L'oréal 14Th May 2013 Growth Momentum Set to Accelerate Luxury & Consumer Goods Fair Value EUR150 Vs

INDEPENDENT RESEARCH UPDATE L'Oréal 14th May 2013 Growth momentum set to accelerate Luxury & Consumer Goods Fair Value EUR150 vs. EUR125 (price EUR134.05) BUY

Bloomberg OR FP In 2013, L’Oréal should benefit from an acceleration of its sales Reuters OREP.PA growth momentum (+6%) and profitability expansion (+50bps). We 12-month High / Low (EUR) 136.1 / 87.6 reiterate our BUY recommendation with a 150EUR Fair Value vs Market capitalisation (EURm) 81,040 Enterprise Value (BG estimates EURm) 78,194 125EUR previously Avg. 6m daily volume ('000 shares) 594.4 Free Float 37.5%  The first quarter (organic growth of 5.8% for the Cosmetics division) 3y EPS CAGR 7.9% Gearing (12/12) -8% bodes well for L’Oréal’s performance this year, especially as the group Dividend yield (12/13e) 1.86% won significant market share, having grown 1.5x faster than the market. The group improved its positions in all geographic regions and all YE December 12/12 12/13e 12/14e 12/15e Revenue (EURm) 22,462 23,850 25,300 26,600 divisions in Q1. EBIT (EURm) 3,697 4,065 4,440 4,815 Basic EPS (EUR) 4.91 5.16 5.64 6.16  In a dynamic cosmetics market, which admittedly slowed down slightly in Diluted EPS (EUR) 4.91 5.16 5.64 6.16 Q1, driven partly by emerging markets where growth potential is still EV/Sales 3.5x 3.3x 3.0x 2.8x significant, L’Oréal should continue to win market share in particular in EV/EBITDA 17.7x 16.0x 14.5x 13.3x EV/EBIT 21.5x 19.2x 17.3x 15.6x the US and in new markets and accelerate its sales growth thanks to i/ its P/E 27.3x 26.0x 23.8x 21.8x presence across all distribution channels, ii/ globalised Research & ROCE 21.6 23.1 24.5 25.4 Development which allows L’Oréal to launch products which meet

13/5/13 consumers’ specific needs and iii/ the strength of its brands. 160

150  For 2013, we forecast like-for-like sales growth of 6% (+5.5% in 2012),

140 driven by New Markets (+10.5%). In 2014 (+6%) and 2015, the trend

130 should continue to be positive. 120  The group’s profitability should continue to improve thanks to i/ gross 110 margin expansion as a result of the optimisation of industrial processes, 100 ii/ a reduction of operating costs as a % of sales. Thus in 2013, we factor

90 M J J A S O N D J F M A M L'OREAL in a 50 bp EBIT margin improvement to 17.0% followed by a 50 bp gain STOXX EUROPE 600 E - PRICE INDEX Source: Thomson Reuters Datastream in 2014.  The share price has risen 29% year-to-date. The performance was boosted by speculation of a buyback of Nestlé’s stake. We reiterate our Buy recommendation and increase our FV on L’Oréal to EUR150 vs EUR125 previously. Our FV is derived from our DCF model (150EUR), corroborated by a valuation by historical average.

Analyst: Sector Analyst Team: Loïc Morvan Peter Farren 33(0) 1 70 36 57 24 Cédric Rossi [email protected]

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L'Oréal

Income Statement (EURm) 2010 2011 2012 2013e 2014e 2015e Revenues 19,496 20,343 22,462 23,850 25,300 26,600 Change (%) 11.6% 4.3% 10.4% 6.2% 6.1% 5.1% Gross margin 13,799 14,492 15,874 16,920 18,000 18,935 Change (%) 12.1% 5.0% 9.5% 6.6% 6.4% 5.2% EBITDA 3,796 4,073 4,497 4,885 5,280 5,654 EBIT 3,056 3,293 3,697 4,065 4,440 4,815 Change (%) 18.6% 7.8% 12.3% 10.0% 9.2% 8.4% Financial results 248 271 302 262 277 312 Pre-Tax profits 3,304 3,564 3,999 4,327 4,717 5,127 Exceptionals NM NM NM NM NM NM Tax 932 978 1,025 1,195 1,295 1,390 Profits from associates 0.0 0.0 0.0 0.0 1.0 2.0 Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 Net profit 2,372 2,586 2,974 3,132 3,422 3,737 Restated net profit 2,372 2,586 2,974 3,132 3,422 3,737 Change (%) 18.7% 9.0% 15.0% 5.3% 9.2% 9.2% Cash Flow Statement (EURm) Operating cash flows 3,171 3,226 3,661 3,952 4,262 4,576 Change in working capital (132) 322 129 129 158 205 Capex, net 658 866 955 1,050 1,100 1,200 Financial investments, net 161 717 466 200 0.0 0.0 Dividends 936 1,030 1,133 1,303 1,433 1,576 Other (372) (253) (94.0) 0.0 0.0 0.0 Net debt 40.6 (504) (1,576) (2,847) (4,418) (6,013) Free Cash flow 2,645 2,038 2,577 2,773 3,004 3,171 Balance Sheet (EURm) Tangible fixed assets 2,677 2,881 2,963 3,173 3,433 3,794 Intangibles assets 7,908 8,682 9,103 9,103 9,103 9,103 Company description Cash & equivalents 1,550 1,652 1,823 3,093 4,665 6,260 L'Oréal is the global leader in the current assets 5,446 6,070 6,387 6,649 6,979 7,365 Other assets 6,463 7,572 9,249 9,249 9,249 9,249 Cosmetics sector boasting market Total assets 24,044 26,857 29,525 31,268 33,429 35,771 share of around 12%. The group is the L & ST Debt 1,591 1,148 247 247 247 247 only player present in all market Others liabilities 7,587 8,073 8,340 7,766 7,938 8,120 segments (Hairdressers, Mass Market, Shareholders' funds 14,866 17,636 20,938 23,255 25,244 27,404 Selective Circuit, Chemists). The Total Liabilities 24,044 26,857 29,525 31,268 33,429 35,771 Capital employed 10,278 11,699 12,305 12,644 13,062 13,628 Consumer Products division accounts Financial Ratios for 52% of Cosmetics sales. The Gross margin (% of sales) 70.78 71.24 70.67 70.94 71.15 71.18 remaining is coming from Luxury Operating margin 15.68 16.19 16.46 17.04 17.55 18.10 Products (25%) and Professionals Tax rate 27.26 28.21 27.43 25.63 27.61 27.46 Products. The main brands are Net margin 12.17 12.71 13.24 13.13 13.52 14.05 ROE (after tax) 13.45 13.45 12.35 12.79 0.0 0.0 L'Oréal Professionnel, L'Oréal Paris, ROCE (after tax) 21.41 20.27 21.63 23.15 24.47 25.44 Garnier, Maybelline, Lancôme, Gearing 0.27 -2.86 -7.53 -12.24 -17.50 -21.94 Armani. Western Europe accounts for Pay out ratio 44.85 46.24 46.87 48.44 49.67 50.35 36% of Cosmetics sales while New Number of shares, diluted 591,000 598,000 606,000 607,000 607,000 607,000 Markets are the first group area (39% Data per Share (EUR) of sales). Bettencourt family owns EPS 4.01 4.33 4.91 5.16 5.64 6.16 Restated EPS 4.01 4.33 4.91 5.16 5.64 6.16 30.7% of shares while Nestlé owns % change 16.9% 7.8% 13.5% 5.2% 9.2% 9.2% 29.5%. BVPS 25.15 29.49 34.55 38.31 41.59 45.15 Operating cash flows 5.37 5.39 6.04 6.51 7.02 7.54 The group's main brands are L'Oréal FCF 4.48 3.41 4.25 4.57 4.95 5.22 Professionnel, L'Oréal Paris, Garnier, Net dividend 1.80 2.00 2.30 2.50 2.80 3.10

Maybelline, Lancôme, Armani. Source: Company Data; Bryan, Garnier & Co ests. L'Oréal derives 40% of its sales from western Europe, 37% from new markets and 23% from North America

L'Oréal

1. A growing global cosmetics market L’Oréal’s greatest asset is to operate in a cosmetics market that has benefited from steady long-term growth and should continue to do so. Indeed, over the past ten years, the average annual growth rate of the global cosmetics sector has been close to 4%. There are many catalysts for the continued momentum of the global market. We would highlight two main ones : i/ an ageing of the world’s population, including in some New Markets and ii/ the emergence of the middle class in New Markets. In addition, the cosmetics market is essentially an offer-based market, driven by innovation, as consumers are looking for high-quality products, which explains why this market has not been commoditised and has not suffered from any devaluation.

1.1. A growing global market After growing by 4.4% in 2011, according to L’Oréal, the cosmetics market grew 4.6% last year and all factors point towards a continuation of this positive trend this year. The group’s CEO, Mr. Jean- Paul Agon, announced during the publication of Q1 2013 sales that he expected the market to grow by close to 4% this year, marked however by a slow-down at the beginning of the year relative to 2012. According to L’Oréal, the global cosmetics market is worth EUR180bn (excluding toothpaste and soap, at wholesale prices). The group estimates that the market could virtually double by 2025 to reach EUR300bn. The growth of the market is steady. In the past ten years, the average annual growth of the market has been close to 4% (+3.9%).

Thus, even in 2009, the global cosmetics market managed to record some, albeit modest, growth (+1%), whilst at the same time the global luxury market declined 7.8%, after a 2.5% decline in 2008. The cosmetics market is therefore particularly resilient.

Fig. 1: A long-term growth market (LFL %)

6.0 5.4 5.4 5.5 5.3 5.1 4.9 4.9 5.0 5.0 4.5 4.6 4.6 4.3 4.2 4.4 4.0 3.8 4.0 4.0 3.3 3.4 2.9 3.0

2.0 1.0 1.0

0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e

Market growth at same forex(%)

Source: Company Data; Bryan, Garnier & Co ests.

Whilst this positive trend was driven by emerging markets in 2012 (see the table below), the US market was also very well oriented (+4.4%) and even Western Europe held up relatively well (the market was flat) in spite of a 3.1% decline in Southern Europe, as momentum remained strong in Northern Europe (growth of 0.8%) including in France, the UK and Germany.

L'Oréal

The slight acceleration of growth in New Markets in 2012 vs. 2011 is partly explained by Japan, where the market grew 4.8% after a 3.6% decline in 2011, which was due partly to the tragic events in Fukushima in March 2011. On the other hand, Asia excluding Japan recorded a slight slow-down (+9.3% after +10.6% in 2011). New Markets (excluding Japan) contributed 77% of the global market’s growth.

Fig. 2: Growth of the cosmetics market by geographic region

LFL change in % 2011 2012 Western Europe 0.7 0.0 North America 4.3 4.4 New markets 5.9 6.5

Source: Company Data; Bryan, Garnier & Co ests. In 2012 like in 2011, the cosmetics market grew fastest in the Luxury segment (+6.3%), sold through department stores, Travel Retail or perfume shops, and in the Mass Market segment (+4.7%). As an indication, in 2009, the luxury-selective distribution segment declined by 6%, making this segment the most cyclical one within the cosmetics market.

Fig. 3: Growth of the cosmetics market by segment

LFL change in % 2011 2012 Luxury market 7.7 6.3 Mass market 3.8 4.7 Hair salons 0.8 1.4 Pharmacies 2.5 2.8

Source: Company Data; Bryan, Garnier & Co ests.

1.2. Positive catalysts The global cosmetics market should continue to be well oriented in the future. Indeed, demographic evolution and its corollary, the ageing of the population, in mature markets but also in certain emerging countries such as China is an important catalyst for the market’s growth. In addition, the growing middle class in emerging countries is another source of growth for the market.

1.2.1. Ageing of the population Like Essilor, L’Oréal should benefit in the coming years from the ageing of the population in Western Europe and China, as illustrated in the graphs below.

In Western Europe, the population aged over 65 should represent 24% of the total population vs. 15% in 2000. Western Europe should represent close to 36% of the group’s sales in 2013. In Western Europe, consumption of cosmetic products per capita is 60% greater for the population aged over 60 than for the population aged 30-39. In addition, care products, which are the most sought after by the older population, represent 29% of L’Oréal’s cosmetics sales (34% of the global cosmetics market). Furthermore, it is the fastest-growing segment of the cosmetics market (+8% like-for-like vs. +5.5% for the group in 2012). Finally, it is also one of the most profitable segments of the cosmetics industry. L’Oréal should therefore benefit from the ageing population in Western Europe.

More globally, the population over 45 should grow twice as fast as the overall world population (CAGR of 2.2% vs. +1% until 2030 to reach 2.8 billion people vs. 8.3 billion for the global population) according to the World Bank.

L'Oréal

Fig. 4: Age pyramid of the Western European population

In 2000 (lhs :Male / rhs : Female) In 2030e

Source : US Census Bureau But this theme also holds true for mainland China (1.3 billion inhabitants in 2011). Thus, whilst the over-60 represented 10% of the Chinese population in 2000 and 13% currently, that category should reach 360m people in 2030 (27% of the total population), as a consequence of the single-child policy introduced in 1979. The ageing of the Chinese population should benefit the Chinese Cosmetics market, which we estimate is worth about EUR 11bn vs. EUR 27bn for each the US and for the top 5 European markets. The size of the Chinese market is close to Brazil’s.

Fig. 5: Age pyramid of the Chinese population

In 2000 (lhs :Male / rhs : Female) In 2030e

1) 2) Source : US Census bureau

1.2.2. Emergence of the middle class in New Markets The other source of structural growth for the cosmetics market is the growing middle class in emerging markets.

Thus in China, the number of middle-class households should double in the coming years. The number of households with disposable income of RMB 60,000 to RMB 100,000 (EUR 6,000 EUR to EUR 10,000), which equates to the middle class, should double and grow from 34 million in 2010 to 69 million in 2020 according to the Boston Consulting Group.

According to L’Oréal, by 2020, there should be an additional 250 million middle-class people in China, compared with 2010. The group is also counting on the younger Chinese age group, in particular consumers under 30 years old.

L'Oréal

Fig. 6: Evolution of the Chinese population

(m) Household annual income (EUR '000) 2010 2020

Upper affluent >20 1 12

Lower affluent >10<20 13 53

Middle Class >6<10 34 69

Emerging Middle >4<6 61 66

Aspirant >2.5<4 57 39

Source: BCG

1.2.3. Per capita consumption is still low in new markets The graph below highlights the growth potential of per capita consumption of cosmetic products in new markets. Whilst that figure reaches EUR 109 per annum in the US, it is EUR 96 in Western Europe and EUR 20 in new markets.

Fig. 7: Cosmetics consumption per inhabitant per year (EUR)

120 109

100 96

40 20 20

0 North America Western Europe New Markets

Source: Company Data; Bryan, Garnier & Co ests. Even within New Markets, there are important differences between countries, as shown in the graph below. Thus, whilst per capita consumption in Brazil is already at EUR 60, thanks partly to the development of direct sales via local actor Natura, it is only EUR 52 in Russia and EUR 11 in China, and even just EUR 3 in India.

The potential is therefore huge. According to L’Oréal, there are currently 5.2 billion consumers of cosmetics products in the world, and this number should reach 6.3 billion in 2030 thanks to the improvement in living standards and access to education. Furthermore, rapid urbanisation (60% of the world’s population should live in cities in 2030 vs. 50% currently) will increase the population confronted to the consequences of pollution on the skin and hair, and this is therefore another source of growth for the cosmetics market.

L'Oréal

Fig. 8: Annual per capita consumption in new markets (EUR)

70 60 60 52 50

30 26

20 11 10 8 3 0 Brazil Russia Mexico China Indonesia India

Source: Company Data; Bryan, Garnier & Co ests. The table below also illustrates the evolving landscape of the global cosmetics market in the coming years. According to L’Oréal, China should be the world’s largest market in 2025, up from the third largest currently. In addition, within the Top 3 markets in 2025, there should be two emerging markets (Brazil and China) vs. just one currently.

Fig. 9: The main cosmetics markets in 2012 and 2025

Ranking 2012 2025 1 US China 2 Japan US 3 China Brazil 4 Brazil Japan 5 Russia Russia 6 France India 7 Germany France 8 UK Germany 9 Italy UK 10 Spain Italy

Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

2. Regular market share gains L’Oréal’s great strength is its ability to consistently grow faster than the market. In the past ten years, L’Oréal’s sales have grown on average 1.4 times faster than the global market. Whilst L’Oréal’s market share has consistently increased, we believe the group still has significant potential.

2.1. Growth rates regularly above the market’s The graph below illustrates the regular out-performance of L’Oréal relative to the global market. We estimate L’Oréal’s market share at between 12% and 12.5%. The only exception to this out- performance was in 2009, when the group’s sales declined 1.5% whilst the global cosmetics market rose 1%.

Fig. 10: Evolution of the cosmetics market and L’Oréal’s sales

12.0

10.0

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0

global market chge (%) L'Oréal sales chge (%)

Source: Company Data; Bryan, Garnier & Co ests. Those regular market share gains (the group’s sales have grown on average 1.4 times faster than the market), are the consequence of a combination of i) an efficient and globalised Research & Development function which allows the group to launch innovative products which are suited to consumers’ specific needs, and ii) marketing teams that work closely with the R&D department. A « Consumer & Market Insight » department was created within the Innovation department in order to best match consumers’ cosmetics needs in the group’s priority markets.

In 2012, L’Oréal (see the table below) grew nearly 1.2 times faster than the cosmetics market, including around twice as fast in the US market. Even in Europe, the group managed to win market share in spite of its already high share (around 20%).

The group improved its market share in all divisions, especially in Professional Products. Market share gains were also significant in the Luxury Products division thanks partly to the success of Lancôme, whose sales grew by 10% in 2012.

L'Oréal

Fig. 11: Growth of the market and L’Oréal’s sales lfl growth (%) Market L'Oréal dev (x) Professionnal Products 1.4 2.1 1.5 Consumer Products 4.6 5.0 1.1 Luxury Products 6.3 8.3 1.3 Active Cosmetics 2.8 5.8 2.1

Western Europe 0.0 0.6 NS! North America 4.4 7.2 1.6 New Markets 6.5 9.2 1.4 Cosmetics branch 4.5 5.5 1.2

Source: Company Data; Bryan, Garnier & Co ests.

The graph below illustrates the evolution of the group’s sales growth relative to the market’s, and demonstrates that since 2000, L’Oréal has regularly out-grown the market, except in 2009 when L’Oréal’s sales declined 1.5% on a like-for-like basis in a market that grew just 1%.

Fig. 12: Out-performance of L’Oréal vs. the global cosmetics market

1.5

0.5

-0.5

-1

-1.5

-2

-2.5

-3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e L'Oréal sales growth vs market growth (%)

Source: Company Data; Bryan, Garnier & Co ests.

2.1.1. An efficient Research & Development L’Oréal Group spends around 3.5% of sales each year in Research & Development costs, equating to EUR 790m in 2012, a year during which 611 patents were filed, the same number as in 2011 and 2010. The group develops fundamental research, which is rare in the cosmetics industry, and naturally, applied research. 3 817 people work in research laboratories situated in the main geographic regions. 130 molecules were thus created in 40 years. One can mention molecule LR 2412 which gave birth to skincare cream Visionnaire by Lancôme, Pro-xylane, present since 2006 in the Absolue range by Lancôme to treat wrinkles, and which more recently allowed L’Oréal Paris to develop the anti-wrinkle line Revitalift Laser x3, as well as Mexoryl, launched in 1993 in the Vichy Capital Soleil range, which allowed L’Oréal Paris to launch the Solar Expertise suncare product range to fight against the negative effects of UV rays on skin ageing.

Often, L’Oréal’s strategy is to first launch those great innovations in selective distribution channels or in pharmacies before expanding them with mass market brands like L’Oréal Paris. As a last example

L'Oréal

we can mention Garnier’s OLIA hair colouring line, launched in 2012, and which uses the ammonia free hair dye technology first used by L’Oréal Professionnel with INOA, which has been available in hair salons since 2009.

In 2012, the group opened the world’s biggest hair research center on 25 000m2 next to Paris, representing an investment of EUR 100m, and which should eventually host 500 researchers who will aim to develop products in the three main hair categories, namely care, dye and styling.

Furthermore, L’Oréal had opened near Lyons in 2011 a production center for reconstructed biological tissue.

Fig. 13: Research & Development costs (EURm)

900 830 790 800 720 700 665 588 609 600 533 560 496 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013e

R&D Costs (EURm)

Source: Company Data; Bryan, Garnier & Co ests.

2.1.2. A partly decentralised R&D L’Oréal’s main asset is the decentralisation of its Research & Development. Beyond the three main global R&D centers (applied research, hair and cosmetics) in France, the group has five regional centers in the US, Brazil, Japan, China and, since this year, in India. These centers assess the cosmetics needs and habits of those different populations and adapt the innovations that come out of the global centers to those local needs.

Thus, the skin of consumers in New Markets tends to be more fragile as it is more exposed to humidity, which is frequent in Asian regions or in Brazil. Asians’ hair is thin whilst Brazilians’ is thicker. Afro-Americans’ skin does not have the same characteristics as Caucasians’.

Overall, innovations will be shared with the 22 other cosmetics and dermatological research centers, of which four are in North America, five in Asia and one in Latin America. The group opened its latest and seventeenth evaluation center in 2012 in Moscow. In certain cases, products launched by regional centers can even generate globally successful products, like Garnier’s BB Cream (a 2-in-1 product which combines the benefits of care and make-up) which started in Asia. This was also the case for Total Repair 5 by L’Oréal Paris, initially developed in Brazil before being adapted to Caucasian and Asian hair types.

L'Oréal

Fig. 14: Global locations of L’Oréal Research

Source: Company Data

At the beginning of the year, the group opened a new Research & Innovation center in Mumbai, for which it will invest around EUR 150m by 2016. This center will focus on studying the specificities of Indian skin and hair, as well as Indian consumers’ needs.

In 2012, L’Oréal’s sales reached EUR 230m (in a market estimated to be worth EUR 2bn) in the Indian sub-continent thanks to 23% like-for-like growth, by far the best performance in BRIMC (+9.6% on average). The Indian regional center comprises a development center in Mumbai as well as an advanced research center in Bangalore. It will employ over 100 researchers by the end of 2013.

2.2. Market share gains are still possible In spite of its global leadership and a global market share which we estimate at around 12%, including around 19% in Western Europe, we believe L’Oréal can further strengthen its leadership in particular in the US, Asia excluding Japan and Latin America.

The graph below illustrates the gap in L’Oréal’s market share between Europe and the US, and especially emerging markets. The group’s goal is to significantly improve market share in the latter thanks to i/ its strategy of decentralised Research & Development allowing it to launch products that meet aspirations of consumers that have different needs than those in Western Europe, ii/ the strength of its brands and iii/ its clout in terms of marketing spend.

L’Oréal’s weak positioning in Latin America (8.4% market share) is partly explained by the situation in Brazil, a country where direct selling dominates the market thanks to Natura, yet L’Oréal is absent from this distribution channel.

L'Oréal

Fig. 15: Market shares by geographic region (in %)

20 18.9 18 16 13.6 14 12.0 12 11.0 10.0 10.2 10 8.4 8 6 4 2 0 Western North Eastern Asia Pacific Africa/ LATAM World Europe America Europe Middle East

Source: Company Data; Bryan, Garnier & Co ests.

2.2.1. In the US… According to the North America General Manager, Mr. Frédéric Rozé, the US is an « emerging country » for L’Oréal. Even if the group has improved its market share in the country since 2011 and even grew almost twice as fast as the market in 2012, we still see significant potential for the group to continue to increase its share.

Indeed, it only has 13.6% market share (it is the second biggest player in the US market behind P&G) vs. nearly 20% in Western Europe and around 12% for the whole group in spite of clear leadership in the hair color segment (45% market share vs. 36% in Europe). But, inter alia in care products and fragrances (see table below), the difference between the two zones is significant and should narrow over the next few years thanks to innovation and a more efficient communication and promotion strategy. However, the US is one of the most competitive markets and in particular in the selective channel where Estée Lauder is the leader and where L’Oréal has a market share of 12% vs. 19% in Europe.

The group’s brands’ ability to win market share in the US has been proven in the past few years. Thus, in the Mass Market channel, L’Oréal’s market share, which was 23.5% in 2007, surpassed 26% in 2012, which allowed the group to become for the first time ever the leader in this market, ahead of Procter & Gamble (25% market share).

Fig. 16: Market shares in the US and Western Europe

in % North America Western Europe Hair Care 15 18 Hair color 45 36 Skin care 8 18 Make-up 18 26 Fragrances 8 15 Total 13.6 19.0

Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

2.2.2. And also in emerging countries As was the case in 2012 (see below), in 2013 L’Oréal should be able to out-grow the market in emerging countries. Globally, in New Markets, L’Oréal grew 1.4x faster than the market.

Fig. 17: Comparison of 2012 performance of L’Oréal and the market in New Markets (constant currency %) chge in % Market L'Oréal dev (x) Asia exc Japan 9.3 10.3 1.11 Latin America 10.2 10.4 1.02 Eastern Europe 3.0 3.9 1.30 Africa, Middle East 7.5 14.7 1.96 New Markets 6.5 9.2 1.4

Source: Company Data; Bryan, Garnier & Co ests. Thus, in Asia excluding Japan and in China, in spite of a regular out-performance relative to competitors in the past few years, we believe market share gains are still likely.

• In China…

In China, where L’Oréal has consistently improved its positions in the past few years and is number two behind Procter & Gamble with a market share of 13.2% (10% in 2007) vs. 14% for the American group (16.3% in 2007), the group’s strategy is, inter alia, since 2010 to increase the presence of its brands of the Mass Market and Luxury Products divisions in Tier 2 and Tier 3 cities. The potential is still huge; China has nearly 100 cities with at least one million inhabitants. Out of the one billion new consumers the group is aiming to attract over the next ten years, 250 million are expected to be Chinese thanks to this expansion strategy in secondary cities. Moreover, Group CEO Mr. Jean-Paul Agon recently indicated that he was not worried about the slow-down in China (the group recorded a growth rate of 11% in Q1 2013). Whilst the group is already the leader in care products, across all distribution channels (mass market, pharmacies and selective distribution), it intends to shortly overtake P&G and become the market leader thanks to, amongst other things, its recent entry in the shampoo market which is dominated by the American group.

For example, the L’Oréal Paris brand aims to open around one hundred counters per year in department stores out of the 1 500 points of sale the brand already operates in 300 cities. The brand is also growing its presence in drugstores and Cosmetics stores which represent a rapidly expanding channel, whilst the hypermarket channel seems to be slowing down. In Cosmetics stores, the L’Oréal Paris brand is present without beauty consultants, whilst they are present in hypermarkets. In the former, consumers prefer free access shelves where L’Oréal Paris is developing more affordable lines such as the Deeply White care product range (30% cheaper than the Revitalift range).

The Luxury division spearheads the group’s growth in China with sales growth of 20% last year. In addition, this year, L’Oréal will continue the roll-out of the Clarisonic brand (instrumental cosmetics) and more importantly launch the Yves Saint Laurent-branded care product ranges. In May, this brand will open its first corner dedicated to cosmetic lines in the Isetan department store on Nanjing Road in Shanghai. The group has already demonstrated its ability to successfully launch new brands; thus Kiehl’s, which was launched in China three years ago, is already the fifth best-selling product of the Luxury division.

L'Oréal

Indeed, even if sales of the Luxury division have doubled every four years in the past ten years, the pace of growth should not slow down in coming years. Lancôme is already present in 70 cities, 33 counters have been opened in the past two years and the brand should accelerate that trend. Here too, the goal is to penetrate secondary cities. Indeed, the market for luxury cosmetics is often an entry point into the luxury world for the middle class as it is the most affordable segment (with the optical market) both in terms of price and frequency of purchases. Whilst, in medium term, China will eventually become the largest market for L’Oréal’s Luxury division, as soon as next year the Chinese (including tourists) will become the division’s most important consumer.

Fig. 18: Market share of L’Oréal and its main competitors in China (%)

18 16 14 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

P&G L'Oréal Shiseido Competitor #4

Source: Company Data; Bryan, Garnier & Co ests.

• And more globally in Asia

In Asia excluding Japan, L’Oréal became the market leader in 2010 ahead of P&G with market share in 2011 of 10.8% and 10.3% respectively. There too, L’Oréal’s position has consistently improved in the past ten years, whilst its US competitor’s has declined, although Unilever’s has improved since 2009. The opening of the group’s largest factory in Indonesia in November 2012, specialized in hair and skin care (for the mass market Garnier and L’Oréal Paris brands) and the recent creation of a subsidiary in Vietnam should help the group accelerate its growth. In 2012, L’Oréal’s sales grew 34% in Indonesia, 23% in India and 19% in Thailand.

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Fig. 19: Market share of L’Oréal and its main competitors in Asia excl. Japan (%)

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

P&G L'Oréal Unilever Shiseido

Source: Company Data; Bryan, Garnier & Co ests.

Globally, within the other BRIMC markets, L’Oréal is already the cosmetics market leader in Russia (around 11% market share) and in Mexico with a market share close to 12% (equal with the Jafra group) whilst it is only third in India with a market share of between 7 and 8%, behind Unilever (the leader partly for historical reasons) and a local group (Marico). In Brazil, the group is the fourth largest player with a market share close to 8% behind Brazilian brand Natura, the O Boticario group, and Unilever but ahead of Avon, the US group. The weak market share in Brazil is largely explained by L’Oréal’s absence from the direct selling channel (including stores) which represents 55% of the cosmetics market.

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3. 2013: another good year! In 2012, the group generated like-for-like sales growth of 5.5% and a 12.3% increase in operating profit, and we are confident that this year should again be a success. For 2013, we anticipate like-for- like sales growth of 6% in a global cosmetics market that should grow 4%, equating to a slight slow- down relative to 2012 (+4.5%). The operating margin should thus expand 70bps to 17.2%.

3.1. We expect organic growth of 6% in 2013 For this year, we forecast like-for-like sales growth of 6%, representing a slight acceleration relative to last year, an assumption which is reinforced by the strong growth seen in the first quarter. Indeed, in this period the group recorded 5.5% sales growth (including +5.8% for the Cosmetics division) in spite of a difficult comparison base (+6.4% for the Cosmetics division).

3.1.1. A very good Q1 in spite of the tough comparison base In spite of a tough comparison base, Q1 2012 like-for-like sales having grown 6.4%, the first quarter of 2013 recorded a remarkable performance with sales growth of 5.1% to EUR 5.93bn and +5.5% on a comparable basis, including +5.8% for the Cosmetics division. The +5.8% growth of the Cosmetics division was driven by a +2.9% volume effect, and a similar value effect. The Q1 value effect is the strongest recorded since 2009.

In a cosmetics market that slowed in the first quarter (+3.5%) after +4.5% in 2012, the group grew 5.8%, or 1.5x faster. Market share gains therefore accelerated in the first quarter relative to 2012, a year during which L‘Oréal grew around 1.2x faster than the market (5.5% vs. +4.5%). The group won market share in all divisions and geographic regions.

Fig. 20: Growth of cosmetics sales by division and geographic region

Lfl chge in % Q1/12 Q2/12 Q3/12 Q4/12 2012 Q1/13 Western Europe 1.7 -0.1 -0.6 1.4 0.6 1.7 North America 6.6 7.9 7.1 7.2 7.2 6.3 New markets 11.2 9.1 8.1 8.2 9.2 9.4 Cosmetics branch 6.4 5.3 4.7 5.5 5.5 5.8

Professional Products 3.1 2.7 0.1 2.4 2.1 0.0 Consumer Products 5.1 4.2 4.9 5.8 5.0 6.5 Luxury Products 12.2 8.7 6.6 6.3 8.3 7.2 Active Cosmetics 4.7 6.4 5.6 7.1 5.8 7.2 Cosmetics branch 6.4 5.3 4.7 5.5 5.5 5.8

Source: Company Data; Bryan, Garnier & Co ests. • By division, it is interesting to note the very good performance of the Luxury Products unit (+7.2% versus +6.3% in Q4 2012 and +8.3% in 2012) in spite of a very tough comparison base (+12.2% in Q1 2012), meaning L’Oréal out-performed the market which grew 4.5% (1.6x faster). Once again, this division recorded the strongest growth within the cosmetics division thanks to i/ the development of Clarisonic (in particular in Europe and in China) and ii/ the launch of a new care product range at Lancôme (Teint Visionnaire). The Travel Retail channel remained very dynamic (+10%) in all geographic regions (growth in excess of 10% in Europe and close to 8% in Asia), L’Oréal is the leader in this segment with a market share close to 20%. The Mass Market Products division also recorded strong sales growth during the quarter (+6.5%) in a market that grew only around 3.5%. L’Oréal

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strengthened its positions in key markets. The growth of this division in Q1, the strongest growth of the past two years, accelerated relative to the performance in Q4 2012 (+5.8%) and last year as a whole (+5%). This positive momentum is partly explained by the successful launch of Advanced Hair Care from L’Oréal Paris in the US and a new care products range by L’Oréal Paris (Age Perfect Renaissance Cellulaire). By contrast, the Professionnal Products division remained under pressure (+0%), confirming the difficult environment for the hair salon market. • By geographic region, we highlight the good performance of New Markets (+9.4% vs. +8.2% in Q4 12 and + 9.2% in 2012). Excluding Japan, New Markets even grew 10.1% in spite of a difficult comparison base (+11.2%). This is the first quarter with double-digit growth in the region since the first quarter of 2012. The best performance came from Latin America (+11.8%) partly thanks to Brazil (+13%). In Asia, sales grew 7.7% (+8.9% excluding Japan). Sales in China grew 11%, in line with the growth of 2012 (+12%). The positive surprise in new markets came from Eastern Europe, where sales grew 9.2% in part thanks to Russia (+15%). • In Western Europe, sales grew 1.7% in Q1 after an increase of 1.4% in Q4 2012 and even +0.6% in 2012. As the market declined slightly in the quarter, L’Oréal won market share in spite of an already high level (close to 20%). L’Oréal’s sales grew 4% in France and even 8% in Germany. Even though Southern European countries (close to 8% of group sales) are still under pressure, sales in Spain improved in the quarter ! Driven by market share gains in particular in the Mass Market and Luxury Products divisions, sales in North America remained well oriented in the first quarter (+6.3%), in line with the excellent performance in 2012 (+7.2%). Whilst the US market grew around 3%, L’Oréal’s growth rate was around double that figure. In North America, L’Oréal grew rapidly (around 8%) in the Mass Market and Luxury Products divisions whilst sales declined in the Professional Products business.

3.1.2. Double-digit growth in New Markets in 2013 ? The first quarter was encouraging, including for Western Europe (+1.7%). With that in mind, we anticipate a sales increase of 1.1% in Western Europe for the full year. Whilst we are confident for North America, and whilst the first quarter was well oriented (+6.3%), we nevertheless forecast a slight slow-down in the growth trend (+5.8%) relative to the performance in 2012 (+7.2%).

On the other hand, New Markets should return to double-digit growth this year (+10.5% expected) after 2012 (+9.2%) which was marked by the slow-down in Asia-Pacific (+9.6% after +13% in 2011) including +12.4% in China. The group seems more confident regarding China’s growth potential in 2013, even if the situation in Korea should remain complicated (sales in this market declined in Q1). The good performance recorded in Q1 (+10.1% excluding Japan) is encouraging.

Moreover, the first quarter of 2013 seems to indicate that after a poor 2012 (+3.9%), the situation is clearly improving in Eastern Europe (+9.2%), particularly in Russia (+15%).

The opening of the group’s biggest factory in Indonesia last February (200 million units to be produced this year with a target of 500 million units by 2015) and of an industrial site in Mexico in 2012, illustrate management’s confidence regarding the growth potential in emerging markets. Moreover, the group’s largest factory should open in Egypt in the next few months.

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Fig. 21: Like-for-like Cosmetics sales growth by geographic region

Chge in % 2010 2011 2012 2013e 2014e Western Europe 1.7 0.6 0.6 1.1 1.3 North America 4.1 5.5 7.2 5.8 4.3 New markets 11.3 9.5 9.2 10.5 10.6 Cosmetics branch 5.6 5.0 5.5 6.0 6.0

Source: Company Data; Bryan, Garnier & Co ests.

3.1.3. Activity is still driven by the Luxury division Whilst the group has strong ambitions for the Professional Products division with an additional one million hair salons globally in the coming years, we believe that, as was the case in the first quarter, business in 2013 will again be driven by the Luxury Products division (+7.4% expected) in spite of a slow-down relative to the momentum in 2012 (+8.3%), thanks to important innovations in the care segment. Nevertheless, the Mass Market division should also generate sustained sales growth (+6.3% expected) as already shown in the first quarter (+6.5%) thanks to significant market share gains in all geographic regions, including in Western Europe, in spite of the already high level.

Fig. 22: Like-for-like Cosmetics sales growth by division

Chge in % 2010 2011 2012 2013e 2014e Professional Products 4.1 2.5 2.1 1.6 3.2 Consumer Products 5.5 4.5 5.0 6.3 5.9 Luxury Products 7.0 8.2 8.3 7.4 6.8 Active Cosmetics 4.7 3.2 5.8 6.4 5.4 Cosmetics branch 5.6 5.0 5.5 6.0 6.0

Source: Company Data; Bryan, Garnier & Co ests. The dynamism of Travel Retail is one of the Luxury Products division’s growth drivers. This channel represents 17% of the division’s sales and recorded a growth rate of 13.8% in 2012 and 10% in the first quarter of 2013. With a 20% share of the Travel Retail market, L’Oréal is the global leader ahead of US group Estée Lauder. The Fragrance-Cosmetics segment s represents 31% of the global Travel Retail market.

Fig. 23: Split of the global Travel Retail market by segment (%)

15.4

31.2

9.7

11.3

16.4 16.0

Perfumes & Cosmetics Wines & Spirits Fashion & Accessories Watches & Jewelry Electronics Others

Source: Company Data; Bryan, Garnier & Co ests.

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3.1.4. A full innovation pipeline in 2013 For 2013, there is a rich pipeline of new products. By division, we would highlight:

• Mass Market division : new hair products for the Elseve line at L’Oréal Paris will be launched in Europe; L’Oréal Paris will launch Age Perfect Renaissance Cellulaire, a cream that aims to preserve the skin against environmental aggression and boost cellular energy ; a new care product for Garnier in order to combat skin blemishes Dark Spot Corrector ; a new line of 24H moisturising skin care at Garnier, Crème Bienfaisante ; roll-out of the coloring line Garnier’Olia which uses the ammonia free coloring technology of Inoa launched by L’Oréal Professionnel three years ago ; finally L’Oréal Paris will launch its new CC Cream (for Color Control) Nude Magic, • Luxury Products division : a new fragrance for men, Eau pour Homme, from Armani as well as a new women’s fragrance towards the end of the year; roll-out of Clarisonic in new countries including China; Lancôme will launch a foundation cream, Teint Visionnaire, which also reduces black spots and dark circles, • Professional Products division : L’Oréal Professionnel will launch in the first half a new product in the Inoa range, Inoa Ultra Blond ; a new serum for stronger hair growth, Initialiste, was launched at the beginning of the year under the Kérastase brand; • Active Cosmetics division : La Roche Posay will launch a new line of care products to help fight dry skin, Nutritic intense and Vichy launched a new Serum range, LiftActiv Serum and a product using a new molecule that originated from its laboratories, which helps combat hair loss, Dercos Neogenic. •

3.2. Operating profitability should improve Whilst 2012 was marked by a modest operating margin improvement (+30bps to 16.5% after a 140bp rise between 2009 and 2011), mainly because of a gross margin decline (-50bps to 70.7%), we are a bit more optimistic for 2013 and forecast a rise in the EBIT margin of 50bps 17.2%. This expansion will be driven by gross margin improvement (+20bps to 70.9%) and a strict control of operating costs as a % of sales (54.0% versus 54.2% in 2012).

3.2.1. Probable gross margin expansion Whilst we believe the gross margin will increase in 2013 (+20bps to 70.9%), we are nevertheless prudent as to the magnitude of the rise. Indeed, only in 2014 do we believe the gross margin will be able return to its 2011 level of 71.1%.

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Fig. 24: Evolution of the gross margin in EURm and as a % of sales

19 000 71.4 18 000 71.2 17 000 71.0 16 000 15 000 70.8

14 000 70.6 13 000 70.4 12 000 70.2 11 000 10 000 70.0 2007 2008 2009 2010 2011 2012 2013e 2014e Gross Margin (EURm) as % of sales

Source: Company Data; Bryan, Garnier & Co ests. The following are the catalysts for a gross margin increase:

• The non-repeat of a negative forex mix which had weighed negatively in 2012 (20bp negative impact on the gross margin). Indeed, the decline of the Euro last year decreased the percentage of sales made in the Eurozone (26.9% versus 29.5% in 2011), which has a gross margin that is higher than the group average ; • Whilst 2012 was penalised by acquisitions, and in particular by Clarisonic, which had a 10bp negative impact on the gross margin, this should not be the case in 2013 ; • Finally, the opening of three important industrial sites in emerging markets in the past few months and in the near future (Mexico and Indonesia in 2012 and Egypt in 2013) as well as the closing of the Clark hair coloring product site in the US (New Jersey) should have a positive impact on the group’s productivity. The factory in Mexico is dedicated to coloring products and replaces the Clark factory. The one in Indonesia is the group’s largest and is specialized in the L’Oréal Paris and Garnier brands, sold through the mass market channel. • Nevertheless, the group could continue its promotion strategy which started last year and which had a negative impact of 20 basis points. Management has indicated it was prepared to be opportunistic with regards to promotions, if needed, in order to win market share, as happened in the US in 2012. The group will therefore be very pragmatic in this regard.

The table below highlights the main investments in emerging markets, including new industrial sites, in the past few years, which should allow the group to improve its industrial productivity and therefore contribute to gross margin improvement.

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Fig. 25: Main investments in new markets

EURm Date Type Amount paid Indonesia Nov-12 skin & hair care factory 100 Saudi Arabia Nov-12 subsidiary NA Mexico Dec 12 Hair color factory 100 India Jan-13 R&D center 30 Myanmar 2013 Subsidiary NA Egypt 2013 factory NA

Source: Company Data; Bryan, Garnier & Co ests.

Regular industrial reorganisation

L’Oréal, which produces 88% of cosmetics units sold, rarely undertakes significant industrial reorganisations, except in 2009 when L’Oréal closed down three factories in Western Europe (Wales, Spain and Monaco). On the other hand, it has put in place a regular long-term industrial optimisation strategy which allowed it to increase production by 1.5x in the past 10 years with virtually the same number of factories (43 versus 42). This strategy largely contributed to the 100bp gross margin improvement in that period (in spite of the 50bp decline in 2012).

Fig. 26: Number of units produced and number of factories

2002 2012 bn units 3.7 ~5.5 Nbr of factories 42 43

Source: Company Data; Bryan, Garnier & Co ests. In addition, the number of factories in new markets has increased significantly in that period (see table below), which has contributed and will continue to contribute in coming years to industrial productivity improvement, given the new factories in emerging countries benefit from lower production costs than those in mature countries. Whilst in 2002, 18% of the group’s total production was in new markets, this number reached 32.6% in 2012 and 25% in 2007. We even think this ratio will markedly increase in 2013 due to the three new factories in New Markets and the Clark closure in the US.

However, whilst the group’s strategy is to favour local production (close to where products are sold), it is in no way an off shoring policy. Thus, the weight of production in new markets is close to the weight of sales in that region (32.6% vs. 39.4% for sales).

Fig. 27: Factories by geographic region

2002 2007 2012 Western Europe 20 21 19 North America 11 8 8 Asia 3 6 6 LATAM 4 3 5 Eastern Europe 2 1 2 Others 2 2 3 Total 42 41 43

Source: Company Data; Bryan, Garnier & Co ests.

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3.2.2. Further operating leverage Beyond the 20bp gross margin increase, we believe L’Oréal should again reduce the weight of operating costs by 20 basis points this year to 54.0% of sales vs. 54.2% in 2012. Whilst R&D costs should remain flat as a % of sales at 3.5% in order to maintain a high level of innovation, L’Oréal should however continue to reduce the weight of general costs (SG&A) as a % of sales to 20.2% in 2013 versus 20.5% in 2012, a year when they already declined by 10bps. 2013 EBIT margin should increase 70 bp and 50 in 2014.

Finally and even more importantly, L’Oréal’s management has often mentioned potential gains with regards to the evolution of advertising spend, with a possible decline as a % of sales, as was already the case last year (-70bps to 30.2%). This is one of the medium-term catalysts for the group’s profitability improvement.

Fig. 28: Evolution of operating profit in EURm and as a % of sales

5 000 18.0

4 500 17.0

4 000 16.0

3 500 15.0

3 000 14.0

2 500 13.0

2 000 12.0

1 500 11.0

1 000 10.0 2007 2008 2009 2010 2011 2012 2013e 2014e EBIT (EURm) as % of sales

Source: Company Data; Bryan, Garnier & Co ests. • Advertising & promotion spend should decline as a % of sales in coming years thanks to a greater efficiency of investments, driven by closer monitoring of their impact on sales trends. In addition, L’Oréal’s negotiating power relative to different media is increasingly important given its size, and this is even more noticeable during economic crises where media spend is often an adjustment variable. Indeed, L’Oréal is the world’s largest advertiser in the cosmetics market.

Moreover, the group is increasingly developing the internet medium, less onerous than classic television or magazine advertising, which represented 9% of media spend in 2012 vs. 7% in 2011 and 5% in 2010. The group’s desire to regularly increase the weight of this media in A&P spend is clear (it should represent more than 10% of media spend this year) and it should contribute to driving down this item as a % of sales. We nevertheless factor in flat A&P spend this year as a % of sales, following the strong decline in 2012, in particular due to investments in the US in the Hair Care segment, but also in China.

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Fig. 29: Break-down of operating costs (2008-2014e)

As % of sales 2008 2009 2010 2011 2012 2013e 2014e Gross margin 70.4 70.5 70.8 71.2 70.7 70.9 71.1 R&D 3.4 3.5 3.4 3.5 3.5 3.4 3.5 Advertising & Promotion 30.0 30.8 30.9 30.9 30.2 30.2 30.1 S&GA 21.5 21.4 20.8 20.6 20.5 20.3 20.1 EBIT 15.5 14.7 15.7 16.2 16.5 17.0 17.5

Source: Company Data; Bryan, Garnier & Co ests.

3.2.3. Below-par profitability in new markets The graph on the next page highlights the sub-par profitability of the « New Markets » region relative to that of Western Europe and North America.

Indeed, even if it has clearly improved in the past few years, the New Markets’ operating margin (18.5% in 2012) is still below the profitability of Western Europe (21.3%). In 2012, for the first time, it nonetheless surpassed that of North America which remained stable.

The group invested significantly in the US in promotion and communication (a bit less in classic advertising) in order to chase market share gains which started in 2011. This strategy paid off as last year L’Oréal became the leader in the Mass Market segment ahead of P&G with a market share of nearly 26%.

Profitability in New Markets should, we believe, get closer to Western Europe’s for the following reasons ;

1. Production costs are lower than in mature markets (industrial investments, raw materials…). Operating costs are also lower than in Western Europe (general costs, wages, rental costs…). 2. In addition, once the critical mass has been reached in a given country, advertising and promotional spend which can easily surpass 50/60% of sales during the first years, tend to decline as a % of sales toward the group average. 3. Moreover, as selling prices are quite similar from region to region, in the medium-term there is no reason for the profitability gap not to close between emerging markets and Western Europe. We forecast an operating margin in 2014 of 20% for the New Markets region vs. 19.2% for North America and 21.7% for Western Europe.

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Fig. 30: Evolution of the operating margin by geographic region (in %)

24.0

22.0

20.0

18.0

16.0

14.0

12.0

10.0 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e

Western Europe North America New Markets

Source: Company Data; Bryan, Garnier & Co ests.

The graph below highlights the progress already made by the group in that region. Whilst in 2008 new markets represented 28% of group EBIT, that number rose to 37.5% in 2012 and should even reach 41% in 2014.

Fig. 31: EBIT in New Markets (in EURm and as a % of the total)

2500 45

2000 35

30 1500 25

20 1000 15

500 10 5

0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e EBIT (EURm) As % of Cosmetics EBIT

Source: Company Data; Bryan, Garnier & Co ests.

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4. A flourishing financial situation! L’Oréal benefits from a remarkable financial situation with a net cash position of EUR 1.5bn at the end of 2012, which could reach EUR 4.1bn by the end of 2014. The use of this cash is a recurring theme for investors.

Given a prudent strategy in terms of acquisitions, which has proven successful even though the group looks at all potential targets, the most likely scenario is a regular increase in the pay-out rate, or a buy- back, even in part, of L’Oréal shares held by Nestlé.

4.1. Net cash of more than EUR 2bn in 2013 Thanks to a constantly improving Free Cash-Flow generation, L’Oréal should have net cash of over EUR 2bn in 2013 and around to EUR 4bn in 2014.

4.1.1. A net cash position since 2011 L’Oréal has historically benefited from a highly satisfactory financial situation and this situation improved again in 2011 with net cash of nearly EUR 500m and EUR 1.5bn in 2012. Even in 2008, after the acquisition of Yves Saint Laurent Beauty for EUR 1.1bn, net gearing had just surpassed 30% before receding to 14% in 2009 ! We forecast net cash of more than EUR 2bn in 2013 and close to EUR 4bn in 2014.

Fig. 32: Evolution of L’Oréal’s net debt (2007-2015e)

6 000 40.0

4 000 30.0

2 000 20.0

0 10.0 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e -2 000 0.0

-4 000 -10.0

-6 000 -20.0

-8 000 -30.0

Net debt (EURm) net gearing (%)

Source: Company Data; Bryan, Garnier & Co ests. And even then, this situation does not take into account the 8.9% holding in Sanofi, valued at close to EUR 10.2bn at the current share price, which can be considered as a financial investment as L’Oréal’s management indicated many times that this holding could eventually be sold depending on the circumstances (acquisitions, share buy-backs…).

4.1.2. Clearly improving FCF A good working capital management (4.4% of sales vs. 5% in 2011), which should continue this year given management’s commitment to control inventory levels (9.1% of sales in 2012 after 10.1% in

L'Oréal

2011) and relatively modest industrial investments (stable as a % of sales at 4.3%) enabled a clear improvement in FCF in 2012 to EUR 2.5bn (before dividend payment) from EUR 2bn in 2011, and we believe the trend should continue this year. After dividend payment, there should be EUR 1.5bn available in 2013 to either finance acquisitions or increase the net cash position.

Fig. 33: Evolution of FCF (EURm)

3 500

3 000

2 500

2 000

1 500

1 000

500

0 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e

FCF (EURm)

Source: Company Data; Bryan, Garnier & Co ests. 4.2. Modestly-sized acquisitions historically The table below highlights L’Oréal’s prudent strategy in terms of acquisitions with a preference for mid-sized targets which do not require significant investments. We believe this policy could continue.

4.2.1. The most recent examples This policy is the result of already high market shares in many countries and a highly selective approach to acquisitions in order to reduce integration risk. The acquisition of The Body Shop (TBS) in 2006 for EUR 945m (1.3x sales) was, with that of YSL Beauté announced in 2008 (EUR 1.1bn) one of the largest in L’Oréal’s history in the past five years, and the amounts in question remain more than reasonable for a group of L’Oréal’s size. We believe this cautious strategy in terms of acquisitions is pertinent given the integration risk inherent to acquired companies (for example TBS showed the difficulties of integrating a company with a strong, but different culture to L’Oréal’s) and should therefore continue, even if the group does look at all potential M&A activity in the sector. We believe L’Oréal’s selective approach to acquisitions is rather reassuring.

The impairment of close to EUR 280m passed by Japanese group Shiseido in its fiscal year ending March 2013 following the acquisition of Bare Essentials for USD 1.6bn in 2010, is another example of an acquisition whose integration ended in failure.

Moreover, in a growth sector like Cosmetics, the need to make large acquisitions is less obvious, even more so in the context of regular market share gains.

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In addition, the group has demonstrated its capacity to significantly increase the top-line (initially modest) of acquired companies. Thus, since 2003, sales of Kiehl’s have grown ten-fold. Essie’s sales have quadrupled since its acquisition in 2010 (sales of USD 25m), as the American group has benefited from its positioning in the rapidly-growing (+10% p.a.) nail polish market. Another example, sales of Maybelline, which were close to USD 300m when acquired in 1996, should be close to USD 2.5bn this year.

Amongst more recent acquisitions, one can mention Urban Decay (sales of USD 130m in 2012), a half fashion half professional American make-up brand, acquired end-2012 for nearly EUR 300m, which should compete with MAC, Estée Lauder’s American make-up brand owned since 1995. The acquisition of Cadum (2011 sales of EUR 58m) last year, could help L’Oréal catch up with Unilever in the hygiene segment. The goal of the Essie deal was, amongst other things, to compete with Coty who had acquired the leader OPI that same year. Finally, the acquisition of Clarisonic in 2011 (sales : USD 105m) was an excellent opportunity to penetrate the instrumental cosmetics market, estimated at EUR 1.5bn.

Fig. 34: Main acquisitions since 2008

Year Target Amount paid (EURm) Comments 2008 YSL Beauté 1,150 French luxury brand 2010 Maly's Midwest & Marshall salon NA US salon distributor 2010 Essie Cosmetics NA US make up brand 2011 Q Med 700 Corrective dermatology 2011 Clarisonic NA US cosmetic device brand 2012 Cadum 200 Soap & baby products 2012 Vogue NA Columbian make up mass market brand 2012 Emiliani Enterprises NA US salon distributor 2012 Urban Decay 300e US make up luxury brand 2012 Spirig NA Dermatology skin care 2013 ICP NA Kenyan Mass market beauty brand

Source: Company Data; Bryan, Garnier & Co ests.

4.2.2. Potential targets Beyond the acquisition of smaller brands designed to fill a niche, such as the American « fashion » make-up brand Urban Decay, or strengthen its presence in a certain market (acquisition of Columbian make-up brand Vogue), we believe the following groups could be of interest to L’Oréal : China’s Jahwa (sales of around USD 550m), the market’s eleventh largest player, present in the selective distribution and mass markets and Indian group Dabur (mass market). Mid-sized acquisitions in Latin America, particularly in Brazil, are also possible. However, we do not believe L’Oréal is interested in Brazilian brand Natura, in spite of persistent rumours, due to its positioning in the direct selling channel, which does not seem to be L’Oréal’s priority given the French group’s limited know-how in that field.

We exclude the possibility of Japanese acquisitions, except modestly-sized ones such as Shu Uemura in 2003, due to significant integration risks.

Amongst mid-sized French targets, it is likely that L’Oréal could be interested in brands like Caudalie (a wine therapy brand that generates sales of around EUR 100m and is 100%-owned by the Cathiard family), Nuxe (a laboratory specialised in natural cosmetics owned by Aliza Jabes together with Natixis capital), which is the fifth largest brand sold in French pharmacies with sales of around EUR

L'Oréal

100m. We can also mention Ales Groupe, specialised in plant cosmetics (hair and care product brands Phyto and Lierac) whose sales were close to EUR 200m in 2012 (but with a net loss). The group is still owned by founder Patrick Alès.

Finally, one cannot exclude an interest for the Clarins group the day the Courtin family decides to relinquish control. Clarins has been 100%-owned by the family since it delisted in 2008. We estimate it makes sales of a bit over EUR 1bn and the brand, positioned in a different (and more accessible) segment than Lancôme and Yves Saint Laurent, is the European leader in the selective channel for care products, but has a weak presence in the US and Asia. L’Oréal has the means to sucessfully help Clarins expand internationally.

4.3. A regular increase in the pay-out ratio The graph below highlights the group’s generous and regular dividend policy. Whilst in 2012 the pay- out ratio reached 46.8% (having increased every year since 2004), we believe it could continue to rise. The group’s financial situation makes this possible, and a target of 50% seems reasonable and realistic.

Fig. 35: Evolution of the dividend and pay-out ratio (2000-2014e)

3 50

48 2.5 46

44 2 42

1.5 40

38 1 36

34 0.5 32

0 30

Dividend (EUR) Pay out (%)

Source: Company Data; Bryan, Garnier & Co ests. A regular improvement of the pay-out ratio is that much more probable insofar as this strategy is compatible with strong Free Cash-Flow generation (see above). The total amount returned to shareholders in 2013 (around EUR 1.3bn) could represent 47% of expected FCF this year. The group’s ability to have a more generous dividend policy is therefore significant. A dividend increase of at least 10% per year seems to be a perfectly reasonable target.

4.4. A buy-back of shares held by Nestlé ? Given L’Oréal’s balance sheet and shareholder structure, one cannot exclude the buy-back (at least in part) of the Swiss group’s holding in L’Oréal (29.3%). This scenario is increasingly talked about by investors, especially as it should be slightly accretive to the French group’s EPS.

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4.4.1. Nestlé holds 29.3% of L’Oréal At the end of 2012, Nestlé held 29.3% of the group’s capital, whilst the Bettencourt family held 30.5%.

Fig. 36: L’Oréal shareholder structure (in % of the capital)

1.7

30.5

38.5

29.3

Bettencourt family Nestlé Float Treasury stock

Source: Company Data; Bryan, Garnier & Co ests.

4.4.2. The 2004 agreements The agreements signed in 2004, and valid for a period of 10 years, between the Bettencourt family and Nestlé, stipulated a number of points ;

• Capping clause : The Bettencourt family and Nestlé agreed not to increase their holding in L’Oréal for a period of three years, and in any case not before a period of six months after the death of Mrs. Liliane Bettencourt. • Non-assignment clause : the parties agreed not to sell their holding for a period of five years starting from the date the agreements were signed in 2004. • Pre-emptive rights : Beyond this five-year period, there are pre-emptive rights between the Bettencourt family and Nestlé until 2014. In addition, L’Oréal has the right to take the Bettencourt family’s place to purchase shares sold by the Swiss group, should the latter decide to do so.

The pre-emptive rights expire next April, hence the emergence of a scenario whereby Nestlé would sell its L’Oréal stake before that date. However, it is also possible that, in the context of another agreement signed by the two parties, the pre-emptive rights could be renewed beyond this date.

Moreover, even after the agreement expires, we believe that if Nestlé wanted to sell its stake (even partially) in L’Oréal, the Swiss group would first offer its shares to the French group given the historic ties between the two.

4.4.3. What if L’Oréal bought part of Nestlé’s stake Whilst a few years ago, the scenario favoured by investors was that of an acquisition by Nestlé of the Bettencourt family’s stake (which we dismiss following a number of comments by Mrs. Francoise

L'Oréal

Bettencourt highlighting her attachment to the group), it seems increasingly clear that the two most probable evolutions of L’Oréal’s shareholding structure are either a status quo between Nestlé and the Bettencourt family, or the acquisition (even partially) of the Swiss group’s stake.

In case of a sale by Nestlé of half of its L’Oréal stake, equating to 15% of the group’s capital (which would need to be executed in tranches given the legislation which limits the maximum share buy-back to 10% of the capital per annum) and the cancellation of acquired shares, the accretive impact on L’Oréal’s 2014 EPS could reach between 6% and 9% if Sanofi shares (valued EUR10.2bn) were sold or the stake was entirely acquired by debt.

In addition, in this scenario, the Bettencourt family would own 35.7% of the capital (and even 43% if Nestlé’s stake was bought in full) vs. 30.5% currently. It seems probable that, given L’Oréal’s past and current shareholding structure, the AMF would exempt the Bettencourt family from having to launch a full offer on the share capital in spite of them crossing the 33% threshold.

Fig. 37: Accretive impact on L’Oréal’s 2014 EPS

% of shares bought 10% 15% EURm Sanofi stake sold Sanofi stake unsold Sanofi stake sold Sanofi stake unsold Before 2014 Net profit 3,527 3,527 3,527 3,527 Number of shares (m) 607 607 607 607 2014 EPS 5.81 5.81 5.81 5.81

After 2014 Net Profit 3,270 3,355 3,183 3,270 Number of shares 546 546 516 516 2014 EPS 6.0 6.14 6.17 6.34 EPS Accretion (%) 3.1 5.7 6.1 9.0 Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

5. Valuation

L’Oréal’s share price has performed remarkably well year-to-date, having risen more than 30%, recording the best performance of our HPC sample. Even if valuation can seem stretched after such a performance, we maintain our Buy recommendation with a Fair Value of EUR 150 vs. EUR 125 previously. This new Fair Value is derived by our DCF model, globally corroborated by an average historic multiple valuation (EUR 146). In addition, we believe the speculative element could drive the share price beyond our FV.

5.1. A clear share price out-performance L’Oréal has been the best performer of our HPC sample, except for Avon, since the beginning of the year with an increase of 27%. Even in a three-month and one-month period, the French group out- performed competitors with an increase of 23% and 8% respectively. There are many reasons for this performance ; i/a good year in 2012 with sales growth of 5.5% and operating profit growth of 12.5%, ii/ a very good first quarter in 2013 with sales growth in the Cosmetics division of 5.8%, equating to a slight acceleration vs. 2012 (+5.5%) in spite of a tough comparison base, thanks to strong market share gains, and finally iii/ speculation on the buyback of L’Oréal shares held by Nestlé, which would have an accretive impact of 3 to 9% on 2014 EPS, depending on the type of financing.

Fig. 38: Three-month and one-month absolute performance

Since three months Since six months Absolute performances Absolute performances

A V ON PRODUCTS A V ON PRODUCTS L'OREA L L'OREA L SHISEIDO SHISEIDO HENKEL PREF. RECKITT BENCKISER GROUP ESTEE LA UDER COS.'A ' ESTEE LA UDER COS.'A ' UNILEV ER CERTS. HENKEL PREF. RECKITT BENCKISER GROUP BEIERSDORF BEIERSDORF PROCTER & GA MBLE PROCTER & GA MBLE INTERPA RFUMS INTERPA RFUMS UNILEV ER CERTS.

- 10.0 - 5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Source :Datastream

5.2. A theoretical FV of EUR 146 by applying the historical average EV/EBIT multiple Given our organic growth estimate of 6% in 2013 and 2014, slightly above the average growth of 5.2% in the period 2001-2012, it seems pertinent to apply the average historic valuation in that period. We believe the group could even trade at a slight premium to the historic average.

The 2013 EV/EBIT multiple at the current share price comes to 19x for a forward historic average (2001-2013) of 20x, equating to a discount of 7%.

• Applying the historic average multiple on our 2013 EBIT forecast, we obtain a target price of EUR 144. • In 2004 and in 2006-07, years when organic growth rose 6.1%, the average EV/EBIT multiple was 20.7x, and applying this multiple would yield a FV of EUR 148.

L'Oréal

• Therefore we obtain a valuation of EUR 146 using the average historic multiples methodology.

Fig. 39: Historic EV/EBIT

40.0

35.0

30.0

25.0

20.0

15.0

10.0

EV / EBIT Moy.

Source: Company Data; Bryan, Garnier & Co ests.

This comparison between L’Oréal’s organic growth and its valuation seems especially pertinent as the two are historically strongly correlated, as shown in the graph below. We therefore believe the current level of PE ratio relative to the CAC seems completely justified.

L'Oréal

Fig. 40: Relative PE and organic growth

2.8 10

2.6 8 2.4 6 2.2

2.0 4

1.8 2

1.6 0 1.4 -2 1.2

1.0 -4

Pe Relatif CAC Croissance Organique N+1

Source: Company Data; Bryan, Garnier & Co ests. 5.3. Valuation of EUR 150 by DCF The Fair value calculated by our DCF model comes to EUR 150 vs. EUR 125 previously. We have factored into our DCF our new 2014 organic growth assumption of 6% (vs. 5.5% previously), in line with our 2013 estimate (EUR 5 impact on our FV). In addition, we have updated the valuation of the Sanofi stake at the current market price of EUR 10.2bn vs. EUR 8.5bn previously (the balance sheet value), in order to take into account its recent share price performance (+16% year-to-date). The pertinence of this new assumption (enhancing EUR 4 impact on FV) is reinforced by the fact that this stake should eventually be sold.

Moreover, we have factored into our DCF a beta of 0.75x, in line with the five-year historic average, vs. 0.9x previously (EUR4), which only took into consideration the company’s large market capitalisation. We have taken in account a 3% free risk rate (3.3% previously) and an unchanged 6.1% risk premium (EUR 8 positive impact on FV).

We assume a terminal growth rate of 2.5%, in line with that of Essilor, in order to take into account the group’s capacity to generate accelerating organic sales growth. This new hypothesis has a EUR 4 enhancing impact on FV.

L'Oréal

Fig. 41: DCF model

M€ 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e sales 22,462 23,850 25,300 26,600 28,063 29,606 31,087 32,641 34,273 35,987 37,426 Chge (%) 10.4% 6.2% 6.1% 5.1% 5.5% 5.5% 5.0% 5.0% 5.0% 5.0% 4.0% EBIT 3,697 4,065 4,440 4,815 5,164 5,537 5,907 6,300 6,615 6,946 7,224 as of sales (%) 16.5% 17.0% 17.5% 18.1% 18.4% 18.7% 19.0% 19.3% 19.3% 19.3% 19.3% PBT 2,699 2,989 3,300 3,515 3,770 4,042 4,312 4,599 4,829 5,071 5,273 Depreciation & amortisation 876 954 1,012 1,064 1,123 1,184 1 243 1,306 1,371 1,439 1,497 as of sales (%) 3.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% working capital (135) (167) (177) (186) (196) (207) (218) (228) (240) (252) (262) as of sales (%) 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% Cap ex (966) (1,002) (1,037) (1,064) (982) (1,036) (1,088) (1,142) (1,200) (1,260) (1,310) as of sales (%) 4.3% 4.2% 4.1% 4.0% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Free Cash flow 2,474 2,775 3,097 3,329 3,714 3,983 4,250 4,534 4,761 4,999 5,199 NPV of FCF 2,300 2,579 2,657 2,674 2,773 2,765 2,742 2,720 2,654 2,591 2,505

Source: Company Data; Bryan, Garnier & Co ests. PV of Future CF (EURm) 26,660 Terminal value 50,589 Enterprise value 77,249 Financial assets 10,321 Minorities 3 Net cash (2013e) 2,877 Market value 90,450 Number of shares (m) 607 Share price (EUR) 150 Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

6. Financials

Fig. 42: Profit & Loss Statement

EURm 2009 2010 2011 2012 2013e 2014e 2015e Sales 17,473 19,496 20,343 22,462 23,850 25,300 26,600 chge (%) (0.4) 11.6 4.3 10.4 6.2 6.0 5.0 Costs of sales (5,162) (5,697) (5,851) (6,588) (6,930) (7,300) (7,665) Gross margin 12,311 13,799 14,492 15,874 16,920 18,000 18,935 As of sales (%) 70.5 70.8 71.2 70.7 70.9 71.1 71.2 R&D costs (609) (665) (720) (790) (820) (875) (925) Advertising & promotion costs (5,389) (6,029) (6,292) (6,776) (7,200) (7,610) (7,980) SG&A costs (3,736) (4,049) (4,187) (4,611) (4,835) (5,075) (5,215) EBITDA 3,277 3,796 4,073 4,497 4,915 5 360 5,769 EBIT 2 577 3 056 3 293 3 697 4 065 4 440 4 815 As of sales (%) 14.7 15.7 16.2 16.5 17.0 17.5 18.1 Financial result (89) (36) (25) (11) (65) (65) (65) Sanofi dividends 260 284 296 313 327 342 377 PBT 2,748 3,304 3,564 3,999 4,327 4,767 5,127 Taxes (749) (932) (978 (1,025) (1,195) (1,295) (1,390) Tax rate (%) 27.3 28.2 27.4 25.6 27.6 27.5 27.1 Minoritaires (2) (3) Group net profit 1,999 2,372 2,584 2,971 3,132 3,422 3,737 Source: Company Data; Bryan, Garnier & Co ests.

Fig. 43: Cash Flow Statement

EURm 2009 2010 2011 2012 2013e 2014e 2015e Net debt n-1 3,700 1,960 41 (504) (1,576) (2,877) (4,528) Operating Cash flow 2,758 3,171 3,226 3,661 3,982 4,342 4,691 WCR chge -721 -132 322 129 129 158 205 Cap ex 628 658 866 955 1,050 1,100 1,200 Acquisitions 160 161 717 466 200 0 0 dividends 851 936 1,030 1,133 1,303 1,433 1,576 Others 100 (372) (253) (94) 0 0 0 Net debt (cash) 1,960 41 (504) (1,576) (2,877) (4,528) (6,238) FCF 2,851 2,645 2,038 2,577 2,803 3,084 3,286

Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

Fig. 44: Balance Sheet

EURm 2009 2010 2011 2012 2013e 2014e 2015e Tangible Asset 2,599 2,677 2,881 2,963 3,173 3,433 3,794 Goodwill 5,466 5,730 6,205 6,478 6,478 6,478 6,478 Intangible Asset 2,042 2,178 2,477 2,625 2,625 2,625 2,625 Financial Assets 6,672 5,837 6,901 8,531 8,531 8,531 8,531 Differed taxes 571 626 671 718 718 718 718 Total FIXED ASSETS 17,350 17,048 19,135 21,315 21,525 21,785 22,146

Cash and liquid assets 1,173 1,550 1,652 1,823 3,123 4,775 6,485 Trade account receivable 2,443 2,685 2,996 3,209 3,369 3,572 3,822 Inventories 1,477 1,810 2,052 2,034 2,136 2,264 2,400 Other debtors 733 846 904 1,007 1,007 1,007 1,007 Taxes 115 105 118 137 137 137 137 TOTAL CURRENT ASSETS 5,941 6,996 7,722 8,210 9,773 11,754 13,850 TOTAL ASSETS 23,291 24,044 26,857 29,525 31,298 33,539 35,996

Short term debt 390 767 1,091 200 200 200 200 Trade account payable 2,603 3,153 3,248 3,318 3,451 3,623 3,804 Other Taxes 133 167 224 157 157 157 157 Other Current liabilities 2,260 2,495 2,568 2,693 2,693 2,693 2,693 Current Liabilities 5,386 6,582 7 131 6,368 6,501 6,673 6,854 Long term debt 2,742 824 57 47 47 47 47 Deferred taxation 418 462 678 764 764 764 764 Provisions 1,147 1,310 1,355 1,408 701 701 702 Minority interests 3 3 3 5 5 5 5 TOTAL LONG TERM LIABILITIES 4,307 2,596 2,090 2,219 1,512 1,512 1,513 SHAREHOLDERS EQUITY 13,598 14,866 17,636 20,938 23,285 25,354 27,629 Share capital 120 120 120 120 120 120 120 Share premium 996 996 970 970 970 970 970 Reserves 14,103 14,772 17,568 20,869 23,215 25,283 27,557 Other -549 50 50 51 52 53 54 Treasury shares -1,072 -1,072 -1,072 -1,072 -1,072 -1,072 -1,072 TOTAL LIABILITIES 23,291 24,044 26,857 29,525 31,298 33,539 35,996 Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

Fig. 45: Sales and EBIT by division

CA (EURm) 2009 2010 2011 2012 2013e Professional Products 2,388 2,717 2,814 3,003 3,090 Consumer Products 8,555 9,530 9,835 10,713 11,340 Luxury Products 4,080 4,507 4,800 5,568 5,980 Active Cosmetics 1,234 1,386 1,422 1,528 1,640 Cosmetics branch 16,257 18,140 18,871 20,812 22,050 The Body Shop 726 755 768 855 910 Dermatology branch 489 602 705 795 890 Group sales 17,472 19,497 20,344 22,462 23,850

EBIT (EURm) 2009 2010 2011 2012 2013e Professional Products 477 552 580 615 645 Consumer Products 1,577 1,765 1,853 2,049 2,225 Luxury Products 617 791 922 1,073 1,190 Active Cosmetics 250 278 287 315 350 Non-allocated -482 -513 -537 -575 -595 Cosmetics branch 2,439 2,873 3,106 3,480 3,825 The Body Shop 54 65 68 77 95 Dermatology branch 85 119 120 140 165 Group EBIT 2,578 3,056 3,293 3,697 4,065

As of sales (%) 2009 2010 2011 2012 2013e Professional Products 20.0 20.3 20.6 20.5 20.9 Consumer Products 18.4 18.5 18.9 19.1 19.6 Luxury Products 15.1 17.6 19.2 19.3 19.9 Active Cosmetics 20.3 20.1 20.2 20.6 21.3 Cosmetics branch 15.0 15.8 16.5 16.7 17.1 The Body Shop 7.4 8.6 8.9 9.1 10.4 Dermatology branch 17.4 19.8 17.0 17.9 19.7 Group EBIT 14.8 15.7 16.2 16.5 17.0

Source: Company Data; Bryan, Garnier & Co ests.

L'Oréal

Price Chart and Rating History

L'Oréal

13/5/13 140

130

120

110

100

70 2010 2011 2012 2013 L'OREAL Source: Thomson Reuters Datastream

Ratings

Date Ratings Price 28/11/11 BUY EUR74.98

Target Price Date Target price 19/04/13 EUR125

15/02/13 EUR118 16/01/13 EUR112

27/07/12 EUR104

13/04/12 EUR100 15/02/12 EUR91

28/11/11 EUR88

L'Oréal

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings

BUY ratings 50% NEUTRAL ratings 30% SELL ratings 20%

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