By and  on February 15, 2008

PARIS — In the face of economic uncertainties in North America, French beauty giant L'Oréal is banking on fast-growing emerging markets to maintain its healthy glow in 2008 and beyond.

"Globally, we're taking part in a rapid and profound transformation of the worldwide cosmetics market with a rebalancing between the different continents and between developed and emerging countries," said Jean-Paul Agon, company chief executive officer, during a presentation Thursday of L'Oréal's 2007 business for financial analysts and journalists that took place in company headquarters in the Paris suburb of Clichy.

Already last year, the "rest of the world" zone contributed 59.9 percent to L'Oréal's cosmetics sales growth and generated 29.3 percent of its business. The region also slightly overtook the value of North America's profitability for the firm.

As reported, L'Oréal's overall revenues last year gained 8.1 percent, or 8 percent on a like-for-like basis, to 17.06 billion euros, or $23.39 billion at average exchange, in the period. These came on net profits after minority interests that rose 28.9 percent to 2.66 billion euros, or $3.64 billion. Excluding nonrecurrent items after minority interests, net profits grew 11.2 percent.

"To me, it's an incredibly reassuring set of results that shows L'Oréal's strategy is really working," said Eva Quiroga, an analyst at UBS in London.

Agon keeps looking forward. "The worldwide cosmetics market of tomorrow is in the midst of forming before our eyes," he continued. "It will be bigger, more dynamic and more global."

The numbers speak for themselves. For 2007, the breakdown of cosmetics sales worldwide was estimated at 32.7 percent for the "rest of the world" zone. The traditional markets include 33.1 percent for Western Europe; 21.6 percent for North America, and 12.6 percent for Japan, according to L'Oréal.

"The notable event in 2007 is that, for the first time, the cosmetics market in the 'rest of the world' [region] matched the sales of the Western European market," said Agon, calling it "a historic event. That being said, the market that comprises the rest of the world will in 2008 be the number-one region worldwide in terms of its cosmetics market's weight."One decade on, the split among regions varies. L'Oréal, basing its numbers on the global market's growth trends over the past three years, projects that by 2017, the rest of the world will generate 48.4 percent of the global cosmetics business; Western Europe, 25.8 percent; North America, 17.2 percent, and Japan, 8.6 percent.

In the run-up to such a division of power, L'Oréal is targeting more geographic growth opportunities after having already earmarked the "BRIMC" countries, comprised of Brazil, Russia, India, Mexico and China.

"We have identified about a dozen countries that we call our 'next 12,'" said Agon. Specifically, they include Argentina, the Czech Republic, Columbia, Dubai, Indonesia, the Philippines, Poland, South Africa, Thailand, Turkey, the Ukraine and Vietnam.

Agon added that such countries are characterized by their accelerated rates of development.

"We have decided to focus our efforts on them so that they, in turn, can take up the relay in terms of growth for our group," he said.

Alongside organic growth, L'Oréal is not averse to expanding business through further diversifying its portfolio of brands via acquisitions.

"We are looking at all potential dossiers," said Agon, adding that the company remains very selective in terms of its choices. "We will not acquire for the sake of acquiring."

Referring to L'Oréal's proposal made late last month to pay PPR 1.15 billion euros, or $1.68 billion at current exchange, for YSL Beauté Holding, including its Roger & Gallet subsidiary plus the beauty licenses for Yves Saint Laurent, Boucheron and Stella McCartney, Agon called it "the jewel in this crown of acquisitions. The Yves Saint Laurent brand will, in an optimal manner, complete the brands of our luxury division and give it leadership in the lucrative and strategic luxury global beauty market."

He added that the French iconic brand will play a key role in what will be L'Oréal's fragrance brand triumvirate, including also Italy's Giorgio Armani and the U.S.' Ralph Lauren.

The first YSL scent under L'Oréal's tutelage is expected to come to market in the second half of next year, according to Marc Menesguen, president of the company's luxury products division. However, no firm plans can be made until the YSL Beauté deal goes through. And that's expected to take a few months, according to Christian Mulliez, L'Oréal's executive vice president of administration and finance.When asked about his stance on Sanofi-Aventis — in which L'Oréal still retains an 8.7 percent stake after selling some 1.8 percent of its share in the pharmaceutical giant's capital for an estimated 1.55 billion euros, or $2.27 billion at current exchange, on Nov. 14 — Agon reiterated he's "flexible," and that the holding is purely financial, not strategic. Agon explained that L'Oréal could possibly sell more of its share of Sanofi-Aventis to back other acquisitions.

Despite a rocky start industry-wide to 2008, due to macroeconomic phenomena, Agon remains optimistic about L'Oréal's outlook for the year and the cosmetics market in general.

"The 'rest of the world' zone will be an increasingly driving force for the growth of the group, particularly this year, when the strong dynamism of emerging countries should enable us to compensate for the likely weakness of consumer consumption in North America," said Agon.

"We think the global cosmetics market won't be too impacted in 2008 by turbulences, and that it will continue to grow in a sustained manner," he continued.

Agon restated L'Oréal's plan to register organic sales growth of 6 to 8 percent in 2008.

The company's stock closed down 4.15 percent on the Paris Bourse Thursday to a unit price of 83 euros, or $121.50 at current exchange.

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