Q1 2020 Earnings Call
Good morning on today's call or for Brookfield, <unk>, 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 other reports filed with the FCC.
Fine 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.
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 Investor section of our website during the Q and they session. We ask that you. Please limit 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 for Brazil.
Thank you really need good morning, everyone.
We have started off our new fiscal year, we did receive results our successful strategy driven by the most people engines of growth helped us deliver an extraordinary performance, especially in light or the bullet died macro environment.
I'd say, it's grew 12% in constant currency, making our 10th consecutive quarter of double digit growth.
As a result, we gained share and strengthening our leading position in global prestige beauty.
We leveraged our strong sales increase we did discipline focus on cost and adjusted diluted earning per share rose 20%.
What performance on both the top and bottom line.
Fueled by successfully innovations increase other sizing and effective marketing across brands categories geographies in China.
We deeper consumer insights informed by improved data analytics, we expanded our growth engines.
Do you need to additional ones any vested in the best opportunities worldwide, which fueled de stronger results.
We remain mindful of global quality to do risks. However, we do strong start in our confidence you continued to execute effectively we're raising our nuts seeds any P.S. estimates for the in constant currency.
During the quarter gift store, not even betterment was challenging and we face different issues you know that he region.
Disruptions, you know called affected commerce in that area.
<unk> Cunard uncertainty about Brexit impact at the consumer spending in the UK and demand for mid cap in North America soft in it.
However by heavy numerous growth engines across all facets of our business, we were able to de lever and exceed our seats in earnings expectations.
Most of you will get achievements came from continued strength in China and try to date.
We also had better than expected improvements across Europe , and our other emerging markets.
Also contributed to our continued growth is our company positions in the sweet spot of consumer goods.
What brands generate superior consumer loyalty heavy then you know what strong departures rates and while our high quality products justified premium pricing. They are in affordable luxury, which we believe makes them more to cedents to economic volatility there not a luxury products.
During the quarter each of our for a lot of just brands grew you blow Buddy.
Reflecting strong consumer demand for established brands and they have proven desirable product and compelling innovations.
It's still older and lemaire, each advanced more than 20%.
It keeps that outage. It is our focus on hero franchises, we try to be high repeat brought its in each brand.
Which greater innovation and resources around these hero product lines.
Brand successfully adopted new consumers and reinforce that loyalty we'd existing ones.
I would just alluded brand is a great example of these winning strategy.
Brand introduced a new product you need a lot of just franchise advanced night repair saves a big concentrate exceeded our expectations. It did help leased the entire franchise by double digits globally.
In Asia buys around it's the lunar new intends to reset concentrate broaden its the brand reach about 70% of consumers who bought it were new to the Brian underscoring our strategic priority to adopt new users with exciting innovations.
It's a lot. It was one of several of our brands that benefited from rapid growth in the skin care category worldwide.
We are well positioned to meet the growing demand for all types of skin care products. If he is our largest category and grew sharply accounting for nearly house of our global seats in the quarter.
We continue to invest seems skincare line.
I made it gained share in luxury skin care, you need a Pacific and Clinique delivered stronger global growth in several years did even by winter received skincare innovations.
One of Clinique, new Whisper audits, the smart clinical more skewed I mentioned on most of what I said line recent need to strongly we'd ageless consumers, particularly in North America into UK.
In other developments I was told for beauty Brenda launched a luxury skincare collection to complement each successful fragments and make up of things.
Hi, where makeup sales grew globally driven by a shot up stick in Asia Pacific and try to retain as well as gains in the European region.
The deceleration in prestige color cosmetics is being driven by ongoing market.
By growth is still healthy in other geographies in global companies like ours are well positioned to grow in that category.
Using enhanced data analytics and consumer insight <expletive> seeking out new and fast growing area. So demand we invest in the promising subcategories as they emerge for example, we knew that interest in foundations, we'd skincare benefits was trending we that inside we did.
Look new products around our hero foundations that offer I drink is emoting benefits in our foundation business climbed 20% globally.
We know visit with great success now the sub categories, where we found got I know that opportunities. For example, mock introduced love me Lipstick breakthrough waitlist and most surprising for and what they offer lasting color. The proud to have helped increase the brand lift business, which climbed double digits.
Overall, our innovation was robust and you probably do accounting for 30% or our makeup captivity discourse.
Turning to our geographies our growth in China accelerated from the three discourse that fueled by multiple engines, we had double digit growth across all categories or channels in nearly all brands.
Our online business in China were strong our seen some timo doubled we growth across brands.
We also successfully passed on it we demoed, especially events such as Jo Malone land on Super Brandy.
Additionally, GLAMGLOW launched on the platform in September .
Investing in emerging markets remains a strategic priority because we anticipate the continuation of growing demand for prestige beauty thrown do you spend the me the class.
Excluding China as a group these markets rose double digits and they recruited several new consumers stand out included Russia, Mexico, Brazil, and Southeast Asia, and we saw improvements to retain immediate east.
Our business you know Kong was challenged I.
Our sales declined 20% in the quarter. It we have not seen signs of improvement to date.
However, since the last downturn in that market, we have repositioned our business and increased sales, we local consumers, becoming less dependent on Tuesdays, which was the most affected area.
Our sales to decline Kong was offset by an acceleration in the rest of Asia, reflecting strong consumer demand sort out what prestige brands and desirable products.
In Europe , the Middle East Africa every market grew which added and now that grow driver in broadening our more people engines. We were encouraged by students in the large western European markets, which advanced as well as many emerging markets Indonesia. Thanks.
Empowered to strong reception of our brands innovation across categories.
The North America amounts to remain challenged by declining makeup sales mainly in color cosmetics as well as weak traffic in brick and mortar department store, where we are the largest player.
Although our business generate the reflected these trends there were several bright spots out.
Our skin care business Rose seven out brands had high assays and we had grown in key sub categories, such as I treatments or mascot.
Typically skincare mccaf growth through two ways, depending on trends and innovation and can accelerate at different rates at different times. However.
We're not going out over the last five years, both categories rose nearly 10% compounded annually in the U.S.
We believe recent declines in color cosmetics in the U.S. due to several factors.
Trends change and a more natural appearance isn't now invoke which requires fewer products there when contouring and other looks with popular.
So the number on new product launches in Macau declined 20% in the last year, including from India brands.
Addition, jens that consumers are discovering the benefits of skin care supported by more social media TBD in that category.
I went brands continue to innovate strongly imboden makeup and skin care Clinique recently launched a new lipstick collection, we met she sequenced human foundational shade, we 28, new lipstick color based on the branch shade match Science. These continues clinique customization are beautiful.
Rather that began with the successful Clinica de skincare launch.
Looking at our business by channel, but I'd hesitate and online globally again drove our performance.
Travel retail upward trajectory couldn't tenet, we strong double digit sales growth, reflecting diversified growth engines across brands worldwide.
Our products continue to resonate globally and the like door growth was robust.
Among our top aid brands in the channel all about one grew double digits at retail.
Digital campaigns and preordering aimed at saboteurs before they start to that Threep helped boost sales.
We expanded distribution.
Our new Estes out fragrance brands and there's still a match distribution expansion remaining for many brands in our portfolio did not only available is more percentage of airports.
Our online business also climb strong double digits all types of online distribution grew substantially led by third party sites and retailer size traffic was higher in mobile commerce accounted for more than house of our E Commerce sites.
We increased our advertising investment faster than our sales growth and continue to focus our spending on digital advertising, which accounted for 75% or the total.
Our digital spending is mainly on advertising social media communications in search engines.
Our brands are using many digital tools and it's been demented with emerging social media platform to connect with consumers for example, Mac launched it to the lets consumer test over when the lipstick shades on their own phase by accessing the comment on their own phone.
And to simply research and purchasing Lemaire and Bobbi Brown launched voice search on their brand Dot com side in North America.
We are proud of our south discourse, there and confident we have the right plans in place for the rest of the our brands have created many exciting products and promotions for the holiday period in store and online for cyber Monday, and 11 11 in Asia, and we believe consumer would be attracted by our comp.
Spelling offerings looking ahead, we spent to find that span and manufacture our more people engine of growth across categories brands channels and geographies to better manage global volatility, where we've continued to leverage our super skincare growth and expect to gain even greater market share in that category.
We had the best diversified pure play in global prestige beauty with talented grew about teams and they have profound local expertise, which made us well position to poor so the fastest growing areas out on the award for any kind of consumer.
I think times, we've continued to transform our business as we anticipate what lies ahead as strengthen our interpreted it a competitive speeds.
Now I, we still nichols for that to trace.
Thank you for briefly and good morning, everyone.
As a reminder, my commentary today is adjusted for the items that Randy mentioned at the beginning of the call and net sales growth numbers are in constant currency.
Now for the quarter result.
Net sales for the first quarter rose, 12% driven by strong growth in our international regions and in our skin care category.
Asia travel retail and online continued to deliver strong growth and our European and Latin American market sales growth accelerated while sales in North America remain challenged.
From a geographic standpoint, our Asia Pacific region, net sales rose, 26% with more than half of the market's contributing double digit increases.
Sales in greater China Rose strong double digits.
Our sales in mainland China continued to deliver broad based growth across the city brands categories and channels as we gain share.
And as anticipated our sales in Hong Kong fell 20%.
Among developed markets in Asia Pac, both Japan, and Korea delivered double digit sales growth this quarter.
Sales in Japan, which grew a solid 7% last fiscal year accelerated even further within the quarter in anticipation of in October 1st that increase in the country.
In Korea sales and specialty multi an online distribution were robust and we gained share in department stores and Southeast Asia grew double digits led by Thailand, Indonesia and Vietnam.
Net sales in our Europe , the Middle Eastern Africa region Rose, 19% with every market contributing to growth.
Our global travel retail business rose strong double digits led by quarters across Asia.
The strong like door growth drove the majority of the increase in travel retail and was supplemented by the rapid development online preordering.
Our emerging markets in the region grew high single digits led by a double digit increase in Russia, and the middle East.
Western markets grew mid single digits led by Switzerland and Grace.
Our sales in the UK grew modestly this quarter. Despite continued challenges in brick and mortar retail some retailers bought extra stock. This quarter ahead of the anticipated hard Brexit and our online business in the UK continue to grow double digits.
Net sales in the Americas declined 6%.
For can water retail remain difficult, especially in department stores.
As you know the makeup category in North America has been declining and we are the leading prestige company in the category.
We continue to invest where we saw the best opportunities for growth.
Skincare showed good growth driven by Estee, Lauder, Clinique and la Mer in their hero franchises. Within makeup we saw solid growth with some key cats sub categories such as mascara.
And while our fragrance business was particularly soft this quarter. It is expected to pick up in the holiday quarter.
Looking at the region by Channel North America sales rose and both brand and retailer online as well as an freestanding retail stores our sales in the specialty multichannel also grew at retail.
Our estee Lauder brand and most luxury brands grew in North America. This quarter. In addition sales in Latin America grew double digits in all major markets.
From a category standpoint, skincare led growth this quarter net sales accelerated to 25% with strong contributions from Estee Lauder Lemaire and Clinique.
Innovations such as Estee Lauder advanced night repair intense reset concentrate.
Hi, there the regenerating serum.
And Clinique smart clinical multi dimensional line contributed incremental sales and supported hero franchises.
And the historical strength of origins and natural skincare helped drive the brands double digit gains.
Net sales in makeup grew 4% with strong double digit growth in Asia and travel retail led by strong innovations and support behind foundation and lift products from Estee Lauder Mack Lemaire and Tom Ford Beauty.
Sales of fragrances declined 1% as sales in luxury in artisanal brands were offset by declines and designer fragrances, Clinique, and Este Lauder, which had a tough comparison to the prior year launch a beautiful bell.
Innovations this quarter included poppy in barley from Jo Malone metal Lee from Tom Ford and New City Exclusives from Longbow.
Fragrance sales grew in all international regions, but were soft in the Americas region as I mentioned earlier.
Our hair care sales declined 4% driven by a tough comparison to the prior year launch of Cherry element shampoo and condition or from the data as well as lower sales from bumble and bumble in North America.
Our gross margin declined 10 basis points compared to the first quarter last year.
Higher obsolescence in sourcing costs were mostly offset by pricing and favorable skin care category mix.
Operating expenses as a percent of sales improved 120 basis points continued leverage of our cost base due to greater efficiencies in our selling model and store operating costs more than covered higher advertising investments to build awareness in critical growth markets and support our innovations globally.
Operating income rose, 17% and operating margin increased by 110 basis points.
Diluted EPS of $1.67 increased 19% compared to the prior year and grew 20% in constant currency.
Yes, with higher than expected due to the strong core sales growth with greater operating leverage and a slightly favorable tax rate.
During the quarter, we utilized 170 million in net cash flows from operating activities, which was below the prior year due primarily to timing differences and accounts payable and we invested $125 million in capital expenditures.
We used $313 million to repurchased 1.6 million shares of our stock and paid 156 million in dividends. We also announced this morning, a 12% increase in our quarterly dividend to 48 cents per share.
Now, let's turn to our outlook for next quarter and for the full year.
We are pleased obviously with a strong start to our fiscal year, but we recognize that a variety of macro risks such as ongoing trade tensions Brexit and continued challenges in Hong Kong's retail environment could impact our fiscal 2000 result, Nonetheless, we believe our multiple engines of growth strategy will continue.
When you to deliver strong global results.
For the year, we're raising our sales growth expectation by 1.28% to 9% in constant currency.
Still assumes a moderation of growth in China and travel retail in the back half of the here.
Despite the market conditions in place today, we expect our North America business to gradually improve fuel by innovations and skincare and foundations that are fragrance performance during holiday and strong growth online.
Currency translation is expected to negatively affect reported sales growth by one percentage point.
Reflecting weighted average rates of 109 for the Euro 123 for the pound and 712 for the won for the fiscal year.
EPS is expected to range between 585, and 593 before restructuring and other charges. This includes approximately five cents of dilution from currency translation.
As you are most likely aware currency rates have moved about 3% to 4% since our last guidance, which was based on rates as of June thirtyth a spot rates.
Juan Euro and pound of all weakened relative to the U.S. dollar and created a currency swing of approximately 10 cents on our annual expectations for S.
So the currency impact previously was a plus five cents that we were expecting for the year and we're now expecting a minus five cents EPS impact based on the September thirtyth spot rates.
For the second quarter net sales are expected to increase approximately 8% to 9% in constant currency currency translation is expected to negatively impact rose by one percentage point. Therefore, we expect reported net sales to grow between seven and 8%.
S is forecast to between $1.83 and $1.86 before restructuring charges. This includes about two cents dilution from currency.
With a strong start to the fiscal year, we are optimistic about our ability to execute our plans to deliver another year of topline growth margin expansion and double digit EPS improvement.
And with that that concludes our prepared remarks, we'll be happy to take your questions [noise].
The floor is now open for questions. If you have a question you simply press the star Keith followed by the digit one on your Touchtone telephone questions will be taken any order in which thing or received to ensure everyone has the opportunity to ask their questions. We will limit each person to one question time permitting we will turn to you for additional questions.
Just Q begin by pressing star Keith you did one our first question today comes from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, so much.
And I wanted to ask a little bit about U.S. and distribution footprint and cause the commentary. We all know of course that the specialty multi channel has has slowed a bit.
And with your comment that it was pretty specific that you still see saw growth in the channel at retail.
So I guess, one can you talk about any inventory de stocking that might be going on in that channel and to what might be happening. There in terms of foot traffic can take away because that might tell us slightly better story in terms of the health of the channel versus I think what we're all worried about.
There was are being like a structural flowed out in the channel. Thanks.
Let me start answer this question I seem to keep appointees I don't think is stocks is the key point here is that they called <unk> mid cap market has softened mint and and there are certain companies like us and certain retailers, which I'm more exposed to.
Makeup than others and these as fluctuations and so in that quarter that was the new news that we had manage their round.
And and so the key idea is that when we see trends we are able to anticipate the react to those trends. That's why we moderated the impacts of these fluctuations on the make up the isn't the pushing more obviously, our skin care business and and continue building.
Our distribution in the way that we want to focus seats in the long term muni swinging the distribution toward the high traffic at the high performance China's and retailers gradually over time. So this strategy continues on top in North America, we ever it really improved.
Our team our capabilities I would ability to manage the market get and what are the except due to anticipated react to the strands very fast we had better consuming they inside some more local relevance and that we have dramatically improve your ability to work on line and our online business and bring it being bid.
He said very solid so we are committed to improve the North America trends in of course with this fiscal year, obviously, even more in the long term and the discourse to was mainly as a split and a softer than expected color makeup business.
Okay. That's great. Thank you and I was.
In that regard for retail you pointing out some of the changes that you've already started to make in the lesson that you would actually talked about and I think some of the things that Chris good highlighted at your analyst day in the spring, we're really interesting so through this hyper segmentation so.
When do we start to see or do you think we started to see that impact performance is that kind of why you're speaking to the forecasted improvement from here. It's less about the makeup category to getting healthier and more about some of the estee Lauder specific proactive hyper segmentation coming into play is that fair.
Yes, that's fair either you're going to be more proactive segmentation well she's going to be innovation focused on disruptive segmentation. That's why in my prepared remark explained that our innovation for example, the clinic innovation and make copies more customized exactly to the opportunity with you didn't decide I also explains that Frank.
Only when you don't look to the last quarter or the last six months, but you look to the last five years. So the categories Midcap skincare well, even the subcategories like color cosmetic this with foundation or most of the rise of vessel anti aging have different situation a different trends will not have it adds over the years, he's got to build being growing pretty well.
In this moment that he's a softness in color makeup for specific consumer driven reason that personally believe these we come back it is always come back up and down Hoover's overtime.
I will also add more in that you know, we did have and unusual anniversary ing of a very strong launch.
Period last quarter from a fragrance standpoint last year with Estee Lauder beautiful Bell and some of our other designer fragrances, and we are comfortable and and quite encouraged by our holiday programs for the second quarter.
Yeah, no. So you want to get if I had bigger maybe just does not completely.
Coming out from the fragrance number that our high end fragrances. So Jo Malone, Tom Ford continues to grow very strongly also in North America globally and in North America. So deep flag. It ends number is 100% influence by the base period of the launch of is alluding to fast and sounds design.
And this on it frightens performance, but our high end science is continue to be strong performance continued to become a bigger percentage of our business and we are at the moment or tilting the proportion.
Okay, great. Thank you so much I'll I'll pass it on trying to get back in.
[noise]. The next question is from Dara Mohsenian with Morgan Stanley . Please go ahead.
Hey, good morning.
Good morning, So I wouldn't.
One of the flush out a bit more the lower global prestige beauty category revenue growth guidance you gave in your release versus last quarter can you give us a sense of which geography. Some product categories are driving that lower growth expectation is it just mainly U.S. makeup or are there other areas and that obviously you raised your own.
Internal sales forecast so.
Just help us understand the context of greater confidence and essay market share trends within that.
Lower prestige category growth.
Yeah. No agent is first of all I want to say that the our estimate to the market is still very very strong Andy 5% to 6% is amount is at the top of the historical averages. So.
To be clear, we continue to believe that decrease the prestige beauty is going to be one of the fastest growing market in consumer goods and that we've continued to be in this moment.
On top of the study garbage is so does that gray moment to growth.
We have taken these falling down reflecting the reality of the softening of the color makeup, but equally in the middle market, specifically North America, UK, Australia, and it to reflect our assumption do in moderation of growth in China and try to retail.
The however to be clear, we have not yet seen happening, but just to be consistent with our future focused and that's where we see but again. This is the most robust consumer market.
In the numbers in these these robustness we've come to you know a you know what estimate.
And obviously, taking up the year I'm certainly reflects stare out you know the performance that we saw and I'm in the first quarter.
Great. Thanks.
The next question is from Olivia Tong with Bank of America. Please go ahead.
Great. Thanks, I'm, just sort of following up a little bit on that can you talk about.
You know your expectation for market share gains, particularly given that a key competitors luxury division at least this quarter outpace your growth clearly Asia continues to be fantastic is there more coming there to drive even greater improvement more that in terms of the U.S. rebound you talked a little bit about that in the prepared remarks.
Even more doors, even better innovation and maybe if you could just sort of if possible on on the category growth to sort of talk through.
The the the procedure growth.
You know where where it's it's more.
There you know where your expectation is going and make up thanks.
So I'll I'll start and and then a retail will continue on so Olivia you know, we're seeing strong growth in Asia.
We're seeing very strong growth as we've called out previously in travel retail we're seeing also an acceleration in EMEA as well. So some of the things that give us confidence in terms of gaining market share it's less about North America at the moment, although weekly.
Charlie I'm, you know expect to see as I said in my prepared remarks on modest improvements in North America throughout the course of the year, but from a share standpoint, we really expect to gain share outside of North America into international markets.
As well as a good growth in online as well yeah.
And I'm talking well treated is clean explain obviously these this trends all discourse that the strength of the last two years shows that we are growing clearly ahead of market. So we are gaining market share. So he's not do we plan to do anything different they continue to gain market share in a very good way we agree.
William Mackie shift to the I was strategy for growing market share is not to spend aggressively in stable markets to fight mask Assia zero some gain our strategy to grow market share is dictated by our compass, where we anticipate will grow to east.
I'm from and we build market share at the beginning of the growth trend for example in this moment, we're gaining significant market share in China. We are gaining significant market share in every single of the emerging markets of the award we are gaining a gain market share in European Weston.
We have gained market share in most of the categories in the UK because of the soft and on that market and so we grow market share, where we are taking the opportunity to really and and TCP and growth in areas that they need to future we increased dramatically.
Our market share is also at a selection of mix, where our high market share markets with demos, there's times bigger and grow our global market share. So he's a very long term oriented game and because of these very efficient and now what rates of return on investment by when market share growth accidents.
The money to read entity the other big driver of market share growth easy innovation as we said, we abbvie robots innovation that ebay in good results in the success of our innovation in the last years, we have improved dramatically our speed of our innovation easy.
Proving India's moment, we added about 70% to they know they should the we have developed from idea to marketing 12 months in many other particularly makeup within six months. These was not possible in the past in these as reinforced our ability to grow market share value innovation in every market or toward that and then finally.
Our leading beauty forward and activities and create them more flexibility for us to invest in advertising and other sizing invested in the quota away is the add to increasing tool in increasing students for us to grow market share globally.
The next question is from Ali Dibadj with Bernstein. Please go ahead.
Thanks, Hey, guys. So that's a very good segue to my question actually and.
Recognizing very much the share gains that you've developed and not growing the beauty category, even as it slows the gap in fact as to your point continue to expand that you continued I probably would further.
The category and I guess my question is what levers do you have.
At your disposal, if if the if the topline as a category.
Flows even more what levers you have your disposal to keep growing topline keep growing margins. If it really gets gets tougher from here would you just continuing to invest more in advertising and innovation like you. Just described would you acquire more would you lever the balance sheet more and bought back stock more.
Their new expansion in geography, or they take advantage of could you cut cost a lot further I guess I'm trying to get a better sense of.
What's the contingency plan if the world gets gets much tougher from from here.
The the contingency plan is is that diversification of our business in the sense that we'd be needed that tutto beauty business globally. We've continued to grow held as I. Just explained in the previous question. So we can argue is five to six or seven but those out to refi numbers and this is.
Sustainably the long term as we have explained in our analyst day, and so that that being the base. However, as we have demonstrated in just a moment they could be in a given market even category, which is softer in this moment is color makeup in the United States. As an example, and then what we do is we are.
Able to continue to try to improving the Scott do it and using to soften as also to be in some markets ship, but most importantly, we're going to diversify our investment our innovation, our marketing got division, our consumer repeat postures activations in CRM on where there is growth and.
Today, we have did GTT to move investment from may be temporarily soft markets or categories to very very high growth markets in categories decent GDP has improved thanks to the increase of valuables cost and reduction of fixed costs they need to duty for voice provide an hour.
Flexibility to invest in advertising when needed. So basically Dan said, they do their own strategic answered. Your question deflects CBD to do we have is part of our moving people NGL growth strategy and the ability to continuously invest where there is growth where the return of our investment will be the high is not on the financially but those.
As interim will grow to market share.
Dan will be modine specific of of the fixed it'd be do we have take take this quarter I think this quarter you can read it in many different away, but for US is it to refi demonstration of our move to put NGL growth, we have the leaving a 12% mask growth globally.
And that despite the color Mcafee had one of the softer trends in Anglo markets in the last year said, Oh, conga as being a DC quota and the North America business in total and had a softer market to than expected.
Right, because we add accelerated and gain market share and deployed innovation in skin care unit to review, we across the globe inevitably single not good because this course that 94% to about what brands through.
Basically all of our portfolio is a growing because Asia is five that accelerate to China is five did accelerate to yeah is being super stronger own line continue to grow at this same strong levels being growing for semi is inevitably single like China, when that's up only which is interest.
Our direct to consumer cost of online media, where we have direct to consumer which includes our brand of calm and T. Mobile has been growing at 40% plus so we continue achieving more die to coincide with the consumers value that and we've been able in despite these 80 of softness to fall.
Who is also on the idea of strength, adding tutto to beat our go to forecast that I think is the key sign that we are trying to explain is these the secret is not never having something in the award that doesn't work, we sat should big business be it got to be something we'd go around somewhere but now we have the.
Flexibility to move in order to always try our best to the D., but the total and progress towards our internal growth as in market share.
The next question is from Rob I didn't sign with Evercore. Please go ahead.
Great. Thank you very much I'd like to drill down a little bit more into China, and and specifically a number of things first you know did that China had accelerated.
Was that your business in your market share or was that the market as a whole.
Second as you've looked at and related as its you've looked at the Chinese market over the last 12 months have there been any changes that you've seen or any adjustments that you've done a to give us a little bit better sense of what's going on in the ground and then finally, you know our read of the the media that's coming out of China is.
At the the Presales for 11 11 are off to a record start I mean really phenomenal presales a is that correct and has that continued thank you.
So let's start to the go to your question China market continue to grow the beauty mascot above 20%. So the market is super sodium we grew much more than that and we'd be significant market shift in the quarter will be we'd be almost two full pulling some market share.
So significant market share in the market.
And so both the market and our market share gains are working together in that sense. What is driving that first of all we are in China for the long term, we had that local organization, which is terrific and understand the local relevance of the market we are able to.
Invest audio growth in this moment in China that he's a lot of growth the discounting or so not only for tier one and two cities, which has been true for sometime but three or four in tier three sodium Korea foresee Rx it'd be too significant which is what these are reflected in the acceleration on t. mode.
Do you are referring to.
Let me explain what's the dynamic here.
Historically in China, and there was no national advertising, we could invest to where we had distribution. So if you had stores since I got you could invest in three into Shang Guy.
We have yet vento, social media social media is national and because of these that he is the possibility of creating demand nationally even if distribution for the moment easing iweb must distribute the brand using totally went ended at 21 Cts why the reality that he's social media event, but.
Demand created enormous seek Sandra cities, so that 100 or cities we million in have beaten said, we growing me that costs that for the moment do not have access to physical distribution and obviously the to the drivers of their consumption is T R and T.
Mobile and online Brian Dotcom sites like ours, so that obviously, all the time distribution will increase and physical distribution will make more inroads into the cities, but for the time being.
Online is basically the way in which the amount that get satisfied and that would that dynamic is a long term dynamic and we continue for some time independently from temporary or not softness or economic variations, but these long term is driven by meet the class demographics.
In by the passion for beauty of the Chinese population and frankly for the Asian population as well so disease the trend and I believe the our position is stronger Andy forecast for the market in the long term remains as strong as possible.
The next question is from Wendy Nicholson with Citi. Please go ahead.
Hi on two questions. If I can first on the balance sheet. Your cash balance just continues to grow on and I assume you're in the market or well be soon supporting the stock and buying back more but just generally you're kind of it seems like you're sort of there's an aversion to acquisitions. These days, but it does can you talk about sort of view.
Our interest in doing some something more aggressive on the on the repurchase side you know, what's your philosophy with that without growing cash balance and then just secondly can you remind us on the gross margin has been under pressure now for several years and it just continues to surprise me because skin care I thought what's your highest gross margin business.
And with that outsized growth I would've thought gross margin would would revert to going back up at some point. So so that a little bit of color there would be great too. Thanks, Okay. Let to let me start with your second question when they in terms of the gross margin. There. There are many factors that impacted and that gross margin, obviously and clearly you know skincare.
They is a benefit from the gross margin standpoint, I'm certain channels or a benefit from the gross margin standpoint as well.
You know as we've called out you know we have given you know given where growth is coming from for us for US you know a lot in a in Asian markets and you're aware of our footprint we do have.
More supply chain expenses related to supporting some of the terrific double digit growth at a that we've had and certainly that growth being in a in eastern part of the World has has increased inventory levels as well as transit cost.
The tire tariffs. We've also spoken about the fact that we do have and have a included some of the higher tariffs that have been.
Called out.
Our gross margin as well.
So we are seeing some some shifts.
Upside related to a category mix and a and some geographic mix offset by some of those other factors related to freight as well as obsolescence and a and some of the supply chain costs related to the tariffs etcetera.
In terms of the balance sheet, you know, our our general philosophy as it relates to free cash flow is to return free cash flow to shareholders. If in fact, we don't have any acquisitions that that we're contemplating we're always.
In the market looking for the right strategic acquisitions that will represent.
White space opportunity for us and incremental sales and profit growth.
We also have minority investments that you know that we have a path to purchase as well.
So we definitely consider acquisitions as a as an important strategic growth opportunity for us the right acquisitions that again represent a good fit within our portfolio. If we have no acquisitions that that are at the right price and a and represent those white space opportunities.
Then generally and we have this discussion every year with our board. We can we returned 100% of free cash flow to shareholders via dividends and share repurchase activity and here as well you're aware as well. We have also increased our capex this year out to reinvest back in the business again to support.
To support long term growth. So I think our capital deployment in terms of the cash even though you're seeing a little bit extra on the balance sheet is Ah you know is in the highest return areas in terms of how we are we strategically allocated for a you know for our purposes as well as for shareholder purposes.
Thanks.
The next question is from Mark African with Stifel. Please go ahead.
Thanks, and good morning, everybody.
Morning, a couple of clarification. Please so the 80.
Benefit in Japan, how much was the benefit was immaterial in the quarter is there any expectations that that comes out of.
The December quarter, and then your category growth expectation.
I was under the impression that you had anticipated a moderation at some point in time in China.
When you gave it originally and so your comment in addition to North America weakness was I guess.
Not surprising or maybe I just missed interpreted so maybe if you could talk about kind of the confluence of those expecting China to already decelerate and I'm, taking your global growth rate down and kind of related to the last one.
How do you think about North America over the balance of the or you'd talked about it I anticipated to stabilize is that still the expectation what is stabilized kind of mean.
Okay. Let me, let me start I'll start with your question on Japan, So as I'm sure you're aware on the Japan market had a VAT increase starting in October for on October Onest. So typically and we had this experience from the last time, there was a VAT increase in a in the market, we do see some acceleration of purchases.
Into into the Mone prior to prior to the a the increase which is expected it typically normalizes out during the course of the year. So the reason I commented on the fact that we're coming off of a 7% growth last year from Japan, We certainly expect Japan for the year woken.
He will normalize out to the levels of very strong growth that that we've seen and we're very pleased with it pick up that we've seen in in Japan over the last over the last couple of years really a testament to the great great team that we have in Japan and on what they've been doing in the market.
As it relates to.
North America, we did say and I did say in my prepared remarks, we expect gradual improvement we did talk about the fact that we have seen further deceleration in in North America Fabrizio talked about the color make up challenges that that we along with others have.
Spoken about in in the market. So you know depending on your definition of stabilization, we certainly expect to see improvement from the results that we saw into first quarter and again, we had some unusual anniversary ing items in the first quarter as well.
But so we expect to see gradual improvement from the first quarter results throughout the balance of the year for North America.
And the thing did about you refer to to China, and we said no I wept market point of view is that 5% to 6% growth teases Superstrong roots that will continue the high end as I splaine, all the started color age, but we have reflected the soft any of the make up north American market in Iowa.
Global estimate and then we had we continue to assume that they could be a softening of the China market into future, but as I said, we have not seen it yeah. I just commented that actually we see an acceleration in this moment, but we believe this is a prudent to us.
I'm sure in the current global economic situation.
The next question is from faulty Oklahoma with Berenberg. Please go ahead.
Yes, good morning, and thank you for taking my questions I'm just on that last comment that you made for Bristow about the potential of a slowdown in China I mean, given the comments that you've also.
During the school about the contingencies you know the diversification of your business the ability to quickly react and adopt and go up and you pockets of growth how should we then read that in a in reference to the guidance that you've given because I guess.
If you think about what you've delivered what you expect to delivering the second quarter. Your full year guardianship clause just over 5% organic growth in the second half.
Sort of trying to understand why you keeping jeez.
You know.
Oh, the old tools that you've got available now to offset the trends should they some of that China slowdown if and when it comes.
In the in the second half two up just to generate.
Hi level of course, thank you.
So I I.
I think this is Tracy and a and then for retail will respond in the second half where I think your numbers are little soft you. If you do the math, it's more in the 6% to 7% range in terms of what we're expecting I'm in the second half of the year with some moderation that that we spoke about.
In a as it relates to China and travel retail and again, given the global backdrop in the global environment. It has nothing to do with our business. It is really a point of view with respect to what could happen to global markets. Given the fact that there are global macro slowdowns, even though.
We haven't and vaccine in China and haven't haven't seen it affect our Asia business in general on which is quite a quite strong.
But it certainly could happen and so as we plan you know our business plan our resources in the second half of the year clearly if it doesn't happen then we'll continue to have a the kind of results that that we had in the first quarter, but we think it's it's responsible for us to to expect what you know many economists.
We are projecting in terms of.
Slowdown in the second half of a year.
And the but either way to go to your point that huge I've explained all our great strengths strategic threatens the flexibility to do you had GTT the ability to leverage old China. That's why we believe that.
Even if there was is moved down where we continue to be in market share and we've continued to be ahead of the market. This trends would be the and if there will be no slowdown.
We will order deliberate and that's what happened this quarter any top end.
Frankly, and even in case, there was one that limited west really was worse than ours, but they should there was that makeup color market in the U.S.. So at any price and so while it one element to that was actually a surprise.
We still over delivered because all the other elements first of all this strategic execution did I commented on and second deal. They don't trends of the market teenager does not slow down and our strategy execution is accidents and so we have over at that event and that does the situation is in just a moment you see also.
Currencies have impacted.
Hey, which were different than our guidance just few months ago. So there are many valuable we're trying to take on their account, but this trends of our margin and the ability to navigate good times and bedtimes growing market share doing better than market. That's I believe is by now really proven.
Thank you for recognizing the fact that we are operating quite well in a very difficult market yep.
Yes, we do have time for one final question that question will come from Linda Bolton with D.A. Davidson. Please go ahead.
Hi, I'm. So I was wondering if you could comment on this concept of your hero products, which drive your core franchises. So successfully I think in the past you had commented that some of the Indy brands.
In North America, maybe weren't so good at that have you detected any increased capability on their part to develop these hero products, which could be further threatening to your market share can you just comment on that and also the idea that youre cost.
Attracts attention up first trial is rising overtime can you comment on that trend and whether there's been any change there saying.
Yeah, and RV dressing question, so as as I explained the Ocean my prepared remarks, well, we define hero progress in our portfolio is actually products, we'd high repeat rates and a decent pastures frequency, meaning products that have not only that power.
To make the consumer loyalty, but also the head the bring they consume it to the repercussions written that create traffic in stores for I went back to us and for our selves. So this brought us a very pressures in the portfolio and to build program like that.
Marketing is not enough you need superior quality and great performance, because I know many people, including myself that is tempted to try new stuff one time to try new things, but I don't know any person that buys distinct. The second time is this broad who didn't perform in line with expectation.
And that's what we mean, we invest into high quality at Randy high quality manufacturing.
In safety clinical test it probably does a really work and Tony they work in term of performance by Dave that kind of texture use I'd just be it in that made the consumer delighted about what define and debt investments that at the end is it the essence of our premium pricing strategy that investment.
Creates repeat brushless DC, Steve very be differentiator between well now that our portfolio and the portfolio or the in the brands. If you look at the numbers. The difference in repeat are still significant because also the difference a repeat driven by quality innovation and by the upbeat.
<unk> to delight the consumer over the long term.
And so we believe diseases strengths, which is no not be mitigate that you in your question speak about new to that frankly on that topic I don't see new threat actually see new strengths and it is it from new students for our brands not for the into France and to prove that <unk> is that disease that first quarter.
In some time, where each one of our big brands is growing globally and a total of them is growing faster the any combination of indeed brands that and so is really an extraordinarily if you will improve our declined to repeat purchase is the biggest driver off.
This dispute.
That concludes today's question and answer session. If you were unable to join for the entire call playback will be available at one PM Eastern time today through November 14th.
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