Annual Report 2018 Contents 1st 86,000 cosmetics group employees Prospects worldwide(1) 02 Prospects by Jean-Paul Agon, Chairman & CEO Strategy 36 150 brands countries 06 Governance · The Board of Directors · The Executive Committee 10 Quality 12 Ethics 26.9 505 14 Responsibility · “Sharing Beauty With All” billion euros patents registered · Citizen Day of sales(2) in 2018 · The L’Oréal Corporate Foundation 18 Human Relations Performance Commitments for 2 4.92 1 Cosmetics Market 24 L’Oréal in figures billion euros in 2020 28 Worldwide advances operating profit “Sharing Beauty With All” 31 Strategic themes Brands 33 Brands overview (1) Source: WWD, Beauty Top 100,May 2018. (2) At 31 December 2018. 34 Consumer Products 38 L’Oréal Luxe 42 Professional Products More exclusive content 46 Active Cosmetics on the digital version Expertise lorealannualreport2018.com 52 Research & Innovation 54 Operations Discover and filter 56 Digital the Annual Report content 58 Administration and Finance Discover the strategic themes of the Annual Report. Use them to filter content and personalise your navigation to find content that matches your interests. The digital version also features more exclusive content, articles, infographics and many videos. Our mission Beauty for All Offering all women and men worldwide the best of cosmetics in terms of quality, efficacy and safety to satisfy all their beauty needs and desires, in their infinite diversity. Our strategy Universalisation L’Oréal has chosen a unique strategy: Universalisation. It means globalisation that captures, understands and respects differences. Differences in desires, needs and traditions. To offer tailor-made beauty, and meet the aspirations of consumers in every part of the world. L’Oréal is driven by this vision of the world. 01 PROSPECTS Prospects by Jean-Paul Agon Jean-Paul Agon, Chairman and Chief Executive Officer of L’Oréal, interviewed by Stéphane Soumier, Chief Editor of BFM Business, on the major themes of 2018 and the Group’s prospects for the future. The cosmetics market continued and countries. And finally because to grow steadily and in fact there are always new consumer accelerated in 2018. Do you targets. think this is a structural trend? “Our greatest Once again, L’Oréal outperformed Clearly, the market has been the market. What were the drivers particularly buoyant, making 2018 the source of of this growth? best year in 20 years(1). There are strong underlying trends driving this pride: delivering Our growth accelerated to produce our acceleration over the past few years. best year in more than 10 years. And we The first, and probably most financial achieved a new record operating important factor is the insatiable performance margin of 18.3%. We significantly desire for beauty across all outperformed the market, generating countries and cultures. Second, while being strong positions in the most promising premiumisation: consumers are and strategic areas for the future. We ready to pay more and trade up for a committed strongly reinforced our position in products with new benefits, better Asia Pacific, where we enjoyed our performance and superior quality. corporate highest growth. Asia Pacific overtook Third, digitalisation, as beauty and North America to become our second digital are a perfect match. It has citizen” largest Zone this year. By sector, we never been easier to discover beauty, Jean-Paul Agon, outpaced the market in both luxury, share it and buy products online, Chairman and Chief Executive Officer the most dynamic of the markets, and even in the most remote corners of dermocosmetics, ideally placed to the world. Digital is and will remain a meet rapidly growing health and well- terrific booster for beauty. Finally, our WATCH THE VIDEO INTERVIEW being expectations all over the world. IN THE DIGITAL ANNUAL REPORT market is also fuelled by increased We strengthened our leadership in two penetration of beauty all over the thriving channels: e-commerce and world. First, because of e-commerce, Travel Retail. Finally, we outperformed which is extending our reach far in skincare, the category where the beyond the limits of traditional combination of trusted brands, power distribution, especially in emerging franchises and the innovation offered economies. Also because of many by our Research & Innovation, is a white spaces in terms of categories winning equation. (1) Source: L’Oréal estimate of the global cosmetics market based on manufacturers’ net prices. Excluding soaps, oral hygiene, razors and blades. Excluding currency effects. 02 PROSPECTS You have said previously that digital is not the cherry on the cake, but the cake itself! Just how important is it for your business? In fact, digital is doing much more embedded in our teams: in every You often say that your objective than generating additional business. It brand, in every Division, every is to make L’Oréal not only an is radically transforming our company. function and every country, infusing economic leader, but also a Digital is boosting our brand power. In the entire company with digital responsible and exemplary leader. this world of algorithms, bigger is truly excellence. Digital has been, and will What progress did you make? better. In 2018, our biggest brands continue to be, a powerful accelerator have become even stronger. Digital is for growth. Beyond digital, new Delivering financial performance while also strengthening our power to connect technologies are opening up new being a committed corporate citizen is with consumers. The acquisition of horizons for beauty. And we are probably our greatest source of pride. ModiFace, for example, has been absolutely determined to be the pioneers, This is what motivates us to always go instrumental in enriching the services the champions and the leaders of this the extra mile. Once again, in 2018, we we offer. Digital is now totally new Beauty Tech(1) world. made major advances that have been recognised by renowned external institutions. L’Oréal is the only company in the world to obtain 3 ‘A’ ratings from the CDP(2) for the third year running. It recognises our actions in fighting climate change, ensuring water “Digital is radically security and combating deforestation. In terms of diversity, we were ranked as transforming our the top gender-balanced company in company. It is boosting Europe by Equileap. And in terms of ethics, we are very proud that for the our brand power” first time, in November 2018, we were ranked as the leading company worldwide, across all industries, by Covalence EthicalQuote. (1) Augmented beauty thanks to new technologies. (2) CDP is an independent international organisation that evaluates companies’ environmental performance. 04 “We firmly believe that victories are won on the pitch. This is linked to the incredible qualities of our 86,000 employees” Your 2018 results represent a while minimising exposure in areas historic achievement and you have which are slowing down. And finally, been the leader of your market our lead in sustainability and ethics. for years. What are the levers Our deep conviction is that economic that will enable you to grow in and environmental, social and societal Check out Jean-Paul Agon’s the years to come? performance go hand in hand and full interview in the digital mutually reinforce each other. These Probably the same ones that have five founding principles make version kept us growing for the last 110 years! L’Oréal a different kind of company, First, our absolute faith in the unique in this industry, perfectly superior quality of our products, adapted and in tune with the with our strategic focus on Research evolution of the world. lorealannualreport2018.com & Development. Because innovation is the name of the game in our business. Second, our belief that top- line growth is clearly the best route to create value for our shareholders. Our business model focuses on top- line growth and operational discipline. This model is robust, and our results have demonstrated this once again. Third, our conviction that victories are won on the ground. Thanks to our unique culture, organisation and, of course, the incredible qualities of our 86,000 people who understand our consumers’ desires and are fully empowered to deploy resources accordingly, acting like real entrepreneurs. Our strategically concentrated but operationally decentralised model, combined with the empowerment of teams in the countries, is what brings agility and excellence onto the field. Fourth, our ability to catch and seize growth wherever it emerges thanks to our total coverage of the market in terms of channels, categories, countries, prices and consumers. We maximise all opportunities wherever they are 05 STRATEGY | GOVERNANCE The Board of Directors Stable governance in a swiftly and constructive dialogue culminates in It determines which topics to prioritise at changing cosmetics market a shared strategic vision, which gives this annual review, in order to steer The composition of the Board of Directors General Management the confidence L’Oréal’s long-term strategy. reflects L’Oréal’s unique shareholding necessary to implement it. A strategic structure and guarantees the interests seminar held in Shanghai in June 2018 Ethics at the heart of L’Oréal’s of all its shareholders. Alongside the Chair- provided an in-depth understanding not governance and commitments man and Chief Executive Officer, there only of the unique characteristics of The Board of Directors places great are three directors from the Bettencourt the