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

So I'm Warren Ackerman, and I run the European Consumer Staples Research team alongside some of my brilliant colleagues, some of which are in the room. So let me be the first to welcome you to Boston for the 19th Annual Barclays Global Consumer Staples Conference. A fun fact, but this is actually the 36th year for the conference. It's been under Barclays ownership for 19 of those 36 years. If people are interested and want to grab me, I can explain the back story or Andrew as I can. But anyway, we're really excited that we have a first this year. This is the first year we're going to be adding luxury, leisure and retail to the Staples roster. So really, you're getting the 2 conferences for the price of one, and we have 160 companies here this year. I know for some of you, the journey has been arduous with plane cancellations and other travel difficulties. So thank you, everybody, for making it here. And I also want to thank and appreciate all the hard work that our management teams have put in to make these presentations and meetings possible year after year and especially the Barclays events team for their hard work and late nights to make this event a success. Anda was telling me as I was walking in that we had a record 15,000 meeting requests over 3 days this year, and she's been burning the midnight oil to complete the puzzle of meetings more her than me. And she's outside for anybody that wants to change or any other request, so please don't hesitate to swing by the desk. And in keeping with tradition, we will be hosting unofficial hours in the bar for the next 2 evenings. And tomorrow, I just want to flag to you from 5 to 7, Barclays is hosting a cocktail reception on the terrace. I think it's called [ Matria ]. Everybody is very much welcome for that. And 3 very small housekeeping things. Firstly, if everybody could wear their lanyards, at all times. Security has been stepped up this year. So we don't want anybody having any issues. Secondly, a number of the presentations will have breakouts after the presentation, including L'Oréal. So if you do want to hear more from management, there are 2 breakout rooms around the corner. So do please join us for those companies where there are breakouts. And then finally, we do appreciate any feedback about what you like about the conference and what can be improved. We're always trying to improve things. So with that, I'm delighted to welcome L'Oréal to the stage to open the conference. Thank you, Christophe, for joining us. I think L'Oréal has a video that they want to show first. Then Christophe is going to have a few minutes, and then we're going to have a fireside chat. Thank you, Christophe. Thank you.

So good morning to everybody. I'm very happy to open the Barclays Back-to-School Conference. As always, I will start with a short video, and I'm sure that this will bring a good dose of dopamine in this room. I will then make a few short remarks about the first half. And also I want to share my confidence about the rest of the year and beyond. So let's start with the video. [Presentation]

So we delivered a strong first half Organic sales growth of 6.5% accelerated steadily from last year and significantly outpaced the market that we believe stand up plus 4.5%. It was fueled by our beauty stimulus plan as the weight of innovation increased by another 250 basis points. Growth was very broad-based. All divisions grew, led by dermatological and Professional division. All regions also grew emerging markets around 10%, developed markets in mid- to high single digits, and all categories grew led by fragrances, and air care and with an acceleration in skin care. Last, we grew twice as fast as the market in e-commerce double down on the winning channel. Our virtuous P&L was on full display as well. Our operating margin rose 20 basis points, and that was after a 70 basis point increase in our advertising and promotional expenses to support our innovation and new brand as we kept tight control of our SG&A. And we are confident in the second half. We told you in late July that market growth accelerated from 4% in the first to 5% in the second quarter and that the full year should land between 4.5% to 5%. And this assessment has been confirmed during the summer. The market remained robust in Europe and North America. North Asia continued its recovery driven by the selective market in Mainland China, and SAPMENA stayed dynamic despite short-term supply chain issues in the Middle East, as you know. The only area of disappointment was Latin America, our smallest region, where growth was below that in the first half. And we have what it takes to continue to outperform the market in the second half. We have a full innovation pipeline in place. Our new fragrances, for example, are off a very good start. We continue to drive our skin care reconquest with the rollout of Korean Champion Dr.G and our red hot Medik8 brand now in over 250 [indiscernible] stores in the U.S., and we continue to leverage our recent acquisitions, including [indiscernible]. And we continue to gain share in the selective market in Mainland China. But also we are stronger than ever to tackle the future. And [indiscernible] research is at the heart of our engine room. Every year, we dedicate, as you know, 3% of our sales to it and expand our ecosystem with new partnerships. That puts us in a unique position to keep exploring and winning in emerging fields like GLP-1 products and longevity. To do only beauty, but all beauty, we are expanding our category coverage as well. That includes body care, which is becoming increasingly valorized in a wellness obsessed world, the mist, which allow us to bring our fragrances to a wider audience and beauty supplements. And we are obviously hugely excited about the adding of Kering Beauté. Creed is off to a great start. We are preparing the first launches of the Balenciaga and Bottega Veneta brand, and our teams have started to immerse themselves in the Gucci universe, 1 year earlier than expected with first product to launch in around 18 months. Last but not least, of course, AI is profoundly shaping the consumer journey, and we are ensuring our competitive moat continues to widen. AI boost [indiscernible], especially research and innovation, our accelerated innovation and creativity are augmented imagination. And AI is allowing our employees to focus on the most value-added parts of their jobs. So you can see that we have every reason to look at the future with confidence. In a dynamic market, we have what it takes to keep winning. And with that, I'm ready to be drilled by Warren.

Do you want to join me on the share, Christophe? Here we go.

Okay. There's lots of pack in and limited time. I've got to start, Christophe, on the global cosmetics market because we're hearing a lot of doom and gloom about FMCG generally, but cosmetics seems to be bucking the trend, 4% growth in Q1, 5% growth in Q2. What's driving the acceleration in the category? And what gives you that confidence that, that momentum can actually hold for the second half. Why is it down, I guess, in the stable sectors?

First, what is important, of course, is to see that Q2 has been slightly accelerating compared to Q1. So we are quite confident that this plus 5% and the exit rate of the growth of the market could be seen in the H2. This is driven by, first, what we've seen after the month of June because we've been observing the market in July and August, and I was saying the market are still quite robust. Of course, there are some issues from here and there because of conflict because of logistic disruptions. But for the time being, we see first big players investing, and we are probably the most active. And therefore, when we observe the consumers in the different big market, we have this confidence for the full year. And what I want to state here is that beauty is a market of really attractive growth. And this is important to reassess what makes this market different is the fact that we have ever said and spoken about the essentiality of beauty. And I will tell you that when you look back at the last 35 years of this market, there's only 1 year when the market was negative. It was in 2020, and frankly speaking, it was more an issue of offer than demand, actually. So it is a strong resilient market. And with all the innovation that we put in this market, some competitors as well, we are quite confident that.

Maybe we can dig into some of the categories, Christophe. I want to start with fragrance. I think fragrance was growing above 10% in the first half for you guys. And there are some fears that we're going to see a slowdown, and we've heard others talking about slower trends. But you seem to be taking more market share. I think you had the top 3 female fragrance brands in Europe at the moment. So I guess the question is, within fragrance, are you confident on the outlook? Is your innovation engine in fragrance driving a structurally higher level of share gain in the category.

Yes. Maybe first, how the market is going. It's true that in the past few years, the fragrance market was growing at a very high speed, like double digit it has been slowing down lately, but still at plus 5%, plus 6%. It's still a very dynamic one and well above the global market. And what is at least what we are seeing in the market is a kind of polarization, polarization between those affordable fragrances. And that's the reason why we are launching is to address a new audience that are looking for more affordable fragrances. And the ultra high-end fragrances, so very, very wide, very expensive, very prestigious brands, and that's where a brand like Creed, of course, in portfolio is helping. So at least on our side, for the time being, we have seen no slowdown. So we are still growing at double-digit growth, meaning twice faster than the market. And of course, always with the same mantra of innovation, bringing new products and we have in the pipe, and it's already visible on the new launches of our Armani, the fragrance called [indiscernible], I've seen in the airports, the launch of the new Valentino fragrance, [indiscernible]. So we have in the pipe what it takes to growing face [indiscernible].

Another category that's on fire is hair care. Hair care up 15.6% in the first half. I think [indiscernible] -- I think it was some crazy number, high 20s growth. Why is hair care so strong? And how much is the market accelerating versus L'Oréal taking market share. You've talked about some of the megatrends in the past in hair care, but do you actually think double-digit growth is sustainable?

First, again, I will start giving some key components of this growth because the market is dynamic as well. And there are some strong market fundamentals that are helping this growth. First, I will speak about a trend that we observed in all geographies, women, they tend to have longer hairs, so of course, it helped. But also we have with the different ethnic components of the population. We more see and more curly hair, [indiscernible] hair. And last time, there is also a quest from most of the consumers to go for more care. And therefore, there was a space to bring more innovation and therefore, to premiumize. And that's where we have been playing to our strength because we are moving this market from a volume driven to a value-driven. And what we see for the time being, it's not stopping. So you rightly mentioned [indiscernible], it's well over 20% growth, but we see growth in 3 out of our 4 divisions because you know that we have hair care in our consumer, in our Professional Products division, but now also with CeraVe in our dermatological.

I mean, maybe one category is doing a slightly less well is makeup. I think it's 18% of your portfolio grew, I think, 2.5%. Are you kind of slightly dissatisfied with that performance? How can you move faster in makeup against super nimble players where trends are moving at light speed. I mean how is a brand like Maybelline doing, for example.

Okay. Now it's true that out of our 5 categories, the most sickle category is makeup, because it's a lot dependent on fashion trends, on color trends, on the -- and with this wall that is becoming more and more digital, and those trends are shifting very quickly. And it's that currently, we are slightly below the market. So of course, we are not happy about that. But for L'Oréal, what we see is two different realities. On one side, we have now a robust momentum on the Consumer division. So in mass, and it's still visible in the U.S. where brands like, but mainly [indiscernible], for example, are doing extremely well. And on the other side, on Luxury division, we have a more muted growth in the range of 2.5%. So that's where we are putting the focus is bringing more innovation as soon in the second half. And of course, there will be much more coming in [indiscernible].

And finally, just on the categories and brands. The one brand I want to ask you about is the Mixa of brand. How big is Mixa now? And how big do you think it could become? And what's your plans for the brand over the next, say, 12 months.

So there's a lot of noise about this very French brand, Mixa, is a brand that has been for quite a while in the French market, and we decided to bring this brand out of this comfort zone. So we'll be launching this brand in Germany, more recently in the south of Europe, and in a few countries in SAPMENA. And this is a way to respond to the consumer focus on more medicated skin care. And it's a brand that has a good formula cheaper than CeraVe. So it has really a very good territory and the truth is that is doing extremely well. We've been growing very fast in Germany and apparently, the first result that I've seen from the U.K. are pretty encouraging. So it's a brand that probably will keep pushing in more territories. And it's quietly growing at above 20% now for several years. So that's the objective is to keep pushing it [indiscernible].

Maybe moving on to some of the geographies. For me, the standout has been SAPMENA. The growth of SAPMENA, I think despite the Middle East headwinds, I think you've told us Vietnam up 50% in the first half. India up 17%. Can you share why maybe under that a little bit. We hear about the 3 big countries. What are you actually seeing in the cosmetics market in this region? And what brands or channels are really driving this kind of -- it seems like a big an inflection in the growth?

Well, first, it's not a surprise because we've been telling already for a while that we consider Southeast Asia as important focus for development. It's first driven by, of course, the increase of number of consumers, the fact that those countries, they are quite stable. They are growing. So all the elements for good growth were there. So we decided, of course, to go faster into this region. And the truth is that the growth is there. We still see low teens growth in this market. And it's really driven by new consumers, but also consumers that are trading up. So there is a kind of sophistication in the routine for some consumers in this region. And you already mentioned some countries that are growing extremely fast. Vietnam, you mentioned India, but Indonesia also is catching up very quickly. It is really driven by all divisions, but I would like to mention especially 2 of them are dermatological Beauty division because there are huge needs in this part of the world. And also our Professional Product division, and both of them are growing by more than 20%. And a key driver is not only the fact that we are bringing new brands because we are still rolling out some of the brands, [indiscernible], CeraVe in some countries. But also, we are really leading the game in the e-commerce. So in this region, we are growing at 40% in e-commerce. We master really well all the different segments of this important channel. And lately, also, we have been playing very well with TikTok shop that is taking a lot of ground in some markets, Indonesia, for example yes. So yes, we are going fast, and we are quite confident for the near future.

Can I ask you about China. I think you grew 10% in L'Oréal Luxe in China, but the mass market remains tough. Can you maybe just remind us how does your portfolio split between mass and selective? And what is the outlook for China? Because our team was in China last week. It does seem like since the summer, the industry has been a bit softer. It sounds like that you're not seeing that. So can you maybe sort of animate a little bit about what you're seeing on the ground in China through the summer?

So China, as you know, for us, it's an important market. It's roughly 17% of our sales. And unlike Western or North America, what is interesting to know is that we -- in China, we are extremely strong in Luxe. And Luxe is well above the 50% of the sales in China. We are close to 60%. So really, we are really dependent on the growth of luxury market there. Then the second biggest is, of course, consumer. Not far we have our Dermatological Beauty business that is growing very fast and professional is still quite small. So second point, this is the market where the weight of e-commerce is the biggest. And today, in China, roughly 2/3, so more than 65% of our sales are in e-commerce. So you need to master this equation. And this is something that we have been managing quite well, managing also the channel shift because, as you know, recently, we have [indiscernible], so the Chinese TikTok that has been growing pretty fast. And it took us a while to understand what are the new rules into this important e-commerce channel. But so far, at least when I see the result of the famous 618, so this big promotional activity that we have in June, I've seen the growth of doing something like 55%. I consider that the brand there we are gaining a lot of knowledge on how to master not only the sales, but also profitability.

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