Q2 2023 Estee Lauder Companies Inc Earnings Call

Good day, everyone and welcome to the Este Lauder companies fiscal 2023 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 the senior Vice President of Investor Relations Ms Rainey Nancy.

Hello on today's call our February feel free enough, President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer since many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these.

Forward looking statements.

To facilitate the discussion of our underlying business the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release.

Unless otherwise stated all organic net sales growth also excludes the non comparable impact of acquisitions divestitures and branch closures and the impact of foreign 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, our 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 or our retailers' websites.

During the Q&A session. We ask that you. Please limit yourself to one question. So we can respond to all of you within the time scheduled for this call and now I'll turn the call over to property sale. Thank.

Thank you Ray and Hello to everyone. It is good to be with you today.

Turning to results for the second quarter of fiscal year, 2023, where organic sales fell 11%, which was within our went out too despite the incremental pressure of COVID-19 resurgence in China.

Many developed and emerging markets globally outperformed our expectations to upset the COVID-19 related impacts of significantly reduced retail traffic as well as limited staffing in beauty advisor in domestic China and tried that he's 89, and then in November and December.

Adjusted EPS fell 49% wireless steep decline this was meaningfully better than I went out to look driven by both disciplined expense management and moderation of the stronger U S dollars.

Importantly, we continue to prudently invest for growth launching so after innovation and increasing A&P as a percentage of sales.

For fiscal year 2023, we are lowering our outlook for organic sales growth and adjusted diluted EPS, primarily for two reasons first inventory levels in China remain somewhat more elevated than we expected due to the disruption in travel and in store staffing levels.

November and December .

Second the recently announced potential rollback of coffee related supportive measures seen Korean duty free are creating a near term transitory pressure to our business with our Korean duty free retailers.

In the third of course that it is more than offsetting the initial positive impact from the resumption of international travel by Chinese consumers as well as favorable trends in our second quarter, including outstanding performance across many developed markets in Western Europe and Asia plus.

It will as many emerging markets globally, and the better than expected currency environment all.

All told our return to growth and it's shifted from the third quarter to the fourth quarter, which Tracy will discuss in greater detail.

We remain focused on investing in our brands, including four innovation advertising strategic entry into new countries and expanded consumer reach to shoot our multiple engines of growth strategy our growth engines in the second quarter, where many emerald categories regions and channels.

And we anticipate they get added to the return of more growth engines across the second half of fiscal year 2023.

Beginning with categories fragrance to extend its long running double digit organic sales growth strike in the second quarter rising 12%. We are inspired by the growth prospects still ahead for the luxury and Masstige segments of the category as consumer pursue unique distinct and long lasting sense.

Of the highest quality manual today consumers seek to build in location based collection to express on self differently across seasons time or did they or events.

Our portfolios of Jo Malone, London, Tom Ford Beauty Le Labo keyed M parties. It has shown the profound free data come out is ideally position for these accelerating fundamental shift.

As demand increases globally, we are excited about our plans to bring these brands to new markets and channels in the coming quarters innovation or we'd also continues to be a key growth pillar. For example don't for beauty outstanding launch of New Rx try and put some in the first south will be followed.

But the Treasury collection in the second house building on the success of region out he lost Cherry.

Makeup grew organically in the Americas as well as in the domestic markets in EMEA and across southeast Asia in the second quarter.

Our brains out indeed, the realizing the promise of the category Renaissance X.

Professional and personal use education rescue and accelerate we'd point innovation alluring marketing campaigns on new platforms and best in class artistry.

Mac what was a standout success the brand growth engines, where many freestanding doors excelled welcoming consumers with expert services delivering double digit organic sales growth globally across channels blockbuster innovation hero products and holiday merchandise proved highly sought.

Yeah.

Clinique farthest fueled makeup across sub categories led by lipsticks as the brand has created the hero franchise with couch cyber it almost lipstick and black honey.

Este Lauder double wear foundation had exceptional success with its my shade Nice story campaign in Western Europe .

Ralph I'll talk drove strong new consumer acquisition and the franchise strengthening its number one ranking foundation with prestige beauty share gains.

Looking ahead, we are excited for the launch of Este Lauder pure Colo lipstick in the second of the brand reinvented its iconic franchise to capitalize or lipstick a revival in integrated skincare benefits for lips designed.

Designed to flatter all skin tones across math green and lush there finishes the line packaging piece will match to the brand original lipstick from the 19 sixties.

In hair care, our brands' extended the category organic sales growth streak to eight consecutive quarters for the sake of in house and did that.

Launched last July in mainland China will be complemented by the brand recent entry into travel retail in China.

As we continue investing for the Viva and growth opportunity or prestige hair care with the Chinese consumers. Moreover.

These are became a certified B corporation, joining le Labo in I worked for for you in achieving this important third party validation is the brand deepening its decades long commitment to social and environmental responsibility.

Skincare organic sales fell sharply in the second quarter. There were a few heads when we the biggest challenge being called the 19 in travel retail in Asia and with the Chinese consumer given the categories exposure.

I mean, the tough landscape for skincare, the ordinary whereas the striking success eats organic sales growth accelerated from high single digit in the first quarter to strong double digits in the second quarter. The brands hero product excelled as did the blockbuster innovation, our most deep there.

Lash and brow serum while the ordinary also realized outstanding performance in the specialty multi channel gained momentum for its exciting launch in India in the fourth quarter of last year.

We are focused on returning skincare to grow globally with sequentially improving trends from the third quarter to the fourth quarter is it transitory pressure for travel retail abate.

To that end, we had an incredibly rich innovation pipeline primed to launch yeah, a few among them.

Well read the out from Mack is Its', a new either real franchise as the brand leverage its expertise to create a nasty three approved skincare line of products, which I purposely designed to perform also with makeup.

Lemaire revamped most arising soft cream arrives this month with powerful new clinical results to reverse and receive visible signs of aging.

Thereafter, Clinique will bring more so huge S. P S to mask it extend its popular hero products to meet consumer desire for ideation, and some protection with a light weight texture has made most of their surge went under at age and I quote we.

With these launches we aim to reach new consumers demographic tapped into high growth sub segment let.

Let me now turn to geographies.

While the U S and domestic China were challenged in the second quarter with sales falling single digit organically in each market. We believe both will be growth engines in the second half.

For the U S. We are optimistic for a return to growth given say sequentially improve the monthly trend in each of organic sales and retail sales performance throughout the second of course to building on this momentum the market is it keeps with numerous growth drivers, including an excel.

Our innovation pipeline that goes brands rollout of nuclear Clinique counters to select doors. After a successful pilot of Clinique Lob in Macy's Herald square and launch of exclusive products by many brands in specialty. Most we are also progressively modernizing numerous.

Freestanding store is that prime to be an important contributor to growth following the rationalization of the footprints.

Moreover, our enhanced omni channel capabilities are also trying to contribute to growth in the U S. S consumers, who engage with our brands online and in store drive consistently higher value from upsell and cross sell.

This was especially true during holidays in the second quarter.

For domestic China, we are confident in a vibrant recovery for our business falling the relaxing of Kobe restriction as the economy is well positioned to rebound and Chinese consumers are passionate for prestige beauty. We entered this phase with momentum having expanded our market.

Prestige beauty in China during the second quarter driven by gains on all of skincare makeup fragrance and hair care, demonstrating the desirability of our aspirational brand portfolio and the excellent go to market strategies of our local team.

While the third of course that is set to be more valuable because of the high level of call. It keys, we now anticipate even stronger organic sales growth as of the fourth quarter as the recovery evolves. We expect online to continue these trends and anticipate it get out to them.

Return to more fulsome brick and mortar traffic by the end of the fiscal year.

Online organic sales rose single digit in the second quarter fueled by many brands are led by double digit growth.

We achieved excellent results for 11 11, as the Este Lauder brand realize top ranks across platforms. Moreover, our retail sales growth in online channel meaningfully outpaced the industry in the quarter for strong prestige beauty share gains.

Beyond the U S and China, we realized outstanding organic sales growth in many large developed and emerging markets around the world.

Our local team have been executing with excellence to deliver broad based sales gains Western Europe led by the U K prospered, while Japan, and Australia contributed strongly in Asia Pacific, India, Brazil, Turkey, and Malaysia, I am on the stars of our emerging markets.

With each posting strong double digit organic sales growth led by India rising nearly 50%.

We are very encouraged with the excellent performance, we are delivering in emerging markets. As these emerging markets involved in recovery from the pandemic, we foresee as compelling long term growth opportunity arising from this pandemic the class trading up into prestige beauty. We entered these important.

Phase of recovery from a position of strength as we hold leading prestige beauty share in many of these markets for example in India, Mexico, South Africa, We had the number one ranked company in both prestige makeup and skincare, while we lead with prestige makeup in Malaysia, Thailand and <unk>.

Turkey.

Let me now turn to the strategic deal we announced in November to acquire told for it.

This transformation of luxury acquisition will make Tom Ford in own brand obesity Lauder companies, enabling us to manage the brand's intellectual property and equity staying true to our focus as a pure play in prestige beauty. We have also reached agreements with luxury companies Zenia group in macro.

To license the brands fashion, and I web businesses, respectively.

We first Boston with Tom Ford, who Theyre 15 years ago, and he's singular vision of modern luxury is beyond compare.

Together, we have elevated Tom Ford beauty into the top echelon of high growth luxury beauty impressively, Tom Ford Beauty is expected to achieve $1 billion in net sales annually over the next couple of years and we have promising profitable growth opportunities ahead.

Yeah.

Before I close I want to recognize the staffed a black is 30 months in the U S and <unk>.

Our employees to have created an engaging calendar of events for colleagues and consumers to celebrate an owner the black as students. While we continue to focus on accelerating our commitment to a ratio of equity and the collective accomplishing about equity goes yeah round.

In closing, while we are lowering our fiscal year 2023 outlook to reflect the additional transitory pressures affecting our travel retail business.

We are encouraged by both the strong underlying trends in many other areas of our business and improving macro trends.

Inflation stabilized in many markets globally, the strength of the U S. Dollar has moderated and they returned to mobility of the Chinese consumer both domestically and international travel he's up any earlier than expected.

In the first half of fiscal year 2023, we made exciting progress on several strategic initiatives to drive growth and resiliency in our business, we significantly strengthened our capabilities in innovation manufacturing and distribution and he opened.

China Innovation labs, our first plant in Asia Pacific, Our new DC in China, Why we also announced our brand portfolio, we Tom Ford and Balmain beauty.

All told we have great confidence that we will emerge from these volatile transition year, even better position to realize the long term growth opportunity of global prestige beauty.

To our employees our future is bright because of your creativity passion and wisdom I extend my deepest gratitude for your significant contribution to our long term success.

Now I turn the call over to Tracy.

Yeah.

Thank you for BREIT, Seattle, and Hello, everyone.

As Fabrizio mentioned, our business in the second quarter continued to be pressured by the external headwinds of COVID-19 related impacts, including the rising number of Covid cases in China lower shipments of replenishment order orders in the U S and the stronger U S dollar.

Our second quarter organic net sales declined 11% and earnings per share decreased 49% to $1 54.

Tighter expense management, and a slightly improved currency impact contributed to our better than expected EPS results.

From a geographic standpoint organic net sales in the Americas declined 3%, we saw healthy demand for our holiday offerings as consumers gravitated to our in store and online promotions.

We also experienced lower shipments of replenishment orders due to the retailer inventory tightening as we anticipated and a later improvement in retail trends post Christmas.

In Latin America organic net sales rose double digits, reflecting continued growth in nearly all markets. The evolution of recovery in makeup as consumers return to stores and the strength of our fragrance portfolio.

Organic net sales in our Europe , the Middle East and Africa region declined 17%, including the negative impact.

Transactions in key international travel retail locations or 3%.

The decline was driven by travel retail as expected while growth from nearly every market in the rest of the region was strong.

Our global travel retail sales were significantly pressured by the ongoing COVID-19 related impacts.

Despite stores being opened throughout the quarter traveled to Hainan remain largely curtailed and as a result shipments of replenishment inventory remained low.

Elsewhere, we experienced strong sales growth and travel retail, reflecting increased international tourism as travel restrictions in many countries lifted from the prior year.

The ongoing pressures in Asia travel retail more than offset the growth we experienced in the rest of the EMEA region, including both developed and emerging markets, such as the United Kingdom, France, India and Turkey.

We continued to see various stages of recovery across the region that coupled with the strong resumption of tourism fueled brick and mortar growth during the quarter.

Organic net sales in our Asia Pacific region fell, 7%, primarily due to the ongoing COVID-19 related impacts in greater China.

This affected brick and mortar sales in greater China, and Doctor Jarrett travel retail in Korea.

Online sales continued to grow in mainland China due in part to the expansion of our online presence with the recent launches on J D and Joanne as well as solid performance during the 11 11 shopping festival.

Most of the other markets in the region continued to progress and recovery as the return of brick and mortar traffic led to high single digit or double digit growth in Japan.

Pan Australia, Malaysia, and the Philippines.

From a category standpoint fragrance continued to lead growth with organic net sales rising 12%.

Strong holiday demand for our beautiful line of fragrances from Este, Lauder and double digit growth from both La Labelle and Tom Ford Beauty propelled the categories growth in every region during the quarter.

Organic net sales and hair care rose, 4% and declined 3% in makeup the latter driven primarily by the Covid restrictions in China and solid performance from both Mac and Clinique drove growth in both the Americas and in domestic markets in EMEA.

Organic net sales in skincare declined 20%.

This category continues to be the most affected by the Covid restrictions in China, particularly in Asia travel retail in mainland, China, where skincare accounts for a large majority of our business.

Our gross margin declined 430 basis points compared to last year, the positive impacts from strategic pricing in this quarter were more than offset by inflationary pressures in our supply chain region and category mix and higher costs due to promotional items.

Operating expenses increased 500 basis points as a percent of sales driven primarily by the reduction in sales.

This also reflects our investments in areas such as advertising promotional activities and innovation, which increased 150 basis points compared to last year.

Operating income declined 46% to $768 million and our operating margin contracted 930 basis points to 16, 6% in the quarter.

During the quarter.

We recorded a $207 million of impairment charges related to the three brands, primarily reflecting lower than expected growth in key geographic regions and channels given the pressure on consumer demand from the impacts of Covid.

Diluted EPS of $1 54 decreased 49% compared to last year.

The impact from foreign currency translation, and foreign currency transactions and Kiwi travel retail locations negatively impacted diluted EPS by 5% and 4% respectively.

During the quarter, we generated $751 million and net cash flows from operating activities compared to $1 8 billion last year.

The decline from last year reflects lower net income and the negative impact from changes in working capital primarily due to the timing of payments.

We invested $419 million in capital expenditures, and we returned 708 million in cash to stockholders through both dividends and share repurchases.

As we expected our first half performance was pressured by ongoing external headwinds, let me now turn to our outlook for the remainder of fiscal 2020 three.

For the second half of fiscal 2023, we are encouraged by the easing of Covid restrictions in China, and the expected return of travellers throughout Asia and around the world once more stabilization occurs without bound flights and visas as well as COVID-19 entry and testing requirements.

In Hainan, we are starting to see increased positive signs already as traffic level declines have moderated in recent months. However, retailer inventory levels are still somewhat elevated reflecting the impact of the lengthy store closures as well as the rapid reduction in traffic and in store staffing.

<unk> in November and December .

And then Korea travel retail and incremental headwind as a marriage since the last outlook we provided in November .

The recently announced potential rollback of Covid related supportive measures in Korean duty free is creating a near term transitory pressure to our business with our Korean duty free retailers, which is pressuring our third quarter outlook.

We now also expect more moderate net sales growth near term in our China business as the rise of Covid cases in November and December slowed expected brick and mortar retail traffic and social usage occasions, which continued in January during the pre lunar new year shopping timeframe.

Collectively we expect these impacts to create greater headwinds in the third quarter than we'd originally expect anticipated.

As a result, we are updating our outlook to reflect a shift in the start of the travel retail recovery in Asia from the third to the fourth quarter of fiscal 2023 due to the normalization of inventory levels in Hainan the uncertain pace of recovery of travel retail traffic in Korea, and a more moderate acceleration of growth in China.

The momentum from our other developed and emerging markets in EMEA and Asia Pacific in the first half is expected to continue as those markets progressively evolve in recovery.

We are also cautiously optimistic and expect our North America net sales performance to improve as our retail growth trend in the region has already increased particularly in January and we have a supportive innovation pipeline planned for the second half as Fabrizio mentioned.

As it relates to our operating income while these external headwinds have introduced a high level of volatility that has had a meaningful impact on our financial results. This fiscal year, we remain confident in the ongoing strength of prestige beauty, our business strategy and our ability to reaccelerate long term profitable.

Both.

We therefore plan to sustain the strategic investments imperative to that growth, including innovation advertising and continued geographic expansion for many of our brands.

These investments also support the continued strengthening of our multiple engines of growth as we invest in emerging markets and faster growth channels that are already progressing well in their recovery.

As a result, we expect to see pressure on our operating income in the third quarter.

With an accelerated improvement in the fourth quarter as the sales recovery in travel retail mainland, China and skincare start to materialize more meaningfully.

Yeah.

The negative impacts from foreign currency that we anticipated in our previous guidance have improved due to the recent weakening of the U S. Dollar. However, currency is still expected to be a meaningful drag to our reported sales and diluted EPS growth for the third quarter and full year.

Our outlook is now based on December 30th spot rates of 1.067 for the Euro.

1.207 for the pound 696, four for the Chinese one and 12 63 for the Korean won.

So with that backdrop, our guidance is as follows.

We expect organic sales for our third quarter to decline, 10% to 8%, primarily reflecting the pressures to our travel retail business that I mentioned previously.

Currency translation is expected to be dilutive to reported net sales by three points and the impact of certain foreign currency transactions in key international travel locations is not expected to be material.

The impact of sales from certain designer fragrance license exits are expected to dilute reported growth by approximately one point.

We expect third quarter adjusted EPS of <unk> 37 to 47 cents for a decline between 81% to 75%.

Currency translation is expected to be dilutive to EPS by four cents such that constant currency adjusted EPS is expected to decline between 79% to 73%.

This includes the negative impact from certain foreign currency transactions in key international travel retail locations of approximately one percentage point.

For the full year.

Assuming a reacceleration of travel retail in the fourth quarter, we expect organic sales to range between down two to flat.

Currency translation is expected to dilute reported sales growth for the full fiscal year by four percentage points and we expect an additional one point of dilution from the impact of certain foreign currency transactions and key international travel retail locations.

The impact of sales from certain designer license exits are expected to dilute reported growth by approximately one point.

We expect full year operating margin to be approximately 15.1%, a 460 basis point contraction from the prior year period, primarily due to the geographical and category mix of sales and foreign currency impacts as well as the sustained investments to support recovery as previously mentioned.

And we now expect our full year effective tax rate to be approximately 25, 5%, reflecting in part the change in our estimated geographical mix of earnings.

Diluted EPS is expected to range between 47, and five O two before restructuring and other charges.

This includes approximately 29 cents of dilution from currency translation.

In constant currency, we expect EPS to fall between 29% and 27%, which includes a negative impact from foreign currency transactions in key international travel retail locations of approximately four percentage points.

Regarding the Tom Ford brand acquisition, we expect to complete this transaction in the fourth quarter and to fund it through a combination of cash debt and deferred payments.

We also estimate a slight EPS dilution to the full year outlook that I just provided due to the final purchase accounting inclusive of transaction costs.

While this year has on down downwardly been a perfect storm of unforeseen macro pressures on our business and the transition to accelerated recovery has indeed been longer than we anticipated we have navigated through the challenging environment and strengthen the company and the process. Thanks to our amazing employees.

Our company values and our multiple engines of growth strategy.

We are encouraged by the many signs of improvement in the overall environment and the progress of our incredible teams have made in preparing us for a strong recovery.

Our fundamentals are solid and intact reinforced by the actions we have taken over the past few years.

From the acquisition of the majority interest in <unk> in fiscal 2021 to the recent announcement of our agreement to acquire the Tom Ford brand and the Balmain license agreement, we are expanding our brand portfolio at both the entry in luxury level of prestige beauty.

We've taken strategic actions to enhance our go to market capabilities supply chain agility and local relevance through our new innovation production and distribution facilities in Asia.

We've enhanced our digital marketing capabilities and continue to progress on our ESG initiatives.

These actions and many more demonstrate that we remain confident in the long term sustainable profitable growth of our business.

And that concludes our prepared remarks, we'll be happy to take your questions at this time.

The floor is now open for questions. If you have a question simply press the star key followed by the digit one on your Touchtone telephone to ensure everyone can ask their question.

Each person to one question time permitting we will return to you for additional questions just queue up again by pressing the star key in the digit one our first question today comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks, good morning.

I was hoping and I. This is probably more for you Tracy if you could walk through with US how your I guess the length of the supply chain works for supplying both Hainan and mainland China currently knowing it shifting and because as we think through the change forecast in demand.

<unk> and thinking you know knowing what I believe is a pretty lengthy supply chain, how you're managing production versus shipments in and if that's sort of informing why there's so much visibility things unfold.

And I guess, we should see inventory spike up on your balance sheet and three kill.

Is that right.

Yes, you're you're correct Lauren that we do expect that you know we will two things one inventory levels are still coming down and in Hainan. They are you know almost at the level that we would expect sales to to accelerate so yes, we should start to see.

And inventory build related to the shipments that we expect to see in Q4.

In Korea.

And again, our the pace is a little bit more uncertain given the transitory nature of nature of what's going on right. Now. So we do anticipate as I mentioned in the prepared remarks that we will start to see resumption of travel and Korea and depending on the pace of that resumption that well you know.

Depend on Oh, the amount of shipments that are that we have in the quarter, but we have taken obviously an assumption. There we are sitting on a decent amount of inventory even in our own warehouses to supply the sales that we expect to see in in the fourth quarter.

The next question is from Dara <unk> of Morgan Stanley . Please go ahead.

Hey, guys good morning.

So good morning.

Just sort of extend that question a little bit right. We have a lot of quarterly volatility in terms of Q3 versus Q4, you know.

Q2, there's.

A difference in shipments versus underlying retail sales, obviously COVID-19 impacts in China. So you know.

It's hard to get a great underlying sense of retail sales here and how the business is doing so for retail maybe you can just give us a little bit of an update on retail sales by region.

I'm, particularly interested in category growth of any macro impacts and in the U S and Europe , and then how youre thinking about Asia Pac and China versus the rest of the region.

Less so on.

On near term results here, but more how results came in in the quarter versus what you originally expected in that light.

For the revenue trajectory as you look out over the next couple of years and how you think about it I think you touched on a lot of aspects of that but it would be helpful to get a general overview.

Yeah, no absolutely with them.

With pleasure, let me start with the with China first of all and so China.

The results in the in the quarter.

We're at a pretty good we we built significant market share so deal get old market in China in whereas it was negative double digits, our net states, where and our retail was negative single digits, and we beat us to market share.

Nevertheless, singled categories. So in most of the risers that we'd be in market shares in a makeup in fragrances he nurse care in and in a very Aspen now. This for US is a very important sign that D. Our brands I really work in the aspirational value of our brands.

It remains very very strong which in the moment of reopening is there is a very strong position to be.

So excellent performance relatively to market there some of our brands, we're shining la Mer in skincare was that the brand there was gaining a the best market share Tom Ford Beauty in makeup and Jo Malone, London fragrance was really leading this share gain.

The other important reading of China is that during 11 11, our net sales were up 10, 9% and our retail sales were up 11, 9% and holding the number one ranking across various categories and there was a lot of great sex.

It says on the brand creative activity.

Live streaming on innovation and and so the way when the consumers are back in these very difficult volatile Peter Leica situations like 11, 11, where there is obviously high traffic our brands respond enormously and obviously when the consumers are not back.

Oh don't travel or a secret to them is when obviously, we have seen some issues. So in total China is developing the way, we planned and and from a market shifts and point recovering old.

And it is definitely going in the right direction in terms of the future.

The potential of China, we continue to see now the the opening to create to gain traffic in mainland.

Brick and mortar we see the continuation of the online success and we see the and obviously the reopening old Tainan and so the Chinese consumer on all fronts also we see the fact that the Chinese consumer is starting to travel internationally and this will gradually increase as the.

And governments will agree these us and model so growth in this moment there are parts of the world. We already opened the others. We will open soon soon Japan and we understand has been an agreement, but he is not yet open will be in soon Korea is the one where the agreement is not yet final.

Our lives, but we are optimistic that in the future with these also will be resolved. So that's another very important trend is we let that positive impact obviously in our retail channel, but also in the countries of destination like it has always been historically a heartburn.

In term of the categories in China, obviously, the most important thing that we locked in as the China accelerate on all fronts. So we'll be there skincare will accelerate for us and so the acceleration of travel retail Asia yesterday risotto, China the acceleration.

International travel, a Chinese which we had in front of us in parity in quarter four but in part in 2000 and fiscal year 2024. These re let.

We'll generate a substantial improvement of our skincare trends that in turn we let that positive impact on our margin mix. So that's obviously an important element of the program than other regions of the world as I commented in my prepared remarks Ah Ah Ah.

It's been very strong in Europe , and where we build market share in most of the European markets are very strong in the rest of Asia, particularly.

From gains in Japan, and Australia as I commented already and are in Korea, excluding the travel retail inputs and they thought particularly heavy on our doctoral drive brand.

<unk>, which has a big percentage in charter detail. Excluding that also Korea started progressing very well so a good progress in the you know the other regions than in North America now in North America.

Obviously, we also continue to lose share in the quarter and that overall, we we we would like to accelerate our plan of share recovery, but the good news is it's been very strong progress in of course. It to every single month October November and then December there was progress.

<unk> in the top line sales acceleration first of all in retail in the quarter in the U S and the plus 2%. So on the positive but December was blast, 6.57%. So in line with our with our goals of acceleration. So we see the U.

<unk> progress and now the next six months.

There is an even stronger plan in the U S. We have a strong acceleration of innovation I mentioned already some in the in the prepared remarks, it like Este Lauder pure chloro lipstick and most of the surge of Clinique I Perriello Mac soft kadima La Mer Cherry collection of Tau for that so and then.

We have some important distribution improvement we are deploying more distribution in department stores with our high end fragrances, Macy's and dealers do the ordinary is entering some doors of Nordstrom. So we had deployed in Ulta and sephora, new doors incremental new doors to an incremental expansion of our key brands.

In these doors and we are renovating 100 freestanding store opening eight new freestanding store and and continuing.

To improve our omni channel capabilities on all fronts. So we see a in acceleration or about what progress also in the U S. So in summary, when I should add but Tracy also underline that at the same time, we have improved our capability behind this program.

Our digital marketing stronger our supply chain is a sharp tenant and faster obviously, we have done progress in our factory in Japan.

Our R&D is opened our R&D center in China, They will increase the amount of local relevant innovations in Asia are in an important way in the next fiscal year, starting this fiscal year in a significant way and we have opened a new distribution when the Serbs travel retail.

I'm in Switzerland, and one service, obviously, China within China as we discussed also into law school. So that our old is investment and progress is and kept the ability to make us ready for the re acceleration in the future and so this fiscal year and somebody is being a year where.

Really we suffered about the the called the Lockdowns are particularly in Asia, and then the high level of infections during the reopening.

And D. The impact of the strengths of the U S dollar the west, particularly big in our high profit high import them in China's travel retail like China travel retail Asia, because on Korean China. The dollar was particularly impactful. So it was really a perfect storm.

I'm kind of situations, but the older arrest apart from these three areas.

Really progressive and in some cases very successful in market share gaining it. So that's that's my overview I hope the answer your question that are having an overview of the situation.

But I would say is a very very encouraging for the recovery periods.

The next question is from Peter Grom of UBS. Please go ahead.

Thanks, operator, and good morning, everyone hope you're doing well so Chris I wanted to ask about the implied outlook for organic revenue growth in the fourth quarter, which is which was quite strong in.

And better than expected and I know, we're still a few months away from fiscal 'twenty four here, but you.

Implied exit rate guidance, a fair way to kind of think about the potential top line recovery looking out to next year or are there kind of any timing related impacts.

Given what you're forecasting in <unk> that could be driving them a stronger growth. Thanks.

Thanks, Peter So look we are expecting a stronger fourth quarter than than probably you anticipated and in Austin as well you know given a few months back and part of that as we said in our prepared remarks is because of the shift of of recovery our expectation certainly in terms of.

Some of travel retail I would just remind you that I and I know you're well aware of this that we're also anniversarying last years are some pretty significant shut down. So this volatility that we're speaking about you know actually started at the end of our fiscal 2022 in the fourth quarter and we're coming up on the anniversary of that so.

Numbers look, particularly large from a you know from a growth standpoint, because we are anniversarying. Some lockdowns are in in China and in you know and in travel retail in Hainan in particular, which was the start of some of the problems that are that you know we have anticipated on this.

Call today.

You know I think we are anticipating for fiscal 'twenty, four and we're not giving fiscal 'twenty four guidance right now, but you know given that in the fourth quarter. You know all markets are are anticipated to be open and remain open.

And traveling will gradually.

Resume and again, you know uncertain about the pace of that resumption, but we've certainly seen encouraging signs and in many of our markets that fiscal 'twenty four it will be a strong year for us. So I wouldn't take the Q4 implied growth and apply it to fiscal 'twenty four [laughter], Peter if that's what you're getting at.

But but certainly we expect you know that we you know many of them there will still be volatility in fiscal 'twenty for but the volatility related to the pandemic and and some of the things that we've experienced this year should be much more moderate than than certainly what we've.

<unk> this year and you know if you have any predictions on currency certainly do let me know.

The next question is from Michael Binetti of Credit Suisse. Please go ahead.

Maybe I could just dovetail on that a little bit you know what.

You told US a few quarters back that 20% margin was a it was a north star as you think out to next year and many of the moving parts of your business. Finally start to come back online is that is there any I don't know there might be some pull forward revenue that leaks into the first half of the year.

No. Obviously, you gave us the fourth quarter here, but as you look out to next year's is 20% and inappropriate.

The North Star for next year, given given the revenue drivers back online and then I guess.

Fabrizio can you can you help us size the travel business, a little better since it's such a big swing factor in the model here going forward I think it was about 15% of sales pre COVID-19 half of it China you spoke a little bit about the shape of it at a conference in December.

The pre COVID-19 the Chinese the Chinese traveler was largely a tier one international traveler I think you've said Hainan is only is completely replace that but it's a different.

Customer, maybe a lower tier customer just because it's always the model around so much can you help us just think about how big that business is today and the non China, but in the non China markets Heinen, none none heightened in China to help us think about the model.

So Oh, let me just end and Fabrizio will pick up on your questions on travel retail, but travel retail actually was larger if you're remembering are Michael our online business with 15% pre pandemic travel retail was more like 26% pre pandemic, but in terms of the operating margin for <unk>.

24 are as you can imagine with some of the you know more recent events, we are still going through what our expectations are for fiscal 'twenty four and we'll certainly provide guidance as we normally do in the August timeframe I think 20% you know it was a little ambitious right now for fiscal 'twenty four based on what we're seeing.

But you know some of that has to do with how how currency moves which was my previous comment in terms of if you have projections on currency, let me know, but certainly in terms of the business fundamentals. The growth. We would expect obviously more margin expansion that is in our normal al.

The rhythm for fiscal 'twenty for us because of the recovery of volume and obviously you know when you're down in in volume as we are this year as much as we protect our you know the strategic investments, but also make choice for discretionary investments as well.

You know volume volume solves a lot of sense and so you know so we would expect you know more leverage on our expense base next year are certainly than we are able to get this year practically because of the the volume trends in it and as well as as the the shocks in terms of when those are those hits have occurred.

And and how fast we can react to them.

So again, we are expecting a are you know certainly a progressive fiscal 'twenty four and with all of the things that we spoke about in the prepared remarks as it relates to the investments that we've made that will come online we'll have a new factory operational in Asia that are that will make up our time to market.

<unk>, we'll have the new innovation center, which will start to contribute to you know to the the development of a of product for us in the future et cetera. So all of those things that we said in the prepared remark marks should also support the acceleration of growth in fiscal 'twenty for now for your travel for more on your trial.

Retail question I'll I'll turn it to Fabrizio.

Thank you Tricia and also I want to add on the margin think is the first step of normalization of our margin that Tracy is describing.

On top of volume is also will depend on which volume because obviously if you assume that then don't validation of business would be in travel retail in China than you are assuming the normalization will be in skincare that tend to be higher margin. So there will be a moment of recovery and normalization and then from there.

We will restart our normal algorithm and obviously that we will see how the normalization trends evolve and how long they will take but that would be the way we will maneuver back in term of the travel retail question as Tracy clarified 26%.

Before and then even more during COVID-19.

D and you were asking about the what are the key dynamics in travel retail. So the dynamics can travel. These days will be first of all Hainan is now establish a yes, I said that when the international travel or the Chinese consumers will restart the highlander well not be cannibalizing the big wave is Hainan he's now.

<unk> well establish vacation play plays for Chinese for internal travel is yes, there are different target groups as a and the Hainan travel is obviously more affordable easy does it require a visa doesn't require passport by the way keep in mind that in this before Covid I do not have.

The last information and now the day, but do you think is changing on the visa model that'd before coffee is less than 20% of China's had the passports and so that is anyway, 80% of Chinese they will go too high and then they would not traveling internationally and is in use of models. So Hainan will continue and will continue to develop the M D.

Addition will be the international travel, which is coming back.

In an important way and then obviously the Korea and rest of Asia. So Korea as it has always been a very busy but as you know Hong Kong Macau.

Japan, we are all very important travel retail businesses that now will that will improve and so there would be different levers of growth. Obviously in all of these now in terminal categories D and because of the prevalence of Chinese consumer to Asia.

Childhood as in general.

Center drove the total global travel retail skincare is a very important category. So that travel retail that acceleration in the future will carry as I was saying before skincare and so this will be a double positive impact on marginality in profitability is it is that combination is powerful and.

And then by category, we see in travel retail is strong acceleration of the fragrance category, particularly the high end fragrance category, which is again profitable and very interesting category for the consumers in this moment.

We we observed many travel retail.

Often this around the world to make them more space for the high end fragrance fragrance development in the future of travel retail. So that's another important important positive and then.

The last point I want to me it is keeping in mind that the travel retail is driven by increased traffic and by increased conversion the numbers the way available before COVID-19 in a normalized way in 2019, we have depending on which parts of the world. The travelers to bias commercial was between 10 and 15%.

We know also that way where it is when there is prepaid like in China, and Korea, So where people can buy online before they go to the airport to this conversion number increased substantially and and there is a lot of retail business that has developed very well in Asia, particularly.

A link to her and then and so the amount of conversion of these travelers ease increase and last thing I want to say is that they come back with Chinese consumers and international travel is very good news because the Chinese consumer when they travel used to have much more potash just per person.

And then the other travelers from different regions. So the increasing mix of Chinese travelers is very good news for global travel retail as well so in the post Covid world. When we'll be really post Covid I think we are going to see some yeah.

Is all of the exciting opportunity globally in the travel retail development.

We have time for one more question.

It's from Mark <unk> of Stifel. Please go ahead.

Yeah, Thanks, and good morning, everyone I wanted.

Wanted to ask about the sustainability of.

Growth in some of these categories, which benefited from reopening like fragrances makeup and your expectations for skincare improvement it sounds like you're obviously talking to improving skincare trends globally, obviously, China as well and then I wanted to ask the same question around China. So should we expect a similar reopened.

And trajectory are where are you expecting a similar reopening trajectory in China that we've seen around the rest of the world in terms of growth and in terms of the categories, which benefits. Thank you.

So the reopening of China is in China today, the level of sales online is the biggest percentage of the world So to be clear the reopening on China will mainly impact the reopening of the a brick and mortar.

So will impact 50, 550% of the business in China about we'll be very positively impacted by the reopening obviously during the period like the one we just leave it doesn't mean it since mid November to mid January where the level of infections in China, So called it with.

Super High.

That 80% of families had somebody with the virus et cetera. So the implications were where they normally in this period you see also reduce consumption everything reduced consumption of lines reduce interest for sure make up what are you not academy, so, but that's temporary obviously so your question is more what type.

When all these is aggregate the only thing I want to clarify that has to be regular on not only the ability to pastures in stores, but also frankly to be free or call. It really free of cargo and consensual come back. So when people will be free of coffee as a disease. When they will go back to the body camera.

After that we will see at least half of the business in China are increasing dramatically. So on traffic and we will see a continuous acceleration it gradual container sector or the online which is already very strong and there are many new platforms online that have been opened in China as we speak which are promising which are doing so.

Excess in our case our success on J D. O. Devine has been very very strong is one of the reasons behind that market share growth and the success of the amazing team all events, particularly 11 11 or June 16th of June 18th being extraordinary. So there are a lot of good potential levers for growth.

There will be activated by they come back local insurance than you were asking about the categories that would it be first of all skincare will be the biggest beneficiary for the simple reason that skincare is the biggest percentage of beauty business in China to be clear that's not the case in Europe or in the U S where the other.

CADA, which I'd be good percentage of the total business. So he has a unique profile of the Chinese consumer with skincare will be the biggest beneficiary been benefiting the biggest from the normalization of the all the consumption patterns and of the postures Boston So they're concerned second fragrance.

On a rolling China fragrance was already growing before Covid is being growing during the period, where Chinese said lower coffee levels than the rest of the world and will continue to grow with the reopening it because there is a clear passion of development of this category in China. The fragrance category is developing bigger percentages.

The high end, where we are focused so the high end fragrance is actually a much bigger percentage of the total market that in the rest of the world, which is great news for the development of this category makeup. We'd also makeup is the is the CADA, which is most affected by COVID-19 situations.

So now is the most affected by the way it's been the most affected everywhere in the world by their coffee situations not all in China and so the resurgence of makeup that we are seeing in this moment in U S. In Europe , and some of our brands, particularly Mac is benefiting from these very well will happen also in China when coffee.

Normalized and loss that we have launched Aveda in China for the reason that we have seen them the clear signs of development of luxury hair care, obviously health care is a category Super well developed among the Chinese coinsurance, but is mainly developed in mass.

Is the beginning of the journey of the development or the luxury we have kept a sustainable health care passed and and so that's that's really also exciting and it is in front of us for the future development.

And in terms of freight.

We continue to expand our fragrance portfolio you know, we're certainly seeing a pick up in expecting a pick up in and travel retail as it relates to fragrance and and fragrance is still a growing category and in Asia. So certainly during the recovery, we expect that our that fragrance trends will continue.

Two to grow particularly in the markets that are that are reopening now.

Okay.

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6947935 that concludes today's Este Lauder conference call I would like to I would like to thank you for your participation and wish you all a good day.

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