Estee Lauder Cos. Inc (EL) — Q2 2020 Earnings Call Transcript

Good morning. On today's call are Fabrizio 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 other reports filed with the SEC, where you will 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. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. During the Q&A session, we ask that you please limit to one question, so we can respond to all of you within the time scheduled for this call. And now, I'll turn the call over to Fabrizio.

Thank you, Rainey, and good morning to everyone. We delivered exceptional results in the second quarter, which I will elaborate on shortly. But first I want to acknowledge how concerned we are for all the people, including our employees and consumers who are affected by the recent outbreak of the coronavirus in China and around the world. Our hearts go out to them and I will discuss what steps our company is taking to support them in a few minutes. In the second quarter, our prestige beauty portfolio resonated with consumers globally. Our successful strategy based on multiple engines of growth once again helped fuel our performance as we grew in all regions and all major categories. Skin care rose in every region as did fragrance and hair care while makeup grew internationally. The company generated 16% constant currency sales growth, the highest organic growth rate in 20 years in the seasonally largest quarter of our fiscal year allowing us to gain significant share in global prestige beauty. While our second quarter continues to be boosted by holiday, it now also includes another important event driver, Singles Day. Our advanced planning for these events delivered strong growth across our business led by the Asia/Pacific region, the global online and travel retail channels and the skincare and fragrance categories powered by the extraordinary performance of Estée Lauder, La Mer and our luxury and artisanal fragrance brands. With disciplined expense management, we leveraged our sales growth into a 21% increase in adjusted diluted earnings per share. Our strong performance reflected smart and deliberate investments in the best opportunities worldwide including focused product innovations, increased advertising, enhanced digital marketing, better use of data analytics, and greater local relevance. We attracted a broader group of consumers and continued to build strong repeat rates for our products, driving greater loyalty. During the quarter, we completed the acquisition of the Korean-based Have & Be Company after having taken a minority stake four years ago. Its Dr. Jart+ skin care brand has grown rapidly with cutting-edge innovation and excellent speed to market capabilities. We are optimistic about our first acquisition in Asia and we see many opportunities to further cultivate the brand globally as consumer interest in skin care continues to expand. Our momentum continued in the first three weeks of January. But as you all know, the global environment has changed meaningfully following the outbreak of the coronavirus. Our thoughts are with individuals who have been diagnosed and those who are mourning family members in France. The Chinese government has responded in a very serious manner along with many other countries and organizations and they are working diligently to address and contain the outbreak and help those afflicted. As a company, we are focused on the well-being of our employees in China and globally and are taking appropriate measures to protect them based on guidance from local authorities and the World Health Organization. Our consumer and business partners in China and elsewhere are also top of mind and we actively engage in ways to support them. We are pledging RMB5 million to support coronavirus relief efforts for needs across China. We are matching donations of U.S.-based employees to assist with the outbreak. We are working on various support initiatives to assist people in their recovery. Over the past 10 years in my role as CEO, I've made numerous trips to many regions of China. I met with our local employees, talked to consumers of all ages and conferred with our business partners. I travel all over to learn more about this beautiful country and its wonderful people. My heart goes out to the citizens of China during this difficult time, and I look forward to my next trip there hopefully in the near future. Although it is difficult to anticipate the full impact of the coronavirus on our business, we expect the next couple of months will be very challenging. Chinese consumers in many big cities are staying home, and retailers are closing stores or limiting hours in an effort to help contain the spread of the virus. Additionally, global travel is being restricted, and the effect is being felt beyond China, into major travel retail corridors and large tourist cities. Given what we know now and our experience with past epidemics, we believe our business will gradually recover towards the end of the fiscal year. We stand ready to invest to facilitate the recovery as soon as the market supports it, leveraging the flexibility of our resource allocation and our multiple growth drivers. We remain committed to China and to the Chinese consumers for the long term, and plan to increase our R&D investment in the market to drive both breakthrough, prestige beauty innovation for China, the Asia/Pacific region, and the rest of the world. Reflecting China's leadership in science, we will expand upon our existing in-market capability and build a new state-of-the-art innovation center, complete with the latest technologies and tools. This facility will also highlight our passion and commitment to quality, sustainability, and employee wellness. Our enhanced capability and capacity will ensure we meet the needs of Chinese and Asia consumers, with local relevance and local trends, as well as creativity, agility, and speed. These investments aim to sustain the long-term development of our company in China and around the world. We will continue working to advance this new development and look forward to sharing more details in the future. Turning back to the second quarter results, the Estée Lauder brand was again a star in our portfolio. The brand grew strong double digits globally in both skin care and makeup, rising in every region, powered by its main hero franchises, including Advanced Night Repair as well as Re-Nutriv, Revitalizing Supreme, Micro Essence, and Double Wear. This is a beautiful example of our multiple engines, not only winning across many brands but also within a big brand. Re-Nutriv, Estée Lauder's luxury skin care line delivered superb results, supported by targeted marketing with the luxury consumer, enhanced merchandising, and desirable innovation. Looking now at our geographic results, sales advanced in every region with strength across categories. In Asia/Pacific, virtually every market grew, led by China, which accelerated, generating strong double-digit growth as all our brands, category, and channels advanced. We had terrific growth from smaller cities in China, which are becoming a greater part of our business and a promising long-term growth driver. We expanded into two new cities, bringing our total to 123. Our online business in China more than doubled, elevated by well-integrated online and offline campaigns for Singles Day. The Estée Lauder brand was among Tmall's best performers for the event, while M•A•C, La Mer, and Jo Malone London each excelled in their respective categories. Our brand expansion strategy on Tmall was a distinct advantage. Following Tom Ford Beauty's launch on Tmall in 2019, the brand executed its first Singles Day to tremendous success in both fragrance and makeup. Its performance was twice that of its Tmall launch day, which was our biggest launch ever on the platform. Chinese consumer interest in the prestige fragrance category is rising and we are nicely positioned with our wide portfolio of luxury fragrances. Jo Malone London and Tom Ford Beauty excelled in the quarter, helping to further diversify our business in China. We plan to launch additional luxury fragrance there later this year. We delivered strong growth in our other emerging markets, outside of China, led by terrific results in Russia, India, Thailand, and Brazil. In the quarter, we continued to invest for growth and attract new consumers. For example, Brazil is the fourth-largest market globally for hair care, and we launched Aveda, our 10th brand there. We are showcasing the brand's historical commitment to sustainability, the environment, and botanically-based product with a salon in São Paulo that includes sustainable elements. Across Europe, the Middle East, and Africa, Estée Lauder, M•A•C, Clinique, and La Mer, our four biggest brands, prospered demonstrating the appeal of established brands that have broad exposure to multiple subcategories and compelling innovation. Every category advanced in the region. Our skin care brand led the growth with sought-after newness from La Mer, Darphin, and Origins. The U.K. grew modestly for the second consecutive quarter in a difficult environment and several of our brands gained share. Our growth strategies are showing promise amid macro industry-specific headwinds. In North America, we made good progress towards stabilization of the business. We leaned into our multiple engines of growth, leveraging our successful skincare and fragrance franchises during the holiday season in light of industry challenges in makeup. There were several bright spots. Brands representing about half of our sales grew and we had gains in the specialty-multi and online channels. In fact, La Mer delivered record Black Friday sales on its own site, driven by unique product assortment and an influencer-led holiday campaign. As we work to rejuvenate the makeup business in North America, we are creating products that leverage consumer insight from our enhanced data analytics. For example, we learned consumers want products that combine skincare benefits with makeup. In response, the Estée Lauder brand just launched Futurist Hydra Rescue, a new moisturizing foundation, combining the positioning of our winning Futurist franchise in China with consumer needs in North America. The launch is off to a very strong start, with high ratings and reviews. Looking now at the channels, our global online business delivered stellar results. Our brand sites, third-party sites, and retailer sites all grew double digits, with broad-based strength across regions. Our online business was vibrant globally around Cyber Monday, as our brands offered well-received products and set the important holiday gifting season. We continue to invest in our excellent growth prospects online. We launched our brands on more third-party sites which are rising in popularity, deployed new digital payment technologies across several of our brand sites in the U.S., and expanded our loyalty programs. Our engaged content has increased the time consumers spend on our brand sites and traffic has grown, increasing the inherent media value these sites provide. Travel Retail also continued its momentum. Our top eight brands grew double digits at retail, with strengths in skin care and our luxury and artisanal fragrance brands growing strongly, aided by expanded distribution in the channel. Innovative pre-retail campaigns, unique retailers' activations, and effective advertising all contributed to fantastic results. The pre-retail segment of Travel Retail excelled in the quarter and is becoming an increasingly important part of our business. Pre-retail enables us to engage with consumers before they travel, build brand equity and desirability, and drive conversion. When tourism and travel resume following the containment of the coronavirus, we anticipate that pre-retail will continue to grow. Another important highlight this quarter was the publication of our 2019 Citizenship and Sustainability Report. Last March, we announced new goals and the report details our vision and progress. One of our goals is to promote ingredient transparency across our brands, and Aveda led the way with an ingredient velocity on its websites. Other brands will soon follow. Innovation is the core of our company and has once again helped drive our performance, accounting for over 25% of sales. We have exciting innovation from our four biggest brands coming in the second half of our fiscal year, many in their hero franchises. We believe these launches will be well received by consumers globally, and these important franchises have high loyalty. We are pleased by our strong start in the first half and we are now focused on managing effectively throughout the coronavirus outbreak. We are determined to serve our consumers in the best ways possible. We believe that the efforts of the Chinese government along with leadership from around the world to contain the outbreak will prove effective. I want to thank our employees worldwide for their extraordinary efforts working through this challenging time, while supporting each other, our consumers, the communities where we work, and our business. Their grace and agility are a testament to our company culture. Now, I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning, everyone. Certainly, our thoughts and best wishes are with everyone managing through a very difficult situation in China and globally. We are committed to supporting our employees and other stakeholders while we also manage the business impact as best we can during this time. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call, and net sales growth numbers are in constant currency. We acquired Have & Be, the owner of the Dr. Jart+ brand, towards the end of December. The results for the new brand will be recorded in future periods on a one-month lag, so you can expect operating results from Dr. Jart+ to be reflected in our fiscal third quarter for the first time, including the impact of purchase accounting and the interest expense on the debt we issued largely to fund this acquisition. So starting with the quarter results. Net sales for the second quarter rose 16% driven by strong growth in our international regions and improvement in North America. Sales growth in Asia, travel retail, and online continue to exceed our expectations. From a geographic standpoint, our Asia Pacific region net sales rose 30% with broad-based growth across the region. Sales in Greater China accelerated, rising very strong double-digits. Our sales in Mainland China continued to deliver broad-based growth across cities, brands, categories, and channels, and our brands saw record results on Singles Day. As expected, sales on Hong Kong declined more than 20%. Among developed markets in APAC, we again delivered double-digit sales growth in Korea this quarter. Our sales in Japan rose mid-single digits despite the October 1st VAT increase last year that contributed to double-digit growth last quarter. Emerging markets in Southeast Asia grew high-single digits led by Thailand. Net sales in our Europe, the Middle East, and Africa region rose 18% with most markets contributing to growth. Our global travel retail business rose strong double digits driven largely by like-door growth, the continued rapid development of online pre-ordering, and the successful introduction of newer brands like Le Labo and KILIAN. Emerging markets in the region grew double digits led by India and Russia. Western European markets grew low to mid-single digits led by Italy, Iberia, and Germany. Net sales in the Americas rose 1%, a significant improvement from last quarter. Skin care and fragrance showed good growth driven by Estée Lauder, Origins, and La Mer as well as strong holiday performances from Jo Malone and Tom Ford. Initial shipments of Estée Lauder's new Futurist Hydra Rescue Moisturizing Makeup launch helped to partially offset the overall continued weakness in the makeup category. In North America, sales rose high-single digits across all our online channels. Our sales in the specialty-multi channel grew double digits, while the brick-and-mortar department store business remained challenged. From a category standpoint, skin care once again led growth this quarter. Net sales accelerated to 28% growth with strong contributions from Estée Lauder, La Mer, Origins, and Clinique. Innovations such as Estée Lauder Advanced Night Repair Intense Reset Concentrate, La Mer The Regenerating Serum, and Clinique iD BB-gel contributed incremental sales and supported their hero franchises. Net sales in makeup grew 7% led by Estée Lauder, Tom Ford, and Bobbi Brown. Solid innovation and support in foundation and lip products, as well as special holiday sets and products drove growth in the category. Sales of fragrances grew 9% driven by strong holiday activations at Jo Malone London and the launch of Metallique from Tom Ford. Fragrance sales grew across all regions but were strongest in the Americas and in Asia. Our hair care sales rose 5% driven by the launch of the Nutriplenish line of products from Aveda and improvement at Bumble and bumble. Our gross margin increased 20 basis points compared to the second quarter last year. Favorable pricing and mix was partially offset by the impact of the incremental tariffs and higher obsolescence costs. Operating expenses as a percentage of sales improved 130 basis points. We continue to leverage higher sales and greater efficiencies in our selling model and store operating costs to fund advertising and strategic investments in technology and other capabilities. Operating income rose 23% and operating margin increased by 150 basis points. Adjusted diluted EPS of $2.11 increased 21% compared to the prior year and the currency translation impact was negligible. EPS was higher than expected due to the stronger sales growth as well as disciplined expense management and was partially offset by a slightly higher tax rate. During the quarter, we acquired the remaining stake in Have & Be, the Korean-based skin care company. The transaction resulted in a one-time gain of $576 million, primarily related to the re-measurement of our previously held minority equity investment to fair value. We also recorded $777 million of impairment charges related to three of our four makeup brands, reflecting the continued challenges in the makeup category that have been most prevalent in North America. While the market momentum for makeup has slowed in the near term as we have previously discussed, the growth opportunities and the strategic value of these brands remain compelling as evidenced by our increased share and capability in specialty-multi retail, the enhanced social media expertise of the brand, and an increased consumer base of Gen-Z and millennials. Turning now to cash flow. For the six months, we generated $1.26 billion in net cash flows from operating activities, which was roughly flat with the prior year. Higher earnings were offset primarily by the timing and level of accounts payable. We invested $291 million in capital expenditures with cash and $1.04 billion to acquire the remaining equity interest in Have & Be, which was funded with debt. We also continue to return cash to stockholders by utilizing $813 million to repurchase 4.3 million shares of our stock and $330 million to pay dividends. So we ended the first six months of the fiscal year with strong net sales growth of 14% in constant currency and adjusted EPS growth of 21%, a tremendous reflection of the hard work of our teams as well as strong consumer momentum that we have in our markets. So now let's turn to our outlook for the balance of this year. The strong performance in the first half of our fiscal year, our multiple engines of growth strategy, and the greater financial flexibility and agility we have built into our operating model are expected to help us effectively manage through the short-term disruption caused by the coronavirus outbreak. Due to the rapid escalation and the fluidity of the situation, it is both complex and difficult to predict the timing and corresponding impact on our business. Therefore, we are not giving explicit guidance for the third quarter. We also remain mindful that a variety of macro risks such as ongoing trade tensions and continued challenges in Hong Kong's retail environment could impact our second-half results. For the fiscal year, we now strive to achieve net sales growth of at least 6% to 8% in constant currency. This range is before the impact of one point of growth from the inclusion of sales from Have & Be. Currency translation is expected to negatively affect reported sales growth by 1 percentage point reflecting weighted average rates of $1.10 for the euro, $1.27 for the pound, and 7.03 for the won for the fiscal year. With this sales guidance, EPS is expected to range between $5.60 and $5.70 before restructuring and other charges. This includes approximately $0.05 of dilution from currency translation and $0.18 dilution from the Have & Be acquisition. In constant currency, we expect EPS growth of 6% to 8%. Excluding the dilution from Have & Be, EPS growth is expected to be at least 9% to 11%, which remains in line with our long-term objectives. For the second half, net sales are expected to increase approximately 1% to 2% in constant currency. Currency translation is expected to negatively impact growth by 1 percentage point and the inclusion of Have & Be is expected to add 2 percentage points. In terms of cadence throughout the second half, we have anticipated the greatest negative sales impact from the coronavirus to be in the third quarter followed by a gradual recovery in the fourth quarter. We are severely curtailing discretionary costs while continuing to support critical areas of growth. Leading Beauty Forward has reduced our percentage of fixed costs in our operations, which gives us greater agility to manage more effectively with slowing sales. We expect the belt-tightening to have the maximum benefit in the fourth quarter. EPS is forecast between $1.86 and $1.91 before restructuring charges. This includes approximately $0.03 dilution from currency and $0.17 dilution from Have & Be, which includes some impact from the coronavirus outbreak, purchase accounting, and interest expense on the debt issuance as I mentioned previously. While our outlook for the balance of this year is uncertain, we do remain quite optimistic about the long-term growth opportunities for the company. We believe we can manage through this difficult health crisis while maintaining the agility to invest as needed and regain our momentum once recovery is established. On behalf of the entire Estée Lauder Companies, we extend our deepest well wishes to those who have been affected and thank everyone for their extraordinary efforts to manage during this period, particularly our incredibly hardworking and wonderful team in China. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

Hi. Good morning, guys. So just was hoping for a bit more clarity on the coronavirus and how you guys are thinking about the potential impact longer term. I guess what we've seen with past epidemics is usually beauty demands come back pretty quickly after a couple of quarters. I know there's not a lot of visibility here and the duration of illness is obviously still a big wildcard. But just to relay any initial thoughts or context on if you think this could be an issue that impairs longer-term growth as we look out over the next few years? You talked about a gradual recovery through fiscal year end. Should we expect things to sort of ramp up pretty quickly after that? Or how are you thinking about it in terms of longevity of impact? Thanks.

So obviously, we don't know about the specific medical health recovery timing, which is the unknown at this point. But we are in agreement with your assumption, which is basically this will have an impact in the short term and the definition of short term is what is unknown today. But then after this period, there will be a recovery and people will come gradually back to normal habits. So, we do expect to recover our momentum at the end of the health crisis. And in terms of our assumption today, we are in line with what you said. We assume the two quarters will be affected by the impact, and we expect a normalization in fiscal year '21. That's our assumption today. The other important thing is that we are ready to stay close to the current mitigation of the issue and resolution of the health crisis as we are doing, supporting our China team and all the activities that the government is putting in place in China today. We will also stand ready to support the recovery when it happens and to invest behind it as required by the market opportunity but most importantly, by the needs of rebuilding the right consumption of Chinese consumers in the name of the economic development of China.

Great. That’s helpful. Thank you.

Great. Thanks. Good morning. I was hoping we'd talk actually a little bit about the Americas because the strength this quarter, the inflection was very notable. So I was wondering, if you could talk a bit more about how much you think this is tied to just being really proactive in promoting and getting behind, I should say, fragrance and skin and holiday being the key to this. Or are you starting to see other lift that you think can carry through past holiday? And then in part with that, of course, we've had the news about incremental Macy's door closures this week. So, if you can just comment on the outlook for the rest of the year in the Americas. Thanks.

This quarter has helped stabilize our North America business, aligning with the strategy we shared on Investor Day. We are dedicated to continuing this stabilization work in the coming months. This quarter, we utilized more detailed market insights to implement our plans and ensured local relevance in our activations. Additionally, we acknowledged the overall softness in the makeup market, prompting us to boost our activity in skin care, especially fragrances during the holiday season, which we adapted effectively to the situation, yielding positive results. We adjusted our growth strategies accordingly, contributing to our success. Our innovation pipeline remains robust, with improved impacts from our innovations. We will persist in this direction, although we still face certain challenges. It’s important to clarify that the softness in makeup, particularly color makeup, persists. As noted, the closure of retail stores where we hold significant market share will proceed, and we fully support Macy's strategy of concentrating on high-performing locations while gradually reducing the number of smaller, lower-performing ones. While we endorse this strategy, it will be essential to ensure we retain consumers for our brands. This will be a challenge, but we will strive to achieve it. We must recognize our extraordinary efforts to improve our business model, which are yielding results, but also acknowledge the ongoing headwinds we face. Therefore, our strategy remains focused on stabilization at this time.

Great. And just as a follow-up, how are you thinking about the impact of Chinese travelers not visiting the U.S. over the next several months just in terms of the outlook?

That's actually a good point. We assume that there will be obviously an important reduction of Chinese travelers not visiting the U.S. in the next at least two or three months, and this will have a negative impact, obviously, on the sales to Chinese tourists. Frankly, in this moment, we are assuming in our guidance also a slowdown in any travel population. To be clear, in this moment because of the coronavirus global concern, tourists in general are being reduced temporarily. So, we are taking this temporary assumption of a decrease into account in our guidance.

Okay. Great. Thanks so much.

And I just want to add as it relates to our guidance. I mentioned the range of $1.82 to $1.91, which is within our press release. I think I mentioned a different number in our guidance for the second half.

Thank you for taking our question and congratulations on a strong quarter. I would like to ask about the Dr. Jart+ dilution. Can you explain how much of the $0.18 is one-time and when you expect that to diminish or potentially turn into an accretive situation? Additionally, as you consider the U.S. numbers, do you think the retailers you partnered with for the holiday strategy are ready to move beyond makeup to focus more on skin care and fragrance? They seem eager to continue prioritizing makeup despite recent warning signs. Have they acknowledged that skin care will be the key driver moving forward, and are they prepared to reduce their makeup offerings more significantly? Lastly, concerning the gains in skin care and fragrance, do you see those as lasting improvements with dedicated shelf space as we approach 2020?

Yes. So, starting with the Have & Be dilution, we obviously have the step-up in inventory which is one-time depends on how you're treating the interest expense which is also in that number. What I would say, Michael, is that we expect that Have & Be will be, if you think forward, relatively flat including purchase accounting. So, eliminating those onetime items next year and accretive the following year.

Okay. The makeup question is the second question?

Sorry could you repeat who was the subject to the makeup when you said they? I didn't understand.

Yes, it seems there was a significant acceleration. Clearly, in North America, we can observe your numbers. It appears that the figures you received from specialty-multi, which has been a strong growth area for you in recent years but had recently slowed down, showed considerable improvement this quarter. It seems like you collaborated with them on skin care. I'm curious if they have shifted their mindset to prioritize skin care as a key growth driver and are willing to allocate more shelf space to that category moving into 2020.

I think everyone recognizes the significance of skin care right now, and we are collaboratively working to maximize its potential. Skin care is seeing growth, particularly with instant results and the combination of skin care products with makeup. While you mentioned shelf space, which changes more gradually, innovation programs are reflecting a lot of this activity. There is increased engagement through social media and advertising for skin care, which is contributing to our results. Makeup remains a substantial category, and specifically, face makeup like foundation continues to perform well. The area that has softened is color makeup. Importantly, we are focusing on enhancing our skin care fragrances and driving future growth in makeup by accelerating innovation in that category to support our retail partners. To clarify, we are not abandoning makeup; rather, we are acknowledging that, in the short term, we are prioritizing other categories while improving makeup innovation to revive consumer interest.

Thank you very much. Congrats on getting North America back to positive.

Thank you.

Great. Thanks. Good morning and let me add my congratulations. I guess my question is around Amazon. There's been some press out recently talking about them potentially evolving their model to launch some luxury brands, maybe using a concession model. If something like this was to play out, would you ever consider or reconsider, excuse me, Amazon as a channel for luxury beauty? And then just a follow-up on China. Can you share, Tracey, maybe what percent of physical doors have been shuttered? And are you seeing any major change in trend in the online business in China since the outbreak has escalated? Thank you.

Okay. On the first question, the answer is no. At this point, we are not considering Amazon as a channel for our luxury beauty products and we are focusing on our current channels and our current partners to build a continued stabilization in North America of our business. As far as the China question, the number of physical doors, I'll let Tracey go with that.

Yes. So, as you can imagine, it's quite fluid. And one of the things that we've seen is the Chinese New Year extended for many of our employees. Our stores have closed as malls have closed. So, very recently two-thirds of our department store doors were closed, and the remaining doors were on reduced hours. Now that could change next week, so this is a very fluid situation.

And on the second part of the China question, which is the online, absolutely the online channel is very strong in China and as we said in the second quarter. But in this moment also online is suffering because in this moment in the middle of the outbreak, the delivery system in homes and in the big distribution centers also people are now working like in this moment until February 10th, many people with non-essential activity in factories and other situations have stopped. The same is for distribution centers and the same for other activities. So online, at least in the short term, is having the same issues as brick-and-mortar. In terms of the role of online in the recovery in the future, we are optimistic that online will play a very strong role in the recovery when the recovery happens.

Thank you for that context. All the best.

Thank you.

Hi. Good morning. So, first part of my question just wanted to follow up on Erinn's question. Can you give us a little bit more texture as to how to disaggregate how Mainland China sales are performing versus the travel retail component of the business? Primarily it's how we think about modeling the back half of the year. One of those businesses is housed within the EMEA segment. The other business is clearly housing APAC. So just want to get a little bit more texture as to which ones being more impacted real-time. And then Fabrizio, if you use history as a guide post here, how do we think about once the issue is called contained what is like the recovery path off from that moment forward? Is it typically from what you've seen before three months, four months for travel retail to come back online from flights being booked? Any help would be appreciated. Thanks.

Yeah. So the short answer to the first question is, at this moment, travel retail is the most impacted channel. Because if you think about what's happening, more than 60 airlines just closed their flights. So in this moment, the travel in and out of China is suspended in the large majority of cases. So there is a lack of traffic in and out of China. Second, in general, tourism at this moment is more prudent because it's a global issue. The outbreak is a global concern. Many people are concerned about traveling and are reducing their choice or postponing travel. This is particularly the case with touristic travel. Then there is a third factor; many companies have banned travel to any place in China, but also to any other place where there is the virus. And so business travel is being reduced not to mention the many companies are reducing business travel for cost containment reasons. So in this moment, the amount of travel in airports is being reduced and traffic is significantly down. That's the biggest impact. The second biggest impact is obviously China Mainland itself and Hong Kong, which have significant reductions as well. So I would say that the Greater China area, because of all the reasons that we have already discussed, is where we expect an impact in the short term. The second part of your question is the recovery. Now the recovery, we know what you know; we have studied all the previous cases in all the previous situations. What we see is that the recovery tends to be hockey stick-like, meaning when things are back, they’re back especially in the traveling sector. When traffic is back, traffic is back and people buy. The thing that we can do more in terms of business learning that we're applying or during the period before the recovery in travel retail will be very important to push conversion, meaning that travel retail is built by traffic and by conversion. Conversion is an area where we're making many improvements. So in this period of transition where traffic will be low, we are reworking our plans to use conversion as a key mitigating element. We are preparing for future recovery plans when the time arrives. The last point I want to make is that we will try to tune the recovery to the recovery of the Chinese economy and the Chinese population. We don't want to look at this just as a business. We want to look at this as a contribution to the recovery of the country and really supporting our employees there. The same will happen in travel retail where, for example, some of our customers and retail partners are Chinese. We are going to stay close to them to contribute to the recovery of the travel retail business to ensure that our long-term retail partners benefit from the recovery as much as possible and to restart the right process and regain momentum not only for us but for the entire industry.

Thank you. Good morning. And I just want to echo the congrats on your results.

Thank you.

As a follow-up on North America and your comments about the mix, it seems natural that during the holidays, there is a greater focus on giftable skincare and fragrances. Additionally, it appears you are wisely increasing marketing efforts for those lines. Do you believe that innovation and momentum will continue to grow over the next few quarters? Or could we see some seasonal positive effects in the second quarter? Thank you.

So I'll start and then Fabrizio can also add his comments. We are progressing towards stabilization in North America. Clearly, it was a strong holiday and a strong second quarter for us in North America and in other parts of the globe. Our teams have worked awfully hard to make this holiday season a very good one and consumers responded, and we're very happy about that. As we look at the back half of the year, Fabrizio touched on the fact that we do have tourists that we expect that that business to be a bit softer given the situation that we're managing through globally. I would also say that North America is making progressive progress. However, I would not expect that the second quarter would necessarily be reflective of continued acceleration from there. But the North America team is executing against all of the strategies that were laid out last year, and we're seeing some good outcomes from that. What we told you last quarter was that North America, we expect certainly to have better performance this year than we did last year. So that is progression towards stabilization.

That's helpful.

Thanks, and good morning everybody. Just wondering if you could quantify the online percentage of sales from China. And related to that, also if you could just quantify the impact benefit from e-commerce accelerating consumption and the enhanced availability in China. In other words, previously consumers would have to visit cities selling the product and now you're up to 123. But e-commerce obviously makes the product available everywhere. So maybe if you could just talk a bit about how you think about that dynamic as having helped past tense sales and how you think about that on a go-forward basis and maybe if you think about some of those Tier 3 to 5 cities, which didn't readily have product readily available, but now people can order online. How do you think about that in terms of accelerating demand, maintaining that demand, and kind of how it will impact future growth?

Yes. No, that's a very good question. As I commented a lot of times on this subject, this is a very important phenomenon because today we have physical distribution in China in 123 cities with our most distributed brands which are Estée Lauder and Clinique and much lower city coverage with the other brands, which are still on a growth trajectory. So it is a lot of physical distribution potential in the long-term still untapped. But at the same time, we know there is demand in China now in over 600 cities. So there are over 450 cities where there is strong demand and there is not yet physical distribution of prestige luxury and for sure prestige luxury of Estée Lauder brands. So this demand gets filled by online and gets filled by when there's consumer travel also travel within China like to amazing tier 3 markets like Hainan Island where they can access the products or when they travel for internal business or vacation to places like Beijing or Shanghai. So that's the situation. But online fills a lot of these cities and that's why it is growing and is very strategic because it gives us access to these consumers in a very productive way. The other important positive consequence of this dynamic is that the brick-and-mortar can remain very productive. It can remain very focused where there is the right productivity and online can cover productively the rest. So this is a good phenomenon that continues to grow. It is definitely one of the reasons behind my comment that we are having better results also in the tier 3 and tier 4 cities also where physical distribution has not yet arrived. In terms of percentage of sales, China has the highest percentage of sales online compared to other markets, and it's on the high side and it's continuing to grow.

Thanks. Thanks for the question. Good morning, everyone. I just wanted to follow up on Fabrizio. How much flexibility do you have to turn up the dial on really focusing on some of those lower tier cities that you just referenced? I'm just thinking about as kind of the year progresses and if you really wanted to turn up the dial to generate sales growth in some of these other tier cities. Do you have that kind of control in the near term? Or is it a much longer-term burn?

We have good control over our online presence, particularly through partnerships like Tmall and our own online activities. It’s important to note that in the luxury sector, we focus on selective distribution, which means building demand that often outstrips supply. This gradual approach is essential for us, especially as demand is currently surging, partly driven by social media. Unlike traditional advertising that was localized, social media allows us to reach a national audience, which creates a dynamic where demand typically exceeds supply, a hallmark of the luxury market. We are committed to fulfilling this demand while maintaining our focus on desirability and high quality. We prioritize selling quality and comprehensive experiences rather than just products, ensuring we provide the best service to our consumers. In short, we are progressing at a gradual pace, but we do have the capacity to ramp up efforts as market opportunities arise.

And just a quick follow-up. Of the 450 cities you cited in China's opportunity, how many do you believe Estée Lauder as a company has a very good handle on demand? And just a general consumer insights in those cities?

So I will not give you specific numbers but I can tell you that we have the consumer data, so we know the number of consumers that are buying from different cities. We use this data analytics to decide where to open physical distribution. So we use the demand and the elements of the strength of the demand from the cities also to judge our physical distribution strategy to make sure that we continue to provide better high-touch services to the consumer when the demand is sufficient to be productive and to offer the quality and the service that we need to offer. So it's a gradual development of quality service.

Very helpful. Thank you.

Welcome.