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

Well, that's very specific. You're not going down to the SKU level but still a very, very specific question. I'll start with fragrances. On fragrance, the market remains -- it continues to grow at plus 20% year-to-date, so very dynamic. We are at 35%. And I think it's a trend that's going to last. It's a category that men, women all over the world have really fallen for post-COVID both because -- for the ones that were using it, but there's also this kind of self-indulgence trend on fragrances. And we're seeing the Chinese market, although small, continuing to grow. So when you say what's the size of your ambition, it's true that today it's a small -- we are the worldwide leaders, but it's only 10% to 11% of our growth. And we are, sorry, growing at plus 28% on a market that's plus 16%. I was quoting the number as 21%. So the market's at 16%, and we are plus 28%. We are #1. We still have the world to conquer. And frankly, the only limitation right now to our growth is the availability of glass. I must say that -- I know that we would have done -- would have had an even better performance for the Q3 and even for L'Oréal Luxe as we had all the glass bottles we needed because, clearly, after COVID, many of the glass manufacturers had shut down some ovens or had slowed down their activity. It takes time to reignite. And as the market has bounced back much stronger than anybody expected and as we really overperformed the market in fragrance, we are -- we've been struggling to have everything we needed. But you have La Vie Est Belle is flying. Libre from YSL has entered the worldwide top 5. And I've heard recently said it was becoming #1 in France, which was kind of a big achievement. And the latest launch, Prada Paradoxe, is not only a great success but I have to say greater than even our wildest expectations. So we have to admit that we are today limited by capacity. And unfortunately, this is an area where you can't create capacity very fast. It takes time. So it's just a question of good forecasting, good negotiation and, hopefully, considering our size, we can get good allocations from the glass manufacturers.

And I will add also the very strong growth that we are still seeing in North Asia, so with a growth that is above 60%. So now North Asia, by the way, is more than 10% of the sales of our total fragrances, so meaning that this market will surely keep growing in the future.

And as it relates to skincare, I can't give you the breakdown of skincare sales per division or brand. I can give you the broad numbers or at least the trends. As you rightfully pointed out, Active Cosmetics is really flying, and all the brands are growing double digits from SkinCeuticals to Vichy, La Roche-Posay. I was looking at La Roche-Posay, has become the #6 skincare brand worldwide, all channels and categories included. So it's from a brand that was a small European pharmacy brand 10 years ago, it's a major achievement. They, of course, continues to build. But if I look at other divisions, we have different fates. Clearly, our Luxe Division is overperforming the market, but Q3 was impacted by China because China is the part of the world where skincare is the biggest and where we have our biggest share in skincare. But the brands Lancôme Absolue, Helena Rubinstein are really doing great. And Kiehl's is in a good momentum. We had a bit of a slowdown in America at some point, but our new launch, we have a retinal product that has really allowed Kiehl's to accelerate again. And if I take our mass market division, it's also growing in skincare with -- something I'm really happy about is the performance of Garnier. L'Oréal Paris is always doing -- done a great job in skincare, but Garnier was, to be honest, not the success story. We are very strong in cleansing with the success of Micellar Water. But now we have, thanks to the launch of the Vitamin C Serum, which started in the emerging markets and is now being rolled out all around the world, a phenomenal success. And it's really putting Garnier on the map in skincare. So they are now launching a new serum for acneic skin with BHA and AHA. So we have the beginning of a good story on Garnier skincare. So on this year-to-date, we are growing over 10% in skincare on the market at 4%, so gaining share, really led by ACD. A bit more -- slowing down a bit in Luxe because of Asia and new acceleration with Garnier in the Consumer Products Division.

The next question comes from Fulvio Cazzol from Berenberg.

My first one is on sun care. I was wondering if you would be able to disclose what this category grew for you and how much it contributes to the overall Consumer Products Division, please. And then my second question is on China skincare. Just following up on your just -- comment just now how the Chinese market for skincare is weak. Can you just maybe highlight what's really kind of behind that? Because I always thought skincare is more of a -- is less consumption occasion-based products, i.e., people will apply it as part of their daily beauty routines. So again, what's kind of -- what am I missing here? Why is it so weak in China despite all the travel restrictions? Are people still using it but depleting their inventories? Or am I missing something?

No, no, I think I'll probably -- I'll start with the second question because I was probably misunderstood. Skincare is not weak in China. The global Chinese market, as we said, was negative in Q3 because of lockdowns. And as China is -- the #1 category by far in China is skincare. It's 60% of the market. By definition, it impacted the skincare market as it did impact other categories. But actually, if we look within -- between makeup and skincare today in China, skincare is the -- remains a better-performing category because, as you rightfully mentioned it, it's less impacted by the wearing of mask than makeup. So it's just that because L'Oréal Luxe is strong in China and China is big skincare market, the slowdown of China had an impact on our overall skincare performance in Q3. But we are gaining share in skincare. Helena Rubinstein is doing fantastic. And I think it's well underway to become a EUR 1 billion brand. The Lancôme Absolue is doing great. And L'Oréal Luxe performance, even during a slow quarter in China, was very positive. We had our -- when we discussed our Q2 or first half results, we said that we had hit a record 30% market share for L'Oréal Luxe in China in Q2. Well, we hit over 31% market share in Q3 with strong performance of Lancôme, Helena Rubinstein and skincare. So I think I was not clear. It's just that the market has slowed down and has -- it weighs on the overall average of our skincare performance, but we keep on being strong and gaining share on that market. Is that clearer on that point?

Yes, definitely.

Yes. And on sun care, sun care, I think, is at plus 30%, Christophe?

Yes, it's plus 30%. Now this is a category that is quite small. In comparison to the total skincare, it's, what, 6% of the sales. So yes, growing very fast this year, the weather was good, but still a small category within our big skincare.

But what I might add to that is that it's -- when you think about sun care, you probably think about the creams you put on the beach. But the reality is that the biggest part of the market in UV protection is actually accounted for in facial skin care. It's daily UV protection, which is in reality probably the most effective anti-aging. And this is one of the categories where technology is really making a difference. And this year, we had a fantastic season, but also we continue to have very good sales in our La Roche-Posay as well as our Vichy daily UV protection products. We also have in Asia on L'Oréal Paris and Garnier daily UV protection products, which are really more and more used by consumers of all ages on top of their skincare routine because this is what protects them from the everyday more harmful UV rays that creates spots on the skin. So yes, we've just launched with La Roche-Posay UVMune 400, which is a new filter that protects against the -- what we call the most insidious UVA rays that penetrate deep inside the skin. So beyond the small number that Christophe mentioned, there's the other part of the iceberg, which is the daily UV protection, where our science gives us a strong edge. And I'm predicting that this category of UV protection will be one of the important growth drivers in the future because the weather out there is not going to get nicer for our skin and for our consumers.

The next question comes from Iain Simpson from Barclays.

Just wondered if you could talk a little bit about CeraVe rollout, please. That's clearly been a phenomenal success for you. I wondered if you could just remind us where it's at in terms of geographic rollout, which countries it's launched in recently and which kind of major countries CeraVe is currently not present in. Any help with that would be very much appreciated. . And then in professional hair care, you've clearly had sort of significant success moving that business rather more online during the U.S. in the last couple of years. Can you just remind us where that's at in terms of moving professional to a more online-driven model elsewhere in the world, please?

So on CeraVe, the brand is -- first of all, as you rightfully said, the brand -- you said the brand has been very dynamic. I would say the brand remains very dynamic because it's at plus 40% year-to-date. And what's very important, as always, is that it continues to grow in its home market in the U.S.A. And the U.S.A. represent more than half of the growth of CeraVe. Yes, we are expanding in many countries, but it remains -- I think we are in most countries now, but we are still small in many because it's a business that we want to build according to the recipe that make the success of Active Cosmetics, which means that it all starts with doctors' and derms' prescriptions. So in every country, we start by visiting doctors, sampling the brand, explaining its difference versus other brands in the market. And then because it's a mass medical brand, we expand the distribution to a more, I would say, self-service, whether pharmacies, drug stores or sometimes perfumeries. I was in Spain, where the brand is in some perfumeries and really flying. So we are still at the beginning of the history of CeraVe around the globe. There is no market where it has taken a leadership position as it has in the U.S. yet, maybe a bit more in the U.K. But the good thing is that it's doing great everywhere. We even launched it in South Africa with special formats and at a price which is not like super affordable but the product, the texture is so great that it's become instantly a hit. And the good thing that helps also us roll the brand out, that thanks to social networks that are global, instead of starting really from scratch when we launch in a country, there's already a base of awareness both from the derms as well as from consumers. So it's still the beginning, but it's very promising. And the rest of the world, when I say CeraVe, that's plus 40%; outside the U.S.A., it's almost at plus 60%, so a very good prospect for CeraVe.

And on professional?

Sorry, I got enthusiastic about CeraVe, so I was about to forget Professional. No, I think first of all, for me, the big important message on hair care is that -- and that's new, that's kind of new. We mentioned it in the first half is that people are spending more on hair care than they ever did. It's true in mass, and it's true in professional. That's probably one of the categories that has most benefited from -- I don't know if it's the lockdowns, of pampering and maybe using less makeup, all the hair being the most visible part of you when you wear a mask. I don't know what's the explanation, but it's true that the market is premiumizing. It's true in mass with the success of Elseve, Elvive Hyaluron Plump or more premium versions of Fructis. And of course, it benefits the professional market. Brands like Kérastase, L'Oréal Professionel is back in the game with products like Metal Detox, which are very successful. And as far as the distribution strategy is concerned, of course, it's different in different parts of the world, depending on the selective distribution agreements. But overall, we want our professional hair care products to be available online. They are available online on Tmall in China, and that's -- frankly, it's the dominant part of the growth is online in China. There are online in America with different channels depending on the selectivity of the brand. As I said, Kérastase is on sephora.com, and other brands are more available on Amazon. And it's also available online in Europe through some sites like LOOKFANTASTIC, Notino but also the e-commerce sites of stylists themselves. And clearly, in today's world, consumers expect to find these products online, and they will become more and more available online.

The next question comes from Pinar Ergun from Morgan Stanley.

Could you please talk a little bit more about the strong acceleration in Consumer, what's driving that? And do you expect continued momentum in this division in the quarters ahead? And then 2 follow-ups. In the Luxe Division, you've called out some sourcing difficulties in addition to the impact of lockdowns in China. What's your outlook for the sourcing challenges? And are you seeing any signs of consumer demand slowdown or down-trading? And finally, what gives you confidence that North America and Europe growth will continue over the coming quarters in light of the more challenging backdrop in the consumer space?

So the acceleration in Consumer, I think, is the -- I would use 3 -- there are many reasons behind it because this division has been really reorganized in many ways. But the 3 key words for me would be innovation, valorization and emerging. Innovation because, frankly, we've had -- and we have a great vintage of innovations for CPD this year, whether it's in hair with Hyaluron Plump from Elseve, whether it's in skin with the Vitamin C Serum from Garnier, whether it's in makeup with the Vinyl ink, lip gloss from -- lip tint from Maybelline. This is really a lot of very successful innovation, which, by the way, were all launched at a very premium price compared or higher gross margin versus the, I would say, catalog. So that's one important factor. The second one is valorization because, as we discussed in previous calls, just it took us some time to adapt to the news regarding inflation inputs, so most of the tariff increases were -- happened -- the first wave happened in March, and the second wave happened over summer. So it's only kicking in now. So if I take the Consumer Division performance, the plus 10% we had in Q3 is very driven by value. I think it's close to 9% in value.

Yes, YTD, we are half-half. But if we focus on Q3, we see 90% is driven by value and 10% by volume.

And clearly, the third element is clearly the acceleration in emerging. We have a strong comeback in the U.S.A., where the brand is gaining share in Q3. We managed to grow in Europe and gain share in several countries despite having there our biggest market share. But really the game changer is really our performance in emerging markets, be it Southeast Asia, Indonesia, India, but also Latin America with great performance. Mexico is doing a fantastic year in CPD, so is Brazil. So I would say these are the 3 elements, and I don't see any reason for this to change because innovation is what we do. Valorization is something that we've accelerated, and I think now it's in the machine, and it's going to be drifting and probably continuing in the quarters to come. And the emerging market is really an opportunity for us because we are still small in market share. So the question on Luxury was -- it's true that -- I mean, the difficulties are real in fragrance bottles. There's also a bit of tension on cartons. So we have several brands. We are allocating our capacities to the best-performing ones. As I told you, glass is not an industry that has a huge flexibility as it relates to production capacities, so I guess we will remain with tensions in the -- for the periods to come. And it's up to us to get as much as we can of what's available and, of course, to put our capacity on -- to bet on the best horses, the promise that we have many fast-running horses, including in male fragrance, but we have the capacity to make choices. We don't see right now a slowdown in fragrances. Actually, we're entering the holiday period, and that's -- I'm sure that's going to be -- once again, fragrance is going to be both a very desirable and affordable gift, so I don't see any slowdown or down-trading. The only area where, going back to the comment I was making on U.K., we've seen a little bit of slowdown on selective makeup a little bit. So that's a point of attention. But as we said, the good thing is that we have many brands. We have YSL that continues to fly in makeup. And we have also Maybelline and L'Oréal Paris for those who can't afford an expensive mascara, even though -- and that's what we always said, that's been always proven by the lipstick effect. A luxury lipstick or mascara is only EUR 30, so it's a very affordable treat. And then there was the U.S. was the third question. We remain confident in the U.S. Frankly, the only -- we are doing great in the PPD, and we talked about the acceleration or the option to reach more consumers online with professional hair care. We have a Consumer Division that has accelerated versus the market. And as I said, we seem to see that consumers are getting used to inflation. Volumes are reducing a bit but not too much. ACD continues to fly. And I think on Luxe, that's probably the division if I had one area where I'd like to do better. Well, I'm not totally happy with our performance on the luxury U.S. market, excluding fragrance, where I think we can do a bit better. And we have a good inspiration with Asia.

The next question comes from Emma Letheren from RBC.

Firstly, could you give an update on your price increases in Europe, whether you've seen any delistings in retail negotiations and whether you have more price increase to come and the timings of those? And secondly, looking more longer term, skin care has seen obviously amazing growth for a long time now. Just wondering how you think about the relative importance of the various growth drivers of that category between trading up and premiumization versus bringing consumers into the category for the first time and getting into white spaces.

Price increases, Christophe?

So I will take the first one. So regarding Europe, I will give you the broad picture, and you will see that we've been constantly driving the prices up. So we started with Q1 with price increase at around 3.7%. And in the last quarter, I see value going up by 5.7%, so you see it has been progressive. But now most of the countries have put the prices on the shares -- put the prices on the shareholders. So that's why we see strong valorization in the Q3.

And to answer your question, we've had no delisting. I'm not saying division -- the discussions are always easy, and some countries are harder than others. We live in a country which is renowned for its challenging discussions. But I think when we are very transparent with retailers about our input costs and that we are not trying to use the global context to pass and justify price increases, we manage to lend to an agreement. Sometimes -- it takes time sometimes but no delisting or sanctions.

And then on top of the price increase, as you know, of course, all our launches since we bring innovation are at a higher price than the current catalog. That helps to even further the valorization. And what we see is still a favorable mix, so driving even up the total value in our business in all regions, by the way.

So now as it relates to skincare, I think this category will continue to grow and is driven by many different factors. Of course, demographics, population is aging, so this is the category you never stop using because you need to moisturize your skin until the day you die. People are -- teenagers are using more and more skin care because that's one of the categories that may be discovered in the lockdowns, where they were using less makeup. So there are younger consumers using skincare. I think also the diversity of the planet, the fact that populations are more and more mixed is also more and more skin differences, which creates new expectations, more expectations and also need for more tailor-made offers. So you have more demanding consumers take care of their skin. Some have more oily skin. Some have mixed skins. And that's something we -- of course, when you invest in research is something we can really satisfy. And clearly also, we see that also explain the success of our Active Cosmetics Division. The fact that there are more and more skin pathologies either created by the environment, by stress, by -- you've got more acne, you've got more age spots. And of course, this can be addressed by aesthetic medicine, but using daily UV protection products with niacinamide to erase spots, fighting acne with products like Effaclar is really something that's concerning a larger number of people. And because there are also -- there is also more and more information online that helps consumers choose, understand what their problems are and what are the products that they would need to satisfy this -- to answer this problem. I see the penetration of skin care increasing. And I'm not totally despaired yet or have not lost hope that Western men will follow the path of Asian men and use skin care on a daily basis. Not there yet, I'm trying to show the way, but I'm not yet an influencer. So I hope that as the younger generations, the more gender fluid and more at ease with beauty products grow older, will also have this growth relay of men's skincare, even though I have to admit that today in the Western world, it's negligible in size.

The next question comes from Rob Ottenstein from Evercore.

Great. Three questions, please. First, just a follow-up on China. Can you confirm the organic sell-in and sell-out numbers on an organic basis? And to what extent there was any sell-in for the Haikou Mall that is coming on soon. So that's the first question. Second question, you mentioned that you've seen some weakness more recently in salons and less frequency going to salons in the U.S. and Europe. What does that tell you about the consumer? Historically, when salon sales slow, is that a leading indicator? What is the read-through in terms of the health of the consumer and the business from that? And then along with that, just in terms of how the business is looking over the next quarter, we're hearing that promotions are picking up in the industry and that retailers, at least in the U.S., are looking to rebalance inventories going into the end of the year. So I just wondered if you could comment on that as well.

So the first question was a very detailed question, so I'll pass it to Christophe, who I guess will not answer.

No. I think for you, what is important is to understand what is the dynamic of the market, so I will say again clearly that when we look at the Chinese Mainland market, the market in Q3 was at minus 4.7%. And L'Oréal sell out -- sold actually all the products that went into the hands of our consumers and was growing at plus 6.7%, so more or less exactly the same way we did H1. So meaning that for the time being, of course, there are always some discrepancies with the sell-in depending on some level of stock, but we are flying at the same speed and this despite the up and down in e-commerce or off-line because of the lockdowns. And I think you had a question also regarding the opening of the famous new mall in Hainan.

Xinhai gang.

Xinhai gang.

It was a new mall, new harbor.

They have delayed the opening, but they confirmed to us that they would be opening on October 28.

And we invoiced -- there was no invoicing for this opening in Q3. It was -- there was, I think, around EUR 30 million invoiced in Q2. So it was not in our Q3 numbers. It was part of what we forwarded because of the Singapore move that happened 1st of July. So it was nothing in Q3. And as far as the Professional Division is concerned, as I said, we see a bit of a slowdown of the salon products and people spacing out a little bit their hair color. It's typically the kind of behavior we see when people are under purchasing power stress or under inflation. So they want to continue to go to the salon, and therefore, they just space these visits out a little bit. The only thing it says is that we will probably sell more home hair color. And I can tell you, for example, we have a product in L'Oréal Paris, which is a little spray called root touch-up, which helps hide your gray roots between 2 salon visits. And this brand, which has launched a very new funny advertising campaign with Eva Longoria, is going through the roof right now. So it's probably a sign that in between 2 professional hair color that people want to stay loyal to, they are using this type of product to retouch. As we see, I think what we see is that consumers are always trying to find beauty solutions, so they make -- they balance between some of the -- their most professional, sometimes expensive spends, and they use every now and then a more affordable product that they can find in mass or in self-service. And that's why, once again, it's great to be a group with -- that covers all channels and price points.

And just related to that in terms of the U.S. consumer, you mentioned that you were a little disappointed in your Luxe sales for the -- in the U.S. Is that a function of the market outside of fragrances? Or is there competitive activity or maybe you could have done more on the innovation side? Just trying to get a sense of where possibly you could improve.

No, the answer is not the market, it's the latter. It's that I think we could have done more on the innovation side. We have a few brands that are doing great. I mean YSL is doing great but still quite small in the U.S. We have Urban Decay that has just launched a new lipstick called Lip Bond that's doing phenomenal. And I'm very happy because Urban Decay had a few soft periods last year. But we could have done a bit better in terms of innovation on some of our other brands like Lancôme or IT Cosmetics. So it's in our hands, so just we have to do it. But I prefer when it's in our hands than it's in the market hands.

The last question comes from Pierre Tegnér from ODDO.

I have 3, if I may. First of all, you said earlier that U.S. volume in PPD is reducing. Is it a decline in volumes or just a slowdown in volume? That's the first question. And the second one, coming back to China, if I understand well, you had a positive organic sales growth in Q3. Is it positive both in Consumer and in Luxe? And is it quite well balanced or are there some discrepancies between these 2 divisions? And the last one is about the value effect because we and investors are paying more and more attention to the balance between volume and value in this inflation context. We understand fully that you are clearly a gross margin model, so that's a competitive advantage for L'Oréal. But could you give us some insight on the pricing action you have taken maybe on some divisions and some geographies. And are we to expect further pricing actions in the coming quarters?

Okay. You were saying the 2 value -- volume-value questions. Christophe, can I ask you a few words about the balance of our performance in China?

Okay. So there was first question regarding the U.S., right, for PPD. So Q3, we had a positive growth in sales but probably a slight -- very slight decline in volume. That's for the first answer. Regarding China on the Q3, we had positive growth in all divisions except a very slight decline of 3% in the sell-out of Consumer Division. But then Luxe was at strong growth. And of course, ACD and PPD, very strong growth. So that's to answer the first 2 questions. And then you wanted also to have a slight insight, right, on the volume and value by division. So what I have to say is that when I look at the figures on the Q3 and YTD, on the volume, it's -- well, first, as we said before, acceleration in the value is for sure in the Q3 because we have now price increases that are in our figures in the Q3 for all divisions. And in terms of volume, it's, I would say, flat on Luxe, a little bit less than flat but -- and all the remaining divisions are growing. And when I look by region, what we see is in volume, except North Asia, it's growing everywhere. And of course, in terms of value, we -- as I said before, we see a very good price increase in Europe but -- nearly 6% in Q3. But just in North America, also a little bit less but more than 4% in the value. Latin America, of course, because of inflation, is above double digit. Of course, the same in North Asia, and that's it. So you see that besides the price increase, we see that in most of our business and whether by region or by division, we are still a positive territory in terms of volume.

And to answer your question around China, the -- our sales were very positive in luxury and slightly negative in mass for one very simple reason is that, in luxury, even when off-line is shut down, e-commerce is both a higher weight and also -- the platforms are also pushing higher-value products. And more importantly, we can activate our consumers through CRM. And that's what we did, for example, with Lancôme. Our teams did what we call a VVIP event in the month of August, where our beauty advisers call every single high-value consumers to propose them to discover the new products and get treated. And that allows even in periods of lockdown to generate some business. It's much harder to do on the mass market business, so our performance in China was more driven by Luxe and by, as I said, professional hair care. But still, CPD was in the online festivals that had the #1 brand with L'Oréal Paris and #1 makeup brand with Stylenanda. So we are ambitious for this division for Double 11. But clearly, the Q3 context was not favorable in terms of channel mix for CPD.

Thank you. I think this ends our conference call. Thank you very much, and we will see you at the beginning of next year.

Thank you very much. Thank you.

Goodbye.

Goodbye.

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