By and  on September 6, 2005

L'Oreal Net Drops 5.8% in First HalfPARIS — French beauty giant L'Oréal posted first-half net profits of 892 million euros, or $1.14 billion, down 5.8 percent year-on-year.As reported, these came on sales of 7.16 billion euros, or $9.18 billion.L'Oréal's operating profits in the half were flat at 1.12 billion euros, or $1.43 billion. The company's pretax profits dipped 5.5 percent to reach 1.26 billion euros, or $1.61 billion, versus the prior-year period. All dollar figures are calculated at average exchange rates.The turnout, which was announced at a financial analyst meeting Friday at L'Oréal headquarters in Clichy, outside of Paris, was lower than most financial analysts' predictions."The numbers are not what I expected," said Eva Quiroga, an analyst at UBS. "I am disappointed, although I think L'Oréal can make their full-year targets. The encouraging news on the top-line front is that the exchange rates continue to help, while underlying growth should remain solid — especially in the third quarter — with a slight shift in the volume-to-value equation in favor of the latter."For the year, L'Oréal's chairman and chief executive officer, Lindsay Owen-Jones, estimates earnings-per-share growth of more than 10 percent and a sales gain of 5 to 6 percent.This would be due largely to a busy product launch and promotional activity schedule in the second half, which follows on a strong second quarter and weaker first quarter for the company. However, Owen-Jones reiterated the impossibility of precisely calculating year-end figures from first-half numbers. He likened the process to car racing — among his favorite sports — by saying: "You can't comment on the end of a Formula One race in the middle of a race."Irrespective of exchange rates, L'Oréal's results are extremely volatile per half-year. Never would anyone be able to predict a year on half a year," he continued, explaining that the sales of the group's divisions fluctuate depending on the season. The luxury goods division, for example, is more profitable in the second half, in the run-up to the holidays, whereas the active cosmetics division performs best in the lead-up to summer, when women buy slimming products.During the question-and-answer session, Owen-Jones was queried about whether L'Oréal is seriously interested in buying Kanebo, owned by the Industrial Revitalization Corp. of Japan. As reported, the French giant is among a number of firms said to be eyeing Kanebo, Japan's second-largest beauty firm, which employs 15,000.Owen-Jones said IRJC had contacted numerous companies, and that none could really pass up the opportunity to look at the Kanebo dossier. "It is rare and unique" that a company such as Kanebo — with significant Japanese market share — would be up for sale, he said, adding that about 92 percent of sales at the firm are generated domestically. Yet, he added: "It is not necessarily the easiest to integrate in terms of synergies. It is a unique opportunity for L'Oréal to understand the workings of a Japanese company. In saying all this I remain very neutral."Owen-Jones also commented on L'Oréal's acquisition earlier last week of German sun care brand Delial from Sara Lee International. He said his company plans to tap Delial's strong foothold in Spain so as to reinforce L'Oréal's presence in the sun care segment. Delial will be integrated into the Garnier portfolio — part of L'Oréal's consumer goods division.The financial analyst conference Friday marked a couple of firsts for L'Oréal. For one, it was a debut of sorts for Jean-Paul Agon, formerly president and ceo of L'Oréal USA, who publicly sat for the first time by the side of Owen-Jones at a financial analyst meeting here. As reported, Agon has recently returned to France with the expectation of ultimately taking the helm of L'Oréal. His nomination is to be voted on by the company's board and, pending approval, he will become ceo beginning April 2006.At that point, Owen-Jones would remain as non-executive chairman.During the conference, Agon spoke of the U.S. business."The market is recovering," he said. "For two to three years it's been difficult," but growth has been picking up in the past few months. And that's despite the fact that U.S. department stores continue to experience sluggish sales, he noted.Also for the first time, L'Oréal broke out operating profits by branches and divisions, expressed as a percentage of sales. In the half, its active cosmetics division was the top performer, registering a 24.7 percent share. Professional products came in second with a 19.1 percent portion, followed by consumer products with 17.7 percent, luxury products with 17.1 percent and the dermatological branch with 10.4 percent.For the full-year 2004, luxury products posted a 20.1 percent share; professional products, 19 percent; active cosmetics posted 18.6 percent; the dermatological branch, 17.3 percent, and consumer products, 16.8 percent.L'Oréal stock closed down 3.7 percent at a unit price of 63.75 euros, or $79.90 at current exchange, on the Paris Bourse Friday.

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