The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2020 Second Quarter Conference Call. Today's call is being recorded and 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 Freda, 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'll find factors that could cause actual results to differ materially from those 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 investor section of our website. During the Q&A session, we ask that you please limit yourself 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, Rainey. Good morning to everyone. We deliver exceptional results in the second quarter, which I will elaborate on shortly. But first, I want to acknowledge how concerned we are for all the people, including our employees and consumers, who are affected by the recent outbreak of the coronavirus in China and around the world. Our hearts go out to them, and I will discuss what steps our company is taking to support them in a few minutes. In the second quarter, our Prestige Beauty portfolio resonated with consumers globally. Our successful strategy, based on multiple engines of growth, once again helped fuel our performance, as we grew in all regions and all major categories. Skincare rose in every region, as did fragrance and hair care, while makeup grew internationally. The company generated 16% constant currency sales growth, the highest organic growth rate in 20 years. in the seasonally largest quarter of our fiscal year, allowing us to gain significant share in global prestige beauty. While our second quarter continues to be boosted by holiday, it now also includes another important event driver, single day. Our advanced planning for these events delivered strong growth across our business, led by Asia-Pacific region the global online and travel retail channels, and the skincare and fragrance categories, powered by the extraordinary performance of Estée Lauder, La Mer, and our luxury and artisanal fragrance brands. With disciplined expense management, we leverage our sales growth into a 21% increase in adjusted and used earnings per share. Our strong performance reflected smart and deliberate investments in the best opportunities worldwide, including focused product innovations, increased advertising, enhanced digital marketing, better use of data analytics, and greater local relevance. We attracted a broader group of consumers and continued to build strong repeat rates for our products, driving greater loyalty. During the quarter, we completed the acquisition of the Korean-based Heaven Bee Company after having taken a minority stake four years ago. Its Dr. Jart skincare brand has grown rapidly with cutting-edge innovation and excellent speed-to-market capabilities. We are optimistic about our first acquisition in Asia. and we see many opportunities to further cultivate the brand globally as consumer interest in skincare continues to expand. Our momentum continued in the first three weeks of January. But as you all know, the global environment has changed meaningfully following the outbreak of the coronavirus. Our thoughts are with individuals who have been diagnosed and those who mourn family and friends. The Chinese government has responded in a very serious manner, along with many other countries and organizations, and they are working tirelessly to address and contain the outbreak and help those afflicted. As a company, we are focused on the well-being of our employees in China and globally and are taking appropriate measures to protect them based on guidance from local authorities and the World Health Organization. Our consumer and business partners in China and elsewhere are also top of mind, and we are actively engaged in ways to support them. We are pledging 5 million RMBs to support coronavirus relief efforts for needs across China, and we are matching donations of U.S.-based employees to assist with the outbreak. We are working on various support initiatives to support people and their recovery. Over the past 10 years, in my role as CEO, I've made numerous trips to many regions of China. I met with our local employees, talked to consumers of all ages, and conferred with our business partners. I've traveled all over to learn more about this beautiful country and its wonderful people. My heart goes out to the citizens of China during this difficult time, and I look forward to my next trip there, hopefully in the near future. Although it is difficult to anticipate the full impact of the coronavirus on our business, we expect the next couple of months will be very challenging. Chinese consumers in many big cities are staying home and retailers are closing stores or limiting hours in an effort to help contain the spread of the virus. Additionally, global travel is being restricted. and the asset is being sold beyond China into major travel retail corridors and large tourist cities. Given what we know now and our experience with past epidemics, we believe our business will gradually recover toward the end of the fiscal year. We stand ready to invest to facilitate the recovery as soon as the market supports it. leveraging the flexibility of our resource allocation and our multiple growth drivers. We remain committed to China and to the Chinese consumers for the long term and plan to increase our R&D investment in the market in order to drive bold, breakthrough, prestige-built innovation for China, the Asia-Pacific region, and the rest of the world. Reflecting China leadership in science, we will expand upon our existing in-market capability and build a new state-of-the-art innovation center complete with the latest technologies and tools. This facility will also highlight our passion and commitment to quality, sustainability, and employee wellness. Our enhanced capability and capacity will ensure we meet the needs of Chinese and Asian consumers with local relevancy and local trends. as well as with creativity, agility, and speed. This investment aims to sustain the long-term development of our company in China and around the world. We will continue working to advance this new development and look forward to sharing more details in the future. Turning back to the second quarter results, the Estelode brand was again a star in our portfolio. The brand grew strong double digits globally in both skincare and makeup and rose in every region, powered by its many hero franchises, including Advanced Night Repair, as well as Renutri, Revitalizing Supreme, Micro Essence, and Double Wear. This is a beautiful example of our multiple engines not only winning across many brands, but also within a big brand. Renault Trip, Estée Lauder luxury skincare line, delivered superb results supported by targeted marketing with a luxury consumer, enhanced merchandising, and desirable innovation. Looking now at our geographic results, sales advanced in every region with strengths across categories. In Asia Pacific, virtually every market grew, led by China, which accelerated, generating strong double-digit growth as all our brands, categories, and channels advanced. We had terrific growth from smaller cities in China, which are becoming a greater part of our business and a promising long-term growth driver. We expanded into two new cities, bringing our total to 123. Our online business in China more than doubled, elevated by well-integrated online and offline campaigns for a single day. The Estée Lauder brand was among Tmall's best performers for the event, while MAC, La Mer, and Jo Malone London each excelled in their respective categories. Our brand expansion strategy on Tmall was a distinct advantage. As an example, Following Tom Ford Beauty launch on Tmall in 2019, the brand executed its first single day to tremendous success in both fragrance and makeup. Its performance was twice that of its Tmall launch day, which was our biggest launch ever on the platform. Chinese consumer interest in prestige fragrance category is rising, and we are nicely positioned with our wide portfolio of luxury fragrances Domalon London and Top4Beauty excelled in the quarter, helping to further diversify our business in China. We plan to launch additional luxury flyers there later this year. We deliver strong growth in our other emerging markets outside of China, led by terrific results in Russia, India, Thailand and Brazil. In the quarter, we continue to invest for growth and attract new consumers. For example, Brazil is the fourth largest market globally for hair care, and we launched Aveda, our 10th brand there. We are showcasing the brand's historical commitment to sustainability, the environment, and botanically-based products with a salon in Sao Paulo that includes sustainable elements. Across Europe, the Middle East, and Africa, Estée Lauder, MAC, Clinique, and La Mer, our four biggest brands, prospered. demonstrating the appeal of established brands that have broad exposure to multiple subcategories and compelling innovation. Every category advanced in the region. Our skincare brand led the growth, which sought after newness from La Mer, D'Arfain, and Origins. In the UK, grew modelously for the second consecutive quarter in a difficult environment, and several of our brands gained share. Our growth strategy is showing promise amid macro and industry-specific headwinds. In North America, we made good progress towards stabilization of the business. We leaned into our multiple engines of growth, leveraging our successful skincare and fragrance franchises during the holiday season in light of industry challenges in makeup. There were several bright spots. brand representing about half of our sales grew, and we had gains in the specialty multi and online channels. In fact, La Mer delivered record Black Friday sales on its own sites, driven by a unique product assortment and an influencer-led holiday campaign. As we work to rejuvenate the makeup business in North America, We are creating products that leverage consumer insight from our enhanced data analytics. For example, we learned consumers want products that combine skincare benefits with makeup. In response, the Estelode brand just launched Futurist Hydra Rescue, a new moisturizing foundation combining the positioning of our winning Futurist franchise in China with consumer needs in North America. The launch is off to a very strong start with high ratings and reviews. Looking now at the channels, our global online business delivered stellar results. Our brand sites, third-party sites, and retailer sites all grew double-digit with broad-based strengths across regions. Our online business was vibrant globally around Cyber Monday, as our brands offered well-received products and sat in the important holiday gifting giving seats. We continue to invest in our excellent growth prospects online. We launched our brands on more third-party sites, which are rising in popularity, deployed new digital payment technologies across several of our brand sites in the U.S., and expanded our loyalty programs. With rich and engaging content, we have increased the time consumers spent on our brand sites, and classic has grown, increasing the inherent media value these sites provide. Travel retail also continued its momentum. Our top eight brands grew double digits at retail, with strengths in skincare, and our luxury and artisanal fragrance brands grew strongly. aided by expanded distribution in the channel. Innovative pre-retail campaign, unique retailers' activation, and effective advertising all contributed to fantastic results. The pre-tail segment of travel retail excelled in the quarter and is becoming an increasingly important part of our business. Pre-tail enabled us to engage with consumers before they travel, build brand equity and desirability and drive conversion when tourism and travel resume following containment of the coronavirus we anticipate that pre-tail will continue to expand another important highlight this quarter was the publication of our 2019 citizenship and sustainability report last march we announced new goals and the report details our vision and progress. One of our goals is to promote ingredient transparency across our brands, and Aveda led the way with an ingredient glossary on its website. Other brands will soon follow. Innovation is the core of our company. It once again helped drive our performance, accounting for over 25% of sales. We have exciting innovation from our four biggest brands coming in the second half of our fiscal year, many in their hero franchises. We believe these launches will be well received by consumers globally, and these important franchises have high loyalty. We are pleased by our strong start in the first half. We are now focused on managing effectively throughout the coronavirus outbreak. we are determined to serve our consumers in the best ways possible. We believe that the efforts of the China's government along with leadership from around the world to contain the outbreak will prove effective. I want to thank our employees worldwide to their extraordinary efforts working through this challenging time while supporting each other, our consumers, the communities where we work, and our business. Their grace and agility are a testament to our company culture. Now, I will turn the call over to Tracy.