The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2022 Fourth Quarter and Full Year 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. Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic net sales growth excludes the non-comfortable 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 sites and 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'm grateful to be with you today to reflect on our record results for fiscal year 2022 and discuss the drivers of our outlook for fiscal year 2023. We leveraged our strengths amid the prolonged pandemic, the invasion of Ukraine, and the onset of higher inflation. Our multiple NGO growth strategy, flexible financial model, and exceptional talent enable us to deliver record performance. At the same time, we invested for long-term growth, reflecting our confidence in the vibrancy of Prestige Beauty now and in the future. We achieved better than expected results in our fourth quarter, leading to above-guidance organic sales growth of 8% for Fiscal Year 2022. Reported sales rose 9% despite heightened foreign exchange pressure to end the year. Adjusted operating margin expanded 80 basis points to an all-time high of 19.7%. We realized this greater profitability even as our growth engines diversified beyond our highest margins categories. Fragrance, makeup, and hair care delivered double-digit sales growth on a reported basis to complement our robust skincare business. Impressively, nine brands contributed double-digit organic sales growth for the year, despite the significant pressure from COVID-19 in Asia-Pacific in the fourth quarter. La Mer, Jo Malone London, and Le Labo showcased the strengths of our portfolio across our large, scaling, and developing brands, respectively. MAC, Estée Lauder, and Clinique powered Makeup's emerging renaissance process. with double-digit gains in the category, as Jo Malone London and Tom Ford Beauty elevated fragrance to new heights with striking growth. Our geographic diversity has been a distinct benefit during the pandemic, allowing us to create and capture growth where opportunities presented themselves around the world. Asia Pacific led growth in fiscals 20 and 21, as markets in the West were more negatively impacted by COVID-19, while the Americas and EMEA drove growth in 2022 as the East confronted renewed pressure from the virus. Today, our $17.7 billion in annual reported revenues tops pre-pandemic levels by 19%, fueled by organic sales growth and enhanced by our acquisitions of Dr. Jart and Dazian. Adjusted operating margin expanded 220 basis points over the three years. Our trusted brands with their hero products and sought-after innovation have thrived, while our increasingly flexible cost structure has served us well. Our focus on hero products has been a winning strategy. These high-repeat, loyalty-inducing products have grown significantly as a mix of our business since fiscal year 2019. Throughout, we have continued to innovate to propel our hero strategy for the years ahead. Innovation served as a powerful catalyst for growth this year, representing over 25% of sales once again. Our newness exceeded consumer desires due to our exceptional data analytics, R&D, and creative capabilities. La Mer's hydrating infusion emulsions, Estée Lauder's re-nutrient diamond serum, and MaxTac mascara are among our breakthrough launches this year, driving favorable earned media value and strong new consumer acquisitions. Turning to category performance, Fragrance grew a stunning 32% organically for the year. Jo Malone London, Tom Ford Beauty, Le Labo, Killian Paris, and Editions de Parfum Frederic Malle each rose strong double digits and expanded in every region, including excellent results in travel retail in EMEA. Yesterday, the brand launched the luxury collection and airing contributed double-digit gains. The outstanding performance of our luxury and artisanal portfolio affirms our strategic pivot to this accretive segment of the category. Consumers' behaviors during the pandemic reinforced fragrance as part of self-care activities and solidified online as this destination for the category to explore, learn, and purchase. Our brand stepped up to create and leverage these new dynamics. We capitalized on the recovery in brick and mortar in many markets, realizing high levels of engagement in freestanding stores while online continued to prosper for the category. Makeup. reneged a powerful growth engine in fiscal year 2022. Strong double-digit organic sales gains in the Americas and EMEA more than offset a double-digit decline in Asia Pacific. As markets in the West reopened, leading to more social and professional user locations, the makeup renaissance emerged. Our brand excelled with innovative artists as well as new products which focused on performance, ingredient narratives, and skinifications of makeup. We leveraged increased traffic in brick and mortar, which allowed us to reestablish our well-loved services in-store to realize terrific growth in services. Hair care proved to be a valuable growth engine, contributing double-digit organic sales growth. The unique value proposition and go-to-market strategy for each of Aveda and Bumble and Bumble resonated with consumers who increasingly expect the benefits of quality products and performance-based ingredients. The skincare category was the most impacted from the resurgence of COVID-19 in Asia-Pacific in the second half of the fiscal year, as the restriction reduced traffic in brick and mortar as well as travel retail, and also temporarily curtailed our distribution capacity in mainland China. In this contest, we delivered solid results as excellent performance from La Mer, Clinique, and Bobby Brown offset pressure from other brands. La Mer had a remarkable year. Consumer around the world gravitated to its icon and blockbusters innovations, embracing newness like the hydrating infused emotion and the upgrade to the treatment lotion to expand their regimens. Renaissance de la Mer lifted sales further as consumer traded up to the brand ultra luxury franchise for its artisanal quality and parallel efficacy and high curated experiences. Clinique and Bobbi Brown's success in skincare demonstrated the execution of our sophisticated hero strategy to drive strong repeat and consumer loyalty. Clinique heroes across subcategories from makeup remover to serum to moisturizer provided it with a winning formula, while Bobbi Brown's globally regional hero philosophy is driving its mix of business and skincare much higher. Looking now at channels, both brick-and-mortar and online served as growth engines for the year, as we pushed exciting initiatives to amplify our omnichannel capability. Let me share a few of the highlights. Brick-and-mortar rebounded strongly in the America and EMEA, as specialty multi, freestanding stores, and department stores all contributed. Our post-COVID business acceleration program enabled us to improve the productivity and sustainability of our brand building, experiential brick-and-mortar footprint, as intended. Online grew mid-single digits organically, led by double-digit growth in Asia-Pacific. Dezium high online penetration boosted reported sales growth in the channel to double digits. Our online channel encompassing brand.com, third-party platforms, pure play retailers, and retail.com is now far more than twice as big pre-pandemic fiscal 19. China and the U.S., which already high online penetration, have expanded farther, while markets in EMEA have seen a surge in online penetration and are now able to realize the benefits of scale. During the year, we diversified in high growth channels globally to expand our consumer reach. Estée Lauder, Clinique and Origins initially launched on GD in China and given the insights gained as well as new consumer acquisition trends, we introduced more brands on GD. Jo Malone London and La Mer launched on Lazada in Southeast Asia and many brands participated in the emerging Ulta Beauty at Target and Sephora Kohl's partnership in the U.S., both in-store and online. We continue to innovate across the online ecosystem to generate trial and repeat. In Latin America, which has historically been a strong market for direct selling, we leverage WhatsApp and Rope social selling to represent 30% of online sales in the region. Around the world, Our beauty advisors and makeup artists became content creators for always-on creation across social media platforms like TikTok. This showcases the powerful evolution of the reach and scale of our expert advice, which now stands well beyond brick and mortar. We also advanced our omni-channel strategy meaningfully this year. In North America, most of our freestanding stores are now equipped with fulfillment capability. We also began to stand up these features in EMEA and Asia Pacific. These new capabilities are driving higher average order values and convincing upsell trends. At the same time, we extended the reach of our loyalty programs globally. introducing programs in Japan, Italy, and Mexico, and expanding offering in other markets across EMEA and Asia Pacific. Here, too, the results are compelling. We are realizing greater purchase frequency, higher level of retention from consumer engaged in loyalty programs. During the fiscal year, we also progressed our ESG goals and commitments. We continued to make strides on our climate action strategy, including the expansion of our renewable energy portfolio across our direct operations globally, and we are recognized by a leading NGO for our commitment to source 100% renewable electricity. In packaging, we set a more ambitious goal to increase the post-consumer recycled content of our packaging to 25% or more by the end of 2025. and set a new goal to reduce the amount of virgin petroleum packaging to 50% or less by the end of 2030. We expanded employee resource groups, a great source of community and unity. Our network of black leaders and executives launched in Brazil while we welcome our group of LGBTQIA plus employees launched in EMEA. We created a group for our ageless employees and continue to scale our reverse mentoring program globally, pairing more junior talent with senior leaders to share insight and perspectives on trends to drive better business decision and foster career development. We brought our unique senior women leadership program, Open Doors, To our international markets, we continued great success in promoting our next generation of women leaders. We realized important progress with the From Every Chair Leadership Development Program. It's inaugural class has already achieved high level of career mobility in the forms of promotions and new roles for black employees. We are encouraged by these initial results and look forward to continued success from this sponsorship program, which we created for equitable advancement and professional development of our black talent. Before I talk about the year ahead, let me conclude on fiscal year 2022 by speaking about Dacium, which complemented our organic sales growth. The ordinary Dacium's ingredient-based brand diversified in exciting ways over the last few months. The brand launched in India and Malaysia, expanded its hair care offering, and also introduced multi-peptide lash, a brow serum, to extend its authorities in treatment. From its innovation exceeding expectations of standing initial results in NICA in India, The Ordinary enters Fiscal Year 2023 with promising opportunities. Now for the future. We refreshed our 10 years compass to help steer our ambitions and investment for the next decade. The compass reinforced our confidence showcasing the abundant growth opportunities ahead. The drivers are many led by growing middle class globally and most especially in emerging markets expanding usage across consumer segments including ageless and men and online expansion fostering consumer access and reach. From the Compass, we distilled our three-year strategy. As we look across the next three years, we expect to deliver more balanced growth across categories and regions. Near-term, the pandemic and macro factors will likely lead to more variable growth by category and regions. We are very confident in the strengths of our company and in the vibrancy of Prestige Beauty. For fiscal year 2023, we expect to deliver strong organic sales growth fueled by our diversified growth engines and enticing innovation, and to take the opportunity in a volatile year to continue investing for our exciting future to build global shares. While the external challenges are many, including inflation, geopolitical uncertainty, a currency that wins, the enduring desirability of our brands with their hero products at high repeat rates is powerful. Additionally, our more effective cost structure, price in power, and strong cash generation should afford us the flexibility to successfully navigate the ongoing complex environment. Innovation is poised to be a catalyst for growth, and we began the year with exciting news. Let me share insights about two skincare launches. Estee Lauder Upgraded Advanced Nye Repair Eye Supercharged Gel Cream addresses the science of eye aging and reflects consumer modern lifestyles of long screen times and environmental stressors. Offering notable incremental benefits from the original product, this launch demonstrates the pricing power of innovation. Clinique Smart Clinical Repair line extended its fiscal 2022 innovation streak with the launch of Smart Clinical Repair Wrinkle Correcting Cream. The moisturizer is coupled with the powerful new claims for Smart Clinical Repair Serum to drive gains in this hero franchise. This year, we expect to reignite growth engines in Asia-Pacific as the pressure of COVID-19 abates. We anticipate in-store traffic levels to gradually improve in mainland China, allowing brick-and-mortar to return to growth to complement ongoing strengths online and for tourism trends to Hainan to ultimately accelerate from the most recent pause which began last week. We are confident in the long-term growth opportunity in mainland China, evidenced by our expansion into almost 100 new doors and three additional cities in fiscal year 2022, as well as our introduction of Aveda last month. We are thrilled to enter the hair care category with Aveda, which is vegan and lipimbani-approved, as the brand launched on Tmall and opened its first freestanding store in the market. Fiscal 2023 is set to be a monumental year for us as our Shanghai Innovation Lab opens, advancing our ambition to best create for the Chinese consumers, and we begin limited production in our new manufacturing facility near Tokyo, which is our first ever in Asia-Pacific. With these two strategy initiatives, we expect to benefit over the next few years from increased speed to market and by further expanding our momentum with outstanding locally relevant innovation in this vibrant region. For the Americas and EMEA, we anticipate ongoing strengths from our growth engines across categories and channels, as well as across developed and emerging markets, given the broad-based gains of Fiscalia 2022. For MCAP, which is a vital category in both regions, the emergence of the MCAP Renaissance give us great confidence going into Fiscalia 2023. In North America in particularly, our focus turns to granular consumer growth opportunity as we have refined our distribution. To close, We delivered excellent performance in fiscal year 2022, achieving record results while advancing initiatives for consumer acquisition, engagement, and high-touch services and experiences to drive trial and repeat levels even higher. Today, our business is not only far bigger and more profitable than the pre-pandemic fiscal year 2019, but our growth drivers are more diversified our R&D and innovation capabilities are more robust and our cost structure is more flexible. While the year ahead more certainly has its external challenges, our company is poised for a bright future as the best diversified pure player in prestige beauty with the most talented and passionate employees to whom I extend my deepest gratitude. I will now turn the call Over to Tracy.