Estée Lauder Companies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Day, everyone, and welcome to The Estee Lauder Company's Fiscal 20 24 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I'd like to turn the floor over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin.

Speaker 1

Hello. On today's call are Fabrizio Freda, President and Chief Executive 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 and disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non comparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation.

Speaker 1

You can find reconciliations between GAAP and non GAAP measures in our press release and on the Investors section of our Web As a reminder, references to online sales include sales that we make directly to our consumers through our brand.com sites and through third party platforms. And also includes estimated sales of our products through our retailers' websites. During the Q and A session, we ask that you please limit yourself to one question, so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Speaker 2

Thank you, Rainey, and hello to everyone. We appreciate you joining us to discuss our Q1 results, revised outlook for fiscal year 2024 and accelerated profit recovery plan to benefit fiscal years 20252026. Before we begin, I want to start by expressing the Tremendous grief and sadness we have for the victims and their families of the horrific terrorist attacks against Israel, The tragic loss of Palestinian lives and the growing humanitarian crisis in Gaza. Our hearts break for the profound suffering across the Middle East during this terrible time. We are committed to continuing to support the safety We delivered our outlook for organic sales and exceeded expectations for adjusted diluted EPS.

Speaker 2

Organic sales decreased 11%. Our global travel retail business drove the decline as expected, with organic sales lower by 51%, given the combination of trade inventory reduction and a structured market containment. The entire rest of our global business rose 4% organically, led by mid to high High single digit growth in the Americas and the markets of EMEA and double digit growth in Asia Pacific excluding Mainland China. The excellent performance in these regions enable us to deliver our sales outlook despite a slower than better recovery of overall prestige beauty in Mainland China. Adjusted diluted EPS of 0.1 1 SENSE was ahead of the outlook as we achieved a better than expected adjusted operating margin.

Speaker 2

There were several drivers for this more favorable profitability led by a greater contribution to sales from skincare than forecasted as well as disciplined expense management. Notably, we continue brand building in the areas with the greatest growth opportunities with AP spending rising as a percentage of sales. While we had a better than expected start of the fiscal year, we are lowering our fiscal year 2024 outlook given the further incremental external headwinds in 2 specific areas of our business. First, the expected growth rate of overall prestige beauty has load in Asia Travel Retail and Mainland China, which is currently also evidenced in the presale phase of the 1111 Shopping Festival. To reflect this impact as well as the ongoing policies In efforts to contain a structural market activity, we are moderating our expectation for fiscal year 2024 retail sales for Asia Travel Retail and Mainland China.

Speaker 2

As part of this, we continue to expect to reset retail inventory in Asia Travel Retail by the end of Q3. 2nd, we are reflecting the risks of business disruption in Israel in other parts of the Middle East. For fiscal year 2024, our revised outlook continues to expect Sequentially improving sales trend each quarter, with double digit organic sales growth in the second half. We also still expect sequentially stronger adjusted operating margin each quarter with continued consumer facing investment in our growth engines. Moreover, we are accelerating and expanding our profit recovery plan, which is designed to benefit fiscal years 20252026 for us to realize our ambitions to rebuild profitability despite The external headwinds increased pressure on the business in fiscal year 2024.

Speaker 2

On our earnings call in August, I described Our 4 strategic imperatives for fiscal year 2024, which are drive momentum where our business is Driving. Return to growth in the U. S. Capture demand from the returning individual travelers in Asia travel retail and begin to rebuild our profitability. Let me share with you our progress across these pillars as well as the Framework of our accelerated and expanded property recovery plan.

Speaker 2

First, we are focused on extending the gains we achieved in fiscal year 2020 In the numerous developed and emerging markets around the world where we prospered. In the Q1, we did just that. In the markets of EMEA, we achieved impressive results once more, driven by the U. K. And Germany.

Speaker 2

Organic sales growth was balanced across brick and mortar and online as engaging activation in store and on social media resonated strongly with consumers across our brand portfolio. We extended our prestige beauty share gains in Western Europe, driven by our high quality hero products and innovation. In EMEA's emerging market, India was a standout, driven by stellar gains by the ordinary and double digit growth by MAC. In Latin America, prestige beauty remains vibrant and we again achieved strong results. Mexico and Brazil excelled, each up double digits organically.

Speaker 2

Our localized go to market initiatives in these 2 dynamic emerging markets are succeeding in attracting new consumers. We continued our winning ways in many markets across Asia Pacific. The evolution of Hong Kong's SIR is especially compelling and we realized very strong prestige share gains with our brands, Our performance in Japan and Australia once again robust, driven by our diversified brand portfolio catering to local desires. Around the world, our direct to consumer business performed especially well. Every region contributed, led by double digit organic sales growth in and we have been ready to meet consumers as they again embrace their enthusiasm for the category.

Speaker 2

Makeup thrived in the quarter as the Americas, the markets in EMEA and Asia Pacific each contributed high single digit organic sales growth to offset the pressure in the category from Global Travel Retail. We are successfully tapping into and creating trends with on point innovation like M. A. C. Studio Radiance Foundation and Estee Lauder Futurist Skin Thin Serum Foundation.

Speaker 2

During this exciting area for the category, our brands are leveraging their expert artists and social media know how to engage with consumers and generate strong and expanding levels of earned media value. Fragrance, again, prosper We delivered our 11th consecutive quarter of organic sales growth, led by outstanding performance in the Americas and Asia Pacific, Strong share gains in prestige fragrance in Western Europe. We continue to believe that we are still in the beginning of a promising long term phase of growth for Indeed, in Asia Pacific, fragrance represent 8% of the prestige beauty industry, whereas in Western Europe, it is 40% of the industry. We are well positioned for this growth opportunity with our luxury and artisanal brands alignment with the trends in the region as consumer gravitate to fragrance collections in addition to single source trends for multiple distinct scents of the highest quality. Moving to our 2nd pillar.

Speaker 2

We are focused on returning to growth in the U. S. For the full year and made strides in the Q1 when encouragingly our organic sales growth improved strongly on a sequential basis and moved from a modest decline last quarter to mid single digit growth this quarter. Our multifaceted strategic plan Included launching a robust innovation pipeline with increased focus on breakthrough ideas and leading trends, increasing engagement by brands on social media to realize greater her media value, accentuating our strength in luxury and artisanal fragrance and in high performance ingredient led and derma skincare and expanding brand reach in specialty multi to attract new consumers. During the Q1, innovation proved to be a powerful catalyst for growth in the U.

Speaker 2

S. Across every category. The contribution are many from Clinique high impact, high-five full volume mascara and M. A. C.

Speaker 2

Studio Radiant Serum Powered Foundation in makeup to Estee Lauder Advanced Night Repair Rescue solution in skincare and more. Through these high profile launches with sophisticated media strategies, our brands Elevated their engagement on TikTok, Instagram and other platforms. Impressively, Max earned media value in the U. S. Beauty improved several ranks to number 2 in the month of September, further solidifying its number 1 rank globally.

Speaker 2

We also achieved strong progress in fragrance in the U. S, driven by our luxury and artisanal brands. Le Labeau, Tom Ford and Jo Malone London Each rose double digit driven by multiple growth engines from innovation to online, brick and mortar and expanded consumer reach. Encouragingly, We returned to growth in skincare in the U. S.

Speaker 2

The Ordinary was a standout. Consumers continue to gravitate to the brands for its scientific ingredient led skincare, driving strong prestige beauty share gains. The brand launch of suiting and barrier support serum drove exceptional new consumers acquisition trends on brand.com and strategically expanded the de ordinary portfolio to include more multi active products. Moreover, Esteluda and La Mer further bolstered our improving performance in the category. Let me now discuss the 3rd pillar to capture demand from the returning individual travel in Asia travel retail.

Speaker 2

For the Q1, retail sales in Global Travel Retail were substantially ahead of our organic sales decline, which reflects the execution of our priority to reduce trade inventory in alignment with retailers. Indeed, we are making solid progress through exciting activation of our heroes, capitalizing on innovation and investing in beauty advisors. Across these three pillars, one of our greatest strengths to leverage is our diverse brand portfolio, which was a fundamental driver of our progress during the this quarter. Mac's excellent performance showcased the strength of our portfolio among large brands, While The Ordinary drove double digit organic sales growth among our scaling brands, El Labo excelled, rising over 40% among on our profit recovery plan. We expect to realize $800,000,000 to $1,000,000,000 of incremental Operating profit across fiscal years 2025 to 2026.

Speaker 2

The plan consists of 4 building blocks to improve each of gross margin and operating margin. 1st, we are focused on optimizing mix by elevating luxury across brands, most especially in skincare and fragrance driven by consumer preferences by expanding our direct to consumer ecosystem across brick and mortar and in line. 2nd, We have identified many opportunities to maximize value through better price realization and accretive innovation. 3rd, We intend to increasingly leverage the strategic investment we have made over the last few years, most notably our new manufacturing facility in Japan, our new China in Shanghai and expanded online capabilities. Lastly, we believe we can unlock meaningful cost efficiency from a combination of shorter supply chains, regionalization of our value chain and improved forecasting accuracy enabled by our new integrated business planning process across the global operation supported by advanced AI capabilities.

Speaker 2

Before I close, I'm pleased to share that today we will release our fiscal year 2023 social impact and sustainability report. Future advancement made possible by the extraordinary efforts of our employees around the world across our ESG areas of focus and previously stated goals. Importantly, we again achieved scope 1 and scope 2 carbon neutrality and maintained our Status of 100 percent renewable electricity globally for our direct operations. The report also details that we attained our Global gender pay equity target for selected employees populations and achieved our spending targets with women and black owned suppliers and made strong progress toward our water withdrawal reduction and packaging targets. Today, we will also publish our 2nd climate transition plan, which describes the effort in our ongoing climate transition journey.

Speaker 2

In closing, in fiscal year 2024, we will remain focused on driving momentum in our markets of strength, returning to growth in the U. S, normalizing our Asia travel retail trade inventory and expanding prestige beauty share further in Mainland China from our 2020 5 and 2026. To our employees, these are difficult times for the world and all of us. I'm grateful for what you do each and every day in caring for each other and for our beautiful company. Thank you.

Speaker 2

And I will now turn the call over to Tracy.

Speaker 3

Thank you, Fabrizio, and hello, everyone. Let me begin with a brief review of our Q1 results in order to devote the majority of my discussion to our revised fiscal 2024 outlook in our profit recovery plan. Our 1st quarter organic net sales declined 11% and earnings per share was $0.11 From a geographic standpoint, organic net sales in the Americas increased 6%, led by mid single digit growth in North America and continued strength in Specialty Multi. In Latin America, net sales rose high single digits and was driven by continued strength in makeup as well as strong growth in both brick and mortar and online channels. Organic net sales in our Asia Pacific region fell 3%, primarily due to incremental headwinds from the slower than expected recovery of overall prestige beauty in Mainland China.

Speaker 3

There were several bright spots in the rest of the region, led by triple digit growth in Hong Kong SAR as well as double digit growth in Japan and Australia. Our strategic investments in brand activation and new product innovation continue to resonate well with consumers in these markets. Hong Kong SAR also benefited from increased traffic in brick and mortar due to fewer COVID related restrictions compared to last year and the resumption of tourism. Organic net sales fell 27% in Europe, the Middle East and Africa due to the ongoing headwinds in our Asia Travel Retail Business. The overall challenges in our Travel Retail Business more than offset the performance in the rest of the region, where we saw strong growth in skincare and makeup as well as growth in most Western and Emerging Markets.

Speaker 3

Organic net sales growth was driven by our developed markets led by the U. K, Germany and France. From a category perspective, Fragrance continued to lead growth with organic net sales rising 5%. Strength from hero products as as compelling innovation from Laliboe propelled double digit increases in the Americas and in Asia Pacific. Tom Ford also contributed to growth, rising double digits in the Americas.

Speaker 3

Organic net sales rose 1% in makeup. We continue to enhance consumer engagement through strategic investments and brand campaigns, including social media activation and new product innovation. Once again, MAC was the overall top performer, and Too Faced, Tom Ford and Clinique all contributed to growth as well. Organic net sales declined 7% in Hair Care and 21% in Skin Care. The pressures in Asia Travel Retail and in Mainland China drove the decrease in skincare.

Speaker 3

The declines from Estee Lauder and La Mer were somewhat offset by strong growth from the ordinary. Consumer demand for the brand's hero products and new product innovation boosted its standout Our gross margin declined 4.40 basis points compared to last year. The benefits from the strategic pricing actions we took at the beginning of the fiscal year were more than offset by the under absorption of overhead in our plants, due primarily to the lower production of skin care products that accelerated in the second half of fiscal twenty twenty three, higher obsolescence charges and an increase in promotional items such as sets and samples to support consumer activation. Operating expenses increased 9.50 basis points as a percent of sales, driven largely by the reduction in sales. We maintain key investment plans in areas such as advertising and promotional activities, innovation and selling to accelerate growth where we had momentum, which collectively accounted for 4 80 basis points of the increase compared to last year.

Speaker 3

Operating income declined 84% to $108,000,000 and our operating margin contracted to 3.1% from 17% last year. Diluted EPS of $0.11 decreased 92% compared to the prior year. The impact from the cybersecurity incident we disclosed this past July was $0.08 dilutive to EPS. The acquisition of the Tom Ford brand was neutral to EPS, including interest expense related to our debt financing and reflecting savings from royalties we no longer as we now own the brand. During the quarter, we utilized $408,000,000 in net cash flows from operating activities compared to $650,000,000 last year.

Speaker 3

The decrease from last year reflects lower levels of working capital, including lower inventory levels, partially offset by lower net income. We invested $295,000,000 in capital expenditures and we returned $236,000,000 in cash to stockholders through dividends. Turning now to our outlook for the 2nd quarter and the full year. As Fabrizio mentioned, while we delivered on our Q1 expectations, we are lowering our fiscal 2024 outlook for the balance of the year to reflect the slower than expected pace of recovery due to incremental external headwinds that continue to evolve during the Q2. This includes the slower than expected growth in overall Prestige Beauty as well as the containment of the unstructured market activity in Asia Travel Retail and in Mainland China.

Speaker 3

This reduction also reflects the risks of potential business disruptions in Israel and other parts of the Middle East as well as currency headwinds. Using September 30 spot rates of 1.055 for the euro, 1.219 for the pound, 7.302 for the Chinese won and 13.49 for the Korean won. Currency translation is and will be subject to negatively impact reported sales and diluted EPS for the Q2 and for the full year. We expect organic sales for our 2nd quarter to decline 8% to 10%. The incremental pressures from impacting sales in our Asia Travel Retail Business and Mainland China are expected to continue to more than offset and we will

Speaker 4

now begin the Q1 of 2019.

Speaker 3

Currency translation and the potential risks of further business disruptions in the Middle East are each anticipated to dilute reported sales growth for the 2nd quarter by 1 percentage point. We expect 2nd quarter adjusted EPS of $0.48 to $0.58 for a decline between 62% to 69%. This includes dilution of approximately $0.08 from assumed risks of potential business disruption in Israel and other parts of the Middle East and approximately $0.04 from currency translation. The increases in our full year effective tax rate and net interest expense are collectively expected to dilute EPS by $0.04 In constant currency, adjusted EPS is expected to decline between 60% 66%. For the full year, we expect organic sales to range between a decline of 1% and an increase of 2%.

Speaker 3

Currency translation and the potential risk of further business disruptions in the Middle East are each anticipated to dilute reported sales growth for the fiscal year by 1 percentage point. We expect full year operating margin to be between 9% 9.5%, a contraction from 11.4% last year due to the lower sales growth level. We now Expect our full year effective tax rate to be approximately 28%, reflecting the full year estimate of our geographical mix of earnings. Diluted EPS is expected to range between $2.17 $2.42 before restructuring and other charges and adjustments. This includes approximately $0.22 from the potential risk of further business disruptions in the Middle East as well as approximately $0.16 from currency translation.

Speaker 3

The increases in our full year effective tax rate and interest expense are collectively and expected to dilute EPS by $0.16 In constant currency, we expect EPS to fall between 25% to 33%. Given this more challenging backdrop for fiscal 2024, we have advanced the development of our multi year profit This plan is designed to accelerate the pace at which we expect to rebuild our margins, while also facilitating operational efficiencies to support go to market agility in our local markets. The planned initiatives will target specific areas to deliver expanded gross margin and operating profitability improvements and is initially expected to drive $800,000,000 to $1,000,000,000 of incremental operating profit over the next for fiscal years. We aim to accelerate many initiatives and substantially operationalize the plan in the second half of fiscal 'twenty four to enable the realization of a meaningful amount of the benefits beginning in fiscal 2025. Our first priority is to accelerate the rebuild of our gross margin.

Speaker 3

We plan to optimize our category, product and channel mix to support Profitable growth as well as focus on accretive innovation. We aim to better capitalize on our strategic Pricing initiatives by reducing discounts related to excess production and continuing to exercise our pricing power ahead of inflation in our markets. Furthermore, we plan to reduce excess and obsolete inventory by enhancing our operational efficiencies and begin to leverage the investments we've while further investing in consumer facing activities that are imperative to accelerating recovery and driving long term profitable growth. Our main areas of focus include containing headcount as well as reduction in costs related to indirect procurement, T and E and transportation. These are just a few examples of actions we expect to take under our profit recovery plan.

Speaker 3

We plan to share more during our Q2 earnings call in February. In closing, while we are encouraged by the strength we are seeing across our brand portfolio in recovery markets, Intensifying macroeconomic and geopolitical volatility as well as weakening consumer confidence in certain markets Have unfortunately slowed the pace of our anticipated recovery in isolated markets. Given these incremental challenges, we are taking actions through the advancement of our profit recovery plan to support our intention to progressively rebuild our profit margins over the next few years. We remain confident about the long term prospects for Global Prestige Beauty and in our corporate strategy to drive long term sustainable profitable growth. The desirability of our brands as well as the positive momentum we are seeing across And in certain markets give us optimism for the future recovery in all of our markets and demonstrate the resilience of our multiple engines of growth and our ability to drive share gains globally.

Speaker 3

Our return to sales growth, combined with the profit recovery plan, which we plan to finalize and begin implementing in the second half of this year, as I said before, support the achievement of margin rebuilding and profit recovery in the next few years. I would like to extend our heartfelt appreciation to our employees around the globe for their continuing commitment and efforts to deliver our results during these challenging times. That concludes our prepared remarks. We'll be happy to take your questions at this time.

Operator

Ladies and gentlemen, we'll now begin that question and answer to ensure the best sound quality. To join the

Speaker 4

question queue.

Operator

Our first question today comes from dara Mohsencia from Morgan Stanley. Please go ahead with your question.

Speaker 5

Good morning. So apologies for multipart question, but just had a few things on the profit recovery program. Conceptually, it sounds like it's more of a recovery from a depressed fiscal 'twenty four base, Pushing even harder on some of the building blocks you outlined previously, is that the case or are there more significant Organizational changes that are now new in this plan to generate incremental savings and also that $800,000,000 to $1,000,000,000 profit recovery, Should we think of that as just savings and recovery from a depressed base and then base business top line growth on top of that could lead to greater recovery? How do we think about that? And then just B, taking a step back, why not get even more aggressive here in terms of posture with the larger restructuring?

Speaker 5

Obviously, the external environment has changed. There's been some internal issues with supply chain and forecasting. So just thoughts on taking a more aggressive

Operator

And ladies and gentlemen, at this point, we may be having some technical difficulties with the speaker line. So one moment while we attempt to reconnect the speaker line. Dara, I'm just going to leave you in the queue. I'll have your line muted and we'll open you up as soon as we rejoin the speakers. And ladies and gentlemen, once again, we do thank you for your patience as we attempt to reconnect the speaker line.

Operator

I'm going to place the hold music back on here momentarily. I'll let you know as soon as we join the speakers back into the conference. And ladies and gentlemen, we do have the speaker line reconnected to the conference. I'd like to turn the floor back over to Rainey for a quick statement.

Speaker 1

Thank you, everyone, for your patience. We apologize for the difficulty. Fabrizio and Tracy are ready for our Q and A session now. So Jamie, if you can Our first question, please.

Operator

Absolutely. And our first question once again is Dara, please go ahead and restate your question.

Speaker 5

Hey, guys. So just wanted to start with a clarity question on the profit recovery program. It sounds like it's stemming more from a recovery versus a depressed fiscal 'twenty four base and pushing even harder on some of the building blocks you had previously outlined. Is that the case or is it more of the larger organizational changes here that are new in this plan versus 3 months ago? And also is that $800,000,000 to $1,000,000,000 profit recovery, is that just the savings and recovery from a depressed base?

Speaker 5

And should we Base business growth on top of that in terms of a top line rebound and the flow through to profit. And then B, and apologize for the multipart, but I want to get clarity Just taking a step back, why not get more aggressive here with the larger restructuring? Obviously, the external environment has changed. There's been internal issues the last few quarters with supply chain and forecasting. In theory, SG and A levels have looked high ex marketing relative to peers.

Speaker 5

So Just any thoughts on taking a more aggressive tack with a broader restructuring and how you guys think about that? Thanks.

Speaker 3

Thanks, Dara, for the question. And again, we do apologize for the technical difficulties. As it relates to the profit recovering planned. It is incremental to the growth that we expect from the base depressed level this year, as you indicate, Dara. So and we are looking at everything.

Speaker 3

Obviously, the first thing we're looking at is, as we mentioned in our prepared remarks, recovering our gross profit margin. And to your point, we've had issues with High levels of inventory, we've talked for years about and you all know that we typically because of our lead times and our historic footprint carry high levels of inventory, which does affect Our agility to be able to manage when shocks happen to the system, which is what's happened over the last couple of years. So Certainly regionalizing our supply chain and completing the manufacturing facility we have in Japan will help us over the next 2 years in terms of being able to take more inventory out of transit and being able to produce a bit closer to demand. We also have implemented and Fabrizio talked about our integrated business planning process, which is leveraging Some of the tools that we've invested in over the last few years to really improve the accuracy of our forecast, to include a bit more of the commercial drivers that drive our business in our forecast, again, to improve the accuracy and have less excess inventory. And then the actions that we're already taking this year to help improve our gross margins for next year is a significant pull down in our production volume.

Speaker 3

So our production units this year are down about 25% from what they were last year. So even though we are anticipating now more modest growth given the update to our forecast, We are drawing down on the inventory that we have on hand, as well as obviously some of the actions we're taking from a shipment standpoint to draw down the inventory that we have in trade in Asia Travel Retail. So there are a number of Actions that we're taking, that will help gross margin. We are going through a SKU rationalization program, in addition to cutting, some of our Smaller, diluted innovation programs that were planned over the next year or 2. So there are lots actions we're taking, all of those actions are not finalized yet, but many of them are in flight.

Speaker 3

They just won't impact as much this year as they will future years. And then yes, we are looking at our expense base and how we operate going forward, especially given our current level of sales and the lower base that we will be growing off of.

Operator

Our next question comes from Stephen Powers from Deutsche Bank. Please go ahead with your question.

Speaker 6

Yes. Thank you and good morning. I guess, And probably Tracy for you as well. Just maybe you could help try a little bit more help bridging to the implied second half revenue and It's a pretty significant step up from where you will be as of the end of December based on the 2Q guide. And that's despite battling what sounds like it will be Headwinds in Asia travel retail inventory that will extend into at least the Q3.

Speaker 6

So again, maybe you can just the building blocks there, your level of confidence and visibility and Alongside that, it might help just if you have a view on what consumption is for your brands through this Q1, maybe through the first half versus what you're actually shipping, because I think a big Part of that bridge is that you start to ship more to consumption as you get out from underneath the inventory headwinds. But again, it's a very big step up. So just some clarity and

Speaker 4

Some

Speaker 6

more detail there would be great. Thank you.

Speaker 3

Yes. So, no, you're exactly right. The assumption is that we ship more towards we're able to ship more towards the retail trends. I mean, as we said in the prepared remarks, our retail trends are ahead Our net trends in Asia Travel Retail, both still down, because we are destocking the trade. And so the expectation is that that will be completed by the end of the third quarter, so in the second half of the year.

Speaker 3

So part of this a large part of the step up that you see in the second half of the year Is our shipping more towards the retail trends that we are expecting in the second half of the year. That's a big part of it. And when you think about what happened to us and what we're anniversarying from the second half of last year, where we had the policy changes first in Korea that impacted our 3rd Q4 and then the policy change or policy reinforcement in Hainan, which impacted our Q4. We had in some parts of our travel retail business, very low shipments given those policy changes. And so we are anniversarying as well some of the initial shocks of that.

Speaker 3

Lastly, I would say that we are seeing travel come back slowly. So again, more slowly than what we anticipated. We are seeing lighter levels of conversion relative to what we saw certainly pre pandemic or even pre the significant Changes in policy across the Asia region. And but we are seeing traffic pick up and we are certainly expecting that conversion will gradually Pickup as well in the second half. So those are some of the things that are underlying our second half expectations.

Speaker 3

And the reason you see That's a big step up in terms of volume. It's a combination of multiple factors, mostly in our Asia travel retail. A bit of it is a pickup as well in China also. Fabrizio, I don't know if there's anything you want to add.

Speaker 2

I just want to add that the our retail underlying retail calendar year to date It is the mid high single digit already globally. And our estimate of retail Continue to be actually improving on this point. So the retail base, which is driven by the consumption of consumers, by the innovation, By the strength of the brand, by the demand from the consumer standpoint, is very solid.

Speaker 3

For calendar year.

Speaker 2

For calendar year to date. And as Tracy has said, the readjustment of inventories It's the big things that we are dealing with and the evolutions of the policies that have Created these readjustments is what has been difficult to predict and anticipate and has been pretty volatile. And so that's the adjustment, but the underlying fundamentals are already strong. It's not that we need to develop them in order to deliver the retail in the future with just to continue evolving on these fundamentals.

Speaker 6

That's very helpful. Thank you very much.

Operator

Our next question comes from Jason English from Goldman Sachs. Please go ahead with your question.

Speaker 7

Hey, good morning folks. Thanks for slotting me in and thanks for sharing that encouraging data point on retail sales. Tracy, you're talking about how Shipments way down last year and it's kind of following the story for last year. We've been thinking once you get leverage back in, once you're able Turn back on the sales, catch up with retail sales, it's going to give you a lot of operational leverage to aid the gross margin recovery, and that's really a sales problem. But if I objectively Step back and look at the composition of the P and L, it does tell a slightly different story.

Speaker 7

I mean, it doesn't look like a revenue problem. Revenues actually just round trip where you were in the Q1 of 2019. It looks like it's really a cost problem despite revenue being back where it was in Q1 2019, COGS up $250,000,000 SG and A up $320,000,000 and this is despite a cost cut program that you announced in late 2020, which So far, it doesn't appear to have yielded any savings. So can you help us understand what's caused the cost to run up so much over the last couple of years? Where have the efficiency savings gone so far?

Speaker 7

And I guess you are announcing the new actions to kind of go after it. Is that enough to kind of take that back out with the initiatives you have in place?

Speaker 3

Yes. No, great question, Jason, so if you look back to the composition of the P and L in fiscal 2019, you'll see that our gross margins were higher. And certainly our cost as a percent of sales was a bit lower. And obviously, given the pull down that we've had in this latest guidance review, our cost as a percent of sales are higher as well. But we did have we've had 2 cost saving programs.

Speaker 3

We had the Leading Beauty Forward program and then we had the post COVID Business In both of those instances, certainly Leading Beauty Forward gave us runway. We were 60, 80 to 100 basis points a year through that program. And that program allowed us to reinvest in capabilities that we needed, in particular to accelerate some of our digital marketing activities, to create some shared services structures in some of our functional areas and to be able to leverage cost better in those areas. So those programs that program was successful in both delivering margin expansion and expense leverage at the time. Advance allowed us to close some of our underproductive brick and mortar doors and take a little bit of org adjustments as well.

Speaker 3

But we have, over the last 2 years invested in a number of capabilities, that have been needed, in terms of in our regulatory area, that includes cyber, but also in the regulatory area, given the increasing regulations in all of the countries that we do business with and the claims that we need to support our brand marketing initiatives going forward. We've made investments in areas like our sustainability program. So we have made a number of investments that Other than the shocks that we've had over the last couple of years have been investments that were needed in the company. Certainly, as we look forward, we are looking at, as I said before, the profit recovery program It's both focused on gross margin because we're not back at the gross margin levels that we were at in fiscal 2019 or even before. And we also are looking at expense areas, everything from our procurement program, where we expect that we can get some savings there, to other org efficiencies.

Speaker 3

So more to come in January, February, actually, when we give you our 2nd quarter Results on what the final plan will look like, but it's believe me, we are as focused on The P and L structure recovery as you are, Jason.

Speaker 7

Okay. Thanks.

Speaker 2

Jason, just would like to add a point on the fact that in really the property recovery plan needs to rebuild gross margin And as you said, also our new capability that we invested in that Tracy mentioned also in IT, in many other areas needs to align to our at current sales levels. And that's the work we are going to do as well. So those are the 2 big area of focus. And in February, We will give much more specifics and details how will affect, will impact 2025 in the majority in 2026. And so it's a politically a plan.

Speaker 2

I just want to say the entire organization is aligned on this plan. We have teams already working on this. We are completely committed to deliver that. And I just want to make a clarification on the programs that we announced in 2020, As you said, it didn't deliver save it did deliver saving in the area of selling. That was the focus.

Speaker 2

Remember, this program was tailored a lot to the fact that the COVID had disrupted the go to market part of the business and then increased Our sales online versus the sales in brick and mortar, so we need to reallocate resources more to online and less to brick and mortar and to create the right future in the future balance of cost between the two areas, that's what we did. In fact, we invested in the online Progress today, we are still leveraging the benefits and we did reduce our cost in the brick and mortar selling areas accordingly to the trends that COVID-nineteen created. So when we did in the past these kind of programs, we have been pretty successful in delivering what we wanted.

Speaker 7

Okay. Thank you. I'll pass it on.

Speaker 2

Thank you.

Operator

Our next question comes from Olivia Tong from Raymond James.

Speaker 8

A bit of a multipart question and follow ups to a few. But First, just a point of clarification on the global retail number that you gave up mid to high single digits, was that for you or for the category? And then On Travel Retail, can you give us a sense on your visibility into how much inventory is still sitting with the groups or individuals versus in the Brick and mortar duty free channel, which we have a little bit better clarity in? Thank you.

Speaker 4

Yes.

Speaker 2

It's our retail sales I was referring to. So calendar year to date in 2023, our trend Retail is mid high single digit up to date and our estimate for the future It's to continue improving that trend. So my point is that retail is solid and the negative net sales that we see in these 1st 6 months for sure. These months of the fiscal year are related to the readjustment of inventories that Tracy was mentioned. 2nd, on the visibility on these inventories in Travel Retail.

Speaker 2

And by the way, when we say this retail, we say ex the travel retail numbers. Just one clarification. So once the travel retail number, the point we are trying to make is that when the travel retail number, The retail and the net will be aligned and we said that they will be aligned as of the end of the third quarter. As of this moment, the retail the solidity of the retail progress is already in the making. That's the point we are trying to make.

Speaker 2

Anyway, on Travel Retail, we had a significant stock reduction in this Q1. And we aim to be in line with the inventory expectation of retailers by the end of March and we have visibility into these numbers. We have visibility, we have exactly the understanding with each one of our retailers on where we are today, what are the programs that we are doing in order to accelerate sales and retail of the existing stocks and what are the programs to obviously replenish and sell in innovation and all what we need to do in these areas. And finally, how by end March, we aim to have the retail and the net aligned.

Operator

Our next question comes from Filippo Falerni from Citi. Please go ahead with your question.

Speaker 4

Hey, good morning, everyone. So I wanted to ask a question on Mainland China. It's the Q1 where you guys Talk about a bit of a slowdown relative to prior quarters. So maybe Fabrizio, can you give some context on The level of slowdown that you're seeing in the category and then from a competitive standpoint, we've Seeing some local brands doing a little bit better, more on the mass side, but have you seen any trade down within the category, both on skincare and cosmetics. Thank

Speaker 2

you. Yes. First of all, The market was growing 2% in the Q1 in China. Our retail during this quarter was flat, but our retail in China calendar year to date is growing and we are building market share, but in that specific quarter, The market growth went down to 2%. Now our estimate of the recovery of the beauty market in Prestige was higher than that and that is the one of the key adjustments we are making in projecting the year.

Speaker 2

That's the point. And so this 2% is the current trend level. Also, As I said in my prepared remarks, the pre sell period of Timo and particularly on in general, the single day confirms a softer trend versus year ago, and that's why we are reflecting this confirmation. Now we are more optimistic about the next part of the single day events in November, but is the pre sell was confirming a softer market. In terms of your second part of the question is the there are local brands in mass and in MasTige, which are doing well and we should start doing well in China for sure.

Speaker 2

In Prestige, the impact of that is for the moment limited. And so, we see Prestige being solid in comparison to mass in general and we don't see a big movement from prestige to mass at this point in time.

Speaker 4

Great. Thank you.

Operator

Our next question comes from Bryan Spillane from Bank of America. Please go ahead with your question.

Speaker 9

Thanks, operator. Good morning, everyone. I wanted to go back to Jason English's question regarding margins. And I guess, As we kind of look forward and try to think about the rebuild to the previous margin aspirations, How much of it will do you expect to come from the expanded cost savings? And how much is just resetting The business mix, because travel retail is so profitable.

Speaker 9

And so do we need travel retail to get back to kind of a similar percentage of sales as it where it was 3 years ago or would you be able to get there if Travel Retail ended up being smaller for reasons given how cyclical it is.

Speaker 3

Yes. No, it's a great question. Given where Travel Retail is right now, and certainly, we, I'm sure many others or thinking about the future of travel retail, which we are very encouraged by, in terms of a return to growth, but a return to the prior levels don't know. You have much now of the volume that has shifted to the local market, and I would expect to continue to see growth in the local market as well. So there may be a rebalance as it relates to the consumption for the Chinese consumer in particular, as well as perhaps other consumer groups.

Speaker 3

So we're not counting on travel retail to get back to prior levels. If it does, that's great. But our profit recovery program, combined with some of the growth plans that we have for our markets and brands going forward, Are not relying on that to return to profit margin the profit margins that we had previously.

Speaker 2

And I would like to offer a bit of historical perspective on what happened during this COVID Period and the volatility that is brought. I mean, when you because you were comparing in your question versus before COVID versus the 3 years ago previous in so it takes 2019. Our business in Mainland China versus 2019 is more than doubled. Our TR business today globally versus 2019 is by now with this estimate that we are Given to you now is actually well below. So that but it's true that during this COVID period, The TR business also driven by the Instructure phenomenon that we have discussed previously was actually up.

Speaker 2

But then by now this has been reabsorbed. So the profile of the business in with Chinese consumers In 2019, was that there was a base sales in mainland China. There was a lot of the sales to Chinese consumer that were happening around the world in their travel. This was estimated to be up to 40% of what was the total consumption at that time before COVID. And a lot of this was in travel retail Also was in the cities that were visited, like, I don't know, London, Paris, New York, Hong Kong, Tokyo, etcetera.

Speaker 2

So Now during COVID, obviously, the frontier were all closed. So this consumption came back into Mainland China. In fact, Our business in Mainland China today, as I said, is double the what it was. And some of it went into travel retail, Lihanna development and all the other things that happen, which are very good for the long term. And some of it went into the unstructured business, which is actually going down now and is part of the readjustment and these are positive things for the long term.

Speaker 2

And so the resulting the result of all These movements is frankly solid and sustainable for the long term, because the results is a Solid business in Mainland China, which we are supporting and will continue to support. We have built an R and D center. We have created all the abilities to be more locally relevant in the future and to continue to support this business and invest in this business And investment is very important market for us in the long term that we believe is core to also to our future growth algorithm. At the same time, The amount of volatile business that went into the TR in the period of COVID has been derisked and is going down. And as we said, we need to continue to de risk it in this fiscal year and that's what we are planning and that's what we are announcing in term of The resulting guidance of that and the travel business, meaning the regular travelers In Chinese consumers, they are traveling the world.

Speaker 2

This is gradually going up again, and so we'll create Good consumption by regular travelers. In this moment, it's going up more in Asia than in The travel into the West is still relatively limited, but we forecast this over time to continue to improve. And the lending place of these moments will be the sustainable profitable business that we are coming back to.

Speaker 9

Okay. So to be clear, we can get back to kind of the previous profit algorithm even if travel retail and Basically, hang on, it's not as big as it was previously.

Speaker 2

Yes, we believe so.

Speaker 9

All right, perfect. Thank you very much.

Operator

And ladies and gentlemen, with that, we've reached the end of today's question and answer session. I'd like to Turn the floor back over to Fabricio for any closing remarks.

Speaker 2

Thank you. And I just wanted to try to summarize this enormous moving part and make sure that we give you The clarity of what we are focused on at this point in this moment. So we expect calendar year 2023 to be the final and frankly painful post COVID reset period for the company. We move forward with confidence as our fundamentals are strong in these attractive prestige beauty industry. Our calendar year to date retail sales performance remain very solid in all recovery markets and in general, both developed and emerging in the mid single high digit that I quoted before.

Speaker 2

Our brand portfolio is better than ever with the recent acquisition of Tom Ford solidifying our luxury strategy and the ordinary, which we didn't talk a lot in this call, but is becoming a powerhouse brand at the entry of growing Active Derma segment and is definitely our fastest growing brand in our portfolio. Our innovation pipeline is robust for fiscal year 2024, but it gets even better and bigger and stronger in fiscal year 2025 with the expansion into the white spaces opportunity that we have identified. We are on track to align retail and net sales via inventory reduction with our retailers in China Private Retail as discussed during the call. We are focused on accelerating a more balanced growth in the future by market and by channel and importantly via the profit recovery plan, we are preparing to rebuild gross margin, leverage our new capabilities to align our expenses to our current sales level and further strengthen our consumer facing activities. We have the strategic focus and the talent to do this work, and together intend to return to our historical cadence of delivering sustainable sales and profit growth.

Speaker 2

And thank you for your time and for your attention today.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • Estee Lauder delivered organic sales decreased 11% in Q1, with a 51% drop in global travel retail offset by 4% growth in other regions, while adjusted EPS of $0.11 beat expectations on stronger skincare contribution and disciplined expense management.
  • The company is lowering its FY2024 outlook due to slower recovery in Asia travel retail and Mainland China and potential Middle East disruptions, but still anticipates sequential quarter-over-quarter improvement and double-digit organic growth in H2.
  • Performance highlights include mid- to high-single digit growth in the Americas and EMEA, double-digit gains in Asia Pacific ex-China, sequentially improving U.S. results driven by robust new product innovation, and an 11th consecutive quarter of organic fragrance growth.
  • The newly accelerated profit recovery plan aims to generate $800 million–$1 billion of incremental operating profit in FY2025–26 through mix optimization, better pricing, leveraging new manufacturing and digital capabilities, and supply-chain regionalization backed by AI.
  • Estee Lauder published its FY2023 social impact report, achieving Scope 1 and 2 carbon neutrality, 100% renewable electricity, global gender pay equity for selected populations, and progress on water withdrawal and sustainable packaging goals.
A.I. generated. May contain errors.
Earnings Conference Call
Estée Lauder Companies Q1 2024
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