The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the S.J. Lauder Company's Fiscal 2020 First Quarter Conference Call. Today's call is being recorded in webcast. For opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Good morning. On today's call are Fabrizio Ferreira, President and Chief Executive Officer, and Tracy Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, Let me refer you to our press release and other reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. During the Q&A session, we ask that you please limit to one question so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Thank you, Reni. Good morning, everyone. We have started off our new fiscal year with terrific results. Our successful strategy, driven by the multiple engines of growth, helped us to deliver an extraordinary performance, especially in light of the volatile macro environment. Net sales grew 12% in constant currency, making our 10th consecutive quarter of double-digit growth. As a result, we gained share and strengthened our leading position in global prestige building. We leveraged our strong sales increase with a disciplined focus on cost and adjusted diluted earnings per share rose 20%. Our performance on both the top and the bottom lines was fueled by successful innovations, increased advertising, and effective marketing across brands, categories, geographies, and channels. With deeper consumer insights informed by improved data analytics, we expanded our growth engines. activated additional ones, and invested in the best opportunities worldwide, which fueled these strong results. We remain mindful of global volatility risks. However, with this strong start and our confidence in continuing to execute effectively, we are raising our net sales and EPS estimates for the year in constant currency. During the quarter, the external environment was challenging. and we faced different issues in every region. Disruptions in Hong Kong affected commerce in that area. Continued uncertainty about Brexit impacted consumer spending in the UK, and demand for make-up in North America softened. However, by having numerous growth engines across all facets of our business, we were able to deliver and exceed our sales and earnings expectations. Most of the overachievements came from continuous trends in China and travel retail. We also had better than expected improvements across Europe and our other emerging markets. Also, contributing to our continued growth is our company positions in the sweet spot of consumer goods. Our brands generate superior consumer loyalty, evident in our strong repurchase rates. And while our high-quality products justify premium pricing, they are an affordable luxury, which we believe makes them more resilient to economic volatility than other luxury products. During the quarter, each of our four largest brands grew globally, reflecting strong consumer demand for established brands and their proven desirable products and compelling innovations. Estée Lauder and La Mer each advanced more than 20%. A key strategy is our focus on hero franchises, which are the high repeat products in each brand. With greater innovation and resources around these hero product lines, our brand successfully attracted new consumers and reinforced their loyalty with existing ones. Our Estée Lauder brand is a great example of this winning strategy. The brand introduced a new product in its largest franchise, Advanced Night Repair. Sales of the concentrate exceeded our expectations, and it helped lift the entire franchise by double digits globally. In Asia, bars around Estée Lauder's new Intense Reset concentrate broadened the brand reach. About 70% of consumers who bought it were new to the brand, underscoring our strategic priority to attract new users with exciting innovations. Estee Lauder was one of several of our brands that benefited from rapid growth in the skincare category worldwide. We are well positioned to meet the growing demand for all types of skincare products. It is our largest category and grew sharply, accounting for nearly half of our global sales in the quarter. We continue to invest in skincare. La Mer gained share in luxury skincare in Asia Pacific, and Clinique delivered its stronger global growth in several years, driven by well-received skincare innovations. One of Clinique's newest products, the Smart Clinical Multidimensional Moisturizer line, resonated strongly with ageless consumers, particularly in North America and the UK. In other developments, our Tom Ford Beauty brand launched a luxury skincare collection to complement its successful fragrance and makeup offerings. Our make-up sales grew globally, driven by sharp upstick in Asia Pacific and travel retail, as well as gains in the European region. The deceleration in prestige color cosmetics has been driven by Anglo market. But growth is still healthy in other geographies, and global companies like ours are well positioned to grow in the category. Using enhanced data analytics, and consumer insight that signal new and fast-growing areas of demand, we invest in the promising subcategories as they emerge. For example, we knew the interest in foundations with skincare benefits was trending. With that insight, we developed new products around our hero foundations that offer hydrating and smoothing benefits. And our foundation business climbed 20% globally. We innovated with great success in other subcategories where we found granular opportunities. For example, MAC introduced Love Me Lipstick, a breakthrough weightless and moisturizing formula that offered lasting color. The product helped increase the brand lip business, which climbed double digits. Overall, our innovation was robust. A new product accounting for 30% of our makeup category this quarter. Turning to our geographies, our growth in China accelerated from the previous quarter, fueled by multiple engines. We had double-digit growth across all categories, all channels, and nearly all brands. Our online business in China was strong. Our sales on Tmall doubled. We grew across brands. We also successfully partnered with Tmall on special events. such as Jo Malone London's Super Brand Day. Additionally, Glam Glow launched on the platform in September. Investing in emerging markets remains a strategic priority because we anticipate a continuation of growing demand for prestige beauty from the expanding middle class. Excluding China, as a group, this market rose double digits and they recruited several new consumers. standout included Russia, Mexico, Brazil, and Southeast Asia, and we saw improvements retail in Middle East. Our business in Hong Kong was challenged. Our sales declined 20% in the quarter, and we have not seen sign of improvement to date. However, since the last downturn in the market, We have repositioned our business and increased sales with local consumers, becoming less dependent on tourism, which was the most affected area. Our sales decline in Hong Kong was offset by an acceleration in the rest of Asia, reflecting strong consumer demand for our prestige brands and desirable products. In Europe, the Middle East, and Africa, every market grew. which added another growth driver and broadened our multiple engines. We were encouraged by strengths in the large Western European markets, which advanced, as well as many emerging markets in the region, thanks in part to strong reception of our brand's innovation across categories. The North American market remained challenged by declining makeup sales, mainly in color cosmetics. as well as weak traffic in brick and mortar department stores, where we are the largest player. Although our business generally reflected these trends, there were several bright spots. Our skincare business rose, several brands had higher sales, and we had grown in key subcategories, such as eye treatments or mascaras. Typically, skincare makeup growth fluctuates depending on trends and innovation and can accelerate at different rates at different times. However, on average, over the last five years, both categories rose nearly 10% compounded annually in the U.S. We believe recent declines in color cosmetics in the U.S. are due to several factors. Trends change. and a more natural appearance is now in vogue, which requires fewer products than when contouring and other looks were popular. Also, the number of new product launches in makeup declined 20% in the last year, including from indie brands. In addition, Gen Z consumers are discovering the benefits of skincare, spurred by more social media activity in that category. Our brands continue to innovate strongly in both makeup and skincare. Clinique recently launched a new lipstick collection which matches the consumer foundation shade with 28 nude lipstick color based on the brand shade Match Science. This continues Clinique customization of beauty products that began with its successful Clinique ID skincare launch. Looking at our business by channel, Travel retail and online globally again drove our performance. Travel retail upward trajectory continued with strong double digit sales growth, reflecting diversified growth engines across brands worldwide. Our products continue to resonate globally and like door growth was robust. Among our top eight brands in the channel, all but one grew double digits at retail. Digital campaigns and pre-ordering aimed at travelers before they start their trip helped boost sales. We expanded distribution for our newer artisanal fragrance brands, and there is still much distribution expansion remaining for many brands in our portfolio that are only available in a small percentage of airports. Our online business also climbed strong double digits. All types of online distribution grew substantially, led by third-party sites and retailer sites. Traffic was higher and mobile commerce accounted for more than half of our e-commerce sales. We increased our advertising investment faster than our sales growth and continued to focus our spending on digital advertising, which accounted for 75% of the total. Our digital spending is mainly on advertising, social media communications, and search engines. Our brands are using many digital tools and experimenting with emerging social media platforms to connect with consumers. For example, Mac launched a tool that lets consumers test over 100 lipstick shades on their own face by accessing the camera of their own phone. And to simply research and purchasing, La Mer and Bobbi Brown launched voice search on their brand.com sites in North America. We are proud of our results this quarter and confident we have the right plans in place for the rest of the year. Our brands have created many exciting products and promotions for the holiday period in store and online for Cyber Monday and 11.11 in Asia. and we believe consumers will be attracted by our compelling offerings. Looking ahead, we expect to further expand and magnify our multiple engines of growth across categories, brands, channels, and geographies to better manage global volatility. We will continue to leverage our superb skincare growth and expect to gain even greater market share in that category. We are the best diversified pure play in global prestige beauty with talented global teams and have profound local expertise, which makes us well positioned to pursue the fastest growing areas around the world for any kind of consumer. At the same time, we will continue to transform our business as we anticipate what lies ahead and strengthen our entrepreneurial and competitive experience. Now, I will turn the call over to Tracy.