2006 _ ANNUAL REPORT 2006 _ ANNUAL REPORT Incorporated in France as a “Société Anonyme” with registered capital of €125,225,382 632 012100 R.C.S. Paris Headquarters: 41, rue Martre 92117 Clichy - France Tel.: +33 1 47 56 70 00 Fax: +33 1 47 56 86 42 Registered Office: 14, rue Royale 75008 Paris - France www.loreal.com www.loreal-finance.com YOUR CONTACTS By telephone From France: toll-free number 0 800 66 66 66 From abroad: +33 1 40 14 80 50 By Internet www.loreal-finance.com By mail Actionnariat L’Oréal BNP Paribas – Securities Services Service aux émetteurs Immeuble Tolbiac 75450 Paris cedex 09 - France L’Oréal Headquarters 41, rue Martre 92117 Clichy - France contents Tel: +33 1 47 56 70 00 Fax: +33 1 47 56 86 42 For further information please contact: 02 _ Chairman’s message - For individual shareholders 04 _ Chief Executive Offi cer’s message and financial market authorities Mr Jean-Régis Carof, 07 _ Corporate governance Director of International Financial Communications 10 _ Management Committee - For financial analysts 11 _ 2006 Financial highlights and institutional investors 18 _ A unique portfolio of international brands Mrs Caroline Millot, Director of Investor Relations 20 _ Markets trends - For journalists Mr Mike Rumsby, 24 _ International Director of International Press Relations 26 _ Western Europe 28 _ North America 30 _ Emerging markets 34 _ Resources 36 _ Research and Development Published by the Administration and Finance Division and by the Corporate Communications and External Affairs Division of L’Oréal 40 _ Production and Technology group. 42 _ Human Resources Photographs: David Arraez (P.44, 45, 48), Leo Aversa/Gamma (P.33, 56, 79), Bahadir Aydin/Karakas (P.33), Gilles Basignac/Gamma 46 _ Sustainable Development (P.54, 60, 68, 76, 81), Carole Bellaïche (P.3, 5, 9, 10, 21, 36, 40, 42), Xia Bin Ru (P.51), Marc Bonneville/Gamma (P.32, 57, 62, 70, 78), Alain Buu (P.40, 41, 49), Serge Chapuis (P.79), Carlo Della Chiesa/Pandora Castelli (P.19), Rémy Cortin/Gamma (P.50, 57), Cyril Coussat/ 50 _ Cosmetics Gamma (P.63, 70, 72, 78), Jean-François Deroubaix/Gamma (P.51, 65, 72), Nicolas Dumont/Gamma (P.71), Andrew Eccles/Jgb Photo 52 _ Professional Products (P.23, 55), Silviu Filipovici/Die Kunstfabrik (P.32), Galderma (P.83), Helène Kerhervé/Gamma (P.64), Boyoung Lee (P.73), L’Oréal (P.26, 31, 42, 43, 48, 55, 61, 63, 64, 65, 69, 72, 74, 75, 77), L’Oréal Research (P.34, 35, 36, 37, 38, 39, 55, 61, 69, 77), Greg Lotus/Artsphere 58 _ Consumer Products (P.19), Louis-Michel Major (P.29), Craig Marais/Gamma (P.30), Luis Mendes/Gamma (P.51, 62), Patrick Messina (P.56, 73), Christopher 66 _ Luxury Products Micaud represented by Kate Ryan (P.58, 59), Braca Nadezdic/Gamma (P.50), Sumit Nayyer (P.31), Micheline Pelletier/Gamma (P.46), 74 _ Active Cosmetics Alain Pérus & Myli Bourigault/L’Œil du Diaph (P.10), Dominique Poisson/Galderma (P.83), Kate Powers/Getty Images (P.61), Gerardo Somoza/Gamma (P.28, 29), Lloyd Sturdy/VisualMedia (P.19, 80), Jason Taylor (P.82), Jonathan Tickner/EJM Photography (P.27), Manuel 80 _ The Body Shop Vasques/Gamma (P.27), Santosh Verma (P.24, 25), Kenneth Willardt/Exposure NY (P.19), Olaf Wipperfurth/WIB (P.19), Ni Xin Xin (P.47), Firooz Zahedi represented by Tricia Burlingham/Artist Representation (cover, P.20), X. 83 _ Dermatology Creation and layout: 133, avenue des Champs-Elysées 75008 Paris - France. 84 _ Information to shareholders This document has been printed on paper manufactured with chlorine-free pulp. Cover: Diane Keaton for L’ORÉAL PARIS. The paper used does not contain any heavy metals. OUR MISSION The right to be beautiful day after day: L’Oréal strives to make this a reality within the reach of every woman and every man. This ambi- tion is reflected in a brand portfolio unequalled anywhere in the world. Since its creation in 1909, the group has always considered this mission of prime importance. The thousands of men and women who have built up the group across the world have made this their personal mission statement. They use their intelligence and creativity, their innovative ability and all their expertise to further the cause of beauty the world over. As well as meeting current consumer aspirations, L’Oréal anticipates their future expectations, being, as always, determined to promote an approach to beauty that is fun, affordable, fulfilling, genuine and generous. None of this would be possible without L’Oréal’s deep respect for human beings of all types and nationalities, and without its genuine commitment to a sustainable environment. Strengthened by these values, and convinced that the quest for beauty has always been a major challenge for women and men, L’Oréal’s teams continue daily to push forward the frontiers of their profession. 02 _ CHAIRMAN’S MESSAGE A PERFECTLY SMOOTH TRANSITION THE SUCCESSION IS SECURE 2006 was an important milestone in the history of Generating dynamism in our businesses all over the L’Oréal. As I had proposed, the functions of Chair- world is an immense task. With his excellent inter- man and Chief Executive Officer were separated. personal skills and knowledge of operational realities, A young management team is now in place, personi- Jean-Paul Agon brings to the group’s management fied by Jean-Paul Agon. Enjoying the full confidence of exceptional energy and enthusiasm, as well as natural the staff, with experience in all the geographical Zones team leading talent. and Divisions and with a successful track record in the group, Jean-Paul Agon immediately took over opera- For my part, in my own new position, I am focusing my tional control without any interruption or loss of impetus efforts on good corporate governance and the group’s of the business. The transition was smooth and har- growth strategy. In a Board of Directors where debates monious, without L’Oréal missing a single heartbeat. are of high quality and where decisions are taken collec- I am particularly pleased that this milestone in the life of tively, my experience enables me to contribute posi- the group has taken place exactly as I had announced tively to choices about the main directions the group to you, and just as we had planned. should take. The outstanding quality of the 2006 results “ is a refl ection of this harmonious transition.„ The outstanding quality of the 2006 results is a reflec- It is my job to interact with General Management, so as tion of this harmonious transition. In a dynamic market, to open up new strategic approaches. With Jean-Paul L’Oréal continued to strengthen its worldwide position Agon and the support of the Board of Directors, we significantly, delivering strong sales’ growth and sub- take the key decisions about the future of the group stantially increased results of remarkable quality. This together, just as we did with the acquisition of The enables us to propose to the Annual General Meeting Body Shop. We do so in a spirit of complete and a substantial increase (+18%) in the dividend and a mutual confidence, both to ensure continuity and to significantly higher payout ratio. In so doing, we are further the group’s interests. demonstrating our respect for our shareholders who, The long standing values and the principles that guide through their loyalty, give the company the resources our actions, such as respect for ethical principles, it needs to carry out its long-term strategy. diversity, respect for the environment and caring for communities: these values help make L’Oréal a well respected group. The long term commitment of our people is also important, for it is their creativity and responsiveness, which make the implementation of our long-term strategy possible. CHAIRMAN’S MESSAGE _ 03 This long term approach in no way rules out our ability to regenerate, to break some of the taboos of our busi- ness, to open up new avenues, so as to meet aspira- tions for beauty worldwide. There is no doubt that in this area Jean-Paul Agon and his management team bring a fresh approach to our vision. The succession is secure. The determination, imagina- tion and vitality at the head of the company make me confident as I look forward, not just to 2007 but also much further ahead: to women and men ready to make their dreams a reality and to make sure that L’Oréal’s heart always beats to the rhythm of success. Sir Lindsay Owen-Jones Chairman of L’Oréal The women and men of L’Oréal also “ provide a guarantee of continuity.„ 04 _ CHIEF EXECUTIVE OFFICER’S MESSAGE COMBINING EVERYONE’S ENERGIES WITH A FORCEFUL BUSINESS MODEL TO FUEL A POWERFUL GROWTH DRIVE 2006 was another year of strong economic growth The key event was the regeneration of our growth in for L’Oréal. Western Europe, driven by market share gains in several The return to dynamic growth, the quality of our operat- categories, such as haircare, facial skincare and per- ing performance, and the strong increase in both profit- fumes. In North America, our sales were affected by ability and cash flow have again proved the strengh and restructuring in two distribution channels out of three. relevance of the L’Oréal business model developed by 2006 was, however, a source of great satisfaction: Sir Lindsay Owen-Jones. L’O RÉAL PARIS rose to third position in make-up and Fructis by GARNIER took second place in the American haircare market, only four years after its launch.