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

Thanks for joining us today. I'm pleased that we have L'Oréal's CFO, Christophe Babule here with us.

Hello. Good morning.

Before we go into some Q&A, I'm just going to give the stage to Christophe, who will do a short presentation for the next 10 minutes, and then we'll get into some Q&A. So over to you, Christophe.

So good morning to everybody. We will start with a small movie to let you know what is L'Oréal. [Presentation]

So yes, welcome to this incredible category called beauty, and I hope this puts you in a good mood. So let's go now to speak more about who is L'Oréal. So you've seen the key figures. And I have to say that, yes, L'Oréal is a truly unique company. Why? Well, let me give you 4 reasons of why I consider that L'Oreal is a truly unique company. Number one, we are, by far, the largest beauty company. We are 1.5x bigger than the #2 and 3x bigger than the #3 players, as you can see on this chart. And size matters in our industry. It allows us to scale our acquisitions and licenses. For example, Prada and Valentino, both have sales of more than EUR 0.5 billion by now. It allow us to scale our brands. We have 12 out of our 37 international brands that are billionaire brands. And I have to say that quite a few more are waiting to join the club. It allows us to scale our innovation. You know that we invest a lot in R&I because new molecules can be cascaded over several brands. And of course, it allow us to scale our technology and we invest a lot in beauty tech. But scale is nothing without agility, which is why we consistently optimize and improve our operational and organization footprint. Reason number 2 is that for more than one century we have been doing only beauty. But we do all beauty making us the only company that is truly a multipolar company. We are in all categories, as you can see on the left side of the slide, and skincare is our largest category, followed by hair and makeup with an increasing weight of fragrances because this category gained 5 points in the last 4 years. We are in all segments or channels with primarily mass and luxe being the biggest ones. We are in all regions. The exposure to our developed market is well balanced. Emerging market contributing 17% of our sales in 2024. And of course, the contribution to the growth is much higher. This breadth of our footprint makes us the turbulence-proof company. Let's take 2024. The ongoing strength in Europe, North America and emerging markets more than offset the softness in China. At the same time, the continued dynamism of the fragrance and haircare markets more than offset the more sluggish momentum that we see in makeup and skincare. Third key point is that over the years, we have built and carefully curated an unrivaled brand portfolio. Our 37 international brands are highly complementary and ensure that we cater to all beauty consumers' wants and needs. And you can see that perfectly on this slide, our brands straddle all price points and cover all consumer aspirations from health to more glamor needs. And we continue to add to our portfolio when we find a brand that will enhance our long-term growth profile, and that is highly complementary. In that spirit, we recently announced 2 very exciting acquisitions. The Luxe division took a majority stake in Medik8, the premium brand with focus on the selective distribution at the health end of the spectrum. And then the Professional Division acquired Color Wow, a U.S.-based prestige haircare brand. That is one of the fastest-growing and most innovative of its industry. And of course, it will fuel the ongoing haircare boom. Fourth reason, our financial situation is rock solid, which enable us to consistently focus on growing the business. As you know, we grew 7.6% compound annually between 2019 and 2024. Last year, our gross margin stood at over 74%, up 120 basis points in 4 years despite the significant inflationary pressure. This allow us to continue to increase our brand investment by 140 basis points to slightly over 32% of our sales. And last, thanks to our laser sharp focus on SG&A, our operating margin increased to a record 20%. And let me remind you that our balance sheet remains healthy with gearing of less than 13% allowing us to pursue growth opportunities, as I just described. So let me now say a few words about our recent first half. First, we delivered organic top line growth of 3%. Now, adjusted for the impact of our IT transformation, mainly in North America and China, the growth stood at 3.2%, implying an acceleration from 2.6% in the first to 3.7% in the second quarter. Now while I'm on the subject of adjustments, I thought it might be helpful to give you an update of where we are in our IT transformation. To that, we have finalized around 1/3 of the process which has included a number of smaller countries but also some of larger countries like China. We promised you earlier this year to be transparent on the impact of this bigger project which takes us to the chart on the right part. You will recognize on Q1, the 90 basis points impact we disclosed in the first quarter and the 130 basis point effect we quantified in the second. And probably what is important for you is that on the Q3, we expect that in the third quarter, there will be a positive phasing impact of 70 basis points. Regarding now our operating margin. Operating profit advanced by 30 basis points, reaching a new first half record of 21.1%. Each of our divisions reporting operating margins in excess of 22%. And 3 of them, Professional, Consumer and Luxe reached a record first half margin. In Dermatological Beauty, the operating margin declined 70 basis points versus last year as we are working to gradually reduce the existing imbalance between the 2 halfs. Regarding the market, that's important because we continue to expect that global beauty market growth will be around 4%, plus 4%, with significant discrepancies between the various regions. And of course, we have every ambition to outperform the market with our strong stimulus plan. So what is the stimulus plan? Critically, our beauty stimulus plan will accelerate further in the second half, up 300 basis points compared to last year, 300 basis points is an addition of launches in the sales that we plan for the second half. We will continue to roll out our most recent blockbusters, and we have an even fuller basket of launches in the second half. This is especially true in Luxe with a new men's fragrance from Prada. You see here the picture [indiscernible], inaugural fragrance from Miu Miu and the latest skincare innovation from Helena Rubinstein. When it comes to e-commerce in the last 12 to 18 months, the contribution from online to total beauty market sales has been accelerating. In the first half, online grew more than twice as fast as the market. We are uniquely well placed to benefit from this shift given our long-standing investment and presence in the channel. Last but not least, let me put the spotlight on what's new in the areas that I know you are most interested in. First, the United States. The momentum continued to accelerate for the market and for us. This was especially true in consumer products, where market growth remained solid and where we outperformed the market 2 to 3x in spite of our adverse footprint, illustrating the success of our launches especially in makeup, where we grew 8 points ahead of the market. We also outperformed the market in our other 3 divisions, especially in Professional Products. The Chinese ecosystem remains a tale of 2 cities. In Mainland China, the market continued to stabilize, and we continue to outperform it in 3 of our divisions. I'm quite optimistic about our Consumer Product division where the gap to the market has been narrowing and with a strong launch pipeline also in the second half. But in Travel Retail, on the other hand, the situation continues to be challenging across all downtown operations, whether in Hainan, where the footfall and conversion rates remain under pressure. South Korea and most recently, also in Thailand. On the tariffs, well, we have now better visibility. Recently, we had some small good news, mainly from Canada. They listed tariffs regarding importation of product from the U.S. And therefore, we believe that the impact in our P&L this year is reducing. I shared a few months ago that could be impacting 40 basis points. Now we are down to 30 basis points. Last point is our acquisition where we've done recently some acquisition in June, as you know, Medik8 and Color Wow. And the good news is that we're expecting to consolidate both brands starting from this month in September. Thank you very much. And with that, I will hand over to Patrick for our fireside chat.

Super. Thanks, Christophe. And thanks also for confirming again the 4% number, I guess, you knew that was going to come up as a question. I guess following up from that, how are you guys performing versus the wider market right now? The gap of outperformance has narrowed recently over the last 12 to 18 months. Are you starting to see maybe some green shoots as we kind of go into the second half now and maybe that outperformance is going to go back to a bit of more of a historical level?

Well, the good news is that at least the market is increasing compared to the first quarter that has been quite impacted in some markets. I'm referring to the U.S., for example. Now the market is probably a little bit above 3%. And what we have seen at least July, August, is positive news. Positive news in the U.S., as I just said, because the market is much more dynamic. And also, for the time being, at least in Mainland China, which is the second biggest market, the market is also stabilizing, with up and downs because depending on the promotion, but that's pretty good news. And when you dive into how the market is doing, it's quite interesting because when you look at the top 30, actually, we have now the figures of the big players. They have all been publishing their results. And we did the plus 3, but the top 30 have been growing by only 0.7%. So the growth is mainly coming from the small brands, mainly from the long tail, those indie brands that are gaining strength in countries like in emerging countries a lot, of course, in the U.S. But that's quite interesting because it means that among the big players, we are strongly outperforming but at the same time, we're agile enough also to compete with the small indie brand in some of the geographies. So that's what we are monitoring very carefully.

Okay. That's clear. You touched on a few things there, and I want to dive into one of the key topics China, and you talked about how you have innovation coming in the second half there. But I want to go back to the Q2 conference call when you talked about competition is fierce. How has the Chinese market been doing since the 618 shopping festival? And how do you expect the innovations to go down in the second half?

Well, first, some insights about the market in China. Competition, of course, is still increasing. But what we see is competition coming from Chinese brands is only in consumer market. So for the time being, in our other divisions, we don't see that fierce competition as the one we can see on consumer. And it's all about bringing our innovation at the right time. So we know that at least in consumer our biggest launches are coming in the next 4 months. So that's why we expect the gap to narrow. And then we'll see, but at least when I look at the results of the 618, we've been growing at 10%, while the overall results are at plus 7%. So we've been doing pretty well. L'Oréal Paris is still the #1 brand. We put 4 of our brands in the top 10, 8 in the top 20. So I can tell you that we're still there and overall growing, which is also a good news because the market was quite negative still in the Q1 and now it's stabilizing. So it's not a big wow. But at least with the innovation, with investment a little by little, we are coming back from a market that was very negative in the second half of last year, minus 6%. So to see the market stabilizing for us, at least, it's a good news.

Okay. Related to China on Luxe, you talked about the consumer side of things. But can you maybe touch on why the Luxe market has been, in general, a bit weaker in China? There's that concern, but also in the U.S., you've seen a bit of weakness. Is it suffering from years of inflation? Is it more competition within the luxury space? Or consumers trading down the pricing that? Can you pinpoint what you think is the cost concern?

Well, there are many factors, and I think that the reason is quite -- could be quite different from one big regions to other ones. First, I want to remind that, for example, in emerging markets, the luxury business is doing pretty well. So growing very fast. Even in Europe, our old continent, Luxury has been developing pretty well, nearly at least above 4%. And now you have 2 big regions for which I believe the reasons are quite different. You have China on one side, where this is due to the economic situation. You know what happened in the past 3 years. But one of the probably things that could change a bit the fate of luxury brands is that you have noticed that recently, the stock market in China has been catching up a lot. And I'm sure that this will help the sentiment of the Chinese consumers probably to look back a little bit more to our luxury brands. And even within the luxury, you have for example, our couture brands in China are performing extremely well. I mean we are speaking about double-digit growth. So probably -- when it comes to skincare brands, it's where here, there is more competition coming from dermatological brands. So our brands, by the way, but also from the market. And from the U.S., I think there was a specific situation that is linked to the Q1 for political and economical reasons. But what we've seen since the end of Q2 and confirmed in July and August, is a stronger dynamism in the U.S. market. And then it comes with innovation. So that's where big companies and we are doing our job is to bring innovation. You know that fragrances are doing extremely well. The market is still -- it's not any more double-digit growth worldwide, but it's still growing by more than 7%. In that context, we are well above 10% growth. And we need to fuel the pipe with strong innovation and that's why we have new launches coming in the second half. So we'll see what happens.

Okay. So going from -- to quite a good success story with Kérastase, can you maybe talk about your success there? What's driving that success maybe? And where are there still white spaces with the brand across different markets?

Yes. This is an incredible result, and we see Kérastase growing extremely well in all regions of the world. In the U.S., it's a huge growth. And I think it's first the fact that the consumers, and we have seen that not only in our Professional Product division, but also in consumer. Consumer has been looking for more value in haircare. So every time we put some innovation, and that's true with L'Oréal Paris, it's true also with Garnier or with other brands. When we put more innovation in the products, implying higher prices, the consumers have been responding extremely well. And by the way, the first success we've noticed it's something that was designed by the Brazilian teams. So a market where prices are not that big. And actually, when we roll out this innovation into other geographies in the U.S., in Europe, it has been the same everywhere. So that's why we have been I think, doing a lot in valorizing this category and therefore, enhancing the growth. So Kérastase is benefiting from that. Consumers are looking for a more value in terms of innovation. So they dare to put the price. And of course, it comes also with very strong innovation. And in that respect, the latest launch of Kérastase is doing extremely well. And the third main reason is e-commerce. This is a brand that is also boosted by our strength in e-com. And I think if you sum up the -- those 3 regions, this is -- those are the main reasons of the strong success of Kérastase.

Okay. And maybe going to another brand that has had a great success over the last 7 years CeraVe. And it's quite interesting because we've seen a bit of a moderation of growth there recently, which I know you guys have touched on a few times. But what is the opportunity you guys are selling at within the CeraVe skin kind of space? And then lastly, on CeraVe, you just did the anti-dandruff line. Curious to hear the strategy behind that rollout, guessing that's after different geographic and target audience compared to the Kérastase brand.

Well, maybe for the audience, I want to remind what is the history of CeraVe because it's a brand that when we acquired was doing EUR 150 million and is now bigger than EUR 2 billion. So of course, there's been a huge probably one of the most incredible success stories among our brands. So this is a brand that has been a bit a victim of its own success. So that's the main reason of the plateauing of the brand in the past few quarters but the teams have been now preparing the next steps for the development. So first, it comes with new products. So as you know, we launched for recently the haircare range of products. And it's visible here in the U.S. [indiscernible] is doing pretty well because in the therapeutic haircare category, we have already 8.5% of market share. So of course, we have now to scale this product in other geographies. And we are also bringing innovation, new products in new categories like Hand & Care. So new launches, it's the #1 thing that we are doing. Second is geographies because even if we started to develop in other regions, the growth of the U.S. has been so big that still today, the U.S. is still half of the market. So we don't have to forget about the huge potential that we still have in other regions, and that's why we put recently the brand in India doing extremely well also in China. We are focusing now in the lower tier cities. So there's a lot to do in many emerging markets. And third point is this brand is addressing probably one of the biggest needs that the consumers have. It's about skin -- resolving skin problems. And we know that mainly in emerging markets with urbanization and pollution, the needs are incredibly big and untapped yet. So that's why we are investing also in helping dermatologists to be more visible in some of the countries.