of what we call wall-to-wall, which was introduced a year ago in our plants. It enables our suppliers of bottles to supply the bottles directly in our factories and this generates large gains on our packaging items. This is one example amongst others. This illustrates our optimization of our production costs.

So, the sum of operating profit plus R&D expenses plus promotion and advertising expenses what we would call the strategic contribution if you allow me to use this new concept is at exactly the same level as the record level posted in the first half last year. So, we wish to increase our R&D investments and boost our growth drivers and this is what explains the reduction in 50 basis points in operating profit. If we hadn't had that, it would have been identical to the record of last year. And we estimate that the annual total of promotion in advertising expenses will in percentage terms be at the same order of magnitude as for the full year 2010. These results illustrate the quality and some liquidity of L’Oreal’s business model and mean that we can confirm our Group’s profitability target for the full year 2011.

Finally, you have seen that our debt is at a historically low level, which enables us to cope calmly with any possible financial turbulence and means also that we are in a position to take any opportunities for strategic acquisition if they arise. As for the second half, we are tackling it with realism, but also confidence and determination. Realism, first of all, we have to be clear sighted, after a summer of very sharp economic disruptions. The contest is obviously uncertain and the economic environment in certain regions such as Western Europe is hard to predict. The consumer spending figures in Western Europe in July were not very good.

We think, however, that the world cosmetic market should record second half growth close to that observed in the first half and we also confirm our goal of outperforming the market and continuing to strengthen our positions. In terms of sales spacing in view of the schedule of our many launches which I am going to be presented in just a little while, we expect that growth will be stronger in the fourth quarter than in the third quarter. But we're also confident because we have a powerful product launch plan and initiative plan for the second half to win over consumers, attract them to our brands and gain market share.

Here are few examples of our launches in the Consumer Products Division, a complete makeover of the major L’Oreal Paris brand Elseve for hair products. We relaunch the Elseve brand about every 10 or 15 years, it's a historic makeover. We have great ambitions with that. At L'Oreal Paris a great new skincare line Total Repair 10 RevitaLift, the first worldwide anti-wrinkle franchise, and definitely a very Garnier innovation, the Miracle Skin Perfector, the first BB Cream in Europe. I don't know whether you're all familiar with what a BB cream is, but with just one gesture it gives you a perfect skin and it should be extremely successful with European woman as it is with Asian woman.

The Falsies Flared Mascara at Maybelline; Maybelline is the number one for Mascara. In Luxury Products the revolutionary new skin line at Lancome called Visionnaire featuring a major molecule as we produce them every five or 10 years from research molecule LR 2412, the combination of 10 years of research for which 17 patents have been filed. It's a new breakthrough following on from Genifique, which is emblematic of our ability to create genuine technological breakthroughs in the area of beauty, thanks to the power of our advanced research.

I believe that Visionnaire is going to be a great success and something, which will leave its imprint in this period. There will be the launch of L'Homme Libre fragrance at Yves Saint Laurent with Benjamin-Millepied, you will recognize as the ambassador; Loverdose, the new Diesel fragrance, which is disruptive as the brand is; and the rollout of the new fragrance Code Sport by Giorgio Armani which is very successful. In Professional Products, the launch of a major new Tone on Tone, a hair colorant to supplement our product line. The new launches are Dialight and Diarichesse and at Kerastase, is also launch of highly innovative personalized hair care line, which provides individual care to each customer Fusio-Dose.

Finally, at Active Cosmetics, LiftActiv Derm Source serum and Dercos Aminexil Pro at Vichy their real solution to a hair loss and Cicaplast Baume B5 at La Roche-Posay. La Roche-Posay is the brand most recommended by dermatologists. As Les Echos was saying this morning there are strong and attractive innovations to develop our brands and enhance growth in the second half, and for next year also. Also as you will have noticed I hope, several of our brands are in the midst of makeovers and are accelerating their growth.

L'Oreal Paris first of all, thanks to its innovations and the modernization of its image. You see here the pictures of the new L'Oreal Paris brand. It is positioned on the –– as a premium brand on the mass market, together with Lancome which has undergone a thorough makeover during the past two years with breakthrough innovations, Genifique Teint Miracle and others new ambassadors and also new communication and more prestigious sales outlets. So there is a real innovation of Lancome, which is the number one brand for luxury beauty in the world and it plans to stay in that spot and strengthen its leadership.

Several other brands have revitalized over the last two years and have built up a real momentum such as Maybelline, which is a winner in all regions with double-digit growth rates. Kiehl's also whose growth model succeeds wherever it goes, probably the number one brand for luxury where it is available. Giorgio Armani, which is experiencing a genuine revival and La Roche-Posay with double-digit growth rates. And so, all of L'Oreal's teams are motivated and determined to seek out growth opportunities and win market share in each distribution channel and each region.

Finally, looking beyond the volatile context and a short-term perspective, we are very confident about the solidity and sustainability of the Group's growth and profitability model. Our growth prospects in an uncertain context make us very confident. We are very confident in our model and our medium growth prospects are more favorable than they have ever been before.

First of all because the worldwide cosmetics market is going to continue its growth mechanically driven by the new markets where hundreds of millions of middle-class consumers are now aspiring to consume high quality cosmetics products and by major demographic trends such as population growth, the increase in life expectancy and growing urbanization.

Secondly because we are banking more than ever on research and innovation, which is the most crucial important factor in this industry, and which will enable us to be increasingly effective in winning over consumers and satisfying their needs to develop markets and just strengthen our leadership. We thoroughly reorganized our research arm last year, firstly to strengthen our ability to create genuine technological breakthrough such as the LR 2412 and boost the development of our new products, and secondly to make research more consumer focused.

And today we have a unique strength, which combines extremely powerful fundamental research and regionalized product development. Thanks to the creation of research and innovation hubs in all of the major markets. Also because our portfolio of powerful and international brands, which encompasses all channels and all segments has been optimized to enable us to meet all types of demand and aspiration from all customers worldwide and our brands have a vast potential for internationalization.

In Asia, as I was indicating, which is the area with the highest growth potential, we have more than doubled our market shares in the last 10 years to take second place in the market in 2010, and we hope to reach the number one place this year or next year. We still hold only 11%. Since up to now, we have concentrated on the skincare and make-up markets, while our presence is still limited to the major markets of India and the Asian countries. So there are considerable growth possibilities.

In Africa and the Middle East, a zone of strong population growth, which offers a substantial long-term economic potential, we are not very developed yet. And the last week, we created a new multi-division zone entrusted to Geoff Skingsley to accelerate the development of our business in this region, which is a new frontier and the last frontier for L'Oreal. And also because of our strategy of universalization, which consists in developing and adjusting our products in each region of the world in order to meet the needs of local consumers as effectively as possible and the strategy will enable us to take full advantage of the emergence of these new markets to concur 1 billion new customers over the coming years.

We are also very confident about our prospects of improving our profitability. In gross profit terms, we are going to continue our efforts in purchasing industrial productivity and supply chain efficiency. We will continue to take steps to optimize purchasing across the board as shown. For example, when we recently signed an agreement you may have seen the information on that. We signed an agreement with a company called Xchanging to optimize our indirect purchasing and make substantial cost savings. In the field of advertising and promotion expenses we have already made a great deal of progress by centralizing media buying at Group level and by concentrating our purchasing on a limited number of media agencies worldwide and this is something new.

We are currently carrying out comprehensive and in-depth studies of all the divisions to optimize the productivity of our growth drivers, thanks in particular to the widespread use of economic models, which measure the impact of the various growth drivers in order to optimize the return on investment and the measurement is done instantly. At the geographic level, most of our subsidiaries and the new markets are now achieving critical mass, as for example in China and Brazil, which are already amongst our 10 largest subsidies in the world, and this will enable us to steadily improve the profitability in this zone.

The group is thoroughly transforming itself since the crisis. Its strategy has been reframed, its organization reshaped, its industrial facilities reorganized, its research approach revised, its net marketing model revised. Everything is now placed to conquer the new growth areas and to continue to strengthen our worldwide leadership. We believe that we have great prospects for sustainable growth, a real potential for improving margins and extremely solid financial situation and a talented and committed team.

Our fundamentals are in this difficult context are solid, dynamic and of good quality, I mean that we can look forward to the future with confidence and ambition. We are thus well prepared to win over a billion new consumers and to promote a new vision of our business universalization and beauty for everyone. Thank you.

Christian Mulliez – Executive Vice President, Administration & Finance

Good morning ladies, good morning gentlemen, the presentation of the financial results will include the information published in July. We will have information on sales profit, cash flow trend and the balance sheet situation. Sales amounted to €10.150 billion, up by 5.9% at constant exchange rates at like-for-like sales increased by 5.2%. The structure effect is positive at 0.7%. It is mainly attributable to the acquisition of American distributors of Professional Products, C.B. Sullivan and Peel’s. The acquisition of the nail polish brand Essie and the Q-Med, company consolidated by Galderma as of March 1, 2011 after a negative exchange effect amounting to minus 0.9%, growth based on reported figures came out at 5%.

Regarding the exchange effect, it is of course critical to foresee what it will be for the complete year 2011, but I can indicate and confirm that what we said in the middle of July that would based on the current rates i.e. €1 at $1.44, the full year impact should be to the tune of minus 1.8% on our overall sales. The main currencies, the U.S. dollar and to a lesser extent the Chinese Yuan and the Russian Rubles were the main contributors to this negative impact. Conversely, the Brazilian Real, the Japanese Yen and the Mexican Peso strengthened their position compared to the Euro. We should note that’s the weight of the Euro during the first half of 2011 accounted for 31.1% of the corporate sales, down from its position in the first half of 2010 which came out at 32.5%. The group is further strengthening its position outside of the Eurozone.

Moving on now to the sales program and division like-for-like of Professional Products increased by 2.1%, Consumer products have grown by 5.2% in the mean time, Luxury Products are still experiencing a rebound at plus 8.5%, Active Cosmetics was at 3.2%, The Body Shop increased to 2.6% and Dermatology Galderma posted growth of 5.3%. If you are with about Galderma, Galderma experienced this year the competition of generic products from two drugs, Differin Gel and Cream 0.1% in the United States and Loceryl mainly in France in anti-fungus product. For the whole of 2011, we may expect growth of Galderma which will be slightly higher than that of the first half of 2010. We should also note on this document still on Galderma the impact of the acquisition of Q-Med company, which is significant on the growth on reported basis Galderma sales which came out at plus 13.6%.

Now, geographic zone, all of the zones have achieved sales growth. Western Europe with modest performance at plus 0.8%, North America experienced strong dynamics at plus 5.8%, new markets have displayed growth figures at 10.1%. New markets have seen their relative weight strengthened again because they have accounted for 37.4% of the cosmetics sales in the first half of 2011 compared to 35.7s% during the same period of 2010. Within the new markets, the Asia-Pacific zone experienced strong growth at plus 13% and an even stronger growth excluding Japan at plus 16.1%, same goes for Latin America with a growth figure of plus 17.3%.

However, Eastern Europe was a disappointment. After several years, so far strong growth, the zone has experienced strong slowdown across all of the countries, notably in Russia. These difficulties should only be temporary and we should resume with growth in this region very soon. Africa and the Middle East have displayed a growth figure of plus 10.1%. Moving in and zooming in on the BRIC countries, which have displayed a combined growth figure of 12.1% and which now account for 16.7% of our overall cosmetics sales at the end of June of 2011.

Only Russia is experiencing somewhat difficult situation now and the four other countries have continued to record sustained growth figures, particularly China at plus 17.1% and India at plus 26.4%. Looking at the different business segments, this is a question that we often have from you. L’Oreal as you know is operating across six different categories. They have all grown in the first half of 2011 with notably some strong increase in skincare plus 5.5%, in the make-up division plus 6.8%, in the fragrance department plus 5.8%, and regarding the hygiene department we can see a continuation of the growth in the deodorants category within the hygiene department. They have increased by 15.2%.

Looking now at the consolidated P&L and starting with the gross margin. Gross margin at €7.260 billion has increased by 5.4% and has come out at 71.5% of overall sales compared to 71.3% in the first half of 2010. There is no improvement of 20 basis points. That was the result of favorable factors that have had positive impact, and more particularly, the improvement of the effectiveness and productivity of the manufacturing plants, the good management of inventory which has led to a new drop in the provisions for absolute and slow-moving inventories and the positive conversion impact resulting from a strengthening of the euro against other currencies.

However, the increase in the price of raw materials has had an unfavorable impact. As you can see we have been able to make up for the increased prices of raw materials, thanks to the very hard work done by the purchasing teams, thanks to the revamping and reorganization of our company internally, thanks to the partnerships with the suppliers, and the increased in the number of volumes produced. Regarding the increase of customer allowances to customers, I mean this is a question you often ask and rightly so, it was very moderate and had virtually no impact whatsoever on the gross margin.

Research expenses have increased by 12.2%. This increase results partially from the integration on 1st of March of the Q-Med Company. At constant exchange rate and like-for-like, the growth of research expenses has been to the tune of 10.7%, a strong increase shows the willingness and the determination of the Group to strengthen its expenses in the field of research and innovation. Across the whole of 2011, research expenses expressed as a percentage of overall sales should slightly increase compared to 2010.

A&P costs came out at 30.9% of overall sales, and they are stable compared to 2010 and they have increased by 40 basis point compared to the first half of 2010. Across the whole of 2011, A&P costs should not differ very much from the level had reached in 2010, which was close to 30.9% or 31% of overall sales. SG&A is at 20.5% of sales, came out at a level that was lower than that of 2010 in general and slightly higher than was the case in the first half of 2010, which as you would probably remember was a historically weak comparison basis. Over the whole of 2011, we would expect a slight improvement in percentage compared to year 2010.

Moving on now to the profitability 17.3%; we can see the operating profit in the first half of 2011 at 16.8%, which can be compared to the record level achieved in the first half of 2010. Now we have a difference of 50 basis points and this is the result of the increase in the investments and what we call the sales field, in other words research costs and expenses and A&P costs.

Moving on now to the half yearly profit figures, we have looked at little history three-year history, you will see the particularly high level of the first half of 2010, which was 17.3%, we can say that considering 2011, profile will be more balanced between the first half and the second half than was the case in both 2009 and 2010.

Moving on now to the operating profit of the different branches and divisions. I’d like to remind you that the half yearly operating profits cannot be extrapolated across the entire year. As shown by the first two columns of the table that we traced the history of 2010, the Professional Products Division experienced a very tense year in 2011 as you know because the market is challenging and its profitability moved from 21.2% to 19.8%. The profitability of the Consumer Products Division at 20.1% has shrunk somewhat compared to the first half of 2010, but is much higher than what was across the whole of 2010 at 18.5%.

The profitability of the Luxury Products Divisions at 18.9% is much higher both 2010 as a whole which was 17.5%, and higher than the first half of 2010. We had a figure of 18% then.

Active Cosmetics, which has higher seasonal nature, has experienced strong profitability at 26.3%, which is very close to the level reached during the first half of 2010. The increase of the non-allocated expenses at 2.8% in particular is the result of the increase in the basic research efforts because that's where it is the non-allocated expenses.

The profitability of the Body Shop was completed is completed for the main part in the second half of each financial year. So it's growth or like there off in the first half is not significant, but the whole of the year we anticipate as far as the Body Shop is concerned, a slight increase of profitability, operating profitability compared to what happened in 2010 as a whole.

Dermatology, where traditionally we have higher profitability figures in the second half, the drop in profitability this year in the first half results from two different factors. The first one was already mentioned before. It is the competition of generic drugs on Differin and the Loceryl product. And the second impact is the negative exchange impact because Galderma achieves a large part of its business and profitability in the United States and is less impacted by the drop of the dollar against the euro. For the entire year, we may expect operating profits of Galderma, which will be slightly higher than 15% of its overall sales.

Moving on now to the operating profit. From the operating profit to the net earnings excluding non-recurrent elements, we have an increase of 2%. We have the financial income excluding dividends, which has dropped strongly. It is now at minus €9 million. This strong decrease results from the significant drop of our net debt for the entire year. We may anticipate a finance cost, which will be slightly higher than €20 million. Sanofi’s dividend amounted to €295 million, an increase of 4.2%.

Tax amounted to €480 million at a rate of 24.2%, much lower rate than that of the first half of 2010, which was 27%. As indicated a year ago, the rate for the first half of 2010, which was particularly high, was the result of the different tax audits that took place. For the whole of 2011 we may anticipate a tax rate that would be slightly higher than 28%, all things being equal.

The net earnings excluding non-recurrent elements came out at 1506 million euro, net earnings per share was €2.52, an increase of 5.4%. Concerning the diluted average number of shares for the entire year 2011, we can anticipate an amount between 598 million and 600 million shares just for your own calculations.

Last part of the P&L. After allowing for non-recurrent elements, in other words gross charge of 62.6 million euro and net of tax €39.9 million, net earnings amounted to €1,466 million, which is an increase of 11.6%. The gross non-recurrent elements correspond for the main part on the one hand to depreciation of intangible assets for the amount of €39.7 million. And on the other hand correspond to the provision for the closing down of Clark's American Company plant for about €30 million.

Moving on to the cash flow. Gross cash flow amounted to €1,795 million, which is stable compared to the first half of 2010. The stability results from the amortization and provisions which are 276 million have struck strongly compared to its level of €398 million in the first half of 2010. Within that position, amortization has been stable in absolute value compared to the first half of 2010.

However, there was a difference in the provisions to the tune of €110 million. Most of this difference comes for the main part €80 million from the provisions for investigations and settlement of disputes in the competition field. This is something we will have to do in the first half of 2010. We should add to this also the allowance for the charge for provisions for tax audits and this is something as I said that happened in the first half of 2010.

Now, moving on to the working capital requirement, it has increased quite a lot as every year in the first half. However, this is a stronger difference this year. The additional increase compared to the variation that we saw in the first half of 2010, it's a difference in the difference, the difference in the variation. So the additional increase compared to the variation that we saw in the first half of 2010 has come for the main part from the trade accounts payable and tax positions.

Regarding the trade account payable, the increase in the expenses in the fourth quarter of 2010 has led mechanically to cash-outs in the first half of 2011, and as regards to taxes, we're talking about cash flow movements, partially tax payments or down payments have been made in particularly in the United States accounting for this.

Now, capital expenditure to the tune of €400 million account for about 4% of overall sales and over the entire year, they could account for about 4.5% of our sales. After payment of the dividend and taking of stakes in different companies, let me remind you that for the main part they correspond to the acquisition of the Swedish company Q-Med by Galderma, the residual cash flow was established at minus €466 million.

Moving on now to the balance sheet, the structure of balance sheet has become even more robust. As the shareholders equity now represents 64% of total assets, their increase compared to December 31, 2010 is the result of the balance between on the positive side, the net result of the period and the revaluation of the Sanofi-Aventis Securities.

And on the negative side, the payment of dividends by L'Oreal and the negative conversion reserves because of the exchange variations, strengthening of the euro, and the gearing now on the 30 June 2011, that financial debt was €526 million, an increase compared to the 31 December 2010 because of the payment of the dividend in May. I would like to thank you very much for your attention.

Question-and-Answer Session

Simon Marshall-Locker – Jefferies

Simon Marshall-Locker from Jefferies. I have one or two small questions. The first one would be on dermatology. We have seen quite an impact with the integration of Q-Med and the impact of generics. Christian, could you give us more details regarding the mid-terms prospective or prospects? Could you tell us about what will happen to growth to margins in the night of what happened, in particular with the impact of generics? The second question will be on A&P costs. Could you give us some indication about what has to do with promotional costs rather than advertising costs in the first half? And is there a trend towards reducing promotional costs. What is the situation from that standpoint? And then we would like to focus on the part of the world where you have lost market shares. You said this Mr. Agon, you are concentrating or focusing your efforts to try to remedy the situation. Eastern Europe is what I am talking about and maybe you could tell us, give us some details, additional details about what you think you will do in the middle term for Eastern Europe, and more particularly focusing on Russia and Poland?

Jean-Paul Agon

I can start if you like on what we will do in Eastern Europe. Admittedly, Eastern Europe is probably the region where we increased the fastest and the most spectacular way over the last 10 years, so much so that we took the leading position in Russia and we have extremely strong positions there.

Now as I have always said and as we showed in the past winning over new markets has not always been a very smooth sailing and sometimes we've had to adjust and we have to make pauses and look back and regarding the issue itself, I'm very confident regarding the future of the Russian and Polish markets. By the way, these are markets, which have not experienced growth in same way as in China or India for example, but these are markets, which are strong, I think in the middle term. We've won over very significant positions.

We are currently in the process of strengthening these positions and we're going to resume with growth. There will be launches that will take place very soon, and we will see in the second half some resumption with growth and we will continue to win over market shares.

Now to complete my answer to your question, I'd like to tell you that the situation is not the same depending on the distribution channels, of course, because we engage in different business segments.

Luxury Products for example has increased very well. Our sell-throughs in Luxury segment have moved in a positive way. We have increased our market shares in Luxury Products even though the distribution of Luxury Products in Russia is somewhat difficult to forecast. It's very specific in nature. Our market shares in the Professional Products division have increased very well. We have experienced double-digit growth over the first half of this year.

Pharmacy, however, pharmaceutical products have suffered some after a very quick growth period. We have experienced in Russia some hitches along the way and in mass-market – in the mass-market division the market is holding up pretty well and we will have to continue winning over market shares as we've done over the last 10 years. So, I don't see any reason for a concern regarding the future of this region. Quite the opposite. It is probably the region in the world, which where we have won a very strong position amongst the emerging market. So, no particular concern there.

The second question, I'll take it first and then Christian will tell you more specifically about Galderma. Second question was on the A&P costs. What we can see at the beginning of this year is that the overall ratio between advertising and promotional costs does not change dramatically. Now admittedly in some markets that has been some stronger competitive pressure than previously, but we have not reacted by increasing in an exaggerated fashion our promotional costs.

Regarding the overall amount, as Christian and I said very clearly, last year there was a small difference, and of course, we do not manage our advertising expenses on a weekly basis. We do this so that we can sustain our launches and our initiatives. There was a slight lagging of variation in the first half or the second half in percentage terms and we will have some smoothing out this year and it will be balanced. We think that regarding the sales field we have a good amount and we not going to increase it that much.

Yes, we’ve gained some shares of voice significantly in some areas in Asia, in North America and in areas where we are winning over the market shares, and building the future.

What I was explaining to you regarding the productivity of our sales field is very significant then you back to this. My personal belief is that we have now reached a level regarding sales field, which is very significant and we stand to win a lot, not just us by the way, but I am interested in our Company than any other regarding the productivity of the A&P costs.

There are new techniques out there, new economic metric models, new testing methods that can be tapped, that used to exist and will be a lot more focused when it comes to measuring the effectiveness of our sales field and that we will make considerable progress when it comes to our return on the investment made in that respect.

So that's what we want to do. As Americans would say we want more back for our bucks. Rather than investing more, we want to better return on our investment.

Simon Marshall-Lockyer – Jefferies


Christian Mulliez

Yes, as regards to Galderma this year they have posted a growth of its business lower than what we had been used to over the last three years, the growth was a double-digit growth like-for-like, but this year at the end of June it's a bit more than 5%, that should be a bit more but it would be single-digit growth figure for the entire year and this is due as I said already to two generic drugs that Galderma has acquired. It is something that is manageable, perfectly manageable the situation. Same can be said about profitability. Profitability of Galderma will drop this year but not by much. It will be a bit higher than 15% this year for 2012.

Everything still remains to be built including from a budgetary standpoint, but 2012 will also experience very honorable figures regarding Galderma's growth. And the third important point here, that to complete its business, it's drug dermatology business line where Galderma is number one with very strong research efforts and good quality achievement, Galderma is also developing in corrective dermatology fillers, aesthetic corrective products with the acquisition of the Q-Med Company which has an enormous potential and this will of course come to complete the existing structures, it will complete Galderma's portfolio. Dermatologists indeed are asking for two types of products. We will have a complete range and we are fully confident.

Maybe I’ll start on my left among these gentlemen behind you.

Unidentified Analyst

I am coming from the Financial Times, (indiscernible). I have two questions that I’d like to ask you. The first one is also on the A&P costs, you mentioned centralization of purchasing. Now, could you put figures on that? Could you tell us what the savings will be? What are the savings that have been derived from this centralization of purchasing? That's number one. Could you also tell us about the distribution of your expenses between traditional media, digital media? Could you tell us how things are developing new business? That was the first question in fact. Second question now, you mentioned acquisitions, acquisitions that you were look to, if they appear on the market, could you give us some indications which market are go you going to be looking at, which business segment are you going to be looking at for future acquisitions? Thank you very much.

Christian Mulliez

Well, thank you very much. Not to you, for your question. Unfortunately, there are two questions that I cannot answer myself because answering these questions would disclose confidential information either to our competitors or to our targets and that's of course not in our interest.

As far as the acquisition policy is concerned, I can’t tell you exactly in which business segment we’re going to look at future acquisitions but to be quite honest with you, I must say that we're very open and we are looking at pretty much all potential acquisitions in the cosmetics world, everywhere across the globe. We are looking at all of them, but we have very selective position and it's not because we have a lot of cash on hand, very positive cash flow, that we are less selective and less demanding regarding future acquisitions, if that can be of any comfort to you or to some of you.

So, unfortunately, I can’t be more precise. I can’t give you any precise figures on the savings that we’ve been able to complete, because we’ve centralized our purchasing space, but I can tell you that they have the very high savings, especially at the time when we went for this approach, but on a permanent basis this has allowed us to optimize our investments.

We are not just talking about the quantity, but also about the quality of what we do. It's very important, when it comes to our relations with the space purchasing centers. We want of course to have the best prices, since we are the first advertiser in this category, the third largest global advertiser; we have a lot of clout, when it comes to purchasing media space. Of course we spend to get the best prices, but we want to have the best possible advice that will impact our productivity. There are some media or media space buying that is more productive than others.

Regarding the digital media now, as you know, digital media is very significant for us. It is our ambition to be in this area as in others. It is ambition to lead the market and to break new ground. We've strengthened our investments in this area. Digital media now accounts for about 67% of all the media that we cover. So, significant share, it is increasing and we have gained some interesting experience in that sector, with productivity levels in some cases that are very spectacular. That said, I think I have covered your questions. Someone behind you.

Unidentified Analyst

Good morning. Here from Barclays. I have a question regarding the new markets you said that you expect the profitability from new markets to improve. My question is when do you think you are going to close the margin gap that you have between the Western European margins and the margins from the new markets and more importantly really what are the achievements on the way getting there? What are your benchmarks that you think will get you closer to that target and ideally, when is that going to happen? Thank you.

Jean-Paul Agon

Thank you very much for the question. In fact, we're very confident about the improvement of the profitability in this new market and that we don't publish first half results of the profitability per zones. But we're very confident that for the year, the profitability of the zone new markets should improve significantly, and so the gap will be reduced gradually year-after-year and there are reasons, for which historically Europe was the most profitable region. But long-term the new markets could be, I don't know if they will be, but could be absolutely a zone, where we are at very high probability.

The reasons what I explained, the reasons are that now our subsidiaries at which certain critical mass were in fact, they can be really profitable and we have some great examples. Our Chinese subsidiary is very profitable; our Russian subsidiary is very profitable; and it's the case of many of these subsidiaries. Also I’d say that, as I also explained previously in some of these meetings. Today, honestly the cost of growth in these countries is less than in the very mature countries or the mature markets. So, I think we can be very confident about the future or growth of the profitability in this zone. Okay, thank you very much.


Astrid Wendlandt, Reuters.

Astrid Wendlandt – Reuters

Good morning, Astrid from Reuters. I have a few questions. Have you seen the concerns regarding the global economy in general weigh on consumption, and in particular in Western Europe and in the Consumer Products and Professional Products divisions? How do you see the margin evolving during the second half compared with the first half? The margin was slightly disappointing for the first half. You said it's not representative, but could you give us some details concerning the evolution during the second half and concerning the second half of the year or so ago there were problems regarding availability of cash in Russia to pay for your products. It has that been settled because it has not been mentioned since?

Jean-Paul Agon

Thank you. We are going to share the question between Christian and myself. I will take the easy part and he will take the hard part. Cash in Russia will remain an issue for a long time. I won't pass judgment on that, but I can tell you that that has not yet been settled. It is less acute than it has been. But it remains something that we need to take into account in our business, and that we are extremely rigorous regarding credit to our clients and cash. We don't take unconsidered risks and we take that into consideration in our business.

Regarding consumption worldwide overall, the economic turbulence took place mostly in August, and we don't yet have the panel numbers for August. What I can tell you is that the July panel numbers for Europe were not very good. That was not related to the financial crisis, because it had not yet really taken place, but it was due to other factors. The mass market consumption in July in Western Europe has not been great.

I'd like remind you that Western Europe today is 25%, i.e., one quarter of the global cosmetics market. This has to be seen in relative fashion for a Group such as ours, which operates worldwide. A large part of the world is doing well and our strategic intention is to develop our business as much as possible in the world, which is doing well, while strengthening our positions in Europe as much as possible.

Regarding the margin, I can say that I don't quite agree with you with all due respect. Concerning your comment that it is disappointing or in any case I would like to qualify that. As I indicated, it compares with a historic first half in 2010 at 17.3. The number was at a historically high level, very unbalanced with respect to the second half. So,, this has to be taken into consideration.

The second factor is as we have indicated there was a voluntary decision to invest in growth drivers in research and development also rebalance between the first and the second half. Let us not forget that last year, we were pulling out of the crisis during the first half, we were still in a period of uncertainty. We didn't quite know how the global cosmetics market would rebound and our investments were a little stronger during the second half than during the first half, but I will let Christian answer on the interesting part, the prospects for margin for the year.

Christian Mulliez

Well, it's fairly simple. We said it and written it. We are confident regarding an improvement of the profitability for the year for reasons of phasing there was a slight decrease during the first half. From an arithmetic point of view, it will increase noticeably during the second half.

Astrid Wendlandt – Reuters

What are the panels?

Jean-Paul Agon

You know what the panels are, don't you know?

Astrid Wendlandt – Reuters

No, I don't know. Could you please explain?

Jean-Paul Agon

Well, Nielsen does studies of sales in stores and a lot of the analysts in the room have the panel figures and have seen the results and the panels indicate the sales of stores in the different countries around Europe for different categories of products, but you have to pay to get the information. So, you can make up your mind, whether you wish to buy the information or not.

Unidentified Analyst

Two questions please. Firstly, on the Professional business, obviously the market is growing slower. What indicators you are looking at for a recovery here? Is it purely an economic issue or is there anything else that's holding the market back in your view?

Secondly, you've obviously continue to invest heavily in this market as we've seen in the margin. Should we expect this high level of investment to continue in the coming 12 months or so? Then, my second question is on the advertising and promotion now that 30.9% for this year. Is this a level that you're happy with for the medium term or is there any scope for this to come down as you gain efficiencies in the purchasing here?

Jean-Paul Agon

Professional is a good question. Honestly, we expected after the crisis that we would see a rebound in Professional as we have seen in Luxury, the rebound in luxury have been quite spectacular. After strong decline in 2008 and 2009 the rebound in Luxury has been very strong and we expected to see that in Professional and it did not happened yet. Why? Because I think in fact it's a different market. Luxury of course is a much more narrow market. It's a market of certain category of the population probably that has money and spends money and professional is broader and it's maybe indicative of the economy or it’s maybe more, what we've seen in the past that L'Oreal it's more indicative of the mood of the consumers and I think that if the mood of the consumers could improve in the years to come, women would go more often to their hairdresser and that would be good for their morale anyway.

But we haven't seen that happening yet. But we're still confident and I would say also that we say in French that hairdresser is the second most old, how do you say (foreign language). I think that hairdresser will never disappear. The hairdresser business will never disappear. It has some cycles, but it will always be a very important business and what we are doing right now, even if the market is not very buoyant, not very positive, we are building our positions for the futures. We are taking advantage of some weaknesses of some of our competitors and we are conquering salons. That's why I told you that we have been conquering 34,000 salons in the first six-month, which is huge and this is everywhere in the world.

Our strategic decision right now is to able to maximize our presence in the salon worldwide and especially in the new countries. I explained also in my presentation that one of the factor of the weakness of the market is that in this market the percentage of the business done by the new markets is quite limited. It's something like I would say 25%, when it is much more, its 50% for some other divisions. So, even the good dynamic that we are seeing in Asia, in Latin America, the mass is not yet big enough to pull the growth of the division and the market.

But I think that here we are doing really a long-term construction. Regarding the investment, as I said before, I think that 30.9 globally roughly we think is a good level and again we believe that we have a lot to gain in term of productivity of this investments. So, we don't plan to increase these investments, and we will see if we can, we don't spend money in order to spend money. If we find solutions to be much more efficient with our investment in the future, why not reducing the amount, but it's not a question of money. It's a question of having the firepower that we need to build our brands in all parts of the world, to establish our positions for the future, to defend our market share or to conquest market share. That’s the vision, okay. Thank you.

Unidentified Analyst

Hello, this is Emmanuel. Good morning. I have two questions. First of all, for the medium term, the improvement of the operating margin, if you consider that A&P would no longer increase, but not drop, R&D has no reason to decrease considering that it would remain stable or grow slightly. The improvement could come only from an increase in profitability or SG&A.

Jean-Paul Agon

We didn't say that advertising and promotion costs would not decrease. What we said that is that the important thing is their efficacy deepening on the effect we wish to reach. We determine the amount of investment in that area that we need to make.

Unidentified Analyst

My question is, is there not a level of internal growth for the Group below which or above which it is not reasonable to expect an improvement in the margin or it is not reasonable to increase it, for instance, with 5% internal growth it is more cautious to maintain the margin and it is only when the internal growth of the Group again it exceeds 6% that you can reasonably improve the margin.

Jean-Paul Agon

Thank you Emmanuel for this question and I’m not going to let myself be locked up in that, but perhaps we are less mathematically minded than you are. But the stronger the growth and the better possibility of improving the margin if that is what you are trying to say, I can agree with you. If you are saying there is a threshold under which it is not possible to improve the margin, I don't believe so.

Unidentified Analyst

In your management of the Group did you not tell yourself it is not reasonable below 5% internal growth to try and improve the margin?

Jean-Paul Agon

Well, I'm saying that the steering of the Group as yesterday and today is long-term management, long-term steering of the Group. The company is here to stay. Our vision is to strengthen our leadership. We have a clear vision of where the opportunities lie, where growth opportunities lie, where the new areas and the new categories are and this is what we are building and it is a long-term construction or steering of the Group, which doesn't mean that we don't need to be intelligent to the short-term, but the true strategic vision means during what it takes to build the basis for a durable company and an improvement of its profitability.

Unidentified Analyst

Thank you. Second question, this is concerning the potential use of the cash; typical question. By listening to you I got the feeling that you're excluding any share buyback plan for the use of this cash. What you're talking about more openly is a possible strategic acquisition. Consequently, obviously we're not going to name names, but what do you mean by strategic acquisition? Is it a minimum size of sales? Is it a regional or global entity, or what?

Jean-Paul Agon

Christian, are you tempted in answering the answer.

Christian Mulliez

No, I’m not. Please go ahead.

Jean-Paul Agon

Emmanuel, the answer is anything that is in our business that is part of our business, anything that can enable us to progress in our business. We are very selective, however. I read in certain papers that there is a risk that with positive cash L'Oreal maybe carrying out less reasonable acquisitions and they should be, and I can assure you that this is not the case. We have a very good cash situation, but as usual, we will be extremely selective in our acquisitions and that is a reason why they are rare. We try and make the right acquisitions and at the right price.

Unidentified Analyst

Well, I'm going to try a last technical question. Can we have the distribution between amortization and provisions?

Christian Mulliez

Yes. That should be possible. I'll give you the depreciation because I have that in mind. So, it was €365 million for amortization in the first half of 2010 and the €358 million in the first half of 2011. So, the difference gives you the provisions, so less provisions than last year because last year we had a high amount for that competition, investigations, tax audits, et cetera. There is a net reversal of provisions. Some people say they get their profit with a reversal of provisions. This is an effect of the funding of the pension funds and the provision is decreased and so it's a balance sheet movement.

Unidentified Analyst

Three questions, Eastern Europe was not extremely good. You were a little disappointed, but there is another region, Latin America. For you it is continuing to do very well but there are governments, such as Brazil, which are trying to slowdown a high growth rate and possible high inflation. Other areas are beginning to see a slowing down. What do you think? It’s an important area.

And Emmanuel tried; I'm going to try again. If the financial markets are excessive, and they often are in both directions, the best target could be yourself, so why not a buyback irrespective of your strategic acquisition ideas, you are the leader in global cosmetics. So, the best target could be yourselves, so why not share buybacks?

Third question on products, Genifique I think surprised a lot of people with its success and is continuing to surprise people. Is the new Lancome potentially this type of success? You talked about the price. Perhaps the price was not the one you wanted to set for Genifique. It was €70. So, what about the new Lancome and what about the new product for hair loss for men? Does it work?

Jean-Paul Agon

Three short questions. I must say that when you see me with a big head of hair that will be a confirmation that the products works. Well, I’m surprised that you say, you were surprised by the success of Genifique. Personally, I was not surprised. Genifique was a tremendous success. Genifique and Visionnaire are the contestants of the L'Oreal model. It's very advanced research.

The development of a particular molecule, which enables you to do something different for the consumer, these are very high quality products and also as you were right in saying it is affordable innovation at a price, which is justified. But which enables consumers in that specific circuit to buy it and Genifique is a tremendous success. I think we should be getting €200 million to €250 million with Genifique. On its own it is doing more than some of our brands, and I’m willing to bet that Visionnaire will be a similar success and it is not going to cannibalize Genifique, the product efficacy, the target. A Visionnaire is complementary to Genifique, so I’m very confident.

Regarding Brazil, I think you're right. I saw a slight weakening or spectacular weakening or slowing down in the businesses of some of our competitors and Brazil can be a country, where there are stops and starts. We saw it last year. It wouldn't be the first time that Brazil sees a growth phase and then a slowing down phase. Substantially, it is a country with a great potential. It's a secular third cosmetics market worldwide. It's a huge cosmetics market, but it is possible that there could be stops and starts in the development. That is not impossible.

This being said, there is not only Brazil in Latin America, Argentina is progressing very well. Mexico is progressing very well. Chile is progressing very well. There are countries, where we are not developed much yet, where we need to speed up the development. Colombia is a wonderful country, where we are not developed much at all and that is the reason, why we have developed Latin America and Africa and Middle East. So, that the person in-charge of Latin America can focus completely on maximizing opportunities in each of these countries. Share buyback, this is a question that Christian likes.

Christian Mulliez

Share buybacks, thank you for your comment Harold, because it looks like a very strong buy. So, thank you, we are going to use that. But our position, it has not changed. We wish to keep our financial flexibility to carry out acquisitions when the time is right and there is something we did not mention, which is important and interesting, it is dividends. You have seen that we have regularly increased our dividend, our payout ratio over €1 billion in dividends were paid out in 2011 and obviously it’s a decision to be taken by the Board of Directors in the annual meeting, but I don’t think that you will be disappointed by the dividend for 2011, which will be paid out in 2012.

Unidentified Analyst

One question on the summer context. There is again distrust or mistrust vis-à-vis the banks, which is rather exceptional in each of the countries you see mistrust for the banks. There is a chasm between both sides of the Atlantic. Have you increased your level of vigilance on your banking counterparts? And for the longer term if there were to be a – is a serious accident in the Eurozone part of your scenarios?

Jean-Paul Agon

Well, we are probably one of the most serene companies because sadly for bankers in the room a few weeks or months from now we will have no debt. So, we are very solid and resistant. Now we are not hoping for that of course. If there were true funding problem on the market, we would not be affected at all. That’s the first point.

It is true. It is not purposely, but this is the result of our ability to generate cash flow and this has been very strong during the past years and from a general point of view, the L'Oreal economic model is a model, which generates strong cash flow. So, this really protects us and this also enables us to envisage acquisitions without jeopardizing the company, without endangering the company. Regarding your question concerning the future of the Eurozone, it’s very important for us.

The Eurozone still accounts for 30% of our sales. What is mostly important for us is that the economic policies which are being decided and implemented in Europe should be policies, which promote growth, consumption, and the development of the different countries and what we’ll see about that. Christian, you wanted to add something?

Christian Mulliez

Yes, regarding the banking counterparts, we’ve all – we have been very vigilant, our bankers know this. The Audit Committee of the Board of Directors gets reports regularly regarding the investment. We don’t have a lot of money invested since we still have a small debt remaining. When we will be able to invest the instruments, we will be sovereign instruments, but the best investment for money remains in acquisition.

Unidentified Analyst

Emmanuel again. I have an additional question. Your number one shareholder expressed a wish to pay more taxes in France.

Jean-Paul Agon

I was not expecting this question from you, Emmanuel.

Unidentified Analyst

The questions regards L'Oreal with a tax rate at 28% in the French debate, I know that the consolidated tax rate for an international company is big black box. But with a consolidated tax rate of 28%, is L'Oreal paying enough taxes in France?

Jean-Paul Agon

We are in any case paying taxes in France. Christian adds that we have been paying taxes in France. We’ve had a tax audit. We bring our profits back into France. L'Oreal is one of the French companies, which is paying taxes.

Christian Mulliez

Are there niches? I was going to say everything else being equal, so 25% everything else being equal.

Unidentified Analyst

Credit Mutual, CIC. Could you tell us about the mass market situation? You said you are going to readjust things regarding the mass market. Is it regarding the price or your policy? And is the situation similar on the Russian market and the Polish market or are there differences on these two different markets? Regarding Yves Saint Laurent and the launches in skin care products for 2012, from a concrete point of view will you be starting with Asia? How will the phasing take place per geographic zone to see where you are going to place your focus?

Jean-Paul Agon

Thank you for your question. I’ll start with Yves Saint Laurent. As you know, Yves Saint Laurent is a brand which has rebounded well, but which is functioning on two of its drivers. We don’t have a skincare offer yet for Saint Laurent, it has never been strong at Saint Laurent and it’s less than 10% of the Saint Laurent sales, the skincare is 40% for Lancome. So there is a tremendous growth potential for Saint Laurent in skincare.

We have decided not to take our time but to work with our laboratories to give Saint Laurent an exceptional formulation policy and it will be announced soon by the brand and it will be a major progress in skincare technology. This launch will take place at the beginning of 2012 and it will be a global launch around the world. Europe, Asia, North America – in Asia, there will be a lot of added value because on a Chinese counter skincare sales for all of the luxury brands account for 70% of the sales. The Chinese don’t use fragrances and they use less makeup. Skincare is a number one product category in all of Asia. So, it is important to have a very high performing skincare line for Asia that will contribute hugely to the development of the brand as a global brand.

Unidentified Analyst

There was another question on East European countries, as far as the Russia and Poland are concerned, they are not very different, you’re right. We can see that the markets are getting a bit more competitive than it used to be, which is perfectly normal. There will be no radical change in our policies. We just have to bear in mind that we need to engage in more launches. We need to have better targeted mixes because we are faced with tougher competition. That’s life, that’s what we’ve been doing in Eastern Europe, in North America and China pretty much everywhere.

We’ve probably capitalized on the first peer to the Eastern Europe countries where it was easy to win over market shares. It’s getting more difficult now. It doesn’t mean that it’s going to be more difficult, let me reassure on this – we just need that we need to come up with better targeted mixes, but we’re getting there. As I was saying, we will have to come up with new product launches. Most product launches and has been the case over the last 12 months. So, we have to adjust to the market and it’s not very complicated, but it’s something that we have to do. I will like to get another question. Another question at the back.

Unidentified Analyst

A very small question directed to Christian. Many were surprised about the fact that the Nestle went out and bought some Asian stock over that cash?

Christian Mulliez

When you get to a positive cash situation we agree that that you will have a low risk, a lower return to catch this cash position, yes, low risk low return, I can confirm that.

Unidentified Analyst


Christian Mulliez

(indiscernible). I would like to have some details regarding the distribution channels. You’ve always been very difficult when it comes to direct sales in Brazil and Russia and pretty much everywhere also in the United States. Now, I would like to have your feeling about that. Are you going to (indiscernible) adverse to this direct sales distribution channel? What about the problems in Eastern Europe? Do they come from the fact that the direct sales channels are holding up pretty well?

Jean-Paul Agon

Well, the concrete answer to your last question is no, quite the reverse, quite the country. If I understand some of the results direct sales in Russia and in the bordering countries were not as good as they were before, so no, not at all is my answer. We are adverse to nothing as a matter of principle which is being very cautious and we’re looking at things with realism and with lot of discipline. I think that direct sales, if I may say, will become obsolete because if you look at the latest sales, direct sales in the world, you will see that the situation has become a lot tougher than it was a year or two ago. Doesn’t mean that we take a different stance when looking at things but direct sales are not as fashionable, have not been as fashionable over the last few years as was the case before. So there is no change in our attitude anyway in that respect.

Unidentified Analyst

Good morning. Eva. Yes, I have three small questions. First of all on the Body Shop, first of all could you tell us about the margin, which is dropping again? What can you do to remedy that and increase it gradually? Secondly, in Consumer Products we have seen a slight drop of the margin where I had expected a small marked increase because last year and the year before they were making marketing investments as of the launch of the deodorant brands. I would like to know whether this reflects investments behind the L'Oreal Paris brand. And are you still happy with Mr. Labelle's forecast? And thirdly, I know that you won’t give us the margin per region in the first half, or on a halfly basis, but I would like to – half-yearly basis, but I would like to know whether you could give us some major trends regarding the three major regions considered?

Jean-Paul Agon

Well, regarding The Body Shop, as Christian already said, The Body Shop as is the case with many other companies that have sales points due 85% of their profit in the second half of the year and a large part of their profit in the last quarter of the year generally speaking. So, quite frankly we could say this quite honestly, the profitability of The Body Shop in the first half is not representative of the entire year. Of course if it was higher than last year, you would be more reassured possibly but quite frankly this is not something we should focus on.

What we should focus on is our willingness to have this profitability increase in year-on-year, and this is our ambition for this year, and I certainly hope that there would be no riots in London or elsewhere that will disrupt or jeopardize our sales – our in-store sales. Our ambition and our objective is to improve yearly profitability of The Body Shop, and this is the business which is managed on a yearly basis, even more than other businesses. It would be absurd to just focus on half yearly figures.

Now regarding the profitability of the different divisions, here again we have to take the different half yearly figures with a pinch of salt. The Consumer Products profitability is 20.1% of the first half, for example, but the average profitability of last year was 18.5%. So here again it all depends on how the sales – the investments between the two halves are distributed, the phasing of initiatives, the phasing of the support lent to the different initiatives, all of that will have an impact. And I don't think that we can draw any final conclusions from that. And your third quarter, what was it again, the regions. The profitability in the different regions, Christian?

Christian Mulliez

Well, quite frankly we don’t provide the figures on a half yearly basis. We are not going to do that now or give you any trends. We can only confirm what was said before by Mr. Agon. In other words, you won’t be disappointed this year by the improvement of the profitability in the new market zone.

Unidentified Analyst

Just two additional questions, one point on Inneov and the increase of growth of Inneov first of all? Secondly, could you tell us about the e-commerce website sales, have they increased, what is the overall trend?

Jean-Paul Agon

I'm not sure that I have got the figure regarding the e-commerce growth rates for the first half. I’m not sure, we will give it to you as an annual figure, but that trend is yes. There’s an increase in these kinds of sales, quite a strong increase, but here again, I’m not sure that it would be very telling to give half yearly figures, because for example profitability figures in the Luxury Division is much higher. Well, I will give you the figures at the end of the year.

Our sales of e-commerce on Kiehl’s or Lancome products are increasing. The same is also true of The Body Shop. I think we have a 30% growth figure for The Body Shop. I don’t know about the other brands. The other question was on, yes Inneov, Inneov, yes that’s a good question. We will have a major event coming up as of the beginning of next year. You may not know that when we launched Inneov, it’s a revolutionary coloring product that is major advanced in terms of the result obtained; the smoothness, the smell, the color obtained, et cetera, but there were just a little difficulty for the hairdresser because this is a product that had to be applied as a three-part procedure rather than in two goes, it was in three goes.

Now for hairdressers, it may not be a problem, but it’s somewhat limited the fact – I mean, if someone explained why not all hairdressers wanted to use the Inneov products because it was a procedure that was slightly more complicated than traditional procedure. So, we decided to change over this product and we launched – we will launch the new Inneov product next year. It would be only in two procedures – a two-stage procedures and it will complete our distribution of this extraordinary coloring range.

Now, Inneov this year has breached a threshold that couldn’t be exceeded because of the complexity of the procedure, but we’re going to start again next year with a simpler product. It still remains I mean the best hair coloring product worldwide.

Unidentified Analyst

It was a last question in fact. On the regional margin development, you expressed your confidence in significantly improving the profitability in new markets. How is the situation going to look like in developed markets, whether it’s slower growth, whether it’s very tough competition and where, as you said before the cost of growth is higher? Are these margins going to be contributing a lower percentage, are the margins going to be under pressure for the full year?

Unidentified Company Speaker

Your question is very smart because as we said that we do not publish the numbers. If you ask me one by one, in fact, it’s like publishing the numbers. So, no, I can’t answer you. The only thing I can tell you as what you can deduct from what we have said this morning is that the margins will improve for the Company as a whole, and will significantly improve for the new markets. So what does it means for the other zones that’s going to be the scoop at the end of the year.

Unidentified Analyst

As a consequence of our interpretation of what you just said, are you planning to think about your capacities, production capacities, distribution capacities in the developed markets? Are you adjusting those to…

Unidentified Company Speaker


Unidentified Analyst

Potentially slower growth? How are you thinking about the growth environment in these developed markets new beyond the next couple of months going forward?

Unidentified Company Speaker

You know we are not planning to have a zero growth in the developed market in the years to come, that’s not our plan. First, if you want you can take them one by one, Japan that’s maybe something else, we are very small in Japan. It’s a very costly market and we don’t have plans to double our growth in Japan. We just want to be a player locally, but we have nothing really special. U.S., we are very ambitious in the U.S. In the U.S.A. we are doing very well. We are growing quite fast plus 5%, its good and we believe that first we can believe that we can think that the U.S. market will still grow. And secondly we think that we have still opportunities in terms of market share gains to grow our business there.

So we are definitely planning for growth in the U.S. but at the same time we are also optimizing our production capacities because as you probably read a few weeks ago we announced that we are going to close the factory in New Jersey – Clark New Jersey and so it means that even in the markets where we think we can grow, we are still optimizing our production capacities.

And in Western Europe, the market are for the moment flat, but we still have the ambition to grow our markets shares or to launch new products or to gain on some new categories and we are still planning to go for growth. I think one very good example this year is France. France is the country in the world where we have the highest market share, especially in the consumer division; it’s very high market share and despite that France is – our business – our Consumer division business in France is growing very well. I mean it’s 3%, 4%, something like that.

So which means that it’s not because you have a very high market share that you can’t grow. Of course it’s more difficult, but it’s not impossible, so it’s definitely the ambition and the determination that we have is to still grow our businesses in Europe and we think we should be able to do it. Okay. And we have quite optimized you remember our production capacities in Europe as two years ago or three years ago we closed three factories. We closed one in Monaco, we closed one in Spain, and one in U.K., so we have made quite a very strong adjustment in terms of production capacities.

And we are doing also some other adjustment like the one you saw before which is wall-to-wall for example, new method where in fact now we are producing and this is completely new. We have never done that at L'Oreal and for the first time at L'Oreal we are producing – our suppliers are producing internally in our factories one billion bottles and tubes internally to improve the cost. So, we are changing many things in fact even if you know it doesn’t look like that, in fact in all aspects industry research, cost, we are really reorganizing, reengineering everything.

Jean-Paul Agon

Maybe the last question, Daniel Christian (indiscernible).


If any? If there is no question, well we would like to invite you to a drink. Thank you very much. Thank you very much for having come this morning.

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