The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2021 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 Senior Vice President of Investor Relations, Ms. Rainey Mancini. Please go ahead.

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 on the SEC, where you will 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. Unless otherwise stated, 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 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. It's a pleasure to speak with you today, and I hope that you and your families are in good health. Our hearts are with those impacted by COVID-19, particularly in places like India and Brazil that are experiencing severe resurgences. We remain committed to doing what we can to support our employees and these communities. Our third quarter of the fiscal year 2021 marks the continuation of strong sequential sales growth improvements despite the ongoing challenges from the pandemic. We exceeded our sales and earnings growth expectations even as several markets experienced increasing COVID-19 pressure throughout the quarter. Our multiple engines of growth strategy drove our success. empowered by the exceptional creativity and passion of our employees. We achieved these outstanding results while acting on our values. First and foremost, we continue to invest in employees and consumer safety and well-being during the health crisis. We expanded our work for the environment from setting innovative new sustainability goals in travel retail to seeing a wind farm in Oklahoma become fully operational, which is our largest renewable energy contract to date and a project we were proud to support. We made progress on our racial equity commitments and also outlined a new set of commitments for women advanced and gender equality, inclusive of achieving gender pay equity and globally increased representation of women from underrepresented groups. In March, we launched our new Equity and Engagement Center of Excellence to drive greater equity and representation within our business and across the value chain. We also launched a partnership with Howard University to support the success of its alumni through our experiential learning, career coaching, professional training, and mentorship opportunities. While there was joy in this progress, there was also sorrow. We stood with our employees, consumers, and partners in denouncing the rise in act of violence, hate, and discrimination against the Asia and Pacific Islander community and committed to donate to organizations that support justice and equal treatment from Asian community in the United States. We keep our employees and communities top of mind through these challenging times. With that as our guiding principle, Let me turn back to financial results. Constant currency sales rose 13%, representing a sequential acceleration of organic sale growth improvement. We delivered a strong performance despite increased COVID-19 hardship in Western Europe, Latin America, and parts of North America during the quarter. Estée Lauder, La Mer, Jo Malone London, Clinique and Tom Ford Beauty led the impressive performance of many brands. Skincare and fragrance once again delivered superior sales growth, although they had the toughest comparison to the year-ago period. In fact, our skincare category was nearly 30% larger on a reported basis this quarter than it was two years ago, owing to innovation, in our powerful hero franchises, strength across multiple subcategories, and the addition of Dr. Jart, but before the future inclusion of Dacian. And our fragrance category was 16% bigger than it was in Fiscalia 2019 on a reported basis, driven by our strategic focus on the luxury and artisanal segments. Both of these categories now have even greater scale to capture prestige beauty share as the recovery unfolds. In the third quarter of fiscal year 2021, we focused our investment decisions on engines of growth and employed cost discipline in other areas, resulting in a near doubling of adjusted valued earnings per share versus the prior year period. While the complexities of the pandemic are ever present, adjusted operating margin nonetheless exceeded that of the third quarter of fiscal year 19 and adjusted diluted earning per share was 5% higher. Throughout the pandemic, we have been steadfast in our commitment to the long term as we successfully navigate the short term. We continue to strategically invest to drive sustainable growth, including building an end-to-end innovation center in Shanghai and state-of-art manufacturing facility near Tokyo. These are expected to open in calendar year 2022. More recently, several of our brands decided to participate in the new partnership of Sephora with Kohl's and Ulta Beauty with Target. beginning in the second half of this calendar year. This new consumer coverage represents the promising evolution of the retail landscape, both in-store and online, in the United States for Prestige Beauty. We also agreed to increase our ownership in Dacian, becoming majority investors with a path to full ownership in three years. Dacian, with its fast-growing brand, The Ordinary, and new brand incubation capability aligns well with our multiple engines of growth strategy. The Ordinary further diversifies our skincare growth engine by consumer segment, price point, and geography with a superior online business. The brand has redefined entry prestige with an increased ingredient-focused, regimen-based product portfolio that drives basket size. The Ordinary has quickly established itself as a top five skincare brand in the U.S. Prestige Beauty, having improved its rank significantly over the last year. Sustainability is integral to Dayseum equity, products, and retail practices, which will enhance our sustainability brand portfolio and fuel the achievement of our ESG strategy and goals. We look forward to continue the exciting journey with Nicola Kellner and her incredibly talented team to realize this global opportunity. In the third quarter, the Estée Lauder brand delivered stellar results, led by strong double-digit growth in skincare, sequentially improving trends in makeup, and a return to growth in fragrance. The brand is driving a renewal in the skinification or makeup trend, with the significant growth of its Futurist franchise and its new beautiful Magnolia fragrance, is off to a very promising start. The Estée Lauder skincare franchises performed exceptionally well, led by Advanced Nail Repair and its recently reformulated Namesake Serum. Revisalizing Supreme also was a standout as the launch of Supreme Bright proved highly so. Supreme Bright is an amazing story of east-to-west success, with the product born in the brightening trend in Asia and realizing global appeals for its uneven skin tone benefits. Renutriv's new eye serum surged and created a halo effect for the franchise face and eye creams. La Mer's performance was once again outstanding. The brand's worldwide success is multifaceted, from both loyal and new consumers, and with increasing demand from men, who now represent more than 15% of sales in mainland China. La Mer's iconic product, rich storytelling, and ideal merchandising aligned to deliver the successful Journey to Renewal campaign for Chinese New Year. As well, the brand executed a superb global campaign focused on moisturizer. The new Renaissance de la Mer, the concentrated night bulb, continued to spark consumer desires, elevating the brand's ultra-luxury franchise. Clinique sales growth accelerated sequentially and rose in every region, driven by its skincare portfolio. From consumers' excellent response to the new Monster Surge 100 Hour in the United States, to even better Clinica Interrapper, fueling substantial growth in mainland China, to in-demand hero franchises like Dramatically Different Monsterizing, Clinique prospered. Our luxury and artisanal fragrances realized significant growth in the Americas and Asia Pacific. Light skincare fragrance offer a means to express self-care, and that's so through the emotional comfort of scent. We are seeing strong repeat from the emerging category in Asia Pacific, while we continue to welcome new consumers in the region. These strengths in fragrances, driven by our strategic shift to the higher end, is favorable to margin enhancement in the category. Jo Malone-London, Tom Ford Beauty, Kylian Paris, Le Labo, and Frederic Malle each grew double digits. Innovation and hero products worked in harmony to fulfill consumer desires, with newness from Jo Malone-London and Tom Ford Beauty incredibly well received. Kylian Paris Virtual Selling, which engaged founder Kylian Hennessy, influencers and education ambassadors through live chat and shoppable live streams contributed to superb online growth. Each region grew this quarter, led by Asia-Pacific, which saw sales rise in every category and many countries contribute. Mainland China was exceptional, delivering sequentially accelerating double-digit sales growth, with skincare and fragrance performing ahead of the previous quarter and make up returning to growth up double digits. Both brick and mortar and online strived, driven by the strong equity of our brands, desirable innovation, high quality product leading to repeat purchase, competitive investment in advertising, and investment in local talent and capabilities. For the Chinese New Year, we met the consumer where she or he chose to shop, serving the local consumer as well the traveling consumer in Hainan, both in-store and pre-tail, to tremendous success. Online continued to be a powerful growth engine, as global sales increased strong double digits in every region. Sales of brand.com, third-party platforms, and retail.com rose strong double digits, while sales of PurePlay grew triple digits as we are building our consumer coverage with select PurePlay's retailers. Our online channel is now nearly double the size it was two years ago. Importantly, the media value of brand.com continues to rise as live chat, virtual try-on, and live streaming led to increased traffic and time spent on our sites. Email online sales increased near triple digits, while Latin America's growth was also very high. We adeptly met consumer demand in these regions, which were more pressured than others from temporary brick and mortar closures. In Asia Pacific and North America, where in-store traffic is gradually improving and comparisons to the premium year are increasingly more difficult, online sales still grew double digits. We are innovating in the high-touch online consumer experience and harnessing our data to increase engagement and drive sales. Let me share two examples from EMEA. In the United Kingdom, Clinique launched an integrated platform to deliver seamless end-to-end high-touch virtual experiences with a personalized data-led version of its Skin School on demand. Clinique is providing consultants with data to unlock more sophisticated recommendations with a multitude of tools to ensure the consumer experience is customized based on preferences. Consultants can now enable co-browsing and the adding of friends to services. This new platform, while still in its early days, is delivering above average conversion rates. La Mer enhanced its virtual experiences with more expert classes and one-to-one consultations tailored to local consumers. The brand expanded live chat to every market in the region, with extended hours and additional days, leading to incredible growth in conversion. All told, La Mer saw its regional online mix of business surge. Our brands are investing for growth with social media platforms. TwoFace introduced a new virtual try-on lens on Snapchat to add to its growing portfolio of virtual try-on experiences. On TikTok, he launched a mini-movie showcasing the transformative experience of Better Than Sex mascara via its first world premiere on the platform. Dr. Jart's Cicapair's color-correcting treatment sparked strong online sales in the United States for the brand, amplified by social selling, TikTok, and influencer support. Looking ahead, We are preparing a renaissance in makeup, and we anticipate the momentum we gradually build around the world, driven by local reopening and social and professional occasions. Our data and insights are driving new creativity to inspire consumers as they increase their occasion-based makeup. We are strategically well-positioned to grow our sales and capture prestige, beauty, share, and make-up recovery with our hero products, robust innovation pipeline, analytics engine driving aspirational intelligence, and enticing in-store and online activation centered on the omni-channel consumer. Already in the third quarter, newness from Clinique Even Better franchise in foundation and concealer was highly sought as we saw consumers restocking their core makeup products. Too Faced new lip plumper was a major hit. Hero products like Tom Ford Beauty eyeshadows and mascara from Too Faced and Bobbi Brown also performed very well. MAC is launching a new mascara and there is exciting innovation for many brands to come. In closing, We deliver outstanding performance despite the resurgent impact of the pandemic in many countries. We led with our values as we continue to prioritize the safety and well-being of our employees and consumers. We made progress on our environmental goals and acted on our social commitment. We invested in accelerating drivers for sustainable growth, including innovation in China, manufacturing in Asia Pacific, global online, and consumer analytics. For the long term, we are confident that our multiple angel of growth strategy will continue to create value for our stakeholders. I want to say thank you to our employees who are integral to our success and are making us a better company through this difficult moment. We are beautifully positioned in Prestige Beauty to continue driving recovery with the house of the most dedicated and talented employees. I will now turn the call over to Tracy.