Estee Lauder Cos. Inc (EL) — Q4 2022 Earnings Call Transcript

Hello. 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 our 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. Unless otherwise stated, all net sales growth numbers are in constant currency and all organic net sales growth excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and third-party platforms. It also includes estimated sales of our products through 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 will turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. I'm pleased to be here today to discuss our record results for fiscal year 2022 and outline our expectations for fiscal year 2023. We successfully utilized our strengths during the ongoing pandemic, the invasion of Ukraine, and rising inflation. Our growth strategy, financial flexibility, and exceptional team enabled us to achieve record performance. Simultaneously, we invested for future growth, reflecting our belief in the vibrancy of prestige beauty. We surpassed expectations in our fourth quarter, achieving organic sales growth of 8% for fiscal year 2022. Reported sales increased by 9% despite foreign exchange pressures. Our adjusted operating margin rose by 80 basis points to a record high of 19.7%. We achieved this improved profitability even as our growth sources diversified beyond our highest margin categories. Fragrance, makeup, and hair care experienced double-digit sales growth, complementing our strong skincare business. Notably, nine brands achieved double-digit organic sales growth for the year despite the significant impact of COVID-19 in Asia-Pacific during the fourth quarter. La Mer, Jo Malone London, and Le Labo highlighted the strength of our portfolio across our various brands. M·A·C, Estée Lauder, and Clinique drove the resurgence of makeup, while Jo Malone London and Tom Ford Beauty elevated fragrance with impressive growth. Our geographic diversity has been a significant advantage during the pandemic, allowing us to create and seize growth opportunities globally. Asia-Pacific led growth in fiscal years 2020 and 2021, while the Americas and EMEA fueled growth in 2022 as Asia faced renewed pressure from the virus. Our annual reported revenues of $17.7 billion exceeded pre-pandemic levels by 19%, supported by organic sales growth and strengthened by our acquisitions of Dr. Jart and DECIEM. Over the past three years, our adjusted operating margin improved by 220 basis points. Our trusted brands with standout products and sought-after innovation have thrived, supported by our increasingly flexible cost structure. Our focus on standout products has proven to be a successful strategy, and these high-repeat products have become a more significant portion of our business since fiscal year 2019. We have continued to innovate to propel our strategy further. Innovation has been a crucial growth driver this year, representing over 25% of our sales again. Our new offerings have met consumer demand due to our strong data analytics, R&D, and creative expertise. Breakthrough launches this year, such as La Mer’s Hydrating Infusion Emulsion, Estée Lauder Advanced Night Repair Serum, and Macstack Mascara, have driven positive media coverage and new customer acquisition. Regarding category performance, fragrance grew by an impressive 32% organically for the year, with brands like Jo Malone London, Tom Ford Beauty, Le Labo, KILIAN PARIS, and Editions de Parfums Frédéric Malle also showing strong double-digit growth across all regions, including significant success in travel retail in EMEA. The luxury collection launched by the Estée Lauder brand contributed to double-digit gains, affirming our strategic focus on this profitable segment. Consumer behavior during the pandemic reinforced fragrance as an aspect of self-care and solidified online as the preferred destination for exploring, learning, and purchasing. Our brands adapted to leverage these new market dynamics, resulting in substantial engagement in freestanding stores while online sales continued to thrive. Makeup remained a significant growth driver in fiscal year 2022, with strong double-digit organic sales growth in the Americas and EMEA offsetting a decline in Asia-Pacific. As Western markets reopened, leading to increased social events, the resurgence of makeup began. Our brand excelled with innovative products emphasizing performance and ingredient narratives. We utilized increased foot traffic in physical stores to reestablish our valued in-store services. Hair care emerged as another valuable growth engine, achieving double-digit organic sales growth thanks to each brand's unique value and market strategy resonating with consumers. The skincare category was most affected by the resurgence of COVID-19 in Asia-Pacific in the second half of the fiscal year, but we still managed solid results as La Mer, Clinique, and Bobbi Brown excelled, countering pressures from other brands. La Mer had a remarkable year, with consumers drawn to its iconic products and innovations like the Hydrating Infused Emulsion and upgrades to The Treatment Lotion. Sales for Genaissance de la Mer increased as consumers turned to the brand's ultra-luxury offerings for quality and effectiveness. Clinique and Bobbi Brown also succeeded in skincare by executing our hero strategy effectively to foster loyalty and repeat purchases. Clinique’s standout products across multiple categories provided winning results, while Bobbi Brown’s hero-driven approach significantly boosted its skincare sales. Both brick-and-mortar and online channels contributed to growth this year as we launched various initiatives to strengthen our omnichannel capabilities. Highlights include a strong rebound in brick-and-mortar sales in the Americas and EMEA, thanks to specialty freestanding stores and department stores. Our Post-COVID Business Acceleration Program improved our brand-building efforts, making our brick-and-mortar presence more productive. Online sales increased organically in the mid-single digits, especially with double-digit growth in Asia-Pacific. DECIEM's strong online presence helped boost reported sales significantly. Our online sales channels now exceed double their size compared to pre-pandemic fiscal 2019. China and the U.S. have expanded their already high online presence, and markets in EMEA are beginning to see substantial increases in online penetration. This year, we diversified our efforts in high-growth channels globally. We initially launched Estée Lauder, Clinique, and Origins on JD in China and then expanded the brand's presence based on valuable consumer insights. Jo Malone London and La Mer launched on Lazada in Southeast Asia, and several brands participated in emerging collaborations with Ulta Beauty at Target and Sephora in the U.S. We continuously innovate within the online ecosystem to drive trials and repeat purchases. In Latin America, known for its direct selling success, we utilized WhatsApp for social selling, which accounted for 30% of online sales in the region. Around the world, our beauty advisers and makeup artists created content for social media platforms like TikTok, showcasing the impressive reach of our expert advice. Our omnichannel strategy also advanced significantly this year. In North America, most freestanding stores are now capable of fulfilling online orders, with plans to expand this feature in EMEA and Asia-Pacific. These capabilities drive higher average order values and increase upsell trends. We also extended our global loyalty programs, launching new initiatives in Japan, Italy, and Mexico while enhancing offerings in other markets across EMEA and Asia-Pacific. The results have been promising, with increased purchase frequency and consumer retention from loyalty program participants. Throughout the fiscal year, we also made strides toward our ESG goals. We expanded our renewable energy portfolio in our direct operations globally and were recognized for our commitment to sourcing 100% renewable electricity. In packaging, we set ambitious goals to increase post-consumer recycled content to 25% or more by 2025 and reduce virgin petroleum packaging to 50% or less by 2030. We expanded employee resource groups fostering community and unity. Our network of Black leaders launched in Brazil, while we welcomed our LGBTQIA+ group in EMEA. We formed a group for our older employees and grew our reverse mentoring program, paving the way for junior talent to collaborate with senior leaders on business insights. Our unique women leadership program, Open Doors, saw continued success in promoting the next generation of women leaders in international markets. We achieved significant progress with our leadership development program, with the inaugural class experiencing notable career growth. We are encouraged by these initial results and are committed to supporting equitable advancement and development for our Black talent. Before discussing the upcoming year, I want to highlight DECIEM, which has enhanced our organic sales growth. The Ordinary’s ingredient-based brand diversified significantly in recent months, entering markets in India and Malaysia, expanding its hair care line, and introducing new treatments. With innovation exceeding expectations, The Ordinary begins fiscal year 2023 with promising opportunities. Looking ahead, we refreshed our 10-year Compass to guide our ambitions and investments for the next decade, highlighting myriad growth opportunities. The growth drivers are numerous, particularly the expanding middle class globally, especially in emerging markets, increased usage across diverse consumer segments, and online expansion enhancing consumer accessibility. From the Compass, we derived our three-year strategy, expecting to achieve balanced growth across categories and regions. In the short term, macro factors may lead to variable growth across categories and regions. We are confident in our company's strength and the prestige beauty sector's vibrancy. For fiscal year 2023, we anticipate strong organic sales growth driven by our diverse growth engines and attractive innovations, seizing opportunities in what is likely to be a volatile year while continuing our investments for future growth and global market share. Though external challenges such as inflation, geopolitical uncertainty, and currency fluctuations persist, the enduring appeal of our brands with high repeat purchase rates remains a strong asset. Our more effective cost structure, pricing power, and robust cash generation will provide the agility needed to navigate this complex environment. Innovation will act as a growth catalyst, and we began the year with notable new products. Estée Lauder’s upgraded Advanced Night Repair Eye Supercharged Gel Cream addresses eye aging while adapting to modern lifestyles and environmental stressors, showcasing the power of innovation pricing. Clinique's Smart Clinical Repair line continued its innovation streak with the launch of Smart Clinical Repair Wrinkle Correcting Cream, complemented by strong claims for its serum, enhancing its hero product lineup. This year, we expect to regain momentum in Asia-Pacific as COVID-19 pressures ease, with in-store traffic gradually increasing in Mainland China, allowing physical stores to rebound alongside ongoing online strength and positive tourism trends in Hainan. We remain confident in the long-term growth potential in Mainland China, underscored by nearly 100 new store openings and expansions into three additional cities in fiscal year 2022, along with Aveda’s recent introduction. Fiscal year 2023 promises to be monumental as our Shanghai innovation lab opens, enhancing our ability to develop products tailored for Chinese consumers, and our new manufacturing facility near Tokyo, the first in Asia-Pacific, begins limited production. These strategic initiatives will facilitate quicker market entry and leverage local innovation in this dynamic region. We anticipate continued strength from our growth engines in the Americas and EMEA, fueled by broad-based gains across categories and channels in developed and emerging markets, especially in the vital makeup category. In North America, our focus shifts to specific consumer growth opportunities following our distribution refinement. In summary, we achieved outstanding performance in fiscal year 2022, delivering record results and advancing initiatives for consumer acquisition, engagement, and enhanced services to drive trial and repeat buying. Today, our business is significantly larger and more profitable than in pre-pandemic fiscal year 2019, with more diversified growth drivers. Our R&D and innovation capabilities are stronger, and our cost structure is more adaptable. While the coming year presents external challenges, our company is well-positioned for a bright future as a leading diversified player in prestige beauty, supported by our talented and passionate employees, to whom I extend my deepest gratitude. I will now turn the call over to Tracey.

Thank you, Fabrizio, and hello everyone. I will briefly discuss our fiscal 2022 fourth quarter and full-year results, followed by our outlook for fiscal 2023. In the fourth quarter, our organic net sales decreased by 8%, which was slightly better than our expectations. This decline was primarily due to disruptions in China caused by COVID restrictions, including issues in travel retail in Hainan, as well as the suspension of our commercial operations in Russia and Ukraine. These challenges outweighed the ongoing growth we experienced from the recovery in the Americas and other parts of the EMEA region. Overall sales growth included around a 1 percentage point contribution from DECIEM, while currency translation negatively affected growth by about 3 percentage points. Regionally, net sales in the Americas increased by 9% organically, driven by double-digit growth in makeup and fragrance. Consumers have been returning to physical stores, leading to strong performance in freestanding retail and specialty shops. We saw sales growth in almost all markets in the region, particularly in Canada and Latin America. In contrast, our Europe, Middle East, and Africa region saw a 9% organic decline, mostly due to the disruptions in travel retail in China and operations halted in Russia and Ukraine. Within this region, ten markets experienced double-digit growth as tourism resumed and brick-and-mortar retail traffic improved. Strong double-digit growth was noted in makeup, fragrance, and hair care categories across EMEA, although skincare sales suffered due to weak travel retail in Asia. Global travel retail, which is mainly monitored in this region, declined in Asia due to COVID restrictions in China. Hainan was particularly affected as stores were closed for parts of the quarter, travel to the island was limited, and online delivery services were disrupted. However, travel retail in European markets and the Americas surged to triple-digit growth as airport traffic rebounded and stores reopened. In the Asia-Pacific region, net sales fell by 19% organically. Greater China and Korea were significantly affected by COVID restrictions, with Shanghai facing the most severe impact due to a two-month lockdown that hindered our distribution capacity in China until the end of May. Nonetheless, our brands performed well during the critical 618 holiday festival, maintaining top rankings on beauty retail platforms like Tmall and JD. There were some positive developments in other parts of Asia, with Malaysia, Japan, the Philippines, and Vietnam continuing their recovery and reopening to tourists. Focusing on net sales by product category, fragrance led organic growth with a 22% increase compared to the prior year and saw double-digit growth across all regions. Luxury fragrances were particularly appealing to consumers seeking indulgence, with standout performances from brands like Tom Ford Beauty, Jo Malone London, and La Labo. Makeup net sales grew by 8% organically due to the recovery and increased use in Western markets. Major contributors included M·A·C and Clinique, driven by popular products such as MAC Studio Fix and the newly launched Macstack Mascara, along with Clinique's Almost Lipstick in Black Honey. Specialty multi-door sales also supported this category’s growth. Hair care saw a 5% organic increase, supported by strong performance from Bumble and bumble and the launch of Aveda’s vegan hair color in EMEA. However, skincare was significantly impacted by COVID-related restrictions in China, particularly in Greater China, Asian travel retail, and Korea. Skincare continues to account for about two-thirds of our business in the Asia-Pacific region, and net sales fell by 21% in the quarter due to disruptions at our Shanghai distribution center, severely affecting Estée Lauder and La Mer brands. The addition of DECIEM sales during the quarter aided skincare growth by approximately 3 percentage points. Our gross margin declined by 370 basis points compared to last year's fourth quarter, largely due to supply chain issues including global transportation delays, port congestion, labor shortages, and increased shipping costs. The unfavorable mix from weaker skincare sales also contributed to the decline. Operating expenses fell by 9% as we cut spending this quarter due to sharply reduced store traffic in China, including Hainan. We reported operating income of $207 million for the quarter, down from $385 million in the previous year. Our diluted EPS of $0.42 included a $0.03 dilution from the DECIEM acquisition. Looking at our full-year results, despite significant volatility, our performance reflects the advantages of our diversified top-line growth and the agility of our teams in effectively managing costs while selectively investing for future growth. Our organic net sales rose by 8%, with double-digit gains in three out of four product categories and two out of three regions. Online sales continued to thrive, increasing by 11% for the year, representing 28% of total sales. Most brick-and-mortar channels saw double-digit growth, although department stores ended the year slightly down due to COVID restrictions in Asia affecting growth in other regions. Our travel retail business also grew, contributing to 27% of overall sales. Our gross margin dropped by 60 basis points to 75.8%, with favorable pricing and currency effects offset by higher supply chain costs, especially in the latter half of the year. The DECIEM acquisition and increased costs for new products and sets also impacted margins. Operating expenses fell by 150 basis points to 56% of sales, with disciplined expense management contributing to this decline. Continuing changes in our channel mix are reducing selling costs, and we are improving resource allocation in advertising and promotions. Throughout the year, we improved flexibility in our cost structure to manage wage, media, and logistics inflation, leading to significant savings. Our full-year operating margin was 19.7%, an improvement of 80 basis points, which included the absorption of 60 basis points of dilution from DECIEM. Our effective tax rate for the year was 21.3%, reflecting a 260 basis point increase over the previous year, driven primarily by a lower current year tax benefit related to share-based compensation. Net earnings rose by 11% to $2.6 billion, and diluted EPS increased by 12% to $7.24, which included $0.04 from currency translation and $0.05 dilution from DECIEM. The Post-COVID Business Acceleration Program is drawing to a close, with anticipated restructuring charges of $500 million to $515 million at the upper end of our previous projections. We're satisfied with the progress made, including exiting four designer fragrance brands as well as the BECCA brand and streamlining distribution for Smashbox and GLAMGLOW. By the end of fiscal 2023, we expect to close nearly 250 underperforming retail stores as part of our effort to rebalance our distribution network. We've also rationalized department store counters and retail locations to focus on more profitable omnichannel opportunities. We are optimizing our organizational structure globally to reduce complexity and enhance our market capabilities, expecting a net reduction of 2,500 to 3,000 positions worldwide. For fiscal 2024, we anticipate achieving annualized gross savings of $390 million to $410 million, with part of these savings allocated to capabilities that foster long-term growth, such as data analytics and online investments. Regarding cash flow, we generated $3 billion from operations, down 16% from $3.6 billion the previous year. This decrease was mainly due to higher working capital needs as we manage pandemic-related disruptions and build inventory for future growth. We utilized $1 billion for capital improvements, up by about $400 million year-over-year, focusing on enhancing capacity and supply chain efficiency, while also investing in in-store experiences and renovations. We returned cash to shareholders at an accelerated pace this year, repurchasing 7.4 million shares for $2.3 billion and paying $840 million in dividends, reflecting a 13% increase in our dividend rate. Despite the challenges, we achieved a strong year and continued investing in foundational growth capabilities. Looking ahead to fiscal 2023, we believe the prestige beauty category offers significant opportunities for robust growth. Global prestige beauty is projected to expand in the mid to high single digits, supported by ongoing recovery and the gradual lifting of COVID restrictions. We are optimistic about the resurgence of international travel, particularly in Asia. Nonetheless, we recognize potential challenges, including high inflation and a possible recession that may dampen consumer spending and lead to cautious inventory management by some retailers. The strengthening dollar is also putting pressure on our international earnings. For fiscal 2023, we forecast organic net sales growth of 7% to 9%. As we discontinued four designer fragrance licenses at the conclusion of fiscal 2022, these brands generated $250 million in sales, which will not be included in our organic growth figures. We anticipate currency translation to significantly impact our reported results for fiscal 2023, with a projected dilution of 3 percentage points to reported sales growth, plus an additional point from foreign currency effects in key international travel retail markets. We expect list price increases to contribute approximately 5.5 percentage points to growth, helping to counteract inflationary pressures. New market entries and distribution expansions could add another 2 points to growth. However, the exit from Russia and Ukraine is expected to decrease sales growth by about 1 percentage point. We plan to pursue margin expansion through operational efficiencies and cost savings while continuing to invest in advertising as appropriate. Our full-year effective tax rate is anticipated to be around 23%, and diluted EPS is expected to range between $7.39 and $7.54, incorporating approximately $0.20 dilution from currency translation, while constant currency growth is projected at 5% to 7%. For the first quarter, we expect organic sales to decline by 4% to 6%. The impact of the designer license exits is expected to dilute reported growth by approximately 1 point, with currency expected to account for an additional 3 points of dilution. Sales in the first quarter will also be hindered by ongoing COVID restrictions in China and Hainan. Retailers in North America are tightening inventories this year, impacting our net sales compared to the previous year. We expect gradual improvements in China and APAC travel retail throughout the first half of the fiscal year, with easier comparisons in the latter half as we move past the Ukraine invasion and the COVID restrictions in China. We project first quarter EPS between $1.22 and $1.32, with currency translation expected to dilute EPS by $0.04. Additionally, foreign currency transactions in key international travel retail markets are projected to negatively affect adjusted diluted EPS growth by 5 percentage points. In conclusion, we are optimistic about the long-term prospects for global prestige beauty and our strategy to exceed industry growth. Our diverse growth strategies performed well in fiscal 2022, and we believe this diversified growth can continue in the upcoming year. Importantly, we remain committed to reinforcing the fundamental drivers of our business that support strong future sales and EPS growth. I would like to extend our sincere gratitude to our global team for their dedication and effort during this challenging macroeconomic environment. That concludes my remarks, and I welcome your questions.

Hi, good morning.

Good morning, Dara.

Good morning, Dara.

So I have a two-part question on China. First, just on the detail side. Can you just give us a bit more of a sense of what you’ve factored into both Q1 and the full year guidance on COVID lockdowns? Are you assuming the city restrictions that are in place today continue throughout Q1? And then what do you assume post Q1 in the balance of the year in terms of lingering shutdowns? And then second, it’s very hard for us to judge externally your underlying market share performance in China excluding supply issues. I’m sure it’s difficult for you also. But just any perspective on underlying market share trends as supply returns to normal, perhaps so far in fiscal Q1, that’d be helpful. And if you expect any of the supply issues recently to have an impact on your forward share at all. Thanks.

So I’ll start, Dara, regarding China and what we’ve baked into our assumptions. Clearly, the first quarter, we are seeing some intermittent disruptions. Our distribution center is open, and we actually opened in June, as we mentioned. So we were well prepared for the 618 holiday festival, as I mentioned in our prepared remarks. We are still seeing some intermittent shutdowns, not whole city shutdowns in China at the moment. So that is still disrupting brick-and-mortar retail. So we have factored that in, certainly to our Q1 expectations for the China market. As it relates to Hainan, as we mentioned also in our prepared remarks, and I’m sure you all have seen, Hainan is experiencing a lockdown right now. So, all of the doors are closed. Courier services as well have been suspended for online orders. We’re obviously monitoring that day by day, but that is something that began at the beginning of the month of August. And right now, we’re expecting that to continue through the end of August with some resumption in September, but not full resumption in September, recognizing that as this situation continues to impact the market, there will be some level of reluctance for consumers to travel. But we certainly expect that that will improve in the upcoming months. So I think first quarter and first half, we are expecting some level of muted performance in the region related to these issues. We do expect second quarter to be better than the first quarter. And then in the second half, obviously, we’re anniversarying quite a bit of disruption in the fourth quarter, some of which, again, in the third quarter for both Hainan as well as China. And we do expect that we will see strong growth in the second half. For the full year, we do expect China to grow double digits. And so again, it is a market that we know there is very strong demand for prestige beauty and for our products and the same with Hainan as well. So we are just navigating through these first few months of the year until we get on the other side in the second half.

And I’ll comment on market share. As Tracey just said, we do expect for the full year, China to go back to growing double digits. We expect a strong recovery in Hainan in the second part, in the second semester of the fiscal year, for sure, a gradual recovery before. That’s our assumption, which obviously is going to give us also results in market share. So speaking about the last quarter, to be clear, the market in China was down 10%. Estée Lauder Company was down 13%. So we lost 1 point of market share. We are now at 23%, so a very strong market share. I would like to argue that given the lockdown of our distribution center, the impossibility of serving for almost 2 months, our consumers losing 1 point of market share temporarily is actually showing that already in June, we started recovery with an outstanding 618 event and the management of this. And then to speak about what we are going to do further in the next 6 months to recover the market share we lost because of the distribution down, first of all, strong brand portfolio brands. We are going to reinforce it with the launch of Aveda that just started, which is a very important launch entering the hair care, big and growing category in China. We are going to double down on Tmall and entering new successful online distribution that we started with JD, where we still have opportunities deploying more brands in other areas where we are testing or distributing. We have very strong innovation starting with what we discussed in the remarks, which is the Estée Lauder Advanced Repair eye product, which is one of the most important recruitment strategies in the market. As you know, we are opening an R&D center this year, and so we are investing in even stronger innovations in the future. We are getting a great strategy to win in key shopping moments. I think that we had demonstrated in ATC in June for the 618 event is extraordinary. Our team, we are coming out of 40 days down in Shanghai, and they were able to operate successfully a very complex and important event. We are going to do the same with 11 November, hopefully, now in the second quarter. We are also improving our distribution in brick-and-mortar. We are opening new cities and new doors in the existing fast-growing cities. We have a new distribution center that we have opened. Actually, we opened this Friday in Guangzhou to mitigate the risk of future distribution disruptions, and then this will turn into a definite ongoing new second big distribution center in the beginning of 2023. We believe the situation in Hainan, despite the current lockdown, which is obviously painful in the short-term but is a super strong opportunity for the long-term. The power of Hainan in the future remains intact and we have strong presence and market share in this operation. I want to say we have an amazing local team, and this local team, they have been able to manage through these difficulties extremely well, and we believe that strength on which we can count in the future to continue building market share over time. Thank you for the question.

Great, thanks. Good morning, everyone. I was struck to mention that pricing this year is expecting to be north of 5%. And if I then layer in what you suggested could be a contribution from distribution, it suggests very limited, let’s call it, like-for-like door volume growth. So just I was curious if you could comment on that because thinking about – you mentioned, Fabrizio, recruitment, you’re talking about launching Aveda. It just feels like there is a lot happening that should still be driving unit growth. And so I was curious if you could comment on that. Thank you.

Yes, Lauren. So I’ll start. Good morning. We did call out, obviously, in our prepared remarks and in the press release a couple of adjustments in our revenue numbers this year. So we did exit our prestige designer licensed businesses. Basically, we ended those licenses. Our focus is on luxury fragrance and artisanal fragrance. So we did let those licenses expire. That is about 1 point of growth. The other point is related to the suspension of our operations in Russia and Ukraine. And so that is also contributing another point, if you will, to adjusted growth and to the suppression of growth that you’re referring to. And then lastly, the currency impact on revenue also impacts us in terms of our growth algorithm. So if you adjust for all of those items, it’s about 6 points of difference between what we’ve guided for the full year and where we expect – where we would expect to end if none of those events had happened. So that is the reason why the growth looks a bit muted, even with the 5.5% pricing. The other thing I would say again is we are starting the year with a fair amount of disruption as we just spoke about in some of our very important markets. And we are assuming a more gradual recovery, and that too impacts our unit growth.

Yes, thank you. Good morning, everyone. I just wanted to revisit China and just given some of the economic data that we’ve been seeing recently and curious if you’ve witnessed any evidence of any economic pressure impacting consumption. And I know it’s hard with all the noise of COVID and the shutdowns, but perhaps maybe some of the markets where you haven’t seen a big COVID impact, maybe you can share what trends would look like. Any perspective would be helpful?

Yes. Hi, Nik. No, actually, we don’t feel this. It’s probably the prestige cosmetic luxury cosmetic segment is more protected because of the big passion of consumers for this category. And as you know, the clear preference for the Chinese consumer for the prestige solutions, which is growing very fast for years now. The percentage of prestige for the total market keeps improving. So, we don’t see this. The proof I can give you is that the top of the ranges are growing the fastest also in our brand. La Mer is one of our fastest-growing brands as an example. So, the – and importantly, the market is very active when there are no restrictions when there are issues. So, we don’t see any impact – obviously, we are prudent in the assumptions we are making on the China economy development in the short-term as everyone is. But we don’t see a very big impact on our business in the absence of COVID restrictions situations.

Good morning. Thanks for taking my question. So, Tracey, I was wondering if you guys can provide more color on the interplay between gross margins and SG&A for the year.

Yes, obviously, we experienced some gross margin pressure in Q4. It was related to some of the activity that we had to manage through in terms of getting product to market and some of the disruption that’s in general in the supply chain. So – and as we think about the first quarter and the guidance that we have provided, we do expect gross margins to be down as well in the first quarter, not to the same extent as they were in the fourth quarter, and that will gradually improve throughout the year as we are anniversaried some of those disruptions. So, for the full year, we are expecting gross margins to be around flat at the moment. But it’s a tale of two halves in terms of the first half and some of the things we are anniversaried and some of the pressures that we are seeing on the business. But we do expect for the full year, gross margin to be flat. In terms of SG&A, again, we expect that we will continue to get good SG&A leverage. I think we are incredibly proud of what our team was able to deliver this past fiscal year and fiscal 2022 in terms of the expense leverage that we were able to deliver. It’s something that we are keenly focused on while also focused on investing in the important areas that drive our long-term growth algorithm. So, those are things that we continue to manage throughout the year, and we will get continued expense leverage this year.

Yes. Thanks and good morning everybody. I wanted to follow-up sort of directionally on the last question on gross margin, if you take a look at it even pre-COVID, pre-supply chain and inflationary pressures adjust for some of the accounting changes kind of going back 3 years, 4 years ago, it’s still kind of down over the last 5 years, and your expectations were flat this year. I guess kind of the puts and takes, which you are taking out of price. You have got a post-COVID business acceleration plan, so there is productivity, there is a mix shift in the business towards direct-to-consumer. I guess maybe if you could talk directionally about kind of what has led the progression down, but more importantly, kind of where do you think it can go over time. Is that high-70s level achievable again? Why or why not? That would be helpful. Thank you.

Yes. I think we have seen over the timeframe that you are speaking about. And yes, we definitely had accounting changes that impacted the gross margin between expenses and gross margin. But we have seen differences in the business in terms of our mix of business. And so fundamentally – and I know it’s important to understand what’s going on in gross margin, but really, what we focus on is operating margin. And as we have seen channel shifts and market shifts, etcetera, those have impacted the gross margin perhaps in some cases – in some of those cases, more negatively, but they have impacted the operating margin quite positively. So, at the end of the day, we are focused on delivering operating margin and profitable growth. In terms of whether or not we expect that we will get back to higher levels of gross margin, it is something that we are working on with our supply chain. So, between our direct procurement programs, some of the things we are doing in transportation, and the opening of our Japanese plant, which should allow us to be not only closer to the consumer but even to some of our suppliers for inbound freight should also help us from a gross margin standpoint. I am not going to commit that we are going to get back to the gross margins that we were at 5 years or 6 years ago, but do know that there are things that we see that are opportunities that we are also working on and very close partnership with our supply chain.

Thank you and good morning. I wanted to focus on makeup, if I could. Obviously, the trajectory there is promising. You have been talking about the makeup renaissance for a while, and it directionally seems to be taking shape. But we are still below 2019 levels by a fair degree. So, I guess really, the question is, sort of what’s your expectation for that recovery to continue the progress you expect to make over the next 12 months? And to some extent, when do you expect to be able to kind of converge with those pre-pandemic levels? And as we talk about that, I am mostly focused on the top line, but obviously, profitability comes alongside that. And your thoughts on rebuilding profitability in makeup alongside the top line would be helpful as well? Thank you.

Okay. So, let me – I will start. In terms of makeup, we continue to be quite bullish on the makeup category. We did see a recovery, particularly in our Western markets. So, part of the strength that we saw this year – this past fiscal year in terms of the growth in makeup and the improvement in margin that we saw in makeup was related to the recovery, in particular, in brick-and-mortar in our Western markets, so in the Americas as well as in Europe. We are still challenged a bit in makeup in our Eastern markets because of some of the disruptions that are going on, in particular, in brick-and-mortar. But we expect makeup to gradually improve as the disruption in those markets improve, and similar to Western markets as consumers resume their normal social and professional occasions. So, that is our expectation in terms of when we will get back to fiscal 2019 levels for makeup. Depending on the disruptions this year, it may take another year or so. But our makeup brands have fantastic innovation for this year, in particular, the MAC brand, but others as well. And so we are very encouraged in terms of makeup. As it relates to the margin, the makeup category has been particularly hit by the pandemic that is now going on for 3 years because of the brick-and-mortar distribution of makeup, and in particular, with a few of our makeup brands where services in-store are very well loved by our consumers and the in-store experience. That took – that was a bit of a challenge with doors closed and with traffic down. Traffic is still down in brick-and-mortar, even in the markets that are in recovery, traffic has not recovered to prior levels, but it’s well on its way to do so. So, I think one of the reasons why we took some of the actions we did with the post-COVID business acceleration program is take a point of view to your point of what that will look like when things are stabilized and what the mix between brick-and-mortar and online should be and took proactive measures to close some underproductive doors, and largely, that will help the makeup category. Most – many of those stores were makeup doors. Some of them were Origins stores. Some of them were Bobbi doors, actually. So, that should continue to help the makeup category as volume returns to, in particular, brick-and-mortar.

Yes. I just want to add that the makeup will continue to follow the user education on makeup, so the normalization from a consumer standpoint. This is happening, but it’s not yet up to the levels it used to be. So, it’s going there, and will be there. So, a lot of benefits are still in front of us and not behind us. So, we will see further progress over time, particularly in the East where the COVID lockdowns are still creating issues, not only in distribution but also in consumer usage of makeup. The other important thing is that makeup is really a blend linked to services. To have the proper experience, you need critical mass per store. The critical mass per store is dependent on traffic, as Tracey said. This is also getting better. The renaissance is, if you want, at the beginning. More progress is in front of us, and that progress, in particular, would also impact positively the bottom line and the profitability of the category. So, we are in the right direction, and we are not yet done on this.

Thanks operator. Good morning everyone. Thanks for taking the question. So, I just wanted to ask – I think you mentioned in the prepared remarks, you talked a bit about product innovation for 2023. And I think also in the press release, you talked about targeted distribution opportunities. So, can you just give us a little bit more color on those two items? And I guess one of the things I am interested in is just, is it sequentially – especially on the product innovation, do we expect, I guess, more of a contribution from new products or product innovation in ‘23 versus what we have seen in the last 2 years just because the environment is a little bit more accepting of that? So, just some color on those two items would be helpful. Thank you.

Yes. I will start on the product innovation. The product innovation was 25% already last year. This is a very good number, and we believe it’s an efficient number. Now, it can be 25% or 30% depending by quarter. But that’s, anyway, a very powerful innovation. The thing that we have improved also the rhythm of innovation. We have innovation really gradually per category, per quarter, per brand in a very sophisticated way, market-by-market, to make sure that we can leverage it. The innovation is strongly supported by sufficient media. Our advertising in total is increasing in fiscal year 2022 in absolute levels. That’s a list in the current assumptions guidance. Some part of this advertising is guiding the innovation and the innovation results. But also, a lot of our innovation is attracting earned media value in a fantastic way. A good example of this has been MACStack’s in the last fiscal year. So, it’s not only paid media, but it’s also earned media that is attached to high-quality innovation. So, some of the high-quality innovation is also efficient from a spending standpoint, from a media standpoint for that reason, and then finally, innovation is driving pricing because innovation many times is about improving product, improving product performance, or entering benefit areas that are more important for the consumer that’s willing to pay more. And so we can invest in our standing products that deliver these results and price for these results as well. So, it’s a combination of factors why innovation is and will continue to be a very strong driver. If you assume more or less the same percentage of innovation on a growing business, so innovation in absolute terms will also increase year-after-year. On distribution, we have opportunities still to increase distribution. We are doing it particularly online where there are a lot of new online ways to access consumers in an efficient and productive way. It’s also important to understand that the distribution opportunity at the end is about consumer coverage. It’s about covering consumers that have desire today that are not covered. The best example of this is, for example, in emerging markets, starting from China, as an example, where we are covering 148 cities, but demand comes from 600 cities or more, and we serve the cities where there is no physical distribution value online. This is happening the same in India. It’s happening in Brazil. It’s happening in Mexico. It’s happening in many emerging markets. So, the new distribution online is covering new consumers in the large majority of cases, and it’s very efficient. There is a lot of opportunity. There are some, which are already in this fiscal year, the fiscal year 2023 assumption. And there are many in the medium to long-term that we are studying and preparing to do.

Great. Thanks. I wanted to ask you a little bit more about the price increases that you are planning, realizing, of course, it’s not clearly the same as CPG. But by tier, sort of super luxury, beauty prestige, how your prices will compare to your peers, especially given that more and more sales are happening in multichannel or online where you will be closer to other brands or consumers can see multiple brands on one screen? And then if I could just sneak in another question sort of piggybacking on Bryan’s about the distribution, the targeted expansion of distribution to retailers that provide broader consumer reach. Fairly certain, I know what isn’t included, but if you could talk a little bit about what that might entail globally and how that – the channel mix progresses as a result? Thank you.

Yes. So, I will start, Olivia, on the pricing piece. We have a very sophisticated algorithm for pricing. So, we do look at price and by SKU, actually, by brand, by SKU relative to what the brand has defined as the competitive set for that particular SKU when we consider what pricing we are going to take, for instance, on whether it’s on a pricing increase on an existing product or even when we introduce a new product. So, that’s very much taken into consideration. We also, depending on – because we have a very broad price tier obviously of our products from Le Mer and Frédéric Malle and Tom Ford to Clinique and MAC and The Ordinary. We also look at for our entry-level prestige brands the gap to their comparable closest mass brand. And so we are also cognizant of that. That has served us quite well in those multi-specialty accounts that you are referring to where our goal continues to be trading consumers up from mass to prestige. And that has worked quite well for us in those particular accounts. And then you had a follow-up question on distribution, I think.

That’s right. Just understanding when you say you are expanding your distribution to provide a broader consumer reach, what – I think we all know what it does not entail, but what that does entail globally and what that – what the implications might be both for sales and profit?

Frankly, it’s what I was explaining in the answer to the previous question. And there are – for example, if you go online in a new partner, with a new partner online, with a new distribution, we cover cities and we cover areas that are not covered by brick-and-mortar. So, these reach consumers that were not reached before. That’s why we expanded our reach. That’s the key thing. So, in other words, we try to avoid duplication in distribution as much as possible and maximize consumer coverage. The key strong benefit that we are getting, as I said, particularly in emerging markets, but that’s true everywhere in the world, is the fact that we are getting new consumers into our business and sourcing new consumers from us into prestige. Tracey?

Yes. And Olivia, so we mentioned in the prepared remarks, we are introducing Aveda into China. That’s expanding distribution for the brand. So, one way we expand distribution is introducing products into a new market, as Fabrizio was indicating, in other emerging markets. We introduced The Ordinary into India via NYKAA. So, that’s one way that we expand distribution, particularly in a market where consumers had not had that opportunity to purchase that product before unless they traveled. We also expand with our existing retailers. So, here in North America, as Ulta and Sephora opened new doors or any other retailer opens new doors, it is our consideration without being over retailed from a brick-and-mortar standpoint of expanding in those stores as well. And that’s an expanded distribution. So, if our retailer opens 20 new doors this year, we will open those doors with them. I think I said in my prepared remarks that we expect around 2 points of growth this year from distribution. And largely, it’s those types of distribution. Fabrizio talked as well about pure plays. Pure plays have been a fantastic way for us to actually – selective pure plays. We are very selective to actually reach new consumers, in particular, younger consumers, who are shopping more online and maybe shopping on an apparel site online that we have an opportunity to introduce beauty products to and get a new consumer as well as a new shopping occasion as they are shopping for their apparel products. So, it’s a very thoughtful way that we think about distribution and expanding distribution right now really to focus on reaching new consumers.

Thank you for squeezing me in and good morning everyone. So, my question is on the cadence of the quarter of the year guidance within the quarter. The sell-side consumers are more cautious to travel, you mentioned retail inventory, if I am mistaken. I wonder if you are embedding some adjustment to retained employees in Q1? And if so, the magnitude of that impact that would give us more confidence on the recovery for the remaining nine months. And just a clarification on how much you expect sales to decline in China, including Hainan, in Q1, embedded in your guidance? Thank you.

Yes. So, I will start with the last, Andrea. We don’t give specific market information. So, it’s embedded in our guidance. You can certainly – if you think about what we have said previously in terms of the size of those businesses, you can probably back into a little bit in terms of what that impact would be. In terms of the retail inventory situation, we do expect that to improve in the second quarter. That was very specific to the U.S., actually, the Americas, but specific to the U.S. And we do expect that to improve in the second quarter as the holiday season approaches. And we do ship those holiday sets in Q2 that we shipped last year in Q1.

I think the other part of the question was Hainan. In Hainan at this moment, they are not ordering. So, there is no inventory sold, but they are – still, what they are selling, they are selling from existing inventory. So, there will be the possibility in the future to rebuild and normalize inventories when COVID abates.

And the only other thing I would add—and you didn’t ask about this, but currency. So, as you saw in our guidance, currency is a big impact for us this year. Obviously, if currency rates change, that will improve. But right now, if currency rates remain where they are at, and hopefully won’t get worse, then about 70% of the impact of currency—the year-over-year impact of the currency depreciation that we have experienced is in the first half. So, that should moderate. We really saw the currency depreciation beginning in the currencies that I mentioned that are the most impactful to us in the second half of our year, really starting in the March, April timeframe. So, we will be anniversarying that in the second half. So, again, as I mentioned, it’s a bit of a tale of two halves and given some of the macro things that are impacting us in this fiscal year.