Estée Lauder Companies Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

There are 11 speakers on the call.

Operator

Good day, everyone, and welcome to the YesDay Lottery Company's Fiscal 2022 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Speaker 1

Hello. On today's call are Fabrizio Freda, President and Chief and Traci 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 our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those forward looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic net sales growth excludes the non comparable impacts of acquisitions, divestitures, shows brand closures and the impact of currency translation.

Speaker 1

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 and A session, we ask that you please limit yourself one question, so we can respond to all of you within the time scheduled for this call. And now, operator Fabrizio.

Speaker 2

Thank you, Rainy, and hello, everyone. It is good to be with you today as our hearts continues to be with those impacted by COVID-nineteen around the world. We achieved record sales and profitability in the Q2 of fiscal year 2022. Our multiple engine low growth strategy showcased the benefit of its diversification. Every category, region and major channel expanded.

Speaker 2

We sized the favorable dynamics of skincare, fragrance, developed markets in the West, brick and mortar and continue to prosper in the East with Chinese consumer as well as in Global Travel Retail and Global Online. The flexibility we built into our business model Over the last decade, enabled us to both allocate resources to attractive growth opportunities and effective manage the impacts by increasing inflationary environment. Our advanced planning for the key shopping moments of 2011 and holidays allowed us to overcome supply chain obstacles. For our Q2, reported net sales grew 14%. Organic net sales rose 11%, adjusted operating margin expanded and adjusted diluted earnings per share increased 15%.

Speaker 2

Today results are all the more impressive compared to the pre pandemic Q2 of fiscal year 2020, when we delivered record organic sales growth in our seasonally largest quarter. Despite the ensuing challenges of COVID-nineteen, which Escalated during the quarter with Omicron, we far exceeded the exceptional results of 2 years ago. Reported sales are 20% higher, driven by organic sales growth and with every region now larger, and we are much more profitable. Our gains during the last 2 years reinforce our confidence in our ability to navigate the impacts of the prolonged pandemic. Moreover, our optimist The opportunities of tomorrow remains incredibly strong, owing to the timeless desirability of our brands and our commitment during the pandemic to invest for the near and the long term.

Speaker 2

Our brand portfolio of large Scaling and developing brands served as a powerful catalyst for growth as consumer reward the quality of our trusted brand and hero products. In the second quarter, 11 brands achieved double digit organic sales growth versus the prior year period. This broad based trend is similar to the contribution in the Q1 despite a far tougher comparison. The momentum in our largest brands Clinique, Estee Lauder, La Mer and MAC continues as the hero franchises capitalize on innovation in delivered standout results in skincare, while Estee Lauderle and MAC drove Makeup's emerging renaissance. Our scaling and developing brands achieved excellent results.

Speaker 2

Jo Malone London and Tom Ford Beauty led fragrance and were among our top performing brands, while Bobbi Brown grew strongly driven by skincare. Aveda and Bumble and Bumble delivered accelerating sales growth in hair care as 2 Phase and Smashbox rose double digits in makeup. Product innovation also served as a powerful catalyst for growth across our brand portfolio, contributing nearly 25% of sales. This level of contribution is notable in a quarter when holiday's exclusives represent a larger mix of business and especially so in a challenged supply chain environment. La Mer, fueled by its iconic heroes on trend holidays merchandising and highly sought new dehydrating infused emulsion led the company's sales growth.

Speaker 2

The brand excelled in every region and across major channels, cherished by its loyal consumer and embraced by new cohort of consumers including more men. Clinique's skincare portfolio with its desirable innovation in hero franchises performed strongly. Its new smart clinical repair wrinkle correcting serum drove sales gains in North America, amplifying the brand's global momentum in the serum subcategory. Clinique take the day off makeup remover saw a dramatic uptick in sales, evidence of makeup's emerging renaissance and the staying power of this cult favorite skincare product, which is recruiting a new generation of consumers. For makeup, the Estee Lauder brand is a driving force in the category emerging Renaissance, with makeup sales for the brand already larger than 2 years ago.

Speaker 2

Estee Lauder Double Wear Hero Franchise delivered remarkable performance, while its which is a Mist to West product born of skinification of makeup trend was very strong. Our fragrance portfolio continue to grow from strength to strength, owing to the enduring scent based rituals created in the pandemic and enhanced by innovation, better online storytelling and expanded reach as consumers in the East embrace this category. Each of Jomal Orlando, Tom Ford Beauty, L'Elegant, Kilian Paris and Frederic Mal delivered strong double digit growth in every region, demonstrating the allure of this brand around the world. Tom Ford Beauty exemplifies the benefits of a strategy focus on heroes and innovation. Its new ombre leather parfum had a hollow effect on the eau de parfum such that sales for the franchise doubled.

Speaker 2

In the Q3, the brand is leveraging its global appeal with a flair of local relevance in the fragrance launch of Tom Ford Rose Trilogy. Our growth engines also continue to diversify by region as we anticipate. Developed markets in the West performed especially well. North America executed with excellence to capture brick and mortar reopening trends and delivered a strong holiday across channels. Festive seasonal exclusive including a Stelluted blockbuster set and Aveda collaboration with Philippe Lim proved highly sought.

Speaker 2

Indeed, our in store and online activation and merchandising were incredibly successful with brand.com posting a record Black Friday. Every category grew double digits organically in North America, led by makeup, where our brand paired trusted product with enticing innovation as social and professional user education increased. Mac, Bobby Brown and 2 Face produced engaging content and artist led education to inspire consumer to size the joy and creativity of the category. Mainland China delivered high single digit organic sales growth, an impressive result given the regional restrictions in the quarter, that pressured brick and mortar and makeup. Online sales rose double digits organically even after having posted significant growth in the year ago period.

Speaker 2

For 11/11 on Timor, the Estee Lauder brand ranked number 1 flagship store in beauty for the 2nd consecutive year as La Mer flagship store Top luxury beauty once more and Jo Malone London again led in prestige fragrance. On JD, GISTELO DE brand ranked number 1 flagship store in beauty in its 1st year. Skincare and fragrance grew double digit organically in Mainland China. Hero Products and Innovation excelled driving new consumer acquisition and repeat purchases. Several brands expanded prestige beauty share in the quarter, including Estee Lauder, Lanner and Doctor.

Speaker 2

Jart. Looking ahead, we are excited about the long term growth We are few months from opening our new innovation center in Shanghai. Our aspiration for it are both as we aim to meet and exceed the desires of Chinese consumers. The center is designed to enable end to end innovation from concept for product packaging through development, scale up and commercialization. I'm pleased to share that the build out of our state of art manufacturing facility near Tokyo is also progressing very well, which is a testament to the amazing work of our global supply chain team amid the pandemic.

Speaker 2

Its first phase is complete, and we are on track to start limited production by the Q1 of fiscal year 2023. Our growth engines further diversified by channel as both online and brick and mortar prospered. Specialty multi and department store contributed meaningfully and freestanding store in the West performed very well on reopening. Traffic improved. It complemented our strategic actions, including those under the post COVID Business Acceleration Program to benefit productivity in brick and mortar.

Speaker 2

These channel trends are encouraging for the long term even if tempered in this moment by Omicron. We continue to expand our omni channel capabilities in the quarter to give consumers flexible and convenient shopping options for greatest certainty for fulfillment. Buy online, pick up in store offerings in the United States for Mac, Aveda, German Orlando and Le Labo are driving favorable average order value trends and we are expanding the capability to more doors internationally, which holds great promise for the future. Our global online channel delivered excellent performance with organic sales rising high single digit after having surged over 50% in the year ago period. Each of brand.com, 3rd party platform, pure player and retail.com contributed to growth.

Speaker 2

The drivers included higher levels of engagement for virtual try on and tools for choosing shade and scent, Sophisticated simply to drive trial and repeat and more and better live streaming. Indeed, in North America, La Mer generated the most sales from a live stream to date in the quarter. Our brands are innovating in social commerce on Instagram, Snapchat, TikTok and WeChat among others. We gained momentum in this promising online ecosystem during the quarter. To face leverage an Instagram live shopping event to launch its new fragrance.

Speaker 2

Estee Lauder Double Wear followers on TikTok skyrocketed With its latest campaign also driving brand awareness and affinity much higher and Tom Ford Beauty creatively debuted its new flagship site on WeChat's Mini program in China. Embedded with these outstanding results across categories, region and channels is the progress we are making in social impact and sustainability. Since we spoke with you in November, We are pleased to have received several external recognition of our ESG efforts. We were named to Forbes inaugural list Identifying the world top female friendly companies, leading the way to support women inside and outside the workforces. And for the 5th year in a row, we were named to Bloomberg Gender Equality Index.

Speaker 2

We were included in the CDP's Climate A List for the 2nd consecutive year, which is a tribute to our deep commitment to climate action and to the highest level of transparency around our environmental impact. Last, MSCI recognized our progress toward our 2025 ESG goal in its recent upgrade of the company to an A rating. The company, our brands and our employees have a number of events and activations planned in honor of Black History Month. We are continuing to focus on our racial equity commitments and the work of accomplishing our goals. As we embark in on the second half of our fiscal year, our innovation pipeline is rich with newness, especially for sustainability.

Speaker 2

La Mer newly advanced the treatment lotion, which will be on counter in March as a powerful upgrade inside and out crafted using our unique greenscore methodology and housed in a new recyclable glass bottle made with 20 and post consumer recycled glass. This methodology, which was peer reviewed in academic journal Green Chemistry during the quarter evaluates ingredients and formulas throughout the lenses of human health ecosystem health and the environment. This approach can be adopted, built upon and scaled by others across our industry to further advance sustainability. Estee Lauder is launching an all new revitalizing Supreme moisturizer created with innovations in formula and ingredients in a new recyclable glass jar. Smashbox is introducing photo finish Silkscreen primer collection featuring vegan formulas with a skin defending complex and instant makeup benefits.

Speaker 2

Lastly, Daisy and Vegan Brands The Ordinary is welcoming back salicidi acid 2% solution, hosting a well list of over 400 1,000 for the new formwork. In closing, we delivered outstanding performance amid the accelerated volatility variability as well as supply chain challenges of the pandemic. This demonstrates that we have the competency to navigate complexity well. Our commitment to invest for the long term is of great importance in this moment as we benefit from the advancement we have made over the last few years in data analytics, technology, R and D and supply chain. These enhanced Capabilities combined with our strong portfolio of desirable brands, exceptional talent and more flexible resource allocation are enabling us to realize the power of our multiple engines of growth strategy even in a difficult external environment.

Speaker 2

The grace, wisdom and ingenuity of our employees in this still challenging moment knows no bounds. They are the embodiment of our company's strong culture. And to them, I extend my deepest gratitude. I will now turn the call over to Tracy.

Speaker 3

Thank you, Fabrizio, and hello, everyone. As you just heard, our momentum continued in our 2nd quarter with net sales growing 11% organically and 14% in total, led by a continued overall progression and recovery despite the volatility inherent across markets with the prolonged pandemic. We had a solid holiday performance across all of our regions. The inclusion of sales from the May 2021 Deciem Investment added approximately 3 points to reported net sales growth and the currency impact was neutral. From a geographic standpoint, organic net sales in the Americas rose 19% as holiday shoppers returned to brick and mortar retail where we had an exciting array of gifting products and holiday activations in store.

Speaker 3

And even with more consumer shopping in stores, Organic sales online also grew solidly in the Americas, with online representing more than a third of sales in the region. Every market in the region contributed to sales growth this quarter, and the inclusion of sales from DECIEM added approximately 5 points to the total reported sales growth in the region. In our Europe, the Middle East and Africa region, Organic net sales rose 13%. Growth was diverse and broad based with global travel retail as well as every market contributing. All channels grew, led by double digit growth across brick and mortar as recovery continued in both developed and emerging markets in the region.

Speaker 3

Despite a strong performance during key shopping moments, organic sales online declined slightly, primarily driven by the U. K. Due to a tough comparison with the prior year, which was more severely impacted by brick and mortar lockdowns. The inclusion of sales from DECIEM added about 3 points to total reported sales growth in the region. Our global travel retail business grew low double digits.

Speaker 3

Travel restrictions have eased globally and international passenger traffic continued to progressively improve, resulting in some stores reopening during the quarter, particularly in Europe and the Americas. Travel Retail continues to be led by Asia Pacific, where demand from Chinese consumers remains strong. In our Asia Pacific region, organic net sales rose 5%. Most of the markets in the region grew, led by Mainland China and Australia, although we continue to see variability in COVID restrictions and retail traffic across markets. Sales grew across most major channels in the region, especially online, which benefited from the recent launch of 3 brands on jd.com.

Speaker 3

The inclusion of sales from DECIEM added approximately 1 point to total reported sales growth in the region. From a category standpoint, organic net sales of fragrances grew 30% with double digit increases across all regions. Exceptional double digit increases from Jo Malone London, Tom Ford Beauty, La La Beaux and Killian Paris reflected strong performances from hero products, new product launches and the continued growth of the bath and body and home subcategories. Organic net sales in makeup rose 12% as consumers in the Americas and Europe responded to social media activations, holiday assortments and trends. Estee Lauder Foundations continued to resonate very strongly with consumers, especially those in the Double Wear and Futurist franchises.

Speaker 3

MAC continued to drive the makeup renaissance with engaging, interactive campaigns throughout the quarter, like the special MAC Trend Halloween report and solid holiday collections. Too Faced, Tom Ford Beauty, Smashbox and Bobby Brown also contributed to growth in the category this quarter. Organic net Sales in skin care grew 7%, reflecting double digit increases from La Mer, Clinique and Bobbi Brown. The inclusion of sales from DECIEM added 4 percentage points to reported growth. Our organic net sales in hair care rose 18% as traffic in salons and stores improved, primarily in the Americas.

Speaker 3

Aveda's growth came mostly from holiday gifts and hero franchises and in online and freestanding stores, while Bumble and Bumble focused on recruiting new consumers in the specialty multichannel. Our gross margin improved 20 basis points compared to last year. The benefits of strategic price increases and favorable currency more than offset the impact of higher makeup mix and lower gross margin on DECIEM products. Inflationary pressures in our supply chain are expected to begin to more prominently impact cost of goods in our fiscal Q3. Operating expenses decreased 140 basis points as a percent of sales.

Speaker 3

Our leverage of selling expense and general and administrative expense was partially offset by increases in advertising and shipping costs, the latter due to both inflation and our direct to consumer online growth. Operating income rose 22% to $1,440,000,000 and our operating margin expanded 160 basis points to 25.9% in the quarter. Our tax rate at 21.4 percent continued at a more normal level this year versus the prior year, which was impacted by a one time benefit associated with GILTI. Diluted EPS of $3.01 increased 15% compared to the prior year. For the 6 months, we generated $1,850,000,000 in net cash flows from operating activities compared to $1,980,000,000 last year, which reflects both a return to more normalized working capital needs as well as increased inventory to mitigate some of the $459,000,000 to support the construction of our new production facility near Tokyo as well as investments in our online business and other technology enhancements.

Speaker 3

And we returned $1,840,000,000 in cash to stockholders through a combination of share repurchases and dividends, with an increase in our dividend rate occurring in the Q2. So turning now to our outlook. We delivered an exceptional first half characterized by strong and diversified double digit organic sales growth and disciplined cost management in the context of intermittent COVID disruptions, including the rise of the Omicron variant, high inflation and volatility. Looking ahead, we are raising guidance to reflect our expectation for a strong year despite the potential further spread of Omicron, supply chain challenges and increased inflationary pressures. Inflation and transportation and procurement is expected to impact our cost of goods in the second half.

Speaker 3

However, The benefit of pricing and cost mitigation efforts are helping to offset some of the inflation impacts for the fiscal year. At this time, we expect pricing to add approximately 3.5 points of growth. With the inclusion of the additional pricing actions we are taking during our second half. We are planning to support the continuation of the recovery with We are also planning to support key hero franchise launches in our Q3 from Estee Lauder, La Mer and Origins with increased marketing and advertising support. This investment will increase cost towards the latter part of the 3rd quarter with more of the benefit to be realized in the 4th quarter.

Speaker 3

For the full fiscal year, organic net sales are forecasted to grow 10% to 13%. Based on rates of 1.146 for the euro, 1.357 for the pound and 6.399 for the Chinese yuan. We expect currency translation to be negligible for the full year. This range excludes approximately 3 points from Divestitures and brand closures, primarily the inclusion of DECIEM. Diluted EPS is expected to range between $7.43 $7.58 before restructuring and other charges.

Speaker 3

This includes approximately $0.07 of accretion from currency translation and $0.03 of accretion from DECIEM. In constant currency, we expect EPS to rise by 14% to 17%. We expect organic sales for our Q3 to rise 8% to 10%. The net incremental sales from acquisitions, And brand closures are expected to add about 3 points to reported growth and currency is forecasted to be negative by about 1 point. We expect Q3 EPS of $1.55 to $1.65 Currency is expected to be $0.01 accretive to EPS and the inclusion of DECIEM is not expected to be material.

Speaker 3

In closing, our results thus far clearly demonstrates the power of our diversified portfolio. Temporary softness in our Eastern markets driven by the pandemic was again offset by renewed growth in our Western markets. A resulting slight slowing of growth in skin care was offset by remarkable growth in fragrances. We continue to be choiceful about where we invest and the flexibility we have built into our cost structure is helping us to mitigate some of the COVID related disruptions and inflation, while allowing us to continue to invest appropriately in our future growth. This agility, along with the resilience of our remarkable teams worldwide, gives us confidence that we can continue to manage through the temporary complexities caused by the prolonged pandemic by focusing clearly on our long term strategy and executing against it with excellence.

Speaker 3

And that concludes our prepared remarks. We'll be happy to take your questions at this time.

Operator

Thank you. The floor is now open for questions. And our first question today will come from the line of Dara Mohsenian with Morgan Stanley.

Speaker 4

I was hoping to get an update on China. You mentioned the strong performance there from a brand perspective during the 'eleven'eleven holiday, but The category wasn't as robust as we've seen in past years in terms of growth. So and with also the lockdown situation there. So Any perspective on category growth in China in calendar Q4 and what you're seeing so far in calendar Q1 of this year would be helpful and Risk from lockdowns and maybe while you're on the subject, just longer term touch on the growth curve of China in terms of per capita consumption development over time and your thoughts there? Thanks.

Speaker 2

Yes. No, sure. So we achieved the High single digit growth in Mainland China this quarter. And where brick and mortar channels were impacted by COVID restrictions. However, our online, which was not impacted by closures, grew double digits in quarter 2 and represented more than half of our business in China.

Speaker 2

Additionally, double digit growth in China every quarter, and we expect this strong trend to have the potential to continue, frankly. What you see in quarter 2 is just one specific segment, the brick and mortar that are set by call it restrictions went to single digit growth, but the rest was all double digit growth. So we remain absolutely excited by the potential of China. The long term fundamentals that you were referring to in your question of the market remain really intact. There is the growing middle class continues to develop the increasing per capita spending continuous, at least in all the data we see on our products.

Speaker 2

And And what the agility for us to serve the Chinese consumers wherever they buy, meaning online, Travel Retail, brick and mortar, we are improving in all these elements. We are increasing the number of cities where we have brick and mortar. We are increasing the coverage online. You heard in the prepared remarks our reference to JD and the incredible success in Dware Estee Lauder is already number 1 shop in there. And the travel retail, where we continue to be very strong, super excited by Hainan And the huge quality expression of our brands that is happening there.

Speaker 2

So very strong Chinese consumers trends and in our routine a great, great future.

Operator

Thank you. Our next question Jim will come from the line of Peter Grom with UBS.

Speaker 5

Hey, good morning, everyone. Hope you're doing well. So I just wanted to ask about the operating expense leverage we have seen year to date. It's just when I take a step back and look at the first half of this year and compare it Pre COVID levels, it's just very impressive what you've been able to do there. And I know there's mixed benefits, sales leverage, cost savings and obviously costs that have yet fully return to pre pandemic levels.

Speaker 5

But is there a way to help us frame how we should think about operating leverage longer term? There a way to kind of disaggregate the benefit you've seen year to date that you believe has greater staying power versus what you might expect to really come back as we return to, I guess, a normal environment? Thanks.

Speaker 3

Yes. Thanks, Peter. In terms of the operating leverage that we've seen thus far, it has been terrific, obviously, in the first half. One of the things to keep in mind is Our launch cadence in terms of when we actually have big product launches does affect quarter to quarter performance. But we certainly have continued to see some of the benefits of Costs not returning, but brick and mortar is picking up and clearly, we're continuing to ramp up in the 3rd Q4, our selling staff to support greater brick and mortar sales.

Speaker 3

So When you look at our full year, the overall margin expansion that is included in our guidance is around 90 basis points. So well ahead of our guidance in terms of 50 basis points a year from a long term And that includes not only some of the costs not fully returning, but also includes some of the incremental Costs related to managing this pandemic, some of the safety procedures we've had in place, some of the additional testing that we have in place, etcetera, that we are incurring. But we certainly expect continued growth from our higher margin Channels and categories in the future, that will continue to benefit us going forward. Thank

Operator

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

Speaker 6

Thanks. Good morning. I wanted to chat a little bit about the Americas and growth that you've seen in particular in North America outside of kind of COVID related recovery. And here I'm thinking about some of the Expanded distribution or consumer reach, you describe it, particularly the expansion of Ulta and Sephora doors into significantly new locations.

Operator

So I was curious kind of

Speaker 6

what you're seeing in terms of how your brands are performing generally in those locations? And what you're seeing in terms of Maybe new consumers coming into those franchises, again, as you think about that expanded consumer reach and your overall footprint broadening out? Thanks.

Speaker 2

So let me start from that. First of all, we see our brands doing well in these new Distributions. And again, these new distributions, particularly the Target Ultra, the Col Sephora that you are referring to, We have designed to get new consumers, particularly sourcing consumer from us. And we see this Working and our initial projections continue to be strong. However, I want to clarify that in quarter 2, a very small Percentage of our growth was coming from those already is just the beginning.

Speaker 2

So the large majority of our growth in quarter 2 was coming from just other organic activities that we are doing in the region. For example, we are So there are some fundamentals which are improving for the post COVID. Then we are gaining share in many on the category Sub categories, for example, Tom Forde, Joe Malone is doing outstanding. The skincare gains share. The ordinary It's an important part of building our overall market share in the region.

Speaker 2

And the other thing that I could mention is our Innovation and our marketing progress has been super strong and the distribution choices that we have done has increased our ability to source new consumers. But apart from the new brick and mortar choices, the online Progress in North America is bringing a lot of new consumers, particularly consumers that before were not shopping online. And now they're Shopping omnichannel. And that's why our omnichannel progress in North America is also playing a strong growth to sustain our Growth now in the long term and continue sourcing new consumers. And finally, we are really executing with excellence.

Speaker 2

We are reinvesting Fast in rebuilding the stores in the correct way, we are investing fast in improving our execution online As we discussed also in previous calls, and so this combination of investing, but at the same time, thanks to our Restructuring program, we are increasing productivity of the brick and mortar. As brick and mortar continues, we are making also our ability to leverage the growth in North America much stronger than what it was before. And that's why North America is not only successful, not only recovering strongly from the COVID, but also becoming a powerful engine of growth for the long term In this model of strategy, I should say, of multiple NGO growth.

Operator

Thank you. Our next question is going to come from the line of Andrea Teixeira with JPMorgan.

Speaker 7

Thank you and good morning. My question is regarding EMEA ex travel. So I was hoping to see If I briefly can discuss a bit of that scenario, unfortunately, Omicron was first into the UK. And as you exit the quarter, how Continental Europe has been and the UK has been performing? And then as a follow-up, I think, Tracey, you mentioned and I appreciate the bridge for the margin front in the Q3.

Speaker 7

I think you explained that the timing of some of the hiring of bricks and mortar and also some market launches and waiting on the market spend. Can you give us some perspective if this is a result of this timing and then we should see again the operating leverage as you pointed out 90 basis points for the year as you go into the Q4? Thank you both, Tom.

Speaker 2

Yes. I'll start from the if I understand your question was on travel and Travel Retail?

Speaker 3

No, ex travel retail. EMEA ex travel retail?

Speaker 2

EMEA ex travel retail, sorry, I didn't Yes. No, EMEA, as Clarisse was very strong, and we saw good progress in many And also in EMEA, the big acceleration is coming from online across every single country. So very exciting progress with all our category all our brands with progress. Also in EMEA, there are emerging markets, Which are doing very well like India, the Middle East, Russia. And so all the overall EMEA is again a strong engines of growth that has been built over this year and now in the post COVID acceleration is proving its role of building a strong engine for growth.

Speaker 2

So all very strong. Tracy?

Speaker 3

Yes. And in terms Of the margin, we still in the second quarter did have quite a few open positions as it relates to our selling staff and certainly hope to be able to close that gap in the 3rd and the 4th quarter. The big difference in the second half of the year is we will be spending more advertising as a percent of sales in the second half of the year to support The launches that we mentioned in the prepared remarks and that will certainly impact, particularly in Q3, The margin and we expect to see the benefit of that in Q4, but really beyond. I mean, these are our largest Skincare Brands, particularly Estee Lauder and La Mer and the Hero franchise reformulations that we are doing on some of the products are really quite significant for us going forward. So that also should help the skincare category grow a bit.

Speaker 3

But again, Skin care is largely affected by some of the shutdowns in high concentration skin care markets like the Asia Pacific market. So Certainly, as that market picks up, we expect that skin care will pick up as well. That too, I would attribute to more of a temporary Slow down than anything

Operator

else. Thank you. Our next question will come from the line of Chris Carey with Wells Fargo.

Speaker 8

On the travel retail business, so low double digit growth, again, keeps the division growing, which is great to see. And you noted that APAC continues to drive growth. I think you said with China Travel Retail Growing rapidly. I guess I'm just trying to balance the strength that you're seeing in China Travel Retail with, I think there was a comment in the press release just around Hainan traffic being impacted by restrictions. And so can you maybe just dimensionalize strong growth from the Chinese consumer and travel retail with Hainan Travel being negatively impacted with the strength that you're seeing there.

Speaker 8

And then I guess just bigger picture on this Broader channels, just how this is developing in Asia, right? I think there's been a view that Mainland China and Japan and Korea can continue to Really strong growth just even as the Chinese travel retail business becomes so much bigger. And I'm just curious your latest thoughts on that. So thanks for all that on travel retail.

Speaker 3

Let me start with your question on what we called out in terms of some of the disruptions that Kurt in Hainan relative to the strong low double digit growth that we had in travel retail. So the Q1 actually we had A greater double digit growth in travel retail. And so when you look at the Q1 versus the Q2, while it was double digit, it was a bit less than in the Q1. And that was a direct impact from some of the restrictions that occurred within China that impacted Hainan. We don't expect that level in the balance of the year.

Speaker 3

So we do expect to see travel retail pickup in the balance of the year. So Hainan continues to be a very strong driver of our travel retail business. And it is Incredibly, luxurious and I know Fabrizio likes to talk about Hainan, so I will let him expand on that as well. But we continue to expand our presence in Hainan and continue to see fantastic consumer receptivity to our brands in Hainan.

Speaker 2

Yes. So to speak to the travel retail trend, first of all, the travel retail retail globally was strong And was accelerating versus the previous quarter. And yes, there were in Asia, there were some elements of acceleration. Yes, Ina was very strong as Tracey was saying, but I want also to underline that there was a strong growth in EMEA and North America as I think Tracey During her prepared remarks as well, which was linked to more traffic during holidays in these regions despite the Omnicom variant growth. Now this is a very important sign because the reactivity of travel retail sales to traffic increase is extraordinary.

Speaker 2

And we have In this in email, for example, during the last quarter, quarter 2. So the first good news is that where traffic increased, travel retail respond very, very And the other good news is what Tracy was speaking about the overall retail growth across despite some of the closures And some of the restrictions. The on Hainan, Hainan is becoming Extraordinary place luxury with amazing experiences. So is probably one of the channels around the world, which is more equity building for the brand. So that's an important thing to underline.

Speaker 2

Also in Aynan, there are many new retailers which are opening. And so in Aynan, there is more Being built in several retailers which are investing in the island. That's also Santi, they will generate will continue to generate expansions growth over time.

Speaker 3

And regarding your question on Travel outside of China, once travel restrictions are lifted, we certainly expect people to start traveling back to Japan and Korea and Thailand and other travel destinations for vacation as well as for business. So we certainly expect that those travel retail quarters will continue to recover similarly to what we've seen the start in EMEA and the Americas, although traffic is still well behind, obviously, pre pandemic levels. So more growth to come as it relates to travel retail.

Speaker 2

Yes. And maybe one thing on that to add, Tracey, is the clarification when the growth of international travel will restart. This will be only moderately cannibalizing anything like Hainan or domestic travel because remember that the external travel is only for people with a passport and there is a relatively small percentage of the population has a passport that traveled internationally, while Hainan is domestic travel and is open to the entire population. So the when international travel will Start, this will be almost all net tax.

Operator

Thank you. And our next

Speaker 9

I think Joy now reporting straight into Peter at International rather than into Asia Pacific. So it's sort of elevating the importance of the Mainland China business. So just hoping you can talk a little bit about some of the structural and leadership changes as well as maybe the culture of the business and how that's changed since 2009, in the context of how should we think about leadership transition risk and how that's evolving?

Speaker 2

By the way, this is a great question and I admire the knowledge you have of our amazing talented team. So thank you for the question. And So what you're seeing actually is the reflection of our culture. What you're seeing is some organizational changes reflecting The shape of the business, particularly the elevation of China to be an independent region given the importance This region and the need of coordination with travel retailer with the other key parts to the company including online. And so that's an important next steps that will make our ability to work We China and in our ability to our China team to get support for our growth capabilities increased.

Speaker 2

So the organization is basically increasing our power of execution in China, The changes, the organization changes. In terms of the changes of senior leadership, they are all well planned retirement plans The culture of the company is that our leaders share with us their plans in advance. We plan this With time and in a very professional way and the very good news is that we have extraordinary succession plans already in Because all the succession of this position has been managed mostly with people that were ready for taking this position that were trained for years to take this position. So I think you should take out of this the strengths of our succession planning That is also the reflection of our culture and the culture is more and more collaborative cultures, which is united by our compass work, by our strategy work and our execution collaborative execution is the results of very clear common goals and very uniting reward systems that make this organization Working team and this has been since 2009 to today is progressing step by step gradually. I think today we are a Well oiled, organization at the top.

Operator

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

Speaker 10

Great. Thank you. Good morning. I wanted to ask you a little bit about brand support and promotion as we've obviously been hearing more and more about The cost to compete, particularly around key events like 11.11 in China, more promotions, deeper discounts, live streaming deals, cost of influencers, things like that. So Can you talk about how the market is evolving and your view on the investment spending necessary to succeed in Asia?

Speaker 10

Even if you could give an idea, it's Kind of funny to ask, but idea of magnitude of volume versus price contribution perhaps in Asia. And then sort of part and parcel with that, if you could just sort of put The Q3 versus second half guidance in context, The margin deceleration is fairly dramatic that's implied in Q3, but a big bounce back in Q4. I get the improvement, I get that You mentioned the new Luvig adds step up, but just it seems like you feel relatively optimistic about the future. So If you could provide some context around that, that would be fantastic. Thanks so much.

Speaker 10

Appreciate it.

Speaker 3

Okay. Well, in terms of 11.11, Yes. Certainly, 11.11 continues to be to get more and more competitive. And we've spoken in the past about how we Due promotion, as it relates to 11.11, a lot of it's done with samples. And certainly, Increasingly, there is more and more media support for 1111 as well.

Speaker 3

It is a big opportunity for us as we view it to recruit new consumers and it is one of the biggest events that we have during the course of the year to, in a concentrated period of time, have the ability to recruit new consumers, which then we retain, Work to retain over the balance of the future years. So media costs have gone up for sure. Live streaming activity It's gone up for sure and we have shifted and adjusted our activity to make sure that our brands Perform well within that environment. So it's a big planning event for the organization. We're really pleased with how our brands Reformed in general during 11.11 and I've already started planning for next year's 11.11, which that's How long in advance we have to plan for it.

Speaker 3

So, as it relates to the cadence of Q3 and Q4, we have Spoken, Olivia, I know you know, for many years about the fact that we focus on the year, And we guide quarter to quarter, but we focus on managing the year. And in any given year, we might have Very large product launch launches in the Q1 or in the case of this year, in the Q3. And so we do feel very positive about the future, obviously. And it is a rebalancing, to your point, between The Q3 and the Q4. The other thing that is embedded in our guidance for the Q3, quite honestly, is the fact that Omicron is still impacting brick and mortar.

Speaker 3

We also have the beauty of weather here in New York, But Omicron is impacting the environment and in brick and mortar. So we are seeing A slower recovery, in the Q3 for brick and mortar than certainly We saw just a few months ago and so we are cautious as it relates to that. And then I did mention that we do have a Step up in continued step up in some of our shipping costs and some of our supply chain costs as well. We have taken pricing. So the second half of the year, our pricing increase is 4%.

Speaker 3

It was 3% in the first half of the year, Since the average of 3.5%, which I spoke about in my prepared remarks. And we know we have Agility going forward is this environment continues to take additional pricing as it warrants. But the combination of pricing And cost savings are really what allows us to invest, for long term sustainable growth, in things like A new innovation center in Shanghai, the new plant that we are investing in Japan, as well as the investments we're making in the other capabilities that Fabrizio spoke about and deliver a very, very strong year in terms of double digit top line growth and 90 basis points of margin expansion.

Speaker 2

Yes. And if I can just underline one thing that Tracey has Explain is that this is really between quarter 3 or quarter 4 is rebalancing. We are taking up the year and we believe in the strength of the year. And if you look at our fiscal year estimate is our guidance is going to be a very strong year And it's going to be a very strong quarter 4 in this year. The quarter 3, we have 3 big, big launches where we had the investment in quarter 3 and the benefits in quarter 4 That's the important thing.

Speaker 2

And then the price increases that we are accelerating as of January, February in certain regions as Tracey explained have the biggest impact, the full impact in quarter 4. And so that's the rebalance We are doing, but in total, we are going to deliver or we are guiding a very strong year and a strong quarter 4, And we are confident on it.

Speaker 3

And because I know our brands are listening, so we do have 3 big skincare launches in the Q3, but we do have makeup, Fragrance and hair care launches as well that we are supporting.

Operator

And we do have time for one final question. And our last question that we'll take today will come from the line of Wendy Nicholson with Citi. Hi, thanks very much. I'm

Speaker 7

hoping I

Operator

can sneak 2 in because

Speaker 1

I think what's kind of

Operator

making folks nervous is the slowdown in travel retail. So Can you just speak to your confidence? I mean, obviously, consumers are still managing to get their skincare product and their fragrance and whatnot. They're just shopping more online. So is there any concern that you have that sort of longer term travel retail is going to be less of a buoyant channel for you, maybe there's just been a shift in consumer behavior or how confident are you that when people start traveling again, that travel retail channel is going to really accelerate.

Operator

And then I don't think you commented specifically, and it goes back to Dara's question, I think on the China promotional environment. Again, that's something that we've heard from other players out there that maybe SA in particular has been exceptionally promotional in China. Can you just comment on that and sort of give us your take on that? Thanks.

Speaker 2

Yes. First of all, we are not promotional In China mainland, actually the majority of our activities are sampling rather than pricing promotion. So if we're promotional, we mean that we have increased our sampling, our Product that we give as a gift when that's our promotional model. Yes, we have been obviously in 2011.11 during the quarter, We have done the promotionality needed to succeed in that event and I think.

Speaker 3

And Wendy, Just realize that retailers with the slowdown in brick and mortar are are also promotional. And so they are using promotion to drive traffic. So when we have seen and we saw a bit of this as well in the U. S. Market, when brick and mortar slowed down that some of the retail activity was quite promotional.

Speaker 3

So That is clearly a retailer driven decision.

Speaker 2

Yes, I think you, Teresa, clarified that retailers rising a promotion, they decide, We don't decide, but our promotions, as I was saying, is a lot about sampling and creating trial opportunities. So it's expensive rather than price. And then obviously, the retailers do what they believe is right for them in a given environment. The your question on travel retail, I think I have a stream high expectation for the long term Quality of Travel Retail Growth. I think this is an extremely promising channel.

Speaker 2

We have just seen the beginning of what will be a long term powerful Expansion for travel retail. And I spoke to this several other times. There are 2 drivers of travel retail, which are very important. One is the obviously the amount of travelers and what happens to travel, so the traffic, but the other is the conversion, so the amount of travelers They become shoppers. And the conversion of travelers into shoppers has been pre COVID was still in the 10%, 15% depending by region.

Speaker 2

So enormous expansion possibility of conversion are still in front of us. And the arrival of online in travel retail, which we call pre tail Today is very strong in Asia, but just at the very, very beginning in any other region of the world, this is we know is a huge conversion driver Because where this happened, we saw conversions of travelers into shoppers go from the 10%, 50% into the 30%. So you can imagine over time with the expansion of the online possibility to buy retail, that Conversion will dramatically grow around the world of travel retail. When you add to this perspective, the fact that the domestic Duty 3, Hainan thing is going to be not cannibalized a lot when international travel will restart As I explained in a previous answer, and so that the when international traffic will come back, A lot of it will be net extra. And when you have in front of us the proof that I was quoting Where for example in EMEA, we have seen some new traffic coming back during the recent holidays, we saw great Sales recovery.

Speaker 2

And so the responsiveness of travel retail to traffic coming back is very, very high. So when you combine all this consideration and you put on top of it that we have a great travel retail team, not only with extraordinary commercial But with great marketing capability that the traveling stores, the stores for travelers are becoming more and more an important trial driver for everything we do, a super important equity building opportunity for the brands. And so they're becoming integral part of the creation of the overall consumer experience and the trial repeat dynamic that we've built. So I hope you realized why we do believe in travel retail as a long term strategy channel.

Speaker 3

And again, I think we feel very good when you look at this quarter. The results that we achieved, Travel Retail had a great quarter, as we said, low double digit growth, but the overall company, grew at 14%. So the diversified engines of growth that we have, really gives us the flexibility to continue to deliver All against our expectations and grow our consumers and grow our profits. So

Operator

be available at 1 pm Eastern Time today through February 17. To hear a recording of the call, please dial 855-859 to 506, passcode 9,000,000,005. That concludes today's Estee Lauder conference call. I would like to thank everyone for their participation and wish you all a good day. Thank you.

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Earnings Conference Call
Estée Lauder Companies Q2 2022
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