By  on February 16, 2007

PARIS — For the first time as L'Oréal chief executive officer, Jean-Paul Agon reviewed the company's full-year results for 2006 and outlined a vision that continues to stretch far and wide.

In a meeting at company headquarters in the Paris suburb of Clichy, Agon — who became ceo in late April — and L'Oréal's divisional managers discussed key topics for the firm.

Among them was a year of some firsts. Last year was the first time L'Oréal's skin care category (including sun care) rang up the most business in the company. On a geographic basis, it was a banner year for L'Oréal in emerging markets, since its sales in the "rest of the world" zone overtook North America's.

L'Oréal reported net profits, excluding nonrecurrent items after minority interests, rose 11.9 percent, to 1.83 billion euros, or $2.3 billion at the average yearly exchange rate, in the period. These came on sales that, as reported, were 15.79 billion euros, or $19.84 billion, up 8.7 percent over 2005. On a constant basis, revenues gained 5.8 percent.

"We had said that our target was to deliver higher growth in 2006 than in 2005," said Agon. "That is what we have done. At 5.8 percent, like-for-like growth has increased compared with 2005. It is now quite close to our long-term growth objective, in the range of plus-6 percent to plus-8 percent per year."

L'Oréal's operating margin came in at 16.1 percent, reflecting a 50 basis-point decline in its second-half 2006 operating margin. That margin, as well as the company's net profits, was below some financial analysts' expectations.

For 2006, L'Oréal registered earnings-per-share growth, excluding nonrecurrent items after priority interests, of 14.7 percent to 2.98 euros, or $3.74, making it the 22nd consecutive year of such double-digit gains.

By division, active cosmetics' sales at L'Oréal rose 14.4 percent, to 1.28 billion euros, or $1.6 billion. On a constant basis, they gained 12.2 percent. It was the first time the division broke the 1 billion euros, or $1.25 billion, barrier. L'Oréal's consumer products' revenues increased 5.4 percent (and 5.8 percent on a like-for-like basis), to 7.9 billion euros, or $9.93 billion. Its luxury products' business rose 5.3 percent (and 5.1 percent on a constant basis) to 3.77 billion, or $4.74 billion, and professional products generated 2.13 billion euros, or $2.67 billion, a 3.2 percent rise (and a 3.8 percent uptick on a like-for-like basis).For L'Oréal, like most other cosmetics companies, the antiaging segment holds huge potential. Also, Agon cited Giorgio Armani as one of the fastest-growing brands in the company's luxury division. He said the goal was to make Armani — whose product categories include fragrance, makeup and, most recently, skin care — top in the luxury beauty industry.

When asked about The Body Shop, which was consolidated by L'Oréal July 1, Agon said: "It has been a very smooth integration; it is going very well. Its medium- and long-term prospects seem excellent."

For the half-year that its business was consolidated into L'Oréal accounts, The Body Shop's revenues were 435 million euros, or $546 million, and its operating profits were 13.4 percent of sales. Had it been consolidated for the full 12 months, its operating profits would have been close to 9 percent, according to Christian Mulliez, L'Oréal's executive vice president of administration and finance.

Such profits were in line with — or even better than — what L'Oréal had expected they would be, said Agon, who pointed out the market should keep in mind that, for 2007, the company would be consolidating a full year of The Body Shop's business, which historically generates stronger sales in the second half.

Agon added that he felt the masstige Body Shop brand was strong in character and strategy in the realm of natural and ethical cosmetics.

Agon reiterated that L'Oréal did not consider The Body Shop a retailer, but a cosmetics brand with its own points of sale that would not be used for selling other L'Oréal-branded products.

"By definition, we are not looking for opportunities in retail," said Agon. "I don't want to exclude anything. In the future, we might be interested in a business with downstream integration. But pure retail is a different type of business.

Between The Body Shop and organic firm Sanoflore, which L'Oréal acquired in October, L'Oréal's cosmetics offering has been significantly diversified. Agon said Garnier would be introducing cosmetics with natural ingredients. Its Fructis hair care brand is slated to launch mass market skin care in the U.S.

Also concerning the natural-beauty category, Agon said during a recent trip to India he was interested in ayurvedic skin care, but denied reports circulating here that L'Oréal was looking to buy an Indian treatment brand.In terms of specific product categories, skin care sales, which rose 11 percent, to 3.85 billion euros, or $4.84 billion, generated 25.6 percent of L'Oréal's sales. Hair care revenues came in at 3.63 billion euros, or $4.56 billion, up 3.8 percent, and rang up 24.2 percent of L'Oréal's overall business. These were followed by makeup, which, by generating 3.12 billion euros, or $3.92 billion, in sales (up 4 percent), made up 20.8 percent of L'Oréal business. Color represented 2.43 billion, or $3.1 billion; fragrance, 1.54 billion euros, or $1.94 billion, and hygiene, 402 million euros, or $505 million.

"We are not at all overexposed in the fragrance category," said Agon.

Regions outside of Western Europe and North America generated 4.07 billion euros, or $5.1 billion, for L'Oréal, up 12.8 percent year-on-year. On a constant basis, they grew 12.7 percent.

"China is booming," said Agon, citing more than 21 percent growth in the country, where L'Oréal posted sales of 419 million euros, or $526 million, and has sent a battalion of its brands. The company has secured the number-one spot in numerous categories, including makeup and pharmacy distribution.

He said China, Taiwan and Hong Kong together should be able to surpass the 1 billion euros, or $1.26 billion, mark "fairly quickly." Agon forecast China would probably be the leading market for cosmetics one day.

Another star among the emerging markets for L'Oréal last year was India, where business spiked 40.3 percent, to 77 million euros, or $97 million.

"I think India is at a turning point," said Agon, who believes that country's beauty distribution channels will evolve quickly.

"In 2006, emerging countries contributed around 60 percent of the total growth of the cosmetics market," said Agon. "Their contribution will continue to advance.…This is an historic opportunity for L'Oréal."

In Japan, L'Oréal posted sales of 341 million euros, or $428 million, down 3 percent year-on-year. Agon recognizes it is extremely competitive, especially with such strong local players.

"Japan is a strategic country," he said. "We aren't content with being small in Japan."Agon called the past year in the U.S. "pretty turbulent" due to the consolidation among retailers in various distribution channels, including department stores.

L'Oréal's sales in North Am­erica were 3.95 billion euros, or $4.97 billion, up 2.2 percent, and 2.7 percent on a constant basis, in 2006 over 2005. "But I think in 2007, things are falling back into place progressively," he said.

Business is looking up in West­ern Europe, as well, where L'Oréal last year posted sales of 6.99 billion euros, or $8.78 billion, up 3.7 percent, and 3.5 percent on a like-for-like basis.

When it comes to Sanofi, the French pharmaceutical giant in which L'Oréal holds about a 10 percent stake, Agon reiterated: "L'Oréal is a very significant shareholder, and there is no change in that attitude."

Overall, Agon is bullish on the new year. "I have full trust in the cosmetics market for 2007 and beyond," he said.

— With contributions from Ellen Groves

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