Estee Lauder Companies, Inc. (The)

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2021 first 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. 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 those 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 disclosed in our press release. All net sales growth numbers are in constant currency. 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 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 everyone. I hope that each of you are in good health as the world continues to confront COVID-19. Our hearts are with those impacted, and our focus remains first and foremost with the safety and well-being of our employees, their families, and our consumers. I continue to be incredibly inspired by our employees' enduring compassion, creativity, and resiliency. You are making us a better company and I stand my deepest gratitude. Our diversified prestige beauty portfolio of categories, channels, geographies, brands, consumer segments and price points give us many levers to fuel the business, both in times of prosperity as well as during more challenging times. In this most difficult moment, our multiple engines of growth strategy is invaluable. For the first quarter of Fiscal Year 2021, sales declined only 9%, a significant sequential improvement driven by every category. Fragrance and hair care, in particular, had striking progress. Our hero products and innovations strived and contributed meaningfully to sales. We successfully adjusted our cost structure to minimize the leveraging effects of lower sales, resulting in an operating margin of 20%, very close to the first quarter of last year when we had double-digit sales growth. In different periods over the last decade, we were driven by different engines, leading to Prestige Beauty share gains each year, and we expect this year to be no different. Since the pandemic began, we estimate that we have grown Prestige Beauty Share globally. On our last earning calls, we explained that the growth engines of the moment are the skincare category, the online channel, and the Asia Pacific region. Each delivered terrific performance to begin our new fiscal year. The Estée Lauder brand performed exceptionally well. returning to growth in the quarter, powered by its hero franchises in skincare. Its advanced night repair franchise delivered very strong double-digit sales growth. Encouragingly, the brand's success in skincare was broad-based, as each of the re-nutritive, revitalizing, supreme perfection in matter essence nutritious franchises also grew double-digits. This is a remarkable achievement when compared to the brand's very strong skincare performance in the prior year. La Mer had a superb quarter with double-digit sales growth globally, driven by its continued outperformance of luxury skincare growth in mainland China. The August launch of its new The Concentrate delivered especially strong double-digit sales growth in Asia Pacific and consumer so the suiting power of this Barria Serum with its new protective antioxidant benefits. Even amid the pandemic, La Mer is welcoming many new consumers, further demonstrating the irresistible appeal of the brand's superior quality. At our last Investor Day, we discussed growth strategies for each of our large, scaling and developing brands. And even in these challenging times, We are resolute in our focus on all three tiers. The Darfen brand is a beautiful example in the developing tier of a brand succeeding through these unparalleled times. Darfen contributed to the skincare category growth in the quarter as the successful launch of Intral Rescue Super Concentrate Serum amplified the strengths of the brand's hero products. Our acquisition of Dr. Jart, with its terrific entry-prestige derma brand positioning and desirable hero products, enhanced the organic sales growth of skincare. Momentum in the serum, watery lotion, and eye care subcategories carried into the quarter, driving skincare growth. The August launch of Estée Lauder New Advanced Night Repair Serum performed extraordinary across geographies and channels, aided by compelling activation and an over 40% surge in consumers' reviews since launch when comparing to the entire lifespan of the previous version. Impressively, Clinique's even better clinical interrupter serum continues to perform strongly in its third quarter since launching, We deliver outstanding double-digit sales growth online, with skincare, makeup, fragrance, and hair care all prospering. Once again, each of our online channels contributed meaningfully. We continued to strategically invest in our brand sites globally, bringing our classic high-touch services to consumers online. The response has been phenomenal. we have seen tremendous growth in time spent on 4Chat, virtual try-on, and shoppable live streams. Even with most retail doors reopened around the world, sales rose 60% organically on our brand sites. We now have virtual try-on across more brands and categories in more markets. In the first quarter alone, We hosted over 1 million virtual try-on sessions globally, with consumers spending more than 30 minutes on average in a session. In North America, the Estée Lauder brand launched AI-driven product recommendations based on real-time consumers' behaviors and past preferences. This dynamic merchandising holds great promise across our brands and regions. Clinique global sales growth on brand.com in the quarter was exceptional, among the strongest across the portfolio. Clinique's King School on-demand live streaming was a great success, leading to new daily programming that combines top consultants with influencers to future holiday sets and favorite Clinique products. Clinique is our first brand to launch new technology that pairs multiple hosts in one shoppable live stream. Bobby Brown continues to scale its Artistry Like Never Before program, expanding virtual artistry to include live chat, pre-booked video consultations, master classes, and live streaming by rapidly converting some of its global makeup artists into a network of virtual sellers. Most of the brands' markets now offer these consultations on brand.com, on local social platforms such as WhatsApp, WeChat and Instagram. These virtual services have a higher conversion rate, up to 10 times the average, and a higher average order value. With enticing innovation and engaging new services and tools, conversion grew strong double digits across our brand sites. Most compelling is the significant conversion growth in markets that are under-penetrated online, such as continental Europe. In the quarter, conversion there grew over 75%, while in Latin America, conversion growth far exceeded 100%. This positions us well for suitable profitable growth online. We invested in online fulfillment during the quarter, strengthening our capacity globally, and we are addressing seasonal fulfillment locations in our largest markets in anticipation of robust consumer demand for holiday. Leveraging our investment in technology, we deployed more omni-channel capabilities in several markets. In the US, we have seen dramatic upstarts in buying online pick-up in-store for Mac. The brand also partnered with Postmates domestically to launch same-day delivery and open a new experiential store in New York. The store features extensive personalization options for consumers, and interactive digital experiences. In these initiatives and more, we are meeting the desires of consumers who are craving convenience and choice, offering them new ways to shop in today's environment. The third engines of growth, Asia Pacific, also excelled. Several markets contributed to the region's high single-digit sales growth, which is most notable as some markets in the region dealt with new waves of COVID-19. Mainland China, Korea and several smaller markets grew organically. In mainland China, we continue to invest in the vibrant opportunity of our second home market. We expanded into more cities in the quarter, reaching over 130. We increased our advertising investment across social and digital platforms, showcasing exciting innovation and building brand awareness as we reach new consumers. We continue expanding our talent in anticipation of our new state-of-the-art innovation center, which will open in Shanghai, as we aim to best meet the needs of Chinese and Asian consumers with local relevancy and local trends through increased capabilities in product design, formulation, consumer insights, and trend analytics. In mainland China, the bricks and mortar channel returned to double-digit growth, such that both offline and online were powerful growth drivers. The travel retail channel further contributed, driven by tremendous growth in Hainan, partly reflecting increased duty-free purchase limits the opening of some travel corridors in Asia, and online pre-tail growth facilitating higher conversion, magnifying Chinese consumer strengths. Indeed, demand from the Chinese consumers was very strong across these channels, most especially in skincare, and we estimate we grew our prestige beauty share. The fragrance category sales growth accelerated in Asia-Pacific in the quarter. We introduced Killian Paris and Frederic Malle in mainland China in very select distribution in June. These unique, luxurious brands are proving highly desirable, which coupled with the ongoing strength of Jo Malone London and Tom Ford drove significant double-digit sales growth of fragrances. In Korea, fragrances also soared. Le Labo, new Citron 28 Seoul fragrance, drove meaningful upside, demonstrating the strength of our locally relevant innovation. Around the world, we continue to closely monitor the evolution of consumer attitudes and purchase behavior related to COVID-19. We combine sophisticated social media listening capabilities with machine learning and proprietary consumer research techniques to develop insights and adapt our marketing and product offering with speed and agility to capture changing trends. Looking ahead, we are confident in the return of growth in the challenged makeup category as the recovery will unfold. In the meantime, we continue to focus on subcategories in makeup that are favored in the era of masks for COVID-19. In fact, even in lip, which is overall pressured, the liquid lip subcategory is growing nicely, driven by MAC's launch of Power Kiss Liquid Lip, as consumers seek much-finished formulas that last. Our innovation represented over 30% of sales in the first quarter. We have an exciting pipeline of new product launches for the remainder of Fiscalia 2021 for both engines of moment and what we expect to be engines of the future. In October, Clinique launched Mosser Surge Intense Replenishing Hydrator, a new formula that hydrates skin for a full 72 hours in a cream gel formula that dries for drier skin types. This month, La Mer will introduce its new Genesense de la Mer Concentrated Night Balm, an ampule strength balm slow crafted with crystal miracle broad that promotes skin natural rebuilding of collagen to help transform the look of skin during sleep. Continuing our progress on sustainability, Origins intends to be the first prestige beauty brand to bring an advanced recycled tube package to market, with its clear improvement active charcoal mask in 2021. This expands upon Clinique's recent launch of All About Clean in Packaging, with most consumer recycled material and plant derived plastic for its tube and most consumer recycled material for its cap. For fiscal year 2021, we continue to expect sequential improvement in sales growth each quarter and to build global share while Prestige Beauty progressively returns to growth. We are mindful of the ongoing impacts of COVID-19, most especially the very limited traffic in retail doors as stores reopen, and the second waves occurring in certain markets. We are investing in several strategic priorities intended to drive our long-term sustainable growth that are progressing in the world of post-COVID business acceleration programs. For the second quarter, we have a magnificent plan for holiday and the 11-11 Global Shopping Festival. Holiday merchandising began a few weeks ago, and our brands created rich activations with engaging, freestyle products. Estée Lauder and La Mer have kits that include best-selling hero products to drive recruitment. Origin is making holiday gifting easy, offering consumers the ability to text or email a gift, allowing the recipients to either accept or exchange their product before it is gift-wrapped and sent to them. Bobbi Brown Holiday Wishlist Deluxe Collection includes all the inspiration, goods, and tools to create ultimate holiday looks. And MAC recently debuted its Frosted Firework Collection, partnering with a diverse range of beauty influencers who generated over 60 million media impressions in the first 10 days after launching. Today we will release our fiscal 2020 Citizenship and Sustainability Report entitled Beauty Inspired, Value Driven. We are incredibly proud of the contribution of our employees around the world in accelerating our citizenship and sustainability efforts and have featured their successes in this year's report. The report highlights the achievement of our 2020 ESG goals, as well as meaningful progress toward our 2025 goals. These milestones were reached across citizenship and sustainability priority focus areas despite the challenges of the pandemic. I'm pleased to announce the company has achieved net zero carbon emissions and 100% renewable electricity globally for our own operations. Building upon this achievement, we also met our goal to set science-based emissions reduction targets addressed in Scope 1 and 2 for our direct operation and Scope 3 for our value chain. Today's announcement signals a new level of ambition and dedication to climate action for DSL loader companies. setting targets in line with the latest climate science in testament to our values and our commitment to managing our business for the long term. We are also proud to have reached zero industrial waste to landfill for our manufacturing, distribution and innovation sites. And we are on track to provide access to training on basic sustainability and corporate social impact programs for our employees worldwide this month. In addition, over the past two years, our programs and grants focused on health, education, and environment have positively impacted the lives of more than 20 million individuals worldwide. Our collective vision is to be the most inclusive and diverse prestige beauty company in the world and to be the employer of choice for diverse talent and the brand of choice for diverse consumers. Our commitment to racial equality, especially our focus on driving racial equity across our business, is central to achieving our vision. In today's report, we'll be publicly disclosing enhanced employee diversity metrics and information on pay equity. We believe this transparency to all our stakeholders is important to holding ourselves accountable to our vision while importantly setting the stage to share our progress. In closing, there is no doubt that we are living and working in a moment unlike any other. And yet, we are confident thanks to our passionate employees, cherished company values, and proven strategy built on multiple engines of growth. We are well equipped to face the challenges of today and even better positioned to embrace the opportunities of tomorrow and continue growing global prestige beauty share. I will now turn the call over to Tracy.

Thank you, Fabrizio, and hello, everyone. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call, and net sales growth numbers are in constant currency. So starting with the first quarter results, net sales declined 9%, driven by the ongoing effects of the COVID-19 pandemic on our brick-and-mortar distribution throughout the world. We achieved strong growth in our global online channel, mainland China, and the skincare category, and delivered better-than-expected results in the travel retail channel and in North America. Other areas progressively improved compared to last quarter as retail doors reopened. The December 2019 acquisition of Dr. Jart contributed approximately three points of net sales growth. From a geographic standpoint, our Asia-Pacific region rose 7%, driven primarily by strong double-digit growth in skin care, and the addition of Dr. Jart's sales in mainland China rose double digits as sales in brick-and-mortar retail continued to improve. The pace of online sales growth in China was slower this quarter, following the highly successful 618 Mid-Year Shopping Festival programs last quarter. Most brands and channels rose double digits in China. Korea rose high single digits, excluding Dr. Jart, and several smaller markets returned to growth as well. Sales in Japan declined due to a tough comparison to the prior year, in which sales grew nearly 20%, as consumers bought ahead of an October 2019 VAT increase. The market has also suffered from softer in-store traffic due to a second wave of COVID-19. Sales in Hong Kong continued to be depressed as well due to the pandemic. Net sales in our Europe, the Middle East, and Africa region declined 9%, with virtually every market continuing to feel the effects of the pandemic. While online growth continued to be quite strong, brick and mortar traffic remained soft, heavily impacted by COVID-19, which also resulted in significantly lower tourism in key markets. Skincare sales in the region grew double digits, driven by travel retail, but were more than offset by declines in makeup and fragrance. The major western markets of France, Spain and the UK contributed the most to the decline in sales, as did the Middle East. Our global travel retail business was essentially flat, as outstanding results in Greater China, particularly Hainan Island and Hong Kong, and sequential improvement in Korea offset the effects of the significant reduction in international travel. Additionally, The growth of pre-tail and the increase in duty-free purchase limits in Hynan drove higher conversion rates. Net sales in the Americas declined 24% as virtually all markets in the region continued to be impacted by COVID-19. Online sales growth continued to be a bright spot, rising over 40%. However, brick-and-mortar retail remained difficult, especially in department stores, and in freestanding stores. From a category standpoint, skincare was the most resilient. Net sales grew 10%, driven by continued strong performance from the Estee Lauder and La Mer brands in Asia, including travel retail, as well as incremental sales from the acquisition of Dr. Jart. Net sales in makeup fell 32%, a significant sequential improvement from last quarter. Makeup has seen the biggest impact from COVID-19, as many consumers continue to partially or fully work from home and forego social gatherings. Fragrance net sales declined 13%, a substantial improvement from last quarter. The category grew strongly in Asia, reflecting double-digit increases from both Tom Ford and Joe Malone, London, as well as the recent launches of Killian Paris and Frederick Mall in mainland China. Bath, body, and home fragrances continued to perform very well. Our hair care net sales were essentially flat, declining only 1%. While stores and salons were not operating at full capacity during the quarter, the category benefited from exceptional innovation from Aveda, including the recent launch of botanical repair as well as strong online sales. Our gross margin increased 20 basis points compared to the first quarter last year. Favorable category mix and lower costs for in-store testers were partially offset by negative currency impact. Operating expenses decreased 7%, and the deleveraging effect of the sales decline caused operating expenses as a percent of sales to increase 80 basis points. Agile cost management and lower selling costs resulting from both channel mix and the impact of the COVID-19 related temporary furloughs and salary reductions on employee costs resulted in a 20% operating margin, which was just 60 basis points lower than the year ago quarter, despite the lower sales. Diluted EPS of $1.44 decreased 14% compared to the prior year. EPS was higher than expected due to both improved sales performance as well as more prudent cost management as doors reopened throughout the quarter. During the quarter, we generated $358 million in net cash flows from operating activities, which was above the prior year, due primarily to timing of working capital items. We invested $116 million in capital expenditures, repaid the remaining $750 million outstanding on our bank revolver and paid 174 million in dividends. We also announced this morning a 10% increase in our quarterly dividend to 53 cents per share. Our plans under the post-COVID business acceleration plan are on track with approvals expected to accelerate in the second quarter and benefits beginning to flow later in our fiscal year. So now let's turn to our outlook. We are pleased with the sequential improvement we saw in nearly every market as the world continues to manage the effects of the pandemic. The path to recovery is not expected to be smooth as cases of COVID-19 have begun to surge again in many markets, creating renewed restrictions on travel and social activities. We are mindful of the risk of a global recession or a slow economic recovery as government support measures in certain markets taper off. We also recognize macro risks, such as ongoing trade tensions and political uncertainty. Nonetheless, Prestige Beauty remains a highly desirable product category, as evidenced by the sequential improvement in sales trends we experienced this quarter. And we believe our multiple engines of growth strategy positions us well to return to strong global results when the impacts from the pandemic subside. With only one quarter of the year completed and the degree of uncertainty I just described, we are not providing explicit sales and EPS guidance for the full year. However, we will provide some underlying assumptions for the year. We continue to expect sequential quarterly sales improvement as the global recovery unfolds, assuming no significant second wave resulting in broad-scale retail door closures again or other major disruptive events. And we do expect to return to sales growth as of the third quarter. Comparisons to our record performance in the prior year first half will be difficult. Conversely, we expect sales and profit to grow significantly in the second half of the year against a period of considerable COVID-19 impacts with particularly strong growth in the fourth quarter. The inclusion of six months of incremental sales from the acquisition of Dr. Jart should add about one to two percentage points to sales growth for the fiscal year, but remains slightly dilutive to profit for the year. We expect to close a number of our less productive freestanding retail stores and exit certain wholesale doors primarily in Western markets, while several of our retail customers are also reducing their store footprints. Many of the unproductive doors are expected to close later in the fiscal year. Our gross margin has recovered from last quarter's inefficiencies related to the sudden COVID-19 impact. Additionally, we continue to invest in increased capacity to support our strong skin care growth. We will continue to leverage a portion of the savings generated from our cost programs to support advertising, and expanding services and capabilities to enable strong growth in our online channel. As I mentioned before, we increased our quarterly dividend rate by 10% to 53 cents per share. We also expect to reinstate share repurchases as we gain comfort that the recovery is more sustained. So while the environment remains quite uncertain, we are providing guidance for the second quarter. For the quarter, we expect sales to decline between 4% and 6% in constant currency. As a reminder, we are comparing against a record prior year quarter where we delivered 16% sales growth and 21% EPS growth last year. We have a robust lineup of holiday offerings at a variety of attractive price points that are carefully targeted to relevant consumer trends we are seeing during this pandemic. and we expect continued strong online sales at our retailers and on our own brand sites. The incremental sales from Dr. Jart are expected to add about two points to growth, and currency is expected to be accretive by approximately one point. We expect second quarter EPS of $1.45 to $1.60, reflecting the sales outlook, continued cost containment measures, and investment in key growth areas like online, innovation, and China. Currency is expected to add two cents to EPS, and Dr. Jart is forecast to dilute EPS by three cents. We will continue to leverage our multiple engines of growth to invest behind a strong recovery in the context of the macro environment. We are taking strategic actions to support long-term sustainable growth by investing appropriately for the long-term, while supporting the recovery in the near term. With a more solid start to the fiscal year and mindful of continued macro volatility over the next several months, we look forward to leveraging the tremendous strength of our brands and driving a strong recovery as the market accommodates. And that concludes our prepared remarks. We'll be happy to take your questions now.

The floor is now open for questions. If you have a question, simply press on the star key followed by the digit one on your touch tone telephone. To ensure that everyone can ask their questions, we will limit each person to one question. Time permitting, we will return you for additional questions. Just queue up again by pressing the star key and the digit one. And our first question is going to come from the line of Lauren Lieberman with Barclays.

Great. Thank you. Good morning, everyone. My question was about channel mix shift, both longer term and in the quarter itself and for fiscal 21. So first piece of it is just over the longer term with the things you've already talked about in the acceleration of e-commerce growth. I'm curious if you think it's fair to say that half of your margin expansion over the next several years could come from that channel mix dynamic. The second was that as we look into fiscal 21, how we should be thinking about the benefits of channel mix on one hand, but then the drags that you will experience as less productive doors get closed to the degree that there's stranded costs that come with that or what the impact of door closures, your own doors and also wholesale doors or customers choosing to close doors, what impact that has on the P&L in the short term. Thanks. Thanks.

Yeah, I'll start, then Tracy will join me in the answer. But basically, all our accelerating engines of growth by channel are more profitable, and that's the good news. On the other side, we have to deliver our brick-and-mortar productivity back to normal, and this obviously will be influenced by how fast COVID retire and how fast the consumer get the confidence again to go in brick and mortar. And as you said, by managing some closures. And then we need to turn the total company into growth. As Tracy said, we believe this will be possible as of quarter three. And so the combination of the improved accelerating engines of growth, which are more profitable And the reestablishment of productivity of brick and mortar will determine when we can go back to our long-term algorithm of growing about half a margin point per year.

Yeah, and, Lauren, as you indicated, I mean, timing will really impact that. So in terms of, you know, when we expect door closures to occur in You know, we've already had a number of wholesale door closures and freestanding door closures over the last few years when you think about the number of retailers that have gone out of business, unfortunately, in the last couple of years. And certain retailers have also indicated their intent to close doors over the next couple of quarters. Um, with our post COVID acceleration program, we too will be closing, uh, doors over the next, uh, Couple of quarters more, uh, towards the end of the year, um, as well as some freestanding stores. Um, so there will be a timing issue where we do see pressure, um, from under productive brick and mortar doors. Um, while we see the uplift that Fabrizio spoke about from our online acceleration. And that's all embedded within the guidance that we've given certainly for the second quarter, and we'll see how the second half of the year plays out. But that's certainly a dynamic that we will be managing in fiscal 21 as the door closures are staged throughout the balance of the year and into fiscal 22.

Thank you. Our next question will come from the line of Dara Mosenian, Morgan Stanley.

Hey, good morning, guys.

Morning.

So for Brito, I was hoping maybe you could give us some perspective on how much of the increased e-commerce demand you've seen since the beginning of the pandemic is sustainable in your mind as you look out longer term. And perhaps within that, can you detail with the e-commerce sales increase you've seen during the pandemic, How much of that you think is driven by new customers? What level of repeat rates you're seeing among those new customers? Thanks.

Yeah, so first of all, the increase of online is extraordinary. During this quarter in total, we were growing about 40%, but our brand.com and some retail.com are growing much stronger. Our brand.com is 60%. So the growth is consistent, and I believe personally it's here to stay. And the reason why it's here to stay, because a lot of this growth is about the new consumers that we see online. And many of these new consumers are mature consumers. And before, online was mainly the destination of younger people, millennials, et cetera. Now it's for everyone. Everyone is online. And also the people that before were not accustomed to go there are going there more often. So what we see is that People buy online. Maybe in the future when the store will be open, we believe that omnichannel will be very strong, and so people will use both brick and mortar and online, obviously. But the amount of purchases online will stay higher, and particularly will stay higher in our estimate in the mature group of consumers, which are very important for us, very important for beauty. So this is a sustainable trend and a sustainable acceleration. The second thing which is happening, which is very important, is historically how high-touch services of, you know, advice or the service of customization or the service of trying the products was exclusively done in stores. And then online at the beginning was mainly a convenience buying opportunity or what you already knew. Shopping was in brick and mortar. Buying was online. This has changed forever. Now there is shopping in brick and mortar, and there is shopping online. What I mean with that is that the high-touch services of customization, of advice, of recommendation are now super-priced online, and the consumers really are catered to this service like never before. So we spoke in our prepared remarks about the availability of chats with consultants, the availability of virtual try-on, the availability of live streaming opportunities. All this is increasing. And the engagement of consumer online is increasing. We mentioned that we have 30 minutes presence on virtual try-on versus only a few minutes in the past. So the combination of new consumers, particularly more mature consumers, better services online with a lot more time and more engagement, and the development of this opportunity for everyone, I think is going to be a sustainable and growing segment for many years to come. But obviously, we absolutely believe that omnichannel will be also important in the future, and the brick and mortar will go back to the right level of productivity, to the right level of traffic, and there will be a combination of the two. There will be an even better combination than in the past.

Thank you. Our next question will come from the line of Dana Telsey with Telsey Advisory Group.

Good morning, everyone, and nice to see the progress. As you think about the makeup category, how are you planning for innovation going forward? What does the timeline look like? And also, Fabrizio, when you talk about channels, what are your thoughts on the specialty multi-channel going forward? Thank you.

So our point of view in makeup will go back to be a very attractive, a very fast-growing category once COVID will retreat. And, you know, the Makeup is very much linked to user educations for makeup, and the user educations for makeup include business, obviously, meetings or going to the office, includes social gathering of any kind, and include also a positive mood of recovery and the interest of expressing ourselves. And so all these will come back. We'll come back strongly, and makeup will come back with it. As we said in the prepared remarks, There are certain categories of makeup which are already coming back, already growing. It's visible that makeup is much stronger where COVID abates, like in Asia, and so it's obviously going to come back. And we will be ready for that. We are preparing, starting from the categories that, in our opinion, will come back first. And we are investing not only in ready to sustain the recovery, but also investing in innovation in the categories that will be the first one to come back. If you take today's reality, for example, eye makeup is much stronger than other categories just because in a period of masking, eye makeup is more relevant than lips, for example. And so there is a very positive trend in our opinion. It's just a matter of time, and the time will depend on the COVID-19. In terms of your second part of the question, specialty multi around the world will remain a very strong channel, a very strong channel for us, a strong channel of growth. And in specialty multi, the strength, in our opinion, will also be the fact that the retail.com, this channel, should continue to increase. It should be able to be very, very strong. The specialty multi key opportunity is to continue to be strong in store, obviously, but particularly to become equally strong in the retail.com and to bring the services and the experiences that have been so strong in brick and mortar to the retail.com in the long term everywhere in the world.

Thank you.

And our next question will come from the line of Steve Powers with Deutsche Bank.

Yes. Hey, good morning. Thanks. Can we just talk a little bit more about the exit rates and consumption coming out of the first quarter and what you're seeing in terms of momentum with a little bit more granularity, whether by geography or category or channel, however you think is most instructive? And if you're able to share a little bit of data around October results, that would be great because we clearly saw volatility in shipments, shipment timing over the course of the September quarter. So I'm just curious as to how you're thinking about that month-to-month lumpiness as we look through and out towards the end of the calendar year as well. Thank you.

Yeah, I'll start, and please, Tracy, add any perspective. If you understand correctly your question, the strength by category is in consumption. It's clearly in skin care, and this remains very strong and in certain regions further accelerating. And within skin care, there are certain subcategories like moisturizer, serum, masks. which are really flying, or eye products, so products for the contour of the eye, et cetera. So there are skin care, and certain skin care categories is clearly the fastest growing consumption. Makeup, I'll just answer one question. Makeup is dependent by category. Eye makeup is strong consumption. For example, lip makeup is under pressure in this moment. But even within categories, it allows us to focus more on the growth consumption in these categories. fragrance are surprisingly back faster than what we originally thought. And this is great news for the holidays. In fact, we are ready to try to push fragrances really in the best possible way during the holidays that we believe is a big opportunity, particularly our high-end fragrances and our artisanal fragrances like Jo Malone, Tom Ford, Frederic Malle, Killian, and Le Labo. Le Labo is doing extraordinarily well everywhere in the world. Then Haircare, as I think Tracy explained in her prepared remark, that Aveda is doing exceptionally well. For us, Aveda is having great innovation, a great program, great work online in support of also the salons that work with Aveda. And this brand is also hitting all the areas because it's obviously about natural, it's about taking care of the world, and so it's also very much into the consumer space of sustainability, and this is starting to pay big dividends. So hair care also is strong in consumption. And so next by category is skin care is strong, hair care is strong, fragrance recovery, and makeup is the more gradual recovery that we assume for the long term. In terms of dynamic of the regions, obviously you have a consumption recovery in Asia, which is much faster. than anyone else. And on the contrary, in the U.S. and in Europe, the impact of COVID on recovery has been much bigger. But we see progress everywhere. That's the important thing. The important thing is that the level of progress is recovery is consistent every part of the world, despite Asia is ahead in the trend of recovery. And then in terms of consumer groups, I found particularly interesting that the consumption has been extraordinary in the more mature consumers. And that's what we see that is a long-term benefit. I mean, the younger consumer has been the driver of many categories, particularly makeup. And in this moment, that's less the case. But the mature consumer has been a bit more following the young consumer in the last probably five years. I think this is changing. The mature consumer are getting much more active, even in experimenting and trying new innovation. And, again, this is for us is a very positive sign for the long term. So consumption overall is gradually recovering.