The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2023 third quarter conference call. Today's call is being recorded and webcast. For opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin.

Hello. On today's call are Fabrice Alfreda, 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 noncomparable 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 investor section of our website. As a reminder, references to online sales include sales that 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, Ray, and hello to everyone. We appreciate you being with us today to discuss our third quarter results and revised outlook for fiscal year 2023. In the third quarter, organic sales fell 8% at the high end of our outlook range and a sequential improvement from the decline of 11% in the second quarter. Nearly all developed and emerging markets grew organically and outperformed our expectations to offset an even slower-than-expected recovery in our Asia travel retail business. As we discussed in February, Asia Travel Retail faced two headwinds in the third quarter. The first, elevated inventory in Hainan, given retailers' expectation for a more accelerated recovery, proved very challenging as conversion of travelers to consumers in Prestige Beauty lagged historical trends as travels initially gravitated to other categories. This led to even lower replenishment orders than we anticipated. The second headwind, the transition in Korea to post-pandemic regulations as traveling consumers gradually return, pressured sales meaningfully. In China and Korea, the resumption of international flights was subdued. Limited visas were granted and group tours were slow to restart. These factors resulted in lower-than-expected traffic in airports throughout the region, which combined with a lower-than-expected conversion further moderated replenishment orders. With this said, there were bright spots for travel retail in Hong Kong, Macau, Europe, and the Americas. All told, global travel retail organic sales declined 45%. This was partially offset by excellent organic sales growth of 10% in the rest of our global business. Our retail sales growth was even stronger than organic sales growth in many markets around the world, including China and the U.S. Encouragingly, retail sales performance is significantly ahead of organic sales results in global travel retail. which gives us confidence that the challenges in travel retail are abating with time. Furthermore, this strength at retail, including prestige beauty share gains in many markets, demonstrated the benefits of our continuing investment in innovation and building the desirability of our brands around the world. These positive retail trends are expected to continue in the fourth quarter. Adjusted diluted EPS in the fiscal third quarter fell 75%, which was also at the high end of our outlook. We invested to fuel markets in various stages of post-pandemic recovery, launching sought-after innovation, expanding brands into new markets, and increasing advertising as percentage of sales. As the shape of recovery for Asia travel retail comes into a better focus, it is proving to be both far more volatile than we expected and more gradual relative to what we experienced in other markets. We are therefore lowering our organic sales and EPS outlook for fiscal year 2023 as we reduce our implied four-quarter outlook, primarily for Asia travel retail. For Asia travel retail, there are two factors driving our revised outlook. In Hainan, the pressure from elevated inventory in the trade is proving to be deeper and longer-lasting, driven by the slower-than-expected consumption trend I discussed, compounded by the retailer inventory tightening. Second, the resumption of international travel by Chinese consumers is evolving more slowly than we anticipated. Having visited Shanghai and Hainan in March, and witnessed firsthand the optimism of consumers, retailers, partners, and our local teams, I am very encouraged for the future of our business with the Chinese consumers. I also had the good fortune to officially open our new China Innovation Lab and met with the amazing scientists and product development specialists in the state-of-the-art R&D facility. which further bolstered my confidence in the business fundamentals. Indeed, the opportunity for prestige beauty in our brands with the Chinese consumer in the medium to long term remains vibrant in the domestic market, in Hainan, and internationally, which remains our focus through this complex phase of recovery from the pandemic. For our fourth quarter outlook, The far slower organic sales growth that we anticipated in February is impacting profitability significantly. There are two factors at play. Beyond the pressure to a big margin accretive area of our business, first, with the rest of the business growing strongly, we will continue to invest to drive the momentum in those areas. Second, strategic and necessary long-term investments in manufacturing, R&D, and information technology capabilities a pressuring margin with the slow recovery of sales. With this said, we are obviously not satisfied by the profitability in our revised outlook for fiscal year 2023. For the future, we are focused on a plan to further accelerate our growth in key markets, return to organic sales growth in our Asia travel retail business and skincare category, and to progressively rebuild margin across brands, categories, and regions. Let me now share more about our third quarter performance as numerous growth engines excelled. Looking at regions, each of the Americas and Asia Pacific returned to organic sales growth, which complemented ongoing gains in the domestic markets of EMEA. Developed markets from every region contributed. led by the United States, the UK, and Hong Kong, while organic sales in our emerging markets rose an outstanding 17% globally. Impressively, in the domestic markets of EMEA, we realized broad-based trends as every category grew double digits organically. The breadth of growth engines by category was matched by the breadth of growth engines by channel, led by specialty multi and online pure play retailers, driven by the successful go-to-market strategy as we focus on high-potential channels. In Western Europe, our brand successfully engaged with consumers to generate, trial, and repeat. The examples are many. For Estée Lauder, Bobbi Brown, and Too Faced, driving viral success on TikTok, to MAC, leveraging Paris Fashion Week for its MAC Locked Kiss Ink Lipstick launch, and La Mer hosting dermatologists for a unique event. These collective initiatives, featuring enticing innovation and hero products, drove the company's accelerating prestige beauty share gains for the quarter in Western Europe. Looking at Asia-Pacific, it similarly delivered diversified growth. Nearly every market and each category contributed to the region's return to organic sales growth. Fragrance was a standout. rising double-digit, fueled by excellent performance of our luxury and artisanal portfolio, led by Jo Malone London, Le Labo, and Tom Ford Beauty. These brand's hero franchises welcome new consumers into the category, while locally inspired innovation and enriching in-store services further contributed to the expansion of this promising category in the region. Mainland China grew low single-digits organically, after four quarters of pressure from COVID-19 restrictions and outbreaks. The beginning of the quarter was impacted by the lingering effects of the COVID cases in November-December. In January, retailers worked through existing inventory, as traffic gradually returned, such that organic sales declined steep double digits. As the reopening progressed, organic sales rose double digits in each of February and March. Even in this complex quarter in mainland China, consumer desire for high-quality products, elevated experiences, and newness was clear, and our brands delivered, led by Estée Lauder and La Mer. For Estée Lauder, skincare fueled its growth. Consumer gravitated to the brand's innovation and cherished it, heroes across franchises, most especially its luxury-oriented Renutri as well as Supreme. La Mer further contributed, boosted by its Esper Beauty Advisor offering differentiated services and the launch of the reformulated, moisturizing soft cream, which attracted new consumers with its advanced benefits. Encouragingly, for the third quarter, our prestige beauty share gains in mainland China accelerated sequentially, driven by skincare as well as both online and brick-and-mortar. In the Americas, the United States returned to organic sales growth, invigorated by strategic go-to-market initiatives and innovation to engage existing as well as new consumers. The ordinary soared. owing to its heroes and a winning streak of innovation, with the latest being multi-peptide eye serum, which is bringing in the new consumer demographic. Estée Lauder's introduction of the revamped Nutritious franchise focused on Jet-Z with all new skincare products and launched exclusively with Ulta Beauty realized strong initial uptake. Looking at makeup in the United States, MAC, Clinique, and Too Faced fueled excellent performance with targeted initiatives to serve various consumer demographics across freestanding stores, specialty multi, and department stores. For Clinique, it is a case study in successfully leveraging viral success of a product, in its case, almost lipstick in black honey, to drive organic sales growth in many subcategories. Across regions, emerging markets showed their promise as a long-term growth engine, as our in-market team executed with excellence to meet the local needs of consumers. The double-digit organic sales growth in emerging markets this quarter extends our fiscally up-to-date momentum with strong contributions from India and Brazil. Globally, our diverse portfolio of brands served as a powerful catalyst for growth. MAC, Tom Ford Beauty, The Ordinary, and Le Labo each contributed strong organic sales growth and demonstrated the gains to be had across our large, scaling, and developing brands. MAC, with its global reach, expert artistry, and service-oriented freestanding stores continue to realize the evolution of the makeup renaissance as markets progress in recovery from the pandemic. Furthermore, the brand leveraged its market-leading EMV ranking with high-impact activation and product launches in makeup. Consumers also embraced Mac's new HyperReal franchise in skincare, which should represent an incremental growth engine for the brand over time. Importantly, HyperReal is another example in our portfolio of exciting east-to-west innovation as it was born in Asia-Pacific and launched globally. Tom Ford Beauty delivered double-digit organic sales growth, excelling across fragrance and makeup. In fragrance, the new private blend cherry collection was an instant hit, while the brand's extension of Tom Ford Noir Extreme Eau de Parfum into Parfum captivated consumers seeking intensity and the highest quality. We are thrilled. to have enriched our brand portfolio last week when we acquired Tom Ford, a power player in luxury with promising growth opportunities ahead. The deal is a wonderful outcome of our successful journey with the brand, which began when we collaborated to create Tom Ford Beauty over 15 years ago. The Ordinary's ingredient-focused product prospered in its heritage markets as well as in new markets evidenced by the brand's very successful February launch in the Middle East, while Le Labo continues to evolve from strength to strength globally, rising 60% organically. In closing, while we are lowering our outlook for fiscal year 2023 to reflect the deeper pressure in Asia travel retail, Given its extended recovery and related retail inventory tightening, we are encouraged by the strong momentum in the rest of our business. Looking ahead, we are focused on a strong acceleration of balanced organic sales growth across regions, categories, and channels, and progressively rebuilding margin. Indeed, Consumer demand is robust for our diverse portfolio brands in developed and emerging markets globally, evidenced in both organic sales growth and retail sales trends. This drives our confidence in the future. To our employees, I extend my deepest gratitude for your exceptional dedication to our company and each other amid a difficult external environment. you have demonstrated an unwavering passion to exceed consumer desires around the world with our beautiful Portafoglio brands. I will now turn the call over to Tracy.