The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2023 fourth quarter and full year conference. 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 Freyda, 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 we make directly to our consumers through brand.com sites and through third-party platforms. It also includes estimated sales of 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. We appreciate you joining us to discuss our fiscal year 2023 results and outlook. Let me begin with the fourth quarter. We delivered an organic sales increase of 4%, achieving a return to growth for the quarter as expected. Momentum continued in the markets of EMEA and Latin America and accelerated in Asia Pacific, where organic sales growth improved from 7% in the third quarter to 36% in the fourth quarter, led by mainland China and Hong Kong SAR. Looking at the full year, while demand for our business is still strong, with retail sales growth up mid-single-digit globally, organic sales declined 6%. We delivered impressive double-digit growth in the markets of EMEA and returned to growth in Asia-Pacific, while the Americas held steady. These gains across the markets of EMEA and Asia-Pacific were more than offset by Asia travel retailing. given the prolonged and complex recovery from the pandemic, as we have discussed in our previous earnings calls. Indeed, our global travel retail business decreased 34% organically in fiscal year 2023, solely driven by Asia travel retail. Our travel retail business in EMEA and the Americas soared. And our investment in activation and in-store beauty advisor drove strong performance as passenger traffic increased. The rest of our business in total rose 5% organically as growth accelerated from 10% in the third quarter to 17% in the fourth quarter. The challenges in Asia travel retail disproportionately pressured skin care, which is our highest margins category. Compounding matters, the leverage was pronounced as the lower level of sales coincided with elevated strategic investment in manufacturing and R&D capabilities, as well as information technology for our online business and to support our expanding supply chain globally. All told, our adjusted operating margin contracted meaningfully in fiscal year 2023 to 11.4%, modestly better than we expected in the revised outlook we offered in May. During fiscal year 2023, we continue to make progress on our sustainability goals and commitments. For our packaging goals, for instance, We have now advanced from 51% of our packaging being recyclable, refillable, reusable, recycled, or recoverable in fiscal year 2019 to over 70% in fiscal year 2023. As well, we are on track to maintain our status of 100% renewable electricity and scope 1 and scope 2 carbon neutrality. We are proud to have been recognized by CDP for our continued commitment to disclose our environmental impact as reflected in our CDP climate, water, and forest disclosure scores for 2022. Most notably, we achieved an A- for our climate change disclosures, and we earned a place in the prestigious A-list for water, improving our score over 2021. Looking ahead. For Asia travel retail, the pressure in Hainan intensified over the course of the fourth quarter. In May and June, retail sales trends deteriorated and turned steeply negative following the enforcement actions to control the go activity. The implication of these are favorable for sustainable long-term growth, but certainly creates significant short-term headwinds through the transition. As we embark on fiscal year 2024, we have four strategic imperatives. Drive momentum where our business is thriving, re-accelerate growth in the United States, capture demand for the returning individual traveler in Asia travel retail, and begin to rebuild our profitability. For fiscal year 2024, we expect to return to full-year organic sales growth and margin expansion, with organic sales rising 6% to 8% and adjusted operating margin improving sequentially throughout the year. Our fiscal year 2024 action plan, where we expect to again increase our investment in advertising as a percentage of sales, will also set the stage for a stronger fiscal year 2025 acceleration. One of our greatest strengths to leverage in our return to top and bottom line growth is our diverse portfolio of nearly 25 brands. Sitting at the top are our $4 billion plus brands of Clinique, Estée Lauder, La Mer, and MAC, each a winner in its own right. MAC The world's biggest prestige makeup brand was our best-performing brand across the entire portfolio in fiscal year 2023. Its unrivaled artistry, hero products, strong earned media value ranking, and breakthrough innovation of the hyper-real franchising skincare drove excellent results. For fiscal year 2024, the brand is on the cusp of a big launch in makeup as MAC aims to extend its winning streak in innovation. Indeed, all our billion-dollar-plus brands have exciting newness ahead in both product and commercial innovation as they leverage their brand equity, scale, and omni-channel beauty advisors. Clinique, the number one prestige skincare brand in the U.S., pioneered dermatologists' developed products when it was founded in 1968. The brand is deepening its connections with dermatologists, adding powerful instant end-dermatologist-level claims, doubling down in its unique safety philosophy, and activating more derm education on TikTok. And later this month, Clinique will elevate its equity in de-aging with a breakthrough launch of Smart Clinical Repay Lifting Face and Neck Rim, a new dermatologist-tested formula. Estée Lauder. Among the biggest prestige brands globally is extending its world-renewed advanced nail repair franchise with the launch of rescue solutions for sensitive skin. And the brand's luxury-oriented re-nutrient franchise has a rich innovation program across makeup and skincare. La Mer. The global leader in luxury skincare grew double-digit in Asia-Pacific in fiscal year 2023 and aims to accelerate its growth with the upcoming launch of the lifting firming serum. This launch capitalizes on La Mer successfully upgraded the moisturizer soft cream as both bring advanced benefit in anti-aging efficacy. Moreover, La Mer is introducing new regimens focused on the power of its iconic medical broth to capitalize on the trend of night regiments. In fiscal year 2024, this esteemed tier of billion-dollar-plus brands is set to expand its breadth count by 50%, as we expect Joe Malone London and Tom Ford to cross the sales threshold. These two brands have excelled over the last decade and are ideally positioned for the next decade, given their positioning in the fast-growing segment of luxury and artisanal fragrance. For Tom Ford, which epitomized luxury glamour, fiscal year 2023 was monumental. We are thrilled to have acquired the brand after having collaborated to create Tom Ford for over 15 years. This acquisition is a central building block to realize our aspirations in high-growth luxury and couture beauty. Moreover, the brand sales rose strong double digits organically in fragrance for the fiscal year. The breadth of this performance was stunning as over 30 markets grew double digits. The strength of its hero products and innovation proven a powerful combination with new and exciting existing consumers. And Tom Ford enticing Cafe Rose launched to begin fiscal year 2024. In MECAP, Tom Ford delivered double-digit organic sales growth in Asia-Pacific and the market in EMEA, driven by excellent performance in LIPS. Among our other scaling brands, or those with sales between $500 million and $1 billion, we are encouraged by their progress in fiscal year 2023. For Bobbin Brown Cosmetics, the brand continues to complement its expanding makeup business with strong growth in skincare, while Aveda executed on its global ambition with a successful launch in mainland China. The ordinary graduated into our tier of scaly brands as double-digit sales growth propelled it well above $500 million. The brand's list of achievements for the year is long. Indeed, from success in its hero product to a step change in the contribution to sales from innovation to doubling its TikTok followers to strong share gains in prestige skincare in the U.S. and Western Europe, the ordinary proved its high-performance ingredient-led products are well-loved, and we believe it is just getting started in realizing its global potential. Looking across our developing brands, in which we strategically invest to realize the scaly brands of the future, Le Labo, Killian Paris, and Édition de Parfum Frédéric Malle each achieved a double-digit organic sales growth in fiscal year 2023 to continue their winning streaks. impressively over the last five years these three brands have delivered over 30 percent compound annual growth demonstrating brand building acumen at this time next year we will be on the verge of launching Balmain Beauty with the namesake luxury fashion house our collaboration with Balmain has been exceptional and we cannot wait to introduce this new luxury beauty brand to the world For our brand portfolio, we have positioned ourselves to take advantage of the efficiency and effectiveness that will be enabled by generative AI. Furthermore, creating high-quality, high-performing products is in our DNA. Innovation has long served as a catalyst for growth and once again represented over 25% of our sales in fiscal year 2023. We have a rich pipeline of newness slated for fiscal year 2024, and it gets even bigger and stronger in fiscal year 2025 with more breakthrough innovation and expansion into white space opportunities. Over the last few years, aligned with our innovation strategy, we have significantly increased the breadth, depth, and diversity of our clinical studies for new and legacy products across categories to deliver impactful claims. This work, combined with our newly opened China Innovation Labs in Shanghai, equips us with even greater capabilities to drive growth with consumers locally and around the world. For skincare, we have also significantly increased our scientific credentialing. demonstrated by an 85% increase in scientific advisory board members and third-party dermatologists and academic partners in the last two years. Last month, at the World Congress of Dermatology in Singapore, we presented several studies for Clinique, Estelode, and La Mer. This was a milestone moment for Estelode's Renutri franchise, as our scientists unveiled our newness breakthrough longevity age reversal research on a global stage. Renutri has been and continues to be a pioneer in this frontier of skin biology and will stand upon the recent success of ultimate diamond transformative brilliant serum with compelling innovation this fiscal year. As we rebuild from the challenges of fiscal year 2023, we expect to leverage and stand upon these strengths as we drive resilient growth. The opportunities ahead of us are significant, as over 900 million people are expected to enter the middle class through 2030 and drive consumption as they seek the high quality, strong efficacy, and joy that prestige beauty affords. Our company has great confidence in the long-term development of China. We are proud of the very strong business we have built, led by our exceptional local team. The Chinese consumers continue to be the unrivaled number one growth drivers of our industry throughout the decade. We are pleased to have returned to organic sales growth in mainland China this fiscal year 2023, and to have expanded our prestige beauty share as the market gradually evolves in its recovery from the pandemic. Impressively, mainland China's fourth quarter organic sales were up double digit compared to both one and two years ago, and we further expanded our prestige beauty share in the quarter. We made significant long-term investment in the market across fiscal year 2023. Beyond the opening of the China Innovation Lab in Shanghai and a new distribution center in Guangzhou, we launched Aveda to start the year and Le Labo to end the year. Aveda quickly captured up the ranks of prestigious hair care, driven in part by its focus on the skinification of hair and high-performance products for scalp care. Le Labo, initial freestanding store in Shanghai, redefines experiential shopping, which makes it no surprise that it was the brand's top-performing store in the world in the month of June. We also invested in the vibrant opportunity in both brick-and-mortar and online, opening in seven new cities, expanding our online reach with Dowin, and creating exceptional live streaming content, which, as you know, is a game changer to excel in the market. Our online ecosystem continues to move from strength to strength across social and commerce, encompassing Tmall, JD, WeChat, Red, and Owen, among others, driving our share gains for the fiscal quarter and year. Online in mainland China performed exceptionally well every month in the fourth quarter to realize over 60% organic sales growth and expand online prestige beauty share by two points, owning to innovation, gifting campaigns, and excellent execution. We capped the quarter success on 6-18, where our brand strength was broad-based, Estée Lauder ranked number one in store live streaming Prestige Beauty on both Tmall and the Wynn. La Mer ranked number one in Luxe Beauty on Tmall for the third consecutive year. And Jo Malone London took the top spot on Tmall and GD for Luxe fragrances. From an organizational standpoint, Mainland China and China Travel Retail have enhanced their capabilities for local coordination or go-to-market strategies and plans to maximize long-term value and support brand equity. The expected growth of the middle class around the world is an exciting implication for our business, given also our vibrant emerging market portfolio. Indeed, in fiscal year 2023, our emerging markets delivered organic sales growth of 20%, led by India, Brazil, Turkey, and Thailand. India grew nearly 50% for the year, driven by excellent performance by our longstanding brands in the market and the very successful launch of The Ordinary. In North America, we are focused on re-accelerating growth to better capture prestige beauty opportunities in the region. Our multi-faceted strategy plan includes launching a robust innovation pipeline increasing engagement by brands on TikTok, accentuating our strengths in luxury and artisanal fragrance, and high-performance ingredient-led skincare, and expanding brand reach in specialty multi, among other initiatives. And we are excited to extend our reach online as The Ordinary and Estée Lauder are soon to launch on TikTok Shop. Let me now turn to our profitability. We have identified four building blocks to progressively expand adjusted operating margin over the next few years. First, we are focused on optimizing mix by elevating luxury across brands driven by consumer preferences and by expanding our direct-to-consumer ecosystem across brick and mortar and online. Second, we see many opportunities to maximize value through better price realization and accretive innovation. Third, we intend to increasingly leverage the strategic investment we have made over the last few years, most notably our new manufacturing facility in Japan and expanded online capabilities. Last, we believe we can unlock meaningful cost efficiencies in our value chain as we complete the rollout and adoption of our new integrated business planning process across the global operation and use generative AI to drive efficiencies. In closing, while we had a challenging year, we remain confident in our long-term strategy to realize the promising growth opportunity in global prestige beauty with our diversified portfolio brands, robust research and development capability, and global reach. We are encouraged by the fundamental strengths of our business in the markets of EMEA, Asia-Pacific, Latin America, and are focused on our plans to recover growth in Asia, travel, retail, and North America. For fiscal year 2024, we believe we are well positioned to return to organic sales growth and improve profitability. To our employees, you are the heart and the soul of our beautiful company, and I extend my deepest gratitude to your exceptional contribution and dedication. And now I will turn the call over to Tracy.