Good day, everyone and welcome to The Estée Lauder Company's Fiscal 2021 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I'd 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 these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. All net sales growth numbers are in constant currency and all organic results exclude the impacts of acquisitions. 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 site 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. Let me first with that each of you are in good health and that your families are well. Our hearts continue to be with those impacted by COVID-19 and our focus remains first and foremost on the health and safety of our employees, their families and our consumers. To our employees, you have lifted us up from caring for the physical and emotional wellbeing of colleagues to make in-hand sanitizer, seeking opportunities to support charities around the world, generously contributing to LCK [ph] employee relief fund and so much more. In December the company made an addition donation to the employees' fund and we continue to make progress on our citizenship and social impact commitments. Our employee's agility and creativity empower the company to deliver the exceptional results we announced today. For the second quarter in fiscal year 2021, sales rose 3% a 12 point positive swing from the decline of 9% in the first quarter. Impressively time brands grew led by the double-digit growth from Estée Lauder and La Mer as well as great performance from Jo Malone London. Le Labo and Frédéric Malle also rose double-digits. We focus our investment decisions on engines of growth while employing strict cost discipline in other areas delivering strong double-digit adjusted diluted earnings per share growth. In the quarter we faced increasing complexity from the pandemic, yet still delivered the results that exceeded our record second quarter of fiscal year 2020 when sales grew, the strongest in 20 years in our seasonally largest quarter. Our multiple engines of growth strategy continued to prove its value, enabling us to pivot with a GDP in this challenging moment. We successfully activated efforts behind the growth engines of skincare, fragrance, Asia-Pacific, travel retail in Asia and global online. Our…

Thank you, Fabrizio and I certainly echo your comments regarding our wonderful employees. As a reminder, my commentary today is adjusted for the items that Renee mentioned at the beginning of the call and net sales growth numbers are in constant currency. Our net sales rose 3% in the second quarter. The COVID-19 pandemic continue to pressure traffic in our brick-and-mortar distribution, but sales declines in stores were entirely offset by strong growth across our online channels and in travel retail in Asia. The December 2019 acquisition of Dr. Jar added approximately three point to net sales growth. Sales performed above our expectations in large part reflecting the outstanding execution during the annual team 1111 Shopping festival as well as the many activations our brands deployed during key shopping events like Brett Black Friday and Fiber Week. In addition to the acceleration and growth we saw in skincare, fragrance sales were strong in the quarter and home fragrance continued to resonate during the pandemic. Our gross margin increased 10 basis points compared to last year's second quarter. Favorable channel mix was driven by the growth in our online sales and also reflects lower costs for testers in our brick-and-mortar distribution. From a category perspective, the acceleration of sales in skincare also benefited gross margin. The positive mix was partially offset by higher obsolescence and a negative currency impact. Operating expenses improved by 160 basis points as a percent of sales, reflecting both the strength of our sales leverage during key shopping moments and our cost containment measures. Many of our COVID related cost containment measures remained in place during the quarter and contributed to our improved profitability along with the benefits of our leading beauty forward initiative. Lower selling cost and other in-store promotion cost also reflected the mix shift…

[Operator instructions] And our first question is going to come from the line of Dara Mohsenian with Morgan Stanley.

So I wanted to focus on topline, clearly very strong performance in skincare and e-commerce during COVID. Can you talk about the sustainability of that strength in each of those areas as we move to a post-COVID environment as well as what some of your key strategies might be to maintain momentum post-COVID and then on the makeup side, that's obviously been a laggard area for obvious reasons. How quickly do you think category growth recovers in makeup post-COVID and what's your outlook there, thanks?

Okay. So first of all, the key drivers for us let's go one by one, skincare very sustainable. The consumers always were more and more enthusiastic for skincare. We have an amazing pipeline innovation for the future years and the strengths of Asia and particularly of China is internal mix one of the biggest builder of skincare because the penetration of skincare, the penetration of beauty for skincare in Asia is very, very high. So we assume the skincare strengths will continue after COVID. The other driver is China and the potential of China as we explained very well at our Investor Day is for the long-term. The Chinese -- the demographic arrived the potential of the smaller cities of tier three and tier four cities will continue to grow. The power of online and offline distribution will continue to be very strong. In TR imagine that the TR growth today, the TR results are mainly driven by Asia and particularly by the domestic travel acceleration within China. So in the future, the domestic travel acceleration within China will continue, but the international travel will be reinstated and so this will be a father acceleration in the long-term when COVID will abate. So all our key drivers are really here for the long-term and most importantly as you know, our drivers tend to be accretive in profitability. So they will clear resources over time. The lager is a brick-and-mortar particularly in the West. Now this obviously in the short term is an issue because there is a lack of traffic and the lack of traffic has created issues of productivity but also on this one, we are working for rebuilding this for the long-term and so what is a drag today, a big drag on what is about one third…

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

I was curious if we could talk a little bit about e-commerce development in Western Europe in particular because I think with certain hidden if you will in the numbers you work through contributions from travel retail and so on is that Western Europe while still down of course is down I think a lot less than has been the case thus far through the pandemic. You mentioned the Cyber Week kind of shopping dynamic in Western Europe, but my sense is that that is a channel that had been somewhat less developed. Historically, so I'd love to hear more about how that build up and thinking about kind of stickiness of that behavior going ahead particularly in a quarter to whether aren't big shopping events that are typical for that market thanks.

So first of all the online business has done very well this quarter plus 60% globally and is interesting we are growing double or triple digit in every brand, every region, every channel, a meaningful channel brand.com, retail.com, third party platform pure plays and so Western Europe is the same. Western Europe is growing depending by market double-digit or triple digit in online and obviously the holiday season has been because of the lockdown as you know in Western Europe particularly COVID was pretty high in November, December. Because of this, the brick-and-mortar were closed in countries like the UK as an example, December was a super difficult month and so it was no regular Christmas holidays in brick-and-mortar and obviously UK was not the only place and so because of this we were able to pivot to online in an historical way. I think our teams have done an amazing work in taking care of our consumer online when they were because of proven behavior for COVID now going into the brick-and-mortar and what we've seen that this works in many, many cases meaning again the consumer's certain categories we're working because of repeat meaning the consumer didn’t do without their preferred Le Mer cream or their preferred advanced whatever and so we got a lot of the selling via the online channel. But also we are able to stick to their gifting habits and we created gifting opportunities and delivering all those for gifting etcetera. So it was a lot of activity and invention in this area. Now this online in general, I believe the online will continue to be very strong also in the long-term and this acceleration will continue also post COVID and one of the reason for that which is particularly true in Western Europe…

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

Question is around the landscape where in North America we've seen some pretty unique partnerships recently with [indiscernible]. Are you expecting to participate in these partnerships? I know historically math hasn’t been that appealing but maybe with ultra target structure what's coming your brand expense? And then I guess secondly if you think about the post behavior of consumer retailer post pandemic, how comfortable are you with the entirety of this brand portfolio today if that ever makes sense? Thank you.

So I didn’t understand the second question.

Are there any brands thinking of the makeup portfolio in particular that you would ever consider investing on the other side of the pandemic. I am just curious on your comfort with the entirety of the portfolio today?

So the first answer is yes, we are working with our partners and discussing the ultra target and the calls opportunities as you said as part of your question. This will depend on which brands in our portfolio these two opportunities may fit different brands in our portfolio and so we are evaluating these with our partners and we are considering participation by brand to these activities and this could be a driver of future acceleration of the COVID in North America as well, importantly to underline these two opportunities are both brick-and-mortar and online and so obviously it will be very important also to been able to manage the online part of that opportunity. In term of the portfolio of brands, we continuously look at our portfolio. We look at our portfolio for efficiency and we open with Dundee's already in the past to rationalization decisions in our portfolio meaning closing brands that for a good reason do not -- cannot sustain the long-term investments and we continue looking into acquisitions an opportunity for reinforcing our portfolio in areas where we have strategic opportunities or strategic apps. So this is a continuous process and during COVID this is continuing.

And our next question is going to come from the line of Rupesh Parikh with Oppenheimer.

So Fabrizio I had a question just on your China business, I was curious what you're seeing right now in the makeup category in China?

Yeah the makeup category in China is stronger than makeup in the other regions because as I say responded to broader social locations and the user locations, but it's still decline, so is not different than the rest of the world China meaning skincare is very, very strong, fragrance is accelerating and makeup is large even in China however, on a completely different proportion because when you see -- when you think of this nature just gave before that makeup is completely correlate to the location of user in China because of the good control of COVID and because of the occasions like business offices are open, people are shopping more regularly, brick-and-mortar shopping is more present in most of the cities. Because of these more occasions makeup is in better shape but still is the lag between the categories and mostly in China I'd say from our consumer understanding is because of mask waving meaning China is better controlling COVID but also better controlling COVID because there is very disciplined mask wearing and mask wearing also is the reason for less use of makeup. So stronger than the rest of the world but still not as strong as it will be after COVID and post COVID where we assume there will be or expect that will be a strong recovery on makeup also in China.

Our next question is going to come from the line of Nik Modi with RBC.

Fabrizio, I wanted to go back on the online discussions, you guys have done a great job with analytics and understanding consumer behavior and given how much migration has occurred on one, I'm just curious what your data and research and analytics are saying about the stickiness. For instance, you talk about the very mature consumers and developed markets migrating online, how strictly do you think that behavior will be I think that will be an important discussion going forward given the margin differential between online and some of the other channels, thank you.

It's a very good question and again our point of view this will be very sticky because the people shopping online and obviously some of them are shopping online because the brick-and-mortar were closed for showing the case of luxury, but they're lacking it and we see all the statistics, all the data telling us they are enjoying the skills. For example, our loyalty programs are working better and better and we have more loyalty program as we discussed and they're getting expanded and the level of loyalty is going up and the re-pastures rate meaning they're coming, that is going up. Then we see conversions very strong and traffic increasing and there are ways where the conversion will be driven will be maintained after. The most important of the investment we're doing in order to maintain conversion also after COVID is the high touch services transfer online. So the chart with the consultants, digital try on, the live streaming opportunities, the use of our particularly the brand.com in this case also has media platform because we see that the time that the consumers are spending on online is increasing dramatically because when the digital try-on service, the possibility to consult, they spend more time and this time is time of disposure to our equity messages. So this is media value, this is really media value meaning we have more than half billion consumers coming on our site and more in this moment and then imagine that they stay nine minutes and they say if we're to buy media to speak to half a billion consumers for nine minutes this will be a huge cost while building place is another benefit of our selling operations. So there is a lot of value in these high touch services. What they will do is they will increase differentiation of our sites from us. They will increase traffic because people are coming not only to buy product for the services and will maintain or possibly farther increase conversion after COVID and then finally will increase the value of our online as media value and so this is a very positive view for the long-term. Obviously we believe that there is a lot of consumer that will continue to shop also in brick-and-mortar after COVID and there is no one consumer there is only online, only brick-and-mortar. I believe the consumer would love the omnichannel speed particularly after COVID they will be anxious to get a gain to brick-and-mortar experience, so they will come back and that's why we are building around these realities this expectation, imagine better omnichannel platform where the consumer will be able to choose the percentage of time or the speed in online and how much they want in brick-and-mortar and that will navigate and on the two channels in new ways. I believe that companies that will have brands that will have a good omnichannel model in the future will have a competitive advantage.

Our next question will come from the line of Olivia Tong with Bank of America.

First just a clarification, Tracey I believe you said that you were adding additional production capacity, so just curious what categories, what regions you were looking at for that and then my question is really around the margin progression especially given this quarter. So I think that's the highest quarterly operating margin you’ve achieved, there is a couple of companies. So realizing of course that there is a lot of more and more expenditures that are coming right now, but as you think about second half long-term, are there things you burn over the course of almost 12 months now on areas you can come back -- cut back on spend more permanently or are there areas where you have to just push even harder and as you think about specifically for Q3 what's planned in Q3 because while you're looking for margin expansion, it looks like it would only imply about similar to what you achieved in fiscal Q2 despite COVID obviously now entering the base. Thank you.

So regarding our production capacity as you’ve seen from our results over the last couple of quarters, clearly where we have been in need and have been investing in terms of production capacity is in skincare and we have invested in North America, we've invested in Europe and as you heard us announce this morning in our prepared remarks, we are also investing in a new facility in Asia to support primarily skincare and there will be some makeup primarily foundation as we're thinking right now in Asia. So very much having capacity closer to where our strong demand growth is will be a real benefit to us and we're looking, were certainly looking forward to that. As it relates to the margin, I would as I said in my prepared remarks Olivia, we had done an excellent job of controlling cost last year once the pandemic hit. Many of those cost controls were temporary controls. When you think about the management salary reductions, some of the rent abatements that we got, given the fact that our stores were closed, some of the furloughing benefit and some of the other back on we controlled headcount, TV, etcetera. So selling terms of the learning going forward, clearly there are some areas of I'd say more discretionary cost as we emerge out of the pandemic that we will continue to control, but the long-term sustainable cost controls really come from our cost saving programs. That's where the permanence, more sustainable cost take up comes from. So that's the reason why you're seeing if you think about what we said last year in terms of our cost programs and the significant amount of management that we did in the third and the fourth quarter to control costs given the fact that all of our brick-and-mortar doors over the course ended up closing that some of those costs certainly will be back in the second half in the third and the fourth quarter. But we will continue to manage costs in a disciplined way as we have up to this point.

Our next question is going to come from the line of Chris Carey with Wells Fargo Securities.

So I just wanted to follow up on the operating margin question, I think it's important EMEA strongest margin we've seen, fragrances I think strongest margin we've seen and from just hearing the answer to that question, it sound like there was -- there has been a lot of efforts around cost savings, but certainly the channel dynamic as well with EMEA online doubling and certainly you’ve seen strengthen in skincare in Asia and so I'm just wondering how much the margin improvement actually might be more sustainable over time from channel mix standpoint?

Absolutely, we have tailwind as it relates to margin given both our category mix growth as well as our channel mix growth. We do have obviously a fairly large footprint of brick-and-mortar that right now given where traffic is, is a bit of a drag on our margin performance and obviously we're addressing that and we will see once the pandemic is behind us and traffic returns, how fast it returns and in the meantime obviously we're taking some actions but we are very comfortable that we have margin progression ahead of us once the pandemic is behind on in a more sustainable way, especially given the tailwinds that we have to your point Chris.

Our next question will come from the line of Michael Binetti with Credit Suisse.

I do want to follow that Tracey, at the Analyst Day, you walked us through a margin that was well into the high teens on what you knew on the business there as we look around at some of the businesses that I'd say are probably the closest in comparison to yours, we see some with some of the two on the operating margin. Obviously you’ve made structural changes that a few of the other analysts have run through, but you're going to end up in a bigger travel business, bigger digital business, bigger China business closing some stores that were a drag. Do you see over the very long term 10 years can this business move into the 20s on margin?

It's again over the very long term, so look I'd say that certainly that is something that we are targeting, given all of our -- again given the tailwind in terms of channel growth and category growth might change obviously makeup might we believe makeup will recover and we're certainly going to support it to recover and the margins will improve on makeup as well. Makeup actually is the category that has the biggest penetration of freestanding stores and brick-and-mortar. So it is a category that is particularly challenged from a margin standpoint in this particular environment. But certainly Michael, everything that we're doing from a business management standpoint and from a cost management standpoint would get us in that North Star of 20%.

And so to follow that, you’ve seen some really strong growth in time and it's come up a bit in the last two calls. We see something regularly even as recently this week, government is going to allow consumer shipments home versus physical pickup in the past. So it seems like there is more and more friction coming out of that process and a lot of square footage is going to be added there. Does island change your travel retail business even after global economies reopened and change your outlook on travel and the Chinese domestic consumer?

Yes now as I said before, our travel retail business in the short term is really driven by Asia in general and China domestic in particular within China domestic, China is the star and is driven by the new traffic and by the increased conversion and by the quantities past just because of the regulations that you just explained and by the developmental of retail. So those are all very important long-term strengths of the channel which is developing. Now when the normal travel will and will never be normal except, but the new normal travel stated after COVID and you are this progress of the domestic travel in China, the international travel in America and Europe within the rest of Asia and the Chinese consumer will go back travelling the world and that's obviously their desire one of the biggest aspiration shoot to the consumer when I look to the consumer opinions and research for the long-term. So when there will be a combination of the stated international travel with stronger domestic travel model that has been developed during this period, this will make still one of the most important long term channels of opportunity -- full of opportunities and again the biggest opportunity remain technically driving conversion. So the conversion of travelers into bias and the retail, so the possibility of buying also without queuing in a store for a long time where you need to take a plane I think, those two elements are big drivers of the future travel retail independently from the short-term management of the cash. And in term of the China overall business, we do monitor Chinese consumers. We spoke to it last time. This time our Chinese business between quarter one and quarter two is basically double the level of growth our China mainland business. Our TR business has also accelerate but not as strong as the China Mainland business which was driven by amazing online events like 1111 during the November period. And so the combination of the development of online within China the sudden brick-and-mortar in China is still double-digit in quarter two was growing double-digit showing the potential of brick-and-mortar when COVID is more managed or will be more manageable and then travel retail continues to do very well and so when look is also to our total Chinese consumer consumption bringing altogether what is domestic travel retail and Mainland China we still see an acceleration in total from quarter one to quarter two and so we believe this is a very, very strong potentially. We're working to manage it in a way which is still building equity of our brands, still protecting every single one of our partners been able to do good business with us for the long-term and that's our goal and we are working on it.

And our last question is going to come from the line of Mark Astrachan with Stifel.

Maybe just follow-up and one other question, so just on online where does did that settle as a percentage of the category sales post pandemic and how do you think about retention of those incremental consumers on reseller.com versus your own brand.com. I've seen for you all and then just quickly, holistically I am thinking about your guidance on a go forward basis, are big events like 618 and 1111 becoming more important in driving your business meaning that the June quarter might be a little bit bigger than its historical level. Same thing for the December quarter and to that part can you explain kind of why we saw somewhat weaker September quarter guidance and I think maybe people had expected the time is same for the March quarter today. Thank you.

Let me talk about the key shopping moments, absolutely particularly in the holiday period as you recall last year in the second quarter we had a 16% growth in constant currency, very much driven by key events that that are in the second quarter. The fourth quarter 618 did quite a bit actually less meaningful to the quarter than certainly 1111, but we are seeing concentration in some of those events and certainly that be in terms of our expectation on sales really flowed through to the bottom line in the second quarter.

Brand.com, online is different channels, they are brand.com, retail.com, pure play and third-party platform, which we did find that the chemo model and so these channels have different level of developments by counties and this is the results of consumer preferences and historical development of the channel. So it's not that we're driving. We're driving all of them and particularly we work with our retail partners very close to drive their retail.com, which is most of the times doing very well, particularly in this period but also for the long-term. So for example in China, retail.com is very limited and white brand.com and most importantly, third-party platform is the most developed while in the US, retail.com is very, very strong and we see a lot of great developments recently in the retail.com of our key partners and this also serves in this moment as a mitigating factor to the brick-and-mortar issues of productivity that we've discussed before. So we will continue develop each one of these channels and is the consumer deciding where to go and obviously we talked with each one of our retail partners to do the best possible job in every channel.

Thank you. If you were unable to join for the entire call, a playback will be available at 1:00 PM Eastern Time today through February 19. To hear a recording of the call, please dial 855-859-2056. The passcode ID number is 1484229. That concludes the Estée Lauder conference call. I would like to thank you all for your participation and I wish you all a good day. Thank you.