The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Yes, They Lotter Company Fiscal 2022 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 Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Hello. I'm today's caller, Fabrizio Prada, 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 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 and adjustments disclosed in our press release. Unless otherwise stated, all net sales growth numbers are in constant currency. and all organic net sales growth excludes the noncomparable impacts of acquisitions, divestitures, brand closures, and the impacts of currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors 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.

Thank you, Reni, and hello, everyone. It is good to be with you today as our hearts continue to be with those impacted by COVID-19 around the world. We achieved record sales and profitability in the second quarter of fiscal year 2022. Our multiple-angeal growth strategy showcased the benefit of its diversification. Every category, region, and major channel expanded. We sized the favorable dynamics of skincare, fragrance, developed markets in the West, brick and mortar, and continue to prosper in the East with Chinese consumers as well as in global travel retail and global online. The flexibility we built into our business model over the last decade enabled us to both allocate resources to attractive growth opportunities and effectively manage the impacts of an increasing inflationary environment. Our advanced planning for the key shopping moments of 11-11 and holidays allowed us to overcome supply chain obstacles. For our second quarter, reported net sales grew 14%. Organic net sales rose 11%, adjusted operating margin expanded, and adjusted dilute earnings per share increased 15%. Today's results are all the more impressive compared to the pre-pandemic second quarter of fiscal year 2020, when we delivered record organic sales growth in our seasonally largest quarter. Despite the answering challenges of COVID-19, which escalated during the quarter with Omicron, we far exceeded the exceptional results of two years ago. Reported sales are 20% higher, driven by organic sales growth, and with every region now larger, and we are much more profitable. Our gains during the last two years reinforced our confidence in our ability to navigate the impacts of the prolonged pandemic. Moreover, our optimism in the opportunities of tomorrow remains incredibly strong, owing to the timeless desirability of our brands and our commitment during the pandemic to invest for the near and the long term. Our brand portfolio of large, scaling, and developing brands served as a powerful catalyst for growth as consumers reward the quality of our trusted brand and hero products. In the second quarter, 11 brands achieved double-digit organic sales growth versus the three-year period. This broad-based trend is similar to the contribution in the first quarter, despite a far tougher comparison. The momentum in our largest brands, Clinique, Estée Lauder, La Mer, and MAC, continues as the hero franchises capitalized on innovation in product engagement and high-touch experiences and services to drive trial and repeat. La Mer and Clinique delivered standout results in skincare, while Estée Lauder and Marc drove makeup's emerging renaissance. Our scaling and developing brands achieved excellent results. Jo Malone London and Tom Ford Beauty led triumphs and were among our top performing brands. while Bobbi Brown grew strongly, driven by skin care. Aveda and Bumble and Bumble delivered accelerating sales growth in hair care, as Too Faced and Smashbox rose double digits in makeup. Product innovation also served as a powerful catalyst for growth across our brand portfolio, contributing nearly 25% of sales. This level of contribution is notable in a quarter when Holidays exclusives represent a larger mix of business, and especially so in a challenged supply chain environment. La Mer, fueled by its iconic heroes on trend holidays merchandising and highly sought new dehydrating infused emotions, led the company's sales growth. The brand excelled in every region and across major channels, cherished by its loyal consumer and embraced by a new cohort of consumers, including more men. Clinique's skincare portfolio, with its desirable innovation and hero franchises, performed strongly. Its new smart clinical retail wrinkle correcting serum drove sales gains in North America, amplifying the brand's global momentum in the serum subcategory. Clinique's take-the-day-off makeup remover saw a dramatic uptick in sales. evidence of Makeup's emerging renaissance and the staying power of this cult-favorite skincare product, which is recruiting a new generation of consumers. For Makeup, the Estée Lauder brand is a driving force in the category emerging renaissance, with Makeup sales for the brand already larger than two years ago. Estée Lauder Double Wear Hero franchise delivers remarkable performance, while its Futurist Foundation which is an east-to-west proto-born of skinification of makeup trend, was very strong. Our fragrance portfolio continued to go from strength to strength, owing to the enduring scent-based rituals created in the pandemic and enhanced by innovation. Better online storytelling and expanded reach as consumers in the east embraced this category. Each of Juma Lollando, Tom Ford Beauty, Le Labo, Killian Paris, and Frederic Malle delivered strong double-digit growth in every region, demonstrating the allure of these brands around the world. Tom Ford Beauty exemplifies the benefits of a strategic focus on heroes and innovation. Its new ombre leather perfume had a hollow effect on the eau de parfum, such that sales for the franchise doubled. In the third quarter, the brand is leveraging its global appeal with a flair of local relevance in the fragrance launch of Tom Ford Rose trilogy. Our growth engines also continue to diversify by region, as we anticipate. Developed markets in the West perform especially well. North America executed with excellence to capture brick-and-mortar reopening trends and deliver a strong holiday across channels. Festive seasonal exclusives, including a loaded blockbuster set and a beta collaboration with Philippe Lim, proved high results. Indeed, our in-store and online activation and merchandising were incredibly successful, with Brand.com posting a record Black Friday. Every category grew double digits organically in North America, led by Macabre, where our brand paired trusted products with enticing innovation as social and professional user education increased. Mac, Bobby Brown, and Too Faced produced engaging content and artist-led education to inspire consumers to size the joy and creativity of the category. Mainland China. delivered high single-digit organic sales growth, an impressive result given the regional restrictions in the quarter, the pressured brick-and-mortar and make-up. Online sales rose double-digits organically, even after having posted significant growth in the year-ago period. For 2011 on Timor, the Estelode brand ranked number one flagship store in beauty for the second consecutive year, as La Mer flagship store topped luxury beauty once more, and Jo Malone London again led in prestige fragrance. On JD, the Estée Lauder brand ranked number one flagship store in beauty in its first year. Skincare and fragrance grew double-digit organically in mainland China. Hero products and innovation excelled. driving new consumer acquisition and repeat purchases. Several brands expanded Fresh Fit Beauty's share in the quarter, including Estée Lauder, Laner, and Dr. Jart. Looking ahead, we are excited about the long-term growth opportunity in the vibrant Asia Pacific region, and most notably in China. We are a few months from opening our new innovation center in Shanghai. Our aspirations for it are both as we aim to meet and exceed the desires of Chinese consumers. The center is designed to enable end-to-end innovation from concept for product and packaging through development, scale-up and commercialization. I'm pleased to share that the build-out of our state-of-the-art manufacturing facility near Tokyo is also progressing very well, which is a testament to the amazing work of our global supply chain team amid the pandemic. Its first phase is complete, and we are on track to start limited production by the first quarter of fiscal year 2023. Our growth engines, further diversified by channel, as both online and brick-and-mortar prospered. Specialty multi and department stores contributed meaningfully, and freestanding stores in the West performed very well on reopening. Traffic improved and complemented our strategic actions, including those under the post-COVID business acceleration program to benefit productivity in brick-and-mortar. These channeled trends are encouraging for the long term even if tempered in this moment by Omicron. We continue to expand our omni-channel capabilities in the quarter to give consumers flexible and convenient shopping options for greater certainty for fulfillment. Buy online, pick up in-store offerings in the United States for Mac, Aveda, German of London and Le Labo are driving favorable average order value trends and we are expanding the capability to more doors internationally, which holds great promise for the future. Our global online channel delivered excellent performance, with organic sales rising high single digit after having surged over 50% in the year-ago period. Each of brand.com, third-party platform, pure player, and retail.com contributed to growth. The drivers included higher levels of engagement for virtual try-on and tools for choosing shade and scent, sophisticated sampling to drive trial and repeat, and more and better live streaming. Indeed, in North America, La Mer generated the most sales from a live stream to date in the quarter. Our brands are innovating in social commerce on Instagram, Snapchat, TikTok, and WeChat, among others. We gained momentum in this promising online ecosystem during the quarter. Too Faced leveraged an Instagram live shopping event to launch its new fragrance. Estelode Double Wear followers on TikTok skyrocketed with its latest campaign also driving brand awareness and affinity much higher. And Tom for Beauty creatively debuted its new flagship site on WeChat's mini program in China. Embedded with these outstanding results across categories, regions, and channels is the progress we are making in social impact and sustainability. Since we spoke with you in November, we are pleased to have received several external recognitions of our ESG efforts. We were named to Forbes inaugural list, identifying the world's top female-friendly companies, leading the way to support women inside and outside the workforce's And for the fifth year in a row, we were named to Bloomberg Gender Equality Index. We were included in the CDP's Climate A-List for the second consecutive year, which is a tribute to our deep commitment to climate action and to the highest level of transparency around our environmental impact. Last, MSCI Canada. recognized our progress toward our 2025 ESG goal in its recent upgrade of the company to an A rating. The company, our brands, and our employees have a number of events and activations planned in honor of Black History Month, and we are continuing to focus on our racial equity commitments and the work of accomplishing our goals. As we embark on the second half of our fiscal year, our innovation pipeline is rich with newness, especially for sustainability. La Mer newly advanced the treatment lotion, which will be on counter in March, as a powerful upgrade inside and out, crafted using our unique Green Score methodology and housed in a new recyclable glass bottle made with 20% post-consumer recycled glass. This methodology, which was peer-reviewed in academic journal Green Chemistry during the quarter, evaluates ingredients and formulas throughout the lenses of human health, ecosystem health, and the environment. This approach can be adopted, built upon, and scaled by others across our industry, to further advance sustainability. Esteloder is launching an all-new revitalizing supreme moisturizer created with innovations in formula and ingredients in a new recyclable glass jar. Smashbox is introducing photo-finished silk screen primer collection featuring vegan formulas with a skin-defending complex and instant makeup benefits. Lastly, Dazian, vague and brand-the-ordinary is welcoming back salicylic acid 2% solution, boosting a win list of over 400,000 for the new formula. In closing, we delivered outstanding performance amid the accelerated volatility and variability, as well as supply chain challenges of the pandemic. This demonstrates that we have the competency to navigate complexity well. Our commitment to invest for the long term is of great importance in this moment as we benefit from the advancement we have made over the last few years in data analytics, technology, R&D, and supply chain. These enhanced capabilities combined with our strong portfolio of desirable brands, exceptional talent, and more flexible resource allocation are enabling us to realize the power of our multiple engines of growth strategy, even in a difficult external environment. The grace, wisdom, and ingenuity of our employees in this still challenging moment knows no bounds. They are the embodiment of our company's strong culture, and to them I extend my deepest gratitude. I will now turn the call over to Tracy.