Estee Lauder Companies, Inc. (The)

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2022 First Quarter Conference Call. Today's call is being recorded on 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 Freyda, President and Chief Executive Officer, and Tracy Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic results exclude the non-comparable impacts 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 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 that 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. We are grateful you have joined us today. We deliver excellent performance to begin fiscal year 2022, reinforcing our optimism in the opportunities of tomorrow as we discussed with you in August. Our multiple engines of growth strategy enabled us to excel amid continued volatility and variability from the pandemic. Organic sales rose 18% and adjusted diluted earnings per share grew an even stronger 31%. Encouragingly, relatively to the pre-pandemic first quarter of fiscal year 2020, our business is 13% larger on a reported basis and more profitable. We achieved these outstanding results with increasingly diverse growth engines, as we expected. By virtue of our dynamic strategy, we could act locally amid the complexity of the pandemic to both create and capture demand. The growth engines of makeup developed markets in the West and brick and mortar reunited and complemented momentum in skincare, fragrance, mainland China, travel retail in Asia Pacific, and global online. Thirteen brands contributed double-digit organic sales growth, demonstrating the breadth of strengths across our portfolio. Estée Lauder and MAC drove makeup emerging renaissance, while La Mer and Clinique delivered standout results in skincare. Impressively, skincare solidly outpaced its pre-year organic sales growth performance despite having the far toughest comparison among the categories. Fragrance soared double digits, driven by Tom Ford Beauty and Jo Malone London. Let me share a few highlights by brand. Estée Lauder advanced planning for the make-up renaissance delivered significant sales growth. As social and professional user education resumed in certain markets, the brand was well-positioned with compelling innovation, superb merchandising, and on-point communication. Its double-wear and futurist foundation franchises rose strong double digits, while its new pure-color whipped matte lipstick was a hit. MAC strategically engaged consumers to drive performance in makeup. In the Americas and EMEA, excellent results from in-store activations and regional Mac the Moment campaigns combined with desirable innovation like luster glass, sheer shine lipstick, and magic extension mascara. The brand's new omni-channel capabilities, which leverage its freestanding stores, also contributed to the strengths and demonstrate a new capability for Mac to benefit from going forward. La Mer performed magnificently and led the company, with sales rising strong double digits. Its new dehydrating infused emulsion expanded our portfolio of east-to-west innovation, captivating consumers in every region. The product's successes are many, as it welcomed new and younger consumers, as well as men, into the brand and created a powerful halo benefit for La Mer's skincare portfolio. It is a striking example of the innovation gains we can achieve when the power of our data analytics combines with our creative talent and R&D. La Mer's iconic Crème de la Mer prospered as a new global campaign focused on its most rising benefit realized terrific initial results. Clinique thrived in skincare from the strength of its heroes. Moreover, its new smart clinical repair wrinkle correcting serum with powerful clinically-led claims and compelling before and after visualizations extend the Clinique winning streak with innovation and further demonstrated the brand ability to be highly relevant for consumers of all ages. In makeup, Clinique's skincare authority drove growth in complexion-led subcategories, while in lip, the brand Brilliant leveraged black honey viral sensation on TikTok to expand its consumer base, especially among Gen Z. Dezium complemented our organic sales growth in skincare with its coveted vegan brand, The Ordinary. Dezium is known for its transparency, which has enamored it with consumers. And in the first quarter, it launched the insightful Everything is Chemicals campaign. And the new regimen builder by The Ordinary on brand.com realized spectacular adoption, further enhancing the brand-powerful online ecosystem. Fragrance momentum continues with stellar double-digit performance in every region. powered by hero products and innovation from Tom Ford Beauty, Jo Malone London, and our artisanal offerings. We are excited for the Estée Lauder brand launch of its luxury collection in the second quarter as it expands our portfolio in the high-growth segment of fragrances. Our fragrance category benefits from diversification among subcategories as well as regions, with outstanding performance from both historically strong markets for fragrance and emerging fragrance opportunities. The self-care rituals related to scent, which were embraced during the pandemic, continue even as social and professional use education resume. Of note, Tom Ford Beauty performed strongly in both fragrance and makeup, such that the brand was among our top performers in the quarters. Its new umber leather perfume and heroes, Hood Woods and Lost Cherry, fueled the brand's success. Our growth engines also diversified geographically, led by developed markets in the West. Our business in North America executed with excellence to deliver strong double-digit organic sales growth, powered by readiness for makeup's emerging renaissance, ongoing strengths in skincare, fragrance, and recovery in healthcare. Strategic go-to-market initiatives supported by on-trend innovation, increased advertising spending, and expert in-store virtual services delighted consumers. Our expanded consumer reach enhanced these initiatives, as Bobbi Brown launch in Ulta Beauty exceeded expectations. and we are encouraged by the early results of the new Ulta Beauty at Target and Sephora at Kohl's relationships. In Asia-Pacific, many markets faced COVID-induced lockdowns and temporary store closures, which pressured performance. Despite this, the region still grew 10% organically, driven by strengths in Greater China and Korea. Mainland China achieved double-digit organic sales growth owing to skincare and fragrance, with online and brick-and-mortar both higher. We launched locally relevant innovation, which proved highly desirable, while we also increased advertising spending, strategically extended our consumer reach to match success on JD, and designed successful activation for Chinese Valentine's Day. We continue to invest in the vibrant and compelling long-term growth opportunity of mainland China, led by our talented local team. We are enthusiastic for our new innovation center in Shanghai to open in the second half of this fiscal year. This new world-class innovation center will be the first of its kind for our company. With it, we will have a unique ability to grow and build on our market, and consumer insights to develop exceptional products to meet and surpass the needs and desires of Chinese consumers. What is more, we are seeing the benefits of recent investment in online fulfillment, which have led to higher service levels and better inventory management while setting the stage for expanded omni-channel capabilities in the market. From a channel perspective, globally, brick and mortar grew strongly in markets which are gradually emerging from the latest waves of COVID-19. We realized excellent results across the board in brick and mortar, most especially in the Americas and EMEA. Our brands created excitement in store with enticing high-touch services and unique activations. We are encouraged by improving trends in the productivity of brick and mortar, owing to both increased traffic and our strategic actions, including those under the post-COVID business acceleration program. As brick and mortar reignites, our global online business continues to showcase its tremendous promise, with impressive organic results, despite significant organic sales growth in the year-ago period. online grew to be nearly double the size on a reported basis of the pre-pandemic first quarter of fiscal year 2020. Many markets capitalized on the remarkable new consumer acquisition trend of the pandemic to deliver sustained gain in repeat purchases. As we seek to engage with consumers in innovative ways, we advanced our work with Instagram, Snapchat, TikTok, WeChat, and others to capitalize on exciting trends in social commerce. We also deployed a technology solution which enables brands to better customize consumer outreach by leveraging data to merchandise and personalize communication. This is leading to higher conversion rates for new consumers and a deeper level of relationship building after the initial purchase to foster retention. Initiatives such as this position us well to realize even greater success with trial and repeat. We continue to invest in online to strategically extend our consumer reach and realize promising results. For example, in the first quarter, La Mer launched on Lazada in Southeast Asia to tremendous success. We differentiated merchandising, unique services, and prestige packaging, making it one of the platform's biggest brand launches ever. Our relationship with Lazada expanded in the current quarter with Jo Malone London, the boot. Before I close, I wanted to share that today we will release our fiscal year 2021 social impact and sustainability report. We are incredibly inspired by the achievements of our employees globally. The report highlights initiatives across key areas, including inclusion, diversity, and equity, climate, packaging, social investment, responsible sources, and green chemistry. I'm particularly proud of our support to employees globally who face financial hardships due to COVID-19. The ELC CARES Employee Relief Fund awarded nearly 14,000 grants and distributed nearly $8 million through June 30, 2021. Here are a few among the many other highlights of the report. We have continued to contribute to a low-carbon future. For the second year in a row, we sourced 100% renewable electricity globally for our direct operations and achieved net zero Scope 1 and Scope 2 emissions. The company also made strong progress in its science-based targets for Scope 1 and 2 and made efforts toward meeting its Scope 3 science-based targets. We achieved our existing post-consumer recycled content goal ahead of schedule and announced a more ambitious goal to increase the amount of such material in our packaging to 25% or more by the end of calendar year 2025. We also committed to reduce the amount of virgin petroleum plastic in our packaging to 50% or less by the end of calendar year 2030. On the last few earning calls, I discussed actions we are taking to make more progress on our commitments for racial equity as well as women advancement and gender equality, which are reflected in the report. We also deepened our work by further aligning the strategy of the Estelode Company's charitable foundation to identify and support programs at the intersection of climate, justice, human rights, and well-being, with a focus on equity, building upon our legacy of founding girls' education and leadership programs. In the beginning of fiscal year 2022, and aligned with our social impact commitments, We were pleased to announce a three-year partnership with Amanda Gorman, activist, award-winning writers, and the youngest inaugural poet in U.S. history. The Estelode companies will contribute $3 million over three years to support Writing Change, a special initiative to advance literacy as a pathway to equality, access, and social change. In addition, Mrs. Gorman will bring her voice of change to the Estelode brand, debuting her first campaign in the second half of this fiscal year. In closing, we delivered outstanding performance to begin the new fiscal year amid the volatility and variability of the pandemic, while continuing to invest in sustainable long-term growth drivers. We are focusing on fundamental capabilities for product quality and the consumer-centric elements of acquisition, engagement, and high-touch experiences and services. We are doing this while improving our cost structure, diversifying our portfolio and its distribution, investing behind the best growth opportunities, and living our values. Our confidence in the long-term growth opportunities for global prestige beauty and our company is reflected in the announcement today to raise the quarterly dividend. I am forever grateful to the grace, wisdom, and ingenuity of our employees globally who are making us a stronger company each and every day. I will now turn the call over to Tracy.

Thank you, Fabrizio, and hello, everyone. We are off to an outstanding start with first quarter net sales growing 18% organically, driven by the nascent recovery in the Americas and EMEA during the quarter compared to a more difficult environment in the prior year. Global logistics constraints caused some retailers, primarily in North America, to order earlier to ensure popular sets and products would be on counter for holiday. We estimate that this contributed approximately 1.5 points to our first quarter sales growth that otherwise would have occurred in the second quarter. The inclusion of sales from the May 2021 Deciem investment added approximately three points to reported net sales growth and currency added just over two points. From a geographic standpoint, organic net sales in the Americas climbed 27% as COVID restrictions eased throughout the region. Brick and mortar retail grew sharply across all formats compared to the prior year period when many stores were temporarily shut down. Distribution in Kohl's with Sephora and in Target with Ulta Beauty began its phased rollout to initial stores and online in mid-August, with minimal impact on net sales growth for the quarter. With the strong resurgence of brick and mortar traffic, Online organic sales growth in the Americas declined single digits against a sharp increase last year, while organic online penetration remained solid at 31% of sales. The inclusion of sales from Deciem added about nine points to the overall reported growth in the region. In our Europe, the Middle East, and Africa region, organic net sales rose 19%, with virtually every market contributing to growth led by the emerging markets in the Middle East, Turkey, and Russia, as well as the UK. Most markets throughout the region saw COVID restrictions lifted, and some tourism resumed during the peak summer months. By channel, the region saw more balance between brick-and-mortar and online growth. All major categories grew this quarter, and the region saw the strongest growth in fragrance and makeup, as social occasions increased. Our global travel retail business grew double-digit as China and Korea continued to be strong. Internal travel restrictions during the quarter in China slowed Hainan sales temporarily, but restrictions lifted in early September, and traffic rebounded. Retailers also responded to the August dip by driving post-travel consumption online. Summer holiday travel in Europe and the Americas picked up, but international travel still reached only 40% of pre-COVID levels. In our Asia-Pacific region, organic net sales rose 10%, driven by Greater China and Korea. The region overall experienced higher levels of COVID lockdowns this quarter compared to last year's quarter due to the rise of the Delta variant, although online remains strong. Sales growth in mainland China was somewhat slower due to COVID restrictions during July and August, and the pace of online sales growth slowed following the successful 618 programs last quarter and in anticipation of the 11-11 shopping festival. As we've mentioned before, these key shopping moments have created some additional seasonality in our business in this region. More than half of our brands in virtually all channels rose double-digit in mainland China. Hong Kong and Macau were bright spots this quarter. They benefited from strong new product launches from La Mer and Jo Malone and successful marketing campaigns from several other brands. From a category perspective, net sales growth in fragrance jumped nearly 50%. Virtually every brand that participates in the category contributed to growth, with exceptional double-digit increases from Tom Ford Beauty, Jo Malone London, and Lollabo. Perfumes and colognes led the category growth, and bath, body, and home fragrances continued to perform well. Net sales in makeup rose 18% as markets in the Americas and Europe began to recover from COVID shutdowns. We are encouraged by the sequential improvement in makeup versus pre-COVID levels, However, makeup sales in the quarter were still 19% below two years ago. Nonetheless, Estee Lauder foundations continued to resonate strongly with consumers, and MAC leaned into the makeup recovery with a number of fun and compelling campaigns. Skin care sales remained strong during the quarter. Organic net sales grew 12%, and the inclusion of sales from Deciem added six percentage points to reported growth. Nearly all of our skincare brands contributed to growth, although Estee Lauder had a tough comparison with the prior year launch of its improved advanced night repair serum. Our hair care net sales rose 8% as traffic in salons and stores in the U.S. and Europe began to return. Both Aveda and Bumble and Bumble saw growth in Hero products as well as continued strength from innovation. Our gross margin declined 100 basis points compared to the first quarter last year. The positive impacts from strategic pricing and currency were more than offset by higher obsolescence costs for both basic and holiday product sets and the inclusion of Deciem. Operating expenses decreased 240 basis points as a percent of sales. Our strong sales growth was partly due to earlier orders from some North America retailers concerned about logistics constraints and costs related to these sales are expected to be incurred in our second quarter. We do continue to manage costs with agility, realizing savings from our cost initiatives while also investing to support a continued brick-and-mortar recovery, as well as our strategic initiatives. Our operating income rose 32 percent to $941 million, and our operating margin rose 140 basis points to 21.4 percent in the quarter. Diluted EPS of $1.89 increased 31 percent compared to the prior year. During the quarter, we used $81 million in net cash flows from operating activities, which was below the prior year. This reflects a more normalized first quarter, where we typically have seasonally higher working capital needs. We invested $205 million in capital expenditures as we ramped up our investment to build the new manufacturing facility in Japan. and we returned $749 million in cash to stockholders through both share repurchases and dividends. We also announced this morning an increase in our quarterly dividend. So now let's turn to our outlook. We are encouraged by the green shoots we are seeing around the world, even in the context of an environment of increased volatility. Our strong performance reflects our ability to navigate through the volatility while leveraging our multiple engines of growth. At the same time, we are mindful that recovery is tenuous and likely to be uneven. Nevertheless, we are cautiously optimistic, and our assumptions for fiscal 2022 remain consistent. We continue to expect an emerging renaissance in the makeup category as restrictions are safely lifted and social occasions increase. We welcome the resumption of some travel in the Americas and EMEA in the first quarter, And as intercontinental restrictions are lifted, we expect international passenger traffic to build toward the end of the fiscal year. We began taking strategic pricing actions in July, and overall, pricing is expected to add at least three points of growth, helping to offset inflationary pressures. On the cost side, we plan to continue to increase advertising to support our brands and drive traffic in all channels, Selling costs are expected to rise to support the reopening of brick and mortar retail. We also continue to invest behind key strategic capabilities like data analytics, innovation, technology, and sustainability initiatives. As you are all aware, global supply chains are being strained by COVID and its related effects in some markets resulting in poor congestion, higher fuel costs, and labor shortages at a time when demand for goods is rising. This is causing us to experience inflation in freight and procurement, which we expect to impact our cost of goods and operating expenses beginning next quarter. Based on what we see through October, the expected benefit of pricing combined with good cost discipline elsewhere are enabling us to maintain our expectations for the year. For the full fiscal year, organic net sales are forecasted to grow 9% to 12%. Based on rates of 1.163 for the euro, 1.351 for the pound, and 6.471 for the Chinese yuan, we expect currency translation to be negligible for the full fiscal year. 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 $0.04 of accretion from currency translation and $0.03 accretion from Deciem. In constant currency, we expect EPS to rise 11% to 14%. At this time, we expect organic sales for our second quarter to rise 8% to 10%. The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about three points to reported growth, and currency is forecasted to be neutral. Operating expenses are expected to rise in the second quarter as we support holiday activations and the continued recovery of brick-and-mortar retail around the world. Additionally, the prior year quarter included some benefit of government subsidies, which are not anticipated in the current year quarter. We expect second quarter EPS of $2.51 to $2.61, Both currency and the inclusion of Deciem are expected to be immaterial to EPS. Notably, our EPS forecast also reflects a 23% tax rate compared to a 15.9% in the prior year when we benefited from certain one-time items. In closing, we are pleased with the terrific start to the year and are proud of the continued efforts of our global teams. We remain confident in our corporate strategy with its multiple growth engines to drive sustainable, profitable growth. That concludes our prepared remarks. We'll be happy to take your questions at this time.

Thank you. The floor is now open for your questions. If you have a question, you simply press the star key followed by the digit 1 on your touchtone phone. To ensure that everyone can ask their question, we will limit each person to one question. Time permitting, we will return you for additional. Just queue up again by pressing the star key and the digit 1. And our first question today comes from Erin Murphy, Piper Sandler.

Great. Thank you. Good morning. I guess my question is around the supply chain, Tracy, for you. If you could talk a little bit more about your ability to get product to the end markets in a timely manner into holiday, and are you seeing any major shifts in product launches? And then maybe if you can share, if you think about the higher OPEX, you know, how you're balancing air freight versus ocean freight currently. Thank you so much.

Yeah. Hi, Erin. You know, we are seeing some supply chain impact, as I said in our prepared remarks. We have experienced some air freight, and we have experienced some delays. But by and large, we're in very good shape for holiday. Our holiday sets, you know, we had anticipated some of the supply chain challenges earlier in the year when clearly our supply chain and more publicly there were discussions about supply chain challenges. And so we did order some products early. We produced some products early and we landed early. many of our gift sets early. And that set us up pretty well for Q2. So we are experiencing some inflation in transport. We're managing it as best we can. One of the things that, you know, certainly we have the benefit of is we are a luxury company, so we do have pricing power. And we have pricing power not only in our inline products, but also in our innovation as well. So we do have the opportunity and have taken the opportunity to offset some of the cost inflation with some of the pricing that we've taken this year.

And our next question is going to come from the line of Lauren Lieberman with Barclays. Great.

Thanks so much. Good morning. Really curious to hear a little bit more about MAC. I would certainly have expected it to be key in the beginning of this makeup resurgence, but was curious what you could tell us in terms of progress on brick-and-mortar footprint in North America and EMEA, how that interacts with the online presence, and how you think about the profit model for that brand or maybe from the makeup category going forward. We're one quarter into the beginning of a recovery, so I recognize that looking at operating margins for the division isn't really fair game yet, but interested to hear how you think that can evolve over the next whatever the appropriate time frame, you know, 12 plus months or so.

Yeah. Hi, Lauren. So you faded out at the very beginning. Your question is about what specifically?

About Mac.

Oh, Mac.

Mac and how the brick and mortar footprint, you know, where you've gotten to so far, how that foots with online presence and how you're thinking about the business model going forward and what that means for profitability.

Yeah, no, you know, as we announced last year in our post-COVID acceleration program, you know, we did take the opportunity last year to close some stores and some additional stores will close this year. And not only freestanding stores, but, you know, there are some counters as well that MAC has pulled out of. We were encouraged at the end of last year and encouraged through the first quarter with MAC performance in both the Americas, so both North America as well as Latin America, and also EMEA. So we really, with a return to brick and mortar, as we had indicated before, we saw higher productivity of the remaining brick and mortar doors that we had opened. And we saw a bit of softness, more in North America than in EMEA, but, you know, a bit of softness in online as traffic returned to brick and mortar. We think that will normalize out a bit in Q2 and we'll see a bit more balance. But, you know, as I think all of us can imagine, I think consumers were very excited about going back to brick and mortar stores in markets where restrictions were lifted and people felt more comfortable going out and socializing.

Yeah, and I can add that also Mac has been a good start in the ultra-target experience. It's a great start in the preparation of the holiday season, and the brand is doing very well online and is one of the brands that is benefiting from the service acceleration online experience. both in U.S. and in EMEA. So overall, very good progress on MAC, obviously, as you would expect in the context of the make-up acceleration for consumers in general.

Thank you. Our next question comes from the line of Nick Modi with RBC Capital Markets.

Yeah, hi. Good morning, everyone. I had a question on consumer behavior, just on online markets. what you're seeing there in terms of stickiness, retention, obviously that's an important channel from a profitability standpoint and consumer engagement. So just wanted to understand that. And then also, you know, Fabrizio, if you think about what happened during the pandemic is consumers were migrating to well-known brands, you know, exploration kind of came down a bit, but I suspect that that's starting to happen now as consumers are getting back out and exploring different brands. And just wanted to get your perspective on that dynamic, if that's what you're seeing and, How does Estee better prepare in the future to deal with all of these upstart brands that are starting up on social media? Thank you.

So I think there are two questions. First of all, what we see online, obviously online is doing pretty well. On a two-year stack, we've doubled it. And so it's a very strong acceleration versus two years. And we see the progress to continue and the growth to continue. Obviously, in the moment where there was the opening of brick and mortar, the amount of growth online has slowed down, but the continuous growth is what is really encouraging. So, the most important part of your question is what happened to the consumer's behavior. So, what we saw during COVID, that the consumers that were already online before, like younger consumers, continue to be online even more intensively. But there were many new consumers that just appeared online during the COVID period. There were well, you know, more the ageless consumer, the more adult consumers. Now, this consumer really enjoyed it, so they are staying online. And so that's what showed that the online continues to grow, even when brick and mortar opens up. But obviously, the two channels grow to get rebalanced in this situation. So very optimistic for online. The other thing that in online continues to grow is that there are very different channels with different level of growth. And We are growing in every single channel. And we are growing in 3PP. We are growing in brand.com. We are growing in retail.com. We are growing in the pure place. And these are very different by region because in every region, one of these channels is stronger than the others. So the combination of the global online growth is continuing to be pretty exciting. And we count on this to continue even when brick and mortar will be fully, fully recovered. And as a result, we have reached already 28% of our business in online, and this will gradually continue to grow over time. So very, very strong. In terms of, sorry, your second question, because it was a separate question on consumer behaviors in Asia?

Yeah, no, it was around exploration, you know, kind of died down during the pandemic situation. are you seeing consumers explore new brands again? And what is FAA doing to, you know, try to make sure that doesn't become too much of a risk going forward?

You know, I think the exploration of newness in the world of beauty will continue, will never stop. And personally, I don't have any data point that suggests it was dependent on COVID. The exploration is not only about new brands, but the exploration is about the newness of the existing brands. In fact, Our percentage of newness continues to be very, very high, and our innovation program continues to be super exciting. We continue to be in the 30% of new products per year, which is extraordinary, and it's been a huge progress in the last years. So we continue to see consumers to be interested in innovation, and we continue to make our innovation program one of the best drivers of growth globally.

Thank you. Our next question is going to come from the line of Dara Musinian with Morgan Stanley.

Hey, guys. Good morning.

Good morning.

Good morning. So just a question on guidance. Clearly, you came in better than expected in terms of fiscal Q1. You mentioned some green shoots, obviously a makeup recovery, America's recovery, Asia, some softness with some of the government lockdowns, inter-quarter, but sounded like that's getting better. So I'm just trying to understand the unchanged local currency top line guidance for the year. Is there something specific that's giving you more caution as you look at the balance of the year? Is it more just some conservatism given it's early in the year? How do you sort of think about that relative to the Q1 top line delivery and some green shoots? And maybe specifically also you can touch on the 11-11 shopping festival in China and what you're seeing there in terms of initial signs heading into that festival. Thanks.

Yeah. Yeah. Thanks, Sarah. So in terms of, you know, we are encouraged, obviously, as we should be by our Q1 performance, you know, we're still only a quarter in, as you mentioned it. We did have some early shipments in the quarter that obviously came out of the second quarter. So some of the growth, as we mentioned, about a point and a half was related to that. But as we look at the balance of the year, we are also, while we're seeing encouragement, there's still a lot of volatility in the market. We did have some markets you know, unexpectedly that were shut down in the first quarter. You know, we are still managing through this pandemic. And so we are, you know, we believe that certainly as you look at Q2 on a two-year stack basis, it is, and really versus pre-pandemic, it's really quite strong. And again, you're seeing some of the seasonality related to 11-11 and continue to impact Q2, and that's reflected in the guidance that we've provided. But we feel that the guidance that we've given for the year is incredibly strong. The only difference between the guidance that we gave last time and this time is currency. Our outlook on currency is a bit less, so that's the one point change in the the guidance that you see. And then from a reported EPS standpoint, our guidance actually, on a constant currency basis, has improved quite a bit. So I would say we are seeing green shoots. We are expressing confidence in the guidance that we are providing quite a bit when you actually look at it from an EPS standpoint, even with all of the things that we're navigating through as it relates to transport, et cetera. And that goes to the choices that we're making as an organization in terms of where to invest and where not to invest, along with the pricing actions that we're taking as well.

Thank you. Our next question is going to come from the line of Steve Powers with Deutsche Bank.

Yes, hey, thanks. First, just to clean up, I apologize if I missed it, but were the early holiday sales in North America that you mentioned in the first quarter skewed at all to any particular brand or product category? That would be helpful. And what I really wanted to ask you about was sort of picking up on something Dara mentioned, but I'm not sure you addressed, Tracy, was just the relative softness in China, Hainan, and Asia that you experienced in the quarter against the curtailed mobility backdrop. versus the improvement that you saw in September, and what I hear is enthusiasm entering December and around the 11-11 holidays. So maybe you can just expand a little bit on how trends evolved through the September quarter, and then what you're expecting in that Asia-Pacific region as we go through fiscal 2Q. Thank you.

Yeah, no. So, Steve, in terms of the early shipments, you know, obviously our larger brands would have comprised, you know, most of the larger, you know, most of the sales dollar volume in terms of those shipments. But it was really across the board. And, again, both we and our retailers wanted to make sure that we had Our holiday programs as well as some of our basic product in store, recognizing the severe constraint that is being projected as it relates to transport during this holiday season. So we feel very good about that. In terms of Asia Pacific, inclusive of China, but other markets as well, We did see some intermittent shutdowns in Asia, and that did include some traffic to Hainan being a bit curtailed in the July and August timeframe and a bit into the early part of September. We saw, as we mentioned in our prepared remarks, Hainan pick up quite a bit when those travel restrictions were lifted almost immediately. So that is a positive sign, and we are you know, still quite encouraged with respect to China and the performance that we expect to see certainly for the balance of the year, you know, both in China and mainland China and with Chinese consumers wherever they shop.

Thank you. Our next question will come from the line of Stephanie Wissink with Jefferies.

Hi, good morning. Thank you for taking my question. This is Grace, my Converse staff. I'm wondering if you could talk a little bit about the strength that you're seeing in fragrance and just touch on the sustainability there. Is there anything assumed in your guidance for fragrance? And then also on a similar vein, if there's anything assumed for the makeup recovery in the second half and guidance. Thank you. Yeah.

You know, we see obviously a very strong fragrance market and we see great growth in every single region. So it's good. We see particularly strong fragrance traction in the high-end fragrances, in what we call the luxury artisanal part of our portfolio. This is really outstanding. So brands like Jo Malone, Tom Ford, Le Labo, Killian, Frederic Malle. And we believe this will continue. This is a trend we have identified. some years ago, and we have focused the growth of our portfolio and our innovation on this kind of highly sophisticated fragrance experiences. And what we have seen that during COVID, this trend has accelerated. The consumers are even more interested. The other interesting thing is during COVID, the element of our fragrance brands that wear, for example, you know, home, like candles or personal cleansing or pampering parts of the lineup beyond the fragrance also was accelerating. And this acceleration continues. So the positives that consumers have learned, also the possibility of the pampering in-house element. of products that these brands provide, they continue to buy them also after the COVID period or this COVID thing. So the entire fragrance brands are strong, the fragrance category is strong, and we expect to have a good holiday season in this area. We expect continuous growth over time.

Thank you. Our next question comes from the line of Andrea Teixeira with JP Morgan.

Thank you. Good morning, and congrats on your results. Can you comment on the cadence of the quarter in Asia Pacific and how you exited? It seems that you had a pickup in China consumption towards the end of the quarter, and Tracy, you mentioned that in your prepared remarks, and I think to that question, but is the deceleration in the fiscal second quarter a function of normalizing the pull forward or more how conservative you're seeing things happening. And then obviously you have, this is an analogy that you have been calling for 11-11. So if you can just kind of elaborate more on that, I would appreciate, thank you.

Yeah, I mean, we achieved double-digit growth in China this quarter. So very strong double digits, also on a two or three years stack basis. So despite the restrictions that we saw in July, and in August. So the Chinese consumer really is strong, and we are serving them also with a variety of locations, meaning in every channel. We see the growth online. We see the growth in brick and mortar. We see the growth in Hainan. And our key idea is to serve the Chinese consumers wherever they are and to serve them in the best possible way. So we manage this with agility depending – What is the commercial model that is emerging in China? We focus more on one channel than on another, also depending by the season and by the moment. Also, skincare, which I think is a great sign of strength. Skincare grew strong double-digit despite the very tough comparison with the previous year, where in our case, we launched the advanced nail repair relaunch. So it was a very big innovation in the base period. So brick and mortar in China also saw very strong growth. And our business online grew double digit, despite the fact that in quarter one online is a bit normally sandwiched between the 618 big event and the 1111 big event. But despite that, we grew double digit. And the long-term fundamental on the market in closing, namely the large and growing middle class, with increasing spending per person, all these remain intact. And so the key idea is to be able to focus on the Chinese consumer in whatever channels they choose to shop in, depending on the moment of the year. And that's what we're doing, and that's why we remain very confident for the remaining of the fiscal year.

And Andrea, as it relates to the rest of APAC, we are expecting a pickup in the second quarter, so we are not anticipating as many of the restrictions to be in place in the rest of APAC that we saw in Q1.

Thank you. Our next question is going to come from the line of Olivia Tong with Raymond James.

Great, thank you. I just want to talk a little bit about some of the new brands, like The Ordinary, and if you could just give a little bit of commentary around, you know, things that you've learned since the majority stake that you've taken, you know, and how that could potentially be influencing other brands in your portfolio with respect to, you know, where you could potentially invest going forward, what retailers might your other brands work in that you may not have thought about earlier. Thank you.

Yeah, first of all, Daesium is an extraordinary company, and The Ordinary is a brand with enormous success and traction. So first of all, we are collaborating with the management team of Daesium to continue building both The Ordinary and to continue building the overall Daesium company with their extraordinary incubation capability. They have new brands that they are creating for the future. so both of these activities so the big learning is obviously the the ability to create bias and interest and the relationship between the ordinary brand and the consumer is really extraordinary obviously we can learn a lot from this but apart from learning we can support them in the um implementation of the global commercial strategies in increasing the reach of the brand and obviously in leveraging their powerful connection with the consumer in the best possible way in supply chain, in R&D, in many, many areas. So we can learn and we can support, and this exchange is proving to be very successful. Then on top of the ordinary, there are other brands that are building other ideas and creating for the future. So what we are learning is also the power of creative incubation and the creation of new brands. and this will have an influence on our future ability to continue developing brands, and definitely we will leverage the strengths of DAISYM also in this area.

Thank you. Our next question will come from the line of Mark Astorchen with Stifel.

Thanks, and good morning, everyone. I wanted to ask about Henan Growth, and I think you had mentioned this on some previous calls in terms of where the growth was coming from, meaning that you weren't necessarily sourcing it from sales in the mainland. I guess I'm curious if that's still the case and kind of how you think about what has driven the growth, especially as it seems like some of the duty-free operators are paying the duties to deliver product to mainland customers. So if that's true, kind of how do you think this all plays out in time in terms of having mainland and Henan or kind of local duty-free work together?

Yeah, I mean, you know, keep... Keep in mind that in China, our most distributed brand, which is a seller that is in 140 cities, where today with the strong social media and with the strong aspirational values of our brand, as we speak, we have demand in more than 700 cities. So there are many, many consumers in China that can only buy either online or traveling, and traveling domestically today, and historically also traveling internationally. And so it's just the market, commercially the market is designed to have a very limited overlap between the mainland China and the highland. Highland serves an enormous amount of consumer that comes also from tier three, tier four cities, areas where there is not a lot of brick and mortar distribution. And so Hainan can attract this consumer in this moment. Also, it's a place where people go for holidays. As part of these holidays, there is a lot of the pleasure of shopping, the pleasure of discovery. So the business in Hainan is proving to be a great trial builder, more than in a cannibalizing business. is building trial of people that otherwise will not be able to try our product. And then we'll repurchase them. We'll repurchase them maybe again in their future travel, but most of the times in their everyday life in mainland China. So obviously there is commercial competition. The market is becoming very competitive. There is a lot of players commercially. There is and will continue to be intense competition. But every channel serves, frankly, a very different role. And so our strategy is to be able to leverage each one of these channels in the best possible way. With the idea of maximizing the coverage and the service to the total consumers in China that are interested, in beauty and over time to be able to better differentiate the scope of the channels and how the consumer will be served by the different channels. Last thing I want to say, Hainan had at least the last number I've seen over the 80 million visitors in the last year. So if you think that Hainan serves the entire middle class because it's domestic travel, you don't need to have a passport. So today, in our knowledge, about 12% of Chinese consumers have passports. Even when international travel will restart, there will be even limited cannibalization versus international travel because China will serve many consumers that do not plan to travel internationally. So we are very positive on the long term and very positive on the ability to serve the consumers using different channels, which is our strategy.

Thank you. Our next question comes from the line of Wendy Nicholson with Citi.

Hi. Two things, if I can. When you were running through the brands and what's growing for you and what's doing especially well, I think you called out La Mer first. And I just wanted to clarify how much of La Mer's growth is coming from from China and travel retail, or is the brand also growing strongly in the U.S. and Western Europe non-travel retail? So that's my first question. And then second thing, I know you said, Tracy, that there was only minimal sales in the first quarter from the pipeline fill into Target and Kohl's. But now that we're kind of, you know, already into November, can you comment a little bit about what you're seeing there? And especially I'm curious about What percentage of the sales that you're getting from Target and Kohl's are in makeup as opposed to skin? I'm just wondering that if those two channels really take off for you, what kind of mix effect that might have on your North American business? Thanks.

Thanks, Wendy. So in terms of La Mer, La Mer is growing in pretty much every market. It's, you know, incredibly strong. The brand does a fantastic job. of innovating. And so we're seeing, you know, growth from both new innovation as well as a continued expansion of new consumers with some of the strategies that the brand is deploying. And we see very high loyalty and repeat with La Mer. So it is, you know, all around, even during this pandemic, it has been one of the constants in terms of in terms of the performance, you know, in our portfolio. And the Lumiere team is just an absolute fantastic, fantastic team. So the brand is doing incredibly, incredibly well. As it relates to Kohl's and Target and Ulta within Target and Sephora within Kohl's, you know, we have seeded the initial doors. You know, we certainly expect during the upcoming holiday season that we will see, you know, increased growth, obviously, and contribution from the distribution that we have. And we're pleased thus far with the partnership. We're seeing more skin care growth than makeup at the moment. But, again, you know, I expect that we will certainly, with some of the strong gift programs that our makeup brands have, We expect that we'll see more make-up growth in the second quarter.

Dr. Yeah, I just wanted to add that, you know, our North America growth this quarter, which has been extraordinary, is the result of many factors. It's definitely not yet the impact of ULTA target or Sephora cost. It was just at the beginning and only in the last months of the quarter. So it's the result of many other very positive signs. We've been getting shares in all categories during the course, that in Clinique, in Mac, in La Mer, in Bobbi, in Tom Ford, in Jo Malone. So it's a very broad growth across. We are really ready with our innovation, with the strong marketing programs. We had anticipated the comeback of MakeUp. We have strengthened our program in what we call the MakeUp Renaissance program. and anticipation on the return to back to school, back to work. We had amazing programs of that. We have added, obviously, the Ordinary, which is the number four brand in skincare in prestige U.S. to our portfolio. So it's a combination of factors of improvement of the strategy and improvement of the execution in our North American organization. So it's a terrific quarter, and we do expect the ultra-targeted called Sephora to contribute more in the next quarters. was not the key contributing factor in quarter one.

Yeah, I think this quarter really represents the diversification that we have within the business that we've talked about. And certainly the North America performance, to Fabrizio's point, represents that as well.

Thank you. And with that, that will conclude today's question and answer session. If you were unable to join for the entire call, a playback will be available at 1 p.m. Eastern today through November the 16th. To hear a recording of the call, please dial 855-859-2056. Enter passcode 6086-324. Again, passcode 6086-324. That concludes Estee Lauder conference call. I'd like to thank you all for your participation and wish you all a good day.