Q3 2020 Earnings Call
Good day, everyone and welcome to the Estee Lauder companies fiscal 2023rd quarter Conference call. Today's call is being recorded and webcast for opening remarks, and introduction I would like to turn call over to seniors.
Other Investor Relations Ms. reining in CD.
Thank you on today's call or for Greasy, Alfredo President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer.
Many of our remarks today contain forward looking statements.
We refer you to our press release and other reports filed with the FCC, where you'll find factors that could cause actual results could differ materially from these forward looking statements.
To facilitate the discussion of our underlying business the commentary on our financial results and expectations as before restructuring and other charges an adjustment disclosed in our press release.
On that sales growth numbers are in constant currency, you can find reconciliations between GAAP and non-GAAP figures on our press release.
Right on the Investor section of our website during the Q and they 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 rating and Hello, everyone.
You are in good health during these difficult kind as the world come from called the 19th.
Oh, my gosh, two doors afflicted.
My deep gratitude goes to anyone around the world.
Despite the growth rate these exports.
Before I discuss to resolve in our strategies to Daddy Geek truth is challenging environment I want to first thank our employees at instead of that competition.
Yeah. It compassion, you wish on whether or not that she's the outbreak.
Polishing you walk routines for yourself and caring for your facilities.
Being truly inspiring Youre Korea TVT essential collaboration.
Hi, guys in two new hike is we have that domestic business from marketing Sage two manufacturing and more.
Employees it truly exemplified I wouldn't be these leadership from <unk>.
Yes, they know that companies and some of these charitable foundations had made donations to how can lead me to spread the drivers.
They did have shipped chased by those affected.
To date, we had made donations commitment to doctors without borders the New York City called <unk>, 19 response, and even thought to fund.
Red Cross inside your China shunned Guy try to get foundation gifts to Asia and community chest Korea.
A week, we established Ian seek here and through you ready fund our new Whiskey eating initiative, we should be funded trial contributions from the company dilutive family and I would employees.
It will provide immediate critic of financial release, two employees, whose lives and being impacted by dependent Nick.
Our brands have also found many food waste to contribute.
The it's dilutive brand do need to 2 million surgical masks for frontline workers in New York Clinique donated 50000 scheme kept brought it to doctors and nurses.
Your cities hospitals.
Either loan should I be the cares it relief program to benefit independent solutions and studies in the United States.
The most key fashion initiative, we have saloons prepare to recall there from called be 19 related closures.
The Mac devalued on fun, he's going to key new each decades long eating by allocating 10 million to 250 local organization over toward the dot providing essential needs it sort of issues to people at higher risk during the call get 19th and Danny.
I'm, especially proud how the company mobilized to manufacture hand, sanitizer for frontline workers high risk individuals and our employees. Thanks to the tremendous work with our wouldn't Blue belt research <unk> development and supply chain schemes.
Oh associated into United States, the United Kingdom in Belgium, making over 1 million hand sanitizers.
Now turning to the quarter's performance as we discussed with you when our last earning cool in early February we expected third quarter seats to decline.
After a strong January globally, we anticipate that Brexit in February and March you know, what Asia Pacific region, and I will try to retention, even just end up the koby 19 outbreak that Burlington county or whatever.
To be 19 continues to spread around the word as the course to progressed and social decency majors began to eat retained trust.
As much evolved tribal was significantly course teams and the is truly old stores in the Americas in Europe, the middle Eastern Africa temporarily closed keen to reach consumer primary access to supply such that the magnitude that the impact when our business was far greater than.
Initially anticipated.
It is very complex it challenging environment.
The seeds fell 9% in constant currency.
Crazy, we provide more details about our financial performance in a moment.
Indeed, what type of course to do with several bright spots you know what business, which led to global prestige beauty Shia its function.
Yeah, It's dilutive brand grew high single digits was the fan ended up both for so that either it states girls.
King cat scenes through internationally, including <unk>.
In our Asia Pacific region, CNC mainland China Rose mid single digit after returning to growth in March.
Our online scenes increased strong double digits worldwide, we growth accelerated significantly from February to March.
The strength of our Blue belt comedy Kids business in January and February enable eat to Delever low single digit sheets growth for the quarter excluding merger.
Each of our three regions out at different stages.
On the carbon 19 outbreak.
So to speak with you today.
Furthermore, we didn't regions, yes, dental containment and recovery varieties.
As a result in given how fluid situation is we are continuously fine tuning over strategies, we dealt with branded regional teams to boot manage the price and plan for the future.
Across the regions in my Jody two of our facilities, if cuttino to manufacture and distribute products.
Do you know match reuse the capacity.
Most of our Oh fishes globally, our operating in a word from whom scenario.
But that tool is evolving.
China courses, each and guy has fully reopened.
As all employees began working indeed, our fees daily three weeks ago after having been on it staggered schedule for several weeks.
As our fees should be open. However, we are going back to work in a different way we are deploying additional safety measures for health and hygiene the old supplying disappeared and she's a war from whom we new ways to collaborate and engage with it.
You know what Asia Pacific region, I, what business in mainland China decided that improving as retail stores began to open we shorts that and I was in March.
In mid April the is pretty every door had reopened.
We are encouraged by China exports in containing the virus in the initial signs of recovery.
We expect to return to double digit sales growth in mainland China into fourth quarter.
More recently seats in Korea, and began to grow and stores that started to reopen Oh, Hebron, Japan, Australia in markets in southeast Asia stealing the containment phase with most retail stores close as we speak.
In Europe, the Middle East Africa.
Retail stores in most countries being closed since early March we the primary exception being in the dollars can peninsula and the Nordic region.
Some countries. It recently announced plans to gradually the open most notably, Germany, and each city, which are promising signs.
Three or two these temporary door closures seven upcountry see western Europe had been a speed and she is lower three traffic is studio abated in response to Gabi 19.
We expect these headwinds to persist for sometime.
In the Americas, most to retain storage it'd be Susan Cates mid March well do retailers staff to see much newer traffic it earlier in the month social distancing again.
More recently, seven upstage into U.S. and announced guidelines for the recovery, we're starting to see that he lead me to deal with any kind of side.
We're closely monitoring devolution of consumer behavior through these challenging time, it we are developing strategies to address.
We are using sophisticated social media listening to machine learning and adequately to teeth and Quinn <unk> deep research that mix.
Each day, we had said see how consumer expressed at needs and desires from 16 seeking to see TVT saskia willingness to understand need there at home needs in routines to hearing there even better momentum it's sustenna BTT concerns.
Our successful to strategy built on most people engines of growth is as vital as ever.
Diversified portfolio categories channels geographies brands and price points give us many levers to fuel the business and we played a crucial role during recovery when stores three open and consumer restocking at home.
Our robust global skin care for your vibrant online business through Disposer in Asia Pacific at the time any engines of growth in this moment.
These engine had tremendous momentum before copied 19 ends up playing a crucial route during containment why brick and mortar disclosed.
Let me for decoupling skincare.
Emerging trends, adding crazy the appeal of the category bolstering Reighty strong category dynamics.
Taking care of once keen has become an expression upsets care, which is raising importance.
Consumer is actively exploring sub categories and expanding their redeem and finding peace of mind in that each one of the routine.
Our focus on hero products is there I strategy as consumer brands and products They trust.
Consumer a newly discovered in continuing to return to our heroes.
The lab heroes like if the looters advanced night repair let Matt.
And that in their treatment lotion and concentrate.
Clinics and more so sewage as being seen see strong global demand online since the outbreak demonstrating that Dynamo These big brands.
Indeed unprecedented times, we sustained through to our belief in the power of innovation on our hero franchises, we launched it's dilutive perfectionist pro rata brightening treatment clinique, even better clinical radical that spot corrector plots raptor.
And the new I concentrate from a man.
Consumer demand is being especially compelling.
In fact for the perfectionist serum it's much loans on how do you have about hey box was one of the load as best as or on the platform.
Clinique, even bet to see room is far exceeding expectation in mainland China and has been highly so two line in the United States.
And the net loans contributed to significant share gains in luxury on chemo.
Among our channels on line is trading around the world as we discussed with you at our Investor Day last year.
We have long believed in the excellent growth prospects problem line and they've been investing in these dynamic channel four years.
Presence globally, we don't line since you know that 50 countries. We are highly diversified we over 300 Brando come sites over 60 brand boutique some platforms such as Tim on hold at 1700 retail comp doors.
Our online brand teams had been actively engaged seems to containment measures to cold.
Optimizing product placement with dredged consumer Cabot wants and needs and show cases tools like Vietnam, I'll try not to ease decision making.
Yes, a little bit brand spend that each phone line say strategy to include a broad array of social selling activities from like shows nice ticket I'm focused on Censky, a blue book spoke margins to live streaming from its brand sides weak global and local makeup artist to live.
Shots, we consume it only sprint side to personalized one to one.
Outreach through various communication tools.
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It's long waited a pre launch 42, newness Selena capsule collection to online and social selling to hone or the commitment you Ted made to consumers. The Brent employed in exciting digital that deviation in place any sort of Sony bands for the global launch two tremendous success.
The order sold out on line in two days.
Denies the biggest cholesterol launch to date in terms of total she's Matt cosmetics Dot com.
Bobbi Brown began DD lesson, we the branch pro makeup artist across digital channels topic, most requested by consumers initial signs porosity and the brand is welcoming all new consumer thanks to these phone with or not industry initiative.
Jo Malone, London as being an influx of at TVT, we'd digital community. So as consumer set so to date and I believe that stays with the power of sense.
I know that brands, whom fragrances, and bath and body categories at double that mix of business.
Throughout action like these in recent weeks, we drove conversion rates sharply higher in our seats ration across demographics.
I'm, especially encouraged by the online growth we've seen from the ageless consumers.
Nobody out what brands I see increases in new consumers.
Treat to force dies some rates even higher.
For let met in the United Kingdom, you consumer application these higher by five times Whiting, Thailand across all brands Italia by eight times.
As consumer behaviors adults. During this time, we first any more data leveraging or what analytics capability to the right even better consumer insights to provide even better service.
When retail stores open.
It will be stronger policy shifts towards that unlock the potential of omni channel.
We also focusing on the areas most immediate opportunity in Asia Pacific mainland China as of March in Korea as Ravi Please moving from containment to recover.
We told you on our last earning calls that we stood ready to facilitate recovery as soon as the markets posted it and we're doing just that.
The mainland China, we successfully piloted emerging business model for online and department stores to adapt to the change in landscape for La Mer personalized service across channels with curated and targeted communication drove both online seats and the ports.
Mr seed significantly higher in the month of March.
The strength of the man repeat business model as being a key factor 40 strong recovery in contributed to the brand outstanding prestige beauty share gains made on China in the quarter.
It's countries in Asia Pacific move into recovery, we're mindful of the consumer in these markets, who traditionally pashtuns our progress in travel retail, but not capable to do so with air travel largely corestate.
Our regional brand leads working to meet these consumer demand even markets.
<unk> eat in department stores specialty moves de freestanding stores or online our tragedy Tate team is also actively engaged as destinations in the China. The open really driving positive trends in heinen for Macau.
We remain focused on meeting the needs of Chinese and Asia consumers with local relevancy and local trends since we last spoke in February we have advanced our work toward our new investment in a state to about innovation Center, which will open as Sean Guy.
In closing these unprecedented time.
I moved by how deeply we're leaving our company values and how are you can't becoming an even better company through these challenging moment.
Without extraordinary people and our successful strategy built on the most people engine for growth, we stand ready to emerge strongly when the global recovery begins.
Now I wish to the cool over to trace.
Thank you for Bts and Hello, everyone.
Oh, good 19, it's certainly proving to be the most significant challenge we faced as a public company as much of our brick and mortar distribution globally has been deemed non essential during the quarter. My several dirt jurisdictions and remains close today, we continue to do our best to support our communities and our employees, while also working to mitigate the bill.
And the impact during this time.
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.
So looking at our third quarter results net sales fell 10% driven by the rapidly evolving impacts from covert 19 that occurred throughout the quarter.
As the majority of our brick and mortar distribution throughout the world as close as the quarter progressed, we quickly pivoted to drive sales online our online growth accelerated sharply at the end of March and continue to rise in April.
Sales grew in travel retail from a strong January and February before travel restrictions were enacted in skincare remained our most resilient category.
The Americas region and the makeup category suffered the biggest shortfalls.
December acquisition of Dr. jar added approximately two points of net sales growth.
Our gross margin decreased 320 basis points compared to the third quarter last year due to a combination of factors.
In the first seven months of our fiscal year, we saw outstanding growth in our skin care category much of it in Asia and in travel retail.
To meet what has now been our third year of double digit demand for our products, we supplemented our internal manufacturing capacity with additional third party suppliers and we incurred increased air freight to support sales growth in areas distant from our manufacturing facilities.
This resulted in higher supply chain cost in our third quarter.
The impact of increase tariffs higher obsolescence and promotional activity also contributed.
Well as the inventory step up related to Dr. John.
Previous initiatives like leading beauty forward, which is still projected to contribute approximately 425 to 475 million a net savings by fiscal 2021 has put us on much stronger footing to weather normal economic downturns.
However, the impact of Covet 19 has not been a normal downturn.
The sudden and dramatic change in sales growth from the beginning of the third quarter to the end created a de leverage effect that could not be offset quickly enough by the significant cost actions, we took which totaled approximately 250 million.
Therefore operating expenses as a percentage of sales rose 250 basis points.
As we told you last quarter, we expect to see a greater impact from our third quarter cost actions, including advertising and promotion reductions more aligned to sales performance, a hiring curtailment and the benefits of work from home, which yielded sharply reduced travel and meeting expense as well as consulting expenses.
Our fourth quarter.
As it became apparent that store closures and social distancing measures would move beyond China to be adopted around the world. We implemented even more cost actions that will have a more meaningful impact on curtailment of expenses beginning in may.
These primarily include furloughs and other lease of absence as well as temporary reduction in compensation for management and board members.
The capabilities, we have built in the actions we are taking now enable us to manage through the situation today, while funding targeted strategic investments going forward, which will position us well to emerge strongly when the recovery is more parent.
Our interest expense rose by $11 million.
28 million during the quarter.
Reflecting higher debt levels to finance the acquisition of Dr. John.
Our effective tax rate increased to 30.5% from 22.1% in last year's third quarter.
Narrowly attributable to a higher effective rate on the company's foreign operations due to the mix of earnings.
Adjusted diluted EPS of 85 cents fell 45% compared to the prior year.
Currency diluted EPS by a penny and the acquisition of Dr. chart diluted EPS by approximately three cents.
During the quarter, we recorded 346 million of impairment charges related to four brands in certain freestanding retail stores that have been further challenge by the impact of cobot 19 on consumer demand.
We believe that our strong balance sheet and ample liquidity provide core competitive advantages for our company demonstrating the importance of scale.
These position us to not only managed through a crisis, but to emerge from it stronger.
During the quarter, we borrowed 1.3 billion under our 1.5 billion revolving credit facility and had 200 million of commercial paper outstanding ending the quarter with nearly 5 billion in cash and cash equivalents.
In April we issued 700 million of 2.6% tenure senior notes in order to further enhance our financial flexibility and liquidity and repaid the commercial paper with the remaining capacity under the revolving credit facility.
We were able to do all of this while maintaining our strong single a credit rating.
For the nine months, we generated 1.95 billion a net cash flows from operating activities, an increase of 11% from the prior year.
We invested 468 million in capital expenditures and 1.04 billion to acquire the remaining interest and Dr. John.
We also used 883 million to repurchase shares and 502 million to pay dividends.
To further enhance near term equipped liquidity, we're focusing our capital investment on areas necessary for future growth and paring back in areas such as retail renovations in office improvements, we cut our planned capital expenditures by one third and now expect to spend between 600 and $650 million for the full year.
Yeah.
Additionally, we have suspended share repurchases for the balance of this fiscal year and our quarterly dividend that would have been paid in June of 2020.
All of these activities greatly enhance our ability to manage through the shutdown in brick and mortar for an extended period of time, while we focus on stimulating greater consumption online.
History has not provided any truly comparable recent events, we can use as guidance concerning the effects of the global pandemic.
The disruption to our business caused by Cobot 19 has clearly been more widespread and more pronounced than we had expected it would be when we last spoke with you just a few months ago in February.
We delivered remarkably strong double digit growth in sales and adjusted EPS through January.
But that was followed by the dramatics spread of the pandemic and the related door closings and curtailment of travel that we spoke about.
Due to the fluidity of the situation. It is both complex and difficult to predict the duration or the timing and trajectory of the recovery and the corresponding impact on our business.
At this point in the fourth quarter, the majority of our distribution with the exception of China in a few other markets remains closed.
And while we are encouraged by the weekly acceleration of our global online business, we do not have enough visibility into the progression of the rest of the business until more retail doors open in the coming months.
And we do believe traffic could initially return at a slower pace as some consumers remain tentative until the treatment has developed therefore, given the level of uncertainty, we're not providing explicit sales and EPS guidance for the year.
That said there are a few guide close that we can provide to you.
The inclusion of six months of sales from the acquisition of Dr., John should add about one percentage point to sales growth for the year.
It is expected to dilute EPS by about 14 cents due to purchase accounting.
Currency translation is expected to negatively affect reported sales growth by one percentage point, reflecting weighted average rates of 111 for the Euro 126 for the pound and 703 for the one for the fiscal year.
The related EPS dilution should be approximately five cents.
We're very encouraged a as we see the beginnings of recovery in China and markets around the world begin to discuss gradually lifting retail and travel restrictions as the virus abates.
We expect strong online acceleration to continue as underlying consumer demand is driving both replenishment and new customers online.
However, unlike the third quarter, where many of our global doors were open until the last month of the quarter. We expect that most of our retail distribution will remain closed for much of the fourth quarter and consumer traffic will likely recover slowly in brick and mortar.
We expect greater sales and margin declines in the fourth quarter as a result.
We estimate that global prestige beauty will decline double digits in the second half of our fiscal year.
We're also mindful of the rest of a global recession, and a slow recovery unemployment impacting consumer sentiment and discretionary spending.
Our gross margin in the fourth quarter will reflect the adverse conditions, we have been experiencing in March and April the sudden a dramatic change to our volume forecast is expected to trigger an accounting rule requiring us to recognize the impact of reduced manufacturing volumes on our standard costs, our plans had been running it meaningfully reduced capacity.
Reflecting some temporary plant closures as well as reduced efficiencies to accommodate social distancing requirements staggered shift changes and other changes necessary in this environment.
We're also required to recognize expenses related to manufacturing employees, who are not working these expenses are now recognized in the current period instead of when the product is sold.
Inclusion of Dr. jar with the impact of the inventory step up we'll also pressured our gross margin.
We expect our belt tightening efforts to have a more pronounced impact in the fourth quarter to partially offset the negative impacts I've discussed.
We are implementing some of the additional actions in may and expect to deliver fourth quarter savings of between 500 and $600 million.
Our full year effective tax rate is expected to be approximately 24%.
So those are some of the Guy point post that we can provide to you for the year.
We are committed to continue to take the appropriate actions to rationalize our cost base relative to the new normal and return as quickly as possible to bill sales growth and margin expansion as the cobot 19 situation stabilizes during the course of fiscal 2021.
We delivered tremendous sales and profit growth through the first half of the year as our business continued to benefit from the strategic actions, we took over the past several years to position our company for sustainable profitable growth.
And while the unfortunate temporary shock of Cobot 19 has made our outlook for the balance of this year uncertain, we have taken appropriate action to mitigate the effects of the pandemic, while continuing to protect our business to be able to be well positioned for both the near term recovery in the long term opportunities inherent in global.
Prestige beauty.
On behalf of some Brito and the Estee Lauder companies leadership team, we extend our immense gratitude to all of our employees around the world for their extraordinary efforts to manage during this unprecedented period.
And that concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is now open for your questions. If you have a question you simply press the star keep all by the digit one on your Touchtone telephone.
Questions will be taking any order, which they were received.
I'm sure everyone has the opportunity to ask their questions well in the each person to one question time permitting we will return to you for additional questions just queue up again by pressing star Keith and they didn't want.
And our first question comes from Lauren Lieberman from Barclays. Your line is now open.
Great. Thanks, good morning.
And then.
Good morning, first to talk about how many questions and so I wanted to start to talk about travel retail and just what your data and analytics had told you over time about.
About the sales historically to that channel how much of it is sorted in coal how much of any new consumers discovering your brand.
How much of it is sales that would ever could happen elsewhere like a replenishment type sale when someone traveled.
Because that could inform thinking about your ability to recapture some of that that sales or what degree of that sales, even assuming global travel remains depressed for a good amount of time. Thanks.
Yes [laughter].
Your your assumption inquiry I went the other confirms.
That does that consumers that.
While targeting a buying just called bidding or replenishing their products. So densities business travel people to charge for business being back soon gates, and obviously does create consumption in travel retail the most successful products.
Tend to be what we call our hero products. So the problems as we chat hi loyalty hybrid pouches rates, because both as a gift and his personal consumption, which are the two drivers are targeting people really wants to buy problems with the day I'm pretty sure will Ida replenish their habits or.
It exciting.
Sense duties that possibility recover at least part of the travel agencies in the contour origins and we're working on DC in every country Mannion energy markets in China U.S. in Europe, So that he's a project to do these as much as possible.
But in this moment to be better <unk> travel retail in Europe, and U.S. is basically closed and and so in the quarter for that he's very big issue closures.
I mean, the loved to try to retain seats, which I, possibly in the short term in Asia, we still see <unk> amazing results. When there are openings you know in this moment they try to retail we de in China, but equally to sign an island property.
Property Dino.
I'll just start to read back any believing get good growth we are focusing in this case very much more.
And any any is working so is again these awards.
The real travel retail recovery will start happening in fiscal year 21, we did get audio reopening of travel and would be probably one of the most can get out two or three openings in the recovery from from hours petition for my with that.
Thank you and our next question comes from Steve Powers from Deutsche Bank. Your line is now open.
Great. Thanks, Richard if you hope you're well.
But is it possible that you could talk a little bit more about what you saw in March relative to January February and what you what you've been seeing in April across your key categories geographies and channels I think that too would help inform at least the near term visibility and I guess related we.
You know if you're able to it sounds like your line of sight to Sun belt tightening. This is in the fourth quarter, but I'm trying to juxtapose that against some of the the near term manufacturing and other could related headwinds that you spoke to Tracy. So just little more color about what you've seen and are seeing in the moment.
You know how things are shutdown. Thank you.
I'll start from where we're seeing on the sales side and then let trees cover all the financial implications and finish with us so deep.
Did he called me first of all is very different by region, because the carbon 19.
Issue it is a different speed and in different level adept in different markets in some markets I did read as you know recall that in other markets are still in the middle of the so we are managing team in a very.
Differentiated way by region bike.
So what we see in this moment is that even in steel the closures.
In Europe, and U.S., 90% <unk> percent, if you have seen the some of the data that emerging on the situation in United States in the last week with Marshall. The first week was April.
Knock it was minus 70% and the brick and mortar closure as it very big.
So these we see the.
Amounts of March them, not sleep trialed impossible not to me where closures have very big any man and in North America is being probably probably the worst moments for that regions and then we see a gradual recovery as the brick and mortar will open in these regions, meaning European America.
And Oh European Amedica, we see or read the an extraordinary progress.
That's the key important important point.
On the other side in places in April in places like China Korea, Taiwan, We see go read double digit growth, we already see the recovery being very active and that's what else is very encouraging because shows that as soon as there is a recovery.
As soon as these the recovery from the consumer at point of view, so when the consumer back with the spirit of really going back to them nor my hobbies like is starting as I said in China Korea, Taiwan, the double digit growth comes back a fast and that because we see we see vote it increase going.
Sumption, we see restocking in consumer homes, and we see a restocking trade.
Which happened at the same time. So did you called it is strong but did you call that is for the moment on in these areas and I said using global online in global aligned to that most odious award is double digit, but the areas which are triple digit.
Then the recalled it is is that started in very few target retains the doors, which are open as I said, mainly in China Korea.
So the award for the moment, Steve closed and so in fiscal <unk> 21, we expect to see Oh engines meeting, including the European the U.S. brick and mortar gradually coming back but this crazy is classified in her prepared remarks.
We believe they come back agreement, but he can most that wouldn't be would be get out. We have signed so these are really in Asia, where the recall that it really starts on line. It was stats get ideally in brick and mortar and brick and mortar acceleration takes much more time because takes no tone.
Secondly, country opening a takes the consumer confidence to buy somebody can most it comes back and these will only come back more could add to it so.
What we see in summary, we see foster recall that in Asia for the moment and a lot to closure stealing European U.S.
Very fast because the online globally and motive get out you'll recall that in truck.
And Steve your question on the cost savings and ER and the manufacturing variance the way I would think about that in the fourth quarter. The five to 600 million of cost savings about a third of it is related to employee actions and a and the other two thirds related to other expense areas that a that weve.
Popped up in terms of our cost savings advertising consulting travel et cetera. So so that's generally the split in the fourth quarter as it relates to our gross profit margin and you saw the impact in the third quarter. You know, we expect that we will continue to see in the fourth quarter the impact obviously of the tariff.
And and of the the higher third party sourcing cost.
That that will impact us in the fourth quarter. In addition to that I spoke about the under absorption of some of our our overhead and labor costs.
That we need to expense in the fourth quarter. So the bigger impact will be in the fourth quarter on that so our gross profit margins will decline further in the fourth quarter related to those those onetime issues related to the the lower production volumes as we increase production volumes as as.
We emerge out of covet 19 that will correct itself.
Thank you and our next question comes from Olivia Tong from Bank of America. Your line is now open.
Great. Thank you good morning, and hope you guys are well.
Good morning.
Turning Olivia.
Well I ask you about just.
Now and.
I think certainly in person that China was only down right and that probably till they still up in the quarter, but do you want to claim which was pretty staggering. So as we start thinking about.
When western markets start to reopen.
Can you talk about different is not only underlying demand in key markets, but obviously your infrastructure because.
Really ecommerce penetration is.
Higher and then then in the U.S.
So can you talk about just your infrastructure.
Yeah.
You comments that are developed just in China overall, and how do you compare.
For that and I'm just thinking later in the year I know, it's still pretty far away, but.
How what's guiding how you plan or.
Holiday singles day, and things down the road.
Feature.
So I'll start and then Tracy will we lot perspective is so the penetration on line actually is very strong in the United States in the UK and in China. Those are the tree markets, where we had stronger penetration aligned with the market is very well developed online so.
In terms of how we see.
We should in the U.S., obviously, our stability issues plan in the U.S. being postponed by the coffee.
Issue that emerge so we'll take it'd be more time there what we originally you were hoping.
Yeah.
Encoder just last quarter.
He's asking them.
<unk>.
Buddies because of the closures the brick and mortar.
In the United States deal on line acceleration, Stan as we speak and so actually he's very reassuring to us that percentage of business online will dramatically increase this was.
The planned for the long term buddies issue has accelerated and as I explained in my prepared remarks, what we're seeing it in the UK in the U.S. any China that D, particularly the ageless consumers. So the consumers about 50 55 that.
As you know on line was the mainly for millennials and the new generations frankly, all these other consumer now extra consumers using equal them as much more leads assets and I. We believe that these changes yet to state and so the increase or the percentage of business line, including retail so it's not.
On the Brenda Commies retail to clone these platforms in China in other parts to the word is pure plays in the UK. So he knows the online channels.
<unk> increased percentage of sees it goes on to be clear for the long term his positive to US is very positive online is always been well got with key drivers one of our profitable drivers and most importantly make it stronger platform for the future of omni channel, which is that way.
Some particularly luxury deep.
You should model as we doubled.
Fronds, so good development and we believe this is positive.
Trees, if you want to up and then on our our infrastructure as well as our plans for for holiday. You know clearly we are mindful of and watching very closely in terms of as doors opened up the productivity up those doors. So on so certainly you know both with our retail partner.
There is as well as our own freestanding stores I'm, just making sure as a as doors opened that they are productive that they are profitable on and we will as we have you know over the last few years take a take appropriate actions and Ah you know if we find that we do.
Emerge out of this with brick and mortar doors that are less profitable than a than we would like for them to be.
As it relates to holiday you know at the same time one of the things that you know for big deal. When he was speaking about online you know the infringe there as you know we are very much focused on the fact that demand remained strong and it's really the access to our products that a that has become challenging end markets.
Like like in Europe, as well as in the Americas, So lots of activity our program shifting to to online related to make sure that people can access our products. We also are you know focused on for holiday. What we think a holiday will will law will be like we actually.
We are hoping that by holiday things stabilize a bit as I mentioned in my prepared remarks, we are mindful that there could be a recession or certainly a impact, but hoping hoping that by holiday people our are ready to out to shop against our holiday programs remain intact the quantities maybe.
Just to the bad given given how much demand has come back by that time.
Thank you and our next question comes from Erinn Murphy from Piper Sandler Your line is now open.
Great. Thank you good morning, and I Hope you both her wallet as well I guess, a follow up just to the Americas Tracy for you. When you think about sales down 23%. Yeah was worse than we thought could you quantify how much like truly the decline from store closures in the last two to three weeks the quarter versus maybe pulling back on wholesale sell.
Again, and then bigger picture if you think about the mix of business in the Americas I guess, the Brito here you already addressed online clearly accelerating but I'm more curious on how you think about the reliance or the toggle between the department store, the specialty multi channel as well as the freestanding store it on the other side, it's quite that thank you.
Sure. So you mean in January as a as a three to mentioned we actually saw positive growth in all of our markets, including in the Americas, We actually started to see some softness towards the end of February into your point. The doors were not closed but certainly it was apparently that time that cobot 19, I'm, we're starting to.
Spread and consumers are starting to get a bit nervous about about shopping in store and really focusing on stocking up on and more essential and then March we saw the biggest impact obviously with the doors closed half of March but really the early part of March a tremendous decline in shopping.
Because of the Tentativeness of of the consumer and really the consumer focused you know understandably, so on health and essentials for 'em for their their homes and their families.
Yeah, and do you want to add to that obviously our job is also to protect our profitability. When we so these evolving we started spending less February can danny match or spend spend it was reduced in order to mitigate the impact of the thing so to be clear we add on to.
Pete and events so D.
<unk> spending was reduced to really start to get out duty February the consumer sentiment started going down the rate in February and any March when the closure southeastern United States <unk> gilt sales went to zero, because basically brick and mortar completely close into consumer was shocked at retailers stopped ordering so.
You need to see demand so much like a very big deep moment.
That's why.
Number was forced it was negative that to be clear till January included in there really was true in the last quarter will cut into 19.
We have study design stabilizing the business and this was.
Going on that policy to trends and again, we plan when the market, we'll get back to go back to our stability position program.
In terms of what we locked into your question are we locked into the other parts of the business, which is not on line.
Obviously, the percentage of online business will increase.
Rest would be reduced so.
That would be closures that would be a reduction.
He can more to stores overall and I, just would make the brick and mortar stores more productive and the ability to deliver dispute in sector. So we don't see these negative.
Yes realism negatively short and long term it would be all to see a negative in the short term and we see the future of the freestanding store and Brenda Kong being an omni channel future in dispute or the is fascinated to see how consumers are learning different way to use the online the concept the last mile.
The role of that as mobile convenience stores, meaning freestanding store vessel Brando chrome how the two combined it can create new experiences. So there's going to be some interesting. It frankly in our opinion promising evolution of the ability to serve the consumer luxury environment into future, but the trends.
Mission is going to be conflicts difficult and into transition. The biggest opportunity is this strong growth double line and again for US. This is also a tall city because we have a great infrastructure, we have very strong in brand account in retail.
In platform in.
In the pure plays depending on which brought to the war that does China that different percentage of the online business, but we have well coating each one of them and so driving these across the globe and into United States is going to be in the transition.
Out of called it.
Longest supported.
Thank you.
Thank you and our next question comes from Michael Binetti from Credit Suisse. Your line is now open.
Hey, guys. Thanks for taking my questions here.
I guess, we should just to follow that question in the Americas I guess he said January was positive in February that slower. So March deeply negative I guess, it's still to averaged out to negative 23. It seems like you withheld some inventories there would probably ordered by the retailers in the U.S.
When you saw this coming maybe you could comment on you know as we look to reopening what we're going to what kind of inventory levels out in the channel.
See as that we're going to be working with as we reopened in the U.S. I guess and then.
It's just going back to travel for a minute to get to the positive number and we just looking at some of the passenger data in China looks like it is down maybe.
70, or 80% through February so that gets your number to be positive and travel I think you've commented to us at the Chinese consumers about half of that business before it speaks to very big growth rates and.
In Europe and in the U.S.
For a year for your entire business your land at positive in the quarter I'm. Just wondering I know you said it could be into fiscal 21 to really see a bona fide recovery in travel, but it seems like you've done some things in that channel there driving a pretty meaningful share gain in the in the travel locations that were open heading into this I wonder if you could comment on any of the strategy there.
Extends out recently.
Yeah I've stuff on say your troubled question and then Crazy we go on the inventory and then.
A question so but because you are right I think what you were describing is what type of but let me summarize. It is a January was not an extraordinary month for children. So that's what season.
So in general remember generally is Chinese new year, so and Chinese new year, yes starts to being taught to steal some of it happens and so.
We gained market share with plenty to do that we had an amazing program.
Yes, they will open Tom, but so traveled with strong India to send it to either they continue to be very strong engine than in February that was it.
It's a little down obviously that travel remained open in other parts of the award and any March childhood really was closing so yes travel in the months of March was there wasn't much.
And so the mix or the three months explain our strong market shift performance in the course I believe our head of our market share performance at chop. It we will continue but the mask in quarter four would be probably the worst in trouble because the Europe in U.S. really close the and Asia as I said.
There is many Asia stores, which are close at that treat really active areas, which is we didn't China domestic travel, we tying into risk to get a descent, which is being reactivated at a certain percentage not fully that with much higher conversion from travelers to pastures.
So that the key the key point here remember that about 10% took travelled by something that moment travel good to reduce buddies open and the 30, 40% to try to buy something for several reasons because a good marketing because that is less people because it's easy because less crowded because.
It is just changes and so in this moment to we're really seeing.
Few few doors, but very important ones with very high conversion rates and that's what is.
Then one yet to see which is encouraging you know what targeted reading in this moment is that in a moment most of the werent disclosed, but when we see openings. The consumer is back very fast because traffic will only be back and get out duly, but the conversion rates can be a much better.
Lastly, I want to see it yet to see which is the positive expectation for the long term and tried to do you see or shouldn't be scratches Olson try to retain the percentage of business im pretty tight beating the ability to three.
Line when travel is increasing and as you can imagine we have great capabilities in that we had a good structure. We have invested in that so we had read you can imagine that in these areas, particularly in the Peter to transition with Ses retail would still be important also was traveling you can expect.
Continuous increase the online part.
So.
The topic, we're of course, the for quarter four for travel retail but steel.
I I believe that long term atrocity would remain extraordinarily strong and extremely promising.
And as far as the inventory in in the trade in our house with our wholesale customers. Currently you know what stores closed six to seven to seven weeks I would say the early part of the door closures on you know we.
Saw you know we started to see a slow pick up in online and as we indicated it hasn't really progressed, so certainly our retailers and those that can share a inventory between our their brick and mortar and their online site have been drawing down on some of the store.
Inventory planned for stores or on their retail or dotcom sites and we've seen a those progressed quite quite nicely and sales really picking up strongly in the last a in the last two to three weeks in particular, so as doors open. We you know expect that you know a from a shipment standpoint, we'll see.
He a slow re order from a replenishment standpoint, I'm certainly from some of the move the fast movers that have moved a most quickly on retailer dotcom site, but as the quarter progress as we would expect shipments to a too you know gradually strengthened throughout the quarter.
And and by June a really you know be a be much stronger.
Thank you.
Thank you and we have time for one more question. My final question comes from the line up Dana Telsey from Telsey Advisory Group. Your line is now often good morning, and glad to hear everyone's healthy and safe what the expense reductions that youve put in place how much of it do you think could be permanent first is transitory and lastly.
Really with the innovation plans underway any shifts in timing and launches, giving the given the current situation. Thank you.
So as you know on then as we've announced we you know have taken some short term cost actions to improve the liquidity situation and and we announced those in the middle Middle of April and so those are some of the employee actions that.
We've taken on and then some of the other actions are also short term as it relates to advertising really rightsizing more our advertising to the current sales trends, which will obviously pick up as are our sales trends pick up there are other areas like travel I think we're all getting used to.
The ability to work from from home and communicate the online and so there are other areas that are more discretionary that we certainly are looking at more permanently having cost reduction and some of those other in those other cost areas. So, but it's something that as you know we.
Ongoing cost management programs. In addition to at the program for leading beauty forward, we have other cost actions and and we take advantage of the opportunities that a that we see to lock in savings whenever we can.
Yeah, and just want to out duties that for the for the long term or so you know what were the most to.
The best drivers for our growth before.
The crisis.
One, which I can embed the stronger seems to be the one that we come out stronger out the crisis, if you're seeing that online channels globally is coming out stronger Chinese consumers, she's recall getting first stronger skincare.
Ease of recording first stronger any other part and we didn't make up season makeup we didn't fragrance seasonal fragrances.
And we didn't try to retain the verification travel retail doors of Asia I'd be called in fast so.
Key drivers of growth as recovery first stronger for the long term so said in other words.
I see all the signs that the key drivers of growth we come out of these classes stronger for the long term and even if into shorter we're going to be hit hard by the closures, particularly by the.
Very understandable consumer shark in this moment in the medium long term, we would be stronger organization.
Key long term drivers side of it and one of these drivers will remain innovation to answer. Your last question is on innovation, we are continuing to innovate as I said in my prepared remarks, we had reinforcing.
Vesting Schon Guy centers to me should our innovation become even more relevant to Asia and to the Asian consumers into the Chinese consumers, particularly and we are focusing our innovations much more than before in the speed indisputable transfusion. We are focusing already shown few would be good enough.
We are focusing go innovation on what works better online in these transitional trying to People's on line with possible because with the closures and we focus our innovation on hero franchises medium to franchises, which.
Hi, consumer loyalty and high consumer awareness because in this moment to transition in the middle of the crashes and out of the called crisis.
We clearly see that consumers.
Interestingly the brands they trust in the product. They know they go back first do loyalty, even before that he knew what dangerous and so we had reflecting these you know what innovation plan that in this moment I believe is one of the strongest we have yet.
Thank you.
Thank you and that concludes today's question and answer session. If you are unable to join for the entire com playback will be available at one PM Eastern time today through may 15th to hear recording up the call. Please dial 8558, Fivenine to 056 task.
For 138 908 that concludes today's Estee Lauder conference call I would like to thank you offer parts for your participation and wish you all good day.
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