The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2023 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, Nisrani 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 organic net sales growth also excludes the non-compatible impacts of acquisitions, divestitures, brand closures, and the impact of foreign 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. And I'll turn the call over to Proprizio.

Thank you, Ray, and hello to everyone. It is good to be with you today. Turning to results, for the second quarter of fiscal year 2023, organic sales fell 11%, which was within our outlook, despite the incremental pressure of COVID-19 resurgence in China. Many developed and emerging markets globally outperformed our expectations to offset the COVID-related impacts of significantly reduced retail traffic, as well as limited staffing in Beauty Advisor, in Domestic China, and Travel Retail in Hainan in November and December. Adjusted EPS fell 49%. While a steep decline, this was meaningfully better than our outlook. driven by both discipline, expense management, and moderation of the stronger U.S. dollars. Importantly, we continue to prudently invest for growth, launching sought-after innovation and increasing AMP as a percentage of sales. For fiscal year 2023, we are lowering our outlook for organic sales growth and adjusted diluted EPS primarily for two reasons. First, inventory levels in Hainan remain somewhat more elevated than we expected due to the disruptions in travel and in-store staffing levels in November and December. Second, the recently announced potential rollback of COVID-related supportive measures in Korea duty-free are creating a near-term transitory pressure to our business with our Korea duty-free retailers. In the third quarter, it is more than upsetting the initial positive impact from the resumption of international travel by Chinese consumers, as well as favorable trends in our second quarter, including outstanding performance across many developed markets in Western Europe and Asia Pacific, as well as many emerging markets globally, and a better than expected currency environment. All told, our return to growth has shifted from the third quarter to the fourth quarter, which Tracy will discuss in greater detail. We remain focused on investing in our brands, including for innovation, advertising, strategic entry into new countries, and expanded consumer reach to fuel our multiple engines of growth strategy. Our growth engines in the second quarter were many among categories, regions, and channels, and we anticipate the gradual return of more growth engines across the second half of fiscal year 2023. Beginning with categories, fragrance extended its long-running double-digit organic sales growth streak in the second quarter, rising 12%. We are inspired by the growth prospects still ahead for the luxury and artisanal segment of the category, as consumers pursue a unique, distinct, and long-lasting sense of the highest quality. Many of today's consumers seek to build an occasion-based collection to express themselves differently across seasons, time of the day, or events. Our portfolios of Jo Malone London, Tom Ford Beauty, Le Labo, Killian Paris, Édition de Parfum Frédéric Malle is ideally positioned for this accelerating fundamental shift. As demand increases globally, we are excited about our plans to bring these brands to new markets and channels in the coming quarters. Innovation will also continue to be a key growth pillar. For example, Tom Ford Beauty's outstanding launch of Noir Extrême Parfum in the first house will be followed by the Cherry Collection in the second house, building on the success of regional Hero Lost Cherry. Makeup grew organically in the Americas, as well as as domestic markets in EMEA and across Southeast Asia in the second quarter. Our brands are indeed realizing the promise of the category renaissance as professional and personal user educations resume and accelerate with on-point innovation, alluring marketing campaigns on new platforms, and best-in-class artistry. Mac was a standout success. The brand growth engines were many, Freestanding doors excelled, welcoming consumers with expert services and delivering double-digit organic sales growth globally. Across channels, blockbuster innovation, hero products, and holiday merchandise proved highly sought. Clinique further fueled makeup across subcategories, led by lipstick, as the brand has created a hero franchise with cult favorite Almost Lipstick in Black Honey. Estée Lauder Double Wear Foundation had exceptional success with its My Shade, My Story campaign in Western Europe. Virality on TikTok drove strong new consumer acquisition and the franchise strengthened its number one ranking foundation with prestige beauty share gains. Looking ahead, we are excited for the launch of Estée Lauder Pure Color Lipstick in the second half. the brand reinvented its iconic franchise to capitalize on lipstick revival and integrate skincare benefits for lips. Designed to flatter all skin tones across matte, cream, and luster finishes, the line packaging pays homage to the brand original lipstick from the 1960s. In hair care, our brands extended the category organic sales growth streak to eight consecutive quarters. For the second half, Aveda launched last July in mainland China will be complemented by the brand recent entry into travel retail in Hainan, as we continue investing for the vibrant growth opportunity of prestige hair care with the Chinese consumers. Moreover, Aveda became a certified B corporation, joining Le Labo in our portfolio in achieving this important third-party validation. as the brand deepened its decades-long commitment to social and environmental responsibility. Skincare organic sales fell sharply in the second quarter, the way a few heads win, with the biggest challenge being COVID-19 in travel retail in Asia and with the Chinese consumer, given the category's exposure. Amidst the tough landscape for skincare, the ordinary... was a striking success. Its organic sales growth accelerated from high single digits in the first quarter to strong double digits in the second quarter. The brand's hero product excelled, as did the blockbuster innovation of multi-petal lash and brow serum, while the ordinary also realized outstanding performance in the specialty multichannel and gained momentum from its exciting launch in India in the fourth quarter of last year. We have focused on returning skincare to growth globally with sequentially improving trends from the third quarter to the fourth quarter as a transitory pressure from tribal retail abate. To that end, we have an incredibly rich innovation pipeline primed to launch. Here are a few among them. Already out from MAC is its new HyperReal franchise. As the brand leveraged its expertise, to create an artistry-approved skincare line of products which are purposely designed to perform also with makeup. La Mer Revamped Moisturizing Soft Cream arrived this month with powerful new clinical results to reverse and resist visible signs of aging. Thereafter, Clinique will bring Moisture Suge SPS to market. extending its popular hero product to meet consumer desire for hydration and sun protection with a lightweight texture that has made most of Surge 100H an icon. With these launches, we aim to reach new consumers' demographic and tap into high-growth subsegment. Let me now turn to geographies. While the US and domestic China were challenged in the second quarter, with sales falling single-digit organically in each market, we believe both will be growth engines in the second half. For the US, we are optimistic for a return to growth given sequentially improving monthly trends in each of organic sales and retail sales performance throughout the second quarter. Building on this momentum, the market is equipped with numerous growth drivers, including an exceptional innovation pipeline across brands, rollout of new clinic counters to select doors after a successful pilot of clinic labs in Macy's Hallow Square, and launch of exclusive products by many brands in specialty multi. We are also progressively modernizing numerous free-standing stores as they are primed to be an important contributor to growth following rationalization of the footprints. Moreover, our enhanced omnichannel capabilities are also primed to contribute to growth in the U.S. as consumers who engage with our brands online and in-store drive consistently higher value from upsell and cross-sell. This was especially true during holidays in the second quarter. For domestic China, we are confident in a vibrant recovery for our business following the relaxing of COVID restrictions, as the economy is well positioned to rebound and Chinese consumers are passionate for prestige beauty. We entered this phase with momentum, having expanded our market share of prestige beauty in China during the second quarter, driven by gains on all of skincare, makeup, fragrance and hair care, demonstrating the desirability of our aspirational brand portfolio and the excellent go-to-market strategies of our local team. While the third quarter is set to be more variable because of the high level of COVID cases, we now anticipate even stronger organic sales growth as of the fourth quarter as recovery evolves. We expect online to continue its strength and anticipate a gradual return to more fulsome brick-and-mortar traffic by the end of the fiscal year. Online organic sales rose single-digit in the second quarter, fueled by many brands and led by La Mer double-digit growth. We achieved excellent results for 2011 as the Estée Lauder brand realized top ranks across platforms. Moreover, Our retail sales growth in online channel meaningfully outplays the industry in the quarter for strong prestige beauty share gains. Beyond the U.S. and China, we realized outstanding organic sales growth in many large developed and emerging markets around the world. Our local team had been executing with excellence to deliver broad-based sales gains. Western Europe, led by the U.K., prospered. while Japan and Australia contributed strongly in Asia-Pacific. India, Brazil, Turkey, and Malaysia are among the stars of our emerging markets, with each posting strong double-digit organic sales growth, led by India rising nearly 50%. We are very encouraged with the excellent performance we are delivering in emerging markets. As these emerging markets evolve in recovery from the pandemic, we foresee compelling long-term growth opportunity arising from the expanding middle class, trading up into prestige beauty. We enter this important phase of recovery from a position of strength, as we hold leading prestige beauty share in many of these markets. For example, in India, Mexico, South Africa, We are the number one rent company in both prestige makeup and skincare, while we lead in prestige makeup in Malaysia, Thailand, and Turkey. Let me now turn to the strategic deal we announced in November to acquire Tom Ford. This transformational luxury acquisition will make Tom Ford an owned brand of Estée Lauder companies, enabling us to manage the brand's intellectual property and equities. Staying true to our focus as a pure player in prestige beauty, we have also reached agreements with luxury companies Zegna Group and Marcolin to license the brand's fashion and eyewear businesses, respectively. We first partnered with Tom Ford over 15 years ago, and his singular vision on modern luxury is beyond compare. Together, we have elevated Tom Ford Beauty into the top echelon of high-growth luxury beauty. Impressively, Tom Ford Beauty is expected to achieve $1 billion in net sales annually over the next couple of years, and we have promising profitable growth opportunities ahead. Before I close, I want to recognize the start of Black History Month in the U.S. I thank our employees to have created an engaging calendar of events for colleagues and consumers to celebrate and honor the Black experience, while we continue to focus on accelerating our commitment to racial equity and the collective accomplishing of our equity goals year-round. In closing, while we are lowering our fiscal year 2023 outlook to reflect the additional transitory pressures affecting our travel retail business, we are encouraged by both the strong underlining trends in many other areas of our business and improving macro trends. Inflation has stabilized in many markets globally, the strength of the US dollar has moderated, and the return to mobility of the Chinese consumer, both domestically and internationally, has happened earlier than expected. Moreover, in the first half of fiscal year 2023, we made exciting progress on several strategic initiatives to drive growth and resiliency in our business. We significantly strengthened our capabilities in innovation, manufacturing, and distribution, having opened the China Innovation Labs, our first plant in Asia-Pacific, our new DC in China, why we also announced our brand portfolio with Tom Ford and Balmain Beauty. All told, we have great confidence that we will emerge from this volatile transitional year even better positioned to realize the long-term growth opportunity of Global Prestige Beauty. To our employees, our future is bright because of your creativity, passion, and wisdom. I extend my deepest gratitude for your significant contribution to our long-term success. And now I turn the call over to Tracy.