The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2021 first 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.

Hello. 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 our reports filed with the FCC, 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 disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the investor section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. 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 that each of you are in good health as the world continues to confront COVID-19. Our hearts are with those impacted and our focus remains first and foremost with the safety and well-being of our employees, their families and our consumers. I continue to be incredibly inspired by our employees enduring compassion, creativity and resiliency. You are making us a better company, and I stand my deepest gratitude. Our diversified prestige beauty portfolio of categories, channels, geographies, brands, consumer segments, and price points give us many levers to fuel the business, both in times of prosperity as well as during more challenging times. In this most difficult moment, our multiple engines of growth strategy is invaluable. For the first quarter of fiscal year 2021, sales declined only 9%, a significant sequential improvement driven by every category. Fragrance and hair care, in particular, had striking progress. Our hero products and innovations strived and contributed meaningfully to sales. We successfully adjusted our cost structure to minimize the leveraging effects of lower sales, resulting in an operating margin of 20%, very close to the first quarter of last year when we had double-digit sales growth. In different periods over the last decade, we were driven by different engines, leading to Prestige Beauty share gains each year, and we expect this year to be no different. Since the pandemic began, we estimate that we have grown Prestige Beauty Share globally. On our last earning calls, we explained that the growth engines of the moment are the skincare category, the online channel, and the Asia Pacific region. Each delivered terrific performance to begin our new fiscal year. The Estée Lauder brand performed exceptionally well. returning to growth in the quarter, powered by its hero franchises in skincare. Its advanced night repair franchise delivered very strong double-digit sales growth. Encouragingly, the brand's success in skincare was broad-based, as each of the renutrient, revitalizing, supreme perfection in macro-essence nutritious franchises also grew double-digits. This is a remarkable achievement when compared to the brand's very strong skincare performance in the prior year. La Mer had a superb quarter with double-digit sales growth globally, driven by its continued outperformance of luxury skincare growth in mainland China. The August launch of its new The Concentrate delivered especially strong double-digit sales growth in Asia Pacific, and consumers so the suiting power of this Barria Serum with its new protective antioxidant benefits. Even amid the pandemic, La Mer is welcoming many new consumers, further demonstrating the irresistible appeal of the brand's superior quality. At our last Investor Day, we discussed growth strategies for each of our large, scaling and developing brands. And even in these challenging times, We are resolute in our focus on all three tiers. The Darfen brand is a beautiful example in the developing tier of a brand succeeding through these unparalleled times. Darfen contributed to the skincare category growth in the quarter as the successful launch of Intral Rescue Super Concentrate Serum amplified the strengths of the brand's hero products. Our acquisition of Dr. Jart with its terrific entry-prestige derma brand positioning and desirable hero products enhanced the organic sales growth of skin care. Momentum in the serum, watery lotion, and eye care subcategories carried into the quarter, driving skin care growth. The August launch of Estée Lauder new advanced night repair serum performed extraordinary across geographies and channels, aided by compelling activation and an over 40% surge in consumers' reviews since launch when comparing to the entire lifespan of the previous version. Impressively, Clinique's even better clinical interrupter serum continues to perform strongly in its third quarter since launching, We deliver outstanding double-digit sales growth online, with skincare, makeup, fragrance, and hair care all prospering. Once again, each of our online channels contributed meaningfully. We continued to strategically invest in our brand sites globally, bringing our classic high-touch services to consumers online. The response has been phenomenal. we have seen tremendous growth in time spent on 4Chat, virtual try-on, and shoppable live streams. Even with most retail doors reopened around the world, sales rose 60% organically on our brand sites. We now have virtual try-on across more brands and categories in more markets. In the first quarter alone, We hosted over 1 million virtual try-on sessions globally, with consumer spending more than 30 minutes on average in a session. In North America, the Celote brand launched AI-driven product recommendations based on real-time consumers' behaviors and past preferences. This dynamic merchandising holds great promise across our brands and regions. Clinique global sales growth on brand.com in the quarter was exceptional, among the strongest across the portfolio. Clinique's King School on-demand live streaming was a great success, leading to new daily programming that combines top consultants with influencers to future holiday sets and favorite Clinique products. Clinique is our first brand to launch new technology that pairs multiple hosts in one shoppable live stream. Bobby Brown continues to scale its Artistry Like Never Before program, expanding virtual artistry to include live chat, pre-booked video consultations, master classes, and live streaming by rapidly converting some of its global makeup artists into a network of virtual sellers. Most of the brands markets now offer these consultations on brand.com, on local social platforms such as WhatsApp, WeChat, and Instagram. These virtual services have a higher conversion rate, up to 10 times the average, and a higher average order value. With enticing innovation and engaging new services and tools, conversion grew strong double digits across our brand sites. Most compelling is the significant conversion growth in markets that are under-penetrated online, such as continental Europe. In the quarter, conversion there grew over 75%, while in Latin America, conversion growth far exceeded 100%. This positions us well for suitable profitable growth online. We invested in online fulfillment during the quarter, strengthening our capacity globally, and we are addressing seasonal fulfillment locations in our largest markets in anticipation of robust consumer demand for holiday. Leveraging our investment in technology, we deployed more omni-channel capabilities in several markets. In the U.S., we have seen dramatic upstarts in buying online pick-up-in-store for Mac. The brand also partnered with Postmates domestically to launch same-day delivery and open a new experiential store in New York. The store features extensive personalization options for consumers, and interactive digital experiences. In these initiatives and more, we are meeting the desires of consumers who are craving convenience and choice, offering them new ways to shop in today's environment. The third engines of growth, Asia Pacific, also excelled. Several markets contributed to the region's high single-digit sales growth, which is most notable as some markets in the region dealt with new waves of COVID-19. Mainland China, Korea, and several smaller markets grew organically. In mainland China, we continue to invest in the vibrant opportunity of our second home market. We expanded into more cities in the quarter, reaching over 130. We increased our advertising investment across social and digital platforms, showcasing exciting innovation and building brand awareness as we reach new consumers. We continue expanding our talent in anticipation of our new state-of-the-art innovation center, which will open in Shanghai, as we aim to best meet the needs of Chinese and Asian consumers with local relevancy and local trends through increased capabilities in product design, formulation, consumer insights, and trend analytics. In mainland China, the bricks and mortar channel returned to double-digit growth, such that both offline and online were powerful growth drivers. The travel retail channel further contributed, driven by tremendous growth in Hainan, partly reflecting increased duty-free purchase limits the opening of some travel corridors in Asia, and online pre-tail growth facilitating higher conversion, magnifying Chinese consumer strengths. Indeed, demand from the Chinese consumers was very strong across these channels, most especially in skin care, and we estimate we grew our prestige beauty share. The fragrance category sales growth accelerated in Asia-Pacific in the quarter. We introduced Killian Paris and Frederick Malt in mainland China in very select distribution in June. These unique, luxurious brands are proving highly desirable, which coupled with the ongoing strength of Jo Malone London and Tom Ford drove significant double-digit sales growth of fragrances. In Korea, fragrances also soared. Le Labo, new Citron 28 Seoul fragrance, drove meaningful upside, demonstrating the strength of our locally relevant innovation. Around the world, we continue to closely monitor the evolution of consumer attitudes and purchase behavior related to COVID-19. We combine sophisticated social media listening capabilities with machine learning and proprietary consumer research techniques to develop insights and adapt our marketing and product offering with speed and agility to capture changing trends. Looking ahead, we are confident in the return of growth in the challenged makeup category as the recovery will unfold. In the meantime, we continue to focus on subcategories in makeup that are favored in the era of masks for COVID-19. In fact, even in lip, which is overall pressured, the liquid lip subcategory is growing nicely, driven by Max's launch of Power Kiss Liquid Lip, as consumers seek mass-finished formulas that last. Our innovation represented over 30% of sales in the first quarter. We have an exciting pipeline of new product launches for the remainder of Fiscalia 2021 for both engines of moment and what we expect to be engines of the future. In October, Clinique launched Mosser Surge Intense Replenishing Hydrator, a new formula that hydrates skin for a full 72 hours in a cream gel formula that dries for drier skin types. This month, La Mer will introduce its new Genesense de la Mer Concentrated Night Balm, an ampule strength balm slow crafted with crystal miracle broad that promotes skin natural rebuilding of collagen to help transform the look of skin during sleep. Continuing our progress on sustainability, Origins intends to be the first prestige beauty brand to bring an advanced recycled tube package to market with its clear improvement active charcoal mask in 2021. This expands upon Clinique's recent launch of All About Clean in Packaging, with most consumer recycled material and plant derived plastic for its tube and most consumer recycled material for its cap. For fiscal year 2021, we continue to expect sequential improvement in sales growth each quarter and to build global share while Prestige Beauty progressively return to growth. We are mindful of the ongoing impacts of COVID-19, most especially the very limited traffic in retail doors as stores reopen, and the second waves occurring in certain markets. We are investing in several strategic priorities intended to drive our long-term sustainable growth that are progressing in the world of post-COVID business acceleration programs. For the second quarter, we have a magnificent plan for holiday and the 11-11 Global Shopping Festival. Holiday merchandising began a few weeks ago, and our brands created rich activations with engaging, freestyle products. Estée Lauder and La Mer have kits that include best-selling hero products to drive recruitment. Origin is making holiday gifting easy, offering consumers the ability to text or email a gift, allowing the recipients to either accept or exchange their product before it is gift-wrapped and sent to them. Bobbi Brown Holiday Wishlist Deluxe Collection includes all the inspiration, goods, and tools to create ultimate holiday looks. And MAC recently debuted its Frosted Firework Collection, partnering with a diverse range of beauty influencers who generated over 60 million media impressions in the first 10 days after launching. Today we will release our fiscal 2020 Citizenship and Sustainability Report entitled Beauty Inspired, Value Driven. We are incredibly proud of the contribution of our employees around the world in accelerating our citizenship and sustainability efforts and have featured their successes in this year's report. The report highlights the achievement of our 2020 ESG goals, as well as meaningful progress toward our 2025 goals. These milestones were reached across citizenship and sustainability priority focus areas despite the challenges of the pandemic. I'm pleased to announce the company has achieved net zero carbon emissions and 100% renewable electricity globally for our own operations. Building upon this achievement, we also met our goal to set science-based emissions reduction targets addressed in Scope 1 and 2 for our direct operation and Scope 3 for our value chain. Today's announcement signals a new level of ambition and dedication to climate action for DSLO companies. setting targets in line with the latest climate science in testament to our values and our commitment to managing our business for the long term. We are also proud to have reached zero industrial waste to landfill for our manufacturing, distribution, and innovation sites. And we are on track to provide access to training on basic sustainability and corporate social impact programs for our employees worldwide this month. In addition, over the past two years, our programs and grants focused on health, education, and environment have positively impacted the lives of more than 20 million individuals worldwide. Our collective vision is to be the most inclusive and diverse prestige beauty company in the world and to be the employer of choice for diverse talent and the brand of choice for diverse consumers. Our commitment to racial equality, especially our focus on driving racial equity across our business, is central to achieving our vision. In today's report, we'll be publicly disclosing enhanced employee diversity metrics and information on pay equity. We believe this transparency to all our stakeholders is important to holding ourselves accountable to our vision while importantly setting the stage to share our progress. In closing, there is no doubt that we are living and working in a moment unlike any other, and yet we are confident thanks to our passionate employees, cherished company values, and proven strategy built on multiple engines of growth. We are well equipped to face the challenges of today and even better positioned to embrace the opportunities of tomorrow and continue growing global prestige beauty share. I will now turn the call over to Tracy.