annual report 1997 - morningstar, inc

annual report 1997

Brought to you by Global Reports

Board of Directors

Message from the Chairman

Corporate Governance

Management Committee

L’Oréal financial highlights

L’Oréal and the Stock Exchange

Highlights of the Year

International momentum

Human Resources

Administration and finance

Production and logistics

L’Oréal and the environment

Research and development

Cosmetics

Salon Division

Consumer Division

Perfumes and Beauty Division

Active Cosmetics Division

Other activities

Galderma

Lanvin

Pharmaceuticals

Synthélabo

insert:Consolidated financial statements

The report of the Board of Directors, thefinancial statements of the parentcompany, L’ORÉAL SA, and supplementaryinformation will be available upon requestfifteen days prior to the Annual GeneralMeeting.

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Contents

Founded nearly a centuryago by French chemistEugène SCHUELLER,L'ORÉAL has long been established as

the world leader in cosmetics.

The Group is also expanding its

business in dermatology and

pharmaceuticals.


L’Oréal 1997 Annual Report 1

Board of Directors

Lindsay Owen-JonesBritish.Joined L'ORÉAL in 1969. During his internationalcareer with the Group he was Chief Executive ofL'ORÉAL in Italy from 1978 to 1981 and Chairmanof Cosmair in the United States from 1981 to1984. Appointed Deputy Chairman and ChiefExecutive Officer in 1984 and Chairman andChief Executive Officer in 1988.L'ORÉAL Board Member since 1984.GESPARAL Board Member.Board Member of the following companies: AIRLIQUIDE, BANQUE NATIONALE DE PARIS andLAFARGE.

Jean-Pierre MeyersL'ORÉAL Board Member since 1987.Vice-Chairman of the Board.GESPARAL Board Member.NESTLÉ S.A. (Switzerland) Board Member.

Liliane Bettencourt *Daughter of Eugène Schueller, who foundedL'ORÉAL in 1907.Vice-Chairman of the Board of GESPARAL inwhich she holds a controlling interest.L'ORÉAL Board Member since 1995.

Françoise Bettencourt MeyersDaughter of Mrs Bettencourt.L'ORÉAL Board Member since 1997.GESPARAL Board Member.

Peter Brabeck-LetmatheAustrian.With the NESTLÉ Group since 1968. AppointedGeneral Manager in 1992, then Chief ExecutiveOfficer of NESTLÉ S.A. (Switzerland) in 1997.L'ORÉAL Board Member since 1997.GESPARAL Board Member.CREDIT SUISSE GROUP Board Member.

Pascal Castres Saint MartinJoined L'ORÉAL in 1979,Vice-President in charge of Administration andFinance since 1991, appointed Group ExecutiveVice-President in 1997.L'ORÉAL Board Member since 1994.Vice-Chairman of the Board of SYNTHÉLABO.

François DalleWith L'ORÉAL from 1942 to 1984,Group Executive Vice-President in 1948,Chairman and Chief Executive Officer from 1957to 1984.NESTLÉ Board Member from 1974 to 1989and Vice-Chairman from 1986 to 1989.L'ORÉAL Board Member since 1950.Vice-Chairman of the Board of GESPARAL.Chairman and Founder of INSTITUT DEL'ENTREPRISE, Chairman and Founder ofASSOCIATION ENTREPRISE et PROGRES.Chairman of the review HUMANISME ETENTREPRISE.

José DanielSpanish.With NESTLÉ from 1957 to 1997,General Director of NESTLÉ S.A. (Switzerland)from 1979 to 1997.Chairman of the Board of NESTLÉ Spain.L'ORÉAL Board Member since 1982, his term willexpire in 1998.GESPARAL Board Member.

Marc Ladreit de LacharrièreWith L'ORÉAL from 1976 to 1991,formerly Vice-President in charge of Finance and Administration,Group Executive Vice-President from 1984 to 1991.Chairman of FIMALAC.L'ORÉAL Board Member since 1984.Board Member of the following companies:CANAL+, CASINO, EURIS, FRANCE TELECOM,GROUPE ANDRÉ.

Guy LandonWith L'ORÉAL from 1953 to 1994,formerly Vice-President in charge of HumanResources,Group Executive Vice-President from 1991 to1994.Chairman and Chief Executive Officer ofARTCURIAL.L'ORÉAL Board Member since 1989.Board Member of the EUROPEAN CENTRE FORCONTINUING EDUCATION.

Olivier Lecerf **

Joined LAFARGE in 1956,Chairman and Chief Executive Officer from 1974to 1989.L'ORÉAL Board Member since 1990.Board Member and Honorary Chairman ofLAFARGE. Board Member of SAINT GOBAIN andMember of the Consultative Committee ofMORGAN STANLEY.

Helmut Maucher **

German.With NESTLÉ since 1951. Chief Executive Officerof NESTLÉ S.A. (Switzerland) until 1997. Chairmanof the Board of Directors since 1990.L'ORÉAL Board Member since 1982.Vice-Chairman of the Board of GESPARAL.Board Member of BAYER AG andDEUTSCHE BAHN AG.

Edouard de RoyèreJoined AIR LIQUIDE in 1966, Executive Vice-President in 1979, Chairman and Chief ExecutiveOfficer from 1985 to 1995.L'ORÉAL Board Member since 1995.Board Member of the following companies:AIR LIQUIDE, DANONE, SODHEXO and SOLVAY.

Jacques P. ViziozJoined the BANQUE NATIONALE POUR LECOMMERCE ET l'INDUSTRIE (BNCI) in 1948, one ofthe founders of BANEXI in 1969. FormerlyExecutive Vice-President of the BANQUENATIONALE DE PARIS (BNP). L'ORÉAL BoardMember since 1967, his term will expire in 1999.External Management Consultant to companies.

Auditors

Pierre Feuillet Albert PavieSubstitute: Substitute:Olivier Thibault Michel Jouan

** Chairman of the Management and Remuneration Committee** Member of the Management and Remuneration CommitteeNote: directorships held in Group subsidiaries are not mentioned.


2 Message from the Chairman

Message from the Chairman

In 1997, L'ORÉAL's performance was driven by

the increased pace of expansion in new markets,

stronger positions for our US subsidiary, which is

firmly established as the Group's second world

centre for creative strategy, and the return to

growth in Western Europe .

Pre-tax profit up 17%

The Group increased sales by 14.5%. It is

true that for the first time in five years,

exchange rates had a substantial favourable

impact, but underlying growth was nonetheless

8.4%.The rise in cosmetics sales was 8.6% which,

according to our estimates, was substantially

more than the increase for the world market.

Our very rapid sales growth, backed by intensive

cost reduction programmes, paved the way for

an 18.2% gain in operating profit and a 17% rise

in pre-tax profit, which outpaced growth in sales.

Despite a higher tax charge in 1997, L'ORÉAL

generated net profit before capital gains and

losses, after minority interests, up 12.8%

to FF 4.21 billion.

The United States

A second world centre for creative strategy

Our US subsidiary confirmed its status as the

Group's second world centre for creative

strategy alongside Paris, enhancing international

scope of brands inspired by the United States

such as RALPH LAUREN fragrances, REDKEN

5th AVENUE and MAYBELLINE NEW YORK. The

latter is successfully expanding into close to

twenty new markets with the ambition to

become mass-market make-up leader, rapidly

moving from regional to global brand status.

In addition, the United States made a strong

contribution to L'ORÉAL's growth with cosmetics

sales exceeding US$ 2 billion .The increase

expressed in French francs was nearly 23%.The

Group, which currently generates a quarter of

its sales in North America, has taken its place

among the front-runners in make-up, hair colour

and skincare in the United States.The acquisition

of the Canadian suncare brand, OMBRELLE, opens

the door to the US sun protection market. L'ORÉAL

has uncontested leading edge technology in this

strategically important business.

Return to growth in Europe

In several European countries, particularly in the

United Kingdom, sales rose at similar rates to

those recorded in new markets.We expanded

sales by nearly 8% in Western Europe, despite

slack consumer demand in France and Germany.

Another major move, as European markets

converge and the Group readies itself for the

advent of the Euro, was the acquisition of

interests not previously held in its Spanish

subsidiaries, meaning that L'ORÉAL now wholly

owns all its European subsidiaries.

At the same time we expect that in the next

three years, the share of sales generated in

Western Europe will drop to less than 50% of


New innovations have paved the way for major

product launches, primarily Color Fusion from

REDKEN 5TH AVENUE, PLÉNITUDE FUTUR.e by

L'OREAL PARIS, as well as Elvive in the United

Kingdom,Teint Idole and Re-Source by LANCÔME,

Spirits by Carlos from HELENA RUBINSTEIN,

Express Finish by MAYBELLINE NEW YORK, Hydra

Detox by BIOTHERM, the Normaderm patch from

VICHY and the Lanvin L'Homme fragrance.

Hand in hand with this international expansion,

the Group rounded out its industrial facilities,

notably in China, Poland, and Brazil.Value analysis

initiatives were also continued during the year.

Synthélabo:

aiming to become a European leader

SYNTHELABO continued its growth in Europe,

with the objective of becoming a European leader

and increased its investment in research,

particularly genomics, which has high potential for

revolutionary technological breakthroughs.

SYNTHELABO generated turnover up 12.6% to

FF 11.7 billion and continued to improve

performance, recording an increase in attributable

net profit of FF 15.8%.

Confidence in the future

The confidence that we have in the future

outlook and success of our Group is based on its

key strengths of leading edge technology, the

international scope of its brands and the

commitment of employees to this great human

adventure.


Lindsay Owen-Jones

Chairman and Chief Executive Officer of L'Oréal

cosmetics sales, as a result of rapid growth in

emerging markets which already account for

more than 15% of sales.

Rapidly capturing

shares in new markets

We are continuing to step up our drive into

new markets with growth of 27% in Asia

excluding Japan, 35% in Latin America and 45%

in Eastern Europe, where the Group set

up two new subsidiaries in Romania and

Slovenia.

Despite the economic fluctuations experienced

by certain of these countries, we firmly believe in

their potential for rapid expansion, particularly in

Asia, where the Group currently generates less

than 6% of its total cosmetics sales. In China, for

example, we have invested in plant, started local

production and set the initial objective of

ensuring that MAYBELLINE make-up products are

available to every Chinese woman.

"L'Oréal, because I'm worth it"

Contrary to predictions that brands were on

the decline, their strength and attraction

for consumers remain growing factors of

the Group's success. Claudia SCHIFFER,

Andie MACDOWELL and GONG LI look out

from posters all over the world with the

message: "L'ORÉAL, because I'm worth it".This

campaign reflects our desire to position L'OREAL

PARIS as one of the world’s great brands,

irrespective of category.

Globalisation of brands depends to a great extent

on the competitive advantages offered by

our products.We have therefore once more

intensified our R&D initiatives. Our

laboratories are now organised around the

Group's key technological businesses: make-up,

colourants and haircare, skincare and sun

protection.


4 L’Oréal 1997 Annual Report

Corporate Governance

The new-style presentation of the Board of

Directors in this Annual Report was adopted at

the Board's request to ensure that the

information provided is as clear as possible.

A collegiate Board structure provides the scope

for each Director to contribute fully to the

Company, bringing the benefit of his or her

specific experience and expertise.

The Board met five times in 1997. A special

meeting was held with the Statutory Auditors in

February to review the preliminary financial

highlights for 1996, before publication of the

provisional results.The conditions under which

consolidation is carried out at L'ORÉAL under the

supervision of the Statutory Auditors were

outlined in detail to the Board.

While Board Members were kept regularly

informed of L'ORÉAL's performance, this meeting

early in the year reflected the wish of the

Chairman to discuss the keynotes of the Group's

strategy and to put its financial performance into

perspective.The Board was thus informed of

Management's global vision and observed that the

resulting projects were perfectly in line with the

Group's objectives of international expansion,

enhanced profitability and value creation.

The Management and Remuneration Committee

met twice in 1997.The Committee, which is

chaired by Mrs. BETTENCOURT and comprises

two other members, Mr. Helmut MAUCHER and

Mr. Olivier LECERF, largely devoted its time to the

remuneration of Group officers and a new stock

option plan for senior management.The

Committee's proposals were subsequently

approved by the Board of Directors.

In February 1998, as in 1997, prior to the

approval of the accounts in April, preliminary

accounts were reviewed by the Board with the

assistance of the Statutory Auditors. Members of

the Board were able to assess the methods used

in drawing up the accounts as well as the quality

of the general system of control for the Group's

subsidiaries all over the world, for the Parent

Company and for consolidation systems.

Finally, the Board wished to reiterate the code of

practice for financial transactions on the Stock

Market, both for its own Members and for other

Group employees who have access to inside

information whether at certain times of the year

or in specific instances.

The Board of Directors will continue to move

ahead with efforts to contribute to the

stringency of audit procedures and to guarantee

transparency of financial information. As in the

past, the Board continues to review Board

membership, organisation and operation on a

periodic basis.


Lindsay Owen-JonesChairman and Chief Executive Officer

Pascal Castres Saint Martin

Group Executive Vice-PresidentVice-Presidentin charge of Administration and Finance

Following the proposal ofMr. Lindsay Owen-Jones,Chairman and ChiefExecutive Officer, L'Oréal'sBoard of Directorsappointed Mr. Pascal CastresSaint Martin as GroupExecutive Vice-President.He takes over from Mr. Gérard Chouraqui whoretired on 1 December 1997after a career of 35 years withthe L'Oréal Group.Mr. Pascal Castres SaintMartin will retain his role asVice-President in charge ofAdministration and Finance, aposition he has held since 1991.

Alain Leprince-Ringuet

Vice-Presidentin charge of Salon Division

Mr. Robert Salmon, whojoined the L'Oréal Group in1963 and had been Vice-President in charge of theProspective since 1991,retired as of 1 January 1998.

Henry-Georges Muller

Vice-Presidentin charge of Active Cosmetics Division

Patrick Rabain

Vice-Presidentin charge of Consumer Division

Gilles Weil

Vice-Presidentin charge of Perfumes andBeauty Division

Jean-François Grollier

Vice-Presidentin charge of Research and Development

Marcel Lafforgue

Vice-Presidentin charge of Productionand Technology

François Vachey

Vice-Presidentin charge of HumanResources

Jean-Pierre Valériola

Vice-President in charge of CorporateCommunications and Public Relations

Functional Divisions

Operational Divisions


Management Committee



L’Oréal financial highlights

L'ORÉALGesparal

As a percentage of 1997 sales by sector:

Cosmetology and Dermatology

Pharmaceutical and Medical Devices

Consolidated Group total (excluding other activities)

1997 Key data

Consolidated sales

Net profit before capital gains and losses and minority interests

Net profit before capital gains and lossesand after minority interests

Fully diluted earnings per share and investment certificate (FF)

Dividendproposed dividend per share and investment certificate (excluding tax already paid to French Treasury, or tax credit) (FF)

+ 14.5%+ 12.2%

+ 12.8%

+ 12.8%

+ 14.3%

60,347

4,225

3,728

55.15

14.00

69,120 (1)

4,739 (1)

4,206 (1)

62.21 (1)

16.00 (1)

Breakdown of share ownershipat 31 December 1997

Research costs

Highlights at 31 December 1997(FF millions)

03%14%05%

1996

1997

43,158

47,242

Total number of employees

1996 1997 96/97 Change

51%

MrsBettencourt

and her family

Nestlé

Public

49%

53.70% 46.30%

(1) dividend to be proposed per share and investment certificate (excluding tax already paid to French Treasury, or tax credit) to the Annual General Meetingon 26 May 1998



0.6%

1.1%

17%

81.3%

Consolidated net sales(FF millions)

97 + 14.6%96 + 13.2%95 + 11.4%

Consolidated Group sales

Breakdown of 1997 consolidated cosmeticssales by division00 000 millions de francs

Consolidated net cosmeticssales(FF millions)

Consolidated cosmeticssales (1)

Breakdown of 1997 consolidated sales by sector00 000 millions de francs

97 + 14.5%96 + 13.1%95 + 12.0%94 + 18.6%93 + 6.9%

+ 14.6%+ 52.6%+ 12.5%+ 15.1%

Cosmetics

Dermatology (1)

Synthélabo

Other

+ 12.2%+ 18.1%+ 12.0%+ 11.9%+ 14.0%

Salon Division

Consumer Division


Active Cosmetics Division

Other Cosmetics

Consolidated net sales

Growth Growth

Growth

11.7%

26.9%

4.8% 1.4%

55.2%

93

40,61347,624

53,37160,347

69,120

94 95 96 97

43,280

48,988

56,163

95 96 97

(1) Including sales generated by agents, 1997 Group consolidated cosmetics salesstood at FF 58.1 billion. Details of these economic sales figures can be found in eachcosmetics division chapter later in the report.

(1) Share attributable to the Group i.e. 50%.



Geographical breakdownof 1997 sales

1997 consolidated profit

Profit before taxation and employee profit sharing(FF millions)

European Union currencies (excl. FF)

French franc

Other European currencies

US dollar

Yen

Other currencies

25%

32%

4%

14%

4%

21%

1997 consolidated sales by currency

Cosmetics 5,878

Dermatology (1) 97

Synthélabo 1,752

Other 35

1.3%

22.6%

0.4%

75.7%

Consolidated profit before taxation and employee profit sharing by sector(FF millions)

Breakdown of 1997 consolidated cosmeticssales by geographical zone

25%

6%

13%

56%

93

4,493

5,3525,886

6,632

7,762

94 95 96 97

93

2,585

3,1213,381

3,728

4,206

94 95 96 97

Western Europe

North America

Asia

Rest of the World

+ 07.7%+ 21.7%+ 13.5%+ 37.5%

Net profit before capital gains and losses,after minority interests(FF millions)

(1) share attributable to the Group i.e. 50%

Growth



Balance sheet (FF millions)

Source and applications of funds(FF millions)

Capital expenditures(industrial, scientific, logistics)(FF millions)

Balance sheet, cash flows and capital expenditure

31,84035,409

22,49811,591

3,8992,794

30,099

64,813

16,354

76

35,066Net fixed assets Shareholders' equity

Minority interestsProvisions for liabilities and charges

Debt

Current liabilities

Others

assets liabilities

Stocks and debtors

Cash and short-term investmentsOthers

151

2,123

272

3,140

cash flow 6,766

3,354

4,492Net profit (before minority interests) Depreciable capital expenditure

Change in working capital requirements

Operating cash flowDepreciation

Provisions and other

93

1,508 1,5351,709

2,211

2,505

94 95 96 97



As at 31 December 1997, L'ORÉAL's share capitalconsisted of 67,606,216 securities (67,590,379 sharesand 15,837 investment certificates) with a par value of FF 10.GESPARAL S.A. holds 53.7% of L'ORÉAL’s capital and70.4% of voting rights.

In the case of failure to comply with the disclosure requirementsspecified in Article 356.1 of the French Companies Act of 24 July1966 and Article 7, paragraph 1, of the Company’s bylaws, the sharesin excess of the relevant disclosure threshold may be stripped ofvoting rights.

(1) Index relative to L'ORÉAL share price.

Fully diluted earnings per share and investment certificate (before capital gains and losses,after minority interests) (4)(in FF)

1993 1994 1995 1996 1997

Final adjusted closing price (2) 1,186.36 990 1,191.82 1,954 2,355

NetDividend per dividend 9.82 11.09 12.09 14.00 16.00 (3)share and investment certificate Tax credit 4.91 5.55 6.05 7.00 8.00 (3)for the year (2)

Total value 14.73 16.64 18.14 21.00 24.00 (3)

L’Oréal share performance (in FF) (base 100 as at 31/12/92)

L’Oréal and the Stock Exchange

Shares (monthly settlement market)(FF)

800

1 000

1 200

1 400

1 600

1 800

2 000

2 200

2 400

2 600

19971996199519941993

93

40.446.2

50.055.15

62.21

94 95 96 97

L'ORÉAL

share price

CAC 40 index (1)

(2) The above figures have been restated to reflect the one-for-ten bonusshare allocation decided by the Board of Directors as at 23 May 1996.(3) Proposed dividend per share and investment certificate (excluding taxcredit) to be approved by the Annual General Meeting on 26 May 1998.

(4) Restated to reflect the one-for-ten bonus share allocation decided bythe Board of Directors as at 23 May 1996.


Highlights of the Year

Jean-Pierre ValériolaVice-President in charge of

Corporate Communicationsand Public Relations

JanuaryIsrael: the INTERBEAUTY subsidiary took over

responsibility for the Salon Division’s operations

in Israel.

FebruaryJapan: LANVIN signed a distribution and

manufacturing agreement with KANEBO.

MarchPoland: coming on stream of a plant to supply

markets in Eastern Europe.

LANCÔME launched Re-Source Lait-en-Eau™

moisturising body spray.

AprilHong Kong: L’ORÉAL sponsored an exhibition of

works of art from the Musée Guimet, Paris.

Korea: the KOBEL subsidiary joined the Salon Division.

China: start of construction of a factory at Suzhou.

MayLaunch of the new Lanvin L’Homme fragrance

for men.

JuneL’ORÉAL was awarded the “Revenu Français” Silver

Trophy for the Best Annual General Meeting.

Sydney: L’ORÉAL presented its research into the

effects of ultraviolet rays and sunscreens at the

19th World Congress on Dermatology.

L’ORÉAL PARIS signed an exclusive worldwide

contract with Claudia SCHIFFER.

July

Japan: the L'ORÉAL Art and Science Foundation

presented the PRIX L’ORÉAL award to two

Japanese research teams.

AugustSpain: L’ORÉAL increased its interests in its Spanish

subsidiaries to 100%.

SeptemberL’ORÉAL PARIS launched PLÉNITUDE FUTUR.e, the first

moisturiser containing nanosomes of pure Vitamin E.

OctoberRome: L’ORÉAL’s Research Department was

awarded first prize by the European Society for

Dermatological Research for its work on

incorporating Langerhans cells into models of

reconstituted skin.

Canada: acquisition of the OMBRELLE sunscreen

brand from DERMTEK.

New subsidiaries set up in Romania and Slovenia.

Argentina: opening of a LANCÔME Institute in

conjunction with Parfumerie POZZI, Buenos Aires.

NovemberLaunch of the L’ORÉAL Internet sites

http://www.loreal.com and loreal-finance.com

Announcement of the creation of the Helena

RUBINSTEIN award for Women in Science, in

partnership with UNESCO.

USA: the Clark plant in New Jersey was one of

38 US companies to receive an Environment

Champion Award.

DecemberChina: L’ORÉAL PARIS unveiled China’s largest

advertising panel in Shanghai.

India: creation of a Salon Division, alongside the

Laboratoires GARNIER business already established

in India.




International momentum

L'ORÉAL worldwide

Increasing international scope of cosmetics, pharmaceuticals and dermatological patents of the L'Oréal Group

Health and beauty are now worldwide markets.

The universal desire to achieve well-being is now

developing as an irreversible trend across the

globe, hand in hand with the growth in

expenditure devoted to such fundamental needs.

Every day, L'ORÉAL continues with the scientific

vocation and industrial enterprise begun in 1907

by its founder, the French scientist Eugène SCHUELLER,

who invented the first synthetic hair colourants.

Research initiatives geared to each individual

consumer contribute to ongoing innovation and

enhanced quality of the Group's cosmetic,

dermatological and pharmaceutical products.

With 47,000 employees and a world network of

400 subsidiaries, 100 agents and 60 manufacturing

plants, the Group's 500 brands enjoy recognition

on all five continents. Ninety years ago, the

company was initially established in Western

Europe, seventy years ago it moved into Latin

America, then into North America in the 1950's.

To round out this expansion it has moved gradually

into Asia, particularly over the last three years. From

haircare products, the Company has expanded into

skincare and bodycare, then perfumes and make-up.

The billions of articles produced are distributed

via every channel, from selective distribution to

mass market retailers, subject to their professionalism.

The Group's increasing international scope is

reflected by the constantly growing share of sales

generated outside France, up from 50% in 1987 to

80% in 1997.The Group continues to capture

market shares steadily every year.

Despite the usual economic ups and downs and a

fiercely competitive environment, L'ORÉAL continues

to push back the frontiers, attentive to the specific

expectations of all its customers, from Buenos Aires

to Shanghai and Helsinki to Dubai. Cross fertilisation

spans from one country to another and across

distribution channels, within the framework of a

policy dedicated to building "mega-brands".

As the year 2000 beckons, population growth,

improvements in the quality of life, modernised

sales systems and the appearance of new niche

markets such as cosmetics geared to younger

consumers or men, provide the health and beauty

business with unlimited scope for development.

In addition, the advance of dermatological and

pharmaceuticals sectors on international markets

is continuing unchecked.The Group has a

substantial foothold in strategic areas of both the

European and Worldwide pharmaceuticals

industry such as neurology, urology and

cardiovascular medicine via SYNTHÉLABO, as well

as dermatology with GALDERMA.

00

010

020

030

040

050

060

070

080

090

0100

Cosmetics Pharmaceuticals

Outside France

France

Dermatology

Growing international reach of L'Oréal business sectors(in %)

30%

26%

13%

13%

18%

World cosmetics market (estimated figures)

Haircare

Make-up

Skincare

Fragrances

Toiletries

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1997199519931991198919871985


CHINA

ITALY

UNITED STATESRUSSIA

ARGENTINA

CHINA



Human Resources

François VacheyVice-Presidentin charge of Human Resources

• The international mobility of managers gathered

momentum in 1997 with more than 200 people

changing country or continent during the year.

These transfers, which offer those involved

an opportunity to broaden their experience

and skills, particularly enhanced the cultural

and national diversity of the L'ORÉAL employee

base.

• There was a sharp increase in both the scale and

the scope of recruitment: 750 future managers,

both junior and more experienced, of 59 different

nationalities, were recruited worldwide.

• To ensure that the quality of recruits matches

our ambitions for development, we again

extended and strengthened our relations with major

training institutions around the world. Initial

contact was established with the CEIBS Business

School in Shanghai and a case study of the

L'ORÉAL Plénitude brand was conducted by the

Harvard Business School. We also increased our

involvement in the CEMS (Community of European

Management Schools) network and became the

lead partner in the COPERNIC training project,

open to students from Eastern Europe. A bursary

created under an agreement with INSEAD in 1996

to encourage highly original projects was awarded

for the first time this year.

• Ongoing training and development continued to

expand internationally. Training programmes at

Group headquarters are drawing a growing number

of participants from other European countries,

from North and South America and from Asia.

In order to meet the needs of rapidly developing

markets, special training assignments were

undertaken in Eastern Europe and Asia, while

training centres are being set up in Asia and Latin

America.

• Promoting youth employment through apprentice

training schemes and helping to bring people with

difficulties back into the labour market are long-

standing features of L'ORÉAL's corporate culture.

Our initiatives in this area are geared to genuine

objectives and are realistically applied with the

resources available. Since 1993, the Group has

taken on 600 trainees in France and currently has

240 young people working on training

programmes. As in previous years, outstanding

contributions to apprenticeship training within the

Group were singled out for a L'ORÉAL

Apprenticeship Award. A L'ORÉAL Trophy for

exceptional initiatives to help the young

unemployed and the disabled was also presented

in 1997.

• A plenary session of the L'ORÉAL European Works

Council took place on 4 July 1997, where the

Group’s 30 personnel representatives, drawn from

11 European Union countries, were kept informed

of L'ORÉAL’s position in economic, financial and

employment terms and its prospects for future

development.

• The Group’s Human Resources Management

network was further strengthened by the creation

of new Human Resources Departments in several

countries, including China, Indonesia, Korea, Israel,

Russia and Poland.



Pascal Castres Saint MartinGroup Executive Vice-President

Vice-President in charge of Administration and Finance

Administration and finance

Financial PolicyL'ORÉAL moved to a net borrowing position in

1996 as a result of the acquisition of MAYBELLINE.

This situation continued in 1997, with the

acquisitions made in cosmetics, pharmaceuticals

and dermatology offsetting the inflow of cash

generated by operations.

In early 1997, L'ORÉAL subscribed to a substantial

increase in the capital of COSMAIR USA.This had

the effect of swapping the financing of the

MAYBELLINE acquisition from US dollars into

French francs, allowing the Group to benefit from

lower interest rates and the rise in the value of

the dollar against the French franc. Preference was

again given to short term borrowing in view of

low interest rates, particularly for the French franc.

Foreign exchange risk managementThe guiding principles which Group businesses are

expected to apply in intercompany transactions with

respect to currency risk management are as follows:

• companies exporting goods invoice in their local

currency

• royalties and dividends are paid by subsidiaries in

their local currency

• exchange rates for the forthcoming year are set

in September of the previous year and Group

companies are required, insofar as possible, to

hedge currency risks based on these "budgetary

rates";

• the Group's Treasury Department is responsible

for trading these forward rate agreements.

AdministrationThe implementation of new accounting software

was speeded up over 1997 so as to pave the way

for the introduction of the Euro and the advent of

the year 2000.This resource will be programmed

in such a way to make the transition as smooth as

possible.

At the same time, an Intranet network is gradually

being extended to all Group subsidiaries.

Particular attention is being given to Internet links

in order to ensure maximum security in terms of

Group information systems.

Financial InformationAfter the introduction of a shareholders' letter,

published three times a year, L'ORÉAL opened an

internet site (loreal-finance.com) in December

1997.The site, which is primarily aimed at financial

analysts and fund managers, contains all the

financial information released by L'ORÉAL as well

as providing real-time access to the share price

and the option to download the whole of the

annual report.

L'ORÉAL recruited Ms. Caroline MILLOT, a financial

analyst, to develop links with financial analysts and

fund managers.

The Company is giving growing importance to

shareholder relations, via the annual report, the

Letter to Shareholders and the many contacts

established at meetings such as the annual

accounts presentation in early April, the Annual

General Meeting in May and the interim results

meeting for analysts, in addition to financial

presentations in France and internationally.



Production and logistics

Quality policyThe ISO certification procedure for our cosmetics

manufacturing plants continued according to plan

in 1997. Today, 17 plants hold ISO 9002, and five

have been awarded ISO 9003. This means that

82% of the Group's cosmetics production is

carried out in ISO certified factories. ISO

recognition of the Australian plant marks the first

certification for L'ORÉAL in this region. The

quality process for packaging design was

remodelled, placing us in a position to obtain ISO

9001 certification for all the Group's packaging

departments throughout the world.

Packaging research and new technologyIn keeping with previous years, the Packaging

Research department filed 65 patents for

cosmetics packaging. Make-up products made an

outstanding contribution to revenue expansion, in

particular due to rocketing sales of nail varnish

incorporating L'ORÉAL patented brushes.

The results of very active development in new

technologies included an advanced high-pressure

process for the production of nanoemulsions, and

a new manufacturing technology for lipstick. Our

CHIMEX chemicals plant started the production of

different types of nanocapsules to accommodate

powerful active ingredients in skincare creams.

Investments and new facilitiesCapital expenditure on production and logistics

for the Group was FF 1.21 billion in 1997. Our

Divisions stepped up expansion in emerging

markets. The manufacturing plant we acquired in

Poland began operating in March and will supply

Eastern European countries and Russia. In China,

we inaugurated the make-up plant acquired by

MAYBELLINE to supply Asian markets. We also

began construction work on the L'ORÉAL plant in

Suzhou, which will start manufacturing at the end

of 1998. In Latin America, we expanded our

Brazilian factory to cope with growing business.

The acquisition of UNISA in Chile gives us

resources for make-up manufacture which will

allow product launches in the southern part of

this continent.

Cost reductionHorizontal value analysis of our ranges, and

internal and external benchmarking have led to

significant cuts in production costs. As a result of

full harmonisation of the MAYBELLINE make-up

range, it is now possible to negotiate with our

suppliers on a global scale. The consequent

savings in costs are very substantial. Horizontal

value analysis has also led to reorganisation and

pooling of production. This is having a significant

impact on the added value of our factories.

Marcel LafforgueVice-Presidentin charge of Productionand Technology

51

6165

95 96 97

Number of patents filed for cosmetics packaging

850

1,100

1,210

95 96 97

Production and logistics investment in cosmetics (FF millions)



L’Oréal and the environment

The main ecological criteria at our production

sites registered new improvements on the already

high rates at which they had stabilised in 1996:

• Consumption of water fell by 6% compared with

1996, bringing the total reduction in six years to 56%.

• Energy consumption was also down by 7%, giving

a total reduction of 30% in six years.

• Recovery of transportable waste through re-use,

recycling or waste-to-energy conversion by

incineration reached 80%. This means that only

20% of waste is not recovered today, compared

with 50% in 1991.

AuditsThe Group continued its programmes of external

audits, carried out by consultants Coopers &

Lybrand. Sites audited in 1997 included Libramont

in Belgium, Clark in the United States, and La

Roche-Posay and Mourenx in France. By the end of

the year, 32 external and 35 internal audits had been

conducted at our 42 cosmetics production sites

worldwide.

Industry awardsThe Clark plant in New Jersey was one of

38 selected as "Environmental Champions" by

Mc Graw-Hill and the U.S. Environmental

Protection Agency (EPA), for its exemplary

achievements under nine voluntary programmes

on waste disposal and the prevention of pollution.

Administrative sitesWhile administrative sites cause only minimal

pollution, L'ORÉAL nonetheless takes measures to

further reduce their impact on the environment.

Some examples are selective sorting of waste to

ensure maximum recycling, recovery of batteries

and cartridges, use of recycled ink-cartridges for

printers and recycling of computer equipment.

The deployment of electric cars to provide a

shuttle service between Group sites has proved

worthwhile, and by the end of 1997 the fleet

numbered 12 vehicles.

Internal competitions"Safety & Environment" competitions were started

for our industrial and administrative sites in 1993,

and in 1995 we added a point-of-sale promotion

competition "POS & Environment". These

contests reflect strong commitment to the

environment by our Divisions around the world

(with 63 entries in 1997), and are an important

source of information for the Group on the

environmental protection initiatives being taken.

Details of the best projects are circulated to all

the Group's Environment Managers. Each year,

L'Oréal Management invites the winners of the

three competitions to an awards ceremony in

Paris.

CommunicationsA comprehensive section on the environment can

be consulted on the new L'ORÉAL Internet site

(address: www.loreal.com).

22%

31%

27%

3%

17%

Treatment of transportablewaste 1997

Recovery 80%

22% Re-use

31% Recycling

27% Waste-to-energy conversion

03% Destruction

17% Landfill disposal



Research and development

L'ORÉAL's innovative approach to Cosmetology

and Dermatology Research continued in 1997,

backed by a budget of FF 1.673 billion and with

more than 2,000 people employed in Group

laboratories.

In the make-up sector, new synthetic polymers

from our Advanced Research Laboratories led to

the development of non-transfer foundations. These

new formulae do not smear off on clothing, and

they give a pleasant sensation on the skin.

Another original polymer, Softex, has enriched the

texture of foundation formulae to give a

"microfibre" effect, with an aerated structure that

allows skin to breathe and offers optimal softness

and ease of use.

The benefits of Céramide R, an active restructuring

agent patented by our laboratories, have been

applied to mascaras to give added volume to

eyelashes.

The new exclusive "nanoemulsion" technology

enables very fine, all-over coverage and has been

adapted to bodycare products to create an

original deep-action moisturising cream with a

fresh, long-lasting effect.

In haircare, research into new setting polymers led

to the launch of soft-styling products that hold a

style while avoiding stiffness and maintaining the

natural bounce of the hair.

Our understanding of the causes of scalp irritation

has made it possible to develop new treatments

that offer greater comfort for sensitive scalps.

In skincare, the patented nanocapsule technology

successfully applied to day-cream treatments was

adapted to accommodate Vitamin A in the

formulation of a revitalising night cream.

Our experience in suncare products and our

observation of the ageing effects of UVA on skin

led to the development of a block for daily use to

protect skin against the harmful rays in daylight

which prematurely age skin.

The fund of experience gained over many years

in reconstituted skin made it possible to produce

skin prototypes containing new cell types

– Langerhans cells – which drive the skin's

immune responses. This biological advance will

soon lead to a greater understanding and

enhanced control of allergy-related skin complaints.

In 1997, 251 new patents and 7,018 international

extensions were registered.

Jean-François GrollierVice-Presidentin charge of Research and Development

1,8371,949

2,089

95 96 97

Number of employeesCosmetology research

1,3091,444

1,673

95 96 97

Cosmetology researchbudget(FF millions)


Cosmetics

SalonConsumerPerfumes and BeautyActive Cosmetics

20

24

30

34


SalonL’ORÉAL PROFESSIONNEL: Majirel, Crescendo, Diacolor, Epicéa Color - Dulcia, Argino 4, Animatic, Inter-Phase - Osmose - Tec Ni Art.INNÉ: Shampoo and conditioning range. KÉRASTASE: Nutritive, Spécifique, Sensitive, Résistance, Solaire. REDKEN: Prescription Hair Care, Cat,Fat Cat, One 2 One - Shades EQ, Color Gels, Color Fusion - Vector Plus - styling range.

TM

F U S I O NC O L O R

ADVANCED PERFORMANCE COLOR CREME

LONG LASTINGCOLOR

BALANCED PROTEIN CONDITIONEASY FLOW

CONSISTENCY

NEW!


For the Salon Division, 1997 was a year of accelerated growth. Significantevents included the creation of special structures to establish our brands innew territories and to roll out REDKEN internationally.Sales for the division increased by 12.2%, with excellent performancesworldwide: up 30% in Asia (excluding Japan), up 25% in Latin America, up16% in North America and up 9% in Europe. Alain Leprince-Ringuet

Vice-Presidentin charge

of Salon Division

60.7%

13.0

%10

.0%

16.3%

Geographical Breakdownof Economic (1) sales(FF 7 billion)


L'Oréal Professionnel• The strategy for colourants, geared to greater

penetration of our brands Majirel, Majimèches,

Diacolor and Epicéa Color, was rewarded by a

spectacular 17% increase in sales, far outpacing the

rate of growth for the market. This was achieved

without any major product launches, and stemmed

from a marketing approach that offered salon staff

genuinely new services, attractive, modern

promotional materials and a unique range of

colour combinations.

This marriage of the latest techniques with

up-to-date fashion trends has raised salon hair

colouring to its highest professional level.

The year was also notable for the international

roll-out of Majimèches, one of our best-selling

salon products ever, to Asia, Latin America and the

United States. The worldwide acclaim earned by

Majimèches for its performance, cosmetic qualities

and ease of use, has elevated the status of the

highlighting offer.

• The Tec Ni Art brand was completely repositioned

with the addition of the new Flexible styling range,

based on advanced resin technology which will

finally allow hairdressers to set a style that lasts,

while conserving the softness and natural

movement of hair.

The triumphant US launch of Tec Ni Art has for the

first time established L'ORÉAL PROFESSIONNEL in

the extensive American styling market.

• The leading products of the Osmose haircare

range, Vitamino Color for coloured hair and

Amino Perm for permed hair, also saw the benefits

of a major technological renovation in 1997.

Hairdressers now have access to the best

technologies to enhance the cosmetic quality of

technically advanced colouring services, which are

essential to their business.

• In the perm segment, which remains difficult, we

extended the launch of AHA-based Dulcia Tonica to

international markets. This gave a fresh stimulus

to the popular Dulcia brand and helped to capture

market shares from rivals.

The international promotion of Animatic was

extended to attract more consumers to this

highly original long-lasting perm.

• L'ORÉAL PROFESSIONNEL, true to its mission of

being the dynamic force behind the hairdressing

profession, accompanied its marketing drive with

new services to help salons develop their

business.

KérastaseKÉRASTASE sales grew by 12% in 1997, confirming

its stature as the world leader in haircare.

• Kérastase Sensitive, in a major innovation,

launched a new scalp massage and treatment

service for salons.

• The Résistance, Solaire and Nutritive ranges all saw

the addition of new products based on

innovations from L'ORÉAL's Advanced Research

Laboratories.

60.7% Western Europe

13.0% North America

10.0% Asia

16.3% Rest of the World

RedkenColor Fusioncream colourant.

➞

(1) Economic sales mean consolidatedcosmetics sales plus sales generated by agents.


Tec Ni Flexiblestyling and soft holdfor hair.

Kérastase Sensitiveshampoo and conditioner forsensitive scalps.

L’Oréal Professionnel ParisMajimèches.

➞


43%

15%

13%

9%

20%

Breakdown of Economic salesby Product Category

43% Colourants

20% Haircare

15% Shampoos

13% Styling

09% Perms

• An anti-hairloss treatment with Aminexil was

launched in major European countries, backed by

a promotional drive which made it a huge success

in hairdressing salons.

InnéLaunched in 1995, the INNÉ brand made real

progress in 1997, spurred by innovative products

which were widely acclaimed by salons carrying

L'Oréal products. La Terre d'Argile, a clay-based

cleansing rinse for greasy hair, and cereal-based

products for dry hair added renewed dynamism

to salon services.

An immediate success when it was launched

in Italy, the INNÉ brand can now look to

further expansion through its Europe-wide

coverage.

INNÉ has also devised a highly original training

programme to help salon staff offer customers

first-hand experience of INNÉ products by playing

on their appeal to the senses and using a warm

and friendly approach.

RedkenIn the United States, REDKEN introduced a

number of highly innovative products inspired by

New York's dynamic, youthful, image.

The launch of a new cream colourant, Color Fusion,

provides stylists with a host of new creative

opportunities while enhancing REDKEN's position

in the colourants sector.

A relaunch of haircare ranges incorporating a new

protein complex, ICS (Interbond Conditioning

System), was acclaimed by both salons and

consumers.

REDKEN's international marketing reach was

extended with special structures in Italy, the

Netherlands, Belgium, Switzerland and Chile,

which will implement its brand development

strategy.

The Salon Division is now structured around two

focal points for creative strategy and research:

Paris for L'ORÉAL PROFESSIONNEL, KÉRASTASE and

INNÉ, and New York for REDKEN.

Salon Division growth in 1997 was driven by

a three-fold strategy: pushing into new markets

notably through the opening of subsidiaries in

Korea, Israel and India; the use of a structured

marketing approach to broaden the base

of our distribution through new salons; and a

higher profile in salons, thanks to our multi-brand

policy.


L’ORÉAL PARIS: Excellence, Elvive, Elsève, Elnett, Studio Line, Préférence, Casting, Féria, L’Oréal Perfection, Plénitude, Revitalift, FUTUR.e.Laboratoires GARNIER PARIS: Ultra doux, Fructis, Belle Color, Synergie, Neutralia, Movida, Ambre Solaire, OBAO.GEMEY PARIS: Gemey, Jean-Louis David, Harley Davidson,Vanderbilt, Daniel Hechter. MAYBELLINE NEW YORK. JADE.

Dop, Jacques Dessange, Mixa, Ushuaia, Narta, Cadonett,Vittel.

Consumer


In 1997, the Consumer Division reported satisfactory growth of 11.2% on acomparable basis, and 18.1% on published figures.These results reflect the Division's continued drive to promote its brandsinternationally through mass-market distribution, and its dynamic policy oflaunching innovative products across the different regions of the world.The success of the Club des Créateurs de Beauté in the complementarycircuit of mail-order cosmetics was a contributor to this performance.

Patrick RabainVice-President

in charge of Consumer Division

As in previous years, new markets were highly

profitable with:

• 30% growth in Eastern Europe, particularly in

Russia where launches of make-up and haircare

products further expanded the market shares

gained in previous years;

• similar growth in Latin America, with the launch

of new colourant and make-up ranges;

• the first significant penetration of the Asian

market with colourants laying the foundation for

the L'ORÉAL PARIS brand, and with self-selection

make-up products.

Mature markets also performed well, with

double-digit growth in the United States and in

Western Europe, excluding France which now

accounts for only 22% of consolidated sales.

In the United States, the successful integration

of MAYBELLINE make-up spurred the Group into

the leading ranks of the cosmetics market, with

a sharp 14% rise in units sold, based on a

comparable structure.

In Western Europe, from Scandinavian to Southern

European markets, growth of over 10% far

outpaced the market

To finance its expansion plans, the Division

generated extra resources by cutting overheads

and manufacturing costs in both mature and

emerging markets. Substantial progress was made

in implementing unified packaging across the

Group worldwide, and in the application of

horizontal value analysis with a view to future

savings. As a result, the Division was able to

increase its marketing budgets with a focus on its

major world brands.

The Division reaffirmed its determination

to make L'ORÉAL PARIS a leading world brand

in all sectors.

With this in mind, several major advertising

campaigns to promote the L'ORÉAL brand name

were launched during the year. These used some

of the world's most beautiful women, drawn from

every continent in a series of television

advertisements, each advertisement ending with

the declaration "L'ORÉAL, because I'm worth it" in

the language of the target country.

Sales for Laboratoires GARNIER PARIS also

continued their upward trend in Europe and in

North and South America.

As part of an effort to diversify its brand portfolio

and to better reflect the drive for a global

culture, the Division extended its marketing of

the MAYBELLINE NEW YORK brand into another

20 countries, from China to Russia. The resulting

43% growth in business showed the true value of

the MAYBELLINE acquisition in 1996.

As in previous years, the Division launched major

innovations based on new technologies, patented

by its various laboratories. There was a more

even balance in the sales mix in 1997, with almost

50% of the Division's consolidated sales generated

by make-up and skincare products (that is,

excluding the contribution of haircare).


L’Oréal ParisFUTUR.e from Plénitude.

➞

54.6%

3.1%

17.3%

25.0%

Geographical Breakdownof Economic (1) sales(FF 31.7 billion)

54.6 % Western Europe

25.0 % North America

13.1 % Asia

17.3 % Rest of the World



L’Oréal ParisCréa-MèchesHair mascara.

Laboratoires GarnierAmbre Solaire Kids.

L’Oréal ParisElsève/Elvive.

➞


HaircareSubstantial progress in the quality of formulations

drove a 19% increase in units for Elsève/Elvive

shampoos worldwide. Aided by the new

Céramide technology, Elvive's UK launch was a

great success, capturing a 10% market share in

shampoos and conditioners in its first year.

Laboratories GARNIER's Fructis shampoo, with

active fruit concentrates, was launched in 1997 in

several European countries including Russia,

where it secured prime market positions.

In the United States, the L'Oréal Kids shampoo

initiative was a resounding success, and helped to

familiarise very young American consumers with

the slogan "L'ORÉAL, because we are worth it too!"

Make-upBacked by numerous innovations, the

MAYBELLINE NEW YORK and L'ORÉAL PARIS

make-up brands enjoyed strong growth in this

very profitable worldwide market.

Make-up overtook colourants in 1997 to become

the Division's leading sales contributor.

L'ORÉAL PARIS make-up launches included

Rouge Pulp, an ultra-glossy lipstick, Teint Captif,

a non-transfer, oil-free foundation, and

Crea-Mèches, a hair mascara to add coloured

highlights to hair.

Make-up launches by MAYBELLINE NEW YORK

included Express Finish, a fast-drying nail varnish,

Great Wear, a long-lasting non-transfer

foundation, and the mascara Volum'Express, which

sold well in the United States and throughout

the world.

The worldwide sales volumes achieved by the

continuing rise of these two strong brands has

improved the cost-effectiveness of expenditure

on Research and Development for make-up.

Hair colourantsA noteworthy feature of 1997 was the sharp

upward swing in sales of permanent colourants

to lighten hair where the superiority of L'ORÉAL

Group laboratories in haircare formulations

is unanimously recognised by consumers around

the world.

Excellence Crème colourant, with built-in hair

protector, was rolled out internationally and

increased its sales by 20%.

In Asian and Latin American countries, where

the majority of the population is aged below 30,

the Excellence Crème traditional offer of covering

grey hair for older women was carried a step

further, and the product was acclaimed by

consumers for its ability to subtly modify hair

colour and texture.The launch of L'Oréal Feria

Bleach + Color met with similar success in several

Asian countries.

After being launched in the United States,

Laboratories GARNIER’s Belle Color ColorEase Gel,

with a 20-minute development time, was

extended to Europe and Latin America, boosting

its sales by 36%.

52.3%

12.7

%

5% 4.1%

25.9%


52.3% Haircare

25.9% Make-up

12.7% Skincare

15.0% Toiletries

04.1% Perfumes


L’Oréal Kidschildren’s shampoos.

L’Oréal ParisRouge Pulp.

Maybelline New York/GemeyExpress Finish.

➞


The other colourant brands, Préférence, Récital and

Movida, achieved satisfactory performances.

SkincareThe market positions of the Plénitude Revitalift

anti-wrinkle and firming cream range were

strengthened in 1997 by the launch of an eye

contour cream and a night cream.

But the outstanding event of 1997 in moisturising

day-creams, which account for the largest share of

the skincare market, was the year-end launch of

PLÉNITUDE FUTUR-e.

Highly successful in Europe and the United States,

this innovation combines pure Vitamin E

nanosome technology with the Mexorxyl SX filter,

in easy-to-use cream and lotion formulations

which are rapidly absorbed by the skin.

Laboratories GARNIER added to the European

market leadership of its Ambre Solaire suncare

range by launching new sun protection products

for children, based on unique patented

photostabilising filters from L'ORÉAL’s laboratories.

The strategic acquisition of the OMBRELLE brand

at the end of the year means that it is now

possible to use certain L'ORÉAL sun protection

patents in North America.

Mail-order cosmeticsAt FF 670 million, consolidated sales in the

CLUB DES CRÉATEURS DE BEAUTÉ PARIS

Mail-Order Cosmetics sector were up by 33%

in 1997.

Growth was driven by a strong 20% rise in French

sales, and by the increasing pace of international

expansion, which saw sales in Germany double

to more than FF 140 million.

Belgium and the United Kingdom enjoyed robust

expansion, while the CLUB DES CRÉATEURS DE

BEAUTÉ in Japan, a joint venture with OTTO

SUMISHO, reported consolidated sales of more

than FF 50 million for its first year of operation.

Major initiatives contributing to this growth

included Performance C, a face cream by

COSMENCE, the AGNÈS B Antitrace non-transfer

foundation, the Sech'Express towel and Voile de

Fraîcheur by Jean-Marc MANIATIS, and, in perfumes,

Premier Rendez-vous by Michel KLEIN.

CLUB DES CRÉATEURS DE BEAUTÉ PARIS is jointly

owned (50% each) by L'ORÉAL and TROIS SUISSES,

and is consolidated by the proportional method.


LANCÔME: Primordiale, Rénergie, Niosôme, Définicils, Rouge Absolu, Rouge Idole,Teint Idole,Trésor, Poême.BIOTHERM: Eau Vitaminée, Hydra-Detox, Biosource, Biosensitive,Tenseur Réducteur Rides, Aqua-teint.HELENA RUBINSTEIN: Force C, Face Sculptor, Spectacular Rouge, Generous Mascara, Softwear.FRAGRANCES: RALPH LAUREN, GIORGIO ARMANI, CACHAREL, GUY LAROCHE, PALOMA PICASSO, LANVIN.



The Perfumes and Beauty Division continued to reinforce its positions in 1997, particularly in skincare and make-up. Several major launches ofinnovative products based on new technologies gave a strong boost to salesof skincare and make-up products, while leading designer fragrances kept uptheir expansion.Total sales of the Perfumes and Beauty Division were up by 12 % on published figures, or 4.9% on a comparable basis. Gilles Weil


of Perfumes and Beauty Division


Lancôme1997 was a good year for the brand, particularly

in skincare (+6.3%) and make-up (+10.5%).

Highlights were the gains made by star

products and the success of innovative

launches.

Trading improved in European markets (+6%) and

new advances were recorded in Latin America,

Eastern Europe and certain Asian countries.

LANCÔME consolidated its positions in the United

States, despite fierce competition.

Sales of the Primordiale anti-ageing skincare line

continued to climb (+43%), reinforced by

Primordiale Nuit. This line was once again

LANCÔME's best-selling skincare product. Other

leading contributors to improved skincare sales

included Rénergie (+10%) and the Contrôle line

(+14%) backed by T-Contrôle.The launch of Blanc

Cristal, a LANCÔME range of products to make

skin appear paler, geared to Asian markets, was

very well received. Other high points of the year

included the launches of Soleil, a new suncare

range, and Re-source, a bodycare moisturiser based

on nanoemulsion technology, which was awarded

the Marie-Claire Prix d'Excellence.

LANCÔME make-up moved into leadership for

non-transfer products in several markets, notably

with the highly successful Teint Idole.The brand

revived its practice of targeted seasonal launches

which are very popular with younger consumers.

Trésor and Ô de Lancôme confirmed their positions

as classics fragrances in a market which is highly

sensitive to new product launches.

Prestige & CollectionsProducts launched nationally in 1996 (Polo Sport

Woman, Acqua Di Giò pour Homme, Eau d'Eden and

Tentations) were promoted worldwide in 1997,

which also saw the launch of Lanvin l'Homme.All

brands made strong headway in Latin America

(+18%) and the Middle East (+23%).

GIORGIO ARMANI

A year of brisk growth in sales (+23%) made

Acqua di Giò one of the market's leading franchise

brands in 1997. In September, Acqua di Giò

pour Homme was launched in the USA, where

it became an immediate top-selling fragrance

for men.

CACHAREL

After launching Eau d'Eden in 1996, this brand ran

a new advertising campaign to revitalise the image

of its leading fragrance, Anaïs Anaïs.

RALPH LAUREN

Polo Sport Woman continued to extend its

international reach. The worldwide success of

Polo Sport and buoyant sales of Polo and Safari for

Men confirmed the global strength of the RALPH

LAUREN brand.

GUY LAROCHE

Despite a difficult context, Drakkar Noir put in a

good performance and held onto its market

leadership in the United States and elsewhere.

PALOMA PICASSO

Tentations was launched in new markets, while

Mon Parfum is now established as a classic

fragrance.Helena RubinsteinAutumn/Winter seasonalpromotions: Spirits from Carlos Villalon.

➞

44.3%

10.3

%

14.7%

30.7%



30.7% North America

10.3% Asia




LANVIN

Following on from the relaunch of Arpège in 1993,

Lanvin l'Homme was introduced, first on the

French market, and then in all European countries,

where it was given an excellent reception by

consumers.

BiothermBIOTHERM achieved a 15.4% rise in consolidated

sales in 1997, with strong overall growth (+11.8%)

in European markets.

New product launches contributed to the solid

performance of this brand:

• Hydra Detox, the first natural detoxifying

moisturising day-cream;

• L'Eau Vitaminée, a range of products with citrus

extracts to refresh, moisturise and revitalise the

skin;

• Profil Up, a deep-action gel to tone, firm and

smooth skin.

The brand reformulated its textures, gave added

freshness to the fragrances of its products, and

refocused its advertising.

Since 1995 the Biotherm brand has been rolled

out internationally and new advances in Asian

countries and Latin America reflected continuing

expansion in 1997. A sharp rise in sales was

noted in Japan at the end of the year. New markets

included Thailand, Singapore, Mexico and Russia.

Helena RubinsteinTotal world sales of Helena RUBINSTEIN increased

by 15.2% in 1997. Revenues were up by 10.5% in

Northern Europe and by 13% in Southern Europe.

Helena RUBINSTEIN confirmed its success in Latin

America with a 29.6% rise in sales. In 1997, the

brand expanded its Asian operations into Korea

and Taiwan. Business in Japan once again enjoyed

robust growth.

Product successes included:

• Force C, with Vitamin C, comprising Force C Cream,

Fluid and Complex. This is Helena RUBINSTEIN's

leading skincare range;

• Face Sculptor, the wrinkle refining Cream and

Serum, launched in October 1997;

• Tan Express, a self-tanning lotion from the Golden

Beauty range;

• the continued rise in sales for Helena RUBINSTEIN

make-up products (+17.9%), was due mainly to

lipsticks, nail varnishes, and mascaras (Generous

Mascara and Spectacular Mascara);

• Softwear, a "microfibre" cosmetic foundation,

which was given an enthusiastic reception. A new

Softwear "microfibre" loose powder was added to

this range;

• highly successful seasonal promotions developed

in conjunction with Carlos VILLALON.

OutlookThe outlook for international expansion remains

bright in Latin America, the Middle East and Eastern

European countries. Sales are evenly distributed

worldwide, which should enable the Group to build

overall growth at a steady pace, offsetting areas

where growth has become more uncertain, such as

Asia. Europe, which still accounts for a substantial

share of the Group's business, should remain a

growth market for all our brands.

New initiatives in skincare, make-up and perfumes,

and adjustments to take account of the changing

structure of retail distribution, augur well for 1998.


BiothermEau Vitaminée.

LancômeRe-source.

LancômePrimordiale Nuit.

LanvinLaunchof Lanvin L’Homme.

➞

42%

25%

1%

32%


42% Perfumes

32% Skincare

25% Make-up

11% Toiletries


VICHY: Thermal S - LumiActiv - LiftActiv - Normaderm - Quintessence - Lumineuses - Teint de Peau. Physio - Cellactia.Capital Soleil. Basic Homme. Capillaires Dercos.PHAS: Sécurissime AHA - Hydraphase - Respectissime Mascara/Eye make-up remover - Eclamat - Rouge Intense - Pur vernis.LA ROCHE-POSAY: Hydranorme - Physiane - Tolériane - Lipikar - Xeroderm - Eau Thermale - Anthélios.

Active Cosmetics


VichySales for VICHY laboratories continued to grow in

1997, bolstered by the outstanding success of

highly innovative products.

LiftActiv, a treatment to reduce the appearance of

wrinkles, and Thermal S, a moisturiser containing

Vichy thermal water, were strong leaders in their

respective markets.

The hairloss prevention treatment, Dercos with

Aminexil, confirmed its huge success (2 million units

sold), as did the Capital Soleil suncare range which

was renovated in 1997.

Two major innovations launched this year pave the

way for further success: Normaderm Express, the

first anti-acne patch, and LumiActiv, a treatment to

counter skin-ageing caused by the sun. This is a

unique scientific advance in anti-ageing products.

The brand once again made substantial headway

outside Western Europe (+28% compared with

1996), in Latin America and Asia. In Central

Europe, the acquisition of the agent in Poland

reflects a policy of steady international expansion.

PhasA substantial increase in consolidated sales

in 1997 confirmed the status of PHAS in the

retail pharmacy sector as a distributor of very

high-tolerance skincare and eyecare cosmetics.

Product highlights in 1997 included:

• an extended colour palette for Pur Vernis nail

varnish;

• the launch of Sécurissime AHA.

• the launch of a new Respectissime eye make-up

remover in single-application sterile packs.

The brand continued to make gains in

international markets:

• operations begun in Portugal,Austria, Ireland and

Korea in 1995 and 1996 continued to grow at a

rate of over 30%;

• the brand's launch in Argentina was highly

successful.

La Roche-PosayA milestone for LA ROCHE-POSAY in 1997 was the

World Dermatology Congress in Sydney, where it

presented 12 scientific papers, reporting on the

latest research into the harmful effects of UVA

and on the effectiveness of Anthélios in treating

conditions such as benign sunburn or solar

urticaria.

Anthélios is increasing its share of the market and

is on its way to becoming the foremost suncare

brand in French pharmacies.

The strong-selling Tolériane range won the

accolade of the French mass-circulation press in

the form of the Marie-Claire Prix d'Excellence.

This brand performed exceptionally well in

international markets, doubling its sales in Italy and

Argentina.


Despite continued slow consumer demand in the retail pharmacy sector,the Active Cosmetics Division is enjoying renewed growth, while it goes onto strengthen its European market leadership and accelerate its worldwideexpansion.This positive trend has gained momentum from the repositioningof the VICHY and PHAS brands and from the success of recent launches ofproducts offering high added-value technology. Henry-Georges Muller


of Active Cosmetics Division

14%

11%

9%1%

65%

65% Skincare

14% Haircare

11% Toiletries

09% Make-up

01% Perfumes

Vichy LaboratoiresLumiActiv, a treatment to counter skin ageingcaused by the sun.

➞

1.6%

1.2%

9.8%

87.4%



01.6% North America

11.2% Asia





Dermatology

Galderma37

Luxury GoodsLanvin38



Galderma

Consolidated sales of more than FF 1.5 billion for

1997 reported by GALDERMA, the joint subsidiary

of L'ORÉAL and NESTLÉ, represented an increase

of 30% on a comparable basis and 52.6% on

published figures.

GALDERMA is building up its business in

treatments for diseases of the skin such as acne

and rosacea. The majority of its products are sold

on medical prescription.

The highlight of the year was the acquisition of

the German company BASOTHERM, dermatological

subsidiary of BOEHRINGER INGELHEIM laboratories,

in June.

This company merged with GALDERMA Germany

and now holds a substantial share of the German

market, the world's third-largest.

Differin Gel® for the treatment of mild acne

continued to attract great interest among

dermatology specialists. It was launched in many

new countries during the year, including the UK,

Brazil, Colombia,Australia and the Philippines.

After the launches planned for 1998, Differin® will

be available in almost 40 countries worldwide.

Other forms of Differin® (a solution and a cream)

are currently being registered with health

authorities, and will be marketed in 1998. This will

add even more to the reputation of Differin® as a

treatment for common acne.

GALDERMA also markets a successful range of

products to accompany dermatological treatments,

such as skin cleansers and moisturisers with

Cetaphil.

In international markets, GALDERMA has set up its

own organisation in Japan and China, where it is

registering products with the health authorities,

prior to marketing them.

Medical sales teams have been reinforced in most

of the Latin American subsidiaries to meet the

growing demand for dermatological products in

these markets.

Numerous registration applications for new

products have been filed, and should enable

GALDERMA to maintain a high rate of growth in

1998.

Galderma’s brands:• Acne: Differine gel (adapalene). Cutacnyl/Benzac

gel and lotion (benzoyl peroxide). Eryacne/

Eryaknen gel (erythromycin). Retacnyl cream

(tretinoin).Tetralysal capsules (lymecyclin).

• Rosacea: Rozex/Metrogel/MetroCream gel

and cream (metronidazole).

• Eczema - Psoriasis: Hydracort cream (hydro-

cortisone cream). Calmurid HC cream (Hydro-

cortisone + urea). Desocort/Desowen ointment,

cream and lotion (desonide). Efficort/Retef cream

(hydrocortisone aceponate). Psorigel gel (coal tar).

• Mycosis: Afongan/Fungisan cream (omoconazole).

• Alopecia: Neoxidil/Lacovin solution (minoxidil).

Ell-Cranell alpha (estradiol).

• Dermatological products: Cetaphil lotion, cleansing

bar, cream (cleanser and moisturiser for sensitive

skin). Ionax T/Ionil T shampoo (anti-dandruff,

seborrheic dermatitis). Nutraderm - Nutraplus

cream, lotion (moisturiser).

Publications for dermatologists. ➞

Differin, acne treatment gel. ➞

Galderma's booth at the World DermatologyCongress in Sydney.

➞


Lanvin

Revival of the Ariane dress.➞

Lanvin accessories:Alice belts for womenRoland Garros panama

➞


While continuing its drive to update the brand

and broaden its appeal to younger consumers,

LANVIN has been expanding business in areas

where it is recognised worldwide for its expertise,

including men's ready-to-wear and tailoring,

women’s wear and accessories such as ties,

leather goods and fragrances.

The business, which has been rolled out

worldwide, enjoys a strong market presence in

Asia, the Middle East and Southern Europe as well

as France. Over the year, key contacts were built

to develop the business in Eastern Europe and the

United States.

In France, a new boutique was opened in April on

the rue Marbeuf in Paris.

The year saw the launch of the Lanvin l'Homme

fragrance, the signature of an agreement between

LANVIN and KANEBO in Japan regarding the

distribution of imported goods from the women's

range and agreement for two women's ready-to-

wear licences, a diffusion line, Lanvin La Collection

and a leisurewear line, Lanvin Golf.

The collections presented in August in Tokyo were

very well received by buyers and judging from

initial orders, should generate a 20% increase in

sales for LANVIN with immediate effect from their

1998 launch.

At the same time, LANVIN signed an agreement

with KANEBO, providing for the opening of

15 boutiques under franchise over five years,

which will distribute products of the premier

women’s wear line and leather goods exported

from Paris.The first store was opened in

September 1997 in Osaka. Some of the remaining

stores will be the result of transfers of operations.

LANVIN Japan will take on direct operating

responsibility for two anchor stores of more than

300 sq. m in Osaka and at Ginza, in the heart of

Tokyo. In the Ginza building, which houses show

rooms and offices, the first four floors have been

given over entirely to sales of all products available

in Paris since 1998.

The opening of sales outlets of a smaller scale in

Hong Kong, under franchise in the People's

Republic of China and in Taiwan has allowed the

brand to weather the crisis in this region.

The boutique at 15 Faubourg Saint Honoré in

central Paris continued to increase sales.

LANVIN is pursuing its business development in

key sectors, in menswear with the new Lanvin

Sports and Studio lines (high fashion garments

which round out the Classique and Tradition

ranges) and in women's leather goods, where the

brand first introduced ranges in late 1996.

For womens' ready to wear, in November the

brand brought in a young Spanish designer,

Cristina ORTIZ, aged 31, who has spent the last

three years as Style Director with a major Italian

designer.


Pharmaceuticals

Synthélabo40

The SYNTHÉLABO share is included in the SBF 120 index of

the Paris Stock Exchange and is listed on the first monthly

settlement market (Sicovam code 12 117). As at

31 December 1997, SYNTHÉLABO ranked 28th in terms

of market capitalisation on the Paris Stock Exchange.

On that date, the share price was FF 752, which was

an increase of 34% compared with 31 December 1996.

The SYNTHÉLABO Annual Report is available from:

Investor Relations, 22 avenue Galilée,

BP 82, 92355 Le Plessis Robinson Cedex, France.

Tel: (+33) 1 45 37 57 42. Fax: (+33) 1 45 37 57 33.


Synthélabo

Stilnox®

leading hypnotic worldwide.➞


SYNTHÉLABO, third-largest French pharmaceutical

group, reported 1997 turnover of FF 11,747

million, up 12.6%, or 6.9% on a comparable basis.

Sales of its top ten products, which account for

61% of pharmaceutical sales, increased 8.7% on a

comparable basis. SYNTHÉLABO operations

continued to expand in international markets,

which now represent 67% of its total business.

Net profit attributable to SYNTHÉLABO, before

post-tax capital gains and losses and goodwill

amortisation, increased 15.8% to FF 1,101 million.

SYNTHÉLABO specialises in three major

therapeutic fields: Central Nervous System,

Cardiovascular and Internal Medicine (Urology,

Gastro-enterology and Allergy). This specialisation

enables it to hold significant market positions in

each of these fields. It is reinforced by the

activities of ELA MEDICAL in cardiac pacing and of

PORGÈS in urological devices. SYNTHÉLABO also

markets OTC products - available without a

prescription in pharmacies - and generic drugs.

SYNTHÉLABO operates through subsidiaries in all

European countries, and through joint ventures in

the United States and Japan. The Group is

committed to developing in Europe with a view to

ranking among the top ten European groups. It

also develops its own molecules in the United

States and Japan and is breaking new ground in

emerging markets. New subsidiaries have thus

been set up in Asia, Latin America, Russia, and

more recently in South Africa.

Research is a high priority, focusing on

SYNTHELABO's three fields of expertise.

In 1997, 14% of total sales were devoted to the

implementation of new technologies and to

research and development of innovative products,

notably for the treatment of Alzheimer's

disease, thrombolysed myocardial infarction,

prostate cancer, stress urinary incontinence,

and nausea and vomiting induced by chemotherapy.

Top ten products and sales generated:Central Nervous System

Stilnox®: insomnia (FF 1,849 million).

Dogmatil®: neurotic and psychosomatic disorders,

schizophrenia (FF 815 million).

Tiapridal®: agitation, agressiveness (FF 415 million).

Solian®: schizophrenia, dysthymia (FF 254 million).

Cardiovascular

Tildiem®: angina pectoris, hypertension

(FF 1,033 million).

Kerlone®: hypertension, angina pectoris

(FF 466 million).

Internal Medicine

Xatral®: benign prostatic hypertrophy

(FF 599 million).

Primpéran®: nausea and vomiting (FF 295 million).

Semi-ethicals and OTC

Aspégic® and derivatives: fever, pain (FF 632 million).

Fluocaril®: oral healthcare (FF 261 million).


Information on the L’ORÉAL share

L'ORÉALSICOVAM code or equity code:12032

Minimum lot 1 share

Traded on the Monthly Settlement Market of the ParisStock Exchange

The share is also traded on the London SEAQ

Unsponsored American Depository Receiptsare freely traded in the United States(1 ADR = 1/5 of a share)

Par value: FF 10

Price at 31 December 1997: FF 2,355

Market capitalisation:FF 159 billion at 31 December 1997 (Ranked third on the Paris Stock Exchange)

CAC 40:Part of the CAC 40 index. At 31 December 1997L'ORÉAL accounted for 5.72% of the index.

For more information:

Consult your bank, stockbroker or other financial intermediary

and your newspaper or Internet http://www.loreal-finance.com.

All shareholders requiring further information may contact

Mr. François ARCHAMBAULT, Group Director of International

Financial Information; Financial Analysts and Fund Managers may

contact Ms. Caroline MILLOT, Director of Investor Relations;

Journalists may contact Mr. Lorrain KRESSMANN, Director of the

Press Office.

Published by the Administration and Finance Division

and the Corporate Communications and Public Relations Division

of the L'ORÉAL Group in association with CARRE NOIR DESIGN,

Square Monceau, 82 Boulevard des Batignolles, 75017 Paris and

SDE CONSEILS EN INFORMATION, 84 rue Villiers, 92683 Levallois-

Perret, English language version: EURO RSCG OMNIUM & ASSOCIES,

84 rue Villiers, 92683 Levallois-Perret

This document is printed on unbleached paper.

Photographs: L'ORÉAL photo library, Stéphinie Pfriender,

Charles Purvis, Isabelle Snyder, Bradford Roman, O. Placet,

Jacques-Yves Guccia, Satoshi Saikusa, Bruno Dujardin, D. Tolstoi,

Christian Moser, Maria Lopez, Peter Lindbergh, Patrick Pipard,

Frédéric Maurel, Alessandro Parenti,Valérie Knight,

Mathiew Donaldson, Peter Blakely, Peter Knapp, Philippe Abergel

and X.


Registered in France as a Société Anonyme with capital of FF 676,062,160 R.C. Paris B 632 012 100

Headquarters: 41, rue Martre, 92117 Clichy - France

Registered office: 14, rue Royale, 75008 Paris - France

http://www.loreal.comhttp://www.loreal-finance.com


L'O

RÉA

L19

97


annual report 1997 - morningstar, inc

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