Q2 2022 Estee Lauder Companies Inc Earnings Call
Good day, everyone and welcome to the Este Lauder companies fiscal 2022 second quarter Conference call. Today's call is being recorded and webcast for opening remarks, and introductions I would like to turn the call over to senior Vice President of Investor Relations Ms Rainey Mancini.
Hello on today's call are for Brasil, Freda, President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer.
Since many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those forward looking statements.
To facilitate the discussion of our underlying business the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release.
Yes, otherwise stated all net sales growth numbers are in constant currency and all organic net sales growth excludes the non comparable impact of acquisitions divestitures and branch closures and the impact of currency translation.
You can find reconciliations between GAAP and non-GAAP measures in our press release and on the investors section of our website. As a reminder, references to online sales include sales, we make directly to our consumers to our brand dotcom sites and through third party platforms and also includes estimated sales of our products through our retailers' websites. During the Q&A session. We ask that you please limit.
And yourself to one question. So we can respond to all of you within the time scheduled for this call and.
The appropriate scale.
Thank you Rainey and Hello, everyone.
It is good to be with you today as our hearts continues to be with those impacted my COVID-19 around the world.
We achieved record sales and profitability in the second quarter of fiscal year 2022.
Our multiple engines of growth strategy showcased the benefits of diversification.
Every category region and major channel expanded we.
We sized the favorable dynamics, so skincare fragrance developed markets in the west brick and mortar and continue to prosper in the east with Chinese consumer as well as in global travel retail and global online.
The flexibility, we built into our business model over the last decade enabled us to both allocated resources to attractive growth opportunities.
They've managed the impacts when increasing inflationary environment to acquire our advanced blending I guess toward the key shopping moments of 11, 11, and holidays allowed us to overcome supply chain obstacles.
For our second quarter reported net sales grew 14% organic sales rose, 11% adjusted operating margin expanded.
Adjusted diluted earnings per share increased 15%.
Today results Oh, the more impressive compared to the premium pandemic second quarter of fiscal year 2020, when we delivered record sales growth in our seasonally largest quarter.
Despite the answering challenges of COVID-19, which escalated during the quarter with army Chrome we far exceeded the exceptional results of two years ago reported sales are 20% higher driven by organic sales growth.
Every region now larger and we are much more profitable.
Our gains during the last two years reinforce our confidence in our ability to navigate the impacts of the prolonged pandemic.
Moreover, our optimist in the opportunities of tomorrow remains incredibly strong owing to the timeless design of BD two of our brands and our commitment during the pandemic to invest for the near and the long term.
Our brand portfolio of large scaling and developing brands served as a powerful catalyst for growth as consumer reward the quality of our trusted brands and hero promos.
In the second quarter 11 brands achieved double digit organic sales growth versus the prior year period.
This broad based strength is similar to the contribution in the first quarter. Despite a.
It's a tougher comparison.
The momentum in our largest brands Clinique Este Lauder La Mer Mac continues as the hero franchises capitalized on innovation and proud of the engagement and high touch experiences and services to drive trial and repeat la Mer and Clinique delivered standout results in skincare.
While Este Lauder and Mac drove mid caps emerging Renaissance, our scaling and developing brands achieved excellent results Jo Malone, London, and Tom Ford Beauty led fragrance and were among our top performing brands.
Bobbi Brown grew strongly driven by skincare.
Bumble and bumble delivered accelerating sales growth in health care as to fees and smashbox rose double digits in makeup.
<unk> innovation also serves as a powerful catalyst for growth across our brand portfolio contributing nearly 25% of sales.
This level of contribution is notable in a quarter when holidays exclusives represent a larger mix of business and especially so in a challenging supply chain environment.
La Mer fueled by each iconic heroes on trend holidays merchandising and highly sought new dehydrating excuse the motion led the company's sales growth the brands excelled in every region and across major China cheaters by its loyal consumer and embraced by.
New cohort of consumers, including more men.
Clinique skin care portfolio, we did desirable innovation a hero franchises performed strongly is news March clinical repeal wrinkle correct in serum drove sales gains in North America amplifying the brand's global momentum in the serum.
Kathy Wendy Clinique.
Clinique take the day off makeup remover, so a dramatic uptick in seats evidence of makeup emerging arena and.
The staying power of these called fiber, it's skincare product, which is recruiting a new generation of consumers.
Our makeup the Este Lauder brand is a driving force in the category of emerging arena.
With makeup sales for the brand already larger than two years ago.
Este Lauder double wear hero franchise deliver remarkable performance, while its future is foundation, which he's an east to west product born of skin indication of makeup trend.
Was very strong.
Our fragrance portfolio continue to go from strength to strength, owing to the enduring scent beads ratio created in the pandemic and enhanced by innovation better online storytelling and expanded reach is consumed in the east embrace this category.
Each of Jo Malone, London, Tom Ford Beauty little ago, helium parties, and Frederick Mt delivered strong double digit growth in every region demonstrating the value of these brands around the world.
Tom Ford Beauty.
Simplifies the benefits of our strategic focus on heroes and innovation is new umbrella per fund had a halo effect on the older person such that saves for different size doubled.
In the third quarter. The brand is leveraging its global appeal with a flare of local relevance in the fragrance launch of Tom Ford Rose trilogy.
Our growth engines also continued to diversify by region as we anticipate developed markets in the west performed especially well North America executed with excellence to capture brick and mortar reopening trends and deliver a strong holiday across channels safety.
<unk> sister, now exclusive including Este Lauder blockbuster set and Aveda collaboration with Phillip Lim proved highly suit indeed, our in store and online activation in merchandising. We're incredibly successful we brand dotcom posting a record black Friday ever.
Every category grew double digits organically in North America led by makeup where our brands pay a trusted product, we then causing innovation and social and professional user <unk> increased Mac Bobbi Brown and two phase produce engaging content and active led education.
To inspire consumer to size, the joy and creativity of the category.
Mainland China delivered high single digit organic sales growth an impressive result, given the regional restrictions in the quarter, the pressured brick and mortar and makeup.
Online sales rose double digits organically, even after having posted significant growth in the year ago period.
For 11 11 on Tmall, the Este Lauder brand ranked number one flagship store in beauty for the second consecutive year as the law may a flagship store topped luxury beauty once more and Jo Malone, London again led in prestige fragrance on J D. The Este Lauder brand ranked <unk>.
Number one flagship store in beauty in its first year.
Skincare and fragrance grew double digit organically in mainland China hero products, and innovation excel driving new consumer acquisition and repeat purchases several brands expanded prestige beauty share in the quarter, including Este Lauder La Mer.
Understood just looking.
Looking ahead, we are excited about the long term growth opportunity in the vibrant Asia passive patchy region.
And most notably in China.
We are few months from opening our new innovation center in Shanghai, our aspiration for REIT, Our board as we aim to meet and exceed the desires of Chinese consumers. The center is designed to enable end to end innovation from concept for.
Product package it through development scale up and commercialization.
I'm pleased to share that the build out of our state of art manufacturing facility near Tokyo is also progressing very well, which is a testament to the amazing work of our global supply chain team amid the pandemic.
It's first phase is complete and we are on track to start limited production by the first quarter of fiscal year 2023.
Our growth engines further diversified by channel.
As both online and brick and mortar prosper.
Specialty multi and department store contribute meaningfully and freestanding store in the west performed very well on reopening.
Traffic improved a complemented our strategic actions, including those under the Pascal the business acceleration program to benefit productivity in brick and mortar. This channel trends are encouraging for the long term, even if tempered in this moment by forming chrome.
We continued to expand our omnichannel capabilities in the quarter to keep consumers flexible and convenient shopping options for greater certainly for fulfillment.
Buy online pickup in store offerings in the United States for Mac, Avista, Jo Malone, London, and the level of driving favorable average order value trends and we are expanding the capability to more doors internationally, which holds great promise for the future.
Our global online channel delivered excellent performance with organic sales rising high single digit after having surged over 50% in the year ago period.
Each brand Com third party platform pure play and retailer Com contributed to growth drivers included higher levels of engagement for virtual try on and tools for choosing shade and sent sophisticated assembly to drive trial, and repeat and more and better live streaming.
Indeed in North America, La Mer generated the most states from a live stream to date in the quarter.
Our brands are innovating in social commerce on Instagram, Snapchat tick tock and wechat among others. We gained momentum in this promising online ecosystem during the quarter two phase leverage Instagram live shopping event to launch its new fragrance Este Lauder double.
We are foolish on Tictoc Sky rocked with this latest campaign also driving brand awareness and affinity much higher and Tom Ford Beauty creatively that debuted its new flagship site on Wechat mini program in China.
Embedded with these outstanding results across categories regions and channels is the progress we are making in social impact and sustainability. Since we spoke with you in November we are pleased to have received several external recognition of our E. S efforts, we were named to Forbes in.
Now going to list it didn't define the word top female friendly companies, leading the way to support women inside and outside the Workforces and for the safety year in a row, we were named to Bloomberg's gender equality index.
We were included in the Cdp's climate a list for the second consecutive year, which is a tribute to our deep commitment to climate action and to the highest level of transparency around our environmental impact last and M. S. Ci recognized our Pearl.
Kress toward our 2025 ESG go in at recent upgrade of the company to any rating.
The company, our brands and our employees and the number of events and Activations planned in Horner Black history month, and we are continuing to focus our on our Rachel equity commitments and the work of accomplishing our goals.
As we embark in on the second half of our fiscal year. Our innovation pipeline is reached with newness, especially for sustainability la mer newly advance the treatment lotion, which will be on counter in March as a powerful upgrade inside and out crafted using.
Our unique green score methodology in house in a new recyclable glass bottle made with 20% post consumer recycled glass.
This methodology, which was peer reviewed academic journal Green chemistry during the quarter evaluates ingredients and formulas throughout the lenses of human health ecosystem health and the environment.
This approach can be adopted build upon and scaled by others across our industry to further advance sustainability.
Este Lauder is launching an all new revitalizing Supreme Moisturizer created with innovations you've formula and ingredients in a new recyclable the last job both John .
Smashbox is introducing photo finished silkscreen primary collection fishery vegan formulas with the scheme defending confluence and instant makeup benefits lastly, Dalian vague and brands. The ordinary is welcoming back salicylic acid, 2% solution boosting.
A waitlist of over 400000 for the new Formula.
In closing, we delivered outstanding performance, Amit the accelerated volatility or variability as well as supply chain challenges of the pandemic.
This demonstrate that we have the competency to navigate complexity well our commitment to invest for the long term is of great importance in this moment as we benefit from the advancement. We have made over the last few years in definitely takes technology R&D and so.
<unk> chain.
These enhanced capabilities combined with our strong portfolio of desirable brands exceptional talent and most flexible resource allocation and enabling us to realize the power of our multiple engines of growth strategy, even in a difficult external environment.
The Grays wisdom and ingenuity of our employees in this still challenging moment knows no bounds. They are the embodiment of our company's strong culture and to them I extend my deepest gratitude.
I will now turn the call over to Tracy.
Thank you Fabrizio and Hello, everyone.
As you just heard our momentum continued in our second quarter with net sales growing 11% organically and 14% in total led by our continued overall progression in recovery, despite the volatility inherent across markets with a prolonged pandemic.
We had a solid holiday performance across all of our regions.
The inclusion of sales from the May 2021 does see him investment added approximately three points to reported net sales growth and the currency impact was neutral.
From a geographic standpoint organic net sales in the Americas rose, 19% as holiday shoppers returned to brick and mortar retail, where we had an exciting array of gifting products and holiday Activations in store and.
And even with more consumer shopping in stores organic sales online also grew solidly in the Americas with online representing more than a third of sales in the region.
Every market in the region contributed to sales growth this quarter.
The inclusion of sales from death, Sam added approximately five points to the total reported sales growth in the region.
In our Europe , the Middle East and Africa region organic net sales rose 13% grew.
Growth was diverse and broad based with global travel retail as well as every market contributing.
All channels grew led by double digit growth across brick and mortar as recovery continued in both developed and emerging markets in the region.
Despite our strong performance during key shopping moments organic sales online declined slightly primarily driven by the U K due to a tough comparison with the prior year, which was more severely impacted by brick and mortar lockdowns.
The inclusion of sales from death, Liam added about three points to total reported sales growth in the region.
Our global travel retail business grew low double digits.
Travel restrictions have eased globally in international passenger traffic continued to progressively improve Roe.
<unk> and some stores reopening during the quarter, particularly in Europe and the Americas.
Travel retail continues to be led by Asia Pacific where demand from Chinese consumers remains strong.
In our Asia Pacific region organic net sales rose, 5% most of the markets in the region grew led by mainland China and Australia, Although we continue to see variability in COVID-19 restrictions and retail traffic across markets.
Sales grew across most major channels in the region, especially online which benefited from the recent launch of three brands on J D Dot com.
The inclusion of sales from death, Sam added approximately one point to total reported sales growth in the region.
From a category standpoint, organic net sales of fragrances grew 30% with double digit increases across all regions.
Exceptional double digit increases from Jo Malone, London, Tom Ford Beauty, La Belle and Kilian, Paris reflected strong performances from hero products, new product launches and the continued growth of the Bath and body and home subcategories.
Organic net sales in makeup rose, 12% as consumers in the Americas, and Europe responded to social media Activations holiday Assortments and trends.
Este Lauder foundations continued to resonate very strongly with consumers, especially those in the double wear and futurist franchises.
Mac continued to drive the makeup Renaissance with engaging interactive campaigns throughout the quarter.
The special Mac trend Halloween report and solid holiday collections.
Too faced Tom Ford Beauty, Smashbox, and Bobbi Brown also contributed to growth in the category this quarter.
Organic net sales in skincare grew 7%, reflecting double digit digit increases from la Mer Clinique and Bobbi Brown the inclusion of sales from death, Liam added four percentage points to reported growth.
Our organic net sales and hair care rose, 18% as traffic in salons in stores improved primarily in the Americas.
Vegas growth came mostly from holiday gifts and hero franchises and in online and freestanding stores, while bumble and bumble focused on recruiting new consumers in the specialty multi channel.
Our gross margin improved 20 basis points compared to last year.
The benefits of strategic price increases and favorable currency more than offset the impact of higher makeup mix and lower gross margin on destiny in products.
Inflationary pressures in our supply chain are expected to begin to more prominently impact cost of goods in our fiscal third quarter.
Operating expenses decreased 140 basis points as a percent of sales are.
Our leverage of selling expense and general and administrative expense was partially offset by increases in advertising and shipping cost the latter due to both inflation and our direct to consumer online growth.
Operating income rose, 22% to 144 billion and our operating margin expanded 160 basis points to 25, 9% in the quarter.
Our tax rate at 21, 4% continued at a more normal level this year versus the prior year, which was impacted by a onetime benefit associated with guilty.
Diluted EPS of $3.01 increased 15% compared to the prior year.
For the six months, we generated $1 85 billion and net cash flows from operating activities compared to 1.98 billion last year, which reflects both a return to more normalized working capital needs as well as increased inventory to mitigate some of the risk of supply chain disruption given the ongoing global <unk>.
Macro challenges.
We significantly increased our capital investment of $459 million to support the construction of our new production facility near Tokyo as well as investments in our online business and other technology enhancements.
And we returned $1 84 billion in cash to stockholders through a combination of share repurchases and dividends with an increase in our dividend rate occurring in the second quarter.
So turning now to our outlook, we delivered an exceptional first half characterized by strong and diversified double digit organic sales growth and disciplined cost management in the context of intermittent COVID-19 disruptions, including the rise of the omicron variant high inflation.
And volatility looking.
Looking ahead, we are raising guidance to reflect our expectation for a strong year. Despite the potential further spread of omicron supply chain challenges and increased inflationary pressures.
Inflation in transportation and procurement is expected to impact our cost of goods in the second half.
However, the benefit of pricing and cost mitigation efforts are helping to offset some of the inflation impacts for the fiscal year.
At this time, we expect pricing to add approximately three and a half points of growth.
With the inclusion of the additional pricing actions, we are taking during our second half.
We are planning to support the continuation of the recovery with increased point of sales staffing as retail traffic continues to gradually improve.
We are also planning to support key hero franchise launches in our third quarter from Este Lauder, La Mer and origins with increased marketing and advertising support.
This investment will increase costs towards the latter part of the third quarter with more of the benefit to be realized in the fourth quarter.
For the full fiscal year organic net sales are forecasted to grow 10% to 13%.
Based on rates of 1.146 for the Euro 1357 for the pound and $6 $3 99 for the Chinese one we expect currency translation to be negligible for the full year.
This range excludes approximately three points from acquisitions divestitures and brand closures, primarily the inclusion of <unk>.
Diluted EPS is expected to range between $7 43, and $7 58 before restructuring and other charges.
This includes approximately seven cents of accretion from currency translation and three cents of accretion from <unk> in constant currency, we expect EPS to rise by 14% to 17%.
We expect organic sales for our third quarter to rise, 8% to 10% the net incremental sales from acquisitions divestitures and brand closures are expected to add about three points to reported growth and currency is forecasted to be negative by about one point.
We expect third quarter EPS of $1 55 to $1 65.
Currency is expected to be <unk> accretive to EPS and the inclusion of <unk> is not expected to be material.
In closing our results, thus far clearly demonstrate the power of our diversified portfolio.
Temporary softness in our eastern markets driven by the pandemic.
Was again offset by renewed growth in our western markets.
A resulting slight slowing of growth in skincare was offset by remarkable growth in fragrances.
We continue to be choice full about where we invest and the flexibility we have built into our cost structure is helping us to mitigate some of the COVID-19 related disruptions and inflation, while allowing us to continue to invest appropriately in our future growth.
This agility along with the resilience of our remarkable teams worldwide gives us confidence that we can continue to manage through the temporary complexities caused by the prolonged pandemic by focusing clearly on our long term strategy and executing against it with excellence.
And that concludes our prepared remarks, we'll be happy to take your questions at this time.
Thank you. The floor is now opened for questions. If you have a question you simply press the star key followed by the digit one on your Touchtone telephone to ensure everyone can ask their question, we will limit each person to one question time permitting we will return you for additional questions just queue up by pressing the star key than one.
Yes.
And our first question today will come from the line of Dara <unk> with Morgan Stanley .
Hey, good morning, guys.
Good morning, Dan I was wondering.
I was hoping to get a update on China, you mentioned the strong performance there from a brand perspective during the 11 11 holiday, but the category wasn't as robust as we've seen them in past years in terms of growth.
So and we would also the lockdown situation there so any perspective on category growth in China in calendar Q4, and what Youre seeing so far in calendar Q1 of this year would be helpful and risks from Lockdowns.
And maybe while you're on that subject just longer term touch on the growth curve of China in terms of per capita consumption development over time in your thoughts there. Thanks.
Yeah, I'm not sure.
So we achieved the high single digit growth in mainland China, This court and where brick and mortar channels were impacted by cargo restrictions.
However, our online which was not impacted by closures grew double digits in quarter, two and represented more than half of our business in China.
Additionally, our business in China travel retail grew rapidly as well as retail.
So we had four years of exceptional double digit growth in China, either reported and we expect this strong trend to have the potential to continue frankly in what you see in quarter. Two is just one specific segment the brick and mortar that affected by Covid restrictions went to single digit growth but.
The rest was all double digit growth. So we remain absolutely excited by the potential of China. The long term fundamentals and that you were referring to your question of the market remain really impact that is the growing middle class continues to develop the increasing per capita spending continues.
In all of the data, we see in our approaches and.
And.
The agility for us to serve the Chinese consumers wherever they buy meaning online travel retail brick and mortar we are improving in all these elements. We are increasing the number of cities, where we have brick and mortar we are increasing the coverage online you heard in the prepared remarks, our reference to J D.
And the incredible success D, where este Lauder is already number one a shop in shop in a in there and the travel retail where we continue to be very strong super excited by Hainan and the huge quarterly dispersion of our brands that is happening there. So.
Very strong Chinese consumers trends and even in our opinion great great future.
Thank you. Our next question will come from the line of Peter Grom with UBS.
Hey, good morning, everyone hope you're doing well so I just wanted to ask about the operating expense leverage we have seen year to date. It's just you know when I take a step back and look at the first half of this year and compared to pre COVID-19 levels. It's just been very impressive what you've been able to do there and I know theres a mix benefit sales leverage cost savings.
And obviously costs that have yet to fully return to pre pandemic levels, but is there a way to help us frame, how we should think about.
Operating leverage longer term is there a way to kind of disaggregate the benefit you've seen year to date that you believe is greater staying power versus what you might expect to really come back.
I guess following quarter abnormal environment. Thanks.
Yeah. Thanks Peter.
And in terms of the operating leverage that we've seen thus far it has been it has been terrific. Obviously in the first half one one of the things to keep in mind is you know our launch launch cadence in terms of when we actually have big product launches does affect quarter to quarter performance, but we.
Certainly have you know.
Continued to see some of the benefits of our of <unk>.
Cost not returning but brick and mortar is picking up and and clearly we're continuing to ramp up in the third and fourth quarter are selling staff to support greater brick and mortar brick and mortar sales. So when you look at our full year the overall margin.
Expansion that is included in our guidance is around 90 basis points. So.
Well ahead of our guidance in terms of 50 basis points a year from a long term perspective.
And that includes you know not only are some of the cost not fully returning.
But also includes some of the incremental costs related to managing this pandemic some of the.
Safety procedures, we've had in place.
Some of the additional testing that we have in place et cetera that that we are incurring.
But we certainly expect continued growth from our higher margin.
Channels and and categories in the future.
It will continue to benefit us benefit us going forward.
Thank you. Our next question will come from the line of Lauren Lieberman with Barclays.
Great. Thanks, good morning.
I wanted to chat a little bit about the Americas.
And growth that you've seen in particular in North America.
Outside of kind of Covid related recovery and here I'm thinking about some of the expanded distribution of our consumer reach you describe it, particularly the expansion of Ulta and sephora doors into.
Put significantly new locations. So I was curious kind of what youre seeing in terms of how your brands are performing generally in those locations and what youre seeing in terms of maybe new consumers coming into you know into those franchises again as you think about that expanded consumer reach and your overall footprint broadening out.
Thanks.
So let me start from that first of all we see our brands doing well in these new distributions and again. These these new distributions, particularly the target to alter the KOL support either you are referring to were.
We have designed to.
Get new consumers, particularly sourcing consumed from us and we see these.
Our working and our initial projections continue to be strong. However, I want to clarify that in course to two very small percentage of our growth was coming from those already is just the beginning so the larger majority of our garage and of course the truth.
It was coming from just the organic activities that we're doing in <unk> in the region.
For example, we are strengthening and diversifying our product categories again make cap rate in a sense is really.
Is really getting us into new user education. So there are some fundamentals which are improving.
<unk> deep pulse corvid.
And then we are gaining share in many on the categories categories. For example, Tom Ford Jo Malone is doing outstanding.
Skincare gained share your DNA is is an important part of building our overall market share in the region.
In that other things I could mention is our innovation and our marketing program has been super strong.
Andy distribution choices that we have done as increased our ability to source new consumers, but apart from the new brick and mortar choices the online progress in North America.
Is it is bringing a lot of new consumers, particularly.
Consumers that before were not shopping online and now they're shopping omnichannel and that's why our Omnichannel progress in North America is also playing a strong growth to sustain our growth now in the long term. It continued sourcing new consumers and finally, we had really executing with excellence we are investing.
Fast in rebuilding the soldiers in the call. The way we are investing in improving our distribution online as we discussed on previous calls.
And so this combination of investing but at the same time, thanks to our restructuring program, we are increasing premium Tvs that brick and mortar as brick and mortar continues we are making also our ability to leverage the growth in North America much stronger than what it was before and that's why North America is not.
Only successful not only recovering strongly from the pulse Scott from the from the Corvid, but also becoming a powerful engine of growth for the long term in this model of strategy I should say of multiple engine of growth.
Thank you. Our next question is going to come from the line of Andrea to share with J P. Morgan.
Thank you and good morning.
One is regarding EMEA ex travel so I was hoping to see if something you can discuss a bit of that scenario. Unfortunately on the call was what's first and so the U K and as you exit the quarter how.
Continental Europe has been and the U K has been performing.
And then as a follow up I think Tracey you mentioned and I appreciate the bridge for the margin in the third quarter. I think you explained that the timing of some of the hiring of a bricks and water and also some market launches and waiting on the marketing spend can.
Can you give us some perspective excuse me as a result of just timing and then we should see again the operating leverage.
The leverage I, just pointed out 90 basis points for the year as you go into the fourth quarter. Thank you both.
Yeah.
Start from the chart if I understand your question was on travel and travel retail no ex travel retail EMEA.
EMEA ex travel retail EMEA expedite related sorry, Ed in here now.
EMEA as far as there was very it was very strong and we saw good progress in our in many markets and <unk> and also in EMEA. The big acceleration is coming from online across every single country. So very exciting progress with all our category, where our brands could probably.
Also in EMEA that are emerging markets, which are doing very well like India, the middle East, Russia, and so all the overall EMEA is again is again a strong engine for growth that has been built over this year and now in the past called the acceleration is proving its Roe.
All of being a strong engine of growth so.
All very strong Tracy.
And in terms of the margin.
You know we still in the second quarter did have quite.
Quite a few open positions as it relates to our selling staff and and certainly hope to to be able to close that gap in in the third and the fourth quarter.
The big difference in the second half of the year as we will be spending more advertising as a percent of sales in the second half of the year to support.
The launches that are that we mentioned in the prepared remarks.
And and that will certainly impact, particularly in Q3.
The margin and we expect to see the benefit of that in Q4, but really beyond I mean these are you know a R.
Our.
Largest.
Skincare brands, particularly Este, Lauder, and la Mer and the hero franchise, a re formulations that we're doing on some of the products.
Really you know quite quite significant for us going forward. So that also should help the skincare category grow a bit but again skincare is largely affected by some of the shutdowns in you know high you know high concentration skincare markets like the Asia Pacific market, So certainly as.
As that market picks up we expect that skin care will will pick up as well that too I would attribute to more of a temporary slowdown than anything than anything else.
Thank you. Our next question will come from the line of Chris Carey with Wells Fargo.
Hi, good morning.
Hi.
Good morning, Amit.
On the travel retail business, so low double digit growth.
Again keeps keeps the division growing which is which is great to see and you noted that.
APAC continues to drive growth I think you said with.
With China travel retail growing rapidly I guess.
I'm just trying to balance.
The strength that Youre seeing.
China travel retail with I think there was a comment in the press release just around high na.
On traffic.
Traffics being being.
Impacted by restrictions.
And so can you maybe just dimensionalize.
Strong growth from the Chinese consumer and travel retail with Hainan travel being negatively impacted.
With.
The strength that Youre seeing there and then I guess just bigger picture on this broader broader channels. Just how this is developing in Asia right. I think there's been a view that mainland China, Japan and Korea.
We continue to deliver really strong growth just even as the Chinese travel retail business becomes so much bigger.
I'm just curious your latest thoughts on that so that's the thanks for all that on travel retail.
Well, let me start with with the your question on what we called out in terms of some of the disruptions that occurred in Hainan relative to the strong low double digit growth that we had in travel retail so the first quarter actually we had.
A greater double digit growth in travel retail and so when you look at the first quarter versus the second quarter. While it was double digit it was a bit less than in the first quarter and that was a direct impact from some of the.
The.
Restrictions that are you know that occurred with within our within China.
That impacted Hainan.
We don't expect that level.
In the balance of the year. So we do expect to see travel retail pick up in the balance of the year.
So Hainan continues to be a very strong driver of our travel retail business and you know and it is incredibly luxurious and and I know Fabrizio likes to talk about Hainan. So I'll, let I'll, let him expand on on that as well but.
But we continue to expand our presence in Hainan and continue to see fantastic fantastic consumer receptivity to our brands and Hainan.
Yeah, so to speak to the travel retail trends first of all the travel retailer retail globally was was strong and was it was accelerating vessel the premiums the appeals court and yes, the wet in Asia, there were some elements of acceleration.
Yes, <unk> was very strongest Tracy was saying, but I want also to underline that there was a strong growth in EMEA and North America as I think Tracy said, you will hear prepared remarks as well.
<unk> was linked to more traffic during holidays in these regions. Despite the omnicom variant growth now this is a very important sign because the activity of travel retail sales to traffic increase is extraordinary and we have seen this as an email for example doing during the last quarter quarter. Two so the first one.
News is the way of traffic increased travel restrained respond very very fast and the other good news is what Tracy was speaking about the overall retail growth across despite some of the closures.
And some of the.
The restrictions on.
On island, Hainan is becoming.
Throw ordinary plays a luxury with amazing experiences. So is probably one of the channels around the world, which is more equity building for the brand. So that's an important thing to underline also in China. There are many new retailers, which are opening and so and I know there is more distribution.
<unk> built in several retailers, which are investing in the island and that's also.
<unk> will generate and will continue to generate.
Spanish let's growth overtime.
And regarding your question on you know travel outside of China. Once travel restrictions are lifted we certainly expect.
No people to start traveling back to Japan, and Korea, and Thailand and other travel.
Travel destinations.
For you know for.
Asian, as well as for business, though.
So we certainly expect that those travel retail quarters will continue to recover similarly to what we've seen the start of in EMEA and the Americas, Although traffic is still well behind obviously pre pandemic levels. So more growth to come as it relates to travel retail, yes, maybe one thing on that to add.
<unk> is the clarification when the growth of international travel will restart.
Does will be only moderately <unk> anything like Hainan or domestic travel because remember that the external travel is only four people with a pass for it and there is a granite really small percentage of your Appalachia is it possible to travel internationally why Hainan is domestic travel and is open to.
The entire population so the.
When international travel will restart this will be almost all netex.
Thank you and our next question will come from the line of Callum Elliot with Bernstein.
Alright, thank you.
So recently, we've seen a lot of leadership changes in the past few months right at the top of the business with I think both Chris Hope and Cedric stepping down.
And I think you've also made some structural changes with <unk>.
Joey now reporting straight into Patriot international rather than into Asia Pacific. Since this is sort of elevating the importance of the mainland China business.
So just hoping that you can talk a little bit about some of the structural and leadership changes.
What is maybe the culture of the business and how that's changed since.
2009 in the context of how should we think about leadership transition risk.
How that's evolving.
By the way.
This is a great question and I admire them. The knowledge you have of our amazing talented team. So thank you for the question and so what you see actually is the reflection of our of our couch, what youre seeing is some organizational changes and reflecting.
The shape of the business, particularly the elevation of China to be an independent region will give you the importance of this region and then need a coordination with travel retailer with data key parts to the company, including online and so that's that's important next steps that will make our ability to work.
With China and in our ability to our China team to <unk>.
Get support for a broad capabilities increased so the organization is is basically increasing our power of execution in China.
The changes organization changes in terms of the changes in senior leadership.
They are all well planned retirement plans that the culture of the companies that you know.
Our leaders share with us their plans in advance we plan. These.
With time and in a very professional way and the very good news is that we have extraordinary succession plans already in place because all the succession of this position is being managed mostly with with people to wear ready for taking this position that we're trained for years to date disposition.
So I.
I think you should take out of this the strengths of our succession planning that is also.
The reflection of our culture, and our culture is that more and more collaborative cultures, which is United by our campus work by our strategy work and our.
<unk> collaborative execution is the results are very clear commingled and very uniting reward systems to make these organizational work working team and this has been since 2009 to today is progressing step by step gradually I think today, we are a well oiled.
Organization at the top.
Thank you. Our next question will come from the line of Olivia Tong with Raymond James.
Great. Thank you good morning.
Wanted to ask you a little bit about brand support and promotion as we've obviously been hearing more and more about the cost to compete particularly around <unk>.
Key events like 11, 11 in China more promotion stinker discounts lifestyle ngl's cost of influenza or things like that so can you talk about how the market's evolving and your view on the investment spending necessary to succeed in Asia, even if you could give an idea kind.
Kind of wanted to ask but the idea of magnitude of volume versus price contribution perhaps in Asia.
And then sort of part and parcel with that if you could just sort of put the the Q3 versus second half guidance in context.
You know I am the margin T.
Deceleration is fairly dramatic that's implied in Q3, but a big bounce back in Q4, I get being cleared and I get that.
You mentioned the odd step up but just it seems like you feel relatively optimistic about the future. So just if you can provide some context around that that would be fantastic. Thanks. So much appreciate it.
Okay well in terms of you know 11 11, yes, certainly 11 11 continues to be you know to get more and more competitive and and we've spoken in the past about how we.
Do promotion as it relates to 11 11, a lot of it is done with samples and and certainly <unk>.
Increasingly there is more and more media support for 11 11 is well it is a big opportunity for us as we view it to recruit new consumers and a and it is one of the biggest events that we have during the course of the year.
To in a concentrated period of time have the ability to recruit new consumers, which then we retain.
To retain over the balance of the future year, So media cost have gone up for sure.
Our live streaming activity has gone up for sure and we have shifted and adjusted our activity.
To you know to make sure that our brands performed well within within that environment. So it's a big planning event for the organization. We're really pleased with how our brands performed in general during during 11, 11, and and I've already started planning for next year is 11, 11, which that's how long in advance we have.
To plan for it so.
As it relates to the cadence of Q3 and Q4, you know we have spoken.
I know you know.
For many years about the fact that you know we focus on the year.
And we guide quarter to quarter, but we focus on managing the year and in any.
Any given year.
He might have.
You know very large product launch launches in the first quarter or in the case of this year in the third quarter.
And and so we do feel very positive about about the future.
Obviously and it is a rebalancing to your point between the third quarter in the fourth quarter. The other thing that is embedded in our guidance for the third quarter quite honestly is the fact that you know omicron is still impacting brick and mortar. We also have the beauty of weather here in New York, but.
But omicron is impacting the you know the environment and in brick and mortar. So we are seeing.
Slower recovery in the third quarter for brick and brick and mortar than certainly we were.
We saw just a few months ago and and so we are we are cautious as it relates to that and then I did mention that we do have a step up in in.
Continued step up in some of our shipping cost and some of our supply chain costs as well we have taken pricing. So the second half of the year, our pricing increases 4%.
It was 3% in the first half of the year.
Hence the average of three 5%, which I spoke about in my prepared remarks.
And we know we have agility going forward. If this environment continues to take to take additional pricing as it warrants, but the combination of pricing and cost savings are really what allows us to invest.
For long term sustainable growth in things like <unk>.
A new innovation center in Shanghai.
Plant that we are investing in in Japan, as well as the investments we're making in the other capabilities that Fabrizio spoke about and deliver a very very strong year in terms of double digit topline growth and 90 basis points of margin expansion.
Yeah, and if I can.
And just underlying <unk> is explained is that this is really between quarters three of course to <unk> every balance we are taking up the year and we believe in the strength of the <unk> and <unk> and if you look at our fiscal year estimate is that our guidance is going to be a very strong year and is going to.
A very strong quarter for <unk>.
In this year.
The quarter three we have three big big launches, where we have the investment in quarter, three and the benefits in quarter four.
It's important to see and then the price increases that we are accelerating as of January February in certain regions as Tracey explained have the biggest.
Biggest theme that the full impact in quarter, four and so that that's the rebalance your way of doing that in total.
We are go into the <unk>, we are guiding very strong year and a strong quarter four and we are confident on it and because I know our brands are listening so and we do have three big skin care launches in the third quarter, but we do have makeup fragrance and hair care launches as well.
Yes.
But we are supporting.
And we do have time for one final question and our last question that will take today will come from the line of Wendy Nicholson with Citi.
Hi, Thanks, very much I'm, hoping I can sneak two in because I think what's kind of making folks nervous is the slowdown in travel retail. So can you just speak to your confidence.
Obviously consumers are still managing to get their skin care product in their fragrance and whatnot.
Just shopping more online. So is there any concern that you have that sort of longer term.
Travel retail is going to be less of a buoyant channel for you maybe there's just been a shift in consumer behavior or or how confident are you that when people start traveling again.
That travel retail channel is going to really accelerate and then I don't think you commented specifically and it goes back to <unk> question I think on the China, a promotional environment again, that's something that we've heard from other players.
Out there that that maybe stay in particular has been exceptionally promotional on in China can you just comment on that and sort of you know.
Give us your take on that thanks.
Yes first of all we are not promotional.
In in China mainland actually the majority of our activities are sampling rather than pricing promotion. So you've put promotional we mean that we have increased our sampling get our products that we give as a gift to win that's our promotional model.
Yes, we have been obviously, an 11 11 during the quarter, we had done the promos tonality needed to succeed in that events it in the sink and and Wendy.
You know just realize that.
Retailers with the slowdown in brick and mortar.
Are also promotional and so you know they are using promotion to drive to drive traffic. So when when we have seen and we saw a bit of this.
As well in the U S market when brick and mortar slowed down that some of the retail activity was quite promotional so that that is clearly a retailer driven decision.
I think you clarified that retailers rising a promotional data side, we don't decide but our promotions as I was saying is a lot about sampling and creating trial opportunity so as expansive rather than pricing and then obviously the retailers do what they believe is right for them in a given environment.
D.
Your question on travel retail.
I think I.
Avis stream.
A high expectation for the long term quality of travel retail growth I think this is a S.
Three Emily promising child, we have just seen the beginning of what will be a long term power for China expansion for travel retail and I spoke to this several times. There are two drivers of travel retail which are very important one is the obviously the amount of travelers and what happens to travelers.
So the traffic, but the other is the conversion so the amount of travelers that become shoppers and the conversion of travelers into shoppers has been pre COVID-19 was still in the 10 and 15% depending by region. So enormous expansion possibility of conversion is still in front of us and the arrival.
Although online in travel retail, which we call pre team today is very strong in Asia, but just at the very very beginning in any other region of the World. This is we know is a huge conversion driver because where this happened we saw conversions of travelers into shoppers go from the 10, 50% into the third.
So you can imagine over time that we did we dispassionately online policy be to buy pre tail.
That conversion will dramatically grow around the world travel retail when you add the two DS perspective, the fact that the domestic duty free.
Hi, Ana and the team is going to be not cannibalize. The launch went international travel will restart as I explained in the previous in the previous answer.
And so that the D link.
Termination of traffic will come back a lot of it will be net extra.
And when you have in front of us to prove that I was quoting before then where for example in EMEA, we have seen some new traffic some traffic coming back during the recent holidays, we saw great sales recovery and so the responsiveness, so travel retail to traffic coming back is.
Very very high and so when you combine all of this consideration and you put on top of it that we have a great travel retail team not only with the extraordinary commercial capabilities, but we great marketing capability that D. The traveling stores the stores for travelers are becoming more and more.
Important value driver for everything we do is super important equity building opportunity for the brands and so they have become an integral part of the creation of the overall consumer experience in that trial repeat dynamic that we have built so I hope you realize why we.
Do believes in travel retail as a long term strategic channel.
And again I think we feel very good when you look at this quarter.
The results that we achieved eat.
Retail had a great quarter.
As we said low double digit growth, but the overall company.
<unk> grew at 14% so the diversified engines of growth that we have.
Really gives us the flexibility to continue to deliver to deliver overall against our expectations and our and grow our consumers and grow our profit so.
Thank you excuse me. Thank you if you were unable to join for the entire call.
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That concludes today's Este Lauder conference call I would like to thank everyone for their participation and wish you all a good day. Thank you.
Yeah.
Okay.
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