The Estée Lauder Companies held a Fiscal 2023 Fourth Quarter and Full Year Conference Call, which was recorded and webcast. Senior Vice President of Investor Relations, Ms. Rainey Mancini, introduced Fabrizio Freda, President and Chief Executive Officer, and Tracey Travis, Executive Vice President and Chief Financial Officer. Fabrizio Freda began by discussing the fourth quarter results, which saw an organic sales increase of 4%.

In fiscal year 2023, organic sales declined 6% globally, with impressive double digit growth in the markets of EMEA and return to growth in Asia Pacific. Asia travel retail, however, decreased 34% organically, and this disproportionately pressured skin care, which is the highest margin category. Despite this, the adjusted operating margin contracted modestly to 11.4%, and progress was made on sustainability goals and commitments.

The company has achieved a variety of sustainability goals, such as a CDP climate, water, and forest disclosure score of A minis and an A list for water. They are facing short-term headwinds in the Asia travel retail industry, but have four strategic imperatives for fiscal year 2024, which include returning to organic sales growth and margin expansion, increasing advertising investment, and leveraging their diverse portfolio of brands.

The four billion-dollar-plus brands of Clinique, Estée Lauder, La Mer and M.A.C. are all performing well, with M.A.C. being the best performing in fiscal year 2023. All of the brands have exciting new products and commercial innovations planned for the future. Clinique is deepening its connections with dermatologists, Estée Lauder is extending its Advanced Night Repair franchise, and La Mer is launching a Lifting Firming Serum.

La Mer is introducing new regiments focused on its iconic Miracle Broth to capitalize on the trend of night regimens. Jo Malone London and TOM FORD are expected to join the billion-dollar-plus brands tier, with TOM FORD having had successful double-digit organic sales growth in fragrance and makeup. Bobbi Brown Cosmetics and Aveda have also had strong growth in skincare and mainland China respectively, while The Ordinary has graduated into the tier of scale brands with double-digit sales growth.

The Ordinary had a successful year, with success in its hero product, increased sales from innovation, and a doubling of its TikTok followers. Le Labo, KILIAN PARIS and Editions de Parfums, Frederic Malle each had double-digit organic sales growth, with a compound annual growth of 30% over the last five years. Balmain Beauty is set to launch in the near future, and the brand is taking advantage of generative AI and its rich pipeline of new products. Clinical studies have been significantly increased to deliver impactful claims.

Estée Lauder has increased its scientific credentialing, presented research at the World Congress of Dermatology, and unveiled newness Breath Rule Longevity Age Reversal research. The company has returned to organic sales growth in mainland China and has expanded its prestige beauty share. The Chinese consumers have been the number one growth drivers of the industry throughout the decade and mainland China's fourth quarter organic sales were up double digit compared to one and two years ago. Estée Lauder has opened China Innovation Labs in Shanghai to drive growth with consumers globally.

In fiscal year 2023, the company made significant investments in the market, such as the opening of a China innovation lab in Shanghai and a new distribution center in Guangzhou. They also launched Aveda and Le Labo, with the latter's freestanding store in Shanghai redefining experiential shopping. The company also invested in brick-and-mortar and online stores, expanding their online reach with Douyin and creating live streaming content. This enabled them to realize over 60% organic sales growth and expand their online prestige beauty share by 2 points. Estée Lauder, La Mer, and Jo Malone London all ranked number one in their respective categories on different platforms. The organization also enhanced their capabilities for local coordination of go-to-market strategies to maximize long-term value and support brand equity.

The expected growth of the middle class around the world is an exciting implication for the business, as the emerging markets saw an organic sales growth of 20% in fiscal year 2023. In North America, the company is focusing on reaccelerating growth by launching a robust innovation pipeline, increasing engagement on TikTok, and expanding the brand reach in specialty multi. To expand their adjusted operating margin, the company is optimizing their mix, maximizing value, leveraging strategic investments, and unlocking cost efficiencies in their value chain.

Fabrizio discussed the successes the company had in the past fiscal year and their plans to improve profitability and return to organic sales growth in the next year. Tracey Travis then discussed the fourth quarter and full year results, highlighting the strong performance in Asia Pacific markets, particularly Mainland China and Hong Kong SAR, which have seen fewer COVID-related restrictions compared to the prior year. Despite this, the company is still facing challenges in their Asia travel retail business.

In the quarter, Estée Lauder saw over 30% organic growth in Mainland China and achieved 60% sales penetration. In EMEA, organic net sales decreased 15%, mainly due to the performance of their Asia travel retail business. In the Americas, organic net sales were flat, but The Ordinary performed strongly. Makeup organic net sales increased 13%, and Fragrance organic net sales rose 12%, with strong growth from Le Labo. This growth was driven by investments in brand activations, increases in in-store staffing, the success of hero products, and new product launches.

TOM FORD's net sales increased 6% in Hair Care and declined 3% in Skin Care, largely due to the pressures in the Asia travel retail business. Gross margin declined 330 basis points and operating expenses increased 70 basis points due to increased advertising and promotional activities. Operating income declined 66% and the effective tax rate was a negative 17.9%. The acquisition of the TOM FORD brand resulted in the creation of a new revenue stream through licensing arrangements with Marcolin and Zegna.

In fiscal 2023, the acquisition had a dilutive effect on EPS of $0.01. The year was more volatile than anticipated due to challenges in Asia travel retail and the US, but the recovery of sales was aided by investments in brand activations, in-store staffing, distribution expansion, and online capabilities. Net sales growth was strong in brick-and-mortar stores and specialty multi-retailers, while global travel retail represented 20% of reported sales and online net sales remained flat. Organic net sales fell 6%, primarily due to Asia travel retail, but nearly all other domestic markets in EMEA grew double digits. Fragrance net sales increased 14%, while Skin Care was more challenged in Asia travel retail and North America.

Net sales in Hair Care grew 6%, but Makeup was flat. Gross margin declined due to slower-than-expected recovery in Asia travel retail, and operating expenses increased 390 basis points due to the decline in sales. Operating income declined 48%, and operating margin contracted 830 basis points. Net sales decreased 53%, and diluted EPS decreased 52%, including the dilutive impacts from foreign currency translation and foreign currency transactions. Net cash flows from operating activities decreased due to lower net income, partially offset by lower working capital.

The company recently disclosed a cybersecurity incident and has since taken their systems back online. They have returned $1.2 billion to stockholders and invested $1 billion in capital expenditures. They anticipate growth in mainland China, travel retail, emerging markets, mature markets, and direct-to-consumer channels over the next few years. They are focused on the transition of key areas of their business and rebuilding their operating margin.

The company plans to return to consistent sales growth within their 6-8% long-term growth algorithm, and restore their operating margin. This will be done by leveraging their prestige pricing power, introducing accretive innovation, and improving operational efficiencies. In fiscal 2024, they expect to recapture lost operating margin at an accelerated rate, and continue to deliver net sales gains in Asia Pacific, Western and emerging European markets, and Latin America. They are aware of the macroeconomic headwinds in the Chinese economy.

This paragraph discusses the impact of the Asia travel retail business on the company's first half of the fiscal year, as well as the expected net sales growth and margin expansion for the full year. It also mentions the acquisition of the TOM FORD brand, the cybersecurity incident, currency translation, strategic price increases, discount reductions, and lower obsolescence, as well as production volume alignment and regionalizing the supply base in Asia.

The company is expecting a contraction in their margins in the first half of the year due to lower sales in their highly margin-accretive areas, but expects to offset this with gross margin expansion in the second half and a full year operating margin of 12-12.5%. They anticipate sequential margin expansion throughout the year, an effective tax rate of 27%, and diluted EPS of $3.50-3.75. Net cash flows from operating activities are expected to be between $1.7-1.8 billion, and capital expenditures are expected to be 6% of forecasted net sales. Investments will be made in distribution and online capabilities, manufacturing and distribution networks, and information technology.

The company has provided an outlook for fiscal 2024 which includes a flat quarterly dividend and the suspension of share repurchases in order to focus on deleveraging after the TOM FORD acquisition. For the first quarter, organic net sales are expected to fall 12-10%, with a diluted EPS of negative $0.31 to negative $0.21 before restructuring and other charges. The cybersecurity incident is expected to be approximately $0.07 dilutive to EPS. The company is confident that they have the right plans to return to their historical cadence of long-term sustainable sales and profit growth.

Tracey Travis explains that in the first and second quarter of last year, there was some disruption in Hainan, but there was still business in Hainan and Korea, resulting in a higher travel retail percent of mix. In the second half of the year, Korea and Hainan faced challenges, and this year, there is less traffic and conversion in Hainan than previously. This is impacting their Q1 compared to last year.

Tracey and Fabrizio Freda have reconfirmed the strategy for 2024, which focuses on building on their strengths and continuing to deliver great results in the global prestige beauty market. They anticipate that travel retail will get progressively better in the third and fourth quarter of the year, due to destocking and investments in markets such as China, Korea, and Japan.

Fabrizio and Tracey discussed the strategy for the next three years, which includes leveraging the growth of the market, building on strengths, fixing issues, and supporting the profit recovery plan. Fabrizio also answered a question from Dara Mohsenian about the visibility of the fiscal 2024 earnings guidance, the incremental investment needed to drive a recovery post-2024, and the ability to get back to peak historical margins in the next few years.

Fabrizio Freda and Tracey Travis have given guidance for their business and they have visibility and clarity in their plans. However, there is still external volatility, particularly in the Chinese market, that needs to be taken into account. They are confident in their guidance but there may still be volatility in the future. They are encouraged by recent signs of recovery, such as the return of travelers.

The company is taking actions to reduce production and inventory levels to improve gross margins. They are confident they can reach their pre-pandemic goal of 20% operating margins once the situation normalizes. They plan to accelerate the margin progression over the next few years, but they will not do so at the expense of hurting their brands or markets. They cannot yet give a specific timeline or number for when they will reach their goal.

Fabrizio Freda of Estee Lauder discusses how the company has increased collaboration between their local and travel retail teams in order to create value and develop brand equities in a more coordinated way. They have also implemented more analytics to better understand the channel dynamics, pricing differentials, and other factors in order to take the right decisions.

The brand health in China is strong, with the business growing 36% in the April-June quarter and a 2 point increase in online market share. Additionally, external research has confirmed that the brand is desirable. As for the rest of the markets, the business has seen a 17% growth rate, despite North America being flat. The success is attributed to the four very big brands, with two more on the way.

The company plans to be a $6 billion company by 2024 and their innovation remains strong, with a promising pipeline for 2024-2025. Execution in the regions has been improving and they have a plan to rebuild North America growth with a rich pipeline of newness, increased E&D investment, strategic pricing, and recruitment for mass.

Estée Lauder is focusing on commercial activities in North America to support its retailers and is investing in new technology and services. The company is particularly focused on its entry-price point brands, such as M·A·C, Clinique, and The Ordinary. Estée Lauder is also investing in luxury fragrances in North America, which have seen double-digit growth in the last 10 quarters. Regarding Hainan, Estée Lauder does not control the Daigou and reseller market, however they are expecting travel retail in Hainan to focus on selling to individuals, rather than relying on Daigou.

Fabrizio Freda states that their travel retail business in EMEA and the Americas is growing strongly due to the return of individual travelers, and the same is expected to happen in APAC. He also mentions that Hainan has experienced a disconnect in timing and a reduction in inventory levels which is having a short-term, temporary impact on their sales. However, they are confident that individual travelers will return and enjoy the fantastic shopping experience that has been created in Hainan.

The company is investing in completing their factory in Japan in order to create a local supply chain which will help them become more agile in managing a volatile backdrop. They have already done some pre-production runs in the current fiscal year, and they expect Japan to be able to fulfill all of the demand out of China by the end of the calendar year.

The factory will produce Skin Care products in fiscal 2024, but it will take a few years of ramp-up before it is fully operational. Additionally, the company has opened a temporary distribution center and is investing in technology to help with forecasting and inventory planning. These investments will help the company become more agile and better manage the shocks to the system.

Fabrizio Freda explains that it will take a couple of years to fully leverage the benefits of increased agility, but those benefits can be seen sooner with high-volume SKUs and brands. This agility will be implemented gradually, with the most urgent needs taken care of first, and eventually becoming an ongoing process in a couple of years. A playback of the call will be available until September 1.

This summary was generated with AI and may contain some inaccuracies.