REGISTRATION DOCUMENT 2014 ANNUAL FINANCIAL REPORT

Transcription

1 REGISTRATION DOCUMENT 2014 ANNUAL FINANCIAL REPORT

2 Table of contents 1 PRESENTATION 2 CORPORATE 3 KEY 4 5 OF THE GROUP 5 / 5.7. OTHER INFORMATION RELATING TO THE FINANCIAL STATEMENTS OF L'ORÉAL PARENT COMPANY MISSION FIVE-YEAR FINANCIAL SUMMARY HISTORY INVESTMENTS (MAIN CHANGES INCLUDING 1.3. BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS 7 SHAREHOLDING THRESHOLD CHANGES) INTERNATIONALIZATION AND THE COSMETICS MARKET STATUTORY AUDITORS' REPORT ON THE FINANCIAL 1.5. RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP 16 STATEMENTS OPERATIONS INVESTMENT POLICY 24 6 CORPORATE SOCIAL, 1.8. RISK FACTORS 25 ENVIRONMENTAL AND SOCIETAL RESPONSABILITY* / 209 GOVERNANCE* THE L ORÉAL GROUP S COMMITMENTS IN THE AREA OF 2.1. FRAMEWORK FOR IMPLEMENTATION OF THE CORPORATE SOCIAL, ENVIRONMENTAL AND SOCIETAL GOVERNANCE PRINCIPLES 36 RESPONSIBILITY THE BOARD S COMPOSITION AND THE WAY IN WHICH 6.2. SOCIAL INFORMATION 216 THE BOARD S WORK IS PREPARED AND ORGANISED ENVIRONMENTAL INFORMATION REMUNERATION OF THE DIRECTORS AND THE EXECUTIVE 6.4. SOCIETAL INFORMATION 246 OFFICERS TABLE OF CONCORDANCE IN RESPECT OF SOCIAL, 2.4. SUMMARY OF TRADING BY DIRECTORS AND EXECUTIVE ENVIRONMENTAL AND SOCIETAL MATTERS 256 OFFICERS IN L ORÉAL SHARES IN STATUTORY AUDITORS' REPORT INTERNAL CONTROL AND RISK MANAGEMENT PROCEDURES ( REPORT OF THE CHAIRMAN OF THE BOARD OF DIRECTORS ON INTERNAL CONTROL) 89 STATUTORY AUDITORS REPORT, PREPARED IN ACCORDANCE WITH ARTICLE L OF THE FRENCH COMMERCIAL CODE ON THE REPORT PREPARED BY THE CHAIRMAN OF THE BOARD OF DIRECTORS 97 STATUTORY AUDITORS' SPECIAL REPORT ON REGULATED 7 STOCK MARKET INFORMATION SHARE CAPITAL / INFORMATION RELATING TO THE COMPANY INFORMATION CONCERNING THE SHARE CAPITAL* LONG-TERM INCENTIVE PLANS* THE L ORÉAL SHARE/L ORÉAL SHARE MARKET INFORMATION POLICY 289 AGREEMENTS AND COMMITMENTS WITH THIRD PARTIES 98 SHAREHOLDER STRUCTURE* FIGURES AND COMMENTS ON THE 2014 FINANCIAL YEAR / THE GROUP S BUSINESS ACTIVITIES IN 2014* FINANCIAL HIGHLIGHTS SIGNIFICANT, RECENT EVENTS AND PROSPECTS CONSOLIDATED FINANCIAL STATEMENTS* / COMPARED CONSOLIDATED INCOME STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME COMPARED CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY COMPARED CONSOLIDATED STATEMENTS OF CASH 8 ANNUAL 9 GENERAL MEETING / DRAFT RESOLUTIONS AND REPORT OF THE BOARD OF DIRECTORS TO THE ANNUAL GENERAL MEETING TO BE HELD ON APRIL 22 ND, 2015 (AS OF FEBRUARY 12 TH, 2015) STATUTORY AUDITORS SPECIAL REPORT ON THE AUTHORIZATION FOR THE FREE GRANTING OF EXISTING SHARES AND/OR SHARES TO BE ISSUED TO EMPLOYEES AND CORPORATE OFFICERS OF THE COMPANY STATUTORY AUDITORS SPECIAL REPORT ON THE SHARE CAPITAL INCREASE RESERVED FOR EMPLOYEES OF THE COMPANY 309 FLOWS 123 APPENDIX / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED COMPANIES AT DECEMBER 31 ST, STATUTORY AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS* / COMPARED INCOME STATEMENTS COMPARED BALANCE SHEETS CHANGES IN SHAREHOLDERS' EQUITY STATEMENTS OF CASH FLOWS NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS TABLE OF SUBSIDIARIES AND HOLDINGS AT DECEMBER 31 ST, STATUTORY AUDITORS HISTORICAL FINANCIAL INFORMATION INCLUDED BY REFERENCE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT AND THE ANNUAL FINANCIAL REPORT DECLARATION BY THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT AND THE ANNUAL FINANCIAL REPORT REGISTRATION DOCUMENT TABLE OF CONCORDANCE ANNUAL FINANCIAL REPORT TABLE OF CONCORDANCE TABLE OF CONCORDANCE WITH THE AMF TABLES ON THE REMUNERATION OF EXECUTIVE OFFICERS AND DIRECTORS TABLE OF CONCORDANCE OF THE MANAGEMENT REPORT 317 Detailed chapter contents can be found at the beginning of each chapter. * This information forms an integral part of the Annual Financial report as provided in the Article L. 451_1_2 of the French Monetary and Financial Code.

3 REGISTRATION DOCUMENT 2014 ANNUAL FINANCIAL REPORT In application of Article of the General Regulation of the Autorité des Marchés Financiers (AMF), this Registration Document was filed, with the AMF on March 17 th, 2015 This Registration Document may be used in connection with a financial transaction if it is accompanied by an information memorandum approved by the AMF. The document has been prepared by the issuer and its signatories incur liability in this regard. This is a free translation into English of the L Oréal 2013 Registration Document issued in the French language and is provided solely for the convenience of English speaking readers. In case of discrepancy the French version prevails. PEFC/ this document was printed in france by an imprim vert-certified printing company, on recyclable, chlorine-free, pefc-certifie pulp from forests managed according to sustainable environmental, economic and social principles. This label recognises the most transparent Registration Documents according to the criteria of the Annual Transparency Ranking

4 INTERVIEW INVENTING THE NEW L ORÉAL: UNIVERSAL, DIGITAL AND SUSTAINABLE 2 REGISTRATION DOCUMENT 4 / L ORÉAL 2014 DOCUMENT DE RÉFÉRENCE L ORÉAL 2014

5 MESSAGE FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Jean-Paul AGON CHAIRMAN AND CHIEF EXECUTIVE OFFICER THE GROUP S PERFORMANCE WAS VERY SOLID. WE FURTHER STRENGTHENED OUR POSITIONS IN THREE OF OUR FOUR DIVISIONS What kind of a year was 2014 for L Oréal? It can be summed up in two words: progress and transformation. Progress first of all, because the year was marked by major launches and market share gains. In a volatile economic context and a less dynamic market, L Oréal posted growth across all its Divisions and geographic zones. But 2014 was also a year of profound transformation for L Oréal, to further strengthen the group and adapt to a rapidly changing world. Could you tell us more about the group s performance in 2014? The Active Cosmetics Division and L Oréal Luxe substantially outperformed their markets in all regions. The Professional Products Division grew faster than its market. The Consumer Products Division meanwhile saw a temporary slowdown in its growth, mainly reflecting its weaker performance in the United States, where after three years of increasing its market share it marked a pause. In geographic terms, the Group strengthened its positions in all parts of the world, except North America. Our progress was especially good in Western Europe, a zone that is strategically important for the group. Profitability there is strong, and there are bright prospects for increasing our market shares, which are already high in this region. We also made progress in the New Markets, our number one zone since 2012, where once again we increased our market shares and recorded high growth. And in terms of results? 2014 was once again a year of very solid financial results. The Group significantly raised its profitability, which reached a record level at 17.3%. Its net profit increased, as did net earnings per share and the dividend proposed at the Annual General Meeting, which is up by +8%. Was 2014 an important year of transformation? Yes, L Oréal has undergone substantial strategic transformations this year to reinforce our competitive advantage in the beauty market. We have made major strategic acquisitions that ideally complement our unique portfolio of brands. The integration of Decléor and Carita means that our Professional Products Division is moving into a new market: professional skincare. The acquisitions of Magic, Niely and NYX are adding to the presence and potential of the Consumer Products Division in markets of great strategic importance: skincare in China and Asia for Magic, hair colour in Brazil and Latin America for Niely, and make-up in America and the rest of the world for NYX. Lastly, the acquisition of Carol s Daughter will underpin our beauty expertise in order to best serve multicultural customers. You have also stepped up digital initiatives. Is this another kind of transformation? It certainly is was an important year for L Oréal s digital transformation, with the appointment of Lubomira Rochet as Chief Digital Officer and a member of the Group s Executive Committee. I am fully convinced that digitalization will profoundly transform the relationship between our brands and consumers in a positive way. We strongly believe that digitalisation is a very important factor in the group s success. What is more, our decentralized organisation, entrepreneurial spirit, and multi-brand and multi-channel approach REGISTRATION DOCUMENT / L ORÉAL 2014 DOCUMENT DE RÉFÉRENCE L ORÉAL

6 are ideally adapted to the digital world. It thus represents a major opportunity and we intend to be trailblazers and leaders in the field of digital beauty. In 2014, we made major advances across all our Divisions and in strategic countries: these pages will give you a glimpse, and you can find out more in our online Annual Report. Were there any other strategic transformations? 2014 was the first year in the roll-out of our major corporate social responsibility project: Sharing Beauty With All. Its objective is to make L Oréal into a model company that is exemplary in terms of sustainable innovation, production and consumption, and shared growth by This is a vital challenge, because sustainable development is, and increasingly will be, an essential driver for the durable success of companies in the 21 st century. As you will see in our Progress Report, we have already made significant advances in a number of fields, especially sustainable innovation and production. For instance, at the end of 2014 we achieved a 50% reduction in CO 2 emissions from our factories and distribution centres compared with As for social issues, 2014 marked the roll-out of the L Oréal Share & Care programme, an unprecedented project aimed at universalising optimum social protection for all Group employees worldwide. Moreover, several strategically important internal transformations also took place this year. WE WANT TO BE A LEADER WITH THE SPIRIT OF A CHALLENGER, AND A LARGE COMPANY WITH THE SPIRIT OF A START-UP What are these internal transformations and what are your objectives? We have started a huge simplification initiative. I am quite convinced that the more complex the world becomes, the more we need to simplify our approach, so as to be fast, agile, responsive, and capable of seizing up-and-coming trends and taking advantage of all opportunities. The aim of these transformations is to adapt the group to a fast-changing world, and to prepare it for future success. So this is the driving force for 2015 and the years to come? Yes, but that s not all. We will keep on course to conquer the beauty market, through all our Divisions, driven by our brands in all regions of the world. We are confident that the worldwide cosmetics market will continue to grow, and we believe in our ability to outperform the market in terms of organic growth. We will also take advantage of the favourable impact of the monetary environment. We will rely, as always, on strong ethical principles and on talented and committed L Oréal teams, which are totally dedicated to continuing our great adventure: in other words, pursuing our Beauty for All mission, our Universalisation strategy and our goal of attracting one billion new consumers. At the same time, we will keep on inventing the New L Oréal of the 21 st century: universal, digital and sustainable. 4 REGISTRATION DOCUMENT 6 / L ORÉAL 2014 DOCUMENT DE RÉFÉRENCE L ORÉAL 2014

7 1 PRESENTATION OF THE GROUP 1.1. MISSION OPERATIONS HISTORY BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS The foundations of a winning strategy An organisation that serves the Group s development A powerful ally of brands and markets Three major fundamental responsibilities A major contribution across the value chain Global economic performance at the service of the brands and commercial entities INVESTMENT POLICY INTERNATIONALIZATION AND THE COSMETICS MARKET A historical presence in developed markets Rapid development outside Western Europe and North America Immense development potential RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP Research, in the Group s genes The multi-hub organisation has shown results Revisiting active principles Animal testing: balancing ethics and innovation A new research territory: the microbiome Connected beauty entrusted to the incubator RISK FACTORS Business risks Legal risks Industrial and environmental risks Counterparty risk Customer risk Liquidity risk Financial and market risks Insurance 32 REGISTRATION DOCUMENT / L ORÉAL

8 1 PRESENTATION OF THE GROUP MISSION 1.1. MISSION Beauty for all For more than a century, L Oréal has devoted itself solely to one business: beauty. It is a business rich in meaning, as it enables all individuals to express their personalities, gain self-confidence and open up to others. Beauty is a language L Oréal has set itself the mission of offering all women and men worldwide the best of cosmetics innovation in terms of quality, efficacy and safety. It pursues this goal by meeting the infinite diversity of beauty needs and desires all over the world. Beauty is universal Since its creation by a researcher, the Group has been pushing back the frontiers of knowledge. Its unique Research arm enables it to continually explore new territories and invent the products of the future, while drawing inspiration from beauty rituals the world over. Beauty is a science Providing access to products that enhance well-being, mobilising its innovative strength to preserve the beauty of the planet and supporting local communities are exacting challenges, which are a source of inspiration and creativity for L Oréal. Beauty is a commitment By drawing on the diversity of its teams, and the richness and the complementarity of its brand portfolio, L Oréal has made the universalisation of beauty its project for the years to come. L Oréal, offering beauty for all 6 REGISTRATION DOCUMENT / L ORÉAL 2014

9 PRESENTATION OF THE GROUP HISTORY 1.2. HISTORY 1 Creation of Société Française de Teintures Inoffensives pour Cheveux by Eugène Schueller Ambre solaire, the first sun protection oil with filtering Launch of Elnett hair lacquer 1957 Acquisition of Lancôme 1964 Acquisition of Biotherm 1970 The first model of a reconstructed epidermis from L Oréal Research 1979 Acquisition of La Roche-Posay 1989 Acquisition of American agents Cosmair 1994 Acquisition of Softsheen and Carson in the United States and in South Africa L Oréal becomes the majority shareholder in Shu Uemura in Japan Acquisition of The Body Shop 2006 Acquisition of YSL Beauté 2008 Acquisition of Essie Cosmetics in the United States 2010 Acquisition of Urban Decay in the United States 2012 Strategic Transaction agreed between L Oréal and Nestlé. Acquisition of Magic Holdings in China, NYX in the United States and Niely Cosmeticos (1) in Brazil Imédia, the first quick oxidation hair colour 1954 Cosmair is named as L Oréal s agent in the United States 1963 L Oréal enters the Paris Stock Market 1965 Acquisition of Laboratoires Garnier 1973 Acquisition of Gemey, an open door to the consumer make-up market 1981 Creation of Laboratoires dermatologiques Galderma 1993 Acquisition of Redken 5 th avenue in the United States 1996 Acquisition of Maybelline in the United States 2000 Acquisition of Matrix and Kiehl s since 1851 in the United States 2004 Takeover of the Gesparal holding company 2007 Creation of the L Oréal Corporate Foundation 2009 L Oréal celebrates its centenary 2011 Acquisition of Clarisonic 2013 Acquisition by The Body Shop of 51% of Emporio Body Store in Brazil (1) Acquisition under completion 1.3. BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS With an international portfolio of 32 diverse and complementary brands, the Group is committed to The foundations of a winning responding to all beauty aspirations worldwide. With a presence in all distribution channels, L Oréal generated sales strategy amounting to billion in 2014 thanks to the efforts made by its 78,611 employees worldwide ONLY ONE BUSINESS, BEAUTY For over 105 years, L Oréal has continually devoted itself to the ONE MISSION, BEAUTY FOR ALL same business: beauty, in which it is the world s leading Our mission: to offer women and men all over the world the company. This is the Group s raison d être because, far from best of cosmetics in terms of quality, efficacy and safety, to being futile and superficial, cosmetics are full of meaning. They satisfy all their needs and their beauty desires in their infinite give everyone self-confidence, enable them to blossom and diversity. open up to others and contribute to individual and collective well-being. REGISTRATION DOCUMENT / L ORÉAL

10 1 PRESENTATION OF THE GROUP BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS COUNTING ON RESEARCH, INNOVATION The Group s research and marketing teams pay heed to all AND QUALITY: INVENTING THE FUTURE consumers from everywhere in the world. The laboratories on OF BEAUTY all continents study their specificities. The Group s innovation policy is based on accessibility and adaptation of products to With 3,782 researchers and a budget representing 3.4% of its the beauty habits and rituals of all men and women in their sales, L Oréal has the largest Research and Innovation team in infinite diversity. the cosmetics industry. The Group is continuing to develop its innovation capabilities through its research centres in France To make Universalisation a really powerful strategy, the global and increases its research budget very regularly. L Oréal market has been organised into eight homogeneous strategic invests in all fields, from Advanced Research to formulation. regions, even more attentive to consumers and closer to their The cosmetics market is a supply-led market, driven by expectations. The Group s organisation is now resolutely innovation, where consumers are always looking for novel multi-centric, with a strong nerve centre based in France. products and improved performances. More than ever, it is the Each major region of the world now has its own centre of products which are new, different, better which make for expertise which groups together the Research and marketing success and lead to growth, which proves the validity of activities. Research thus has 5 hubs all over the world, led by L Oréal s business model based on the excellence of Research the central teams and fuelled by the Group s core expertise and creative marketing. and fundamental knowledge. Turning to innovation enables L Oréal to always remain one step ahead THE PORTFOLIO OF COSMETICS BRANDS: OFFERING THE BEST OF BEAUTY IN EACH DISTRIBUTION CHANNEL The Group has the most varied, richest and most powerful brand portfolio in the cosmetics industry. This abounding portfolio enables it to meet the beauty expectations of consumers all over the world. The brands are reinvented all the time so that they always match consumer demand perfectly. In addition, new acquisitions regularly provide valuable additions to this unique portfolio. Some of these are brands with a global vocation, like the recently acquired American Urban Decay make-up brand, which makes a tremendous contribution to our L Oréal Luxe brands; NYX Cosmetics, an affordable, makeup artist-inspired brand or Decléor and Carita, which expand growth potential in Professional Products in the field of professional skincare. Other acquisitions are aimed at extending the Group s geographical coverage: in Colombia with the make-up brand Vogue, in Kenya with Interbeauty, or in Brazil with Niely Cosméticos (1) and Emporio Body Store, and in China with Magic Holdings, the leading specialist in cosmetics facial masks. These newly acquired companies are accelerating the Group s penetration of their markets in a spectacular manner and contribute to boosting future organic growth ONE DEVELOPMENT STRATEGY, UNIVERSALISATION L Oréal relies on its single strategy Universalisation meaning globalisation that respects differences. This strategy aims at offering beauty to meet the specific expectations of consumers in every region of the world. Unlike standardisation, it is based on a keen ability to listen to consumers and a profound respect for their differences GIVING PRIORITY TO HUMAN RESOURCES AND AN UNSWERVING CORPORATE CULTURE L Oréal has always been guided by humanist values that have caused it to place the individual and talent at the heart of its organisation. These strategic intangible assets are one of the Group s main competitive advantages in the long term, alongside the brands, governance or Research. The Group s human and social project revolves around two priorities: the first is individual performance development of employees and future leaders and the second, social performance. In this field, L Oréal has launched the global Share & Care programme, with the objective of guaranteeing security, protection and well-being for all the Group s employees, wherever they may be located in the world. This programme aims at attracting and fostering the loyalty of the best talents in all the countries of the world, as has been the case in France for a number of years A STRATEGY OF CONSTANT, SUSTAINABLE, SHARED GROWTH Supported by loyal shareholders, vigilant governance and stable management, L Oréal has always targeted constant, sustainable growth. Since its very beginnings, the Group has been committed to developing its presence in all regions of the world, by applying the fundamental rules of a good corporate citizen in all regions: s the products offered to consumers meet the highest quality standards; s the Group s commitments in social matters are the same in all its subsidiaries; s all production centres comply with the same rules aimed at reducing their environmental footprint. Social audits are carried out at suppliers of factories and distribution centres; (1) Acquisition under completion 8 REGISTRATION DOCUMENT / L ORÉAL 2014

11 PRESENTATION OF THE GROUP BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS s each subsidiary participates, as far as its resources allow, in In all its historical categories (haircare, hair colours, styling and the large corporate philanthropy programmes of the shaping), the Division has built a unique brand portfolio: luxury L Oréal Foundation such as For Women In Science, hair care (Kérastase, Shu Uemura Art of Hair), general Hairdressers against AIDS and Beauty for a Better Life. premium brands (L Oréal Professionnel, Redken), an affordable professional brand (Matrix), and a handful of Above and beyond its solid long-term economic performances, the Company seeks to be exemplary, and sets specialist brands. itself demanding standards in order to limit its footprint on the In order to strengthen its brand leadership further, develop planet. In October 2013, L Oréal launched its new commitment markets, and accelerate the conquest of new professional hair to sustainability by 2020: Sharing beauty with all. This salons, the strategy is organised: programme concerns all the Group s impacts, and covers four areas: innovating sustainably, producing sustainably, by region: accelerating growth in the New Markets consuming sustainably and sharing growth. (Details of the (promotion of the profession through education, commitments under this programme are set out in chapter 6, development of a customised offering of both products on pages 212 to 215). and services, leveraging complementary distribution channels), revitalising growth in mature countries by making the hair salon experience more engaging A GROUP THAT CONSTANTLY ADAPTS (e-motion concept, exclusive new professional services, development of expert fashion assistance provided by L Oréal relies on great continuity in its strategy. But continuity hairdressers); does not prevent renewal. L Oréal transforms its business to adapt to changes in the world in order to consolidate its by category: enlarging its professional expertise to two leadership and increase its chances of success in the future. new segments (nail care and colour, Decléor and Carita The challenge is twofold: it is necessary both to pursue the skincare): these new activities, which are highly strategy which has enabled L Oréal to be successful over the complementary to the profession of hairdresser, will last hundred years and, at the same time, to invent the new make it possible to enhance the authority of the Division L Oréal of the 21 st century, perfectly matched and in tune with over the professional beauty business as a whole, in hair a profoundly changing world. salons and beauty institutes An organisation that serves the Group s development s The Consumer Products Division: Innovations in cosmetics that are affordable to all. The Consumer Products Division has built its development around the deployment of its three main brands (L Oréal Paris, Garnier, Maybelline), accompanied by several specialist or L ORÉAL S.A. regional brands (Magic, Essie, Dark and Lovely, Nice & Lovely, Vogue, LaScad brands: Dop, Narta, Mixa, etc.). L Oréal S.A. is a French company with its registered office in France, which carries out a commercial business specific to With the aim of accelerating its growth, the Consumer that country. In parallel, L Oréal S.A. acts as a holding Products Division rolls out its strategy in all countries: company and has a role firstly of strategic coordination and secondly of scientific, industrial and marketing coordination of by region: defending and increasing its already strong the L Oréal Group on a global basis. The subsidiaries develop positions in Western Europe, pursuing the winning the Group s business activities in the country or region in which momentum in North America, speeding up growth in the they are located. In this connection, they manufacture or have New Markets; produced and commercialise the products that they decide to sell on their market. by category: accentuating its development and leadership in hair care, skin care, make-up and hair Almost all the subsidiaries are owned by L Oréal S.A., which colours, to achieve the necessary critical mass has a holding or control percentage equal to or close to 100%. thresholds in every location where the Division is present, The detailed list of these subsidiaries is set out in the notes to and developing the growth driver categories (men s the consolidated and parent company financial statements cosmetics, deodorants) to prepare for its future growth. on pages 174 to 177 and pages 201 to 203. s L Oréal Luxe: Creating exceptional experiences COSMETICS DIVISIONS The Cosmetics Divisions represented over 96% of consolidated sales in 2014 and are organised into four operating Divisions present in every zone and in every country, each corresponding to a specific marketing channel. Each Division fully intergrates all the opportunities arising from increased digitalisation. s The Professional Products Division: Offering the best of professional beauty. L Oréal Luxe orchestrates in a large number of countries a unique portfolio of 17 prestigious brands: emblematic general brands, aspirational designer brands and alternative or specialist brands. L Oréal Luxe s strategy revolves around a vision: by region: accelerating in Asia and in Travel Retail, the leading growth drivers for L Oréal Luxe, consolidation of its leadership in Western Europe, strengthening of the positions in the United States, and development of new growth areas (Russia, Middle East); REGISTRATION DOCUMENT / L ORÉAL

12 1 PRESENTATION OF THE GROUP BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS by category: developing to skincare with three Travel retail: the travellers channel is a booming channel multi-category brands and four specialist brands, that conveys an image. Already the leader in this channel, the developing in make-up with, in particular, global Group decided to create the Group Travel Retail Division deployment of the recently acquired specialist Urban Worldwide, including multi-division activities. This Division s Decay brand, and optimisation of growth in fragrances ambition is to continue to widen the gap, with a global by winning major positions in women s perfumes and shopper strategy: a personalised, custom-tailored approach, consolidation of its leadership in the men s category. according to languages, cultures and beauty rituals, which makes it possible to respond to the aspirations of this new s The Active Cosmetics Division: Helping everyone in their quest for skin's beauty and health. generation of travellers. The Body Shop With a portfolio of very complementary brands, strongly anchored in science and working closely with healthcare Founded in 1976 in Great Britain by Dame Anita Roddick, The professionals all over the world, the Active Cosmetics Division is Body Shop Branch represents nearly 4% of consolidated sales the leader in dermocosmetics. in The mission of this strongly committed brand is to have a positive impact on the life of men and women of all origins. In a perfect position to respond to the growing demand for A growing number of consumers, in all countries, are looking advice, efficacy and safety from consumers, the Division for products that combine efficacy with the natural inspiration, deploys its global brands: Vichy, La Roche-Posay, and proposed by brands with an ethical business model. The Body SkinCeuticals. Shop s deployment strategy combines: The Division implements its strategy by adapting its business s pioneering, innovative products based on the highest model to the realities and opportunities of the healthcare quality natural ingredients; channels in each of the major regions: pharmacies and chemists in Western Europe; s a tone of communication with a strong personality; drugstores in North America and in the New Markets; s a personalised purchasing experience in stores or online. Personalised advice to customers on all markets. On the New Markets where the Brand has a particular resonance, the launch of The Body Shop through the The Group leadership of the Selective Divisions (L'Oréal Luxe, acquisition of Emporio Body Store in Brazil is a tremendous Active Cosmetics, Professional Products, The Body Shop), opportunity for development in a market in tune with its vision created in 2013, aims to accelerate the Group s development of beauty, its sensorial products and its values. in all these distribution channels, by using its know-how in each of its selective sales networks. See segment information on page REGISTRATION DOCUMENT / L ORÉAL 2014

13 PRESENTATION OF THE GROUP BUSINESS ACTIVITIES AND STRATEGIC ORIENTATIONS / THE GROUP S SIMPLIFIED ORGANISATION CHART 1 Professionnal Products L'Oréal Luxe Active Cosmetics Consumer Products The Body Shop Research & Innovation Digital Human Resources Admin & Finance Operations Comm, Sustainability & Public Affairs Almost all subsidiaries are directly held by L Oréal parent s the Administration and Finance Division, in charge of the company with a holding or control percentage equal to or Group s financial policy, controlling and consolidation, close to 100%. The detailed list of these subsidiaries is set information systems and legal and tax co-ordination, as out in the notes to the consolidated and parent company well as financial communications and relations with financial statements on pages 174 et seq. and pages 201 shareholders and investors and strategic prospective; et seq. s the Communication, Sustainability and Public Affairs NB: On July 8 th, 2014, L Oréal sold all its holdings in the Division, in charge of co-ordination of corporate companies of the Galderma group to Nestlé. communication, co-ordination of communication by the Divisions and brands and Sustainable Development SUPPORT DIVISIONS Several specialist Divisions provide their expertise and support to the operational Branches and Divisions and to the other business activities: s the Research and Innovation Division, in charge of fundamental and applied research; s the Digital Division, which has the mission of accelerating the Group s digital transformation by helping the brands to create new territories for expression and the teams to build more interactive, more personalised, closer relationships with consumers, while taking advantage of the business development opportunities offered by Digital as a distribution channel; s the Operations Division, in charge of coordination of production and the supply chain; s the Human Resources Division, in charge of recruitment, training and talent development policies and co-ordination of social policy; GEOGRAPHIC ZONES The Group s international development has naturally meant that L Oréal has had to adapt its organisation to the need to co-ordinate the establishment and development of its brands on every continent. Thus, various geographical zones have been created, each with operational responsibility for the subsidiaries in the countries of its region: s Western Europe Zone; s Americas Zone; s Asia, Pacific Zone; s Eastern Europe Zone; s Africa, Middle East Zone. REGISTRATION DOCUMENT / L ORÉAL

14 1 PRESENTATION OF THE GROUP INTERNATIONALIZATION AND THE COSMETICS MARKET EXECUTIVE COMMITTEE Members of L Oréal s Executive Committee First name/last name Jean-Paul Agon Laurent Attal Nicolas Hieronimus Barbara Lavernos Brigitte Liberman Marc Menesguen Christian Mulliez Alexis Perakis-Valat Alexandre Popoff Sara Ravella Position Chairman and Chief Executive Officer Executive Vice-President Research and Innovation President Selective Divisions Executive Vice-President Operations President Active Cosmetics Division President Consumer Products Division Executive Vice-President Chief Financial Officer Executive Vice-President Asia-Pacific Zone Executive Vice-President Eastern Europe Zone Executive Vice-President Communications, Sustainability and Public Affairs Lubomira Rochet Frédéric Rozé Geoff Skingsley Jérôme Tixier An Verhulst-Santos Jochen Zaumseil Chief Digital Officer Executive Vice-President Americas Zone Executive Vice-President Africa, Middle East Zone Executive Vice-President Human Relations and Advisor to the Chairman President Professional Products Division Executive Vice-President Western Europe Zone 1.4. INTERNATIONALIZATION AND THE COSMETICS MARKET A historical presence in developed markets companies with commercializing its products, these companies being united in 1953 around an exclusive agent, Cosmair. Following the Company s takeover in 1994, it ensured the Group s development on the North American continent with the status of subsidiary. The acquisition of brands like Maybelline (1996), Matrix and Kiehl s (2000), or more recently Clarisonic (2011) Urban Decay (2012) and NYX (2014) have L Oréal is present in 130 countries in all 5 continents. Founded in France in 1909, the Group developed rapidly in Western Europe. In 2014, it made 35.1% of its cosmetics sales in this firmly anchored the Group in North America. In 2014, its sales territory in which the Group is long established. on that continent increase d by 1.1% like-for-like to reach 24.9% of world cosmetic sales. In the first half of the 20 th century, L Oréal gained a foothold in North America. Initially, the Group entrusted distribution 12 REGISTRATION DOCUMENT / L ORÉAL 2014

15 PRESENTATION OF THE GROUP INTERNATIONALIZATION AND THE COSMETICS MARKET and 39.6% in The weight of the New Markets in the Rapid development outside Group's sales has increased by nearly 60% between 2005 and Western Europe and North This progression is expected to continue. America Beginning in the 1970s, the Latin America Zone developed with a multi-divisional organisation that the Group has applied in the other major regions of the world. Present in Japan for nearly 50 years, L Oréal has developed its presence in that country by choosing the brands to be given priority for this extremely specific market: Kérastase in hair salons, Lancôme in Luxury products and Maybelline and L Oréal Paris in mass-market products. The 1990s witnessed the opening up of New Markets with the fall of the Berlin wall which gave the brands access to the markets in Eastern European countries. L Oréal was among the first foreign groups to obtain an authorisation from the Indian government in 1994 for the creation of a wholly-owned subsidiary with its registered office in Mumbai. In 1997, the Group created a large multi-divisional zone in Asia and opened new subsidiaries, particularly in China where L Oréal holds 100% of the capital of its entity. The Africa and Middle East zone, where the Group had a weak presence, is a new frontier for development in the New Markets: the number of subsidiaries in that region has increased from 7 to 12 over the last six years. The mid 2000s were the turning point: the strong acceleration of the development of the New Markets has led to a shift of the point of gravity in the economic world. In all, the percentage of cosmetics sales generated by the Group in the New Markets was 15.5% in 1995, 27.1% in 2006 The Group's business footprint is well-balanced across the main markets in the world. In September 2013, the Group has presented the Sharing Beauty with All program and had detailed its commitments for 2020 to redure its environmental impact while confirming its growth ambitions. A thorough presentation of these commitments appears in chapter 6 pages 212 to Immense development potential Besides the major countries known as the BRIMC countries (Brazil, Russia, India, Mexico and China), L Oréal has notably identified among its growth markets the following countries: Poland, Ukraine, Turkey, Argentina, Colombia, Indonesia, Thailand, Philippines, Egypt, Saudi Arabia, Pakistan, Kazakhstan, South Africa and Nigeria. In some of these countries, the consumption of cosmetics products per inhabitant is 10 to 20 times lower than in mature countries. Several tens of millions of inhabitants have access every year throughout the world to levels of revenues which make them part of the middle classes and allow them to consume modern cosmetics products. The marketing teams, in particular in large countries, pay heed to these new consumers. The laboratories on all continents study their specificities. The Group s innovation policy is based on the accessibility and adaptation of products to the beauty habits and rituals of all men and women in their infinite diversity. These form the basis for the universalisation of beauty. 1 REGISTRATION DOCUMENT / L ORÉAL

16 1 PRESENTATION OF THE GROUP INTERNATIONALIZATION AND THE COSMETICS MARKET NORTH AMERICA 24.9% OF GROUP COSMETICS SALES + 1.1% Sales growth in 2014 (1) + 2.8% Market growth in 2014 (2) SALES 5,389.4 M OPERATING PROFIT (3) 18.7% (% of sales) WESTERN EUROPE 35.5% OF GROUP COSMETICS SALES + 2.4% Sales growth in 2014 (1) + 0.3% Market growth in 2014 (2) SALES 7,697.7 M OPERATING PROFIT (3) 22.7% (% of sales) LATIN AMERICA AFRICA, MIDDLE EAST EASTERN EUROPE ASIE, PACIFIQUE 8.6% OF GROUP COSMETICS SALES % Sales growth in 2014 (1) % Market growth in 2014 (2) SALES 1,853.7 M 2.6% OF GROUP COSMETICS SALES % Sales growth in 2014 (1) + 7.0% Market growth in 2014 (2) SALES M 7.3% GROUP COSMETICS SALES + 6.0% Sales growth in 2014 (1) + 3.1% Market growth in 2014 (2) SALES 1,585.4 M 21.1% GROUP COSMETICS SALES + 5.3% Sales growth in 2014 (1) + 4.1% Market growth in 2014 (2) SALES 4,563.6 M NEW MARKETS (1) Like-for-like 39.6% OF GROUP COSMETICS SALES + 6.9% Sales growth in 2014 (1) + 5.3% Market growth in 2014 (2) 8,571.1 M Sales 19.6% Operating profit (% of sales) (3) (2) Source: L Oréal estimates of worldwide cosmetics market based on net manufacturing prices excluding soap, toothpaste, razors and blades. Excluding currency fluctuations (3) Operating profit before «non-allocated». See chapter 3, page REGISTRATION DOCUMENT / L ORÉAL 2014

17 PRESENTATION OF THE GROUP INTERNATIONALIZATION AND THE COSMETICS MARKET / WORLDWIDE COSMETICS MARKET FROM 2005 TO 2014 (1) The worldwide cosmetics market represents approximately (Annual growth rate as %) 181 billion, and grew by an estimated +3.6% (1) in It is a particularly robust market, which is steadily expanding, while proving very resilient when economic conditions are at their most difficult. The cosmetics consumer s behaviour has not +4.9% +5.0% changed since the crisis. There has been no devaluation, +4.6% +4.6% banalisation or massification of the market. On the contrary, +4.2% consumers aspirations for quality are higher than ever, and +3.8% +3.8% they are always eager for technology and new ideas. The +3.6% cosmetics market remains a supply-led market, driven by innovation, where consumers are always looking for quality, +2.9% performance and perceived results % / BREAKDOWN OF THE WORLD COSMETICS MARKET IN 2014 (1) (As %) BY GEOGRAPHIC ZONE BY PRODUCT CATEGORY 34.7% Asia-Pacific 2.8% Africa, Middle East 7.3% Eastern Europe 21.8% Western Europe 20.9% North America 12.5% Latin America 35.3% 23.3% 10.8% 16.6% 12.8% 1.2% Skincare Haircare Toiletries, deodorants Make-up Perfumes Oral cosmetics For the second year running, in 2014, the dermocosmetics market was the most dynamic with growth of +5.1%. The market was buoyant on all continents, even in Western Europe with growth of nearly +3%. With growth of +5.2%, the selective market continued to grow at a steady pace in 2014; bolstered by Asia, the United States and e-commerce, it contributes 29% of global growth (1). With growth of +3.5%, mass market sales tailed off particularly due to mature countries and Asia. From a geographic viewpoint, the New Markets continue to attain increasing levels of growth: excluding Japan, they represent 80% of worldwide market growth this year (1), due in half to Asia-Pacific (1) Source: L Oréal estimates of the worldwide cosmetics market based on net manufacturer prices excluding soap, toothpaste, razors and blades. Excluding currency fluctuations. REGISTRATION DOCUMENT / L ORÉAL

18 1 PRESENTATION OF THE GROUP RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP / MAIN WORLDWIDE PLAYERS (1) (2013 Sales in billions of US$) L Oréal Unilever Procter & Gamble Estée Lauder Shiseido (1) Source: Beauty s top 100 WWD, August 2014, in data for Competitive positions and market share held by the Group s Divisions and brands mentioned in this report are based on studies, panels and polls obtained from specialised organisations and companies, or, in the absence of comprehensive studies, are the result of estimates made by L Oréal on the basis of available statistical data RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP THE SCIENTIFIC ADVISORY BOARD IS CONTINUING ITS Research, in the Group s genes WORK WITH REGARD TO SENIORS Over a century ago, a scientist called Eugène Schueller founded L Oréal by launching a major innovation: a harmless hair dye. Research thus became one of the components of the Group s DNA, and very quickly one of the keys to its success. To invent beauty and accommodate the aspirations of millions of men and women, L Oréal is continuing to push back the boundaries of science. This commitment to innovation remains unwavering: offering everyone, everywhere in the world, the best of cosmetics in terms of quality, efficacy and safety. The work conducted and the ingredients used respect consumers, the environment and biodiversity. To win over a billion new consumers, the Group constantly increases its investments, with a budget of 761 million in 2014, up by 1.6% as compared to the previous year. Created in 2013 to explore the future boundaries of beauty, and chaired by the Global Scientific Director, the Scientific Advisory Board, which brings together nine prominent external experts with diverse research backgrounds, devoted its reflections in 2014 to beauty for seniors (aged 65 and older), this rapidly growing silver generation with a wide array of aspirations. Its recommendations to conduct several fundamental studies to better understand skin and hair ageing provide added confirmation for certain actions already in progress, and encourage further initiatives. The Board s experts are convinced that relatively unexplored territories like those of the microbiome or of intelligent materials bear the promise of fruitful cosmetic innovations for the future. 16 REGISTRATION DOCUMENT / L ORÉAL 2014

19 PRESENTATION OF THE GROUP RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP In order to succeed in the changeover from a highly The multi-hub organisation has centralised system to one of a matrix, multi-hub organisation, shown results The implementation of an international organisation, with its six hubs, is beginning to show its results. Due to their close proximity with consumers, the hubs innovate with genuine local relevance and nourish the flow of innovations. the roles and responsibilities in each of the main functions have been clarified. The international dimension is reinforced through global management of the project portfolio. 1 3 Global centres (France) 5 Regional hubs 18 Research centres 16 Evaluation centres LOCAL RESEARCH AND ADAPTATION OF PRODUCTS To adapt to consumers all over the world, L Oréal s Research teams are present in all geographic zones through its 18 cosmetics research centres and 16 evaluation centres. The R&I teams draw on the local ecosystem: consumers, universities, suppliers. The research centres are grouped together in 3 global centres in France (Advanced Research, Hair métiers and Cosmetic métiers) and 5 regional hubs: in the United States, China, Japan, Brazil and India. These regional hubs identify consumer needs and cosmetic practices. The richness of their scientific ecosystem promotes cooperation and partnerships for excellence. The data collected then enables the researchers to develop new products that are perfectly in tune with local expectations and aspirations. The innovations developed are also shared in a coordinated manner to promote the fluidity of exchanges. Research and Innovation budget Research and Innovation budget Number of patents ( millon) ( million) , , , Among these major molecules, it is possible to cite Ionène G Revisiting active principles (1978) which respects the integrity of the hair in hair colours; L Oréal s Advanced Research Department was set up in 1963 to extend the knowledge of skin and hair in order to think up new concepts which will lead to the synthesis of new molecules. The Group thereafter multiplied the number of patent filings (501 in 2014) and developed a large number of active principles, the main ones being at the source of the Group s flagship products. Mexoryl SX (1993) and Mexoryl XL (1995) sun filters which protect against UVA and UVB rays; Pro-Xylane (2006) to treat deep wrinkles and LR2412 (2011) which reduces wrinkles while giving a more even skin tone; Stemoxydine (2012) which favours follicular regrowth or finally, Filloxane (2013), which revitalises fine, limp hair. REGISTRATION DOCUMENT / L ORÉAL

20 1 PRESENTATION OF THE GROUP RESEARCH & INNOVATION: EXCELLENCE STEP-BY-STEP THE ART OF MAXIMISING As progress is made in science, the research teams are accustomed to revisiting the properties and interactions of captive molecules, and studying the synergy effects that could enable them to make the most of their knowledge of hair and skin. In hair care, they combined four molecules which had already proven themselves separately to take care of damaged, weakened hair in one and the same range, SERIOXYL by L Oréal Professionnel. Each of them targets a specific problem: fragility, thinning, lack of density and vigour. Céramide R repairs hair fibre, SP94 favours cuticle cohesion and improves the anchoring of hair in the scalp, while Stemoxydine contributes to renewal of the hair follicle and Intracylane really fortifies hair Animal testing: balancing ethics and innovation To respond to the essential requirements of harmlessness of their innovations, the Research team embarked in the 1980s on developing alternative methods to animal testing for the evaluation of the safety of its products and active principles. Major progress has been made thanks to tissue engineering: reconstructing the first human epidermis in 1979 and then the first complete skin (epidermis and dermis) in Twelve reconstructed skin and corneal tissue models have been developed to date. These models are fabulous tools to predict the safety and efficacy of products and make it possible to reduce the time-to-market. Thanks to these models, L Oréal was able to stop testing finished products on animals in 1989 and develop predictive evaluation strategies to satisfy the European regulations which prohibit the offering for sale of products containing any ingredient that has been tested on animals after March 11 th, This law has not had any impact on the innovation efforts made by the Group, which has no longer conducted animal testing anywhere in the world since March 2013 and which does not delegate this responsibility to anyone. EPISKIN IN CHINA In four decades of international scientific cooperation, the Group has built genuine expertise in this area. This ethical commitment led to validation of several alternative methods before it shifted into the era of predictive evaluation. This led to the creation of a subsidiary, Episkin, which produces and sells validated skin models in Lyon. Its engagement became international, following the changes in the legislation and regulations in Brazil, India, China, and so on. It is with this objective in mind that production of restructured Asian skin in China started in 2008; the marketing of these skins by the recently formed company, Shanghai Episkin Biotechnology Co. Ltd can now be envisaged. VALIDATIONS IN PROCESS L Oréal is participating in the validation of several alternative methods. In Europe, for ocular sensitisation and irritation and in Japan, for ocular corrosivity and irritation. In China, in partnership with the authorities, L Oréal is participating in pre-validation of an alternative method for skin irritation using a Chinese Episkin model A new research territory: the microbiome Each square centimetre of skin is normally colonised by millions of microorganisms which form the skin microflora. It educates the immunity system and protects the body against the invasion of more dangerous organisms: responsible both for skin health and beauty, there are over 500 different specifies of microflora. Thanks to the progress made in the recent genomics technologies, several research teams are now seeking to characterise the skin microbiome, i.e. to identify all the genomes of these micro-organisms colonising a precise area of the skin. This knowledge is essential to understanding both how to preserve the natural ecosystem of the skin and also how the disturbance of this balance can lead to skin disorders or infections. In collaboration with certain of these teams, L Oréal s researchers have obtained their first results with regard to mapping of the microbiome of skins affected by atopic dermatitis, characterised by a loss of diversity of the microbiome. They have shown that treatment with Lipikar Baume AP by La Roche-Posay makes it possible to restore a good balance. The knowledge contributed by this study opens up new perspectives in the diagnosis and treatment of this skin disease and in the development of new treatments Connected beauty entrusted to the incubator The digital revolution is profoundly changing beauty product consumption. This is why L Oréal R&I decided, at the end of 2012, to create a Connected Beauty Incubator in the United States within a short distance of the campus of the University of California in San Francisco: this consists of a cross-functional team of researchers tasked with looking beyond what exists to imagine the future of beauty. They work in collaborative mode and integrate the development of science and technology, the power of data and new consumption patterns. Their mission is to increase collaboration with centres of excellence in biology, biophysics or biotechnology. Its first innovation: Makeup Genius an application for tablets and smartphones at L Oréal Paris, the first stage of a dream enabling women to test make-up virtually, with perfect colour rendering, as if it had been applied by a professional makeup artist, then buy the corresponding products. 18 REGISTRATION DOCUMENT / L ORÉAL 2014