Estee Lauder Companies, Inc. (The)

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2021 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 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 results exclude the impact 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 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 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 you and your families are in good health and our hearts continue to be with those impacted by COVID-19. We delivered outstanding performance amid the pandemic. in fiscal year 2021, capped with an exceptional fourth quarter empowered by our dynamic multiple engines of growth strategy, as well as the timeless desirability of prestige beauty. In a year of pain and sorrow, our employees cared for each other, their families, and our company with compassion, creativity, and resolve. While the challenges of COVID-19 persist, We confidently begin fiscal year 2022 as a stronger company, full of aspiration for the opportunities of tomorrow. For fiscal year 2021, sales rose 11% as we pivoted our energy resources to the growth engines of skincare, fragrance, Asia-Pacific, travel retail in Asia-Pacific, and global online. Impressively, eight brands grew double digits, led by Estée Lauder, La Mer, and Jo Malone London. Multiple waves and variants of COVID-19, to the extent of which were unexpected a year ago, drove volatility and variability throughout the year. We saw reopening revert to closing, and reopenings in one market met with renewed lockdowns in other markets. Despite this, we delivered on the goal we set last August for sales growth to improve sequentially each quarter. Our sales exceeded $16 billion for the first time ever, up 9% from fiscal year 2019 on a reported basis, fueled by skincare and fragrance. Adjusted operating margin expanded to 18.9%, which is 140 basis points above fiscal year 2019, as we invested in today's strongest growth engines, managed cost with discipline, and funded long-term growth opportunities. Adjusted diluted earnings per share rose 21% relative to two years ago. We delivered these excellent results while pushing our social impact and sustainability goals and commitment. First and foremost, we remain focused on employee and consumer safety and well-being. We achieved important milestones for our 2025 sustainability goals, expanded our inclusion, diversity, and equity programs, defined a strategy for women's advancement and gender equality, and advanced work toward our racial equity commitment. Here are a few among the many areas of our progress. We achieved net zero carbon emissions and 100% renewable electricity globally for our own operations. We also set science-based emissions reductions targets, addressing scope one and two for our direct operation and certain elements of scope three for our value chain, signaling our new level of ambition for climate actions. We launched ingredient glossaries for seven additional brands, such that 11 brands now offer this insightful content. We transformed our traditional inclusion, diversity, and equity week into a blockbuster virtual experience with 35 events involving thousands of participants from 25 countries. We also introduced new educational offerings, including for anti-racism and inclusive leadership. We expanded our grassroots-led employee resource groups, which served as a source of support and comfort throughout the tumult of last year. The Women Leadership Network is our largest group and is now globally with its expansion into Latin America and Asia Pacific. We created two new leadership programs for women and black employees. The Open Door Women's Leadership Program is a unique, intensive course to develop our next generation of women leaders. Building on its success, we designed the Open Doors Collection, a self-guided program to bring these leadership skills to all our employees around the world. The Forum Every Chair Leadership and Developer Program has successfully helped to ensure that black employees have equitable access to leadership trainings, mentorships, career development, and advancement opportunity, as well as to build a stronger, more inclusive network of talent across the organization by promoting visibility and facilitating leadership connections points with participants. Our new partnership with Howard University focused on its alumni, hosted 12 engaging events, and launched an accelerator program to help increase the pipeline for Black talent with career coaching, professional training, and self-empowering networking. Let me now turn to product innovation, which served as an impactful catalyst for growth in fiscal year 2021. Innovation represented over 30% of sales, exceeding our expectations. We combined data analytics with our creative talent and R&D to successfully anticipate, scale, and set trends across categories. The Estelode brand achieved its fourth consecutive year of double-digit sales growth in fiscal year 2021. fueled by strengths across its many hero franchises in skincare. Trusted products, along with innovation, were highly sought from Shanghai to New York, Paris, and now Sao Paulo, given the brand's well-received launch in Brazil. Advanced Nye Repair's newly reformulated serum sparked excellent sales growth, revitalizing Supreme's new Supreme Bright Moisturizer, further bolstered the accelerating franchise, while the new eye serum surged and created a halo effect on demand. In makeup, the brand's double wear, fuchsias, and pure chloro franchises produced significant double-digit sales growth in the fourth quarter, an exciting early sign of makeup renaissance. La Mer delivered outstanding double-digit sales growth in the fiscal year as innovation soared and engaging campaigns with iconic ingredient-based narratives drove demand for its hero products. The new Renaissance de la Mer Concentrated Night Balm proved highly sought-after and expanded the brand's ultra-luxury franchise as it both welcomed new consumers and captivated loyal consumers globally. Clinique skincare excelled in fiscal year 2021. Sales rose double digits, empowered the brands to high single-digit sales growth. The brand successfully met consumer needs through the launch of Moster Surge 100-hour, with its unique hydration benefits and target solution for hard-to-solve skincare problems. like even better clinical interrupter. Clinique showcased its promise for makeup renaissance with stellar double-digit category growth in the fourth quarter, with the new even better clinical serum foundation and even better concealer capitalizing on its skincare authority. All told, our robust skincare portfolio from entry prestige to luxury and across subcategories in fulfilling this churning need around the world. Dr. Jart, with its artful derma brand positioning and hero products, delivered strong double-digit organic sales growth in the second half of fiscal year 2021. In May, we amplified the strength of our skincare portfolio as we became majority owner of Dazian, with its coveted ingredient-based brand, The Ordinary, an emerging science-driven new brand as part of its portfolio. Complementing skincare strengths, fragrance delivered striking sequential sales growth acceleration throughout the year. Each of our luxury and artisanal fragrance brands contributed meaningfully, from Jo Malone London to Tom Ford Beauty, Le Labo, Killian Paris, and Frederic Malle. In both established fragrance markets of the West, and emerging fragrance market of the East. Tom Ford Beauty's private blend franchise is both recruiting new consumers and driving strong repeat in markets newly embracing the category, with the brand's fragrance sales more than doubling in mainland China during the year. The Asia Pacific region was another dynamic growth engine in fiscal year 2021. as annual sales growth accelerated from 18% to 22%, led by mainland China, where sales rose strong double digits. Korea grew organically, as several smaller markets also contributed to Asia-Pacific strengths. The region, however, experienced increasing pressure from the pandemic as the year evolved, with Japan and many markets in Southeast Asia particularly impacted from renewed lockdowns in the second half. Mainland China prospered as we invested in its vibrancy of today and opportunity of tomorrow. We entered more cities, reaching 145, expanded our presence in specialty multi, opened the freestanding doors, and increased our advertising spending. Skincare and fragrance sales grew strong double digits for the fiscal year. we are encouraged that the make-up accelerated to double-digit sales growth in the second half. Our brands delivered excellent results for the key events of Tmall's 11.11 Global Shopping Festival and 6.18 Mid-Year Shopping Festival, as engaging live streaming generated product discovery for many new consumers. For the reason 6.18 among Tmall Beauty flagship stores Estée Lauder brand ranked number one in total beauty, while La Mer ranked first in luxury beauty, and Jo Malone London led the fragrance category. To further capture the market's terrific online growth opportunity, we have continued to invest in Tmall and Brand.com to expand our capabilities. Most recently, some brands increased coverage of a different demographic by launching on GD in July. With international travel largely curtailed, we expanded our investment in the dynamic travel retail development of Hainan Island to serve the Chinese consumers in the best possible way given the island's tremendous traffic growth and higher duty-free purchase limits. Our brands further elevated the in-store and pre-tailed shopping experiences. delivered ideal merchandising, and leveraged live streaming to drive strong sales growth. Looking at channels, online thrived globally in fiscal year 2021, characterized by strong double-digit sales gain and step change in its power as a growth engine. We accelerated our consumer-facing digital infrastructure and fulfillment investment, The challenge is now more than twice as big as it was two years ago and greatly benefits from its diversification as each of brand.com, third-party platforms, retail.com, and pure play retailers delivered outstanding performance. During the year, brand.com came to epitomize the allure of a luxury flagship store for each brands. localized by market and reimagined with our classic high-touch services. We expanded virtual trend on live streaming, omni-channel capabilities, and consultations with our expert beauty advisors. Consumers are all ages explored, replenished, and engaged in an immersive environment of entertainment and community. Our brands increasingly leverage the exciting trends in social commerce by integrating with Instagram, WeChat, Snapchat, and others. Estée Lauder launched on TikTok with the Night Done Right hashtag, driving nearly 12 billion views and the creation of almost 2 million videos. Its challenge used diverse creators to educate a younger audience on how important it is to take care of your skin at night. showcasing advanced night repair. Clinique's It Happens campaigns on TikTok became a viral sensation, highlighting the brand acne solution and sporting the creation of nearly 700,000 videos on the app. Together, these and other strategic actions deliver exceptional results for brand.com as new consumers' conversion, basket-sized, repeat, and loyalty members grew considerably. Beyond the favorable growth rates, the direct relationship we fostered with consumers enabled us to better optimize engagement in-store and online, offering exciting future growth opportunities. We are investing across all channels of online, collaborating with traditional and pure-play retailers on initiatives to actualize prestige beauty online potential. We spoke on the last call about having expanded our presence with pure player retailers, which continued into the fourth quarter, most especially in EMEA. And as I discussed a few minutes ago, we are expanding our consumer coverage in mainland China. For fiscal year 2022, we expect these growth engines of skincare, fragrance, Asia-Pacific, travel retail Asia-Pacific, and global online to continue to thrive, owing to our strong repeat purchase rates, sophisticated data analytics drive consumer acquisitions and retention, high-touch online services, and robust innovation pipeline. Three compelling skincare innovations recently launched. Estee Lauder's new Advanced Night Repair Eye Matrix is focused on lines in every eye zone, while La Mer Dehydrating Infused Emotion is designed to replenish, strengthen, and stabilize skin with healing moisture and has already proven to attract new consumers. Clinif Smart Clinical Repair Wrinkle Correcting Serum is designed to visibly reduce stubborn lines. Our Shanghai Innovation Center is expected to open in the second half of this fiscal year. enriching our capability in product design, formulation, consumer insight, and trend analytics for Chinese and Asian consumers. Also, with the new center, our east-to-west innovation will benefit, enabling us to create more successes like Estée Lauder Futurist Hydra or Supreme Bright and La Mer, the treatment lotion. As the world emerges from the pandemic, We will be the best diversified pure play in prestige beauty as more engines of growth contribute across categories, geographies, and channels. Makeup and hair care are poised to gradually reignite as growth engines, as are developed markets in the West and brick and mortar retail. Growth in emerging markets is expected to resume over time as vaccination rates increase. We anticipate the momentum in makeup will build around the world, driven by local reopening and increasing social and professional user education, just as we saw in the fourth quarter. Indeed, makeup started to improve to the end of fiscal year 2021, driven by our hero subcategories of foundation and mascara. Newness in the category was highly sought and evidenced by the success of MAC's Magic Extension Mascara, Too Faced Lip Plumper, Smashbox Halo Tinted Moisturizer, and Bobbi Brown Sheer Pressure Power. Contributing to makeup emerging renaissance, MAC launched MAC The Moment, a campaign linking its makeup products and artistry-inspired trends to key experiences, such as date night parties, weddings, and back-to-school shopping. Too Faced expanded into brows in July with a collection that includes an innovative brow gel that adds color and texture. Similar to makeup, hair care is set to benefit from the rights of socially professional user education as well as salon reopenings. Aveda, which is now 100% vegan, and Bumble and Bumble entered fiscal year 2022 with Momentum. owing to desirable innovation and rich consumer engagement from strong online performance globally over the past year. As make-up and hair care reignite, we expect our engines of growth will gradually diversify by geography and channel, initially driven by developed markets in the West and over time by emerging markets. In the United States, the fourth quarter we aligned innovation advertised pending and in-store activations as consumers returned to stores eager to explore beauty and experience high-touch services. Across brick and mortar, from regional and national department stores to specialty, multi, and freestanding stores, our business in the United States prospered, most especially in makeup and fragrance, and exceeded our expectations. As we start our new fiscal year, Bobby Brown recently debuted in Ulta Beauty. Several of our brands launched online and in store with Sephora at Kohl's and Ulta Beauty at Target. In closing, we leverage the power of our multiple engines of growth strategy to elevate the company to new heights in fiscal year 2021. We did this while leaving our values with the health and well-being of our employees as primary focus in making important progress on our social impact commitment and sustainability goals. Our success and agility in operating amid the challenges of the past year give us confidence for fiscal year 2022 as we expect volatility and variability from the pandemic to persist for some time to come. This year, we are celebrating our 75th anniversary as a company and beginning our next 75 years incredibly inspired by the opportunities of tomorrow as the leading global house of prestige beauty with the most talented employees to whom I extend my deepest gratitude. I will now turn the call over to Tracy.

Thank you, Fabrizio, and hello, everyone. I concur with Fabrizio in thanking our incredible team who have demonstrated great resilience during the pandemic. Navigating through the highly uneven recovery this past year has certainly required greater agility and flexibility, and our teams across the globe rose to the occasion, delivering superb results for the fiscal year while also establishing a stronger foundation for future growth, and profitability. We delivered exceptional net sales growth of 56% in our fourth quarter as we anniversary pandemic-related store closures in the prior year period. The inclusion of six weeks of sales from Deciem added approximately three points to growth in the quarter. Our performance also exceeded the pre-pandemic levels of the fiscal 2019 fourth quarter by 9%, driven by significant sales increases in mainland China, the skincare and fragrance categories, global online, and travel retail in Asia. All three regions grew and all product categories within each region grew during the quarter. Net sales in the Americas region rose 86% against a prior year period with almost no brick and mortar retail open. Throughout the quarter, consumer confidence in the U.S. grew as COVID restrictions abated and people resumed shopping in stores again. Our brands responded with strong programs supporting recovery, new product launches, and animating key brand shopping events like Mother's Day. Sales in the region remain below fiscal 19 levels for the quarter, reflecting in part the loss of over 900 retail locations that represented nearly 170 million in annual sales. Additionally, makeup has historically been the largest category in the region, and the category has yet to fully recoup sales lost during the pandemic. Nevertheless, we are encouraged by the sequential acceleration in North American sales, which has been better than we expected. Net sales in our Europe, the Middle East, and Africa region increased 65%. with all markets contributing to growth as COVID restrictions eased throughout the quarter. Global travel retail, which is primarily reported in this region, continued to suffer from a significant drop in international passenger traffic, but grew strong double digits in the quarter as comparisons eased and local tourism in China, especially to Hainan, remained robust. Across developed markets in the region, Store traffic has begun to pick up and retailers have become more comfortable with restocking. Emerging markets in the region saw strong retail in the quarter, driven by locally relevant holiday activations, retailer events, and online performance. Sales in the region were slightly above fiscal 19 levels for the quarter, primarily due to the resilience of travel retail. Net sales in the Asia-Pacific region rose 30%. Virtually every country contributed to growth, although the pace of improvement varied widely among the markets and a resurgence of COVID has slowed a full recovery. Sales of our products online continue to rise strong double digits in the region, driven by the successful 618 shopping festival campaign in China and including the continued strength of social e-commerce. Mainland China continued to experience robust double-digit growth with broad-based improvement across product categories, brands, and channels. Other markets in the region, including Korea, Hong Kong, and Japan, grew exceptionally against prior year brick-and-mortar lockdowns. Sales in the region were 50% above 2019 levels, largely reflecting China's rapid emergence from the pandemic last year. Net sales in all product categories grew sharply this quarter, and skin care, fragrance, and hair care drove higher sales in fiscal 2019. Fragrance led growth, with net sales rising 150% versus prior year. Luxury fragrances resonated with consumers looking for self-care and indulgence, and among Chinese consumers increasingly attracted to the category. Home, bath, and body products have also gained traction during the pandemic and helped to attract new consumers. Joe Malone London saw recovery to pre-pandemic levels in brick and mortar, and the brand's Blossom and Brit collections were popular in Asia. Standouts from Tom Ford Beauty include the recent launch of Tubaru's New and the continued strength of Bitter Peach and Rose Prick. Net sales in makeup jumped 70% against a prior year that reflected the greatest beauty category impact of COVID-19, particularly in Western markets, where makeup is the largest category. The makeup category in prestige beauty has proven to be especially sensitive to brick-and-mortar recovery due to the use of testers and in-store services by consumers. Estee Lauder saw strong growth of futurist and double-wear foundations in Asia. and MAC liquid lip color and eye products, especially mascara, outperformed. Haircare net sales grew 52% as salons and stores reopened. The launch of Aveda's Blonde Revival Shampoo and Conditioner also contributed to category growth, adding to other strong innovation programs over the past several months from Aveda. Net sales in skincare continued to thrive. They rose 42% in the quarter, driven by strong increases from the La Mer, Estee Lauder, Clinique, and Dr. Jart brands, particularly in Asia. Skin care sales growth also benefited from the addition of Decium in the quarter by approximately four percentage points. Our gross margin improved 650 basis points compared to the fourth quarter last year. This favorability reflected significant improvements in obsolescence and manufacturing efficiencies compared to the prior year impact of COVID-19 on our sales and on our manufacturing locations. Operating expenses rose 36%, driven by the planned increase in advertising and selling costs to support the reopening of retail and the recovery. Additionally, we sharply curtailed spending last year in response to the onset of the pandemic and some of these costs were reinstated, primarily compensation. We delivered operating income of $385 million for the quarter, compared to a $228 million operating loss in the prior year quarter. Diluted earnings per share of 78 cents included two cents of favorable currency translation and two cents dilution from the acquisition of Deciem. Our full-year results reflect the benefits of our strategic focus as we leaned into current growth drivers and invested behind future areas of growth while effectively managing both cost and cash. The sequential acceleration of our business throughout the year culminated in net sales growth of 11%. The strength of Chinese consumer demand both at home and in travel retail, the resilience of the skincare and fragrance categories, and the momentum we drove in our online channels all supported our growth. Our distribution mix continued to evolve even as brick and mortar reopened. Sales of our products through all online channels continued to thrive as they rose 34% for the year and represented 28% of sales. Despite the continued curtailment of international travel, our business in the travel retail channel grew. ending fiscal 2021 at 29% of sales. Among brick and mortar retail, specialty multi and perfumeries grew, while department stores and freestanding stores experienced the greatest impact from the ongoing pandemic and declined for the year. Our gross margin rose 120 basis points to 76.4%, driven by favorable pricing, lower obsolescence, increased manufacturing efficiencies, and lower costs for testers and stores, and partially offset by currency due to the weakening of the U.S. dollar. Operating expenses declined 300 basis points to 57.5% of sales. Selling and store operating costs decreased as high-service stores were either closed for part of the year or they reopened with reduced traffic and staffing levels. Additionally, in-store merchandising costs decreased while advertising investments, primarily digital media, rose faster than sales to support our brands in the recovery. We achieved significant savings from our cost initiatives, including leading beauty forward and the preliminary benefits from the post-COVID business acceleration program. And this gave us the flexibility to reinvest in necessary capabilities, absorb some of the inflation in media and logistics costs, as well as support the reinstatement of certain compensation elements that were reduced or frozen due to the onset of the pandemic. Our full year operating margin was 18.9%, representing a 420 basis point improvement over last year and 140 basis points above fiscal 2019. This year also includes 50 basis points of dilution from the inclusion of Dr. Jart and Deciem. Our effective tax rate for the year was 18.7%, a decrease of 450 basis points over the prior year, primarily driven by the geographic mix of earnings, which included a favorable one-time adjustment for fiscal years 2019 and 2020 related to recently issued GILTI tax regulations. Net earnings rose 57% to $2.4 billion, and diluted EPS increased 57%, to $6.45. Earnings per share includes $0.11 accretion from currency translation and $0.08 dilution from the acquisitions of Dr. Jart and Deciem. In fiscal 2021, we recorded $148 million after tax, or $0.40 per share, of impairment charges related to our Smashbox and GlamGlo brands, as well as certain freestanding retail stores. Restructuring and other charges related primarily to the post-COVID business acceleration program were $176 million after tax or $0.48 per share. These charges were more than offset by the one-time gain on our minority interest in Deciem of $847 million after tax or $2.30 per share. The post-COVID business acceleration program is progressing quickly with projects underway across all regions. We have closed nearly 500 doors or counters, including about 50 freestanding stores under the program in fiscal 2021. We also closed approximately 100 additional freestanding stores outside of the program and upon lease expiration, primarily in North America and in Europe. We realigned our go-to-market organizations to better reflect our evolving channel mix. We are also winding down certain brands, such as Becca and Rodin. These actions are expected to continue into fiscal 2022. For the total program, we continue to expect to take charges of between 400 and 500 million through fiscal 2022 and generate savings of 300 to 400 million before tax by fiscal 2023, a portion of which will be reinvested. We continue to focus on maintaining strong liquidity while also investing for future growth during the year. Cash generated from operations rose 59% to $3.6 billion, primarily reflecting the higher net earnings. We utilized $637 million for capital improvements, supporting increased capacity and other supply chain improvements, further e-commerce development, and information technology. We repaid $750 million of debt outstanding from our revolving credit facilities, issued $600 million of new long-term debt, and retired $450 million of debt. We used $1.1 billion net of cash acquired to increase our ownership interest in Deciem, and we returned $1.5 billion in cash to stockholders during the year via increased dividends and the reinstatement of share repurchase activities in the second half of the fiscal year. So looking ahead to fiscal 2022, we are encouraged by the increasing vaccination rates and reopening of markets around the world. We look forward to the resumption of international travel, increasing foot traffic and brick and mortar retail, and the development of our recent acquisitions. We are still mindful, however, that the recovery has evolved unevenly and some markets are seeing their third or fourth waves of COVID. including increasing effects of new more contagious strains of the virus hindering a return to normal life. This has been particularly evident in the U.S. over the past several weeks. Additionally, increasing climate and geopolitical events make it difficult to predict the corresponding impact on our business. Nevertheless, Given the strength of our programs, we are cautiously optimistic and therefore providing a range of sales and EPS expectations for the fiscal year, caveated with the following underlying assumptions. Progressive recovery in the makeup category as full vaccination rates increase and mask wearing abates in western markets during the first half of the fiscal year. beginning of the resumption of international travel in the second half of the fiscal year. The addition of new retail accounts for some of our brands should provide broader access to new consumers, notably through Sephora at Kohl's and Ulta at Target in North America, and the addition of JD.com in China Online. The inclusion of incremental sales from Deciem benefiting sales growth for the fiscal year. primarily in the Americas and EMEA regions and in the skincare category. Pricing is expected to add approximately three points of growth, helping to offset inflation risk in freight, media, labor, and commodities. Increased advertising support as markets reopen and further investment behind select capabilities, including data analytics, innovation, technology, and sustainability initiatives while maintaining good cost discipline elsewhere. We forecast increasing benefits from our post-COVID business acceleration program as it ramps up this year. Approximately $200 million of the costs we cut during the pandemic are expected to be reinstated. These primarily include hiring, travel and meeting expenses, furloughs and other leaves of absence, and compensation. In addition to these assumptions, there are a few non-operating items you should be aware of as you adjust your models. Our full-year effective tax rate is expected to return to a more normalized level of approximately 23% from 18.7% in fiscal 2021. Net interest and investment expense is expected to be around $150 million. The increase is primarily due to the comparison to last year when we recorded the benefit of our minority interest in Deciem through May 18, 2021. At that time, we acquired a majority ownership in Deciem, and we began to fully consolidate the entire business and deduct the portion of the income we don't own as a charge to net earnings attributable to non-controlling interest. This charge is expected to be less than $5 million in fiscal 2022. Net cash flows from operating activities are forecast between $3.2 and $3.4 billion. Capital expenditures are planned at approximately 5% of projected sales as we develop additional manufacturing and distribution capacity, notably for the building of our new facility in Japan. We also expect to fund more robust research and development capabilities in China and North America, increase investment in technology, and support new distribution and e-commerce for our brands. Our CapEx plan for the year also includes some spending deferred from last year. Also, beginning in fiscal 2022, we plan to introduce the concept of organic sales growth in our earnings materials, and investor presentations. Organic growth adjusts reported sales growth for both currency and changes in structure, such as acquisitions, divestitures, and brand closures. This should help provide a more meaningful understanding of the performance of our comparable business. Additionally, reflecting the level of volatility still in the environment, we are at this point widening our guidance ranges for the year. For the full fiscal year, organic net sales are forecasted to grow 9% to 12%. Based on August 13 spot rates of 1.17 for the euro, 1.381 for the pound, 11.64 for the Korean won, and 6.479 for the Chinese won, we expect currency translation to add one point to reported sales growth for the full fiscal year. As I mentioned earlier, This range excludes approximately three points from acquisitions, divestitures, and brand closures, primarily the inclusion of Deciem. Diluted EPS is expected to range between $7.23 and $7.38 before restructuring and other charges. This includes approximately 19 cents of accretion from currency translation. In constant currency, we expect EPS to rise by 9% to 12%. This also includes approximately $0.03 accretion from Deciem. At this time, we expect organic sales for our first quarter to rise 11% to 13%. The incremental sales from acquisitions, divestitures, and brand closures are expected to add about three points to reported growth, and currency is expected to be accretive by approximately three points. Operating expenses are expected to rise in the first quarter as we invest in the reopening and recovery of brick-and-mortar retail around the world, and some of the temporary cost measures start to ease. We expect first-quarter EPS of $1.55 to $1.65. Currency is expected to be accretive to EPS by 5 cents, and Deciem is forecast to have no impact. In closing, While we are cautious about the uneven recovery to date, we remain confident about the strategic actions we continue to take to support sustainable, profitable growth post-pandemic and the agility we have demonstrated this past year. On behalf of the entire Estee Lauder Company's leadership team, we give thanks to our incredible teams around the world for their extraordinary efforts to manage during this unprecedented period. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

The floor is now open for questions. If you have a question, you simply press the star key followed by 1 on your touchtone telephone. To ensure 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, then the digit 1. And our first question today will come from the line of Dara Mosenian with Morgan Stanley.

Hey, good morning, guys.

Hi, Dara.

Good morning. Can you give us an update on how much of the incremental e-commerce business and new customers you obtained during COVID are proving sticky now that we fully cycle COVID? And perhaps also just give us a sense for expectations for e-commerce sales growth in fiscal 22 and how you sort of think about that versus a COVID boost. And then longer term, can you also spend some time just discussing how you're better using or upgrading technology to drive e-commerce sales longer term? Thanks.

So let me start. First of all, I would say the large majority. of our online progress during COVID is very sticky. And keep in mind that we attracted also many new consumers. These new consumers were also among the older consumers, and they really liked it. And so we see they're coming back and they're staying, even when store reopens, obviously with a different balance. But this is definitely happening. But then in total, Our online is continuing to grow, and we expect this to continue to grow for many years to come, and the trend will not stop after COVID. Also, our online mix, which is 3pp in China, for example, which, as you heard from the prepared remark, flying, our last 18.6 event was really strong. And then retail.com, that for many retailers around the world, is booming, pure clay, which is very much growing, and then brand.com. And obviously, brand.com in the moment, the part of brand.com in the moment that is the big reopening and people go back to store will temporarily stabilize or slightly decrease, but then will start growing again. That's our expectation. So overall, all in all, our online business will continue to progress as percentage of total business over the next years.

And keep in mind, Dara, you know, we also explained in our prepared remarks that we do have some new customers. So retailer.com should pick up as well with the – with the U.S. expansion of Ulta into Target and Sephora into Kohl's, and the same with JD in China. So again, we've got, as Fabrizio said, very strong plans for online again this year and expect that it will, again, increase as a percent of our penetration of sales. As it relates to technology, we are investing quite a bit in our e-commerce platform to enable capabilities, many of which we have spoken about, whether it's virtual try-on, our data analytics that certainly support our being able to more personalize experiences for consumers. and many other capabilities. And beyond online, we continue to invest in the consumer experience in our stores and in other areas as well. So we do have a robust technology investment plan that I would expect to continue over the next couple of years. We're also investing in new technology in our new facility that is opening in a couple of years in Japan. and it will be a state-of-the-art manufacturing facility, so it will leverage quite a bit of technology also.

Great. Thanks.

Our next question will come from the line of Olivia Tong with Raymond James.

Great. Thank you. Good morning. I was wondering if you could talk a little bit more about Asia Pacific and the improvement there, and if you could talk about the drivers there. You mentioned the strength of 618. So should we expect more quarterly variability in Asia, whether because of 6-18 or 11-11, and how that could influence how the year develops? And then if you could just talk a little bit about the current trends, given another uptick in volatility associated with the pandemic. Thank you.

No, I mean, there is very, very, very big strengths in Asia-Pacific that will continue in the long term. Obviously, as we said in the prepared remarks, There's been some pandemic issues and lockdowns, places like Japan or some parts of Southeast Asia, which become an obstacle to this, so a temporary obstacle to this growth in these Pacific markets. But overall, Asia-Pacific will continue to be very strong and will be led by China and whose progress we will continue to develop in our opinion, and also that's what's happening so far. Now, what you call variability of sales, meaning up and down, so sales in Asia-Pacific, particularly in China, frankly, is more about seasonality. There is a clear seasonality, like there is in the U.S., like there is in Europe, and there are you know, holiday moments, Chinese New Year moments, moments where the Chinese population travel, moments in which they are more home, moments where there are festivities, and there are moments of the year where certain products, particularly in skincare, are more used than others. Obviously, there is important elements of seasonality. Now, the good news, we are completely on top of those. We manage seasonality with anticipation. And that's why our quarter-by-quarter a year programs are pretty well articulated and recognize consumer seasonality and trade promotionality period in a very accurate way at this point of time. So this is a leverage point rather than an issue. That's why I would not call it variability, but rather seasonality.

Thank you. Our next question will come from the line of Lauren Lieberman with Barclays.

Great. Thanks. Good morning. I was struck by the discussion of 3% contribution from pricing in 22. I know there's always some pricing in the business. It's somewhat subtle, at least from a consumer standpoint, but 3% just sounded higher than usual to me. So I was curious, you know, if it's more centered in categories and brands, are there areas where you just like the momentum is so strong that it's not an untapped opportunity or is this more in response to the, you know, broadly inflationary environment?

Well, as you mentioned, Lauren, we take pricing every year, usually in the two to two and a half percent range. We are taking approximately three percent of pricing this year. And yes, it is certainly considering the inflationary environment that we're operating in. We do take differential pricing. So that is an average across all of our markets, all of our brands. Um, and, um, and, but, uh, but so there's no specific category that we're taking any more pricing in than others. Um, but, uh, but it is tiered, uh, certainly by the tiering of our, um, of our, uh, brand portfolio.

And I just want to add, we do have the ability, uh, to price, uh, where there is the opportunity and, uh, and because of our loyalty, repeat levels, et cetera, obviously in certain markets with spaces. And so we are planning, because of the current inflationary environment, as you said, to take about half a point more prices than in the previous years, and this is completely justified. And this combined with our cost-saving programs should allow us to manage the inflation without any negative impact, neither of our advertising nor on our profitability, and that's our plan. The other thing I want to say about our flexibility on pricing is that with the kind of success we are having of innovation and the kind of very attractiveness of our innovation that can command luxury pricing very easily because of the great, great quality that we are deploying to the consumers. And the moment you have between 20% and 30% every year of this coming from innovation, you can imagine that we can decide the pricing of 20%, 30% every year based also on our intent and the power of our innovation. So this is an extra flexibility that we have in terms of managing pricings over the years.

And our next question is going to come from the line of Rob Ottenstein with Evercore.

Great. Thank you very much. Just two questions, if I can. Just a quick follow-up on the China issue. You know, we're reading a little bit about government actions in terms of cracking down on wealth-flaunting luxury, particularly in social media. And so I just wanted to make sure that that's not something that you see affecting your business. And then, you know, my deeper question is if you could give us an update on the e-commerce in the U.S., as a percent of sales and how that breaks out between your directbrand.com business and the retail.com business and any changes and trends there that you're seeing. Thank you.

Sorry, could you repeat the one on the U.S.?

Yeah, just an update on the .com business in the U.S. You know, the percent of sales, I think it was running 40%, and then how that's breaking out between the direct business and the retail.com.

Yeah. Okay, starting with China. No, we don't see any issue on China potential in our industry, on luxury, what you're saying. Actually, we see a lot of support to the trend and a lot of interest in our products as the middle class evolves. And we see also, given, for example, all the government actions that have been taken to support the development of Hainan and the duty free in Ireland, there is obviously an interest in supporting internal consumption. And somehow our industry is benefiting from the interest in being a creation of internal consumption and also bringing the consumption that in the past was outside more internally. So it's all of a positive trend. The other thing, when you speak about luxury, I just want to say we are really affordable, actually, in the sense that our products are luxury within the beauty category, but they are very affordable purchases in the context of total luxury. So we don't see any negative at this point in time on this front. On the contrary, very strong support for the long term. Going to the internal online development in the U.S., I'll turn this to Tracy for your specific question on the percentages.

Yeah. In terms of the online percentage, we ended last year a little over 40% online. Again, as you know, we started the year with some of our brick-and-mortar doors actually closed, so very, very strong online penetration. And as brick-and-mortar reopened, the online penetration lessened a bit, but we did end the year at about 40%. In terms of the retailer.com versus brand.com, we are seeing, and it varies, so we saw quite a bit of strength in retailer.com towards the second half of the year and strengthen brand.com earlier in the year. And this year, obviously, we have some very strong plans for both brand.com and retailer.com in the U.S. to continue to grow.

Thank you.

Our next question will come from the line of C Powers, Deutsche Bank.

Yes, thanks, and good morning. I was hoping you could just elaborate a bit further on what you're doing to best position your portfolio to take advantage of the anticipated recovery and makeup, and to what degree you see your businesses likely to accrue net share gains alongside that recovery. Thank you.

So we are preparing for the makeover in a sense. And we are working on all our makeup brands and in all our regions to leverage these as user locations comes back. The proof that what will be happening in the U.S. in this last quarter is very encouraging. In this last quarter, our makeup was extraordinarily strong, for example, in countries where there was a recovery reopening like the U.S. And we saw great results on MAC, on Too Faced, on many other brands. And we saw particularly the recovery start from foundation and lipsticks, which is a very good news, a very good sign. So what we're doing is, first of all, we are preparing programs, marketing programs and innovation programs and new launches for every market, making sure that we time those to the expected recovery trend. That will be gradual, but we will be, as you know, we'll be dependent on vaccination levels and on the ability to control the COVID spikes where this happens. And so we have all analytics that tell us when this timing could be in different parts of the world. And we time our marketing action, our advertising relaunch actions, our innovation actions to the different expected recovery moments. So it's a pretty complex elaboration of plan, but it's very effective. And so far it's given us the kind of results we wanted, but most importantly, the kind of return on investment that we wanted when you time it correctly. The second thing that we're doing, obviously, is making sure that we use data analytics and we use the understanding of the consumers to really tailor it to where the trend will start. And as I said, by makeup subcategories, there are very different priorities that the consumer choose in coming back to the makeup when the user location gets restated. And so we have some outstanding new capability in analytics that drive us also in maximum effectiveness in these areas. So all in all, we are very, very encouraged by the early recovery in the countries where this happened, which are mainly U.S., China, and we are well organized to follow up on the recovery gradually in the course of 2022.

And our next question will come from the line of Stephanie Wissink with Jefferies.

Hi, good morning. This is Grace on for stuff. I wanted to dig in a little on the travel retail recovery that you're expecting and how you think about the growth in market locations like Hainan. Would you expect that Hainan continues to grow once international travel resumes or is there a rebalancing where the demand is realized? Thank you.

Yeah, first of all, we expect Hainan to continue to grow in the future. And we expect Hainan's success to be relatively independent from the comeback to international travel. Let me explain that. You know, if you put in the number of Chinese consumers that have a passport, which is, you know, is above 10%, evolved into order 15, from the informations which are available, and you assume that only a percentage of those consumers with a passport travel internationally in a given year, you immediately see that the international travel is going to create consumption, but it's a certain percentage of the Chinese population. Hainan is domestic travel, so it's open to 100% of the Chinese middle class that wants to travel, and it's traveling as we speak. So the Hainan phenomenon basically goes well beyond international travel because it's domestic travel and appeals 100% to the population. That's why we believe that Hainan is here to stay and is a great opportunity for the long term that will continue to grow even when international travel will restart. As far as the international travel question, we are assuming that some international travel will gradually restart in the second semester. of our fiscal year, 2022 fiscal year. And this obviously, this is an assumption, nobody knows, and will depend not only from the pandemic development, will depend also from the government decisions on how to manage the various rules around the management of the pandemic. So we can only go with estimates, but that's what we are currently estimating. And we have seen Already some, for example, in summer in Europe, we are seeing some new travel, some new movements and some increase, but obviously relatively still very much below what was before COVID. And then in fiscal year 2023, we assume there will be a more robust international travel acceleration.

And our next question is going to come from the line of Mark Astrichan with Stiefel.

Thanks, and morning, everyone. I wanted to ask a bit of a follow-up on China and just maybe talk a bit about what's embedded in your expectations just overall for the business, for that country, for fiscal 22, and maybe in the context of things that we've seen around slowing sales on Tmall and discuss the – commentary about expanding on JD and just how does that fit in? And you talked about different demographics. So if you could elaborate a bit on what you're hoping to accomplish there, that'd be helpful. Thank you.

So we expect the market in China to continue to grow double digit. And we are very, very optimistic on the strengths of this market, as well as on our position with the consumers in this market. We expect to see a continuous acceleration of online, which is already 50% of mainland China business today and further growing. We see the possibility of continued growth in the existing platforms like Timo, which is for us, for beauty, for our brands, very successful and a great partner that we will continually to develop and manage with also specific products, specific brands, specific new brands in the future. And then we see an acceleration of brand.com and in the marketing models around the brand.com in which we are investing and also improving our technologies to keep it aligned with the extraordinary development of technology in China. and the ability to make this technology very appealing to the consumers. And so we keep learning and keep evolving in this area. And then there are certain brands that are appealing to certain demographics that also decided to expand in JD and just now in July. And so we're very optimistic with also the results of this increased coverage. of consumers that we are getting. And there will be more opportunity in the future. It's a very, very dynamic market and competitive market which keeps evolving. And our principle is always to stay ahead of the evolution, which admittedly is not easy in such a dynamic market. But we are trying to stay always ahead of the evolution and anticipate change. And we get helped in this by our extraordinary Chinese leadership team that keep us abreast of all what's happening and help us anticipating all the trends. And we get help by our compass that we discuss in our time, which give us a good point of view on what will be the evolution in the consumer preferences in every market, but particularly in China.

And our next question is going to come from the line of Aaron Murphy with Piper Sandler.

Great. Thanks. Good morning. My question is for Tracy. If you could talk a little bit more about what you expect for the sales and the profitability rebound in the North American segment in fiscal 2022, particularly when you're kind of layering on some of the new distribution partnerships, both Kohl's and Sephora and Ulta Target. And then I do have a follow-up for Fabrizio on Deciem. I know that Ordinary has been driving the large success to date, but they do have a Curious on your plans to scale some of them. Thank you.

Okay, let me start with North America. You know, we're very optimistic given the trends that we saw in the fourth quarter and that are continuing into the first quarter as it relates to North America. So people are coming back to stores. People are still shopping online. And certainly... Um, the, um, the, the new retail partnerships of our retail partners, um, you know, we are expecting, um, will, um, will, um, also, uh, contribute to, to growth this year. Um, but you know, across the board, the, the team has, has really been working on a terrific innovation. Um, we're increasing advertising in North America, um, in, um, in fiscal 2022. So we expect both top line growth and margin expansion. in North America related to our strategies in 2022.

And on Deisium, you are absolutely right. Deisium is a company with an extraordinary portfolio of brands. The Ordinary is today the biggest and is continuing to be very successful and growing. It's an extraordinary brand. But there are other brands like Neod, which is more science-based, that we intend with the Deisium team to continue developing. And also Daesium is adding to Estelode company the capability of an extraordinary incubation model and ability. So we definitely intend to continue incubate new brands, develop new ideas, and continue with the Daesium philosophy of challenging the status quo and seeing new different point of views to be offered to the consumers and develop extraordinary new brands in the long term. But in this moment, the opportunity for the ordinary to continue to grow, to continue to expand is frankly amazing and is obviously the priority we are focusing on in fiscal year 2022.

Thank you so much. And our next question is going to be from the line of Chris Carey with Wells Fargo.

Hi, thank you very much. I just wanted to follow up on the disclosure around travel retail being 29% of fiscal 21 sales. Can you just confirm that? And then that would imply that you had a pretty big acceleration in Q4 in the travel retail business. And then does that mean that the continental Europe business declined in the quarter? So just any clarification just around that. And then just longer term, This decision to partner with Ulta at Target, support at Kohl's, this is really an expansion of distribution, perhaps into some channels where you've been less comfortable going in the past, but these brands are being curated in a different setting. What are your thoughts on that in other channels, say Amazon or other online forums over time? So thanks so much for those.

Yes, so I can confirm travel retail in terms of the percent of mix at 29%. We did have strong growth in travel retail in the fourth quarter. And, you know, in terms of the EMEA region, we did see growth as well in the EMEA region, excluding travel retail. The UK was a little challenged, but But as we mentioned in the prepared remarks, all regions grew in the fourth quarter.

Yeah, and the other thing I want to say on travel retail on the long term, as I said, is the travel retail has this addition of the domestic travel in China, which is a very important addition. And so the developments of the business with the Chinese consumers is extraordinary. And then the Chinese consumer, depending on the period of the year, their choices, some of them would travel, travel to Hainan, buy there, others would buy in their cities. And so you will see this spending growth of the Chinese consumers in the China region or in the private retail Hainan, depending on what the Chinese consumer decide to do. Our strategy is very simple. we are going to serve the growing demand of Chinese consumers wherever they choose to shop. And so we are online, we are in the outstanding quality department stores in China, we are in Hainan, and in all these areas where they shop, we tend to be present with outstanding execution, great luxury quality of services, and to really give justice to our elevated luxury positioning in these positions. And that's the strategy, to cover the Chinese consumer shopping. And as far as when the international traveling will restart, we'll obviously also cover the international travelers in the best possible way. In terms of your second part of the question, I would like To clarify one thing, I think fiscal year 2021 was an extraordinary year to build our luxury position and to elevate our consumer expression in a very luxury way. If you think that the core investment that we have done has been in elevating the brand building, the luxury experience online, and that we have been able to bring online a lot of the luxury experiences services in the past were only in the best department stores or in the best brick-and-mortar locations. So this now means that we have elevated to the best possible experience about 30% of our business. Then, as I explained, our best expression of luxury is frankly in TR. It's been for since a long time, particularly in the best airports of the world, but now it's in Aynan. where there is the best expression of the brands in the world. And as you said, it's another 29%. So we have elevated our luxury expression in more than 60% of our business around the world. And that's the key areas where we are invested. We have also taken the opportunity where there is the opportunity to source from mass and to continue growing the prestige segment to bring some of our brands that have the power of sourcing from mass closer to where the mass consumers are choosing to shop and want to have the opportunity to upgrade to different quality. And that's where some opportunities like the UltraTarget and the Sephora calls offer us the opportunity to further source from us and further serve more consumers and consumers that we didn't access before with our best experience and best quality products.

Thank you. And that's all the time we have for questions and answers. With that, I would like to conclude the Q&A portion of today's call. If you were unable to join for the entire call, a playback will be available at 1 p.m. Eastern time today through September 2nd. To hear a recording of the call, please dial 855-859-2056. Passcode is 6687487. Again, dial 855-859-2056 and passcode is 6687487. That concludes the Estee Lauder conference call. I would like to thank everyone for their participation, and I wish you all a good day.