Good day everyone and welcome to The Estée Lauder Company's Fiscal 2021 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through Brand.com and through third-party platforms. It also includes estimated sales of our products through our retailer’s websites. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Thank you, Rainey and hello everyone. I hope that each of you are in good health, as the world continues to confront COVID-19. Our hearts are with those impacted and our focus remains first and foremost, with the safety and well-being of our employees, their families, and our consumers. I continue to be incredibly inspired by our employees' enduring compassion, creativity, and resiliency, you are making us a better company, and I stand my deepest gratitude. Our diversified prestige beauty portfolio of categories, channels, geographies, brands, consumers segments, and price points give us many levers to fuel the business, both in times of prosperity as well as during more challenging times. In this most difficult moment, our multiple engines of growth strategy is invaluable. For the first quarter of fiscal year 2021, sales declined only 9%, a significant sequential improvement, driven by every category. Fragrance and healthcare in particular, had striking progress. Our hero products and innovations thrived and contributed meaningfully to sales. We successfully adjusted our cost structure to minimize the leveraging effects of lower sales, resulting in an operating margin of 20%, very close to the first quarter of last year, when we had double-digit sales growth. In different periods over the last decade, we were driven by different engines, leading to prestige beauty share gains each year and we expect this year to be no different. Since the pandemic began, we estimate that we have grown prestige beauty share globally. On our last earning call, we explained that the growth engines at the moment are the skincare category, the online channel in, Asia-Pacific regions, each delivered terrific performance to begin our new fiscal year. The Estée Lauder brand performed exceptionally well, returning to growth in the quarter powered by its hero franchises in skincare. Its Advanced Night…

Thank you, Fabrizio and hello everyone. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call and net sales growth numbers are in constant currency. So, starting with the first quarter results, net sales decline 9% driven by the ongoing effects of the COVID-19 pandemic on our brick-and-mortar distribution throughout the world. We achieved strong growth in our global online channel, Mainland China, and the skincare category and delivered better than expected results in the travel retail channel and in North America. Other areas progressively improved compared to last quarter as retail doors reopened. The December 2019 acquisition of Dr. Jart contributed approximately three points of net sales growth. From a geographic standpoint, our Asia-Pacific region rose 7%, driven primarily by strong double-digit growth in skincare and the addition of Dr. Jart sales in Mainland China rose double-digits as sales in brick-and-mortar retail continued to improve. The pace of online sales growth in China was slower this quarter, following the highly successful 6.18 Mid-Year Shopping Festival programs last quarter. Most brands and channels rose double-digits and China. Korea rose high single-digits, excluding Dr. Jart and several smaller markets returned to growth as well. Sales in Japan declined due to a tough comparison to the prior year, in which sales grew nearly 20% as consumers bought ahead of an October 2019 VAT increase. The market has also suffered from softer in store traffic due to a second wave of COVID-19. Sales in Hong Kong continued to be depressed as well due to the pandemic. Net sales in our Europe, the Middle East, and Africa region declined 9% with virtually every market continuing to feel the effects of the pandemic. While online growth continued to be quite strong, brick-and-mortar traffic remained soft,…

The floor is now open for questions. [Operator Instructions] And our first question is going to come from the line of Lauren Lieberman with Barclays.

Great, thank you. Good morning, everyone. My question was about channel make shift both longer term and in the quarter itself and for fiscal 2021. So, first piece of it is just over the longer term with the things you've already talked about the acceleration of ecommerce growth. Curious if you think it's fair to say that half of your margin expansion over the next several years could come from that that channel mix dynamic. The second was that as we look into fiscal 2021, how we should be thinking about the benefits of channel mix on one hand, but then the drags that you will experience as less productive doors get closed to the degree that there's stranded costs that come with that or what the impact of door closures -- your own doors and also wholesale doors or customers choosing due to closed doors, what impact that has on the P&L in the short-term? Thanks

Yes. I will start and then Tracey, will join me in the answer. But basically, all our accelerating engine of growth by channels are more profitable, and that's the good news. On the other side, we have to deliver our brick and mortar productivity back to normal. And these obviously, would be influenced by how fast COVID retire and how fast they consumer get the confidence, again, to go in brick and mortar and as you -- as you said, by managing some closures. And then we need to turn the total company into growth. That, as Trace said, we believe this will be possible as of course, the trail. And so the combination of the improved accelerating engines of growth, which are more profitable, and the re-establishment of routines your brick and mortar will determine, when we can go back to our long term algorithms of growing about half a margin point per year. Tracey?

Yes. And Lauren, as you indicated, I mean timing is will really impact that. So in terms of, when we expect door closures to occur. We've already had a number of wholesale door closers and freestanding door closures over the last few years, when you think about the number of retailers that have gone out of business, unfortunately, in the last couple of years. And certain retailers have also indicated their intent to close doors over the next couple of quarters. With our post-COVID acceleration program, we too will be closing doors over the next couple of quarters more towards the end of the year, as well as some freestanding stores. So there will be a timing issue where we do see pressure from under productive brick and mortar doors, while we see the uplift that Fabrizio spoke about from our online acceleration. And that's all embedded within the guidance that we've given certainly for the second quarter and, and we'll see how the second half of the year plays out. But that's certainly a dynamic that we will be managing in fiscal 2021 as the foreclosures are staged throughout the balance of the year and into fiscal 2022.

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

Hey, good morning, guys.

Good morning.

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

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

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

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

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

Thank you.

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

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

Yes, I'll start, and please Tracey add, any perspective. If I understand correctly, your question, so the strength by category is in consumption is clearly in skin care and this remains very strong and in certain regions rather accelerating. And within skin care, there are certain sub-categories like moisturizers, serum, masks, which are really flying or eye products or products for the contour of the eye, et cetera. So, there are -- so skin care and certain skin care category is clearly the fastest growing consumption. Makeup, I just answer one question is makeups dependent by category eye makeup is strong consumption, for example lip makeup is under pressure in this moment. But even with this within category these allow us to focus more on the growth consumption in this category. Fragrance, surprisingly, back faster than what we originally thought and this is great news for the holidays. In fact, we are ready to try to push fragrances clearly in the best possible way during the holidays that we believe is a big opportunity, particularly our high-end fragrances in our artisanal fragrances like Jo Malone, Tom Ford, Frédéric Malle, KILIAN and Le Labo. Le Labo is extraordinarily well everywhere in the world. And so then hair care. Now, as I think Tracey explained in her prepared remarks that Aveda is doing exceptionally well. For us, Aveda is heading great innovation, a great program, great work online in support of also the salons that work with Aveda. And in this brand is also hitting all the areas, because is obviously is about natural, is about taking care of the world and so is also very much into the consumer space of sustainability. And this is starting to paying dividends. So hair care also is strong on consumption. And so net by…

And then in terms of the month or the second quarter, October came in, is coming in as we expected. So and it is reflected in our guidance. So I know we had starting in July, a little bit of a shipment to restart the business, given the fact that some of our inventory levels were low, particularly in North America we don't see anything like that in the second quarter. And as you probably know, Steve, October is the smaller of the three months in the second quarter, obviously, November and December with for us both Singles' Day in China and in Asia as well as holiday. November and December are by far the two bigger months.

Yes. Thanks so much.

And our next question will come from the line of Erinn Murphy, Piper Sandler.

My question is around travel retail, it improve very nicely in the quarter. Could you just share a little bit about how much was driven from the higher duty free allowances in Hainan Island? And then how are you thinking about travel retail for the balance of the year? Thank you.

Yes. Travel retail as an exceptional performance and clearly the West, meaning Europe and the Americas are very, very basically closed or very, very small to travel. So the first thing is that the recovery has been being driven by Asia and within Asia, there are three elements which are driving this recovery. The first, as we discussed, is the acceleration of domestic travel within China with Hainan at the center of that. And Hainan has been seen both an increase of traffic meaning domestic tourism that came back at a very high percent, but I think that the number published, they are really about 80% of what they historically were in terms of domestic travel. And then in term of traffic and then the increase of possibility of buying per consumer that together it generated that the very big growth that we have seen, and we believe this is so sustainable. Then there is the opening on certain corridor in Asia, which has started particularly on Kong, Macau, and that we see in Korea is also starting being more solid. So -- and then is the retail, meaning online, the ability to reserve online, the product, which is accelerating dramatically, obviously in a moment where the consumer are still concerned to go in stores with a lot of people, the ability to do retail is serving their purpose and make them feel safer and protected. So the combination of those three things is -- has very important results, which is increasing conversion. As I said several times, in travel retail, the results are driven by traffic and conversion. And in this moment, even in presence of lower traffic, we are seeing a dramatic increase in conversion. And what do we see for the long-term? Under the long-term will be dependent, obviously, how traffic will be restated. The domestic travel in China is a new element. And obviously, this -- we believe will remain an opportunity for the long-term, the -- when international traffic will be reestablished will depend on COVID, obviously, and that we will monitor closely and serve this purpose, but the increase of retail as a percentage, particularly in Asia will remain a very positive element for the long-term, because will have an extraordinarily positive element -- impact, sorry on conversion even when international traffic will restart, that because of this is the combination of what's happened during COVID. And the opportunity of traffic recovery in the long-term will make this channel in our opinion, will remain one of the most interesting channels for the long-term.

Thank you. Our next question will come from Jason English, Goldman Sachs.

Hey, good morning, folks.

Good morning, Jason.

Congratulations on --thank you. Congratulations on sequential improvement, especially in travel retail. It's quite impressive. I want to come back to some of the questions on margins. As we were closing fiscal 2019, I think you finished with 17.5% EBIT margin; your 50 bps algorithm would have landed us to around 19.5% by fiscal 2023. And I referenced fiscal 2023. because it may be like the first year we're back to sort of normal, because we're going to have a lot of turbulence obviously for the remainder of this year, and then residual spillover just on door closures, et cetera in 2022. But if we're tracking towards the 19.5% in 2023 before, is there any reason that we can't get to it if not actually exceeded, right? You’re pulling a lot of cost out, right now I imagine you'll discover that not all of need to go back. And you've got this pretty compelling from a margin mix perspective, tailwind. Why -- are there any offsets that would prevent you from getting to that 19.5% if not actually exceeding it, assuming 23% isn't de-normalized?

Yes, I mean, I think in -- on the last call, Jason, we indicated that we expected to get potentially to our fiscal 2019 margins by fiscal 2022. Now part of the post-COVID acceleration program, certainly is helping to accelerate the achievement of that. But I think that math is a little aggressive right now for fiscal 2023. As we think about the recovery of the business, and obviously, it all depends on how quickly we get back to your point normal as it relates to normal consumption from a brick-and-mortar standpoint, and where the balance of the channel mix plays out. So that's a little bit aggressive, but recognize that certainly given the cost actions we take as it relates to post-COVID acceleration to accelerate our brick-and-mortar productivity and therefore help our margin. And some of the favorable mix items that Lauren indicated earlier from the growth of online as well as when travel retail resumes, which is another factor for us. We had good travel retail performance quarter. Travel retail is another accretive channel for us in international travel whenever that resumes and what that looks like will also be a factor. So we're very comfortable that we will have margin progression. And we will get to the 19.5 that you're referencing. It's just a matter of timing.

Thank you. Our next question will come from the lineup Rob Ottenstein, Evercore.

Great. Thank you very much. I'd love to circle back to mainland China. And perhaps can you tell us a little bit about the overall sales growth online and offline, kind of what sort of impact travel retail had on the business. And given your comments about increases in domestic travel, retail in China and Hainan, should we kind of think that Mainland China X travel retail may not see the kind of growth that it's had before? And then, finally related to China, any kind of impact for timing on 11.11 did that have any impact? Thank you.

So, no, I think we look at the Chinese consumers in total, and it was another extraordinary quarter for Chinese consumer consumption. We estimate that the total Chinese consumer consumption was about plus 20% and we were plus 28% to plus 30% range, when you look at the total, so extraordinary? Actually, I think we have developed the strength that when the Chinese consumer shopping mainly online, we are online and there are high traffic moment when this happen. When they come back to the store, we're there in brick-and-mortar. And this was a gain a double-digit growth in brick-and-mortar for the first time after COVID. When they go domestically travel go to Hainan, we are among the first being there being ready for that. So look at us as being dynamically following the Chinese consumer wherever they choose to shop and wherever the traffic is side by quarter and see that flexibility as a strength rather than having every single China having to perform in the same every quarter. This is not going to happen. China is a very dynamic market. And in fact, the online, the 11.11 and then the 18.6 meaning the June events, which are two huge to do create the fact that in July, August is -- online is less strong. But then domestic travel was much stronger. And the real strength is to be able to be there at the right moment in every one of these channels. So Chinese consumers are strong. Our growth in China is strong. We are a local organization in China, really focus on the long-term with enormously built in flexibility and collaboration between different groups. This quarter that was particularly interesting because we have the more cities as explained. Brick-and-mortar went back to double-digit growth. Domestic travel went to about 80% of traffic. New consumers were coming in our brands, particularly from lower tier cities, via online and via the travel. And we launched 2 new brands, as you heard of Fragrances. On top of that, we are expanding our scientific presence and investing in a new research center, R&D in Shanghai that will give us new capabilities to even more locally relevant. So it is a very strong momentum for China. And we personally, I personally believe that the consumption of Chinese consumers will be growing strongly for the long-term.

Thank you. And our next question will come from the line of Fulvio Cazzol with Berenberg.

Yes. Good morning, and thank you for taking my question. I was wanting to ask about the innovation pipeline. There was some mentions made in the prepared remarks. And I remember in previous quarters, you highlighted that you were being opportunistic in terms of product launches, trying to time them when they could be the most effective. So I was just wondering if you could give us a bit of color on how your first quarter played out, if that benefit from some of the shifts of innovations from previous quarter or was it fairly normalized. And then following up on that, how should we think about Q2, and maybe even 2021? Is there a lot of pent-up, let's say, innovations to come out and help your growth along, please? Thank you.

Yes, first of all, our innovation has been very strong as 30% of sales in the previous quarter has been 20%, 25%. So frankly, we don't aim to a specific percentage as innovation is very strong and we have a great pipeline. So your question is how do we decide how to focus on which innovation? This obviously was the moment where skin care was the most demanded from consumers. And we tend to focus our innovation where there is the strongest trend and the stronger consumer demand. And so definitely skin care was a big focus. Now, obviously, on skin care, you cannot plan innovation in a few months is a very important investment for the long-term. So we had this extraordinary innovation advance the retailer and concentrate on La Mer that we have planned for that period. It's just that we went even deeper, even stronger because we saw the opportunity. So the innovation timing is set that we have flexibility obviously, to move them when needed. But the most important thing which is flexible, is the amount of investment, the amount of focus that we can have on different innovation, depending on the consumer demand in that specific moment and in a very different location. So I our agility is about we tailor innovation locally and so the local teams have the opportunity to launch it light, launch a big, go deeper, postpone demand, anticipate demand, there is a lot of flexibility to tailor the innovation to the local consumers. But the fundamental innovation is done with a very accurate pipeline for the long-term. And that's why we say that our pipeline is never been stronger, frankly, and this was already in place before COVID.

And the only thing I would add to that we had also very strong innovation. We spoke about the fact that the fragrance category has been a nice surprise for us and that has been driven by innovation, across the board with our fragrance brands and then obviously haircare with Aveda. Aveda has had a couple of very strong innovation launches this year that really has driven a lot of momentum for us in haircare and certainly helped from a recovery standpoint, where we did see some shifts in innovation and from a timing standpoint is in the makeup category understandably. So we do have strong programs lined up for the second half of the year, in addition to skincare and fragrance and hair care, also for our makeup category, hopefully, as people start to gradually wear more makeup and perhaps become more socially active that innovation will actually pan out to help to continue to grow that makeup category.

Fantastic. Thank you.

Thank you. That concludes the question-and-answer portion of today's call. If you were unable to join for the entire call, a play back will be available at 1:00 PM Eastern Time today through November 16th. To hear a recording of the call, please dial 855-859-2056, passcode 1797894, again 855-859-2056, and then enter passcode 1797894. That concludes today's Estée Lauder conference call. I would like to thank you all for your participation, and wish you all a Good day.