L'Oréal's (LRLCY) CEO Jean-Paul Agon on Full Year 2016 Results - Earnings Call Transcript

| About: L'Oreal Co. (LRLCY)

L’Oréal Co. ADR (OTCPK:LRLCY) Full Year 2016 Earnings Conference Call February 10, 2017 3:00 AM ET

Executives

Jean Régis - Director of Individual Shareholder and Market Authority Relations

Jean-Paul Agon - Chairman and Chief Executive Officer

Christian Mulliez - Executive Vice President and Chief Financial Officer

Alexis Perakis-Valat - President, Consumer Products Division

Nicolas Hieronimus - President, Selective Divisions

Brigitte Liberman - President, Active Cosmetics Division

Nathalie Roos - President, Professional Products Division

Analysts

Celine Pannuti - JP Morgan

Rosie Edwards - Berenberg

Pierre Tegner - Natixis Securities

Toby McCullagh - Macquarie

Nicholas Micallef - Euromonitor

Eva Quiroga - Deutsche Bank

Mark Astrachan - Stifel

Jean-Paul Agon

So as usual, we are going to start. What do you think? We are very early today. You are very silent. Great presentation. So anyway before - we have two minutes before we start, so maybe I can say good morning to all. Welcome to this annual presentation of our results.

I would like maybe first to introduce the team, the new team because 40% of the team is new. I will start on the left with Nathalie Ross, who is the new President of the Professional Products Division, who succeeded An Verhulst April 1 last year. Nicolas Hieronimus, as you know, is not a newcomer. Christian, not also. I don’t think so. Alexis Perakis, another new one, another newcomer. Alexis is the new President of the Consumer Product Division since October 1 but he is perfectly already aware of everything, so you can ask him anything you want. And Brigitte Liberman that you know very well.

So we’re going to start right now. It’s 9 o’clock, and I will ask Jean Régis to give us a few housekeeping details as usual.

Jean Régis

Good morning, ladies and gentlemen. We are very happy to welcome you to our annual financial information meeting. First let's have a quite look at the agenda of this meeting. As usual, Christian Mulliez, our CFO, will kick off with a presentation of the financial statement for 2016. Then each head of division will summarize the highlights of his or her division for 2016, as well as prospects for 2017.

After the divisions’ presentations, Jean-Paul Agon, our chairman and CEO, will share with you his perspectives regarding L’Oréal’s business and prospects. Then we will move directly to the Q&A session up to the end of the meeting, that is until around 11:00. Afterwards, light cocktail reception will be served into Club Salon on the first floor.

Now I require one more minute of your time as I would like to draw your attention onto few practicalities. First, a reminder of the safety instructions, which you need to be familiar with. Second point I would ask you to read the disclaimer on the last page of the booklet you have been given at the entrance of this room.

Third point, there is a Wi-Fi coverage over the campus so that you can connect to the Internet. Please use the login and password shown on the screen behind me. As this meeting is held in English with simultaneous interpretation into French, headsets are available at the entrance to the room. French can be found on channel one. If you so wish, you may connect to it right now. Of course if you feel more comfortable in French, you can ask your questions in French and we will be very happy to answer in the same language.

Point number four, during the Q&A session after Mr. Agon’s speech, we kindly ask you to state your name and company name as clearly as possible before you ask your question. In addition to your questions, we will take some questions send by e-mail. We ask our fellow journalists to be so kind as to raise a question during the last part of the Q&A session.

Last point, the entire meeting is broadcasted live on our dedicated website, www.loreal-finance.com. The recorded webcast of the meeting will be available in the Presentations and Webcast section of the same site from 4:00 p.m. Paris Time.

Thank you for your attention. I wish you a pleasant meeting.

Jean-Paul Agon

Thank you, Jean. So let’s start immediately with Christian with financial results of 2016.

Christian Mulliez

Good morning, ladies and gentlemen. The presentation of L’Oréal’s financial results for 2016 will include information about sales, profits, cash flow, balance sheet and dividend growth.

Sales. Our consolidated sales amounted to €25.8 billion, up by 5.1% at constant exchange rates. Like-for-like sales grew by 4.7%. This reflects volume effect of 85% and the value effect of 15%. Changes in the scope of consolidation were slightly positive at plus 0.4% that correspond mainly to the acquisitions of Niely in Brazil in 2015 and IT Cosmetics in the United States in 2016. After taking into account a foreign exchange impact of minus 2.8%, reported sales rose by plus 2.3%.

As far as the foreign exchange effect is concerned, it is of course too early at this point in the year to give you forecasts for what it will be in 2017. We will give you a precise extrapolated figure when we published our first quarter sales on April 18. However I can tell you that, at current exchange rates, the impact in 2017 would be positive around plus 1.5%.

As for the change in consolidation scope at this point in the year, a slightly positive impact can be expected in the same order of magnitude as in 2016 because of the acquisitions of IT Cosmetics and Atelier Cologne over a full-year, to which should be added the impact of the acquisitions of CeraVe, Ambi and AcneFree, whose 2016 sales amounted to some $168 million.

Currency. The euro represented 24.7% of consolidated sales. For the record, 10 years ago in 2006, the euro represented 36% of our sales. At 27.3% sales in dollars are now very much higher than the sales in euro. In 2016, the changes in exchange rate of our main invoicing currencies were as follows. The U.S. dollar remains stable against the euro. The Chinese yuan weakened at minus 5%. The Pound sterling at minus 11%. The Brazilian real declined by minus 5% and the Russian ruble at minus 8%.

Sales by division. All our divisions are growing. Professional Products recorded an increase of plus 1.8% with good growth in Europe but the lackluster a performance in North America. Consumer products grew by plus 4.4%, an improvement compared with 2015, with North America accelerating strongly and Western Europe growing well despite a very negative French market.

L’Oréal Luxe at plus 6.9% is growing strongly with a strongest growth in our fourth divisions in a robust market. Here again, performance is good in North America, in Europe, excluding France, and in the new markets.

And Active Cosmetics at plus 5.7% with powerful performances, especially in North America and Latin America. The Body Shop recorded growth of plus 0.6%. Difficult markets in Hong Kong and Saudi Arabia, which are important contraries for The Body Shop, had an impact of the performance of this business.

By regions. All regions also recorded growth with Western Europe at plus 2.4% like-for-like, higher - much higher than the market, was estimated growth was plus 1%. North America at plus 5.8%, also very much higher than it’s market with estimated growth was plus 4%. And the new markets with growth at plus 6.3% outperforming the market with estimated growth was plus 5%.

In the new markets, Asia-Pacific at plus 3.6% with Southeast Asia holding up well. Very difficult conditions in India in the fourth quarter because of demonetization and the lackluster of China, which is experiencing a rapid shift between the different channels of distribution. Latin America at plus 11.1%; Eastern Europe at plus 10.4% with Russia at plus 16%. And finally, Africa, Middle East with another year of growth at plus 7.9%. The fourth quarter was difficult in Middle East markets as they felt the impact of lower oil price. This is likely to continue in the first quarter of 2017.

P&L. With a further increase in operating profitability, plus 20 basis points at 17.6% of sales, this is a new record level. Let's start by analyzing gross profit. Gross profit at €18.495 billion came out at 71.6% of sales compared with 71.2% in 2015. That is an increase of 40 basis points.

The impact of foreign exchange, both conversion and transaction and of acquisitions, contributed to 20 basis points to the increase in gross margin. Improvements in the cost of sales, mainly as a result of productivity and increased volumes, also contributed 20 basis points to this improvement.

R&D expenses increased in relative value to 3.3% as a percentage of sales. Half of this increase is the result of the conversion effect and the other half to the increasing price in R&D expenses.

Advertising and promotion expenses at 29% of sales have remained nearly stable at minus 10 basis points compared with 2015. This can be attributed to the mix effect of the acquisitions. As announced in February 2016, we have further accelerated our efforts in digital, which now accounts for 32% of all media spend compared with 25% in 2015. We have, of course, continued to take advantage of purchasing conditions to invest in the developments of our brands.

Selling, general and administrative expenses at 21.7% of sales have come out at a slightly higher level by 20 basis points compared with 2015. This is a result, first of all, of the impact of currencies by 20 basis points, and second of the following two factors which had also a negative impact by 20 basis points; growth in spending on digital for 10 basis points and growth in the brands whose multi-channel business model is implemented through stores for 10 basis points. Thus our other general and administrative expenses have improved by 20 basis points.

Overall operating profit at €4.539 billion have grown as drawn by 3.5% and amounts to 16.7% of sales. Note that, at constant exchange rates, operating profit growth would have been plus 6%.

By division. The profitability of the Professional Products Division at 20.3% is up by 30 basis points. The profitability of the Consumer Products Division came out at 20.2%, plus 10 basis points compared with 2015. The profitability of L’Oréal Luxe at 21.2%, increased significantly in 2016 by plus 50 basis points. And lastly at Active Cosmetics, there was a further increase in profitability at 23.2%. Active Cosmetics is the number one divisions in term of profitability. The profitability of The Body Shop weakened in 2016 at 3.7%. Despite promising assets such as the naturalness, surprised positioning of its products, it’s large global footprint and the great potential of digital, The Body Shop suffered in 2016 from the temporally decline in the profitability of its activities in the Middle East and Hong Kong, and spending to upgrade its e-commerce capacities.

Profitability by regions. Profitability in Western Europe rose in 2016 to 22.9%, a new record level. In North America, profitability improved by 17 basis points at 19.6%. And in the new markets, profitability slightly decreased this year at 19.7%, while remaining very close to its all-time high. The cause is the negative impact of regional trades in Latin America. You will note once again we share the robustness of the L’Oréal business model with quiet homogenous profitability across all three geography zones and all four divisions.

Let's continue to review the P&L. Finance expenses came out at €19 million. They consists mainly of the financial costs of social liabilities. For 2017 a slightly higher expense can be expected close to €40 million. Sanofi dividends amounted to €346 million. As for projection for 2017, all other things being equal, you will have noted that Sanofi has this week announced plus 1% increase in dividend.

Income tax amounted to €1.217 million, represents tax rate in 2016 of 25%, slightly below that of 2015, which came out at 25.8%. For 2017, it may be estimated at this point in the year that the tax rate should be close to that of 2016 in the order of 25% to 26%.

Net profit excluding non-recurring items amounted to €3.647 million, and net earnings per share at €6.40 is up by 4.6%. For those of you who would like to carry out the simulation for 2017, it would be best at this stage of the year to factor in an average diluted number of shares in the order of 563 million, which takes into account the €500 million share buyback program announced yesterday evening.

A word of guidance about the 2017 results. Looking beyond the technical issues we are helping you with the average number of shares, the tax rate, the financial expenses and initial indication of the impact on the sales of currencies and changing consolidation scope, we would like to say: first, for those of you who intended to forecast 2017 and beyond, without The Body Shop that no decision has been taken so far; and secondly, set of policy in terms of guidance has always been prudent in order to retain fully way to optimize the running of our business whilst delivering the progressive increase of our EBIT margin. We will therefore limit ourselves to indicating that we are targeting another increase in sales, profit and operating profitability from the level of 17.6% in 2016 without quantifying this increase at this point in the year.

Non-recurring items in 2016 amounted to €541 million. So non-recurring items consist mainly of the impact of impairment recorded in the first half of 2016 and Magic and Clarisonic, and the French tax of 3% on dividend payments, representing a total of €52 million. So net profit amounted in 2016 to €3.105 billion.

Cash flow. Gross cash flow amounted to €4.717 billion, up by 7.2%. So the change in working capital in 2016 was a very modest increase of €12 million. CapEx amounted to 5.4% of sales, a slight increase compared with 2015 when it represented 4% of sales. For 2017, CapEx in the same order as 2016 maybe expected as a percentage of sales.

Operating net cash flow increased by 9.5%. And finally, after payment of the dividend, acquisitions and share buyback, the residual cash flow is negative by at €17.4 million.

The balance sheet. Balance sheet is particularly solid with shareholders’ equity amounted to €24.5 billion. And we once again - we are once again in cash positive situation with a net cash of €481 million.

So dividend. The quality of the balance sheet is such that at the Annual General Meeting of shareholders, the Board of Directors will propose a further significant increase in dividend at €3.3 per share, that is plus 6.5%, and this strong increase in dividends results in a payout ratio of 51.1%. The ratio is thus resuming its growth interrupted in 2016 by an extremely positive exchange rate impact. So this should be seen as a reflection of L’Oréal’s constant policy in this field. It is made on the long-term vision dynamic and well-balanced.

Thank you for your attention.

Jean-Paul Agon

Thank you very much, Christian. So I propose now that Alexis talk to us about the year 2016 for the Consumer Products Division.

Alexis Perakis-Valat

Ladies and gentlemen, good morning. Last year, the Consumer Products Division accelerated its growth and outperformed the market. We were up 4.4% like-for-like ahead of the market, which was slightly below 4%.

The first highlight is that the two categories we identified last year as our strategic growth engines have indeed led the way; make-up and hair care. Make-up saw double-digit growth, thanks to our one of the kind brand portfolio. With Maybelline, the hottest looks from New York made easy, the number one makeup brand in the world, L’Oréal Makeup Designer, the number two make-up brand in the world, the best of professional style and make-ups, and NYX Professional Makeup the core brand of the makeup junkies, as well as Essie, champion of growth in nail color with its iconic must-have shades. In hair care also we've gained market share, driven by the success of Ultra Doux, the world’s fastest growing major hair care brand in 2016.

The second highlight is that we now have four major global brands; L’Oréal Paris, Garnier, Maybelline New York, and now 20 years after the acquisition of Maybelline, NYX Professional Makeup, already a huge hit in 40 countries . All four of these global brands are growing and we are deploying them across the worldwide multi-channel environment in drug, food and mass stores of course, as well as e-commerce, which is growing at more than 30% for the division. But also branded retail with a highly successful NYX Professional Makeup freestanding stores. In exactly two weeks, we will open our 100th boutique worldwide in the U.S.

Thirdly our major regions performed well. North America was outstanding at plus 7.5%. We are already the leader there and have continued to grow much faster than the market, reaching our highest market share never. In Western Europe, we reinforced our leadership and accelerated growth at plus 2%. In the U.K., we had double-digit growth. In Germany and in Spain, both mid-to-high single-digit.

In new markets the division grew overall by 4.2%. To highlight just one country per region where we had strong double-digit growth, look at Russia for Eastern Europe, Mexico for Latin America, Egypt for Africa Middle East. And in Asia-Pacific, even though it was a challenging year in China due to Magic and the channel shifts, we had a good year in South Asia, and particularly in Indonesia. So as you can see, faster growth and clear outperformance in 2016.

Now we are determined to further strengthen this momentum in the years to come, thanks to four strategic levers. Our first lever is to accelerate the deployment of game-changing innovations.

Last year was a great vintage for new products with Magic Retouch, the Clay Masks, and low shampoo for L’Oréal, as well as Micellar Water for Garnier. These are all real innovations that we've been able to be the first to bring to the mass markets. They all have a lot of potential across the globe and we are going to make the most of them. And of course we are very exciting initiatives underway in Q1, as you can see here on the screen and many more to come this year. As an example, we're launching, as we speak, a brand-new hair, Colorista, the first ever solution for Millenials to fulfill their hair color dreams.

Our second lever is to maximize the power of make-up. The appetite for make-up is stronger than ever all over the world. We are already by far the number one in this category with the powerhouse of highly aspirational brands, and we know the market so well that we have an unrivalled ability to get the right products, the right shades, the right finishes out at the right time.

Three examples coming out in the first quarter, L’Oréal Matte Addiction, Maybelline’s Colossal Big Shot and the new NYX Professional Makeup animation, The Power of Nude.

Our third lever is to champion the key beauty trends that will drive tomorrow’s growth. Firstly natural hair care with three complementary visions, Ultra Doux, which embodies a caring and wholesome nature; the big re-launch of Fructis for Garnier, leveraging on the energy of fruit actives, as well as Botanicals, our new L’Oréal brand, premium hair care, crafted with botanical ingredients. And the second key trend is an Natural Skincare that we will champion in the mass market with breakthrough formulas under the Garnier brand.

Our fourth and final lever is to strengthen our digital clout. Digital is a source of inspiration for innovation. Social listening is a way of life for us. It helps us to understand what the latest trends are and jump on them as they start. This is how Colorista was created. Digital also allows us to master precision advertising. This is how we launched Ultra Doux Oat Delicacy in Western Europe with tailored contents based on different consumer insights. But beyond advertising, we are also creating relevant editorial content for our brands. This is for the deeper more emotional bond with our consumers.

We've done this successfully with Maybelline, creating tutorials, how-to videos or even YouTube series such as Glossy Talk with over 35 million views in 2016.

So in conclusion, we are reinventing the division. To win in this new and exciting world, reinventing the way we create new products, reinventing the way we engage with our consumers, reinventing our distribution channels. So more than ever, we are ready and determined to lead the new mass fast beauty markets.

Thank you for your attention.

Jean-Paul Agon

Thank you very much, Alexis. We were effectively very happy to see the Consumer Division back to growth and back to over-performing the markets in 2016. So, another division that clearly outperformed, Active Cosmetics. Brigitte?

Brigitte Liberman

Good morning. 2016 was once again a very good year for the Active Cosmetic Division, with like-for-like growth of plus 5.7%, the division outperformed its market with estimated growth around 4.5%, confirming its leadership and continuing to expand the dermo-cosmetics category worldwide.

All the zones recorded growth. Latin America up by 16% is the number one contributor to the growth, followed by North America up by 9% with the U.S. becoming the second largest country of the division. Africa, Middle East achieved a double-digit growth.

Health is the future of beauty, that is our conviction and our response to the consumer search for performance enhancing skincare and advice from healthcare professionals. Our brand portfolio, which is very complementary satisfied the two main trends in skincare; natural and medicalised.

I would like to emphasize four key success factors from 2016, which illustrates this vision. Our complementary brand portfolio, our product innovations, our increased digitalization and our partnerships with dermatologists. In our portfolio, two emblematic skincare brands under medical side continued their upward trend with its mission a better life and sensitive skin, La Roche-Posay, the brand recommended by dermatologists posted double-digit growth for the seventh year running.

SkinCeuticals has become the number one U.S. medical aesthetic skincare brand worldwide and confirmed its expansion with growth of 14%. Our two brands Roger Gallet and Sanoflore contributed to the Division’s development on the rising wave of naturality and well-being. Roger Gallet opened eight stores in China basing its success on authenticity and sensorial experience, and Sanoflore, our organic brand, achieved its third year of double-digit growth in France. Finally, Vichy is coming back to its roots by positioning itself on the more natural health trend.

The second key factor, our product innovations which are fully integrated into this health approach, Slow Age by Vichy, a new generation of an everyday anti-aging skin care. This is a move into the scientific field of the exposome, which takes into account all the different factors like the environmental conditions that can have an impact on skin aging.

Effaclar Duo (+) Unifiant from La Roche-Posay is dedicated to acne-prone skin types and gives immediate results in terms of masking skin lesions. The innovation brought by a Triple Lipid Restore from SkinCeuticals for mature skin is the brand’s more successful launch over the last eight years.

The third decisive factor, digital acceleration of the division. I will give you three examples to illustrate how digital can amplify our advocacy model. In 2016, we successfully launched editorial multi-brand platforms in three regions of the world. Those portals are offering unique and exclusive articles and services provided by health and beauty experts around healthy, aging and problem of the skin. These platforms represent an amazing opportunity for us to connect with our consumers and they have already attracted millions of them.

Second example, the Skinchecker Campaign designed to encourage people to check beauty spots in order to detect the early signs of skin cancer has engaged over 18 million people throughout the globe. And the last example is the La Roche-Posay My UV Patch, the first connected patch that educates people how to play safe in the sun. Nearly 0.5 million patches were distributed last year free of charge.

The Division is also accelerated on e-commerce. New partnerships, portfolio expansion coupled with skin expert advice have led to 40% growth in 2016.

Finally we keep on building a trustful relationship with around 100,000 physicians, among which 50,000 dermatologists. This year, the second Skin Alliance Program in Paris brought to get the worldwide key opinion leaders in dermatology to exchange views on our research and our expertise in dermo-cosmetics.

We are entering 2017 with optimism. The acquisition in progress of three American brands; CeraVe, AcneFree and Ambi completes our portfolio. These brands based on solid relation with health professionals enable us to meet the growing demand for active skincare at affordable prices. These brands will double the Division's turnover in the U.S. and we will roll-out CeraVe worldwide in the years to come to make it a major global skincare brand.

And the result in a solid dermo-cosmetic environment, we feel confident in our ability to remain the market’s driving force and achieve a new year of strong growth. Thank you.

Jean-Paul Agon

Thank you, Brigitte. Thank you very much. So Nathalie, tell us about the bright future of the Professional Division.

Nathalie Roos

Good morning, ladies and gentlemen. As you can see, 2016 has been a disappointing year for the Professional Division at plus 1.8% like-for-like, slightly below the market, but with very different performances across regions.

On the upside, Western Europe had a good year at plus 3%, driven by the U.K. and Southern Europe, both at plus 5%. Moreover in the new markets, the Division outperformed in a number of countries, such as India, our first growth contributor at plus 18%, and Russia at plus 18% driving the growth of Eastern Europe. Latin America is growing overall at plus 6% and Africa, Middle East at plus 11%.

Nonetheless, the Division has been impacted by a mixed performance in the United States, where the growth of Redken and Matrix has been offset by adjustments in our portfolio of partner brands at SalonCentric. Still looking ahead, there are promising perspectives which make us believe that the Division is going to bounce back.

First the new color dynamism from ultra subtle to ultra blonde, hair color is generating increasing excitement. We know that hair color is the new make-up and this is a great opportunity for our Division, since only a professional can personalize the colors and techniques to create accustom-made look for anyone.

We are building on this new market dynamic. In 2016, our hair color was already solid, and in 2017, we are reinventing color. We are fueling the market with color innovations that enable us to capture trends with our brands. Redken City Beats and L’Oréal Professional Colorful Hair are very good examples of this.

We are also bringing to the market the new bonders technology, an in-salon service that dares to experiment with the largest pallet of hair color and lightning, while caring for the hair fiber. So lot has just happened and its impact would be felt in 2017.

The second major opportunity for the professional market is the increasing demand for natural beauty, and we are seeing it in hair care Biolage RAW, a completely new range of eco-friendly professional care product. We are launching Aura Botanica from Kérastase, which combines natural formulas with the ultimate luxury. Decléor is a pioneer is aroma therapy is the perfect answer to the consumer demand for natural skin care. Its new boutique institute concept offers a unique sensorial experience of well-being.

The third driver for our growth is our Salon Emotion program, reinventing consumer experience in the salon is a major priority for the Division. More than 4,500 salons have already been transformed across regions generating between plus 15% and plus 30% incremental business depending on the salon. In 2017, we are accelerating the Salon Emotion program in every region.

And probably the most important opportunity to reinvent professional beauty is digital. We are creating digital education with the ambition to reach our 1.5 million partner hair-dressers worldwide and enable them to master the new trends and techniques in real time. We are developing specific partnerships with e-beauty e-retailer since e-commerce is a big opportunity to recruit new consumers into the salons.

And we are offering ultra personalized digital tools such as the Kérastase Connected Brush Hair Coach powered by Withings, and the mobile application, Style My Hair by L’Oréal Professionnel. So as you can see, we are committed to accelerating our growth. In 2017, we are reinventing professional beauty and continuing as leaders in its development.

Thank you for your attention.

Jean-Paul Agon

Thank you very much, Nathalie. And to finish in beauty, Nicolas, tell us about the great success of the luxury division.

Nicolas Hieronimus

Good morning everyone. 2016 has been a great year for L’Oréal Luxe again. L’Oréal Luxe published €7.662 billion turnover for 2016 and increased by plus 6.9% like-for-like and 6% reported, which includes the addition of newly acquired brands; Atelier Cologne and IT Cosmetics last summer.

The second half of the year at plus 8.1% income was particularly strong in sell-in and in sell-outs, including a great holiday season allowing the Luxe division to gain significant market shares worldwide. Thanks to the power of the luxury brand portfolio, L’Oréal Luxe has maintained a solid and regular growth of its sales despite a weaker environment and outperformed the market for the sixth consecutive year with six major milestones I would like to underline for 2016.

Our global e-commerce first has been growing by 34%, reaching more than 10% of our turnover. Number one growth of the top 10 luxury brands worldwide, YSL Beauté has topped the €1 billion mark. The brand is a phenomenon.. Kiehl's continues to grow and reached $1 billion net sales in 2016. Lancôme confirms its title of number one worldwide female luxury beauty brands and beats its American archrival on the selective U.S. markets.

Urban Decay, acquired in 2012, voted Trusted Brand of the Year by WWD became number two on the U.S. selective make-up market, up two ranks and grew by 34% worldwide. And finally, four of our latest women fragrances Lancôme La Vie Belle number one in Europe and growing in the top five in the USA; Si by Giorgi Armani; Black Opium and Mon Paris by Yves Saint Laurent are in the global top 15. L’Oréal Luxe really leads the new female fragrance arena.

In terms of regions, all our zones grew in 2016. Western Europe is at plus 3% comparable in net sales and strongly above the market in sell-out. U.K. and Spain are the top performers this year. I’m particularly happy with the performance of the USA, showing a very solid plus 8% growth for the full-year. L’Oréal Luxe USA has grown 4 points above the markets in sell-out on the number-one selective market of the world with clear contributions from brands like Lancôme, Urban Decay, YSL, Armani and now IT Cosmetics.

L’Oréal new markets grew on Luxe by 10% with Russia standing out with a plus 25%. In Asia, we over-performed the market and recorded double-digit growth in China, Australia, Japan and South Asia. The situation in Hong Kong is getting normalized and travel retail achieved a very solid year, in particular in Asia-Pacific.

In terms of categories, our winning strategic bet has been make-up. The Division’s development in make-up is one of the sensations and reasons behind the great share of L’Oréal Luxe in 2016. L’Oréal Luxe went full steam ahead with a plus 25% growth, almost twice the speed of the most dynamic category of the markets. All our make-up brands have performed solidly in 2016. Each of them has a unique and complimentary positioning from the edginess of Saint Laurent, the Italian elegance of Armani to the Tokyo inspiration of Shu Uemura, they all reach out to a particular type of customer.

Innovation in make-up was remarkable in 2016. On the foundation segment first with our famous cushions, our Urban Decay All Nighter Foundation and even also on lips with initiatives such as cream by Salon, only magnet by Armani you should see the lines forming in Asia for these two products are absolutely by Lancôme Teint Idole [ph], and even more so on lips with initiatives such as Vinyl cream by Saint Laurent or Lip Magnet by Armani, you should see the lines forming in Asia for these two products or L'Absolu Rouge by Lancôme, all exclusive technologies from the L’Oréal R&I.

Vice Lipstick by Urban Decay in its 100 shades was a major hit. In 2016, we can say that lip make-up has highly contributed to the success of our cultural beauty brands which are booming everywhere and particularly in Asia.

Finally make-up is also a about retail where temptation and playfulness are key like in this ultra-modern salon beauty corners or this Lancôme new makeup bars. Beyond the power of our brands and innovations, what I consider the base of our success is how L’Oréal Luxe constantly adapts to the new world. We adapt to the market shift through swift resource allocations. In our central cockpit, we have the flexibility to allocate our investments to the base growth areas.

He adapt our marketing strategies to the new digital landscape. On each of our star products or icons, digital is at the core. For Urban Decay, social media is the second major with daily contents, tutorials, social influence of post or initiatives, like this Vice Lipstick simulation app. Digital is a key driver of the brand success. We have also strongly engaged in programmatic precision marketing and advertising. This allows for example Mon Paris, the new Yves Saint Laurent fragrance to become a success without cannibalizing Black opium.

We adapt to the new customer expectations in terms of shopping experience through D2C or direct-to-consumer first. We opened several boutique on Urban Decay, rolled down new design of Kiehl's stores, innovated with pop-up stores on Giorgio Armani in Paris, or YSL in Los Angeles and supported our direct e-commerce with new tools in order to provide full brand immersion.

CRM and the 60 million qualified contacts of our L’Oréal Luxe database allows us to meet the growing demand for personalization. We develop customized solutions like a new personalized skincare in-store with Kiehl's apothecary preparations or proposed Yves Saint Laurent engraved lipstick online with stunning sales. We adapt our brand to the New World too. Take Lancôme for instance, which is rejuvenating reinventing itself recruiting Millenials with launches such as Énergie de Vie skincare or Juicy Shaker lip color, whilst boosting the attractive power of its icons like Génifique or Absolue skincare lines.

In 2016 we also adapted our portfolio with two acquisitions in strategic areas. Niche perfumery first with Atelier Cologne, a fragrance artistic brand offering premium quality lasting cologne with a Norwegian retail concept. Still modest in size Atelier Cologne has a global potential. Thanks to Atelier Cologne with the addition of new collections by Ralph Lauren, Margiela or Viktor & Rolf, L’Oréal has become a stronger actor on the alternative fragrance market.

And in the make-up category we acquired a new growth driver, IT Cosmetics. The U.S. brand creates innovative skin-loving problem-solving cosmetics developed with leading plastic surgeons and it specializes in complexion, hybrids and make-up brushes so different from Urban Decay. IT Cosmetics and Atelier Cologne are two added additions to our portfolio of brands.

So with all this, 2017 looks like a promising year for L’Oréal Luxe. We believe that the selective market should remain dynamic and that the make-up boom will continue. And we are well-equipped to take advantage of it. Innovative spirit, proximity, speed and flexibility will be the ingredients for our 2017 recipe. We have prepared a strong fragrance plan in order to lead in this category. It will include the rollout of Atelier Cologne and initiatives on the second half that I cannot unfortunately reveal to you today.

We have also planned to come back in skincare with stores launches on our top signatures starting from the first quarter for Lancôme but also Biotherm and Kiehl's. On Clarisonic too with a revolutionary anti-aging tool and now on IT Cosmetics, which is not just a make-up but also a skincare brand since the successful launch of this category in 2016. So it should be a good year. And even if the world remains uncertain, we are strongly confident in our success. Thank you.

Jean-Paul Agon

Thank you very much. Thank you, Nicolas. So good morning again. Last year here I told you that the world was becoming increasingly weaker and I was not wrong. 2016 was definitely a very volatile year.

Despite this very uncertain context, 2016 was, as you could see, actually a pretty good year for the beauty market in general, and for L’Oréal in particular. First the global beauty market maintained, in 2016, solid growth. It's remained in fact very dynamic. We estimate that it grew at plus 4%, very close to the year before.

By region, North America almost a quarter of the global markets confirmed its positive momentum. Western Europe proved resilient with growth improving almost everywhere, except in France, which turned negative with a drop-off in all channels, particularly in the mass markets.

New markets with huge discrepancies by country maintained a good base overall and still drive global growth. The most dynamic regions were Eastern Europe and Hispanic Latin America, only partly boosted by inflation. In Asia, the progressive deceleration of China and the challenges in Hong Kong and India were compensated by a more favorable market in Japan and Korea and Asian countries.

By sector, as you could hear, luxury was still buoyant with leading the bag. Mass-market remained very solid. Dermo-cosmetics was slightly less dynamic but still driving growth. Professional improved gradually. Door-to-door was still lagging, and across sectors, e-commerce continued to develop rapidly in both mature and new markets.

Secondly, 2016 was also a pretty good year for L’Oréal . We were able to accelerate our growth, outperform the market and increase our leadership worldwide. In terms of innovation first that are more than ever, the name of the game, 2016 was a great vintage across all divisions, as you could see in the presentations before.

Three divisions out of four made great progress. L’Oréal Luxe continued to gain share across all regions of the world, thanks to its unique portfolio of iconic brands, it's fast-paced of great innovations and its perfect operational excellence.

As planned, the Consumer Product Division reinvented itself to adapt to the new mass market world. It truly accelerated its market share gains and its growth by implementing the strategy that was presented to you last year; maximization of make-up, rollout of NYX and deployment of Garnier Ultra-Doux.

Active Cosmetics continued to lead the worldwide development of the dermo-cosmetics category, whose potential will be now powerfully increased by the very strategic acquisition of CeraVe.

And the Professional Product Divisions had a disappointing year. We believe that the pickup of the hair color market, the full deployment of 2016 launches and the numerous management changes that we implemented will translate into a significant growth acceleration in 2017.

As far as The Body Shop is concerned, as you could read into our statement, it has been decided to explore all strategic options regarding its ownership in order to give you the best opportunities and full ability to continue its development. Beside that we gained market share in each of our three strategic regions. 2016 has been a year of acceleration in North America, where we have achieved a spectacular market share gains across the Consumer Products Divisions, which has grown more than 2x faster than the market.

L’Oréal Luxe is also clearly winning with a greater successes of Lancôme, Urban Decay, Yves Saint Laurent and the addition of IT Cosmetics, and Active Cosmetics which is playing a key role in the creation of the dermo-cosmetics category with nearly doubled in revenue with this new acquisition. Overall we extended our leadership in the U.S. beauty market, where our market share is now almost twice that of the second player in beauty.

We achieved also a solid growth in Western Europe, over-performing in region where we already have a strong leadership position, our market share being 3x that of the number of two competitor. Three divisions further strengthened our positions, especially the Consumer Product Division with an notable acceleration in sell-through at the end of the year.

Apart from France, which has been facing persistent challenging market conditions, most of the other countries performed well or even very well. We achieved amazing market share gains in the U.K., where we were able to enjoy double-digit growth and we clearly outperformed the market in Germany and in Spain.

In the new markets where growth remains solid, there was, as usual, a sharp contrast between regions. We achieved good market share gains in Latin America with continued success in the Hispanic zone, for example in Mexico, Colombia, Peru. Brazil is back now in positive territory with Active Cosmetics outperforming the market and the Consumer Product Division benefiting from the successful integration of our Niely acquisition.

We also had an excellent year with further market share gains in Eastern Europe, especially in the Russia, Ukraine and Poland. In Asia, we had real momentum in South Asia and Pacific region, driven by the dynamism of Indonesia, Thailand and Australia. We also saw good growth in South Korea and Taiwan. Conversely in India, our sales were impacted, like everyone else, by the demonetization.

In China, L’Oréal Luxe achieved a double-digit growth and reinforced its leadership. While the Consumer Product Division was slowed down by the difficulties of Magic and the progressive adjustment to the accelerating channel shift. This creates some turbulence, but the good news is that we are the leader in e-commerce, a channel that we identify and seized very early on.

Our brands in China are stronger than ever and L’Oréal is number one beauty company in the second largest beauty market in the world where we are just now celebrating our 20th anniversary.

Finally in Africa and Middle East, all of the divisions have gained shares. We experienced a slow down at the end of the year in particular in Saudi Arabia, where the market is in decline. In contrast, Egypt and Pakistan continue to build at good pace.

2016 was also a pretty good vintage in term of acquisitions. We made four very diverse but also very strategic acquisitions that will complement perfectively our brands. CeraVe will considerably expand Active Cosmetic potential. IT Cosmetics is the perfect complement to the make-up artist brands and meets the specific needs of millions of women and has a very big potential. Atelier Cologne will enhance our position in the fast-growing segment of alternative perfumery, and the small for the moment, Saint-Gervais Mont-Blanc may have a great future because it taps into new aspirations in skincare.

Last but not least, we deliver a compelling set of results, as Christian Mulliez has shown you, confirming once again the power of our economic model set to create significant value. A record level of profitability of 17.6%; a strong free cash flow at plus 9.5% and a strong increase of plus 6.5% of the dividend at €3.30, that would be proposed at the annual general meeting of shareholders.

In parallel, 2016 was also a very good year in the pace of transformation of our company, making the Group even more digital, efficient, agile and sustainable. We continued to forge ahead with the profound transformation of the Group across three key areas. We increased first our digital lead with very tangible wins. Our e-commerce sales grew plus 33% and are now equivalent to the fourth largest country of the Group.

Our precision advertising programs enable us to have more relevant and efficient communications brand by brand, the most engaging content in the most relevant context at the right time to the right target. More than 30% of our advertising is now digital, optimizing our midyear efficiency.

The success of our digital transformation stems from the combination of the very clear strategic direction we set and are very decentralized agile approach in execution. With significant investment in talent, we now have close to 1,600 digital experts on board and our internal upscaling program has already benefited almost 10x that number. With all these wins, we are considered now by the digital professionals as the undisputed digital leader of the beauty industry.

Several advances were also made throughout our manufacturing and supply chain, while continuing to improve our quality, safety and environmental performance, all along our value chain. We accelerated packaging design with rapid prototyping techniques like 3D printing that allow us to further reduce time-to-market. In production, there is a true revolution with our new industrial platforms, which are evolving to an ultra-connected augmented reality and robotized industry 4.0. In the big factories, modernization is increasing our productivity and speed of execution, especially thanks to high-speed lines and operations excellence programs. In the smaller factories, new robots, cobots, allow us to be even more agile and to make personalization possible and affordable.

Finally, our supply chain has become even more reactive to respond to the major challenges linked to e-commerce. Our industry 4.0 program integrates all the new opportunities that digitalization offers throughout the entire value chain. At the same time, we have continued our profound transformations in term of sustainable development. Our comprehensive approach of our companywide efforts framed by our Sharing Beauty With All program are clearly paying off.

Out of nearly 3,000 companies scored in 2016 by the Carbon Disclosure Project we're one out of only two companies in the world to receive three A’s in the three critical areas; climate, sustainable water management and fight against deforestation. If we have been working hard this past few years to transform our company into a new L’Oréal, it is because we are fully conscious that as the world is changing around us at an amazing speed, the world of beauty is changing radically too and we believe that we are right now at the dawn of a new world of beauty.

And the two very good news, it is for the better both for the market and for L’Oréal . This new world of beauty should translate over time into a faster growing market. This new era where digital is omnipresent, ever-present and essential to the lives of our consumers should be a new golden era for appearance, self-expression and self-esteem, a new golden era for beauty.

As we enter into the era of social networks, we also enter into the era of, what we call, social beauty, where the way you look the quality of your hair, of your skin would be more important than ever in the way you feel for your image of yourself and for your positive interactions with others.

These should infuse progressively all categories of beauty, make-up today, hair color very soon but also styling hair care, skincare. Beauty will be increasingly important for consumers and they will want more of it. They will be ready to devote a larger share of their income to beauty and personal care. In this era of digital, where they have access anytime and anywhere to every possible information, they want more innovations truly new different and better products.

They will be always looking for something extra in terms of performance and results. They will not compromise on quality, efficacy, security and sincerity. And they will drive the premiumisation of the market. They will be keener than ever to trade up in terms of quality for better products.

Consumers will not only be ready to buy more beauty products. They will also be ready to pay more for it because they are worth it. They also have new expectations. They will expect a more personal relationship with brands, an ongoing one-to-one dialogue. They will expect customer’s advice and new services that help them choose and use their products and they expect the best immersive shopping experience, connecting directly with their brands, for example, through e-commerce or in-boutique on top of traditional distribution channels.

This bright new world of beauty, as we call it, creates a unique opportunity for L’Oréal that is more than ever the beauty company, uniquely positioned and equipped to drive and capture this exciting new golden era of beauty, firstly because our superiority in research and innovation gives us an edge in quality efficacy and safety, which are in the world of total transparency, more important than ever.

That digitalization of our laboratories is opening new perspectives. Design-thinking, open labs and fast-prototyping enable us to accelerate innovation. In parallel, the regionalization of our R&I herbs and our unique strategy of universalization fits particularly well with the multi-polarizing world. Innovation isn't just about products anymore. It is also about services. Our Digital Incubator based in San Francisco is spearheading game-changing innovations such as Makeup Genius that you know, Virtual Makeup Coach downloaded over 20 million times, the La Roche-Posay UV Patch that helps educate consumers about sun protection or recently the Kérastase Connected Brush that will help people better care for their hair and this is just the beginning.

We aren’t working alone on all these groundbreaking ideas. We have created strong partnership with world-class start-up and entrepreneurs in the field of beauty. Our partnerships with Founders Factory in the U.K. and Partech in France have enabled us to drive our transformation further and faster pairing the speed and agility of those small outfits with our global resources and talents.

Second, because we have always nurtured a really proximity and deep understanding of consumer expectations. François Dalle, our former CEO, created our seize up-and-coming trends motto, in French “saisir et tendances”. That's even more true today as we can harness the power of social listening. L’Oréal has been quick and the first international beauty company to spot the new growing trends like the boom of make-up, the new aspiration for natural care and the dream for personalization and also to translate them fast into great innovations in 2016 and ‘17.

Third, because L’Oréal is at the cutting edge of direct consumer relationships, we have developed new ways of connecting with our consumers. We have seized the opportunities that digital offers to interact and converse with them on a personal level. With over one billion viewers on our brand website and social media pages, L’Oréal is clearly the champion of connected beauty. Once again, our digital acumen has been acknowledged by L2, which has ranked two L’Oréal brands in each Digital IQ top five in the U.S., in China, in Germany and in France.

And the remains data assets that we'll be able to collect, thanks to our unique portfolio of a brand collections across all channels and countries, will give us a very strong competitive advantage.

Forth, because as we have anticipated and adjusted our distribution footprint to where our consumers wanted to shop, we are exploring now all the new opportunities of the direct to consumer channels. L’Oréal is leading beauty in e-commerce, expanding fast across all divisions and some of our brands are also opening branded boutique in order to respond to consumer demand for immersive brand experience and services and to create for them a new multi-channel shopping opportunity.

Finally our unique characteristics, that you know well, appear to be perfectly fitted in this new world of beauty. Our global flotilla of brands, agile, adaptive, perfectively complimentary, each addressing a specific consumer targets, our total reaching presence across all channels, categories, price points, countries, our unique organization strategically concentrated but operationally decentralized, and last but not least, our entrepreneurial company culture and our expert highly engaged teams.

To conclude, we are very confident that this new golden era for beauty can be also a new golden age for L’Oréal, the beauty company, the one and only that offers the best of beauty to all women and men living on this planet accomplishing our mission and purpose, beauty for all.

Inspired and energized by this vision, we start this year 2017 with voluntarism, as usual, and confidence despite the multiple political and economic uncertainties that lay ahead. We believe, at this time of the year, that the beauty market growth should be around the same as in 2016 around plus 4%. Our objective is of course to outperform the market in every division and in every region.

We believe that the profile of the growth will be similar to the one we had in 2016, i.e., first quarter slightly below the average of the year. And of course we are confident that we will deliver another year of increase in sales and profit.

Thank you very much.

Question-and-Answer Session

A - Jean-Paul Agon

All right. So we are on time and ready for your questions. So who is ready to ask the first question? There is someone below that. Celine, I’m surprised. Please a mike for Celine.

Celine Pannuti

Bonjour. Good morning. I have two questions. Yes, thank you for giving us the outlook for the beauty market for 2017. As we look into 2016 there has been a deceleration in emerging market growth, and in fact in the fourth quarter EMs was even slower than developed market which is quite unfortunately remarkable. Just wanted to understand how we go forward into 2017 in EMs, and specifically China which I understood as well that Magic was supposedly going through accelerate through the second half, so if you could comment on where we are there? And my second question. Shall I ask it now?

Jean-Paul Agon

Yes.

Celine Pannuti

Yes. I think constant profit growth was 6% versus constant - sorry, constant FX profit growth was 6% constant FX was 5%. Just wanted to understand what is the - at the time of accelerating growth, what are the fact that maybe you are going into D2C, is that changing the way we should look about growth leverage on the margin? Thank you.

Jean-Paul Agon

I'm sure that Christian will be very happy to answer this one, and I will start with the first one. You're right. The growth of the market themselves in 2016 were a bit slower for her emerging market and higher for mature markets like the U.S. and Europe, which is good for us, because as you know, we are probably the most balanced company of all between the three part of the world, between Western Europe, between North America and emerging markets.

So for 2016, as the world is becoming very unpredictable, it's very difficult to say. What we know is that several FX impacts that existed - still exist. The situation in India is not yet much better. The demonetization is still running. In China, the mass market has clearly decelerated. In Brazil, as you know as well as me, the economic situation is not getting better for the moment. So I would say that, at this stage of the year, it's probable that the global growth of the markets would probably be more or less the same than last year.

But what is remarkable is that in the evolution of the beauty market is that all in all every year, in total it is around 4%. It was 4% last year. It was 3.9% the year before. It was not very far the year before. So it's a mixed bag every year and not the same mix. But at the end because we are pretty balanced everywhere, we are able to take every opportunity.

So Christian, what about the second interesting question of Celine?

Christian Mulliez

About margins, Celine, you wouldn’t be surprised telling me that just confirm what I said before, and which is our turnover will increase, volume will increase. We will be simply in the term of management of expenses, we are more driven by an allocation of resources. So in the end, the profitability will improve progressively gradually from a starting point of 17.6%, and that's it.

Jean-Paul Agon

And regarding your question regarding D2C. D2C, no one said that D2C will be dilutive to the profitability. E-commerce is usually pretty relative, and the push that we are making in term of branded boutique is first very limited because there are very few brands for which we believe it's an interesting new way. It's mostly Kiehl's, Urban Decay and NYX, so the numbers of stores are pretty limited. And I think, they are what, 200 stores more in 2016 for this brand than the year before, for all the brand and the year before, and also we are very disciplined in term of store opening and store management because we know from the experience of some of our competitors that if you are not disciplined in retail, then it's difficult to be relative, and we definitely don't want to compromise at all our profitability.

Celine Pannuti

Just on China, if you could - I had asked on China, the plans for the 2017 with Magic being a hit in 2016.

Jean-Paul Agon

Well, in China I think the difficulty that we had in 2016 and that has impacted our CPD sales in China was on two-fronts. First definitely Magic was slower than we expected. So as you know, it was also due to the fact that we were waiting for innovations that are really coming - that started to come in the second half of 2016 and are really accelerating right now. We are launching, as we speak, new state-of-the-art mask, very interesting, more valorized on the market. And so we have reasons to believe that the brand would be more competitive and we'll gain again market share this year.

This is the bet that we do on this market, which is by the way, still a very interesting market. The mask, the skincare mask market in China is still a very good one, very dynamic. The only problem with that it’s a very highly competitive now. Okay? And the global mass market has clearly decelerated, in fact in China it's really a tale of two parts. On one side, you have luxury markets, luxury beauty market that is really booming and the growth of the market, the luxury market in China is double-digit and the division, thanks to a great job, is even outperforming of the growth of the market.

But on the mass market side, the growth has really been decelerating for the past five years and is very low single-digit now. Okay? Any other question? Please, yes.

Unidentified Analyst

Hello. It’s [indiscernible] from the AFP, Agence France-Presse. Just a couple of questions again on The Body Shop. How long do you give yourself to find a solution on Body Shop? Is it going - is it expected for this year, and are you already in contact with potential buyers for instance? Second, there was also recently rumors about an interest of L’Oréal on the Greek brand, APIVITA. I was wondering if you could say something about that too? And the third, can you give us the evolution on the sales, specifically in the France markets? Thanks.

Jean-Paul Agon

So I will take the third one. I will give the first two one that are very interesting to my friend, Christian.

So the third one, regarding French, the French market was very difficult last year. It was negative. It was minus 3% in mask. It was minus 3% in luxury I think. It was low single-digit negative in professional. It was flat for the first time in many years in the pharmacy channel. And so in fact it was a negative market and to be honest it was the most negative market in the world, which is really unfortunate.

So we believe there were many reasons for that that you know very well, because you live in France like us. So we hope that in 2017 the market will get better. It’s absolutely too early to tell but we hope so. And we hope that many of the factors will get better this year.

So regarding the two very interesting questions, Christian.

Christian Mulliez

Yes, regarding the Greece, you know that we do not comment on rumors, so that's my answer. And regarding Body Shop, it should take several months maybe a bit more.

Jean-Paul Agon

Good. Thank you. We cannot say more than that. We are exploring options. Please. No questions? Yes, please.

Rosie Edwards

This is Rosie Edwards from Berenberg. Just in the fourth quarter in Western Europe, you mentioned very strong sell-through. Can you just give us a little bit more color in terms of the growth? And then also in luxury, in the U.S., I was wondering if you could give us an idea of your channel mix there, so split between say, department stores, specialty, retailers, online, that sort of thing? Thank you.

Jean-Paul Agon

Okay. So maybe I will ask Nicolas because I don't want to be the only one to speak to. I will ask Nicolas to talk about the luxury in the U.S., and then maybe every division to give a flavor about their sell-through in the fourth quarter in Western Europe. Nicolas?

Nicolas Hieronimus

In the U.S., what I can say is that our footprint of distribution is very balanced. Obviously like many brands, we started with a stronghold in traditional department stores but over the past couple of years, we have very strongly accelerated in assisted self-service with the customers such Sephora and Ulta [ph], which we are expanding very first in the USA. Boutiques obviously with Kiehl's and Urban Decay and a very strong e-commerce present probably in the U.S.

U.S. is the country where e-commerce has the highest weight on the total division’s turnover, so you’ve heard over 10% globally, so in the U.S. it's even higher than that closer to the 15% I guess. So pretty balanced which allows us again to leverage our portfolio of brands with all the different distribution channels and seize the best opportunities.

Jean-Paul Agon

Towards about luxury fourth quarter, Western Europe.

Nicolas Hieronimus

Fourth quarter, the European market was average in terms of growth last year and we talked about France, The couple of markets were really dynamic, the U.K. and Spain were extremely dynamic. The U.K. benefit from the low pound and the influx of tourists plus great consumption. And on these markets, we significantly over-performed the market in December, thanks to our fragrance performance particularly and also make-up. So good U.K., good Spain, okay Germany, difficult France, and everywhere we went above the market in December.

Jean-Paul Agon

Professional Products in fourth quarter Europe.

Nathalie Roos

Yes, we had definitely a have better Q4 in Western Europe, which was boosted by the desire for color, and at the same time, we have introduced in the market, the bonders technology I’ve just mentioned, which is really an enabler for daring more colors, more changes without any damage on your hair fiber. So this has been really a booster of the Q4 in Western Europe.

Jean-Paul Agon

Alexis?

Alexis Perakis-Valat

Yes, there was really an increase of market share of the division in the second half in Europe, which was very clear due to a couple of factors. First, it's make-up. It’s the deployment of NYX but not only, so it's very good performance in the make-up market in the Consumer Products Division.

Second is the deployment of some of the innovations I shared with you, the Micellar Water, the Clay Masks of L’Oréal, some of these innovations have really been a very big hit and are continuing to be very dynamic in Europe and are very forced as mask. And the third factor that is true is some countries have been extremely dynamic, and in Germany and in the U.K. for example, we've seen over the last months sell-outs that were double-digit, which was just very notable.

Jean-Paul Agon

Yes, which didn't happen for many years. So to be honest to see - and you know that because you’ve got the Nielson panel and it's true that when you see some key countries like Germany, U.K., or even Spain where our sell-out are at double-digit or close to double-digit, it's pretty impressive and it bodes well for - I hope for the year after. Brigitte?

Brigitte Liberman

The Q4 was in line with the rest of the year and with very solid growth especially driven by La Roche-Posay on skincare with robust business model based on prescription on dermatologist. So all in all, the country were at same level, except France, as we already explained, which suffered particularly last year.

Jean-Paul Agon

But it's getting better in the beginning of the year because it has - the weather has been good for you, which means cold with a lot of flu which is…

Brigitte Liberman

In January, yes.

Jean-Paul Agon

When people are sick unfortunately for them but it's good for us because they go to pharmacies and we sell more products. So Brigitte is very happy with the beginning of the year in pharmacy. Any other questions? Yes, please.

Unidentified Analyst

Hi good morning. [indiscernible]. I have three questions please.

Jean-Paul Agon

Okay.

Unidentified Analyst

The first one is I think usually you were giving us the growth by category, make-up, hair skin for L’Oréal. So I was wondering if you could share with this data for 2016? Then the next question was last year, topic was the growth of international brands versus the local brands. So just wondering how it evolved this year and also...

Jean-Paul Agon

Can you repeat that?

Unidentified Analyst

Yes, last year I think one point we were discussing about was local brands versus international brands notably in mass markets. And so I was wondering how it will evolve this year and notably in Asia? And third, you were pointing the change in distribution mix, the shift of channel in China. And so how are you positioned now towards this shift in trends in distribution?

Jean-Paul Agon

Okay. So I will start, as usual, by the last one. So in fact in China, as I said before, it’s really again a tail of two parts. Luxury, there is no channel shift. Of course - and Nicolas will complement - but of course e-commerce is growing but it's still limited, and in fact the market is pretty clear. They are building department stores and perfumeries around the country, and as I said very often, when you think that there are, what 200 department stores around in China, for a country with 1.400 billion people and when you think that there are 2,000 in the U.S., even if they are bit maybe too many, you see that there is still a long potential for building stores, development of consumption on the Chinese market. So there is no channel shift really for luxury.

There has been a big channel shift for mass, and in fact this is the country in the world where the channel shift has been the most extraordinary and we had never seen that - no one has seen that anywhere else and never before. And to make you realize, we think that this year, in 2017, we think that we are going to do probably roughly 30% of our Consumer Product Division sales on e-commerce, which was almost zero five years ago, so it's a huge shift.

And so we are taking it as quickly as we can. We were, to be honest also, I think the first international company or maybe even the first company to see it coming and to seize it as a trend as an opportunity, so we have moved very fast. And the good thing is that the market share that we have in this e-commerce is very good too, and L’Oréal Paris is the number one brand in beauty, Maybelline in make-up, L’Oréal Men Expert in men’s care. So we are really moving very fast and that explains why - in fact among all the international companies, we are the one doing it the best.

Still as you can understand, it has an impact on the net sales because in fact you move from a long-value - long chain, supply chain system in a normal type of distribution to a very short supply chain system with e-commerce. And of course in term of inventories in retailers, it is much smaller with the e-commerce player than you have with your normal distribution. So this explains also the impact on the net sales.

Alexis, you know the country very well. Do you want to…

Alexis Perakis-Valat

No. I think you explained it very well.

Jean-Paul Agon

Thank you, Alexis.

Alexis Perakis-Valat

You explained it very well.

Jean-Paul Agon

And I think that - the good news - of course this is a transition period and we said that by the way last year. We said that for the Consumer Division, there is a transition period that lasted last year and will probably last another one or two quarters this year but we - for us, it's not a bad evolution because our brands are very strong in e-commerce. They have a huge awareness, consumer demand. And so once this transition is done, I think it's going to be very positive and it's also pretty relative, so it's not a bad evolution. So the second question that I really forgot was…

Yes, in fact what we are seeing - it's not really the position between - it's not conceptually it’s not in a position between international brand and local brands. It will be a mistake to see this way because people could think that consumers around the world now are not - they don't want to buy international brands. They prefer local brands. It's not that. It is big brands and small brands. And it happens that small brands are more generally local brands. And so we have seen that in the Consumer Division, and it's more of course Consumer Division than luxury division because there are very - it’s not yet to stand for luxury.

But for Consumer Division, we have seen more or less the same last year where in fact if you look at all the panel around the world, what they call, the other brands has been growing faster than the market. I think the difference was a bit less than the year before but still growing faster. And to be honest, among the big companies, L’Oréal - if you look well at the panel, L’Oréal was the only company international that grew faster than the markets among the big ones, which means that because - thanks to the adjustment that we have made and that we are making on make-up on with all the launches that you have seen, because we are also seizing the ascending trends, the new opportunities, we are able also to enjoy the support of the market as the smaller brands.

Alexis, nothing to add?

Alexis Perakis-Valat

No. The only thing maybe to add is that the weight of these, what you call local brands, is not the same across all categories. It's in hair care and even in make-up it’s not as big as well as it is in skincare, so there is really also a category answer to this question.

Jean-Paul Agon

Okay. And you had also a question about the categories. So last year in fact, as you know, the market was plus 4%. The only category that was much higher than the average was of course make-up. Make-up was twice that,. plus 8%, and all the other categories were in the low single-digit growth, which is around 2% to 3%.

And thanks - and one of the reasons of the very good year that we had was that, for us, the growth that we had on make-up was twice the speed of the market, which is 15% growth on make-up, and definitely the fact that we are the number one in international manufacturer of make-up and with the collection of brand that we have, NYX, Maybelline, L’Oréal, Urban Decay, Yves Saint Laurent, Giorgio Armani, Lancôme et cetera, help us to play perfectly well and offer to all type of consumers what they really want in term of make-up and IT Cosmetics now. Okay? Thank you. Okay, yes.

Pierre Tegner

Good morning. Sorry I'm in the dark.

Jean-Paul Agon

Yes, you are.

Pierre Tegner

So you don't see me. Pierre Tegner from Natixis.

Jean-Paul Agon

Good morning.

Pierre Tegner

Good morning. I have some questions. The first one is on CapEx. We have seen a strong rise in percentage of sales of CapEx in 2016 and you are saying that for this year, probably we will be at the same level, so that's good because investment is growth. We know that. And I would like to know what is beyond this high degree of CapEx. Does that mean that you have the big part of the organic growth coming from volume growth and are there other drivers beyond that? So that's the first question. And the second question is, could you share with us what about the Travel Retail in the biggest market U.S., Western Europe and Asia, and what are the - are you seeing some changes between Q4 and the rest of the year?

Jean-Paul Agon

Okay, Christian will be happy to answer the first one, and Nicolas I'm sure the second one.

Christian Mulliez

Thank you, Pierre, for making the question and the answer because it's correct. First CapEx increase and it should stay in 2017 at about the same level in relative term as in 2016. So this is something like 5.5% of the turnover increase came from volume growth, something as I mentioned in my speech, something like 85% of our growth, organic growth last year came from volume, only 15% from value, so of course this request some CapEx. On top of that we are keeping on investing significantly in IT and digital IT specifically, and not to forget some CapEx in point of sales in retail.

Jean-Paul Agon

Nicolas, Travel Retail?

Nicolas Hieronimus

Yes, so the Travel Retail markets, we estimate the growth last year around short of 8% and obviously it was a growth that was very different between regions. The European Travel Retail - European and Middle East, Africa was slightly negative, as was the Americas, which is very under the influence of Brazilian travelers.

On the other hand, the Asia-Pacific Travel Retail was extremely dynamic, the high double-digit growth boosted by obviously Chinese travelers, which are developing fast. We remain very confident in this market, first of all, because the traffic itself is continuously growing. It was growing around 7% last year and is planned to grow around the same in 2017.

The regions hopefully you should rebalance a bit and we see some very early signs of improvements in Europe and America with lower comparatives. And the good thing is that, as the L’Oréal as the leader of Travel Retail market and once again with a very balanced multi-division footprint, can really adapt to these changes and accelerate where growth opportunities are, which is what we did last year.

Jean-Paul Agon

Thank you, Nicolas. Yes, please.

Toby McCullagh

Hi there. It’s Toby McCullagh from Macquarie. Just a couple of questions. First given that you had a very good Q4, and therefore good exit momentum, and also the Q1 of 2017 is the easiest comp of the year, could you perhaps explain a little bit as to why you're guiding the 1Q is going to be below you growth rate for the year? Are there some technical factors there, or is it something about the timing of product launches, and in which case, could you give us a bit of help on which divisions we should expect those to be in? And then secondly, I know I've missed it at the beginning. I'm sure you gave the growth rates of NYX, or if you didn't, if you could?

Jean-Paul Agon

In fact I gave it in the figure this morning, so I don't know if I should repeat it but it's public, yes, plus 125%.

Toby McCullagh

Okay. that's a big number.

Jean-Paul Agon

Yes. Probably the record growth of any beauty brand, significant beauty brand last year.

Toby McCullagh

And so on that point just looking forward on NYX. Of that growth, how much of it has been rolling out into the new markets, and therefore looking forward to how much of it will be in new markets and how much of it do you think is going to be sort of growth in existing markets based on strong category growth within make-up?

Jean-Paul Agon

That's a good question. Alexis, what do you think?

Alexis Perakis-Valat

I think we are going to do both in the case of NYX because we are seeing, for example, in the U.S., where the brand has been for some years now, the U.S. - the growth in the U.S. of NYX has been extremely strong in 2016. So we think that going forward, growth will both come from like-for-like growth in existing countries and also rolling out of the brand in some new countries.

Jean-Paul Agon

Yes, anyway when the brand starts its international deployment the two are part of the business. You grow your business by the increase the acceleration of the like-for-like but you also increase by the deployment of the brand across new stores just because the brand is conquering new consumers. And in order to conquer this new consumers, you go to more countries. In a country you go to more stores. And so that's part of the dynamic of this brand. And as you said yourself, it's true that 125% is a very strong. We are still very confident for 2017. I cannot promise you it's going to be 125% again, but we are expecting a strong number again.

Regarding the question for Q1 2017, we are just a bit cautious because some of the elements of weakness that we saw on the markets around the world in 2000 - at the end of 2016 still exists. As I told you, India is still weak. Middle East is very weak. Saudi Arabia is really weak and so it is not helping. I told about the transition in China. It's too early to say if the situation in France will very much favor and acceleration of the sell-out. I'm not sure yet.

So we prefer to be cautious. And it's true also that the deployment, the full deployment of the new products that were presented this morning will become more March/April than they come in January/February. It's more and more like that. When you have a new collection of launches, they are presented to the retail and then they are deployed later in the year. So we believe it's more prudent to be cautious for the first quarter.

The thing is that we think that the luxury business should be good because we had, Nicolas, the good sell-out at Christmas time, so this should be a positive. Okay? But as we told you, we are also very confident for the year. There was another question there. Please.

Nicholas Micallef

Hello. Nicholas from Euromonitor.

Jean-Paul Agon

Hello.

Nicholas Micallef

I have a question about distribution. We are seeing for example department stores losing some of their strength and increasing emphasis by retailers, some private label for example or retailers such as Sephora for example. They are dedicating more space towards some parents’ companies brands. Does this make it inevitable for L’Oréal to adapt more mono-brand retail strategy direction going forward?

Jean-Paul Agon

Well, I think we are - to be honest, we are very pragmatic. And so we adapt and this is what we have been doing for last 107 years and that we intend to keep doing. So we adapt, and apparently we are adapting well seeing the numbers. And it really depends on the type of brand. As I told you before, some brands are really prone to the branded retail and some others are not. So we are really pragmatic and we will adapt to the evolution of the market.

The ultimate mission that we have is to serve our consumers wherever they want to shop, whenever they want to shop, nobody want to shop. So what we are seeing now is that consumers in many parts of the world want more and more to shop on online, okay. So for us it's a new channel. We go online. Some of them want more and more for make-up mostly to - not only but mostly to shop in branded stores because they have a larger assortment, because they have service, because there is a brand experience. And so we are doing that for them. So we really are following the evolution of the aspiration of our consumers.

Yes, another one in the dark. The same one.

Pierre Tegner

Thank you. Pierre Tegner again.

Jean-Paul Agon

The same in the dark, okay.

Pierre Tegner

Yes. I have two other questions. One is about Mexico because I remember you have relocated some manufacturing tools in Mexico, so I understand this point is probably quite tough to speak about, but what's you view with the lack of visibility we can have on the medium term? And the other one is about, what you said, around retail and my question is on The Body Shop. In the way you manage The Body Shop number of boutiques, we think the different options you have in line. Can we think about the conversion of Body Shop boutiques into other L’Oréal brand boutiques?

Jean-Paul Agon

That's very creative question and the answer is no. So my answer will be less creative than your question. The answer is no. No, The Body Shop is a business. It's a company. It's an entity. It has its network of stores that - by the way, we increased nicely over the past 10 years from 2,000 to 3,000 stores today, and this is an entity and we are not going to touch it at all.

The first question was about Mexico. In fact we have one factory in Mexico that produce for Latin America and North America, and because I expected the question, it’s very small because it's less than 5% of the consumption of products in North America. So it's a very, very tiny part of the business.

And I think it's important to note here that the policy of L’Oréal has always been in fact to manufacture where we sell. Of course mostly for the consumer division. But it’s important in term of units of volumes. So the policy has always been to manufacture where we sell, so we manufacture in the U.S. for the American consumers, in China for the Chinese consumers, in Brazil for the Brazilian consumers et cetera. So in fact most of what we manufacture - what we sell in the U.S. is made in the U.S.

We import some brands from outside of the U.S. from western Europe from different part of the world but we export also a lot from the U.S., because as you know, we have American brands like Kiehl's, like Redken, et cetera, and in fact the balance is pretty equal. So we don't think that we have any major risk there.

Okay? No one in dark. Yes, Eva. Yes, Eva please.

Eva Quiroga

Can I maybe come back to - or come to skincare. It's clearly been a slow going market. I think Nicolas was talking about a fuller pipeline of new products for 2017. I think he is talking about natural products. What does it take to get this category growing again. Is it a lack of innovation amongst other things that's been holding it back and do you think this would pick up? And then secondly on Kiehl's. Can you maybe talk now that we have €1 billion in sales, how we have to think about the growth there? Is there still a lot of store expansion opportunity or is that now more of a same-store growth story?

Jean-Paul Agon

Thank you, Eva. Nice question. So you were looking at Nicolas, so I'm sure that he will be happy to answer the first and the second one, and maybe Alexis will complement on the skincare category.

Alexis Perakis-Valat

It's true that the skincare market globally has been slower this year and it's true it's also it's a market that is changing, that is reinventing itself a bit in the same way make-up has gone to through a transformation with the influence of social networks, with the consumers wanting more instant benefit with some products being hybrid between make-up and skincare, if I take for example the IT Cosmetics brand we just acquired. They have one of their bestselling product. It’s called by Bye Bye Under Eye. Is it skincare or makeup? It's a skincare product with [indiscernible]. And so we have to adjust to these new landscape where consumer wants as much long-term benefits, which they get from our formulas and short-term results, so that's something we are adapting to right now.

The other thing is that clearly Kiehl's is doing great because it's really is a true skincare brand and its bang on the ascending trends and some of the other brands as you could hear we had a pretty strong focus on make-up, so that's a choice we made and it's being paying off.

Regarding the expansion of Kiehl's, the brand is still growing in like-for-like as well as in total growth and we want to keep it that way. So we keep our eye on the like-for-like in every country, so we will continue to open stores. We will continue to accelerated e-commerce L’Oréal Luxe. Kiehl's is the brand with the highest percentage of e-commerce because it's got this direct relationship to consumers, so there is many areas of opportunities for this brand, which is really connecting with the consumers.

Jean-Paul Agon

Alexis, skincare for Garnier for example.

Alexis Perakis-Valat

Yes, to build on what Nicolas said, two points may be. The first thing is that, actually it’s true that skincare is also becoming social and we see that the most visual part of skincare are extremely successful, for example L’Oréal Paris had a very big success with Clay Masks because it's very integral [ph] part of skincare, so that's the first point. And then the second point is that when we talk about skincare especially for mass, it's a tale of two stories because there is care and there is cleansing and what we are seeing is that actually the more people use make-up, the more people have to remove make-up and because of that the cleansing category is first a very dynamic category. Second a big category. In the U.S. cleansing is as big as care, and we've been very active on that front especially with the Garnier brand and with the huge success of the Micellar Water.

Jean-Paul Agon

Absolutely. Thank you. I will take one question because this year we have opened questions by Internet from analysts from abroad. And so there was one question, which is - and it's not the easiest one, so don't think that I'm taking the easy question just to get rid of the difficult ones. Mark Astrachan from Stifel. So why growth of Consumer Division, excluding NYX, remains below 3% for the third consecutive year? Doesn’t it mean that L’Oréal is not getting share in mass beauty?

Well, I would answer to Mark, wherever he is, that in fact when you base your strategy of acceleration on a brand, of course you can expect that the brand is growing fast and that it is the essential of the growth of the division. It’s a bit - the answer is in the question. So still we have seen some nice evolutions with our other brands. The Garnier brand, as Alexis was mentioning, has done very good inroads. Maybelline is also moving in the right direction. And of course we are enjoying this fantastic success with NYX and it would be - it would not be a good idea not to take advantage of it.

And the second part of the question is how much this weakness in CPD is attributable to China and what measures L’Oréal taking to improve country performance?

I talked about it before. It's true that the fact that with the channel shift story that we talked about before had an impact on the global growth of the Consumer Division last year. And what are we doing? We are doing what I said before. We are really - in fact what's important is that for the priority is to accelerate the consumer demand on our brands because when you are in a period of transition of channel shift, the absolute priority is to make sure that there is an increase of the consumer demand because if there is an increase in consumer demand, at the end eventually your business will grow even if there is a transition in that sales into because of the adaptation to the different networks.

So this is what we are doing and we are pretty confident, as I said in my presentation, L’Oréal is the number one beauty company in China and our brands are stronger than ever. Any other question? No.

Jean-Paul Agon

Okay. So thank you very much. Thank you for attending this meeting. And we offer you go a light cocktail, as we say, outside of the room on the first floor. Thank you very much.

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