The Estée Lauder Companies Inc.

Hey, everyone, and welcome to the Estee Lauder Company's fiscal 2020 third 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 the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Thank you. 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 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 on our press release and on the Investors 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, Reni, and hello, everyone. I hope you are in good health during this difficult time as the world confronts COVID-19. My heart goes out to those afflicted and my deep gratitude goes to everyone around the world who is part of the global relief efforts. Before I discuss results and our strategies to navigate through this challenging environment, I want to first thank our employees at DST Loader Companies. The care and compassion you have shown one another since the outbreak while also balancing new work routines for yourself and caring for your families has been truly inspiring. Your creativity and sense of collaboration have risen to new heights as we have adapted our business from marketing to sales to manufacturing and more. Our employees have truly exemplified our belief in leadership from every chair. Yes, the Lodec companies and some of its charitable foundations have made donations to help limit the spread of the virus and ease the related hardship faced by those it affected. To date, we have made donations and commitments to Doctors Without Borders, the New York City COVID-19 Response and Impact Fund, Red Cross Society of China, Shanghai Charity Foundation, Give to Asia, and Community Chest of Korea. This week, we established the ELC Care Employee Relief Fund, our newest giving initiative, which will be funded through our contributions from the company, the Loader family, and our employees. It will provide immediate and critical financial relief to employees whose lives have been impacted by the pandemic. Our brands have also found meaningful ways to contribute. The Estée Lauder brand donated 2 million surgical masks for frontline workers in New York, while Clinique donated 50,000 skincare products to doctors and nurses in New York City's hospitals. Aveda launched Aveda Cares, a relief program to benefit independent salons and stylists in the United States. The multi-faceted initiative will help salons prepare to recover from COVID-19-related closures. The MAC Viva Grand Fund is continuing its decades-long giving by allocating 10 million to 250 local organizations all over the world that are providing essential needs and services to people at higher risk during the COVID-19 pandemic. I'm also especially proud of how the company mobilized to manufacture hand sanitizer for frontline workers, high-risk individuals, and our employees, thanks to the tremendous work of our global research and development and supply chain teams. Our facilities in the United States, the United Kingdom and Belgium are making over 1 million hand sanitizers. Now, turning to the quarter's performance. As we discussed with you on our last earning call in early February, we expected third quarter sales to decline. After a strong January globally, We anticipated pressure in February and March in our Asia-Pacific region and our travel retail channel, given the extent of the COVID-19 outbreak at that point in time. However, COVID-19 continued to spread around the world as the quarter progressed and social distancing measures began to impact retail traffic. As March evolved, travel was significantly curtailed, and virtually all stores in the Americas and Europe, the Middle East and Africa, temporarily closed. Hindrance consumer primary access to supply, such that the magnitude of the impact on our business was far greater than initially anticipated. In this very complex and challenging environment, reported sales fell 9% in constant currency. Tracy will provide more details about our financial performance in a moment. In this volatile quarter, there were several bright spots in our business, which led to global Prestige Beauty's share expansion. The Estée Lauder brand grew high single digits, while their fan, L.L. Labo, also delivered sales growth. Skincare sales grew internationally, including Dr. Jart. In our Asia-Pacific region, Sales in mainland China rose mid-single-digit after returning to growth in March. Our online sales increased strong double-digits worldwide, with growth accelerating significantly from February to March. The strength of our global travel retail business in January and February enabled it to deliver low single-digit sales growth for the quarter, excluding Dr. Jart. Each of our three regions are at different stages of impact from the COVID-19 outbreak, as I speak with you today. Furthermore, within regions the extent of containment and recovery varies. As a result, and given how fluid the situation is, we are continuously fine-tuning our strategies with our brand and regional teams to both manage the present and plan for the future. Across the regions, a majority of our facilities have continued to manufacture and distribute products, though in a much reduced capacity. Most of our offices globally are operating in a work-from-home scenario. But that too is evolving. Our China headquarters in Shanghai has fully reopened. As all employees began working in the office daily three weeks ago, after having been on a staggered schedule for several weeks. As offices reopen, however, we are going back to work in a different way. We are employing additional safety measures for health and hygiene. We are also applying the experiences of work from home with new ways to collaborate and engage more effectively. In our Asia-Pacific region, our business in mainland China is further improving As retail stores began to reopen, we shortened hours in March. By mid-April, virtually every door had reopened. We are encouraged by China's efforts in containing the virus and the initial signs of recovery. We expect to return to double-digit sales growth in mainland China in the fourth quarter. More recently, sales in Korea have begun to grow, and stores have started to reopen. However, Japan, Australia and markets in Southeast Asia are still in the containment phase with most retail stores closed as we speak. In Europe, the Middle East and Africa, retail stores in most countries have been closed since early March, with the primary exception being in the Balkan Peninsula and the Nordic regions. Some countries have recently announced plans to gradually reopen, most notably Germany and Italy, which are promising signs. Prior to these temporary door closures, several countries in Western Europe have been experiencing lower retail traffic as tourism abated in response to COVID-19. We expect these headwinds to persist for some time to come. In the Americas, most retail stores have been closed since mid-March. Although retailers started seeing much lower traffic earlier in the month, a social distancing began. More recently, several states in the U.S. have announced guidelines for the recovery, and we are starting to see very limited reopening with curbside pickup. We are closely monitoring the evolution of consumer behavior through this challenging time, and we are developing strategies to address it. We are using sophisticated social media listening tools, machine learning, and other qualitative and quantitative research techniques. Each day, we are assessing how consumers express their needs and desires, from seeking positivity, self-care, and wellness, to understanding their at-home needs and routines, to hearing their environmental and sustainability concerns. Our successful strategy built on multiple engines of growth is as vital as ever. Our diversified portfolio of categories, channels, geographies, brands, and price points give us many levers to fuel the business and will play a crucial role during recovery when stores reopen and consumers restock at home. Our robust global skincare portfolio, vibrant online business, a broad exposure in Asia Pacific are the primary engines of growth in this moment. These engines had tremendous momentum before COVID-19 and are playing a crucial role during containment while brick and mortar is closed. Let me first speak on skincare. Emerging trends are increasing the appeal of the category, bolstering already strong category dynamics. Taking care of one's skin has become an expression of self-care, which has risen in importance. Consumers are actively exploring subcategories and expanding their regiments, finding peace of mind in the ritual of a routine. Our focus on hero products is the right strategy, as consumers seek brands and products they trust. Consumers are newly discovering and continuing to return to our heroes. We love heroes like Estée Lauder's Advanced Night Repair, La Mer, Creme de la Mer, Treatment Lotion, and Concentrate. A clinic's muscle surge has been seen since strong global demand online since the outbreak, demonstrating the dynamism of big brands. In this unprecedented time, we are staying true to our belief in the power of innovation on our hero franchises. We launched SLO, the perfectionist pro-rapid brightening treatment, Clinique, even better, clinical radical dark spot corrector plus interrupter, and the new eye concentrate from La Mer. Consumer demand has been especially compelling. In fact, For the perfectionist Serum, its March launch on Alibaba Haybox was one of Estee Lauder's best ever on the platform. Clinique Even Better Serum is far exceeding expectation in mainland China and has been highly sought online in the United States. And La Mer launch contributed to significant share gains in luxury on Tmall. Among our channels, Online is thriving around the world. As we discussed with you at our investor day last year, we have long believed in the excellent growth prospects of online and have been investing in this dynamic channel for years. Our presence is global, with online sales in over 50 countries. We are highly diversified, with over 300 brand.com sites, over 60 brand boutiques on platforms such as Tmall, and over 1,700 retail.com doors. Our online brand teams have been actively engaged since the containment measures took hold, optimizing product placement to address consumer current wants and needs, and showcasing tools like virtual try-on to ease decision-making. The SLO, the brand, expanded its online sales strategy to include a broader array of social selling activities from live shows on Instagram focused on self-care with global spoke models to live streaming from its brand sites with global and local makeup artists to live chats with consumers on its brand site to personalize one-to-one outreach through various communication tools. MAC pivoted. its long-awaited April launch for its newness Selena capsule collection to online and social selling to honor the commitment it had made to consumers. The brand employed an exciting digital activation in place and in person events for the global launch to tremendous success, as pre-order sold out online in two days. Selena is the biggest collection launched to date in terms of total sales on maccosmetics.com. Bobbi Brown began daily lessons with the brand's pro makeup artists across digital channels on topics most requested by consumers. Initial signs are positive, and the brand is welcoming all new consumers thanks to this always-on-artistry initiative. Jo Malone London has been an influx of activity with its digital communities as consumers have sought to elevate and uplift their space with the power of scent. China, the brand's home fragrances and bath and body categories have doubled their mix of business. Throughout action like this in recent weeks, we drove conversion rates sharply higher and our sales have risen significantly. across all demographics. I'm especially encouraged by the online growth we have seen from the ageless consumers. Globally, our brands are seeing increases in new consumers of three to four times. Some rates are even higher. For La Mer in the United Kingdom, new consumer acquisition is higher by five times, while in Thailand, across all brands, it is higher by eight times. As consumer behaviors evolve during this time, we are worsening more data, leveraging our analytics capability to derive even better consumer insight to provide even better service. When retail stores reopen, we will be in a stronger position to further unlock the potential of omnichannel. We are also focusing on the areas of most immediate opportunity in Asia-Pacific. with mainland China as of March and Korea as of April moving from containment to recovery. We told you on our last earning call that we stood ready to facilitate recovery as soon as the market supported it, and we are doing just that. In mainland China, we successfully piloted emerging business models for online and department stores to adapt to the changing landscape. For La Mer, personalized service across channels with curated and targeted communication drove both online sales and department store sales significantly higher in the month of March. The strength of the La Mer repeat business model has been a key factor for its strong recovery and contributed to the brand outstanding prestige beauty share gains in mainland China in the quarter. As countries in Asia Pacific move into recovery, We are mindful of the consumer in these markets who traditionally purchase our products in travel retail, but not able to do so with air travel largely curtailed. Our regional brand leads are working to meet this consumer demand in markets, be it in department stores, specialty multi, freestanding stores, or online. Our travel retail team is also actively engaged as destinations in the channel reopen. already driving positive trends in Hainan or Macau. We remain focused on meeting the needs of Chinese and Asian consumers with local relevancy and local trends. Since we last spoke in February, we have advanced our work toward our new investment in a state-of-the-art innovation center which will open in Shanghai. In closing, this unprecedented time I'm moved by how deeply we are leaving our company values and how our intent of becoming an even better company through this challenging moment. With our extraordinary people and our successful strategy built on a multiple lens of growth, we stand ready to emerge strongly when the global recovery begins. Now, I will turn the call over to Tracy.