The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2020 Fourth Quarter and Full Year 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.

Hello. On today's call are Fabricio Freda, President and Chief Executive Officer, and Tracy Travis, Executive Vice President and Chief Financial Officer. Hello. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our 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 in our press release and on the investor section of our website. For clarity, I would like to remind you that references to online sales include sales of our products from our online channels, including brand.com and third-party platforms, as well as estimated sales of our products through our retailers' websites. During the Q&A session, we ask that you please limit yourself for one question so that 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, and hello, everyone. Fiscal year 2020 was truly a year without parallels as we delivered one of our strongest first halves on record and navigated with agility through an unprecedented pandemic in the second half. In both of these dramatically different halves, our employees led with extraordinary passion, creativity and resiliency. Our hearts continue to be with everyone impacted by COVID-19 and we remain focused on the safety and well-being of our employees, their families and consumers. The second half of our fiscal year also marked a period of profound pain as tragic events in the United States highlighted the systemic racial injustice that has plagued our society for far too long. In June, we announced a comprehensive set of commitments to act with urgency on achieving racial equity. We stand in solidarity with our black employees, black consumers, and black communities and firmly know black lives matter. Among our many commitments, We are listening and learning to foster a stronger internal culture and advocacy and inclusion. We are focusing on talent and opportunity to ensure that we are providing more equitable access to professional development and advancements for our black employees. We are ensuring that the end-to-end creative process accurately and consistently represents the black experience and engages black professionals. We are investing for change through a three-year $10 million pledge for the company, our brands, our foundation, employee matching gifts, and the Loader family to support non-profits and are in the process of making the initial $5 million donation. Since announcing our commitments, we have held 30 town halls, with our employees and began to identify gaps in our professional development and advancement opportunity for our existing black talent. We have also engaged a diversity-focused recruitment firm and created new diversity recruitment resources. We have commitment to doing more as allies at our company and in our communities. In the last few months, The company and our employees have also made donations and pledges to organizations around the world to help limit the spread of COVID-19 and ease the related hardship faced by the communities in which we live and work. We made hand sanitizer for frontline workers, high-risk individuals, and our employees. The production continues in this day at our facilities in the United States, the United Kingdom, Belgium, and Switzerland. Our brand has found meaningful ways to offer support, and Aveda is a shining example. Its initiative for salon owners and stylists serves to connect and educate as well as to provide financial and business assistance. By offering extended payments term, online sales, reopening toolkits, and over 1,000 hours of virtual education, Aveda actively assisted its network. during this challenging period of salon closures. Turning now to the year's performance. In the first half of fiscal year 2020, sales rose 14% and adjusted EPS climbed to 20%. Our continued performance yielded strong global prestige beauty share gains. In fact, our gains accelerated in calendar 2019. We were well on our way to a third fiscal year of double-digit sales and adjusted EPS growth. Despite extensive temporary store closures worldwide in the second half as COVID-19 pandemic took hold, sales fell only 20% and we were profitable as we quickly pivoted to online to capture consumption and adjust our construction. Our multiple engines of growth strategy which has powered our success for over a decade, continues to be highly effective. The company diversified prestige beauty portfolio give us many levers to drive the business. Our robust global skincare portfolio, vibrant online business, a broad exposure to Asia Pacific are the engines of this moment. In them, we enjoy both strong and growing prestige, beauty, share, and profitability. Across these engines, the Estée Lauder brand's performance was magnificent in fiscal year 2020, as it achieved its third consecutive year of double-digit sales growth. Impressively, the brand hero franchises of Advanced and Repair, Revitalizing Supreme, Perfectionist, Renutri, and Microessence all contributed meaningfully to growth. For the fiscal year, skincare performed exceptionally well. Estée Lauder, La Mer, Tom Ford, Origins, Darfem, and Le Labo drove growth organically, while the category also benefited from the acquisition of Dr. Jart. We delivered excellent performance across subcategories, owing to strong repeat purchase rates, data and analytics-driven marketing, new social selling strategies developed during COVID-19, and highly desirable innovation. Among the subcategories, demand for watery lotions is soaring, as a hydrated step before serums and moisturizer in the new era of self-care. Esteloder Micro Essence, La Mer The Treatment Lotion, Origins Dr. Whale Mega Mushroom Treatment Lotion, delivered outstanding growth for the fiscal year, and we expect to continue favorability in this compelling subcategory. Beyond watery lotions, our serums and high-care subcategories are prospering. For serums cherished heroes like Estelode Advanced Naritea and innovation from Clinique Even Better Line and Estelode Perfection and Renutri franchise, bolstered growth in fiscal year 2020. La Mer's new eye concentrate, launched a few months ago, has been highly sought as consumers are embracing its lighter texture and new claims. In EMEA, the product was the bestseller on LaMer.com in the fourth quarter. Trusted brands like Clinique flourished online when brick-and-mortar closed. In the fourth quarter, Clinique U.S. prestige beauty share rose on Retailer.com, solidifying its number one rank. Sales on Clinique.com were the largest across all our brand sites in the quarter, driven by heroes, dramatically different moisturizing lotion and moisture surge. Clinique promised to deliver products that are simple, safe, and effective for skin, is resonating loudly online. Our online business surged worldwide in fiscal 2020. It delivered nearly triple-digit organic sales growth in the fourth quarter, which is a testament to the capabilities and scale we had built. Each of brand.com, brand boutiques on platforms such as Tmall, and retailer.com doors contributed meaningfully. On our brand sites, in particular, we delivered nearly 90% organic sales growth globally in the fourth quarter, as we increased investments to offer the best high-touch services. We quickly evolved our live chat capability to offer video. We also enhanced our virtual try-on to include more categories. We rapidly deployed live streaming, first in mainland China and then globally, engaging makeup artists as well as brand ambassadors for tutorials. Our live streams are shoppable, meaning that consumers can make purchases within the event. Across the brands, traffic grew significantly in the fourth quarter and conversion rates rose dramatically. Encouragingly, we saw strong growth in engagement and repeat purchase behaviors. Both new and existing consumers shopped our brand sites more frequently, as for example with Origins and Esteloder in the United States, reinforcing the great work we are doing to cultivate and retain consumers through this moment. Consumers have discovered new shopping habits online that are enduring, and this is true of all ages. Clinique's live streaming series, designed to both entertain and educate, led consumers to return more frequently, spend four times longer on site, and convert at far higher levels. The brand new live streaming event with Clinique Global Ambassador Emilia Clarke surpassed these newly elevated conversion levels. Bobby Brown launched its Artistry Like Never Before program in May, offering consumers one-on-one and small group video consultations with national make-up artists. These engaging sessions range from 15 to 60 minutes, with the 30-minute make-up bag makeover session as the most popular. Conversion rates are incredibly strong, with a high level of units per transaction. Bobby Brown continues to scale this program globally to meet the increasing demand. This is just one example of the many ways our brands are building community through this challenging moment and we see this as an exciting evolution of the shopping experience for the future. Aveda, which led our brands by first launching its ingredient glossary earlier in the year, is seeing guests who engage with the glossary spent three times more time on Aveda.com than average. Further acting on our commitment to ingredient transparency, Clinique, La Mer and Origins launched their ingredient glossaries in the fourth quarter, and we have more to come in fiscal year 2021. We maintained our strategy focus on key online shopping events throughout the year. Our advanced planning for these events delivered outstanding results. For the 6-18 mid-year shopping festival, the Estée Lauder brand sales on T-Mall tripled and its sales ranked second among all prestige beauty brands. Our Asia-Pacific region delivered superior sales growth in fiscal year 2020. Every category in the region expanded, led by accelerating growth in skincare movements. Fragrance also accelerated as consumer desire in the region for our portfolio of luxury and artisanal fragrance built. Mainland China performed exceptionally, with its sales rising roughly 50% organically in the fourth quarter. Korea and several other markets also grew for the year and fourth quarter, driving prestige beauty share gains for both periods. In mainland China, the premium and luxury segments of prestige skincare are booming. In fact, luxury is the primary growth driver for the total category. For this, La Mer is ideally positioned with its heritage, iconic ingredients and superior quality. La Mer is helping to grow the category and the brand shares of prestige skincare is expanding significantly, which is the ideal combination. Desire for our luxury and artisanal fragrances is strong in the region, and we continue to see it grow. In the fourth quarter, we launched Killian and Frederick Mouth in mainland China, with great initial interest from consumers. In Korea, our fragrance sales soared as Jo Malone London and Tom Ford grew with our launches, while Killian and Le Labo were also highly sought. collectively driving prestige share gains in the category. With air travel still largely curtailed, we are focused on meeting demand locally across the brick-and-mortar and online channels, as well as in localized destinations of travel retail. Hainan, in particular, is prospering, as tourism gradually resumes, which partially offset the decline of travel retail in the fourth quarter. As of July, duty-free shopping allowances in Hainan have increased more than threefold, which is further boosting consumption. We continue to strengthen our leadership in the travel retail channel. Innovation is fundamental to our strategy, and even in this unique year, it once again represented over 25% of sales. It will play a vital role in fiscal year 2021. powering the engines of the moment and the engines of the future. Ready out this month are two big launches in skincare. La Mer launched its new concentrate as a potent barrier serum newly advanced with antioxidant power to be a double source of strength against environmental stressors and their aging effects. Estée Lauder introduced a breakthrough new generation of its brand icon, Advanced Night Repair. This powerhouse serum still has all the benefits and texture loyal consumers know and love, and now features innovative new technology. Tested on women of all skin tones, ethnicities, and ages, it now offers the fast-growing, highly desired benefits of firmness, poor minimization and 8-hour antioxidant power on top of its existing wrinkle and uneven skin tone benefits to recruit a younger consumer while retaining our lower loyal users globally. Its package has been modernized into a luxurious recyclable glass bottle that supports our sustainability initiatives. We have exciting launches to come from MAC and Clinique in Macabre. as we anticipate trends on the horizon. Our pipeline in fragrances and hair care is also robust, with newness from Jo Malone London and Aveda, among others. Looking ahead, we are confident that we can return to our long-term growth algorithm of 6% to 8% sales growth, 60 basis points of operating margin expansion and double-digit earning per share growth in constant currency, after a period of normalization as the impacts of COVID-19 subside. Our citizenship and sustainability goals remain on track. We are also implementing sustainable office practices in mainland China and exploring green energy solutions there. For fiscal year 2021, we are investing in several strategic priorities intended to drive our long-term sustainable growth. Among the priorities are enhancing manufacturing capabilities, expanding online fulfillment capabilities, and further funding growth opportunities in Asia-Pacific, including our new state-of-the-art innovation center in Shanghai. While the world continues to confront many unknowns related to the pandemic, certain realities have emerged that have accelerated our strategy. As online has quickly grown, we need to more aggressively adjust our brick-and-mortar footprint and more closely align with how and where the consumer wants to shop. The post-COVID business acceleration program we announced today is designed to rapidly reallocate our resources, enabling us to invest in the greatest opportunities for long-term sustainable growth like online, skincare, or China. Importantly, this program will also improve the productivity and sustainability of our brand-building brick-and-mortar footprint and better position us to make it experiential and omnichannel. Tracy will discuss the program in more detail. In closing, we confidently bring the strengths of the first half and the learnings from the second half with us into a new fiscal year. I want to thank all our employees for your exceptional contributions across the year, and most especially the second half. You navigated through an unprecedented period with grace and made us a better company. Now, I will turn the call over to Tracy.