The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2022 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.

Hello. Hello. On today's call are Fabrizio 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. 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 impact of currency translation. 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 site 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 to everyone. I want to begin by expressing the great sadness we have for our colleagues and all the people impacted by the invasion of Ukraine, who are experiencing a devastating humanitarian trade crisis. We continue to focus on our employees' safety and our dearest hope is for peace to prevail. In the third quarter of fiscal year 2022, we delivered organic sales growth of 9% in line with our guidance, despite the acceleration of temporary COVID-19 restriction in China in March. We exercised cost discipline as volatility increased and our adjusted operating margin expanded, leading to stronger-than-expected adjusted diluted earnings per share growth of 17%. Our multiple engines of growth strategy enabled us to amplify the engines of the moment amid an intensified macro environment, with sales rising organically across both brick-and-mortar and online. Every category grew organically, led by fragrances outstanding performance. Eleven brands contributed double-digit organic sales growth and further demonstrated our diversified drivers. Consumer demand remains robust, even in this inflectionary environment. Our largest brands provided highly sought-after. MAC, Estée Lauder, and Clinique each delivered double-digit growth in makeup. fueling the category Renaissance, while La Mer thrived in skincare. Four of our scaling brands resonated strongly with consumers, as Jo Malone London, Tom Ford Beauty, Aveda, and Bobbi Brown each rose double digits. Among our developing brands, Le Labo, Killian Paris, and Bumble and Bumble each achieved outsized growth and showcased their promise. Our sales rose double-digit organically in the Americas and EMEA. We capitalized on reopening to translate improving brick-and-mortar traffic trends into outstanding sales growth, owing to our high-touch services, breakthrough innovation, hero franchises, and operational excellence. Our freestanding stores delivered exceptional performance. benefiting from fleet optimization and expanded omnichannel capabilities and complemented strengths in specialty multi. We are managing the ongoing complexities from the invasion of Ukraine as well as the temporary COVID-driven restrictions in China, which impacted performance in Asia-Pacific in the quarter. In mainland China, organic sales fell mid-single-digit as 25% growth online was offset by a steep decline in brick-and-mortar. After a strong February in mainland China, traffic slowed more sharply in March to pressure brick-and-mortar sales. Additionally for us, the distribution centers for our mainland China business are in Shanghai and operated with limited capacity. Tourism to Hainan Island was also curtailed in March after a vibrant start of the quarter. There is no doubt that these current limitations in China will prove to be transitory, although there will be a far greater impact on our results in the fourth quarter than there were in the third quarter, as Tracy will discuss. Looking ahead, We are confident in the resilience of the Chinese consumers and the untapped opportunity driving our investments in the market. We expect a re-acceleration of growth when this moment of COVID abates. Let me share the progress we made during the third quarter to drive these strong results and advance our long-term ambitions for our multiple-engine growth strategy. Innovation excelled to reach nearly 30% of sales. We continue to elevate our ability to leverage data analytics with our best-in-class creative talent and R&D to successfully anticipate, scale, and set trends. The breadth of our innovation wins was far-reaching and benefited every category. In skincare, La Mer upgraded the treatment lotion sword. As The brand doubled down on this coveted east-to-west product, increasing the skin, recharging Miracle Broad, and transitioning to a recyclable, luxurious glass bottle that contains 20% post-consumer recycled content. In Asia-Pacific, consumers gravitated to the new cerium strengths and anti-aging benefits. while in the Americas, educating on the benefits of hydration and energy proved impactful with consumers, demonstrating our expertise in serving multiple needs with one product and communicating with the appropriate local relevance. For makeup, MAC sought to grow its mascara base, especially across Gen Z, young and millennial, and multi-ethnic consumers. and created MAC Stack Mascara with breakthrough technology that stacks and builds the lash look. MAC Stack went viral on TikTok, having now amassed over 153 million views, and its sales far exceeded our expectations in the quarter. Tom Ford Beauty's new private blend, Rose Fragrances, featured locally relevant notes where rose, The sheen features Chinese golden peony and rose damalsi includes Italian bergamot. This launch drove exceptional results globally, including China, where the brand had a very successful Valentine's Day. Lastly, in her care, Aveda launched Botanical Repair Strengthening Overnight Serum, disrupting the category by creating our first overnight serum that builds new hair bonds while you sleep. The product sold key consumers pain points with quick-absorbing technology by leveraging a serum-based formula. Encouragingly, the product quickly rose to being the top-selling product in freestanding stores and sold out on brand.com. We are excited to build upon this momentum where our new innovation center in Shanghai opens later this calendar year. This important investment in China will significantly increase our ability to serve the Chinese and Asian consumers with locally relevant and inspired innovation. Also, the new center will further enable our east-to-west innovation mindset, supporting the creation of more successes like La Mer's, the treatment lotion. Looking at our growth engines by category, The strategic decision to pivot our Fragance portfolio to luxury and artisanal is benefit both top-line growth and profitability. Fragance's performance in the third quarter was superb, with sales increasing 31% organically. Impressively, sales exceeded the pre-pandemic third quarter of Fiscalia 2019 by nearly 50% on a reported basis. Jo Malone London, Tom Ford Beauty, Le Labo, Kylian Paris, and Édition de Parfum Frédéric Malle each delivered double-digit sales growth, and Estée Lauder brand complemented these trends with its well-received new luxury collection. As consumers around the world increasingly express their individuality with scent, These brands are delivering outstanding results with strong double-digit growth fiscal year to date in every region driven by demand across channels from brick and mortar to online and travel retail. Their freestanding doors are driving omnichannel experiences while their online businesses have been transformed during the pandemic. And these fragrance brands are also contributing to our sustainability goals with refillable packaging being a compelling element of the value proposition for Le Labo and Kilian Paris. We are also thrilled to announce that during the third quarter, Le Labo became B Corp certified, making it the first major fragrance brand and first within our company to receive this certification, indicating a high level of commitment to sustainability and impact. Turning to make-up. It was on this call a year ago that we introduced our expectation for Makeup Renaissance, anticipating it would gradually evolve, market by market, as social and professional use educations began to resume. We envisioned the category would experience a recovery driven by both restocking as well as a renaissance rooted in a renewed passion for the joy and creativity of makeup after a difficult time. Even with the rise of the Delta and Omnicom variants, the make-up renaissance has delivered very favorable trends and offers great promise for the future. As user location expanded in certain markets, upon reopening in the third quarter, make-up once again delivered double-digit organic sales growth in the Americas and EMEA. Mac and Clinics make-up sales growth accelerated sequentially. while Estée Lauder and La Mer businesses in the category are already ahead of pre-pandemic levels. Our brands have been meticulous in executing their merchandising and innovation strategy for the Renaissance. We invested to create the omni-artist, who is meeting the consumer in innovative ways across brick and mortar and online, to educate, inspire new looks, and offer the best in personalized high-touch services. Mac has been superb in this regard. So too has Bobby Brown, with event-like live streams from the largest mall in Manchester, England, to Esper group classes, to Douyin in China, to one-to-one Zoom sessions in the U.S. Moving to healthcare. Aveda, Bumble, and Bumble have reunited growth engines to contribute to the diversified category growth that we expected for Fiscal Year 2022. Impressively, even as these brands grew sales strong double digits in brick and mortar on reopening during the third quarter, they also achieved mid-single digit online growth. Lastly, while skincare was pressured by COVID restrictions in the East, The bright spots were still many. In the quarter, we continue to advance our strategies across many long-term growth drivers, from luxury to prestige. La Mer performance was extraordinary, with sales rising strong double digits. As I discussed, it upgrades the treatment lotion soared, creating a hollow effect on the still-new, dehydrating-infused emulsion. while its heroes were highly sought after. With desirable innovation and coveted icons, La Mer is welcoming new consumers, earning their trust, and trading them up as its ultralight Renaissance de la Mer franchise is booming. While our high-end prestige skincare thrives with La Mer and Estée Lauder Renaud Trip, Bobbi Brown is prospering in the heart of the category. thanks to its strategic focus on treasured heroes like vitamin-enriched face base. We are also laser-focused on entry-level prestige to reach new consumers, notably with Dacian, the ordinary, as the brand amplifies its heroes to drive repeat with its ingredient-led, regimen-based approach. After the quarter closed, Deisium announced it would be refining its brand portfolio to focus resources on the compelling opportunity we foresee for Dior, Demi, and Nude. During the quarter, we also improved upon the fundamentals of consumer acquisitions, engagement, and high-touch services, positioning us well to realize even greater success with trial and repeat. Our partnership with TikTok expanded, and we are piloting new innovations on the platform to be at the forefront of social commerce innovations. In the U.S., several of our brands launched storefronts on TikTok, seamlessly linking to brand.com. Brands also expanded their capabilities with Instagram shopping and launched catagore-powered lenses on Snapchat, similarly linked to brand.com. Clinique realized favorable engagement trends on TikTok and Instagram, and it featured its back-in-stock coveted black honey lipstick and strong recruitment growth with new advertising for Monster Surge 100-hour featuring the Made for Social Phase of Adventure campaign. The Estelode brand entered the metaverse as connecting with our consumer wherever they are is paramount. and we are excited to be testing and learning in this new ecosystem. Estelode was the exclusive beauty brand partner of Decentraland Metaverse Fashion Week, the first ever large virtual fashion week in an on-chain metaverse. Around the world, our brands are increasingly leveraging new campaign management tools to tailor communication and drive repeat. to both re-engage with consumers and foster relationships with new consumers. We are realizing increased reactivation and repeat purchase rate from the UK to France, Australia and beyond. In closing, we delivered very strong performance amid the accelerating headwinds during the third quarter. We also made excellent progress advancing the long-term drivers of our multiple-engine growth strategy. These results and this progress are due to the tremendous accomplishments of our employees around the world, to whom I extend my deepest thanks as they continue to manage complex situations with grace and ingenuity. Moreover, I am incredibly inspired by our employees' compassion for each other. Last week marked the two-year anniversary of the ELC CARES Employees Relief Fund, The fund was created in response to employee increasing desire to support one another in times of need. Since inception, over $10 million has been distributed to employees globally from donations and company matches. Looking ahead, while we are lowering our expectations for the fourth quarter given the impact of the temporary COVID-driven restrictions in China, We expect to deliver another record year in fiscal year 2022. We remain incredibly optimistic about the future of our business. This quarter proved the vibrancy of Prestige Beauty, its resiliency even in a difficult microenvironment, and the strength of our trusted brands and product innovations as markets sequentially recover from the prolonged pandemic. I will now turn the call over to Tracy.