By  on January 25, 2008

PARIS — L'Oréal aims to ensure YSL Beauté's profits will be as attractive as those of its other luxury brands if a proposed deal to acquire it from PPR goes through.

The French beauty giant intends to bring YSL Beauté's profit margins in line with L'Oréal's existing luxury brands in the medium to long term, Jean Paul Agon, L'Oréal's chief executive officer, told analysts during a conference call Thursday.

L'Oréal on Wednesday proposed paying PPR 1.15 billion euros, or $1.68 billion, for YSL Beauté Holding, including its Roger & Gallet subsidiary. YSL Beauté is part of the PPR subsidiary Gucci Group.

On Thursday, L'Oréal also announced fourth-quarter 2007 sales hit 4.42 billion euros, or $6.41 billion at average exchange, representing a year-over-year increase of 6.6 percent, or 9 percent on a like-for-like basis. Agon told analysts he expects the company's 2008 sales growth to come in at between 6 and 8 percent.

"We know how to work well with designers," said Agon, referring to the YSL Beauté deal. "What we've been able to do with Giorgio Armani, with Ralph Lauren and with Viktor & Rolf, we believe we can do with YSL. It will take a little time, we're starting from a lower position, but it's an area we know very well," he said, noting he hopes the acquisition would be "a neutral investment" in 2008. YSL Beauté's profit margins were around 5 percent at the end of 2006.

"It has a huge amount of sales potential, that we think has been undertapped so far," said Agon. While he wouldn't disclose proposed royalties or the duration of the licensing agreement, Agon categorized it as "a very, very long-term arrangement." As well as growth synergies, Agon said cost savings would also be generated by the proposed deal, but added it is too early to specify from where they would be derived.

With respect to future acquisitions, Agon said the deal would "keep L'Oréal busy for a while." However, he added executives will keep their eyes open for other opportunities on the market.

For full-year 2007, L'Oréal posted sales up 8.1 percent, or 8 percent on a like-for-like basis, to 17.06 billion euros, or $23.39 billion at average exchange for the year. The impact of changes in consolidation, resulting from its acquisitions of The Body Shop, Sanoflore, Beauty Alliance, PureOlogy and Maly's West amounted to plus-3.6 percent. Currency fluctuations had a negative impact of 3.5 percent for the full year. Growth excluding the exchange rate impact was 11.6 percent.Commenting on the figures, Agon said, "Overall, and despite the negative impact of exchange rates, which was more pronounced in the fourth quarter, we are confirming our target of double-digit net earnings per share growth."

L'Oréal's full-year sales of professional products rose 12.5 percent to 2.39 billion euros, or $3.28 billion. Its consumer products business rose 4.8 percent to 8.28 billion euros, or $11.35 billion; luxury products posted growth of 4.1 percent to 3.93 billion euros, or $5.38 billion, and its active cosmetics division spiked 10.7 percent to 1.25 billion euros, or $1.71 billion. On a like-for-like basis, sales grew 7.5 percent, 7.9 percent, 8.4 percent and 10.8 percent, respectively.

L'Oréal reported steady sales growth in Western Europe, where revenues rose 3.7 percent to 7.25 billion euros, or $9.94 billion. In North America, sales increased 1.3 percent to 4 billion euros, or $5.49 billion. The rest of the world, which includes Asia, Latin America, Eastern Europe and other countries, was up 14.5 percent to 4.65 billion euros, or $6.38 billion. On a like-for-like basis, sales by region were up 4.1 percent, 4.8 percent and 17.9 percent, respectively.

For 2008, Agon said while the overall business environment is not very promising, history has proven that the cosmetics market is buffered from economic fluctuations and crises.

"We at L'Oréal are confident in our ability to reach our goals," he said. "Even though there is stormy weather and forecasts are a bit less certain, we are targeting growth of between 6 percent and 8 percent."

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