L'Oreal SA Management Discusses Q2 2012 (H1 2012) Results - Earnings Call Transcript

| About: L'Oreal Co. (LRLCY)

L'Oreal SA (OTCPK:LRLCY) Q2 2012 (H1 2012) Earnings Call August 29, 2012 3:00 AM ET


Jean-Paul Agon - Chairman, Chief Executive Officer and Chairman of Strategy & Sustainable Development Committee

Jean-Régis Carof - Director of Shareholder and Market Authority Relations

Christian Mulliez - Executive Vice President of Administration and Finance


Eva Quiroga - UBS Investment Bank, Research Division

Celine AH Pannuti - JP Morgan Chase & Co, Research Division

Erik Sjogren - Morgan Stanley, Research Division

Catherine Rolland - Kepler Capital Markets, Research Division

Gael Colcombet - MainFirst Bank AG, Research Division

Jean-Paul Agon

So maybe we can get a little bit of organization, or I maybe start. So good morning, all. Thank you all for being back to work the same time as us, because I know that we're one of the few who publish half yearly results at the end of August. So we're all back at school together. Jean-Régis, tell us how this is going to work.

Jean-Régis Carof

Fine, thank you. Good morning, ladies and gentlemen. Before we start the meeting, I'll just give you a few practical details about how it's organized. And I would invite you, firstly, to read the disclaimer that's on the last page of the leaflet you've been given. As for the organization of the meeting, first thing, as you came in, you would have found some translation headsets. French is on Channel 1 and English on Channel 2. I would therefore suggest that you select the channel you wish to hear.

Secondly, we have WiFi in this building. And thus, you can have an Internet connection by using the login and the password that you have on the screen before you and that you will also find on the posters in the lobby outside. Therefore, we would ask you to switch your mobile phones and smartphones to silent so they don't sound off during the meeting.

Thirdly, as you came in, you were given the leaflet with the charts that Mr. Agon will talk about during the presentation. You also have the press release on the half yearly results that was made available to the financial community yesterday at 6 p.m. And fourthly, as usual, the whole meeting will be on a webcast on the loreal-finance.com website.

And in that respect, I first will tell you the French communication department has developed, under L'Oréal my finance, a certain number of iPad and iPhone applications that have been specially designed for you. And as now, I can tell you that quite a number of you have already downloaded these applications from App Store and told us, in fact, this morning how happy they were with the availability of this information on their iPad or iPhone. You seem to be blowing your own trumpet there. Well, not really. I'm just telling you how our communication systems are growing. All right. No more self-publicity then.

So just wanted to say that all the presentations and the recording of the webcast of the meeting will be available on Presentations & Webcasts on the same website this afternoon as of 4:00, and the half yearly report 2012 will be available online as of the 31st of August in French and English. Thank you very much.

Jean-Paul Agon

Okay. Thank you very much, Jean-Régis. We will kick off, therefore, with the figures. Christian Mulliez, the floor is yours.

Christian Mulliez

Thank you, Jean-Paul. Good morning, everybody. As part of today's presentation of L'Oréal's financial performance in H1 2012, we will present information pertaining to sales, profit, cash flow and the balance sheet.

Consolidated sales came to EUR 11,213,000,000, up 6.7% on a like-for-like ForEx basis. Like-for-like sales rose 6%. We have a 0.7% positive scope difference, which is mostly due to the impact of the Q-Med acquisition by Galderma in March 2011, of the Clarisonic acquisition in the U.S. in December 2011 and of Cadum in France in April 2012.

With the highly positive currency fluctuations at over 3.8%, the increase on a reported basis comes to over 10.5%. With regard to the ForEx difference, it is difficult to forecast exactly where it will stand for the full year of 2012. I can simply tell you that with the current exchange rate, that is EUR 1 for $1.25, the impact on yearly sales should be a positive 5% or more.

With regard to the currency situation in the first half year of 2012, the U.S. dollar and to a lesser extent, the Chinese yuan and sterling were the main contributors to this positive impact. With regard to our main billing currencies, only the Brazilian real and the Mexican peso have weakened against the euro. Please note that the weight of the euro in H1 2012 accounted for 28.4% of the group's sales, down from 31.1% in H1 2011 and 32.5% in H1 2010. Therefore, the group is continuing to steadfastly strengthen its position outside of the Eurozone.

Sales per branch and division on a like-for-like basis. Professional Products are up 2.9%. Consumer Products have grown 4.7%. L’Oréal Luxe is still going strong, rising 10.4%. Active Cosmetics comes to 5.4%. The Body Shop is at 5.4%. And lastly, Dermatology or Galderma is enjoying 11% growth. Please note that on a reported basis, L’Oréal Luxe's strong growth, standing at 17.9%, is due both to the Clarisonic acquisition and to a positive ForEx impact, not forgetting a reported -- a 19.9% growth of Galderma on a reported basis. And this is due to the Q-Med acquisition and also to the fact that the -- we have a stronger dollar, and this has an impact on the U.S. to euro conversion of Galderma sales in the U.S.

On a geographic basis, every geographic area is growing. Western Europe is enjoying modest growth, 0.8%. North America is enjoying brisk business, 7.3%. The New Markets are enjoying double-digit growth, 10.2%. The New Markets are seeing the relative weight strengthening again since they account for 38.8% of the Cosmetics sales in H1 2012, up from 37.4% in H1 2011. This year, the New Markets have become the leading geographic area for the group. They have now overtaken Western Europe. Asia -- the Asia Pacific region is enjoying strong growth, 12.5%; South America, 8.2%. As announced, Eastern Europe stands at 3.1%. So Eastern Europe is gradually recovering following a disappointing year in 2011. Africa and the Middle East is enjoying strong growth, 17.2%.

Our different business segments are all growing in H1 2012: skincare, up 9.7%; make-up, up 6%; hair care, up 3.7%; hair color, up 3.8%; and lastly, fragrances, up 6.6%.

Our P&L now. Our operating profit has grown quite a bit, 11.4%, and profitability is up as well, standing at 16.9% of sales. Let us start by breaking down our gross profit. Gross profit stands at EUR 7,966,000,000. It has risen steeply. 9.7% of gross margin accounts for 71% of sales compared to a 71.2% in 2011 and 71.5% in H1 2011. This 50-basis-point differential from half year to half year is due to 2 technical factors. First of all, a negative ForEx impact of about 20 basis points, and this is due to the euro being weaker against the main other currencies. This is a mix impact on the gross profit per geographic area. And secondly, consolidation of the U.S. company, Clarisonic, this has had a negative impact of 10 basis points on gross profit.

This change is also due to a decision which has been made. This decision to strengthen whenever necessary in the decision to strengthen customer allowances. And as you know, these come off the sales figure, and therefore, they have an impact on the gross profit. And this can be estimated at about 30 basis points. This decision, in terms of resource allocation, was made possible as we reduced our A&P costs, as we will see later. And with regard to gross margin, other factors have had a positive contribution to the tune of about 10 basis points.

Now research and innovation costs have remained stable as a share of sales, 3.4%, up 11.6%. This increase reflects the group's unwavering determination to support its investment into research and innovation. Advertising and promotion costs come to 30.4% of sales. That is slightly under the level in H1 2011, lower by 50 basis points. This reduction was possible without affecting our share of voice. The cosmetic media market was quieter than in 2011 both in terms of volumes and in terms of value. And also, we have continued to improve our purchasing terms, and this can be combined with the positive impact of digital media planning. I would like to remind you that as early as February 2012, we indicated that a slight decrease of this ratio cannot be ruled out. With regard to the full year of 2012, A&P costs could be expected to be slightly lower as a share of sales, slightly lower than the 2011 level.

SG&A costs stand at 20.3% of sales, which is 20 basis points lower than in H1 2011, and this confirms the efforts that we have made to continue to generate productivity gains. With regard to the entire year of 2012, we can expect a slight improvement compared with the year before. In total, operating profit has grown by 11.4%, as we said before. This is an improvement of 10 basis points compared with H1 2011, where it stood at 16.9%.

Moving on to profitability of branches and divisions now. I remind you that the half yearly operating profitability figures cannot be extrapolated over the whole year, as we can see from the first 2 columns in the chart giving you the figures for 2011. The profitability figures for Professional Products and Consumer Products divisions at 19.9% in first half of this year, virtually unchanged against the first half of last year. Profitability of the L'Oréal Luxe at 19.5% is up on its level of the first half last year, which was 18.9%. And then finally, Active Cosmetics, which is always a very seasonal business, once again has posted very high profitability in this first half year, 26.1%, very close to the level it was at in the first half of 2011. The non-allocated amount, 2.7%, is slightly down on the equivalent last year.

Body Shop. Well, there, each year, Body Shop produces its profitability mainly in the second half year. Its improvement in this first half year for 30 basis points is therefore not significant. As you know that for the full year, we expect a slight increase of Body Shop's operating profitability over 2011. And then Dermatology, there, once again, usually, profitability comes in second half year. And the first half year was 11%, well up on its level of 2011 in the first half year.

Moving on from operating profit to net profit excluding tax and non-recurring items and earnings per share. Now the financial expenses are considerably down at EUR 4.7 million, mainly because of the significant reduction of our debt in the second half. We can expect a slightly lower level than in the first half of this year. Sanofi dividends were EUR 313 million, up 6%. Income tax was EUR 545 million. That's a rate of 24.7%, slightly over the level of first half of 2011, which was 24.2%. For the full year 2012, we can expect an income tax rate of around 27%, perhaps slightly under if nothing changes.

The net profit excluding non-recurring items is EUR 1,658.6 million, up 10.1%, double-digit growth therefore and the earnings per share, EUR 2.75, up 8.9%. As for the diluted average number of shares for the full year 2012, at this stage, we can expect to be around 606 million, 607 million shares so that you can make your various calculations.

Now taking the non-recurring items into account, that is to say a pretax total of EUR 55.6 million, post-tax of EUR 33.4 million. The net profit is EUR 1,625 million, up 10.8%. These pretax elements mainly correspond to the provision for the closure of the American plant in Solon of the Professional Products division, and that's EUR 31 million.

Cash flows now. The cash flow is EUR 1.963 billion, up 9.3% over the first half year of 2011. Depreciation and amortization, EUR 310 million, rose over the 2011 H1 level, where it was EUR 277 million. And within this amount, depreciation and amortization is up to EUR 397 million against EUR 352 million for the same period last year. It's the same for provisions, which in net terms meant EUR 817 million in reversals compared with net reversals of EUR 76 million in the first half 2011, mainly, in both cases, at both half years. So this is the consequence of funding the pension fund.

As occurs each year in the first half, the working capital requirement rose quite sharply. This increased up to EUR 711 million, very similar to what happened in the first half of 2011, EUR 700 million. And as happens each year, this is mainly the consequence of receivables given we have very seasonal business. Investments, EUR 483 million or 4.3% of sales. And over the year, this could increase to 4.5% of sales, and this is something that we already told you at the beginning of the year. And then after dividend payout and acquisitions, mainly, I'll remind you of the acquisition of Cadum, the residual flow was minus EUR 238 million, a minus figure because of dividend payout.

Balance sheet, its structure is very strong since shareholders' equity is close to 66% of total assets. The increase over 31st of December 2011 is due to the balance on the plus side; the net profit over the period; the marking to market of the Sanofi holding, which increased on the stock market; and the cumulative translation adjustment because of currency fluctuations; and on the minus side, the L'Oréal dividend payout.

And then final chart, debt. I'm not sure that's the right title, actually. But still, on the 30th of June of this year, our financial situation was very healthy, because net cash was positive at EUR 234 million, down on the amount at the end of last year. But this was because of the one-offs of the dividend payout in the first half of this year.

Thank you very much.

Jean-Paul Agon

Thank you, Christian. Christian has -- he said it all, so I'm not going to get back to all of the information he's given you. As you may have seen, our performance during the first half of the year, as you've seen, has grown strongly. Operating income is up 11.4%, and net income is up 10.8%. And this performance confirms the robustness and relevance of L'Oréal's economic model. It is important to stress that half year, our figures are not particularly representative. This performance, however, reflects the group's ability to build strong profitable growth.

Instead, I prefer to show you exactly what we have been doing over the past half year. Over the first few months of the year, L'Oréal has continued to strengthen its position, it's continued to assert its leading position in the global Cosmetics market. We have also continued to build the future of L’Oréal, and this is in line with our long-term strategy of locally attuning beauty strategies and also, our objective of winning over the next billion consumers.

You need to understand that the global Cosmetics market has remained buoyant with growth of more than 4%. There have been sharp contrasts between the different regions and the different channels. On a regional basis, we can safely say that the situation in Western Europe has been relatively flat. North America has grown by about 4%, and the New Markets region has remained buoyant, growing by more than 7%.

On a channel-by-channel basis, there have been major differences between the different channels. Luxury has driven a growth up 6%. Mass market is in line with the average, between 4% and 5%. Derma and Cosmetics are about 3%. And again, this year, the Professional Products market is still weak, up between 1% and 2% worldwide.

You need to understand that in the first half of 2012, as in 2011, the market has not lost any value. More than ever, it is driven by innovation and quality. All of our businesses or divisions in our geographic areas have grown. We have strengthened our leading position, and in all of our businesses, we have continued to lay the groundwork for future growth.

Let us start with Luxury. L'Oréal Luxe is driven by brisk market conditions worldwide thanks to the growth of its major brands and also, quality of its innovation efforts. The Lancôme brand is in the middle of a transformation. It's enjoying double-digit growth and is now, again, a major growth driver for the Luxury division thanks to the success of Visionnaire, of Rouge in Love, not forgetting Absolue L'Extrait. This is a new ultra-Luxury Skincare product.

YSL is still in the middle of its transformational process. It's advancing strongly. Its Skincare line, Forever Youth Liberator, has been a resounding success, which is paving the way into New Markets in America and in Asia. And let's not forget the success of the highly original bestseller, the Rouge Pur Couture lipgloss.

Our designer brands now. Ralph Lauren, Diesel, Viktor & Rolf have aggressive strategies. All fragrance launches have been extremely successful, and Kiehl's continues to expand at a very high rate and is now establishing itself as a major player in the luxury market.

Lastly, our latest acquisition, Clarisonic, posted significant growth in the first half of the year in the U.S. market. It is now the second leading L'Oréal Luxury brand on this market and in seventh position on the selective beauty market. Actually, Clarisonic is marketed in U.S. stores as a selective beauty brand on a par with Lancôme. So we trust in the future. We are highly ambitious in terms of making this branch global.

All in all, the Luxury division has gained market share in all regions across the world. It has strengthened its leadership in China. It has beefed up its position in the U.S. and in Europe. It has also -- and that is the very first time in many, many years. It has also won market share in the strategic travel retail business segment, where it enjoys a comfortable leadership.

With regard to the Consumer Products division. This division continues to grow and globalize its brands. L'Oréal Paris is continuing to strengthen its position in hair care. Elsève has been overhauled. The new Arginine module has been launched, and the hair care oils are enjoying dramatic success. Hair care oils are representing a new market, which is skyrocketing across the world, and this is an opportunity that we've been able to seize right from the outset. Maybelline has strengthened its global leadership with its new SuperStay 14HR Lipstick, not forgetting the new mascara called Illegal Length.

Lastly, Garnier is accelerating fast with the launch of new products which are highly original and highly consistent with the brand, the new BB cream product. That is a global sensation, not forgetting the Dark Spot Corrector facial care product, which is #1 on the U.S. market and which is currently being launched in Europe. And also, the latest projects in the hair color market, Nutrisse Color mousse and Color Sensation.

And lastly, the runt of the litter, Essie. Essie is riding on the back of a major global trend in terms of the nail polish market, and sales have increased by a factor of 4 since the acquisition in 2010.

Thanks to all of those efforts, the division has grown on every continent. It has also been able to strengthen its positions in its most competitive historical markets, such as the U.S. We grew -- our growth rate was double the market trend on this market but also in Western Europe. We strengthened our positions there, which were already very high.

Professional Products now. The division has continued to strengthen its global position. In terms of hair color, INOA is a success, more than 50 million applications since its launch. L'Oréal Professionnel has launched INOA, INOA version 2, for a simplified 2-stage application process which will revolutionize the hair color market for hairstylists across the world. Now Redken is now absorbing this technology with the launch of Chromatics, riding on the strength of this same trend. Also in hair care, Kérastase is transforming its brand with major and successful innovations, such as Cristalliste, to try and win over new and younger consumers. We now have a new advertising campaign, which is more modern, more assertive, and this is in line with the brand's unique positioning as a Luxury brand in hair salons.

During the first half year, the division advanced its market share all across the world, particularly in strategic countries, such as India and China and also, and this is quite remarkable, in countries such as Germany. And as you well know, Germany is the home market of L'Oréal's top global competitors on the Professional Products market.

Now Active Cosmetics. This division is in the middle of an acceleration phase. And through the combined effect of a wide range of factors, the relaunch of Vichy for example, this is starting to pay off. LiftActiv Serum 10 is successful. We have a new skincare product called Idealia. This is an opportunity to completely transform the brand in terms of positioning. Ideal skin is no longer a dream. But also, in terms of packaging and advertising communication, Vichy is returning to positive growth and is again spearheading growth of the global Derma Cosmetics market.

Lastly -- or secondly, the outstanding success of La Roche-Posay. La Roche-Posay continues to enjoy double-digit growth and is steadily asserting itself as the preferred Derma Cosmetics brand for dermatologists all across the world.

Third factor, the growing success of our growth-driving brands, SkinCeuticals and Roger & Gallet. They enjoy unique positioning in the pharmaceutical community across the world, and this globalization effort is only in its infancy. The division is now starting to win back market share in Europe, particularly in -- and in other countries as well. Two strategic countries in particular are Brazil. This year, Brazil will become the #3 country all across the world. And the U.S. In the U.S., we just signed an agreement with Walgreens to distribute Vichy La Roche-Posay brands in 3,000 of their sales outlets. This means we are truly creating a new Derma Cosmetics market in this country.

Last but not least, The Body Shop has also achieved real acceleration during the first half of this year, and this reflects a turnaround for the brand. The most recent innovations have been extremely successful, Chocomania in particular. There is a new store called Pulse, which is being rolled out, and this is accelerating the like-for-like sales, not forgetting the importance of geographic expansion and acceleration in online sales, which are up by more than 40% a year. This is not much. It's up only by 3% or 4%. But if you generate growth of 40% per year, obviously, when you add it all up, this means quite a bit.

During this past year, we've also continued to modernize the company, optimize the way it operates and strengthen its growth-oriented structure. First and foremost, in research and innovation, where enormous effort put into the transformation reorganization, that started a few years ago has continued, the objective being more than ever to sustain a regular flow of major innovations for our brands. And as you know, in March 2012, we opened our new global hair research laboratory at Saint-Ouen, which is the world's largest center of hair expertise and was an investment of EUR 100 million. This lab is the bridgehead and the nerve center of our globalized research network, which has 5 regional hubs: the United States, Japan, China, Brazil and India, to take up the fantastic challenge of making beauty universal. Our research is now located and connected to all the major markets of tomorrow.

We've also considerably strengthened our growth-oriented structure by continuing to plant the L'Oreal flag all over the world the last 5 years. We've created subsidiaries in some 10 new countries, such as Nigeria and Kenya last year. We have just created one in Saudi Arabia where, previously, we've been represented by an agent and where our businesses are expanding very rapidly. We are thus building up our international strategic footprint in order to seize all the opportunities of these new markets, which should contribute more than 80% of the annual growth of the worldwide market and thus, L'Oréal's growth over the next 15 years. So we're well on the way to winning our next billion consumers.

Industrial terms. We're adding to production facilities so that we can supply locally these new markets. So let me start off with our new factory in Russia in 2011, Kaluga. Two new plants have come onstream in the first half, one is in Indonesia and the other in Mexico. By the end of 2012, we'll have completed our new factory in Egypt, which will supply all the Middle Eastern markets. So far, we haven't grown much in that area, and one of the reasons was we didn't have any local industrial sourcing facilities. And at the same time, of course, we're continuing to make progress in terms of productivity. We're doing very well there.

Our growth will also, as I said at the beginning of the year, also be visited by the digital revolution. All our divisions, brands and businesses have made the decisive switch to digital media both in terms of communication and distribution channels. So digital media now represents 10% in this first half year, 10% of our advertising expenses and offer extremely new opportunities for our brands in terms of creativity, content and consumer connectivity. Our e-commerce sales rose around 30% in the first half. And as with Body Shop, this additional growing source of sales from e-commerce should have an acceleration effect on the group's growth over the coming years.

Looking at the growth drivers. As we have said, we're stepping up our efforts to optimize and increase productivity there in the worldwide media market where, in this first half year, costs haven't really risen much. So every year, we're managing to buy at better conditions thanks to our efforts to optimize our negotiations and introduce more effective approaches in media planning, the use of economic trade return investment models and the influence of digital media also enabling us to achieve significant improvement. Furthermore, we are continuing our efforts to constantly optimize organization structures, pool support services and concentrate teams so as to further reduce our selling, general and administrative expenses. It's something we've managed to do well over recent years.

Finally, we have continued to build on our work in field of corporate social responsibility, because the same benefit of development also contributes to value creation. For example, our operations division, in an unprecedented move, has set up what is set to become a very powerful program called Solidarity Sourcing. What it means is we earmark a proportion of our purchasing for supplies expanding [ph] from people usually excluded from the labor market. This social inclusion program is not philanthropy but an approach integrated into our business model worldwide and systematic.

So as you can see, we have continued to thoroughly transform the company to make it even more efficient, enhance its performance and make sure it's better equipped to seize the market opportunities emerging all over the world.

Looking forward to the second half of this year, even though the economic context, as everyone is saying, very uncertain, we are tackling it with great confidence and determination. First of all, because we believe that the Cosmetics market should remain buoyant even though, over the summer, we noted some obvious signs of slowdown, for example, in the Luxury market in Asia and the United States and in travel retail. We still believe that the worldwide Cosmetics market should grow by around 4% over the whole year. So confident that primarily based on a very strong program of powerful innovations initiatives in the second half, you'll be able to judge for yourselves, but I'll give you a few examples.

L'Oréal Luxe, major fragrant launches: firstly, the new Lancôme product, La Vie Est Belle, which is a very strong segment of optimism and determination; the new Yves Saint Laurent manifesto; and the new Cacharel, Catch...Me. But there are also major skincare launches, such as Génifique Yeux; Blue Therapy by Biotherm, which actually should mark the renewal and acceleration of the brand. And in make-up, the new foundation, Touche Éclat by Yves Saint Laurent; and Lancôme's Hypnose mascara. In Consumers Products too, there have been major launches, such as L’Oréal Paris' Revitalift laser and Rouge Caresse skincare lipstick. And also, a historic move by Garnier with the launch of Olia, which is the first example of ODS-2 technology cascading. Basically, so the first example of this in the mass market sector. And Active Cosmetics, Idealia Pro by Vichy; and Redermic [C] by La Roche-Posay; and above all, revolution in hair loss with Dercos Neogenic by Vichy thanks to a new molecule discovered by the L'Oréal labs called stemoxidine, which increases current hair density.

So as you can see, there are many initiatives underway, but above all, they're going to be very powerful initiatives that will underpin the development of our brands in this second half year and above all, boost their growth over the culminating months. On top of this, there are number of very strategic launches in hair care and skincare in China and United States which are scheduled for the end of the year. So this year, majority of these major projects, which you've been able to see, set to start in October, November. This means that the group's growth is expected to be stronger in the fourth quarter than the third.

So in conclusion, very simple terms. We feel bolstered by our first half results and this very strong program of projects for the second. And therefore, we confirm, as you could probably expect that for this year, despite the uncertainties of the economic environment, our ambition is to outperform the market and achieve another year of growth in sales results and profitability.

Thank you for your attention, and we can now take your questions. Eva?

Question-and-Answer Session

Eva Quiroga - UBS Investment Bank, Research Division

I'd like to get back to the marketing mix. We understand the reasons underpinning growth in the first half of the year. What about the second half in terms of A&P but also in terms of marketing efforts? There's a lot of innovation going on, on the Luxury side of things. And also, with regard to travel retail, you said that growth was good in the first half. Could you please elaborate on what you're doing to try to support growth, growth of the network but also growth of the L'Oréal brands as part of this network?

Jean-Paul Agon

Thank you for this excellent question. Let me start with travel retail. As you well know, on this business segment, we enjoy a comfortable leadership. It is L'Oréal that created this channel many years ago, and we have maintained our leadership. We are highly active. We consider that this is a major channel today. We use it sometimes for our Luxury Products. We use this channel to launch our Luxury fragrances, because when you think about it, this is a channel that captures our best consumers. So we are extremely active in all of our Luxury brands but also, other types of products. It is in this channel that L'Oréal Paris and other types of brands and other such brands, like The Body Shop, are growing, and we're also entertaining new ideas to develop new brands that don't yet exist yet, growth-driving brands. So this is a channel unto itself that transcends geographic boundaries and that is becoming truly strategic and deserves a lot of attention. With regard to our marketing mix, I believe that many times, one underestimates the true revolution that is taking place in terms of the marketing mix. There's a true transformational process going on in terms of our industry. The digital revolution is changing the way consumers buy or behave or live; less TV, less reading the press, spending more time online. So media consumption is changing, so by definition, the marketing mix will be different. So we are tackling those changes in very aggressive fashion. We talked about the digital revolution at L'Oréal back in 2010, and this has truly triggered a change in the behavior of our marketing people across the world. It's not very difficult for these guys. Generally, they're under 30, so they're fully in line with what is going on in terms of technological changes and breakthroughs, and this is having excellent results, sometimes even dramatic results. With regard to your specific question pertaining to A&P, as Christian explained, there's nothing wrong with being smart. In some markets, say the competition is emphasizing A&P or there are opportunities to do exactly that, and we believe it's the best way to invest our money to generate the best possible productivity gains. And this is why, as you well saw in the first half of the year, we have limited our investments to 30.5% in terms of growth drivers, and we're very happy with the results. We have gained market share like never before on the U.S. market. You need to remember that in the United States, this is unprecedented. We have never gained market share on the U.S. market so quickly ever in the Consumer Products section, but also for the Luxury segment. In addition, with regard to Europe, for a couple of years, we were under a little bit of pressure as the leading player on the market, but now, we are regaining market share in -- despite sluggish market conditions. So I believe that we are being very clever about the way we invest our money. So to try to address your question, we -- you should expect us to continue to try and be clever in the second half of the year as well. Celine? I'm surprised Celine didn't ask the first question, but maybe Eva was faster.

Celine AH Pannuti - JP Morgan Chase & Co, Research Division

I have 3 questions. Question number one, could you please tell us more about the impact of the FX mix in the second half on gross profit? And can we expect that Clarisonic will have the same impact on gross profit in the second half year? Now the impact of transactions in 2013, could you please tell us more about that, maybe avenues that we can explore, maybe clues? How can we quantify this? And thirdly, the share buyback program. The EUR 500 million that you announced in the second half, can we also expect that over the next few years, your policy with regard to the share buyback program, should we expect a rolling buyback initiative?

Christian Mulliez

Thank you for those excellent questions, Celine. With regard to gross profit, we listed the impacts. Let me get back to those 2 technical factors. The conversion impact because of the geographic mix, this has an impact, a negative impact, in the first half of the year by 20 basis points. Now it's hard to predict what will happen over the full year, but considering the current exchange rates, it should come to about 20 basis points, between 20 basis points and 25 basis points for the full year effect. With regard to the Clarisonic acquisition, this will have an impact on a full year basis. We can extrapolate 10 basis points over the entire year, because the statement of income for Clarisonic is very specific. The gross profit is low, but EBIT and operating profitability is remarkable, so this slightly distorts the structure of our P&L. So much for the foreseeable impacts. With regard to 2013, I'm not going to quantify anything, because we're busy. As we speak, we are currently building up our hedging position for transactions for 2013. What I can tell you, however, is that this is smelling pretty good. This is smelling very, very good, but we'll tell you more about this in February. It's too soon to tell. With regard to the share buyback program, it is no secret, not to us, not to our Board of Directors, that the balance sheet structure is extremely robust. And therefore, we believed it was a good idea to implement this program. Now EUR 500 million, this is what I read here and there. Some people say it's not a whole lot of money, but I think it's a lot of money. And secondly, the EUR 500 million will be invested into -- over the course of 4 months, and then we will see. Other questions?

Unknown Analyst

I have 3 questions. This summer, you noticed clear signs of slowdown in the Luxury segment, which is the main growth driver for the Cosmetics market globally, and yet, the growth forecasts have not been scaled back. What does that mean? Does that mean you're expecting that Cosmetics purchases will be transferred from the Luxury segment to other distribution segments? That was my first question. Secondly, could you please give us additional information regarding your strategy with regard to A&P? Well, the customer allowances that you grant to end users, we'd like to understand what is your new strategy on this front? Third and last question. France can be expected to set up a 75% tax rate for income in excess of EUR 100 million. So what's going to happen to your leading executives? Geographically, they are mostly in France. So what will be the impact of such a decision? Does this mean like -- does this mean that like other CAC 40 companies, you will maybe reorganize your geographic distribution?

Jean-Paul Agon

Yes. I'll tell you what. Let's discuss the half yearly performance first. But the first 2 questions that you asked are typical questions, questions that a financial analyst would ask, so I'm not going to address the third part of your question. I'm telling it to you straight. That will give you some indication of my stance. Question number one, the slowdown. This is an interesting question, actually, if you anticipate a slowdown in H2. Well, this is why. We believe that this was slightly over 4% in the first half and slightly under 4% in the second half. So when you add it all up, we said at the beginning of the year that we expected a 4% rate. We still believe that this rate will materialize. It will -- it was probably slightly over 4% growth in the first half and probably will be slightly over 4% in the second half as well. In terms of growth, this does not change our forecasts at all, because when you do the math, our growth is fundamentally driven by the projects that we set up. So in terms of growth, over the next 18 months, whether the market growth rate is 3%, 3.5% to 4%, it is, in any case, driven by our successful initiatives. The growth of our group will be mostly driven by our pipeline of innovative products and the new launches and how successful they will be. We will continue to gain market share in the U.S., for example. The U.S. market is pretty spectacular. The mass market segment has grown by 3%. Actually, the market grows by 3%, but our growth rate is 7% or 8%. So whether the market trend is 2%, 2.5% or 3% doesn't really make difference. What -- the most important thing for us is that the U.S. market is our priority. The Western European market is also a priority. We are delighted to gain market share there. In the course of an interview just this morning -- it wasn't your newspaper. It was another one. I said this morning during the interview that our performance in France is spectacular, and this is very promising. France is the country in the world where L'Oréal has the biggest market share. That makes sense. It's our home market. And yet, even in a market where we have such high market share already and market trend is 0%, and yet, we're generating 4% growth. And what's even more spectacular is that this is happening across the board, spectacular growth happening in the Luxury segment, in the Active Cosmetics market, in Consumer Products and also, Professional Products. So as you can see, the future is not set in stone, and growth is up to us. So we will do what it takes to generate growth wherever convenient. Second question, in customer allowances. Well, there's not a whole lot, to tell you the truth. When we talk about 30 basis points, seriously, peanuts. But what we mean is that in terms of how we manage our operations, well, our operations people have elbow room. They have the flexibility required to respond to the competitions, advertising, our promotional campaigns. They are able to support our distributors. Now I don't like the term that you used. It's not that we consent to making or granting customer allowances. It is something that we want to do. It is deliberate on our part. We want to boost the traffic in points of sale. We want to enlist and win over new customers. We have to be street smart. It's all about street smart fighting, isn't it? We have to be aggressive. Being aggressive out on the streets is -- can be more effective than a traditional advertising TV campaign. Any other questions?

Unknown Analyst

[indiscernible]. Could you give us a bit more detail about recent developments in China? And you were talking about a slowdown in China, particularly in the Luxury market. You also mentioned Korea. Could you say something about Asia and China in particular, please?

Jean-Paul Agon

Yes, indeed. This summer, in the early summer, we saw that there was a bit of a slowdown in terms of sales in Asia. Now it's Korea, the most significant, because they are the kings of stop and go, as we say. That's to say this is where you get the most uneven development in the Luxury market. In Korea, it's flat, 0%. It was, what, plus 20% a few years ago, and now, it's fallen to 0%. It might get back up to 20% positive growth and fuse off, and it happens, that sort of thing. Anyway, we saw that in major U.S. department stores, growth is strong. It's -- no, I was going to say high double digits. It's over 10% in any case, maybe not 15% to 20%, but over 10%. And strangely, because it seems to be a global phenomenon, this was seen in Asian airports. Footfall was down. Consumption was down. So my feeling is that you shouldn't jump to conclusions. There are all sorts of things going on in China at the moment which might perhaps explain a temporary slowdown in Luxury sales, so we'll see. We'll just take our time and see how things go by the end of the year. But here too, we shouldn't go too far. The growth in Luxury Products, as you've seen in Luxury, in beauty in the first half in our business, it wasn't huge. We're talking what, plus 6%. So here too, if there's a slight downturn, we'll be able to cope with that especially since we feel, for once, it's never the case, we now have the brands and products to win. I'm very satisfied with what the L'Oréal Luxe division has done, not because of growth because some of this growth of course is coming from the fact that market is buoyant. But that's -- they deserve what they've achieved. There have been some excellent launches, very good products in various sectors. Visionnaire, that has been sweeping all the board. And I can tell you that among our brands, we -- well, most of them are doing very well. In root health, Lancôme, back to double-digit growth; at Kiehl's, 5%; and Clarisonic growing 40%, one we just bought. Yves Saint Laurent is back on an upward track. Our designer brands have all had successful launches. So I think we can say that this is a collective success in Luxury that will give us good times in the months and years, for that's what counts, really. Yes. Go ahead, sir.

Unknown Analyst

Just a couple of quick questions, if I may. Firstly, with regards to the gross margin, sorry to come back to that. But the customer allowances, was that in response to a sort of changing competitor environment at all? And if so, do you see that as a sort of structural shift, might we see a little bit of that more going forward? So is it just a 1/2 response by a competitor we shouldn't get excited about? And just secondly, for the full year, you gave guidance of 605 million, 606 million share count. What buyback assumption is that based on? Is that before or after you've spent EUR 500 million?

Jean-Paul Agon

So Christian, you will take the second question. Again, this -- honestly, I don't think that you should take the 30-basis-point change in the promotional allowance as something very fundamental and essential. I understand that you have to take what we give you, but we -- okay. We are transparent, and we explained to you the little evolution because it had a consequence on the gross margin. But it doesn't mean that the world has changed and that competition is becoming more aggressive or that we have decided to cut back our price, not at all, just an adaptation of our action to the environment. And then I think that, that's I think one of the strength of L'Oréal, that we are a nimble and flexible company and that we adjust our strategy to the environment. So I can't tell you what will go on for the future. What is absolutely sure is that I can tell you that we have -- there is no strategic decision to increase year-after-year our promotional allowance. That's for sure. And second information, I don't think that there is any need for that either. All right. Just a tactical, not strategical but tactical adjustment that has been made during this first half, because we thought that it was the best way to invest our money. Regarding the buyback, Christian?

Christian Mulliez

As far as the average number of share I've given, which is 606 million, maybe 607 million, it takes into account the share buyback that we are going to implement in the next few days. The accretive impact of this program will be very limited this year, of course, because we only start in the end of August or beginning of September. But the impact will be much stronger next year, of course, something like plus 7% or plus 8% of the EPS next year.

Jean-Paul Agon

Okay. Other question? I can't see. The lights are in my eyes. Yes, on the back. Yes.

Unknown Analyst

Pierre Tien [ph], yes. I have 2 questions. The first is about the lower operating profitability in Consumer. That's the second year in a row in the first half. Are there technical reasons for this? And is this some sort of indication about the future level of profitability that can be expected in the medium and long term? Is it a business that you think could still boost its operating profitability? And the second question is, I mean this is not disclosed for this first half, but could you give us some idea about the margin differential between mature and New Markets? Because on a number of occasions, you said there was a form of convergence happening here that you seem to suggest is positive. But is operating margin improving on the mature markets? What are the overall trends? Is everything getting better, basically, is the question. Or is there anything getting worse?

Jean-Paul Agon

No, okay. I fully get your point. It's true, Consumer, well, there's an overall trend downwards half-to-half. But full-year-on-full-year, it's going up, and the reason is simple. It's because gradually, things get rebalanced out between the 2 halves in terms of profitability in this division. There are divisions that, for structural reasons, have a first half that's not profitable in the second, Active Cosmetics, for example, simply because they're very seasonal in Active Cosmetics. Sun creams, body lotions, slimming products, they are invoiced in the first half, sold in the second, and some of that is returned in the second. So obviously, you're going to be more profitable in the first than the second half. But in Consumer, it's hardly seasonal at all. It's just marginal. There's no reason why profitability in first half should be better than the second half. And we can look back over past figures and see that for whatever reason, maybe because some people have wanted to be a bit cautious in terms of growth drivers at the beginning of the year, and there, you had higher profitability in the first than the second. And now, I think the trend is the people are trying to balance out, smooth things up of the 2. Last year, we're at 20.1% in first half in Consumer and 17.6% in the second, 18.9% overall, which was up 0.4% over the previous year. So similarly, what we're trying to do here is smooth out other trend in Consumer for both halves whilst trying to boost the end of year profitability figure. Of course, that's why you shouldn't read too much into the half year figures. As for the regions, you're quite right. Our strategy is to converge, and we're talking about converging upwards, to be honest, not converging downwards. So what we're trying to do here, what we want, what we're aiming at is to maintain high profitability in Western Europe, there's no reason to imagine that it will be different, and gradually ratchet up of the profitability of the other regions. And basically, I think there are very good reasons to assume we'll achieve that. Is that satisfying? I can't see because you're way back behind the camera in the dark side of the room. Go on.

Unknown Analyst

In New Markets in the first half, have margins improved?

Jean-Paul Agon

Well, we don't publish, so we can't tell you.

Unknown Analyst

No, I realize that. But could we have some indication, compare with the -- between the new and the mature?

Jean-Paul Agon

Answer, we have no reason to be worried, no cause for concern at this stage. Next one? Well, maybe I can just take this opportunity to add that we can see from this, this year, in terms of divisions' profitability, a sort of a catch-up effect in L’Oréal Luxe compared with other divisions, L'Oréal Luxe in 2008, 2009 had a hard time. And now, they're catching up in terms of profitability, but this doesn't prevent the other divisions, of course, from trying to boost their own performance. Same with our 3 regions. It's their job to improve profitability, converge upwards, basically, so to say, across the board. Anyone else with questions?

Unknown Analyst

Just a question, really, on YSL. And I think my understanding was at the time of the acquisition, part of the attraction was to take it global. I was wondering if you could maybe update us sort of where you are in that process, maybe an outline of sort of geographic spread of the business currently.

Jean-Paul Agon

Okay. Thank you. It's very important. You're right. In fact, you're perfectly right. I mean, the objective of the acquisition was to have in our portfolio a French designer brand in order to have it on the map and to be able to compete with other big French designer brand around the world, because we think that Saint Laurent deserves a strong position worldwide. And Saint Laurent was historically a brand mostly developed in Europe and almost not developed in the rest of the world. So what are the news? It's very simple. First, we have started to be very successful in North America. North America was priority #1, because the brand was already there but not very successful. So the success of the brand has been very good on the first half 2012. If I remember well, the -- I think the growth in sellout is something like 20%. So it's a very -- it's one of the most successful brand in -- on the -- in the U.S.A., in the department stores in the U.S.A. on this first half, so very good news there. And we deliberately waited to have a great skincare line before to launch in Asia, because even for Luxury brand, skincare is a major element of business in the department stores in Asia and particularly, in China or Japan. In China, for example, on a department store counter, a Luxury brand like Lancôme or other, they do sometimes 60% to 70% of their sales in skincare. So going to Asia with -- before having a great skincare line would have been really stupid. So we now have this great skincare line. It is proving to be successful. And this launch has been very successful, which was not something obvious, because for Saint Laurent to have credibility in skincare was not something obvious. But it works. It's very successful. And so we are planning a great acceleration of Saint Laurent beginning 2013 in Asia and particularly, in China, where in fact, until now, the brand was sold by an agent, because we didn't want to take back too early. Now we are ready, and we're going to launch, take back the brand, launch Saint Laurent and launch a skincare at the same time early 2013. So we are really pretty confident. Some of the -- on Saint Laurent, to update you, some of the launches that have been made this year have been extremely successful, and Vernis Rouge has been one of the most trendy, asked for new product in the Luxury business. And we are pretty excited with our new launch, Manifesto. A new fragrance launch is always a bet, but this one seems to smell good, not only because the perfume is great but also because it seems to be really Saint Laurent, really different, really provocative, really the Saint Laurent spirit. So we are pretty, pretty confident with the brand. I'm very happy to have it.

Erik Sjogren - Morgan Stanley, Research Division

Erik from Morgan Stanley. Two questions. Firstly, last year, you gave us some numbers on the percentage of sales from new products split between the second and the first half. Do you have any data on that for this year? And the second there, I was wondering, a number of companies across Consumer staples have spoken about increasingly bringing emerging market innovations to particularly Europe to address the tough environment here in terms of pack sizes and so on. Is this something that L'Oréal is also looking at?

Jean-Paul Agon

All right. So second question first. Yes, I've read in papers that some companies think of adapting the, I mean, strategy for India to Europe, because there is a kind of popularization of the market. And honestly, this is not at all our strategy. The strategy of L'Oréal as -- I respect their strategy. They do what they want, but it is not at all the strategy that we want to follow. As I explained in the call yesterday, our strategy is more the "smartphone strategy," which means that it's always the only way out is up and not down. And so for us, it's exactly the opposite. What we want -- we believe in R&D. We believe in innovation. We believe in quality. We believe in added value, and we believe that consumers are absolutely ready to buy products when they – of -- at a higher price even if they offer the level of quality of an innovation that they want. So in fact, this is our strategy, and this will be our strategy. It doesn't mean that we don't offer a large choice of price between our brand and our products. And that's also part of the strategy of the group, which is to cover all segments of the population. For example, in the Consumer goods, we have products like Garnier that are very accessible. We have Maybelline, which is an accessible make-up brand. And we have L'Oréal Paris, which is more expensive, for people who want it. But the idea is more -- again, the more quality, more innovation, more value. It was Mr. Schueller who invented that 50 years ago with the same sentence. At that time, there was the franc -- and the sood [ph] and the franc and he said one sood more in quality, one franc more in price. So it's always the -- always going up in terms of quality and innovation. Your first question was -- you remember it?

Erik Sjogren - Morgan Stanley, Research Division

The sales from new products split between first and…

Jean-Paul Agon

Oh, yes. Yes. In fact, sales this year, the balance of innovation is more or less -- the balance of percentage of business with new products is more or less the same between the 2 halves, which is around 17%, if I remember well. Only the phasing will be a bit different, because the phasing this year will be a bit more towards the end of the year, because we have some very, very strong initiatives that we're going to take at the end of the year that, in fact, will prepare the year 2013. So there will be a bit more towards the end of the year. Yes, please, Catherine.

Catherine Rolland - Kepler Capital Markets, Research Division

Catherine Rolland from Kepler Markets. Just now, you were saying that you saw a change in trend in Luxury market in the early summer. Has the same happened in the other divisions? Maybe say something about the geographic areas as well.

Jean-Paul Agon

Well, not really is the answer. It's really in Luxury, but I was saying it's perhaps that things are now calming down after heating up. In -- across the other divisions, I wouldn't say so. In Consumer Products, to be honest, the situation in Europe is flat, market terms I'm talking, but that's been the case for several years now. The problem in Southern Europe, there's nothing new. If anything, we're coping a bit better, because as it's been a problem, been around for several years now, our sales people, customer allowances, for example, this has learned how to cope now, Greece, Portugal Spain, et cetera. We're learning to live with this. So they realize it's perhaps a smart thing to give a bit more customer allowances, do a little less in TV advertising. But basically, Europe is same; U.S., no change; China, same. There's no major change in Consumer there, maybe in terms of channels but otherwise, no major change. So I don't really think you can say that there's a major slowdown in Consumer. Professional Products, well, unfortunately -- well, we're -- it hasn't dropped further, thankfully. Maybe it's about to take an upturn. Who knows? Active Cosmetics, well, news is anything good. So basically, no major changes elsewhere. This is why we are not especially concerned by the second half, because we think that the market will continue to be buoyant, and we have reasons to believe that we might even improve in terms of market share.

Gael Colcombet - MainFirst Bank AG, Research Division

Gael Colcombet, MainFirst. With your permission, I'd like to get back to 2 areas that you mentioned this morning, South America and Eastern Europe. I seem to remember that with regard to Eastern Europe, you talked about difficulties last year, difficulties experienced by Garnier. And with regard to South America, Brazil in particular, how do you intend to address the Brazilian market? You're not in the -- you're not one of the top players, and this is a specific market, different than the others. So what do you intend to do in Brazil? And how do you intend to change the "deal?"

Jean-Paul Agon

You're absolutely right. Brazil is a highly specific market in the sense that the top 2 players, if I remember correctly, are direct sales type players. They sell directly to consumers, and the third one is -- has a distribution network. It's a Brazilian network of stores and shops, and so Brazil is a very specific market. We are extremely confident in terms of our position in the Brazilian market. This is a highly buoyant market. We have a slide to show you. So let me display it, and I hope what I'll say will match what is on the slide. All right. Number one, there are lots of good things going on in Brazil. First of all, this is a major beauty market. Brazilian women want to be beautiful, and we love countries where women love beauty. Number two, this is a fast-growing market. Over the past few years, this market has grown very quickly. And third reason, we're also extremely confident because even though growth was sluggish in the first half compared with the baseline, that is the previous half of the previous year, but we're expecting the growth will accelerate in the second half. Now on Saturday, I will travel there. I will spend a week in Brazil, and I'll be able to confirm exactly what I'm saying today. So on the screen, you can find a list of all of the initiatives and projects that we have planned. Our main brand in Brazil is Elsève, L'Oréal Paris. Garnier is also popular. Garnier is back on the offense on the hair color segment. We're working on Fructis. We're working on BB cream. This is a global sensation, particularly in Brazil. So a lot of initiatives, a lot of projects are driving growth in other countries, have driven growth over the past 12 months, and they are now being rolled out in Brazil. So we are pretty confident in terms of our ability to restore growth over there. What was the other country you mentioned? Oh, Eastern Europe. Well, things are happening exactly in line with what we announced. Last year, we admitted to experiencing a number of difficulties in Eastern Europe. It makes sense that not everything is going absolutely perfectly in every single country. Obviously, when you're trying to winning -- when you're trying to win new business in new countries, there are ups and downs and peaks and troughs. And we said that the situation would gradually get better, and this is exactly what is happening. We are returning to positive growth. Growth in the first half is up, in positive territory but slightly under the market trend, and that's not what we want. So we intend to fast track our growth rate, particularly in Russia. And based on the latest news, things are going really well on the Russia front, thanks to Garnier in particular. Garnier didn't do too well last you. It's a dominant brand in Russia. It didn't do too well last year, and we are turning things around. There you go. Any other questions? All right. Censorship it's not my motto. And I said that at the end of the meeting, if journalists had a -- have questions, I would try to answer them to the best of my ability, but I also said that there are questions that I will not answer. Any questions?

Well, if there are none, allow me to summarize. I believe that our performance speaks for itself. Our performance has grown significantly in the first half of the year, and we are extremely confident in terms of our performance for the second half. And I'm sure you are fully capable of reading between the lines. Thank you very much, and we will see you next time.

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