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

You want to take the second question, Christophe?

Yes. So in Travel Retail if we look at the overall market, we see a market that has been in the Q3 at roughly minus 12%. And of course, regarding our sellout, we've been following more or less the market pattern but we've been, of course, slowing down the selling. And this is to significantly reduce our level of stocks. So this is already visible in end of September. And we do believe that we still have to do a part of the job in Q4. I don't have the precise figures of how much stock, but the objective is to come back to the normal level of stock at the end of this year. So usually, in that kind of business we stand between 3 to 4 months of stock, which is the regular level of stock. So this is our objective to make sure that as soon as January 1, if the market is up, of course, we'll be able to catch all the growth. So as usual, we will adjust the stocks accordingly every quarter.

And as far as the U.S. are concerned, on the makeup market -- actually it's a bit of the tale of 2 cities because on the one hand, we've seen a slowdown of the mass makeup market in Q3, but in -- we've seen also an acceleration of the luxury makeup market during the same quarter. So of course, it's very hard to predict, looking ahead. But -- and more importantly, we are -- which is an area where we can improve, but we are progressively improving our performance in luxury makeup, with a good comeback of many good results of YSL, the performance of Lancôme on Amazon, which, as you know, we've opened Amazon for Lancôme, and it happens to be a very successful, both in terms of sales, but also in terms of recruitment of new consumers, thanks to the media we are spending on the platform. So it's positive for the future of L'Oréal Luxe in North America.

And our next question comes from the line of Bruno Monteyne from Bernstein.

My first question is about emerging markets ex China. I think in the past, you sort of discussed how the e-commerce penetration is helping you grow quite fast. It's driven by the brands in the consumer division, quite different from other regions. So you've been growing at 20% or more for quite a while now, and that region isn't that much smaller than China. So what I'm trying to lead up to, it's driving more growth than China, even if China was to normalize somewhat. Am I fair to expect that emerging market exciting will be as big and bigger as a growth contribution for you than China will be? That's the first question. And the second question is, you were talking about the market growth trend in China Mainland. And I was a bit confused. I thought you said that premium beauty in the market, not for L'Oréal, was growing faster than mass market. Did I hear that correctly? Because most of the online data seem to suggest the opposite, that premium is declining versus mass market doing better? And is there any reason why e-commerce would be so different?

Okay. So the question on emerging markets. It's true that, frankly, the performance of our emerging markets are -- is extremely strong. There are both Latin America and our SAPMENA-SSA region are growing in the area of 24%. And there's a little bit of a race between the two to know who's going to be the fastest for the year. And it's really -- what I have to say, first of all, is the incredible resilience of these markets overall. They are growing double digits. We said that both are between the 12% and 13% type of growth. And we often get the question about whether we feel confident that it is going to last. And I have to say that if there's one positive effect for some parts of the world of the overall geopolitics, it's for emerging markets, because you see both India getting a lot of investments and developing its economy and you see the market accelerating. And a country like Mexico is also booming and has a strong currency, because a lot of industries are being developed, there is lot of American investments in Mexico. And we see also Brazil benefiting from its ability to trade both with China and North America. So this market, the economy overall and consumptions are very solid. And it's true that at least in Southeast Asia, we are behind in terms of market share. Our market share in India is only 8% when it's 15% at global level. So we are accelerating and growing very significantly, with a growth of over 20% in India at the end of 9 months. So as far as contribution to growth is concerned, yes, this year, considering the growth of the different regions and the impact of both Travel Retail and the slower market in China, the sum of the 2 emerging markets will be the biggest growth contributor to the group than North Asia. But the biggest growth contributor to the group this year will also be Europe, which is something we are very happy about. And as far as your question on China, yes, the premium part of the market is the fastest growing year-to-date. I think we have a significant contribution to that growth, because we do animate the market with our innovation, with our new brands. And it's true also that -- as you know, e-commerce is also -- and the success of the big events, such as 6/18 or Valentine's Day is always favoring first the big brands, which is why L'Oréal Paris is very successful, too. But also more premium products, because that's both more interesting for the algorithm of the platform, but also that's where the promotions have a more significant impact for the consumer. So we see great results for Lancôme and super brand days or 6/18, same for our Helena Rubinstein or [ Estee Lauder ]. And as I said, our 2 premium skin care brands in China, Takami, our Japanese skincare brand and Helena Rubinstein are having really spectacular growth in Mainland China.

In each division because it's not only true for Luxury, but the same for our CPD Division [indiscernible] skyrocketing or SkinCeuticals for our Dermatological Beauty.

In fact, the Chinese consumer is -- has become -- that's one of the things, the evolutions we see post-COVID has become, I would say, even more pragmatic, even more demanding on the quality of the product, on the functional benefit, as they say, of the product. And so when you have brands or products that really do perform in terms of efficacy and also in terms of brand aspiration, they can thrive on the Chinese market.

And our next question is coming from the line of Olivier Nicolai from Goldman Sachs.

Thank you again, Françoise, for your help throughout all these years. 2 questions, please. First of all, on Aesop has been part of the L'Oréal, I mean now for the last 6 weeks. So I know it's still early days, but would be great to hear. If you could give us your first impression of the brand and kind of the ambition for the brand, how quickly it could become a big other brand? And when can we expect this EBIT margin, which on the numbers from the previous order was quite low to be in line with the rest of L'Oréal Luxe? And then secondly, on Lancôme on Amazon in the U.S. has been a tremendous success since the launch. I was just wondering if it's a different consumer that you're recruiting there, are you gaining share from other luxury brands? Or are you actually pushing your mainstream consumer to premiumize to some extent? And would you consider doing the same thing in Europe, having Lancôme being sort of on Amazon in the U.K. or in France and in the rest of Europe?

Okay. So Aesop. We've been trained by Aesopians, who are the employees of Aesop. So to say that you have to say Aesop and not Aesop, which is a mistake I was making. So I'm happy to share that with you. Aside from that, first of all, the first impression, I will start with the numbers in September, Aesop did a plus 17-point-something growth. So it's a very good top line growth, first of all. Second, we met the teams, and we welcome them, and we brought them in. We brought with us the CEO of Aesop to our China trip, because obviously, China is the #1 growth opportunity for Aesop. We have 4 stores in Shanghai, which are beautiful, but only 4 stores in Shanghai. So it's the very beginning. We are about to work with them and to make them benefit from our cloud and from our R&D support. But frankly, this is the moment where we're getting to know the teams. But we are very frankly, very exciting at the prospect and about the growth opportunities. On the specific topic of profitability, the first thing -- 2 things to say. First, as we said, and it's important for me to remind it is that based on our -- on the numbers we have, and we are still really fine-tuning them, but the -- we know that Aesop will have a 25 basis points dilution effect on the 12-year rolling period for the group. 12 months, sorry, 12 months period for the group, so -- which is something we have to take into account for next year. And overall, even though the objective is also to progressively improve this profitability, we must not forget that as it's a retail brand, the profitability is calculated on consumer pricing, consumer price numbers, not on wholesale prices. So of course, in percentage point, it's always going to be lower. But considering the growth potential, I think it will be very beneficial to the earnings per share of L'Oréal in the years to come. So just the beginning, and truly excited about it. We'll see what happens next. And as far as Lancôme on Amazon is concerned, it's true it's great. It's a great start. And by the way, what's interesting is that it's particularly good on makeup, where Lancôme probably a bit -- tiny bit more facilities in the environment of a [ Sephora ] to speak to its consumers. First of all, I want to say that there would -- there have been a fantastic work done by the American teams along with the brand team to create a shopping experience which is truly worthy of the brand equity of Lancôme. And if you go to the Lancôme page on Amazon, you will see that it's really as good as our own D2C brand site. And regarding consumers, we see that the first numbers of that, around 75% are new to the brand. So maybe they were buying somewhere where we did not compute them. But overall, so I'm not sure the 75% is 100% accurate, but it's a good proxy of the fact that through a new distribution channel, with a brand that's already quite known, you can truly reach new consumers and increase your penetration. So it's good news. And I think it's -- I can't say whether it's taking from other brands on Amazon, because not yet many luxury brands are present on Amazon. We have more, I would say, accessible luxury brands such as Urban Decay or use to the people right now. And -- but I think for me, it's more a penetration tool than necessarily trying to steer from brand [indiscernible] So very promising. And of course, we have to continue and to make sure that Lancôme continues to develop on this platform.

[Operator Instructions] And our next question comes from the line of Ashley Wallace.

I have 3 questions, please. The first one is a follow-up question on Asia Travel Retail. I guess the destocking in Korea started right at the beginning of the year, so 4 or 5 months ahead of Hainan. I was wondering if you feel that Korea Travel Retail has already ended its destocking, and if you can help us understand if you're seeing better trends there or not? And connected to that ends with the Hainan weakness, can you help us understand the potential margin implication of the weakness in Asia Travel Retail on the second half EBIT margin for the Luxe division? My second question is actually on Europe. A little bit of a follow-up. I know you spent a bit of time on it. But in some of the consumer categories like luxury and retail, and we've already started to see size of weakness playing out with the European local consumer. Obviously, you've had great Q3 results overall, but is there anything that worries you in the European market, for example, trends towards the end of September, signs of downtrading or volume weakness? And then my third question is more of a modeling question. At the beginning of the call, I think Françoise mentioned an adjustment for hyperinflation? Can you just explain a little bit what that means? Does it impact anything but the FX component? Or do you make some type of an adjustment for the like-for-like also?

We start with the last question with Christophe and I'll -- and we'll deal with the other ones together.

I will start with maybe to Retail. I think your question was on the stocking in Korea. So I can tell you that here, the level of stocks is very healthy. So there is not much destocking to do in that part? And regarding the Hainan impact. So I just want to remind you that today, Hainan is around 2% of our sales. So maybe, yes, for Luxe, it's always more complicated because of the level of profit, but it's really manageable. So it's totally, I would say, even if it's -- it will have a small impact, but totally manageable.

It will have an impact for Luxury, but for the group, we can manage. That's, in the end, the principle of our compensation system between divisions, regions that we can offset, as I said, temporary pockets of weakness, and it's true for top line and it's, of course, true for profits. As far as Europe is concerned, we don't see impact on our sales. We don't see slowdown or trading down on our sales. As I told you, all 4 divisions grew double digit in Q3. It's true that in some markets, you see negative units. But not on our brands, because I think we have a very different profile of consumers, and it's fair to say that on some, I would say, lower-end brand, there is more reduction of consumption, including some own labels, but we continue to grow in units and we have a good performance, thanks to our innovations. I think it's important to remind always that beauties and offer market. It's a market where, of course, some people buy a basic product for just functional results, but our consumers are looking for the best of beauty. And when I see the success and results of a brand like the new hair color, GOOD from Garnier, which is very premium versus the market of Bond Repair from [indiscernible], the new YSL fragrance, MYSLF from Yves Saint Laurent. Kerastase or Metal Detox from L'Oréal Professional, which are all sophisticated premium, high-quality products. These are flying. So there's there is a, I would say, a very specific situation where we managed to continue to grow in units and value on the market. And you had a question on the hyperinflation.

Hyperinflation, exactly, yes.

Yes. So it's a bit technical, but basically, the like-for-like are calculated on comparatives, which are restated to reflect the variation in purchasing power between prior year and the end of the latest reporting period. So and the restatement, of course, goes into the scope impact. So that's why this effect is reported there. Of course, happy to give you more details if you wanted them.

I guess the impact is if you hadn't made this adjustment, the like-for-like would be better than what you just reported Double 11.

Okay. It's very simple. We have -- 0.5% is related to Argentina and 0.2% is for Turkey. So it's around 0.8%.

Okay. Perfect.

And our next question comes from the line of Javier Escalante from Evercore.

Good afternoon, everyone. Goodbye, Françoise. Thank you very much. Welcome, Eva. Nicolas, Christophe. I need to come back to China, but I'm a bit confused, and I thought that it was very helpful in July when you introduced this term of the China ecosystem, right? And if you can help us understand -- thinking of the ecosystem, how much of the market is e-commerce, how much is brick-and-mortar? And this Travel Retail daigou situation, how much would have been -- or was in the past, in whatever period you have the data readily available, how do you see that pie chart, say, 12 months from now?

So it's a complicated question, because I don't think I have the data to answer to you on the exact split between e-commerce, brick-and-mortar, in the overall Chinese ecosystem, particularly considering the changes and evolutions in the Travel Retail market, where you have orders are being placed online and then taken physically. So it's hard to make that split. We can comment on the weight of e-commerce in the Mainland Chinese market, which Christophe is currently looking forward. If I go back to the ecosystem, we continue to see, as I said, different trends. The Chinese market, where we are significantly gaining share on a muted market as we said, at a plus 7.7% growth, and we clearly grew above the market. In Hong Kong, the market has bounced back strongly, because a lot of tourists have gone back to Hong Kong. Though Hong Kong is growing very, very fast, and we are benefiting from that rebound, whilst being very careful about inventory levels. And as you know, Hainan is the opposite. Right now the market is down double-digit negative because of the change in this paradigm of the reset we've been talking about. And our own sell-out is a bit better than this number, but as we are destocking, that's why our invoicing is much lower. But overall, if I take the total Chinese ecosystem, our sell-out, our sales to customers have been up high single digits. And in the market, as we said, has been -- is broadly stable overall. So substantially gaining market shares. And as far as the weight of e-commerce on the Chinese market is concerned, first of all, both channels are growing for L'Oréal, whereas at the market level, it's online is slightly positive, while off-line remains slightly negative.

Yes, maybe on Mainland China, we see online growing very strong for L'Oréal, so double-digit growth, and offline is also growing, but mid-single-digit.

And a more strategic question because you mentioned earlier, Nicolas, that something like everything premium in skin care continues to be great, right? And if there is something that is particular about China, is that these online promotions in daigou that basically -- it appears that it reaches a type of consumer that is probably not as wealthy and younger than the same products in the West. Do you think that, that is good long-term strategy? Meaning that once you say use Helena Rubinstein, you're not going to go back to something that is less. So, or the contrary, if the economy goes south, so basically, you are going to lose these aspirational shoppers. Any view when it comes to that?

Well, first of all, just to remind that our strategy in the Chinese ecosystem, first of all, has always been to focus privilege and always favor Mainland China. So daigou is not a strategy. Daigou was a phenomenon that we had to live with, and we're very happy that it ends, and that's the market goes back to normal. And of course, whether on the big events or during -- or when the daigou phenomenon was prevalent, you have a number of consumers that benefit from the offers from better prices to discover our brands. And that's why, by the way, while Travel Retail will always remain a very important channel for us, not just for promotions, but also because it showcases our brands in a way that frankly, it is absolutely second to none. So we do recruit consumers with our big events and with our Travel Retail activities. We also have consumers that stock up that are already loyal consumers. So it's a good way. We, of course, continue to sell outside of the big events. And what we are not at all afraid of is people abandoning our brands, because if that was the case, right now, we wouldn't see our most premium skin care brands growing faster. Actually, people are striving for quality. They want quality and Helena Rubinstein, I don't know if you have tried one of these creams but it's the best anti-aging cream that we have in the group and consumers love it. So today, it's actually a bit more difficult for mid-market brands than for premium brands. So our strategy is to continue to allow people to try our brands. And the way to do it, as I said, will be also to open new city. I remind you, because that's an information we share every now and then but that our market share overall in China is extremely different between Tier 1 cities and Tier 3, 5 cities, and it's over 25% in Tier 1 cities and it's below 10% in cities in Tier 3 and 5. So right now, we see that we are opening new counters in Tier 3 cities and plus. That's where we're going to gain the largest number of consumers. Again, today, we sell approximately to 100 million consumers in China out of an addressable target of 400 million. So we have lots of people to reach. And of course, one of the ways to do it is through the big events you were talking about, but also opening doors, presenting the brands in a very beautiful way in these new cities. And what we see, that even in these Tier 4, 5 cities that we were serving already through e-commerce, would be seen more during Double 11. When we open a counter or a boutique, it increases both the sale offline, of course, but also the sales online, because suddenly consumers discover the quality of the brand. So it's -- I don't think there is any risk on the strategy, because Mainland China has always been our priority.

Thank you, Nicolas. That was my base assumption that people -- when people try the good stuff, they don't go back.

Thank you. And as we have no more questions registered, I now hand back to our speakers for any closing comments.

No. I think we are very -- again, it was the last call for Françoise. She was very moved. I can tell you, you cannot see her, but she was very moved by everybody's comments. So I guess, maybe some of you will invite her for a cup of tea. And in the meantime, we do thank you for your questions and your attention, and have a good evening.

Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect.