The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2021 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 the 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 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, and all organic results exclude the impact of acquisitions. 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 includes 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, Janie, and hello, everyone. Let me first wish that each of you are in good health, and that your families are well. Our hearts continue to be with those impacted by COVID-19, and our focus remains first and foremost on the health and safety of our employees, their families, and our consumers. To our employees, you have lifted us up from caring for the physical and emotional well-being of colleagues to making hand sanitizer seeking opportunities to support charities around the world, generously contributing to the LC Care Employee Relief Fund, and so much more. In December, the company made an additional donation to the Employees Fund, and we continue to make progress on our citizenship and social impact commitments. Our employees' agility and creativity empowered the company to deliver the exceptional results we announced today. For the second quarter in fiscal year 2021, sales rose 3%, a 12-point positive swing from the decline of 9% in the first quarter. Impressively, 10 brands grew, led by the double-digit growth from Estée Lauder and La Mer, as well as great performance from Jo Malone London. Le Labo and Frederick Malle also rose double digits. We focused our investment decisions on engines of growth while employing strict cost discipline in other areas, delivering strong double-digit adjusted diluted earning per share growth. In the quarter, we faced increasingly complexity from the pandemic, yet still delivered results that exceeded our record second half quarter of fiscal year 2020, when sales grew the strongest in 20 years in our seasonally largest quarter. Our multiple engines of growth strategy continued to prove its value, enabling us to pivot with agility in this challenging moment. We successfully activated efforts behind the growth engines of skincare, fragrance, asia pacific travel retail in asia and global online our skin care category performed extraordinarily its accelerating growth reflected the strong and locally relevant innovation successful hero strategies compelling ingredient narratives and deeper consumer relationships enabled by sophisticated data and analytics growth of our high repeat hero products was broad-based across subcategories, from cleansers to watery lotions, serum, eye care, and moisturizers. Our skincare business has continued to go from strength to strength, bolstered by the peace of mind of the ritual of skincare as an expression of self-care. From entry prestige through luxury, our brands excelled in skincare. Many brands contributed, demonstrating the breadth of our performance. Dr. Jart provided incremental sales from our double-digit organic growth with its appealing derma brand positioning. The Estee Lauder brand once again delivered double-digit growth across several of its hero franchises in skin care. Its new advanced nail repair serum was a powerful force. thanks to its new formula, a luxurious, more sustainable glass bottle. The serum delivered a healthy fit to Advanced Night Repair Eye. And these two hero products benefited from their synergies and desirable sets. The brand's revitalizing supreme franchise accelerated significantly, gaining momentum with its hero moisturizer. La Mer leadership in luxury skincare grew as consumers demand for its iconic products with powerful proven efficacy soared. Here, two serum was a vibrant subcategory. Its new Deconcentrate was a big contributor to growth, amplifying strengths of heroes like Crème de la Mer and the treatment lotions. The new Renaissance de la Mer concentrated night bulb performed exceptionally well, driving the brand's ultra-luxury franchise to new highs. Clinique returned to growth, lifted by skincare, as its hero franchises that are focused on hard-to-solve skincare problems like acne and dark spots thrived. Even better clinical interrupter, is now firmly established as a core performance of the brand and continues to deliver significant growth. It was complemented by an acceleration in the brand's three-step product and Acne solution lines. Our luxury and artisanal fragrances captivated consumer desires. For Tom Ford Beauty, Jo Malone London, Le Labo, Frederic Malle, and Killian Paris, innovations and iconic products were both highly sought. These brands all delivered stellar online sales growth along with improving brick-and-mortar sales in certain markets. Jo Malone London and Le Labo home products continued to flourish as consumers craved the sense to elevate the sanctuary of their homes. Our global online channel delivered outstanding double-digit sales growth, significantly accelerated from the previous quarter and driven by every region. Growth was robust across the board as brand.com, third-party platforms, pure players, and retailer.com doors all contributed meaningfully. Our go-to-market strategies for each of these were tremendously successful, particularly during Black Friday, Cyber Week, and Tmall 1111 Global Shopping Festival, driving strong consumer acquisition and retention. We continue to enhance our brand sites with high-touch services. These strategic investments are elevating the consumer experience from convenience buying to enriched shopping, complete with useful tools, targeted recommendation, and expert advice. Across our brands, we are uniquely combining technology and data with our talented beauty advisor on a global scale. Virtual try-on is proving to be incredibly powerful, driving over twice the engagement as well as higher conversion and retention rates. In the quarter, we added virtual try-on to more sites around the world. The number of sessions nearly doubled from the prior quarter, reflecting both the expansion to additional sites as well as a big up-stick in activity on brand sites that had previously launched it. VideoChat is also proving to be very impactful. In North America, conversion of live chat sessions is nearly four times higher than average conversion in the market. VideoChat usage accelerated during the holiday season as our skilled beauty advisor offered useful insights and customized education to consumers, driving much higher basket sites than average. our brands are increasingly offering other engaging virtual services and experiences. Two examples are found on Clinique.com. Clinique Reality, the brand's skin diagnostic tool, instructs the consumer in a highly personalized manner, driving notably strong conversion rates. And Clinique Skin School addresses the growing demand for credible education in an entertaining format with a new focus on real-time interactions. Skin School brilliantly integrates live chat and trend-based programming with brand expert consultants. We continue to pursue high-touch innovation online. As evidenced by the SLO The Brand new AI-driven product recommendations based on real-time consumer behavior and past preferences, that we are piloting in North America. We anticipate that this dynamic merchandising holds great promise and are excited to scale in this year for Estée Lauder as well for other brands. We are welcoming new consumers on our brand sites by also successfully driving repeat, enabled in part by our loyalty programs. In the first half of fiscal year 2021, the number of loyalty program members who both rose strong double digits, driven by triple-digit growth of international loyalty program members. In so many ways, we are building deeper relationships with our consumers. Our brands delivered excellent results for Tmall 1111 Global Shopping Festival. leveraging the latest live streaming technology and capabilities to generate product discovery. For 11.11, the Estée Lauder brand moved into the number one rank in beauty. La Mer notched number one rank in luxury beauty. MAC was the number one prestige makeup brand. And Jo Malone London was the leader in fragrance. We have long believed in the compelling growth prospects of online, and have been investing in it for more than two decades. At the onset of COVID-19, we nearly doubled our rate of online investment, including accelerating our consumer-facing investment, like virtual try-ons, social selling, omnichannel, or loyalty programs, while also increasing our investment in our digital infrastructure and fulfillment network, to meet the much higher traffic and demand. In addition to these capital investments, we continue to optimize our advertising investment in digital channels as well as invest in our great online talent domestically in our headquarters in New York and in our local markets around the world. Among the regions, Asia-Pacific delivered the strongest sequential improvement with sales growth accelerating from 7% to 27%. Mainland China prospered, while Korea and several smaller markets contributed organically. In mainland China, momentum in brick and mortar carried into the quarter, with sales again growing double-digit. Online accelerated significantly, elevated by a remarkable 11.11 event. Nearly every brand grew, as across the brands we reached more consumers, thanks to locally relevant innovation, hero products, rich storytelling, and successful influencer activations, as well as the dedication and creativity of the local team in China. Travel retail grew single digits organically, driven by strong results in Asia, particularly in Hainan, as we fulfilled the desires of the traveling Chinese consumers with ideal merchandising. Traffic to Hainan continued to rebound, and the duty-free annual partial limit had increased threefold there in July, providing a favorable benefit in the quarter as consumers sought to spend to the new annual limit before year-end. conversion was also a strong driver, owing Pretail, which newly offered live streaming. Across channels, demand from Chinese consumers accelerated, especially in skincare and fragrance. The long-term growth opportunity we foresee in the dynamic Asia-Pacific region are abundant. Over the last 15 months, despite the challenges of the pandemic, we made three significant investment commitments as we strive to best meet the desires of Chinese and Asian consumers. In late 2019, we acquired the Korean-based skincare brand Dr.Jart. While in early 2020, we committed to build an end-to-end innovation center in Shanghai. Today, I'm pleased to confirm we are building a state-of-the-art manufacturing facility near Tokyo. We are on track to open our Shanghai Innovation Center in spring 2022. This will increase our local capabilities in product design and formulation. We are also strengthening our consumer insight and trend analytics in this vibrant market. We broke ground in our new manufacturing facility near Tokyo. which is to be operational in late 2022. It will enable us to better meet demand and increase speed of market in the region. The facility will house advanced technologies and engineering equipment with high standards of sustainability and safety and will be designed to promote flexible and leading-edge working environment. Across our engines, innovation contributed significantly in the second quarter, ahead of our aggressive goals, driven by focus on fewer, bigger, and better hero innovations. We have an enticing pipeline of new product launches for the remainder of our fiscal year. Already out are two in skincare. The Estée Lauder brand launched Supreme Bright, It addresses the trend of brightening in Asia and is also highly relevant for consumers of all skin tones around the world. With its even better skin tone, a dark spot benefits, meeting top needs of the multi-ethnic consumers. Clinique introduced Monster Surge 100 Hour with an exclusive aloe vera bioferment that provides hydration that goes 10 layers deep into skin surface and also lasts 100 hours even after you wash your face. In makeup, Clinique launched even better clinical serum foundation, a weightless liquid foundation with 24 hours wear, a good for skin ingredients to help visibly improving skin instantly and over time. Our strategic focus and investment in our ESG goals remain of utmost importance for us and our key stakeholders, and we continue to advance our work in the quarter. Let me share a few examples in climate, sustainable ingredients and packaging, and inclusion and diversity for the many areas of our recent progress. We are pleased to have joined CDP's 2020 Climate A-List, having been awarded the highest score of A. In January, Aveda proudly announced that its products are vegan. As a mission-driven brand, this was a natural step for Aveda, a brand that continuously works to reduce its environmental impact while also responding to the fast-growing consumer trends. Our brands are employing more innovative and sustainable packaging as they launch new products, while also improving the packaging of existing products. The two new clinic products which I just described are two such examples of innovation launching in more sustainable packaging. To continue to invest in and advance our diverse talent, we created a sponsorship program for equitable, advanced, and professional development of our black talent. from the From Every Chair leadership development program will ensure that our Black employees have the support and advocacy of senior executives and equitable access to leadership training, mentorship, and career development opportunities. In closing, we delivered excellent performance amid the pandemic, leveraging the strengths of our multiple Engines of Growth strategy hero products and robust innovation. We did this while leaving our values as we increasingly embedded ESG in everything we do, focusing on safety and well-being of our employees, making progress on our environmental goals and acting on our racial equity commitments. We also invested in technology and data for new capabilities to support accelerating growth drivers. These accomplishments and actions give us confidence that we are well positioned to continue to drive recovery and return to our long-term growth targets after the period of recovery. I'm incredibly grateful to our employees whose grace and fortitude are making us a better company throughout this very difficult moment. While the role ahead will still be challenging, together we can be optimistic. The brighter days are coming. I wish each one of you good health, and now I will turn the call over to Tracy.