On Wednesday, L’Oreal SA (OR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Unidentified Company Speaker: Thank you for this excellent question. Let me start with travel retail. As you all know, on this business segment we enjoy a comfortable leadership. It is L’Oreal 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 consumer, so we are extremely active in all of our luxury brands but also other types of products. It is in this channel that L’Oreal Paris and other types of brands, (added to) such brands like the Body Shop are growing and we are also entertaining new ideas to develop new brands that don’t exist yet, growth driving brands. So this is a channel onto itself that transcends geographic boundaries and that is becoming truly strategic and deserves a lot of attention. With regard to a marketing mix, I believe that many times one underestimates the true revolution that is taking place in terms of the marketing mix. There is 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’Oreal back in 2010 and this is truly triggered a change in the behavior of marketing people across the world. It is not very difficult for these guys. Generally they are under 30, so they are fully in line with what is going on in terms of technological changes and breakthroughs. This is having excellent results, sometimes even dramatic results. With regard to your specific question, pertaining to A&P, as Christian explained, there is nothing wrong with being smart. In some markets, say the competition is emphasizing A&P or there are opportunities to do exactly that. We believe it’s the best way to invest our money to generate the best possible productivity gains and this is why, as you all 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 in 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 in the market but now we are regaining market share 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, 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 that didn’t ask the first question, but maybe Eva was faster.
Celine Pannuti – JPMorgan: I have three questions. Question number one. Could you please tell us more about the impact of the FX mix in the second half gross profit and can we expect that Clarisonic will have the same impact on gross profit in the second half of the year? Now the impact of transactions in 2013, could you please tell us more about that? Maybe revenues that we can explore, maybe clues. How can we quantify this? Thirdly, the share buyback program; the 500 million that you announced in the second half, can we also expect that over the next two years? Your policy with regard to the share buyback program, should we expect the rolling buyback initiative?
Unidentified Company Speaker: Thank you for those excellent questions Celine. With regard to gross profit, we listed the impacts. Let me get back to those two 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 and 25 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 are 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 talk. 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 believe it was a good idea to implement this program. Now, €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. Secondly, the €500 million will be invested into over the course of four months and then we will see. Are there questions?
Luxury Segment Slowdown
Unidentified Analyst: I have three questions. This summer you noticed clear signs of slowdown in the Luxury segment, which is the main growth driver for the cosmetics markets globally, and yet the growth forecasts (have not been scaled) back, what does that mean? Does that mean we’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? Overall, the customer allowances that you grant to end users, I would like to understand what is your new strategy on this front? Third and last question. France can be expected to setup 75% tax rate for income in excess of €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 that like other CAC 40 companies you will maybe reorganize your geographic distribution?
Unidentified Company Speaker: Yes. I’ll tell you what, let’s discuss the half yearly performance first, but the first two questions that you asked are difficult 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 added all up, we said at the beginning of the year that we expect 2% to 4% rate. We still believe that this rate will materialize. 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%, or 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 new launches and how successful they will be. We will continue to gain market share, but – in the U.S., for example, you know, the U.S. market is pretty spectacular. The mass market segment is growing by 3%. Actually, the market grows by 3%, but (off our) freight is 7% or 8%. So whether the market trend is 2%, 2.5%, or 3% doesn’t really make a difference. What’s the most important thing for us is that the U.S. market is our priority, the Western European market is also our 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’Oreal has the biggest market share. That makes sense. It’s our home market and yet even in the 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 and instead 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. The growth is up to us, so we will do what it takes to generate growth wherever convenient.
Unidentified Analyst: Second question in customer allowances?
Unidentified Company Speaker: Well, it’s not a whole lot to do (with it). When we talk about 30 basis points, seriously its peanuts. But what we mean is that in terms of how we manage our operations – well, our operations people have Elbow Room. They have lot of flexibility required to respond to the competitions, advertising or promotional campaigns. They are able to support our distributors. Now I don’t like the term that you use. It’s not that we consent to making or granting customers allowances. It is something that we want to do. It is delivered on our part. We want to boost 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 can be more effective than a traditional advertising TV campaign. Any other questions?
Unidentified Analyst: (Indiscernible). Could you give us a bit more detail about recent developments in China? You were talking about a slowdown in China, particularly in luxury market and you also mentioned Korea. Could you say something about Asia and China in particular, please?
Unidentified Company Speaker: It’s late this summer – the early summer, we saw that there was a bit of a slowdown in terms of sales in Asia, now it’s Korea (they are not) significant because there are the (kings) who stop and go as we say it has to say. This is where you get the most uneven development on the luxury market and Korea is flat zero, it was what plus 20 few years ago, now it’s fallen to zero. It might get back up to €0.20 positive growth. (Indiscernible) often happens that sort of thing anyway. We saw that in major U.S. department stores growth is strong. It’s what, high – no, I was going to say high double digits. It’s over 10 in any case and maybe now 15 to 20 but over 10, and strangely because it seems to be a global phenomenon, this was seen in Asian airports. A foothold was down, consumption was down. So my feeling is that you shouldn’t jump to any conclusions. There are all sorts of things that are 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 to 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 and beauty in the first half in our business, it wasn’t huge and we’re talking, what, plus 6%. So here, too, if there is a slight downturn, we’ll be able to cope with that, especially since we feel for once, it’s (not other) case, we now have the brands and products to win. I’m very satisfied with what the L’Oreal Luxe division has done, not just because of growth, because some of this growth of course is coming from the fact the market is buoyant because they deserve what they’ve achieved. There have been some excellent launches, very good products, been very successful; Visionnaire, that is being sweeping (on the forward) and I can tell you that among our brands, we – well, most of them are doing very well, in (indiscernible) Lancome back to double-digit growth, Kiehl’s 5%, Clarisonic growing 40% one which has brought Yves Saint Laurent is back on an upward track. Our design of 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 months and years and of course that’s what counts really
Unidentified Analyst: Thank you very much. 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 sort of changing competitor environment at all, and if so, did you see that as a sort of structural shift might we see (indiscernible) more going forward? So is it just a one half response by competitor, we shouldn’t get excited about? 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 €500 million?